<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997
REGISTRATION NO. 333-15553
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
----------------
JOHN B. KILROY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KILROY REALTY CORPORATION
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
EDWARD SONNENSCHEIN, JR., ESQ. LYNN TOBY FISHER, ESQ.
LATHAM & WATKINS KAYE, SCHOLER, FIERMAN, HAYS &
633 WEST FIFTH STREET HANDLER, LLP
LOS ANGELES, CALIFORNIA 90071 425 PARK AVENUE
(213) 485-1234 NEW YORK, NEW YORK 10022
(212) 836-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
AGGREGATE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED PRICE (1) FEE (2)
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<S> <C> <C>
Common Stock, par value $.01 per share.......... $317,400,000 $63,480
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The Company has previously paid a registration fee of $64,539 with the
original filing of this Registration Statement on November 5, 1996, based
on the originally proposed maximum offering price and number of shares of
Common Stock to be registered.
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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<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<C> <S>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors;
Distribution
Policy; Business and Properties; Certain
Relationships and Related Transactions
4. Determination of Offering Price........ Underwriting
5. Dilution............................... Dilution
6. Selling Security Holders............... Not applicable
7. Plan of Distribution................... Underwriting
8. Use of Proceeds........................ Use of Proceeds
9. Selected Financial Data................ Selected Financial Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to Registrant... Prospectus Summary; Business and
Properties; Management; Principal
Stockholders; Certain Provisions of
Maryland Law and of the Company's
Articles of Incorporation and Bylaws
12. Policy with Respect to Certain
Activities............................ Policies With Respect to Certain Activities
13. Investment Policies of Registrant...... Policies With Respect to Certain Activities
14. Description of Real Estate............. Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties
15. Operating Data......................... Business and Properties
16. Tax Treatment of Registrant and Its
Security-Holders...................... Federal Income Tax Consequences
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters................... Risk Factors; Principal Stockholders;
Distribution Policy; Shares Available for
Future Sale
18. Description of Registrant's
Securities............................ Description of Capital Stock; Certain
Provisions of Maryland Law and of the
Company's Articles of Incorporation and
Bylaws
19. Legal Proceedings...................... Business and Properties--Legal Proceedings
20. Security Ownership of Certain
Beneficial Owners and Management...... Principal Stockholders
21. Directors and Executive Officers....... Management
22. Executive Compensation................. Management
23. Certain Relationships and Related
Transactions.......................... Risk Factors; Business and Properties;
Management; Certain Relationships and
Related Transactions; Principal
Stockholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<C> <S>
24. Selection, Management and Custody of
Registrant's Investments.............. Risk Factors; Business and Properties;
Policies With Respect to Certain
Activities
25. Policies with Respect to Certain
Transactions.......................... Risk Factors; Business and Properties;
Policies With Respect to Certain
Activities; Management; Certain
Relationships and Related Transactions;
Principal Stockholders
26. Limitations of Liability............... Management; Certain Provisions of Maryland
Law and of the Company's Articles of
Incorporation and Bylaws
27. Financial Statements and Information... Index to Financial Statements
28. Interests of Named Experts and
Counsel............................... Not Applicable
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED JANUARY , 1997
PROSPECTUS
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12,000,000 Shares
KILROY REALTY CORPORATION
Common Stock
[LOGO OF KILROY REALTY CORPORATION]
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Kilroy Realty Corporation (the "Company") has been formed to succeed to the
business of Kilroy Industries and its affiliates consisting principally of a
portfolio of Class A suburban office and industrial buildings in prime
locations, primarily in Southern California, and the affiliated real estate
ownership, acquisition, development, leasing and management businesses which
were established in Southern California in 1947. Upon the consummation of this
offering (the "Offering") and a series of related transactions (the "Formation
Transactions"), the Company will own 14 suburban office buildings (the "Office
Properties"), 11 of which are located in Southern California, and 12 industrial
properties (the "Industrial Properties"), 11 of which are located in Southern
California. The Company will operate as a self-administered and self-managed
real estate investment trust (a "REIT"). The Company intends to make regular
quarterly distributions to its stockholders beginning with a distribution for
the period ending March 31, 1997.
All of the shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by the Company and will
represent approximately 81.3% of all shares of Common Stock (or interests
exchangeable therefor) outstanding after consummation of the Offering. Upon
consummation of the Offering, the Company's officers and directors (and certain
of their affiliates) will own in the aggregate 18.7% of the Common Stock or
interests exchangeable therefor. See "Principal Stockholders." To assist the
Company in maintaining its qualification as a REIT for federal income tax
purposes, ownership by any person generally is limited to 7.0% of the then
outstanding Common Stock, which limit can be waived by the Board of Directors.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
will be between $22.00 and $23.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The shares of Common Stock offered hereby have been approved
for listing on the New York Stock Exchange (the "NYSE") under the symbol "KRC,"
subject to official notice of issuance. See "Glossary" beginning on page 163
for definitions of certain terms used in this Prospectus.
See "Risk Factors" on pages 20 to 35 for a discussion of certain material
factors which should be considered in connection with an investment in the
Common Stock offered hereby, including:
. Conflicts of interest with, and material benefits to, affiliates of the
Company, including certain officers and directors, in connection with the
Formation Transactions, consummation of the Offering and the operation of
the Company's ongoing businesses, including conflicts associated with the
tax consequences of sales and refinancings of the Company's properties.
. Taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes and the resulting decreases in cash
available for distribution.
. The inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the Company's
interest.
. The valuation of the Company's properties was not based on third-party
appraisals, and the consideration to be paid by the Company for the
properties may exceed their aggregate fair market value, thereby increasing
the risk that the aggregate market value of the Common Stock may exceed the
Company's total assets.
. A portion of the Company's anticipated cash flow may be generated from
development activities which are partially dependent on the availability of
development opportunities, and are subject to the risks inherent with
development, which in turn may negatively impact the Company's ability to
make distributions.
. Dependence on demand for office, industrial and retail space in the Southern
California market, thereby increasing the risk that the Company will be
materially adversely affected by general economic conditions in a single
market.
. Dependence on certain significant tenants, particularly Hughes Electronic
Corporation's Space & Communications Company, thereby increasing the
potential negative impact to the Company of downturns in the business of, or
its relationship with, such tenants.
. The distribution requirements of REITs may limit the Company's ability to
finance future developments, acquisitions and expansions without additional
debt or equity financing necessary to achieve the Company's business plan,
which in turn may adversely affect the price of the Company's Common Stock.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
ANDEXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONPASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share............. $ $ $
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Total(3).............. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $4,541,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,800,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made at the office
of Prudential Securities Incorporated, One New York Plaza, New York, New York,
on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
, 1997 SMITH BARNEY INC.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY....................................................... 1
The Company.............................................................. 1
Risk Factors............................................................. 3
Formation and Structure of the Company................................... 5
Formation of Kilroy Services, Inc. ...................................... 9
Growth Strategies........................................................ 10
The Office and Industrial Properties..................................... 13
The Company's Southern California Submarkets............................. 15
The Financing............................................................ 15
Distribution Policy...................................................... 16
Tax Status of the Company................................................ 17
The Offering............................................................. 17
Summary Financial Data................................................... 18
RISK FACTORS............................................................. 20
Conflicts of Interest.................................................... 20
Adverse Consequences of Failure to Qualify as a REIT..................... 22
Risks of Development Business and Related Activities Being Conducted by
the Services Company.................................................... 23
No Appraisals; Consideration to be Paid for Properties and Other Assets
May Exceed their Fair Market Value...................................... 23
Cash Flow from Development Activities is Uncertain....................... 24
Dependence on Southern California Market................................. 24
Dependence on Significant Tenants........................................ 24
Distributions to Stockholders Affected by Many Factors................... 25
Real Estate Investment Considerations.................................... 25
Real Estate Financing Risks.............................................. 28
Changes in Investment and Financing Policies Without Stockholder Vote.... 28
Risk of Operations Conducted Through the Operating Partnership........... 29
Influence of Certain Continuing Investors................................ 29
Limits on Ownership and Change in Control................................ 30
Dependence on Key Personnel.............................................. 31
Distribution Payout Percentage........................................... 31
Historical Operating Losses of the Office and Industrial Properties...... 31
No Limitation on Debt.................................................... 31
Government Regulations................................................... 32
Immediate and Substantial Dilution....................................... 33
No Prior Public Market................................................... 34
Effect of Market Interest Rates on Price of Common Stock................. 34
Shares Available for Future Sale......................................... 34
FORMATION AND STRUCTURE OF THE COMPANY................................... 36
Formation Transactions................................................... 36
Reasons for the Reorganization of the Company............................ 38
Comparison of Common Stock and Units..................................... 40
Advantages and Disadvantages of the Formation Transactions to
Unaffiliated Stockholders............................................... 41
Benefits of the Formation Transactions to the Continuing Investors....... 41
Determination and Valuation of Ownership Interests....................... 43
Allocation of Consideration in the Formation Transactions................ 43
FORMATION OF KILROY SERVICES, INC. ...................................... 44
THE COMPANY.............................................................. 45
General.................................................................. 45
Growth Strategies........................................................ 47
USE OF PROCEEDS.......................................................... 51
DISTRIBUTION POLICY...................................................... 53
CAPITALIZATION........................................................... 58
DILUTION................................................................. 59
SELECTED FINANCIAL DATA.................................................. 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 62
Results of Operations.................................................... 62
Development and Management Fees.......................................... 64
Adoption of SFAS No. 121................................................. 64
Liquidity and Capital Resources.......................................... 65
Historical Cash Flows.................................................... 66
Funds from Operations.................................................... 67
Inflation................................................................ 67
BUSINESS AND PROPERTIES.................................................. 68
General.................................................................. 68
Occupancy and Rental Information......................................... 75
Lease Expirations........................................................ 75
Tenant Information....................................................... 83
Office Properties........................................................ 84
Industrial Properties.................................................... 91
Development, Leasing and Management Activities........................... 91
Acquisition Properties................................................... 93
The Company's Southern California Submarkets............................. 94
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Seattle Market............................................................ 105
Excluded Properties....................................................... 105
Insurance................................................................. 107
Uninsured Losses from Seismic Activity.................................... 107
Government Regulations.................................................... 108
Management and Employees.................................................. 110
Legal Proceedings......................................................... 110
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 111
Investment Policies....................................................... 111
Dispositions.............................................................. 112
Financing................................................................. 112
Working Capital Reserves.................................................. 113
Conflict of Interest Policies............................................. 113
Other Policies............................................................ 115
THE FINANCING............................................................. 116
The Mortgage Loans........................................................ 116
The Credit Facility....................................................... 116
MANAGEMENT................................................................ 118
Directors and Executive Officers.......................................... 118
Committees of the Board of Directors...................................... 120
Compensation of Directors................................................. 120
Executive Compensation.................................................... 121
Employment Agreements..................................................... 121
Stock Incentive Plan...................................................... 122
Section 401(k) Plan....................................................... 127
Indemnification........................................................... 127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 128
Partnership Agreement..................................................... 128
Assignment of Lease; Various Services Provided by the Services Company to
the Kilroy Group......................................................... 128
Benefits of the Formation Transactions to Certain Executive Officers...... 128
PRINCIPAL STOCKHOLDERS.................................................... 129
DESCRIPTION OF CAPITAL STOCK.............................................. 130
General................................................................... 130
Common Stock.............................................................. 130
Transfer Agent and Registrar.............................................. 131
Preferred Stock........................................................... 131
Restrictions on Ownership and Transfer.................................... 131
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS................................................. 134
Board of Directors........................................................ 134
Removal of Directors...................................................... 134
Business Combinations..................................................... 135
Control Share Acquisitions................................................ 135
Amendment to the Articles of Incorporation and Bylaws..................... 136
Meetings of Stockholders.................................................. 136
Advance Notice of Director Nominations and New Business................... 136
Dissolution of the Company................................................ 137
Limitation of Directors' and Officers' Liability.......................... 137
Indemnification Agreements................................................ 138
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP........................ 139
Management................................................................ 139
Indemnification........................................................... 139
Transferability of Interests.............................................. 139
Issuance of Additional Units.............................................. 140
Capital Contribution...................................................... 140
Awards Under Stock Incentive Plan......................................... 141
Redemption/Exchange Rights................................................ 141
Registration Rights....................................................... 141
Tax Matters............................................................... 141
Operations................................................................ 142
Duties and Conflicts...................................................... 142
Certain Limited Partner Approval Rights................................... 142
Term...................................................................... 142
SHARES AVAILABLE FOR FUTURE SALE.......................................... 143
General................................................................... 143
Redemption/Exchange Rights/Registration Rights............................ 144
Reinvestment and Share Purchase Plan...................................... 145
FEDERAL INCOME TAX CONSEQUENCES........................................... 145
Taxation of the Company................................................... 145
Failure to Qualify........................................................ 150
Taxation of Taxable U.S. Stockholders Generally........................... 151
Backup Withholding........................................................ 152
Taxation of Tax-Exempt Stockholders....................................... 152
Taxation of Non-U.S. Stockholders......................................... 153
Tax Aspects of the Operating Partnership.................................. 155
Services Company.......................................................... 157
OTHER TAX CONSEQUENCES.................................................... 158
ERISA CONSIDERATIONS...................................................... 158
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs .......... 158
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Status of the Company, the Operating Partnership and the Services Company
Under ERISA............................................................. 159
UNDERWRITING............................................................. 160
LEGAL MATTERS............................................................ 161
EXPERTS.................................................................. 161
ADDITIONAL INFORMATION................................................... 162
GLOSSARY................................................................. 163
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN
UNCERTAINTIES SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS UNDER THE
CAPTIONS "PROSPECTUS SUMMARY," "THE COMPANY," "DISTRIBUTION POLICY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "BUSINESS AND PROPERTIES," SUCH AS THOSE CONCERNING, AMONG
OTHER THINGS, FUTURE RESULTS OF OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION,
LEASE RENEWALS, INCREASES IN BASE RENT, FEE DEVELOPMENT ACTIVITIES, SOURCES OF
GROWTH, ECONOMIC CONDITIONS AND TRENDS, PROPERTY ACQUISITIONS AND PLANNED
DEVELOPMENT AND EXPANSION OF OWNED OR LEASED PROPERTY ARE PROJECTIONS AND ARE
NECESSARILY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. ACTUAL OUTCOMES ARE
DEPENDENT UPON THE COMPANY'S SUCCESSFUL PERFORMANCE OF INTERNAL PLANS,
ECONOMIC CONDITIONS IN THE SUBMARKETS IN WHICH THE COMPANY'S PROPERTIES ARE
LOCATED SUCH AS OVERSUPPLY OF OFFICE, INDUSTRIAL OR RETAIL SPACE OR A
REDUCTION IN THE DEMAND FOR SUCH SPACE, SUCCESSFUL COMPLETION OF PLANNED
DEVELOPMENT, THE AVAILABILITY OF DEVELOPMENT OPPORTUNITIES, THE AVAILABILITY
OF ACQUISITION AND DEVELOPMENT FINANCING, COMPLIANCE WITH APPLICABLE LAWS AND
REGULATIONS AND THE SUCCESSFUL MANAGEMENT OF OTHER ECONOMIC, LEGAL, FINANCIAL
AND GOVERNMENTAL RISKS AND UNCERTAINTIES.
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, set forth elsewhere in this Prospectus. Unless otherwise indicated,
all calculations and information contained in this Prospectus assume (i) an
initial public offering price of $22.50 per share of Common Stock (representing
the midpoint of the range set forth on the cover page of this Prospectus),
(ii) that the Underwriters' over-allotment option will not be exercised and
(iii) the consummation of the Formation Transactions described under the
heading "Formation and Structure of the Company," including consummation of the
financings described under the heading "The Financing" and the acquisition of
certain properties described under the heading "Business and Properties--
Acquisition Properties" and give pro forma effect thereto as if such
transactions had each occurred on January 1, 1995. In addition, unless
otherwise indicated, all calculations and information contained in this
Prospectus, other than the historical and pro forma financial statements and
the respective notes thereto, give pro forma effect to the recent extension of
the tenant lease with Hughes Electronics Corporation's Space & Communications
Company with respect to space leased in the Office Property located at 2250 E.
Imperial Highway, and a portion of the space leased in the Office Property
located at 2240 E. Imperial Highway as if such lease renewal had occurred on
January 1, 1995. Unless the context otherwise requires, (i) the "Company" shall
include Kilroy Realty Corporation ("Kilroy Realty") and its subsidiaries,
including Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy
Services, Inc. (the "Services Company"), and with respect to the period prior
to the Offering, the Kilroy Group (as defined below), and its predecessors,
(ii) the "Kilroy Group" shall mean, collectively, Kilroy Industries, a
California corporation ("KI"), and certain of its affiliated corporations,
partnerships and trusts that prior to the Offering owned the Properties, as
identified in "Note 1. Organization and Basis of Presentation" to the
historical financial statements of the Kilroy Group (collectively, the
"Partnerships") and (iii) the "Continuing Investors" shall mean the persons and
entities which beneficially own interests in the Partnerships or in the
Properties and will receive limited partnership interests ("Units") in the
Operating Partnership in connection with the Formation Transactions. See "--
Formation and Structure of the Company." Additional capitalized terms shall
have the meanings set forth in the Glossary beginning on page 163.
THE COMPANY
The Company has been formed to succeed to the business of the Kilroy Group,
consisting principally of a portfolio of Class A suburban office and industrial
buildings in prime locations, primarily in Southern California, and the Kilroy
Group's real estate ownership, acquisition, development, leasing and management
businesses which were established in Southern California in 1947. Upon the
consummation of the Offering and the Formation Transactions, the Company
(through the Operating Partnership) will own 14 Office Properties encompassing
an aggregate of approximately 2.0 million rentable square feet and 12
Industrial Properties encompassing an aggregate of approximately 1.3 million
rentable square feet. Eleven of the 14 Office Properties and 11 of the 12
Industrial Properties are located in prime Southern California suburban
submarkets (including a complex of three Office Properties located in El
Segundo, adjacent to the Los Angeles International Airport, presently the
nation's second largest air-cargo port, and a complex of five Office Properties
located adjacent to the Long Beach Municipal Airport). The Company also will
own three Office Properties located adjacent to the Seattle-Tacoma
International Airport in the State of Washington and one Industrial Property
located in Phoenix, Arizona. The Office Properties, Industrial Properties and
the related assets owned by the Partnerships contributed to the Company by the
Continuing Investors in connection with the Formation Transactions are
collectively referred to herein as the "Properties." As of September 30, 1996,
the Office Properties were approximately 79.8% leased to 130 tenants and the
Industrial Properties were approximately 93.7% leased to 20 tenants. The
average age of the Office Properties and the Industrial Properties is
approximately 12 years and 24 years, respectively. The Company developed and
leased all but two of the 14 Office Properties and all but five of the 12
Industrial Properties, and, upon consummation of the Offering and acquisition
of the Acquisition Properties, will manage all of the Properties.
The Company was founded in 1947 by John B. Kilroy, Sr., a nationally
prominent member of the real estate community, and is led by John B. Kilroy,
Jr., the Company's Chief Executive Officer and President. The
1
<PAGE>
Company's executive officers have been with the Company for an average of
approximately 13 years. The Company presently has 47 employees, 34 of whom are
located at the Company's headquarters at Kilroy Airport Center at El Segundo,
California. Upon consummation of the Offering, the Company's officers and
directors (and certain of their affiliates) will own in the aggregate 18.7% of
the Company's Common Stock (or interests exchangeable therefor).
The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily in
Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. Existing locations offer tenants: (i) lower
business taxes and operating expenses than in adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) strategic access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airplane travelers. As a result, the Properties attract major corporate
tenants and historically have achieved among the highest occupancy, tenant
retention and rental rates, both within their respective submarkets and as
compared to their respective neighboring submarkets. See "Business and
Properties--Office Properties" and "--Industrial Properties."
The Company's major tenants include, among others, Hughes Electronic
Corporation's Space & Communications Company and related companies ("Hughes
Space & Communications"), a tenant since 1984, which is engaged in high-
technology commercial activities including satellite development and related
applications such as DirecTV, as well as Mattel, Inc., Northwest Airlines,
Inc., Olympus America, Inc. and Furon Co., Inc. As of December 31, 1995, the
Company's ten largest office tenants and ten largest industrial tenants (based
upon annual base rents as of December 31, 1995) had leased space from the
Company for an average of 5.3 years. The Company's strong relationships with
its tenants is further evidenced by its average tenant retention rate (based
upon rentable square feet) for the two-year and nine-month period ended
September 30, 1996, which was 71.7% for the Properties located in the Southern
California Area. The Company's extensive experience and long-term presence in
Southern California have enabled it to form key alliances and working
relationships with large corporate tenants, municipalities and landowners that
have led to a variety of development projects and provide a continuing source
of development and acquisition opportunities with institutional sellers. As a
result of its experience and relationships, the Company currently has exclusive
rights to develop approximately 24 acres of developable land (net of the
acreage required for streets) at Kilroy Airport Center Long Beach (the
"Development Properties"). These properties are presently entitled for over
900,000 rentable square feet of office, industrial and retail space. See
"Business and Properties--Development, Leasing and Management Activities."
The Company believes, based on independent economic surveys, that the
Southern California office and industrial real estate market is recovering
after experiencing a downturn over the last several years. Vacancy rates in the
Class A office space market in the greater Southern California area, including
the counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura (the
"Southern California Area"), have decreased from a high in 1991 and 1992 of
nearly 20.0% to a level at the end of 1996 of under 17.0%. Vacancy rates in the
industrial space market in the Southern California Area also are decreasing
from a high of nearly 14.0% in 1992 to 7.6% at the end of 1996. In addition,
the Company has on average achieved increases in rental rates since 1994 in the
Office Properties it has managed. See "--The Company's Southern California
Submarkets" and "Business and Properties--The Company's Southern California
Submarkets." Management believes that the on-going economic recovery in its
submarkets will continue the trend of increasing occupancy rates and should
apply some upward pressure on rents for Class A office buildings. See "--Growth
Strategies."
The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to tenants,
its capital structure, its access to public capital markets, the lack of new
construction of office properties in its submarkets, its access to developable
properties, the knowledge and experience of its senior
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management team and its long-term relationships with large Southern California
corporate tenants, municipalities, landowners and institutional sellers. In
addition, the Company believes that it will be one of a limited number of REITs
focusing on office and industrial properties and that it will be the only REIT
with a 50-year operating history concentrating primarily on suburban Southern
California office and industrial properties. In the 12 months following the
consummation of the Offering, the Company expects sources of potential growth
in cash available for distribution per share from the amount set forth under
the caption "Distribution Policy" through: (i) the further leasing of its
available space, currently approximately 400,000 rentable square feet; (ii) the
renewal of leases for approximately 60,000 rentable square feet which expire
during such period; and (iii) the acquisition of strategic properties with
Units and/or with available cash and borrowings under a $100.0 million
revolving credit facility (the "Credit Facility") which the Company expects to
enter into shortly after the Offering and its approximately $60 million of
working capital cash reserves upon consummation of the Offering. In the second
12-month period following consummation of the Offering, the Company expects
sources of potential growth in cash flow per share from: (i) contractual
increases in base rent payments from tenants; (ii) continued leasing of
available space; (iii) the acquisition of strategic properties; and (iv) the
contemplated completion of certain planned development activities. In addition,
the Company presently plans to expand one or more of its Industrial Properties
during the next two years, subject to substantial pre-leasing. There can be no
assurance, however, that the Company will achieve any growth in cash available
for distribution per share, that available space will be leased, that leases
scheduled to expire will be renewed or that the Company will successfully
acquire additional properties or complete any of its planned development
activities. See "Risk Factors--Real Estate Investment Considerations --Risks of
Real Estate Acquisition and Development."
The Company will be fully integrated in that it will perform substantially
all leasing, management and tenant improvements on an "in-house" basis and will
be self-administered and self-managed. The Company expects to qualify as a REIT
for federal income tax purposes beginning with its taxable year ending December
31, 1997. See "Federal Income Tax Consequences--Taxation of the Company."
RISK FACTORS
An investment in the shares of Common Stock involves various material risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby. Such risks
include, among others:
. conflicts of interest, particularly with the Continuing Investors
(including John B. Kilroy, Sr. and John B. Kilroy, Jr.) in connection
with the (i) Formation Transactions, (ii) operation of the Company's
ongoing businesses, including conflicts associated with the tax
consequences to Continuing Investors of sales or refinancings of any of
the Properties, which, together with certain provisions of the Operating
Partnership agreement, may influence the Company's decision to sell or
refinance, or to prepay debt secured by, certain properties, (iii)
potential election by the Company to exercise its option to purchase any
of the properties owned or controlled by one or more of the Continuing
Investors which the Company has the option to acquire (the "Excluded
Properties") and (iv) enforcement of agreements with affiliates of the
Company, any of which could result in decisions affecting the Company
that do not fully reflect interests of all of the Company's
stockholders;
. limitations on the Company's ability to withdraw as general partner of
the Operating Partnership, transfer or assign its interest in the
Operating Partnership without the consent of at least 60% of the Units
(including Units held by the Company which will represent 81.7% of all
Units outstanding upon consummation of the Offering) and without meeting
certain criteria with respect to the consideration to be received by the
Continuing Investors, or to dissolve the Operating Partnership or sell
the Office Property located at 2260 E. Imperial Highway, El Segundo,
California, at Kilroy Airport Center at El Segundo without the consent
of more than 50% of the Units held by limited partners (excluding Units
held by the Company), which may in each case result in the Company
taking action that is not in the best interest of all stockholders;
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. taxation of the Company as a corporation if it fails to qualify as a
REIT for federal income tax purposes, the Company's liability for
certain federal, state and local income taxes in such event and the
resulting decrease in cash available for distribution;
. the inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the
Company's interest because the Company does not control the election of
directors or the selection of officers of the Services Company;
. the valuation of the Properties was not based on third-party appraisals
and there have not been arm's-length negotiations with respect to such
values. The consideration to be paid by the Company for the Properties
may exceed their aggregate fair market value;
. A portion of the Company's anticipated cash flow may be generated from
development activities, which are partially dependent on the
availability of development opportunities, and are subject to the risks
inherent in development as well as general economic conditions and
limitations on such activities imposed by the REIT tests, which in turn
may negatively impact the Company's ability to make distributions;
. geographic concentration of 22 of its 26 Properties in Southern
California, creating a dependence on demand for office, industrial and
retail space in such market and increasing the risk that the Company
will be materially adversely affected by general economic conditions in
a single market;
. the Company's results of operations are dependent on certain key
tenants, particularly Hughes Space & Communications, which accounted for
approximately 25.3% of the Company's total base rental revenues for the
year ending December 31, 1995 (giving pro forma effect to a recent
extension of a lease with Hughes Space & Communications with respect to
two of the Office Properties located at Kilroy Airport Center at El
Segundo), thereby increasing the potential negative impact to the
Company of downturns in the business of, or its relationship with, such
tenants. The base periods of the Hughes Space & Communications' leases
expire beginning in January 1999;
. the distribution requirements for REITs under federal income tax laws
may limit the Company's ability to finance future acquisitions,
developments and expansions without additional debt or equity financing
and may limit cash available for distribution;
. real estate investment considerations such as the effect of economic and
other conditions on real estate values, the general lack of liquidity of
investments in real estate, the ability of tenants to pay rents, the
possibility that leases may not be renewed or will be renewed on terms
less favorable to the Company, the possibility of uninsured losses,
including losses associated with earthquakes, the ability of the
Properties to generate sufficient cash flow to meet operating expenses,
including debt service, and competition in seeking properties for
acquisition and in seeking tenants, which, individually or in the
aggregate, may negatively impact the Company's ability to make
distributions;
. risks associated with debt financing, including the potential inability
to refinance mortgage indebtedness upon maturity and the potential
increase in the level of indebtedness incurred by the Company since its
organizational documents do not limit the amount of indebtedness which
the Company may incur, which may adversely affect the ability of the
Company to repay debt, particularly in the event of a downturn in the
Company's business;
. substantial influence over the affairs of the Company by certain
Continuing Investors who are directors and executive officers of the
Company, and the ability of the Board of Directors to change the
investment policies of the Company (including the Company's ratio of
debt to total market capitalization) without the consent of
stockholders, which may result in a decline in the market value of the
Common Stock;
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. potential antitakeover effects of provisions generally limiting the
actual or constructive ownership by any one person or entity of Common
Stock to 7.0% of the outstanding shares, a classified board of directors
and other charter and statutory provisions and provisions in the
Operating Partnership partnership agreement that may have the effect of
inhibiting a change of control of the Company or making it more
difficult to effect a change in management or limiting the opportunity
for stockholders to receive a premium over the market price for the
Common Stock;
. dependence on key personnel;
. the Company's cash available for distribution may be less than the
Company expects and may decrease in future periods from expected levels,
materially adversely affecting the Company's ability to make the
expected annual distributions of $1.55 per share during the 12-month
period following consummation of the Offering (which represents
approximately 90.5% of the estimated cash available for distribution for
such period) or to sustain such distribution rate in the future;
. the Company's historical operating losses for financial reporting
purposes;
. the ability of the Company to incur more debt, thereby increasing its
debt service, which could adversely affect the Company's cash flow;
. the potential liability of the Company for environmental matters and the
costs of compliance with certain governmental regulations, which may
negatively impact the Company's financial condition, results of
operations and cash available for distribution;
. immediate and substantial dilution of $12.97 per share in the net
tangible book value per share of the shares of Common Stock purchased by
new investors in the Offering;
. no prior public market for the shares of Common Stock, including the
risk that an active trading market might not develop, or if developed
might not be maintained, which may negatively impact the price at which
shares of Common Stock may be resold;
. potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance future
development; and
. the possible issuance of additional shares of Common Stock, including
2,692,374 shares of Common Stock issuable upon exchange of the Units
outstanding upon consummation of the Offering, which may adversely
affect the market price of the shares of Common Stock or result in
dilution on a per share basis of cash available for distribution.
FORMATION AND STRUCTURE OF THE COMPANY
The Company was formed in September 1996 and the Operating Partnership was
formed in October 1996. The Services Company will be formed prior to
consummation of the Offering. Prior to or simultaneous with the consummation of
the Offering, the Company, the Operating Partnership, the Services Company and
the Continuing Investors will engage in certain transactions (the "Formation
Transactions"), designed to enable the Company to continue and expand the real
estate operations of the Continuing Investors, to facilitate the Offering, to
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1997 and to preserve
certain tax advantages for the existing owners of the Properties. The Formation
Transactions are as follows:
. Pursuant to an omnibus option agreement (the "Omnibus Agreement"), the
Operating Partnership may require the contribution to the Operating
Partnership of all of the Continuing Investors' interests in the
Properties (other than the Acquisition Properties), the assets used to
conduct the leasing, management and development activities (principally
office equipment), the contract rights in connection with
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development opportunities at Kilroy Airport Center Long Beach, and the
rights with respect to the purchase of each of the Acquisition
Properties, in exchange for Units representing limited partnership
interests in the Operating Partnership. The book value to the Continuing
Investors of the assets to be contributed to the Operating Partnership
is a negative $113.2 million and the value of the Units representing
limited partnership interests in the Operating Partnership to be
received by the Continuing Investors is $60.6 million, assuming a Unit
value equal to the assumed initial public offering price of $22.50 per
share. The right to acquire the Properties and the other assets
described above in exchange for Units is conditioned upon the
consummation of the Offering. Pursuant to the terms of the Omnibus
Agreement, the Operating Partnership has the right to acquire the
Properties and other assets from the Continuing Investors in exchange
for Units through December 31, 1998, the date the Omnibus Agreement
terminates. Following the consummation of the Offering and the Formation
Transactions, the Units received by the Continuing Investors will
constitute in the aggregate an approximately 18.3% limited partnership
interest in the Operating Partnership.
. John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the
voting common stock of the Services Company for the aggregate purchase
price of $5,275 in cash (representing 5.0% of its economic value), and
the Operating Partnership will acquire all of the non-voting preferred
stock of the Services Company (representing 95.0% of its economic
value).
. The Company will sell shares of Common Stock in the Offering, issue
restricted shares of Common Stock to Richard E. Moran Jr., Executive
Vice President, Chief Financial Officer and Secretary of the Company
(but not a Continuing Investor) and contribute the net proceeds from the
Offering and the issuance of such restricted stock (approximately $246.6
million in the aggregate) to the Operating Partnership in exchange for
an 81.7% general partner interest in the Operating Partnership.
. The Operating Partnership will borrow approximately $84.0 million in
principal amount of long-term financing and $12.0 million in principal
amount of short-term debt pursuant to the Mortgage Loans.
. The Company, through the Operating Partnership, will apply the aggregate
of the net Offering proceeds and the Mortgage Loans toward the repayment
of existing mortgage indebtedness on certain of the Properties, the
purchase of the Acquisition Properties and the payment of its expenses
from the Offering and the Financing. See "Use of Proceeds."
. Forty-seven of the current 69 employees of KI will become employees of
the Company, the Operating Partnership and/or the Services Company,
including John B. Kilroy, Jr., the President and Chief Executive Officer
of KI, three other officers (Mr. Jeffrey Hawken, Executive Vice
President and Chief Operating Officer, Mr. Richard E. Moran Jr.,
Executive Vice President, Chief Financial Officer and Secretary, and
Mr. Campbell Hugh Greenup, General Counsel) who are not Continuing
Investors and 43 other operating and administrative employees. See
"Management."
. Concurrent with the consummation of the Offering, the Operating
Partnership or the Services Company will enter into management
agreements with respect to each of the Excluded Properties (the
"Management Agreements"). Pursuant to the terms of each of the
Management Agreements, the Operating Partnership or the Services
Company, as applicable, will have exclusive control and authority
(subject to an operating budget to be approved by the owners of each
property) over each of the Excluded Properties for a term of 24 months.
If any of the Excluded Properties are sold during the term of the
Management Agreements, then either party may terminate the respective
Management Agreement upon 30 days' prior written notice. In
consideration of the services to be provided under each of the
Management Agreements, the Company will receive a market rate monthly
property management fee as well as any applicable leasing commissions.
See "Business and Properties--Excluded Properties."
. Concurrent with the consummation of the Offering, the Company also will
enter into option agreements (together, the "Option Agreements") with
partnerships controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr.
granting to the Operating Partnership the exclusive right to acquire (i)
approximately 18
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undeveloped acres located at Calabasas Park Centre for cash and (ii) the
Office Property located at North Sepulveda Boulevard, El Segundo for
cash (or for Units after the first anniversary of the Offering at the
election of the seller), and in each case pursuant to the other terms of
the respective Option Agreement. See "Business and Properties--Excluded
Properties--Calabasas Park Centre" and "--North Sepulveda Boulevard, El
Segundo" for a discussion of the purchase price and other material terms
of each Option Agreement.
The Continuing Investors are comprised of (i) seven individuals, John B.
Kilroy, Sr., his five children, John B. Kilroy, Jr., Patrice Bouzaid, Susan
Hahn, Anne McCahon and Dana Pantuso, and Marshall L. McDaniel, a long-time
employee of KI, all of whom are "accredited investors" as defined in Regulation
D ("Regulation D") under the Securities Act, and (ii) corporations,
partnerships and trusts owned, directly or indirectly, solely by such
individuals, all of which are also "accredited investors." See "Note 1.
Organization and Basis of Presentation" to the historical financial statements
of the Kilroy Group. In addition, John B. Kilroy, Sr. is the Company's Chairman
of the Board of Directors and John B. Kilroy, Jr. is President and Chief
Executive Officer and a director of the Company. Consent on behalf of the
Continuing Investors to the Formation Transactions was received on or before
November 3, 1996 pursuant to a private solicitation thereof in compliance with
Regulation D.
REASONS FOR THE REORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions outweigh
the detriments to the Company. The benefits of the Company's REIT status and
structure, as opposed to the status and structure of the Partnerships, include
greater access to capital for refinancing and growth, allowing stockholders to
participate in real estate growth through one business enterprise,
diversification of risk and reward not available in single asset entities,
reduction in indebtedness encumbering the Properties, greater liquidity than
interests in partnerships owning individual properties, allowing stockholders
to benefit potentially from the current public market valuation of REITs and
deferral of tax liabilities to the Continuing Investors upon contribution of
the Properties.
The detriments of the Company's REIT status and structure as opposed to the
status and structure of the Partnerships include the fact that management will
be subject to conflicts of interest in the operation of the Operating
Partnership and the limited partners of the Operating Partnership will have
certain approval rights with respect to certain transactions, including (i) the
right of partners holding in the aggregate at least 60% of all interests in the
Operating Partnership to withhold consent to the withdrawal of the general
partner, or the transfer or assignment of the general partner's interest in the
Operating Partnership (see "Partnership Agreement of the Operating
Partnership--Transferability of Interests") and (ii) if limited partners own at
least 5% of the outstanding Units (including Units owned by the Company), the
right of limited partners holding in the aggregate more than 50% of all Units
representing limited partnership interests in the Operating Partnership to
withhold consent to (a) the dissolution of the Operating Partnership (other
than pursuant to a merger or sale of substantially all of the Company's assets)
or (b) prior to the seventh anniversary of the consummation of the Offering, to
sell the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo (see "Partnership Agreement of the Operating Partnership--
Certain Limited Partner Approval Rights"). In addition, the Continuing
Investors will have influence over certain transactions, including with respect
to the Company's acquisition, management and leasing activities, asset sales,
dispositions and refinancings of properties and its distribution policy. Other
detriments of the Company's REIT status include a potential lower overall rate
of return for an investor who exchanges an interest in a single asset for a
smaller interest in a group of assets, lower potential of distributions from
asset sales, no assurance that the public market valuation of the Company will
reflect private real estate values, the aggregate cost to the Company of the
Offering (estimated at approximately $23.4 million, including underwriting
discounts and commissions) and the incremental costs of operating a public
company. See also "Risk Factors."
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The following diagram illustrates the structure of the Company, the Operating
Partnership and the Services Company after the consummation of the Offering and
the Formation Transactions:
Kilroy Realty Corporation
(the "Company")(1)
Kilroy Realty, L.P.
(the "Operating Partnership")
81.7% owned by the Company
as general partner
18.3% owned by the Continuing Investors
as limited partners
Kilroy Services, Inc.
(the "Services Company")
100% nonvoting
preferred stock owned by
the Operating Partnership(/2/)
100% voting common stock
owned by John B. Kilroy, Sr.
and John B. Kilroy, Jr.(/3/)
- --------
(1) 12,000,000 shares of Common Stock, representing 99.5% of the outstanding
shares of Common Stock after the Offering, will be owned by public
stockholders and 60,000 restricted shares of Common Stock, representing
0.5% of the outstanding shares of Common Stock, will be owned by Richard E.
Moran Jr., Executive Vice President, Chief Financial Officer and Secretary
of the Company (but not a Continuing Investor). If all Units of the
Operating Partnership were exchanged for Common Stock, the Company would be
owned approximately 81.3% by public stockholders, 0.4% by Mr. Moran and
18.3% by the Continuing Investors. Beginning on the second anniversary of
the consummation of the Offering, each Unit will be redeemable by the
Operating Partnership at the request of the Unitholder for cash (based on
the fair market value of an equivalent number of shares of Common Stock at
the time of such redemption) or, at the Company's option, it may exchange
Units for shares of Common Stock on a one-for-one basis, subject to certain
antidilution adjustments and exceptions; provided, however, that if the
Company does not elect to exchange such Units for shares of Common Stock, a
Unitholder that is a corporation or limited liability company may require
the Company to issue shares of Common Stock in lieu of cash, subject to the
Ownership Limit, or such other limit as provided in the Company's Articles
of Incorporation or as otherwise permitted by the Board of Directors. See
"Partnership Agreement of Operating Partnership--Redemption/Exchange
Rights." Under certain circumstances, 50% of the Units received by John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries may be redeemed
prior to the second anniversary of the consummation of the Offering in
connection with the obligation of certain of the Continuing Investors to
indemnify the Company in connection with the Formation Transactions. See
"Formation and Structure of the Company--Allocation of Consideration in the
Formation Transactions." Executive officers, directors and other employees
of the Company will have options to acquire approximately 900,000 shares of
Common Stock which could reduce the percentage owned by public stockholders
to approximately 76.7% (assuming exchange of all outstanding Units and the
exercise of all outstanding options).
(2) Represents 95.0% of the economic interest in the Services Company.
(3) Represents 5.0% of the economic interest in the Services Company.
The Company presently anticipates that one of the Mortgage Loans (see "--The
Financing") will be incurred by a limited partnership which is wholly-owned by
the Company and the Operating Partnership and which will be structured to be a
"bankruptcy remote" financing vehicle. The Properties pledged as collateral for
such Mortgage Loan will be transferred to such limited partnership.
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BENEFITS TO THE CONTINUING INVESTORS
The principals of KI proposed the Formation Transactions to the Continuing
Investors because they believe that the benefits of the organization of the
Company for the Continuing Investors outweigh the detriments to them. Benefits
to the Continuing Investors include:
. improved liquidity of their interests in the Properties and increased
diversification of their investment;
. repayment of indebtedness in the aggregate net amount of approximately
$229.5 million resulting from the refinancing of existing mortgage
indebtedness, of which approximately $37.2 million is guaranteed by John
B. Kilroy, Sr., including $8.7 million which also is guaranteed by John
B. Kilroy, Jr., and the repayment of approximately $3.4 million of
personal indebtedness of John B. Kilroy, Sr.;
. an employment agreement between the Company and John B. Kilroy, Jr.
providing annual salary, incentive compensation (including Common Stock
options) and other benefits for his services as an officer of the
Company (see "Management--Employment Agreements"), and a grant of
options to purchase Common Stock to John B. Kilroy, Sr. (see
"Management--Stock Incentive Plan"); and
. the deferral of certain tax consequences that would arise from a sale,
or in certain circumstances a contribution, of such interests and assets
to the Company or to a third party.
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was determined
based upon the percentage of estimated cash available for distribution required
to pay estimated cash distributions resulting in an annual distribution rate
equal to 6.89% of the assumed initial public offering price of the Common Stock
of $22.50. The ownership interest in the Operating Partnership allocated to the
Company is equal to this percentage of estimated cash available for
distribution, and the remaining interest in the Operating Partnership will be
allocated to the Continuing Investors receiving Units in the Formation
Transactions. The parameters and assumptions used in deriving the estimated
cash available for distribution are described under the caption "Distribution
Policy."
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after consummation of the Offering and the
Formation Transactions or an opinion as to the fairness of the allocation of
shares to the purchasers in the Offering. The initial public offering price
will be determined based upon the estimated cash available for distribution and
the factors discussed under the caption "Underwriting," rather than a property
by property valuation based on historical cost or current market value. This
methodology has been used because management believes it is appropriate to
value the Company as an ongoing business rather than with a view to values that
could be obtained from a liquidation of the Company or of individual properties
owned by them. See "Underwriting."
FORMATION OF KILROY SERVICES, INC.
Prior to consummation of the Offering, Kilroy Services, Inc. (the "Services
Company") will be formed under the laws of the State of Maryland to succeed to
the development activities of the Kilroy Group and to perform development
activities for the Company and third parties. John B. Kilroy, Sr. and John B.
Kilroy, Jr. together will own 100% of the voting common stock of the Services
Company, representing 5.0% of its economic value. The Operating Partnership
will own 100% of the nonvoting preferred stock of the Services Company,
representing 95.0% of its economic value. The ownership structure of the
Services Company is necessary to permit the Company to share in the income of
the activities of the Services Company and also maintain its status as a REIT.
Although the Company anticipates receiving substantially all of the economic
benefit of the businesses carried on by the Services Company through the
Company's right to receive dividends through the Operating Partnership's
investment in the Services Company's nonvoting preferred stock, the Company
will not be able to elect the Services Company's officers or directors and,
consequently, may not have the ability to influence the operations of the
Services Company. See "Risk Factors--Risks of Development Business and Related
Activities Being Conducted by the Services Company--Adverse Consequences of
Lack of Control Over the Businesses of the Services Company."
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GROWTH STRATEGIES
The Company's objectives are to maximize growth in cash flow per share and to
enhance the value of its portfolio through effective management, operating,
acquisition and development strategies. The Company believes that opportunities
exist to increase cash flow per share: (i) by acquiring office and industrial
properties with attractive returns in strategic suburban submarkets where such
properties complement its existing portfolio; (ii) from contractual increases
in base rent; (iii) as a result of increasing rental and occupancy rates and
decreasing concessions and tenant installation costs as vacancy rates in the
Company's submarkets generally continue to decline; (iv) by developing
properties for the benefit of the Company where such development will result in
a favorable risk-adjusted return on investment; and (v) by expanding Properties
within the Company's existing industrial portfolio. The Company's ability to
achieve its growth strategy will be aided by its working capital cash reserves
of approximately $60 million upon consummation of the Offering and the proposed
Credit Facility.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space at
attractive rental rates because of increasing demand and, with respect to the
Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's markets, as
well as the Company's ability to acquire properties with Units (thereby
deferring the seller's taxable gain), all of which create enhanced acquisition
opportunities; (iii) the quality and location of the Properties; and (iv) the
limited availability to competitors of capital for financing development,
acquisitions or capital improvements. Management believes that the Company is
well positioned to exploit existing opportunities because of its extensive
experience in its submarkets and its nearly 50-year presence in the Southern
California market, its seasoned management team and its proven ability to
develop, lease and efficiently manage office and industrial properties. In
addition, the Company believes that public ownership and its capital structure
will provide new opportunities for growth. There can be no assurance, however,
that the Company will be able to lease available space, complete any property
acquisitions, successfully develop any land acquired or improve the operating
results of any developed properties that are acquired. See "Business and
Properties--Development, Leasing and Management Activities."
Operating Strategies. The Company will focus on enhancing growth in cash flow
per share by: (i) maximizing cash flow from existing Properties through active
leasing, contractual base rent increases and effective property management;
(ii) managing operating expenses through the use of in-house management,
leasing, marketing, financing, accounting, legal, construction management and
data processing functions; (iii) maintaining and developing long-term
relationships with a diverse tenant group; (iv) attracting and retaining
motivated employees by providing financial and other incentives to meet the
Company's operating and financial goals; and (v) continuing to emphasize
capital improvements to enhance the Properties' competitive advantages in their
markets.
The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
September 30, 1996, the Company leased or renewed leases for an aggregate of
approximately 1.0 million rentable square feet of office space and
approximately 718,000 rentable square feet of industrial space. As of December
31, 1995, the Office Properties located in the Southern California Area were
approximately 89.5% leased as compared to approximately 82.0% for the Southern
California Area, approximately 89.2% for the El Segundo submarket and
approximately 85.4% in the Long Beach submarket. In addition, at December 31,
1995, the Industrial Properties were approximately 91.4% leased as compared to
approximately 82.3% and approximately 87.1% for industrial properties located
in Los Angeles and Orange Counties, respectively. As of September 30, 1996, (i)
the Office Properties contained approximately 2.0 million rentable square feet
and were approximately 79.8% leased, and (ii) the Industrial Properties
contained approximately 1.3 million rentable square feet and were approximately
93.7% leased. In addition, the number of
10
<PAGE>
individual lease transactions since 1992, including the results for the nine-
month period ended September 30, 1996, averaged over 33 per year. See "Business
and Properties--General," "--Properties," "--Occupancy and Rental Information"
and "--The Company's Southern California Submarkets."
Approximately 1.0 million aggregate rentable square feet in the Properties
was leased by the Company from January 1, 1992 through December 31, 1994, a
period which management characterizes as recessionary. Based on the leases the
Company signed in 1996, and the findings in an independent study of the
Southern California real estate market commissioned by the Company, management
believes that the recent trend toward increasing rental rates in Class A office
and industrial buildings in the Company's Southern California submarkets
presents significant opportunities for growth. In addition, approximately 66.5%
of the Company's net rentable square feet is subject to leases expiring in 2000
or beyond, when management expects asking rents for the respective Properties
to be higher than the rents paid pursuant to such leases. In addition, as of
December 31, 1995 approximately 36.7% of the Company's total base rent
(representing approximately 23.7% of the aggregate net rentable square feet of
the Properties) was attributable to leases with Consumer Price Index increases
and approximately 28.1% of the Company's total base rent (representing
approximately 30.5% of the aggregate net rentable square feet of the
Properties) was attributable to leases with other specified contractual
increases. No assurance can be given, however, that new leases will reflect
rental rates greater than or equal to current rental rates or that current or
future economic conditions will support higher rental rates. See "Risk
Factors--Real Estate Investment Considerations."
Acquisition Strategies. The Company will seek to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that may: (i) provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's extensive experience, capital structure
and ability to acquire properties for Units, and thereby defer a seller's
taxable gain, if any, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies in the market which lack its access to capital or the
ability to issue Units. See "Business and Properties--Development, Leasing and
Management Activities."
The Company has entered into an agreement to acquire the two office
properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy
Airport Center Long Beach Phase I was developed by the Company in 1987 and has
been leased and managed by the Company since its inception. In addition, the
Company has entered into an agreement to purchase an office property located in
Thousand Oaks, California. The Company also has entered into an agreement to
acquire a three building office and industrial complex located in Anaheim,
California. In addition, KI, on behalf of the Operating Partnership, has
acquired a multi-tenant industrial property located in Garden Grove,
California. The acquisition of these properties (the "Acquisition Properties")
by the Company is expected to occur concurrently with the consummation of the
Offering and, accordingly, the Acquisition Properties are included in the
discussion of the Properties included throughout this Prospectus. There can be
no assurance, however, that the Company will be able to complete any property
acquisitions, including the acquisition of the Acquisition Properties,
successfully develop any land acquired or improve the operating results of any
developed properties that are acquired. See "Business and Properties--
Acquisition Properties."
11
<PAGE>
Development Strategies. The Company's interests in the Development Properties
provide it with significant growth opportunities.
The Company is the master ground lessee of, and has sole development rights
in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53-
acre property entitled for office, research and development,
light industrial and other commercial projects at which the Company will own,
upon consummation of the Offering, all five existing Office Properties and
manages all ongoing leasing and development activities. The Company developed
Phases I and II in 1987 and 1989/1990, respectively, encompassing an aggregate
of approximately 620,000 rentable square feet of office space. The Company
controls development of the Phase III and IV parcels while receiving rental
revenue in connection with such parcels under current leases expiring in July
2009 and September 1998, respectively, in amounts sufficient to cover a
substantial portion of the predevelopment carrying costs. Phases III and IV
presently are planned to be developed on the projects' approximately 24
undeveloped acres and are entitled for an aggregate of approximately
900,000 rentable square feet. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of each of Phases III and IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development of Phases III and IV is uncertain.
No assurance can be given that the Company will commence such development when
planned, or that, if commenced, such development will be completed. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development" and "Business and Properties--Development, Leasing
and Management Activities--Kilroy Long Beach."
In addition, certain of the Industrial Properties can support additional
development, and the Company presently is planning to develop in the next two
years, subject to substantial pre-leasing, approximately 105,000 rentable
square feet of such additional space.
The Company may engage in the development of other office and/or industrial
properties primarily in Southern California submarkets when market conditions
support a favorable risk-adjusted return on such development. The Company's
activities with third-party owners in Southern California are expected to give
the Company further access to development opportunities. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Development Properties or any other properties. See "Business and
Properties--Development, Leasing and Management Activities."
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the ratio of debt to total market capitalization (total debt of the
Company as a percentage of the market value of issued and outstanding shares of
Common Stock, including interests exchangeable therefor, plus total debt) to
approximately 50%. However, such objectives may be altered without the consent
of the Company's stockholders, and the Company's organizational documents do
not limit the amount of indebtedness that the Company may incur. Upon
completion of the transactions outlined under the caption "Formation and
Structure of the Company," total debt will constitute approximately 22.4% of
the total market capitalization of the Company (assuming an initial public
offering price of $22.50 per share of Common Stock). In addition, upon
consummation of the Offering, the Company will have working capital cash
reserves of approximately $60 million. The Company anticipates that upon
consummation of the Offering all but approximately $12.0 million of its
permanent indebtedness will bear interest at fixed rates. The Company intends
to utilize one or more sources of capital for future acquisitions, including
development and capital improvements, which may include undistributed cash
flow, borrowings under the proposed Credit Facility, the Company's
approximately $60 million of working capital cash reserves out of the net
proceeds of the Offering, issuance of debt or equity securities and other bank
and/or institutional borrowings. There can be no assurance, however, that the
Company will be able to obtain capital for any such acquisitions, developments
or improvements on terms favorable to the Company. See "--Growth Strategies,"
"The Company--Growth Strategies" and "Business and Properties--Development,
Leasing and Management Activities."
12
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of December 31, 1995, unless indicated otherwise. This table
gives pro forma effect to a recent extension of one of the leases with Hughes
Space & Communications with respect to two of the Office Properties located at
Kilroy Airport Center at El Segundo as if such lease renewal had occurred on
January 1, 1995. After completion of the Formation Transactions, the Company
(through the Operating Partnership) will own a 100% interest in all of the
Office and Industrial Properties other than the five Office Properties located
at Kilroy Airport Center Long Beach and the three Office Properties located at
the SeaTac Office Center, each of which are held subject to ground leases
expiring in 2035 and 2062 (assuming the exercise of the Company's options to
extend such lease), respectively.
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE
NET LEASED 1995 OF 1995 RENT
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- --------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties:
Kilroy Airport Center at El
Segundo
2250 E. Imperial Highway(8).... 1983 291,187 80.9 4,316 4,042 11.5 18.32 17.16
2260 E. Imperial Highway)(9)... 1983 291,187 100.0 7,160 6,545 19.1 24.59 22.48
2240 E. Imperial Highway
El Segundo, California(10)..... 1983 118,933 100.0 1,130 1,121 3.0 9.50 9.43
Kilroy Airport Center Long Beach
3900 Kilroy Airport Way(11).... 1987 126,840 94.0 2,282 2,092 6.1 19.14 17.55
3880 Kilroy Airport Way(11).... 1987 98,243 100.0 1,296 1,022 3.5 13.19 10.40
3760 Kilroy Airport Way........ 1989 165,278 92.1 3,372 2,807 9.0 22.16 18.45
3780 Kilroy Airport Way........ 1989 219,745 63.6 3,465 3,005 9.2 24.79 21.50
3750 Kilroy Airport Way
Long Beach, California......... 1989 10,457 100.0 75 28 0.2 7.21 2.66
SeaTac Office Center
18000 Pacific Highway.......... 1974 207,092 58.7 1,799 1,510 4.8 14.80 12.42
17930 Pacific Highway.......... 1980 210,899 -- -- -- -- -- --
17900 Pacific Highway
Seattle, Washington........... 1980 113,605 87.7 1,896 1,820 5.0 19.02 18.26
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California(11)....... 1985 42,790 93.2 493 475 1.3 12.37 11.92
2829 Townsgate Road
Thousand Oaks, California(11).. 1990 81,158 100.0 1,888 1,760 5.0 23.26 21.69
185 S. Douglas Street
El Segundo, California(12)..... 1978 60,000 100.0 1,313 898 3.5 21.89 14.96
--------- ----- ------ ------ ---- ----- -----
Subtotal/Weighted Average 2,037,414 77.0 30,485 27,125 81.2 19.44 17.30
--------- ----- ------ ------ ---- ----- -----
Industrial Properties:
2031 E. Mariposa Avenue
El Segundo, California......... 1954 192,053 100.0 1,556 1,296 4.1 8.10 6.75
3340 E. La Palma Avenue
Anaheim, California............ 1966 153,320 100.0 881 790 2.3 5.74 5.16
2260 E. El Segundo Boulevard
El Segundo, California(13)..... 1979 113,820 100.0 553 510 1.5 4.86 4.48
2265 E. El Segundo Boulevard
El Segundo, California......... 1978 76,570 100.0 554 493 1.5 7.23 6.44
1000 E. Ball Road
Anaheim, California(14)........ 1956 100,000 100.0 639 519 1.7 6.39 5.19
1230 S. Lewis Street
Anaheim, California............ 1982 57,730 100.0 303 284 0.8 5.25 4.92
12681/12691 Pala Drive
Garden Grove, California ...... 1970 84,700 82.6 476 454 1.3 6.81 6.48
<CAPTION>
TENANTS LEASING
PERCENTAGE 10% OR MORE OF
LEASED NET RENTABLE
AS OF SQUARE FEET PER
9/30/96 PROPERTY
(%)(6) AS OF 9/30/96(7)
---------- ----------------
<C> <S>
83.9 Hughes Space &
Communications
(33.0%)
100.0 Hughes Space &
Communications
(100.0%)
100.0 Hughes Space &
Communications
(94.6%)
94.0 McDonnell
Douglas
Corporation
(50.9%), Olympus
America, Inc.
(18.6%)
100.0 Devry, Inc.
(100.0%)
82.6 R.L. Polk & Co.
(9.8%)
92.2 SCAN Health Plan
(20.4%), Zelda
Fay Walls (12.7%)
100.0 Oasis Cafe
(37.1%),
Keywanfar &
Baroukhim
(16.1%),
SR Impressions
(15.0%)
60.0 Principal Mutual
(8.8%),
Lynden (8.8%),
Rayonier (8.0%)
-- --
87.7 Key Bank
(41.9%)(15),
Northwest
Airlines
(24.9%),
City of Sea Tac
(17.2%)
91.6 Peryam & Kroll
(26.7%),
DMV/VPI
Insurance Group
(26.5%),
Midcom
Corporation
(15.5%)
100.0 Worldcom, Inc.
(34.2%), Data
Select Systems,
Inc. (13.0%),
Pepperdine
University
(12.7%),
Anheuser Busch,
Inc. (12.0%)
100.0 Northwest
Airlines, Inc.
(100%)
-----
79.8
-----
Mattel, Inc.
100.0 (100%)
Furon Co., Inc.
59.2 (59.2%)
Ace Medical Co.
100.0 (100%)
100.0 MSAS Cargo
Intl., Inc.
(100%)
100.0 Allen-Bradley
Company (100%)
100.0 Extron
Electronics (100%)
82.6 Rank Video Services America, Inc.
(82.6%)
</TABLE>
(footnotes on next page)
13
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
NET LEASED 1995 OF 1995 RENT LEASED
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE AS OF
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER 9/30/96
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) (%)(6)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2270 E. El Segundo
Boulevard
El Segundo,
California........... 1975 7,500 100.0 129 129 0.3 17.17 17.17 --
5115 N. 27th Avenue
Phoenix,
Arizona(16).......... 1962 130,877 100.0 640 612 1.7 4.89 4.68 100.0
12752-12822 Monarch
Street
Garden Grove,
CA(11)(17)........... 1970 277,037 76.4 727 715 1.9 3.43 3.38 100.0
4155 E. La Palma
Avenue
Anaheim, CA(11)(17).. 1985 74,618 100.0 325 237 0.9 4.36 3.18 100.0
4125 La Palma Avenue
Anaheim, CA(11)(17).. 1985 69,472 65.6 319 302 0 .8 7.00 6.63 100.0
--------- ----- ------ ------ ----- ----- ----- -----
Subtotal/Weighted
Average 1,337,697 92.2 7,102 6,341 18.8 5.76 5.14 93.7
--------- ----- ------ ------ ----- ----- ----- -----
Office & Industrial--
All Properties 3,375,111 83.0 37,587 33,466 100.0 13.42 11.95 85.3
--------- ----- ------ ------ ----- ----- ----- -----
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE FEET PER
PROPERTY
AS OF 9/30/96(7)
--------------------
<S>
--
Festival
Markets, Inc.
(100%)
Cannon Equipment
(60%),
Vanco (16.4%)
Bond
Technologies
(29.6%),
NovaCare
Orthotics
(24.0%),
Specialty
Restaurants
Corp.
(21.7%)
Household
Finance
Corporation
(59%), CSTS
(34%)
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1995.
(2) Total base rent for the year ended December 31, 1995, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.
(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1995 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12. Tenant improvements,
leasing commissions and other concessions are estimated using the same
methodology used to calculate effective rent for the Properties as a whole
in the charts set forth under the caption "Business and Properties--
General."
(4) Base rent for the year ended December 31, 1995 divided by net rentable
square feet leased at December 31, 1995.
(5) Effective rent at December 31, 1995 divided by net rentable square feet
leased at December 31, 1995.
(6) Based on all leases at the respective Properties dated on or before
September 30, 1996. Occupancy for all Properties at December 31, 1996 was
approximately 88.2%.
(7) Excludes office space leased by the Company.
(8) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software Products
Marketing Division, Inc., for approximately 6,800 rentable square feet,
are written on a full service gross basis except that there is no Expense
Stop.
(9) For this Property, the lease with Hughes Space & Communications is written
on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance costs
with respect to the leased space and, in addition, pays its pro rata share
of real estate taxes, insurance, and certain other expenses including
common area expenses.
(10) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(11) This Property is an Acquisition Property.
(12) For this Property, the lease is written on a triple net basis.
(13) This Industrial Property was vacant until April 1995. The tenant began
paying rent in mid-October 1995 at an annual rate of $4.40 per rentable
square foot.
(14) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis Street.
(15) This lease terminates on December 31, 1996.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
14
<PAGE>
THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS
The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study the
Company's Southern California submarkets, and the discussion of such submarkets
below is based upon Lesser's findings. While the Company believes that these
estimates of economic trends are reasonable, there can be no assurance that
these trends will in fact continue.
The Company's Office and Industrial Properties are primarily located in Los
Angeles, Orange and Ventura Counties which, together with Riverside and San
Bernardino Counties, comprise the second largest Consolidated Metropolitan
Statistical Area in the United States. Management believes that the region's
economy, which in 1994 commenced recovery from a four-year economic recession,
and the continuing growth in the region's foreign trade, tourism and
entertainment industries, provide an attractive environment for owning and
operating Class A office and industrial properties since occupancy rates and
asking rents generally are increasing. In addition, since 1992 there has been
virtually no increase in the region's office space, while the region's demand
for quality industrial space and low vacancy rates has spurred modest new
construction of industrial properties.
Vacancy rates in the office space market in the Southern California Area are
trending downward from a high in 1991 and 1992 of nearly 20.0% to a level at
the end of 1996 of under 17.0%. At September 30, 1996, the vacancy rate for the
Southern California Area Office Properties was approximately 6.9%. Vacancy
rates in the industrial space market in the Southern California Area have
decreased from a high of nearly 14% in 1992 to approximately 7.6% at December
31, 1996. At September 30, 1996, the vacancy rate for the Southern California
Area Industrial Properties was approximately 7.0%.
As of December 31, 1995, the Southern California Area had a total population
of approximately 15.6 million people which accounted for approximately 5.9% of
the total U.S. population. Beginning in 1990, annual population growth in the
region has averaged approximately 217,000 persons. Of the total population at
December 31, 1995, approximately 9.2 million and 2.6 million persons lived in
Los Angeles and Orange Counties, respectively, the counties in which all but
five of the Properties are located. Annual estimated growth in population over
the next five years in these counties is expected to be approximately 94,000
and 32,000 persons, respectively. See "Business and Properties--The Company's
Southern California Submarkets."
THE FINANCING
The Company, on behalf of the Operating Partnership, has obtained a written
commitment for mortgage loans of $96.0 million (the "Mortgage Loans"), the
closing of which is a condition to the consummation of the Offering. The
proceeds of the Mortgage Loans will principally be used to repay existing
indebtedness on the Properties. The Mortgage Loans consist of: (i) an $84.0
million mortgage loan secured by certain of the Properties (the "$84.0 Million
Loan") and (ii) a $12.0 million mortgage loan secured by the SeaTac Office
Center (the "SeaTac Loan"). The $84.0 Million Loan requires monthly principal
and interest payments based on a fixed rate of 8.2%, amortizing over a 25-year
period, and matures in 2005. The Company presently anticipates that the $84.0
Million Loan will be incurred by a limited partnership which is wholly-owned by
the Company and the Operating Partnership and structured to be a "bankruptcy
remote" financing vehicle. The Properties to be pledged as collateral for the
$84.0 Million Loan will be transferred to such limited partnership. The SeaTac
Loan requires monthly payment of interest computed at a variable rate and has a
term of six months. Principal and interest under the SeaTac Loan will be full
recourse to the Company. The Company has financed the SeaTac Office Center in
this manner in order to provide flexibility to obtain additional financing
secured by the SeaTac Office Center if the Company leases additional space at
this Property.
The Company is currently negotiating a $100.0 million revolving Credit
Facility (the Credit Facility, together with the Mortgage Loans, the
"Financing") which the Company, on behalf of the Operating
15
<PAGE>
Partnership, expects to enter into shortly after the consummation of the
Offering. The availability of funds under the Credit Facility is expected to be
subject to the value of collateral securing the facility and the Company's
compliance with a number of customary financial and other covenants on an
ongoing basis. The Company expects that, initially, approximately $50.0 million
will be available under the Credit Facility. The Company also will have working
capital cash reserves of approximately $60 million and capital expenditure cash
reserves of approximately $2.3 million upon consummation of the Offering. The
Credit Facility and the working capital cash reserves will be used primarily to
finance acquisitions of additional properties. The Credit Facility will also be
available to refinance the SeaTac Loan. Payment of principal and interest on
the Credit Facility is expected to be secured by certain of the Properties. In
addition, borrowings under the Credit Facility are expected to be recourse
obligations to the Company and the Operating Partnership.
If the initial public offering price for the Common Stock is less than the
assumed offering price of $22.50 per share, the Company expects to make up any
shortfall between the aggregate net proceeds of the Offering and the Mortgage
Loans, and the intended uses thereof, by reducing its working capital cash
reserves. See "Use of Proceeds."
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of its Common Stock. The first distribution, for the period commencing
upon the consummation of the Offering and ending March 31, 1997, is anticipated
to be approximately $ per share (which is equivalent to a quarterly
distribution of $.3875 per share or an annual distribution of $1.55 per share)
which results in an initial annual distribution rate of 6.89%, based on an
initial public offering price of $22.50 per share. The Company does not expect
to change its estimated distribution rate if any of the Underwriters' over-
allotment option is exercised. The Company currently expects to distribute
approximately 90.5% of estimated cash available for distribution for the 12
months following the consummation of the Offering. Units and shares of Common
Stock will receive equal distributions. The Board of Directors may vary the
percentage of cash available for distribution which is distributed if the
actual results of operations, economic conditions or other factors differ from
the assumptions used in the Company's estimates.
The Company established its initial distribution rate based on estimated cash
flow for the 12 months following the consummation of the Offering and the
Formation Transactions which the Company anticipates to be available for
distribution, taking into account rents under existing leases, estimated
operating expenses, capital improvements, debt service requirements, known
contractual commitments, and estimated amounts for recurring tenant
improvements and leasing commissions. To maintain its qualification as a REIT,
the Company must make annual distributions to stockholders of at least 95% of
its taxable income, determined without regard to the deduction for dividends
paid and by excluding any net capital gains. Under certain circumstances, the
Company may be required to make distributions in excess of cash flow available
for distribution to meet such distribution requirements. See "Distribution
Policy."
The Company's estimate of the initial distribution rate for the Common Stock
was based on the Company's estimate of cash available for distribution, which
is being made solely for the purpose of setting the initial distribution rate
and is not intended to be a projection or forecast of the Company's results of
operations or of its liquidity. The Company believes that its estimate of cash
available for distribution constitutes a reasonable basis for setting the
initial distribution rate. However, no assurance can be given that the
Company's estimate will be accurate. See "Risk Factors--Distribution Payout
Percentage."
16
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ending December 31, 1997 and believes its organization
and proposed method of operation will enable it to meet the requirements for
qualification as a REIT. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its REIT taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) to its stockholders. As a REIT, the Company generally will not be
subject to federal income tax on net income it distributes currently to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income tax at regular corporate rates and may not be
able to qualify as a REIT for the four subsequent taxable years. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT" and "Federal
Income Tax Considerations." Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain federal, state and local taxes on
its income and property. In addition, the Services Company will be subject to
federal and state income tax at regular corporate rates on its net income.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby.. 12,000,000 shares
Common Stock Outstanding af-
ter the Offering............ 14,752,374 shares(/1/)
Use of Proceeds.............. Together with the net proceeds of the Mortgage
Loans, repayment of approximately $229.5 million
(including accrued interest and loan fees) of
existing mortgage and other indebtedness,
approximately $49.0 million for the purchase of
the Acquisition Properties and the remaining
approximately $68.2 million to be available for
expenses of the Formation Transactions, expenses
of the Financing, expenses of the Offering and
as working capital.
NYSE symbol.................. KRC
</TABLE>
- --------
(1) Includes 2,692,374 Units (calculated on an as-exchanged basis) issued in
connection with the Formation Transactions and 60,000 restricted shares of
Common Stock to be issued to Richard E. Moran Jr., Executive Vice
President, Chief Financial Officer and Secretary of the Company (but not a
Continuing Investor) pursuant to the Stock Incentive Plan, but excludes
1,400,000 additional shares of Common Stock reserved for issuance as
restricted shares of Common Stock, or upon the exercise of options granted,
pursuant to the Stock Incentive Plan (as defined herein). See "Management--
Stock Incentive Plan" and "Shares Eligible for Future Sale."
17
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth certain financial data on a pro forma basis
for the Company, and on an historical basis for the Kilroy Group, which consist
of the combined financial statements of the Kilroy Group (the "Combined
Financial Statements") whose financial results will be consolidated in the
historical and pro forma financial statements of the Company. The financial
data should be read in conjunction with the historical and pro forma financial
statements and notes thereto included in this Prospectus. The combined
historical summary financial data as of December 31, 1994, 1995 and September
30, 1996 and for each of the three years in the period ended December 31, 1995
and the nine months ended September 30, 1995 and 1996 have been derived from
the Combined Financial Statements of the Kilroy Group audited by Deloitte &
Touche LLP, independent public accountants, whose report with respect thereto
is included elsewhere in this Prospectus. The selected combined historical
financial and operating information as of December 31, 1993, 1992 and 1991, and
for the years ended December 31, 1992 and 1991, have been derived from the
unaudited Combined Financial Statements of the Kilroy Group and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the operating information for
the unaudited periods. The pro forma data assume the completion of the
Formation Transactions, including acquisition of the Acquisition Properties and
the consummation of the Offering (based upon the midpoint of the range of the
initial public offering price set forth on the cover page of this Prospectus)
and the Financing, and use of the aggregate net proceeds therefrom as described
under "Use of Proceeds" as of the beginning of the periods presented for the
operating data and as of the balance sheet date for the balance sheet data. The
pro forma financial data does not give effect to the recent extension of the
tenant lease with Hughes Space & Communications with respect to space leased in
the Office Property located at 2250 E. Imperial Highway, El Segundo, California
and a portion of the space leased in the Office Property located at 2240 E.
Imperial Highway, El Segundo, California. The pro forma financial data are not
necessarily indicative of what the actual financial position or results of
operations of the Company would have been as of and for the periods indicated,
nor does it purport to represent the future financial position and results of
operations.
18
<PAGE>
THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA --------------------- PRO FORMA ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- ------------ -------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Rental income.......... $ 30,635 $ 25,156 $ 24,056 $39,141 $ 32,314 $ 31,220 $ 34,239 $ 32,988 $ 29,300
Tenant reimbursements.. 3,326 2,583 2,377 3,886 3,002 1,643 4,916 5,076 5,416
Parking income......... 1,317 1,317 1,193 1,582 1,582 1,357 1,360 1,286 1,358
Development and
management fees....... -- 580 926 -- 1,156 919 751 882 779
Sale of air rights..... -- -- 4,456 4,456 4,456 -- -- -- --
Lease termination
fees.................. -- -- -- 100 100 300 5,190 48 --
Other income........... 364 65 211 705 298 784 188 221 206
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total revenues......... 35,642 29,701 33,219 49,870 42,908 36,223 46,644 40,501 37,059
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Property expenses...... 6,411 5,042 5,045 8,668 6,834 6,000 6,391 6,384 6,971
Real estate taxes
(refunds)............. 1,457 970 1,088 2,002 1,416 (448) 2,984 3,781 2,377
General and
administrative
expense............... 3,100 1,607 1,554 4,133 2,152 2,467 1,113 1,115 841
Ground lease........... 832 579 542 1,127 789 913 941 854 726
Development expenses... -- 584 564 -- 737 468 581 429 255
Option buy-out cost.... 3,150 3,150 -- -- -- -- -- -- --
Interest expense....... 5,937 16,234 18,660 7,916 24,159 25,376 25,805 26,293 26,174
Depreciation and
amortization.......... 7,668 6,838 7,171 10,580 9,474 9,962 10,905 10,325 9,116
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total expenses......... 28,555 35,004 34,624 34,426 45,561 44,738 48,720 49,181 46,460
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Income (loss) before
equity in income of
subsidiary, minority
interest and
extraordinary item.... 7,087 (5,303) (1,405) 15,444 (2,653) (8,515) (2,076) (8,680) (9,401)
Equity in income (loss)
of subsidiary......... (58) -- 136 -- -- -- -- --
Minority interest...... (1,286) -- (2,851) -- -- -- -- --
Extinguishment of
debt.................. -- 20,095 15,267 -- 15,267 1,847 -- -- --
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Net income (loss)...... $ 5,743 $ 14,792 $ 13,862 $12,729 $ 12,614 $ (6,668) $ (2,076) $ (8,680) $ (9,401)
======== ========== ======== ======= ========= ========= ========= ========= ========
Pro forma net income
per share(1).......... $ 0.48 $ 1.06
======== =======
<CAPTION>
DECEMBER 31,
----------------------------------------------------
SEPTEMBER 30, 1996 COMBINED HISTORICAL
----------------------- ----------------------------------------------------
COMBINED
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- ------------ --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumu-
lated depreciation and
amortization.......... $285,150 $ 227,127 $ 224,983 $ 223,821 $ 222,056 $ 221,423 $220,363
Total assets........... 250,582 131,062 132,857 143,251 148,386 161,008 169,147
Mortgages and loans.... 96,000 224,046 233,857 250,059 248,043 250,792 245,645
Total liabilities...... 109,981 244,285 254,683 273,585 263,346 263,156 254,786
Minority interest...... 25,730
Stockholders' equity
(deficit)............. 114,871 (113,223) (121,826) (130,334) (114,960) (102,148) (85,639)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA ---------------------- PRO FORMA -------------------------------
1996 1996 1995 1995 1995 1994 1993
----------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)......... $18,243 $4,685 $1,310 $22,018 $2,365 $1,447 $3,639
Cash flows from:
Operating activities... -- 5,528 9,270 -- 10,071 6,607 11,457
Investing activities... -- (2,140) (446) -- (1,162) (1,765) 2,028
Financing activities... -- (3,388) (8,824) -- (8,909) (4,842) (13,485)
Office Properties:
Square footage......... 2,037,414 1,688,383 1,688,383 2,037,414 1,688,383 1,688,383 1,688,383
Occupancy.............. 79.8% 76.3% 72.8% 77.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage......... 1,337,697 916,570 916,570 1,337,697 916,570 916,570 916,570
Occupancy.............. 93.7% 90.8% 98.4% 92.2% 98.4% 79.7% 77.6%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
12,060,000 shares of Common Stock outstanding after the Offering.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of unit holders (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1996 and 1995, non-cash compensation. Further, in 1996 and
1995 non-recurring items (sale of air rights and option buy-out cost) were
excluded. Management considers Funds from Operations an appropriate measure
of performance of an equity REIT because industry analysts have accepted it
as such. The Company computes Funds from Operations in accordance with
standards established by the Board of Governors of NAREIT in its March 1995
White Paper, which may differ from the methodology for calculating Funds
from Operations utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, Funds from Operations does not
represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. See notes (9), (10) and (11) under the
caption "Distribution Policy" and the notes to the historical financial
statements of the Kilroy Group. Funds from Operations should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP.
19
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves various material
risks. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
CONFLICTS OF INTEREST
Certain Limited Partner Approval Rights. While the Company will be the sole
general partner of the Operating Partnership, and generally will have full and
exclusive responsibility and discretion in the management and control of the
Operating Partnership, certain provisions of the Partnership Agreement place
limitations on the Company's ability to act with respect to the Operating
Partnership. The Partnership Agreement provides that if the limited partners
own at least 5% of the outstanding Units (including Units held by the Company
which will represent 81.7% of all Units outstanding upon consummation of the
Offering), the Company shall not, on behalf of the Operating Partnership, take
any of the following actions without the prior consent of the holders of more
than 50% of the Units representing limited partner interests (excluding Units
held by the Company): (i) dissolve the Operating Partnership, other than
incident to a merger or sale of substantially all of the Company's assets; or
(ii) prior to the seventh anniversary of the consummation of the Offering,
sell the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo, other than incident to a merger or sale of substantially
all of the Company's assets. Furthermore, the Partnership Agreement provides
that, except in connection with certain transactions, the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, without the consent of the holders of
at least 60% of the Units (including Units held by the Company) and without
meeting certain other criteria with respect to the consideration to be
received by the limited partners. In addition, the Company has agreed to use
its commercially reasonable efforts to structure certain merger transactions
to avoid causing the limited partners to recognize gain for federal income tax
purposes by virtue of the occurrence of or their participation in such
transactions. The restrictions on the Company's ability to act as described
above may result in the Company being precluded from taking action which the
Board of Directors believes is in the best interest of all stockholders. See
"Partnership Agreement of the Operating Partnership--Transferability of
Interests" and "--Certain Limited Partner Approval Rights."
Tax Consequences Upon Sale or Refinancing. Unlike persons acquiring shares
of Common Stock in the Offering, holders of Units may suffer different and
more adverse tax consequences than the Company upon the sale or refinancing of
the Properties owned by the Operating Partnership, and therefore such holders
may have different objectives regarding the appropriate pricing and timing of
any sale or refinancing of such Properties. While the Company, as the sole
general partner of the Operating Partnership, will have the authority (subject
to certain limited partner approval rights described below) to determine
whether and on what terms to sell or refinance each Property owned solely by
the Operating Partnership, those directors and officers of the Company who
hold Units may seek to influence the Company not to sell or refinance the
Properties, even though such a sale might otherwise be financially
advantageous to the Company, or may seek to influence the Company to refinance
a Property with a higher level of debt. The Partnership Agreement provides
that if the limited partners own at least 5% of the outstanding Units
(including Units held by the Company which will represent 81.7% of all Units
outstanding upon consummation of the Offering), the Company shall not, on
behalf of the Operating Partnership, take any of the following actions without
the prior consent of the holders of more than 50% (excluding Units held by the
Company) of the Units representing limited partner interests: (i) dissolve the
Operating Partnership, other than incident to a merger or sale of
substantially all of the Company's assets; or (ii) prior to the seventh
anniversary of the consummation of the Offering, sell the Office Property at
2260 E. Imperial Highway at Kilroy Airport Center at El Segundo, other than
incident to a merger or sale of substantially all of the Company's assets. The
Operating Partnership will also use commercially reasonable efforts to
cooperate with the limited partners to minimize any taxes payable in
connection with any repayment, refinancing, replacement or restructuring of
indebtedness, or any sale, exchange or any other disposition of assets, of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Transferability of Interests" and "--Certain Limited Partner
Approval Rights."
20
<PAGE>
Failure to Enforce Terms of Certain Agreements. As recipients of Units in
the Formation Transactions, John B. Kilroy, Sr., as Chairman of the Company's
Board of Directors, and John B. Kilroy, Jr., as the Company's President and
Chief Executive Officer and a director of the Company, will have a conflict of
interest with respect to their obligations as directors or officers of the
Company to enforce the terms of the agreements relating to the transfer to the
Operating Partnership of their interests in the Properties and other assets to
be acquired by the Company and relating to the Company's option to purchase
certain additional properties owned by entities controlled by them. See
"Business and Properties--Development, Leasing and Management Activities--
Excluded Properties." The failure to enforce the material terms of those
agreements (which would require the approval of the Independent Directors)
could result in a monetary loss to the Company, which loss could have a
material effect on the Company's financial condition or results of operations.
While certain Continuing Investors will provide indemnities in connection with
such transfers, such indemnities would be impaired to the extent that such
Continuing Investors have other obligations, including obligations for taxes
arising from the Formation Transactions or prior transactions, which they may
not have sufficient assets to satisfy.
Policies with Respect to Conflicts of Interest. The Company has adopted
certain policies designed to eliminate or minimize conflicts of interest.
These policies include (i) provisions in the Company's Articles of
Incorporation and Bylaws which require that at least a majority of the
directors be Independent Directors, (ii) provisions in the Company's Bylaws
which require that a majority of the Independent Directors approve
transactions between the Company and members of the Kilroy Group, including
the enforcement of terms of the transfers of the Properties to the Operating
Partnership and the exercise of the options with respect to the Excluded
Properties, and the sale or refinancing of the Properties and (iii) the
requirement that the members of the Board of Directors that are Continuing
Investors (John B. Kilroy, Jr. and John B. Kilroy, Sr.) enter into
noncompetition agreements with the Company. The provisions contained in the
Company's Articles of Incorporation can be modified only with the approval of
two-thirds of the shares of the Company's capital stock outstanding and
entitled to vote thereon, and the provisions contained in the Company's Bylaws
can be modified only with the approval of a majority of either the Company's
Board of Directors or the shares of the Company's capital stock outstanding
and entitled to vote thereon. However, there can be no assurance that these
policies will not be changed in the future or that they otherwise always will
be successful in eliminating the influence of such conflicts, and, if they are
not successful, decisions could be made that might fail to reflect fully the
interests of all stockholders. See "Policies with Respect to Certain
Activities--Conflict of Interest Policies."
Competitive Real Estate Activities of Management. John B. Kilroy, Sr. and
John B. Kilroy, Jr. will have controlling ownership interests in a complex of
three office properties which are located in the El Segundo submarket in which
four of the Office Properties and four of the Industrial Properties are
located. These properties will be managed by the Operating Partnership and
certain of the Company's officers, directors and employees will spend an
immaterial portion of their time and effort managing these interests and
Calabasas Park Centre, an undeveloped approximately 66-acre site (representing
approximately 45 developable acres net of acreage required for streets and
contractually required open areas). The Kilroy Group is actively marketing for
sale all but 18 acres of Calabasas Park Centre. Certain of the Company's
officers, directors and employees will spend an immaterial amount of time in
connection with any sales of such parcels.
Each of these properties is currently owned by partnerships owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The properties
located on North Sepulveda Boulevard in El Segundo will be managed by the
Operating Partnership pursuant to a management agreement on market terms. With
respect to Calabasas Park Centre, the officers, directors and employees of the
Company will spend an immaterial amount of time in connection with the
entitlement, marketing and sales of such parcels. Calabasas Park Centre will
be managed by the Services Company pursuant to a management agreement on
market terms. The implementation of the arrangements relating to each of these
properties will involve a conflict of interest with John B. Kilroy, Sr. and
John B. Kilroy, Jr. The Kilroy Group holds certain other real estate interests
which are not being contributed to the Company as part of the Formation
Transactions. All of such other real estate interests relate to miscellaneous
properties and property rights that the Company believes are not of a type
appropriate for inclusion in the
21
<PAGE>
Company's portfolio and the properties are not consistent with the Company's
strategy. See "Business and Properties--Excluded Properties."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1997. Although management
believes that it will be organized and will operate in such a manner, no
assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as
a REIT involves the satisfaction of numerous requirements (some on an annual
and others on a quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
For example, in order to qualify as a REIT, at least 95% of the Company's
gross income in any year must be derived from qualifying sources and the
Company must pay distributions to stockholders aggregating annually at least
95% of its REIT taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). The complexity of these
provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets in partnership form. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of such qualification. The Company is
relying on the opinion of Latham & Watkins, tax counsel to the Company,
regarding various issues affecting the Company's ability to qualify, and
continue to qualify, as a REIT. See "Federal Income Tax Consequences--Taxation
of the Company" and "Legal Matters." Such legal opinion is based on various
assumptions and factual representations by the Company regarding the Company's
ability to meet the various requirements for qualification as a REIT, and no
assurance can be given that actual operating results will meet these
requirements. Such legal opinion is not binding on the Internal Revenue
Service ("IRS") or any court.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the REIT's total
assets on certain testing dates. See "Federal Income Tax Consequences--
Taxation of the Company--Requirements for Qualification." The Company believes
that its allocable share of the aggregate value of the securities of the
Services Company to be held by the Operating Partnership will be less than 5%
of the value of the Company's total assets, based on the initial allocation of
Units among participants in the Formation Transactions and the Company's
opinion regarding the maximum value that could be assigned to the expected
assets and net operating income of the Services Company after the Offering. In
rendering its opinion as to the qualification of the Company as a REIT, Latham
& Watkins is relying on the conclusions of the Company regarding the value of
the Services Company.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available for investment or distribution to stockholders because of
the additional tax liability to the Company for the years involved. In
addition, distributions to stockholders would no longer be required to be
made. See "Federal Income Tax Consequences--Taxation of the Company--
Requirements for Qualification."
Other Tax Liabilities. Even if the Company qualifies for and maintains its
REIT status, it will be subject to certain federal, state and local taxes on
its income and property. For example, if the Company has net income from a
prohibited transaction, such income will be subject to a 100% tax. In
addition, the Company's net income, if any, from the third-party development
conducted through the Services Company will be subject to federal income tax
at regular corporate tax rates. See "Federal Income Tax Consequences--Services
Company."
22
<PAGE>
RISKS OF DEVELOPMENT BUSINESS AND RELATED ACTIVITIES BEING CONDUCTED BY THE
SERVICES COMPANY
Tax Liabilities. The Services Company will be subject to federal and state
income tax on its taxable income at regular corporate rates. Any federal,
state or local income taxes that the Services Company is required to pay will
reduce the cash available for distribution by the Company to its stockholders.
Adverse Consequences of Lack of Control Over the Businesses of the Services
Company. To comply with the REIT asset tests that restrict ownership of shares
of other corporations, upon consummation of the Offering, the Operating
Partnership will own 100% of the nonvoting preferred stock of the Services
Company (representing approximately 95.0% of its economic value) and John B.
Kilroy, Sr. and John B. Kilroy, Jr. will own all the outstanding voting common
stock of the Services Company (representing approximately 5.0% of its economic
value). This ownership structure is necessary to permit the Company to share
in the income of the Services Company and also maintain its status as a REIT.
Although it is anticipated that the Company will receive substantially all of
the economic benefit of the businesses carried on by the Services Company
through the Company's right to receive dividends through the Operating
Partnership, the Company will not be able to elect directors or officers of
the Services Company and, therefore, the Company will not have the ability to
influence the operations of the Services Company or require that the Services
Company's board of directors declare and pay a cash dividend on the nonvoting
preferred stock of the Services Company held by the Operating Partnership. As
a result, the board of directors and management of the Services Company may
implement business policies or decisions that would not have been implemented
by persons controlled by the Company and that are adverse to the interests of
the Company or that lead to adverse financial results, which could adversely
impact the Company's net operating income and cash flow. See "Formation and
Structure of the Company."
Adverse Consequence of REIT Status on the Businesses of the Services
Company. Certain requirements for REIT qualification may in the future limit
the Company's ability to receive increased distributions from the fee
development operations conducted and related services offered by the Services
Company. See "--Adverse Consequences of Failure to Qualify as a REIT."
NO APPRAISALS; CONSIDERATION TO BE PAID FOR PROPERTIES AND OTHER ASSETS MAY
EXCEED THEIR FAIR MARKET VALUE. No independent valuations or appraisals of the
Properties were obtained in connection with the Formation Transactions. The
valuation of the Company has been determined by considering the enterprise
value of the Company as a going concern based primarily upon a capitalization
of estimated and anticipated Funds from Operations (as defined) and cash
available for distribution and the other factors discussed in this Prospectus
under "Distribution Policy" and "Underwriting," rather than an asset-by-asset
valuation based on historical cost or current market value. This methodology
has been used because management believes it is appropriate to value the
Company as an ongoing business rather than with the view to values that could
be obtained from a liquidation of the Company or of individual assets owned by
the Company. Accordingly, there can be no assurance that the consideration
paid by the Company will not exceed the fair market value of the Properties
and other assets acquired by the Company. A valuation of the Company
determined solely by appraisals of the Properties and other assets of the
Company may result in a significantly lower valuation of the Company from that
which is reflected by the initial public offering price per share set forth on
the cover of this Prospectus, which also takes into account the businesses of
the Services Company, the earnings of the Properties and the going concern
value of the Company. See "Underwriting." Since the liquidation value of the
Company is likely to be significantly less than the value of the Company as a
going concern, stockholders may suffer a significant loss in the value of
their shares if the Company were required to sell its assets.
The valuation of the Company's development, leasing and management services
business has been derived, in part, from a capitalization of the revenue
derived from the Company's contracts with third parties for real estate
development, leasing and management services. Upon consummation of the
Offering, the Company expects to provide through the Operating Partnership
leasing and management services, and through the Services Company development
services.
The consideration paid and the allocation of Units of the Operating
Partnership among the participants in connection with the Formation
Transactions were not determined by arm's-length negotiations. Since no
23
<PAGE>
appraisals of the Properties and other assets were obtained, the value of the
Units allocated to participants in the Formation Transactions may exceed the
fair market value of their ownership of such Properties and assets. The terms
of the option agreements relating to the Excluded Properties also were not
determined by arm's-length negotiations, and such terms may be less favorable
to the Company than those that may have been obtained through negotiations
with a third party. In addition, approximately $37.2 million of mortgage
indebtedness guaranteed by John B. Kilroy, Sr., of which $8.7 million is also
guaranteed by John B. Kilroy, Jr., and personal indebtedness of approximately
$3.4 million of John B. Kilroy, Sr., will be repaid in connection with the
Formation Transactions. See "--Conflicts of Interest," "Use of Proceeds" and
"Formation and Structure of the Company."
CASH FLOW FROM DEVELOPMENT ACTIVITIES IS UNCERTAIN. A portion of the
Company's anticipated cash flow may be generated from development activities
which are partially dependent on the availability of development opportunities
and which are subject to the risks inherent with development and general
economic conditions. In addition, development activities will be subject to
limitations imposed by the REIT tests. See "Federal Income Tax Consequences--
Taxation of the Company--Income Tests." There can be no assurance that the
Company will realize such anticipated cash flows. See "Risk Factors--Real
Estate Investment Considerations--Risks of Real Estate Acquisition and
Development." Also, these development activities generally will be conducted
by the Services Company. Accordingly, cash flow from these activities will be
further dependent upon the decision of the Services Company's board of
directors to declare and pay a cash dividend on the nonvoting preferred stock
held by the Operating Partnership. See "--Risks of Development Business and
Related Activities Being Conducted by the Services Company."
DEPENDENCE ON SOUTHERN CALIFORNIA MARKET. Twenty-two of the 26 Properties,
comprising an aggregate of approximately 2.7 million rentable square feet
(representing approximately 80.4% of the aggregate rentable square feet of all
of the Properties), are located in Southern California. Consequently, the
Company's performance will be linked to economic conditions and the demand for
office, industrial and retail space in this region. The Southern California
economy has experienced significant recessionary conditions in the past
several years, primarily as a result of the downsizing of the aerospace and
defense industries; there is still a dependence on these industries in the
Company's El Segundo and Long Beach Airport area submarkets. The recessionary
conditions resulted in a general increase in vacancies and a general decrease
in net absorption and rental rates in the Company's El Segundo and Long Beach
Airport area submarkets. See "Business and Properties--The Company's Southern
California Submarkets." Although the recently announced disposition of defense
businesses of Hughes Electronics Corporation does not involve tenants at the
Properties, any resulting vacancy in the Company's submarkets may have an
adverse effect on rental rates and occupancy at the Company's Properties. Any
decline in the Southern California economy generally may result in a material
decline in the demand for office, industrial and retail space, have a material
adverse effect greater than if the Company had a more geographically diverse
portfolio of properties, and may materially and adversely affect the ability
of the Company to make distributions to stockholders. See "Business and
Properties--The Company's Southern California Submarkets."
In addition, eight Office Properties, representing approximately 64.9% of
the aggregate office space of all of the Office Properties, are located in two
office parks in El Segundo, California, and Long Beach, California,
respectively.
DEPENDENCE ON SIGNIFICANT TENANTS. The Company's ten largest office tenants
represented approximately 46.3% of annual base rent for the year ended
December 31, 1995 (giving pro forma effect to a recent extension of a lease
with Hughes Space & Communications with respect to two of the Office
Properties located at Kilroy Airport Center at El Segundo), and its ten
largest industrial tenants represented approximately 16.1% of annual base rent
for the same period. Of this amount, its largest tenant, Hughes Space &
Communications, currently leases approximately 495,000 rentable square feet of
office space in Kilroy Airport Center at El Segundo, representing
approximately 25.3% of the Company's total base rent revenues for the year
ended December 31, 1995 (giving pro forma effect to the Hughes Space &
Communications lease extension). The base periods of the Hughes Space &
Communications leases expire beginning in January 1999. The Company's revenues
and cash available for distribution to stockholders would be
disproportionately and materially adversely affected in the
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event of bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its stockholders will be based principally on cash available for
distribution from the Properties. Increases in base rent under the leases of
the Properties or the payment of rent in connection with future acquisitions
will increase the Company's cash available for distribution to stockholders.
However, in the event of a default or a lease termination by a lessee, there
could be a decrease or cessation of rental payments and thereby a decrease in
cash available for distribution. In addition, the amount available to make
distributions may decrease if properties acquired in the future yield lower
than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be
dependent on a number of other factors, including the Company's financial
condition, any decision to reinvest funds rather than to distribute such
funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Company deems
relevant. In addition, the Company may issue from time to time additional
Units or shares of Common Stock in connection with the acquisition of
properties or in certain other circumstances. No prediction can be made as to
the number of such Units or shares of Common Stock which may be issued, if
any, and, if issued, the effect on cash available for distribution on a per
share basis to holders of Common Stock. Such issuances, if any, will have a
dilutive effect on cash available for distribution on a per share basis to
holders of Common Stock. See "The Company--Growth Strategies." The possibility
exists that actual results of the Company may differ from the assumptions used
by the Board of Directors in determining the initial distribution rate. In
such event, the trading price of the Common Stock may be adversely affected.
To obtain the favorable tax treatment associated with REITs, the Company
generally will be required to distribute to its stockholders at least 95% of
its taxable income (determined without regard to the dividends paid deduction
and by excluding net capital gains) each year. In addition, the Company will
be subject to tax at regular corporate rates to the extent that it distributes
less than 100% of its taxable income (including net capital gains) each year.
The Company will also be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
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.
The Company intends to make distributions to its stockholders to comply with
the distribution requirements of the Code and to reduce exposure to federal
income taxes and the nondeductible excise tax. Differences in timing between
the receipt of income and the payment of expenses in arriving at taxable
income and the effect of required debt amortization payments could require the
Company to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT.
REAL ESTATE INVESTMENT CONSIDERATIONS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred in connection therewith. If the
Properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the ability to make
distributions to the Company's stockholders could be adversely affected.
Income from, and the value of, the Properties may be adversely affected by the
general economic climate, local conditions such as oversupply of office,
industrial or retail space or a reduction in demand for office, industrial or
retail space in the area, the attractiveness of the Properties to potential
tenants, competition from other office, industrial and retail buildings, and
the ability of the Company to provide adequate maintenance and insurance and
increased operating costs (including insurance premiums, utilities and real
estate taxes). In addition, revenues from properties and real estate values
are also affected by such factors as the cost of compliance with regulations
and the potential for liability under applicable laws, including changes in
tax laws, interest rate levels and the availability of financing.
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The Company's income would be adversely affected if a significant number of
tenants were unable to pay rent or if office, industrial or retail space could
not be rented on favorable terms. Certain significant expenditures associated
with an investment in real estate (such as mortgage payments, real estate
taxes and maintenance costs) generally are not reduced when circumstances
cause a reduction in income from the investment.
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has limited ability to vary its portfolio quickly
in response to changes in economic or other conditions. In addition, the
prohibition in the Code and related regulations on a REIT holding property for
sale may affect the Company's ability to sell properties without adversely
affecting distributions to the Company's stockholders.
Competition. The Company plans to expand, primarily through the acquisition
and development of additional office and industrial buildings in Southern
California and other markets where the acquisition and/or development of
property would, in the opinion of management, result in a favorable risk-
adjusted return on investment. There are a number of office and industrial
building developers and real estate companies that compete with the Company in
seeking properties for acquisition, prospective tenants and land for
development. All of the Properties are in developed areas where there are
generally other properties of the same type. Competition from other office,
industrial and retail properties may affect the Company's ability to attract
and retain tenants, rental rates and expenses of operation (particularly in
light of the higher vacancy rates of many competing properties which may
result in lower-priced space being available in such properties). The Company
may be competing with other entities that have greater financial and other
resources than the Company. During the two-year and nine-month period ended
September 30, 1996, the Company's weighted average renewal rate, based on net
rentable square footage, was 71.7% for the Properties located in the Southern
California Area and 50.9% for the Properties overall. The lower overall
retention rate is due primarily to the termination in 1993 of a lease for
211,000 square feet at the SeaTac Office Center.
Lease Expirations. Certain leases expiring during the first several years
following the Offering are at rental rates higher than those attained by the
Company in its recent leasing activity. Such leases, or other leases of the
Company, may not be renewed or, if renewed, may be renewed at rental rates
lower than rental rates in effect immediately prior to expiration. Decreases
in the rental rates for the Company's properties, the failure of tenants to
renew any such leases or the failure of the Company to re-lease any of the
Company's space could materially adversely affect the Company and its ability
to make distributions. During the three calendar years ending December 31,
1999, the Company will have expiring Office Property leases covering
approximately 408,000 net rentable square feet, and Industrial Property leases
covering approximately 92,900 net rentable square feet. For the year ended
December 31, 1995, such leases had a weighted average annual base rent per net
rentable square foot of approximately $18.81 and $5.97, respectively. For the
nine-month period ended September 30, 1996, the Company entered into 31 Office
Property lease transactions for an aggregate of approximately 342,000 net
rentable square feet with a weighted average initial annual base rent per net
rentable square foot of approximately $19.52 (excluding the Thousand Oaks
Office Property where the Company entered into one lease transaction with an
initial annual base rent per net rentable square foot of $24.00). For the 12-
month period ending December 31, 1996, the Company entered into one Industrial
Property lease transaction for approximately 62,500 net rentable square feet
with an initial annual base rent per net rentable square foot of $6.36. See
"Business and Properties--General" and "--Lease Expirations."
Ground Leases. The Company's eight Office Properties located at Kilroy
Airport Center in Long Beach (assuming consummation of the acquisition of
Kilroy Long Beach Phase I concurrent with the consummation of the Offering)
and the SeaTac Office Center are held subject to ground leases. A default by
the Company under the terms of a ground lease could result in the loss of
Properties located on the respective parcel, with the landowner becoming the
owner of such Properties unless the default under the lease is cured or
waived. In addition, upon expiration of the ground leases, including the
options thereon, there is no assurance that the Company will be able to
negotiate new ground leases at all or, if any leases were renewed, that they
will be on terms consistent with or more favorable than existing terms, which
may result in the loss of the Properties or increased rental expense to the
Company. The ground leases for the Kilroy Airport Center Long Beach
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will expire in 2035. See "Business and Properties--Office Properties--Kilroy
Long Beach." The ground leases for the SeaTac Office Center (including renewal
options) will expire in 2062. See "Business and Properties--Office
Properties--SeaTac."
Capital Improvements. The Properties vary in age and require capital
improvements regularly. If the cost of improvements, whether required to
attract and retain tenants or to comply with governmental requirements,
substantially exceeds management's expectations, cash available for
distribution could be reduced.
Risks of Real Estate Acquisition and Development. The Company intends to
actively seek to acquire office and industrial properties to the extent that
they can be acquired on advantageous terms and meet the Company's investment
criteria. Acquisitions of office and industrial properties entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with
any new real estate investment.
In addition to the Development Properties, the Company will pursue other
development opportunities both for ownership by the Company and on a fee
basis. The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
office or industrial buildings, including the risks that financing may not be
available on favorable terms for development projects and construction may not
be completed on schedule or within budget, resulting in increased debt service
expense and construction costs and delays in leasing such properties and
generating cash flow. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations.
The Company anticipates that future acquisitions and developments will be
financed, in whole or in part, through additional equity offerings, lines of
credit and other forms of secured or unsecured financing. If new developments
are financed through construction loans, there is a risk that, upon completion
of construction, permanent financing for newly developed properties may not be
available or may be available only on disadvantageous terms. Equity, rather
than debt, financing of future acquisitions or developments could have a
dilutive effect on the interests of existing stockholders of the Company.
While the Company has focused primarily on the development and ownership of
office and industrial properties, the Company plans in the future to develop
properties, part or all of which will be for retail use. In addition, while
the Company has historically limited its ownership of properties primarily to
the Southern California market, the Company in the future may expand its
business to geographic markets other than Southern California, where the
acquisition and/or development of property would, in the opinion of
management, result in a favorable risk-adjusted return on investment. The
Company will not initially possess the same level of familiarity with new
types of commercial development or new markets, which could adversely affect
its ability to acquire or develop properties in any new localities or to
realize expected performance.
Uninsured Loss. Management believes that the Properties are covered by
adequate comprehensive liability, rental loss and all-risk insurance provided
by reputable companies and with commercially reasonable deductibles, limits
and policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations including large deductibles or
copayments, such as losses due to seismic activity. See discussion of
uninsured losses from seismic activity below. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its investment
in and anticipated profits and cash flow from a property and would continue to
be obligated on any mortgage indebtedness or other obligations related to such
property. Any such loss would adversely affect the Company and its ability to
make distributions.
Uninsured Losses from Seismic Activity. The Properties are located in areas
that are subject to earthquake activity. Although the Company expects to have
earthquake insurance on a substantial portion of its Properties,
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such insurance will not be replacement cost and should any Property sustain
damage as a result of an earthquake, or should losses exceed the amount of
such coverage, the Company may incur uninsured losses or losses due to
deductibles or co-payments on insured losses. See "Business and Properties--
Uninsured Losses from Seismic Activity."
Risks Involved in Property Ownership Through Partnerships and Joint
Ventures. Although the Company will own fee simple interests in the Properties
(other than Kilroy Long Beach and the SeaTac Office Center, which are held
subject to long-term ground leases), in the future the Company may also
participate with other entities in property ownership through joint ventures
or partnerships. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise present, including the possibility
that the Company's partners or co-venturers might become bankrupt, that such
partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Company, and that such partners or co-venturers may be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives, including the Company's
policy with respect to maintaining its qualification as a REIT. The Company
will, however, seek to maintain sufficient control of such partnerships or
joint ventures to permit the Company's business objectives to be achieved.
There is no limitation under the Company's organizational documents as to the
amount of available funds that may be invested in partnerships or joint
ventures.
REAL ESTATE FINANCING RISKS. The Company will be subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest, the risk that indebtedness on the Properties will not be refinanced
at maturity or that the terms of such refinancing will not be as favorable as
the terms of such indebtedness. If the Company were unable to refinance its
indebtedness on acceptable terms, or at all, the Company might be forced to
dispose of one or more of the Properties upon disadvantageous terms, which
might result in losses to the Company and might adversely affect the cash
available for distribution. If prevailing interest rates or other factors at
the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect the
Company's cash flow and its ability to pay expected distributions to
stockholders. Further, if a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, or is in
default under the related mortgage or deed of trust, such Property could be
transferred to the mortgagee, the mortgagee could foreclose upon the Property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to the
Company. Foreclosures could also create taxable income without accompanying
cash proceeds, thereby hindering the Company's ability to meet the REIT
distribution requirements of the Code. See "The Financing."
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER
VOTE. Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT (unless a change is approved by the Company's Board of
Directors and stockholders), the Company's Board of Directors will determine
its investment and financing policies, its growth strategy, and its debt,
capitalization, distribution and operating policies. Although the Board of
Directors has no present intention to revise or amend these strategies and
policies, the Board of Directors may do so at any time without a vote of the
Company's stockholders. See "Policies With Respect to Certain Activities--
Other Policies." Accordingly, stockholders will have no control over changes
in strategies and policies of the Company, and such changes may not serve the
interests of all stockholders and could adversely affect the Company's
financial condition or results of operations, including its ability to
distribute cash to stockholders.
Issuance of Additional Securities. The Company has authority to offer its
Common Stock or other equity or debt securities in exchange for property or
otherwise. Similarly, the Company may cause the Operating Partnership to offer
additional Units or preferred units of the Operating Partnership, including
offers in exchange for property to sellers who seek to defer certain of the
tax consequences relating to a property transfer. Existing stockholders will
have no preemptive right to acquire any such securities, and any such issuance
of equity securities could result in dilution in an existing stockholder's
investment in the Company.
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Risks Involved in Acquisitions Through Partnerships or Joint Ventures. The
Company may invest in office and industrial properties through partnerships or
joint ventures instead of purchasing such properties directly or through
wholly-owned subsidiaries. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present in a direct
acquisition of properties. These include the risk that the Company's co-
venturer or partner in an investment might become bankrupt; a co-venturer or
partner might at any time have economic or business interests or goals which
are inconsistent with the business interests or goals of the Company and a co-
venturer or partner might be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives.
Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of
securities of entities engaged in the ownership of real estate. Ownership of
such securities may not entitle the Company to control the ownership,
operation and management of the underlying real estate. In addition, the
Company may have no ability to control the distributions with respect to such
securities, which may adversely affect the Company's ability to make required
distributions to stockholders. Furthermore, if the Company desires to control
an issuer of securities, it may be prevented from doing so by the limitations
on percentage ownership and gross income tests which must be satisfied by the
Company in order for the Company to qualify as a REIT. See "Federal Income Tax
Consequences--Taxation of the Company--Requirements for Qualification as a
REIT." The Company intends to operate its business in a manner that will not
require the Company to register under the Investment Company Act of 1940 and
stockholders will therefore not have the protection of that Act.
The Company may also invest in mortgages, and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, Funds from Operations and the Company's ability to make required
distributions to stockholders could be adversely affected.
RISK OF OPERATIONS CONDUCTED THROUGH THE OPERATING PARTNERSHIP. The Company
will own and manage the Properties through its investment in the Operating
Partnership in which it will own an approximately 81.7% economic interest (or
an 83.7% interest if the Underwriters' over-allotment option is exercised in
full). The remaining interests in the Operating Partnership will be owned by
the Continuing Investors. Although the number of limited partnership Units was
designed to result in a distribution per Unit equal to a distribution per
share of Common Stock, such distributions would be equal only if the Company
distributes to stockholders all amounts it receives in distributions from the
Operating Partnership. See "Formation Transactions--Comparison of Common Stock
and Units." In addition, under the terms of the Partnership Agreement, the
limited partners of the Operating Partnership have certain approval rights
with respect to certain transactions that affect all stockholders. See "--
Conflicts of Interest--Certain Limited Partner Approval Rights."
INFLUENCE OF CERTAIN CONTINUING INVESTORS. John B. Kilroy, Sr., the
Company's Chairman of the Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer and one of its directors, will
own, together with the other Continuing Investors, Units exchangeable for
shares of Common Stock equal to approximately 18.3% of the total outstanding
shares (and, together with options exercisable for shares of Common Stock,
19.7% of the total outstanding shares). In addition, the Messrs. Kilroy will
hold two of the Company's five seats on the Board of Directors. Under the
terms of the Company's charter, no other stockholder presently is permitted to
own in excess of 7.0% of the Common Stock. In addition, although the Messrs.
Kilroy will not be able to take action on behalf of the Company without the
concurrence of other members of the Company's Board of Directors, they will,
for so long as limited partners of the Operating Partnership own at least 5%
of the outstanding Units, be able to block (i) the dissolution of the
Operating Partnership, or (ii) prior to the seventh anniversary of the
consummation of the Offering, the sale of the Office Property located at 2260
E. Imperial Highway at Kilroy Airport Center at El Segundo, in each case other
than incident to a merger or sale of all or substantially all of the Company's
assets, and be able to exert substantial influence over the Company's affairs.
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LIMITS ON OWNERSHIP AND CHANGE IN CONTROL. Certain provisions of the
Maryland General Corporation Law (the "MGCL") and the Company's Articles of
Incorporation and Bylaws, and certain provisions of the Operating
Partnership's partnership agreement, could have the effect of delaying,
deferring or preventing a change in control of the Company or the removal of
existing management and, as a result, could prevent the stockholders of the
Company from being paid a premium for their shares of Common Stock over then
prevailing market prices.
Limits on Ownership of Common Stock. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of its capital stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year for which
the election to be treated as a REIT has been made). Furthermore, after the
first taxable year for which a REIT election is made, the Company's shares
must be held by a minimum of 100 persons for at least 335 days of a 12-month
taxable year (or a proportionate part of a short tax year). In addition, if
the Company, or an owner of 10% or more of the Company, actually or
constructively, owns 10% or more of a tenant of the Company (or a tenant of
any partnership in which the Company is a partner), the rent received by the
Company (either directly or through any such partnership) from such tenant
will not be qualifying income for purposes of the REIT gross income tests of
the Code. See "Federal Income Tax Consequences--Taxation of the Company." In
order to protect the Company against the risk of losing REIT status due to a
concentration of ownership among its stockholders, the Articles of
Incorporation of the Company limit actual or constructive ownership of the
outstanding shares of Common Stock by any single stockholder to 7.0% (the
"Ownership Limit") of the then outstanding shares of Common Stock. See
"Description of Capital Stock--Restrictions on Ownership and Transfer." The
Board of Directors will consider waiving the Ownership Limit with respect to a
particular stockholder if it is satisfied, based upon the advice of tax
counsel or otherwise, that ownership by such stockholder in excess of the
Ownership Limit would not jeopardize the Company's status as a REIT and the
Board of Directors otherwise decided such action would be in the best
interests of the Company. The Board of Directors has waived the Ownership
Limit with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of
their families and certain affiliated entities and has permitted such
individuals and entities to actually or constructively own, in the aggregate,
up to 21% of the outstanding Common Stock.
Actual or constructive ownership of shares of Common Stock in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, will cause the violative transfer or ownership to be void with respect
to the transferee or owner as to that number of shares in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, as applicable, and such shares will be automatically transferred to a
trust for the benefit of a qualified charitable organization. Such purported
transferee or owner shall have no right to vote such shares or be entitled to
dividends or other distributions with respect to such shares. See "Description
of Capital Stock--Restrictions on Ownership and Transfer" for additional
information regarding the Ownership Limit.
Staggered Board. Following the consummation of the Offering, the Board of
Directors of the Company will be divided into three classes serving staggered
three-year terms. The terms of the first, second and third classes will expire
in 1998, 1999 and 2000, respectively. Directors for each class will be chosen
for a three-year term upon the expiration of the current class' term,
beginning in 1998. In addition, the Articles of Incorporation authorize the
Board of Directors to issue up to 150,000,000 shares of Common Stock and
30,000,000 shares of preferred stock and to establish the rights and
preferences of any shares of preferred stock issued. No shares of preferred
stock will be issued or outstanding at the consummation of the Offering. See
"Description of Capital Stock--Preferred Stock." Under the Articles of
Incorporation, stockholders do not have cumulative voting rights.
The Ownership Limit, the staggered terms for directors, the issuance of
additional common or preferred stock in the future and the absence of
cumulative voting rights could have the effect of (i) delaying or preventing a
change of control of the Company even if a change of control were in the
stockholders' interest, (ii) deterring tender offers for the Common Stock that
may be beneficial to the stockholders, or (iii) limiting the opportunity for
stockholders to receive a premium for their Common Stock that might otherwise
exist if an investor attempted
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to assemble a block of shares of Common Stock in excess of the Ownership Limit
or otherwise to effect a change of control of the Company. See "Management"
and "Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and directors, particularly John B. Kilroy, Sr., the
Company's Chairman of the Board, and John B. Kilroy, Jr., the Company's
President and Chief Executive Officer, for strategic business direction and
experience in the Southern California real estate market. While the Company
believes that it could find replacements for these key personnel, the loss of
their services could have an adverse effect on the operations of the Company.
The Company has entered into employment agreements with John B. Kilroy, Jr.,
Jeffrey C. Hawken, Richard E. Moran Jr. and Campbell Hugh Greenup. See
"Management--Employment Agreements."
DISTRIBUTION PAYOUT PERCENTAGE. The Company's expected annual distributions
for the 12 months following consummation of the Offering of $1.55 per share
are expected to be approximately 90.5% of estimated cash available for
distribution. If cash available for distribution generated by the Company's
assets for such 12-month period is less than the Company's estimate, or if
such cash available for distribution decreases in future periods from expected
levels, the Company's ability to make the expected distributions would be
adversely affected. Any such failure to make expected distributions could
result in a decrease in the market price of the Common Stock. See
"Distribution Policy."
HISTORICAL OPERATING LOSSES OF THE OFFICE AND INDUSTRIAL
PROPERTIES. Although the Office and Industrial Properties developed by the
Company after their construction and initial lease-up periods have
historically generated positive net cash flow, the effect of depreciation,
amortization and other non-cash charges of the Company has resulted in net
losses for financial reporting purposes in each of the last five fiscal years.
Historical operating results of the Office and Industrial Properties may not
be comparable to future operating results of the Company because, prior to the
completion of the Offering and the Formation Transactions, the Office and
Industrial Properties were encumbered with greater levels of debt (which has
the effect of reducing net income) than that with which the Company intends to
operate. In addition, the historical results of operations do not reflect the
acquisition and development of any of the Acquisition Properties or the
Development Properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." However, there can be no assurance that
the Company will acquire the Acquisition Properties or acquire and
successfully develop any of the Development Properties, and, even if such
Properties are acquired and successfully developed, that they will not
experience losses in the future.
NO LIMITATION ON DEBT. The Board of Directors currently intends to fund
acquisition opportunities and development partially through short-term
borrowings, as well as out of undistributed cash available for distribution
and other available cash. The Board of Directors expects to refinance projects
purchased or developed with short-term debt either with long-term indebtedness
or equity financing depending upon the economic conditions at the time of
refinancing. Upon completion of the Offering and the Formation Transactions,
the debt to total market capitalization ratio of the Company will be
approximately 22.4% (assuming an initial public offering price of $22.50 per
share of Common Stock). The Board of Directors has adopted a policy of
limiting its indebtedness to approximately 50% of its total market
capitalization (i.e., the market value of the issued and outstanding shares of
Common Stock, including interests exchangeable therefor, plus total debt), but
the organizational documents of the Company do not contain any limitation on
the amount or percentage of indebtedness, funded or otherwise, that the
Company may incur. The Board of Directors, without the vote of the Company's
stockholders, could alter or eliminate its current policy on borrowing at any
time at its discretion. If this policy were changed, the Company could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Company's cash flow and its ability to make expected
distributions to its stockholders and an increased risk of default on the
Company's obligations. See "Policies With Respect to Certain Activities--
Financing."
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. The Company has used total market
capitalization because it believes that the book value of its assets (which to
a large extent is the depreciated value
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of real property, the Company's primary tangible asset) does not accurately
reflect its ability to borrow and to meet debt service requirements. The total
market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the
underlying assets of the Company at all times. Although the Company will
consider factors other than total market capitalization in making decisions
regarding the incurrence of indebtedness (such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
such properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service),
there can be no assurance that the ratio of indebtedness to total market
capitalization (or to any other measure of asset value) will be consistent
with the expected level of distributions to the Company's stockholders.
GOVERNMENT REGULATIONS. Many laws and governmental regulations are
applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is "readily achievable."
Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The impact of application of the ADA to the
Company's properties, including the extent and timing of required renovations,
is uncertain. If required changes involve a greater amount of expenditures
than the Company currently anticipates or if the changes must be made on a
more accelerated schedule than the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial, and the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral and may expose it to liability resulting
from any release of or exposure to such substances. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at another location
may also be liable for the costs of removal or remediation of such substances
at the disposal or treatment facility, whether or not such facility is owned
or operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report,
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but do not include soil sampling or subsurface investigations. In connection
with the preparation of the Phase I environmental survey with respect to
Kilroy Long Beach Phase I, interviews of certain individuals formerly employed
at the site documented in a historical site assessment survey revealed the
site's possible prior use as a Nike air defense command center or missile
facility. Further investigation performed by the Company's environmental
consultants and by the Company did not reveal any additional information with
respect to such use of the site. The Company's investigation included whether
the site might have been used previously for the storage of missiles
containing nuclear warheads, and did not reveal any facts that would indicate
that the prior use of the site would result in a material risk of
environmental liability. Consequently, the Company does not believe that this
site constitutes a risk of a liability that would have a material adverse
effect on the Company's financial condition or results of operations taken as
a whole. In connection with the preparation of the Phase I environmental
survey with respect to the Industrial Property located at 12752-12822 Monarch
Street, soil sampling revealed trace elements of contamination with cleaning
solvents. However, based on the level of contamination noted in the
environmental survey, management does not believe that such contamination will
have a material adverse effect on the Company's financial condition or results
of operations taken as a whole.
None of the Company's environmental assessments of the other Properties has
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole, nor is the Company aware of any such material
environmental liability. Nonetheless, it is possible that the Company's
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Properties will not be affected by tenants, by
the condition of land or operations in the vicinity of the Properties (such as
the presence of underground storage tanks), or by third parties unrelated to
the Company. If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds the Company's budgets for such items, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's Funds from
Operations and expected distributions.
The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Southern California Northridge earthquake on January 17,
1994. Such regulations do not apply to the Properties. There can be no
assurance, however, that similar regulations will not be adopted by
governmental agencies with the ability to regulate the Properties or that
other requirements affecting the Properties will not be imposed which would
require significant unanticipated expenditures by the Company and could have
an adverse effect on the Company's Funds from Operations and cash available
for distribution. The Company believes, based in part on recent engineering
reports, that its Properties are in good condition. See "Business and
Properties--Uninsured Losses from Seismic Activity."
IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under
"Dilution," as of September 30, 1996, the Properties to be contributed by the
Kilroy Group in exchange for Units in the Operating Partnership had a pro
forma net tangible book value for financial reporting purposes (giving effect
to the Offering) of approximately $114.9 million, or $9.53 per share of Common
Stock. As a result, the pro forma net book value per share of Common Stock of
the Company after the consummation of the Offering and the Formation
Transactions will be less than the assumed initial public offering price of
$22.50 per share. The purchasers of Common Stock offered hereby will
experience immediate and substantial dilution of $12.97 per share of Common
Stock (based on the assumed initial public offering price) in the net tangible
book value of the shares of Common Stock. See "Dilution."
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NO PRIOR PUBLIC MARKET. Prior to the Offering, there has been no public
market for the Common Stock, and there can be no assurance that an active
trading market will develop as a result of the Offering or, if a trading
market does develop, that it will be sustained or that the shares of Common
Stock will be resold at or above the initial public offering price. The market
for equity securities can be volatile and the trading price of the Common
Stock could be subject to wide fluctuations in response to operating results,
news announcements, trading volume, general market trends, changes in interest
rates, governmental regulatory action and changes in tax laws. The initial
public offering price of the Common Stock offered hereby will be determined
through negotiations between the Company and the representatives (the
"Representatives") of the Underwriters. Among the factors to be considered in
such negotiations, in addition to prevailing market conditions, will be
distribution rates and Funds from Operations of publicly traded REITs that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential and earnings prospects of the Company, and
the current state of the Company's industry and the economy as a whole. The
assumed initial public offering price does not necessarily bear any
relationship to the Company's book value, assets, financial condition or any
other established criteria of value and may not be indicative of the market
price for the Common Stock after the Offering. See "Underwriting."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the factors
that will influence the market price of the Common Stock in public markets
will be the annual yield on the price paid for shares from distributions by
the Company. An increase in prevailing market interest rates on fixed income
securities may lead prospective purchasers of the Common Stock to demand a
higher annual yield from future distributions. Such an increase in the
required yield from distributions may adversely affect the market price of the
Common Stock.
SHARES AVAILABLE FOR FUTURE SALE. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of the Common Stock. Sales of
substantial amounts of shares of Common Stock in the public market (or upon
exchange of Units) or the perception that such sales might occur could
adversely affect the market price of the shares of Common Stock.
Upon the consummation of the Offering and the Formation Transactions, the
Company will have 12,060,000 shares of Common Stock outstanding (including
60,000 restricted shares of Common Stock issued to an officer of the Company
who is not a Continuing Investor and excluding 1,800,000 shares of Common
Stock subject to the Underwriters' over-allotment option), of which all but
the 60,000 restricted shares of Common Stock will be freely tradeable in the
public market by persons other than "affiliates" of the Company without
restriction or registration under the Securities Act. The Common Stock issued
to an officer and all of the shares of Common Stock that are issuable upon the
redemption of Units will be deemed to be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred unless
registered under the Securities Act or an exemption from registration is
available, including any exemption from registration provided under Rule 144
of the Securities Act. In general, upon satisfaction of certain conditions,
Rule 144 of the Securities Act permits the sale of certain amounts of
restricted securities two years following the date of acquisition of the
restricted securities from the Company and, after three years, permits
unlimited sales by persons unaffiliated with the Company.
It is expected that the Operating Partnership will issue an aggregate of
2,692,374 Units to executive officers, directors and other Continuing
Investors in connection with the formation of the Company which, after two
years following the receipt of such Units, may be redeemed by the Operating
Partnership at the request of the holders for cash (based on the fair market
value of an equivalent number of shares of Common Stock at the time of such
redemption) or, at the Company's option, exchanged for an equal number of
shares of Common Stock, subject to certain antidilution adjustments and, with
respect to 50% of the Units to be issued to John B. Kilroy, Sr., John B.
Kilroy, Jr. and Kilroy Industries, the obligation of such Continuing Investors
to indemnify the Company in connection with the Formation Transactions. See
"Formation and Structure of the Company--Allocation of Consideration in the
Formation Transactions." However, if the Company does not elect to exchange
such Units for shares, a Continuing Investor that is a corporation or a
limited liability company may require the Company to issue shares of Common
Stock in lieu of cash, subject to the Ownership Limit or, with the consent of
the
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Board of Directors, such other limit which does not result in the failure of
the Company to qualify as a REIT. See "Formation and Structure of the Company"
and "Shares Available for Future Sale--Redemption Rights/Exchange
Rights/Registration Rights." It is expected that immediately after the
Offering the Company will grant options to purchase an aggregate of
approximately 900,000 shares of Common Stock at the initial public offering
price to certain directors, executive officers and other employees of the
Company and an additional approximately 500,000 shares of Common Stock will be
reserved for issuance as restricted shares of Common Stock or upon the
exercise of options granted under the Stock Incentive Plan. See "Management--
Stock Incentive Plan." In addition, the Company may issue from time to time
additional shares of Common Stock or Units in connection with the acquisition
of properties, including the possible issuance of Units upon the exercise of
options to acquire the Excluded Properties. See "The Company--Growth
Strategies" and "Business and Properties--Development, Management and Leasing
Activities--Excluded Properties." The Company has agreed to file and generally
keep continuously effective beginning two years after the completion of the
Offering a registration statement covering the issuance of shares upon the
exchange of Units and the resale thereof and has agreed to provide piggyback
registration rights with respect to shares of Common Stock which may be
acquired by the Continuing Investors and certain other persons. See "Shares
Available for Future Sale." The Company also anticipates that it will file a
registration statement with respect to the shares of Common Stock issuable
under the Stock Incentive Plan following the consummation of the Offering.
Such registration statements and registration rights generally will allow
shares of Common Stock covered thereby, including shares of Common Stock
issuable upon exchange of Units or the exercise of options or restricted
shares of Common Stock to be transferred or resold without restriction under
the Securities Act.
In addition to the limits placed on the sale of shares of Common Stock by
operation of Rule 144 and other provisions of the Securities Act, (i) each of
the Continuing Investors has agreed not to, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Units or shares of Common Stock or other capital stock of
the Company, or any securities convertible or exercisable or exchangeable for
any Units or shares of Common Stock or other capital stock of the Company for
a period of two years from the date of this Prospectus, and (ii) the Company
has agreed not to offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition) of any (other than pursuant to the Stock
Incentive Plan) shares of Common Stock or other capital stock of the Company,
or any securities convertible or exercisable or exchangeable for any Units or
shares of Common Stock or other capital stock of the Company, for a period of
180 days from the date of this Prospectus, in each case without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, subject to certain limited exceptions. At the conclusion of the
two-year period referenced in clause (i) above, Common Stock issued upon the
subsequent exchange of Units may be sold in the public market pursuant to the
registration rights described above. Notwithstanding the foregoing, 50% of the
Units received by John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries in connection with the Formation Transactions will be pledged to
secure their indemnification obligations pursuant to an agreement with the
Company. See "Formation and Structure of the Company." Future sales of the
shares of Common Stock described above could have an adverse effect on the
market price of the shares of Common Stock and the existence of Units,
options, shares of Common Stock reserved for issuance as restricted shares of
Common Stock or upon exchange of Units and the exercise of options and
registration rights referred to above may adversely affect the terms upon
which the Company may be able to obtain additional capital through the sale of
equity securities. See "Shares Available for Future Sale" and "Underwriting."
Such sales may be increased or accelerated to the extent that the Continuing
Investors have personal obligations, including obligations for taxes, which
may arise as a result of the Formation Transactions or prior transactions.
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FORMATION AND STRUCTURE OF THE COMPANY
Kilroy Realty was formed in September 1996 and the Operating Partnership was
formed in October 1996. The Services Company will be formed prior to
consummation of the Offering.
FORMATION TRANSACTIONS
Prior to or simultaneous with the consummation of the Offering, the Company,
the Operating Partnership, the Services Company and the Continuing Investors
will engage in the Formation Transactions designed to enable the Company to
continue and expand the real estate operations of KI, to facilitate the
Offering, to enable the Company to qualify as a REIT for federal income tax
purposes commencing with its taxable year ending December 31, 1997 and to
preserve certain tax advantages for the existing owners of the Properties. The
Formation Transactions are as follows:
. Pursuant to the Omnibus Agreement, the Operating Partnership may require
the contribution to the Operating Partnership of all of the Continuing
Investors' interests in the Properties (other than the Acquisition
Properties), the assets used to conduct the leasing, management and
development activities (principally office equipment), the assignment of
contract rights in connection with development opportunities at Kilroy
Airport Center Long Beach, and the rights with respect to the purchase
of each of the Acquisition Properties, in exchange for Units
representing limited partnership interests in the Operating Partnership.
The book value to the Continuing Investors of the assets to be
contributed to the Operating Partnership is a negative $113.2 million
and the value of the Units representing limited partnership interests in
the Operating Partnership to be received by the Continuing Investors is
$60.6 million, assuming a Unit value equal to the assumed initial public
offering price of $22.50 per share. Pursuant to the terms of the Omnibus
Agreement, the Operating Partnership has the right to acquire the
Properties and the other assets described above from the Continuing
Investors in exchange for Units through December 31, 1998, the date the
Omnibus Agreement terminates. Following the consummation of the Offering
and the Formation Transactions, the Units received by the Continuing
Investors will constitute in the aggregate an approximately 18.3%
limited partnership interest in the Operating Partnership.
. John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the
voting common stock of the Services Company for the aggregate purchase
price of $5,275 in cash (representing 5.0% of its economic value), and
the Operating Partnership will acquire all of the non-voting preferred
stock of the Services Company (representing 95.0% of its economic
value).
. The Company will sell shares of Common Stock in the Offering, issue
restricted shares of Common Stock to Richard E. Moran Jr., Executive
Vice President, Chief Financial Officer and Secretary of the Company
(but not a Continuing Investor) and contribute the net proceeds from the
Offering and the issuance of such restricted stock (approximately $246.6
million in the aggregate) to the Operating Partnership in exchange for
an 81.7% general partner interest in the Operating Partnership.
. The Company, through the Operating Partnership, will borrow
approximately $84.0 million principal amount of long-term financing and
$12.0 million principal amount of short-term debt pursuant to the
Mortgage Loans.
. The Operating Partnership will apply the aggregate of the net Offering
proceeds and the Mortgage Loans toward the repayment of existing
mortgage indebtedness on certain of the Properties, the purchase of the
Acquisition Properties and payment of its expenses arising in connection
with the Offering and the Financing. See "Use of Proceeds."
. Forty-seven of the current 69 employees of KI will become employees of
the Company, the Operating Partnership and/or the Services Company,
including John B. Kilroy, Jr., the President and Chief Executive Officer
of KI, three other executive officers (Mr. Jeffrey Hawken, Executive
Vice President and Chief Operating Officer, Mr. Richard E. Moran Jr.,
Executive Vice President, Chief Financial
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Officer and Secretary, and Mr. Campbell Hugh Greenup, General Counsel)
who are not Continuing Investors and 43 other operating and
administrative employees. See "Management."
. The Operating Partnership or the Services Company will enter into
Management Agreements with respect to each of the Excluded Properties.
Pursuant to the terms of each of the Management Agreements, the
Operating Partnership or the Services Company, as applicable, will have
exclusive control and authority (subject to an operating budget to be
approved by the owners of each property) over each of the Excluded
Properties for a term of 24 months. If any of the Excluded Properties
are sold during the term of the Management Agreements, then either party
may terminate the respective Management Agreement with respect to the
property being sold upon 30 days' prior written notice. In consideration
of the services to be provided under the Management Agreements, the
Company will receive a monthly property management fee as well as any
applicable leasing commissions. See "Business and Properties--Excluded
Properties."
. Concurrent with the consummation of the Offering, the Company will enter
into Option Agreements with partnerships controlled by John B. Kilroy,
Sr. and John B. Kilroy, Jr. granting to the Operating Partnership the
exclusive right to acquire (i) the approximately 18 undeveloped acres
located at Calabasas Park Centre for cash and (ii) the office property
located at North Sepulveda Boulevard, El Segundo for cash (or for Units
after the first anniversary of the Offering at the election of the
seller), and in each case pursuant to the other terms of the respective
Option Agreement. See "Business and Properties--Excluded Properties--
Calabasas Park Centre" and "--North Sepulveda Boulevard, El Segundo" for
a discussion of the purchase price and other material terms of each
Option Agreement.
As a result of the foregoing transactions, the Company will own 12,060,000
Units of the Operating Partnership (including 60,000 Units attributable to the
issuance by the Company of 60,000 restricted shares of Common Stock to Mr.
Moran), which will represent an approximately 81.7% economic interest in the
Operating Partnership, and the Continuing Investors will own 2,692,374 Units,
which will represent the remaining approximately 18.3% economic interest in
the Operating Partnership. If the Underwriters' over-allotment option is
exercised in full and the net proceeds from the additional shares of Common
Stock sold by the Company are contributed to the Operating Partnership, the
Company's percentage ownership interest in the Operating Partnership will
increase to approximately 83.7%. The Company will be the sole general partner
and retain management control over the Operating Partnership.
Holders of Units will have the opportunity after two years following the
receipt of such Units to have their Units redeemed by the Operating
Partnership at the request of the Unitholder for cash (based on the fair
market value of an equivalent number of shares of Common Stock at the time of
such redemption) or, at the Company's option, it may exchange Units for shares
of Common Stock on a one-for-one basis, subject to certain antidilution
adjustments and the obligation of certain of the Continuing Investors to
indemnify the Company in connection with the Formation Transactions, provided,
however, that if the Company does not elect to exchange such Units for shares
of Common Stock, a Unitholder that is a corporation or limited liability
company may require the Company to issue shares of Common Stock in lieu of
cash, subject to the Ownership Limit or such other limit as provided in the
Company's Articles of Incorporation, as applicable. See "Formation and
Structure of the Company--Allocation of Consideration in the Formation
Transactions," Under certain circumstances, 50% of the Units received by John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries may be redeemed
prior to the second anniversary of the consummation of the Offering in
connection with the obligation of such Continuing Investors to indemnify the
Company in connection with the Formation Transactions. See "--Allocation of
Consideration in the Formation Transactions."
The Continuing Investors are comprised of (i) seven individuals, John B.
Kilroy, Sr., his five children, John B. Kilroy, Jr., Patrice Bouzaid, Susan
Hahn, Anne McCahon and Dana Pantuso, and Marshall L. McDaniel, a long-time
employee of KI, all of whom are "accredited investors" as defined in
Regulation D, and (ii) corporations, partnerships and trusts owned, directly
or indirectly, solely by such individuals, all of which are also "accredited
investors." See "Note 1. Organization and Basis of Presentation" to the
historical financial statements of the Kilroy Group. In addition, John B.
Kilroy, Sr. is the Company's Chairman of the Board of
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Directors and John B. Kilroy, Jr. is President and Chief Executive Officer and
a director of the Company. Consent of the Continuing Investors to the
Formation Transactions was received on or before November 3, 1996 pursuant to
a private solicitation thereof in compliance with Regulation D.
REASONS FOR THE REORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions
outweigh the detriments to the Company. The benefits of the Company's REIT
status and structure, as opposed to the status and structure of the
Partnerships, include the following:
. Access to Capital. The Company's structure will, in the Company's
judgment, provide it with greater access to capital for refinancing and
growth. Sources of capital include the Common Stock sold in the Offering
and possible future issuances of debt or equity through public offerings
or private placements. The financial strength of the Company should
enable it to obtain financing at better rates and on better terms than
would otherwise be available to the Partnerships, some of which are
single asset entities.
. Growth of the Company. The Company's structure will allow stockholders,
including the Continuing Investors through their ownership of Units, an
opportunity to participate in the growth of the real estate market
through an ongoing business enterprise. In addition to the existing
portfolio of Properties, the Company gives stockholders an interest in
all future development by the Company and in the fee-producing service
businesses being contributed by the Company to the Services Company.
. Risk Diversification. The Company's structure provides stockholders a
diversification of risk and reward not available in single asset
entities by providing them with an equity interest in a REIT in which
there has been a pooling together of similar properties and by
consolidating the operating business and future development projects.
. Deleveraging. Upon completion of the Offering and the Formation
Transactions, the Company will have substantially reduced the debt
encumbering the Properties. This reduction, with a consequent reduction
in debt service, will increase the aggregate amount of cash available
for distribution to stockholders. The Formation Transactions also will
permit the Company to refinance its existing indebtedness at more
favorable rates.
. Liquidity. The equity interests in the Partnerships are typically not
marketable. The Company's structure allows stockholders, including the
Continuing Investors, the opportunity to liquidate their capital
investment through the disposition of Common Stock or Units. Beginning
on the second anniversary of the consummation of the Offering, holders
of Units will have the opportunity to have their Units redeemed by the
Operating Partnership for cash equal to the value of an equal number of
shares of Common Stock, or the Company may elect to exchange such Units
for an equivalent number of shares of Common Stock, provided, however,
if the Company does not elect to exchange such units for shares of
Common Stock, a holder of Units that is a corporation or limited
liability company may require the Company to issue Common Stock in lieu
thereof, subject to the Ownership Limit or such other limit as provided
in the Company's Articles of Incorporation, as applicable.
. Public Market Valuation of Real Estate Assets. The Company's structure
may allow investors to benefit potentially from the current public
market valuation of REITs, which management believes is favorable in
light of the current private market valuation of comparable assets.
. Tax Deferral. The Formation Transactions provide to the Continuing
Investors the opportunity to defer the tax consequences that would arise
from a sale or contribution of their interests in the Properties and
other assets to the Company or to a third party.
The detriments of the Company's REIT status and structure as opposed to the
status and structure of the Partnerships include the following (see also "Risk
Factors"):
. Conflicts of Interest. Management of the Company will be subject to a
number of conflicts of interest in the operation of the Operating
Partnership as well as the formation of the Company. Among other
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conflicts, there will be no independent valuation or appraisal of the
Properties, and no arm's-length negotiation of the terms of the option
agreements relating to the Excluded Properties, and there can be no
assurance that the value given to the Continuing Investors by the
Company for such assets is equal to their fair market value. Because
John B. Kilroy, Sr. and John B. Kilroy, Jr. will be directors or
officers of the Company, they will have a conflict of interest with
respect to enforcing the agreements transferring their interest in
certain assets to the Company. In addition, because the Continuing
Investors and officers of the Company may suffer different tax
consequences than the Company upon the sale or refinancing of any of the
Properties, their interests regarding the timing and pricing of such
sale or refinancing may conflict with those of the Company. So long as
the Continuing Investors own more than 5% of the outstanding Units, the
Continuing Investors will be able to veto or preclude the sale of the
Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo at any time prior to the seventh anniversary of the
Offering. In addition, the Company is required to use its commercially
reasonable efforts to structure any merger, consolidation or other
business combination, any sale or other disposition of all or
substantially all of its assets, or any reclassification,
recapitalization or change of its outstanding equity interests, to avoid
causing the limited partners to recognize gain for federal income tax
purposes by virtue of the occurrence of or their participation in such
transaction. The Operating Partnership will also use commercially
reasonable efforts to cooperate with the limited partners to minimize
any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or
any other disposition of assets, of the Operating Partnership. See
"Partnership Agreement of the Operating Partnership--Certain Limited
Partner Approval Rights."
. Consent Rights of Limited Partners. The Company will be the sole general
partner of the Operating Partnership and will own and control 81.7% of
the ownership interests in the Operating Partnership. However, under the
terms of the Partnership Agreement, the Company may not withdraw as
general partner of the Operating Partnership or transfer or assign its
interest in the Operating Partnership without the consent of partners
holding in the aggregate at least 60% of all interests in the Operating
Partnership. See "Partnership Agreement of the Operating Partnership--
Transferability of Interests". In addition, until the seventh
anniversary of the Offering the general partner of the Operating
Partnership will not be able to dissolve the Operating Partnership, or
sell the Office Property located at 2260 E. Imperial Highway at Kilroy
Airport Center at El Segundo, without the consent of limited partners
holding in the aggregate more than 50% of all Units representing limited
partnership interests in the Operating Partnership, provided that the
limited partners own at least 5% of the outstanding Units (including
Units owned by the Company). See "Partnership Agreement of the Operating
Partnership--Certain Limited Partner Approval Rights". As a consequence
of the exercise of these consent and approval rights, the Company may be
precluded from taking action that the Board of Directors believes is in
the best interest of all stockholders. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain
Limited Partner Approval Rights."
. Influence of Certain Continuing Investors. John B. Kilroy, Sr., the
Company's Chairman of the Board of Directors, and John B. Kilroy, Jr.,
the Company's President and Chief Executive Officer and one of its
directors, will own, together with the other Continuing Investors, Units
exchangeable for shares of the Common Stock equal to approximately 18.3%
of the total outstanding shares. In addition, the Messrs. Kilroy will
hold two of the Company's five seats on the Board of Directors. Under
the terms of the Company's charter, no other stockholder presently is
permitted to own in excess of 7.0% of the Common Stock. Consequently,
although the Messrs. Kilroy will not be able to take action on behalf of
the Company without the concurrence of other members of the Company's
Board of Directors, they will be able to block certain transactions by
the Operating Partnership and exert substantial influence over the
Company's affairs.
. Loss of Individual Asset Growth Opportunity. Any given asset may over
time outperform the Common Stock. Any investor who exchanges an interest
in a single asset for a smaller interest in a
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<PAGE>
group of assets will receive a lower return on investment if the asset
from which the investor traded outperforms the Common Stock.
. No Anticipated Distributions from Asset Sales. Unlike the Partnerships,
in which the net proceeds from the sale of assets were generally
distributed to the partners, the Company is not expected to have
significant asset sales. Moreover, the Company may decide to reinvest
the proceeds from asset sales rather than distribute them to
stockholders. Although stockholders will have the ability to sell their
shares of Common Stock (subject to certain restrictions discussed
herein), they would not be able to rely upon the mere passage of time to
realize their share of the gains, if any, that might be recognized at
any point in time from a liquidation of all or part of the assets of the
Company.
. Public Market Valuation. Although the public market may value real
estate assets on a basis that is attractive in relation to private
market real estate values, there is no assurance that this condition, if
it exists, will continue. In the 1980s, REIT shares generally traded at
a discount to the underlying private market values of the REIT
properties, rather than at a premium. This condition could return. In
addition, an increase in interest rates could adversely affect the
market value of the shares of Common Stock.
. Costs of the Transaction. The aggregate expenses of the Offering,
including the underwriting discount, are expected to be approximately
$23.4 million, assuming gross proceeds of the Offering of approximately
$270.0 million. In addition, the Operating Partnership will incur costs
of approximately $1.8 million in the aggregate in connection with the
Financing.
. Costs of Operating Public Company. The Company expects to incur expenses
in connection with the requirements of being a public company, including
without limitation, preparation of financial statements and proxies,
printing and filing costs, directors' and officers' insurance, and legal
and accounting fees, estimated to be $1.0 million annually.
COMPARISON OF COMMON STOCK AND UNITS
Conducting the Company's operations through the Operating Partnership allows
the Continuing Investors to defer certain tax consequences by contributing
their interests in Properties to the Operating Partnership and also offers
favorable methods of accessing capital markets. Units in the Operating
Partnership will be held by the Continuing Investors and the Company. Each
Unit was designed to result in a distribution per Unit equal to a distribution
per share of Common Stock (assuming the Company distributes to its
stockholders all amounts it receives as distributions from the Operating
Partnership). Beginning two years following the consummation of the Offering,
each Unit issued in the Formation Transactions is redeemable by the Operating
Partnership at the request of the Unitholder for cash payable by the Operating
Partnership or, at the Company's option, the Company may exchange Units for
Common Stock on a one-for-one basis (subject to certain antidilution
adjustments and certain limitations on exchange to preserve the Company's
status as a REIT), provided, however, that if the Operating Partnership elects
to redeem such Units for cash, a Unitholder that is a corporation or a limited
liability company may require the Company to issue shares of Common Stock in
lieu of cash. There are, however, certain differences between the ownership of
Common Stock and Units, including:
. Voting Rights. Holders of Common Stock may elect the Board of Directors
of the Company, which, as the general partner of the Operating
Partnership, controls the business of the Operating Partnership.
Unitholders may not elect directors of the Company.
. Transferability. The shares of Common Stock sold in the Offering will be
freely transferable under the Securities Act by holders who are not
affiliates of the Company or the Underwriters. The Units and the shares
of Common Stock into which they are exchangeable are subject to transfer
restrictions under applicable securities laws and under the Partnership
Agreement, including the required consent of the general partner to the
admission of any new limited partner, and 50% of the Units of John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries will be pledged
to secure certain indemnity obligations. See "Shares Available for
Future Sale" for a description of the Registration Rights Agreement
applicable to holders of Units.
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<PAGE>
. Distributions. Because the relative tax basis of the contributions by
the public investors and the Continuing Investors are expected to be
different, it is possible that the public investors' distribution will
include a return of capital that exceeds that of the Continuing
Investors. See "Federal Income Tax Consequences."
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
STOCKHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
stockholders of the Company include their ability to participate in the cash
flow of the Properties through their ownership in the Company and in all
future office and industrial property acquisitions and development by the
Company. The potential disadvantages of such transactions to unaffiliated
stockholders of the Company may be several, including the impact of shares
available for future sale and substantial and immediate dilution in the
tangible book value per share, and the lack of arm's-length negotiations to
determine the terms of the transfers of the Properties to the Company and the
Operating Partnership and the terms of the option agreements relating to the
Excluded Properties. See the discussion of such matters under "Risk Factors."
BENEFITS OF THE FORMATION TRANSACTIONS TO THE CONTINUING INVESTORS
The principals of KI proposed the Formation Transactions to the Continuing
Investors because they believe that the benefits of the organization of the
Company for the Continuing Investors outweigh the detriments to them. Benefits
to the Continuing Investors include:
. improved liquidity of their interests in the Properties and increased
diversification of their investment;
. repayment of indebtedness in the aggregate net amount of approximately
$229.5 million resulting from the refinancing of existing mortgage
indebtedness, of which approximately $37.2 million is guaranteed by John
B. Kilroy, Sr., including $8.7 million which also is guaranteed by John
B. Kilroy, Jr., and the repayment of approximately $3.4 million of
personal indebtedness of John B. Kilroy, Sr.;
. an employment agreement between the Company and John B. Kilroy, Jr.
providing annual salary, incentive compensation (including Common Stock
options) and other benefits for his services as an officer of the
Company (see "Management--Employment Agreements"), and a grant of
options to purchase Common Stock to John B. Kilroy, Sr. (see
"Management--Stock Incentive Plan"); and
. the deferral of certain tax consequences of taxable dispositions of
assets through the creation of the Operating Partnership and the direct
contribution of their interests in the Properties to the Operating
Partnership in exchange for Units.
Set forth below are the (i) names of executive officers of the Company and
certain other persons involved in the Formation Transactions; (ii) net book
value of the interests of such persons in the Properties being transferred;
(iii) value of the Units, (iv) the number of shares of Common Stock, (v) cash,
(vi) the number of stock options, (vii) consideration for the Excluded
Properties and (viii) repayment of debt and/or termination of guarantees that
were outstanding as of December 31, 1996, to be received by the named persons
in the Formation Transactions:
<TABLE>
<CAPTION>
NET BOOK DEBT
VALUE OF REPAYMENT/
PROPERTY ANNUAL NO. OF SHARES NO. OF CONSIDERATION GUARANTEE
INTERESTS SALARY OF COMMON CASH STOCK FOR EXCLUDED TERMINATION
$ $ UNITS $ STOCK $ OPTIONS PROPERTIES $
--------- ------ ------- ------------- ---- ------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John B. Kilroy, Sr. .... $ (76,233) -- $28,419(1) -- -- 15 --(2) $40,636(3)
John B. Kilroy, Jr. .... (33,231) $200 28,419(1) -- -- 250 --(2) 8,700(4)
KI(5)................... -- -- -- -- -- -- -- --
Persons other than
officers/directors(6).. (3,759) -- 3,740 -- -- -- --(2) --
--------- ---- ------- --- --- --- --- -------
$(113,223) $200 $60,578 -- -- 265 --(2) $49,336
========= ==== ======= === === === === =======
</TABLE>
(footnotes on next page)
41
<PAGE>
- --------
(1) Includes the Units to be beneficially owned by KI which are allocated to
John B. Kilroy, Sr. and John B. Kilroy, Jr., the only shareholders of KI,
in accordance with their respective percentage ownership of KI. The value
of the Units received by the Continuing Investors in connection with the
Formation Transactions was determined assuming a Unit value equal to the
assumed per share initial offering price of $22.50.
(2) In the event the Company exercises its option with respect to any of the
Excluded Properties, each of John B. Kilroy, Sr. and John B. Kilroy, Jr.
will receive approximately 49.0% and 51.0%, respectively, of the purchase
price for the sale of the parcels at Calabasas Park Centre and
approximately 65.1% and 18.2%, respectively, of the purchase price for the
sale of the properties located at North Sepulveda Boulevard in El Segundo.
In addition, each of Patrice Bouzaid, Susan Hahn, Anne McCahon and Dana
Pantuso, the daughters of John B. Kilroy, Sr., will receive approximately
4.2% of the purchase price for the sale of the properties located at North
Sepulveda Boulevard in El Segundo. The exercise price for the options for
the Excluded Properties will vary depending on the date of exercise. See
"Business and Properties--Excluded Properties."
(3) Represents $3.4 million of personal indebtedness repaid with proceeds of
indebtedness incurred by the Company within the past 12 months, which
indebtedness will be repaid with proceeds of the Offering, and $37.2
million of personal guarantees of indebtedness of the Kilroy Group secured
by the Properties, which indebtedness will be repaid with proceeds of the
Offering. See "Use of Proceeds."
(4) Represents the termination of personal guarantees of indebtedness of the
Kilroy Group secured by the Properties, which indebtedness will be repaid
with proceeds of the Offering. See "Use of Proceeds."
(5) The amounts attributable to KI are reflected in the amounts attributable
to each of John B. Kilroy, Sr. and John B. Kilroy, Jr., the only
shareholders of KI, who own 81.3% and 18.7% of the common stock of KI,
respectively.
(6) The persons other than officers/directors of the Company are Patrice
Bouzaid, Susan Hahn, Anne McCahon and Dana Pantuso, the daughters of John
B. Kilroy, Sr., and Marshall McDaniel, a long-time employee of KI, all of
whom are Continuing Investors.
The following table contains information concerning the grant of stock
options under the Company's 1997 Stock Incentive Plan expected to be made for
the year ended December 31, 1997 to John B. Kilroy, Sr. and John B. Kilroy,
Jr. The table also lists potential realizable values of such options on the
basis of assumed annual compounded stock appreciation rates of 5% and 10% over
the life of the options.
OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE
SECURITIES VALUE AT
UNDERLYING EXERCISE ASSUMED ANNUAL
OPTIONS OR BASE RATES OF SHARE
GRANTED PRICE EXPIRATION PRICE APPRECIATION
(#)(1) PER SHARE(2) DATE(3) FOR OPTION TERM(4)
---------- ------------ ------------ ---------------------
(IN THOUSANDS)
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Sr. .... 15,000 $22.50 January 2007 $ 212 $ 538
John B. Kilroy, Jr. .... 250,000 $22.50 January 2007 $3,538 $8,965
</TABLE>
- --------
(1) The options granted to Messrs. Kilroy will vest in three equal
installments on the first, second and third anniversaries of the date of
the grant.
(2) Assuming an initial public offering price of the Common Stock of $22.50
per share. The option price will be equal to the initial public offering
price of the Common Stock.
(3) The expiration date of the options will be ten years after the date of
grant.
(4) The potential realizable value is reported net of the option price, but
before income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% only from
the date of grant to the expiration date of the option.
No third party determination of the value of the Properties was sought or
obtained in connection with the acquisition by the Operating Partnership of
the Properties, and the terms of each of the Option Agreements relating to the
Excluded Properties were not determined through arm's-length negotiations.
There can be no assurance that the aggregate value of the consideration
received by the participants in the Formation Transactions, including the
grant of the options relating to the Excluded Properties, is equivalent to the
fair market value of the properties and assets acquired by the Company and the
Operating Partnership in connection with the Formation Transactions. See "Risk
Factors--No Appraisals; Consideration to be Paid for Properties
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<PAGE>
and Other Assets May Exceed their Fair Market Value" and "--Conflicts of
Interest--Competitive Real Estate Activities of Management."
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was
determined based upon the percentage of estimated cash available for
distribution required to pay estimated cash distributions to stockholders of
the Company representing an annual distribution rate equal to 6.89% of the
assumed initial public offering price of the Common Stock of $22.50. The
ownership interest in the Operating Partnership allocated to the Company is
equal to this percentage of estimated cash available for distribution and the
remaining interest in the Operating Partnership will be allocated to the
Continuing Investors receiving Units in the Formation Transactions. The
parameters and assumptions used in deriving the estimated cash available for
distribution are described under the caption "Distribution Policy."
Based on the issuance of 12,000,000 shares of Common Stock in the Offering
plus 60,000 restricted shares of Common Stock to Richard E. Moran Jr. (who is
not a Continuing Investor), the Company will hold an approximately 81.7%
ownership interest in the Operating Partnership and the Continuing Investors
will hold an approximately 18.3% ownership interest in the Operating
Partnership. If the Underwriters' over-allotment option is exercised in full,
the Company will hold an approximately 83.7% ownership interest in the
Operating Partnership and the Continuing Investors will hold an approximately
16.3% ownership interest in the Operating Partnership.
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after consummation of the Offering and the
Formation Transactions or an opinion as to the fairness of the allocation of
shares to the purchasers in the Offering. The initial public offering price
will be determined based upon the estimated cash available for distribution
and the factors discussed under the caption "Underwriting," rather than a
property by property valuation based on historical cost or current market
value. This methodology has been used because management believes it is
appropriate to value the Company as an ongoing business rather than with a
view to values that could be obtained from a liquidation of the Company or of
individual properties owned by them. See "Underwriting."
ALLOCATION OF CONSIDERATION IN THE FORMATION TRANSACTIONS
No independent valuations or appraisals of the Properties were obtained in
connection with the Formation Transactions. The allocation of Units among the
Continuing Investors was based primarily on the relative contributions to net
operating income and other factors relating to the value of the Company as an
on-going enterprise, and generally was not determined through arm's-length
negotiations. There can be no assurance that the fair market value of the
Properties transferred to the Company will equal the sum of the value of the
Units issued to the Continuing Investors.
Certain Continuing Investors (the "Indemnitors") have agreed pursuant to a
supplemental representations, warranties and indemnity agreement, a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, to make certain representations and warranties
concerning the Properties, and have also agreed to indemnify the Company
against breaches of such representations and warranties. These representations
and warranties will survive the closing of the Offering until June 1998 and
the related indemnification obligations generally will be joint and several
among the Indemnitors. Fifty percent of the Units received by John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries in the Formation Transactions
will be pledged to secure their indemnification obligations under the
supplemental representations, warranties and indemnity agreement.
43
<PAGE>
FORMATION OF KILROY SERVICES, INC.
Prior to consummation of the Offering, Kilroy Services, Inc. will be formed
under the laws of the State of Maryland to succeed to the development
activities of the Kilroy Group. John B. Kilroy, Sr. and John B. Kilroy, Jr.
together will own 100% of the voting common stock of the Services Company,
representing 5.0% of its economic value. The Operating Partnership will own
100% of the nonvoting preferred stock of the Services Company, representing
95.0% of its economic value. The ownership structure of the Services Company
is necessary to permit the Company to share in the income of the activities of
the Services Company and also maintain its status as a REIT. Although the
Company anticipates receiving substantially all of the economic benefit of the
businesses carried on by the Services Company through the Company's right to
receive dividends through the Operating Partnership's investment in the
Services Company's nonvoting preferred stock, the Company will not be able to
elect the Services Company's officer or directors and, consequently, may not
have the ability to influence the operations of the Services Company or
require the declaration of dividends. See "Risk Factors--Risks of Development
Business and Related Activities Being Conducted by the Services Company--
Adverse Consequences of Lack of Control Over the Businesses of the Services
Company."
The Services Company initially will have three directors, including Campbell
Hugh Greenup, who also serves as the General Counsel of the Company, and
Jeffrey C. Hawken, who also serves as the Executive Vice President and Chief
Operating Officer of the Company. See "Management." In addition, the Services
Company will have a third and independent director. Campbell Hugh Greenup will
serve as the Services Company's President and Secretary, and David Armanetti
will serve as its Vice President of Development Services and Treasurer. Prior
to the Offering, Mr. Greenup was a Senior Vice President for Development of KI
and Mr. Armanetti was a Vice President for Development of KI.
44
<PAGE>
THE COMPANY
GENERAL
The Company has been formed to succeed to the business of the Kilroy Group
consisting principally of a portfolio of Class A suburban office and
industrial buildings in prime locations primarily in Southern California, and
the Kilroy Group's real estate ownership, acquisition, development, leasing
and management businesses. Upon the consummation of the Offering and the
Formation Transactions, the Company (through the Operating Partnership) will
own 14 Office Properties encompassing an aggregate of approximately 2.0
million rentable square feet and 12 Industrial Properties encompassing an
aggregate of approximately 1.3 million rentable square feet. Eleven of the 14
of the Office Properties and 11 of the 12 Industrial Properties are located in
prime Southern California suburban submarkets (including a complex of three
Office Properties located in El Segundo, adjacent to Los Angeles International
Airport, presently the nation's second largest air-cargo port, and a complex
of five Office Properties located adjacent to the Long Beach Municipal
Airport). The Company also will own three Office Properties located adjacent
to the Seattle-Tacoma International Airport in the State of Washington and one
Industrial Property located in Phoenix, Arizona. As of September 30, 1996, the
Office Properties were approximately 79.8% leased to 130 tenants and the
Industrial Properties were approximately 93.7% leased to 20 tenants. The
average age of the Office Properties and the Industrial Properties is
approximately 12 years and 24 years, respectively. The Company developed and
leased all but two of the 14 Office Properties and all but five of the 12
Industrial Properties, and upon consummation of the Offering and acquisition
of the Acquisition Properties will manage all of the Properties.
The Company was founded in 1947 by John B. Kilroy, Sr., a nationally
prominent member of the real estate community, and is led by John B. Kilroy,
Jr., the Company's President since 1981. The Company's executive officers have
been with the Company for an average of approximately 13 years. The Company
has been involved in the ownership, acquisition, entitlement, development,
leasing and management of commercial properties, the majority of which are
located in Southern California, for nearly 50 years and has been focusing
primarily on office and industrial development for the past 30 years. The
Company presently has 47 employees, 34 of whom are located at the Company's
headquarters at Kilroy Airport Center at El Segundo, California.
The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily
in Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Company's extensive experience and
long-term presence in Southern California have enabled it to form key
alliances and working relationships with major corporate tenants,
municipalities and landowners in Southern California that have resulted in a
variety of development projects and provide an on-going source of development
and acquisition opportunities. The Southern California Properties located in
Los Angeles and Orange Counties are situated in locations which the Company
believes are among the best within key submarkets, offering tenants: (i) lower
business taxes and operating expenses than adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airline travelers.
The Company also has focused on the design and construction of its projects.
The Office Properties developed by the Company (Kilroy Airport Center at El
Segundo, Kilroy Airport Center Long Beach and SeaTac Office Center) were
designed and developed to above-standard specifications, with an emphasis on
long-term operating efficiency and tenant comfort. The Industrial Properties
also were designed and developed to provide above-standard quality and meet
the long-term needs of tenants and were designed as multi-use facilities to
satisfy various types of manufacturing, distribution and office uses. As a
result, the Industrial Properties continue to serve the evolving needs of
their tenants, some of which have recently invested substantially in long-term
tenant improvements. As a result of the high quality and strategic location of
the Properties, and the Company's attention to the highest quality management
and service, the Company believes that the Properties attract major corporate
tenants and historically have achieved among the highest occupancy, tenant
retention and rental rates,
45
<PAGE>
both within their respective submarkets and as compared to their respective
neighboring submarkets. See "Business and Properties--Office Properties" and
"--Industrial Properties."
The Company has created value by effectively working with municipalities,
large landowners and other members of the real estate community in Southern
California, and has maintained strong relationships at all levels of
government, as well as with financial institutions and major corporate
tenants. In 1981, the Company initiated the El Segundo Employers' Association,
a traffic and management organization composed of major employers in the El
Segundo area. The organization has worked with local government and has been
instrumental in the furtherance of infrastructure developments in El Segundo
and throughout the surrounding area, including two recent developments that
management believes will have a substantial economic benefit to the El Segundo
submarket. First, in October 1994, Interstate Highway I-105 (the "I-105
Freeway") opened, which crosses Los Angeles from east to west and provides
substantially improved access to El Segundo and Los Angeles International
Airport. A second infrastructure development in the El Segundo submarket is a
major east-west grade-separated light rail commuter line (the "Green Line").
The Green Line runs adjacent to Kilroy Airport Center at El Segundo.
Management believes that the Green Line, which opened in August 1995, will add
significant value to the El Segundo submarket. See "Business and Properties--
The Company's Southern California Submarkets--El Segundo Submarket."
The Company's major tenants include, among others, Hughes Space &
Communications, a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, as well as CompuServe, Inc., Employer's Health Insurance Co.,
the Federal Aviation Administration, First Nationwide Mortgage Corporation,
Furon Co., Inc., GTE Directories Sales Corporation, Great Western Bank,
HealthNet, Mattel, Inc. (which has its worldwide corporate headquarters in
El Segundo), North American Title Company, Northwest Airlines, Inc., Olympus
America, Inc., The Prudential Insurance Company of America, R.L. Polk &
Company, SCAN HealthPlan, Senn-Delaney Leadership Consulting Group, Inc.,
Transamerica Financial Services, Inc., 20th Century Industries, UniCare
Financial Corporation and Unihealth. As of December 31, 1995, the Company's
ten largest office tenants and ten largest industrial tenants (based upon
annual base rents as of December 31, 1995) had leased office space from the
Company for an average of 5.3 years. The Company's strong relationships with
its tenants is further evidenced by its average tenant retention rate (based
upon rentable square feet) for the two-year and nine-month period ended
September 30, 1996, which was 71.7% for the Properties located in the Southern
California Area and 50.9% for the Properties overall. The lower overall
retention rate results primarily from the 1993 termination of a lease for
211,000 net rentable square feet at the SeaTac Office Center. The Company's
extensive experience and long-term presence in Southern California have
enabled it to form key alliances and working relationships with large
corporate tenants, municipalities and landowners that have led to a variety of
development projects and provide a continuing source of development and
acquisition opportunities with institutional sellers. As a result of its
experience and relationships, the Company currently has exclusive rights to
develop approximately 24 acres of developable land (net of the acreage
required for streets) at Kilroy Airport Center Long Beach. These properties
are presently entitled for over 900,000 rentable square feet of office,
industrial and retail space.
The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to
tenants, its capital structure, its access to public capital markets, the lack
of new construction of office properties in its submarkets, its access to
developable properties, the knowledge and experience of its senior management
team and its long-term relationships with the Southern California real estate
community, large corporate tenants, municipalities, landowners and
institutional sellers. In addition, the Company believes that it will be one
of a limited number of REITs focusing on office and industrial properties and
that it will be the only REIT with a 50-year operating history concentrating
primarily on suburban Southern California office and industrial properties. In
the 12 months following the consummation of the Offering, the Company expects
sources of potential growth in cash available for distribution per share from
the amount set forth under the caption "Distribution Policy," through: (i) the
further leasing of its available space, currently approximately 400,000
rentable square feet; (ii) the renewal of leases for approximately 60,000
rentable square feet which
46
<PAGE>
expire during such period; and (iii) the acquisition of strategic properties
with Units and/or with available cash and borrowings under the proposed Credit
Facility and its approximately $60 million of working capital cash reserves,
upon consummation of the Offering. In the second 12-month period following
consummation of the Offering, the Company expects sources of potential growth
in cash flow per share from: (i) contractual increases in base rent payments
from tenants; (ii) continued leasing of available space; (iii) the acquisition
of strategic properties; and (iv) the contemplated completion of certain
planned development activities. In addition, the Company presently plans to
expand one or more of its Industrial Properties during the next two years,
subject to substantial pre-leasing. There can be no assurance, however, that
the Company will achieve any growth in cash available for distribution per
share, that available space will be leased, that leases scheduled to expire
will be renewed, that the Company will successfully complete any of its
planned development activities or that the Company will be able to acquire and
develop any of the Development Properties or other properties that may become
available. See "Risk Factors--Real Estate Investment Considerations--Risks of
Real Estate Acquisition and Development."
The Company will continue its practice of managing or administering
substantially all leasing, management, tenant improvements and construction on
an "in-house" basis and will be self-administered and self-managed. The
Company intends to elect to qualify as a REIT for federal income tax purposes
beginning with its taxable year ending December 31, 1997. See "Federal Income
Tax Consequences--Taxation of the Company."
Kilroy Realty Corporation, a Maryland corporation, has executive offices at
2250 East Imperial Highway, El Segundo, CA 90245 and its telephone number is
(213) 772-1193.
GROWTH STRATEGIES
The Company's objectives are to maximize growth in cash flow per share and
to enhance the value of its portfolio through effective management, operating,
acquisition and development strategies. The Company believes that
opportunities exist to increase cash flow per share: (i) by acquiring office
and industrial properties with attractive returns in strategic suburban
submarkets where such properties complement its existing portfolio; (ii) from
contractual increases in base rent; (iii) as a result of increasing rental and
occupancy rates and decreasing concessions and tenant installation costs as
vacancy rates in the Company's submarkets generally continue to decline; (iv)
by developing properties for the benefit of the Company where such development
will result in a favorable risk-adjusted return on investment; and (v) by
expanding Properties within the Company's existing industrial portfolio. The
Company's ability to achieve its growth strategy will be aided by its working
capital cash reserves of approximately $60 million upon consummation of the
Offering and the proposed Credit Facility.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's markets, as
well as the Company's ability to acquire properties with Units (thereby
deferring the seller's taxable gain), all of which create enhanced acquisition
opportunities; (iii) the quality and location of the Properties; (iv) the
Company's access to development opportunities as a result of its significant
relationships with large Southern California corporate tenants, municipalities
and landowners and its nearly 50-year presence in the Southern California
market; and (v) the limited availability to competitors of capital for
financing development, acquisitions or capital improvements. Management
believes that the Company is well positioned to exploit existing opportunities
because of its extensive experience in its submarkets, its seasoned management
team and its proven ability to develop, lease and efficiently manage office
and industrial properties. In addition, the Company believes that public
ownership and its capital structure will provide new opportunities for growth.
There can be no assurance, however, that the Company will be able to lease
available space, complete any property acquisitions, successfully develop any
land acquired or improve the operating results of any developed properties
that are acquired. See "Business and Properties--Development, Leasing and
Management Activities."
47
<PAGE>
Operating Strategies. The Company will focus on enhancing growth in cash
flow per share by: (i) maximizing cash flow from existing Properties through
active leasing, contractual base rent increases and effective property
management; (ii) managing operating expenses through the use of in-house
management, leasing, marketing, financing, accounting, legal, construction
management and data processing functions; (iii) maintaining and developing
long-term relationships with a diverse tenant group; (iv) attracting and
retaining motivated employees by providing financial and other incentives to
meet the Company's operating and financial goals; and (v) continuing to
emphasize capital improvements to enhance the Properties' competitive
advantages in their markets.
The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
September 30, 1996, the Company leased or renewed leases for an aggregate of
approximately 1.0 million rentable square feet of office space and
approximately 718,000 rentable square feet of industrial space. As of December
31, 1995, the Office Properties in the Southern California Area were
approximately 89.5% leased as compared to approximately 82.0% for the Southern
California Area, approximately 89.2% for the El Segundo submarket and
approximately 85.4% in the Long Beach submarket. In addition, at December 31,
1995, the Industrial Properties were approximately 91.4% leased as compared to
approximately 82.3% and approximately 87.1% for industrial properties located
in Los Angeles and Orange Counties, respectively. As of September 30, 1996,
(i) the Office Properties contained approximately 2.0 million rentable square
feet and were approximately 79.8% leased, and (ii) the Industrial Properties
contained an aggregate of approximately 1.3 million rentable square feet and
were approximately 93.7% leased. In addition, the number of individual lease
transactions since 1992, including the results for the nine-month period ended
September 30, 1996, averaged over 33 per year. See "Business and Properties--
General," "--Properties," "--Occupancy and Rental Information," and "--The
Company's Southern California Submarkets."
Approximately 1.0 million aggregate rentable square feet in the Properties
was leased by the Company from January 1, 1992 through December 31, 1994, a
period which management characterizes as recessionary. Based on the leases the
Company signed in 1996, and the findings in an independent study of the
Southern California real estate market commissioned by the Company, management
believes that the recent trend toward increasing rental rates in Class A
office and industrial buildings in the Company's Southern California
submarkets presents significant opportunities for growth. In addition,
approximately 66.5% of the Company's net rentable square feet is subject to
leases expiring in 2000 or beyond, when management expects asking rents for
the respective Properties to be higher than the rents paid pursuant to such
leases. In addition, as of December 31, 1996 approximately 36.7% of the
Company's total base rent (representing approximately 23.7% of the aggregate
net rentable square feet of the Properties) was attributable to leases with
Consumer Price Index increases and approximately 28.1% of the Company's total
base rent (representing approximately 30.5% of the aggregate net rentable
square feet of the Properties) is attributable to leases with other specified
contractual increases. No assurance can be given, however, that new leases
will reflect rental rates greater than or equal to current rental rates or
future economic conditions will support higher rental rates. See "Risk
Factors--Real Estate Investment Considerations."
Acquisition Strategies. The Company will seek to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that may: (i) provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's extensive experience, capital structure
and ability to acquire properties for Units, and thereby defer a seller's
taxable gain, if any, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies
48
<PAGE>
in the market which lack its access to capital or the ability to issue Units.
See "Business and Properties-- Development, Leasing and Management
Activities."
The Company has entered into an agreement to acquire the two office
properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy
Airport Center Long Beach Phase I was developed by the Company in 1987 and has
been leased and managed by the Company since its inception. In addition, the
Company has entered into an agreement to purchase an office property located
in Thousand Oaks, California. The Company also has entered into an agreement
to acquire a three building office and industrial complex located in Anaheim,
California. Furthermore, KI, on behalf of the Operating Partnership, has
acquired a multi-tenant industrial property located in Garden Grove,
California. The acquisition of the Acquisition Properties by the Company is
expected to occur concurrently with the consummation of the Offering and,
accordingly, the Acquisition Properties are included in the discussion of the
Properties included throughout this Prospectus. There can be no assurance,
however, that the Company will be able to complete any property acquisitions,
including the acquisition of the Acquisition Properties, successfully develop
any land acquired or improve the operating results of any developed properties
that are acquired. See "Business and Properties--Acquisition Properties."
Development Strategies. The Company's interests in the Development
Properties provide it with significant growth opportunities.
The Company is the master ground lessee of, and has sole development rights
in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53-
acre property entitled for office, research and development, light industrial
and other commercial projects at which the Company will own, upon consummation
of the Offering, all five existing Office Properties and manages all ongoing
leasing and development activities. The Company developed Phases I and II in
1987 and 1989/1990, respectively, encompassing an aggregate of approximately
620,000 rentable square feet of office and light industrial space. The Company
controls development of the Phase III and IV parcels while receiving rental
revenue in connection with such parcels under current leases expiring in July
2009 and September 1998, respectively, in amounts sufficient to cover a
substantial portion of the predevelopment carrying costs. Phases III and IV
presently are planned to be developed on the project's approximately
24 undeveloped acres and are entitled for an aggregate of approximately
900,000 rentable square feet. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of each of Phases III and IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development of Phases III and IV is uncertain.
No assurance can be given that the Company will commence such development when
planned, or that, if commenced, such development will be completed. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development" and "Business and Properties--Development,
Leasing and Management Activities--Kilroy Long Beach."
In addition, certain of the Industrial Properties can support additional
development, and the Company presently is planning to develop in the next two
years, subject to substantial pre-leasing, approximately 105,000 rentable
square feet of such additional space.
The Company may engage in the development of other office and/or industrial
properties primarily in Southern California submarkets when market conditions
support a favorable risk-adjusted return on such development. The Company's
activities with third-party owners in Southern California are expected to give
the Company further access to development opportunities. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Development Properties or any other properties. See "Business and
Properties--Development, Leasing and Management Activities."
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the ratio of debt to total market capitalization (total debt of the
Company as a percentage of the market value of issued and outstanding shares
of Common Stock, including interests exchangeable therefor, plus total debt)
to approximately 50%. However, such objectives may be altered without the
consent of the Company's stockholders, and the Company's organizational
documents do
49
<PAGE>
not limit the amount of indebtedness that the Company may incur. Upon
completion of the transactions outlined under the caption "Formation and
Structure of the Company," total debt will constitute approximately 22.4% of
the total market capitalization of the Company (assuming an initial public
offering price of $22.50 per share of Common Stock). In addition, upon
consummation of the Offering, the Company will have working capital cash
reserves of approximately $60 million. The Company anticipates that upon
consummation of the Offering all but approximately $12.0 million of the
permanent indebtedness will bear interest at fixed rates. The Company intends
to utilize one or more sources of capital for future acquisitions, including
development and capital improvements, which may include undistributed cash
flow, borrowings under the proposed Credit Facility, the Company's
approximately $60 million of working capital cash reserves out of the net
proceeds of the Offering, issuance of debt or equity securities and other bank
and/or institutional borrowings. There can be no assurance, however, that the
Company will be able to obtain capital for any such acquisitions, developments
or improvements on terms favorable to the Company. See "--Growth Strategies,"
"The Company--Growth Strategies" and "Business and Properties--Development,
Leasing and Management Activities."
50
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock in the
Offering (based on the midpoint of the range of the initial public offering
price set forth on the cover page of this Prospectus), after deduction of
underwriting discounts and commissions and estimated offering expenses, are
expected to be approximately $246.6 million (approximately $284.3 million if
the Underwriters' over-allotment option is exercised in full). In addition to
the net proceeds from the Offering, the Operating Partnership expects to
receive net proceeds from the Mortgage Loans, after payment of expenses
related thereto, of approximately $95.5 million. The Company intends to apply
the net proceeds of the Offering and from the Mortgage Loans as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Repayment of existing mortgage debt (net of
discounts/premiums)...................................... $229,452
Purchase price of the Acquisition Properties.............. 48,962
Working capital cash reserves............................. 60,000
Capital expenditure cash reserves......................... 2,336
Financing expenses........................................ 1,350
--------
Total................................................. $342,100
========
</TABLE>
Upon consummation of the Offering, the estimated amount of indebtedness of
the Kilroy Group secured by the Properties which is to be repaid with net
proceeds of the Offering and the Financing will be approximately $229.5
million (including accrued interest and loan fees), of which approximately
$37.2 million has been guaranteed by certain members of the Kilroy Group,
including officers and directors of the Company. An aggregate of approximately
$32.1 million of indebtedness was incurred within the last year, of which $1.5
million was incurred to finance tenant improvements and to pay leasing
commissions related to Kilroy Airport Center Long Beach, $9.1 million was
incurred by KI (on behalf of the Company) to acquire the Industrial Property
located at 12752-12822 Monarch Street, Garden Grove, California (including
expenses at closing) and $21.5 million was used to repay $16.6 million of
existing indebtedness (including $3.4 million of indebtedness of John B.
Kilroy, Sr., the Chairman of the Company's Board of Directors, and accrued
interest and prepayment penalties in connection with such repayments), and to
pay approximately $940,000 in property taxes and approximately $454,000 in
loan costs, legal fees and other expenses in connection with such financing,
with the remainder being contributed to working capital.
The approximately $49.0 million to be used to purchase the Acquisition
Properties referenced above represents the aggregate purchase price paid or to
be paid (including expenses at closing) pursuant to executed agreements for
the acquisition of Kilroy Airport Center Long Beach Phase I, the Westlake
Office Plaza and the Anaheim Office and Industrial Properties. The acquisition
of the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California is reflected in the repayment of existing mortgage debt (net
of discounts/premiums) referenced above, as this amount was incurred by KI on
behalf of the Company to acquire the property prior to consummation of the
Offering based on the closing schedule required by the seller. See "Business
and Properties--Acquisition Properties."
In addition, the Company presently intends to use the approximately $2.3
million of capital expenditure cash reserves to pay to Hughes Space &
Communications, in connection with Formation Transactions, the remaining
balance of approximately $1.4 million in connection with the amendment and/or
extension of leases of office space at the Office Properties located at Kilroy
Airport Center, including $500,000 in connection with a tenant improvement
allowance for the properties located at 2240 and 2250 E. Imperial Highway and
the balance in connection with the cancellation of an option to purchase an
equity interest in the Office Properties located at Kilroy Airport Center at
El Segundo. Also from such $2.3 million capital expenditure cash reserves, in
connection with the Financing, the Company will make earthquake-related
improvements to certain of the Properties in an aggregate amount of
approximately $500,000.
51
<PAGE>
The following table presents the balances, as of September 30, 1996, and the
expected balances as of the date the Offering is consummated, of the mortgages
and loans (which are all of the current outstanding mortgages and loans on the
Properties) intended to be repaid out of the net proceeds of the Offering. The
mortgages expected to be repaid upon completion of the Offering had a weighted
average interest rate of approximately 8.74% and a weighted average remaining
term to maturity of approximately 3.14 years as of September 30, 1996.
<TABLE>
<CAPTION>
EXPECTED BALANCE AS OF
BALANCE AS OF THE DATE THE
PROPERTY LOCATION SEPTEMBER 30, 1996 OFFERING IS CONSUMMATED
- ----------------- ------------------ -----------------------
(IN THOUSANDS)
<S> <C> <C>
Kilroy Airport Center at El Segundo }
2240 E. Imperial Highway }
2250 E. Imperial Highway }.......................... $ 94,799 $ 93,999
2260 E. Imperial Highway }
El Segundo, California }
Kilroy Airport Center Long Beach }
3750 Kilroy Airport Way }
3760 Kilroy Airport Way }.......................... 56,168 56,168
3780 Kilroy Airport Way }
Long Beach, California }
SeaTac Properties Ltd. }
17900 Pacific Highway }
17930 Pacific Highway }.......................... 20,162 16,100
18000 Pacific Highway }
Seattle, Washington }
2031 E. Mariposa Avenue
El Segundo, California(1)..................................... 12,000 12,000
3332 E. La Palma Avenue
Anaheim, California........................................... 7,589 7,580
2260 E. El Segundo Boulevard }
El Segundo, California }
2265 E. El Segundo Boulevard }
El Segundo, California }
2270 E. El Segundo Boulevard }
El Segundo, California }
185 S. Douglas Street }
El Segundo, California(2) }.......................... 21,523(3) 21,525(3)
1000 E. Ball Road }
Anaheim, California(1) }
1230 S. Lewis Street }.......................... 5,536 5,506
Anaheim, California(1) }
12681/12691 Pala Drive
Garden Grove, California...................................... 3,267 3,264
5115 N. 27th Avenue
Phoenix, Arizona.............................................. 3,000 3,000
12752-12822 Monarch Street
Garden Grove, California...................................... -- 9,060(4)
-------- --------
$224,046 $228,202
======== ========
</TABLE>
(footnotes on next page)
52
<PAGE>
- --------
(1) This property is also subject to a second mortgage securing the
indebtedness referenced in note (3) below which will be repaid with the
net proceeds of the Offering. This property is also subject to a mortgage
securing the $9.1 million aggregate principal amount of indebtedness
(including related expenses incurred in connection therewith) referenced
in note (4) below which will be repaid with the net proceeds of the
Offering.
(2) This property is also subject to a mortgage securing the $9.1 million
aggregate principal amount of indebtedness (including related expenses
incurred in connection therewith) referenced in note (4) below, which will
be repaid with the net proceeds of the Offering.
(3) This indebtedness is also secured by a second mortgage on the properties
located at 1000 East Ball Road, Anaheim, California, 1230 S. Lewis Street,
Anaheim, California and 2031 E. Mariposa Avenue, El Segundo, California.
(4) Represents the principal amount of indebtedness incurred on December 19,
1996, by KI on behalf of the Company, in connection with the acquisition
of the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California, plus accrual of related closing expenses. See "Business
and Properties--Acquisition Properties--12752-12822 Monarch Street, Garden
Grove, California." The indebtedness matures on the earlier of the date on
which the Offering is consummated and June 20, 1997 and, as of December
31, 1996, had an interest rate of approximately 8.41%.
In the event that the Underwriters' over-allotment option is exercised, the
net proceeds thereof will be used by the Company for additional working
capital and will be available for development and for future acquisitions of
additional properties not yet identified. Pending application of such net
proceeds, the Company will invest the net proceeds in interest-bearing
accounts and short-term, interest-bearing securities, which are consistent
with the Company's intention to qualify for taxation as a REIT. Such
investments may include, for example, obligations of the Governmental National
Mortgage Association, other government and government agency securities,
certificates of deposit and interest-bearing bank deposits.
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of its Common Stock. The first distribution, for the period commencing
upon the consummation of the Offering and ending March 31, 1997, is
anticipated to be approximately $ per share (which is equivalent to a
quarterly distribution of $.3875 per share or an annual distribution of $1.55
per share) which results in an initial annual distribution rate of 6.89%,
based on the midpoint of the range of the initial public offering price set
forth on the cover page of this Prospectus. The Company does not expect to
change its estimated distribution rate if any of the Underwriters' over-
allotment option is exercised. The Company currently expects to distribute
approximately 90.5% of estimated cash available for distribution for the 12
months following the consummation of the Offering. Units and shares of Common
Stock will receive equal distributions. The Board of Directors may vary the
percentage of cash available for distribution which is distributed if the
actual results of operations, economic conditions or other factors differ from
the assumptions used in the Company's estimates.
The Company believes that its estimate of cash available for distribution
constitutes a reasonable basis for setting the initial distribution rate and
is made solely for the purpose of setting the initial distribution rate and is
not intended to be a projection or forecast of the Company's results of
operations or of its liquidity. The Company presently intends to maintain the
initial distribution rate for the 12 months following the consummation of the
Offering unless actual results from operations, economic conditions or other
factors differ significantly from the assumptions used in its estimate.
However, no assurance can be given that the Company's estimate will prove
accurate. The actual return that the Company will realize will be affected by
a number of factors, including the revenue received from the Properties, the
distributions and other payments received from the Operating Partnership and
Services Company (which in turn is based in part on revenues received from
development activities), the operating expenses of the Company, the interest
expense incurred on its borrowings, the ability of tenants to meet their
obligations, general leasing activity and unanticipated capital expenditures.
See "Risk Factors--Real Estate Investment Considerations."
53
<PAGE>
The following table illustrates the adjustments made by the Company to its
pro forma Funds from Operations for the twelve months ended September 30, 1996
in order to calculate estimated cash available for distribution:
<TABLE>
<CAPTION>
AMOUNT
------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Pro forma net income before minority interests for the year
ended December 31, 1995..................................... $ 15,580
Plus pro forma net income before minority interests for the
nine months ended September 30, 1996........................ 7,029
Less pro forma net income before minority interests for the
nine months ended September 30, 1995........................ (12,390)
--------
Pro forma net income before minority interests for the 12
months ended September 30, 1996(1).......................... 10,219
Add non-cash items:
Pro forma depreciation for the 12 months ended September
30, 1996(2)............................................... 9,205
Pro forma amortization for capitalized leasing commissions
for the 12 months ended September 30, 1996(2)............. 1,041
Nonrecurring item and non-cash compensation(3)............. 3,600
--------
Pro forma Funds from Operations for the 12 months ended
September 30, 1996.......................................... 24,065
Adjustments:
Net increases in contractual rental income(4).............. 305
Net increase from new leases(5)............................ 4,113
Net effect of lease expirations, assuming no renewals(6)... (4,052)
Net effect of straight-line rents(7)....................... 293
Interest income on excess cash from proceeds of
Offering(8)............................................... 3,021
--------
Estimated cash flow from operating activities for the 12
months ending January 31, 1998.............................. 27,745
Estimated capitalized tenant improvements and leasing
commissions(9).............................................. (1,117)
Estimated capital expenditures(10)........................... (310)
Scheduled debt principal payments(11)........................ (1,060)
--------
Estimated cash available for distribution for the 12 months
ending January 31, 1998..................................... $ 25,258
========
Company's share of cash available for distribution(12)..... $ 20,636
Minority interest's share of cash available for
distribution.............................................. $ 4,622
========
Total estimated initial annual distribution.................. $ 22,866
========
Estimated initial annual distribution per share.............. $ 1.55
========
Estimated cash available for distribution payout ratio(13)... 90.5%
========
</TABLE>
- --------
(1) The effect of including the Services Company was a reduction in Funds
from Operations of $50,000 during such period.
(2) Pro forma depreciation of $9,595,000 for the year ended December 31, 1995
plus $6,773,000 for the nine months ended September 30, 1996 less
$7,163,000 for the nine months ended September 30, 1995. Pro forma
amortization of $985,000 for the year ended December 31, 1995 plus
$895,000 for the nine months ended September 30, 1996 less $839,000 for
the nine months ended September 30, 1995. Amortization consists primarily
of amortization of deferred leasing commissions. Non-cash interest
expense of $60,000 for the year ended September 30, 1996 related to
amortization of the costs associated with the Mortgage Loans is not added
back in this table in conformity with NAREIT's definition of Funds from
Operations.
(3) Includes elimination of the cost to buy out an option held by a third
party to acquire a portion of a Property ($3,150,000) and compensation
expense relating to a restricted Common Stock grant ($450,000).
(4) Represents an incremental increase in Funds from Operations attributable
to contractual rental increases for the 12 months ending January 31, 1998
(over actual rental revenue included in pro forma Funds from Operations
for the 12 months ended September 30, 1996). The contractual rental
increases are limited to the actual number of months in which the
increased rental rate will be in effect as to each lease.
(footnotes continued on next page)
54
<PAGE>
(5) Represents the incremental increase in Funds from Operations attributable
to rental revenue from new executed leases commencing after September 30,
1995 for the 12 months ending January 31, 1998.
(6) Represents the elimination of rental revenue reflected in rental revenue
for the 12 months ended September 30, 1996 from: (i) leases which expired
between September 30, 1995 and September 30, 1996 ($1,249,000) and (ii)
leases which will expire between October 1, 1996 and January 31, 1998 for
that portion of the 12 months ending January 31, 1998 that such leases
are no longer in effect ($2,803,000).
This table assumes that leases which expire prior to January 31, 1998 will
not be renewed or re-leased during the period. As a result of this
assumption, the effective average occupancy rate of the Properties for the
12-month period ending January 31, 1998 will equal approximately 87.2%,
versus the actual occupancy rate for the Properties of approximately 88.2%
as of December 31, 1996. The Company's average tenant retention rate for
expiring leases for January 1, 1994 through September 30, 1996 was
approximately 71.7% for the Properties located in the Southern California
Area and 50.9% for the Properties overall.
(7) Represents the effect of adjusting straight-line rental income and
expense included in pro forma net income from an accrual basis under GAAP
to a cash basis.
(8) Represents estimated interest earned at 5% on working capital cash
reserves of $60,423,000.
(9) Reflects projected non-incremental revenue-generating tenant improvement
("TI") and leasing commission ("LC") for the 12-month period ending
January 31, 1998 based on the weighted average TI and LC expenditures for
all renewed and retenanted space incurred during 1993, 1994, 1995 and the
nine months ended September 30, 1996, multiplied by the average annual
net rentable square feet of leased space expiring during the three 12-
month periods following the consummation of the Offering.
<TABLE>
<CAPTION>
WEIGHTED
1993 1994 1995 1996 AVERAGE
----- ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Retenanted
TI per net rentable square foot.. $5.21 $20.82 $4.76 $8.62 $ 12.50
LC per net rentable square foot.. $1.85 $ 3.56 $4.23 $3.85 3.41
----------
Total weighted average TI and
LC............................ 15.91
Average annual net rentable
square feet of leased space
expiring during the three 12-
month periods following the
Offering...................... 137,976
----------
Total estimated annual TI and
LC............................ 2,195,198
Rate of retenant(i)............ 30%
----------
Total cost of retenants........ $ 659,000
Renewals
TI per net rentable square foot.. $ -- $ .28 $4.49 $4.01 $ 2.89
LC per net rentable square foot.. $ -- $ .07 $1.61 $1.02 0.80
----------
Total weighted average TI and
LC............................ 3.69
Average annual net rentable
square feet of leases expiring
during the three 12-month
periods following the
Offering...................... 137,976
----------
Total estimated annual TI and
LC............................ 509,131
Rate of renewal(i)............. 70%
----------
Total cost of renewals....... 357,000
----------
Total TI and LC cost of Office
Properties...................... 1,016,000
----------
INDUSTRIAL PROPERTIES:
TI per net rentable square foot.... $ .14 $ 4.49 $2.00 $ -- $ 2.19
LC per net rentable square foot.... $1.49 $ 3.49 $1.84 $ -- 2.16
----------
Total weighted average TI and
LC.............................. 4.35
Average annual net rentable
square feet of leases expiring
during the three 12-month
periods following the Offering.. 23,333
----------
Total estimated annual TI and
LC.............................. 101,000
----------
Total.............................. $1,117,000
==========
</TABLE>
(footnotes continued on next page)
55
<PAGE>
--------
(i) The Company's historical weighted average renewal rate, based on net
rentable square footage, from January 1, 1994 through September 30,
1996 was 71.7% for the Properties located in the Southern California
Area and 50.9% for the Properties overall. The lower overall renewal
rate results primarily from a 1993 termination of a lease for 211,000
square feet at the SeaTac Office Center. Management believes, based on
historical figures and its review of market conditions in the
Company's submarkets in which the Properties are located, that the
assumption of a 70% renewal rate is reasonable.
(10) Estimated annual capital expenditures not reimbursed by tenants. The
average of historical nonreimbursed capital expenditures at the Office
and Industrial Properties during the years ended December 31, 1994 and
1995 was $150,000. All capital expenditures during 1993 were reimbursed
by tenants.
(11) Estimated principal payments on the Mortgage Loans. Excludes the net
effect of the refinancing of the SeaTac Loan.
(12) The Company's share of estimated distributions based on its approximately
81.7% partnership interest in the Operating Partnership.
(13) Calculated as the estimated initial annual distribution divided by the
estimated cash flow available for distribution for the 12 months ending
January 31, 1998. The payout ratio of estimated adjusted pro forma Funds
from Operations (which is substantially equivalent to the Company's
estimated pro forma cash flow from operating activities) for the 12
months ending January 31, 1998 equals 82.4%.
The Company anticipates that its estimated cash available for distribution
will exceed earnings and profits due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Distributions by
the Company to the extent of its current or accumulated earnings and profits
for federal income tax purposes, other than capital gain dividends, will be
taxable to stockholders as ordinary dividend income. Capital gain
distributions generally will be treated as long-term capital gains.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable return of capital to the extent of each stockholder's basis in his
or her Common Stock to the extent thereof, and thereafter as taxable gain. The
non-taxable distributions will reduce each stockholder's tax basis in the
Common Stock and, therefore, the gain (or loss) recognized on the sale of such
Common Stock or upon liquidation of the Company will be increased (or
decreased) accordingly. Based on the estimated cash flow available for
distribution set forth in the table above, the Company believes that
approximately 10% of distributions for the 12 months following consummation of
the Offering would represent a return of capital. If actual cash available for
distribution or taxable income vary from these amounts, the percentage of
distributions which represent a return of capital may be materially different.
For a discussion of the tax treatment of distributions to holders of Common
Stock, see "Federal Income Tax Consequences--Taxation of U.S. Stockholders"
and "--Taxation of Non-U.S. Stockholders." In order to qualify to be taxed as
a REIT, the Company must make annual distributions to stockholders of at least
95% of its REIT taxable income (determined without regard to the dividends
received deduction and by excluding any net capital gains) which the Company
anticipates will be less than its share of adjusted Funds from Operations.
Under certain circumstances, the Company may be required to make distributions
in excess of cash available for distribution in order to meet such
distribution requirements.
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of cash available
for distribution for future periods. Management will seek to control the
timing and nature of investing and financing activities in order to maximize
the Company's return on invested capital.
Future distributions by the Company will be subject to the requirements of
the MGCL and the discretion of the Board of Directors of the Company, and will
depend on the actual cash flow of the Company, its financial condition, its
capital requirements, any decision by the Board of Directors to reinvest the
Operating Partnership's Funds from Operations rather than distribute such
funds to the Company, the annual distribution requirements under the REIT
provisions of the Code (see "Federal Income Tax Considerations--Taxation of
the Company--Annual Distribution Requirements") and such other factors as the
Board of Directors deems relevant. There can be no assurance that any
distributions will be made or that the expected level of distributions will be
maintained by the Company. See "Risk Factors--Real Estate Investment
Considerations" and "--Distribution Payout Percentage." If revenues generated
by the Company's properties in future periods decrease materially from current
levels, the Company's ability to make expected distributions would be
materially adversely affected, which could result in a decrease in the market
price of the shares of Common Stock.
56
<PAGE>
The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may,
from time to time, repurchase shares of Common Stock in the open market for
purposes of fulfilling its obligations under this distribution reinvestment
program, if adopted, or may elect to issue additional shares of Common Stock.
If the Company adopts a distribution reinvestment program, it will solicit
participation in the program after the Offering by means of a separate
prospectus, and a purchase of shares of Common Stock in the Offering does not
entitle any investor to participate in any such program. There can be no
assurance that the Company will adopt such a program, and consequently, the
probable date of adoption or number of shares of Common Stock that would be
available under such program cannot be determined at this time.
Cash available for distribution is based on Funds from Operations (which is
defined by NAREIT as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding amortization
of deferred financing costs)) and after adjustments for unconsolidated
partnerships and joint ventures. The calculation of adjustments to pro forma
Funds from Operations is being made solely for the purpose of setting the
initial distribution amount and is not intended to be a projection or
prediction of the Company's actual results of operations nor is the
methodology upon which such adjustments are made intended to be a basis for
determining future distributions. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. The Company computes Funds from Operations
in accordance with standards established by the Board of Governors of NAREIT
in its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds from
Operations does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Funds from Operations."
The Company intends to provide its stockholders with annual reports
containing audited financial statements with a report thereon by the Company's
independent auditors, together with management's discussion and analysis, as
required under applicable Commission rules and regulations.
57
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (based on
the Combined Financial Statements of the Kilroy Group) as of September 30,
1996 on an historical basis, and on a pro forma basis as adjusted to give
effect to the Formation Transactions, the Offering, the Financing and the
application of the net proceeds therefrom as described under the caption "Use
of Proceeds." The information set forth in the following table should be read
in conjunction with the Combined Financial Statements of the Kilroy Group and
notes thereto, the pro forma financial information of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage Loans(1).................................... $ 224,046 $ 96,000
Borrowings under Credit Facility(2).................. -- --
----------- ----------
Total debt............................................. 224,046 96,000
----------- ----------
Minority interest in the Operating Partnership(3)...... -- 25,730
----------- ----------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 30,000,000 shares
authorized, none issued or outstanding..............
Common Stock, $.01 par value, 150,000,000 shares
authorized, 12,060,000 shares issued and
outstanding(3)(4)................................... -- 121
Capital in excess of par value....................... -- 114,750
Accumulated deficit.................................. (113,223) --
----------- ----------
Total stockholders' equity (deficit)................... (113,223) 114,871
----------- ----------
Total capitalization................................... $ 110,823 $ 236,601
=========== ==========
</TABLE>
- --------
(1) The Company, on behalf of the Operating Partnership, has obtained written
commitments for the Mortgage Loans, the closing of which is a condition to
the consummation of the Offering. See "The Financing--The Mortgage Loans."
(2) The Company, on behalf of the Operating Partnership, expects to obtain a
written commitment to establish the $100.0 million Credit Facility, which
the Company expects to enter into concurrently with the consummation of
the Offering. See "The Financing--The Credit Facility."
(3) Assumes no exchange of the Units to be issued to the Continuing Investors
in connection with the Formation Transactions. If all of the Units were
exchanged, 14,752,374 shares of Common Stock would be outstanding.
(4) Excludes 1,400,000 shares of the 1,460,000 shares of Common Stock reserved
for issuance pursuant to the Stock Incentive Plan. See "Management--Stock
Incentive Plan." Includes 60,000 restricted shares of Common Stock to be
issued to an officer of the Company who is not a Continuing Investor.
58
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of the net tangible book value of their Common Stock
from the assumed initial public offering price. At September 30, 1996, the
Company had a negative combined net tangible book value of approximately
$113.2 million, or negative $42.05 per share of Common Stock (assuming the
exchange of Units issued to Continuing Investors in connection with the
Formation Transactions into shares of Common Stock on a one-for-one basis).
After giving effect to the sale of the shares of Common Stock offered hereby
at an assumed initial public offering price of $22.50 per share of Common
Stock, the deduction of underwriting discounts and commissions and estimated
Offering expenses and the receipt by the Company of approximately
$246.6 million in net proceeds from the Offering, the pro forma net tangible
book value at September 30, 1996 would have been $114.9 million, or $9.53 per
share of Common Stock. This amount represents an immediate increase in net
tangible book value of $51.58 per Unit to Continuing Investors and an
immediate dilution in pro forma net tangible book value of $12.97 per share of
Common Stock to new public investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $22.50
Pro forma net tangible book value before the
Offering(1)............................................. $(42.05)
Increase in pro forma net tangible book value
attributable to the Offering and Formation
Transactions............................................ 51.58
-------
Pro forma net tangible book value after the Offering(2).... 9.53
------
Dilution in pro forma net tangible book value to new
investors(3).............................................. $12.97
======
</TABLE>
- -------
(1) Net tangible book value per share of Common Stock before the Offering is
determined by dividing net tangible book value (total tangible assets less
total liabilities) of the Company by the number of shares of Common Stock
of the Company representing the exchange in full of the Units to be issued
to the Continuing Investors.
(2) Based on pro forma net tangible book value of approximately $114.9 million
divided by 12,060,000 shares of Common Stock outstanding. There is no
impact on dilution attributable to the exchange of Units to be issued to
the Continuing Investors due to the effect of minority interest.
(3) Dilution is determined by subtracting pro forma net tangible book value
per share of Common Stock after giving effect to the Formation
Transactions and the Offering from the assumed initial public offering
price paid by a new investor for a share of Common Stock.
The following table sets forth, on a pro forma basis giving effect to the
Offering and the Formation Transactions: (i) the number of shares of Common
Stock to be sold by the Company in the Offering and the number of Units issued
to the Continuing Investors in connection with the Formation Transactions;
(ii) the net tangible book value as of September 30, 1996 of the assets
contributed to the Operating Partnership in the Formation Transactions; and
(iii) the net tangible book value of the average contribution per share/Unit
based on total contributions. See "Risk Factors--Immediate and Substantial
Dilution."
<TABLE>
<CAPTION>
SHARES/UNITS BOOK VALUE OR CASH
ISSUED(1)(2) CONTRIBUTIONS AVERAGE PRICE
------------------ ------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE/UNIT
---------- ------- ---------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors(2)........ 12,060,000 81.7% $ 270,000 (3) 202.5 % $ 22.50
Units issued to
Continuing Investors in
connection with the
Formation
Transactions........... 2,692,374 18.3% (136,664)(4) (102.5)% $(50.76)
---------- ----- ---------- --------
Total............... 14,752,374 100.0% $133,336 100.0 %
========== ===== ========== ========
</TABLE>
- -------
(1) Reflects the shares of Common Stock offered hereby and the Units to be
issued to the Continuing Investors in exchange for assets contributed in
connection with the Formation Transactions at the initial exchange ratio
of one share of Common Stock for each Unit. There are, however, certain
restrictions on the exchange of Units. See "Partnership Agreement of the
Operating Partnership--Redemption/Exchange Rights."
(2) Includes 60,000 restricted shares of Common Stock that will be purchased
by an officer of the Company, who is not a Continuing Investor, for $.01
per share ($600 in the aggregate) in connection with a grant pursuant to
the Company's Stock Incentive Plan.
(3) This amount is based on the assumed initial public offering price of
$22.50.
(4) Based on the September 30, 1996 pro forma book value of the assets to be
contributed to the Operating Partnership in connection with the Formation
Transactions less $23.44 million attributable to underwriting discounts
and commissions and estimated expenses of the Offering.
59
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial data on a pro forma basis
for the Company, and on an historical basis for the Kilroy Group, which
consist of the Combined Financial Statements of the Kilroy Group whose
financial results will be consolidated in the historical and pro forma
financial statements of the Company. The financial data should be read in
conjunction with the historical and pro forma financial statements and notes
thereto included in this Prospectus. The combined historical summary financial
data as of December 31, 1994, 1995 and September 30, 1996 and for each of the
three years in the period ended December 31, 1995 and the nine months ended
September 30, 1995 and 1996 have been derived from the Combined Financial
Statements of the Kilroy Group audited by Deloitte & Touche LLP, independent
public accountants, whose report with respect thereto is included elsewhere in
this Prospectus. The selected combined historical financial and operating
information as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 have been derived from the unaudited Combined
Financial Statements of the Kilroy Group and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the operating information for the unaudited
periods. The pro forma data assume the completion of the Formation
Transactions, including acquisition of the Acquisition Properties and the
consummation of the Offering (based upon the midpoint of the range of the
initial public offering price set forth on the cover page of this Prospectus)
and the Financing and use of the aggregate net proceeds therefrom as described
under "Use of Proceeds" as of the beginning of the periods presented for the
operating data and as of the balance sheet date for the balance sheet data.
The pro forma financial data do not give effect to the recent extension of the
tenant lease with Hughes Space & Communications with respect to space leased
in the Office Property located at 2250 E. Imperial Highway, El Segundo,
California and a portion of the space leased in the Office Property located at
2240 E. Imperial Highway, El Segundo, California. The pro forma financial data
are not necessarily indicative of what the actual financial position or
results of operations of the Company would have been as of and for the periods
indicated, nor does it purport to represent the future financial position and
results of operations.
60
<PAGE>
THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA --------------------- PRO FORMA ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- ------------ -------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Rental income.......... $ 30,635 $ 25,156 $ 24,056 $39,141 $ 32,314 $ 31,220 $ 34,239 $ 32,988 $ 29,300
Tenant reimbursements.. 3,326 2,583 2,377 3,886 3,002 1,643 4,916 5,076 5,416
Parking income......... 1,317 1,317 1,193 1,582 1,582 1,357 1,360 1,286 1,358
Development and
management fees....... -- 580 926 -- 1,156 919 751 882 779
Sale of air rights..... -- -- 4,456 4,456 4,456 -- -- -- --
Lease termination
fees.................. -- -- -- 100 100 300 5,190 48 --
Other income........... 364 65 211 705 298 784 188 221 206
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total revenues......... 35,642 29,701 33,219 49,870 42,908 36,223 46,644 40,501 37,059
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Property expenses...... 6,411 5,042 5,045 8,668 6,834 6,000 6,391 6,384 6,971
Real estate taxes
(refunds)............. 1,457 970 1,088 2,002 1,416 (448) 2,984 3,781 2,377
General and
administrative
expense............... 3,100 1,607 1,554 4,133 2,152 2,467 1,113 1,115 841
Ground lease........... 832 579 542 1,127 789 913 941 854 726
Development expenses... -- 584 564 -- 737 468 581 429 255
Option buy-out cost.... 3,150 3,150 -- -- -- -- -- -- --
Interest expense....... 5,937 16,234 18,660 7,916 24,159 25,376 25,805 26,293 26,174
Depreciation and
amortization.......... 7,668 6,838 7,171 10,580 9,474 9,962 10,905 10,325 9,116
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total expenses......... 28,555 35,004 34,624 34,426 45,561 44,738 48,720 49,181 46,460
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Income (loss) before
equity in income of
subsidiary, minority
interest and
extraordinary item.... 7,087 (5,303) (1,405) 15,444 (2,653) (8,515) (2,076) (8,680) (9,401)
Equity in income (loss)
of subsidiary......... (58) -- 136 -- -- -- -- --
Minority interest...... (1,286) -- (2,851) -- -- -- -- --
Extinguishment of
debt.................. -- 20,095 15,267 -- 15,267 1,847 -- -- --
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Net income (loss)...... $ 5,743 $ 14,792 $ 13,862 $12,729 $ 12,614 $ (6,668) $ (2,076) $ (8,680) $ (9,401)
======== ========== ======== ======= ========= ========= ========= ========= ========
Pro forma net income
per share(1).......... $ 0.48 $ 1.06
======== =======
<CAPTION>
DECEMBER 31,
----------------------------------------------------
SEPTEMBER 30, 1996 COMBINED HISTORICAL
----------------------- ----------------------------------------------------
COMBINED
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- ------------ --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumu-
lated depreciation and
amortization.......... $285,150 $ 227,127 $ 224,983 $ 223,821 $ 222,056 $ 221,423 $220,363
Total assets........... 250,582 131,062 132,857 143,251 148,386 161,008 169,147
Mortgages and loans.... 96,000 224,046 233,857 250,059 248,043 250,792 245,645
Total liabilities...... 109,981 244,285 254,683 273,585 263,346 263,156 254,786
Minority interest...... 25,730
Stockholders' equity
(deficit)............. 114,871 (113,223) (121,826) (130,334) (114,960) (102,148) (85,639)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA ---------------------- PRO FORMA -------------------------------
1996 1996 1995 1995 1995 1994 1993
----------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)......... $18,243 $4,685 $1,310 $22,018 $2,365 $1,447 $3,639
Cash flows from:
Operating activities... -- 5,528 9,270 -- 10,071 6,607 11,457
Investing activities... -- (2,140) (446) -- (1,162) (1,765) 2,028
Financing activities... -- (3,388) (8,824) -- (8,909) (4,842) (13,485)
Office Properties:
Square footage......... 2,037,414 1,688,383 1,688,383 2,037,414 1,688,383 1,688,383 1,688,383
Occupancy.............. 79.8% 76.3% 72.8% 77.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage......... 1,337,697 916,570 916,570 1,337,697 916,570 916,570 916,570
Occupancy.............. 93.7% 90.8% 98.4% 92.2% 98.4% 79.7% 77.6%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
12,060,000 shares of Common Stock outstanding after the Offering.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of unit holders (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non- cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1996 and 1995, non-cash compensation. Further, in 1996 and
1995 non-recurring items (sale of air rights and option buy-out cost) were
excluded. Management considers Funds from Operations an appropriate
measure of performance of an equity REIT because industry analysts have
accepted it as such. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT
in its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds
from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes
(9), (10) and (11) under the caption "Distribution Policy" and the notes
to the historical financial statements of the Kilroy Group. Funds from
Operations should not be considered as an alternative for net income as a
measure of profitability nor is it comparable to cash flows provided by
operating activities determined in accordance with GAAP.
61
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Kilroy Group and
notes thereto appearing elsewhere in this Prospectus. The Combined Financial
Statements of the Kilroy Group are comprised of the operations, assets and
liabilities of the Properties other than the Acquisition Properties. As part
of the Formation Transactions, the Properties will be contributed to the
Operating Partnership, of which the Company will be the sole general partner
and the beneficial owner of an approximately 81.7% interest. As a result, for
accounting purposes, the financial information of the Operating Partnership
and the Company will be consolidated.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Total revenues decreased $3.5 million, or 10.6%, for the nine months ended
September 30, 1996 compared to the same period for 1995. Revenues from base
rents increased $1.1 million, or 4.6%, to $25.2 million in the 1996 period
compared to $24.1 million in the 1995 period. Rents from Office Properties
increased $0.8 million during the nine months ended September 30, 1996 from
the comparable period in 1995. Such increase was due to office space under
lease increasing from 1,229,000 square feet at September 30, 1995 to 1,288,000
square feet at September 30, 1996. The majority of this increase relates to
leasing at Kilroy Airport Center Long Beach. There was no significant change
in rent per square foot during the 1996 period compared to the 1995 period.
Rents from Industrial Properties increased a net $0.3 million during the nine
months ended September 30, 1996 compared to the same period in 1995. The net
increase was due to a lease with a Consumer Price Index ("CPI") increase and
the effect of the 2260 E. El Segundo Boulevard Building being leased for the
entire nine months ended September 30, 1996. Tenant reimbursements and parking
revenues increased to $2.6 million and $1.3 million, respectively, in the 1996
period compared to $2.4 million and $1.2 million for the same period in 1995.
The overall $0.3 million increase is primarily due to increased billable
operating expenses resulting from new leases and parking income. Revenues for
1995 include a gain on the sale of air rights of $4.5 million at Kilroy
Airport Center at El Segundo. See Note 2 to the Combined Financial Statements.
Expenses in the nine months ended September 30, 1996 increased by $0.4
million, or 1.1%, to $35.0 million compared to $34.6 million in the 1995
period. During the nine months ended September 30, 1996, the Company accrued
the costs of an option buy-out of $3.15 million for the cancellation of an
option to purchase a 50% equity interest in Kilroy Airport Center at El
Segundo. Interest expense decreased $2.5 million, or 13.4%, to $16.2 million
in 1996 from $18.7 million in 1995, primarily as a result of the forgiveness
and restructuring of certain debt in 1995 and 1996 (see Note 4 to the Combined
Financial Statements).
Net income was $14.8 million for the nine months ended September 30, 1996
compared to $13.9 million for the same period in 1995. The increase of $0.9
million is due primarily to a decrease in interest expense of $2.5 million, an
increase in extraordinary gains of $4.8 million less the nonrecurring option
buy-out cost of $3.15 million for the 1996 period and the sale of air rights
of $4.5 million in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $6.7 million, or 18.5%, for the year ended December
31, 1995 compared to the year ended December 31, 1994. Revenues from base
rents increased $1.1 million, or 3.5%, to $32.3 million in 1995 from $31.2
million in 1994. In 1995, rents from Industrial Properties increased $0.8
million from the year ended December 31, 1994, primarily due to the effect of
12-months' rental for the Property located at 2265 E. El Segundo Boulevard
compared to four-months' rental in 1994. Office square footage and average
rent per net rentable square foot remained relatively unchanged for the year
ended December 31, 1995 compared to the year ended December 31, 1994.
Industrial square footage under lease increased to 902,000 at December 31,
1995 as compared to 730,000 a year earlier. The 2260 E. El Segundo Boulevard
building was leased in April 1995 after being vacant during 1994. The Company
also leased the 1230 S. Lewis St. property in February 1995
62
<PAGE>
at a rate of $6.11 per net rentable square foot, down from the rate of $6.43
in effect for the prior year. Tenant reimbursements increased to $3.0 million
in 1995 from $1.6 million in 1994 due principally to the 1994 $1.5 million
refund to tenants for property tax refunds. Parking revenues increased to
$1.6 million in 1995 from $1.4 million in 1994 due to recognition of 12-
months' parking income for Kilroy Airport Center Long Beach in 1995 compared
to two months in 1994, together with increased tenant parking revenues at
Kilroy Airport Center at El Segundo. Revenues for 1995 include a gain on the
sale of air rights of $4.5 million referred to above. Other income decreased
$0.5 million to $0.3 million during 1995 compared to 1994, primarily as a
result of nonrecurring interest income of $0.4 million on the property tax
refunds referred to below.
Expenses in 1995 increased $0.8 million, or 1.8%, to $45.6 million. Property
operating expenses increased $0.8 million, or 13.9%, primarily due to
increased utility costs, increases in employee wages and benefits and a $0.3
million management fee paid to KI to cover costs of the loan renegotiation at
Kilroy Airport Center at El Segundo. Real estate taxes increased $1.9 million,
to $1.4 million in 1995 from a credit balance of $0.4 million in 1994,
primarily due to the $2.4 million property tax refund recorded by the Company
in 1994 and the effect of a reduction in aggregate assessed property values in
1995. General and administrative expenses decreased $0.3 million, or 12.0%, to
$2.2 million in 1995 from $2.5 million in the 1994 period, primarily due to a
$0.3 million penalty for late payment of property taxes in 1994. Interest
expense decreased $1.2 million to $24.2 million in 1995 from $25.4 million in
1994 due to the September 1995 extension of the mortgage on Kilroy Airport
Center at El Segundo at a lower interest rate and the forgiveness of certain
debt, offset in part by the effect of higher interest rates on the variable
rate mortgage secured by Kilroy Airport Center Long Beach. See Note 4 to the
Combined Financial Statements. Ground lease expense decreased $0.1 million to
$0.8 million in 1995, reflecting the effect of 12 months' reduction of ground
rent for Phase III of Kilroy Airport Center Long Beach compared to six months
in 1994. The $0.5 million decrease in depreciation and amortization to
$9.5 million in 1995 results from certain assets becoming fully amortized.
Net income increased $19.3 million to $12.6 million in 1995 compared to a
net loss of $6.7 million in 1994, primarily due to the sale of air rights
discussed above and a $13.4 million increase in gains on extinguishment of
debt to $15.3 million in 1995 compared to $1.8 million in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues decreased $10.4 million, or 22.3%, for the year ended
December 31, 1994 compared to the year ended December 31, 1993. The primary
reason for the decrease in revenue was the receipt of lease termination fees
in 1993 of $5.2 million, of which $5.0 million related to a lease termination
at the SeaTac Office Center and $0.2 million to the Kilroy Airport Center Long
Beach. Revenues from base rents decreased $3.0 million, or 8.8%, to $31.2
million for the year ended December 31, 1994 compared to $34.2 million for the
year ended December 31, 1993, due to the lease termination at the SeaTac
Office Center referred to above (with $2.0 million in rental revenue in 1993),
a lease renegotiation resulting in a lower rent rate effective June 1, 1994
for a lease on office space in the parking structure at Kilroy Airport Center
at El Segundo, partially offset by continuing leasing activity at Kilroy
Airport Center Long Beach. Office square footage under lease decreased to
1,239,000 at December 31, 1994 from 1,360,000 at December 31, 1993. The
decrease is due primarily to the termination of the lease at the SeaTac Office
Center (211,000 square feet) offset by 30,000 square feet of new leases
elsewhere in the project and a 55,000 increase in square footage leased at
Kilroy Airport Center Long Beach. Average office rent per square foot declined
$2.33 per square foot in 1994 from 1993 due to the lease renegotiation
referred to above and a softness in the Southern California rental market in
1994. Industrial rents decreased $0.2 million in 1994 primarily due to an
extension of a lease at a reduced rate.
Tenant reimbursements decreased to $1.6 million in 1994 from $4.9 million in
1993, due to a $1.5 million refund to tenants in 1994 for property tax refunds
(for the tax years 1990 through 1994) and an approximate $1.5 million decrease
due to the termination of the SeaTac Office Center lease referred to above.
Tenant reimbursements consist of additional rental revenue from tenants
covering operating expenses, such as utilities and property taxes, and are
recorded as revenue in accordance with the lease terms. Other income increased
$0.6 million, to $0.8 million in 1994 from $0.2 million in 1993, primarily as
a result of interest income of $0.4 million on the property tax refunds
referred to above.
63
<PAGE>
Expenses in 1994 decreased $4.0 million, or 8.2%, to $44.7 million compared
to $48.7 million in 1993. Property expenses decreased $0.4 million, or 6.1%,
due to the vacancy at SeaTac Office Center referred to above and the related
reduction in expenses. Real estate taxes decreased $3.4 million to a credit
balance of $0.4 million in 1994 from taxes of $3.0 million in 1993, primarily
due to property tax refunds of $2.4 million (for the tax years 1990 through
1994) recorded by the Company in 1994 together with an approximate $1.0
million decrease resulting from a reduction in aggregate assessed value of the
Properties during the year ended December 31, 1994. General and administrative
expenses increased $1.4 million, to $2.5 million in 1994 from $1.1 million in
1993, principally due to a $0.6 million increase in the allowance for
uncollectible rent attributable to a single tenant, a $0.3 million penalty in
1994 for late payment of property taxes and $0.2 million of expenses relating
to a financing arrangement which was not consummated. Interest expense
decreased $0.4 million, to $25.4 million in 1994 due to a decrease in the
interest rate on the variable rate mortgage secured by Kilroy Airport Center
Long Beach. Depreciation and amortization decreased $0.9 million to $10.0
million in 1994 as a result of certain assets becoming fully amortized.
The net loss increased $4.6 million to $6.7 million in 1994 compared to a
net loss of $2.1 million in 1993, due to lease termination fees of $5.2
million received in 1993 and the net effect of the items discussed above.
DEVELOPMENT AND MANAGEMENT FEES
The Kilroy Group's third-party development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- ----------------
1996 1995 1995 1994 1993
------ ------ ------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $580 $926 $1,156 $919 $751
Expenses..................................... 584 564 737 468 581
------ ------ ------ ---- ----
Excess of revenues over expenses............. $ (4) $362 $ 419 $451 $170
====== ====== ====== ==== ====
</TABLE>
Subsequent to the Formation Transactions, the Company's and the Kilroy
Group's development activities will be conducted through Kilroy Services,
Inc., See "Formation and Structure of the Company--Formation Transactions" and
"Formation of Kilroy Services, Inc."
The increases in revenues in 1994, as compared with 1993, and in 1995, as
compared with 1994, was a result of the commencement of development services
for the Riverside Judicial Center (commencing in 1994) and the Northrop
Grumman Corporation's property located in Pico Rivera, California (the
agreement for which commenced in 1995 and expires in February 1997). The $0.3
million decrease in revenues during the nine months ended September 30, 1996
compared with the same period in 1995 was primarily the result of a decrease
in development services at the Calabasas Park Centre which was acquired by the
stockholders of KI in 1996. Revenues from Calabasas Park Centre were $0.1
million, $0.4 million, $0.5 million, $0.7 million and $0.7 million for the
nine months ended September 30, 1996 and 1995 and the years ended December 31,
1995, 1994 and 1993, respectively. The remainder of the decrease was due to
the substantial completion of development services for the Riverside Judicial
Center. A portion of the related expenses of development and management
services are fixed in nature and have not fluctuated significantly, while the
majority of the related expenses are variable in nature and fluctuate with the
level of development and management activities. With the acquisition of
Calabasas Park Centre by the Kilroy Group in 1996, and completion of the fee
activities pursuant to the agreement with Northrop Grumman in February 1997,
the Company does not expect significant fee activity from these sources.
ADOPTION OF SFAS NO. 121
During 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." No impairments have been determined and,
therefore, no real estate carrying amounts have been adjusted.
64
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Upon the consummation of the Offering and the Formation Transactions and the
use of proceeds therefrom, the Company will have (i) acquired the Acquisition
Properties, (ii) reduced its total indebtedness by approximately $128.0
million and (iii) established working capital cash reserves of approximately
$60.0 million and capital expenditure cash reserves of approximately $2.3
million. The Company is currently negotiating a $100.0 million Credit
Facility, which the Company expects to enter into shortly after consummation
of the Offering. The Credit Facility is expected to be used primarily to
finance acquisitions of additional properties. The availability of funds under
the Credit Facility is expected to be subject to, among other things, the
value of the underlying collateral securing it. The Company expects that,
initially, it will have approximately $50.0 million in availability under the
Credit Facility. In connection with certain leases signed after September 30,
1996, the Company is obligated to fund approximately $2.0 million in tenant
improvements and leasing commissions. This obligation will be assumed by the
principals of KI. The Company presently expects to finance development
activities from working capital and from funds from operations. See "The
Financing--The Credit Facility." In addition, if the Offering is consummated
on or before June 30, 1997, the Company will pay to Richard E. Moran Jr., the
Company's Executive Vice President, Chief Financial Officer and Secretary, a
bonus of $200,000, pursuant to the terms of his employment agreement. This
obligation also will be assumed by the principals of KI. See "Management--
Executive Compensation."
The Company anticipates that distributions will be paid from cash available
for distribution, which is expected to exceed cash historically available for
distribution as a result of the reduction in debt service anticipated to
result from the repayment of indebtedness. The Company presently intends to
make distributions quarterly, subject to the discretion of the Board of
Directors. Amounts accumulated for distribution will be invested by the
Company primarily in interest-bearing accounts and short-term, interest-
bearing securities, which are consistent with the Company's intention to
qualify for taxation as a REIT. Such investments may include, for example,
obligations of the Government National Mortgage Association, other
governmental agency securities, certificates of deposit and interest-bearing
bank deposits.
The Company believes the Offering and the Formation Transactions will
improve its financial performance through changes to its capital structure,
principally the substantial reduction in its overall debt and its debt to
equity ratio. Through the Formation Transactions, the Company will repay all
of its existing mortgage debt of $224.0 million secured by the Properties
(other than the Acquisition Properties) and will have debt outstanding of
$96.0 million comprised of the $84.0 Million Loan and the $12.0 million SeaTac
Loan. The $84.0 Million Loan will bear interest at 8.2%, amortize over 25
years and mature in 2005. The SeaTac Loan will bear interest at a variable
rate and mature in July 1997. Thus, total secured debt after the Formation
Transactions (assuming no advances under the Credit Facility) will be reduced
by approximately $128.0 million. This will result in a significant reduction
in annual mortgage interest expense as a percentage of total revenue (15.9% on
a pro forma basis as compared to 56.3% for the historical year ended December
31, 1995). Cash from operations required to fund interest expense will
decrease substantially, although this reduction will be offset by the use of
cash from operations to meet annual REIT distribution requirements. The market
capitalization of the Company, based on the assumed initial public offering
price of $22.50 per share and the debt outstanding at the completion of the
Offering, is expected to be approximately $427.9 million with total debt of
approximately $96.0 million. As a result, the Company's debt to total market
capitalization ratio will be approximately 22.4%.
The Company was adversely impacted in 1993 and 1994 by the decline in market
rental rates, higher vacancies and its higher leverage which prevented it from
meeting certain of its financial obligations. Bank notes relating to
properties other than the SeaTac Office Center aggregating $9.7 million and
$23.7 million were in default as of December 31, 1995 and 1994, respectively.
Past due interest relating to the notes was $2.9 million and $5.7 million as
of December 31, 1995 and 1994, respectively. In addition, property taxes of
$0.2 million, $0.5 million and $0.6 million were past due as of September 30,
1996, and December 31, 1995 and 1994, respectively. In June 1996, the Company
repaid the principal of the bank notes relating to such properties, and the
applicable accrued interest, and all but $40,000 of the property taxes, with
the proceeds of a financing secured by certain of the Industrial Properties.
With respect to the SeaTac Office Center, a high vacancy rate in 1993 resulted
in insufficient cash flow to service the underlying debt on this property. The
high vacancy rate has
65
<PAGE>
continued and a note payable to an insurance company having a principal
balance of $20.2 million and accrued interest of $1.9 million, as of September
30, 1996, has been in default since October 1995. In October 1996, the Company
successfully negotiated a discounted payoff with the lender and the ground
lessor which provides for a payoff or purchase of the lender's note at a
discount on or before February 10, 1997. The Company believes it will be able
to meet this commitment irrespective of the consummation of the Offering based
upon discussions with other sources of financing. Bank notes relating to the
SeaTac Office Center aggregating $6.8 million were in default as of December
31, 1995 and 1994. Past due interest relating to these notes was $2.1 million
and $1.4 million as of December 31, 1995 and 1994, respectively. In June 1996,
the Company repaid the principal of the bank notes and the applicable accrued
interest relating to the SeaTac Office Center with the proceeds of a financing
secured by certain of the Industrial Properties.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital, net cash provided by operations and
additional debt or equity financings. The Company estimates that for the 12
months ending September 30, 1997 it will incur approximately $1.1 million of
expenses attributable to non-incremental revenue generating tenant
improvements and leasing commissions and $310,000 of capital expenditures not
reimbursed by tenants. The Company expects that it will incur tenant
improvement and leasing commission costs in connection with the leasing-up of
available space at the SeaTac Office Center. Based upon current market
conditions, the Company expects such tenant improvement and leasing commission
costs to equal approximately $ per net rentable square foot. As of
December 31, 1996, approximately 330,000 net rentable square feet were
available for lease at the SeaTac Office Center. In addition, the Company will
set aside approximately $2.3 million of the net proceeds of the Offering for
certain nonrecurring capital expenditures. See "Distribution Policy." From
such $2.3 million capital expenditure cash reserves, the Company will pay to
Hughes Space & Communications, in connection with Formation Transactions, the
remaining balance of approximately $1.4 million in connection with the
amendment and/or extension of leases of office space at the Office Properties
located at Kilroy Airport Center, including $500,000 in connection with a
tenant improvement allowance for the properties located at 2240 and 2250 E.
Imperial Highway and the balance in connection with the cancellation of an
option to purchase an equity interest in the Office Properties located at
Kilroy Airport Center at El Segundo. In November 1996, $2.26 million of the
option buy-out liability was paid by KI and its stockholders. Also from such
$2.3 million capital expenditure cash reserves, in connection with the
Financing, the Company will make earthquake-related improvements to certain of
the Properties in an aggregate amount of approximately $500,000. The Company
presently has no financial commitments in its capacity as a developer of real
estate projects and believes that it will have sufficient capital resources to
satisfy its obligations during the 12-month period following completion of the
Offering, and that its net cash provided by operations will be adequate to
meet both operating requirements and expected distributions by the Company in
accordance with REIT requirements.
The Company expects to meet certain of its long-term liquidity requirements,
including the repayment of long-term debt of $84.0 million (less scheduled
principal repayments) in 2005, the repayment of debt of $12.0 million in July
1997 and possible property acquisitions and development, through long-term
secured and unsecured borrowings, including the Credit Facility, and the
issuance of debt securities or additional equity securities of the Company or,
possibly in connection with acquisitions of land or improved properties, the
issuance of Units of the Operating Partnership.
The Phase I environmental assessments of the Properties have not revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. See "Risk Factors--Government Regulations--Environmental Matters"
and "Business and Properties--Government Regulations--Environmental Matters."
HISTORICAL CASH FLOWS
Historically, the Kilroy Group's principal sources of funding for operations
and capital expenditures were cash flow from operating activities and secured
debt financings. The Kilroy Group incurred net losses before extraordinary
items in each of the last five years and for the nine-month period ended
September 30, 1996.
66
<PAGE>
However, after adding back depreciation and amortization, the Properties have
generated positive net operating cash flows for the last four years.
The Company's net cash provided by operating activities decreased to $6.6
million for the year ended December 31, 1994 from $11.5 million for the same
period in 1993 primarily as a result of lease termination fees of $5.2
received in 1993. The Company's net cash from operating activities increased
$3.5 million from the year ended December 31, 1994 compared to the same period
in 1995, or from $6.6 million in 1994 to $10.1 million in 1995. The increase
was primarily due to the sale of air rights in 1995 of $4.5 million. The
Company's net cash from operating activities decreased $3.8 million to $5.5
million during the nine months ended September 30, 1996 compared with $9.3
million in the comparable 1995 period. The decrease was a result of the sale
of air rights of $4.5 million in 1995, the option buy-out cost of $3.15
million in 1996, offset by an increase in total rent of $1.3 million in 1996
and a decrease in interest expense of $2.5 million in 1996.
Net cash received from investing activities of $2.0 million for the year
ended December 31, 1993 decreased to net cash used in investing activities of
$1.8 million for the same period in 1994 due to the receipt in the 1993 period
of a $2.7 million reimbursement of tenant improvements. Net cash used in
investing activities decreased $0.6 million to $1.2 million for the year ended
December 31, 1995 from $1.8 million for 1994 due to a decrease in the number
of new lease transactions and the resulting decrease in the level of tenant
improvements. Net cash used in investing activities increased $1.7 million to
$2.1 million in the nine months ended September 30, 1996 from $0.4 million in
the 1995 period primarily due to an increase in the number of new lease
transactions and the resulting increase in the level of tenant improvements.
The Company's cash flows used in financing activities decreased $8.7 million
to $4.8 million from $13.5 million for the year ended December 31, 1993 as a
result of net borrowings of $3.9 million during the year ended December 31,
1994 compared to a net repayment of $2.7 million of debt in the 1993 period,
together with an decrease in deemed distributions to partners to $8.7 million
during the year ended December 31, 1994 compared to $10.7 million in the 1993
period. Cash flows used in financing activities increased $4.1 million to $8.9
million for the year ended December 31, 1995 compared to net cash used in
financing activities of $4.8 million for the same period in 1994 as result of
net repayments of debt in the 1995 period compared to net borrowings in the
1994 period and a $4.6 million decrease in deemed distributions to partners.
Cash flows used in financing activities was $3.4 million for the nine months
ended September 30, 1996 consisting of net proceeds from issuance of debt of
$2.8 million, less $6.2 million in distributions to partners.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
audited Combined Financial Statements and selected financial data included
elsewhere in this Prospectus. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (loss), as an
indication of the Company's performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.
INFLATION
The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.
67
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Upon the consummation of the Offering and the Formation Transactions, the
Company (through the Operating Partnership) will own 14 Office Properties
encompassing an aggregate of approximately 2.0 million rentable square feet
and 12 Industrial Properties encompassing an aggregate of approximately
1.3 million rentable square feet. Eleven of the 14 of the Office Properties as
well as 11 of the 12 Industrial Properties are located in prime Southern
California suburban submarkets (including a complex of three Office Properties
located adjacent to the Los Angeles International Airport, presently the
nation's second largest air cargo port, and a complex of five Office
Properties located adjacent to the Long Beach Municipal Airport). The Company
also will own three Office Properties located adjacent to the Seattle-Tacoma
International Airport in the State of Washington, and one Industrial Property
located in Phoenix, Arizona. As of September 30, 1996, the Office Properties
were approximately 79.8% leased to 130 tenants and the Industrial Properties
were approximately 93.7% leased to 20 tenants. The Company has developed,
managed and leased all but two of the 14 Office Properties and all but five of
the 12 Industrial Properties. The Company believes that all of its Properties
are well-maintained and, based on recent engineering reports, do not require
significant capital improvements.
In addition to the Office and Industrial Properties, the Company has
development rights with respect to approximately 24 acres of developable land
(net of acreage required for streets), located in Southern California. See "--
Development, Leasing and Management Activities." Upon consummation of the
Offering, the Company also will have the option to purchase three office
properties and 18 acres of undeveloped land currently beneficially owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. which will not be
contributed to the Operating Partnership immediately upon consummation of the
Offering. The Company will have the right to acquire the option properties
under the terms and conditions described below. All of these properties will
be managed by the Company. See "--Excluded Properties."
In general, the Office Properties are leased to tenants on a full service
basis, with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during the
tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance and
operating expenses ("Expense Stop"). The tenant pays its pro rata share of
increases in expenses above the Base Year or Expense Stop. All leases for the
Industrial Properties are written on a triple net basis, with tenants paying
their proportionate share of real estate taxes, operating costs and utility
costs.
68
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Office Properties managed
by the Company (i.e., all of the Office Properties other than the Thousand
Oaks Office Property and the La Palma Business Center Office Property which
are being acquired concurrently upon consummation of the Offering) since
January 1, 1992 (based upon an average of all lease transactions during the
respective periods):
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1).............. 27 19 36 27 31
Rentable square feet
during period(1)....... 221,946 127,126 354,018 105,544 341,940
Base rent ($)(1)(2)..... 21.41 19.32 18.89 19.31 19.52
Tenant improvements
($)(3)................. 9.04 6.82 15.01 7.30 8.99
Leasing commissions
($)(4)................. 1.37 2.18 2.66 3.03 2.87
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... 18.65 17.72 16.97 17.30 17.73
Expense Stop ($)(7)..... 6.05 6.15 6.77 6.77 6.70
Effective equivalent
triple net rent
($)(8)................. 12.43 11.57 10.20 10.53 11.03
Occupancy rate at end of
period (%)............. 74.8% 76.1% 75.8% 75.6% 78.7%
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(8) Equals effective rent minus Expense Stop.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Thousand Oaks Office
Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1).............. -- 1 1 9 1
Rentable square feet
during period(1)....... -- 1,437 2,745 76,266 2,745
Base rent ($)(1)(2)..... -- 25.01 23.40 23.09 24.00
Tenant improvements
($)(3)................. -- 16.25 -- 5.04 --
Leasing commissions
($)(4)................. -- -- -- 4.90 --
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... -- 22.73 23.40 21.42 24.00
Expense Stop ($)(7)..... -- 6.45 6.16 6.49 6.16
Effective equivalent
triple net rent
($)(8)................. -- 16.28 17.24 14.93 17.84
Occupancy rate at end of
period (%)(9).......... NA NA NA 100.0% 100.0%
</TABLE>
(footnotes on next page)
69
<PAGE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount. Expense Stop for 1996 is
estimated.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ended December 31, 1992,
1993 and 1994.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at 4175 E. La Palma Avenue,
Building A, La Palma Business Center since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996(1)
------ ------ ------ ------ ---------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(2)................ NA -- 1 1 0
Rentable square feet
during period(2)......... NA -- 3,348 2,038 --
Base rent ($)(2)(3)....... NA -- 19.36 16.48 --
Tenant improvements
($)(4)................... NA -- -- 9.69 --
Leasing commissions
($)(5)................... NA -- -- 2.06 --
Other concessions ($)(6).. NA -- -- -- --
Effective rent ($)(7)..... NA -- 19.36 14.17 --
Expense Stop ($)(8)....... NA -- 5.45 5.45 --
Effective equivalent tri-
ple net rent ($)(9)...... NA -- 13.91 8.72 --
Occupancy rate at end of
period (%)(2)(10)........ NA NA 92.6% 93.2% 91.6%
</TABLE>
- --------
(1) No leasing activity occurred during the nine-month period ended
September 30, 1996.
(2) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(3) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(4) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(5) Equals the aggregate of leasing commissions payable to employees and
third parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(6) Includes moving expenses, furniture allowances and other concessions.
(7) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(8) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(9) Equals effective rent minus Expense Stop.
(10) Occupancy data is not available for the years ended December 31, 1992 and
1993.
70
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
(other than the Industrial Properties at the La Palma Business Center which
are being acquired upon consummation of the Offering and the Industrial
Property located at 12752-12822 Monarch Street, Garden Grove, California,
which was acquired by KI on behalf of the Company prior to consummation of the
Offering) since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996(1)
------- ------- ------- ------- ---------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period................. 1 1 1 2 0
Net rentable square feet
leased during period... 100,000 70,000 76,570 171,550 --
Base rent ($)(2)........ 6.39 6.81 7.23 4.99 --
Tenant improvements
($)(3)................. 5.87 0.14 4.49 2.00 --
Leasing commissions
($)(4)................. 1.37 1.49 3.49 1.84 --
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... 5.19 6.48 6.44 4.63 --
Expense stop ($)(7)..... -- -- -- -- --
Effective equivalent
triple net rent
($)(8)................. 5.19 6.48 6.44 4.63
Occupancy rate at end of
period (%)............. 86.0% 77.6% 79.7% 98.4% 90.8%
</TABLE>
- --------
(1) No leasing activity occurred during the nine-month period ended September
30, 1996.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total rentable square feet
leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
71
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
and Monarch Street Industrial Properties since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
------------------------------ PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
----- ------ ------ ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1)................. NA 2 -- 4 5
Rentable square feet during
period(2)................. NA 63,094 -- 229,952 107,381
Base rent ($)(2)........... NA 7.37 -- 3.66 4.72
Tenant improvements
($)(3).................... NA 2.65 -- 0.61 0.75
Leasing commissions
($)(4).................... NA 3.61 -- 0.55 1.25
Other concessions ($)(5)... NA -- -- -- --
Effective rent ($)(6)...... NA 7.37 -- 3.48 4.34
Expense stop ($)(7)........ NA -- -- -- --
Effective equivalent triple
net rent ($)(8)........... NA 7.37 -- 3.48 4.34
Occupancy rate at end of
period (%)(9)............. NA NA 51.2% 78.7% 100.0%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total rentable square feet
leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ending December 31, 1992 and
1993.
72
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of December 31, 1995, unless indicated otherwise. This table
gives pro forma effect to a recent extension of one of the leases with Hughes
Space & Communications with respect to two of the Office Properties located at
Kilroy Airport Center at El Segundo as if such lease renewal had occurred on
January 1, 1995. After completion of the Formation Transactions, the Company
(through the Operating Partnership) will own a 100% interest in all of the
Office and Industrial Properties other than the five Office Properties located
at Kilroy Airport Center Long Beach and the three Office Properties located at
the SeaTac Office Center, each of which are held subject to ground leases
expiring in 2035 and 2064 (assuming the exercise of the Company's options to
extend such lease), respectively.
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE
NET LEASED 1995 OF 1995 RENT
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- --------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties:
Kilroy Airport Center at El
Segundo
2250 E. Imperial Highway(8).... 1983 291,187 80.9 4,316 4,042 11.5 18.32 17.16
2260 E. Imperial Highway)(9)... 1983 291,187 100.0 7,160 6,545 19.1 24.59 22.48
2240 E. Imperial Highway
El Segundo, California(10)..... 1983 118,933 100.0 1,130 1,121 3.0 9.50 9.43
Kilroy Airport Center Long Beach
3900 Kilroy Airport Way(11).... 1987 126,840 94.0 2,282 2,092 6.1 19.14 17.55
3880 Kilroy Airport Way(11).... 1987 98,243 100.0 1,296 1,022 3.5 13.19 10.40
3760 Kilroy Airport Way........ 1989 165,278 92.1 3,372 2,807 9.0 22.16 18.45
3780 Kilroy Airport Way........ 1989 219,745 63.6 3,465 3,005 9.2 24.79 21.50
3750 Kilroy Airport Way
Long Beach, California......... 1989 10,457 100.0 75 28 0.2 7.21 2.66
SeaTac Office Center
18000 Pacific Highway.......... 1974 207,092 58.7 1,799 1,510 4.8 14.80 12.42
17930 Pacific Highway.......... 1980 210,899 -- -- -- -- -- --
17900 Pacific Highway
Seattle, Washington........... 1980 113,605 87.7 1,896 1,820 5.0 19.02 18.26
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California(11)....... 1985 42,790 93.2 493 475 1.3 12.37 11.92
2829 Townsgate Road
Thousand Oaks, California(11).. 1990 81,158 100.0 1,888 1,760 5.0 23.26 21.69
185 S. Douglas Street
El Segundo, California(12)..... 1978 60,000 100.0 1,313 898 3.5 21.89 14.96
--------- ----- ------ ------ ---- ----- -----
Subtotal/Weighted Average 2,037,414 77.0 30,485 27,125 81.2 19.44 17.30
--------- ----- ------ ------ ---- ----- -----
Industrial Properties:
2031 E. Mariposa Avenue
El Segundo, California......... 1954 192,053 100.0 1,556 1,296 4.1 8.10 6.75
3340 E. La Palma Avenue
Anaheim, California............ 1966 153,320 100.0 881 790 2.3 5.74 5.16
2260 E. El Segundo Boulevard
El Segundo, California(13)..... 1979 113,820 100.0 553 510 1.5 4.86 4.48
2265 E. El Segundo Boulevard
El Segundo, California......... 1978 76,570 100.0 554 493 1.5 7.23 6.44
1000 E. Ball Road
Anaheim, California(14)........ 1956 100,000 100.0 639 519 1.7 6.39 5.19
1230 S. Lewis Street
Anaheim, California............ 1982 57,730 100.0 303 284 0.8 5.25 4.92
12681/12691 Pala Drive
Garden Grove, California ...... 1970 84,700 82.6 476 454 1.3 6.81 6.48
<CAPTION>
TENANTS LEASING
PERCENTAGE 10% OR MORE OF
LEASED NET RENTABLE
AS OF SQUARE FEET PER
9/30/96 PROPERTY
(%)(6) AS OF 9/30/96(7)
---------- ----------------
<C> <S>
83.9 Hughes Space &
Communications
(33.0%)
100.0 Hughes Space &
Communications
(100.0%)
100.0 Hughes Space &
Communications
(94.6%)
94.0 McDonnell
Douglas
Corporation
(50.9%), Olympus
America, Inc.
(18.6%)
100.0 Devry, Inc.
(100.0%)
82.6 R.L. Polk & Co.
(9.8%)
92.2 SCAN Health Plan
(20.4%), Zelda
Fay Walls (12.7%)
100.0 Oasis Cafe
(37.1%),
Keywanfar &
Baroukhim
(16.1%),
SR Impressions
(15.0%)
60.0 Principal Mutual
(8.8%),
Lynden (8.8%),
Rayonier (8.0%)
-- --
87.7 Key Bank
(41.9%)(15),
Northwest
Airlines
(24.9%),
City of Sea Tac
(17.2%)
91.6 Peryam & Kroll
(26.7%),
DMV/VPI
Insurance Group
(26.5%),
Midcom
Corporation
(15.5%)
100.0 Worldcom, Inc.
(34.2%), Data
Select Systems,
Inc. (13.0%),
Pepperdine
University
(12.7%),
Anheuser Busch,
Inc. (12.0%)
100.0 Northwest
Airlines, Inc.
(100%)
------
79.8
------
Mattel, Inc.
100.0 (100%)
Furon Co., Inc.
59.2 (59.2%)
Ace Medical Co.
100.0 (100%)
100.0 MSAS Cargo
Intl., Inc.
(100%)
100.0 Allen-Bradley
Company (100%)
100.0 Extron
Electronics (100%)
82.6 Rank Video Services America, Inc.
(82.6%)
</TABLE>
(footnotes on next page)
73
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
NET LEASED 1995 OF 1995 RENT LEASED
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE AS OF
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER 9/30/96
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) (%)(6)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2270 E. El
Segundo
Boulevard
El Segundo,
California..... 1975 7,500 100.0 129 129 0.3 17.17 17.17 --
5115 N. 27th
Avenue
Phoenix,
Arizona(16).... 1962 130,877 100.0 640 612 1.7 4.89 4.68 100.0
12752-12822
Monarch Street
Garden Grove,
CA(17)......... 1970 277,037 76.4 727 715 1.9 3.43 3.38 100.0
4155 E. La Palma
Avenue
Anaheim,
CA(11)(17)..... 1985 74,618 100.0 325 237 0.9 4.36 3.18 100.0
4125 La Palma
Avenue
Anaheim,
CA(11)(17)..... 1985 69,472 65.6 319 302 0 .8 7.00 6.63 100.0
--------- ----- ------ ------ ----- ----- ----- -----
Subtotal/Weighted
Average 1,337,697 92.2 7,102 6,341 18.8 5.76 5.14 93.7
--------- ----- ------ ------ ----- ----- ----- -----
Office &
Industrial--All
Properties 3,375,111 83.0 37,587 33,466 100.0 13.42 11.95 85.3
--------- ----- ------ ------ ----- ----- ----- -----
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE FEET PER PROPERTY
PROPERTY LOCATION AS OF 9/30/96(7)
----------------- ------------------------
<S> <C>
2270 E. El
Segundo
Boulevard
El Segundo,
California..... --
5115 N. 27th
Avenue
Phoenix,
Arizona(16).... Festival Markets, Inc. (100%)
12752-12822
Monarch Street
Garden Grove,
CA(17)......... Cannon Equipment (60%),
Vanco (16.4%)
4155 E. La Palma
Avenue
Anaheim,
CA(11)(17)..... Bond Technologies (29.6%),
NovaCare Orthotics (24.0%),
Specialty Restaurants Corp.
(21.7%)
4125 La Palma
Avenue
Anaheim,
CA(11)(17)..... Household Finance
Corporation (59%), CSTS (34%)
Subtotal/Weighted
Average
Office &
Industrial--All
Properties
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1995.
(2) Total base rent for the year ended December 31, 1995, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.
(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1995 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12. Tenant improvements,
leasing commissions and other concessions are estimated using the same
methodology used to calculate effective rent for the Properties as a
whole in the charts set forth under the caption "Business and
Properties--General."
(4) Base rent for the year ended December 31, 1995 divided by net rentable
square feet leased at December 31, 1995.
(5) Effective rent at December 31, 1995 divided by net rentable square feet
leased at December 31, 1995.
(6) Based on all leases at the respective Properties dated on or before
September 30, 1996. Occupancy for all Properties at December 31, 1996 was
approximately 88.2%.
(7) Excludes office space leased by the Company.
(8) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software
Products Marketing Division, Inc., for approximately 6,800 rentable
square feet, are written on a full service gross basis except that there
is no Expense Stop.
(9) For this Property, the lease with Hughes Space & Communications is
written on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro
rata share of real estate taxes, insurance, and certain other expenses
including common area expenses.
(10) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(11) This Property is an Acquisition Property.
(12) For this Property, the lease is written on a triple net basis.
(13) This Industrial Property was vacant until April 1995. The tenant began
paying rent in mid-October 1995 at an annual rate of $4.40 per rentable
square foot.
(14) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis
Street.
(15) This lease terminates on December 31, 1996.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
74
<PAGE>
OCCUPANCY AND RENTAL INFORMATION
The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Properties for the past three
years:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
BASE RENT
AVERAGE PER RENTABLE
PERCENTAGE SQUARE
YEAR LEASED (%)(1) FOOT($)(2)
---- ------------- ------------
<S> <C> <C>
OFFICE:
1995............................................ 77.0 19.42
1994............................................ 70.9(3) 20.35(3)
1993............................................ 76.1(3) 21.87(3)
INDUSTRIAL:
1995............................................ 81.5 6.52
1994............................................ 78.7(3) 6.71(3)
1993............................................ 81.8(3) 6.73(3)
</TABLE>
- --------
(1) Average of beginning and end-of-year aggregate percentage leased.
(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.
(3) Excludes data from the Thousands Oaks Office Property and the La Palma
Business Center which are being acquired in connection with the Offering
and the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California which was acquired by KI on behalf of the Company prior
to consummation of the Offering.
LEASE EXPIRATIONS
The following table sets out a schedule of the lease expirations for the
Office Properties for each of the ten years beginning with 1996, assuming that
none of the tenants exercises renewal options or termination rights:
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED BASE RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES(1) (SQ. FT.) LEASES(%)(2) ($000)(3) LEASES($)(4)
------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/1996..... 7 83,080 5.26 $ 1,340 $16.13
1997..... 16 61,854 3.92 1,226 19.82
1998..... 20 85,138 5.39 1,942 22.80
1999..... 29 261,082 16.53 4,507 17.26
2000..... 24 149,969 9.50 3,300 22.00
2001(4).. 20 289,383 18.32 5,105 17.64
2002..... 2 83,047 5.26 1,606 19.34
2003..... 3 17,574 1.11 346 19.72
2004..... 4 311,491 19.72 7,731 24.82
2005 and
beyond................. 10 236,731 14.99 4,174 17.63
--- --------- ------ ------- ------
Totals................ 135 1,579,349 100.00 $31,278 $19.80
=== ========= ====== ======= ======
</TABLE>
- --------
(1) Includes office tenants only. Excludes leases for amenity, retail, parking
and month-to-month office tenants. Some tenants have multiple leases.
(2) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(3) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
(4) Includes Hughes Space & Communications leases of 96,133 and 11,556 net
rentable square feet at Kilroy Airport Center at El Segundo. These leases
expire in October 2001 and are at a triple net base rental rate of $14.04
per square foot.
75
<PAGE>
The following table sets out a schedule of the lease expirations for the
Industrial Properties for each of the ten years beginning with 1996, assuming
that none of the tenants exercises renewal options or termination rights:
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED BASE RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES(%)(1) ($000)(2) LEASES($)
------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/1996..... 0 -- -- -- --
1997.................... 0 -- -- -- --
1998.................... 1 70,000 5.61 476 6.81
1999.................... 1 22,888 1.83 78 3.41
2000.................... 3 210,464 16.86 1,594 7.58
2001.................... 4 189,667 15.19 918 4.84
2002.................... 0 -- -- -- --
2003.................... 4 252,966 20.26 1,204 4.76
2004.................... 1 76,570 6.13 554 7.23
2005 and beyond......... 6 425,787 34.12 2,317 5.44
--- --------- ------ ------ -----
Totals.............. 20 1,248,342 100.00 $7,141 $5.72
=== ========= ====== ====== =====
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
76
<PAGE>
The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of September 30, 1996, assuming
that none of the tenants exercise renewal options or terminations rights, if
any, at or prior to the scheduled expirations:
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 1,317 4,385 23,033 29,148 18,201 112,715 18,517
Percentage of
Total Leased Sq.
Ft.............. 0.58% 1.92% 10.07% 12.74% 7.96% 49.28% 8.10%
Annualized Base
Rent of Expiring
Leases.......... $ 24,496 $ 83,025 $ 464,705 $ 695,821 $ 302,853 $1,653,035 $ 456,220
Percentage of
Total Annualized
Base Rent....... 0.59% 1.99% 11.16% 16.70% 7.27% 39.68% 10.95%
Number of Leases
Expiring........ 1 3 6 4 2 3 1
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft..............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 100,978 15,898
Percentage of
Total Leased Sq.
Ft.............. 86.40% 13.60%
Annualized Base
Rent of Expiring
Leases.......... $1,085,716 $ 196,670
Percentage of
Total Annualized
Base Rent....... 84.66% 15.34%
Number of Leases
Expiring........ 1 2
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 26,356 12,406 6,811 64,530
Percentage of
Total Leased Sq.
Ft.............. 22.10% 10.41% 5.71% 54.12%
Annualized Base
Rent of Expiring
Leases.......... $ 516,551 $ 221,992 $ 124,105 $1,149,922
Percentage of
Total Annualized
Base Rent....... 22.63% 9.73% 5.44% 50.39%
Number of Leases
Expiring........ 2 2 1 1
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft..............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 21,418 228,734
Percentage of
Total Leased Sq.
Ft.............. 9.35% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 485,244 $ 4,165,399
Percentage of
Total Annualized
Base Rent....... 11.66% 100%
Number of Leases
Expiring........ 2 22
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 286,151 286,151
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100%
Annualized Base
Rent of Expiring
Leases.......... $7,160,207 $ 7,160,207
Percentage of
Total Annualized
Base Rent....... 100.00% 100%
Number of Leases
Expiring........ 1 1
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 116,876
Percentage of
Total Leased Sq.
Ft.............. 100%
Annualized Base
Rent of Expiring
Leases.......... $ 1,282,386
Percentage of
Total Annualized
Base Rent....... 100%
Number of Leases
Expiring........ 3
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 9,128 119,231
Percentage of
Total Leased Sq.
Ft.............. 7.66% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 269,532 $ 2,282,102
Percentage of
Total Annualized
Base Rent....... 11.81% 100%
Number of Leases
Expiring........ 1 7
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 98,243 98,243
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100%
Annualized Base
Rent of Expiring
Leases.......... $1,296,270 $ 1,296,270
Percentage of
Total Annualized
Base Rent....... 100.00% 100%
Number of Leases
Expiring........ 1 1
</TABLE>
- ----
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
77
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 12,545 8,698 23,598 46,675 19,385 27,470 4,892
Percentage of
Total Leased
Sq. Ft......... 8.76% 6.07% 16.47% 32.58% 13.53% 19.17% 3.41%
Annualized Base
Rent of Expiring
Leases.......... $ 334,440 $ 194,155 $ 529,690 $ 947,293 $ 412,749 $ 560,406 $ 100,330
Percentage of
Total Annualized
Base Rent....... 10.86% 6.31% 17.20% 30.77% 13.41% 18.20% 3.26%
Number of Leases
Expiring........ 2 1 4 9 3 3 1
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 22,469 2,088 4,339 74,093 28,251 9,439
Percentage of
Total Leased Sq.
Ft.............. 11.47% 1.07% 2.22% 37.82% 14.42% 4.82%
Annualized Base
Rent of Expiring
Leases.......... $ 532,872 $ 47,606 $ 89,709 $1,816,896 $ 638,222 $ 209,299
Percentage of
Total Annualized
Base Rent....... 11.85% 1.06% 1.99% 40.40% 14.19% 4.65%
Number of Leases
Expiring........ 4 1 2 7 5 1
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 1,570 1,685
Percentage of
Total Leased Sq.
Ft.............. 22.01% 23.62%
Annualized Base
Rent of Expiring
Leases.......... $ 37,155 $ 11,400
Percentage of
Total Annualized
Base Rent....... 49.28% 15.12%
Number of Leases
Expiring........ 1 1
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... 21,669 14,633 5,171 8,941 8,678 20,974 3,243
Percentage of
Total Leased Sq.
Ft. ............ 19.99% 13.50% 4.77% 8.25% 8.01% 19.35% 2.99%
Annualized Base
Rent of Expiring
Leases.......... $ 313,357 $ 209,460 $ 81,505 $ 119,698 $ 132,601 $ 383,924 $ 36,845
Percentage of
Total Annualized
Base Rent....... 18.33% 12.25% 4.77% 7.00% 7.76% 22.46% 2.16%
Number of Leases
Expiring........ 3 3 4 6 4 2 1
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft. ............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 143,263
Percentage of
Total Leased
Sq. Ft......... 100%
Annualized Base
Rent of Expiring
Leases.......... $ 3,079,063
Percentage of
Total Annualized
Base Rent....... 100%
Number of Leases
Expiring........ 23
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 3,922 51,290 195,891
Percentage of
Total Leased Sq.
Ft.............. 2.00% 26.18% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 85,656 $1,077,090 $ 4,497,350
Percentage of
Total Annualized
Base Rent....... 1.90% 23.95% 100%
Number of Leases
Expiring........ 1 2 23
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 3,878 7,133
Percentage of
Total Leased Sq.
Ft.............. 54.37% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 26,839 $ 75,394
Percentage of
Total Annualized
Base Rent....... 35.60% 100%
Number of Leases
Expiring........ 1 3
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... 25,087 108,396
Percentage of
Total Leased Sq.
Ft. ............ 23.14% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 432,104 $ 1,709,494
Percentage of
Total Annualized
Base Rent....... 25.28% 100%
Number of Leases
Expiring........ 2 25
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... --
Percentage of
Total Leased Sq.
Ft. ............ --
Annualized Base
Rent of Expiring
Leases.......... --
Percentage of
Total Annualized
Base Rent....... --
Number of Leases
Expiring........ --
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
78
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 47,549 23,772
Percentage of
Total Leased
Sq. Ft. ....... 47.73% 23.86%
Annualized Base
Rent of
Expiring
Leases......... $ 667,587 $ 512,695
Percentage of
Total
Annualized Base
Rent........... 37.03% 28.44%
Number of Leases
Expiring....... 1 3
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 8,924 1,300 2,038 22,390
Percentage of
Total Leased
Sq. Ft. ....... 25.75% 3.75 5.88% 64.61%
Annualized Base
Rent of
Expiring
Leases......... $ 141,093 $ 48,113 $ 19,595 $ 348,230
Percentage of
Total
Annualized Base
Rent........... 25.33% 8.64 3.52% 62.52%
Number of Leases
Expiring....... 4 1 1 3
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of Expiring
Leases......... 2,745 3,592 34,823 19,193
Percentage of
Total Leased
Sq. Ft. ....... 3.38% 4.43% 42.91% 23.65%
Annualized Base
Rent of
Expiring
Leases......... $ 65,064 $ 84,384 $ 834,132 $ 454,075
Percentage of
Total
Annualized Base
Rent........... 3.45% 4.47% 44.18% 24.05%
Number of Leases
Expiring....... 1 1 2 5
185 S. Douglas
Street
El Segundo, CA
Square Footage
of Expiring
Leases......... 60,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,313,418
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 83,080 61,854 85,138 261,082 149,969 289,383 83,047 17,574
Percentage of
Aggregate
Leased
Sq. Ft. ....... 5.26% 3.92% 5.39% 16.53% 9.50% 18.32% 5.26% 1.11%
Annualized Base
Rent of
Expiring
Leases......... $1,339,880 $1,225,669 $1,772,554 $4,507,056 $3,300,029 $5,105,305 $1,606,142 $ 346,474
Percentage of
Aggregate
Annualized Base
Rent........... 4.31% 3.94% 5.70% 14.49% 10.61% 16.41% 5.16% 1.11%
Number of Leases
Expiring....... 7 16 19 29 24 20 2 3
<CAPTION>
-----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 28,300 99,621
Percentage of
Total Leased
Sq. Ft. ....... 28.41% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 622,317 $ 1,802,599
Percentage of
Total
Annualized Base
Rent........... 34.52% 100%
Number of Leases
Expiring....... 1 5
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 34,652
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 557,031
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 9
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of Expiring
Leases......... 20,805 81,158
Percentage of
Total Leased
Sq. Ft. ....... 25.64% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 450,288 $ 1,887,943
Percentage of
Total
Annualized Base
Rent........... 23.85% 100%
Number of Leases
Expiring....... 2 11
185 S. Douglas
Street
El Segundo, CA
Square Footage
of Expiring
Leases......... 60,000
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 1,313,418
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 311,491 52,983 85,505 98,243 1,579,349
Percentage of
Aggregate
Leased
Sq. Ft. ....... 19.72% 3.35% 5.41% 6.22% 100%
Annualized Base
Rent of
Expiring
Leases......... $7,731,107 $1,099,444 $1,778,726 $1,296,270 $31,108,655
Percentage of
Aggregate
Annualized Base
Rent........... 24.85% 3.53% 5.72% 4.17% 100%
Number of Leases
Expiring....... 4 4 5 1 134
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
79
<PAGE>
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2031 E. Mariposa
Avenue
El Segundo, CA
Square Footage
of Expiring
Leases......... 192,053
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,556,321
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
3332 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
2260 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
2265 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
1000 E. Ball Road
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
2031 E. Mariposa
Avenue
El Segundo, CA
Square Footage
of Expiring
Leases......... 192,053
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 1,556,321
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
3332 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 90,746 90,746
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 543,180 $ 543,180
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
2260 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 113,820 113,820
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,300 $ 553,300
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
2265 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 76,570 76,570
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,934 $ 553,934
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
1000 E. Ball Road
Anaheim, CA
Square Footage
of Expiring
Leases......... 100,000 100,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 639,432 $ 639,432
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
80
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1230 S. Lewis
Street
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
12681/12691 Pala
Drive
Garden Grove, CA
Square Footage
of Expiring
Leases......... 70,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
2270 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
5115 N. 27th
Avenue
Phoenix, AZ
Square Footage
of Expiring
Leases......... 130,877
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 640,348
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
12752-12822
Monarch Street
Garden Grove, CA
Square Footage
of Expiring
Leases......... 22,888 42,608 165,981
Percentage of
Total Leased
Sq. Ft......... 8.26% 15.38% 59.91%
Annualized Base
Rent of
Expiring
Leases......... $ 78,060 $ 136,171 $ 592,548
Percentage of
Total
Annualized Base
Rent........... 8.28% 14.45% 62.89%
Number of Leases
Expiring....... 1 2 1
<CAPTION>
---------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1230 S. Lewis
Street
Anaheim, CA
Square Footage
of Expiring
Leases......... 57,730 57,730
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 302,930 $ 302,930
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
12681/12691 Pala
Drive
Garden Grove, CA
Square Footage
of Expiring
Leases......... 70,000
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
2270 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... --
Percentage of
Total Leased
Sq. Ft. ....... --
Annualized Base
Rent of
Expiring
Leases......... --
Percentage of
Total
Annualized Base
Rent........... --
Number of Leases
Expiring....... --
5115 N. 27th
Avenue
Phoenix, AZ
Square Footage
of Expiring
Leases......... 130,877
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 640,348
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
12752-12822
Monarch Street
Garden Grove, CA
Square Footage
of Expiring
Leases......... 45,560 277,037
Percentage of
Total Leased
Sq. Ft......... 16.45% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 135,432 $ 942,211
Percentage of
Total
Annualized Base
Rent........... 14.37% 100%
Number of Leases
Expiring....... 1 5
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
81
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 18,411 16,182 22,094
Percentage of
Total Leased
Sq. Ft......... 24.67% 21.69% 29.61%
Annualized Base
Rent of
Expiring
Leases......... $ 37,970 $ 141,574 $ 145,820
Percentage of
Total
Annualized Base
Rent........... 8.12% 30.29% 31.20%
Number of Leases
Expiring....... 2 1 1
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 64,891
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 465,407
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 2
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 70,000 22,888 210,464 189,667 252,966
Percentage of
Aggregate
Leased
Sq. Ft. ....... 5.61% 1.83% 16.86% 15.19% 20.26%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358 $ 78,060 $1,594,291 $ 918,093 $1,203,775
Percentage of
Aggregate
Annualized Base
Rent........... 6.67% 1.09% 22.33% 12.86% 16.86%
Number of Leases
Expiring....... 1 1 3 4 4
PORTFOLIO TOTALS
Square Footage
of Expiring
Leases......... 83,080 61,854 155,138 283,970 360,433 479,050 83,047 270,540
Percentage of
Aggregate
Leased
Sq. Ft. ....... 2.94% 2.19% 5.49% 10.04% 12.75% 16.94% 2.94% 9.57%
Annualized Base
Rent of
Expiring
Leases......... $1,339,880 $1,225,669 $2,248,912 $4,585,116 $4,894,320 $6,023,398 $1,606,142 $1,550,249
Percentage of
Aggregate
Annualized Base
Rent........... 3.50% 3.20% 5.88% 11.99% 12.80% 15.75% 4.20% 4.05%
Number of Leases
Expiring....... 7 16 20 30 27 24 2 7
<CAPTION>
-----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 17,931 74,618
Percentage of
Total Leased
Sq. Ft......... 24.03% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 142,080 $ 467,444
Percentage of
Total
Annualized Base
Rent........... 30.40% 100%
Number of Leases
Expiring....... 1 5
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 64,891
Percentage of
Total Leased
Sq. Ft......... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 465,407
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 2
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 76,570 248,476 177,311 1,248,342
Percentage of
Aggregate
Leased
Sq. Ft. ....... 6.13% 19.90% 14.22% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,934 $1,485,542 $ 830,812 $ 7,140,865
Percentage of
Aggregate
Annualized Base
Rent........... 7.76% 20.80% 11.63% 100%
Number of Leases
Expiring....... 1 3 3 20
PORTFOLIO TOTALS
Square Footage
of Expiring
Leases......... 388,061 301,459 262,816 98,243 2,827,691
Percentage of
Aggregate
Leased
Sq. Ft. ....... 13.72% 10.66% 9.29% 3.47% 100%
Annualized Base
Rent of
Expiring
Leases......... $8,285,041 $2,584,986 $2,609,538 $1,296,270 $38,249,521
Percentage of
Aggregate
Annualized Base
Rent........... 21.66% 6.76% 6.82% 3.39% 100%
Number of Leases
Expiring....... 5 7 8 1 154
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
82
<PAGE>
TENANT INFORMATION
The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
satellite communications, manufacturing, entertainment, banking, insurance,
telecommunications, health care, computer software, finance, engineering,
technology, legal and accounting. The following table sets forth information
as to the Company's largest tenants based upon annualized rental revenues for
the year ended December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL LEASE
BASE RENTAL BASE RENTAL INITIAL LEASE EXPIRATION
REVENUE($)(2) REVENUES(%) DATE(3) DATE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Office Tenants(1):
Hughes Aircraft
Corporation's Space &
Communications
Company(4)........... $ 9,757,877(5) 25.32 August 1984 January 1999
Northwest Airlines:
El Segundo.......... 1,313,418 3.41 August 1978 February 2001
Seattle............. 622,317 1.62 May 1980 April 2005
Devry, Inc............ 1,296,270 3.36 November 1994 October 2009
McDonnell Douglas
Corporation.......... 1,149,922 2.98 February 1992 January 2002
SCAN(6)............... 941,325 2.44 February 1996 May 2006
Zelda Fay Walls(7).... 823,896 2.14 August 1989 August 2000
Worldcom, Inc......... 674,592 1.75 January 1995 December 1999
The Walls Group....... 456,220 1.18 October 1991 September 2002
Olympus America,
Inc.................. 443,375 1.15 September 1993 December 1998
SITA.................. 378,359 0.98 June 1984 May 1999
----------- -----
Total............... $17,857,571 46.33
=========== =====
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL LEASE
BASE RENTAL BASE RENTAL INITIAL LEASE EXPIRATION
REVENUE($)(2) REVENUES(%) DATE(3) DATE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Industrial Tenants(1):
Mattel, Inc........... $ 1,556,321 4.04 May 1990 October 2000
Festival Markets...... 640,348 1.66 May 1991 May 2001
Allen-
Bradley/Rockwell..... 639,432 1.66 May 1992 April 1998
Cannon Equipment...... 592,548 1.54 August 1995 July 2003
MSAS Cargo
International Inc.... 553,934 1.44 September 1994 August 2004
Ace Medical........... 553,300 1.44 April 1995 April 2006
Furon, Inc. .......... 543,180 1.41 February 1990 July 2005
Rank Video Services... 476,358 1.24 October 1984 May 1998
Household Finance
Corporation.......... 319,199 0.83 June 1993 November 2003
Extron................ 302,930 0.79 February 1995 January 2005
----------- -----
Total............... $ 6,177,550 16.05
=========== =====
</TABLE>
- --------
(1) Table excludes the lease with LACTC (total annual base rent of $449,935)
which expired on April 30, 1996, the lease with Cerplex Group, Inc./Incert
(total annual base rent of $337,530) which expired on June 30, 1996 and
the lease with Key Bank of Washington (total annual base rent of $667,587)
which expired on December 31, 1996.
(2) Determined in accordance with GAAP.
(3) Represents date of first relationship between tenant and the Kilroy Group.
(4) Includes Hughes Space & Communication's leases at Kilroy Airport Center at
El Segundo of (i) 96,133 and 11,556 net rentable square feet which expire
in October 2001, (ii) 286,151 net rentable square feet which expires in
July 2004 and (iii) 100,978 net rentable square feet which expires in
January 1999.
(footnotes continued on next page)
83
<PAGE>
(5) Tenant annual base rental revenue for Hughes Space & Communications gives
pro forma effect to the recent extension of the tenant lease with respect
to 96,133 rentable square feet of office space located at 2250 E. Imperial
Highway (along with 11,556 rentable square feet located at 2240 E.
Imperial Highway) as if such lease renewal had occurred on January 1,
1995. See "Business and Properties--Kilroy LAX."
(6) Tenant executed leases during 1995 representing approximately 44,825
square feet effective on February 15, 1996. Base rental revenue figure
included on a contract basis.
(7) The term of this lease has been extended to 2007 and, effective February
1, 1997, annual base rent under this lease will be $672,000.
OFFICE PROPERTIES
All but two of the Office Properties are Class A office buildings. Each of
the Kilroy LAX, Kilroy Long Beach and SeaTac (each as defined) Office
Properties was designed and developed to above-standard specifications to
accommodate the long-term needs of tenants and include features such as extra-
floor loading capacity and extra-high ceilings. Each of the Kilroy LAX, Kilroy
Long Beach and SeaTac Office Properties also was designed with an emphasis on
long-term operating efficiency and tenant comfort and includes above-standard
climate controls, on-site management and security, covered parking, heliports
and retail services, all in professionally landscaped environments. In
addition, each of the Kilroy LAX and Kilroy Long Beach Office Properties
offers tenants redundant telecommunications capability and utility leads. The
Office Properties range in size from two to 12 stories and are easily
accessible from major highways and all but two (Westlake Plaza and the Office
Property located at the La Palma Business Center) are easily accessible from
major airports. Management believes that as a result of these factors the
Office Properties in the Southern California Area achieve among the highest
rent, occupancy and tenant retention rates when compared to other properties
within their respective submarkets and in neighboring submarkets. Management
believes that the location, quality of construction and amenities at the
complexes as well as the Company's reputation for providing a high level of
tenant service have enabled the Company to attract and retain a national
tenant base.
Kilroy LAX. The Company developed, owns, leases and manages three Office
Properties at Kilroy Airport Center at El Segundo ("Kilroy LAX"), a Class A
high-rise, multi-tenant corporate office complex situated in what the Company
considers to be the premier location in El Segundo immediately adjacent to Los
Angeles International Airport ("LAX"), the new light rail system servicing Los
Angeles County and the new I-105 Freeway with a freeway off-ramp and freeway
on-ramp providing immediate access to and from the project's parking
facilities. Kilroy LAX was built in 1983 to high quality specifications to
address the anticipated demands of the submarket's aerospace and high
technology tenants. The Company believes Kilroy LAX has the premier location
in the El Segundo office submarket for a number of reasons, including:
(i) unobstructed views of LAX, West Los Angeles and Downtown Los Angeles; (ii)
excellent access to LAX, the new I-105 Freeway and the new light rail system;
(iii) close proximity to corporate office users including Hughes Space &
Communications and its satellite manufacturing facility, and other related
enterprises such as DirectTV; and (iv) for tenants with their names on the
Property, visibility to freeway and airline travelers.
The complex is comprised of two 12-story towers and a 13-level parking
structure with two floors of office space on top, encompassing an aggregate of
approximately 701,000 rentable square feet, of which 93.3% was leased as of
September 30, 1996. Kilroy LAX features fiber optic/telecommunications dual
redundancy (one of the few properties in Southern California so equipped) and
multiple lead-lines for both water and power, thereby mitigating the risk of
temporary loss of such services to the facility. The Property was designed and
constructed with above-standard floor loadings and floor-to-ceiling heights to
accommodate the weight and raised floors requirements of computer and other
equipment. The facility is climate controlled in smaller areas which, while
increasing tenant comfort, allows for separate thermostat controls for areas
housing temperature sensitive equipment and reduces costs for after-hour
operations. The facility was designed toward tenant efficiency and convenience
and features an above-standard ratio of elevators to rentable square feet and
provides 24-hour on-site security and management, private dual heliports,
shuttle service to LAX and on-site retail, banking and dining facilities. In
addition, the two 12-story towers are joined by an atrium and are
professionally landscaped creating a pleasant environment. In addition, the
facility has been recognized by the local utility for its energy efficient
heating, ventilating and air conditioning systems which reduce operating costs
for both the Company and its
84
<PAGE>
tenants. Management believes because of these and other high quality features,
Kilroy LAX continues to attract long-term major corporate tenants at rates
above those offered by other facilities in the El Segundo and neighboring
submarkets. The occupancy rates for Kilroy LAX as of the years ended December
31, 1993 through 1995, and the nine-month period ended September 30, 1996,
were 90.8%, 91.6%, 92.1% and 93.3%, respectively.
Major tenants of the facility include Hughes Space & Communications (the
Company's largest tenant), the Federal Aviation Administration and Realtime
Associates. Hughes Space & Communications has been a tenant at Kilroy LAX
since its opening and, over the past five years, has consolidated operations
into its owned facilities in El Segundo (which includes its satellite
manufacturing facility) and into leased facilities at Kilroy LAX which also
serves as its headquarters. In addition, Hughes Space & Communications has
invested substantial amounts in tenant improvements, including approximately
$3.3 million during the year ended December 31, 1994 and $23.5 million since
1984, and repeatedly has renewed leases at the facilities, including one lease
for approximately 101,000 rentable square feet which has been renewed twice.
Hughes Space and Communications is a major employer and owner of technical
facilities in El Segundo, including facilities for the development of
satellite technology and its applications, such as DirecTV.
Because the book value of the Office Property located at 2240 E. Imperial
Highway will be in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below. The information
presented below gives pro forma effect to the recent extension of the tenant
lease with Hughes Space & Communications with respect to this Office Property
as if such lease renewal had occurred on January 1, 1995.
The Office Property located at 2240 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1991 through 1995. As
of September 30, 1996, Hughes Space & Communications occupied approximately
94.6% of the Property's net rentable square feet under two leases. Under the
principal lease for this space, Hughes Space & Communications commenced
occupancy of 101,000 square feet on August 11, 1986 and renewed the lease on
February 1, 1989 and again on June 1, 1994. In connection with the latter
renewal, Hughes made a one time payment of $4,000,000 to the Company in
consideration of a lease amendment to relieve Hughes Space & Communications of
the obligation to remove certain tenant improvements upon termination of the
lease. The current lease term under this lease expires on January 31, 1999,
subject to a five-year option to renew at fair market value, but not less than
$15.84 per annum per net rentable square foot, on a triple net basis. Hughes
Space & Communications also leases 11,556 rentable square feet (along with the
96,133 rentable square feet located at 2250 E. Imperial Highway) under a
second lease which expires October 31, 2001, at an annualized triple net base
rental rate of $14.04 and, for the first year of the lease term, the tenant's
allocable share of operating costs shall not exceed $7.32 per rentable square
foot. The lease also is subject to a five-year option to renew at fair market
value, adjusted bi-annually for CPI adjusted increases in base rent. The total
annual rental income per net rentable square foot for the years ended
December 31, 1991 through December 31, 1995 was $23.17, $24.42, $25.22, $17.15
and $11.83, respectively.
85
<PAGE>
The following table sets forth for such Property for each of the ten years
following the date of Offering (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases,
(iii) the percentage of total leased net rentable square feet represented by
such leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
YEAR OF NUMBER OF SQUARE FOOTAGE REPRESENTED SQUARE FOOT
LEASE LEASES SUBJECT TO BY EXPIRING ANNUAL BASE RENT UNDER REPRESENTED BY
EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES ($)(1) EXPIRING LEASES($)
---------- --------- --------------- ------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/31/96-12/31/96....... 0 -- -- -- --
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 1(2) 100,978 86.4 $1,085,716 $10.75
2000.................... 0 --
2001.................... 2(3) 15,898 13.6 196,670 12.37
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 0 -- -- -- --
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 3 116,876(4) 100.0 $1,282,386 $10.97
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The terms of a lease representing 11,556 rentable square feet are
described in the text preceding this table.
(4) The aggregate square footage reflected in each of the respective leases
differs from the actual aggregate square footage for this Property of
118,933 as shown on the table under the caption "The Office and Industrial
Properties." Subsequent to the execution of the leases, the Property was
remeasured at a larger aggregate number of square feet than is reflected
in the executed leases.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $4.1 million (net of accumulated
depreciation and reductions in depreciable basis). The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life ranging from 31 1/2 years to 39 years,
depending upon the date of certain capitalized improvements to the Property.
For the year ended December 31, 1995, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
4.3%. For the 12-month period ending September 30, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending September 30, 1996 totaled approximately $130,000. Management does not
believe that any capital improvements made during the 12-month period
immediately following the Offering should result in an increase in annual
property taxes.
Because the gross revenues for the Office Property located at 2250 E.
Imperial Highway for the year ended December 31, 1995 were in excess of 10% of
the aggregate gross revenues for all of the Properties, additional information
regarding this Property is presented below. The information presented below
gives pro forma effect to the recent extension of the tenant lease with Hughes
Space & Communications with respect to this Office Property as if such lease
renewal had occurred on January 1, 1995.
The Office Property located at 2250 E. Imperial Highway had an occupancy
rate of 84.0%, 82.5%, 77.8%, 79.8% and 80.9% as of the years ended December
31, 1991 through 1995, respectively. As of September 30, 1996, Hughes Space &
Communications occupied 33% of the Property's net rentable square feet. The
Property's other tenants include companies engaged in the communications,
technology, transportation and healthcare industries. Hughes Space &
Communications commenced occupancy of 96,133 rentable square feet on
86
<PAGE>
November 1, 1986 and has entered into an agreement to renew this space (along
with the 11,556 square feet located at 2240 E. Imperial Highway) through
October 31, 2001, at a triple net annual base rental rate of $14.04 per square
foot and, for the first year of the lease term, the tenant's allocable share
of operating costs shall not exceed $7.32 per rentable square foot. The lease
also is subject to a five-year option to renew at fair market value, adjusted
bi-annually for CPI increases in base rent. The total annual rental income per
net rentable square foot for the years ended December 31, 1991 through
December 31, 1995 was $17.82, $18.73, $19.62, $18.89 and $18.86, respectively.
The following table sets forth for such Property for each of the ten years
following the date of the Offering (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/1/96-12/31/96........ 1 1,317 0.6 $ 24,496 $18.60
1997.................... 3 4,385 1.9 83,025 18.93
1998.................... 6 23,033 10.1 464,705 20.18
1999.................... 4 29,148 12.7 695,821 23.87
2000.................... 2 18,201 8.0 302,853 16.64
2001.................... 3 112,715 49.3 1,653,035 14.67
2002.................... 1 18,517 8.1 456,220 24.64
2003.................... 0 -- -- -- --
2004.................... 2 21,418 9.3 485,244 22.66
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 22 228,734 100.0 $4,165,399 $18.21
=== ======= ===== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending September 30, 1996 totaled approximately $240,000.
Management does not believe that any capital improvements made during the 12-
month period immediately following the Offering should result in an increase
in annual property taxes.
Because the 1995 gross revenues for the Office Property located at 2260 E.
Imperial Highway were in excess of 10% of the aggregate gross revenues for all
of the Properties, additional information regarding this Property is presented
below.
The Office Property located at 2260 E. Imperial Highway had an occupancy
rate of 100.0% for the years ended December 31, 1991 through 1995. As of
September 30, 1996, Hughes Space & Communications occupied 100.0% of the
Property's net rentable square feet. Hughes Space & Communications commenced
occupancy of the entire building on August 1, 1984. This lease runs through
July 31, 2004 with CPI adjusted increases in base rent every two years. The
next CPI adjustment is scheduled to occur on August 1, 1998 and provides for
an increase in base rent to the extent that such CPI adjustment exceeds a
minimum floor of 1.86% compounded
87
<PAGE>
annually. The remaining CPI adjustments scheduled for August 1, 2000 and
August 1, 2002, respectively, provide for similar increases to the extent that
the CPI adjustment exceeds a minimum floor of 3% compounded annually. The
total annual rental income per net rentable square foot was $25.35, $26.16,
$26.66, $24.59 and $24.59 for the years ended December 31, 1991 through
December 31, 1995, respectively. The following table sets forth for such
Property for each of the ten years following the date of Offering (i) the
number of tenants whose leases will expire, (ii) the total net rentable square
feet covered by such leases, (iii) the percentage of total leased net rentable
square feet represented by such leases, (iv) the annual base rent represented
by such leases and (v) the average annual rent per net rentable square foot
represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES($)(1) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/96....... 0 -- -- $ -- $ --
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 0 -- -- -- --
2000.................... 0 -- -- -- --
2001.................... 0 -- -- -- --
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 1(2) 286,151 100.0 $7,160,207 $25.02
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 1 286,151(3) 100.0 $7,160,207 $25.02
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The square footage reflected in the lease differs from the actual square
footage for this Property of 291,187 as shown on the table under the
caption "The Office and Industrial Properties." Subsequent to the
execution of the lease, the Property was remeasured at a larger aggregate
number of square feet than is reflected in the executed lease.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending September 30, 1996 totaled approximately $275,000.
Management does not believe that any capital improvements made during the 12-
month period immediately following the Offering should result in an increase
in annual property taxes.
Kilroy Long Beach. The Company developed, owns, leases and manages the three
Office Properties which comprise Phase II of Kilroy Airport Center Long Beach
("Kilroy Long Beach Phase II"), part of a planned four-phase, 53-acre Class A
corporate office headquarters, business park and retail and entertainment
center strategically located adjacent to the San Diego freeway (Interstate
405, the major coastal north-south highway in Southern California between Los
Angeles and Orange Counties) (the "I-405 Freeway") and immediately adjacent to
the Long Beach Airport. The Company has sole development rights for the
remaining 24 developable acres. Upon consummation of the Offering, the Company
also will own the two office buildings comprising Kilroy Long Beach Phase I
("Kilroy Long Beach Phase I") which were developed by the Company and which
have been leased and managed by the Company since their inception. See "--
Acquisition Properties--Kilroy Long Beach Phase I." Kilroy Long Beach Phase II
includes an eight-story and a six-story office building, and a multi-level
parking structure with retail facilities on the ground floor, encompassing an
aggregate of approximately 395,000 net rentable square feet, of which 88.4%
was leased as of September 30, 1996. The
88
<PAGE>
facility is the only GTE SmartPark in Los Angeles County and offers tenants an
array of advanced telecommunications functions through a pre-laid fiber optic
network, emergency backup loop and ISDN interfaces. The facility also includes
state-of-the-art mechanical and electrical systems designed to accommodate the
highest tenant demands including above-standard floor-to-ceiling heights and
floor loading and four high-speed passenger elevators. Each of the office
structures offers efficient 28,000 square foot floors. Other amenities include
a spacious lobby with an atrium, and a central courtyard with a fountain and
pedestrian arcade. The facility also features 24-hour on-site security and
management, a fitness center, group conference facilities, helipad facilities,
and various retail and business services including banking facilities, dining
facilities and printer services. The occupancy rates for Kilroy Long Beach
Phase II as of the years ended December 31, 1993 through 1995, and the nine
month period ended September 30, 1996, were 64.8%, 78.7%, 76.5% and 88.3%,
respectively. Major tenants include AIG Claim Services, Inc., Assistance in
Marketing, Inc., CompuServe, Inc., Employer's Health Insurance, Co., GTE
Directories Sales Corporation, Great Northern Insured Annuities Corp., Great
Western Bank, HealthNet, Mutual of America Life Insurance Company, North
American Title Company, The Prudential Insurance Company of America, R.L. Polk
& Company, SCAN Health Plan, Senn-Delaney Leadership Consulting Group, Inc.,
20th Century Industries, UniCare Financial Corporation, Unihealth and Zelda
Fay Walls.
Kilroy Airport Center Long Beach was developed in response to a desire by
the City of Long Beach to promote development in the airport area. Phase I of
the project, two office buildings encompassing approximately 225,000 rentable
square feet, was developed by the Company in 1987 and was sold in 1993. The
Company has entered into an agreement to reacquire the Phase I Office
Properties. As of September 30, 1996 the Phase I Office Properties were 96.6%
leased to eight tenants with total annual rental income per leased net
rentable square foot of $15.67 (calculated on the basis of base rent of signed
leases at September 30, 1996, adjusted for contractual increases in base rent
in effect during the 12-month period ending September 30, 1996). Major tenants
include McDonnell Douglas Corporation, Olympus America, Inc. and Devry, Inc.
See "--Acquisition Properties--Kilroy Long Beach Phase I." The Company has
overseen and continues to oversee all leasing and management of Phase I.
Kilroy Long Beach Phase II was developed by the Company in 1989/1990 and
encompasses an aggregate of approximately 395,000 net rentable square feet.
Phases III and IV are planned for future development. See "--Development,
Leasing and Management Activities--Kilroy Airport Center Long Beach."
Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee (assuming the assignment to the
Company of the approximately 14-acre parcel in connection with the acquisition
of Kilroy Long Beach Phase I). The City of Long Beach is the ground lessor
with respect to Kilroy Long Beach Phases I through III and the Board of Water
Commissioners of the City of Long Beach, acting on behalf of the City of Long
Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The
basic term under each of the ground leases expires on July 17, 2035. Primary
rent under the leases for Kilroy Long Beach Phases I, II, III and IV is
currently approximately $338,000 per year, $295,000 per year, $75,000 per year
and $77,000 per year, respectively, with such amounts adjusted periodically to
take account of changes in the fair market rental value of the land underlying
each lease.
Because the book value of the Office Property located at 3780 Kilroy Airport
Way will be in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below.
The Office Property located at 3780 Kilroy Airport Way had an occupancy rate
of 70.2%, 70.5%, 69.1%, 78.6% and 63.6% as of the years ended December 31,
1991 through 1995, respectively. As of September 30, 1996, SCAN Health Plan, a
group health insurer, and Zelda Fay Walls, an operator of executive office
suites, occupied approximately 20.4% and 12.7%, respectively, of the
Property's net rentable square feet. The Property's other tenants include
companies engaged in the insurance, healthcare, finance, high technology, law
and accounting industries. Base rent under the SCAN Health Plan lease is
$941,325 per year. The lease expires on August 31, 2000, subject to two
successive five-year options to renew. Base rent under the Zelda Fay Walls
lease
89
<PAGE>
is currently $823,896 per year although the tenant has been paying only
approximately $640,200 since August 1993 and the balance is expensed quarterly
by the Company as an increase to its bad debt reserve. Effective February 1,
1997, annual base rent under the lease will be $672,000, and the term of the
lease has been extended to 2007, subject to a five-year option to renew. The
total annual rental income per net rentable square foot for the years ended
December 31, 1991 through 1995 was $13.02, $17.53, $19.76, $20.54 and $18.55,
respectively. The following table sets forth for such Property for each of the
ten years following the date of Offering (i) the number of tenants whose
leases will expire, (ii) the total net rentable square feet covered by such
leases, (iii) the percentage of total leased net rentable square feet
represented by such leases, (iv) the annual base rent represented by such
leases and (v) the average annual rent per net rentable square foot
represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/1/96-12/31/96........ -- -- -- $ -- $ --
1997.................... 4 22,469 11.5 532,872 23.72
1998.................... 1 2,088 1.1 47,606 22.80
1999.................... 2 4,339 2.2 89,709 20,68
2000.................... 7 74,093 37.8 1,816,896 24.52
2001.................... 5 28,251 14.4 638,222 22.59
2002.................... -- -- -- -- --
2003.................... 1 9,439 4.8 209,299 22.17
2004.................... 1 3,922 2.0 85,656 21.84
2005 and beyond......... 2 51,290 26.2 1,077,090 21.00
--- ------- ------ ----------
Totals.............. 23 195,891 100.00 $4,497,350 $22.96
=== ======= ====== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
The Company's tax basis in the Property for federal income tax purposes was
$11.4 million (net of accumulated depreciation) as of December 31, 1995. The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from 31 1/2
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1995, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.4%. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.2%. Property taxes on this Property for the
12-month period year ending September 30, 1996 totaled $162,000. Management
does not believe that any capital improvements made during the 12-month period
immediately following the Offering should result in an increase in annual
property taxes.
SeaTac Office Center at Seattle-Tacoma International Airport. The Kilroy
Group developed and operates the SeaTac Office Center ("SeaTac"), south of
Seattle in SeaTac, Washington, a Class A office development in the Southend
submarket of the Puget Sound region. SeaTac is comprised of two 12-story
towers (constructed in 1977 and 1980, respectively) and a 4-level office and
garage structure with two floors of office space on top (constructed in 1980),
all with views of the Olympic and Coastal mountain ranges. The site is located
directly across from the Seattle-Tacoma International Airport. The facility
currently contains an aggregate of approximately 530,000 square feet of office
space. Current zoning permits up to an additional 500,000 square feet of
development. The facility features 24-hour on-site security and management,
parking for over 1,900 vehicles, computer training and consultation, travel
agencies and a 24-hour restaurant. As of September 30, 1996, SeaTac had
approximately 308,000 rentable square feet of available office space. Major
tenants include First
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<PAGE>
Nationwide Mortgage Corporation, Lynden, Inc., National Chemsearch, Northwest
Airlines, Inc., Rayonier, Inc., Seattle-First National Bank and Transamerica
Financial Services, Inc.
SeaTac is situated on an approximately 17-acre site subject to two long-term
ground leases and an airspace lease. The initial term of the ground leases
runs through December 31, 2032, and may be extended for an additional period
of thirty years. Payments under the ground leases are subject to adjustment
for increases in the CPI every five years. Payments under the airspace lease
are made monthly. Aggregate payments under the two ground leases and the
airspace lease for the year ended December 31, 1995 totaled approximately
$285,000. As of September 30, 1996, the SeaTac Properties were encumbered by a
first mortgage loan having an outstanding principal balance of $20,162,000.
The loan bears interest at a rate of 9.75% per year and is scheduled to mature
on May 15, 2001. See "Note 4. Debt" to the Combined Financial Statements of
the Kilroy Group.
INDUSTRIAL PROPERTIES
Like the Office Properties, the Industrial Properties developed by the
Company (the Industrial Properties other than the Acquisition Properties) were
designed and developed to provide above-standard quality and meet the long-
term needs of tenants. The Company was among the first Southern California
developers to air-condition its Industrial Properties, increasing each
facility's multidimensional use while providing environments for increased
tenant operating efficiency and comfort. While most of the buildings are
occupied by a single tenant, the Industrial Properties developed by the
Company were designed for multi-tenant operations and can be reconfigured for
such use. The Industrial Properties, all but one of which are located in
Southern California, are primarily comprised of single-story, tilt-up concrete
buildings ranging in size from approximately 57,000 to 277,000 square feet.
The Industrial Properties feature high-tech assembly areas and supporting
office space for management and administrative functions.
The Industrial Property leases are written on a triple net basis with
initial terms of three to eleven years and options to renew for up to an
additional five years at the then current fair market value. The leases
generally provide for rent increases based on the applicable regional CPI or
contain specific contractual increases. The leases do not contain purchase
options.
Certain of the Industrial Properties can support additional development and
the Company presently is planning to develop in the next two years, subject to
substantial pre-leasing, approximately 105,000 square feet of additional
leasable area. The Company anticipates that any such development would be
funded with amounts available under the Credit Facility. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Industrial Properties, or obtain financing for any such development on
terms favorable to the Company. See "Risk Factors--Real Estate Financing
Risks" and "--No Limitation on Debt."
DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES
Since 1947, the Company and its affiliates have developed millions of square
feet of office and industrial space, including high technology facilities,
primarily located in Southern California, for its own portfolio and for third
parties. Development activities include site selection, land entitlement,
project design and construction, build-to-suit activities and tenant
renovations. The Company has successfully developed numerous sophisticated
development projects for some of the nation's most prominent corporations both
in Southern California and around the country. The Company's extensive
experience has enabled it to form key alliances with major corporate tenants,
municipalities and landowners in Southern California. The Company's
relationships with tenants and users has enabled it to receive fees in
connection with its role as developer of various projects, or, in the case of
Kilroy Long Beach, to develop the land for its own account where such
development will result in a favorable risk-adjusted return on investment. In
connection with the Formation Transactions, the Company will succeed to the
Kilroy Group's rights in and to the Development Properties.
The Company or the Operating Partnership will be the manager of the
Properties and may provide building management services for independent
building owners for terms that vary in length but which generally provide
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<PAGE>
for management fees of 4% to 5% of collected revenue and may also provide for
reimbursement of expenses. The Services Company will provide development
services for the Company and the Operating Partnership, as well as for third
parties, at market rates.
The following is a description of the Development Properties as presently
contemplated.
Kilroy Airport Center Long Beach. In conjunction with the Company's role as
master ground lessee of Kilroy Long Beach, the Company manages all ongoing
leasing and development activities for the four-phase, approximately 53-acre
office and retail development project, including sole development rights to
the approximately 24 remaining developable acres. To date the Company has
developed Phases I and II. See "--Office Properties--Kilroy Airport Center
Long Beach" and "Acquisition Properties." Current development activities are
focused on Phase III of the project ("Kilroy Long Beach Phase III") which will
be developed and owned by the Company. Kilroy Long Beach Phase III presently
is contemplated to initially include a seven-story office building with
approximately 186,000 rentable square feet and a five-story office building
with approximately 132,000 rentable square feet. In addition, Kilroy Long
Beach Phase III may be developed, subject to site plan approval by the City of
Long Beach, to include an additional office building with up to 150,000
rentable square feet of space. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of Kilroy Long Beach Phase III is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development is uncertain.
Kilroy Long Beach also is planned to include Phase IV ("Kilroy Long Beach
Phase IV"), which will be developed and owned by the Company. Kilroy Long
Beach Phase IV presently is contemplated to include an aggregate of up to
550,000 rentable square feet of office and retail space including high quality
retail and specialty shops, sit-down and convenience restaurants and, subject
to site-plan approval by the City of Long Beach, a multitheater and virtual
reality entertainment center. Development of Kilroy Long Beach Phase IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development is uncertain.
To date the Company has invested approximately $8.8 million in
infrastructure improvements which are in place for Kilroy Long Beach Phases
III and IV and has available an additional approximately $2.6 million of
revenue bond proceeds held by the City of Long Beach which the Company
believes is sufficient to provide for further traffic mitigation improvements,
if any, which may be required by the City in connection with the future
development. Because of the over 900,000 aggregate rentable square feet
entitled at Kilroy Long Beach Phases III and IV, and the significant
infrastructure improvements already in place, the Company believes that Kilroy
Long Beach offers substantial opportunity for tenant expansion from a location
servicing both Los Angeles and Orange Counties. See "--Office Properties--
Kilroy Long Beach."
Kilroy Long Beach Phase III and Phase IV will be developed by the Company or
the Services Company for the benefit of the Company. Prior to the Formation
Transactions, the Kilroy Group and its affiliates acquired construction
materials at a cost of approximately $6.5 million in connection with the
development of Kilroy Long Beach Phase III. These construction materials will
not be contributed to the Company and the Company will have no obligation to
purchase the materials from the Kilroy Group or to in any way use the
materials in the development and completion of the project. Any decision on
the part of the Company to purchase the materials from the Kilroy Group in the
future will be determined by a majority of the Independent Directors.
Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee. The City of Long Beach is the ground
lessor with respect to Kilroy Long Beach Phase III and the Board of Water
Commissioners of the City of Long Beach, acting on behalf of the City of Long
Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The
basic term under each of the ground leases expires on July 17, 2035. Primary
rent under the leases for Kilroy Long Beach Phases III and IV is currently
approximately $75,000 per year and $76,764 per year, respectively, with such
amounts adjusted periodically to take account of changes in the fair market
rental value of the land underlying each lease.
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<PAGE>
Riverside Judicial Center. In a unique "public-private partnership" with the
City of Riverside Redevelopment Agency and the County of Riverside, the
Company has substantially completed for a fee a comprehensive master planning,
design, entitlement and development effort for the initial phase of a multi-
jurisdictional judicial center complex (the "Riverside Judicial Center") in
downtown Riverside that is expected to serve the entire greater Riverside and
San Bernardino area. Riverside is located approximately 56 miles east of Los
Angeles. The project currently includes a United States Bankruptcy Court and
administrative complexes. In addition, future development at the site may also
include a United States District Court. Construction of the Riverside Judicial
Center began in February 1996. Upon consummation of the Formation
Transactions, the Services Company will be assigned the Development Management
Agreement in connection with the project.
Northrop Grumman. The Company has been retained on a fee basis by Northrop
Grumman Corporation ("Northrop Grumman") to undertake a comprehensive, multi-
phased effort to analyze, entitle and manage the future reuse, planning,
entitlement, marketing and disposition of the approximately 200-acre property
located in the City of Pico Rivera, located approximately 13 miles east of Los
Angeles, which currently serves as Northrop Grumman's headquarters for
activities related to the U.S Air Force's B-2 "Stealth" Bomber Program. Early
stages of the project are underway, including the execution of a Memorandum of
Understanding with the City of Pico Rivera and a community outreach program
and submission of a conceptual reuse plan to the City of Pico Rivera. The
agreement runs through February 15, 1997.
ACQUISITION PROPERTIES
The Company has entered into agreements to acquire from non-affiliated third
parties four office properties and two industrial properties upon consummation
of the Offering, and will acquire one Industrial Property which was purchased
from a non-affiliated third party by KI on behalf of the Company prior to
consummation of the Offering and will be assigned to the Company upon
consummation of the Offering (collectively, the "Acquisition Properties"). In
the event one or more of the Acquisition Properties are purchased, the Company
expects to finance the acquisition cost (approximately $49.0 million in the
aggregate) with long-term borrowings under the $84.0 Million Loan, new
mortgage financing and/or the proceeds of the Offering. Acquisition of each of
these properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or concurrent with consummation of the Offering there is no assurance
that any of the Acquisition Properties will be acquired. In addition,
concurrent with the Offering the Company will assume and repay out of the
Offering proceeds the indebtedness incurred by KI (on behalf of the Company)
to acquire the Industrial Property located at 12752-12822 Monarch Street,
Garden Grove, California (including expenses at closing). Unless otherwise
indicated, all calculations and information contained in this Prospectus give
pro forma effect to the acquisition of the Acquisition Properties.
Kilroy Long Beach Phase I. Two of the Acquisition Properties comprise Kilroy
Long Beach Phase I, a Class A office complex which includes a two-story office
building and a combination two/three-story office building encompassing an
aggregate of 225,000 rentable square feet. The Company has entered into an
agreement for the purchase of these Office Properties for an aggregate
purchase price of $23.5 million. Kilroy Long Beach Phase I was developed by
the Company in 1987 and sold by the Company to the current owner, a non-
affiliated third party, in 1993. The Company has overseen all leasing and
management activity at the property since its development. As of September 30,
1996, the properties were 96.6% leased to eight tenants at an average annual
base rent per net rentable square foot of $15.90. See "--Office Properties--
Kilroy Long Beach."
Thousand Oaks Office Property. Another Acquisition Property is a stand-alone
three-story Class A office property located in Thousand Oaks, California,
which encompasses approximately 81,100 rentable square feet and, as of
September 30, 1996, was 100.0% leased to eleven tenants at an average annual
base rent per net rentable square foot of $23.26. The Company has entered into
an agreement with a non-affiliated third party for the purchase of this Office
Property for a purchase price of $13.2 million.
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<PAGE>
Anaheim Office and Industrial Properties. The Company also has entered into
an agreement to purchase one office and two industrial properties located at
4123-4175 East La Palma Avenue, Anaheim, California. The Office Property
consists of approximately 42,800 rentable square feet. At September 30, 1996,
the Office Property was 91.6% leased to 11 tenants at an average annual base
rent per net rentable square foot of $12.37. The Industrial Properties
comprise an aggregate of approximately 144,000 rentable square feet. At
September 30, 1996, each of the Industrial Properties was 100% leased with an
aggregate annual base rent per net rentable square foot of $3.74. Pursuant to
the terms of the purchase agreement, the Company will acquire all of these
properties for an aggregate purchase price of $12.2 million in cash.
12752-12822 Monarch Street, Garden Grove, California. On behalf of the
Company, in December 1996 KI purchased an industrial building located at
12752-12822 Monarch Street, Garden Grove, California. The building contains an
aggregate of approximately 277,000 rentable square feet. As of September 30,
1996, the property was 100% leased to five tenants at an average annual base
rent per net rentable square foot of $3.38. Pursuant to the terms of the
purchase agreement, the Property was acquired on behalf of the Company for a
purchase price of $9.1 million in cash and will be transferred to the Company
concurrent with the Offering. The Company will assume and repay out of the net
proceeds of the Offering the debt and expenses incurred by KI in connection
with the acquisition. The purchase was completed on behalf of the Company in
December 1996 because of the closing schedule required by the seller.
THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS*
The Company believes that Los Angeles, Orange and Ventura Counties have been
and will continue to be excellent markets in which to own and operate Class A
office, industrial and retail property over the long term. The Company
believes that these counties are attractive for a number of reasons:
. These counties, together with Riverside and San Bernardino Counties,
comprise the second largest Consolidated Metropolitan Statistical Area
in the United States (the "Southern California Area") and rank as the
world's 12th largest economy;
. The continuing expansion of the service-producing sector of the economy;
. Employment sectors using Class A office and industrial properties
continue to expand with the Southern California Area's continuing growth
in foreign trade and diversification of industries;
. Since 1992 there has been virtually no increase in the Southern
California Area's inventory of office space; and
. The Southern California Area's demand for quality industrial space has
spurred new construction of industrial properties.
- --------
* The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study
the Company's Southern California submarkets, and the discussion of such
submarkets below and under the caption "Prospectus Summary--The Company's
Southern California Submarkets" is based upon Lesser's findings. While the
Company believes that these estimates of economic trends are reasonable,
there can be no assurance that these trends will in fact continue.
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<PAGE>
As of December 31, 1995, the Southern California Area had a total population
of approximately 15.6 million people which accounted for approximately 5.9% of
the total U.S. population. Annual population growth in the Southern California
Area since 1990 has averaged approximately 217,000 persons. Of the
approximately 15.6 million people in the Southern California Area,
approximately 9.2 million persons lived in Los Angeles
County and approximately 2.6 million persons lived in Orange County. Annual
estimated growth in population in these counties over the next five years is
expected to be approximately 94,000 and 32,000 persons, respectively. The
following table presents the total population as a proportion of the United
States population for the Southern California Area and California for 1980,
1990 and 1995 and the estimated population for 2000 and 2010.
TOTAL POPULATION AS A PROPORTION OF THE UNITED STATES
SOUTHERN CALIFORNIA AREA AND CALIFORNIA
1980-2010
<TABLE>
<CAPTION>
1980 1990 1995 2000 2010
<S> <C> <C> <C> <C> <C>
California 10.50% 12.00% 12.30% 12.70% 13.50%
Southern California Area 3.65% 5.80% 5.90% 6.10% 6.30%
</TABLE>
Increasing Employment. The Southern California Area economy experienced
significant recessionary conditions during the 1990-1993 period. While the
Southern California Area lagged behind the rest of the country in entering the
recession, it also lagged in the economic recovery, in part due to the
cutbacks in the aerospace and defense industries. Employment growth recovered
in 1995. The passage of the North American Free Trade Agreement (NAFTA) in the
first quarter of 1995 and the General Agreement on Tariffs and Trade (GATT) in
the fourth quarter of 1994 provide optimism for new jobs and economic growth
for California. In 1995, the Southern California Area experienced a net
increase in employment with the addition of approximately 113,000 jobs,
representing an approximately 1.9% increase over the prior year. Of the total,
approximately 61,000 jobs (approximately 53.9% of the total) were created in
Los Angeles County. Employment in the Southern California Area is expected to
increase during 1996 through 1998, with an expected average increase of
approximately 125,000 to 135,000 jobs annually, representing an annual growth
rate of approximately 2.1%
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to 2.2%, nearly twice the expected national growth rate of 1.2%. The following
table shows the annual non-agricultural change in jobs for the Southern
California Area for the period from 1980 through 1995, and the expected change
in jobs for the period from 1996 through 1998.
ANNUAL NON-AGRICULTURAL EMPLOYMENT CHANGE
SOUTHERN CALIFORNIA AREA
1980-1998
ANNUAL CHANGE IN JOBS
Southern California Area
1980 -0-
1981 67,900
1982 (127,300)
1983 42,100
1984 222,700
1985 190,800
1986 188,500
1987 194,700
1988 189,300
1989 155,700
1990 90,600
1991 (173,000)
1992 (189,000)
1993 (102,500)
1994 29,200
1995 112,800
1996 124,448
1997 127,062
1998 135,907
Unemployment rate in the Southern California Area is moving downward from
its 1993 peak. For the U.S., the 1995 unemployment rate was approximately 6.2%
versus approximately 7.7% in California. By comparison, the 1993 unemployment
rates for the U.S. and California were approximately 6.9% and 9.2%,
respectively. While the unemployment rate in the Southern California Area has
been declining in the last couple of years, it probably will remain higher
than the unemployment rate for the nation as a whole. Within the Southern
California Area, the 1995 unemployment rates vary from a low of approximately
5.4% in Orange County to a high of approximately 8.7% in Riverside and San
Bernardino Counties. Los Angeles County's unemployment rate stood at
approximately 7.7%--the same as California's.
Diversification of Industries. Los Angeles and Orange Counties are widely
regarded as major centers for corporate and international business and the
growth of international trade through the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States, is
driving the growth of business in the surrounding area. While the southern
coastal Los Angeles County market, including the El Segundo and Long Beach
submarkets, has historically been, and continues to be, associated with the
aerospace and defense industries, the downsizing of those industries has
resulted in the region becoming more diversified, with major corporations in
emerging industries such as telecommunications and healthcare. The Company
believes this diversity, which is reflected in the Company's tenant base, has
strengthened these submarkets in which the Properties are located.
Foreign Trade. The growth in the region's employment is attributable in part
to the increase in the volume of trade in the region's ports and airports,
which at the end of 1995 accounted for over 12.0% of the total trading volume
in the United States and which has grown at an average annual rate of
approximately 11.4% during the ten-year period ended in 1994 compared to an
approximately 8.0% growth rate nationally during the same period. In addition,
during 1995 the trading volume among the region's ports and airports increased
another approximately 16.0%, further securing the region's position as the
nation's leader in international trade activity.
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The following table shows the growth in the Los Angeles Customs District's
share of U.S. Trade for the period from 1972 through 1995.
LOS ANGELES CUSTOMS DISTRICT SHARE OF U.S. TRADE
1972-1995
1972 6%
1973 6%
1974 7%
1975 6%
1976 7%
1977 7%
1978 7%
1979 7%
1980 8%
1981 8%
1982 8%
1983 9%
1984 9%
1985 11%
1986 12%
1987 12%
1988 12%
1989 12%
1990 12%
1991 12%
1992 12%
1993 12%
1994 13%
1995 12%
Growing Service Economy. Over the last 15 years the composition of
employment in the Southern California Area has shifted, generally mirroring
national patterns. The goods-producing sector (mining, construction and
manufacturing) has declined from an approximately 28.7% share in 1980 to
approximately 20.1% in 1995. Within this sector, manufacturing accounted for
the entire decline. Correspondingly, the services-producing sector
(transportation, communications and utilities; wholesale and retail trade;
finance, insurance and real estate services; and government) has expanded from
approximately 71.3% of total employment in 1980 to approximately 79.9% in
1995. The following table presents the total employment growth from 1980 to
1995 for various employment sectors in the Southern California Area.
TOTAL NON-AGRICULTURAL EMPLOYMENT GROWTH BY INDUSTRY
SOUTHERN CALIFORNIA AREA
1980-1995
Mining -10.2
Construction 16.9
Manufacturing -260
Transportation and Public Utilities 38.2
Wholesale and Retail Trade 238.5
F.I.R.E. 32.9
Services 697.6
Government 138.5
Goods Producing Employment -253.3
Service Producing Employment 1145.7
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In particular, the entertainment industry now accounts for over 200,000 jobs
in the region. The following table shows the growth of tourism and
entertainment-related jobs for the period from 1972 through 1995.
GROWTH OF TOURISM AND ENTERTAINMENT-RELATED JOBS
SOUTHERN CALIFORNIA AREA
1972-1995
<TABLE>
<CAPTION>
YEAR Thousands of Jobs % Change
<S> <C> <C>
1972 110 ---
1973 120 9.1%
1974 120 0.0%
1975 123 2.5%
1976 130 5.7%
1977 140 7.7%
1978 145 3.6%
1979 150 3.4%
1980 148 -1.3%
1981 165 11.5%
1982 167 1.2%
1983 175 4.8%
1984 180 2.9%
1985 190 5.6%
1986 200 5.3%
1987 218 9.0%
1988 225 3.2%
1989 242 7.6%
1990 254 5.0%
1991 262 3.1%
1992 245 -6.5%
1993 251 2.4%
1994 263 4.8%
1995 297 12.9%
</TABLE>
In addition, recent developments in the Southern California Area aerospace
industry, such as additional orders for the McDonnell Douglas C-17 military
cargo jets and the announcements of new orders for McDonnell Douglas airliners
by commercial carriers and the hiring of up to 700 employees by TRW
Corporation, should help to stabilize related employment. The following table
shows the number of jobs in the aerospace/high technology industries in the
Southern California Area for the period from 1988 through 1995.
AEROSPACE/HIGH TECHNOLOGY EMPLOYMENT TRENDS
SOUTHERN CALIFORNIA AREA
1988-1995
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aerospace/High Technology 274.2 265.6 253.3 228.6 199 168.7 146.7 135
</TABLE>
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Office Submarkets. Total office space in the Southern California Area
amounts to approximately 229.2 million square feet. The Southern California
Area is the second largest office market in the country after the New York
City Metro Area (with over approximately 800 million square feet). Los Angeles
County comprises two-thirds of the metro office inventory, roughly 156.1
million square feet; Orange County accounts for approximately 54.2 million
square feet.
Vacancy rates in the office space market in the Southern California Area are
trending downward from a high in 1991 and 1992 of approximately 19.7% to a
level at the end of 1996 of approximately 16.7%. At September 30, 1996, the
vacancy rate for the Southern California Office Properties was approximately
6.9%. The following table shows the U.S. and Southern California Area office
vacancy rates for the period from 1988 through 1996.
OFFICE MARKET VACANCY TRENDS
SOUTHERN CALIFORNIA AREA VERSUS U.S.
1988-1996
VACANCY RATE
SOUTHERN
CALIFORNIA
U.S. AREA
------- ----------
1988 18.2% 0.0%
1989 18.6% 17.2%
1990 19.5% 0.0%
1991 19.4% 19.8%
1992 18.7% 19.7%
1993 17.0% 19.2%
1994 15.5% 18.3%
1995 14.1% 17.8%
1996 12.8% 16.7%
Net absorption in the Southern California Area in 1996 amounted to
approximately 3.1 million square feet, up from last year's total of 2.2
million and 1994's total of 2.7 million and nearly double 1993's total of
approximately 1.7 million square feet. By comparison, absorption in the
Southern California Area ranged from approximately 11.1 million to 11.7
million square feet during the mid- to late 1980s. Annual increases in
employment during the 1980s fluctuated between approximately 160,000 and
200,000 jobs per year, as opposed
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to job losses during 1991 to 1994. The following table shows the annual
absorption of office space in the Southern California Area for each of the
years from 1986 through 1996.
ANNUAL NET ABSORPTION OF OFFICE SPACE
SOUTHERN CALIFORNIA AREA
1986-1996
1986 11,116
1987 11,684
1988 11,687
1989 11,260
1990 7,635
1991 5,005
1992 3,301
1993 1,689
1994 2,657
1995 2,153
1996 3,140
No Additional Supply of Office Space. During the last five years new
construction of office space in the Southern California Area has decreased
substantially. The following table shows the additions in square footage to
the Southern California office market for each of the last eight years.
ADDITIONS TO THE SOUTHERN CALIFORNIA AREA'S OFFICE MARKET*
<TABLE>
<CAPTION>
Year Square Feet
<S> <C>
1989 21,097
1990 11,033
1991 9,384
1992 3,188
1993 720
1994 0
1995 0
1996 0
</TABLE>
- --------
* Square feet shown in thousands. The above table represents additions to the
Southern California Area's office market net of office space removed from
service. In 1994 and 1995, the total square footage in the market decreased
by approximately 2.0 million square feet and approximately 1.3 million
square feet, respectively.
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The addition in the near-term of any new speculative office space to the
market remains unlikely as effective rents for multi-tenant properties are
currently well below the level needed to make new construction economically
feasible.
El Segundo Office Submarket. In the El Segundo submarket the Company owns
and operates three Office Properties at Kilroy LAX, and one stand alone two-
story office building. The aggregate rentable square feet of the Office
Properties in the El Segundo submarket represent approximately 22% of the
approximately 3.4 million rentable square feet of all Class A office
properties located in this submarket as of December 31, 1996.
The El Segundo submarket is an approximately 5.4 square mile area in the
southwestern coastal section of Los Angeles County. The El Segundo submarket
has the advantages of proximity to LAX without the disadvantages of being
located within the City of Los Angeles, as is the case with the submarket
located on the northeast side of LAX (the "LAX/Century Boulevard submarket").
The El Segundo submarket has a highly qualified computer and technology-based
work force. El Segundo's tax structure is as much as $6.00 per square foot per
annum lower than neighboring Los Angeles, principally attributable to lower
gross receipts and utility taxes. As a result, the El Segundo submarket has
historically enjoyed higher rental occupancy and tenant retention rates than
neighboring submarkets, such as LAX/Century Boulevard, Torrance and Carson.
The El Segundo submarket tenant base has broadened from its historic
concentration of aerospace industry tenants. A number of major corporations
have a significant presence in the El Segundo submarket, including Xerox
Corporation, Mattel, Inc., Chevron USA, Inc., AT&T, TRW Corporation and Hughes
Space & Communications.
Management believes that because of the high quality and strategic location
of the four Office Properties located in the El Segundo submarket, the El
Segundo Office Properties have had higher occupancy and tenant retention than
other properties within this submarket and have achieved higher rental rates.
The vacancy rate of Class A office buildings in the El Segundo submarket was
approximately 19.8% as of September 30, 1996 as compared to approximately 7%
for the Company's El Segundo Office Properties as a whole as of September 30,
1996. The average asking annual rental rate in the El Segundo submarket as of
September 30, 1996 was approximately $22.00 per square foot for Class A office
buildings compared to an average asking annual rental rate of $24.00 per
square foot for the Company's El Segundo Office Properties as of September 30,
1996. No new office buildings are under construction and, to the Company's
knowledge, no new construction is presently
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projected in the near future in the El Segundo submarket. The following tables
show the comparative vacancy rates of Class A office space in the El Segundo
submarket and Kilroy LAX, and the comparative mean asking rents of Class A
office space in the El Segundo submarket and Kilroy LAX, respectively.
HISTORICAL CLASS A OFFICE VACANCY
KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A
1990-1996 (1996 FIGURES AS OF SEPTEMBER 30)
<TABLE>
<CAPTION>
Year Kilroy Properties El Segundo Class A
<S> <C> <C>
1990 8.0% 8.3%
1991 6.9% 4.4%
1992 6.8% 8.5%
1993 5.5% 5.5%
1994 4.3% 19.5%
1995 4.3% 10.8%
1996 7.2% 19.8%
</TABLE>
HISTORICAL CLASS A OFFICE RENTS
KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A
1990-1996 (1996 FIGURES AS OF SEPTEMBER 30)
<TABLE>
<CAPTION>
Kilroy Properties El Segundo Class A
Mean Asking Rents Mean Asking Rents
<S> <C> <C>
1990 $23.30 $22.30
1991 $23.85 $22.65
1992 $23.91 $22.55
1993 $23.70 $21.30
1994 $23.40 $21.80
1995 $23.40 $21.10
1996 $23.40 $22.00
</TABLE>
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Through September 30, 1996, net absorption of Class A office space in the El
Segundo submarket was a negative 357,000 square feet, principally the result
of the 500,000 net rentable square feet of office space owned by an
unaffiliated third-party located at 200 North Sepulveda Boulevard and vacated
by Hughes Electronics early in 1996. During the same period, Hughes Space &
Communications extended leases for office space located at Kilroy LAX covering
over 107,000 net rentable square feet. Local brokers indicate that the office
space located at 200 North Sepulveda Boulevard is among the lower quality
Class A buildings in the El Segundo submarket and is not conducive to most
tenants seeking a better quality Class A product as offered at Kilroy LAX.
During the year ended 1996, rents at Kilroy LAX remained relatively unaffected
by the addition of the lower quality space to the vacant inventory.
Management believes that the submarket's expanding economy, the availability
of large blocks of office space and lower rental rates than those offered in
the nearby West Los Angeles office submarket should apply some short-term
upward pressure on rents for quality Class A office space by as much as 5.0%
within the next year. Rental rates at lower quality (non-Class A) buildings
are expected to be flat until vacancies drop to a level of at least 15%.
Long Beach Airport Area Office Submarket. Upon consummation of the Offering
and the Formation Transactions, the Company will own five Office Properties at
Kilroy Long Beach Phases I and II which represent approximately 42% of the
total rentable square feet of all Class A office properties located in the
Long Beach Airport area submarket.
The Long Beach Airport area submarket is strategically located near the
border of Los Angeles and Orange Counties, adjacent to the I-405 Freeway and
is in close proximity to several other freeways which serve the area. The
submarket is also near the Long Beach Airport which, through AmericaWest
Airlines, provides commercial airline access to all regions of the country.
The Long Beach Airport area submarket provides tenants with the ability to
draw a workforce from and to provide services to clients in both Los Angeles
and Orange Counties, making it an ideal location for companies operating in
both counties to consolidate their operations to a convenient single location.
In addition, portions of the submarket, including the Properties located at
Kilroy Airport Center Long Beach, are located within a favorable tax zone
which permits qualifying tenants to receive a variety of tax credits and
deductions not available in neighboring submarkets. The submarket also offers
tenants a secure environment within a first class office park with the
potential for substantial expansion, whereas the Long Beach central business
district submarket is hampered by traffic congestion and limited opportunities
for tenant expansion.
As of September 30, 1996, the vacancy rate of Class A office buildings in
the Long Beach Airport area submarket was approximately 16.6% as compared to
approximately 8.6% for the Company's Long Beach Office Properties. For the
year ended December 31, 1996, the submarket experienced net absorption of
approximately 20,000 rentable square feet of office space, as compared to
approximately 458,000 rentable square feet for the year ended December 31,
1995, of which 275,000 rentable square feet was attributable to two leases
entered into by McDonnell Douglas at the Long Beach Airport Business Park. As
of December 31, 1996 and 1995, the mean asking annual rental rate in the Long
Beach Airport area submarket was approximately $22.00 and $24.40,
respectively, per rentable square foot for Class A office buildings compared
to the mean asking annual rental rate at Kilroy Long Beach of $24.00 and
$24.30, respectively, per rentable square foot.
The decrease in the submarket's vacancy rate, the indications of improvement
in the submarket's aerospace industry and the present difficulty in locating
large blocks of contiguous space should apply some short-term upward pressure
on rents for Class A office space within the next two years. Available space
for technology companies is particularly difficult to find and buildings which
offer current telephone communication capabilities and electrical support are
more likely to benefit earlier.
Thousand Oaks Submarket. Upon consummation of the Offering and the Formation
Transactions, the Company will own a stand-alone three-story office building
located in Thousand Oaks, California. The City of Thousand Oaks has
approximately 112,600 residents, and is located 40 miles northwest of Los
Angeles in
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Ventura County, which is located along the coast immediately north of Los
Angeles County. As of December 31, 1995, Ventura County had a population of
approximately 720,000 persons. The County is home to companies in various
industries including high technology, pharmaceuticals and finance. As of
December 31, 1996, the vacancy rate of office space in the Ventura County
office submarket was approximately 13.6%. During the years ended December 31,
1996 and 1995, there was net absorption in the Ventura County office submarket
of approximately 79,000 and 157,000 rentable square feet of office space,
respectively. The average annual effective gross rent for office space in the
Ventura County office submarket as of December 31, 1996 was $17.76 per square
foot, an increase of 17.5% over 1995.
Industrial Submarkets.
As of December 31, 1996, available industrial space in the Southern
California Area totaled approximately 1.2 billion square feet. Vacancy rates
in the industrial space market in the Southern California Area have declined
from a high of approximately 13.8% in 1992 to approximately 7.6% at December
31, 1996. At September 30, 1996, the vacancy rate for the Industrial
Properties was approximately 6.3%. The following table shows the U.S. and
Southern California Area industrial vacancy rates for the period from 1991
through 1996.
INDUSTRIAL MARKET VACANCY TRENDS
U.S. AND THE SOUTHERN CALIFORNIA AREA
1991-1996
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
U.S. 7.9% 8.7% 8.3% 7.4% 6.9% 7.7%
Southern California Area 13.0% 13.8% 13.5% 12.6% 9.2% 7.6%
</TABLE>
Much of the existing space on the market in the Southern California Area is
considered to be functionally obsolete due to its age, services, and/or
configuration. As a result, the Southern California Area inventory for
industrial space is beginning to experience a modest growth in new
construction primarily of build-to-suit. In addition, speculative construction
also grew modestly in 1996 with approximately 7.0 million square feet of new
construction representing approximately 0.6% of the region's inventory.
However, this amount still is relatively modest when compared to 1989 levels
when new construction for the year reached approximately 34.0 million square
feet, and the existing building inventory was approximately 1.0 billion square
feet.
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El Segundo Industrial Submarket. The Company owns four Industrial Properties
located in the City of El Segundo, which contain an aggregate of approximately
390,000 rentable square feet. The El Segundo industrial submarket is part of
the South Bay industrial market which includes the cities of Torrance, Carson
and Long Beach. At September 30, 1996, the Company's El Segundo Industrial
Properties were 98.1% leased to three tenants. At December 31, 1996, the South
Bay industrial market contained approximately 185 million rentable square feet
of industrial space, with a vacancy rate of approximately 8.0%.
Orange County Industrial Submarket. Upon consummation of the Offering, the
Company will own seven Industrial Properties in Orange County, five of which
are in the City of Anaheim and two of which are in the City of Garden Grove.
The seven Industrial Properties located in Orange County contain an aggregate
of approximately 816,877 rentable square feet. At September 30, 1996, the
Company's Orange County Industrial Properties were 90.5% leased to 14 tenants.
At December 31, 1996, the Orange County industrial submarket contained
approximately 207 million rentable square feet, with a vacancy rate of
approximately 8.8%. The low current vacancy rate in the Southern California
industrial submarket as a whole is likely to put upward pressure on rents for
Southern California Class A buildings during 1996, with increases by as much
as 9% by the end of 1997.
SEATTLE MARKET
As of 1995, the population of the Seattle metropolitan statistical area
("Seattle MSA") was 2.2 million making it the 21st largest in the country. The
median per capita personal income in 1995 for the Seattle MSA was $28,329,
which is 22% above the national level.
The Seattle MSA has the 15th largest employment level in the nation. Since
1985, employment has grown at an average annual rate of 3.2%. Industries
concentrated in Seattle include aircraft manufacturing, aircraft parts,
computer and data processing and healthcare. The largest employers in the
greater Seattle area are Boeing Co., The University of Washington, Safeway
Inc., Microsoft Corp. and Group Health Cooperative of Puget Sound.
As of December 31, 1992, the vacancy rate for office space in the Seattle
MSA was 13.2%. Since then, this rate has steadily declined to a level of 12%
as of December 31, 1994 and 9.1% as of June 30, 1996. The Seattle MSA's
aggregate office space of 51.3 million square feet made it the 14th largest in
the nation and, as of June 30, 1996, it contained 35.2 million square feet of
Class A office space with a vacancy rate of 8.7%. Over the last three years
only 581,000 square feet of office space has been added to the Seattle MSA.
EXCLUDED PROPERTIES
The Company will hold options to acquire (i) parcels comprising an aggregate
of approximately 18 acres located at Calabasas Park Centre, in Calabasas,
California and (ii) a three-building office complex located on North Sepulveda
Boulevard in El Segundo, California at the respective purchase price for each
of the properties as discussed below. The office complex was developed and has
been leased and managed by the Kilroy Group and each option property is
currently owned by a partnership beneficially owned and controlled by John B.
Kilroy, Sr. and John B. Kilroy, Jr. The option for Calabasas Park Centre is
exercisable on or before the first anniversary of the Offering. The option for
the office complex located on North Sepulveda Boulevard in El Segundo is
exercisable on or before the seventh anniversary of the consummation of the
Offering. The purchase price for each of the properties will be payable in
cash, provided, however, that if the option for the office complex in El
Segundo is exercised after the first anniversary of the consummation of the
Offering, the purchase price will be payable in cash or Units at the election
of the seller. The Company intends to account for acquisitions of Excluded
Properties, if any, using the purchase accounting method.
In the event that the owner of a property receives an offer from a third
party for the master lease or purchase of such property, such owner may give
notice to the Company, which notice shall include the proposed purchase price,
leasing terms and/or other economic terms of the proposed transfer or lease of
such property. The Company shall then have 60 days to give notice of its
election to acquire or lease such property at the lower of
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the applicable option price or the proposed purchase price or lease terms. In
the event that the Company does not give such notice, the option to acquire
such property shall be suspended and the owner may proceed with the sale or
lease of such parcel pursuant to the terms of such offer, provided that the
economic terms may be up to 5% below that described in such notice; provided,
however, that with respect to any sale of the approximately 18 acres located
at Calabasas Park Centre discussed below, the Company shall have the right to
acquire at the option price the owners' rights and related monetary
obligations under the respective sales agreement. In the event the owners of
such property (i) have not entered into a letter of intent for the sale or
lease of such property within 180 days following the notice to the Company
referenced above, or (ii) have not completed the sale of the respective
property within 270 days following such notice, then the Company's option with
respect to such property shall be reinstated, up to the expiration date of the
option. The Company's options shall be subject to any arrangements entered
into by the Kilroy Group in connection with any financing, recapitalization or
leasing of the properties including, without limitation, any rights of the
lender(s) with respect to such properties with respect to a transfer pursuant
to the applicable option. In addition, the office complex will be managed by
the Operating Partnership pursuant to a management agreement on market terms.
Calabasas Park Centre. Kilroy Calabasas Associates, a limited partnership,
beneficially owned 49.0% by John B. Kilroy, Sr. and 51.0% by John B. Kilroy,
Jr., and controlled by both of them, owns Calabasas Park Centre, an
approximately 66-acre site (representing approximately 45 developable acres
net of acreage required for streets and contractually required open areas) in
the City of Calabasas located immediately west of the San Fernando Valley,
which is presently entitled for over one million rentable square feet of
office, retail and hotel development, and for which future entitlements are
expected to include residential development. The property has substantially
all significant infrastructure improvements in place. Kilroy Calabasas
Associates is actively marketing for sale various parcels totaling
approximately 27 acres for neighborhood retail, hotel and residential
development, of which approximately 1.7 acres is proposed to be dedicated to
the City of Calabasas for civic use. Because these 27 acres are not planned
for development for office or industrial use, management believes that such
parcels are not appropriate for inclusion in the Company's portfolio. Kilroy
Calabasas Associates has received offers with respect to certain parcels and
is pursuing such offers in the ordinary course of business, although there is
no assurance that any such transactions will be completed in the near term.
John B. Kilroy, Sr. and John B. Kilroy, Jr. each expect to spend an immaterial
amount of time in connection with any entitlement, marketing and sales of
parcels of Calabasas Park Centre. The remaining approximately 18 acres for
which the Company has been granted an option is entitled for over 500,000
rentable square feet for office, hotel and limited retail use. Because of the
uncertainty that such 18 acres will be used primarily as office space, this
property is not appropriate for inclusion in the Company's portfolio at this
time. In addition, both John B. Kilroy, Sr. and John B. Kilroy, Jr. have
agreed not to sell any of the parcels at Calabasas Park Centre to a real
estate investment trust with an existing portfolio of office or industrial
properties unless first offered to the Company on the same economic terms. See
"Policies with Respect to Certain Activities--Conflicts of Interest Policies--
Noncompetition Agreements."
Pursuant to the terms of the applicable option agreement, the purchase price
for the parcels located at Calabasas Park Centre will be equal to the total
accumulated costs, as of the date such option is exercised, in connection with
acquisition of rights with respect to, and the entitlement and development of
such property, including, without limitation, property taxes, predevelopment
and entitlement costs and fees, and related bond financing costs.
North Sepulveda Boulevard, El Segundo. The Kilroy Group developed and
operates a three-building office complex located on an over 3.5-acre parcel in
El Segundo, California, adjacent to LAX. The complex is comprised of an 11-
story office building (constructed in 1972), an eight-story office building
(constructed in 1962) and a seven-level parking structure with retail space on
the ground floor (constructed in 1972), encompassing an aggregate of
approximately 360,000 rentable square feet of office space and approximately
5,600 rentable square feet of retail space. The properties have convenient
access to LAX and the I-105 Freeway. As of September 30, 1996, the office
space was 100% leased to Hughes Space & Communications (of which approximately
60% is occupied) at an average annual triple net base rent per net rentable
square foot of $21.06,
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subject to a lease scheduled to expire on February 28, 1998. Management
believes that in light of the near-term expiration of the current lease and
the uncertainty of whether the current rental rate will approximate market
rental rates at the time of expiration, this office complex is not appropriate
for inclusion in the Company's portfolio at this time. The property is owned
by Kilroy Airport Imperial Co., a limited partnership, beneficially owned by
John B. Kilroy, Sr. and by John B. Kilroy, Jr. (who have an approximately
65.1% interest and an 18.2% interest, respectively), and controlled by both of
them. In addition, each of Patrice Bouzaid, Susan Hahn, Anne McCahon and Dana
Pantuso, the daughters of John B. Kilroy, Sr., have an approximately 4.2%
interest in the limited partnership. Each of Messrs. Kilroy expects to spend
an immaterial amount of time in connection with the management of the
property.
As of September 30, 1996, the office complex was encumbered by a first
mortgage loan having an outstanding principal balance of approximately $61.4
million. The loan bears interest at a rate of 9.63% per year and is scheduled
to mature on February 1, 2005. This property is also encumbered by a second
mortgage loan having an outstanding principal balance as of September 30, 1996
of $3.4 million. This loan bears interest at a rate of 9.75% per year and is
scheduled to mature on February 28, 1998.
Pursuant to the terms of the applicable Option Agreement, the purchase price
for the North Sepulveda Boulevard properties is equal to the sum of (i) the
then outstanding mortgage indebtedness secured by the respective properties,
plus (ii) $1, plus (iii) the aggregate amount of capital contributed by the
beneficial owners of the property, net of actual cash distributions
distributed in respect of such beneficial owners, during the period beginning
on the date of the consummation of the Offering and ending on the date of
exercise of the option, plus (iv) an annualized return of 8.0% on the amount
in excess of $5.0 million, if any, as determined pursuant to clause (iii)
preceding. The Company's option to purchase the North Sepulveda Boulevard
properties is subject to a right of first offer held by Hughes Space &
Communications.
Other Excluded Properties. In addition to the properties described above,
the Company will not acquire the following properties, each of which is owned
and controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr.: (i) an
approximately three-acre undeveloped parcel located in Tampa, Florida, which
management believes is not appropriate for inclusion in the Company's
portfolio because of the long-term uncertainty of demand for office and
industrial property in the local market; and (ii) an approximately one-half-
acre parcel located in Santa Ana, California which management believes is not
appropriate for inclusion in the Company's portfolio because the parcel is
subject to an easement for railroad use, making the property undesirable for
development for office or industrial use. Each of John B. Kilroy, Sr. and John
B. Kilroy, Jr. will spend an immaterial amount of time managing these
properties.
INSURANCE
Management believes that the Properties are covered by adequate
comprehensive liability, rental loss, and all-risk insurance, provided by
reputable companies, with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. There are,
however, certain types of losses which may be either uninsurable or not
economically insurable, such as losses due to floods, riots or acts of war.
Should an uninsured loss occur, the Company could lose both its invested
capital in and anticipated profits from the property.
UNINSURED LOSSES FROM SEISMIC ACTIVITY
The Properties are located in areas that are subject to seismic activity.
Although the Company expects to have earthquake insurance on certain of the
Properties, should any Property sustain damage as a result of an earthquake,
or should losses exceed the amount of such coverage, the Company may incur
uninsured losses or losses due to deductibles or co-payments on insured
losses.
All of the Properties were reviewed by an independent engineering
consultant. Each of the Office Properties located at Kilroy LAX, Kilroy Long
Beach and the SeaTac Office Center was reviewed as part of the respective
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office complex ("Office Complex") in which each is located and the following
data summarizes the findings with respect to each Office Complex taken as a
whole. The review of each of the Properties and Office Complexes included a
review of the probable loss associated with certain seismic activity for the
"as-is" building shell construction. The estimated property damage loss
associated with building shell construction and related business interruption
for the Office Complexes and each of the other Properties was estimated based
upon site-specific seismic ground motion intensities expected to occur at
least once during 50-year and 200-year time periods. For 50-year seismic
ground motion intensity, these property damage loss evaluations indicate that
none of the Office Complexes would be expected to incur property damage losses
in excess of approximately 10% of their respective estimated replacement cost
value ("RCV") and only two of the Industrial Properties would be expected to
incur property damage losses in excess of approximately 10% of the RCV. The
two Industrial Properties, located at 12691 Pala Drive, Garden Grove,
California and 1230 South Lewis Street, Anaheim, California, are expected to
incur 50-year property damage losses of approximately 13% and approximately
14%, respectively, of their RCVs. For seismic ground motion intensities
expected to occur at least once in a 200-year period, these property damage
loss evaluations indicate that only one of the Office Properties (including
the Office Complexes) would be expected to incur property damage losses in
excess of approximately 21% of its RCV. Specifically, the Office Property
located at 185 South Douglas Street, El Segundo, California is expected to
incur a 200-year property damage loss of approximately 40% of its estimated
RCV. With respect to the Industrial Properties, only four would be expected to
incur 200-year property damage losses in excess of 25% of their respective
RCVs. Specifically, Industrial Properties located at 12691 Pala Drive, Garden
Grove, California; 1230 South Lewis Street, Anaheim, California; 2260 E. El
Segundo Boulevard, El Segundo, California; and 2270 E. El Segundo Boulevard,
El Segundo, California, each would be expected to experience property damage
losses of approximately 40% of its respective estimated RCV during a 200-year
seismic disturbance.
The Company has insurance for loss in the event of damage to the Properties
from earthquake activity, which consists of primary loss insurance of $1.0
million and $10.0 million supplemental coverage, for losses in excess of
$11.0 million. Both the primary loss and supplemental coverage are subject to
deductibles equal to 25% of the insurable values for each location per
occurrence and, for the primary coverage, a minimum deductible of $250,000 (to
the extent that such amount is greater than 25% of the insurable values at
such location) for each location per occurrence. The Company's earthquake
insurance might not be sufficient to cover the cost of damage sustained in any
seismic event and is not replacement cost.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is "readily achievable."
Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The impact of application of the ADA to the
Company's properties, including the extent and timing of required renovations,
is uncertain. If required changes involve a greater amount of expenditures
than the Company currently anticipates or if the changes must be made on a
more accelerated schedule than the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial and, the presence of such substances may
adversely affect the owner's ability to rent or sell the
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property or to borrow using such property as collateral. In addition, the
presence of such substances may expose it to liability resulting from any
release or exposure of such substances. Persons who arrange for the disposal
or treatment of hazardous or toxic substances at another location may also be
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
In connection with the preparation of the Phase I environmental survey with
respect to Kilroy Long Beach Phase I, interviews of certain individuals
formerly employed at the site documented in a historical site assessment
survey revealed the site's possible prior use as a Nike missile storage
facility. Further investigation performed by the Company's environmental
consultants and by the Company did not reveal any additional information with
respect to such use of the site. The Company's investigation included whether
the site might have been used previously for the storage of missiles
containing nuclear warheads, and did not reveal any facts that would indicate
that the prior use of the site would result in a material risk of
environmental liability. Consequently, the Company does not believe that this
site constitutes a risk of a liability that would have a material adverse
effect on the Company's financial condition or results of operations taken as
a whole. In connection with the preparation of the Phase I environmental
survey with respect to the Industrial Property located at 12752-12822 Monarch
Street, soil sampling revealed trace elements of contamination with cleaning
solvents. However, based on the level of contamination noted in the
environmental survey, management does not believe that such contamination will
have a material adverse effect on the Company's financial condition or results
of operations, taken as a whole. None of the Company's environmental
assessments of the other Properties has revealed any environmental liability
that the Company believes would have a material adverse effect on the
Company's financial condition or results of operations taken as a whole, nor
is the Company aware of any such material environmental liability.
Nonetheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, there can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to stockholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The
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Company believes that the Properties are currently in material compliance with
all such regulatory requirements. However, the requirements will not be
changed or that new requirements will not be imposed which would require
significant unanticipated expenditures by the Company and could have an
adverse effect on the Company's Funds from Operations and expected
distributions.
The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Northridge Earthquake. As currently enacted, such
regulations do not apply to the Properties. There can be no assurance,
however, that similar regulations will not be adopted by other cities in which
the Properties are located or that new requirements will not be imposed which
would require significant unanticipated expenditures by the Company and could
have a material adverse effect on the Company's Funds from Operations and cash
available for distribution.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Risk Factors--Government
Regulations," "Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and Bylaws," "Partnership Agreement of Operating
Partnership," "Federal Income Tax Consequences" and "ERISA Considerations."
MANAGEMENT AND EMPLOYEES
The Operating Partnership has been structured as the entity through which
the Company will conduct substantially all of its operations. The Services
Company has been structured as an entity through which the Company will
conduct substantially all of its development activities and related
operations. The Company generally has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, but not of the Services Company.
The Company (primarily through the Operating Partnership and the Services
Company) initially will employ approximately 47 persons. The Company, the
Operating Partnership and the Services Company will employ substantially all
of the professional employees of KI that are currently engaged in asset
management and administration. The Operating Partnership will employ
approximately 18 on-site building employees who currently provide services for
the Properties. The Company, the Operating Partnership and the Services
Company believe that relations with their employees are good.
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance. In May 1994, KI permitted an uncontested foreclosure by the Bank of
America on a five-story office building located in El Segundo, California as
part of an overall renegotiation of KI's loans and lines of credit. In July
1993, KI sold Kilroy Long Beach Phase I to the mortgagee thereof, at a
purchase price slightly in excess of the outstanding balance of such mortgage.
KI continued to lease and manage such facility after such sale. In December
1994, the owner of Hidden River Corporate Park located in Tampa, Florida
permitted the uncontested foreclosure of the deeds of trust and certain other
property pledged as collateral to secure certain development loans related to
such property. KI developed the property, an approximately 210-acre office
park, and at the time of the foreclosure John B. Kilroy, Sr. and John B.
Kilroy, Jr. were limited partners in the company which owned the property.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The Company's policies with respect to the following activities have been
determined by the Board of Directors of the Company and may be amended or
revised from time to time at the discretion of the Board of Directors, without
a vote of the stockholders of the Company, if they determine in the future
that such a change is in the best interests of the Company and its
stockholders.
INVESTMENT POLICIES
Investment in Real Estate or Interests in Real Estate. The Company will
conduct all its investment activities through the purchase of interests in the
Operating Partnership until all Units have been redeemed or exchanged for
shares of Common Stock and the Operating Partnership ceases to exist. During
such period, the proceeds of all equity capital raised by the Company will be
contributed to the Operating Partnership in exchange for Units in the
Operating Partnership. The investment objectives of the Company are to achieve
stable cash flow available for distributions and, over time, to increase cash
flow and portfolio value by actively managing the Properties, developing
properties, acquiring additional properties that, either as acquired or after
value-added activities by the Company (such as improved management and leasing
services and renovations), will produce additional cash flows and by extending
its management, development and leasing business with third-parties. The
Company's policy is to develop and acquire properties primarily for generation
of current income and appreciation of long-term value.
The Company expects to pursue its investment objectives primarily through
the ownership of quality office, industrial and retail properties. The
Properties will initially consist of 14 Office Properties and 12 Industrial
Properties. The Company currently contemplates developing and acquiring
additional office buildings and industrial buildings primarily in Southern
California, although future investments could be made outside of such area or
in different property categories if the Board of Directors determines that
such acquisitions and developments would be desirable. The Company will not
have any limit on the amount or percentage of its assets invested in any
single property or group of related properties. The Board of Directors may
establish limitations as it deems appropriate from time to time. No
limitations have been set on the number of properties in which the Company
will seek to invest or on the concentration of investments in any one
geographic region.
The Company may develop, purchase or lease income-producing properties for
long-term investment and expand, improve or sell its properties, in whole or
in part, when circumstances warrant. The Company may also participate with
other entities in property ownership through joint ventures or other types of
co-ownership. Equity investments by the Company may be subject to existing or
future mortgage financing and other indebtedness which will have priority over
the equity interests of the Company.
As the sole general partner of the Operating Partnership, the Company will
also determine the investment policies of the Operating Partnership. Under the
Partnership Agreement, all future investments must be made through the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Management."
Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, the Company may, in its discretion, invest in
mortgages and other real estate interests consistent with the Company's
qualification as a REIT. The Company has not previously invested in mortgages
and does not presently intend to invest in mortgages or deeds of trust, but
may invest in participating or convertible mortgages if the Company concludes
that it may benefit from the cash flow or any appreciation in the value of the
subject property. Such mortgages are similar to equity participations.
Investments in real estate mortgages run the risk that one or more borrowers
may default under such mortgages and that the collateral securing such
mortgages may not be sufficient to enable the Company to recoup its full
investment.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership
limitations and gross income tests necessary for the Company to qualify and
maintain its status as a REIT, the Company may invest in securities of other
entities engaged in real estate
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activities or securities of other issuers. See "Federal Income Tax
Considerations--Taxation of the Company." Except for its investment in the
Services Company, the Company does not currently intend to invest in the
securities of other issuers except in connection with acquisitions of indirect
interests in properties (normally general or limited partnership interests in
special purpose partnerships owning properties) and in connection with the
acquisition of substantially all of the economic interest in a real estate-
related operating business where such investments would be consistent with the
Company's investment policies. Investment in these securities is also subject
to the Company's policy not to be treated as an investment company under the
Investment Company Act of 1940. The risks of investing in real estate-related
operating businesses include the risk that contracts with third parties may be
terminated by such third parties, not renewed upon expiration or renewed on
less favorable terms, and the risk that fee income will decrease as a result
of a decline in general real estate market conditions.
DISPOSITIONS
The Company has no current intention to cause the disposition of any of the
Properties, although it reserves the right to do so if the Board of Directors
determines that such action would be in the best interests of the Company. The
disposition of the Office Property located at 2260 E. Imperial Highway at
Kilroy LAX in El Segundo is subject to the approval of limited partners of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Certain Limited Partner Approval Rights."
FINANCING
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. Upon completion of the Offering and the
Formation Transactions, the debt to total market capitalization ratio (i.e.,
the total consolidated debt of the Company as a percentage of the market value
of the issued and outstanding shares of Common Stock and Units plus total
consolidated debt) of the Company will be approximately 22.4% (assuming an
initial public offering price of $22.50 per share of Common Stock). This ratio
will fluctuate with changes in the price of the Common Stock (and the issuance
of additional shares of Common Stock) and differs from the debt-to-book
capitalization ratio, which is based upon book value. As the debt-to-book
capitalization ratio may not reflect the current income potential of a
company's assets and operations, the Company believes that debt-to-total
market capitalization ratio provides a more appropriate indication of leverage
for a company whose assets are primarily income-producing real estate. The
total market capitalization of the Company, however, is more variable than
book value, and does not necessarily reflect the fair market value of the
underlying assets of the Company at all times. Although the Company will
consider factors other than total market capitalization in making decisions
regarding the incurrence of indebtedness (such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
such properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service),
there can be no assurance that the ratio of indebtedness to total market
capitalization (or to any other measure of asset value) will be consistent
with the expected level of distributions to the Company's stockholders.
The Board of Directors has adopted a policy of limiting the Company's
indebtedness to approximately 50% of its total market capitalization, but the
organizational documents of the Company do not contain any limitation on the
amount or percentage of indebtedness, funded or otherwise, that the Company
may incur. In addition, the Company may from time to time modify its debt
policy in light of then current economic conditions, relative costs of debt
and equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of its
Common Stock, growth and acquisition opportunities, the Company's continued
REIT qualification requirements and other presently unknown factors which may
arise in the future which, in the judgment of the Board of Directors, require
a revision in such policy. Accordingly, the Company may increase or decrease
its debt to market capitalization ratio beyond the limits described above.
To the extent that the Board of Directors decides to obtain additional
capital, the Company may raise such capital through additional equity
offerings (including offerings of senior or convertible securities and
preferred stock), sales of investments, bank and other institutional
borrowings, the issuance of debt securities (which may
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be convertible into or exchangeable for shares of Common Stock or be
accompanied by warrants to purchase shares of Common Stock) or retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT income), or a combination of these methods. In the event
that the Board of Directors determines to raise additional equity capital, the
Board has the authority, without stockholder approval, to issue additional
shares of Common Stock or other capital stock (including securities senior to
the Common Stock) of the Company in any manner, and on such terms and for such
consideration, it deems appropriate, including in exchange for property.
Existing stockholders would have no preemptive right to purchase shares issued
in any offering, and any such offering might cause a dilution of a
stockholder's investment in the Company. As long as the Operating Partnership
is in existence, the net proceeds of the sale of Common Stock by the Company
will be contributed to the Operating Partnership as a contribution to capital
in exchange for a number of Units in the Operating Partnership equal to the
number of shares of Common Stock sold by the Company. The Company presently
anticipates that any additional borrowings would be made by the Operating
Partnership, although the Company might incur indebtedness, the proceeds of
which would be re-loaned to the Operating Partnership on the same terms and
conditions as are applicable to the Company's borrowing of such funds. See
"Partnership Agreement of the Operating Partnership--Capital Contribution."
Borrowings may be unsecured or may be secured by any or all of the assets of
the Company, the Operating Partnership or any existing or new property-owning
partnership and may have full or limited recourse to all or any portion of the
assets of the Company, the Operating Partnership or any existing or new
property-owning partnership. Indebtedness incurred by the Company may be in
the form of bank borrowings, purchase money obligations to the sellers of the
properties, publicly or privately placed debt instruments or financing from
institutional investors or other lenders. There are no limits on the number or
amount of mortgages or interests which may be placed on any one property. In
addition, such indebtedness may be recourse to all or any part of the property
of the Company or may be limited to the particular property for which the
indebtedness relates. The proceeds from any borrowings by the Company may be
used for working capital, to refinance existing indebtedness, to finance the
acquisition, expansion or development of properties and for the payment of
distributions.
The Board of Directors also has the authority to cause the Operating
Partnership to issue additional Units in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for
property. See "Partnership Agreement of the Operating Partnership--Issuance of
Additional Units."
In the future, the Company may seek to extend, expand, reduce or renew the
Mortgage Loans, the proposed Credit Facility, or obtain new credit facilities
or lines of credit, subject to its general policy of debt capitalization.
Future mortgage loans, credit facilities and lines of credit may be used for
the purpose of making acquisitions or capital improvements, providing working
capital or meeting the taxable income distribution requirements for REITs
under the Code if the Company has taxable income without receipt of cash
sufficient to enable the Company to meet such distribution requirements.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts that the Board of Directors determines from
time to time to be adequate to meet normal contingencies in connection with
the operation of the Company's business and investments.
CONFLICT OF INTEREST POLICIES
Directors and officers of the Company may be subject to certain conflicts of
interests in fulfilling their responsibilities to the Company. The Company has
adopted certain policies designed to minimize potential conflicts of interest.
Terms of Transfers. The terms of the transfers of the Properties to the
Operating Partnership by the Continuing Investors, and the terms of each of
the option agreements relating to the Excluded Properties, were not determined
through arm's-length negotiation. Partners and affiliates of the Kilroy Group
who are directors
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and officers of the Company had a substantial economic interest in the
entities transferring the Properties and granting the options. Consequently,
such directors and officers may be subject to a conflict of interest with
respect to their obligations as management of the Company to enforce the terms
of the agreements relating to such transfers, including the indemnification
provisions thereof. However, the Independent Directors must approve any
transactions between the Company and members of the Kilroy Group including the
enforcement of the terms of the transfers. See "Risk Factors--Conflicts of
Interests" and "Management."
Sale or Refinancing of Properties. The sale of certain of the Properties may
cause adverse tax consequences to members of the Kilroy Group, as compared to
the effects on the Company. In addition, a significant reduction in debt
encumbering such Properties could cause adverse tax consequences to the
members of the Kilroy Group, as compared to the effects on the holders of
Units or shares of Common Stock. As a result, certain officers and directors
who are members of the Kilroy Group might not favor such a sale of the
Properties or a significant reduction in debt even though such sale or debt
reduction could be beneficial to the Company. The decision as to whether to
proceed with any such sale or debt reduction would be made by the Board of
Directors, subject to the obligation of the Operating Partnership to use its
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership. In addition, the
Partnership Agreement provides that if the limited partners own at least 5% of
the outstanding Units (including Units held by the Company), the Company shall
not, on behalf of the Operating Partnership, prior to the seventh anniversary
of the consummation of the Offering, sell the Office Property located at 2260
E. Imperial Highway, at Kilroy LAX, other than incident to a merger or sale of
substantially all of the Company's assets. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain Limited
Partner Approval Rights."
Noncompetition Agreements. John B. Kilroy, Sr. has agreed, during the term
of his service as a member of the Company's Board of Directors, not to conduct
property development, acquisition or management activities with respect to
office and industrial property in greater Southern California or in any other
market in which the Company owns, develops or manages property. John B.
Kilroy, Sr. will not be restricted, however, from continuing to own, manage
and lease certain other existing real estate investments owned by him
including, without limitation, certain properties described under "Business
and Properties--Excluded Properties."
John B. Kilroy, Jr. has agreed, during the term of his employment agreement
and for one year thereafter (unless terminated by the Company without "cause"
or he terminates his employment for "good reason" or following a "change of
control," as such terms are defined in his employment agreement), and for so
long as he is a member of the Company's Board of Directors, not to conduct
property development, acquisition, sale or management activities in any
market. Notwithstanding the foregoing, John B. Kilroy, Jr. will not be
restricted from continuing to own, manage, lease, transfer and exchange
certain existing real estate investments owned by him described under the
caption "Business and Properties--Excluded Properties" or owning interests in
real property not competitive with the Company. See "Management--Employment
Agreements."
In addition, with respect to the property located at Calabasas Park Centre,
each of Mr. John B. Kilroy, Sr. and Mr. John B. Kilroy, Jr. has agreed to be
limited solely to activities related to the marketing, entitlement and sale of
such properties. Such properties are being actively marketed for sale and are
expected to be sold in the ordinary course of business. Mr. John B. Kilroy,
Sr. and Mr. John B. Kilroy, Jr. each will spend an immaterial amount of time
in connection with the sale of such properties. In addition, each has agreed
not to sell such properties located at Calabasas Park Centre to a real estate
investment trust with an existing portfolio of office or industrial properties
unless first offered to the Company on the same economic terms.
License Agreement. The Continuing Investors who are members of the Kilroy
family will enter into a license agreement (the "License Agreement") pursuant
to which such Continuing Investors will grant to the Company the nonexclusive
right to use the Kilroy name in connection with the acquisition, development,
leasing and management of commercial properties. Pursuant to the terms of the
License Agreement, each of the Continuing Investors will retain the right to
use the Kilroy name for commercial endeavors, including in connection with
real estate transactions. Such activities will be subject to the limitations
set forth in the agreements described under the caption "--Noncompetition
Agreements."
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Policies Applicable to All Directors. Under the Company's Articles of
Incorporation and Maryland law, a contract or transaction between the Company
and any of its directors or between the Company and any other corporation,
firm or other entity in which any of its directors is a director, officer,
stockholder, member or partner or has a material financial interest is not
void or voidable solely because of such interest if (i) the contract or
transaction is approved, after disclosure of the interest, by the affirmative
vote of a majority of the disinterested directors, or by the affirmative vote
of a majority of the votes cast by disinterested stockholders, or (ii) the
contract or transaction is established to have been fair and reasonable to the
Company.
The Company's Articles of Incorporation and Bylaws provide that a majority
of the Company's Board of Directors must be Independent Directors. See
"Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws--Board of Directors."
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend (i) to invest in the securities of other issuers (other than the
Operating Partnership and the Services Company) for the purpose of exercising
control over such issuer, (ii) to underwrite securities of other issuers or
(iii) to trade actively in loans or other investments.
The Company has authority to offer shares of Common Stock or other
securities and to repurchase or otherwise reacquire shares of Common Stock or
any other securities in the open market or otherwise and may engage in such
activities in the future. The Company may, under certain circumstances,
purchase shares of Common Stock in the open market, if such purchases are
approved by the Board of Directors. The Board of Directors has no present
intention of causing the Company to repurchase any of the shares of Common
Stock, and any such action would be taken only in conformity with applicable
federal and state laws and the requirements for qualifying as a REIT under the
Code and the Treasury Regulations. Although it may do so in the future, except
in connection with the Formation Transactions, the Company has not issued
Common Stock or any other securities in exchange for property, nor has it
reacquired any of its Common Stock or any other securities. The Company
expects to issue shares of Common Stock to holders of Units upon exercise of
their exchange rights in the Partnership Agreement of the Operating
Partnership. The Company has not made loans to other entities or persons,
including its officers and directors. The Company may in the future make loans
to joint ventures in which it participates in order to meet working capital
needs. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers other than the Operating
Partnership, nor has the Company invested in the securities of other issuers
other than the Operating Partnership and the Services Company for the purposes
of exercising control, and does not intend to do so.
At all times, the Company intends to make investments in such a manner as to
be consistent with the requirements of the Code for the Company to qualify as
a REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board of Directors of the Company determines that
it is no longer in the best interests of the Company to qualify as a REIT and
such determination is approved by the affirmative vote of holders owning at
least two-thirds of the shares of the Company's capital stock outstanding and
entitled to vote thereon.
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THE FINANCING
THE MORTGAGE LOANS
The Company, on behalf of the Operating Partnership, has obtained written
commitments for mortgage loans totaling $96.0 million (the "Mortgage Loans"),
the closing of which is a condition to the consummation of the Offering. The
proceeds of the Mortgage Loans principally will be used to repay existing
indebtedness on the Properties. The Mortgage Loans consist of the $84.0
Million Loan and the $12.0 million SeaTac Loan.
The $84.0 Million Loan will require monthly principal and interest payments
based on a fixed rate equal to the sum of the interest rate for U.S. Treasury
Securities maturing 8 years from the date of the closing of the Credit
Facility plus 1.75%, and will amortize over a 25-year period, maturing in
2005. The $84.0 Million Loan will be secured by cross-collateralized and
cross-defaulted mortgages on certain of the Properties. The $84.0 Million Loan
may not be repaid during the first four years of the loan term. Thereafter the
loan may be repaid in whole or in part, subject to a prepayment premium. The
$84.0 Million Loan will require reserves for current taxes and insurance,
capital expenditures and tenant improvements and leasing commissions. Upon
consummation of the Offering, an improvements and repairs reserve of
approximately $ will be established, representing 125% of the estimated
costs of improvements requested by the lenders, which reserve will be released
upon completion of the improvements; a replacement reserve of $ will be
established, which thereafter will be funded monthly at an annual rate of $.15
per square foot of the collateral ($.20 per square foot for one approximately
81,200 square foot Office Property); and a reserve of $ will be established
to make certain earthquake-related structural modifications. A tenant
improvement and leasing commission reserve will commence in January 1998; the
Company presently anticipates that the average balance of this reserve will be
approximately $1.0 million in each of the first four years of the reserve. In
addition, the $84.0 Million Loan will include customary representations and
warranties and will require the borrower to comply with the following
affirmative and negative covenants: limitations on the incurrence of
additional indebtedness; limitations on advances to and investments in others
(including the guaranty of any obligations of another person); limitations on
the transfer or sale of assets including the collateral; limitations on merger
and acquisition transactions; maintenance of minimum levels of insurance;
maintenance of collateral; and other customary covenants. The Company
anticipates that the $84.0 Million Loan will be incurred by a limited
partnership which is wholly-owned by the Company and the Operating Partnership
and which will be structured to be a "bankruptcy remote" financing vehicle.
The Properties to be used as collateral for the $84.0 Million Loan will be
transferred to that limited partnership. Subject to certain limited
exceptions, the $84.0 Million Loan will be non-recourse to the Company.
The SeaTac Loan will bear interest at a variable rate equal to the 30-day
London interbank overnight rate ("LIBOR") plus 3.0%, and matures in July 1997.
The SeaTac Loan will require monthly payments of interest. The SeaTac Loan
will be secured by the ground leasehold interest in the SeaTac Office Center.
Principal and interest under the SeaTac Loan will be full recourse to the
Company. SeaTac's occupancy rate was approximately 42.1% at September 30,
1996. The Company excluded the SeaTac Office Center from the collateral pool
for the $84.0 Million Loan to provide flexibility to incur additional debt
secured by the SeaTac Office Center if the Company leases additional space at
this Property.
THE CREDIT FACILITY
The Company, on behalf of the Operating Partnership is currently negotiating
a two-year, $100.0 million revolving credit facility (the "Credit Facility")
which the Company and the Operating Partnership expect to enter into shortly
after the Offering. There can be no assurance that the Company and the
Operating Partnership will enter into the Credit Facility. The Credit Facility
is expected to be used primarily to finance acquisitions of additional
properties. Payment of principal and interest is expected to be secured by
certain Properties other than Properties securing the Mortgage Loans. In
addition, borrowings under the Credit Facility are expected to be recourse
obligations to the Operating Partnership and the Company.
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Availability under the Credit Facility would be subject to the value of the
underlying collateral securing it. The Company expects that, initially,
approximately $50.0 million of the total amount of the Credit Facility would
be available to the Operating Partnership. The Operating Partnership's ability
to borrow under the Credit Facility is expected to be subject to its
compliance with the following covenants on an ongoing basis: a ratio of Net
Operating Cash Flow (as defined in the Credit Facility) to Debt Service (as
defined in the Credit Facility) of 1.75-to-1; a loan to collateral value ratio
of not more than 60.0%; a ratio of debt to Tangible Fair Market Value (as
defined in the Credit Facility) of real property assets owned by the Operating
Partnership of not more than 50%; a ratio of earnings before income taxes,
depreciation and amortization to Debt Service of at least 2-to-1; limitations
on distributions to 95% of funds from operations; Consolidated Tangible Net
Worth (as defined in the Credit Facility) of the Operating Partnership of not
less than 90.0% of the Operating Partnership's Consolidated Tangible Net Worth
as of the closing date for the Credit Facility; maintenance of the Company's
status as a REIT for federal income tax purposes and compliance with all
applicable regulations in connection with such status; maintenance of
collateral; a limit on total development projects to 20% of total assets;
limitations on the incurrence of additional indebtedness; and other customary
covenants. The Credit Facility is expected to require monthly interest only
(LIBOR based) payments on the total borrowings outstanding under the Credit
Facility. The Company and the Operating Partnership anticipate that the Credit
Facility will be either extended, renewed or refinanced through the issuance
of debt or equity securities at its maturity. The Company and the Operating
Partnership will be responsible for payment of the lender's fees and expenses
associated with providing the Credit Facility.
If the initial public offering price for the Common Stock is less than the
assumed offering price of $22.50 per share, the Company expects to make up any
shortfall between the aggregate net proceeds of the Offering and the Mortgage
Loans, and the intended uses thereof, by reducing its working capital cash
reserves. See "Use of Proceeds."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Offering, the Board of Directors will consist of
five members, including a majority of directors who are Independent Directors.
Directors of the Company will be divided into three classes serving staggered
three-year terms (except initial terms expiring in 1998 and 1999) with
directors serving until the election and qualification of their successors.
The first annual meeting of stockholders of the Company after the Offering
will be held in 1998. Each of the proposed directors named below has been
nominated for election upon the consummation of the Offering and has consented
to serve. See "Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and Bylaws--Board of Directors." Subject to rights
pursuant to any employment agreements, officers of the Company serve at the
pleasure of the Board of Directors.
The following table sets forth certain information with respect to the
directors, proposed directors and executive officers of the Company
immediately following the completion of the Formation Transactions and
consummation of the Offering:
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------
<C> <C> <S> <C>
John B. Kilroy, Sr....... 74 Chairman of the Board of Directors 1999
John B. Kilroy, Jr....... 48 President, Chief Executive Officer and 2000
Director
Jeffrey C. Hawken........ 37 Executive Vice President and Chief
Operating Officer
Campbell Hugh Greenup.... 43 General Counsel
Richard E. Moran Jr...... 45 Executive Vice President, Chief
Financial Officer and Secretary
A. Christian Krogh....... 48 Vice President, Asset Management
William P. Dickey........ 53 Director Nominee 1998
Matthew J. Hart.......... 44 Director Nominee 1999
Dale F. Kinsella......... 48 Director Nominee 2000
</TABLE>
The following is a biographical summary of the experience of the directors,
proposed directors and executive officers of the Company:
JOHN B. KILROY, SR., age 74, founded, in 1947, the businesses which were
incorporated in 1952 as the entity today known as Kilroy Industries. Mr.
Kilroy has served as Kilroy Industries' President from its incorporation
until 1981, and as its Chairman of its Board of Directors since 1954. Mr.
Kilroy is a nationally recognized member of the real estate community,
providing the Company with strategic leadership and a broadly-based network
of relationships. Mr. Kilroy is a trustee of the Independent Colleges of
Southern California, serves on the Board of Directors of Pepperdine
University, and is a past trustee of Harvey Mudd College.
JOHN B. KILROY, JR., age 48, has been responsible for the overall
management of all facets of KI and its various affiliates since 1981. Mr.
Kilroy has been involved in all aspects of commercial and industrial real
estate acquisition, sales, development, construction, leasing, financing,
and entitlement since 1967 and has worked for KI for over twenty-five
years. Mr. Kilroy became President of KI in 1981 and was elected Chief
Executive Officer in 1991. Prior to that time he held positions as
Executive Vice President and Vice President--Leasing & Marketing. He is a
member of the National Realty Committee and the Urban Land Institute, and
is a trustee of the El Segundo Employers Association, and a past trustee of
Viewpoint School, the Jefferson Center For Character Education and the
National Fitness Foundation.
JEFFREY C. HAWKEN, age 37, has been responsible for the management and
operations of KI's real estate portfolio. Mr. Hawken's activities have
included leasing, asset and facility management, with an emphasis on
quality of service, operational cost reduction and code compliance. He has
also served on KI's acquisitions and executive committees. Mr. Hawken
joined KI in 1980, as a Senior Financial Analyst, and has been involved in
property and asset management with the Company since May 1983. Since that
time,
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he attained the designation of Real Property Administrator (RPA) through
the Building Owner's and Manager's Association (BOMA).
CAMPBELL HUGH GREENUP, age 43, has over 14 years of experience in the
real estate industry.Mr. Greenup joined KI in 1986 as Assistant General
Counsel and had responsibility for a significant portion of the Company's
legal affairs, including transaction negotiation and documentation. In
addition, he has been responsible for all the Company's development
activities, including land acquisition and entitlement, project
development, leasing and disposition. In this role, he was also President
of Kilroy Technologies Company, LLC, the Kilroy services entity, and
directed all of the Company's fee development activities. Mr. Greenup is a
member of the American Bar Association, the Urban Land Institute-IOPC Gold
Committee, the National Association of Corporate Real Estate Executives and
the Los Angeles County Beach Advisory Commission.
RICHARD E. MORAN JR., age 45, was Executive Vice President, Chief
Financial Officer and Secretary of the Irvine Apartment Communities, Inc.
from 1993 to 1996. Mr. Moran was affiliated with The Irvine Company from
1977 to 1993. He served as Treasurer of The Irvine Company from 1983 to
1993, was named Vice President in 1984, Senior Vice President in 1990, and
Executive Vice President Corporate Finance in 1992. Previously, he was a
certified public accountant with Coopers & Lybrand. He is a member of the
Urban Land Institute. Mr. Moran received his Master of Business
Administration degree from the Harvard University Graduate School of
Business Administration and his undergraduate degree from Boston College.
A. CHRISTIAN KROGH, age 48, has over 20 years of experience in the real
estate industry. Mr. Krogh joined KI in 1990 as Treasurer and was
responsible for all cash flow forecasting, preparing variance reports,
monitoring short-term cash needs and investments, interfacing with lenders,
performing credit analysis for prospective tenants, interfacing with asset
management on the day-to-day activities of the Company, as well as other
traditional treasurer's functions. Mr. Krogh also was responsible for
overseeing KI's personnel functions, obtaining and monitoring property
insurance and coordinating employee benefit programs. In the 15 years prior
to joining KI Mr. Krogh held similar positions with two other real estate
companies.
WILLIAM P. DICKEY, age 53, has agreed to serve as a member of the Board
of Directors of the Company commencing upon the consummation of the
Offering. Mr. Dickey has been the president of The Dermot Company, Inc., a
real estate investment and management company since 1990. From 1986 to
1990,Mr. Dickey was a managing director of real estate for CS First Boston
Corporation. Prior to 1986, Mr. Dickey was a partner at the New York law
firm of Cravath, Swaine & Moore, where he started as an associate beginning
in 1974. Mr. Dickey is a member of the board of directors of Horizon Group,
Inc., a REIT which invests primarily in factory outlet centers, Price
Enterprises, Inc., a REIT which invests primarily in shopping centers, and
Mezzanine Capital Property Investors, Inc., a REIT which invests primarily
in the East Coast office/mixed use space, and is a member of the board of
trustees of Retail Property Trust, a REIT which invests primarily in
regional malls. Mr. Dickey received his undergraduate degree from the
United States Air Force Academy, his Masters Degree from Georgetown
University and his Juris Doctor Degree from Columbia Law School.
MATTHEW J. HART, age 44, has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering.
Mr. Hart joined Hilton Hotels Corporation in 1996 and is its Executive Vice
President and Chief Financial Officer. Mr. Hart is primarily responsible
for Hilton's corporate finance and development activities. Prior to joining
Hilton, Mr. Hart was Senior Vice President and Treasurer of The Walt Disney
Company from 1995 to 1996. From 1981 to 1995, Mr. Hart was employed by Host
Marriott Corporation (formerly known as Marriott Corporation), most
recently as its Executive Vice President and Chief Financial Officer. He
was responsible for the company's corporate and project financing
activities, as well as the corporate control and the corporate tax
functions. Before joining Marriott Corporation, Mr. Hart had been a lending
officer with Bankers Trust Company in New York. Mr. Hart is a member of the
board of directors of First Washington Realty Trust, Inc., a REIT which
invests
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primarily in retail properties. Mr. Hart received his undergraduate degree
from Vanderbilt University and a Masters of Business Administration from
Columbia University.
DALE F. KINSELLA, age 48, has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering.
For the past eight years, Mr. Kinsella has been a partner with the Los
Angeles law firm of Kinsella, Boesch, Fujikawa & Towle. Mr. Kinsella
received his undergraduate degree from the University of Santa Barbara and
his Juris Doctor Degree from the University of California at Los Angeles.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the consummation of the Offering, the
Board of Directors will establish an audit committee (the "Audit Committee").
The Audit Committee will be established to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the scope and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Audit Committee will initially consist of two or more
Independent Directors.
Independent Committee. Promptly following the consummation of the Offering,
the Board of Directors will establish an independent committee (the
"Independent Committee") consisting solely of Independent Directors. The
Independent Committee will be established to approve transactions between the
Company and John B. Kilroy, Sr. or John B. Kilroy, Jr. and their respective
affiliates.
Executive Committee. Promptly following the consummation of the Offering,
the Board of Directors will establish an executive committee (the "Executive
Committee"). Subject to the Company's conflict of interest policies, the
Executive Committee will be granted the authority to acquire and dispose of
real property and the power to authorize, on behalf of the full Board of
Directors, the execution of certain contracts and agreements, including those
related to the borrowing of money by the Company (and, consistent with the
Partnership Agreement of the Operating Partnership, to cause the Operating
Partnership to take such actions.) The Executive Committee will include John
B. Kilroy, Sr., John B. Kilroy, Jr. and at least one Independent Director.
Executive Compensation Committee. Promptly following the consummation of the
Offering, the Board of Directors will establish an executive compensation
committee (the "Executive Compensation Committee") to establish remuneration
levels for executive officers of the Company and implementation of the
Company's Stock Incentive Plan (as defined) and any other incentive programs.
The Executive Compensation Committee will initially consist of two or more
Independent Directors.
The membership of the committees of the Board of Directors will be
established after the completion of the Formation Transactions and the
Offering. The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors annual compensation of
$12,000 for their services. In addition, Independent Directors will receive
$1,000 for each committee meeting chaired by such director. Independent
Directors also will be reimbursed for reasonable expenses incurred to attend
director and committee meetings. Officers of the Company who are directors
will not be paid any director's fees. Each Independent Director will receive,
upon initial election to the Board of Directors, an option to purchase 10,000
shares of Common Stock which will vest pro rata in annual installments over a
three-year period. Each Independent Director also will receive an option to
purchase 1,000 shares of Common Stock on each anniversary of his election to
the Board of Directors, which options also will vest pro rata in annual
installments over a three-year period. All stock options will be issued
pursuant to the Stock Incentive Plan at an exercise price equal to or greater
than the fair market value of the Common Stock at the date of grant.
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EXECUTIVE COMPENSATION
Since the Company has no operating history, meaningful individual
compensation information for executive officers is not available for prior
periods. The compensation table below sets forth the annual base salary rates
and other compensation expected to be paid in 1997 to the Chief Executive
Officer and the Company's other executive officers who are expected to have a
total annual salary and bonus in excess of $100,000. The Company has entered
into employment agreements with certain of its executive officers as described
below. See "--Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL ------------------- STOCK UNDERLYING
POSITION YEAR(1) SALARY BONUS AWARD(S) OPTIONS/SARS(2)
------------------ ------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Jr. .... 1997 $200,000 $ (3) -- 250,000
Director, President and
Chief Executive Officer
Jeffrey C. Hawken....... 1997 175,000 (3) -- 150,000
Executive Vice
President and
Chief Operating Officer
Richard E. Moran Jr. ... 1997 200,000 (3) $1,349,400(4) 150,000
Executive Vice
President,
Chief Financial Officer
and Secretary
Campbell Hugh Greenup... 1997 165,000 (3) -- 100,000
General Counsel
</TABLE>
- --------
(1) Amounts given are annualized projections for the year ending December 31,
1997.
(2) Options to purchase an aggregate of 900,000 shares of Common Stock will be
granted to directors, executive officers and other employees of the
Company upon consummation of the Offering. Such options will vest pro rata
in annual installments over a three-year-period. An additional 500,000
shares of Common Stock will be reserved for issuance under the Stock
Incentive Plan. See "--Stock Incentive Plan."
(3) Under the terms of each executive officer's respective employment
agreement, each executive officer is entitled to receive an annual bonus
in an amount up to 100% of such executive's base salary. The amount of any
such bonus will be determined by the Executive Compensation Committee of
the Board of Directors. In addition, Mr. Moran will receive a bonus of
$200,000 if the Offering is consummated on or before June 30, 1997. Mr.
Moran's bonus payable upon consummation of the Offering is an obligation
of the principals of KI. See "--Employment Agreements."
(4) Pursuant to Mr. Moran's employment agreement, concurrent with the
consummation of the Offering he will receive 60,000 restricted shares of
Common Stock under the Stock Incentive Plan with an aggregate value of
$1.35 million (assuming a per share value equal to the assumed initial
public offering price of $22.50 per share) against the payment of $600
therefor. The restricted stock will vest in equal annual installments pro
rata over a three-year period, subject to certain acceleration provisions.
See "Management--Employment Agreements." Mr. Moran will be entitled to
receive distributions in respect of such restricted stock.
EMPLOYMENT AGREEMENTS
Each of John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr. and
Campbell Hugh Greenup will enter into an employment agreement with the Company
which will be effective as of the consummation of the Offering. The employment
agreements will have an initial term of three years and will be subject to
automatic one-year extensions following the expiration of the initial term.
The employment agreements provide for annual base compensation in the amounts
set forth in the Executive Compensation table with the amount of any bonus to
be determined by the Executive Compensation Committee, up to 100% of the
applicable annual base compensation. Under the terms of his employment
agreement, Mr. Moran will receive a bonus of $200,000 if the Offering is
consummated on or before June 30, 1997. Mr. Moran's bonus payable upon
consummation of the Offering is an obligation of the principals of KI.
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The employment agreements entitle the executives to participate in the
Company's Stock Incentive Plan (each executive will initially be allocated the
number of stock options and/or restricted stock set forth in the Executive
Compensation table) and to receive certain other insurance benefits. The
employment agreements also provide that in the event of death, the executive's
estate will receive monthly payments of the executive's annual salary, plus
one-twelfth of any bonus to be received, for a period equal to the lesser of
the term remaining under the employment agreement or one year. In addition, in
the event of a termination by the Company without "cause," a termination of
employment resulting from "disability," a termination by the executive for
"good reason," or, in the case of Mr. Kilroy and Mr. Moran, a termination
pursuant to a "change of control" of the Company (as such terms are defined in
the respective employment agreements), the terminated executive will be
entitled to (i) severance (the "Severance Amount") and (ii) continued receipt
of certain benefits including medical insurance, life and disability insurance
and the receipt of other customary benefits established by the Company for its
executive employees for two years following the date of termination
(collectively, the "Severance Benefits"). The Severance Amount is equal to the
sum of two times the executive's average annual base compensation and two
times the highest annual bonus received during the preceding 36-month period.
"Disability" means a physical or mental disability or infirmity which, in the
opinion of a physician selected by the Board of Directors, renders the
executive unable to perform his duties for six consecutive months or for
shorter periods aggregating 180 business days in any twelve-month period (but
only to the extent that such definition does not violate the Americans with
Disabilities Act). "Cause," as defined under the terms of the respective
employment agreements, means (a) the executive's conviction for commission of
a felony or a crime involving moral turpitude, (b) the executive's willful
commission of any act of theft, embezzlement or misappropriation against the
Company; or (c) the executive's willful and continued failure to substantially
perform the executive's duties (other than such failure resulting from the
executive's incapacity due to physical or mental illness), which is not
remedied within a reasonable time. "Good reason" means (a) the Company's
material breach of any of its obligations under the employment agreement
(subject to certain notice and cure provisions) or (b) any removal of the
executive from one or more of the appointed offices or any material alteration
or diminution in the executive's authority, duties or responsibilities,
without "cause" and without the executive's prior written consent. "Change of
Control" means (a) the event by which the individuals constituting the board
of directors as of the date of the Company's initial public offering of Common
Stock cease for any reason to constitute at least a majority of the Company's
board of directors; provided, however, that if the election, or nomination for
election by the Company's stockholders of any new director was approved by a
vote of at least a majority of the members of the original board of directors,
such new director shall be considered a member of the original board of
directors, (b) an acquisition of any voting securities of the Company by any
"person" (as the term "person" is used for purposes of Section 13(d) or
Section 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) immediately after which such person has "beneficial
ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of the combined voting power of the Company's then
outstanding voting securities unless such acquisition was approved by a vote
of at least one more than a majority of the original board of directors; or
(c) approval by the stockholders of the Company of (i) a merger,
consolidation, share exchange or reorganization involving the Company, unless
the stockholders of the Company, immediately before such merger,
consolidation, share exchange or reorganization, own, directly or indirectly
immediately following such merger, consolidation, share exchange or
reorganization, at least 80% of the combined voting power of the outstanding
voting securities of the corporation that is the successor in such merger,
consolidation, share exchange or reorganization in substantially the same
proportion as their ownership of the voting securities immediately before such
merger, consolidation, share exchange or reorganization; (ii) a complete
liquidation or dissolution of the Company; or (iii) an agreement for the sale
or other disposition of all or substantially all of the assets of the Company.
STOCK INCENTIVE PLAN
The Company has established the Stock Incentive Plan to enable executive
officers, key employees and directors of the Company, the Operating
Partnership and the Services Company to participate in the ownership of the
Company. The Stock Incentive Plan is designed to attract and retain executive
officers, other key employees and directors of the Company, the Operating
Partnership and the Services Company and to provide incentives to such persons
to maximize the Company's cash flow available for distribution. The Stock
Incentive
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Plan provides for the award to such executive officers and employees of the
Company, the Operating Partnership and the Services Company (subject to the
Ownership Limit, or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors) of a broad
variety of stock-based compensation alternatives such as nonqualified stock
options, incentive stock options, restricted stock and stock appreciation
rights, and provides for the grant to Independent Directors and directors of
the Services Company (subject to the Ownership Limit, or such other limit as
provided in the Company's Articles of Incorporation or as otherwise permitted
by the Board of Directors) of nonqualified stock options.
Stock Options. Promptly after the closing of the Offering, the Company
expects to issue to certain officers, directors and key employees of the
Company, the Operating Partnership and the Services Company options to
purchase, subject to the Ownership Limit, or such other limit as provided in
the Company's Articles of Incorporation or as otherwise permitted by the Board
of Directors, 900,000 shares of Common Stock pursuant to the Stock Incentive
Plan. The term of each of such option will be ten years from the date of
grant. Each such option will vest 33 1/3% per year over three years and is
exercisable at a price per share equal to the initial public offering price
per share of Common Stock in the Offering. The following table below sets
forth the expected allocation of the options to such persons.
<TABLE>
<CAPTION>
NAME OPTIONS
---- -------
<S> <C>
John B. Kilroy, Sr................................................. 15,000
John B. Kilroy, Jr................................................. 250,000
Jeffrey C. Hawken.................................................. 150,000
Richard E. Moran Jr. .............................................. 150,000
Campbell Hugh Greenup.............................................. 100,000
Independent Directors (as a group)................................. 30,000
Other employees (as a group)....................................... 205,000
</TABLE>
An additional 500,000 shares of Common Stock will be reserved for issuance
under the Stock Incentive Plan. There is no limit on the number of awards that
may be granted to any one individual so long as the (i) aggregate fair market
value (determined at the time of grant) of shares with respect to which an
incentive stock option is first exercisable by an optionee during any calendar
year cannot exceed $100,000, (ii) the grant does not violate the Ownership
Limit or cause the Company to fail to qualify as a REIT for federal income tax
purposes and (iii) the maximum number of shares of Common Stock for which
stock options and stock appreciation rights may be issued during any fiscal
year to any participant in the Stock Incentive Plan shall not exceed 300,000.
See "Description of Capital Stock--Restrictions on Ownership and Transfer." To
the extent permitted by the foregoing, the option grants shown in the above
table will include incentive stock options.
Restricted Stock. Restricted stock may be sold to participants at various
prices (but not below par value) and made subject to such restrictions as may
be determined by the Executive Compensation Committee. Restricted stock,
typically, may be repurchased by the Company at the original purchase price if
the conditions or restrictions are not met. In general, restricted stock may
not be sold, or otherwise transferred or hypothecated, until restrictions are
removed or expire. Purchasers of restricted stock will have voting rights and
will receive distributions prior to the time when the restrictions lapse. The
Company will issue 60,000 restricted shares of Common Stock reserved for
issuance under the Stock Incentive Plan, to Richard E. Moran Jr. upon
consummation of the Offering.
Administration of the Stock Incentive Plan. The Stock Incentive Plan is
administered by the Board of Directors and/or the Executive Compensation
Committee. No person is eligible to serve on the Executive Compensation
Committee unless such person is then an Independent Director. The Committee
has complete discretion to determine (subject to (a) the Ownership Limit
contained in the Articles of Incorporation of the Company and (b) a limit
against granting options or stock appreciation rights for more than 300,000
shares to any person in any fiscal year) which eligible individuals are to
receive option or other stock grants, the number of shares subject to each
such grant, the status of any granted option as either an incentive option or
a non-qualified stock option under the federal tax laws, the exercise schedule
to be in effect for the grant, the maximum term for which any granted option
is to remain outstanding and subject to the specific terms of the Stock
Incentive Plan, any other terms of the grant.
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Eligibility. All employees of the Company may, at the discretion of the
Executive Compensation Committee, be granted incentive and non-qualified stock
options to purchase shares of Common Stock at any exercise price not less than
100% of the fair market value of such shares on the grant date. Directors of
the Company, employees of the Operating Partnership, employees and directors
of the Services Company, consultants and other persons who are not regular
salaried employees of the Company are not eligible to receive incentive stock
options, but are eligible to receive non-qualified stock options. In addition,
all employees and consultants of the Company, the Operating Partnership and
the Services Company are eligible for awards of restricted stock and grants of
stock appreciation rights.
Number of Shares Subject to Stock Incentive Plan. The Company has reserved
up to 1,460,000 shares of Common Stock for issuance pursuant to the Stock
Incentive Plan, 60,000 of which will be issued, and options covering 900,000
of which will be granted, under the Stock Incentive Plan upon the consummation
of the Offering.
Purchase Price of Shares Subject to Options. The price of the shares of
Common Stock subject to each option shall be set by the Executive Compensation
Committee; provided, however, that the price per share of an option shall be
not less than 100% of the fair market value of such shares on the date such
option is granted; provided, further, that, in the case of an incentive stock
option, the price per share shall not be less than 110% of the fair market
value of such shares on the date such option is granted in the case of an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company, any subsidiary or any parent corporation ("greater than 10%
stockholders").
Non-Assignability. Options may be transferred only by will or by the laws of
descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.
Terms and Exercisability of Options. Unless otherwise determined by the
Board of Directors or the Executive Compensation Committee, all options
granted under the Stock Incentive Plan are subject to the following
conditions: (i) options will be exercisable in installments, on a cumulative
basis, at the rate of thirty-three and one-third percent (33 1/3%) each year
beginning on the first anniversary of the date of the grant of the option,
until the options expire or are terminated, and (ii) following an optionee's
termination of employment, the optionee shall have the right to exercise any
outstanding vested options for a specified period.
Options are not assignable or transferable by the optionee except by will or
the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her
outstanding options until such options are exercised and the purchase price is
paid for the shares.
To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an optionee during any calendar year (under the Stock
Incentive Plan and all other incentive stock option plans of the Company, any
subsidiary and any parent corporation) exceeds $100,000, such options shall be
taxed as non-qualified stock options. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted. For this purpose, the fair market value of stock shall be
determined as of the time that the option with respect to such stock is
granted.
Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid:
(i) in cash or by certified or cashier's check payable to the order of the
Company, (ii) by delivery of shares of Common Stock of the Company already
owned by, and in the possession of, the optionee or (iii) if authorized by the
Board of Directors or the Executive Compensation Committee or if specified in
the option agreement for the option being exercised, by a recourse promissory
note made by the optionee in favor of the Company or through installment
payments to the Company.
On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.
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Termination of Employment; Death or Permanent Disability. If a holder of an
option ceases to be employed by the Company for any reason other than the
optionee's death or permanent disability, such optionee's stock option shall
expire three months after the date of such cessation of employment unless by
its terms it expires sooner; provided, however, that during such period after
cessation of employment, such stock option may be exercised only to the extent
it was exercisable according to such option's terms on the date of cessation
of employment. If an optionee dies or becomes permanently disabled while the
optionee is employed by the Company, such optionee's option shall expire
twelve months after the date of such optionee's death or permanent disability
unless by its terms it expires sooner. During such period after death, such
stock option may, to the extent it remains unexercised upon the date of such
death, be exercised by the person or persons to whom the optionee's rights
under such stock option are transferred under the laws of descent and
distribution.
Acceleration of Exercisability. In the event that the Company is acquired by
merger, consolidation or asset sale, each outstanding option which is not to
be assumed by the successor corporation or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation will, at
the election of the Board of Directors (or if so provided in an option or
other agreement with an optionee), automatically accelerate in full.
Adjustments. In the event any change is made to the Common Stock issuable
under the Stock Incentive Plan by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other
change in corporate structure effected without the Company's receipt of
consideration, appropriate adjustment will be made to (i) the maximum number
and class of shares issuable under the Stock Incentive Plan and (ii) the
number and/or class of shares and price per share in effect under each
outstanding option.
Amendments to the Stock Incentive Plan. The Board of Directors may at any
time suspend or terminate the Stock Incentive Plan. The Board of Directors or
Executive Compensation Committee may also at any time amend or revise the
terms of the Stock Incentive Plan, provided that no such amendment or revision
shall, unless appropriate stockholder approval of such amendment or revision
is obtained, (i) increase the maximum number of shares which may be acquired
pursuant to options granted under the Stock Incentive Plan (except for
adjustments as described in the foregoing paragraph) or (ii) change the
minimum purchase price required under the Stock Incentive Plan.
Termination. The Stock Incentive Plan will terminate ten years from the date
the Offering is consummated, unless sooner terminated by the Board of
Directors.
Registration Statement on Form S-8. After the consummation of the Offering,
the Company expects to cause to be filed with the Securities and Exchange
Commission a Registration Statement on Form S-8 covering the restricted shares
of Common Stock and the shares of Common Stock underlying options granted
under the Stock Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES TO PARTICIPANTS IN THE STOCK INCENTIVE PLAN
The following summary of the material federal income tax consequences to
participants in the Stock Incentive Plan is based on current law, is for
general information only and is not tax advice. The summary does not purport
to discuss all aspects of federal income taxation that may be relevant to a
particular participant in light of such participant's personal investment
circumstances.
A participant may be subject to state or local taxation in various state or
local jurisdictions in which he or she works or resides. State and local tax
treatment of the participants are not discussed in this summary, and such
state and local tax treatment may not conform to the federal income tax
consequences discussed in this summary.
Non-Qualified Stock Options. A participant who is granted non-qualified
stock options does not realize income as a result of the grant of such
options. However, the participant normally realizes compensation income at the
time the options are exercised, in the amount by which the fair market value
of the Common Stock on the date the options are exercised exceeds the option
exercise price paid. This compensation income is taxable at
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ordinary income rates, and the Company is required to withhold taxes on the
amount treated as ordinary income to the participant.
The participant's tax basis for Common Stock acquired upon the exercise of a
non-qualified stock option is the price paid to exercise the option plus the
amount of ordinary income realized by the participant as a result of the
exercise of the option. Any appreciation in the value of such Common Stock may
qualify for capital gains treatment, provided that applicable holding period
requirements are satisfied.
The tax consequences resulting from a participant's exercise of non-
qualified options by surrendering Common Stock already owned by the
participant are not completely certain. In published rulings, the Internal
Revenue Service (the "IRS") has taken the position that, to the extent that
the number of shares acquired is equivalent to the number of shares
surrendered, the participant recognizes no gain and the participant's basis in
the shares acquired upon such exercise is equal to the participant's basis in
the surrendered shares, that any additional shares acquired upon such exercise
is compensation to the participant taxable under the rules described above,
and that the participant's basis in any such additional shares will be their
fair market value.
Incentive Stock Options. A participant who is granted incentive stock
options is not treated as having received taxable income upon either the grant
or the exercise of the options. Instead, such participant is taxed at the time
of the sale or other taxable disposition of the Common Stock acquired pursuant
to the exercise of the option. Generally, such participants pay taxes at long-
term capital gains rates on the difference between the amount realized on the
sale or other disposition of the shares and the option exercise price. To
qualify for such capital gains treatment, the participant (i) must not sell or
dispose of the shares earlier than two years from the date of grant of the
incentive stock option or one year from the date of transfer of the shares to
the participant upon exercise, and (ii) must be an employee of the Company at
all times during the period beginning with the date of the grant of the option
and ending three months before the date of exercise. If the shares of stock
are sold or otherwise disposed of before the end of the one-year period or the
two-year period, a portion of the gain, if any, may be treated as compensation
taxable as ordinary income rather than as capital gain.
The tax consequences resulting from a participant's exercise of incentive
stock options by surrendering shares of Common Stock already owned by the
participant are not completely certain. In published rulings and proposed
regulations, the IRS has taken the position that generally the participant
recognizes no income upon such stock-for-stock exercise, that to the extent
that the number of shares acquired is equivalent to the number of shares
surrendered, the participant's basis in the shares acquired upon such exercise
is equal to the participant's basis in the surrendered shares increased by any
compensation income recognized by the participant, that the participant's
basis in any additional shares acquired by such exercise is zero, and that any
sale or other disposition of the acquired shares within the one-year period or
the two-year period described above is viewed as a disposition of the shares
with the lowest basis first.
Alternative minimum tax must be paid when it exceeds a taxpayer's regular
federal income tax. Alternative minimum tax is calculated based on alternative
minimum taxable income, which is taxable income for federal income tax
purposes, modified by certain adjustments and increased by tax preference
items. For purposes of the foregoing, the difference between the exercise
price and the fair market value of shares of Common Stock acquired pursuant to
the exercise of an incentive stock option is classified as alternative minimum
taxable income for the year of exercise. For alternative minimum tax purposes
(but not for regular income tax purposes), the participant's basis in the
acquired shares is the fair market value of the shares at the time the
incentive stock option is exercised. A disqualifying disposition of the
acquired shares during the same year in which the incentive stock option was
exercised will cancel the alternative minimum taxable income generated upon
exercise of the incentive stock option. Should there be a disqualifying
disposition in a year other than the year of exercise, the income on the
disqualifying disposition will not be considered income for alternative
minimum tax purposes.
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FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
The following summary of the material federal income tax consequences to the
Company is based on current law, is for general information only and is not
tax advice.
Section 162(m) Limitation. Subject to a limited number of exceptions,
Section 162(m) of the Code denies a deduction to a publicly held corporation
for payments of remuneration to certain employees to the extent the employee's
remuneration for the taxable year exceeds $1,000,000. For this purpose,
remuneration attributable to stock options is included within the $1,000,000
limitation. However, to the extent that the remuneration is payable solely on
account of the attainment of one or more performance goals and certain other
procedural requirements are met, then such remuneration is not subject to the
$1,000,000 limitation.
The Company has attempted to structure the Stock Incentive Plan in such a
manner that the remuneration attributable to the stock options will not be
subject to the $1,000,000 limitation. The Company has not, however, requested
a ruling from the IRS or an opinion of counsel regarding this issue.
Non-Qualified Stock Options. Subject to the limitations set forth in Code
Section 162(m) and discussed above, the Company is entitled to deduct from its
taxable income the amount that the participant is required to include in
ordinary income at the time of such inclusion.
Incentive Stock Options. The Company is not entitled to any deduction on
account of the grant of the incentive stock options or the participant's
exercise of the option to acquire Common Stock. However, in the event of a
subsequent disqualifying disposition of such shares under circumstances
resulting in taxable compensation to the participant, subject to the
limitations set forth in Code Section 162(m) and discussed above, the Company
is entitled to a tax deduction equal to the amount treated as taxable
compensation to the participant.
SECTION 401(K) PLAN
Effective upon the consummation of the Offering, the Company intends to
establish the Company's Section 401(k) Savings/Retirement Plan (the "Section
401(k) Plan") to cover eligible employees of the Company and any designated
affiliate.
The Section 401(k) Plan will permit eligible employees of the Company to
defer up to 15% of their annual compensation, subject to certain limitations
imposed by the Code. The employees' elective deferrals are immediately vested
and non-forfeitable upon contribution to the Section 401(k) Plan. The Company
currently does not intend to make matching contributions to the Section 401(k)
Plan; however, it reserves the right to make matching contributions or
discretionary profit sharing contributions in the future.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see "Certain Provisions of Maryland
Law and of the Company's Articles of Incorporation and Bylaws--Limitation of
Directors' and Officers' Liability" and "--Indemnification Agreements."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company (or members of their
immediate families) and persons who will hold more than 5% of the outstanding
shares of Common Stock (or interests exchangeable therefor) have direct or
indirect interests in transactions which have been or will be consummated by
the Company, the Operating Partnership or the Services Company, including the
transfer of certain Properties to the Operating Partnership by the Continuing
Investors, the grant of options with respect to the Excluded Properties and,
if exercised, the purchase by the Company of one or more of the Excluded
Properties from the respective Continuing Investors, the repayment of certain
indebtedness encumbering the Properties and the performance of management and
leasing activities by the Operating Partnership and certain development and
other activities by the Services Company at the Excluded Properties. See
"Formation Transactions." In addition, John B. Kilroy, Sr. has contributed
$1,000 to the Company in exchange for an aggregate of 50 shares of Common
Stock, and upon consummation of the Offering, John B. Kilroy, Jr. and John B.
Kilroy, Sr. each will have contributed cash to the Services Company, which,
upon consummation of the Offering and the Formation Transactions, will
represent a 5.0% economic interest in the Services Company.
PARTNERSHIP AGREEMENT
Concurrently with the completion of the Offering, the Company will enter
into the Partnership Agreement of the Operating Partnership with the various
limited partners of the Operating Partnership. See "Partnership Agreement of
Operating Partnership." John B. Kilroy, Sr. and John B. Kilroy, Jr., who are
limited partners of the Operating Partnership, are directors and/or officers
of the Company.
ASSIGNMENT OF LEASE; VARIOUS SERVICES PROVIDED BY THE SERVICES COMPANY TO THE
KILROY GROUP
Concurrently with the completion of the Offering, KI will assign to the
Operating Partnership all of its interest as a tenant in a lease with a
partnership affiliated with the Continuing Investors covering the space
currently serving as the headquarters of KI at Kilroy LAX in El Segundo,
California. The Company, the Operating Partnership and the Services Company
will occupy such space, with the Company and the Services Company subleasing
some of such space from the Operating Partnership and paying rent to the
Operating Partnership therefor, at rates which the Company believes are equal
to the fair rental value of the space.
Pursuant to management agreements, the Operating Partnership will provide
management and leasing services, and the Services Company will provide
development services, with respect to the Excluded Properties, each of which
is beneficially owned and controlled by John B. Kilroy, Sr. and John B.
Kilroy, Jr., for fees equivalent to the fair market value of such services.
See "Business and Properties--Development, Management and Leasing--Excluded
Properties."
BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN EXECUTIVE OFFICERS
In connection with the Formation Transactions, John B. Kilroy, Sr., Chairman
of the Company's Board of Directors, will receive Units, the repayment of a
personal loan and the termination of guarantees of loans secured by certain of
the Properties. Also in connection with the Formation Transactions, John B.
Kilroy, Jr. will receive Units, as well as the termination of guarantees of
loans secured by certain of the Properties and certain benefits under his
employment agreement with the Company. See "Use of Proceeds". In addition,
each of John B. Kilroy, Sr. and John B. Kilroy, Jr. own and control Kilroy
Calabasas Associates, a California limited partnership, and Kilroy Airport
Imperial Co., a California limited partnership, which, upon the exercise of
certain options by the Company, may transfer certain of the Excluded
Properties to the Operating Partnership in exchange for cash or Units. In the
event that the Independent Directors determine to cause the Company to
exercise its options to purchase these properties, John B. Kilroy, Sr. and
John B. Kilroy, Jr. will receive the consideration paid therefor. See
"Business and Properties--Development, Management and Leasing--Excluded
Properties."
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of Common
Stock immediately following the consummation of the Offering and the Formation
Transactions for (i) each person who is expected to be the beneficial owner of
5% or more of the outstanding Common Stock immediately following the
consummation of the Offering, (ii) directors, proposed directors and the
executive officers of the Company, and (iii) directors, proposed directors and
executive officers of the Company as a group. Except for the restricted Common
Stock owned by Mr. Moran and the 50 shares of Common Stock owned by John B.
Kilroy, Sr. (which will be repurchased upon consummation of the Offering),
none of the persons or entities listed below currently owns any shares of
Common Stock, but rather owns Units exchangeable for shares of Common Stock.
See "Partnership Agreement of the Operating Partnership--Redemption/Exchange
Rights." This table assumes that (i) the Formation Transactions and the
Offering are completed and (ii) the Underwriters' over-allotment option will
not be exercised. Each person named in the table has sole voting and
investment power with respect to all of the shares of Common Stock shown as
beneficially owned by such person, except as otherwise set forth in the notes
to the table. This table reflects the ownership interests each of the
following persons would have if each person exchanged all of his Units for
shares of Common Stock at an initial exchange ratio of one Unit for each share
of Common Stock (without regard to the Ownership Limit and the prohibition on
redemption or exchange of Units until two years after the date of the
Offering). See "Partnership Agreement of the Operating Partnership--
Redemption/Exchange Rights." Unless otherwise indicated, the address of each
named person is c/o Kilroy Realty Corporation, 2250 East Imperial Highway,
Suite 1200, El Segundo, California 90245.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK(1)(2)
------------------------ --------------------- ---------------------
<S> <C> <C>
John B. Kilroy, Sr ............ 1,263,087(3) 8.56%
John B. Kilroy, Jr. ........... 1,263,087(3) 8.56%
Jeffrey C. Hawken.............. -- --
Richard E. Moran Jr. .......... 60,000(4) 0.41%
Campbell Hugh Greenup.......... -- --
William P. Dickey.............. -- --
Matthew J. Hart................ -- --
Dale F. Kinsella............... -- --
All directors and executive
officers as a group
(8 persons)................... 2,586,174 17.53%
</TABLE>
- --------
(1) Includes the Units to be beneficially owned by KI which are allocated to
John B. Kilroy, Sr. and John B. Kilroy, Jr., the only shareholders of KI,
in accordance with their respective percentage ownership of KI. Excludes
options to purchase 695,000 shares of Common Stock granted to executive
officers and directors at the consummation of the Offering.
(2) Assuming exchange of the 2,692,374 Units outstanding upon consummation of
the Offering.
(3) These Units have been pledged to secure certain indemnification
obligations to the Company arising in connection with the Formation
Transactions. See "Certain Relationships and Related Transactions."
(4) Represents 60,000 restricted shares of Common Stock granted under the
Stock Incentive Plan to Richard E. Moran Jr. pursuant to the terms of his
employment agreement, which shares will vest in three equal annual
installments over a three-year period. See "Management--Employment
Agreements."
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation and Bylaws, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
GENERAL
Under the Articles of Incorporation, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock, par value $.01 per
share, and 30,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"). Upon completion of the Offering and Formation
Transactions, there will be 12,060,000 shares of Common Stock issued and
outstanding (including 60,000 restricted shares of Common Stock granted to an
officer of the Company who is not a Continuing Investor and excluding the
1,800,000 shares which are subject to the Underwriters' over-allotment option
and shares that may be issued upon the exchange of outstanding Units), and no
shares of Preferred Stock will be issued and outstanding.
COMMON STOCK
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, including the election of
directors, and, except as otherwise required by law and except as provided in
any resolution adopted by the Board of Directors with respect to any other
class or series of stock establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares will possess the exclusive voting power,
subject to the provisions of the Company's Articles of Incorporation regarding
the ownership of shares of Common Stock in excess of the Ownership Limit, or
such other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors described below. Holders of
shares of Common Stock will have no conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company or cumulative voting rights in the election of
directors. All shares of Common Stock to be issued and outstanding following
the consummation of the Offering will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or
series of stock and to the provisions of the Articles of Incorporation
regarding ownership of shares of Common Stock in excess of the Ownership
Limit, or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors described
below, distributions may be paid to the holders of shares of Common Stock if
and when authorized and declared by the Board of Directors of the Company out
of funds legally available therefor. The Company intends to make quarterly
distributions, beginning with distributions for the portion of the quarter
from the consummation of the Offering through March 31, 1997. See
"Distribution Policy."
Under Maryland law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of
any holders of Preferred Stock to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities arising
out of its status as general partner of the Operating Partnership.
Subject to the provisions of the Articles of Incorporation regarding the
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors described below, all shares of
Common Stock will have equal distribution, liquidation and voting rights, and
will have no preference or exchange rights. See "--Restrictions on Ownership
and Transfer."
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the
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shares entitled to vote on the matter unless a lesser percentage (but not less
than a majority of all of the votes entitled to be cast on the matter) is set
forth in the corporation's charter. Under the MGCL, the term "substantially
all of the Company's assets" is not defined and is, therefore, subject to
Maryland common law and to judicial interpretation and review in the context
of the unique facts and circumstances of any particular transaction. The
Articles of Incorporation of the Company do not provide for a lesser
percentage in any such situation.
The Articles of Incorporation authorize the Board of Directors to reclassify
any unissued shares of Common Stock into other classes or series of classes of
stock and to establish the number of shares in each class or series and to set
the preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be ChaseMellon
Shareholder Services.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued
or outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Company's Articles of Incorporation
to fix for each series the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications
and terms or conditions of redemption, as permitted by Maryland law. Because
the Board of Directors has the power to establish the preferences, powers and
rights of each series of Preferred Stock, it may afford the holders of any
series of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of shares of Common Stock. The issuance of
Preferred Stock could have the effect of delaying or preventing a change of
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest. The Board of Directors
has no present plans to issue any Preferred Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership Limits. For the Company to qualify as a REIT under the Code, no
more than 50% in value of its outstanding shares of stock may be owned,
actually or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made). In addition, if the Company, or an owner of 10% or more of the
Company, actually or constructively owns 10% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Company expects to qualify as a REIT, the Articles of
Incorporation contain restrictions on the ownership and transfer of Common
Stock which are intended to assist the Company in complying with these
requirements. The Ownership Limit set forth in the Company's Articles of
Incorporation provides that, subject to certain specified exceptions, no
person or entity may own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Code, more than 7.0% (by number or
value, whichever is more restrictive) of the outstanding shares of Common
Stock. The constructive ownership rules are complex, and may cause shares of
Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 7.0% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common
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Stock) by an individual or entity, could, nevertheless cause that individual
or entity, or another individual or entity, to own constructively in excess of
7.0% of the outstanding Common Stock and thus violate the Ownership Limit, or
such other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors. The Board of Directors may, but
in no event will be required to, waive the Ownership Limit with respect to a
particular stockholder if it determines that such ownership will not
jeopardize the Company's status as a REIT and the Board of Directors otherwise
decides such action would be in the best interest of the Company. As a
condition of such waiver, the Board of Directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The Board
of Directors has obtained such undertakings and representations from John B.
Kilroy, Sr. and John B. Kilroy, Jr. and has waived the Ownership Limit with
respect to the actual and constructive ownership (and to any constructive
ownership of securities therefrom) of Common Stock by John B. Kilroy, Sr. and
John B. Kilroy, Jr. Consequently, John B. Kilroy, Sr., John B. Kilroy, Jr.,
members of their families and entities (including the Operating Partnership)
which are deemed to own the Kilroys' Common Stock under the constructive
ownership rules of the Code will be permitted to own, in the aggregate,
actually or constructively, up to 21% (by number of shares or value, whichever
is more restrictive) of the outstanding Common Stock. See "Description of
Capital Stock--Restrictions on Ownership and Transfer--Ownership Limits."
The Company's Articles of Incorporation further prohibits (i) any person
from actually or constructively owning shares of stock of the Company that
would result in the Company being "closely held" under Section 856(h) of the
Code or otherwise cause the Company to fail to qualify as a REIT, and (ii) any
person from transferring shares of stock of the Company if such transfer would
result in shares of stock of the Company being owned by fewer than 100
persons. Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of stock of the Company that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give notice immediately to the Company and provide the Company
with such other information as the Company may request in order to determine
the effect of such transfer on the Company's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as
otherwise described above, any change in the Ownership Limit would require an
amendment to the Articles of Incorporation. Amendments to the Articles of
Incorporation require the affirmative vote of holders owning at least two-
thirds of the shares of the Company's capital stock outstanding and entitled
to vote thereon.
Pursuant to the Articles of Incorporation, if any purported transfer of
Common Stock of the Company or any other event would otherwise result in any
person violating the Ownership Limit or such other limit as provided in the
Company's Articles of Incorporation or as otherwise permitted by the Board of
Directors, then any such purported transfer will be void and of no force or
effect with respect to the purported transferee (the "Prohibited Transferee")
as to that number of shares in excess of the Ownership Limit or such other
limit, and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a purported transfer, the person or entity
holding record title to any such excess shares (the "Prohibited Owner") shall
cease to own any right or interest) in such excess shares. Any such excess
shares described above will be transferred automatically, by operation of law,
to a trust, the beneficiary of which will be a qualified charitable
organization selected by the Company (the "Beneficiary"). Such automatic
transfer shall be deemed to be effective as of the close of business on the
business day prior to the date of such violative transfer. Within 20 days of
receiving notice from the Company of the transfer of shares to the trust, the
trustee of the trust (who shall be designated by the Company and be
unaffiliated with the Company and any Prohibited Transferee or Prohibited
Owner) will be required to sell such excess shares to a person or entity who
could own such shares without violating the Ownership Limit, or such other
limit as provided in the Company's Articles of Incorporation or as otherwise
permitted by the Board of Directors, and distribute to the Prohibited
Transferee or Prohibited Owner an amount equal to the lesser of the price paid
by the Prohibited Transferee or Prohibited Owner for such excess shares or the
sales proceeds received by the trust for such excess shares. In the case of
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required
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to sell such excess shares to a qualified person or entity and distribute to
the Prohibited Owner an amount equal to the lesser of the Market Price (as
defined in the Company's Articles of Incorporation) of such excess shares as
of the date of such event or the sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all
voting rights with respect to such excess shares. Subject to Maryland law,
effective as of the date that such shares have been transferred to the trust,
the trustee shall have the authority (at the trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Transferee or Prohibited Owner,
as applicable, prior to the discovery by the Company that such shares have
been transferred to the trust and (ii) to recast such vote in accordance with
the desires of the trustee acting for the benefit of the Beneficiary. However,
if the Company has already taken irreversible corporate action, then the
trustee shall not have the authority to rescind and recast such vote. Any
dividend or other distribution paid to the Prohibited Transferee or Prohibited
Owner (prior to the discovery by the Company that such shares had been
automatically transferred to a trust as described above) will be required to
be repaid to the trustee upon demand for distribution to the Beneficiary. In
the event that the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors, then the
Articles of Incorporation provide that the transfer of the excess shares will
be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer until the trustee has
sold the shares of stock held in the trust. Upon such a sale to the Company,
the interest of the Beneficiary in the shares sold shall terminate and the
trustee shall distribute the net proceeds of the sale to the Prohibited
Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Articles of Incorporation, every owner of a specified percentage
(or more) of the outstanding shares of Common Stock must file a completed
questionnaire with the Company containing information regarding their
ownership of such shares, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between 0.5% and
5.0%, depending upon the number of record holders of the Company's shares. In
addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such stockholder's actual and constructive
ownership of Common Stock on the Company's status as a REIT and to ensure
compliance with the Ownership Limit, or such other limit as provided in the
Company's Articles of Incorporation or as otherwise permitted by the Board of
Directors.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Company's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the MGCL and the Company's Articles of Incorporation and Bylaws, copies of
which are exhibits to the Registration Statement of which this Prospectus is a
part.
BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of directors
of the Company shall be established by the Bylaws but shall not be less than
the minimum number required by the MGCL, which in the case of the Company is
three. The Bylaws currently provide that the Board of Directors will consist
of not fewer than five nor more than 13 members. Any vacancy (except for a
vacancy caused by removal) will be filled, at any regular meeting or at any
special meeting called for that purpose, by a majority of the remaining
directors or, in the case of a vacancy resulting from an increase in the
number of directors, by a majority of the entire Board of Directors. A vacancy
resulting from removal will be filled by the stockholders at the next annual
meeting of stockholders or at a special meeting of the stockholders called for
that purpose. The Articles of Incorporation and Bylaws provide that a majority
of the Board must be "Independent Directors." An "Independent Director" is a
director who is not an employee, officer or affiliate of the Company or a
subsidiary or division thereof, or a relative of a principal executive
officer, or who is not an individual member of an organization acting as
advisor, consultant or legal counsel, receiving compensation on a continuing
basis from the Company in addition to director's fees.
Pursuant to the Articles of Incorporation, the directors are divided into
three classes as nearly equal in size as practicable. One class will hold
office initially for a term expiring at the annual meeting of stockholders to
be held in 1998, another class will hold office initially for a term expiring
at the annual meeting of stockholders to be held in 1999 and another class
will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 2000. As the term of each class expires, directors
in that class will be elected for a term of three years and until their
successors are duly elected and qualified and the directors in the other two
classes will continue in office. The Company believes that classification of
the Board of Directors will help to assure the continuity and stability of the
Company's business strategies and policies as determined by the Board of
Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of Common Stock will be
able to elect all of the successors of the class of directors whose term
expires at that meeting.
REMOVAL OF DIRECTORS
While the Company's Articles of Incorporation and the MGCL empower the
stockholders to fill vacancies in the Board of Directors that are caused by
the removal of a director, the Company's Articles of Incorporation preclude
stockholders from removing incumbent directors except upon a substantial
affirmative vote. Specifically, the Company's Articles of Incorporation
provide that a director may be removed only for cause and only by the
affirmative vote of at least two-thirds of the votes entitled to be cast in
the election of directors. Under the MGCL, the term "cause" is not defined and
is, therefore, subject to Maryland common law and to judicial interpretation
and review in the context of the unique facts and circumstances of any
particular situation.
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This provision, when coupled with the provision in the Bylaws authorizing the
Board of Directors to fill vacant directorships, precludes stockholders from
removing incumbent directors except upon a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's shares, or an affiliate of the Company who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by
holders of outstanding shares of the Company's voting stock and (ii) two-
thirds of the votes entitled to be cast by holders of outstanding shares of
the Company's voting stock other than shares held by the Interested
Stockholder with whom the business combination is to be effected, unless,
among other things, the Company's stockholders receive a minimum price (as
defined in the MGCL) for their shares of stock and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply,
however, to business combinations that are approved or exempted by the Board
of Directors prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Company's Board of Directors has resolved to opt
out of the business combinations provisions of the MGCL, and such resolutions
also require that any decision to opt back in be subject to the approval of
holders of a majority of the shares of Common Stock. As a result of the
Company's decision to opt out of the business combinations provisions of the
MGCL, an Interested Stockholder would be able to effect a "business
combination" without complying with the requirements set forth above. The
decision to opt out of the provisions may have the effect of making it easier
for stockholders who become Interested Stockholders to consummate a business
combination involving the Company. However, no assurance can be given that any
such business combination would be consummated or, if consummated, would
result in a purchase of shares of Common Stock from any stockholder at a
premium.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of the Company acquired in a
"control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror or by officers or directors who
are employees of the Company. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired
by the acquiror, or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of all voting power. "Control shares" do not include shares of stock
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If
no request for a meeting is made, the Company may itself present the question
at any stockholders' meeting.
If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously
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been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares of stock entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
shares of stock as determined for purposes of such appraisal rights may not be
less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Company's Articles
of Incorporation or Bylaws. The Bylaws of the Company contain a provision
exempting from the control share acquisition statute any and all acquisitions
by any person of the Company's shares of stock. Although there can be no
assurance that such provision will not be amended or eliminated at any time in
the future, the Company's Board of Directors has resolved that the provision
may not be amended or eliminated without the approval of the holders of at
least a majority of the shares of Common Stock. As a result of the Company's
decision to opt out of the "control share acquisition" provisions of the MGCL,
stockholders who acquire a substantial block of Common Stock are not precluded
from exercising full voting rights with respect to their shares on all matters
without first obtaining the approval of other stockholders entitled to vote.
This may have the effect of making it easier for any such control share
stockholder to effect a business combination with the Company. However, no
assurance can be given that any such business combination would be consummated
or, if consummated, would result in a purchase of shares of Common Stock from
any stockholder at a premium.
AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation may not be amended without the
affirmative vote of at least two-thirds of the shares of capital stock
outstanding and entitled to vote thereon voting together as a single class.
Other than provisions of the Bylaws (i) opting out of the control share
acquisition statute, (ii) requiring approval by the Independent Directors for
selection of operators of the Properties or of transactions involving John B.
Kilroy, Sr. and John B. Kilroy, Jr. and their affiliates and (iii) those
governing amendment of the Bylaws, each of which may be amended only with the
approval of a majority of the shares of capital stock entitled to vote, the
Company's Bylaws may be amended by the vote of a majority of the Board of
Directors or the shares of the Company's capital stock entitled to vote
thereon.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide for annual meetings of stockholders, commencing
with the year 1998, to elect the Board of Directors and transact such other
business as may properly be brought before the meeting. Special meetings of
stockholders may be called by the President, the Board of Directors or the
Chairman of the Board and shall be called at the request in writing of the
holders of 50% or more of the outstanding stock of the Company entitled to
vote.
The MGCL provides that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each stockholder entitled to notice of the meeting but
not entitled to vote at it.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by or at the
direction of the Board of Directors or (c) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice
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procedures set forth in the Bylaws, and (ii) with respect to special meetings
of stockholders, only the business specified in the Company's notice of
meeting may be brought before the meeting of stockholders.
The provisions in the Company's Articles of Incorporation on classification
of the Board of Directors and amendments to the Articles of Incorporation and
the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their
shares of Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests.
DISSOLUTION OF THE COMPANY
Under the MGCL, the Company may be dissolved by (i) the affirmative vote of
a majority of the entire Board of Directors declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at any annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
two-thirds of the total number of shares of capital stock outstanding and
entitled to vote thereon voting as a single class.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's officers and directors are and will be indemnified under
Maryland law, the Company's Articles of Incorporation of the Company and the
Partnership Agreement of the Operating Partnership against certain
liabilities. The Articles of Incorporation and Bylaws require the Company to
indemnify its directors and officers to the fullest extent permitted from time
to time by the laws of Maryland.
The MGCL permits a corporation to indemnify its directors and officers and
certain other parties against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (i) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions, and the Articles of Incorporation of the Company contain this
provision. The law does not, however, permit the liability of directors and
officers to the corporation or its stockholders to be limited to the extent
that (i) it is proved that the person actually received an improper personal
benefit in money, property or services, (ii) a judgment or other final
adjudication is entered in a proceeding based on a finding that the person's
action, or failure to act, was committed in bad faith or was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding or (iii) in the case of any criminal proceeding,
the director had reasonable cause to believe that the act or failure to act
was unlawful. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or rescission.
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The Partnership Agreement also provides for indemnification of the Company,
as general partner, and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and the partners of the
Operating Partnership to the same extent liability of officers and directors
of the Company to the Company and its stockholders is limited under the
Company's Articles of Incorporation. See "Partnership Agreement of the
Operating Partnership--Indemnification."
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors
under the Company's directors' and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by law, it provides greater assurance to directors and
executive officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or the stockholders to eliminate the rights it provides.
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PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the "Partnership Agreement") and the
descriptions of certain provisions set forth elsewhere in this Prospectus, are
qualified in their entirety by reference to the Partnership Agreement, which
is filed as an exhibit to the Registration Statement of which this Prospectus
is a part. See "Additional Information."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will be the
sole general partner of, and will initially hold approximately 81.7% of the
economic interests in, the Operating Partnership. The Company will conduct
substantially all of its business through the Operating Partnership, except
for development and certain other services (which will be conducted through
the Services Company) in order to preserve the Company's REIT status. The
Operating Partnership will own a 95.0% economic interest in the Services
Company. Generally, pursuant to the Partnership Agreement, the Company, as the
sole general partner of the Operating Partnership, will have full, exclusive
and complete responsibility and discretion in the management and control of
the Operating Partnership, including the ability to cause the Operating
Partnership to enter into certain major transactions including acquisitions,
dispositions and refinancings and to cause changes in the Operating
Partnership's line of business and distribution policies.
The Continuing Investors, as limited partners of the Operating Partnership,
will have no authority to transact business for, or participate in the
management activities or decisions of, the Operating Partnership, except as
provided in the Partnership Agreement and as required by applicable law.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and directors
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership to the same extent
liability of officers and directors of the Company is limited under the
Articles of Incorporation.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership, without the consent of the holders of at least 60% of
the partner interests (including the interests of the Company, which will
represent approximately 81.7% of the total partner interests upon consummation
of the Offering). Pursuant to the Partnership Agreement, the limited partners
have agreed not to transfer, assign, sell, encumber or otherwise dispose of,
without the consent of the Company, their interest in the Operating
Partnership, other than to family members or accredited investors who agree to
assume the obligations of the transferor under the Partnership Agreement
subject to a right of first refusal for the benefit of the Company. The
Continuing Investors are subject to additional restrictions on their ability
to transfer shares of Common Stock. See "Underwriting."
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests (each a "Termination Transaction") unless the Termination
Transaction has been approved by holders of at least 60% of the Units
(including Units held by the Company, which will represent approximately 81.7%
of all Units outstanding upon consummation of the Offering) and in connection
with which all limited partners either will receive, or will have the right to
elect to receive, for each Unit an amount of cash, securities or other
property equal to the product of the number of shares of Common Stock into
which each Unit
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is then exchangeable and the greatest amount of cash, securities or other
property paid to the holder of one share of Common Stock in consideration of
one share of Common Stock pursuant to the Termination Transaction. If, in
connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of the outstanding
shares of Common Stock, each holder of Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Units
immediately prior to the expiration of such purchase, tender or exchange offer
and had thereupon accepted such purchase, tender or exchange offer.
The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the
assets directly or indirectly owned by the surviving entity are held directly
or indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case, the
"Surviving Partnership"); (ii) the limited partners own a percentage interest
of the Surviving Partnership based on the relative fair market value of the
net assets of the Operating Partnership and the other net assets of the
Surviving Partnership immediately prior to the consummation of such
transaction; (iii) the rights, preferences and privileges of the limited
partners in the Surviving Partnership are at least as favorable as those in
effect immediately prior to the consummation of such transaction and as those
applicable to any other limited partners or non-managing members of the
Surviving Partnership; and (iv) such rights of the limited partners include
the right to exchange their interests in the Surviving Partnership for at
least one of the following: (a) the consideration available to such persons
pursuant to the preceding paragraph, or (b) if the ultimate controlling person
of the Surviving Partnership has publicly traded common equity securities,
such common equity securities, with an exchange ratio based on the relative
fair market value of such securities and the Common Stock. For purposes of
this paragraph, the determination of relative fair market values and rights,
preferences and privileges of the limited partners shall be reasonably
determined by the Company's Board of Directors as of the time of the
Termination Transaction and, to the extent applicable, the values shall be no
less favorable to the limited partners than the relative values reflected in
the terms of the Termination Transaction.
In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure
such transaction to avoid causing the limited partners to recognize gain for
federal income tax purposes by virtue of the occurrence of or their
participation in such transaction. The Operating Partnership will also use
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership.
ISSUANCE OF ADDITIONAL UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general and limited partnership interests in the Operating
Partnership, including preferred Units of limited partnership interests.
CAPITAL CONTRIBUTION
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. If the Company so contributes
additional capital to the Operating Partnership, the Company's partnership
interest in the Operating Partnership will be increased on a proportionate
basis. Conversely, the partnership interests of the limited partners will be
decreased on a proportionate basis in
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the event of additional capital contributions by the Company. See "Policies
With Respect to Certain Activities--Financing."
AWARDS UNDER STOCK INCENTIVE PLAN
If options granted in connection with the Stock Incentive Plan are exercised
at any time or from time to time, or restricted shares of Common Stock are
issued under the Stock Incentive Plan, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of shares of Common Stock to such exercising participant or the
proceeds received by the Company upon issuance of the shares. Upon such
contribution the Company will be issued a number of Units in the Operating
Partnership equal to the number of shares of Common Stock so issued.
REDEMPTION/EXCHANGE RIGHTS
Limited partners will have rights to require the Operating Partnership to
redeem part or all of their Units for cash (based upon the fair market value
of an equivalent number of shares of Common Stock at the time of such
redemption) or the Company may elect to exchange such Units for shares of
Common Stock (on a one-for-one basis, subject to adjustment in the event of
stock splits, stock dividends, issuance of certain rights, certain
extraordinary distributions and similar events), provided, however, that if
the Company does not elect to exchange such Units for shares of Common Stock,
a holder of Units that is a corporation or a limited liability company may
require the Company to issue Common Stock in lieu thereof, subject to the
Ownership Limit or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors, as
applicable. The Company presently anticipates that it will elect to issue
Common Stock in exchange for Units in connection with each such redemption
request, rather than having the Operating Partnership pay cash. With each such
redemption or exchange, the Company's percentage ownership interest in the
Operating Partnership will increase. This redemption/exchange right may be
exercised by limited partners from time to time, in whole or in part, subject
to the limitations that such right may not be exercised (i) prior to the
expiration of two years following the consummation of the Offering or (ii) at
any time to the extent such exercise would result in any person actually or
constructively owning Common Stock in excess of the Ownership Limit or such
other amount as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors, as applicable, assuming Common
Stock was issued in such exchange. See "Description of Capital Stock--
Restrictions on Ownership and Transfer." In addition, under certain
circumstances 50% of the Units received by John B. Kilroy, Sr., John B.
Kilroy, Jr. and Kilroy Industries may be redeemed prior to the second
anniversary of the consummation of the Offering in connection with the
obligation of such Continuing Investors to indemnify the Company in connection
with the Formation Transactions. See "Formation and Structure of the Company--
Allocation of Consideration in the Formation Transactions."
REGISTRATION RIGHTS
For a description of certain registration rights held by the Continuing
Investors, see "Shares Available for Future Sale--Redemption/Exchange
Rights/Registration Rights."
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and, as such, will have authority to make
tax elections under the Code on behalf of the Operating Partnership.
The net income or net loss of the Operating Partnership will generally be
allocated to the Company and the limited partners in accordance with their
respective percentage interests in the Operating Partnership, subject to
compliance with the provisions of Sections 704(b) and 704(c) of the Code and
the Treasury Regulations promulgated thereunder. See "Federal Income Tax
Consequences--Tax Aspects of the Operating Partnership."
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OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
The Partnership Agreement provides that the net operating cash revenues of the
Operating Partnership, as well as net sales and refinancing proceeds, will be
distributed from time to time as determined by the Company (but not less
frequently than quarterly) pro rata in accordance with the partners'
respective percentage interests. Pursuant to the Partnership Agreement, the
Operating Partnership will assume and pay when due, or reimburse the Company
for payment of, all expenses it incurs relating to the ownership and operation
of, or for the benefit of, the Operating Partnership and all costs and
expenses relating to the operations of the Company.
DUTIES AND CONFLICTS
Except as otherwise set forth in "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Management--Employment
Agreements," any limited partner of the Operating Partnership may engage in
other business activities outside the Operating Partnership, including
business activities that directly compete with the Operating Partnership.
CERTAIN LIMITED PARTNER APPROVAL RIGHTS
The Partnership Agreement provides that if the limited partners own at least
5% of the outstanding Units (including Units held by the Company), the Company
shall not, on behalf of the Operating Partnership, take any of the following
actions without the prior consent of the holders of more than 50% (excluding
Units held by the Company) of the Units representing limited partner
interests: (i) dissolve the Operating Partnership, other than incident to a
merger or sale of substantially all of the Company's assets; or (ii) prior to
the seventh anniversary of the consummation of the Offering, sell the Office
Property located at 2260 E. Imperial Highway, at Kilroy LAX, other than
incident to a merger or sale of substantially all of the Company's assets.
TERM
The Operating Partnership will continue in full force and effect for 99
years or until sooner dissolved pursuant to the terms of the Partnership
Agreement.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the consummation of the Offering and the Formation Transactions, the
Company will have outstanding 12,060,000 shares of Common Stock (including
60,000 restricted shares of Common Stock issued to an officer of the Company
who is not a Continuing Investor and excluding the 1,800,000 shares which are
subject to the Underwriters' over-allotment option), of which the 12,000,000
issued in the Offering (or 13,800,000 if the Underwriters' overallotment
option is exercised in full) will be freely tradeable in the public market by
persons other than "affiliates" of the Company without restriction or
registration under the Securities Act.
Each of the Continuing Investors has agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any Units or shares of Common Stock or other capital stock
of the Company, or any securities convertible or exercisable or exchangeable
for any Units or shares of Common Stock or other capital stock for a period of
two years from the date of this Prospectus, and the Company has agreed not to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any (other than pursuant to the Stock Incentive Plan)
shares of Common Stock or other capital stock of the Company, or any
securities convertible or exercisable or exchangeable for any Units or shares
of Common Stock or other capital stock of the Company, for a period of 180
days from the date of this Prospectus, in each case without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
subject to certain limited exceptions. Notwithstanding the foregoing, 50% of
the Units received by John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries in connection with the Formation Transactions will be pledged to
secure their indemnification obligations pursuant to an agreement with the
Company. See "Formation and Structure of the Company."
The shares of Common Stock owned by "affiliates" of the Company, the 60,000
restricted shares of Common Stock issued to an officer of the Company who is
not a Continuing Investor and the shares of Common Stock issuable upon
exchange of Units (other than those issued pursuant to registration rights, as
described below), will be subject to Rule 144 promulgated under the Securities
Act ("Rule 144") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted shares" (defined generally as shares acquired
from the issuer or an affiliate in a non-public transaction) for at least two
years, as well as any person who purchased unrestricted shares on the open
market who may be deemed an affiliate of the Company, would be entitled to
sell, subject to certain manner of sale, public information and notice
requirements, within any three-month period, a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding number of
shares of Common Stock or 1% of the average weekly trading volume of those
shares during the four calendar weeks preceding each such sale. After
restricted shares are held for three years, a person who is not then deemed an
affiliate of the Company is entitled to sell such shares under Rule 144
without regard to these volume limitations. Sales of shares of Common Stock by
affiliates of the Company will continue to be subject to the volume
limitations, unless resold under an effective registration statement under the
Securities Act. The Commission has stated that it will re-issue a notice of
proposed rulemaking which, if adopted in the form expected to be proposed,
would shorten the applicable holding period under Rule 144(d) and Rule 144(k)
to one and two years, respectively (from the current two- and three-year
periods described above). The Company cannot predict whether such amendments
will be proposed or adopted or the effect thereof on the trading market for
its Common Stock.
The Company has established the Stock Incentive Plan for the purpose of
attracting and retaining executive officers, directors and other key
employees. See "Management--Stock Incentive Plan." Upon the consummation
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of the Offering, the Company will issue in the aggregate options to purchase
900,000 shares of Common Stock to executive officers, directors and certain
key employees and has reserved 500,000 additional shares of Common Stock for
future issuance under the Stock Incentive Plan.
Prior to the date of this Prospectus, there has been no public market for
the shares of Common Stock. The shares of Common Stock have been approved for
listing on the NYSE, subject to official notice of issuance. No prediction can
be made as to the effect, if any, that future sales of shares of Common Stock
(including sales pursuant to Rule 144) or the availability of shares of Common
Stock for future sale will have on the market price prevailing from time to
time. Sales of substantial amounts of shares of Common Stock (including shares
of Common Stock issued upon the exercise of options or the exchange of Units),
or the perception that such sales could occur, could adversely affect
prevailing market prices of the shares of Common Stock and impair the
Company's ability to obtain additional capital through the sale of equity
securities. See "Risk Factors--Shares Available for Future Sale." For a
description of certain restrictions on transfers of Common Stock held by
certain stockholders of the Company, see "Underwriting" and "Description of
Capital Stock--Restrictions on Ownership and Transfer."
REDEMPTION/EXCHANGE RIGHTS/REGISTRATION RIGHTS
Each limited partner of the Operating Partnership will have the right to
require the Operating Partnership to redeem part or all of their Units for
cash (based on the fair market value of an equivalent number of shares of
Common Stock at the time of such redemption) or, at the election of the
Company, to exchange such Units for shares of Common Stock, at any time
beginning two years after the completion of the Offering subject to the
obligation of John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries,
with respect to 50% of their Units, to indemnify the Company in connection
with the Formation Transactions. See "Formation and Structure of the Company--
Allocation of Consideration in the Formation Transactions." If the Company
does not elect to exchange such Units for shares of Common Stock, a Unitholder
that is a corporation or a limited liability company may require the Company
to issue shares of Common Stock in lieu of cash, subject to the Ownership
Limit or such other amount as provided in the Company's Articles of
Incorporation, as applicable. Upon completion of the Formation Transactions,
an aggregate of approximately 2,692,374 Units will be held by limited partners
of the Operating Partnership. If the Company elects to exchange Units for
Common Stock, each Unit will be exchangeable for one share of Common Stock,
subject to adjustment in the event of stock splits, distribution of rights,
extraordinary dividends and similar events.
In order to protect the Company's status as a REIT, a holder of Units is
prohibited from exchanging such Units for shares of Common Stock, to the
extent that as a result of such exchange any person would own or would be
deemed to own, actually or constructively, more than 7.0% of the Common Stock,
except to the extent such holder has been granted an exception to the
Ownership Limit. See "Description of Capital Stock--Restrictions on Ownership
and Transfer."
The Company has granted the Continuing Investors receiving Units in
connection with the Formation Transactions certain registration rights
(collectively, the "Registration Rights") with respect to the shares of Common
Stock acquired upon exchange of Units or otherwise (the "Registrable Shares").
The Company has agreed to file and generally keep continuously effective
beginning two years after the completion of the Offering a registration
statement covering the issuance of shares of Common Stock upon exchange of
Units and the resale thereof. In addition, the Company has granted the
Continuing Investors piggyback registration rights with respect to shares of
Common Stock acquired by them by any means. The Company also has agreed to
provide the Registration Rights to any other person who may become an owner of
Units, provided such person provides the Company with satisfactory
undertakings. The Company will bear expenses incident to its registration
obligations upon exercise of the Registration Rights, including the payment of
federal securities law and state Blue Sky registration fees, except that it
will not bear any underwriting discounts or commissions or transfer taxes
relating to registration of Registrable Shares.
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REINVESTMENT AND SHARE PURCHASE PLAN
The Company is considering the adoption of a Distribution Reinvestment and
Share Purchase Plan that would allow stockholders to automatically reinvest
cash distributions on their outstanding shares of Common Stock and/or Units to
purchase additional shares of Common Stock at a discounted price and without
the payment of any brokerage commission or service charge. Stockholders would
also have the option of investing limited additional amounts by making cash
payments. No decision has been made yet by the Company whether or not to adopt
such a plan and there can be no assurance that such a plan will ever be
adopted by the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax considerations
regarding the Company and the Offering is based on current law, is for general
information only and is not tax advice. The information set forth below, to
the extent that it constitutes matters of law, summaries of legal matters or
legal conclusions, is the opinion of Latham & Watkins, tax counsel to the
Company, as to the material federal income tax considerations relevant to
purchasers of the Common Stock. This discussion does not purport to deal with
all aspects of taxation that may be relevant to particular stockholders in
light of their personal investment or tax circumstances, or to certain types
of stockholders subject to special treatment under the federal income tax
laws, including, without limitation, certain financial institutions, life
insurance companies, dealers in securities or currencies, stockholders holding
Common Stock as part of a conversion transaction, as part of a hedge or
hedging transaction, or as a position in a straddle for tax purposes, tax-
exempt organizations (except to the extent discussed under the heading "--
Taxation of Tax-Exempt Stockholders") or foreign corporations, foreign
partnerships and persons who are not citizens or residents of the United
States (except to the extent discussed under the heading "Taxation of Non-U.S.
Stockholders"). In addition, the summary below does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to
prospective stockholders.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it will be organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code commencing with
such taxable year, and the Company intends to continue to operate in such a
manner, but no assurance can be given that it will operate or continue to
operate in such a manner so as to qualify or remain qualified.
These sections of the Code and the corresponding Treasury Regulations are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
Latham & Watkins has acted as tax counsel to the Company in connection with
the Offering and the Company's election to be taxed as a REIT. In the opinion
of Latham & Watkins, commencing with the Company's taxable year ending
December 31, 1997, the Company will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a
REIT under the Code. It must be emphasized that this opinion is based on
various factual assumptions relating to the organization and operation of the
Company, the Operating Partnership and the Services Company, and is
conditioned upon certain representations made by the Company as
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to factual matters. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Prospectus and assumes that the actions described in this
Prospectus are completed in a timely fashion. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet (through actual
annual operating results, distribution levels and diversity of stock
ownership) the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Latham & Watkins.
Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
Prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows. First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired
by the Company through foreclosure or otherwise after a default on a loan
secured by the property or a lease of the property) which is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount
equal to (a) the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% test multiplied by (b) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, with
respect to any asset (a "Built-In Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in which the
basis of the Built-In Gain Asset in the hands of the Company is determined by
reference to the basis of the asset in the hands of the C corporation, if the
Company recognizes gain on the disposition of such asset during the ten-year
period (the "Recognition Period") beginning on the date on which such asset
was acquired by the Company, then, to the extent of the Built-In Gain (i.e.,
the excess of (a) the fair market value of such asset over (b) the Company's
adjusted basis in such asset, determined as of the beginning of the
Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that the Company will make an election pursuant to IRS
Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association; (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of twelve months, or during a
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proportionate part of a taxable year of less than twelve months. Conditions
(v) and (vi) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT. For purposes of conditions (v) and
(vi), pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi).
The Company believes that upon consummation of the Offering it will have
issued sufficient shares of Common Stock with sufficient diversity of
ownership pursuant to the Offering to allow it to satisfy conditions (v) and
(vi). In addition, the Company's Articles of Incorporation provides for
restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such ownership
and transfer restrictions are described in "Description of Capital Stock--
Restrictions on Ownership and Transfer." These restrictions, however, may not
ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy such
share ownership requirements, the Company's status as a REIT will terminate.
See "--Failure to Qualify." In addition, a corporation may not elect to become
a REIT unless its taxable year is the calendar year. The Company will have a
calendar taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income
tests and the asset tests. Thus, the Company's proportionate share of the
assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any subsidiary partnerships)
will be treated as assets and items of income of the Company for purposes of
applying the requirements described herein. A summary of the rules governing
the federal income taxation of partnerships and their partners is provided
below in "--Tax Aspects of the Operating Partnership." The Company has direct
control of the Operating Partnership and intends to operate it consistent with
the requirements for qualification as a REIT.
Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from certain types of temporary investments. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments,
dividends, interest and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). Third, subject to
certain exceptions in the year in which the Company is liquidated, short-term
gain from the sale or other disposition of stock or securities, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year. For purposes of applying the 30% gross income test, the holding
period of Properties acquired by the Operating Partnership in the Formation
Transactions will be deemed to have commenced on the date of acquisition.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as "rents from
real property." Finally, for rents received to qualify as
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"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
The REIT may, however, directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant" of the
property. The Company does not and will not; (i) charge rent for any property
that is based in whole or in part on the income or profits of any person
(except by reason of being based on a percentage of receipts or sales, as
described above); (ii) rent any property to a Related Party Tenant (unless the
Company determines in its discretion that the rent received from such Related
Party Tenant is not material and will not jeopardize the Company's status as a
REIT); (iii) derive rental income attributable to personal property (other
than personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under the
lease); or (iv) perform services considered to be rendered to the occupant of
the property, other than through an independent contractor from whom the
Company derives no revenue.
The Services Company will receive fees in exchange for the performance of
certain development activities. Such fees will not accrue to the Company, but
the Company will derive its allocable share of dividends from the Services
Company through its interest in the Operating Partnership, which qualify under
the 95% gross income test, but not the 75% gross income test. The Company
believes that the aggregate amount of any nonqualifying income in any taxable
year will not exceed the limit on nonqualifying income under the gross income
tests.
The Operating Partnership will receive fees in exchange for the performance
of certain management activities for third parties with respect to properties
in which the Operating Partnership does not own an interest, including certain
of the Excluded Properties. Such fees will result in nonqualifying income to
the Company under the 95% and 75% gross income tests. The Company believes
that the aggregate amount of nonqualifying income, including such fees, in any
taxable year will not exceed the limit on nonqualifying income under the gross
income tests.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income
tests because nonqualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions are inapplicable to a particular set of circumstances involving the
Company, the Company would not qualify as a REIT. As discussed above in
"Federal Income Tax Considerations--Taxation of the Company--General," even if
these relief provisions apply, a 100% tax would be imposed on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company failed the 75% or 95% test multiplied by (b) a fraction intended to
reflect the Company's profitability. No similar mitigation provision provides
relief if the Company fails the 30% gross income test. In such case, the
Company would cease to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business (including the Company's share of any such gain
realized by the Operating Partnership) will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon the Company's ability
to satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that
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depends on all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends to hold the Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning, and operating the Properties (and other
properties) and to make such occasional sales of the Properties as are
consistent with the Operating Partnership's investment objectives. There can
be no assurance, however, that the IRS might not contend that one or more of
such sales is subject to the 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by the Operating Partnership) must be represented by
real estate assets including (i) its allocable share of real estate assets
held by partnerships in which the Company owns a direct or indirect interest
(such as the Operating Partnership) and (ii) stock or debt instruments held
for not more than one year purchased with the proceeds of a stock offering or
long-term (at least five years) public debt offering of the Company, cash,
cash items and government securities. Second, not more than 25% of the
Company's total assets (including its allocable share of the assets held by
the Operating Partnership) may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities.
As described above, the Operating Partnership owns 100% of the non-voting
preferred stock of the Services Company, and by virtue of its ownership of
interests in the Operating Partnership, the Company will be considered to own
its pro rata share of such stock. See "Structure and Formation of the
Company." The Operating Partnership does not and will not own any of the
voting securities of the Services Company, and therefore the Company will not
be considered to own more than 10% of the voting securities of the Services
Company. In addition, the Company believes (and has represented to tax counsel
to the Company for purposes of its opinion, as described above) that the value
of its pro rata share of the securities of the Services Company to be held by
the Operating Partnership will not exceed, at the closing of the Offering, 5%
of the total value of the Company's assets, and will not exceed such amount in
the future. Latham & Watkins, in rendering its opinion as to the qualification
of the Company as a REIT, is relying on the representation of the Company to
such effect. No independent appraisals have been obtained to support this
conclusion. There can be no assurance that the IRS will not contend that the
value of the securities of the Services Company held by the Company (through
the Operating Partnership) exceeds the 5% value limitation.
The 5% value test must be satisfied not only on the date that the Company
(directly or through the Operating Partnership) acquires securities in the
Services Company, but also each time the Company increases its ownership of
securities of the Services Company (including as a result of increasing its
interest in the Operating Partnership as a result of Company capital
contributions to the Operating Partnership or as limited partners exercise
their redemption/exchange rights). Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in the Operating
Partnership's overall interest in the Services Company.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests
and to take such other actions within 30 days after the close of any quarter
as may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
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Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of (a) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and by excluding the Company's net capital gain) and (b) 95% of
the excess of the net income, if any, from foreclosure property over the tax
imposed on such income, minus (ii) the excess of the sum of certain items of
noncash income (i.e., income attributable to leveled stepped rents, original
issue discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT Taxable Income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. Such distributions are
taxable to holders of Common Stock (other than tax-exempt entities, as
discussed below) in the year in which paid, even though such distributions
relate to the prior year for purposes of the Company's 95% distribution
requirement. The amount distributed must not be preferential--i.e., each
holder of shares of Common Stock must receive the same distribution per share.
A REIT may have more than one class of capital stock, as long as distributions
within each class are pro rata and non-preferential. To the extent that the
Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gain corporate
tax rates. The Company intends to make timely distributions sufficient to
satisfy these annual distribution requirements. In this regard, the
Partnership Agreement authorizes the Company, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit the Company to meet these
distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the distribution requirements described above. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at taxable income of the Company. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange for short-term, or possibly long-term,
borrowings, to pay dividends in the form of taxable stock dividends.
If the Company fails to meet the 95% distribution test due to certain
adjustments (e.g., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by agreement
with the IRS, the Company may pay a "deficiency dividend" to holders of shares
of Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company would also
be required to pay interest to the IRS and would be subject to any applicable
penalty provisions.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. As a result, the Company's failure
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to qualify as a REIT would reduce the cash available for distribution by the
Company to its stockholders. In addition, if the Company fails to qualify as a
REIT, all distributions to stockholders will be taxable as ordinary income, to
the extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) is an estate or trust the
income of which is subject to United States federal income taxation regardless
of its source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations.
Distributions made by the Company that are properly designated by the Company
as capital gain dividends will be taxable to taxable U.S. Stockholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of Common Stock. U.S.
Stockholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income. To the extent that
the Company makes distributions (not designated as capital gain dividends) in
excess of its current and accumulated earnings and profits, such distributions
will be treated first as a tax-free return of capital to each U.S.
Stockholder, reducing the adjusted basis which such U.S. Stockholder has in
his shares of Common Stock for tax purposes by the amount of such distribution
(but not below zero), with distributions in excess of a U.S. Stockholder's
adjusted basis in his shares taxable as long-term capital gains (or short-term
capital gain if the shares have been held for one year or less), provided that
the shares have been held as a capital asset. Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company on or
before January 31 of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be
able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition
of Common Stock, however, will not be treated as investment income unless the
U.S. Stockholder elects to reduce the amount of such U.S. Stockholder's total
net capital gain eligible for the 28% maximum capital gains rate by the amount
of such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized
by a U.S. Stockholder upon the sale or other disposition of shares of Common
Stock that have been held for six months or less (after applying certain
holding
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period rules) will be treated as a long-term capital loss, to the extent of
capital gain dividends received by such U.S. Stockholder from the Company
which were required to be treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any stockholders who fail to certify their non-foreign status to the Company.
See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
a tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its shares of Common Stock as "debt financed property" within the meaning
of the Code and such shares are not otherwise used in a trade or business, the
dividend income from the Company will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Stock will not constitute UBTI
unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the interests
in the REIT. Tax-exempt pension funds that are described in Section 401(a) of
the Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds
more than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests
in the REIT. The percentage of any REIT dividend treated as UBTI is equal to
the ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were
a qualified trust and therefore subject to tax on UBTI) to (ii) the total
gross income of the REIT. A de minimis exception applies where the percentage
is less than 5% for any year. The provisions requiring qualified trusts to
treat a portion of REIT distributions as UBTI will not apply if the REIT is
able to satisfy the "not closely held" requirement without relying upon the
"look-through" exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of Common Stock contained in the
Articles of Incorporation, the Company does not expect to be classified as a
"pension held REIT."
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TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances, including, for example, if the investment in the
Company is connected to the conduct by a Non-U.S. Stockholder of a U.S. trade
or business. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income
tax laws with regard to an investment in Common Stock, including any reporting
requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of
United States federal income tax on a gross basis (that is, without allowance
of deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States
trade or business. Dividends that are effectively connected with such a trade
or business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholders's Common Stock, but
rather will reduce the adjusted basis of such stock. For FIRPTA withholding
purposes (discussed below), such distributions (i.e., distributions that are
not made out of earnings and profits) will be treated as consideration for the
sale or exchange of shares of Common Stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common
Stock, they will give rise to gain from the sale or exchange of his stock, the
tax treatment of which is described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current or accumulated earnings and profits, the distribution will
generally be treated as a dividend for withholding purposes. However, amounts
thus withheld are generally refundable if it is subsequently determined that
such distribution was, in fact, in excess of current or accumulated earnings
and profits of the Company.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's United States trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as domestic stockholders
with respect to such gain (except
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that a stockholder that is a foreign corporation may also be subject to the
30% branch profits tax, as discussed above), or (ii) the Non-U.S. Stockholder
is a nonresident alien individual who is present in the United States for 183
days or more during the taxable year and has a "tax home" in the United
States, in which case the nonresident alien individual will be subject to a
30% tax on the individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests
will cause the Non-U.S. Stockholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income at the
same rates applicable to domestic stockholders (subject to a special
alternative minimum tax in the case of nonresident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-
U.S. Stockholder that is a corporation and is not entitled to treaty relief or
exemption, as discussed above. The Company is required to withhold 35% of any
such distribution. That amount is creditable against the Non-U.S.
Stockholder's United States federal income tax liability. To the extent that
such withholding exceeds the actual tax owed by the Non-U.S. Stockholder, the
Non-U.S. Stockholder may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of United States real property interests. A domestic person who
holds shares of Common Stock on behalf of a Non-U.S. Stockholder will bear the
burden of withholding, provided that the Company has properly designated the
appropriate portion of a distribution as a capital gain dividend.
Sale of Common Stock. Gain recognized by a Non-U.S. Stockholder upon the
sale or exchange of shares of Common Stock generally will not be subject to
United States taxation unless such shares constitute a "United States real
property interest" within the meaning of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). The Common Stock will not constitute a
"United States real property interest" so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non- U.S. Stockholders. The
Company believes that at the closing of the Offering it will be a
"domestically controlled REIT," and therefore that the sale of shares of
Common Stock will not be subject to taxation under FIRPTA. However, because
the shares of Common Stock will be publicly traded, no assurance can be given
that the Company will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% United States withholding tax on the
amount of such individual's gain.
If the Company does not qualify as or ceases to be a "domestically-
controlled REIT," gain arising from the sale or exchange by a Non-U.S.
Stockholder of shares of Common Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest"
unless the shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the New York Stock
Exchange) and the selling Non-U.S. Stockholder held no more than 5% (after
applying certain constructive ownership rules) of the shares of Common Stock
during the shorter of (i) the period during which the taxpayer held such
shares, or (ii) the 5-year period ending on the date of the disposition of
such shares. If gain on the sale or exchange of shares of Common Stock were
subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to
regular United States income tax with respect to such gain in the same manner
as a U.S. Stockholder (subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals
and the possible application of the 30% branch profits tax in the case of
foreign corporations), and the purchaser of the stock would be required to
withhold and remit to the IRS 10% of the purchase price.
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Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Common Stock by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States or (c) is a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States stockholders)
for United States tax purposes, unless the broker has documentary evidence in
its records that the holder is a Non-U.S. Stockholder and certain other
conditions are met, or the stockholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds of a
sale of Common Stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a Non-U.S. Stockholder, or otherwise establishes an exemption.
A Non-U.S. Stockholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
New Proposed Regulations. The United States Treasury has recently issued
proposed Treasury Regulations regarding the withholding and information
reporting rules discussed above. In general, the proposed Treasury Regulations
do not alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
and modify reliance standards. If finalized in their current form, the
proposed Treasury Regulations would generally be effective for payments made
after December 31, 1997, subject to certain transition rules.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
General. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income,
gain, loss, deduction and credit of a partnership, and are potentially subject
to tax thereon, without regard to whether the partners receive a distribution
from the partnership. The Company will include in its income its proportionate
share of the foregoing partnership items for purposes of the various REIT
income tests and in the computation of its REIT taxable income. Moreover, for
purposes of the REIT asset tests, the Company will include its proportionate
share of assets held by the Operating Partnership. See "--Taxation of the
Company."
Entity Classification. The Company's interest in the Operating Partnership
involves special tax considerations, including the possibility of a challenge
by the IRS of the status of the Operating Partnership as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes. If the Operating Partnership was treated as an association, it would
be taxable as a corporation and therefore be subject to an entity-level tax on
its income. In such a situation, the character of the Company's assets and
items of gross income would change and preclude the Company from satisfying
the asset tests and possibly the income tests (see "--Taxation of the
Company--Asset Tests" and "--Income Tests"), and in turn would prevent the
Company from qualifying as a REIT. See "Federal Income Tax Consequences--
Taxation of the Company--Failure to Qualify" above for a discussion of the
effect of the Company's failure to meet such tests for a taxable year. In
addition, a change in the Operating Partnership's status for tax purposes
might be treated as a taxable event in which case the Company might incur a
tax liability without any related cash distributions.
The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Final Regulations apply for tax periods beginning on or
after January 1, 1997 (the "Effective Date"). Unless it
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elects otherwise, an Eligible Entity in existence prior to the Effective Date
will have the same classification for federal income tax purposes that it
claimed under the entity classification Treasury Regulations in effect prior
to the Effective Date. In addition, an Eligible Entity which did not exist, or
did not claim a classification, prior to the Effective Date, will be
classified as a partnership for federal income tax purposes unless it elects
otherwise. The Company has not requested, and does not intend to request, a
ruling from the IRS that the Operating Partnership will be treated as a
partnership for federal income tax purposes. However, in connection with the
closing of the Formation Transactions, Latham & Watkins will deliver an
opinion to the Company stating that based on the provisions of the Partnership
Agreement, certain factual assumptions and representations described in the
opinion and the Final Regulations, the Operating Partnership will be treated
as a partnership for federal income tax purposes (and not as an association or
a publicly traded partnership taxable as a corporation). Unlike a private
letter ruling, an opinion of counsel is not binding on the IRS, and no
assurance can be given that the IRS will not challenge the status of the
Operating Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Operating Partnership could be
treated as a corporation for federal income tax purposes.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder.
The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the
limited partners in accordance with their respective percentage interests in
the Operating Partnership. Notwithstanding the foregoing, such agreement
provides that certain interest deductions and income from the discharge of
certain indebtedness of the Operating Partnership, attributable to loans
transferred to the Operating Partnership by certain Continuing Investors, will
be allocated disproportionately to such Continuing Investors. In addition,
allocations of net income or net loss will be subject to compliance with the
provisions of Sections 704(b) and 704(c) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at such time (a "Book-Tax Difference").
Such allocations are solely for federal income tax purposes and do not affect
the book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including the Properties). Consequently, the Partnership
Agreement requires that such allocations be made in a manner consistent with
Section 704(c) of the Code.
In general, the principals of KI and other Continuing Investors who are
limited partners of the Operating Partnership will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition
of any of the contributed assets which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to such
limited partners, and the Company will generally be allocated only its share
of capital gains
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attributable to appreciation, if any, occurring after the closing of the
Formation Transactions. This will tend to eliminate the Book-Tax Difference
over the life of the Operating Partnership. However, the special allocation
rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands the Operating Partnership may cause the Company to be
allocated lower depreciation and other deductions, and possibly an amount of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "--Taxation of the Company--Annual Distribution
Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to
be entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have not
yet decided which will be used to account for Book-Tax Differences with
respect to the Properties initially contributed to the Operating Partnership.
With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's income and (b) its allocable
share of indebtedness of the Operating Partnership and (iii) will be reduced,
but not below zero, by the Company's allocable share of (a) losses suffered by
the Operating Partnership, (b) the amount of cash distributed to the Company
and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss
will be deferred until such time and to the extent that the Company has
adjusted tax basis in its interest in the Operating Partnership. To the extent
that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such
decreases being considered a constructive cash distribution to the partners),
exceeds the Company's adjusted tax basis, such excess distributions (including
such constructive distributions) will constitute taxable income to the
Company. Such taxable income will normally be characterized as a capital gain,
and if the Company's interest in the Operating Partnership has been held for
longer than the long-term capital gain holding period (currently one year),
such distributions and constructive distributions will constitute long-term
capital gain.
SERVICES COMPANY
A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, and in turn to fund distributions by the Company to
its stockholders, is expected to come from the Services Company, through
dividends on nonvoting preferred stock to be held by the Operating
Partnership. The Services Company will not qualify as a REIT and will pay
federal, state and local income taxes on its taxable income at normal
corporate rates. The federal, state and local income taxes that the Services
Company is required to pay will reduce the cash available for distribution by
the Company to its stockholders.
As described above, the value of the Company's indirect interest in the
securities of the Services Company held by the Operating Partnership cannot
exceed 5% of the value of the Company's total assets at the end of any
calendar quarter in which the Company acquires such securities or increases
its interest in such securities (including as a result of the Company
increasing its interest in the Operating Partnership). See "--Taxation of
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the Company--Asset Tests." This limitation may restrict the ability of the
Services Company to increase the size of its business unless the value of the
assets of the Company or the Operating Partnership is increasing at a
commensurate rate.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "--Status of the Company, the Operating Partnership
and the Partnerships under ERISA," to a prospective purchaser that is not an
employee benefit plan, another tax-qualified retirement plan or an individual
retirement account ("IRA")). This discussion does not propose to deal with all
aspects of ERISA or Section 4975 of the Code or, to the extent not preempted,
state law that may be relevant to particular employee benefit plan
shareholders (including plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to
state law requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT
ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER
ERISA, SECTION 4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW
WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON STOCK BY
SUCH PLAN OR IRA. Plans should also consider the entire discussion under the
heading "Federal Income Tax Considerations," as material contained therein is
relevant to any decision by an employee benefit plan, tax-qualified retirement
plan or IRA to purchase the Common Stock.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in shares of
Common Stock is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require
(i) an ERISA Plan's investments to be prudent and in the best interests of the
ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan's
investments to be diversified in order to reduce the risk of large losses,
unless it is clearly prudent not to do so, (iii) an ERISA Plan's investments
to be authorized under ERISA and the terms of the governing documents of the
ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into
transactions prohibited under Section 406 of ERISA. In determining whether an
investment in shares of Common Stock is prudent for purposes of ERISA, the
appropriate fiduciary of an ERISA Plan should consider all of the facts and
circumstances, including whether the investment is reasonably designed, as a
part of the ERISA Plan's portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the ERISA Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow and funding requirements of the
ERISA Plan, and the liquidity and current return of the ERISA Plan's
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portfolio. A fiduciary should also take into account the nature of the
Company's business, the length of the Company's operating history and other
matters described under "Risk Factors."
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY, THE OPERATING PARTNERSHIP AND THE SERVICES COMPANY
UNDER ERISA
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and disqualified persons deal with such
assets. In certain circumstances where a Plan holds an interest in an entity,
the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or
control with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations, effective March 13, 1987
(the "Regulations"), that outline the circumstances under which a Plan's
interest in an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock of a REIT. However, the Regulations provide
an exception to the look-through rule for equity interests that are "publicly-
offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-
held and (iii) either (a) part of a class of securities that is registered
under section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part
of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such longer period allowed by the Securities and Exchange Commission)
after the end of the fiscal year of the issuer during which the offering of
such securities to the public occurred. Whether a security is considered
"freely transferable" depends on the facts and circumstances of each case.
Generally, if the security is part of an offering in which the minimum
investment is $10,000 or less, any restriction on or prohibition against any
transfer or assignment of such security for the purposes of preventing a
termination or reclassification of the entity for federal or state tax
purposes will not of itself prevent the security from being considered freely
transferable. A class of securities is considered "widely-held" if it is a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another.
The Company anticipates that the Common Stock will meet the criteria of the
publicly-offered securities exception to the look-through rule. First, the
Company anticipates that the Common Stock will be considered to be freely
transferable, as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal tax laws to
maintain the Company's status as a REIT. Second, the Company believes that the
Common Stock will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the Common Stock will be part of an offering of securities to the
public pursuant to an effective registration statement under the Securities
Act and will be registered under the Exchange Act within 120 days after the
end of the fiscal year of the Company during which the offering of such
securities to the public occurs. Accordingly, the Company believes that if a
Plan purchases the Common Stock, the Company's assets should not be deemed to
be Plan assets and, therefore, that any person who exercises authority or
control with respect to the Company's assets should not be a Plan fiduciary.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated ("Prudential Securities"), Donaldson, Lufkin &
Jenrette Securities Corporation, J.P. Morgan Securities Inc. and Smith Barney
Inc. are acting as representatives ("Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement,
to purchase from the Company the number of shares of Common Stock set forth
below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Prudential Securities Incorporated................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
J.P. Morgan Securities Inc........................................
Smith Barney Inc..................................................
----------
Total......................................................... 12,000,000
==========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share, and that such dealers may re-allow a concession of $ per share to
certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,800,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose
of covering over-allotments incurred in the sale of shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to 12,000,000.
The Company has agreed to indemnify the several Underwriters against or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act. The Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. Nevertheless, the
Underwriters may seek to enforce such indemnification and rights to
contribution which are expressly provided under the Act.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Each of the Continuing Investors has agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, pledge, grant of any option to purchase or other sale or disposition) of
any Units or shares of Common Stock or other capital stock of the Company, or
any securities convertible or exercisable or exchangeable for any Units or
shares of Common Stock or other capital stock for a period of two years from
the date of this Prospectus, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, grant any option to purchase or otherwise
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
(other than pursuant to the Stock Incentive Plan) shares of Common Stock or
other capital stock of the Company, or any securities convertible or
exercisable or exchangeable for any Units or shares of Common Stock or other
capital stock of the Company, for a period of 180 days from the date of this
Prospectus, in each case without the prior written consent of Prudential
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Securities, on behalf of the Underwriters, subject to certain limited
exceptions. Notwithstanding the foregoing, 50% of the Units received by John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries in connection with
the Formation Transactions will be pledged to secure their indemnification
obligations pursuant to an agreement with the Company. See "Formation and
Structure of the Company."
The shares of Common Stock have been approved for listing on the NYSE,
subject to official notice of issuance. In order to meet one of the
requirements for listing the shares of Common Stock on the NYSE, the
Underwriters have undertaken to sell (i) lots of 100 or more shares to a
minimum of 2,000 beneficial holders, (ii) a minimum of 1.1 million shares and
(iii) shares with a minimum aggregate market value of $40.0 million.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the Representatives. Among the factors to be
considered in such determination were prevailing market conditions, dividend
yields and financial characteristics of publicly traded REITs that the Company
and the Representatives believe to be comparable to the Company, the present
state of the Company's financial and business operations, the Company's
management, estimates of the business and earnings potential of the Company
and the prospects for the industry in which the Company operates.
An affiliate of J.P. Morgan & Co. is expected to provide the Mortgage Loans
and the proposed Credit Facility. In such event, the Company will pay (i) a
debt placement fee to an affiliate of J.P. Morgan & Co. for (a) the
$84.0 Million Loan equal to 0.5% of the principal amount thereof and (b) the
SeaTac Loan equal to 1.5% of the principal amount thereof, and (ii) an
origination fee to an affiliate of J.P. Morgan & Co. for the proposed Credit
Facility equal to 1.0% of the maximum amount available thereunder. It is
expected that an affiliate of Prudential Securities will participate in the
Credit Facility.
Upon consummation of the Offering, Prudential Securities will receive
approximately $31.0 million of the net proceeds from the Offering as repayment
of indebtedness, fees and related interest expected to be accrued and unpaid
as of such date. See "Use of Proceeds."
The Prudential Insurance Company of America, an affiliate of Prudential
Securities, is a tenant in one of the Office Properties located in Kilroy Long
Beach, leasing approximately 2,189 square feet of space.
The Company will pay to the Representatives advisory fees equal, in the
aggregate, to 0.75% of the gross proceeds received by the Company in the
Offering, for investment banking services relating to, among other things, the
structuring of the Formation Transactions and the Offering.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Latham & Watkins, Los Angeles, California. Legal matters
relating to Maryland law, including the validity of the issuance of the shares
of Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Kaye, Scholer, Fierman, Hays & Handler,
LLP, New York, New York. In addition, the description of federal income tax
consequences contained in this Prospectus under "Federal Income Tax
Consequences" is, to the extent that it constitutes matters of law, summaries
of legal matters or legal conclusions, the opinion of Latham & Watkins,
special tax counsel to the Company as to the material federal income tax
consequences of the Offering.
EXPERTS
The financial statements of Kilroy Realty Corporation as of September 30,
1996, the Kilroy Group as of September 30, 1996, December 31, 1995 and 1994
and for each of the three years in the period ended December 31, 1995 and the
nine months ended September 30, 1995 and 1996 and the Acquisition Properties
for
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the year ended December 31, 1995 and the nine months ended September 30, 1996
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the registration statement, and are included in
reliance on the reports of such firm, given upon their authority as experts in
auditing and accounting.
In addition, certain statistical information provided under the captions
"Prospectus Summary--The Company's Southern California Submarkets" and
"Business and Properties--The Company's Southern California Submarkets" has
been prepared by Robert Charles Lesser & Co., and is included herein in
reliance upon the authority of such firm as expert in, among other things,
real estate consulting and urban economics.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street N.W., Washington, D.C. 20599, a Registration
Statement (of which this Prospectus is a part) on Form S-11 under the
Securities Act and the rules and regulations promulgated thereunder with
respect to the securities offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
financial statements thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, copies of
which may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, or by way of the Commission's
Internet address, http://www.sec.gov.
Following the consummation of the Offering, the Company will be required to
file reports and other information with the Commission pursuant to the
Exchange Act. In addition to applicable legal or New York Stock Exchange
requirements, if any, the Company intends to furnish its stockholders with
annual reports containing consolidated audited financial statements with a
report thereon by the Company's independent certified public accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
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GLOSSARY
"Acquisition Properties" means the two office buildings and related assets
that comprise Kilroy Long Beach Phase I, the Thousand Oaks Office Property and
the Office and Industrial Properties located at 4123-4175 East La Palma,
Anaheim, California that are expected to be acquired by the Company
concurrently with the completion of the Offering, including, with respect to
Kilroy Long Beach Phase I, the ground lease with respect thereto, and the
Industrial Property located at 15752-12822 Monarch Street, Garden Grove,
California which was purchased by KI on behalf of the Company prior to
consummation of the Offering and will be assigned to the Company upon
consummation of the Offering.
"ADA" means the Americans with Disabilities Act, enacted on July 26, 1990.
"Audit Committee" means the audit committee of the Board of Directors.
"base rent" means gross rent excluding payments by tenants on account of
real estate taxes, operating expenses and utility expenses.
"Class A office buildings" means office buildings that have excellent
location and access, attract major corporate tenants, have high quality
finishes, are well maintained, professionally managed and are either new
buildings or buildings that are competitive with new buildings.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means common stock, par value $.01 per share, of the Company.
"Company" means Kilroy Realty Corporation and its consolidated subsidiaries
and the Services Company.
"Continuing Investors" shall mean the persons and entities receiving Units
in connection with the Formation Transactions. See "Note 1. Organization and
Basis of Presentation" to the Combined Financial Statements of the Kilroy
Group.
"Credit Facility" means the $100.0 million revolving credit facility that
the Company expects to enter into shortly after consummation of the Offering.
"$84.0 Million Loan" means the $84.0 million mortgage loan secured by
certain of the Properties.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board of
Directors.
"Formation Transactions" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of
the Properties and other assets to the Company, as described under "Formation
and Structure of the Company--Formation Transactions."
"Funds from Operations" means, in accordance with the resolution adopted by
the Board of Governors of NAREIT in its March 1995 White Paper, net income
(loss) computed in accordance with GAAP, excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and after
adjustments for unconsolidated partnerships and joint ventures.
"Independent Director" means a director of the Company who is not an
employee, officer or affiliate of the Company or a subsidiary or division
thereof, or a relative of a principal executive officer, and who is not an
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individual member of an organization acting as advisor, consultant or legal
counsel, receiving compensation on a continuing basis from the Company in
addition to director's fees.
"Industrial Properties" means the 12 industrial properties in which the
Company will have an ownership interest upon completion of the Offering,
including the Industrial Property located at 15752-12822 Monarch Street,
Garden Grove, California which was purchased by KI on behalf of the Company
prior to consummation of the Offering and will be assigned to the Company upon
consummation of the Offering.
"IRAs" means individual retirement accounts.
"IRS" means the Internal Revenue Service.
"KI" means Kilroy Industries, a California corporation, that operated the
Company's business prior to the consummation of the Offering and the Formation
Transactions.
"Kilroy Group" means KI and the partnerships and trusts affiliated with KI
that prior to the Offering owned the Properties (other than the Acquisition
Properties) and other assets being transferred to the Company in the Formation
Transactions. See "Note 1. Organization and Basis of Presentation" of the
historical financial statements of the Kilroy Group.
"Kilroy Realty Corporation" means Kilroy Realty Corporation, a Maryland
corporation with its principal office at 2250 East Imperial Highway, Suite
1200, El Segundo, California 90245.
"LAX" means Los Angeles International Airport.
"look-through rule" means the ERISA rule providing that in certain
circumstances where a Plan holds an interest in an entity, the assets of the
entity are deemed to be the Plan's assets.
"MGCL" means the Maryland General Corporation Law.
"Mortgage Loans" means the $96.0 million mortgage loans, the closing of
which is a condition to the completion of the Offering, to be obtained by the
Company concurrently with the consummation of the Offering.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"net absorption" means, with respect to a specified market area, the net
increase in occupied rentable space.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the initial public offering of shares of Common Stock of
Kilroy Realty Corporation pursuant to and as described in this Prospectus.
"Office Properties" means the 14 office properties in which the Company will
have an ownership interest upon completion of the Offering, including
consummation of the Formation Transactions and acquisition of the Acquisition
Properties.
"Omnibus Agreement" means the agreement by and among each of the Continuing
Investors and the Company pursuant to which the Continuing Investors will
contribute their interests in the Properties (other than the Acquisition
Properties), and certain other assets, in exchange for Units representing
limited partnership interests in the Operating Partnership.
"Operating Partnership" means Kilroy Realty, L.P., a Delaware limited
partnership with its office at 2250 East Imperial Highway, Suite 1200, El
Segundo, California 90245, organized in the Formation Transactions and through
which all of the Company's interests in the Properties will be held and real
estate activities will be conducted.
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"Ownership Limit" means the restriction contained in the Company's Articles
of Incorporation providing that, subject to certain exceptions, no holder may
own, or be deemed to own by virtue of the constructive ownership provisions of
the Code, more than 7.0% (by number or value, whichever is more restrictive)
of the outstanding shares of Common Stock.
"Partnership Agreement" means the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended from time to time.
"Partnerships" means those corporations, general and limited partnerships
and trusts affiliated with Kilroy Industries whose Properties are being
acquired by the Operating Partnership.
"Plans" means employee benefit plans and IRAs.
"Preferred Stock" means shares of preferred stock, par value $.01 per share,
of the Company.
"Properties" means the real property and related assets owned by the
Partnerships and contributed to the Company by the Continuing Investors in
connection with the Formation Transactions, including, but not limited to,
real property and the Acquisition Properties.
"Prospectus" means this prospectus relating to the sale of up to 12,000,000
shares of Common Stock of the Company in the Offering, plus the 1,800,000
shares subject to the Underwriters' over-allotment option.
"Regulations" means regulations issued by the United States Department of
Labor defining "plan assets."
"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or an
owner of 10% or more of the REIT, actually or constructively owns a 10% or
greater ownership interest.
"rentable square feet" means a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.
"Representatives" means Prudential Securities Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, J.P. Morgan Securities Inc. and
Smith Barney Inc., as representatives of the Underwriters.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SeaTac Loan" means the $12.0 million mortgage loan secured by the SeaTac
Office Center.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Company" means Kilroy Services, Inc., a Maryland corporation with
its principal office at 2250 East Imperial Highway, El Segundo, CA 90245,
which will perform the Company's development activities and third party
development services, and the economic value of which will be owned 95.0% by
the Operating Partnership and 5.0% collectively by John B. Kilroy, Sr. and
John B. Kilroy, Jr.
"Southern California Area" means the counties of Los Angeles, Orange,
Riverside, San Bernardino and Ventura.
"Stock Incentive Plan" means the Company's stock incentive plan, as further
described in this Prospectus under the caption entitled "Management--Stock
Incentive Plan."
"Thousand Oaks Office Property" means the office building and related realty
located at 2829 Townsgate Road, Thousand Oaks, California.
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"Treasury Regulations" means regulations of the U.S. Department of Treasury
under the Code.
"triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.
"Underwriters" means each of the Underwriters named in the section of this
Prospectus entitled "Underwriting."
"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Representatives relating to the purchase of the Common Stock
offered hereby.
"Units" means limited and general partnership interests representing an
ownership interest in the Operating Partnership.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Kilroy Realty Corporation
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1996................................................................... F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet................. F-3
Pro Forma Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996 and the year ended December 31, 1995... F-5
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-7
Historical:
Independent Auditors' Report............................................ F-8
Balance Sheet as of September 30, 1996.................................. F-9
Notes to Balance Sheet.................................................. F-10
Kilroy Group (Predecessor Affiliates)
Independent Auditors' Report............................................ F-12
Combined Balance Sheets as of September 30, 1996, and December 31, 1995
and 1994............................................................... F-13
Combined Statements of Operations for the nine months ended September
30, 1996 and 1995 and the three years ended December 31, 1995, 1994 and
1993................................................................... F-14
Combined Statements of Accumulated Deficit for the three years ended
December 31, 1995, 1994 and 1993 and nine months ended September 30,
1996................................................................... F-15
Combined Statements of Cash Flows for the nine months ended September
30, 1996 and 1995 and the three years ended December 31, 1995, 1994 and
1993................................................................... F-16
Notes to Combined Financial Statements.................................. F-17
Acquisition Properties
Independent Auditors' Report............................................ F-27
Combined Historical Summaries of Certain Revenues and Certain Expenses
for the nine months ended September 30, 1996 and for the year ended
December 31, 1995...................................................... F-28
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses............................................................... F-29
</TABLE>
F-1
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
This unaudited pro forma condensed consolidated balance sheet is presented
as if (i) the transfer of the Properties and business and operations of the
Kilroy Group pursuant to the Formation Transactions and (ii) the Offering, the
Mortgage Loans and use of proceeds to repay indebtedness and purchase the
Acquisition Properties had each occurred on September 30, 1996. Such pro forma
information is based upon the historical balance sheet of the Kilroy Group at
September 30, 1996. The acquisition of the Properties (other than the
Acquisition Properties) and business and operations of the Kilroy Group will
be recorded by the Company at the historical cost reflected in the Kilroy
Group financial statements. The historical cost basis, similar to a pooling of
interests, will be used because these Properties have been under the common
control of John B. Kilroy, Sr. and John B. Kilroy, Jr. The purchase of the
Acquisition Properties will be accounted for as a purchase transaction. Future
acquisitions, including the possible purchase of Excluded Properties, will be
accounted as purchase transactions. This pro forma condensed balance sheet
should be read in conjunction with the pro forma condensed statement of
operations of the Company and the historical combined financial statements and
notes thereto of the Kilroy Group and the historical combined summaries of
certain revenues and certain expenses of the Acquisition Properties included
elsewhere in this Prospectus. See "The Company" and "Use of Proceeds."
The unaudited pro forma condensed balance sheet is not necessarily
indicative of what the actual financial position of the Company would have
been assuming the Company had been formed and the consummation of the
Formation Transactions, the Offering and the Mortgage Loans and the use of
proceeds thereof, and the acquisition of the Acquisition Properties at
September 30, 1996, nor does it purport to represent the future financial
position of the Company.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------
KILROY REALTY
KILROY REALTY KILROY CORPORATION
CORPORATION GROUP ACQUISITION PRO FORMA PRO FORMA
HISTORICAL HISTORICAL PROPERTIES ADJUSTMENTS CONSOLIDATED
------------- ---------- ----------- ----------- -------------
(A) (B)
ASSETS
<S> <C> <C> <C> <C> <C>
Rental properties, net
of accumulated
depreciation and
amortization........... $ -- $ 119,405 $ 58,022 (C) $ -- $177,427
Cash and cash
equivalents............ 1 (58,022)(C) 119,495 (D) 61,474
Tenant receivables,
net.................... 3,363 3,363
Deferred charges and
other assets, net of
accumulated
amortization........... 8,294 24 (E) 8,318
--------- --------- -------- --------- --------
Total................ $ 1 $ 131,062 -- $ 119,519 $250,582
========= ========= ======== ========= ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C>
Liabilities:
Debt................... $ -- $ 224,046 $(128,046)(F) $ 96,000
Accounts payable and
accrued expenses...... 2,600 2,600
Accrued construction
costs................. 460 (460)(G)
Accrued property
taxes................. 1,007 1,007
Accrued interest
payable............... 3,538 (3,538)(H)
Accrued cost of option
buy-out and tenant
improvements.......... 3,650 (2,260)(I) 1,390
Rent received in
advance and tenant
security deposits..... 8,984 8,984
--------- --------- -------- --------- --------
Total liabilities.... 244,285 (134,304) 109,981
--------- --------- -------- --------- --------
Minority interest....... 25,730 (J) 25,730
--------- --------- -------- --------- --------
Stockholders' equity
(deficit):
Common stock........... 1 120 (K) 121
Additional paid-in
capital............... 253,703 (K) 114,750
(25,730)(J)
(113,223)(L)
Accumulated deficit.... (113,223) 113,223 (L)
--------- --------- -------- --------- --------
Total stockholders'
equity (deficit).... 1 (113,223) 228,093 114,871
--------- --------- -------- --------- --------
Total................ $ 1 $ 131,062 $ 119,519 $250,582
========= ========= ======== ========= ========
</TABLE>
F-2
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
These pro forma adjustments are to reflect the Offering, the Formation
Transactions, including the transfer of the Properties (other than the
Acquisition Properties), the purchase of the Acquisition Properties and the
Mortgage Loans and the use of proceeds thereof.
(A) Reflects Kilroy Realty Corporation audited balance sheet as of September
30, 1996.
(B) Reflects Kilroy Group audited historical combined balance sheet as of
September 30, 1996.
(C) Reflects the cost of the Acquisition Properties.
The Acquisition Properties, all of which will be acquired from unaffiliated
third parties, are as follows:
<TABLE>
<CAPTION>
PROPERTY CASH PURCHASE PRICE SELLER
-------- ------------------- ------
<S> <C> <C>
Westlake Plaza Centre.... $13,235 Westlake Plaza Partners
Long Beach Phase I....... 23,488 The Northwestern Mutual Life
Insurance Company
La Palma Business
Center.................. 12,208 Horowitz Brothers 1975 Trust
Monarch Building......... 9,091 ARGO REO Limited Partnership
-------
Total................ $58,022
=======
</TABLE>
The acquisition of the Acquisition Properties will be accounted for as
purchase transactions. The operations of the Sellers were not acquired and
land and buildings were the only assets purchased. The cost of the
properties will be allocated as follows:
<TABLE>
<S> <C>
Land............................................................. $19,297
Buildings and improvements....................................... 38,725
-------
$58,022
=======
</TABLE>
(D) The adjustment to pro forma cash and cash equivalents was determined as
follows:
<TABLE>
<S> <C>
. Net proceeds from the Offering after underwriting discount and
estimated issuance costs of $23,441............................ $ 246,559
. Net proceeds from the $84.0 Million Loan bearing interest at
8.2% and the $12.0 million SeaTac Loan bearing interest at 30-
day LIBOR plus 300 basis points after estimated issuance cost
of $480........................................................ 95,520
---------
. Net proceeds................................................... 342,079
. Repayment of mortgage debts net of forgiveness of $4,062 and
including $338 of additional loan fees ........................ (220,322)
. Purchase of Acquisition Properties............................. (58,022)
. Payment of accrued interest.................................... (912)
. Payment of debt issuance costs................................. (1,350)
---------
Net increase in cash and cash equivalents........................ $ 61,473
=========
(E)Reflects the net increase as follows:
. Issuance costs of the Mortgage Loans and the $100 million
Credit Facility................................................. $ 1,830
. Write-off of loan costs relating to repayment of mortgage
debt............................................................ (1,806)
---------
Net increase in deferred charge.................................. $ 24
=========
</TABLE>
F-3
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED)--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(F) Reflects the net decrease as follows:
<TABLE>
<S> <C>
. Issuance of $84.0 Million Loan payable monthly until maturity
in 2005....................................................... $ 84,000
. Issuance of $12.0 million SeaTac Loan......................... 12,000
. Repayment of mortgage debt from net proceeds of the Offering
and the Mortgage Loans........................................ (224,046)
---------
Net decrease in mortgage debt................................... $(128,046)
=========
</TABLE>
(G) Amount represents a liability for construction costs which will not be
assumed by Kilroy Realty Corporation.
(H) Amount represents accrued interest which will not be assumed by Kilroy
Realty Corporation ($732) and accrued interest forgiven ($1,894) and paid
($912) in connection with the repayment of mortgage debt.
(I) Amount represents the portion of accrued cost of option buy-out which will
not be assumed by Kilroy Realty Corporation.
(J) Reflects the estimated minority interest of the Continuing Investors in
the Operating Partnership computed as follows:
<TABLE>
<S> <C>
Pro forma total assets............................................. $250,581
Pro forma total liabilities........................................ (109,981)
--------
Pro forma net book value of Operating Partnership.................. $140,600
========
Minority interest of Continuing Investors at 18.3%................. $ 25,730
========
</TABLE>
(K) Reflects the issuance of 12,000,000 shares of Common Stock, par value $.01
per share, at an assumed initial Offering price of $22.50 per share. The
following table sets forth the adjustments to additional paid-in capital:
<TABLE>
<S> <C>
. Net proceeds from the Offering of Common Stock after
underwriting discounts and commissions and estimated issuance
costs of $23,441................................................ $246,559
Less: par value of Common Stock of 12,000,000 shares at $.01 per
share........................................................... (120)
. Accrued interest which will not be assumed by Kilroy Realty
Corporation..................................................... 732
. Write-off of loan costs relating to repayment of mortgage debt.. (1,806)
. Portion of liability for option buy-out cost which will not be
assumed by Kilroy Realty Corporation............................ 2,260
. Net gain on repayment of mortgage debt and accrued interest..... 5,618
. Liability for construction costs which will not be assumed by
Kilroy Realty Corporation....................................... 460
--------
Net adjustment to additional paid-in capital...................... $253,703
========
</TABLE>
(L) Reflects the reclassification of the accumulated deficit.
F-4
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited pro forma condensed consolidated statements of operations are
presented as if (i) the transfer of the Properties (other than the Acquisition
Properties) and business and operations of the Kilroy Group pursuant to the
Formation Transactions and (ii) the Offering and the Mortgage Loans, and the
use of proceeds thereof to repay indebtedness and purchase the Acquisition
Properties, each had occurred on January 1, 1995. Such pro forma information
is based upon the historical results of operations of the Kilroy Group for the
nine months ended September 30, 1996, and the year ended December 31, 1995.
This pro forma condensed consolidated statement of operations should be read
in conjunction with the pro forma condensed consolidated balance sheet of the
Company and the historical combined financial statements and notes thereto of
the Kilroy Group and the historical combined summaries of certain revenues and
certain expenses of the Acquisition Properties and notes thereto included
elsewhere in this Prospectus. Reference is also made to "The Company" and "Use
of Proceeds."
The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of what the actual results of operations of the
Company would have been assuming the Company had been formed and the
consummation of the Formation Transactions, the Offering and the Mortgage
Loans and the use of proceeds thereof, and the acquisition of the Acquisition
Properties at January 1, 1995, nor does it purport to represent the results of
operations of future periods of the Company.
F-5
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------------------------------
KILROY COMPANY PRO
GROUP ACQUISITION PRO FORMA PRO FORMA FORMA
HISTORICAL PROPERTIES SUBSIDIARY ADJUSTMENTS CONSOLIDATED
---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income.... $25,156 $5,875 $ (396)(A) $ 30,635
Tenant
reimbursements.. 2,583 743 3,326
Parking.......... 1,317 1,317
Development and
management
fees............ 580 $(580)(B)
Lease termination
fees............
Sale of air
rights..........
Other income..... 65 299 364
------- ------ ----- -------- ----------
Total revenues.. 29,701 6,917 (580) (396) 35,642
------- ------ ----- -------- ----------
EXPENSES:
Property
expenses........ 5,042 1,315 54 (C) 6,411
Real estate
taxes........... 970 417 70 (D) 1,457
General and
administrative.. 1,607 200 1,293 (E) 3,100
Ground lease..... 579 253 832
Option buy-out
cost............ 3,150 3,150
Development and
management
expenses........ 584 (584)(B)
Interest
expense......... 16,234 (10,297)(F) 5,937
Depreciation and
amortization.... 6,838 830(G) 7,668
------- ------ ----- -------- ----------
Total expenses.. 35,004 3,015 (584) (8,880) 28,555
------- ------ ----- -------- ----------
Income (loss)
from operations
before equity in
income
of subsidiaries
and minority
interest........ (5,303) 3,902 4 8,484 7,087
Equity in income
of subsidiary... (58)(B) (58)
Minority
interest........ (1,286)(H) (1,286)
------- ------ ----- -------- ----------
Net income
(loss) $(5,303) $3,902 $ 4 $ 7,140 $ 5,743
======= ====== ===== ======== ==========
Average number of
shares
outstanding...... 12,060,000
==========
Net income per
common share(I).. $ 0.48
==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
KILROY COMPANY PRO
GROUP ACQUISITION PRO FORMA PRO FORMA FORMA
HISTORICAL PROPERTIES SUBSIDIARY ADJUSTMENTS CONSOLIDATED
---------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income.... $ 32,314 $7,355 $ (528)(A) $ 39,141
Tenant
reimbursements.. 3,002 884 3,886
Parking.......... 1,582 1,582
Development and
management
fees............ 1,156 $(1,156)(B)
Lease termination
fees............ 100 100
Sale of air
rights.......... 4,456 4,456
Other income..... 298 407 705
-------- ------ ------- -------- ----------
Total revenues.. 42,908 8,646 (1,156) (528) 49,870
-------- ------ ------- -------- ----------
EXPENSES:
Property
expenses........ 6,834 1,882 (48)(C) 8,668
Real estate
taxes........... 1,416 495 91 (D) 2,002
General and
administrative.. 2,152 303 1,678 (E) 4,133
Ground lease..... 789 338 1,127
Option buy-out
cost............
Development and
management
expenses........ 737 (737)(B)
Interest
expense......... 24,159 (16,243)(F) 7,916
Depreciation and
amortization.... 9,474 1,106(G) 10,580
-------- ------ ------- -------- ----------
Total expenses.. 45,561 4,124 (737) (14,522) 34,426
-------- ------ ------- -------- ----------
Income (loss)
from operations
before equity in
income
of subsidiaries
and minority
interest........ (2,653) 4,522 (419) 13,994 15,444
Equity in income
of subsidiary... 136 (B) 136
Minority
interest........ (2,851)(H) (2,851)
-------- ------ ------- -------- ----------
Net income
(loss) $(2,653) $4,522 $ (419) $ 11,279 $ 12,729
======= ====== ======= ======== ==========
Average number of
shares
outstanding...... 12,060,000
==========
Net income per
common share(I).. $ 1.06
==========
</TABLE>
F-6
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (DOLLARS IN THOUSANDS)
(A) Represents the elimination of rental income received from Kilroy
Industries.
(B) Represents the elimination of the Services Company's gross revenues and
expenses and the recording of the equity in income of the Services Company
net of income taxes.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------- ------------
<S> <C> <C>
Development and management fees........... $ 580 $1,156
Development and management expenses....... (584) (737)
Elimination of nonrecurring Services
Company expenses......................... 80
----- ------
76 419
Elimination of management fees earned on
one of the Acquisition Properties........ (137) (181)
----- ------
(61) 238
Income tax expense........................ (95)
----- ------
Estimated service company net income
(loss)................................... (61) 143
----- ------
At 95% economic interest.................. $ (58) $ 136
===== ======
</TABLE>
(C) Represents the elimination of management fees charged to the Kilroy Group
by Kilroy Industries and the reclassification of expenses which previously
had not been allocated to individual properties.
(D) Represents incremental property taxes on the Acquisition Properties due to
change of ownership.
(E) Represents the estimated incremental increases in other general and
administrative expenses, including, without limitation, the incremental
general and administrative expenses to be incurred as a public company,
increases in other G&A expenses, less the effect of the reclassification
of property expenses which previously had not been allocated to individual
properties.
(F) Reflects reduction of interest expenses associated with the mortgage debts
assumed to be repaid using net proceeds from the Offering:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------- ------------
<S> <C> <C>
. Interest expense on the Mortgage Loans
(fixed interest rate of 8.2% on $84,000
with 25-year amortization; variable
interest rate of LIBOR plus 3.0% on
$12,000)................................ $ 5,892 $ 7,856
. Amortization of the issuance costs on
the Mortgage Loans...................... 45 60
. Interest expense on debt assumed to be
retired................................. (16,234) (24,159)
-------- --------
Net interest expense reduction.......... $(10,297) $(16,243)
======== ========
</TABLE>
(G) Represents depreciation expense calculated based on the cost of the
Acquisition Properties' buildings depreciated on the straight-line method
over a 35 year life.
(H) Represents the income allocated to the 18.3% minority interest (Units) in
the Operating Partnership owned by Continuing Investors.
(I) Pro forma net income per share of Common Stock is based upon 12,000,000
shares of Common Stock assumed to be outstanding in connection with the
Offering and 60,000 restricted shares of Common Stock granted to an
officer of the Company.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Kilroy Realty Corporation:
We have audited the accompanying balance sheet of Kilroy Realty Corporation
(the "Company") as of September 30, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at September 30, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
October 25, 1996
F-8
<PAGE>
KILROY REALTY CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash............................................................... $1,000
======
STOCKHOLDER'S EQUITY
Common Stock, $.01 par value, 10,000,000 shares authorized;
50 shares issued and outstanding.................................. $1,000
======
</TABLE>
See notes to balance sheet.
F-9
<PAGE>
KILROY REALTY CORPORATION
NOTES TO BALANCE SHEET
SEPTEMBER 30, 1996
1. FORMATION OF THE COMPANY
Kilroy Realty Corporation (the "Company") was incorporated in Maryland on
September 13, 1996. The Company will file a Registration Statement on Form S-
11 with the Securities and Exchange Commission with respect to a proposed
public offering (the "Offering") of 12,000,000 shares of Common Stock. The
Company has been formed to succeed to the business of the Kilroy Group
consisting of a portfolio of 19 office and industrial properties (the "Kilroy
Properties") and the real estate ownership, acquisition, development, leasing
and management businesses historically conducted by Kilroy Industries and
related partnerships. The Company's assets will be owned and controlled by,
and all of its operations will be conducted through, Kilroy Realty, L.P. (the
"Operating Partnership") and other subsidiaries. The Company will control, as
the sole general partner, and will initially own an approximately 81.7%
interest in, the Operating Partnership. The Operating Partnership will conduct
certain development services through Kilroy Services, Inc. ("Services
Company"). John B. Kilroy, Sr. and John B. Kilroy, Jr. together will own 100%
of the voting common stock representing a 5% economic interest in the Services
Company. The Operating Partnership will own 100% of the nonvoting preferred
stock representing 95% of the economic interest in the Services Company. The
nonvoting preferred stock will not have any voting rights except as provided
by law, will not be convertible or exchangeable into other securities of the
Company, will have no redemption rights or any appraisal rights except as
provided by law and the holders thereof will have no preemptive rights to
subscribe for any securities of the Company. Holders of the nonvoting
preferred stock will participate in all distributions from the Services
Company and receive 95% of all distributions, if and when such distributions
are authorized and declared by the Services Company's board of directors out
of funds legally available therefor. Upon dissolution, holders of nonvoting
preferred stock will be entitled to receive preferential liquidating
distributions in an amount equal to 95% of the value of the Services Company's
assets. The Operating Partnership's investment in the Services Company will be
accounted for under the equity method. As of October 25, 1996, the Services
Company had not yet been formed.
Prior to and simultaneous with the consummation of the Offering, the
Company, the Operating Partnership and the Continuing Investors intend to
engage in certain formation transactions (the "Formation Transactions")
summarized as follows:
(i) The Continuing Investors will contribute all of their interests in
the Kilroy Properties to the Operating Partnership in exchange for units
representing limited partnership interests in the Operating Partnership
("Units"). The transfer of the Kilroy Properties, which are under the
common control of John B. Kilroy, Sr. and John B. Kilroy, Jr., to the
Operating Partnership will be accounted for at the historical cost of the
Continuing Investors' interests therein similar to a pooling of interests;
(ii) The Company will sell shares of Common Stock in the Offering and
will contribute the net proceeds from the Offering (estimated to be
approximately $246.6 million after deduction of estimated offering
expenses) to the Operating Partnership in exchange for Units in the
Operating Partnership. The Operating Partnership will use substantially all
of such net proceeds, together with the net proceeds of borrowings under
the Mortgage Loans, discussed below, for the repayment of certain existing
mortgage and loan indebtedness on the Kilroy Properties, the acquisition of
certain properties (the "Acquisition Properties") and additions to working
capital cash reserves;
(iii) The Operating Partnership will enter into an $84.0 million secured
mortgage financing and a $12.0 million secured mortgage financing (the
"Mortgage Loans"), which will be nonrecourse obligations of the Operating
Partnership; and
(iv) The Company will amend its charter and authorize 150,000,000 shares
of Common Stock, $.01 par value per share, and 30,000,000 shares of
Preferred Stock, par value $.01 per share.
F-10
<PAGE>
KILROY REALTY CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
SEPTEMBER 30, 1996
2. INCOME TAXES
It is the intent of the Company to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company generally will not be subject to federal income tax to the extent that
it distributes at least 95% of its REIT taxable income to its stockholders.
REITs are subject to a number of organizational and operational requirements.
If the Company fails to qualify as a REIT in any taxable year, the Company
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax rates.
3. OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company upon the
consummation of the Offering. These costs will be deducted from the gross
proceeds of the Offering.
4. STOCK INCENTIVE PLAN AND RESTRICTED STOCK GRANT
Prior to the consummation of the Offering, the Company intends to adopt and
have its shareholders approve a stock incentive plan (the "Stock Incentive
Plan"), for the purpose of attracting and retaining executive officers,
directors and employees. A maximum of 1,460,000 shares of Common Stock
(subject to adjustment) will be reserved by the Company for issuance under the
Stock Incentive Plan, including 60,000 restricted shares of Common Stock which
will be issued to an officer of the Company upon consummation of the Offering
and which will vest in equal annual installments over a three-year period.
******
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Kilroy Group:
We have audited the accompanying combined balance sheets of Kilroy Group
(described in Note 1) as of September 30, 1996 and December 31, 1995 and 1994,
and the related combined statements of operations, accumulated deficit, and
cash flows for the nine months ended September 30, 1996 and each of the three
years in the period ended December 31, 1995 and the combined statements of
operations and cash flows for the nine months ended September 30, 1995. These
financial statements are the responsibility of the management of Kilroy Group.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kilroy Group as of September 30, 1996 and
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the nine months ended September 30, 1996 and 1995 and for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
December 20, 1996
F-12
<PAGE>
KILROY GROUP
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
<S> <C> <C> <C>
ASSETS
RENTAL PROPERTIES (Notes 1, 2, 4, 5, 6 and
9):
Land..................................... $ 12,490 $ 12,490 $ 12,490
Buildings and improvements............... 214,637 212,493 211,331
--------- --------- ---------
Total rental properties................ 227,127 224,983 223,821
Accumulated depreciation and
amortization............................ (107,722) (101,774) (93,475)
--------- --------- ---------
Rental properties, net................. 119,405 123,209 130,346
TENANT RECEIVABLES, NET (Note 2)........... 3,363 3,973 3,961
DEFERRED CHARGES AND OTHER ASSETS, NET
(Notes 2, 3 and 7)........................ 8,294 5,675 8,944
--------- --------- ---------
TOTAL...................................... $ 131,062 $ 132,857 $ 143,251
========= ========= =========
LIABILITIES AND ACCUMULATED DEFICIT
LIABILITIES:
Debt (Notes 4, 8 and 9).................. $ 224,046 $ 233,857 $ 250,059
Accounts payable and accrued expenses.... 2,600 2,590 3,482
Accrued construction costs (Note 2)...... 460 874 --
Accrued property taxes (Note 2).......... 1,007 1,399 1,563
Property tax refund payable to tenants
(Note 3)................................ -- -- 1,500
Accrued interest payable (Note 4)........ 3,538 7,251 8,057
Accrued cost of option buy-out and tenant
improvements (Note 5)................... 3,650 -- --
Rents received in advance and tenant
security deposits (Note 2).............. 8,984 8,712 8,924
--------- --------- ---------
Total liabilities...................... 244,285 254,683 273,585
COMMITMENTS AND CONTINGENCIES (Note 6).....
ACCUMULATED DEFICIT (Note 1)............... (113,223) (121,826) (130,334)
--------- --------- ---------
TOTAL...................................... $ 131,062 $ 132,857 $ 143,251
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-13
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, DECEMBER 31,
----------------- -------------------------
1996 1995 1995 1994 1993
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUES (Notes 2 and 5):
Rental income (Note 7).......... $25,156 $ 24,056 $32,314 $31,220 $34,239
Tenant reimbursements (Note 3).. 2,583 2,377 3,002 1,643 4,916
Parking......................... 1,317 1,193 1,582 1,357 1,360
Development and management
fees........................... 580 926 1,156 919 751
Sale of air rights (Note 2)..... -- 4,456 4,456 -- --
Lease termination fees.......... -- -- 100 300 5,190
Other income (Note 3)........... 65 211 298 784 188
------- -------- ------- ------- -------
Total revenues................ 29,701 33,219 42,908 36,223 46,644
------- -------- ------- ------- -------
EXPENSES:
Property expenses (Notes 2 and
7)............................. 5,042 5,045 6,834 6,000 6,391
Real estate taxes (Note 3)...... 970 1,088 1,416 (448) 2,984
General and administrative...... 1,607 1,554 2,152 2,467 1,113
Ground leases (Note 6).......... 579 542 789 913 941
Development and management
expenses....................... 584 564 737 468 581
Option buy-out cost (Note 5).... 3,150 -- -- -- --
Interest expense................ 16,234 18,660 24,159 25,376 25,805
Depreciation and amortization... 6,838 7,171 9,474 9,962 10,905
------- -------- ------- ------- -------
Total expenses................ 35,004 34,624 45,561 44,738 48,720
------- -------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY GAINS.. (5,303) (1,405) (2,653) (8,515) (2,076)
EXTRAORDINARY GAINS
(Note 4)........................ 20,095 15,267 15,267 1,847 --
------- -------- ------- ------- -------
NET INCOME (LOSS)................ $14,792 $ 13,862 $12,614 $(6,668) $(2,076)
======= ======== ======= ======= =======
</TABLE>
See notes to combined financial statements.
F-14
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1993............................................ $(102,148)
Deemed and actual distributions to partners, net of
contributions.................................................... (10,736)
Net loss.......................................................... (2,076)
---------
BALANCE, DECEMBER 31, 1993.......................................... (114,960)
Deemed and actual distributions to partners, net of
contributions.................................................... (8,706)
Net loss.......................................................... (6,668)
---------
BALANCE, DECEMBER 31, 1994.......................................... (130,334)
Deemed and actual distributions to partners, net of
contributions.................................................... (4,106)
Net income........................................................ 12,614
---------
BALANCE, DECEMBER 31, 1995.......................................... (121,826)
Deemed and actual distributions to partners, net of
contributions.................................................... (6,189)
Net income........................................................ 14,792
---------
BALANCE, SEPTEMBER 30, 1996......................................... $(113,223)
=========
</TABLE>
See notes to combined financial statements.
F-15
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------
1996 1995 1995 1994 1993
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $ 14,792 $ 13,862 $ 12,614 $(6,668) $(2,076)
Adjustment to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............. 6,838 7,171 9,474 9,962 10,905
Net (increase) decrease:
Provision for bad debts.. 920 839 1,000 909 350
Extraordinary gains...... (20,095) (15,267) (15,267) (1,847) --
Changes in assets and
liabilities:
Tenant receivables....... (310) (571) (1,012) (760) (695)
Deferred charges and
other assets, net ...... (1,688) 2,331 2,095 (3,212) 34
Accounts payable and
accrued expenses........ 10 1,519 (892) 2,274 (698)
Accrued construction
costs................... (414) -- 874 -- --
Accrued property taxes... (392) (671) (164) (2,411) 1,676
Property tax refund
payable to tenants...... -- (1,500) (1,500) 1,500 --
Accrued interest
payable................. 1,945 2,274 3,061 1,846 1,368
Accrued cost of option
buy-out and tenant
improvements............ 3,650 -- -- -- --
Rents received in advance
and tenant security
deposits................ 272 (717) (212) 5,014 593
--------- --------- --------- ------- -------
Net cash provided by
operating activities... 5,528 9,270 10,071 6,607 11,457
--------- --------- --------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for rental
properties................ (2,140) (446) (1,162) (1,765) (633)
Reimbursement of tenant
improvements.............. -- -- -- -- 2,661
--------- --------- --------- ------- -------
Net cash (used in)
provided by investing
activities............. (2,140) (446) (1,162) (1,765) 2,028
--------- --------- --------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds received from
debt...................... 21,057 489 625 11,127 7,191
Principal payments on
debt...................... (18,256) (2,207) (5,428) (7,263) (9,940)
Deemed and actual
distributions to
partners.................. (6,189) (7,106) (4,106) (8,706) (10,736)
--------- --------- --------- ------- -------
Net cash (used in)
provided by financing
activities............. $ (3,388) $ (8,824) $ (8,909) (4,842) (13,485)
========= ========= ========= ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the period
for interest.............. $ (14,289) $ (16,386) $ (21,098) (23,530) (24,437)
========= ========= ========= ======= =======
</TABLE>
See notes to combined financial statements.
F-16
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization--Kilroy Group (not a legal entity) consists of the combination
of Kilroy Industries ("KI") and general and limited partnerships, a limited
liability company and trusts, the properties of which are under common control
of KI and/or its stockholders, John B. Kilroy, Sr. and John B. Kilroy, Jr. The
entities referred to collectively as Kilroy Group ("KG") are engaged in the
acquisition, development, ownership and operation of 19 office and industrial
properties (the "Kilroy Properties") located in California, Washington and
Arizona. KI has historically provided acquisition, financing, construction and
leasing services with respect to the Kilroy Properties. KI has also provided
development services to third-party owners of properties for a fee.
The names of the corporation, partnerships and trusts which directly own the
Kilroy Properties are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
OF PROPERTY BY KI,
JOHN B. KILROY, SR.,
AND/OR
ENTITY NAME JOHN B. KILROY, JR. PROPERTY LOCATION
----------- -------------------- -------- --------
<S> <C> <C> <C>
OFFICE:
Kilroy Airport
Associates 100% Kilroy Airport Center at El Segundo:
2240 E. Imperial Highway El Segundo, California
2250 E. Imperial Highway El Segundo, California
2260 E. Imperial Highway El Segundo, California
Kilroy Long Beach
Partner II 99%(1) Kilroy Airport Center Long Beach:
3750 Kilroy Airport Way Long Beach, California
3760 Kilroy Airport Way Long Beach, California
3780 Kilroy Airport Way Long Beach, California
Kilroy Freehold
Industrial
Development
Organization
("K-FIDO") 83%(2) 185/181 S. Douglas Street El Segundo, California
SeaTac Properties Ltd. 99%(1) SeaTac Office Center:
17900 Pacific Highway Seattle, Washington
17930 Pacific Highway Seattle, Washington
18000 Pacific Highway Seattle, Washington
INDUSTRIAL:
Kilroy Industries 100% 2031 E. Mariposa Avenue El Segundo, California
Kilroy Building 73
Partnership 100% 3332 E. La Palma Avenue Anaheim, California
K-FIDO 83%(2) 2260 E. El Segundo Boulevard El Segundo, California
K-FIDO 83%(2) 2265 E. El Segundo Boulevard El Segundo, California
K-FIDO 83%(2) 2270 E. El Segundo Boulevard El Segundo, California
A-102 Trust 20%(2) 5115 N. 27th Avenue Phoenix, Arizona
KI 1979 Trust 85%(2) 1000 E. Ball Road Anaheim, California
KI 1979 Trust 85%(2) 1230 S. Lewis Street Anaheim, California
Kilroy Garden Grove
Associates 100% 12681/12691 Pala Drive Garden Grove, California
</TABLE>
- --------
(1) The balance of the ownership interests are held by Marshall L. McDaniel
(representing an aggregate interest of approximately 1%).
(2) The balance of the ownership interests are held by the four adult
daughters of John B. Kilroy, Sr.
F-17
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The development services of KG relating to non-owned properties have been
conducted by KI and Kilroy Technologies Company, LLC, both wholly-owned by
John B. Kilroy, Sr. and John B. Kilroy, Jr.
Certain of the named entities are owned by other entities. The Kilroy
Properties are ultimately owned beneficially in the proportions identified
above.
Basis of Presentation--The accompanying combined financial statements of KG
have been presented on a combined basis because of the common ownership and
management and because the entities are expected to be the subject of a
business combination with Kilroy Realty Corporation (the "Company"), a
recently formed Maryland corporation which is expected to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as amended.
Concurrently with the business combination, the Company intends to raise
capital through an initial public offering of Common Stock, mortgage loans and
a credit facility to be secured by mortgage liens on the properties. The
business combination has been structured to allow the beneficial owners of the
Kilroy Properties (including members of KG) to receive limited partnership
interests in Kilroy Realty, L.P. (the "Operating Partnership") aggregating a
18.3% interest. The Company will be the managing general partner of the
Operating Partnership, which will hold the operating assets and will manage
the Kilroy Properties. Certain other properties and operations affiliated with
KI have been excluded as they are not compatible with the investment purposes
of the Company. Deemed and actual cash distributions to partners, net of
contributions, included in the combined statements of accumulated deficit
generally represent distributions of the cash flows generated by KG, and
advances to partners and KI, as well as related-party transactions (see
Note 7).
2. SIGNIFICANT ACCOUNTING POLICIES
Rental Properties--Rental properties are stated at historical cost less
accumulated depreciation, which, in the opinion of KG's management, is not in
excess of net realizable value. Net realizable value does not purport to
represent fair market value. Costs incurred for the acquisition, renovation
and betterment of the properties are capitalized. Maintenance and repairs are
charged to expense as incurred.
During 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Under this standard, if impairment
conditions exist, the Company makes an assessment of the recoverability of the
carrying amounts of individual properties by estimating the future
undiscounted cash flows, excluding interest charges, on a property by property
basis. If the carrying amount exceeds the aggregate future cash flows, the
Company would recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. Any long-lived assets to be disposed
of are to be valued at estimated fair value less costs to sell. Based on such
periodic assessments, no impairments have been determined and, therefore, no
real estate carrying amounts have been adjusted.
Depreciation and Amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives, as
follows:
Buildings--25 to 40 years
Tenant improvements--shorter of lease term or useful lives ranging from 5
to 20 years
Deferred Charges--Deferred charges include deferred leasing costs and loan
fees. Leasing costs include leasing commissions that are amortized on the
straight-line basis over the initial lives of the leases, which range from 5
to 10 years. Deferred loan fees are amortized on a straight-line basis over
the terms of the respective loans, which approximates the effective interest
method.
Accrued Property Taxes--As of September 30, 1996 and December 31, 1995 and
1994, $202,000, $696,000 and $783,000, respectively, of accrued property taxes
were past due.
F-18
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition and Tenant Receivables--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the lease term. Unbilled deferred rent represents the
amount that expected straight-line rental income exceeds rents currently due
under the lease agreement. Total tenant receivables consists of the following
amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tenant rent and reimbursements receivable... $ 3,889 $ 3,171 $1,981
Allowance for uncollectible rent............ (2,757) (1,837) (837)
Unbilled deferred rent...................... 2,231 2,639 2,817
------- ------- ------
Tenants receivables, net.................... $ 3,363 $ 3,973 $3,961
======= ======= ======
</TABLE>
Included in tenant rent and reimbursements receivable are additional rentals
based on common area maintenance expenses and certain other expenses that are
accrued in the period in which the related expenses are incurred.
Rents Received in Advance and Tenant Security Deposits--The balances as of
September 30, 1996 and December 31, 1995 and 1994 include a $4,000,000 payment
received from a tenant in connection with the tenant's obligation to remove
tenant improvements upon termination of the lease. Such payment is
nonrefundable and will be recognized as income, net of the costs of removal of
improvements, upon termination of the lease. The related lease expires in
1999, subject to a five-year option to renew.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Parking--The Kilroy Airport Center--LAX and the SeaTac Office Center include
parking facilities. KG records as revenue the gross parking receipts. KG
contracts with parking management companies to operate the parking facilities,
and such contract costs are included in property expenses.
Development Services--Development and management fees represent fees earned
by KG for supervision services provided for building development and
management of nonowned properties. Fees are typically a percentage of total
development costs plus reimbursement for certain expenses. Unreimbursed
expenses are recorded as development expenses and include items such as wages,
equipment rental, supplies, etc.
Sale of Air Rights--In 1995, based on an agreement between KG and the
California Transportation Commission, KG received $4,456,000, net of related
expenses, for granting temporary construction and permanent air right
easements over a portion of its property for the construction of a freeway on-
ramp. In connection with this transaction, KG accrued $874,000 as of December
31, 1995 for the costs of restoration of the property after construction of
the on-ramp.
F-19
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred assets:
Deferred financing costs................ $ 2,631 $ 3,436 $ 3,333
Deferred leasing costs (Note 7)......... 11,069 11,327 10,650
------- -------- -------
Total deferred assets................. 13,700 14,763 13,983
Accumulated amortization.................. (6,791) (10,142) (8,934)
------- -------- -------
Deferred assets, net...................... 6,909 4,621 5,049
Prepaid expenses.......................... 1,385 1,054 1,075
Property tax refunds receivable........... --- --- 2,820
------- -------- -------
Total deferred charges and other
assets............................... $ 8,294 $ 5,675 $ 8,944
======= ======== =======
</TABLE>
Property tax refunds, which were collected in 1995, relate to appeals filed
by KG in the fourth quarter of 1994 for refunds of property taxes paid in 1990
through 1994 and include related interest income of $441,000. Such amounts
were recorded as a reduction of property taxes and as other income during the
year ended December 31, 1994. Of these property tax recoveries, approximately
$1,500,000 was refunded to tenants of the related properties and has been
recorded as a reduction to tenant reimbursements income during the year ended
December 31, 1994.
4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank notes payable, due in December 1994,
bearing interest at prime (8.5% at
December 31, 1995)(a)..................... --- $ 16,536 $ 30,536
Bank notes payable, due in January 1999,
bearing interest at LIBOR + 1.15% (6.4% at
September 30, 1996 and 6.9% at December
31, 1995)................................. $ 56,168 54,811 54,186
Notes payable to finance company and
related pension funds, maturing in 1997
and 1998, bearing interest at rates from
8.5% to 12.7%(b)(c)....................... 28,537 33,447 33,705
Note payable to insurance company, maturing
April 2001, bearing interest at 9.75%(d).. 20,162 20,162 21,173
Notes payable to insurance companies,
maturing March 2006, bearing interest at
9.5%(c)................................... 1,989 10,722 11,170
Note payable to insurance company due April
2002, bearing interest at 9.25%(e)........ 94,799 97,283 98,347
Notes payable to underwriter due in June
1997, bearing
interest at LIBOR + 3% (8.5% at September
30, 1996)(c).............................. 21,525 -- --
Bank notes payable, due in July 2008,
bearing interest at 10%................... 866 896 942
-------- -------- --------
$224,046 $233,857 $250,059
======== ======== ========
</TABLE>
- --------
(a) In September 1995, a note payable to a bank of $14,000,000 due in December
1994 and accrued interest payable of $3,867,000 was retired by a cash
payment of $2,600,000. KG recorded an extraordinary gain of
F-20
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$15,267,000 as a result of this transaction. The remaining notes payable of
$16,536,000 were in default as of December 31, 1995 and 1994. Past due
interest on the remaining notes, approximately $5,003,000 at December 31,
1995, is included in accrued interest. See discussion below under (c)
regarding settlement of this loan and accrued interest.
(b) During the nine months ended September 30, 1996, three of the notes payable
totaling $16,608,000 were amended to extend the maturity dates from 1996 to
1997 and 1998. In May, 1996, an additional note with a principal balance of
$2,500,000 which was due in February 1996 was amended to extend the
maturity date from February 1996 to 1997. During June 1996, notes payable
of $5,765,000 were amended to extend the maturity date from June 1996 to
April 1998.
(c) On June 20, 1996, KG obtained a mortgage loan of $21,525,000 from one of
the underwriters of the proposed public offering of common stock referred
to in Note 1. Such loan is due on June 20, 1997 and bears interest at 3%
above LIBOR. Fees of $2,279,000 were incurred in connection with obtaining
this loan. An additional fee of $337,500 is payable if the loan is not
repaid within 150 days after June 20, 1996. The proceeds were used to pay:
$2,100,000 as settlement of bank notes with an aggregate principal balance
of $16,536,000 and $5,659,000 of unpaid interest, a note payable to an
insurance company with a principal balance of $8,549,000 and a note payable
to a finance company with a principal balance of $4,600,000. The
forgiveness of $20,095,000 has been recorded as an extraordinary gain.
(d) KG is not currently making the required monthly principal installments of
$239,000 on this note and accrued interest of $1,894,000 is unpaid as of
September 30, 1996. The SeaTac Office Center is pledged as collateral for
the note payable. On October 25, 1996, KG and the insurance company entered
into a forbearance agreement which provides KG with the exclusive right to
purchase the note payable for $16,100,000 on or before January 31, 1997. In
the event KG does not acquire the loan, the fee owner of the property has
the right from February 1, 1997 through February 28, 1997 to pay off the
loan on the same terms and conditions. In the event KG is unable to acquire
the loan on or prior to January 31, 1997, the fee owner has assigned its
rights to KG for the period February 1, 1997 to February 10, 1997. If KG
fails to perform any of its obligations under the agreement, an event of
default shall occur and the insurance company shall have the right to
pursue any and all remedies available under the agreement and the note
payable, including foreclosure. It is contemplated that a portion of the
proceeds from the initial public offering referred to in Note 1, will be
used to purchase this note. KG believes it will be able to meet this
commitment irrespective of the consummation of the Offering referred to in
Note 1 based upon discussions with other sources of financing.
(e) Under an agreement with the insurance company, monthly payments of
principal and interest are calculated based on gross receipts from leases
of the property that secures the loan. All receipts from the property are
deposited into a lock box account from which all operating costs, which
must be approved by the lender, are to be paid. Monthly installments of
principal and interest of $881,475 and property taxes are payable from the
lockbox account and any deficiency must be funded by KG. There are certain
provisions in the agreement that may require additional payments of
principal.
In 1994, two notes payable to insurance companies, with an aggregate unpaid
balance of $6,782,000 were paid after forgiveness of $1,847,000 of principal by
the lenders, which has been recorded as an extraordinary gain.
The notes payable are secured by deeds of trust on all Kilroy Properties and
the assignment of certain rents and leases associated with the related
properties. The notes are generally due in monthly installments of principal
and interest or interest only. As of September 30, 1996, approximately $37.2
million of notes payable are guaranteed by certain members of KG. Several notes
contain restrictive covenants with which KG has complied as well as penalties
for early repayment of principal equal to a percentage of the unpaid balance.
F-21
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future principal payments on notes payable are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
YEAR ENDING 1996 1995
----------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1996........................................... $ 41 $ 4,301
1997........................................... 64,174 69,935
1998........................................... 10,317 10,626
1999........................................... 58,658 57,301
2000........................................... 2,722 2,722
Thereafter..................................... 88,134 88,972
-------- --------
Total........................................ $224,046 $233,857
======== ========
</TABLE>
5. FUTURE MINIMUM RENT
KG has operating leases with tenants that expire at various dates through
2006 and are either subject to scheduled fixed increases or adjustments based
on the Consumer Price Index. Generally, the leases grant tenants renewal
options. Leases also provide for additional rents based on certain operating
expenses as well as sales volume of certain retail space within the office
buildings. Future minimum rent to be received under operating leases,
excluding tenant reimbursements of certain costs, are as follows as of:
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR ENDING 1995
----------- ------------
(IN THOUSANDS)
<S> <C>
1996....................................................... $ 33,359
1997....................................................... 33,013
1998....................................................... 30,750
1999....................................................... 26,999
2000....................................................... 23,297
Thereafter................................................. 67,612
--------
Total.................................................... $215,030
========
</TABLE>
Rental revenue from one tenant, Hughes Electronic Corporation's Space &
Communications Company ("Hughes"), was $8,161,142, $10,817,000, $11,395,000
and $12,258,000 for the nine months ended September 30, 1996 and the years
ended December 31, 1995, 1994 and 1993, respectively. Future minimum rents
from this tenant are $66,949,000 at December 31, 1995.
On September 18, 1996, KG and Hughes amended the terms of certain of their
lease agreements. Such amendments included the extension of one lease through
October 31, 2001 and a $500,000 allowance for tenant improvements. In
addition, KG agreed to pay Hughes $3,150,000 in consideration for the
cancellation of an option to purchase a 50% equity interest in Kilroy Airport
Center at El Segundo which has been reflected in the statement of operations
for the nine months ended September 30, 1996. In November 1996, $2,260,000 of
the total liability of $3,650,000 was paid by KI and its stockholders. The
remaining balance is payable in monthly installments of $100,000 commencing in
January 1997.
The majority of Kilroy Properties are located in Southern California. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industries in which the tenants operate.
F-22
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--KG has noncancelable ground lease obligations on Kilroy
Airport Center--Long Beach with an initial lease period expiring on July 31,
2035, classified as an operating lease. Further, KG has noncancelable ground
lease obligations on the SeaTac Office Center expiring on December 31, 2032
with an option to extend the leases for an additional 30 years. Rentals are
subject to adjustment every five years based on the variation of the Consumer
Price Index. The minimum commitment under these leases at December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
----------- (IN THOUSANDS)
<S> <C>
1996....................................................... $ 743
1997....................................................... 743
1998....................................................... 761
1999....................................................... 923
2000....................................................... 1,056
Thereafter................................................. 35,737
-------
Total.................................................... $39,963
=======
</TABLE>
Litigation--KG is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of KG.
7. RELATED-PARTY TRANSACTIONS
KI provides management, legal, accounting and general administrative
services pursuant to agreements that provide for management fees based upon a
percentage of gross revenues from the Kilroy Properties and reimbursement of
other costs incurred by KI in connection with providing the aforementioned
services. Kilroy Company ("KC"), an affiliated entity, provides marketing and
leasing services. Charges by KC include leasing commissions paid to employees
and outside leasing brokers as well as fees to cover its general
administrative costs. Management fees are expensed as incurred and are
included in property expenses. Leasing fees are capitalized and amortized over
the life of the related leases. In the opinion of KG management, the fees paid
to KI and KC for management and leasing services are comparable to the rates
which KG would have paid an independent company to provide similar services.
In addition, KI is a tenant at the Kilroy Airport Center--LAX, Kilroy Airport
Center--Long Beach and SeaTac Office Center, under month-to-month leases.
Charges for services provided by KI and KC and rental income from KI are
summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER YEAR ENDED DECEMBER
30, 31,
----------- --------------------
1996 1995 1995 1994 1993
------ ---- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Management fees................................ $ 916 $754 $1,343 $1,026 $1,359
Leasing fees................................... $1,372 $743 $ 804 $1,456 $ 431
Rental income.................................. $ 396 $396 $ 528 $ 528 $ 797
</TABLE>
Management fees in 1995 include a fourth quarter charge of $321,000 relating
to management time incurred for the renegotiation of loans.
F-23
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by KG using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Receivables, accounts payable and other liabilities are carried at amounts
that reasonably approximate their fair value.
The fixed rate mortgage notes payable totaling $146,352,000, $162,510,000
and $165,325,000 as of September 30, 1996, December 31, 1995 and 1994 have
fair values of $149,600,000, $165,300,000 and $169,900,000, respectively
(excluding prepayment penalties), as estimated based upon interest rates
available for the issuance of debt with similar terms and remaining
maturities. These notes were subject to prepayment penalties of $542,000,
$722,000 and $757,000 at September 30, 1996, December 31, 1995 and 1994,
respectively, that would be required to retire these notes prior to maturity.
The carrying values of floating rate mortgages totaling $77,694,000,
$71,347,000 and $84,734,000 at September 30, 1996, December 31, 1995 and 1994,
respectively, reasonably approximate their fair values.
The fair value estimates presented herein are based on information available
to KG management as of September 30, 1996, December 31, 1995 and 1994.
Although KG management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date, and current estimates of fair value may differ significantly from the
amounts presented herein.
F-24
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. SCHEDULE OF RENTAL PROPERTY
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------
GROSS AMOUNTS
AT WHICH CARRIED AT CLOSE OF
INITIAL COST COSTS PERIOD
-------------------- CAPITALIZED -----------------------------
BUILDINGS SUBSEQUENT TO DATE OF
AND ACQUISITION/ BUILDING AND ACCUMULATED ACQUIS. (A)
PROPERTY ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTR. (C)
-------- ------------ ------- ------------ ------------- ------- ------------ -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kilroy Airport
Center
El Segundo, CA..... $97,283 $ 6,141 $69,195 $18,884 $ 6,141 $88,079 $94,220 $42,495 1983(C)
Kilroy Airport
Center
Long Beach, CA..... 54,811 -- 47,387 11,041 -- 58,428 58,428 15,322 1989(C)
185/181 S. Douglas
Street
El Segundo,
California(1)...... 15,639 525 4,687 1,845 628 6,429 7,057 3,509 1978(C)
SeaTac Office
Center............. 26,999 -- 25,993 8,109 -- 33,239 33,239 22,523 1977(C)
2270 E. El Segundo
Boulevard
El Segundo,
California(1)...... -- 361 100 76 419 118 537 73 1977(C)
2260 E. El Segundo
Boulevard,
El Segundo,
California(1)...... -- 1,423 4,194 1,236 1,703 5,150 6,853 2,914 1979(C)
2031 E. Mariposa
Avenue,
El Segundo,
California......... 12,000 132 867 2,668 132 3,535 3,667 2,328 1954(C)
3332 E. La Palma
Avenue,
Anaheim,
California......... 7,683 67 1,521 2,851 67 4,372 4,439 3,028 1966(C)
2265 E. El Segundo
Boulevard,
El Segundo,
California......... 4,600 1,352 2,028 644 1,570 2,454 4,024 1,550 1978(C)
5115 N. 27th
Avenue,
Phoenix, Arizona... 3,000 125 1,206 (27) 126 1,178 1,304 1,168 1962(C)
1000 E. Ball Road,
Anaheim,
California(2)...... 5,846 838 1,984 719 838 2,703 3,541 1,563 1979(A)(3)
1956(C)
1230 S. Lewis
Street,
Anaheim,
California(2)...... -- 395 1,489 1,994 395 3,483 3,878 2,444 1982(C)
12681/12691 Pala
Drive,
Garden Grove,
California......... 5,996 471 2,115 1,210 471 3,325 3,796 2,857 1980(A)
1970(C)
-------- ------- -------- ------- ------- -------- -------- --------
Total........... $233,857 $11,830 $162,766 $51,250 $12,490 $212,493 $224,983 $101,774
======== ======= ======== ======= ======= ======== ======== ========
</TABLE>
- ----
(1) Two notes payable of $8,639,000 and $7,000,000 are secured by the
buildings located at 2260 and 2270 E. El Segundo Boulevard, El Segundo,
California, and the buildings located at 185/181 S. Douglas Street, El
Segundo, California.
(2) A note payable of $5,846,000 is secured by the buildings located at 1000
East Ball Road, Anaheim, California and 1230 South Lewis Street, Anaheim,
California.
(3) The Property located at 1000 E. Ball Road, Anaheim, California, was
developed for a third party by the Company in 1956, and acquired by the
Company in 1979.
F-25
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate gross cost of property included above, for federal income tax
purposes, approximated $200,782,000 as of December 31, 1995.
The following table reconciles the historical cost of the Kilroy Properties
from January 1, 1993 to December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period.................... $223,821 $222,056 $235,549
Additions during period--Acquisition,
improvements, etc............................ 1,162 1,765 633
Deductions during period--Write-off of tenant
improvements................................. -- -- (14,126)
-------- -------- --------
Balance, close of period........................ $224,983 $223,821 $222,056
======== ======== ========
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1993 to December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period..................... $ 93,475 $84,759 $ 86,442
Additions during period--Depreciation and
amortization for the year..................... 8,299 8,716 9,782
Deductions during period--Accumulated
depreciation of written-off tenant
improvements.................................. -- -- (11,465)
-------- ------- --------
Balance, close of period......................... $101,774 $93,475 $ 84,759
======== ======= ========
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Kilroy Group:
We have audited the accompanying combined historical summaries of certain
revenues and certain expenses (defined as operating revenues less direct
operating expenses) of the Acquisition Properties for the nine months ended
September 30, 1996 and the year ended December 31, 1995. These financial
statements are the responsibility of the Acquisition Properties' management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined historical summary of
certain revenues and certain expenses is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined historical summary of certain revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined historical summary of certain revenues and
certain expenses. We believe our audits provide a reasonable basis for our
opinion.
The accompanying combined historical summaries of certain revenues and
certain expenses were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
Form S-11 Registration Statement of Kilroy Realty Corporation. Material
amounts, described in Note 1 to the historical summaries of certain revenues
and certain expenses, that would not be comparable to those resulting from the
proposed future operation of the Acquisition Properties are excluded, and the
summaries are not intended to be a complete presentation of the revenues and
expenses of these properties.
In our opinion, such historical summaries of certain revenues and certain
expenses present fairly, in all material respects, the combined certain
revenues and certain expenses, as defined in Note 1, of the Acquisition
Properties for the nine months ended September 30, 1996 and the year ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 20, 1996
F-27
<PAGE>
ACQUISITION PROPERTIES
COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
CERTAIN REVENUES:
Rental income..................................... $5,875 $7,355
Tenant reimbursements............................. 743 884
Other income...................................... 299 407
------ ------
Total certain revenues.......................... 6,917 8,646
------ ------
CERTAIN EXPENSES:
Property expenses (Note 3)........................ 1,315 1,882
Real estate taxes................................. 417 495
Ground rent (Note 4).............................. 253 338
General and administrative........................ 200 303
------ ------
Total certain expenses.......................... 2,185 3,018
------ ------
CERTAIN REVENUES IN EXCESS OF CERTAIN EXPENSES...... $4,732 $5,628
====== ======
</TABLE>
See notes to combined statements of certain revenues and certain expenses.
F-28
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN
EXPENSES
1. BASIS OF PRESENTATION
The combined historical summaries of certain revenues and certain expenses
relate to the operations of four properties, Westlake Plaza Centre (located in
Thousand Oaks), Long Beach Phase I, La Palma Business Center (located in
Anaheim) and the Monarch Building (located in Garden Grove) (collectively, the
"Acquisition Properties"), which are expected to be acquired by Kilroy Realty
Corporation (the "Company") from four unaffiliated third parties.
Operating revenues and operating expenses are presented on the accrual basis
of accounting. The accompanying statements of certain revenues and certain
expenses are not representative of the actual operations for the period
presented, as certain revenues and certain expenses that may not be comparable
to the revenues and expenses expected to be incurred by the Company in the
proposed future operation of the Acquisition Properties have been excluded.
Revenues excluded consist of termination fees and interest income. Expenses
excluded consist of interest, depreciation, professional fees and other costs
not directly related to the future operations of the Acquisition Properties.
Financial statements for the three years ended December 31, 1995, as
required by Rule 3-14(a)(1), have not been provided because:
(i) the properties were not acquired from a related party;
(ii) material factors such as rental markets and occupancy rates have
been disclosed in the Prospectus under the caption "Prospectus
Summary--The Office and Industrial Properties" and "Business and
Properties--General"; and
(iii) management is not aware of any material factors relating to the
properties that would cause the summaries of certain revenues and
certain expenses for the nine months ended September 30, 1996 and
the year ended December 31, 1995 not to be indicative of future
operating results.
2. OPERATING LEASES
Rental income is recognized on the accrual method as earned, which
approximates recognition on a straight line basis.
The Acquisition Properties are leased to tenants under operating leases with
expiration dates extending to the year 2009. Future minimum rents under the
Acquisition Property's office leases, excluding tenant reimbursements are as
follows as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------ (IN THOUSANDS)
<S> <C>
1996 (three months)....................................... $ 1,988
1997...................................................... 8,244
1998...................................................... 8,119
1999...................................................... 7,270
2000...................................................... 6,413
Thereafter................................................ 25,768
-------
Total................................................... $57,802
=======
</TABLE>
F-29
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN
EXPENSES--(CONTINUED)
3. RELATED-PARTY TRANSACTIONS
Property expenses include $137,000 and $181,000 of management fees for the
nine months ended September 30, 1996 and for the year ended December 31, 1995,
respectively, related to Long Beach Phase I, which was paid to an affiliate of
the Company.
4. COMMITMENTS
Long Beach Phase I is located on land that is under a noncancelable ground
lease which expires in 2035 and is classified as an operating lease. Minimum
annual lease payments are as follows as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------ (IN THOUSANDS)
<S> <C>
1996 (three months)....................................... $ 85
1997...................................................... 338
1998...................................................... 338
1999...................................................... 338
2000...................................................... 338
Thereafter................................................ 11,661
-------
Total................................................... $13,098
=======
</TABLE>
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 20
Formation and Structure of the Company................................... 36
Formation of Kilroy Services, Inc........................................ 44
The Company.............................................................. 45
Use of Proceeds.......................................................... 51
Distribution Policy...................................................... 53
Capitalization........................................................... 58
Dilution................................................................. 59
Selected Financial Data.................................................. 60
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 62
Business and Properties.................................................. 68
Policies with Respect to Certain Activities.............................. 111
The Financing............................................................ 116
Management............................................................... 118
Certain Relationships and Related Transactions........................... 128
Principal Stockholders................................................... 129
Description of Capital Stock............................................. 130
Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws................................................ 134
Partnership Agreement of the Operating Partnership....................... 139
Shares Available for Future Sale......................................... 143
Federal Income Tax Consequences.......................................... 145
Other Tax Consequences................................................... 158
ERISA Considerations..................................................... 158
Underwriting............................................................. 160
Legal Matters............................................................ 161
Experts.................................................................. 161
Additional Information................................................... 162
Glossary................................................................. 163
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,000,000 Shares
[LOGO OF KILROY REALTY CORPORATION]
KILROY REALTY CORPORATION
Common Stock
----------
PROSPECTUS
----------
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
SMITH BARNEY INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DESCRIPTION OF GRAPHICS AND PHOTOS FOR EDGAR TRANSMISSION
Inside Front Cover: Map of Southern California, indicating the Company's office
and industrial properties by location.
Fold-out Inside Front Cover: Ten photos of Office Properties: Clockwise, in
order: 1. Two photos of SeaTac Office Center in Seattle, Washington --
pedestrian view of the office's exterior at night and aerial view of the Office
Property and parking lot during the day; 2. Four photos of Kilroy Airport
Center Long Beach in Long Beach, California -- pedestrian views of the office's
main entrance at night and during the day and interior view of the office's
reception area; 3. 2829 Townsgate Road in Thousand Oaks, California -- view from
across the parking lot of the office building; 4. Three photos of Kilroy
Airport Center in El Segundo, California -- the office's main entrance from two
different pedestrian views, and two office buildings on the northwest corner of
the property from across the street.
Inside Back Cover: Five photos of Industrial Properties: Top to bottom, in
order: 1. Photo of 3340 East La Palma in Anaheim, California; 2. 1230 South
Lewis Street in Anaheim, California; 3. 2031 East Mariposa Avenue in El
Segundo, California; 4. 2265 East El Segundo Boulevard in El Segundo,
California; 5. 2260 East El Segundo Boulevard in El Segundo, California.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 64,539
NYSE Filing Fee................................................ 126,600
Printing and Engraving Expenses................................ 900,000
Legal Fees and Expenses........................................ 1,700,000
Accounting Fees and Expenses................................... 1,350,000
Registrar and Transfer Agent Fees and Expenses................. 2,500
Blue Sky Fees and Expenses..................................... 20,000
National Association of Securities Dealers, Inc. .............. 26,375
Miscellaneous Expenses......................................... 350,986
----------
Total........................................................ $4,541,000
==========
</TABLE>
All of the costs identified above will be paid by the Company.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Formation Transactions, immediately prior to or
simultaneous with the consummation of the Offering an aggregate of 2,692,374
Units will be issued to Kilroy Industries, Kilroy Technologies Company, LLC, a
California limited liability company, John B. Kilroy, Sr., John B. Kilroy,
Jr., Ms. Patrice Bouzaid, Ms. Susan Hahn, Ms. Anne McCahon and Ms. Dana
Pantuso, the daughters of John B. Kilroy, Sr., and Marshall L. McDaniel, a
long-time employee of Kilroy Industries, each of which will be transferring
interests in the Properties and certain other assets to the Company in
consideration of the transfer of such Properties and assets. The book value to
the Continuing Investors of the assets to be contributed to the Operating
Partnership is a negative $113.2 million and the value of the Units
representing limited partnership interests in the Operating Partnership to be
received by the Continuing Investors is $60.6 million, assuming a Unit value
equal to the assumed initial public offering price of $22.50 per share. No
independent valuations or appraisals of the Properties were obtained in
connection with the Formation Transactions. All of such persons irrevocably
committed to the exchange of Units for the contribution of their respective
interests in the Properties on November 3, 1996, prior to the filing of the
Registration Statement, and are "accredited investors" as defined under
Regulation D. The issuance of such Units will be effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering. See "The Formation
and Structure of the Company."
In September 1996, 50 shares of Common Stock were issued to John B. Kilroy,
Sr. for an aggregate purchase price of $1,000. The issuance of such shares was
effected in reliance upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. In addition, upon consummation of the Offering, 60,000 restricted
shares of Common Stock will be issued to Mr. Richard E. Moran Jr. against the
payment of $600 in cash therefor pursuant to the terms of his employment
agreement. The issuance of such shares will be effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
II-1
<PAGE>
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the MGCL permits a corporation to indemnify its directors
and officers and certain other parties against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty; (ii) the director or officer actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Indemnification may be
made against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer, whether or not involving action in the director's or
officer's official capacity, in which the director or officer was adjudged to
be liable on the basis that personal benefit was received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted.
In addition, Section 2-418 of the MGCL requires that, unless prohibited by
its charter, a corporation indemnify any director or officer who is made a
party to any proceeding by reason of service in that capacity against
reasonable expenses incurred by the director or officer in connection with the
proceeding, in the event that the director or officer is successful, on the
merits or otherwise, in the defense of the proceeding.
The Company's Charter and Bylaws provide in effect for the indemnification
by the Company of the directors and officers of the Company to the fullest
extent permitted by applicable law. The Company is currently in the process of
purchasing directors' and officers' liability insurance for the benefit of its
directors and officers and expects such insurance to be in effect prior to
consummation of the Offering.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a)(1) FINANCIAL STATEMENTS
Kilroy Realty Corporation
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996
Notes to Pro Forma Condensed Consolidated Balance Sheet
Pro Forma Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996 and the Year Ended December 31, 1995
Notes to Pro Forma Condensed Consolidated Statements of Operations
Historical:
Independent Auditors' Report
Balance Sheet as of September 30, 1996
Notes to Balance Sheet
Kilroy Group (Predecessor Affiliates)
Independent Auditors' Report
Combined Balance Sheets as of September 30, 1996, and December 31, 1995
and 1994
Combined Statements of Operations for the nine months ended September 30,
1996 and 1995 and the three years ended December 31, 1995
Combined Statements of Partners' Deficit for the nine months ended
September 30, 1996 and for the three years ended December 31, 1995
Combined Statements of Cash Flows for the nine months ended September 30,
1996 and 1995 and the three years ended December 31, 1995
Notes to Combined Financial Statements
Acquisition Properties
Independent Auditors' Report
Combined Historical Summaries of Certain Revenues and Certain Expenses
for the nine months ended September 30, 1996 and for the year ended
December 31, 1995
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and qualifying accounts for the three years ended
December 31, 1995
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
**3.1 Articles of Amendment and Restatement of the Registrant.
**3.2 Amended and Restated Bylaws of the Registrant.
**3.3 Form of Certificate for Common Stock of the Registrant.
**5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered.
**8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters.
**10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.
**10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.
**10.3 Omnibus Agreement dated as of October 30, 1996 by and among Kilroy
Realty, L.P. and the parties named therein.
**10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<S> <C>
**10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.
**10.6 1997 Stock Incentive Plan of the Registrant and Kilroy Realty, L.P.
**10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.
**10.8 Lease Agreement dated January 24, 1989 by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.
**10.9 First Amendment to Lease Agreement dated December 28, 1990 by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.
**10.10 Lease Agreement dated July 17, 1985 by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.
**10.11 Lease Agreement dated April 21, 1988 by and between Kilroy Long Beach
Associates and the Board of Water Commissioners of the City of Long
Beach, acting for and on behalf of the City of Long Beach, for Long
Beach Phase IV.
**10.12 Lease Agreement dated December 30, 1988 by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase II.
**10.13 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.
**10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.
**10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.
**10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.
**10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.
**10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.
**10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and
Kilroy Industries dated May 15, 1969 for SeaTac Office Center.
**10.20 Amendment No. 1 to Ground Lease and Grant of Easement dated April 27,
1973 among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.
**10.21 Amendment No. 2 to Ground Lease and Grant of Easement dated May 17,
1977 among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.
**10.22 Airspace Lease dated July 10, 1980 by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.
**10.23 Lease dated April 1, 1980 by and among Bow Lake, Inc., as lessor, and
Kilroy Industries and SeaTac Properties, Ltd., as lessees for Sea/Tac
Office Center.
**10.24 Amendment No. 1 to Ground Lease dated September 17, 1990 between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.
**10.25 Amendment No. 2 to Ground Lease dated March 21, 1991 between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.
*10.26 Management Agreement by and between Kilroy Realty, L.P. and Kilroy
Airport Imperial Co.
*10.27 Management Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.
***10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Airport Imperial Co.
***10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<S> <C>
***10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.
***10.31 Employment Agreement between the Registrant and Richard E. Moran Jr.
***10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.
***10.33 Employment Agreement between the Registrant and C. Hugh Greenup.
**10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.
**10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.
***10.36 License Agreement by and among the Registrant and the other persons
named therein.
***10.37 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.
***10.38 Form of Mortgage Note.
***10.39 Form of Indemnity Agreement.
***10.40 Form of Assignment of Leases, Rents and Security Deposits.
***10.41 Form of Credit Agreement.
***10.42 Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and
Assignment of Leases and Rents.
***10.43 Form of Environmental Indemnity Agreement.
***10.44 Form of Assignment, Rents and Security Deposits.
***10.45 Form of Revolving Credit Agreement.
***10.46 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.
***10.47 Assignment of Leases, Rents and Security Deposits.
***10.48 Form of Environmental Indemnity Agreement.
***21.1 List of Subsidiaries of the Registrant.
**23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
**23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit
5.1).
***23.3 Consent of Deloitte & Touche LLP.
***23.4 Consent of Robert Charles Lesser & Co.
***23.5 Consent of William P. Dickey.
***23.6 Consent of Matthew J. Hart.
***23.7 Consent of Dale F. Kinsella.
**24.1 Power of Attorney.
**24.2 Power of Attorney.
**27.1 Financial Data Schedule.
</TABLE>
- --------
* To Be Filed By Amendment
** Previously Filed
*** Filed Herewith
II-5
<PAGE>
ITEM 36. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described under Item 33
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 4 TO ITS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY
OF EL SEGUNDO, STATE OF CALIFORNIA, ON THE 27TH DAY OF JANUARY, 1997.
Kilroy Realty Corporation
By: /s/ John B. Kilroy, Sr
-----------------------------
JOHN B. KILROY, SR.
Chairman of the Board of Directors
Date: January 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 4 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the
/s/ John B. Kilroy, Sr. Board and Director January 27, 1997
- -------------------------------------
JOHN B. KILROY, SR.
* President, Chief
- ------------------------------------- Executive Officer January 27, 1997
JOHN B. KILROY, JR. and Director
(Principal
Executive Officer)
Chief Financial
/s/ Richard E. Moran Jr. Officer and January 27, 1997
- ------------------------------------- Secretary
RICHARD E. MORAN JR. (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ John B. Kilroy, Sr.
* By_________________________________
JOHN B. KILROY, SR. Attorney-in-
Fact
</TABLE>
II-7
<PAGE>
KILROY GROUP
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
EACH OF THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE
BEGINNING EXPENSES OR AT END
OF PERIOD RENTAL REVENUE DEDUCTIONS OF PERIOD
---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for uncollectible
rent......................... $837 $1,000 $ -- $1,837
==== ====== ===== ======
Year Ended December 31, 1994
Allowance for uncollectible
rent......................... $514 $ 909 $(586) $ 837
==== ====== ===== ======
Year Ended December 31, 1993
Allowance for uncollectible
rent......................... $337 $ 350 $(173) $ 514
==== ====== ===== ======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
**3.1 Articles of Amendment and Restatement of the Registrant.
**3.2 Amended and Restated Bylaws of the Registrant.
**3.3 Form of Certificate for Common Stock of the Registrant.
**5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding
the validity of the Common Stock being registered.
**8.1 Opinion of Latham & Watkins regarding certain federal
income tax matters.
**10.1 Amended and Restated Agreement of Limited Partnership of
Kilroy Realty, L.P.
**10.2 Form of Registration Rights Agreement among the
Registrant and the persons named therein.
**10.3 Omnibus Agreement dated as of October 30, 1996 by and
among Kilroy Realty, L.P. and the parties named therein.
**10.4 Supplemental Representations, Warranties and Indemnity
Agreement by and among Kilroy Realty, L.P. and the
parties named therein.
**10.5 Pledge Agreement by and among Kilroy Realty, L.P., John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries.
**10.6 1997 Stock Incentive Plan of the Registrant and Kilroy
Realty, L.P.
**10.7 Form of Indemnity Agreement of the Registrant and Kilroy
Realty, L.P. with certain officers and directors.
**10.8 Lease Agreement dated January 24, 1989 by and between
Kilroy Long Beach Associates and the City of Long Beach
for Kilroy Long Beach Phase I.
**10.9 First Amendment to Lease Agreement dated December 28,
1990 by and between Kilroy Long Beach Associates and the
City of Long Beach for Kilroy Long Beach Phase I.
**10.10 Lease Agreement dated July 17, 1985 by and between Kilroy
Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.
**10.11 Lease Agreement dated April 21, 1988 by and between
Kilroy Long Beach Associates and the Board of Water
Commissioners of the City of Long Beach, acting for and
on behalf of the City of Long Beach, for Long Beach Phase
IV.
**10.12 Lease Agreement dated December 30, 1988 by and between
Kilroy Long Beach Associates and the City of Long Beach
for Kilroy Long Beach Phase II.
**10.13 First Amendment to Lease, dated January 24, 1989, by and
between Kilroy Long Beach Associates and the City of Long
Beach for Kilroy Long Beach Phase III.
**10.14 Second Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and the
City of Long Beach for Kilroy Long Beach Phase III.
**10.15 First Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and the
City of Long Beach for Kilroy Long Beach Phase II.
**10.16 Third Amendment to Lease Agreement, dated October 10,
1994, by and between Kilroy Long Beach Associates and the
City of Long Beach for Kilroy Long Beach Phase III.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
-------- ---------------------- ----------
<C> <S> <C>
**10.17 Development Agreement by and between Kilroy Long Beach
Associates and the City of Long Beach.
**10.18 Amendment No. 1 to Development Agreement by and between
Kilroy Long Beach Associates and the City of Long Beach.
**10.19 Ground Lease by and between Frederick Boysen and Ted
Boysen and Kilroy Industries dated May 15, 1969 for
SeaTac Office Center.
**10.20 Amendment No. 1 to Ground Lease and Grant of Easement
dated April 27, 1973 among Frederick Boysen and Dorothy
Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties.
**10.21 Amendment No. 2 to Ground Lease and Grant of Easement
dated May 17, 1977 among Frederick Boysen and Dorothy
Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties.
**10.22 Airspace Lease dated July 10, 1980 by and among the
Washington State Department of Transportation, as
lessor, and Sea Tac Properties, Ltd. and Kilroy
Industries, as lessee.
**10.23 Lease dated April 1, 1980 by and among Bow Lake, Inc.,
as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessees for Sea/Tac Office Center.
**10.24 Amendment No. 1 to Ground Lease dated September 17, 1990
between Bow Lake, Inc., as lessor, and Kilroy Industries
and Sea/Tac Properties, Ltd., as lessee.
**10.25 Amendment No. 2 to Ground Lease dated March 21, 1991
between Bow Lake, Inc., as lessor, and Kilroy Industries
and Sea/Tac Properties, Ltd., as lessee.
*10.26 Management Agreement by and between Kilroy Realty, L.P.
and Kilroy Airport Imperial Co.
*10.27 Management Agreement by and between Kilroy Realty, L.P.
and Kilroy Calabasas Associates.
***10.28 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Airport Imperial Co.
***10.29 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Calabasas Associates.
***10.30 Employment Agreement between the Registrant and John B.
Kilroy, Jr.
***10.31 Employment Agreement between the Registrant and Richard
E. Moran Jr.
***10.32 Employment Agreement between the Registrant and Jeffrey
C. Hawken.
***10.33 Employment Agreement between the Registrant and C. Hugh
Greenup.
**10.34 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Sr.
**10.35 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Jr.
***10.36 License Agreement by and among the Registrant and the
other parties named therein.
***10.37 Form of Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and
Assignment of Leases, Rents and Security Deposits.
***10.38 Form of Mortgage Note.
***10.39 Form of Indemnity Agreement.
***10.40 Form of Assignment of Leases, Rents and Security
Deposits.
***10.41 Form of Credit Agreement.
***10.42 Form of Variable Interest Rate Indenture of Mortgage,
Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Leases and Rents.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
-------- ---------------------- ----------
<C> <S> <C>
***10.43 Form of Environmental Indemnity Agreement.
***10.44 Form of Assignment, Rents and Security Deposits.
***10.45 Form of Revolving Credit Agreement.
***10.46 Form of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Leases and Rents.
***10.47 Assignment of Leases, Rents and Security Deposits.
***10.48 Form of Environmental Indemnity Agreement.
***21.1 List of Subsidiaries of the Registrant.
**23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
**23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with
Exhibit 5.1).
***23.3 Consent of Deloitte & Touche LLP.
***23.4 Consent of Robert Charles Lesser & Co.
***23.5 Consent of William P. Dickey.
***23.6 Consent of Matthew J. Hart.
***23.7 Consent of Dale F. Kinsella.
**24.1 Power of Attorney.
**24.2 Power of Attorney.
**27.1 Financial Data Schedule
</TABLE>
- --------
* To Be Filed By Amendment
** Previously Filed
*** Filed Herewith
<PAGE>
EXHIBIT 10.28
OPTION AGREEMENT
THIS AGREEMENT (this "Agreement") is made on __________ __, 1997, by
---------
and between KILROY AIRPORT IMPERIAL CO., a California limited partnership (the
"Transferor") and KILROY REALTY, L.P., a Delaware limited partnership (the
- -----------
"Operating Partnership" or "Transferee").
- ---------------------- ----------
RECITALS
--------
A. The Transferor owns the real property, as described in Exhibit A,
and the buildings, structures and other improvements situated thereon, which
collectively are referred to as the "Property."
--------
B. The Transferee desires to have the right to acquire all or any
part of the Property, without becoming obligated to acquire it, under specified
terms and conditions. As used herein, "Option" means the option to purchase the
------
Property under this Agreement,
C. The Transferee desires to acquire the Option as part of a series
of transactions relating to the proposed initial public offering (the
"Offering") of common stock of Kilroy Realty Corporation, a Maryland corporation
--------
(the "Company"). Upon the closing of the Offering, the Company will be a self-
-------
administered real estate investment trust and will be the sole general partner
and majority owner of the Transferee.
D. Prior to the Transferee's acquisition of the Property under this
Agreement, the Property will be managed by the Transferee pursuant to a Property
Management Agreement between the Transferor and the Transferee.
AGREEMENT
---------
NOW, THEREFORE, for and in consideration of the foregoing premises,
and the mutual undertakings set forth below, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Grant of Option. Effective as of the consummation of the Offering and
---------------
subject to the terms and conditions contained herein, the Transferor hereby
grants to the Transferee the Option, on the terms and conditions herein
described. The Transferee acknowledges that the right of the Transferee to
exercise the Option and acquire the Property is subject to the right of first
offer held by Hughes Electronics Corporation pursuant to its tenant lease
agreement with the Transferor.
1.1 Commencement of Option. The Transferee shall have the right to
----------------------
exercise the Option as of the consummation of the Offering.
1.2 Term of Option. The term of the Option shall be seven years from
--------------
the consummation of the Offering, unless earlier terminated as described in
Section 5 hereof (such term being the "Exercise Period").
---------------
<PAGE>
1.3 Consideration for Option. The Option is granted in consideration
------------------------
of the payment of $10.00 and other good and valuable consideration.
2. Process for Exercise of Option.
------------------------------
2.1 Inspection. Upon receipt of Notice of Exercise (as defined in
----------
Section 2.2 hereof) and through the Close of Escrow (as defined in Section
- ----------- -------
3.1(d) hereof), the Transferor agrees to permit the Transferee and its agents to
- ------
enter upon the Property, subject to the rights of any tenants, at reasonable
times to make such surveys, inspections and tests as may reasonably be necessary
in connection with its examination of the Property. The Transferee hereby
agrees to repair any damage it or its agents may cause to the Property, and
further agrees to indemnify, defend and hold the Transferor harmless from and
against any and all claims, losses, damages and expenses, including reasonable
attorneys' fees, suffered by the Transferee as a result of Transferee's or the
Transferee's agent's entry upon or acts upon the Property.
2.2 Exercise. The Option may be exercised during the Exercise Period
--------
by delivery of written notice by the Transferee to the Transferor (a "Notice of
---------
Exercise"), stating that the Option is exercised on the terms set forth in this
- --------
Agreement. The day Notice of Exercise is received by the Transferor shall
hereinafter be referred to as the "Exercise Date." If the Option is exercised,
-------------
the Property shall be conveyed within 60 days of the Exercise Date, subject to
the terms of the Acquisition Agreement (as defined in Section 3).
---------
2.3 Right of First Refusal. Notwithstanding the foregoing, if the
----------------------
Transferor receives an unsolicited offer from an unaffiliated third party to
purchase the Property, then the Transferor shall have the right to convey the
Property or master lease to the Property to such unaffiliated third party during
the Exercise Period; provided, however, that the Transferor shall first give
-------- -------
written notice (the "Notice") thereof to the Transferee (the date the Notice is
------
received by the Transferee is referred to as the "Notice Date"), which Notice
-----------
shall include the proposed purchase price and other economic terms (the
"Proposed Purchase Price") or the proposed leasing terms (the "Leasing Terms"),
----------------------- -------------
as applicable, of the proposed transfer or master lease of the Property, and the
Transferee shall then have 60 days from the Notice Date to give notice (the "OP
--
Notice") of its election to acquire the Property at the lower of the Acquisition
- ------
Price or the Proposed Purchase Price or to master lease the Property on the
Lease Terms. In the event the Transferee does not give the OP Notice during the
60-day period following the Notice Date, the Option shall be suspended and the
Transferor may proceed with the sale or lease pursuant to the terms of the offer
from an unaffiliated third party, as set forth in the Notice, so long as the
economic terms are not more than 5% below that described in the Notice. In the
event the Transferor of the Property (i) has not entered into a letter of intent
for the sale of the Property within 180 days following the Notice Date, or (ii)
has not completed the sale of the Property within 270 days following the Notice
Date, then the Option will be automatically reinstated. The Option shall be
subject to any arrangements entered into by the Transferor in connection with
any financing, recapitalization or leasing of the Property including, without
limitation, any rights of the current lender(s) with respect to the Property
with respect to a transfer pursuant to the Option.
2
<PAGE>
3. Acquisition Process.
-------------------
3.1 Acquisition Escrow. Upon exercise of the Option, the Transferor
------------------
shall open, within five business days after the Exercise Date, an escrow with a
title insurance company selected by the Transferor and reasonably acceptable to
the Transferee at an office of such title insurance company in Los Angeles
County and shall notify the Transferee of the number and location of such escrow
(the "Acquisition Escrow"). Within 30 days after opening the Acquisition
------------------
Escrow, the parties shall execute a mutually acceptable acquisition agreement
containing terms and conditions customary in similar transactions and consistent
with this Agreement (an "Acquisition Agreement") and shall deliver one executed
---------------------
copy to each of the Transferor and the Transferee, and one executed copy to the
escrow holder. The Transferor and the Transferee shall thereafter additionally
execute, acknowledge and deliver any and all other documents reasonably
necessary or appropriate to carry out the terms and conditions of the
Acquisition Agreement. The Transferor and the Transferee shall execute and
deposit such additional escrow instructions as shall be reasonably required by
the escrow holder to consummate the transactions contemplated herewith;
provided, however, that in the event of any conflict between the printed portion
of any such additional instructions and the provisions of this Agreement, the
provisions of this Agreement shall control.
3.2 Acquisition Price.
-----------------
(a) The "Acquisition Price" will be equal to the sum of (i) the then
-----------------
outstanding mortgage indebtedness secured by the Property, plus (ii) one dollar
($1.00), plus (iii) the aggregate amount of capital contributed by the
beneficial owners of the Property, net of actual cash distributions in respect
of such beneficial owners, during the period beginning on the date of the
consummation of the Offering, plus (iv) an annualized return of 8.0% on the
amount in excess of five million dollars ($5,000,000), if any, as determined
pursuant to clause (iii) preceding.
(b) In exercising the Option, the Transferee will use reasonable
commercial efforts to cooperate with the Transferor (and the current owners of
the Transferor) to minimize any taxes payable in connection with such exercise
or the assumption or repayment of debt relating to the Property.
4. Permitted Activities by the Transferor. Notwithstanding the
--------------------------------------
foregoing, the Transferor has the right to sell the Property, subject to the
right of first refusal as set forth in Section 2.3.
-----------
5. Termination of Option. The Option conveyed herein will terminate
---------------------
upon the occurrence of any of the following events:
(i) The Transferor sells all of the parcels comprising the
Property in accordance with this Agreement;
(ii) The Transferee and the Transferor mutually agree in
writing to terminate this Agreement; or
3
<PAGE>
(iii) The Transferee fails to exercise the Option during the
Exercise Period.
6. Procedure if Option Terminates.
------------------------------
6.1 Notice of Termination. If the Option terminates or is terminated
---------------------
pursuant to this Agreement, the Transferor will provide notice of such
termination to the Transferee (the "Option Termination Notice").
-------------------------
6.2 Verification of Termination. Upon receipt of Option Termination
---------------------------
Notice, the Transferee agrees that, if the Option is terminated, it will
execute, acknowledge and deliver to the Transferor in recordable form with
appropriate authorization for recording, within ten (10) days from request
therefor, a quitclaim deed or any other document reasonably requested by the
Transferor or a title insurance company to verify the termination of the Option.
6.3 Right to Documents. In the event that the Option is not
------------------
exercised, or the Acquisition Escrow fails to close for any reason other than a
default by the Transferor, upon receipt of the Option Termination Notice, the
Transferee shall forthwith deliver to the Transferor and shall be deemed to have
assigned to the Transferor, without the execution of any additional documents,
all of the Transferee's right, title and interest in all studies, reports,
governmental applications, permits, maps, plans, specifications and other
documents in its possession or that it has made or contracted to be made
respecting the Property, including without limitation all engineering reports,
surveys, soil tests, seismic studies, environmental reports, grading, flood
control and drainage plans, design renderings, market analyses, feasibility
studies, proposed tentative, parcel and final maps, and all correspondence with
governmental agencies and their personnel concerning the same.
7. Assignment. The Transferee may not assign the Option without the
----------
Transferor's prior written consent, which consent may be conditioned, withheld
or delayed in the Transferor's sole and absolute discretion, provided, that the
--------
Transferee may assign the Option to the Company or any direct or indirect
subsidiary of the Company or the Operating Partnership without the Transferor's
prior consent.
8. Notices. Any notice to be given hereunder by either party to the
-------
other shall be given in writing by personal delivery, telecopy or by registered
or certified mail, postage prepaid, return receipt requested, and shall be
deemed communicated as of the date of delivery. Mailed notices shall be
addressed as set forth below, but each party may change the address set forth
below by written notice to the other party in accordance with this paragraph.
To the Transferor:
Kilroy Airport Imperial Co.
2250 East Imperial Highway
El Segundo, California 90245
Telefax: (310) 322-5981
4
<PAGE>
To Transferee:
Kilroy Realty, L.P.
2250 East Imperial Highway
El Segundo, California 90245
Attention: Secretary
Telefax: (310) 322-5981
9. Miscellaneous.
-------------
9.1 Entire Agreement. This instrument contains the entire agreement
----------------
between the parties related to the Option herein granted. Any oral
representations or modifications concerning this Agreement shall be of no force
or effect. This Agreement may be amended only by a subsequent agreement in
writing signed by the Transferee and the Transferor.
9.2 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the respective heirs, personal representatives, successors and
assigns of the parties hereto, except as expressly provided in Section 9 above.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.4 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL
-------------
LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE CHOICE OF LAWS PROVISIONS
THEREOF.
9.5 Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(Signature Page Follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
"TRANSFERORS"
KILROY AIRPORT IMPERIAL CO., a
California limited partnership
By: _______________________,
its general partner
By:___________________________
Name:
Title:
"TRANSFEREE"
KILROY REALTY, L.P.,
a Delaware limited partnership
By Kilroy Realty Corporation,
its general partner
By:___________________________
Richard E. Moran Jr.
Executive Vice President, Chief Financial
Officer and Secretary
<PAGE>
EXHIBIT A TO
Option Agreement
----------------
Legal description of the Property
A-1
<PAGE>
EXHIBIT 10.29
OPTION AGREEMENT
THIS AGREEMENT (this "Agreement") is made on __________ __, 1997, by
---------
and between KILROY CALABASAS ASSOCIATES, a California limited partnership (the
"Transferor") and KILROY REALTY, L.P., a Delaware limited partnership (the
- -----------
"Operating Partnership" or "Transferee").
- ---------------------- ----------
RECITALS
--------
A. The Transferor owns approximately 18 acres of certain unimproved
land (other than infrastructure improvements), as described in Exhibit A (the
---------
"Property").
- ---------
B. The Transferee desires to have the right to acquire all or any
part of the Property, without becoming obligated to acquire it, under specified
terms and conditions. As used herein, "Option" means the option to purchase the
------
Property under this Agreement,
C. The Transferee desires to acquire the Option as part of a series
of transactions relating to the proposed initial public offering (the
"Offering") of common stock of Kilroy Realty Corporation, a Maryland corporation
--------
(the "Company"). Upon the closing of the Offering, the Company will be a self-
-------
administered real estate investment trust and will be the sole general partner
and majority owner of the Transferee.
D. Prior to the Transferee's acquisition of the Property under this
Agreement, the Property will be managed by the Transferee pursuant to a Property
Management Agreement between the Transferor and the Transferee.
AGREEMENT
---------
NOW, THEREFORE, for and in consideration of the foregoing premises,
and the mutual undertakings set forth below, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Grant of Option. Effective as of the consummation of the Offering and
---------------
subject to the terms and conditions contained herein, the Transferor hereby
grants to the Transferee the Option, on the terms and conditions herein
described.
1.1 Commencement of Option. The Transferee shall have the right to
----------------------
exercise the Option as of the consummation of the Offering.
1.2 Term of Option. The term of the Option shall be one year from
--------------
the consummation of the Offering, unless earlier terminated as described in
Section 5 hereof (such term being the "Exercise Period").
---------------
1.3 Consideration for Option. The Option is granted in consideration
------------------------
of the payment of $10.00 and other good and valuable consideration.
<PAGE>
2. Process for Exercise of Option.
------------------------------
2.1 Inspection. Upon receipt of Notice of Exercise (as defined in
----------
Section 2.2 hereof) and through the Close of Escrow (as defined in Section
- ----------- -------
3.1(d) hereof), the Transferor agrees to permit the Transferee and its agents to
- ------
enter upon the Property, subject to the rights of any tenants, at reasonable
times to make such surveys, inspections and tests as may reasonably be necessary
in connection with its examination of the Property. The Transferee hereby
agrees to repair any damage it or its agents may cause to the Property, and
further agrees to indemnify, defend and hold the Transferor harmless from and
against any and all claims, losses, damages and expenses, including reasonable
attorneys' fees, suffered by the Transferee as a result of Transferee's or the
Transferee's agent's entry upon or acts upon the Property.
2.2 Exercise. The Option may be exercised during the Exercise Period
--------
by delivery of written notice by the Transferee to the Transferor (a "Notice of
---------
Exercise"), stating that the Option is exercised on the terms set forth in this
- --------
Agreement. The day Notice of Exercise is received by the Transferor shall
hereinafter be referred to as the "Exercise Date." If the Option is exercised,
-------------
the Property shall be conveyed within 60 days of the Exercise Date, subject to
the terms of the Acquisition Agreement (as defined in Section 3).
---------
2.3 Right of First Refusal. Notwithstanding the foregoing, if the
----------------------
Transferor receives an unsolicited offer from an unaffiliated third party to
purchase the Property, then the Transferor shall have the right to convey the
Property or master lease to the Property to such unaffiliated third party during
the Exercise Period; provided, however, that the Transferor shall first give
-------- -------
written notice (the "Notice") thereof to the Transferee (the date the Notice is
------
received by the Transferee is referred to as the "Notice Date"), which Notice
-----------
shall include the proposed purchase price and other economic terms (the
"Proposed Purchase Price") or the proposed leasing terms (the "Leasing Terms"),
----------------------- -------------
as applicable, of the proposed transfer or master lease of the Property, and the
Transferee shall then have 60 days from the Notice Date to give notice (the "OP
--
Notice") of its election to (i) acquire the Property at the lower of the
- ------
Acquisition Price or the Proposed Purchase Price or to master lease the Property
on the Lease Terms, or (ii) acquire the Transferor's rights and related monetary
obligation under the respective sales agreement. In the event the Transferee
does not give the OP Notice during the 60-day period following the Notice Date,
the Option shall be suspended and the Transferor may proceed with the sale or
lease pursuant to the terms of the offer from an unaffiliated third party, as
set forth in the Notice, so long as the economic terms are not more than 5%
below that described in the Notice. In the event the Transferor of the Property
(i) has not entered into a letter of intent for the sale of the Property within
180 days following the Notice Date, or (ii) has not completed the sale of the
Property within 270 days following the Notice Date, then the Option will be
automatically reinstated. The Option shall be subject to any arrangements
entered into by the Transferor in connection with any financing,
recapitalization or leasing of the Property including, without limitation, any
rights of the current lender(s) with respect to the Property with respect to a
transfer pursuant to the Option.
2
<PAGE>
3. Acquisition Process.
-------------------
3.1 Acquisition Escrow. Upon exercise of the Option, the Transferor
------------------
shall open, within five business days after the Exercise Date, an escrow with a
title insurance company selected by the Transferor and reasonably acceptable to
the Transferee at an office of such title insurance company in Los Angeles
County and shall notify the Transferee of the number and location of such escrow
(the "Acquisition Escrow"). Within 30 days after opening the Acquisition
------------------
Escrow, the parties shall execute a mutually acceptable acquisition agreement
containing terms and conditions customary in similar transactions and consistent
with this Agreement (an "Acquisition Agreement") and shall deliver one executed
---------------------
copy to each of the Transferor and the Transferee, and one executed copy to the
escrow holder. The Transferor and the Transferee shall thereafter additionally
execute, acknowledge and deliver any and all other documents reasonably
necessary or appropriate to carry out the terms and conditions of the
Acquisition Agreement. The Transferor and the Transferee shall execute and
deposit such additional escrow instructions as shall be reasonably required by
the escrow holder to consummate the transactions contemplated herewith;
provided, however, that in the event of any conflict between the printed portion
of any such additional instructions and the provisions of this Agreement, the
provisions of this Agreement shall control.
3.2 Acquisition Price.
-----------------
(a) The "Acquisition Price" will be equal to the total accumulated
-----------------
costs of the Transferor in the Property, as of the date the Option is exercised,
in connection with acquisition of rights with respect to, and the entitlement
and development of, the Property, including, without limitation, property taxes,
predevelopment and entitlement costs and fees, and related bond financing costs.
(b) In exercising the Option, the Transferee will use reasonable
commercial efforts to cooperate with the Transferor (and the current owners of
the Transferor) to minimize any taxes payable in connection with such exercise
or the assumption or repayment of debt relating to the Property.
4. Permitted Activities by the Transferor. Notwithstanding the
--------------------------------------
foregoing, the Transferor has the right to sell the Property, subject to the
right of first refusal as set forth in Section 2.3.
-----------
5. Termination of Option. The Option conveyed herein will terminate
---------------------
upon the occurrence of any of the following events:
(i) The Transferor sells all of the parcels comprising the
Property in accordance with this Agreement;
(ii) The Transferee and the Transferor mutually agree in writing
to terminate this Agreement; or
3
<PAGE>
(iii) The Transferee fails to exercise the Option during the
Exercise Period.
6. Procedure if Option Terminates.
------------------------------
6.1 Notice of Termination. If the Option terminates or is terminated
---------------------
pursuant to this Agreement, the Transferor will provide notice of such
termination to the Transferee (the "Option Termination Notice").
-------------------------
6.2 Verification of Termination. Upon receipt of Option Termination
---------------------------
Notice, the Transferee agrees that, if the Option is terminated, it will
execute, acknowledge and deliver to the Transferor in recordable form with
appropriate authorization for recording, within ten (10) days from request
therefor, a quitclaim deed or any other document reasonably requested by the
Transferor or a title insurance company to verify the termination of the Option.
6.3 Right to Documents. In the event that the Option is not
------------------
exercised, or the Acquisition Escrow fails to close for any reason other than a
default by the Transferor, upon receipt of the Option Termination Notice, the
Transferee shall forthwith deliver to the Transferor and shall be deemed to have
assigned to the Transferor, without the execution of any additional documents,
all of the Transferee's right, title and interest in all studies, reports,
governmental applications, permits, maps, plans, specifications and other
documents in its possession or that it has made or contracted to be made
respecting the Property, including without limitation all engineering reports,
surveys, soil tests, seismic studies, environmental reports, grading, flood
control and drainage plans, design renderings, market analyses, feasibility
studies, proposed tentative, parcel and final maps, and all correspondence with
governmental agencies and their personnel concerning the same.
7. Assignment. The Transferee may not assign the Option without the
----------
Transferor's prior written consent, which consent may be conditioned, withheld
or delayed in the Transferor's sole and absolute discretion, provided, that the
--------
Transferee may assign the Option to the Company or any direct or indirect
subsidiary of the Company or the Operating Partnership without the Transferor's
prior consent.
8. Notices. Any notice to be given hereunder by either party to the
-------
other shall be given in writing by personal delivery, telecopy or by registered
or certified mail, postage prepaid, return receipt requested, and shall be
deemed communicated as of the date of delivery. Mailed notices shall be
addressed as set forth below, but each party may change the address set forth
below by written notice to the other party in accordance with this paragraph.
To Transferor:
Kilroy Calabasas Associates
2250 East Imperial Highway
El Segundo, California 90245
Telefax: (310) 322-5981
4
<PAGE>
To Transferee:
Kilroy Realty, L.P.
2250 East Imperial Highway
El Segundo, California 90245
Attention: Secretary
Telefax: (310) 322-5981
9. Miscellaneous.
-------------
9.1 Entire Agreement. This instrument contains the entire agreement
----------------
between the parties related to the Option herein granted. Any oral
representations or modifications concerning this Agreement shall be of no force
or effect. This Agreement may be amended only by a subsequent agreement in
writing signed by the Transferee and the Transferor.
9.2 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the respective heirs, personal representatives, successors and
assigns of the parties hereto, except as expressly provided in Section 9 above.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.4 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL
-------------
LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE CHOICE OF LAWS PROVISIONS
THEREOF.
9.5 Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(Signature Page Follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
"TRANSFERORS"
KILROY CALABASAS ASSOCIATES, a
California limited partnership
By Kilroy Calabasas Company,
its general partner
By:____________________________
John B. Kilroy, Jr.
President
"TRANSFEREE"
KILROY REALTY, L.P.,
a Delaware limited partnership
By Kilroy Realty Corporation,
its general partner
By:____________________________
Richard E. Moran Jr.
Executive Vice President, Chief Financial
Officer and Secretary
<PAGE>
EXHIBIT A TO
Option Agreement
----------------
Legal description of Calabasas Property
A-1
<PAGE>
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of
---------
___________, 1997, between Kilroy Realty Corporation, a Maryland corporation
(the "Company"), and John B. Kilroy, Jr. (the "Executive").
------- ---------
1. EMPLOYMENT
The REIT and the Operating Partnership hereby agree to employ the
Executive, and the Executive hereby agrees to be employed by the REIT and the
Operating Partnership, on the terms and conditions set forth herein. The REIT
and the Operating Partnership shall collectively be referred to herein as the
"Company." The allocation of the obligations of the Company between the REIT
and the Operating Partnership shall be determined as set forth in Section 8
hereof.
2. TERM AND RENEWAL
2.1 Term. The employment of the Executive by the Company as provided
----
in Section 1 will commence on the date hereof and will terminate three years
from the date hereof (the "Expiration Date") unless automatically extended for
---------------
an additional 12-month period pursuant to Section 2.2 hereof or sooner
terminated as hereinafter provided (each such period, an "Employment Period").
-----------------
2.2 Renewal. Following the expiration of the initial Employment
-------
Period and provided that this Agreement has not been terminated by the Executive
or the Company pursuant to Section 5 hereof, and every year thereafter, this
Agreement shall be automatically renewed on the terms set forth herein for an
additional twelve (12) month period, effective on each anniversary date of the
date hereof.
3. POSITION AND DUTIES
3.1 Position. The Executive hereby agrees to serve as President and
--------
Chief Executive Officer of the Company. In addition, for so long as such
Executive is elected by the Company's stockholders to serve as a member of the
board of directors of the Company (the "Board"), then, for so long as the
-----
Executive is an employee of the Company, the Executive hereby agrees to serve as
a member thereof. At the Company's request, the Executive may, at the
Executive's discretion, serve the Company and/or its respective subsidiaries and
affiliates in other offices and capacities in addition to the foregoing, but
shall not be required to do so. In the event that the Executive, during the
term of this Agreement, serves in any one or more of the aforementioned
capacities, the Executive's compensation shall not be increased beyond that
specified in Section 4 of this Agreement. In addition, in the event the Company
and the Executive mutually agree that the Executive shall terminate the
Executive's service in any one or more of the aforementioned capacities, or the
Executive's service in one or more of the aforementioned capacities is
terminated, the Executive's compensation, as specified in Section 4 of this
Agreement, shall not be diminished or reduced in any manner.
<PAGE>
3.2 Duties. The Company agrees that the duties that may be assigned
------
to the Executive shall be the usual and customary duties of the offices of
President and Chief Executive Officer.
3.3 Devotion of Time and Effort. The Executive shall devote
---------------------------
substantially all of his business time and attention to the performance of
services to the Company in his capacity as an officer thereof and as may
reasonably be requested by the Board.
3.4 Other Activities. The Executive may engage in other activities
----------------
for the Executive's own account while employed hereunder, including without
limitation charitable, community and other business activities, provided that
such other activities do not materially interfere with the performance of the
Executive's duties hereunder.
4. COMPENSATION AND RELATED MATTERS
4.1 Salary. During the Employment Period, the Company shall pay the
------
Executive an annual salary of $200,000 during the first 12-month period and at
such annual salary as determined by the Executive Compensation Committee of the
Board (the "Executive Compensation Committee") during the second and subsequent
--------------------------------
12-month periods of the Executive's employment with the Company, but not less
than $200,000. All salary is to be paid consistent with the standard payroll
practices of the Company (e.g., timing of payments and standard employee
----
deductions, such as income tax withholdings, social security, etc.). The
Executive's performance and salary shall be subject to review at the end of each
fiscal year and an increase in annual salary, if one is so determined by the
Executive Compensation Committee, shall be made on a basis consistent with the
standard practices of the Company.
4.2 Bonus. The Executive Compensation Committee shall review the
-----
Executive's performance at least annually during each year of the Employment
Period and cause the Company to award the Executive a cash bonus in an amount
equal to up to 100% of the annual salary, as provided in Section 4.1 above,
which the Executive Compensation Committee shall reasonably determine as fairly
compensating and rewarding the Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of such
cash bonus shall be determined in the sole and absolute discretion of the
Executive Compensation Committee and shall be dependent on, among other things,
the achievement of certain performance levels by the Company, including, without
limitation, growth in funds from operations, and the Executive's performance and
contribution to increasing the funds from operations.
4.3 "Gross-Up" of Compensation. The amount of the salary and any
--------------------------
bonus payable to the Executive pursuant to Sections 4.1 and 4.2 above, shall be
"grossed up" as necessary (on an after-tax basis) to compensate for any
additional withholding taxes or other expenses due to the implementation of the
Compensation Split (as defined in Section 8 below) with respect to the financial
obligations of the Company and the Operating Partnership, respectively.
2
<PAGE>
4.4 Business Expenses. The Company shall promptly, in accordance
-----------------
with Company policy, reimburse the Executive for all reasonable business
expenses incurred in accordance with and subject to the limits set forth in the
Company's written policies with respect to business expenses, including, without
limitation, business seminar fees, professional association dues, reasonable
entertainment expenses incurred by the Executive in connection with the business
of the Company and/or its respective subsidiaries and affiliates, and reasonable
travel expenses, including all airfare, hotel and rental car expenses, incurred
by the Executive in traveling in connection with the business of the Company,
upon presentation to the Company of written receipts for such expenses.
4.5 Other Benefits.
--------------
(a) Medical Insurance. During the Employment Period, the
-----------------
Company, at its sole cost, shall provide to the Executive, the Executive's
spouse and children such health, dental and optical insurance as the Company may
from time to time make available to its other executive employees, subject to
and on a basis consistent with the terms, conditions and overall administration
of such plans or arrangements.
(b) Life and Disability Insurance. During the Employment
-----------------------------
Period, the Company shall provide to the Executive such disability and/or life
insurance as the Company in its sole discretion may from time to time make
available to its other executive employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans or
arrangements.
(c) Pension Plans, Etc. During the Employment Period, the
-------------------
Executive shall be entitled to participate in all pension, 401(k) and other
employee plans and benefits established by the Company on at least the same
terms as the Company's other executive employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
or arrangements.
4.6 Automobile Allowance. The Company shall provide the Executive
--------------------
with a reasonable automobile allowance during the term of the Executive's
employment with the Company, subject to and on a basis consistent with Company
policy.
4.7 Vacation. The Executive shall be entitled to four (4) vacation
--------
weeks (20 business days) in each calendar year, subject to and on a basis
consistent with Company policy. In addition, the Executive will be entitled to
all Company holidays.
4.8 Office, Staff, and Equipment. The Company agrees to provide the
----------------------------
Executive, as a condition to the Executive's services hereunder, such staff,
equipment and office space as is reasonably necessary for the Executive to
perform the Executive's duties hereunder, subject to and on a basis consistent
with Company policy.
5. TERMINATION
3
<PAGE>
5.1 Death. The Executive's employment hereunder shall terminate upon
-----
his death.
5.2 Disability. The Executive's employment hereunder shall terminate
----------
on the Executive's physical or mental disability or infirmity which, in the
opinion of a competent physician selected by the Board, renders the Executive
unable to perform properly his duties under this Agreement for six (6)
consecutive calendar months or for shorter periods aggregating one hundred and
eighty (180) business days in any twelve (12) month period, but only to the
extent that such definition does not violate the Americans with Disabilities
Act..
5.3 Cause. The Company may terminate the Executive for Cause at any
-----
time, upon written notice to Executive. For purposes of this Agreement, "Cause"
-----
shall mean:
(a) the Executive's conviction for commission of a felony or a
crime involving moral turpitude;
(b) the Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Company; or
(c) the Executive's willful and continued failure to
substantially perform the Executive's duties hereunder (other than
such failure resulting from the Executive's incapacity due to physical
or mental illness), which failure is not remedied within a reasonable
time after written demand for substantial performance is delivered by
the Company which specifically identifies the manner in which the
Company believes that the Executive has not substantially performed
the Executive's duties.
5.4 Termination Without Cause. The Company may terminate this
-------------------------
Agreement without Cause at any time, provided that the Company first delivers to
the Executive the Company's written election to terminate this Agreement at
least ninety (90) days prior to the effective date of termination.
5.5 Executive's Termination for Good Reason. The Executive may
---------------------------------------
terminate this Agreement for Good Reason upon at least ten (10) days prior
written notice to the Company. For purposes of this Agreement, "Good Reason"
-----------
shall mean:
(a) the Company's material breach of any of its obligations
hereunder and either such breach is incurable or, if curable, has not
been cured within fifteen (15) days following receipt of written
notice by the Executive to the Company of such breach by the Company;
(b) any removal of the Executive from one or more of the offices
specified in Section 3.1 hereof without Cause and without the
Executive's prior written consent; or
4
<PAGE>
(c) any material alteration or diminution in the Executive's
authority, duties or responsibilities herein without Cause and without
the Executive's prior written consent.
5.6 Executive's Voluntary Termination. The Executive may, at any
---------------------------------
time, terminate this Agreement without Good Reason, provided that the Executive
delivers written notice to the Company at least ninety (90) days prior to the
effective date of termination.
5.7 Change of Control. The Executive may terminate this Agreement,
-----------------
upon at least ten (10) days' prior written notice to the Company at any time
within two (2) years after a "Change in Control" (as hereinafter defined) of the
Company. For purposes of this Agreement, a "Change in Control" shall mean the
-----------------
occurrence of any of the following events:
(a) the individuals constituting the Board as of the date of the
Company's initial public offering of common stock (the "Incumbent Board")
---------------
cease for any reason to constitute at least a majority of the Board;
provided, however, that if the election, or nomination for election by the
Company's stockholders, of any new director was approved by a vote of at
least a majority of the Incumbent Board, such new director shall be
considered a member of the Incumbent Board;
(b) an acquisition of any voting securities of the Company (the
"Voting Securities") by any "person" (as the term "person" is used for
------------------ ------
purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act
of 1934, as amended (the "1934 Act")) immediately after which such person
--------
has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated
under the 1934 Act) of 20% or more of the combined voting power of the
Company's then outstanding Voting Securities unless such acquisition was
approved by a vote of at least one more than a majority of the Incumbent
Board; or
(c) approval by the stockholders of the Company of:
(i) a merger, consolidation, share exchange or
reorganization involving the Company, unless the stockholders of the
Company, immediately before such merger, consolidation, share exchange or
reorganization, own, directly or indirectly immediately following such
merger, consolidation, share exchange or reorganization, at least 80% of
the combined voting power of the outstanding Voting Securities of the
corporation that is the successor in such merger, consolidation, share
exchange or reorganization (the "Surviving Company") in substantially the
-----------------
same proportion as their ownership of the Voting Securities immediately
before such merger, consolidation, share exchange or reorganization;
(ii) a complete liquidation or dissolution of the Company;
or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of the Company.
5
<PAGE>
5.8 Nonrenewal. The Company may terminate this Agreement upon the
----------
expiration of any Employment Period, provided that the Company gives written
notice of such nonrenewal to the Executive at least ninety (90) days prior to
the expiration of such Employment Period.
5.9 Retirement. The Executive's employment shall terminate upon his
----------
retirement upon or immediately following his sixty-fifth birthday. In the case
of the Executive's retirement, the Company shall pay to the Executive promptly
after Executive's termination (i) the unpaid annual salary pursuant to Section
4.1 hereof to which such Executive is entitled pursuant to Section 6 hereof,
through the date of the termination of such Executive's employment, and (ii) as
soon as practicable after the close of the Company's fiscal year in which the
Executive's termination occurs, a prorated portion of any unpaid bonus
determined by the Board pursuant to Section 4.2 hereof. This Section 5.9 shall
not limit the entitlement of the Executive to any retirement benefit then
available to the Executive under any benefit plan or policy which is maintained
by the Company for the Executives's benefit.
5.10 Notice. Any termination of the Executive's employment by the
------
Company or the Executive shall be communicated by written Notice of Termination
to the other party. For purposes of this Agreement, a "Notice of Termination"
---------------------
shall mean a notice that shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
5.11 Date of Termination. The effective date of the Executive's
-------------------
termination depends on the type of termination applied. "Date of Termination"
-------------------
shall mean the following:
(a) if the Executive's employment is terminated by his death, the
date of his death;
(b) if the Executive's employment is terminated by reason of his
disability, the date of the opinion of the physician referred to in
Section 5.2 hereof;
(c) if the Executive's employment is terminated by the Company
for Cause pursuant to Section 5.3 hereof, or without Cause by the
Company pursuant to Section 5.4 hereof, the date specified in the
Notice of Termination;
(d) if the Executive resigns for Good Reason (pursuant to Section
5.5 hereof), voluntarily resigns (pursuant to Section 5.6 hereof), or
resigns due to a Change of Control (pursuant to Section 5.7 hereof),
the date of the Notice of Termination;
(e) if the Executive's employment is terminated pursuant to
Section 5.8 hereof, the date this Agreement terminates by its terms;
and
6
<PAGE>
(f) if the Executive's employment is terminated pursuant to
Section 5.9 hereof, the date of such Executive's retirement.
5.12 Termination Obligations.
-----------------------
(a) The Executive hereby acknowledges and agrees that all
Personal Property and equipment furnished to or prepared by the Executive in the
course of or incident to his employment, belongs to the Company and shall be
promptly returned to the Company upon termination of the Employment Period.
"Personal Property" includes, without limitation, all electronic devices of the
-----------------
Company used by the Executive, including, without limitation, personal
computers, facsimile machines, cellular telephones, pagers and tape recorders
and all books, manuals, records, reports, notes, contracts, lists, blueprints,
maps and other documents, or materials, or copies thereof (including computer
files), and all other proprietary information relating to the business of the
Company. Following termination, the Executive will not retain any written or
other tangible material containing any proprietary information of the Company.
(b) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships then held
with the Company or any affiliate.
(c) The representations and warranties contained herein and the
Executive's obligations under this Section 5.12 and Sections 7 and 9 hereof
shall survive termination of the Employment Period and the expiration of this
Agreement.
6. COMPENSATION UPON TERMINATION
6.1 Death.
-----
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated pursuant to Section 5.1 hereof, the Company shall pay monthly to the
Executive's estate his annual salary payable pursuant to Section 4.1 hereof and
one-twelfth of any bonus payable pursuant to Section 4.2(a) hereof at the most
recent annual amount received, or entitled to be received, by the Executive for
a period equal to the lesser of one (1) year following the Date of Termination
or the remainder of the Employment Period as set forth in Section 2 hereof.
(b) Severance Benefits. At the Executive's estate's expense,
------------------
the Executive's spouse and children shall also be entitled to any continuation
of health insurance coverage rights under any applicable law.
6.2 Disability.
----------
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated by reason of disability pursuant to Section 5.2 hereof, the Company
shall pay to the Executive and the Executive shall receive a single severance
payment in an amount equal to the sum of: (i) two times the Executive's average
annual salary paid hereunder pursuant to Section 4.1 hereof for the preceding
thirty-six month period (or, if the Executive has been employed less
7
<PAGE>
than thirty-six months, the average annual salary for the period employed) plus
(ii) an amount equal to two times the highest annual bonus received by the
Executive during the preceding thirty-six month period (or during the period the
Executive has been employed hereunder if shorter than thirty-six
months)(collectively, the "Severance Payment"). Such payment shall be in
-----------------
addition to any disability insurance payments to which the Executive is
otherwise entitled and any other compensation earned by Executive hereunder.
(b) Severance Benefits. At the Executive's own expense, the
------------------
Executive and the Executive's spouse and children shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
6.3 Cause.
-----
(a) Salary and Bonus. If the Executive's employment shall be
----------------
terminated for Cause pursuant to Section 5.3 hereof, the Company shall pay the
Executive his salary and any bonus then payable pursuant to Sections 4.1 and 4.2
hereof through the Date of Termination.
(b) Benefits. At the Executive's own expense, the Executive and
--------
the Executive's spouse and children shall also be entitled to any continuation
of health insurance coverage rights under any applicable law.
6.4 Termination Without Cause.
-------------------------
(a) Severance Payment. If the Company shall terminate the
-----------------
Executive's employment without Cause pursuant to Section 5.4 hereof, the Company
shall pay the Executive the Severance Payment, as described in Section 6.2(a)
hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.5 hereof for a period of two (2) years commencing on the
Date of Termination.
6.5 Executive's Termination for Good Reason.
---------------------------------------
(a) Severance Payment. If the Executive terminates his
-----------------
employment with the Company pursuant to Section 5.5 hereof for Good Reason, the
Company shall pay the Executive the Severance Payment, as described in Section
6.2(a) hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.5 hereof for a period of two (2) years commencing on the
Date of Termination.
6.6 Executive's Voluntary Termination. In the event of the voluntary
---------------------------------
termination of this Agreement by the Executive, pursuant to Section 5.6 hereof,
the Executive
8
<PAGE>
shall have the right to receive the Executive's compensation as provided in
Section 4 hereof through the Date of Termination.
6.7 Change of Control.
-----------------
(a) Severance Payment. If the Executive terminates this
-----------------
Agreement within two (2) years after a Change in Control pursuant to Section 5.7
hereof, the Company shall pay the Executive the Severance Payment, as described
in Section 6.1(a) hereof.
(b) Severance Benefits. Following such termination, and in
------------------
addition to paying the Executive's Severance Payment, the Company, at the
Company's expense, shall continue to provide to the Executive and the
Executive's spouse and children all benefits described in Section 4.5 hereof for
a period of two (2) years commencing on the Date of Termination.
6.8 Manner of Payment. Any Severance Payment made pursuant to this
-----------------
Section 6 shall be payable in a one-time payment by the Company.
6.9 Limitation. The foregoing notwithstanding, the total of such
----------
Severance Payments, pursuant to Sections 6.1, 6.2, 6.4, 6.5 and 6.7 hereof,
shall be reduced to the extent that the payment of such amount would cause the
Executive's total termination benefits (as determined by the Executive's tax
advisor) to constitute an "excess" parachute payment under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and by reason of such
----
excess parachute payment the Executive would be subject to an excise tax under
Section 4999(a) of the Code, but only if the Executive determines that the
after-tax value of the termination benefits calculated with the foregoing
restriction exceed those calculated without the foregoing restriction.
7. CONFIDENTIALITY AND NON-SOLICITATION COVENANTS
7.1 Confidentiality. In addition to the agreements set forth in
---------------
Section 5.12(a) hereof, the Executive hereby agrees that the Executive will not,
during the Employment Period or at any time thereafter directly or indirectly
disclose or make available to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever, any Confidential Information
(as defined below). The Executive agrees that, upon termination of his
employment with the Company, all Confidential Information in his possession that
is in written or other tangible form (together with all copies or duplicates
thereof, including computer files) shall be returned to the Company and shall
not be retained by the Executive or furnished to any third party, in any form
except as provided herein; provided, however, that the Executive shall not be
obligated to treat as confidential, or return to the Company copies of any
Confidential Information that (i) was publicly known at the time of disclosure
to the Executive, (ii) becomes publicly known or available thereafter other than
by any means in violation of this Agreement or any other duty owed to the
Company by the Executive, or (iii) is lawfully disclosed to the Executive by a
third party. As used in this Agreement the term "Confidential Information"
------------------------
means information disclosed to the Executive or known by the Executive as a
consequence of or through his relationship with the Company, about the owners,
tenants, employees, business
9
<PAGE>
methods, public relations methods, organization, procedures, property
acquisition and development, or finances, including, without limitation,
information of or relating to owner or tenant lists of the Company and its
affiliates.
7.2 Non-Solicitation. For a period of one (1) year following the
----------------
date on which the Executive's employment hereunder is terminated, the Executive
shall not solicit or induce any of the Company's employees, agents or
independent contractors to end their relationship with the Company, or recruit,
hire or otherwise induce any such person to perform services for the Executive,
or any other person, firm or company. The restrictions set forth in this
Section 7.2 hereof shall not apply if the Executive's employment is terminated
pursuant to Section 5.4, 5.5 or 5.7 hereof.
8. PAYMENT OF FINANCIAL OBLIGATIONS
The payment or provision to the Executive by the Company of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's salary,
bonus and other benefits set forth in Section 4 hereof, the payment (if
applicable) of the Severance Payment and provision of the severance benefits (if
applicable) set forth in Section 6 hereof and any indemnification obligations,
shall be allocated (the "Compensation Split") -% to the Company and -% to the
------------------
Operating Partnership initially, subject to adjustment from time to time by the
Executive Compensation Committee.
9. GENERAL PROVISIONS
9.1 Injunctive Relief and Enforcement. The Executive acknowledges
---------------------------------
that the remedies at law for any breach by him of the provisions of Sections
5.12(a) or 7 hereof may be inadequate and that, therefore, in the event of
breach by the Executive of the terms of Sections 5.12(a) or 7 hereof, the
Company shall be entitled to institute legal proceedings to enforce the specific
performance of this Agreement by the Executive and to enjoin the Executive from
any further violation of Sections 5.12(a) or 7 hereof and to exercise such
remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement.
9.2 Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when addressed as follows and (i) when
personally delivered, (ii) when transmitted by telecopy, electronic or digital
transmission with receipt confirmed, (iii) one day after delivery to an
overnight air courier guaranteeing next day delivery, or (iv) upon receipt if
sent by certified or registered mail. In each case notice shall be sent to:
If to Executive: John B. Kilroy, Jr.
Kilroy Realty Corporation
2250 E. Imperial Highway
El Segundo, CA 90245
Facsimile: (310) 322-5981
10
<PAGE>
If to the Company: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Attention: Secretary
Facsimile: (310) 322-5981
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9.3 Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. In addition, in the event any provision in this
Agreement shall be determined by any court of competent jurisdiction to be
unenforceable by reason of extending for too great a period of time or over too
great a geographical area or by reason of being too extensive in any other
respect, each such agreement shall be interpreted to extend over the maximum
period of time for which it may be enforceable and to the maximum extent in all
other respects as to which it may be enforceable, and enforced as so
interpreted, all as determined by such court in such action.
9.4 Assignment. This Agreement may not be assigned by the Executive,
----------
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
9.5 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
9.6 Headings. The headings contained herein are for reference
--------
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.7 Choice of Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California without
giving effect to the principles of conflict of laws thereof.
9.8 Indemnification. To the fullest extent permitted under
---------------
applicable law, the Company shall indemnify, defend and hold the Executive
harmless from and against any and all causes of action, claims, demands,
liabilities, damages, costs and expenses of any nature whatsoever (collectively,
"Damages") directly or indirectly arising out of or relating to the Executive
-------
discharging the Executive's duties hereunder on behalf of the Company and/or its
respective subsidiaries and affiliates, so long as the Executive acted in good
faith within the course and scope of the Executive's duties with respect to the
matter giving rise to the claim or Damages for which the Executive seeks
indemnification.
9.9 LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE
-------------------------
COMPANY IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED
TO THIS AGREEMENT, A BREACH OF ANY
11
<PAGE>
COVENANT CONTAINED IN THIS AGREEMENT (WHETHER EXPRESS OR IMPLIED BY EITHER LAW
OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN WHOLE OR IN PART ON ANY BREACH
OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES SHALL BE LIMITED TO CONTRACTUAL
DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES, AND (II) CONSEQUENTIAL AND/OR
INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER INDIRECT OR SPECULATIVE
----
DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE EXECUTIVE MAY RECOVER FOR ANY
REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS OWED (BUT NOT YET PAID) TO THE
EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS NATURAL TERM AND THROUGH ANY
APPLICABLE SEVERANCE PERIOD, PLUS INTEREST ON ANY DELAYED PAYMENT AT THE MAXIMUM
RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER THE DATE(S) THAT SUCH
PAYMENTS WERE DUE.
9.10 WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
--------------------
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL FOR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
9.11 Attorneys' Fees. If any legal action, arbitration or other
---------------
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
9.12 Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board.
9.13 The Executive's Acknowledgment. The Executive acknowledges (a)
------------------------------
that he has had the opportunity to consult with independent counsel of his own
choice concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
(Signature Page Follows)
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date and year first above written.
KILROY REALTY CORPORATION
By:_______________________________________
Richard E. Moran Jr.
Executive Vice President, Chief
Financial Officer and Secretary
KILROY REALTY, L.P.
By Kilroy Realty Corporation, its general
partner
By:_______________________________________
Richard E. Moran Jr.
Executive Vice President, Chief
Financial Officer and Secretary
EXECUTIVE
__________________________________________
John B. Kilroy, Jr.,
<PAGE>
EXHIBIT 10.31
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of
---------
_______________, 1997, by and between Kilroy Realty Corporation, a Maryland
corporation (the "REIT"), Kilroy Realty, L.P., a Delaware limited partnership
----
(the "Operating Partnership") and Richard E. Moran Jr. (the "Executive").
---------
1. EMPLOYMENT
The REIT and the Operating Partnership hereby agree to employ the
Executive, and the Executive hereby agrees to be employed by the REIT and the
Operating Partnership, on the terms and conditions set forth herein. The REIT
and the Operating Partnership shall collectively be referred to herein as the
"Company." The allocation of the obligations of the Company between the REIT
and the Operating Partnership shall be determined as set forth in Section 8
hereof.
2. TERM AND RENEWAL
2.1 Term. The employment of the Executive by the Company as provided
----
in Section 1 will commence on the date hereof and will terminate three years
from the date hereof (the "Expiration Date") unless automatically extended for
---------------
an additional 12-month period pursuant to Section 2.2 hereof or sooner
terminated as hereinafter provided (each such period, an "Employment Period").
-----------------
2.2 Renewal. Following the expiration of the initial Employment
-------
Period and provided that this Agreement has not been terminated by the Executive
or the Company pursuant to Section 5 hereof, and every year thereafter, this
Agreement shall be automatically renewed on the terms set forth herein for an
additional 12-month period, effective on each anniversary date of the date
hereof.
3. POSITION AND DUTIES
3.1 Position. The Executive hereby agrees to serve as Executive Vice
--------
President, Chief Financial Officer and Secretary of the Company. In addition,
if, at the discretion of the Board of Directors of the Company (the "Board"),
-----
the Company nominates the Executive for election to the Board, and in the event
that such Executive is elected by the Company's stockholders to serve as a
member of the Board, then, for so long as the Executive is an employee of the
Company, the Executive hereby agrees to serve as a member thereof. At the
Company's request, the Executive may, at the Executive's discretion, serve the
Company and/or its respective subsidiaries and affiliates in other offices and
capacities in addition to the foregoing, but shall not be required to do so. In
the event that the Executive, during the term of this Agreement, serves in any
one or more of the aforementioned capacities, the Executive's compensation shall
not be increased beyond that specified in Section 4 of this Agreement. In
1
<PAGE>
addition, in the event the Company and the Executive mutually agree that the
Executive shall terminate the Executive's service in any one or more of the
aforementioned capacities, or the Executive's service in one or more of the
aforementioned capacities is terminated, the Executive's compensation, as
specified in Section 4 of this Agreement, shall not be diminished or reduced in
any manner.
3.2 Duties. The Company agrees that the duties that may be assigned
------
to the Executive shall be the usual and customary duties of the offices of
Executive Vice President, Chief Financial Officer and Secretary which duties
shall include, without limitation, the responsibility to:
(i) maintain the custody of the corporate funds and securities;
(ii) keep full and accurate accounts of receipts and disbursements
in books belonging to the Company;
(iii) deposit all moneys, and other valuable effects in the name and
to the credit of the Company, in such depositories as may be
designated from time to time by the Board;
(iv) disburse the funds of the Company as may be ordered by the
Board;
(v) take proper vouchers for such disbursements;
(vi) comply with all financial reporting obligations, including all
periodic financial reports required to be filed under federal
and state securities laws;
(vii) maintain shareholder relations, including preparation of press
releases with respect to quarterly and annual earnings and
other appropriate matters;
(viii) maintain appropriate contacts and relationships with financial
analysts and the investment community;
(ix) render to the Board, at its regular meetings, or when the Board
so requires, an account of the Executive's transactions as
Executive Vice President and Chief Financial Officer of the
Company; and
(x) attend meetings of the Board and record the minutes of such
meetings.
2
<PAGE>
3.3 Devotion of Time and Effort. The Executive shall devote
---------------------------
substantially all of his business time and attention to the performance of
services to the Company in his capacity as an officer thereof and as may
reasonably be requested by the Board.
3.4 Other Activities. The Executive may engage in other activities
----------------
for the Executive's own account while employed hereunder, including without
limitation charitable, community and other business activities, provided that
such other activities (i) do not compete with the business and activities of the
Company or any of its direct and indirect subsidiaries and (ii) do not
materially interfere with the performance of the Executive's duties hereunder.
Notwithstanding the foregoing, during the term of this Agreement, the Executive
shall not serve as a member of the board of directors of any noncharitable
entity, other than the Company, its direct and indirect subsidiaries, and any of
their affiliates, without the Company's prior written consent.
4. COMPENSATION AND RELATED MATTERS
4.1 Salary. During the Employment Period, the Company shall pay the
------
Executive an annual salary of $200,000 during the first full 12-month period and
at such annual salary as determined by the Executive Compensation Committee of
the Board (the "Executive Compensation Committee") during the second and
--------------------------------
subsequent 12-month periods of the Executive's employment with the Company, but
not less than $200,000. All salary is to be paid consistent with the standard
payroll practices of the Company (e.g., timing of payments and standard employee
----
deductions, such as income tax withholdings, social security, etc.). The
Executive's performance and salary shall be subject to review at the end of each
fiscal year and an increase in annual salary, if one is so determined by the
Executive Compensation Committee, shall be made on a basis consistent with the
standard practices of the Company.
4.2 Bonus.
-----
(a) The Executive Compensation Committee shall review the
Executive's performance at least annually during each year of the Employment
Period and cause the Company to award the Executive a cash bonus in an amount
from 0% to 100% of the annual salary, as provided in Section 4.1 above, which
the Executive Compensation Committee shall reasonably determine as fairly
compensating and rewarding the Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of such
cash bonus shall be determined in the sole and absolute discretion of the
Executive Compensation Committee and shall be dependent on, among other things,
the achievement of certain performance levels by the Company, including, without
limitation, growth in funds from operations, and the Executive's performance and
contribution to increasing the funds from operations.
(b) In the event that the Company consummates an initial public
offering (an "IPO") of its common stock, $.01 par value per share (the "Common
Stock") on or before June 30, 1997, and provided that the Executive is employed
by the Company on the date such IPO is consummated, then the Executive shall be
entitled to receive, and the Company
3
<PAGE>
shall award and pay to the Executive within 30 days following consummation of
the IPO, a cash bonus of $200,000. Any bonus paid to the Executive pursuant to
this Section 4.2(b) shall be excluded from the determination of the bonus
payable to the Executive, if any, in respect of the year during which the IPO is
consummated pursuant to Section 4.2(a) of this Agreement. In addition, the
payment made to the Executive pursuant to this Section 4.2(b) shall be reduced
by the amount paid to the Executive, if any, pursuant to Section 4.2(b) of the
Employment Agreement, dated as of December 9, 1996, by and among the Executive,
the Company, and Kilroy Industries, a California corporation (the "Original
--------
Employment Agreement").
- --------------------
4.3 Restricted Stock. Promptly after consummation of the IPO by the
----------------
Company, the Company shall authorize and grant to the Executive and the
Executive shall receive, upon payment to the Company of $.01 per share therefor,
60,000 shares of Restricted Stock (as defined below). The Restricted Stock
shall vest in three (3) equal installments upon each of the first three (3)
anniversaries of the date of grant at a rate of 331/3% per each 12-month period.
For purposes of this Agreement, "Restricted Stock" shall mean all shares of
----------------
Common Stock granted by the Company to the Executive pursuant to this Section
4.3 and from time to time by the Company's Executive Compensation Committee.
Upon the grant of such Restricted Stock, the Company and the Executive shall
enter into a written Restricted Stock Agreement (the "Restricted Stock
----------------
Agreement") which shall contain such terms and conditions as the Board or
Executive Compensation Committee shall determine, consistent with the Company's
1997 Stock Incentive Plan (the "Stock Incentive Plan"), in addition to the
--------------------
following:
(a) Rights as Stockholder. Upon delivery of the shares of
---------------------
Restricted Stock to the escrow holder pursuant to Section 4.3(d) hereof, the
Executive shall have all the rights of a stockholder with respect to said
shares, subject to the restrictions set forth below and in the Restricted Stock
Agreement, including the right to vote the shares and to receive all dividends
and other distributions paid or made with respect to the shares.
(b) Restrictions. All shares of Restricted Stock (including any
------------
shares received by the Executive with respect to the shares of Restricted Stock
as a result of stock dividends, stock splits or any other form of
recapitalization) shall be subject to (i) customary restrictions on ownership
and transfer set forth in the Restricted Stock Agreement, including, without
limitation, such restrictions as are set forth in the Company's Charter and
Bylaws, and (ii) the vesting requirements set forth in this Section 4.3,
provided, however, that such vesting requirements shall terminate upon (1) a
resolution adopted by and at the discretion of the Board or Executive
Compensation Committee, after the Restricted Stock is issued, on such terms and
conditions as it considers appropriate, and (2) upon termination of the
Executive's employment pursuant to Section 5.1, 5.2, 5.4, 5.5 or 5.7 of this
Agreement and in such other circumstances as shall be set forth in the
Restricted Stock Agreement and the Stock Incentive Plan. Notwithstanding the
foregoing, none of the restrictions to be determined pursuant to this Section
4.3(b) shall result in restrictions more burdensome on, or less favorable to,
the Executive than the terms and conditions contemplated herein, provided,
however, that the restrictions on ownership set forth in the Company's Charter
and Bylaws shall apply to all shares of Restricted Stock unless such provisions
are otherwise amended with respect to such restrictions on ownership pursuant to
and in accordance with applicable law. Upon the vesting of shares of
4
<PAGE>
Restricted Stock pursuant to this Section 4.3, or the termination of such
vesting requirements pursuant to this Section 4.3(b), the restrictions pursuant
to this Section 4.3(b) with respect to such shares of Restricted Stock shall
terminate.
(c) Repurchase of Restricted Stock. The Company shall have the
------------------------------
right to repurchase from the Executive the Restricted Stock then subject to
restrictions hereunder and under the Restricted Stock Agreement immediately upon
the termination of the Executive's employment for any reason at a cash price per
share equal to the price paid by the Executive for such Restricted Stock;
provided, however, that no such right of repurchase shall exist in the event of
a termination of employment pursuant to Sections 5.1, 5.2, 5.4, 5.5 or 5.7
hereof.
(d) Escrow. The Board or Executive Compensation Committee shall
------
appoint an executive officer of the REIT, other than the Executive, or such
other escrow holder who shall retain physical custody of each certificate
representing Restricted Stock until all the restrictions imposed hereunder and
under the Restricted Stock Agreement have been removed, provided, however, that
in no event shall the Executive retain physical custody of any certificates
representing Restricted Stock issued to such Executive.
(e) Legends. In order to enforce the restrictions imposed upon
-------
the Restricted Stock, the Board or Executive Compensation Committee shall cause
a legend or legends to be placed on certificates representing all shares of
Restricted Stock that are still subject to restrictions hereunder and under the
Restricted Stock Agreement, which legend or legends shall make appropriate
reference to the conditions imposed hereby and thereby.
(f) Section 83(b). The Executive may not make an election under
-------------
Section 83(b) of the Code (as defined below) with respect to the receipt of any
share of Restricted Stock.
The grant of Restricted Stock to the Executive pursuant to this Section 4.3
shall be reduced by the number of shares of Restricted Stock granted to the
Executive, if any, pursuant to Section 4.3 of the Original Employment Agreement.
4.4 Stock Options.
-------------
(a) Promptly after consummation of the IPO of the Company, the
Company shall grant to the Executive options to purchase 150,000 shares of
Common Stock at a price per share equal to the initial price per share of Common
Stock sold to the public in the IPO. Such options shall be "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, to the maximum extent permitted by the Code. Additional future
awards may be made at the discretion of the Company's Executive Compensation
Committee. For purposes of this Agreement, "Stock Options" shall mean all
incentive stock options granted to the employee pursuant to this Section 4.4 and
from time to time by the Company's Executive Compensation Committee.
5
<PAGE>
(b) The Stock Options granted pursuant to Section 4.4(a) of this
Agreement and the Stock Incentive Plan, shall vest in three (3) equal
installments upon the first three (3) anniversaries of the date of the grant at
a rate of 331/3% per each 12-month period and shall remain exercisable for a
period of ten (10) years following the date of the grant. Notwithstanding the
foregoing, the Stock Options shall become exercisable in full immediately upon
(1) a resolution adopted by and at the discretion of the Board or Executive
Compensation Committee, after the Stock Options have been granted, on such terms
and conditions as it considers appropriate, and (2) termination of the
Executive's employment pursuant to Section 5.1, 5.2, 5.4, 5.5 or 5.7 of this
Agreement and in such other circumstances as shall be set forth in the Stock
Incentive Plan. In addition, the grant of Stock Options to the Executive
pursuant to this Section 4.4 shall be reduced by the number of shares of
Restricted Stock granted to the Executive, if any, pursuant to Section 4.4 of
the Original Employment Agreement.
4.5 "Gross-Up" of Compensation. The amount of the salary and any
--------------------------
bonus payable to the Executive pursuant to Sections 4.1 and 4.2 above, shall be
"grossed up" as necessary (on an after-tax basis) to compensate for any
additional withholding taxes or other expenses due to the implementation of the
Compensation Split (as defined in Section 8 below) with respect to the financial
obligations of the Company and the Operating Partnership, respectively.
4.6 Business Expenses. The Company shall promptly, in accordance
-----------------
with Company policy, reimburse the Executive for all reasonable business
expenses incurred in accordance with and subject to the limits set forth in the
Company's written policies with respect to business expenses, including, without
limitation, business seminar fees, professional association dues, reasonable
entertainment expenses incurred by the Executive in connection with the business
of the Company and/or its respective subsidiaries and affiliates, and reasonable
travel expenses, including all airfare, hotel and rental car expenses, incurred
by the Executive in traveling in connection with the business of the Company,
upon presentation to the Company of written receipts for such expenses.
4.7 Other Benefits.
--------------
(a) Medical Insurance. During the Employment Period, the
-----------------
Company, at its sole cost, shall provide to the Executive, the Executive's
spouse and children such health, dental and optical insurance as the Company may
from time to time make available to its other executive employees of the same
level of employment, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans or arrangements. For the
purposes of this Section 4, the Executive is deemed to be of the same level of
employment as each of the Company's other Executive Vice Presidents.
(b) Life and Disability Insurance. During the Employment Period,
the Company shall provide to the Executive such disability and/or life insurance
as the Company in its sole discretion may from time to time make available to
its other executive employees of the same level of employment, subject to and on
a basis consistent with the terms, conditions and overall administration of such
plans or arrangements.
6
<PAGE>
(c) Pension Plans, Etc. During the Employment Period, the
Executive shall be entitled to participate in all pension, 401(k) and other
employee plans and benefits established by the Company on at least the same
terms as the Company's other executive employees of the same level of
employment, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans or arrangements.
4.8 Automobile Allowance. The Company shall provide the Executive
--------------------
with a reasonable automobile allowance during the term of the Executive's
employment with the Company as the Company in its sole discretion may from time
to time make available to its other executive employees of the same level of
employment, subject to and on a basis consistent with Company policy.
4.9 Vacation. The Executive shall be entitled to four (4) weeks (20
--------
business days) in each calendar year or such greater amount the Company from
time to time shall determine and make available to its other executive employees
at the same level of employment, subject to and on a basis consistent with
Company policy. In addition, the Executive will be entitled to all Company
holidays.
4.10 Office, Staff, and Equipment. The Company agrees to provide the
----------------------------
Executive, as a condition to the Executive's services hereunder, such staff,
equipment and office space as is reasonably necessary for the Executive to
perform the Executive's duties hereunder, subject to and on a basis consistent
with Company policy.
5. TERMINATION
5.1 Death. The Executive's employment hereunder shall terminate upon
-----
his death.
5.2 Disability. The Executive's employment hereunder shall terminate
----------
on the Executive's physical or mental disability or infirmity which, in the
opinion of a competent physician selected by the Board, renders the Executive
unable to perform properly his duties under this Agreement for six (6)
consecutive calendar months or for shorter periods aggregating one hundred and
eighty (180) business days in any twelve (12) month period, but only to the
extent that such definition does not violate the Americans with Disabilities
Act.
5.3 Cause. The Company may terminate the Executive for Cause at any
-----
time, upon written notice to Executive. For purposes of this Agreement, "Cause"
-----
shall mean:
(a) the Executive's conviction for commission of a felony or a
crime involving moral turpitude;
(b) the Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Company; or
7
<PAGE>
(c) the Executive's willful and continued failure to
substantially perform the Executive's duties hereunder (other than
such failure resulting from the Executive's incapacity due to physical
or mental illness), which failure is not remedied within a reasonable
time after written demand for substantial performance is delivered by
the Company which specifically identifies the manner in which the
Company believes that the Executive has not substantially performed
the Executive's duties.
5.4 Termination Without Cause. The Company may terminate this
-------------------------
Agreement without Cause at any time, provided that the Company first delivers to
the Executive the Company's written election to terminate this Agreement at
least ninety (90) days prior to the effective date of termination.
5.5 Executive's Termination for Good Reason. The Executive may
---------------------------------------
terminate this Agreement for Good Reason upon at least ten (10) days prior
written notice to the Company. For purposes of this Agreement, "Good Reason"
-----------
shall mean:
(a) the Company's material breach of any of its obligations
hereunder and either such breach is incurable or, if curable, has not
been cured within fifteen (15) days following receipt of written
notice by the Executive to the Company of such breach by the Company;
or
(b) any material alteration or diminution in the Executive's
authority, duties or responsibilities herein without Cause and without
the Executive's prior written consent.
Notwithstanding anything in this Agreement to the contrary, "Good Reason"
shall not include the reassignment of the Executive, at the Company's sole
discretion, to any other position of Executive Vice President or higher position
with the Company, any of its direct or indirect subsidiaries or any of their
respective affiliates.
5.6 Executive's Voluntary Termination. The Executive may, at any
---------------------------------
time, terminate this Agreement without Good Reason, provided that the Executive
delivers written notice to the Company at least ninety (90) days prior to the
effective date of termination.
5.7 Change of Control. The Executive may terminate this Agreement,
-----------------
upon at least ten (10) days' prior written notice to the Company at any time
within two (2) years after a "Change in Control" (as hereinafter defined) of the
Company. For purposes of this Agreement, a "Change in Control" shall mean the
-----------------
occurrence of any of the following events:
(a) the individuals constituting the Board as of the date of the
Company's IPO of common stock (the "Incumbent Board") cease for any reason
---------------
to constitute at least a majority of the Board; provided, however, that if
the election, or nomination for election by the Company's stockholders, of
any new director was
8
<PAGE>
approved by a vote of at least a majority of the Incumbent Board, such new
director shall be considered a member of the Incumbent Board;
(b) an acquisition of any voting securities of the Company (the
"Voting Securities") by any "person" (as the term "person" is used for
------------------ ------
purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act
of 1934, as amended (the "1934 Act")) immediately after which such person
--------
has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated
under the 1934 Act) of 20% or more of the combined voting power of the
Company's then outstanding Voting Securities unless such acquisition was
approved by a vote of at least one more than a majority of the Incumbent
Board; or
(c) approval by the stockholders of the Company of:
(i) a merger, consolidation, share exchange or
reorganization involving the Company, unless the stockholders of the
Company, immediately before such merger, consolidation, share exchange or
reorganization, own, directly or indirectly immediately following such
merger, consolidation, share exchange or reorganization, at least 80% of
the combined voting power of the outstanding Voting Securities of the
corporation that is the successor in such merger, consolidation, share
exchange or reorganization (the "Surviving Company") in substantially the
-----------------
same proportion as their ownership of the Voting Securities immediately
before such merger, consolidation, share exchange or reorganization;
(ii) a complete liquidation or dissolution of the Company;
or
(iii) an agreement for the sale or other disposition of all
or substantially all of the assets of the Company.
5.8 Nonrenewal. The Company may terminate this Agreement upon the
----------
expiration of any Employment Period, provided that the Company gives written
notice of such nonrenewal to the Executive at least ninety (90) days prior to
the expiration of such Employment Period.
5.9 Retirement. The Executive's employment shall terminate upon his
----------
retirement upon or immediately following his sixty-fifth birthday. In the case
of the Executive's retirement, the Company shall pay to the Executive promptly
after Executive's termination (i) the unpaid annual salary pursuant to Section
4.1 hereof to which such Executive is entitled pursuant to Section 6 hereof,
through the date of the termination of such Executive's employment, and (ii) as
soon as practicable after the close of the Company's fiscal year in which the
Executive's termination occurs, a prorated portion of any unpaid bonus
determined by the Board pursuant to Section 4.2 hereof. This Section 5.8 shall
not limit the entitlement of the Executive to any retirement benefit then
available to the Executive under any benefit plan or policy which is maintained
by the Company for the Executive's benefit.
9
<PAGE>
5.10 Notice. Any termination of the Executive's employment by the
------
Company or the Executive shall be communicated by written Notice of Termination
to the other party. For purposes of this Agreement, a "Notice of Termination"
---------------------
shall mean a notice that shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
5.11 Date of Termination. The effective date of the Executive's
-------------------
termination depends on the type of termination applied. "Date of Termination"
-------------------
shall mean the following:
(a) if the Executive's employment is terminated by his death,
the date of his death;
(b) if the Executive's employment is terminated by reason of his
disability, the date of the opinion of the physician referred to in
Section 5.2 hereof;
(c) if the Executive's employment is terminated by the Company
for Cause pursuant to Section 5.3 hereof, or without Cause by the
Company pursuant to Section 5.4 hereof, the date specified in the
Notice of Termination;
(d) if the Executive resigns for Good Reason (pursuant to
Section 5.5 hereof), or voluntarily resigns (pursuant to Section 5.6
hereof) or resigns pursuant to Change of Control (pursuant to Section
5.7 hereof), the date of the Notice of Termination;
(e) if the Executive's employment is terminated pursuant to
Section 5.8 hereof, the date this Agreement terminates by its terms;
and
(f) if the Executive's employment is terminated pursuant to
Section 5.9 hereof, the date of such Executive's retirement.
5.12 Termination Obligations.
-----------------------
(a) The Executive hereby acknowledges and agrees that all
Personal Property and equipment furnished to or prepared by the Executive in the
course of or incident to his employment, belongs to the Company and shall be
promptly returned to the Company upon termination of the Employment Period.
"Personal Property" includes, without limitation, all electronic devices of the
-----------------
Company used by the Executive, including, without limitation, personal
computers, facsimile machines, cellular telephones, pagers and tape recorders
and all books, manuals, records, reports, notes, contracts, lists, blueprints,
maps and other documents, or materials, or copies thereof (including computer
files), and all other proprietary information relating to the business of the
Company. Following termination, the Executive will not retain any written or
other tangible material containing any proprietary information of the Company.
10
<PAGE>
(b) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships then held
with the Company or any affiliate.
(c) The representations and warranties contained herein and the
Executive's obligations under this Section 5.12 and Sections 7 and 9 hereof
shall survive termination of the Employment Period and the expiration of this
Agreement.
6. COMPENSATION UPON TERMINATION
6.1 Death.
-----
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated pursuant to Section 5.1 hereof, the Company shall pay monthly to the
Executive's estate his annual salary payable pursuant to Section 4.1 hereof and
one-twelfth of any bonus payable pursuant to Section 4.2(a) hereof at the most
recent annual amount received, or entitled to be received, by the Executive for
a period equal to the lesser of one (1) year following the Date of Termination
or the remainder of the Employment Period as set forth in Section 2 hereof. In
addition, all theretofore unvested Stock Options, Restricted Stock and other
awards issued pursuant to the Stock Incentive Plan shall immediately vest.
(b) Severance Benefits. At the Executive's estate's expense, the
------------------
Executive's spouse and children shall also be entitled to any continuation of
health insurance coverage rights under any applicable law.
6.2 Disability.
----------
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated by reason of disability pursuant to Section 5.2 hereof, the Company
shall pay to the Executive and the Executive shall receive a single severance
payment in an amount equal to the sum of: (i) two times the Executive's average
annual salary paid hereunder pursuant to Section 4.1 hereof for the preceding
thirty-six month period (or, if the Executive has been employed less than
thirty-six months, the average annual salary for the period employed) plus (ii)
an amount equal to two times the highest annual bonus received by the Executive
during the preceding thirty-six month period (or during the period the Executive
has been employed hereunder if shorter than thirty-six months)(collectively, the
"Severance Payment"). Such payment shall be in addition to any disability
-----------------
insurance payments to which the Executive is otherwise entitled and any other
compensation earned by Executive hereunder.
(b) Severance Benefits. At the Executive's own expense, the
------------------
Executive and the Executive's spouse and children shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
6.3 Cause.
-----
11
<PAGE>
(a) Salary and Bonus. If the Executive's employment shall be
----------------
terminated for Cause pursuant to Section 5.3 hereof, the Company shall pay the
Executive his salary and any bonus then payable pursuant to Sections 4.1 and 4.2
hereof through the Date of Termination.
(b) Benefits. At the Executive's own expense, the Executive and
--------
the Executive's spouse and children shall also be entitled to any continuation
of health insurance coverage rights under any applicable law.
6.4 Termination Without Cause.
-------------------------
(a) Severance Payment. If the Company shall terminate the
-----------------
Executive's employment without Cause pursuant to Section 5.4 hereof, the
Company shall pay the Executive the Severance Payment, as described in Section
6.2(a) hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.7 hereof for a period of two (2) years commencing on the
Date of Termination.
6.5 Executive's Termination for Good Reason.
---------------------------------------
(a) Severance Payment. If the Executive terminates his
-----------------
employment with the Company pursuant to Section 5.5 hereof for Good Reason, the
Company shall pay the Executive the Severance Payment, as described in Section
6.2(a) hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.7 hereof for a period of two (2) years commencing on the
date of such termination.
6.6 Executive's Voluntary Termination. In the event of the voluntary
---------------------------------
termination of this Agreement by the Executive, pursuant to Section 5.6 hereof,
the Executive shall have the right to receive the Executive's compensation as
provided in Section 4 hereof through the Date of Termination.
6.7 Change of Control.
-----------------
(a) Severance Payment. If the Executive terminates this
-----------------
Agreement within two (2) years after a Change in Control pursuant to Section 5.7
hereof, the Company shall pay the Executive the Severance Payment.
(b) Severance Benefits. Following such termination, and in
addition to paying the Executive's Severance Payment, the Company, at the
Company's expense, shall continue to provide to the Executive and the
Executive's spouse and children all benefits
12
<PAGE>
described in Section 4.7 hereof for a period of two years commencing on the Date
of Termination.
6.8 Manner of Payment. Any Severance Payment made pursuant to this
-----------------
Section 6 shall be payable in a one-time payment by the Company.
6.9 Limitation. The foregoing notwithstanding, the Severance
----------
Payment, pursuant to Sections 6.1, 6.2, 6.4, 6.5 and 6.7 hereof, shall be
reduced to the extent that the payment of such amount would cause the
Executive's total termination benefits (as determined by the Executive's tax
advisor) to constitute an "excess" parachute payment under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and by reason of such
----
excess parachute payment the Executive would be subject to an excise tax under
Section 4999(a) of the Code, but only if the Executive determines that the
after-tax value of the termination benefits calculated with the foregoing
restriction exceed those calculated without the foregoing restriction.
7. CONFIDENTIALITY AND NON-SOLICITATION COVENANTS
7.1 Confidentiality. In addition to the agreements set forth in
---------------
Section 5.12(a) hereof, the Executive hereby agrees that the Executive will not,
during the Employment Period or at any time thereafter directly or indirectly
disclose or make available to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever, any Confidential Information
(as defined below). The Executive agrees that, upon termination of his
employment with the Company, all Confidential Information in his possession that
is in written or other tangible form (together with all copies or duplicates
thereof, including computer files) shall be returned to the Company and shall
not be retained by the Executive or furnished to any third party, in any form
except as provided herein; provided, however, that the Executive shall not be
obligated to treat as confidential, or return to the Company copies of any
Confidential Information that (i) was publicly known at the time of disclosure
to the Executive, (ii) becomes publicly known or available thereafter other than
by any means in violation of this Agreement or any other duty owed to the
Company by the Executive, or (iii) is lawfully disclosed to the Executive by a
third party. As used in this Agreement the term "Confidential Information"
------------------------
means information disclosed to the Executive or known by the Executive as a
consequence of or through his relationship with the Company, about the owners,
tenants, employees, business methods, public relations methods, organization,
procedures, property acquisition and development, or finances, including,
without limitation, information of or relating to owner or tenant lists of the
Company and its affiliates.
7.2 Non-Solicitation. For a period of one (1) year following the
----------------
date on which the Executive's employment hereunder is terminated, the Executive
shall not solicit or induce any of the Company's employees, agents or
independent contractors to end their relationship with the Company, or recruit,
hire or otherwise induce any such person to perform services for the Executive,
or any other person, firm or company. The restrictions set forth in this
Section 7.2 hereof shall not apply if the Executive's employment is terminated
pursuant to Section 5.4 or 5.5 hereof.
13
<PAGE>
8. PAYMENT OF FINANCIAL OBLIGATIONS
The payment or provision to the Executive by the Company of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's salary,
bonus and other benefits set forth in Section 4 hereof, the payment (if
applicable) of the Severance Payment and provision of the severance benefits (if
applicable) set forth in Section 6 hereof and any indemnification obligations,
shall be allocated (the "Compensation Split") ___ to the Company and ___ to the
------------------
Operating Partnership initially, subject to adjustment from time to time by the
Executive Compensation Committee.
9. GENERAL PROVISIONS
9.1 Injunctive Relief and Enforcement. The Executive acknowledges
---------------------------------
that the remedies at law for any breach by him of the provisions of Sections
5.12(a) or 7 hereof may be inadequate and that, therefore, in the event of
breach by the Executive of the terms of Sections 5.12(a) or 7 hereof, the
Company shall be entitled to institute legal proceedings to enforce the specific
performance of this Agreement by the Executive and to enjoin the Executive from
any further violation of Sections 5.12(a) or 7 hereof and to exercise such
remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement.
9.2 Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when addressed as follows and (i) when
personally delivered, (ii) when transmitted by telecopy, electronic or digital
transmission with receipt confirmed, (iii) one day after delivery to an
overnight air courier guaranteeing next day delivery, or (iv) upon receipt if
sent by certified or registered mail. In each case notice shall be sent to:
If to Executive: Richard E. Moran Jr.
9 Skyline
Irvine, California 92612
If to the Company: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Attention: President and CEO
Facsimile: (310) 322-5981
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9.3 Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. In addition, in the event any provision in this
Agreement shall be determined by any court of competent jurisdiction to be
14
<PAGE>
unenforceable by reason of extending for too great a period of time or over too
great a geographical area or by reason of being too extensive in any other
respect, each such agreement shall be interpreted to extend over the maximum
period of time for which it may be enforceable and to the maximum extent in all
other respects as to which it may be enforceable, and enforced as so
interpreted, all as determined by such court in such action.
9.4 Assignment. This Agreement may not be assigned by the Executive,
----------
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
9.5 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
9.6 Headings. The headings contained herein are for reference
--------
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.7 Choice of Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California without
giving effect to the principles of conflict of laws thereof.
9.8 Indemnification. To the fullest extent permitted under
---------------
applicable law, the Company shall indemnify, defend and hold the Executive
harmless from and against any and all causes of action, claims, demands,
liabilities, damages, costs and expenses of any nature whatsoever (collectively,
"Damages") directly or indirectly arising out of or relating to the Executive
-------
discharging the Executive's duties hereunder on behalf of the Company and/or its
respective subsidiaries and affiliates, so long as the Executive acted in good
faith within the course and scope of the Executive's duties with respect to the
matter giving rise to the claim or Damages for which the Executive seeks
indemnification.
9.9 LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE
-------------------------
COMPANY IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED
TO THIS AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER
EXPRESS OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN
WHOLE OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES
SHALL BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES,
AND (II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
----
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM AND THROUGH ANY APPLICABLE SEVERANCE PERIOD, PLUS INTEREST ON ANY
DELAYED PAYMENT
15
<PAGE>
AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER THE
DATE(S) THAT SUCH PAYMENTS WERE DUE.
9.10 WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
--------------------
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL FOR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
9.11 Attorneys' Fees. If any legal action, arbitration or other
---------------
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
9.12 Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board.
9.13 The Executive's Acknowledgment. The Executive acknowledges (a)
------------------------------
that he has had the opportunity to consult with independent counsel of his own
choice concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
(Signature Page Follows)
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date and year first above written.
KILROY REALTY CORPORATION
___________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY REALTY, L.P.
By Kilroy Realty Corporation, its general
partner
By:________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
EXECUTIVE
___________________________________________
Richard E. Moran Jr.
<PAGE>
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of _________,
---------
1997, by and between Kilroy Realty Corporation, a Maryland corporation (the
"REIT"), Kilroy Realty, L.P., a Delaware limited partnership (the "Operating
- ----- ---------
Partnership") and Jeffrey C. Hawken (the "Executive").
- ----------- ---------
1. EMPLOYMENT
The REIT and the Operating Partnership hereby agree to employ the
Executive, and the Executive hereby agrees to be employed by the REIT and the
Operating Partnership, on the terms and conditions set forth herein. The REIT
and the Operating Partnership shall collectively be referred to herein as the
"Company." The allocation of the obligations of the Company between the REIT
and the Operating Partnership shall be determined as set forth in Section 8
hereof.
2. TERM AND RENEWAL
2.1 Term. The employment of the Executive by the Company as provided
----
in Section 1 will commence on the date hereof and will terminate three years
from the date hereof (the "Expiration Date") unless automatically extended for
---------------
an additional 12-month period pursuant to Section 2.2 hereof or sooner
terminated as hereinafter provided (each such period, an "Employment Period").
-----------------
2.2 Renewal. Following the expiration of the initial Employment
-------
Period and provided that this Agreement has not been terminated by the Executive
or the Company pursuant to Section 5 hereof, and every year thereafter, this
Agreement shall be automatically renewed on the terms set forth herein for an
additional 12-month period, effective on each anniversary date of the date
hereof.
3. POSITION AND DUTIES
3.1 Position. The Executive hereby agrees to serve as Executive Vice
--------
President and Chief Operating Officer of the Company. In addition, if, at the
discretion of the Board of Directors of the Company (the "Board"), the Company
nominates the Executive for election to the Board, and in the event that such
Executive is elected by the Company's stockholders to serve as a member of the
Board, then, for so long as the Executive is an employee of the Company, the
Executive hereby agrees to serve as a member thereof. At the Company's request,
the Executive may, at the Executive's discretion, serve the Company and/or its
respective subsidiaries and affiliates in other offices and capacities in
addition to the foregoing, but shall not be required to do so. In the event
that the Executive, during the term of this Agreement, serves in any one or more
of the aforementioned capacities, the Executive's compensation shall not be
increased beyond that specified in Section 4 of this Agreement. In addition, in
the event the Company and the Executive mutually agree that the Executive shall
terminate the Executive's service in any one or more of the aforementioned
capacities, or the Executive's service in one or more of the aforementioned
capacities is terminated, the
<PAGE>
Executive's compensation, as specified in Section 4 of this Agreement, shall not
be diminished or reduced in any manner.
3.2 Duties. The Company agrees that the duties that may be assigned
------
to the Executive shall be the usual and customary duties of the offices of
Executive Vice President and Chief Operating Officer.
3.3 Devotion of Time and Effort. The Executive shall devote
---------------------------
substantially all of his business time and attention to the performance of
services to the Company in his capacity as an officer thereof and as may
reasonably be requested by the Board.
3.4 Other Activities. The Executive may engage in other activities
----------------
for the Executive's own account while employed hereunder, including without
limitation charitable, community and other business activities, provided that
such other activities (i) do not compete with the business and activities of the
Company or any of its direct and indirect subsidiaries and (ii) do not
materially interfere with the performance of the Executive's duties hereunder.
Notwithstanding the foregoing, during the term of this Agreement, the Executive
shall not serve as a member of the board of directors of any noncharitable
entity, other than the Company, its direct and indirect subsidiaries, and any of
their affiliates, without the Company's prior written consent.
4. COMPENSATION AND RELATED MATTERS
4.1 Salary. During the Employment Period, the Company shall pay the
------
Executive an annual salary of $175,000 during the first full 12-month period and
at such annual salary as determined by the Executive Compensation Committee of
the Board (the "Executive Compensation Committee") during the second and
--------------------------------
subsequent 12-month periods of the Executive's employment with the Company, but
not less than $175,000. All salary is to be paid consistent with the standard
payroll practices of the Company (e.g., timing of payments and standard employee
----
deductions, such as income tax withholdings, social security, etc.). The
Executive's performance and salary shall be subject to review at the end of each
fiscal year and an increase in annual salary, if one is so determined by the
Executive Compensation Committee, shall be made on a basis consistent with the
standard practices of the Company.
4.2 Bonus. The Executive Compensation Committee shall review the
-----
Executive's performance at least annually during each year of the Employment
Period and cause the Company to award the Executive a cash bonus in an amount
equal to up to 100% of the annual salary, as provided in Section 4.1 above,
which the Executive Compensation Committee shall reasonably determine as fairly
compensating and rewarding the Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of such
cash bonus shall be determined in the sole and absolute discretion of the
Executive Compensation Committee and shall be dependent on, among other things,
the achievement of certain performance levels by the Company, including, without
limitation, growth in funds from operations, and the Executive's performance and
contribution to increasing the funds from operations.
2
<PAGE>
4.3 "Gross-Up" of Compensation. The amount of the salary and any
--------------------------
bonus payable to the Executive pursuant to Sections 4.1 and 4.2 above, shall be
"grossed up" as necessary (on an after-tax basis) to compensate for any
additional withholding taxes or other expenses due to the implementation of the
Compensation Split (as defined in Section 8 below) with respect to the financial
obligations of the Company and the Operating Partnership, respectively.
4.4 Business Expenses. The Company shall promptly, in accordance
-----------------
with Company policy, reimburse the Executive for all reasonable business
expenses incurred in accordance with and subject to the limits set forth in the
Company's written policies with respect to business expenses, including, without
limitation, business seminar fees, professional association dues, reasonable
entertainment expenses incurred by the Executive in connection with the business
of the Company and/or its respective subsidiaries and affiliates, and reasonable
travel expenses, including all airfare, hotel and rental car expenses, incurred
by the Executive in traveling in connection with the business of the Company,
upon presentation to the Company of written receipts for such expenses.
4.5 Other Benefits.
--------------
(a) Medical Insurance. During the Employment Periods, the
-----------------
Company, at its sole cost, shall provide to the Executive, the Executive's
spouse and children such health, dental and optical insurance as the Company may
from time to time make available to its other executive employees of the same
level of employment, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans or arrangements. For the
purposes of this Section 4, the Executive is deemed to be of the same level of
employment as each of the Company's Executive Vice Presidents.
(b) Life and Disability Insurance. During the Employment
-----------------------------
Periods, the Company shall provide to the Executive such disability and/or life
insurance as the Company in its sole discretion may from time to time make
available to its other executive employees of the same level of employment,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans or arrangements.
(c) Pension Plans, Etc. During the Employment Periods, the
-------------------
Executive shall be entitled to participate in all pension, 401(k) and other
employee plans and benefits established by the Company on at least the same
terms as the Company's other executive employees of the same level of
employment, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans or arrangements.
4.6 Automobile Allowance. The Company shall provide the Executive
--------------------
with a reasonable automobile allowance during the term of the Executive's
employment with the Company as the Company in its sole discretion may from time
to time make available to its other executive employees of the same level of
employment, subject to and on a basis consistent with Company policy.
3
<PAGE>
4.7 Vacation. The Executive shall be entitled to four (4) vacation
--------
weeks (20 business days) in each calendar year or such greater amount the
Company from time to time shall determine and make available to its other
executive employees at the same level of employment, subject to and on a basis
consistent with Company policy. In addition, the Executive will be entitled to
all Company holidays.
4.8 Office, Staff, and Equipment. The Company agrees to provide the
----------------------------
Executive, as a condition to the Executive's services hereunder, such staff,
equipment and office space as is reasonably necessary for the Executive to
perform the Executive's duties hereunder, subject to and on a basis consistent
with Company policy.
5. TERMINATION
5.1 Death. The Executive's employment hereunder shall terminate upon
-----
his death.
5.2 Disability. The Executive's employment hereunder shall terminate
----------
on the Executive's physical or mental disability or infirmity which, in the
opinion of a competent physician selected by the Board, renders the Executive
unable to perform properly his duties under this Agreement for six (6)
consecutive calendar months or for shorter periods aggregating one hundred and
eighty (180) business days in any twelve (12) month period, but only to the
extent that such definition does not violate the Americans with Disabilities
Act.
5.3 Cause. The Company may terminate the Executive for Cause at any
-----
time, upon written notice to Executive. For purposes of this Agreement, "Cause"
-----
shall mean:
(a) the Executive's conviction for commission of a felony or a
crime involving moral turpitude;
(b) the Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Company; or
(c) the Executive's willful and continued failure to
substantially perform the Executive's duties hereunder (other than
such failure resulting from the Executive's incapacity due to physical
or mental illness), which failure is not remedied within a reasonable
time after written demand for substantial performance is delivered by
the Company which specifically identifies the manner in which the
Company believes that the Executive has not substantially performed
the Executive's duties.
5.4 Termination Without Cause. The Company may terminate this
-------------------------
Agreement without Cause at any time, provided that the Company first delivers to
the Executive the Company's written election to terminate this Agreement at
least ninety (90) days prior to the effective date of termination.
4
<PAGE>
5.5 Executive's Termination for Good Reason. The Executive may
---------------------------------------
terminate this Agreement for Good Reason upon at least ten (10) days prior
written notice to the Company. For purposes of this Agreement, "Good Reason"
-----------
shall mean:
(a) the Company's material breach of any of its obligations
hereunder and either such breach is incurable or, if curable, has not
been cured within fifteen (15) days following receipt of written
notice by the Executive to the Company of such breach by the Company;
(b) any removal of the Executive from one or more of the offices
specified in Section 3.1 hereof without Cause and without the
Executive's prior written consent; or
(c) any material alteration or diminution in the Executive's
authority, duties or responsibilities herein without Cause and without
the Executive's prior written consent.
5.6 Executive's Voluntary Termination. The Executive may, at any
---------------------------------
time, terminate this Agreement without Good Reason, provided that the Executive
delivers written notice to the Company at least ninety (90) days prior to the
effective date of termination.
5.7 Nonrenewal. The Company may terminate this Agreement upon the
----------
expiration of any Employment Period, provided that the Company gives written
notice of such nonrenewal to the Executive at least ninety (90) days prior to
the expiration of such Employment Period.
5.8 Retirement. The Executive's employment shall terminate upon his
----------
retirement upon or immediately following his sixty-fifth birthday. In the case
of the Executive's retirement, the Company shall pay to the Executive promptly
after Executive's termination (i) the unpaid annual salary pursuant to Section
4.1 hereof to which such Executive is entitled pursuant to Section 6 hereof,
through the date of the termination of such Executive's employment, and (ii) as
soon as practicable after the close of the Company's fiscal year in which the
Executive's termination occurs, a prorated portion of any unpaid bonus
determined by the Board pursuant to Section 4.2 hereof. This Section 5.9 shall
not limit the entitlement of the Executive to any retirement benefit then
available to the Executive under any benefit plan or policy which is maintained
by the Company for the Executives's benefit.
5.9 Notice. Any termination of the Executive's employment by the
------
Company or the Executive shall be communicated by written Notice of Termination
to the other party. For purposes of this Agreement, a "Notice of Termination"
---------------------
shall mean a notice that shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
5.10 Date of Termination. The effective date of the Executive's
-------------------
termination depends on the type of termination applied. "Date of Termination"
-------------------
shall mean the following:
5
<PAGE>
(a) if the Executive's employment is terminated by his death,
the date of his death;
(b) if the Executive's employment is terminated by reason of his
disability, the date of the opinion of the physician referred to in
Section 5.2 hereof;
(c) if the Executive's employment is terminated by the Company
for Cause pursuant to Section 5.3 hereof, or without Cause by the
Company pursuant to Section 5.4 hereof, the date specified in the
Notice of Termination;
(d) if the Executive resigns for Good Reason (pursuant to Section
5.5 hereof) or voluntarily resigns (pursuant to Section 5.6 hereof),
the date of the Notice of Termination;
(e) if the Executive's employment is terminated pursuant to
Section 5.7 hereof, the date this Agreement terminates by its terms;
and
(f) if the Executive's employment is terminated pursuant to
Section 5.8 hereof, the date of such Executive's retirement.
5.11 Termination Obligations.
-----------------------
(a) The Executive hereby acknowledges and agrees that all Personal
Property and equipment furnished to or prepared by the Executive in the course
of or incident to his employment, belongs to the Company and shall be promptly
returned to the Company upon termination of the Employment Period. "Personal
--------
Property" includes, without limitation, all electronic devices of the Company
- --------
used by the Executive, including, without limitation, personal computers,
facsimile machines, cellular telephones, pagers and tape recorders and all
books, manuals, records, reports, notes, contracts, lists, blueprints, maps and
other documents, or materials, or copies thereof (including computer files), and
all other proprietary information relating to the business of the Company.
Following termination, the Executive will not retain any written or other
tangible material containing any proprietary information of the Company.
(b) Upon termination of the Employment Period, the Executive shall be
deemed to have resigned from all offices and directorships then held with the
Company or any affiliate.
(c) The representations and warranties contained herein and the
Executive's obligations under this Section 5.12 and Sections 7 and 9 hereof
shall survive termination of the Employment Period and the expiration of this
Agreement.
6
<PAGE>
6. COMPENSATION UPON TERMINATION
6.1 Death.
-----
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated pursuant to Section 5.1 hereof, the Company shall pay monthly to the
Executive's estate his annual salary payable pursuant to Section 4.1 hereof and
one-twelfth of any bonus payable pursuant to Section 4.2 hereof at the most
recent annual amount received, or entitled to be received, by the Executive for
a period equal to the lesser of one (1) year following the Date of Termination
or the remainder of the Employment Period as set forth in Section 2 hereof.
(b) Severance Benefits. At the Executive's estate's expense, the
------------------
Executive's spouse and children shall also be entitled to any continuation of
health insurance coverage rights under any applicable law.
6.2 Disability.
----------
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated by reason of disability pursuant to Section 5.2 hereof, the Company
shall pay to the Executive and the Executive shall receive a single severance
payment in an amount equal to the sum of: (i) two times the Executive's average
annual salary paid hereunder pursuant to Section 4.1 hereof for the preceding
thirty-six month period (or, if the Executive has been employed less than
thirty-six months, the average annual salary for the period employed) plus (ii)
an amount equal to two times the highest annual bonus received by the Executive
during the preceding thirty-six month period (or during the period the Executive
has been employed hereunder if shorter than thirty-six months)(collectively, the
"Severance Payment"). Such payment shall be in addition to any disability
-----------------
insurance payments to which the Executive is otherwise entitled and any other
compensation earned by Executive hereunder.
(b) Severance Benefits. At the Executive's own expense, the
------------------
Executive and the Executive's spouse and children shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
6.3 Cause.
-----
(a) Salary and Bonus. If the Executive's employment shall be
----------------
terminated for Cause pursuant to Section 5.3 hereof, the Company shall pay the
Executive his salary and any bonus then payable pursuant to Sections 4.1 and 4.2
hereof through the Date of Termination.
(b) Benefits. At the Executive's own expense, the Executive and
the Executive's spouse and children shall also be entitled to any continuation
of health insurance coverage rights under any applicable law.
6.4 Termination Without Cause.
-------------------------
7
<PAGE>
(a) Severance Payment. If the Company shall terminate the
Executive's employment without Cause pursuant to Section 5.4 hereof, the Company
shall pay the Executive the Severance Payment, as described in Section 6.2(a)
hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.5 hereof for a period of two (2) years commencing on the
Date of Termination.
6.5 Executive's Termination for Good Reason.
---------------------------------------
(a) Severance Payment. If the Executive terminates his
-----------------
employment with the Company pursuant to Section 5.5 hereof for Good Reason, the
Company shall pay the Executive the Severance Payment, as described in Section
6.2(a) hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.5 hereof for a period of two (2) years commencing on the
Date of Termination.
6.6 Executive's Voluntary Termination. In the event of the voluntary
---------------------------------
termination of this Agreement by the Executive, pursuant to Section 5.6 hereof,
the Executive shall have the right to receive the Executive's compensation as
provided in Section 4 hereof through the Date of Termination.
6.7 Manner of Payment. Any Severance Payment made pursuant to this
-----------------
Section 6 shall be payable in a one-time payment by the Company.
6.8 Limitation. The foregoing notwithstanding, the total of such
----------
Severance Payments, pursuant to Sections 6.1, 6.2, 6.4 and 6.5 hereof, shall be
reduced to the extent that the payment of such amount would cause the
Executive's total termination benefits (as determined by the Executive's tax
advisor) to constitute an "excess" parachute payment under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and by reason of such
----
excess parachute payment the Executive would be subject to an excise tax under
Section 4999(a) of the Code, but only if the Executive determines that the
after-tax value of the termination benefits calculated with the foregoing
restriction exceed those calculated without the foregoing restriction.
7. CONFIDENTIALITY AND NON-SOLICITATION COVENANTS
7.1 Confidentiality. In addition to the agreements set forth in
---------------
Section 5.11(a) hereof, the Executive hereby agrees that the Executive will not,
during the Employment Period or at any time thereafter directly or indirectly
disclose or make available to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever, any Confidential Information
(as defined below). The Executive agrees that, upon termination of his
employment with the Company, all Confidential Information in his possession that
is in written or other
8
<PAGE>
tangible form (together with all copies or duplicates thereof, including
computer files) shall be returned to the Company and shall not be retained by
the Executive or furnished to any third party, in any form except as provided
herein; provided, however, that the Executive shall not be obligated to treat as
confidential, or return to the Company copies of any Confidential Information
that (i) was publicly known at the time of disclosure to the Executive, (ii)
becomes publicly known or available thereafter other than by any means in
violation of this Agreement or any other duty owed to the Company by the
Executive, or (iii) is lawfully disclosed to the Executive by a third party. As
used in this Agreement the term "Confidential Information" means information
------------------------
disclosed to the Executive or known by the Executive as a consequence of or
through his relationship with the Company, about the owners, tenants, employees,
business methods, public relations methods, organization, procedures, property
acquisition and development, or finances, including, without limitation,
information of or relating to owner or tenant lists of the Company and its
affiliates.
7.2 Non-Solicitation. For a period of one (1) year following the
----------------
date on which the Executive's employment hereunder is terminated, the Executive
shall not solicit or induce any of the Company's employees, agents or
independent contractors to end their relationship with the Company, or recruit,
hire or otherwise induce any such person to perform services for the Executive,
or any other person, firm or company. The restrictions set forth in this
Section 7.2 hereof shall not apply if the Executive's employment is terminated
pursuant to Section 5.4 or 5.5 hereof.
8. PAYMENT OF FINANCIAL OBLIGATIONS
The payment or provision to the Executive by the Company of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's salary,
bonus and other benefits set forth in Section 4 hereof, the payment (if
applicable) of the Severance Payment and provision of the severance benefits (if
applicable) set forth in Section 6 hereof and any indemnification obligations,
shall be allocated (the "Compensation Split") -% to the Company and -% to the
------------------
Operating Partnership initially, subject to adjustment from time to time by the
Executive Compensation Committee.
9. GENERAL PROVISIONS
9.1 Injunctive Relief and Enforcement. The Executive acknowledges
---------------------------------
that the remedies at law for any breach by him of the provisions of Sections
5.11(a) or 7 hereof may be inadequate and that, therefore, in the event of
breach by the Executive of the terms of Sections 5.11(a) or 7 hereof, the
Company shall be entitled to institute legal proceedings to enforce the specific
performance of this Agreement by the Executive and to enjoin the Executive from
any further violation of Sections 5.11(a) or 7 hereof and to exercise such
remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement.
9.2 Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when addressed as follows and (i) when
personally delivered, (ii) when
9
<PAGE>
transmitted by telecopy, electronic or digital transmission with receipt
confirmed, (iii) one day after delivery to an overnight air courier guaranteeing
next day delivery, or (iv) upon receipt if sent by certified or registered mail.
In each case notice shall be sent to:
If to Executive: Jeffrey C. Hawken
1622 Matthews Avenue
Manhattan Beach, CA 90266
Telephone: (310) 379-2625
If to the Company: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Attention: President and CEO
Facsimile: (310) 322-5981
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9.3 Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. In addition, in the event any provision in this
Agreement shall be determined by any court of competent jurisdiction to be
unenforceable by reason of extending for too great a period of time or over too
great a geographical area or by reason of being too extensive in any other
respect, each such agreement shall be interpreted to extend over the maximum
period of time for which it may be enforceable and to the maximum extent in all
other respects as to which it may be enforceable, and enforced as so
interpreted, all as determined by such court in such action.
9.4 Assignment. This Agreement may not be assigned by the Executive,
----------
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
9.5 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
9.6 Headings. The headings contained herein are for reference
--------
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.7 Choice of Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California without
giving effect to the principles of conflict of laws thereof.
9.8 Indemnification. To the fullest extent permitted under
---------------
applicable law, the Company shall indemnify, defend and hold the Executive
harmless from and against any and all causes of action, claims, demands,
liabilities, damages, costs and expenses of any nature
10
<PAGE>
whatsoever (collectively, "Damages") directly or indirectly arising out of or
-------
relating to the Executive discharging the Executive's duties hereunder on behalf
of the Company and/or its respective subsidiaries and affiliates, so long as the
Executive acted in good faith within the course and scope of the Executive's
duties with respect to the matter giving rise to the claim or Damages for which
the Executive seeks indemnification.
9.9 LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE
-------------------------
COMPANY IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED
TO THIS AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER
EXPRESS OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN
WHOLE OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES
SHALL BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES,
AND (II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
----
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM AND THROUGH ANY APPLICABLE SEVERANCE PERIOD, PLUS INTEREST ON ANY
DELAYED PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM
AND AFTER THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
9.10 WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
--------------------
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL FOR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
9.11 Attorneys' Fees. If any legal action, arbitration or other
---------------
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
9.12 Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board.
9.13 The Executive's Acknowledgment. The Executive acknowledges (a)
------------------------------
that he has had the opportunity to consult with independent counsel of his own
choice concerning this
11
<PAGE>
Agreement, and (b) that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
(Signature Page Follows)
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date and year first above written.
KILROY REALTY CORPORATION
By:____________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY REALTY, L.P.
By Kilroy Realty Corporation, its general
partner
By:____________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
EXECUTIVE
_______________________________________________
Jeffrey C. Hawken
<PAGE>
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of _________,
---------
1997, by and between Kilroy Realty Corporation, a Maryland corporation (the
"REIT"), Kilroy Services, Inc., a Maryland corporation (the "Services Company")
- -----
and C. Hugh Greenup (the "Executive").
---------
1. EMPLOYMENT
The REIT and the Services Company hereby agree to employ the Executive, and
the Executive hereby agrees to be employed by the REIT and the Services Company
on the terms and conditions set forth herein. The REIT and the Services Company
shall collectively be referred to herein as the "Company." The allocation of
the obligations of the Company between the REIT and the Services Company shall
be determined as set forth in Section 8 hereof.
2. TERM AND RENEWAL
2.1 Term. The employment of the Executive by the Company as provided
----
in Section 1 will commence on the date hereof and will terminate three years
from the date hereof (the "Expiration Date") unless automatically extended for
---------------
an additional 12-month period pursuant to Section 2.2 hereof or sooner
terminated as hereinafter provided (each such period, an "Employment Period").
-----------------
2.2 Renewal. Following the expiration of the initial Employment
-------
Period and provided that this Agreement has not been terminated by the Executive
or the Company pursuant to Section 5 hereof, and every year thereafter, this
Agreement shall be automatically renewed on the terms set forth herein for an
additional 12-month period, effective on each anniversary date of the date
hereof.
3. POSITION AND DUTIES
3.1 Position. The Executive hereby agrees to serve as General
--------
Counsel of the Company. In addition, if, at the discretion of the Board of
Directors of the Company (the "Board"), the Company nominates the Executive for
election to the Board, and in the event that such Executive is elected by the
Company's stockholders to serve as a member of the Board, then, for so long as
the Executive is an employee of the Company, the Executive hereby agrees to
serve as a member thereof. At the Company's request, the Executive may, at the
Executive's discretion, serve the Company and/or its respective subsidiaries and
affiliates in other offices and capacities in addition to the foregoing, but
shall not be required to do so. In the event that the Executive, during the
term of this Agreement, serves in any one or more of the aforementioned
capacities, the Executive's compensation shall not be increased beyond that
specified in Section 4 of this Agreement. In addition, in the event the Company
and the Executive mutually agree that the Executive shall terminate the
Executive's service in any one or more of the aforementioned capacities, or the
Executive's service in one or more of the aforementioned capacities is
terminated, the Executive's compensation, as specified in Section 4 of this
Agreement, shall not be diminished or reduced in any manner.
<PAGE>
3.2 Duties. The Company agrees that the duties that may be assigned
------
to the Executive shall be the usual and customary duties of the offices of
General Counsel.
3.3 Devotion of Time and Effort. The Executive shall devote
---------------------------
substantially all of his business time and attention to the performance of
services to the Company in his capacity as an officer thereof and as may
reasonably be requested by the Board.
3.4 Other Activities. The Executive may engage in other activities
----------------
for the Executive's own account while employed hereunder, including without
limitation charitable, community and other business activities, provided that
such other activities (i) do not compete with the business and activities of the
Company or any of its direct and indirect subsidiaries and (ii) do not
materially interfere with the performance of the Executive's duties hereunder.
Notwithstanding the foregoing, during the term of this Agreement, the Executive
shall not serve as a member of the board of directors of any noncharitable
entity, other than the Company, its direct and indirect subsidiaries, and any of
their affiliates, without the Company's prior written consent.
4. COMPENSATION AND RELATED MATTERS
4.1 Salary. During the Employment Period, the Company shall pay the
------
Executive an annual salary of not less than $165,000 during the first full 12-
month period and at such annual salary as determined by the Executive
Compensation Committee of the Board (the "Executive Compensation Committee")
--------------------------------
during the second and subsequent 12-month periods of the Executive's employment
with the Company, but not less than $165,000. All salary is to be paid
consistent with the standard payroll practices of the Company (e.g., timing of
----
payments and standard employee deductions, such as income tax withholdings,
social security, etc.). The Executive's performance and salary shall be subject
to review at the end of each fiscal year and an increase in annual salary, if
one is so determined by the Executive Compensation Committee, shall be made on a
basis consistent with the standard practices of the Company.
4.2 Bonus. The Executive Compensation Committee shall review the
-----
Executive's performance at least annually during each year of the Employment
Period and cause the Company to award the Executive a cash bonus in an amount
equal to up to 100% of the annual salary, as provided in Section 4.1 above,
which the Executive Compensation Committee shall reasonably determine as fairly
compensating and rewarding the Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of such
cash bonus shall be determined in the sole and absolute discretion of the
Executive Compensation Committee and shall be dependent on, among other things,
the achievement of certain performance levels by the Company, including, without
limitation, growth in funds from operations, and the Executive's performance and
contribution to increasing the funds from operations.
4.3 "Gross-Up" of Compensation. The amount of the salary and any
--------------------------
bonus payable to the Executive pursuant to Sections 4.1 and 4.2 above, shall be
"grossed up" as necessary (on an after-tax basis) to compensate for any
additional withholding taxes or other
2
<PAGE>
expenses due to the implementation of the Compensation Split (as defined in
Section 8 below) with respect to the financial obligations of the Company and
the Services Company, respectively.
4.4 Business Expenses. The Company shall promptly, in accordance
-----------------
with Company policy. reimburse the Executive for all reasonable business
expenses incurred in accordance with and subject to the limits set forth in the
Company's written policies with respect to business expenses, including, without
limitation, business seminar fees, professional association dues, reasonable
entertainment expenses incurred by the Executive in connection with the business
of the Company and/or its respective subsidiaries and affiliates, and reasonable
travel expenses, including all airfare, hotel and rental car expenses, incurred
by the Executive in traveling in connection with the business of the Company,
upon presentation to the Company of written receipts for such expenses.
4.5 Other Benefits.
--------------
(a) Medical Insurance. During the Employment Periods, the
-----------------
Company, at its sole cost, shall provide to the Executive, the Executive's
spouse and children such health, dental and optical insurance as the Company may
from time to time make available to its other executive employees of the same
level of employment, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans or arrangements. For the
purposes of this Section 4, the Executive is deemed to be of the same level of
employment as each of the Company's Executive Vice Presidents.
(b) Life and Disability Insurance. During the Employment Periods,
-----------------------------
the Company shall provide to the Executive such disability and/or life insurance
as the Company in its sole discretion may from time to time make available to
its other executive employees of the same level of employment, subject to and on
a basis consistent with the terms, conditions and overall administration of such
plans or arrangements.
(c) Pension Plans, Etc. During the Employment Periods, the
-------------------
Executive shall be entitled to participate in all pension, 401(k) and other
employee plans and benefits established by the Company on at least the same
terms as the Company's other executive employees of the same level of
employment, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans or arrangements.
4.6 Automobile Allowance. The Company shall provide the Executive
--------------------
with a reasonable automobile allowance during the term of the Executive's
employment with the Company as the Company in its sole discretion may from time
to time make available to its other executive employees of the same level of
employment, subject to and on a basis consistent with Company policy.
4.7 Vacation. The Executive shall be entitled to four (4) vacation
--------
weeks (20 business days) in each calendar year or such greater amount the
Company from time to time shall determine and make available to its other
executive employees at the same level of employment, subject to and on a basis
consistent with Company policy. In addition, the Executive will be entitled to
all Company holidays.
3
<PAGE>
4.8 Office, Staff, and Equipment. The Company agrees to provide the
----------------------------
Executive, as a condition to the Executive's services hereunder, such staff,
equipment and office space as is reasonably necessary for the Executive to
perform the Executive's duties hereunder, subject to and on a basis consistent
with Company policy.
5. TERMINATION
5.1 Death. The Executive's employment hereunder shall terminate upon
-----
his death.
5.2 Disability. The Executive's employment hereunder shall terminate
----------
on the Executive's physical or mental disability or infirmity which, in the
opinion of a competent physician selected by the Board, renders the Executive
unable to perform properly his duties under this Agreement for six (6)
consecutive calendar months or for shorter periods aggregating one hundred and
eighty (180) business days in any twelve (12) month period, but only to the
extent that such definition does not violate the Americans with Disabilities
Act.
5.3 Cause. The Company may terminate the Executive for Cause at any
-----
time, upon written notice to Executive. For purposes of this Agreement, "Cause"
-----
shall mean:
(a) the Executive's conviction for commission of a felony or a
crime involving moral turpitude;
(b) the Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Company; or
(c) the Executive's willful and continued failure to
substantially perform the Executive's duties hereunder (other than
such failure resulting from the Executive's incapacity due to physical
or mental illness), which failure is not remedied within a reasonable
time after written demand for substantial performance is delivered by
the Company which specifically identifies the manner in which the
Company believes that the Executive has not substantially performed
the Executive's duties.
5.4 Termination Without Cause. The Company may terminate this
-------------------------
Agreement without Cause at any time, provided that the Company first delivers to
the Executive the Company's written election to terminate this Agreement at
least ninety (90) days prior to the effective date of termination.
5.5 Executive's Termination for Good Reason. The Executive may
---------------------------------------
terminate this Agreement for Good Reason upon at least ten (10) days prior
written notice to the Company. For purposes of this Agreement, "Good Reason"
-----------
shall mean:
(a) the Company's material breach of any of its obligations
hereunder and either such breach is incurable or, if curable, has not
been cured within
4
<PAGE>
fifteen (15) days following receipt of written notice by the Executive
to the Company of such breach by the Company;
(b) any removal of the Executive from one or more of the offices
specified in Section 3.1 hereof without Cause and without the
Executive's prior written consent; or
(c) any material alteration or diminution in the Executive's
authority, duties or responsibilities herein without Cause and without
the Executive's prior written consent.
5.6 Executive's Voluntary Termination. The Executive may, at any
---------------------------------
time, terminate this Agreement without Good Reason, provided that the Executive
delivers written notice to the Company at least ninety (90) days prior to the
effective date of termination.
5.7 Nonrenewal. The Company may terminate this Agreement upon the
----------
expiration of any Employment Period, provided that the Company gives written
notice of such nonrenewal to the Executive at least ninety (90) days prior to
the expiration of such Employment Period.
5.8 Retirement. The Executive's employment shall terminate upon his
----------
retirement upon or immediately following his sixty-fifth birthday. In the case
of the Executive's retirement, the Company shall pay to the Executive promptly
after Executive's termination (i) the unpaid annual salary pursuant to Section
4.1 hereof to which such Executive is entitled pursuant to Section 6 hereof,
through the date of the termination of such Executive's employment, and (ii) as
soon as practicable after the close of the Company's fiscal year in which the
Executive's termination occurs, a prorated portion of any unpaid bonus
determined by the Board pursuant to Section 4.2 hereof. This Section 5.9 shall
not limit the entitlement of the Executive to any retirement benefit then
available to the Executive under any benefit plan or policy which is maintained
by the Company for the Executives's benefit.
5.9 Notice. Any termination of the Executive's employment by the
------
Company or the Executive shall be communicated by written Notice of Termination
to the other party. For purposes of this Agreement, a "Notice of Termination"
---------------------
shall mean a notice that shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
5.10 Date of Termination. The effective date of the Executive's
-------------------
termination depends on the type of termination applied. "Date of Termination"
-------------------
shall mean the following:
(a) if the Executive's employment is terminated by his death, the
date of his death;
5
<PAGE>
(b) if the Executive's employment is terminated by reason of his
disability, the date of the opinion of the physician referred to in
Section 5.2 hereof;
(c) if the Executive's employment is terminated by the Company
for Cause pursuant to Section 5.3 hereof, or without Cause by the
Company pursuant to Section 5.4 hereof, the date specified in the
Notice of Termination;
(d) if the Executive resigns for Good Reason (pursuant to Section
5.5 hereof) or voluntarily resigns (pursuant to Section 5.6 hereof),
the date of the Notice of Termination;
(e) if the Executive's employment is terminated pursuant to
Section 5.7 hereof, the date this Agreement terminates by its terms;
and
(f) if the Executive's employment is terminated pursuant to
Section 5.8 hereof, the date of such Executive's retirement.
5.11 Termination Obligations.
-----------------------
(a) The Executive hereby acknowledges and agrees that all
Personal Property and equipment furnished to or prepared by the Executive in the
course of or incident to his employment, belongs to the Company and shall be
promptly returned to the Company upon termination of the Employment Period.
"Personal Property" includes, without limitation, all electronic devices of the
-----------------
Company used by the Executive, including, without limitation, personal
computers, facsimile machines, cellular telephones, pagers and tape recorders
and all books, manuals, records, reports, notes, contracts, lists, blueprints,
maps and other documents, or materials, or copies thereof (including computer
files), and all other proprietary information relating to the business of the
Company. Following termination, the Executive will not retain any written or
other tangible material containing any proprietary information of the Company.
(b) Upon termination of the Employment Period, the Executive
shall be deemed to have resigned from all offices and directorships then held
with the Company or any affiliate.
(c) The representations and warranties contained herein and the
Executive's obligations under this Section 5.12 and Sections 7 and 9 hereof
shall survive termination of the Employment Period and the expiration of this
Agreement.
6. COMPENSATION UPON TERMINATION
6.1 Death.
-----
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated pursuant to Section 5.1 hereof, the Company shall pay monthly to the
Executive's estate his annual salary payable pursuant to Section 4.1 hereof and
one-twelfth of any bonus
6
<PAGE>
payable pursuant to Section 4.2 hereof at the most recent annual amount
received, or entitled to be received, by the Executive for a period equal to the
lesser of one (1) year following the Date of Termination or the remainder of the
Employment Period as set forth in Section 2 hereof.
(b) Severance Benefits. At the Executive's estate's expense, the
------------------
Executive's spouse and children shall also be entitled to any continuation of
health insurance coverage rights under any applicable law.
6.2 Disability.
----------
(a) Severance Payment. If the Executive's employment shall be
-----------------
terminated by reason of disability pursuant to Section 5.2 hereof, the Company
shall pay to the Executive and the Executive shall receive a single severance
payment in an amount equal to the sum of: (i) two times the Executive's average
annual salary paid hereunder pursuant to Section 4.1 hereof for the preceding
thirty-six month period (or, if the Executive has been employed less than
thirty-six months, the average annual salary for the period employed) plus (ii)
an amount equal to two times the highest annual bonus received by the Executive
during the preceding thirty-six month period (or during the period the Executive
has been employed hereunder if shorter than thirty-six months)(collectively, the
"Severance Payment"). Such payment shall be in addition to any disability
-----------------
insurance payments to which the Executive is otherwise entitled and any other
compensation earned by Executive hereunder.
(b) Severance Benefits. At the Executive's own expense, the
------------------
Executive and the Executive's spouse and children shall also be entitled to any
continuation of health insurance coverage rights under any applicable law.
6.3 Cause.
-----
(a) Salary and Bonus. If the Executive's employment shall be
----------------
terminated for Cause pursuant to Section 5.3 hereof, the Company shall pay the
Executive his salary and any bonus then payable pursuant to Sections 4.1 and 4.2
hereof through the Date of Termination.
(b) Benefits. At the Executive's own expense, the Executive and
--------
the Executive's spouse and children shall also be entitled to any continuation
of health insurance coverage rights under any applicable law.
6.4 Termination Without Cause.
-------------------------
(a) Severance Payment. If the Company shall terminate the
-----------------
Executive's employment without Cause pursuant to Section 5.4 hereof, the Company
shall pay the Executive the Severance Payment, as described in Section 6.2(a)
hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive
7
<PAGE>
and the Executive's spouse and children all benefits described in Section 4.5
hereof for a period of two (2) years commencing on the Date of Termination.
6.5 Executive's Termination for Good Reason.
---------------------------------------
(a) Severance Payment. If the Executive terminates his employment
-----------------
with the Company pursuant to Section 5.5 hereof for Good Reason, the Company
shall pay the Executive the Severance Payment, as described in Section 6.2(a)
hereof.
(b) Severance Benefits. In addition to paying the Executive's
------------------
Severance Payment, the Company, at the Company's expense, shall continue to
provide to the Executive and the Executive's spouse and children all benefits
described in Section 4.5 hereof for a period of two (2) years commencing on the
Date of Termination.
6.6 Executive's Voluntary Termination. In the event of the voluntary
---------------------------------
termination of this Agreement by the Executive, pursuant to Section 5.6 hereof,
the Executive shall have the right to receive the Executive's compensation as
provided in Section 4 hereof through the Date of Termination.
6.7 Manner of Payment. Any Severance Payment made pursuant to this
-----------------
Section 6 shall be payable in a one-time payment by the Company.
6.8 Limitation. The foregoing notwithstanding, the total of such
----------
Severance Payments, pursuant to Sections 6.1, 6.2, 6.4 and 6.5 hereof, shall be
reduced to the extent that the payment of such amount would cause the
Executive's total termination benefits (as determined by the Executive's tax
advisor) to constitute an "excess" parachute payment under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and by reason of such
----
excess parachute payment the Executive would be subject to an excise tax under
Section 4999(a) of the Code, but only if the Executive determines that the
after-tax value of the termination benefits calculated with the foregoing
restriction exceed those calculated without the foregoing restriction.
7. CONFIDENTIALITY AND NON-SOLICITATION COVENANTS
7.1 Confidentiality. In addition to the agreements set forth in
---------------
Section 5.11(a) hereof, the Executive hereby agrees that the Executive will not,
during the Employment Period or at any time thereafter directly or indirectly
disclose or make available to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever, any Confidential Information
(as defined below). The Executive agrees that, upon termination of his
employment with the Company, all Confidential Information in his possession that
is in written or other tangible form (together with all copies or duplicates
thereof, including computer files) shall be returned to the Company and shall
not be retained by the Executive or furnished to any third party, in any form
except as provided herein; provided, however, that the Executive shall not be
obligated to treat as confidential, or return to the Company copies of any
Confidential Information that (i) was publicly known at the time of disclosure
to the Executive, (ii) becomes publicly known or available thereafter other than
by any means in violation of this Agreement
8
<PAGE>
or any other duty owed to the Company by the Executive, or (iii) is lawfully
disclosed to the Executive by a third party. As used in this Agreement the term
"Confidential Information" means information disclosed to the Executive or known
------------------------
by the Executive as a consequence of or through his relationship with the
Company, about the owners, tenants, employees, business methods, public
relations methods, organization, procedures, property acquisition and
development, or finances, including, without limitation, information of or
relating to owner or tenant lists of the Company and its affiliates.
7.2 Non-Solicitation. For a period of one (1) year following the
----------------
date on which the Executive's employment hereunder is terminated, the Executive
shall not solicit or induce any of the Company's employees, agents or
independent contractors to end their relationship with the Company, or recruit,
hire or otherwise induce any such person to perform services for the Executive,
or any other person, firm or company. The restrictions set forth in this
Section 7.2 hereof shall not apply if the Executive's employment is terminated
pursuant to Section 5.4 or 5.5 hereof.
8. PAYMENT OF FINANCIAL OBLIGATIONS
The payment or provision to the Executive by the Company of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's salary,
bonus and other benefits set forth in Section 4 hereof, the payment (if
applicable) of the Severance Payment and provision of the severance benefits (if
applicable) set forth in Section 6 hereof and any indemnification obligations,
shall be allocated (the "Compensation Split") -% to the Company and -% to the
------------------
Services Company initially, subject to adjustment from time to time by the
Executive Compensation Committee.
9. GENERAL PROVISIONS
9.1 Injunctive Relief and Enforcement. The Executive acknowledges
---------------------------------
that the remedies at law for any breach by him of the provisions of Sections
5.11(a) or 7 hereof may be inadequate and that, therefore, in the event of
breach by the Executive of the terms of Sections 5.11(a) or 7 hereof, the
Company shall be entitled to institute legal proceedings to enforce the specific
performance of this Agreement by the Executive and to enjoin the Executive from
any further violation of Sections 5.11(a) or 7 hereof and to exercise such
remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement.
9.2 Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when addressed as follows and (i) when
personally delivered, (ii) when transmitted by telecopy, electronic or digital
transmission with receipt confirmed, (iii) one day after delivery to an
overnight air courier guaranteeing next day delivery, or (iv) upon receipt if
sent by certified or registered mail. In each case notice shall be sent to:
If to Executive: C. Hugh Greenup
30718 Manzano Drive
9
<PAGE>
Malibu, CA 90265
Facsimile: (310) 457-1180
If to the Company: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Attention: President and CEO
Facsimile: (310) 322-5981
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9.3 Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. In addition, in the event any provision in this
Agreement shall be determined by any court of competent jurisdiction to be
unenforceable by reason of extending for too great a period of time or over too
great a geographical area or by reason of being too extensive in any other
respect, each such agreement shall be interpreted to extend over the maximum
period of time for which it may be enforceable and to the maximum extent in all
other respects as to which it may be enforceable, and enforced as so
interpreted, all as determined by such court in such action.
9.4 Assignment. This Agreement may not be assigned by the Executive,
----------
but may be assigned by the Company to any successor to its business and will
inure to the benefit and be binding upon any such successor.
9.5 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
9.6 Headings. The headings contained herein are for reference
--------
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
9.7 Choice of Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California without
giving effect to the principles of conflict of laws thereof.
9.8 Indemnification. To the fullest extent permitted under
---------------
applicable law, the Company shall indemnify, defend and hold the Executive
harmless from and against any and all causes of action, claims, demands,
liabilities, damages, costs and expenses of any nature whatsoever (collectively,
"Damages") directly or indirectly arising out of or relating to the Executive
-------
discharging the Executive's duties hereunder on behalf of the Company and/or its
respective subsidiaries and affiliates, so long as the Executive acted in good
faith within the course and scope of the Executive's duties with respect to the
matter giving rise to the claim or Damages for which the Executive seeks
indemnification.
10
<PAGE>
9.9 LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE
-------------------------
COMPANY IS AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED
TO THIS AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER
EXPRESS OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN
WHOLE OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES
SHALL BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES,
AND (II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
----
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM AND THROUGH ANY APPLICABLE SEVERANCE PERIOD, PLUS INTEREST ON ANY
DELAYED PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM
AND AFTER THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
9.10 WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE
--------------------
PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY
TRIAL FOR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
9.11 Attorneys' Fees. If any legal action, arbitration or other
---------------
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
9.12 Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board.
9.13 The Executive's Acknowledgment. The Executive acknowledges (a)
------------------------------
that he has had the opportunity to consult with independent counsel of his own
choice concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
(Signature Page Follows)
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date and year first above written.
KILROY REALTY CORPORATION
By:__________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY SERVICES, INC.
By:____________________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
EXECUTIVE
_______________________________________________
C. Hugh Greenup
<PAGE>
EXHIBIT 10.36
LICENSE AGREEMENT
-----------------
This License Agreement ("Agreement") is entered into as of by and
among John B. Kilroy, Sr., John B. Kilroy, Jr., Patrice Bouzaid, Susan Hahn,
Anne McCahon, Dana Pantuso and Kilroy Industries, a California corporation
("KI"), collectively as licensors (the "Licensor"), and Kilroy Realty
Corporation, a Maryland corporation ("KRC"), and its Subsidiaries, collectively
as Licensees (the "Licensee").
A. Whereas, Licensee and its Subsidiaries have been formed to succeed to
substantially all of the business of KI and its affiliates, consisting
principally of a portfolio of Class A suburban office and industrial buildings
located primarily in Southern California, and the affiliated real estate
ownership, acquisition, development, leasing and management businesses of such
entities; and
B. Whereas, subject to the limitations contained in this Agreement,
Licensor desires to give, and Licensee desires to obtain, access to the "Kilroy"
name for the purpose of engaging in the acquisition, development, leasing and
management of commercial properties;
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
1. GRANT OF LICENSE. Pursuant to the limitations set forth in this Agreement,
----------------
Licensor hereby grants to Licensee and its Subsidiaries (as defined in the next
sentence) the nonexclusive, nontransferable and world-wide right to use the
"Kilroy" name for the purpose of engaging in the acquisition, development,
leasing and management of commercial properties, and any activities related to
any of the foregoing. For purposes of this Agreement, "Subsidiary" shall mean
any corporation in an unbroken chain of corporations beginning with the KRC if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing 50 percent or more of (i) the total combined voting
power of all classes of stock or (ii) the economic interest in one of the other
corporations in such chain. "Subsidiary" shall also mean any partnership or
limited liability company in which KRC or any Subsidiary owns more than 50
percent of the capital or profits interests. Neither the Licensee nor its
Subsidiaries may make any other use of the "Kilroy" name without explicit prior
written approval of the Licensor.
2. CONSIDERATION. The Licensor has granted the license hereunder in
-------------
consideration of any amounts paid by the Licensee to the Licensor or its
affiliates in connection with the contribution of certain property owned by the
Licensor or its affiliates to the Licensee. The Licensee shall not be charged
any additional usage, royalty or licensee fees in connection with this
Agreement.
3. PROPRIETARY RIGHTS. Anything to the contrary in this Agreement
------------------
notwithstanding, the Licensor shall retain all right title and interest in the
"Kilroy" name. The Licensee shall not claim ownership of the "Kilroy" name.
Page 1
<PAGE>
4. LIMITATIONS ON LIABILITY.
------------------------
4.1. THE LICENSEE ASSUMES TOTAL RESPONSIBILITY AND RISK FOR ANY USE
LICENSEE MAKES OF THE "KILROY" NAME AND THE LICENSOR SHALL NOT BE LIABLE FOR ANY
COST OR DAMAGE ARISING EITHER DIRECTLY OR INDIRECTLY FROM ANY SUCH USE. EVEN IF
APPRISED IN ADVANCE OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING, UNDER NO
CIRCUMSTANCES SHALL THE LICENSOR BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES THAT RESULT IN ANY WAY FROM THE
LICENSEE'S USE OF THE "KILROY" NAME. THE PRECEDING SENTENCE NOTWITHSTANDING,
NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO INTERFERE WITH OR ALTER THE RIGHTS
OF ANY OF THE PARTIES HERETO UNDER ANY OTHER AGREEMENT ENTERED INTO BY SUCH
PARTY.
5. DISPUTES. In the event of any dispute arising out of, under, or pursuant
--------
to the terms of this Agreement or the activities of the parties, such dispute
will be resolved by arbitration under the jurisdiction of and pursuant to the
rules then in force of the American Arbitration Association at Los Angeles,
California; provided, however, that the Licensor and the Licensee each
acknowledge that any default under Section 1 or Section 3 of this Agreement will
result in irreparable injury to the non-defaulting party, and that in such event
the exact amount of damages is now and will be difficult to ascertain and the
remedies at law for any such failure would not be reasonable or adequate
compensation. Accordingly, the Licensor and the Licensee agree that if either
such party defaults under either Section 1 or Section 3, the Licensor or the
Licensee, as the case may be, shall be entitled to specific performance and
injunctive relief in any court of competent jurisdiction, without posting bond
or other security, and without the necessity of proving actual damages.
6. GENERAL.
-------
6.1. ASSIGNMENT. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by either party without the prior written
consent of the other party.
6.2. ENTIRE AGREEMENT, AMENDMENTS. This Agreement constitutes the entire
----------------------------
agreement among the parties with respect to the license granted herein and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties to this Agreement.
No amendment, supplement, modification or waiver of this Agreement shall be
binding unless executed in writing by the party to be charged thereby. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement, whether or not
similar, nor shall any such waiver constitute a continuing waiver unless
otherwise expressly provided.
Page 2
<PAGE>
6.3. COUNTERPARTS. This Agreement may be executed by original signature
------------
or by facsimile transmission and in one or more counterparts, each of which
shall be deemed an original, but all of which taken together shall constitute
one and the same instrument.
6.4. CHOICE OF LAW. This Agreement shall be construed and interpreted and
-------------
the rights of the parties shall be determined in accordance with the laws of the
State of California, without regard to the conflict laws of any state.
6.5. INVALIDITY. If any one or more of the provisions of this Agreement
----------
or any other instrument referred to herein, shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, then to the maximum extent
permitted by law, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement or any other such instrument.
(Signature pages follows.)
Page 3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first given above.
LICENSOR:
KILROY INDUSTRIES, A CALIFORNIA CORPORATION
By:___________________________________________________
Name:____________________________________________
Title:___________________________________________
JOHN B. KILROY, SR., AN INDIVIDUAL
______________________________________________________
JOHN B. KILROY, JR., AN INDIVIDUAL
______________________________________________________
PATRICE BOUZAID, AN INDIVIDUAL
______________________________________________________
SUSAN HAHN, AN INDIVIDUAL
______________________________________________________
ANNE MCCAHON, AN INDIVIDUAL
______________________________________________________
Page 4
<PAGE>
DANA PANTUSO, AN INDIVIDUAL
______________________________________________________
LICENSEE:
KILROY REALTY CORPORATION, A MARYLAND CORPORATION
By:___________________________________________________
Name:____________________________________________
Title:___________________________________________
Page 5
<PAGE>
EXHIBIT 10.37
INDENTURE OF MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
FINANCING STATEMENT, FIXTURE FILING AND
ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS
Dated as of January , 1997
from
____________________________
having an address
________________________________________
___________________________________
________________________
as Grantor
to
[ ] TITLE INSURANCE COMPANY
having an address at
___________________________
___________________________
as Trustee
for the benefit of
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
having an address at
60 Wall Street
New York, New York 10260
as Beneficiary
________________________________________________________________________________
Prepared and drafted by and after recording, return to:
Martha Feltenstein, Esq.
c/o Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS............................................................. 6
2. WARRANTY................................................................ 22
3. PAYMENT AND PERFORMANCE OF OBLIGATIONS SECURED.......................... 24
4. NEGATIVE COVENANTS...................................................... 24
5. INSURANCE............................................................... 25
6. CONDEMNATION AND INSURANCE PROCEEDS..................................... 29
7. IMPOSITIONS, LIENS AND OTHER ITEMS...................................... 35
8. FUNDS FOR TAXES AND INSURANCE........................................... 36
9. LICENSE TO COLLECT RENTS................................................ 37
10. SECURITY AGREEMENT...................................................... 38
11. TRANSFERS, INDEBTEDNESS AND SUBORDINATE LIENS........................... 39
12. MAINTENANCE OF TRUST ESTATE; ALTERATIONS; INSPECTION; UTILITIES......... 43
13. LEGAL COMPLIANCE........................................................ 45
14. BOOKS AND RECORDS, FINANCIAL STATEMENTS, REPORTS AND OTHER
INFORMATION............................................................. 46
15. COMPLIANCE WITH LEASES AND AGREEMENTS................................... 48
16. BENEFICIARY'S RIGHT TO PERFORM.......................................... 50
17. GRANTOR'S EXISTENCE; ORGANIZATION AND AUTHORITY......................... 50
18. PROTECTION OF SECURITY; COSTS AND EXPENSES.............................. 51
19. MANAGEMENT OF THE TRUST ESTATE.......................................... 51
20. REMEDIES................................................................ 52
21. APPLICATION OF PROCEEDS................................................. 57
22. CERTAIN WAIVERS......................................................... 58
23. NOTICE OF CERTAIN OCCURRENCES........................................... 58
24. TRUST FUNDS............................................................. 58
25. TAXATION................................................................ 58
26. NOTICES................................................................. 59
27. NO ORAL MODIFICATION.................................................... 59
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
28. PARTIAL INVALIDITY...................................................... 59
29. SUCCESSORS AND ASSIGNS.................................................. 59
30. GOVERNING LAW........................................................... 59
31. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS....................... 60
32. NO WAIVER............................................................... 64
33. NON-RECOURSE OBLIGATIONS................................................ 64
34. FURTHER ASSURANCES...................................................... 66
35. ESTOPPEL CERTIFICATES................................................... 66
36. INTENTIONALLY OMITTED................................................... 67
37. INDEMNIFICATION BY GRANTOR.............................................. 67
38. RELEASE OF PROPERTY..................................................... 68
39. RATING AGENCY MONITORING................................................ 70
40. ENVIRONMENTAL MATTERS................................................... 70
41. RECOURSE NATURE OF CERTAIN INDEMNIFICATIONS............................. 72
42. COUNTERPARTS............................................................ 72
43. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF
BENEFICIARY............................................................. 72
44. NO ENDORSEMENT.......................................................... 72
45. SUBSTITUTE PROPERTY..................................................... 73
46. DEFEASANCE.............................................................. 76
47. DEFEASANCE COLLATERAL ACCOUNT........................................... 79
48. RESERVES................................................................ 79
49. SUBSTITUTE OR SUCCESSOR TRUSTEE......................................... 81
50. LIABILITY OF TRUSTEE.................................................... 82
51. BENEFICIARY AND TRUSTEE................................................. 82
52. AS TO PROPERTY IN ARIZONA............................................... 88
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
53. AS TO PROPERTY IN CALIFORNIA............................................ 89
54. LIABILITY OF ASSIGNEES OF BENEFICIARY................................... 91
55. SECURITIZATION.......................................................... 91
56. SEPARATE LOANS.......................................................... 95
</TABLE>
EXHIBIT A - LEGAL DESCRIPTION OF PROPERTIES
EXHIBIT B - ENVIRONMENTAL REPORTS
SCHEDULE 1 ALLOCATED LOAN AMOUNTS
SCHEDULE 2 PERMITTED ENCUMBRANCES AND OPERATING AGREEMENTS
SCHEDULE 3 SPECIAL ASSESSMENTS
SCHEDULE 4 SPECIFIED PROPERTIES
SCHEDULE 5 SEISMIC RETROFITTING WORK
iii
<PAGE>
INDENTURE OF MORTGAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATEMENT,
FIXTURE FILING AND ASSIGNMENT
OF LEASES, RENTS AND SECURITY DEPOSITS
THIS INDENTURE OF MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
FINANCING STATEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES, RENTS AND SECURITY
DEPOSITS (herein, together with all amendments and supplements thereto, this
"Mortgage"), dated as of the ____ day of January, 1997, is made by
- ---------
____________________________, [each] a ________ [limited
partnership/corporation/limited liability company] (collectively, "Grantor"),
-------
having an address c/o _____________________, to [ ] Title Insurance
Company, having an address at _____________________________ ("Trustee"), for
-------
the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York banking
corporation, having an address at 60 Wall Street, New York, New York 10260,
together with its successors and assigns, "Beneficiary").
-----------
W I T N E S S E T H :
-------------------
WHEREAS, Grantor is the record and beneficial owner of the fee simple
interests in the thirteen (13) Properties (as defined below), located on and
comprising the land described in Exhibit "A-1-A-13" attached hereto
-----------------
(collectively, the "Land"); and
----
WHEREAS, Beneficiary has agreed to make a loan to Grantor in the
principal amount of Eighty Four Million Dollars ($84,000,000) (collectively, the
"Loan"), which Loan shall be evidenced by the Note, of even date herewith
----
(together with all amendments, modifications, supplements, restatements,
substitutions and replacements thereof or thereto, the "Note"), executed by
----
Grantor in favor of Beneficiary, payable as specified therein, with a maturity
date of January , 2022 or if such date is not a Business Day, on the next
preceding Business Day (the "Maturity Date") or such earlier date as may be
-------------
required under the terms of the Note; and
WHEREAS, the indebtedness evidenced by the Note and the other
obligations of Grantor set forth in the other Loan Documents (as defined below)
shall be secured by this Mortgage and the other Loan Documents; and
WHEREAS, Grantor and Beneficiary intend these recitals to be a
material part of this Mortgage.
NOW, THEREFORE, in consideration of the Loan to Grantor evidenced by
the Note and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor hereby agrees as follows:
TO SECURE:
(i) payment and performance of all covenants, conditions,
liabilities and obligations of Grantor to Beneficiary contained in, and
payment of the indebtedness evidenced by, the Note plus all interest
payable thereunder; and
(ii) payment and performance of all covenants, conditions,
liabilities and obligations contained in this Mortgage and any extensions,
renewals or modifications hereof; and
<PAGE>
(iii) payment and performance of all covenants, conditions,
liabilities and obligations of Grantor contained in the Assignment of
Leases, Rents and Security Deposits, dated as of the date hereof (together
with any extensions, renewals or modifications thereof, the "Assignment of
-------------
Leases"), between Grantor, as assignor, and Beneficiary, as assignee, and
------
the Cash Collateral Account, Security, Pledge and Assignment Agreement,
dated as of the date hereof (together with any extensions, renewals or
modifications thereof, the "Cash Collateral Agreement"), among Grantor, as
-------------------------
pledgor, _____________, as agent, and Beneficiary, as pledgee;
(iv) and payment and performance of all covenants, conditions,
liabilities and obligations of Grantor contained in each of the other Loan
Documents (as defined below); and
(v) without limiting the foregoing, payment of all
indebtedness, liabilities, and amounts from time to time incurred by
Beneficiary pursuant to the Note, this Mortgage or such other Loan
Documents, even if the aggregate amount of the monetary obligation
outstanding at any one time exceeds the face amount of the Note (all of the
foregoing indebtedness, monetary liabilities and obligations set forth in
clauses (i)-(iv) above and this clause (v), collectively, the
"Indebtedness"); and
------------
(vi) payment of the Indebtedness together with the payment and
performance of all other covenants, conditions, liabilities and obligations
described and set forth in clauses (i)-(v) above and in this clause (vi),
collectively, the "Obligations."
-----------
GRANTING CLAUSES
----------------
NOW, THEREFORE, THIS MORTGAGE WITNESSETH: that Grantor, in
consideration of the premises, the Indebtedness secured by the Note, the
acceptance by Beneficiary of the trusts created hereby, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged (a) has mortgaged, warranted, granted, bargained, sold, alienated,
released, confirmed, conveyed, pledged and assigned and (b) by these presents
does hereby irrevocably grant and create a first priority Lien (as defined
below), subject to the Permitted Encumbrances and the provisions hereof and of
the other Loan Documents, on and security interest in, and does hereby MORTGAGE,
WARRANT, GRANT A SECURITY INTEREST IN, GRANT, BARGAIN, SELL, ALIENATE, RELEASE,
CONFIRM, CONVEY, PLEDGE, ASSIGN, TRANSFER AND SET OVER to Trustee, IN TRUST WITH
POWER OF SALE AND RIGHT OF ENTRY AND POSSESSION, for the benefit and use of
Beneficiary and its successors and assigns forever, in the trusts created hereby
all its estate, right, title and interest now owned or hereafter acquired in, to
and under any and all the property (collectively, the "Trust Estate") described
------------
in the following Granting Clauses:
(A) the Land;
(B) all of Grantor's right, title and interest in and to the
buildings, foundations, structures, improvements and fixtures now or
hereafter located or erected on the Land (the "Improvements");
------------
2
<PAGE>
(C) all of Grantor's right, title and interest, if any, in and
to (i) all streets, avenues, roads, alleys, passages, places, sidewalks,
strips and gores of land and ways, existing or proposed, public or private,
adjacent to the Land, and all reversionary rights with respect to the
vacation of said streets, avenues, roads, alleys, passages, places,
sidewalks and ways in the land lying thereunder, (ii) all air, lateral
support, drainage, oil, gas and mineral rights, options to purchase or
lease, waters, water courses and riparian rights now or hereafter
pertaining to or used in connection with the Land and/or Improvements,
(iii) all and singular, the tenements, hereditaments, rights of way,
easements, appendages and appurtenances and property now or hereafter
belonging or in any way appertaining to the Land, and (iv) all estate,
right, title, claim or demand whatsoever, either at law or in equity, in
possession or expectancy, of, in and to the Land (collectively, the
"Appurtenances");
-------------
(D) all of Grantor's right, title and interest in and to all of
the machinery, appliances, apparatus, equipment, fittings, fixtures,
materials, articles of personal property and goods of every kind and nature
whatsoever, and all additions to and renewals and replacements thereof, and
all substitutions therefor, now or hereafter affixed to, attached to,
placed upon or located upon or in the Land, or any part thereof, and used
in connection with the use, ownership, management, maintenance, enjoyment
or operation of the Land in any present or future occupancy or use thereof
and now owned or leased or hereafter owned or leased (to the extent
permitted by the applicable Lease) by Grantor including, but without
limiting the generality of the foregoing, all heating, lighting, laundry,
cooking, incinerating, loading, unloading and power equipment, boilers,
dynamos, stokers, engines, pipes, pumps, tanks, motors, conduits,
switchboards, plumbing, lifting, cleaning, fire prevention, fire
extinguishing, refrigerating, ventilating, and communications apparatus,
air cooling and air conditioning apparatus, building materials and
equipment, elevators, escalators, carpeting, shades, draperies, awnings,
screens, doors and windows, blinds, stoves, ranges, refrigerators,
dishwashers, cabinets, office equipment, furniture and furnishings,
partitions, ducts and compressors (other than equipment and personal
property of tenants of the Land or the Improvements, or any part thereof)
(hereinafter collectively called "Building Equipment"), and Grantor agrees
------------------
to execute and deliver, from time to time, such further instruments
(including, without limitation, any financing statements under the Uniform
Commercial Code of the applicable State in which a Property is located (the
"UCC")) as may be reasonably requested by Beneficiary to confirm the lien
---
of this Mortgage on any Building Equipment or any Intangible;
All such right, title and interest of Grantor in and to each of the 13
distinct parcels or sets of parcels of the Land, Grantor's interest in and to
the Improvements and Building Equipment located thereon and such other property
with respect thereto described in the foregoing Granting Clauses is herein
called a "Property" and all such Properties are herein collectively called the
--------
"Properties."
- -----------
(E) all of Grantor's right, title and interest as lessor or
licensor, as the case may be, in, to and under all leases, underlettings,
concession agreements and licenses of the Properties, or any part thereof,
now existing or hereafter entered into by Grantor
3
<PAGE>
including, without limitation, any cash and securities deposited thereunder
(collectively, the "Leases"), the grant of such cash and securities hereunder
------
being expressly subject to the provisions of the applicable Leases, and all of
Grantor's right, title and interest, subject to the provisions of Section 9, in
---------
the right to receive and collect the revenues, income, rents, issues, profits,
royalties and other benefits payable under any of the Leases or otherwise
arising from the use or enjoyment of all or any portion of the Properties
(collectively, the "Rents");
-----
(F) subject to the provisions of Section 6 hereof, all of
---------
Grantor's right, title and interest in and to all proceeds, judgments,
claims, compensation, awards or payments hereafter made to Grantor for the
taking, whether permanent or temporary, by condemnation, eminent domain, or
for any conveyance made in lieu of such taking, of the whole or any part of
the Properties, including, without limitation, all proceeds, judgments,
claims, compensation awards or payments for changes of grade of streets or
any other injury to or decrease in the value of the Properties, whether
direct or consequential, which said awards and payments are hereby assigned
to Beneficiary, who is hereby authorized to collect and receive the
proceeds thereof and to give proper receipts and acquittances therefor, and
to apply the same toward the payment of the Indebtedness in such order as
Beneficiary may determine in accordance with the provisions of this
Mortgage without regard to the adequacy of Beneficiary's security hereunder
and notwithstanding the fact that the amount thereof may not then be due
and payable, and toward the payment of reasonable counsel fees, costs and
disbursements incurred by Beneficiary in connection with the collection of
such awards or payments; and Grantor hereby agrees, upon request, to make,
execute and deliver any and all further assignments and other instruments
sufficient for the purpose of confirming this assignment of said proceeds,
judgments, claims, compensation awards or payments to Beneficiary, free,
clear and discharged of any encumbrances of any kind or nature whatsoever
other than the Permitted Encumbrances;
(G) subject to the provisions of Section 6 hereof, all of
---------
Grantor's right, title and interest in and to all unearned premiums paid
under insurance policies now or hereafter obtained by Grantor to the extent
the same insure the Properties and any other insurance policies required to
be maintained pursuant to Section 5 hereof to the extent the same insure
---------
the Properties including, without limitation, liability insurance policies
and Grantor's interest in and to all proceeds of the conversion and the
interest payable thereon, voluntary or involuntary, of the Trust Estate, or
any part thereof, into cash or liquidated claims including, without
limitation, proceeds of casualty insurance, title insurance (other than
liability insurance) or any other insurance maintained on or with respect
to the Properties;
(H) all right, title and interest of Grantor in and to all
extensions, improvements, betterments, renewals, substitutes and
replacements of, and all additions and Appurtenances to, the Properties,
hereafter acquired by or released to Grantor or constructed, assembled or
placed by Grantor on the Properties, and all conversions of the security
constituted thereby; immediately upon such acquisition, release,
construction, assembling, placement or conversion, as the case may be, and
in each such case, to the extent permitted by law, without
4
<PAGE>
any further mortgage, conveyance, assignment or other act by Grantor, any of
such extensions, improvements, betterments, renewals, substitutes and
replacements shall become subject to the Lien of this Mortgage as fully and
completely, and with the same effect, as though now owned by Grantor and
specifically described herein;
(I) all of Grantor's right, title and interest in, to and under,
to the extent the same may be encumbered or assigned by Grantor pursuant to
the terms thereof without occurrence of a breach of default thereunder or a
violation under applicable law, and without impairment of the validity or
enforceability thereof, (i) any Operating Agreements (as defined below) and
all contracts and agreements relating to the Properties (other than the
Leases), and other documents, books and records related to the ownership
and operation of the Properties; (ii) to the extent permitted by law, all
consents, licenses (including, to the extent permitted by law, any licenses
held by Grantor permitting the sale of liquor at any of the Properties the
transfer and/or assignment of which is permitted by law without filing or
other qualification), warranties, guaranties, building permits and
government approvals relating to or required for the construction,
completion, occupancy and operation of the Properties; (iii) all plans and
specifications for the construction of the Improvements, including, without
limitation, installations of curbs, sidewalks, gutters, landscaping,
utility connections and all fixtures and equipment necessary for the
construction, operation and occupancy of the Improvements; (iv) all such
other contracts and agreements (other than the Leases) from time to time
executed by Grantor relating to the ownership, leasing, construction,
maintenance, operation, occupancy or sale of the Properties, together with
all rights of Grantor to compel performance of the terms of such contracts
and agreements; and (v) subject to the terms of the Cash Collateral
Agreement, the Accounts (as defined below) and any funds in such Accounts
from time to time (it being understood that at such time as Grantor shall
withdraw any amounts from any Accounts in accordance with the provisions of
the Cash Collateral Agreement, the same shall cease to constitute part of
the Trust Estate);
(J) to the extent the same may be encumbered or assigned by
Grantor pursuant to the terms thereof and to the extent permitted by law,
all of Grantor's right, title and interest in, to and under escrows,
documents, instruments, and general intangibles, as the foregoing terms are
defined in the UCC, in any case which now or hereafter relate to, are
derived from, or are used in connection with the Properties, and all
contract rights, franchises, books, records, plans, specifications,
permits, licenses, approvals, actions and causes of action which now or
hereafter relate to, are derived from or used in connection with the
Properties or the use, operation, maintenance, occupancy or enjoyment
thereof or the conduct of any business or activities thereon (collectively,
the property described in the foregoing paragraphs (F), (G), (H), (I) and
this paragraph (J), the "Intangibles"); and
------------
(K) all of Grantor's right, title and interest in all proceeds,
both cash and noncash, of the foregoing which may be sold or otherwise be
disposed of pursuant to the terms hereof.
5
<PAGE>
TO HAVE AND TO HOLD THE TRUST ESTATE hereby conveyed, or mentioned and
intended so to be, whether now owned or held or hereafter acquired, subject only
to the Permitted Encumbrances, unto Trustee for the benefit and use of
Beneficiary, its successors and assigns, forever, upon the terms and conditions
set forth herein.
IN TRUST FOREVER, WITH POWER OF SALE (to the extent permitted by
applicable law), upon the terms and trusts set forth herein and to secure the
performance of, and compliance with, the obligations, covenants and conditions
of this Mortgage and the other Loan Documents all as herein set forth.
1. Definitions. Wherever used in this Mortgage, the following
-----------
terms, and the singular and plural thereof, shall have the following meanings.
All capitalized terms used but not otherwise defined herein shall have the
meanings assigned to them in the Note:
Accounts: Shall mean, collectively, the Operating Account, the
--------
Interest Escrow Account, the Repair Reserve Account, the TI and Leasing Reserve
Account, the Deferred Maintenance Reserve Account, the Replacement Reserve
Account and the Mortgage Escrow Account and any and all of Grantor's other
accounts, general intangibles, chattel paper, cash or monies, wherever located,
whether in the form of cash or checks, and all cash equivalents including all
deposits and certificates of deposit, instruments, whether negotiable or non-
negotiable, debt notes both certificated and uncertificated, repurchase
obligations for underlying notes of the types described herein, and commercial
paper (it being agreed that all of the foregoing must at all times qualify as
Permitted Investments (as defined in the Cash Collateral Agreement)), (a)
received in connection with the sale or other disposition of all or any of the
Properties, (b) maintained by Grantor in a segregated account in trust for the
benefit of Beneficiary, or (c) held by Beneficiary, but not any account
maintained by Grantor or an Affiliate of Grantor or cash or cash equivalents
that have been disbursed to Grantor in accordance with the Cash Collateral
Agreement.
Affiliate: Shall mean, with respect to any specified Person, any
---------
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with, or any general partner in, such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities or other beneficial interest, by contract or otherwise; and the terms
"controlling" and "controlled" have the meanings correlative to the foregoing.
Aggregate Alteration Threshold Amount: Shall mean $4,000,000.
-------------------------------------
Allocated Loan Amount: Shall mean the portion of the Principal
---------------------
Indebtedness allocated, solely for purposes of performing certain calculations
hereunder, to each Property as set forth in Schedule 1 annexed hereto and made a
----------
part hereof, as such amounts shall be adjusted from time to time as hereinafter
set forth. In the case of a Total Loss of any one or more specific Properties in
accordance with Section 6(d) where the Proceeds are less than 125% of the
------------
Allocated Loan Amount, each Allocated Loan Amount shall be increased by an
amount equal to the product of (a) the difference between 125% of the applicable
Allocated Loan Amount and the Proceeds, and (b) a fraction, the numerator of
which is the applicable Allocated Loan Amount (prior to the
6
<PAGE>
adjustment in question) and the denominator of which is the Principal
Indebtedness prior to the adjustment to the Principal Indebtedness resulting in
the recalculation of the Allocated Loan Amount. All calculations made pursuant
to this Mortgage with respect to an Allocated Loan Amount (including Premium or
scheduled interest payments on an Allocated Loan Amount) shall be certified to
Beneficiary by Grantor pursuant to an Officer's Certificate.
Alteration: As defined in Section 12 hereof.
---------- ----------
Approved Banks: Shall mean banks or other financial institutions
--------------
which have a minimum long-term unsecured debt rating of at least "AA" by each of
the Rating Agencies, or if any such bank or other financial institution is not
rated by all the Rating Agencies, then a minimum long-term rating of at least
"AA" or its equivalent by two of the Rating Agencies.
Appurtenances: As defined in Granting Clause (D) hereof.
-------------
Assignee: As defined in Section 64 hereof.
-------- ----------
Assignment of Leases: As defined in the recitals hereof.
--------------------
Beneficiary: As defined in the introductory paragraph hereof.
-----------
Best: As defined in Section 5(b).
---- ------------
Building Equipment: As defined in Granting Clause (E) hereof.
------------------
Business Day: Shall mean any day except a Saturday, a Sunday or
------------
any other day on which commercial banks in the States of New York are authorized
or obligated by law, governmental decree or executive order to be closed.
Cash: Coin or currency of the government of the United States of
----
America.
Cash and Cash Equivalents: Shall mean any or a combination of the
-------------------------
following: (i) Cash, and (ii) U.S. Government Obligations.
Cash Collateral Agreement: As defined in the recitals hereof.
-------------------------
Casualty Amount: As defined in Section 6(b) hereof.
--------------- ------------
Closing Date: Shall mean the date the Loan and the transactions
------------
contemplated hereby are consummated.
Code: Shall mean the Internal Revenue Code of 1986, as amended, and
----
any successor thereto, and any temporary or final regulations promulgated
thereunder.
Debt: Shall mean, with respect to any Person at any time, (a)
----
indebtedness or liability of such Person for borrowed money whether or not
evidenced by bonds, debentures, notes or other instruments, or for the deferred
purchase price of property or services (excluding trade obligations); (b)
obligations of such Person as lessee under leases which should have been or
should be, in accordance with GAAP, recorded as capital leases; (c) current
liabilities of such Person in respect of unfunded vested benefits under plans
7
<PAGE>
covered by Title IV of ERISA; (d) obligations issued for, or liabilities
incurred on the account of, such Person; (e) obligations or liabilities of such
Person arising under acceptance facilities; (f) obligations of such Person under
any guarantees or other agreement to become secondarily liable for any
obligation of any other Person, endorsements (in each case other than for
collection or deposit in the ordinary course of business) and other contingent
obligations to purchase, to provide funds for payment, to supply funds to invest
in any Person or otherwise to assure a creditor against loss; (g) obligations of
such Person secured by any Lien on any property of such Person, whether or not
the obligations have been assumed by such Person; or (h) obligations of such
Person under any interest rate or currency exchange agreement.
Debt Service: Shall mean the scheduled amount of interest and
------------
principal due and payable in accordance with the Note during any applicable
period.
Debt Service Coverage Ratio: Shall mean for any period the ratio of
---------------------------
Net Operating Income to Debt Service on the Note (based on a debt service
constant on the Note of the greater of __% per annum and the actual debt service
constant on the Note) for such period.
Default: Shall mean the occurrence or existence of any event or
-------
condition which, with the giving of notice or the passage of time, or both,
would constitute an Event of Default hereunder.
Default Rate: Shall have the meaning set forth in the Note.
------------
Defeasance: As defined in Section 46 hereof.
---------- ----------
Defeasance Collateral: Shall mean Defeasance Eligible Investments
---------------------
included in the Trust Estate as collateral pursuant to Sections 38, 45 and 46
----------------------
hereof (including, without limitation, all amounts then on deposit in the
Defeasance Collateral Account).
Defeasance Collateral Account: As defined in Section 47 hereof.
----------------------------- ----------
Defeasance Eligible Investments: Shall mean obligations or securities
-------------------------------
not subject to prepayment, call or early redemption which are direct obligations
of, or obligations fully guaranteed as to timely payment by, the United States
of America or any agency or instrumentality of the United States of America, or
the obligations of which are backed by the full faith and credit of the United
States of America, the ownership of which will not cause Beneficiary to be an
"investment company" under the Investment Company Act of 1940, as amended, as
evidenced by an Opinion of Counsel accept able to Beneficiary, and which
qualify under (S) 1.860G-2(a)(8) of the Treasury regulations. All such
obligations or securities shall mature or be redeemable, or provide for payments
of interest thereon, on or prior to the Business Day preceding the date such
amounts are required to be applied under this Mort gage.
Deferred Maintenance Reserve Account: As defined in the Cash
------------------------------------
Collateral Agreement.
Deferred Maintenance Reserve Amount: As defined in Section 48(c)
-----------------------------------
hereof.
8
<PAGE>
Direct Beneficial Owner: Shall mean such Persons who own any direct
-----------------------
ownership interest in Grantor.
Environmental Certificate: As defined in Section 40(b) hereof.
------------------------- -------------
Environmental Claim: Shall mean any claim, action, cause of action,
-------------------
investigation or written notice by any Person alleging potential liability
(including potential liability for investigatory costs, cleanup costs, natural
resource damages, property damages, personal injuries or penalties) arising out
of, based upon or resulting from (a) the presence, threatened presence, release
or threatened release into the environment of any Hazardous Substances from or
at the Properties, or (b) the violation, or alleged violation, of any
Environmental Law, relating to the Properties, in either case, occurring or
arising at any time prior to the taking of possession of the applicable Property
or Properties by Beneficiary or any Person (other than Grantor or an Affiliate
of Grantor) acting through or on behalf of Beneficiary.
Environmental Event: As defined in Section 40(b) hereof.
------------------- -------------
Environmental Laws: Shall mean all present or future federal,
------------------
state and local laws, statutes, rules, ordinances, and regulations relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including, without limitation laws, statutes, rules, ordinances and
regulations relating to emissions, discharges, releases of Hazardous Substances,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Substances
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. (S)(S) 9601 et seq.; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S)(S) 6901 et seq.;
the Toxic Substance Control Act, 15 U.S.C. (S)(S) 2601 et seq.; the Water
Pollution Control Act (also known as the Clean Water Act), 33 U.S.C. (S) 1251 et
seq.; the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; and the Hazardous Materials
Transportation Act, 49 U.S.C. (S) 1801 et seq., as the same may be hereafter
amended or modified.
Environmental Reports: As defined in Section 40(a) hereof.
--------------------- -------------
ERISA: Shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time, and the regulations promulgated thereunder.
Events of Default: Shall mean the occurrence of any of the
-----------------
following, each of which shall constitute an Event of Default under this
Mortgage:
(a) (i) Failure to make any payment of interest or principal on the
Note when due, or (ii) failure to pay the principal balance of the Note when
due; or
(b) Grantor fails to pay any other amount payable pursuant to this
Mortgage or the Note when due and payable in accordance with the provisions
hereof, with such failure continuing for fifteen (15) days after Beneficiary
delivers written notice thereof to Grantor; or
9
<PAGE>
(c) (i) Failure to keep in force the insurance required by Section 5
---------
of this Mortgage, or (ii) failure to comply (with such default continuing for
five (5) days without notice from Beneficiary) with any other covenants set
forth in Section 5 of this Mortgage; or
---------
(d) Any default under the terms of Section 7 (subject to the terms of
---------
Section 7(c)) beyond any applicable time periods set forth therein, with such
- ------------
default continuing for ten (10) days after Beneficiary delivers written notice
thereof to Grantor, or the incurrence of any Debt in violation of Section 11(c),
-------------
11(f) of this Mortgage or the occurrence of any Transfer in violation
- -----
of Sections 11(a) or 11(b) (but subject to the terms of Section 11(d), 11(f)
----------------------- --------------------
of this Mortgage; or
(e) Grantor shall fail to observe or perform any covenant or
agreement contained in this Mortgage (other than those covered by clauses (a)
through (d) above) for 30 days after written notice thereof has been given to
Grantor by Beneficiary;
(f) Any representation, warranty, certification or statement made by
Grantor in this Mortgage or in any certificate, financial statement or other
document delivered pursuant to this Mortgage shall prove to have been incorrect
in any material respect when made (or deemed made);
(g) Any attempt by Grantor to assign its rights under this Mortgage;
or
(h) Any other default in the performance or payment, or breach, of
any material covenant, warranty, or agreement of Grantor contained herein or in
any other Loan Document (other than a covenant, or agreement, a default in the
performance or payment of or the breach of which is specifically addressed
elsewhere in this definition), which default is not cured within thirty (30)
Business Days after receipt by Grantor of notice from Beneficiary in writing of
such breach. If cure of such default (a) would require performance of an
Obligation other than payment of Indebtedness to Grantor and (b) cannot be
effected within said 30 Business Day period despite Grantor's diligence in
prosecuting such cure, then, provided Grantor commences to cure within said
thirty (30) Business Day period and diligently prosecutes said cure to
completion, subject only to Excusable Delays, the cure period provided hereunder
shall be extended to such time as may be reasonably necessary to cure the
default; provided, however, that such extended period shall in no event exceed
120 days plus time permitted for Excusable Delays; and provided, further, that
Grantor shall provide Beneficiary with a written report and evidence of the
progress of Grantor's cure efforts 90 days after commencement of such 120-day
cure period. Notwithstanding the foregoing sentence, the cure period provided
hereunder may be extended for one additional 120-day period, subject to
Excusable Delays, if and only if (x) such default involves breach of a covenant
(as distinct from a representation) and cure of such default would require
physical construction or remedial work, and (y) such cure cannot with diligence
be completed within the initial 120-day period. Grantor shall provide
Beneficiary with an additional written report and evidence of the progress of
Grantor's cure efforts 90 days after commencement of such additional 120-day
cure period.
(i) The entry by a court of (A) a decree or order for relief in
respect of Grantor or its General Partner in an involuntary case or proceeding
under any applicable Federal or state bankruptcy, insolvency, reorganization
10
<PAGE>
or other similar law or (B) a decree or order adjudging Grantor or its General
Partner a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of Grantor or its General Partner under any applicable Federal or state
bankruptcy, insolvency, reorganization or other similar law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of Grantor or its General Partner or of any substantial part of
either of their respective property, or ordering the winding up or liquidation
of either of their respective affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect for a
period of more than ninety (90) consecutive days; or
(j) The commencement by Grantor or its General Partner of a voluntary
case or proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of it in an involuntary case or proceeding
under any applicable Federal or state bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by Grantor or its general partner of a
petition or answer or consent seeking reorganization or relief under any
applicable Federal or state bankruptcy, insolvency, reorganization or other
similar law, or the consent by Grantor or its General Partner to the filing of
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official of
Grantor or its General Partner or of any substantial part of any of either of
their respective property, or the making by Grantor or its General Partner of an
assignment for the benefit of creditors, or the admission by Grantor or its
General Partner in writing of its inability to pay its debts generally as they
become due, or the taking of official partnership action of Grantor or corporate
action of its General Partner (or if, at any time, Grantor shall no longer be a
partnership or the General Partner shall no longer be a corporation) in
furtherance of any such action; or
(k) one or more final nonappealable judgments or decrees in an
aggregate amount of $100,000 as of such date shall be entered by a court or
courts of competent jurisdiction against Grantor (other than any judgment as to
which, and only to the extent, a reputable insurance company has acknowl edged
coverage of such claim in writing) and (i) any such judgments or decrees shall
not be stayed, discharged, paid, bonded or vacated within thirty (30) days or
(ii) enforcement proceedings shall be commenced by any creditor on any such
judgments or decrees;
(l) This Mortgage or any other Loan Document or any Lien granted
hereunder or thereunder shall, in whole or in part, terminate, cease to be
effective or cease to be a legally valid, binding and enforceable obligation of
Grantor, or any Lien securing the Indebtedness shall, in whole or in part, cease
to be a perfected first priority Lien, subject to the Permitted Encumbrances
(except in any of the foregoing cases in accordance with the terms hereof or
under any other Loan Document); or
(m) Any "Event of Default" as defined in any Loan Document other than
this Mortgage occurs.
11
<PAGE>
Exculpated Parties: As defined in Section 33 hereof.
------------------ ----------
Excusable Delay: Shall mean a delay due to acts of God,
---------------
governmental restrictions, stays, judgments, orders, decrees, enemy actions,
civil commotion, fire, casualty, strikes, work stoppages, shortages of labor or
materials or other causes beyond the reasonable control of Grantor, but lack of
funds in and of itself shall not be deemed a cause beyond the control of
Grantor.
First Class: Shall mean, with respect to any Property, a standard of
-----------
operation and maintenance consistent with first-class properties comparable to
and in the same metropolitan area as the applicable Property.
GAAP: Shall mean the generally accepted accounting principles set
----
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such entity as may be in general use
by significant segments of the U.S. accounting profession, to the extent such
principles are applicable to the facts and circumstances on the date of
determination.
General Partner: Shall mean Kilroy Realty Finance, Inc., a Delaware
---------------
corporation, which is the general partner of Grantor.
Governmental Authority: Shall mean any Federal, state or local
----------------------
government or any other political subdivision thereof exercising executive,
legislative, judicial, regulatory or administrative functions.
Grantor: As defined in the introductory paragraph hereof.
-------
Hazardous Substance: Shall mean any material waste or material
-------------------
substance which is:
(a) included within the definition of "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" in or pursuant to
any Environmental Law, or subject to regulation under any Environmental Law;
(b) listed in the United States Department of Transportation Optional
Hazardous Materials Table, 49 C.F.R. (S) 172.101 enacted as of the date hereof
or hereafter amended, or in the United States Environmental Protection Agency
List of Hazardous Substances and Reportable Quantities, 40 C.F.R. Part 302, as
enacted as of the date hereof or as hereafter amended; or
(c) an explosive, radioactive, asbestos, polychlorinated biphenyl, oil
or petroleum product.
Impositions: Shall mean all taxes (including all ad valorem,
-----------
sales (including those imposed on lease rentals), use, single business, gross
receipts, value added, intangible transaction, privilege or license or similar
taxes), governmental assessments (including all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not commenced or completed within the term of this
Mortgage), water, sewer or other rents and charges, excises, levies, fees
(including license, permit, inspection, authorization and similar fees), and
12
<PAGE>
all other governmental charges, in each case whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, of every character in
respect of the Trust Estate and/or any Rents (including all interest and
penalties thereon), which at any time prior to, during or in respect of the term
hereof may be assessed or imposed on or in respect of or be a Lien upon (a)
Grantor (including all income, franchise, single business or other taxes imposed
on Grantor for the privilege of doing business in the jurisdiction in which the
Trust Estate is located), (b) the Trust Estate, or any other collateral
delivered or pledged to Beneficiary in connection with the Loan, or any part
thereof, or any Rents therefrom or any estate, right, title or interest therein,
or (c) any occupancy, operation, use or possession of, or sales from, or
activity conducted on, or in connection with the Trust Estate or the leasing or
use of all or any part thereof. Nothing contained in this Mortgage shall be
construed to require Grantor to pay any tax, assessment, levy or charge imposed
on (i) any tenant occupying any portion of the Property or (ii) Beneficiary in
the nature of a franchise, capital levy, estate, inheritance, succession, income
or net revenue tax.
Improvements: As defined in Granting Clause (C) hereof.
------------
Indebtedness: As defined in the recitals hereof.
------------
Indemnified Environmental Parties: As defined in Section 40 hereof.
--------------------------------- ----------
Indemnified Parties: As defined in Section 37 hereof.
------------------- ----------
Indemnity: Shall mean the Indemnity Agreement, dated as of even date
---------
herewith, by Kilroy Realty Corp., for the benefit of Beneficiary.
Independent Accountant: Shall mean Deloitte & Touche LLP, or another
----------------------
firm of nationally recognized, independent certified public accountants selected
by Grantor which is reasonably acceptable to Beneficiary.
Independent Appraiser: Shall mean an independent appraiser which is a
---------------------
member of the American Institute of Real Estate Appraisers selected by Grantor
and having at least five (5) years of experience in the applicable real estate
market where the applicable Property is located in the valuation of properties
of the type being appraised.
Independent Architect: Shall mean an independent architect,
---------------------
engineer or construction consultant selected by Grantor, licensed to practice in
the State where the applicable Property is located and having at least five (5)
years of experience.
Independent Director: Shall mean an individual reasonably
--------------------
satisfactory to Beneficiary who shall not have been at the time of such
individual's appointment, and may not have been at any time during the preceding
two years (i) a shareholder of, or an officer or employee of, Grantor or any of
its shareholders, subsidiaries or affiliates, (ii) a customer of, or supplier
to, Grantor or any of its shareholders, subsidiaries or affiliates, (iii) a
person or other entity controlling any such shareholder, supplier or customer,
or (iv) a member of the immediate family of any such shareholder, officer,
employee, supplier or customer of any other director of Grantor. As used
herein, the term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the
13
<PAGE>
management and policies of a person or entity, whether through ownership of
voting securities, by contract or otherwise.
Individual Environmental Matter: As defined in Section 48(c).
------------------------------- -------------
Individual Threshold Amount: Shall mean, with respect to the Property
---------------------------
described on Schedule 1 attached hereto as the [Kilroy Airport] Property,
----------
$1,000,000, and with respect to each other Property, the greater of $250,000 and
five percent (5%) of the Allocated Loan Amount therefor.
Individual Trustee: Shall mean such person as is required by
------------------
applicable state law to perform the functions of Individual Trustee pursuant to
Section 52 hereof.
- ----------
Insurance Requirements: Shall mean all terms of any insurance
----------------------
policy required hereunder covering or applicable to any Property or any part
thereof, all requirements of the issuer of any such policy, and all orders,
rules, regulations and other requirements of which Grantor has notice of the
national board of fire underwriters (or any other body exercising similar
functions) applicable to or affecting any Property or any part thereof or any
use of any Property or any part thereof.
Intangibles: As defined in Granting Clause (J) hereof.
-----------
Interest Escrow Account: As defined in the Cash Collateral Agreement.
-----------------------
Jurisdictional Trustee: As defined in Section 52 hereof.
---------------------- ----------
Land: As defined in the recitals hereof.
----
Leases: As defined in Granting Clause (E) hereof.
------
Legal Requirements: As defined in Section 13(a) hereof.
------------------ -------------
Letter of Credit: Shall mean an irrevocable, unconditional,
----------------
transferable, clean sight draft letter of credit in favor of Beneficiary and
entitling Beneficiary to draw thereon in New York, New York, issued by a
domestic Approved Bank or the U.S. agency or branch of a foreign Approved Bank,
or if there are no domestic Approved Banks or U.S. agencies or branches of a
foreign Approved Bank then issuing letters of credit, then such letter of credit
may be issued by a domestic bank, the long term unsecured debt rating of which
is the highest such rating then given by the Rating Agencies to a domestic
commercial bank. If at any time the bank issuing any such Letter of Credit
shall cease to be an Approved Bank, Beneficiary shall have the right immediately
to draw down the same in full and hold the proceeds of such draw in accordance
with the applicable provisions hereof, unless Grantor shall deliver a
replacement Letter of Credit within thirty (30) days after Beneficiary delivers
written notice to Grantor that such bank shall have ceased to be an Approved
Bank.
Lien: Shall mean any mortgage, deed of trust, lien, pledge,
----
hypothecation, assignment, security interest, or any other encumbrance of, on or
affecting the Trust Estate or any portion thereof or any interest therein,
including, without limitation, any conditional sale or other title retention
14
<PAGE>
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, the filing of any financing statement, and mechanic's,
materialmen's and other similar liens and encumbrances.
Loan: As defined in the recitals hereof.
----
Loan Amount: Shall mean the aggregate Principal Amount of the
-----------
Loan, which initially shall be $84,000,000.
Loan Documents: Shall mean this Mortgage, the Assignment of
--------------
Leases, the Cash Collateral Agreement, the Indemnity, the Note, and any and all
other agreements, instruments or documents executed by Grantor evidencing,
securing or delivered in connection with the Loan and the transactions
contemplated hereby.
Manager's Consent: Shall mean the Manager's Consent and Subordination
-----------------
of Management Agreement, dated as of even date herewith.
Material Adverse Effect: Shall mean any event or condition that has a
-----------------------
material adverse effect on (i) all of the Properties taken as a whole, (ii) the
business, prospects, profits, operations or condition (financial or otherwise)
of Grantor, or (iii) the ability of Grantor to repay the principal and interest
of the Indebtedness as it becomes due.
Material Alteration: Shall mean any Alteration which, when
-------------------
aggregated with all related Alterations constituting a single project, involves
an estimated cost exceeding the greater of the Individual Threshold Amount with
respect to Alterations (including the Alteration in question) being undertaken
at a single Property at such time or the Aggregate Alteration Threshold Amount
with respect to Alterations (including the Alteration in question) being
undertaken at all the Properties at such time, but in either event, excluding
any Alteration for which a Tenant is obligated to pay directly.
Material Lease: means, with respect to any Property, any Lease which
--------------
is for 10% or more of the net rentable square footage at such Property or which
accounts for 15% or more of the cash flow at such Property.
Maturity Date: As defined in the recitals hereof.
-------------
Maximum Foreseeable Casualty Loss: As defined in Section 5
--------------------------------- ---------
hereof.
Measuring Period: As defined in Section 38(b) hereof.
---------------- -------------
Minimum Defeasance Collateral Requirement: Shall mean, with respect
-----------------------------------------
to a Property Release or a substitution pursuant to Section 46 hereof resulting
----------
in a Defeasance, Defeasance Collateral in an amount sufficient to pay (x) 125%
of the Allocated Loan Amount applicable to the Property which is the subject of
the Property Release or substitution, and sufficient to pay scheduled interest
and principal payments (such payments, the "Defeasance Debt Service Payments")
--------------------------------
on the portion of the Loan equal to such Allocated Loan Amount on such Property
or Replaced Property, as the case may be, assuming an interest rate on the Note
equal to the greater of __% and the actual interest rate on the Note, through
and including the Reset Date (as defined in the Note) together with the
outstanding principal balance of the Note as of the
15
<PAGE>
Reset Date. Sufficient portions of the Defeasance Collateral must mature on or
before the dates when such amounts are required to be applied to pay Defeasance
Debt Service Payments when due.
Monthly TI and Leasing Reserve Amount: As defined in Section 48(b)
------------------------------------- -------------
hereof.
Monthly Replacement Reserve Amount: As defined in Section 48(d)
----------------------------------
hereof.
Mortgage: As defined in the recitals hereof.
--------
Mortgage Escrow Account: As defined in Section 8(a) hereof.
----------------------- ------------
Mortgage Escrow Amounts: As defined in Section 8(a) hereof.
----------------------- ------------
Mortgage Escrow Security: As defined in Section 8(b) hereof.
------------------------ ------------
Net Operating Income: Shall mean, with respect to any period, the
--------------------
excess of Operating Income over Operating Expenses for such period.
Nondisqualification Opinion: Shall mean an opinion of tax counsel,
---------------------------
which shall be independent outside counsel, to the effect that a contemplated
action would not materially adversely affect the federal income tax status as a
REMIC, trust or other vehicle of any REMIC, trust or other vehicle in which the
Loan may be included at the time such opinion is required.
Nondisturbance Agreement: As defined in Section 15(d) hereof.
------------------------ -------------
Note: As defined in the recitals hereof.
----
Obligations: As defined in the recitals hereof.
-----------
Officer's Certificate: Shall mean a certificate delivered to
---------------------
Beneficiary and signed by an officer of the General Partner of Grantor.
Operating Account: As defined in the Cash Collateral Agreement.
-----------------
Operating Agreements: Shall mean the reciprocal easement
--------------------
agreements, operating agreements and similar agreements affecting the ownership,
use and operation of the Properties included in the Permitted Encumbrances
listed on Schedule 2 hereto, as such agreements have been or may hereafter be
----------
amended, modified or supplemented.
Operating Expenses: Shall mean, for any period, without duplication,
------------------
all expenses paid or to be paid by Grantor during such period in connection with
the ownership, operation, management, maintenance, repair and use of the Trust
Estate, determined on an accrual basis, and, except to the extent otherwise
provided in this definition, in accordance with GAAP. Operating Expenses
specifically shall include (i) all payments required to be made pursuant to any
Operating Agreements, (ii) legal, accounting, appraisal and other professional
fees and disbursements in connection with the Note, and (iii) fees and expenses
of Beneficiary (if any) paid by Grantor, and (iv) management fees, whether or
not actually paid, equal to _ % of annual "base" or "fixed" Rent due under the
Leases. Notwithstanding the foregoing, Operating
16
<PAGE>
Expenses shall not include (1) depreciation or amortization, (2) income taxes or
other Impositions in the nature of income taxes, (3) any expenses (including
legal, accounting and other professional fees, expenses and disbursements)
incurred in connection with the making of the Loan or the sale, exchange,
transfer, financing or refinancing of all or any portion of the Trust Estate or
in connection with the recovery of insurance or condemnation proceeds which are
applied to prepay the Note, (4) any expenses which in accordance with GAAP
should be capitalized, (5) Debt Service, and (6) any item of expense which would
otherwise be considered within Operating Expenses pursuant to the provisions
above but is paid directly by any Tenant or reimbursed by the Tenant to Grantor.
Operating Income: Shall mean, for any period, all income of
----------------
Grantor during such period from the operation of the Trust Estate or, as
applicable, a Property as follows:
(i) all amounts payable to Grantor by any Person as rent and
other amounts under Leases, license agreements, occupancy agreements or
other agreements relating to the Trust Estate or, as applicable, a Property
(including reimbursements and percentage rents);
(ii) rent insurance proceeds; and
(iii) all other amounts which in accordance with GAAP are
included in Grantor's annual financial statements as operating income
attributable to the Trust Estate or, as applicable, a Property.
Notwithstanding the foregoing, Operating Income shall not include (a)
any condemnation or insurance proceeds (other than rent insurance proceeds or
condemnation proceeds with respect to a temporary taking and, in either such
case, only to the extent allocable to the applicable reporting period), (b) any
proceeds resulting from the Transfer of all or any portion of a Property, (c)
any rent attributable to a Lease prior to the date on which the actual payment
of rent is required to commence thereunder, (d) any item of income otherwise
includable in Operating Income but paid directly by any tenant to a Person other
than Grantor, provided such item of income is an item of expense (such as
payments for utilities paid directly to a utility company) and is otherwise
excluded from the definition of Operating Expenses pursuant to clause (6) of the
definition thereof, or (e) security deposits received from Tenants until
forfeited. Operating Income shall be calculated on the accrual basis of
accounting and, except to the extent otherwise provided in this definition, in
accordance with GAAP.
Opinion of Counsel: Shall mean an opinion of counsel of a nationally
------------------
recognized law firm or other law firm reasonably acceptable to Beneficiary and,
at any time that the Loan is included in any securitization transaction, the
Rating Agencies, procured by Grantor and rendered at Grantor's sole cost and
expense.
Permitted Debt: As defined in Section 11(c), 11(f) hereof.
-------------- --------------------
Permitted Encumbrances: Shall mean:
----------------------
(i) Liens for Impositions not yet due and payable or Liens
arising after the date hereof which are being contested in good faith by
17
<PAGE>
appropriate proceedings promptly instituted and diligently conducted in
accordance with Section 7(c) hereof;
------------
(ii) In the case of Liens arising after the date hereof,
statutory Liens of carriers, warehousemen, mechanics, materialmen and other
similar Liens arising by operation of law, which are incurred in the
ordinary course of business for sums which are being contested in good
faith in accordance with Section 7(c);
------------
(iii) All immaterial easements, rights-of-way, restrictions and
other similar charges or non-monetary encumbrances against real property
and other agreements which do not materially and adversely affect (A) the
ability of Grantor to pay any of its obligations to any Person as and when
due, (B) the marketability of title to the Trust Estate, (C) the fair
market value of the Trust Estate, or (D) the use or operation of the Trust
Estate as of the Closing Date and thereafter;
(iv) Those matters set forth in the "marked-up" commitment for
Beneficiary's loan policy of title insurance concerning the Properties
issued by the Title Company and agreed to by Beneficiary in Beneficiary's
sole discretion;
(v) Liens in favor of Beneficiary under this Mortgage and the
other Loan Documents;
(vi) Rights of existing and future Tenants, as tenants only,
pursuant to Leases; and
(vii) Such other title exceptions as Beneficiary and the
applicable Rating Agencies may approve in writing in their sole discretion.
Person: Shall mean any individual, corporation, partnership,
------
joint venture, estate, trust, unincorporated association, and any federal,
state, county or municipal government or any political subdivision thereof.
Principal Amount: Shall mean the principal amount of the Note, as
----------------
defined therein.
Principal Indebtedness: Shall mean the Principal Amount payable by
----------------------
Grantor under the Note.
Proceeds: As defined in Section 6 (b) hereof.
-------- -------------
Properties: As defined in Granting Clause (E) hereof.
----------
Property Release: Shall mean the release of a Replaced Property from
----------------
the lien and security interest of Beneficiary in this Mortgage and other Loan
Documents relating to such Replaced Property, and the execution and delivery by
Beneficiary of any agreements reasonably requested by Grantor to release and
terminate or reconvey and reassign, such Mortgage; provided that such release
and termination or reconveyance and reassignment shall be without recourse to
Beneficiary and without any representation and warranty and Grantor shall be
released from its obligations under the Loan Documents with respect to the
Replaced Property; provided, further, that upon the release and termination or
reconveyance and reassignment of Beneficiary's security
18
<PAGE>
interest in this Mortgage relating to the Replaced Property, all references
herein to this Mortgage relating to the Replaced Property shall be deemed
deleted; and provided, further, that upon any Property Release, Grantor shall
cause to be delivered to Beneficiary in form and substance reasonably
satisfactory to Beneficiary, at Grantor's sole cost and expense, an original
title insurance policy endorsement, insuring Beneficiary's perfected first
priority interest under this Mortgage in and to the remaining Properties in the
Trust Estate following the Property Release.
Qualifying Manager: As defined in Section 19(a) hereof.
------------------ -------------
Rating Agencies: Shall mean Standard & Poor's Ratings Services, Duff
---------------
& Phelps Credit Rating Co., Moody's Investors Services, Inc. and Fitch Investor
Services, L.P. or, if such corporation shall for any reason no longer perform
the functions of a securities rating agency, any other nationally recognized
statistical rating agency designated by Beneficiary, provided, however, that at
any time during which the Loan is an asset of a securitization, "Rating
Agencies" shall mean the rating agencies that from time to time rate the
securities issued in connection with such securitization.
Renewal Lease: As defined in Section 15(b) hereof.
------------- -------------
Rents: As defined in Granting Clause (F) hereof.
-----
Repair Reserve Account: As defined in the Cash Collateral Agreement.
----------------------
Repair Reserve Amounts: As defined in Section 48 hereof.
---------------------- ----------
Replaced Property: As defined in Section 45(a) hereof.
----------------- -------------
Replacement Reserve Account: As defined in the Cash Collateral
---------------------------
Agreement.
Required Opinion: Shall mean an Opinion of Counsel addressed to
----------------
Beneficiary and dated as of the date of delivery to the effect that (i) the
Defeasance Collateral has been duly and validly assigned and delivered to
Beneficiary, (ii) the security interest of Beneficiary for the ratable benefit
of any certificateholder, with respect to the Defeasance Collateral, is a first
priority perfected security interest as security for payment of the Note, which
opinion may contain, and be subject to, conditions, exceptions and
qualifications customarily included in such opinion, and (iii) making the
payment which accompanies such opinion would not constitute an avoidable
preference under Section 547 of the Bankruptcy Code or under applicable state
law in the event of a filing of a petition for relief under the Bankruptcy Code
or such applicable state law by or against Grantor, as to the portion of the
defeasance Collateral that is equal to the fair market value of the Property
being released in connection with such payment.
Single Purpose Entity: Shall mean a Person, other than an
---------------------
individual, which (i) is formed or organized solely for the purpose of holding,
directly, an ownership interest in the Properties, (ii) does not engage in any
business unrelated to the Properties and the financing thereof, (iii) has not
and will not have any assets other than those related to its interest in the
Properties or the financing thereof or any indebtedness other
19
<PAGE>
than the Loan and trade payables incurred in the ordinary course of business and
paid within the time periods set forth in the Loan Documents, and in amounts not
to exceed those set forth in the Loan Documents, (iv) maintains its own separate
books and records and its own accounts, in each case which are separate and
apart from the books and records and accounts of any other Person, (v) holds
itself out as being a Person, separate and apart from any other Person, (vi)
does not and will not commingle its funds or assets with those of any other
Person, (vii) conducts its own business in its own name; (viii) maintains
separate financial statements, (ix) pays its own liabilities out of its own
funds, (x) observes all partnership formalities or corporate formalities or
limited liability company formalities, as applicable, (xi) maintains an
arm's length relationship with its Affiliates, (xii) pays the salaries of its
own employees, if any, and maintains a sufficient number of employees in light
of its contemplated business operations, (xiii) does not guarantee or otherwise
obligate itself with respect to the debts of any other Person or hold out its
credit as being available to satisfy the obligations of any other Person, (xiv)
does not acquire obligations or securities of its partners, members or
shareholders, (xv) allocates fairly and reasonably shared expenses, including,
without limitation, any overhead for shared office space, (xvi) uses separate
stationery, invoices, and checks, (xvii) does not and will not pledge its assets
for the benefit of any other Person or make any loans or advances to any other
Person, (xviii) does and will correct any known misunderstanding regarding its
separate identity, (xix) maintains adequate capital in light of its contemplated
business operations, and (xx) has and will have a partnership or operating
agreement, certificate of incorporation or other organizational document which
complies with the standards and requirements for a Single Purpose Entity set by
the Rating Agencies at such time. In addition, if such Person is a limited
partnership, (1) all general partners of such Person shall be Single Purpose
Entities, and (2) if such Person has more than one general partner, then the
organizational documents shall provide that such Person shall continue (and not
dissolve) for so long as a solvent general partner exists. In addition, if such
Person is a corporation, then, at all times: (a) such Person shall have at least
[two (2)] Independent Directors, and (2) the board of directors of such Person
may not take any action requiring the unanimous affirmative vote of 100% of the
members of the board of directors unless all of the directors, including an
Independent Director, shall have participated in such vote. In addition, if such
Person is a limited liability company, (1) the managing member shall be a Single
Purpose Entity, (2) its articles of organization, certificate of formation
and/or operating agreement, as applicable, shall provide that such entity will
dissolve only upon the bankruptcy of the managing member, and (3) if such Person
has more than one managing member, then the organizational documents shall
provide that such Person shall continue (and not dissolve) for so long as a
solvent managing member exists. In addition, such Person (1) without the
unanimous consent of all of the partners, directors or members, as applicable,
has not and will not with respect to itself or to any other Person in which it
has a direct or indirect legal or beneficial interest (a) seek or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator,
custodian or other similar official for such Person or all or any portion of
such Person's properties, or (b) take any action that might cause such Person to
become insolvent, (2) has and will maintain its books, records, resolutions and
agreements as official records, (3) has held and will hold its assets in its own
name, (4) has and will maintain its financial statements, accounting records and
other entity documents separate and apart from any other Person, and (5) has not
and will not identify its partners,
20
<PAGE>
members or shareholders, or any affiliates of any of them as a division or part
of it.
Specified Properties: As defined in Section 38(b) hereof.
-------------------- -------------
Substitute Property: As defined in Section 45(a) hereof.
------------------- -------------
Taking: Shall mean a temporary or permanent taking by any
------
Governmental Authority as the result or in lieu or in anticipation of the
exercise of the right of condemnation or eminent domain, of all or any part of
the Trust Estate, or any interest therein or right accruing thereto, including
any right of access thereto or any change of grade affecting a Property or any
part thereof.
Tax Opinion: Shall mean an Opinion of Counsel to the effect that a
-----------
contemplated action (a) will not result in any deemed exchange pursuant to
Section 1001 of the Code of the Note; and (b) will not adversely affect the
Note's or such other note's status as indebtedness for federal income tax
purposes.
Tenant: Shall mean any Person leasing, subleasing or otherwise
------
occupying any portion of a Property.
Threshold Amount: Shall mean $4,000,000.
----------------
TI and Leasing Reserve Account: As defined in the Cash Collateral
------------------------------
Agreement.
Title Company: Shall mean Chicago Title Insurance Company.
-------------
Total Loss: Shall mean (i) a casualty, damage or destruction of a
----------
Property, the cost of restoration of which (calculated in accordance with the
provisions of Section 6 hereof) would exceed twenty-five percent (25%) of the
---------
applicable Allocated Loan Amount, and with respect to which Grantor is not
required, under the applicable Leases to apply Proceeds to the restoration of
such Property or (ii) a permanent Taking of twenty-five percent (25%) or more of
the gross leasable area of a Property or so much of a Property, in either case,
such that it would be impracticable, in Beneficiary's sole discretion, even
after restoration, to operate such Property as an economically viable whole and
with respect to which the applicable Lease does not require such restoration.
Transfer: Shall mean sell, assign, convey, transfer, pledge or
--------
otherwise dispose of, or where used as a noun, a sale, assignment, conveyance,
transfer, pledge or other disposition.
Trust Estate: As defined in the Granting Clauses hereof, which
------------
shall, in any event, exclude any and all Replaced Property, and include any and
all Substitute Property.
Trustee: As defined in the recitals hereof.
-------
Trustees: Shall mean the Trustee, the Individual Trustee together
--------
with the Jurisdictional Trustee, all separate trustees and co-trustees appointed
as provided in Section 52 hereof.
----------
21
<PAGE>
UCC: As defined in Granting Clause (D) hereof.
---
U.S. Government Obligations: Any direct obligations of the United
---------------------------
States Government, including, without limitation, treasury bills, notes and
bonds.
Work: As defined in Section 6(b) hereof.
---- ------------
All accounting terms not specifically defined herein shall be
construed in accordance with GAAP. When used herein, the term "financial
statements" shall include the notes and schedules thereto. Unless otherwise
specified herein or therein, all terms defined in this Mortgage shall have the
defined meanings when used in any other Loan Document or in any certificate or
other document made or delivered pursuant thereto.
The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Mortgage shall refer to this Mortgage as a whole and
not to any particular provision of this Mortgage, and section, schedule and
exhibit references are to this Mortgage unless otherwise specified. The words
"includes" and "including" are not limiting and mean "including without
limitation."
In the computation of periods of time from a specified date to a later
specified date, the word "from" means "from and including;" the words "to" and
"until" each mean "to but excluding," and the word "through" means "to and
including."
References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto executed in
writing by all of the parties thereto and, if Beneficiary's consent was required
for the original of any such document, consented to by Beneficiary. All
references in this Mortgage to the plural of any document described herein shall
mean all of such documents collectively.
References to statutes or regulations are to be construed as including
all statutory and regulatory provisions consolidating, amending, or replacing
the statute or regulation.
The captions and headings of this Mortgage are for convenience of
reference only and shall not affect the construction of this Mortgage.
REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Grantor represents and warrants to, and covenants and agrees with,
Beneficiary as follows:
2. Warranty. (a) Grantor owns good, indefeasible and insurable fee
--------
simple title to the Land and the Improvements, subject only to the Permitted
Encumbrances. This Mortgage upon its due execution and proper recordation is
and will remain a valid and enforceable (and, with respect to all personalty (as
to which security interests are governed by the UCC), upon proper recordation
and the filing of a financing statement) perfected first Lien on and security
interest on the Land, Improvements and such personalty subject to the Permitted
Encumbrances. Grantor represents and warrants that none of the Permitted
Encumbrances will adversely affect (i) the ability of
22
<PAGE>
Grantor to pay any of its obligations to any Person as and when due, (ii) the
marketability of title to the Trust Estate, (iii) the fair market value of the
Trust Estate, or (iv) the use or operation of the Trust Estate as of the Closing
Date and thereafter. Grantor, subject to its rights as set forth in Section 38
of this Mortgage, will preserve its fee simple title to the Trust Estate for so
long as the Note remains outstanding and will warrant and defend same and the
validity and priority of the Lien hereof from and against any and all claims
whatsoever other than the Permitted Encumbrances.
(b) This Mortgage and each of the Loan Documents executed by Grantor,
is the legal, valid and binding obligation of Grantor, enforceable against
Grantor in accordance with their terms, subject to applicable bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
affecting creditor's rights generally in effect from time to time.
(c) Grantor owns good and insurable fee simple title to the
Properties, subject only to the Permitted Encumbrances. Grantor will preserve
its title to its Properties as warranted herein and will forever warrant and
defend same and the validity and priority of the Lien hereof from and against
any and all claims whatsoever;
(d) On the date hereof, no portion of the Improvements at any
Property has been materially damaged, destroyed or injured by fire or other
casualty which is not now fully restored or in the process of being restored;
(e) Grantor has, and will maintain in effect at all times until the
Indebtedness and Obligations are satisfied in full, (i) all necessary material
licenses, permits, authorizations, registrations and approvals to own, use,
occupy and operate each of the Properties as an office or industrial building,
as the case may be; (ii) full power and authority to carry on its business at
each of the Properties as currently conducted. Prior to the date hereof, Grantor
has not received any written notice of any currently uncured violation of any
such licenses, permits, authorizations, registrations or approvals that could
materially impair the value of the Property for which such notice was given or
which would affect the use or operation of any Property in any material respect
except for such matters as have been (i) previously disclosed to Beneficiary in
writing or (ii) cured or remedied;
(f) As of the date hereof, Grantor has not received any written
notice of any Taking or threatened Taking of any Property or any portion
thereof;
(g) Each Property and the Equipment located on such Property
constitutes all of the real property, equipment and fixtures currently owned by
Grantor or used in the operation of the business located on such Property;
(h) Each Property has adequate access to public streets, roads or
highways;
(i) Each Property constitutes a separate tax lot, with a separate tax
assessment, independent of any other land or improvements, except as previously
disclosed to Beneficiary in writing;
(j) All utility services necessary for the operation of each Property
have been connected and are available in adequate capacities directly
23
<PAGE>
from utility lines and without the need for private easements not presently
existing; and
(k) For so long as the Note remains unpaid, Grantor is not and shall
not be an "employee benefit plan" (within the meaning of Section 3(3) of ERISA)
to which ERISA applies and Grantor's assets do not and will not constitute plan
assets.
(l) Grantor is and shall remain a Single Purpose Entity.
3. Payment and Performance of Obligations Secured. Grantor shall
----------------------------------------------
promptly pay when due the principal of and interest on the Indebtedness and all
other payment Obligations secured by this Mortgage, all in lawful money of the
United States of America, and shall further perform fully and in a timely manner
all Obligations of Grantor. All sums payable by Grantor hereunder shall be paid
without demand, counterclaim, offset, deduction (except as required by law) or
defense. Grantor waives all rights now or hereafter conferred by statute or
otherwise to any such demand, counterclaim (other than mandatory counterclaims),
setoff, deduction (except to the extent the same may not, by law, be waived) or
defense.
4. Negative Covenants. Grantor covenants and agrees that it shall
------------------
not:
(a) incur, create or assume any indebtedness for borrowed money or
Transfer or lease the Trust Estate or any interest therein, except as permitted
under Sections 11 and 15 hereof;
------------------
(b) engage, directly or indirectly, in any business other than that
of entering into this Mortgage and the other Loan Documents to which Grantor is
a party and the ownership, management, leasing, construction, development,
operation and maintenance of the Trust Estate for its present and related uses;
(c) make advances or make loans to any Persons or entities (including
Affiliates of Grantor) or hold any investments (other than Permitted
Investments, Defeasance Collateral and Cash and Cash Equivalents) under this
Mortgage;
(d) partition any Property;
(e) commingle its assets with the assets of any of its Affiliates
except in connection with the Cash Collateral Agreement;
(f) guarantee any obligations of any Person;
(g) enter into any new management agreement for any of the Properties
without Beneficiary's consent;
(h) enter into any agreement for the sale of any asset or transfer of
any interest except as may be permitted hereby;
(i) amend or modify any of its organizational documents without
Beneficiary's consent;
24
<PAGE>
(j) dissolve, wind-up, terminate, liquidate, merge with or
consolidate into another Person, except as expressly permitted pursuant to this
Mortgage;
(k) engage in any activity that would subject it to regulation under
ERISA; or
(l) voluntarily file or consent to the filing of a petition for
bankruptcy, insolvency, reorganization, assignment for the benefit of creditors
or similar proceeding under any Federal or state bankruptcy, insolvency,
reorganization or other similar law or otherwise seek any relief under any laws
relating to the relief of debts or the protection of debtors generally, without
the unanimous consent of its [general partner(s)/managing member(s)) (including
the unanimous consent of the directors of the corporate [general
partner/managing member] or shareholders, as the case may be, which at all times
shall include the consent of the Independent Director.
5. Insurance.
---------
(a) Insurance Coverage Requirements. Grantor shall, at its sole
-------------------------------
cost and expense, keep in full force and effect insurance coverage of the types
and minimum limits as follows during the term of this Mortgage:
(i) Property Insurance. Insurance with respect to the
------------------
Improvements and the Building Equipment against any peril included within
the classification "All Risks of Physical Loss" with extended coverage in
amounts at all times sufficient to prevent Grantor from becoming a co-
insurer within the terms of the applicable policies, but in any event such
insurance shall be maintained in an amount equal to the full insurable
value of the Improvements and the Building Equipment (and must provide
coverage of any additional costs associated with applicable Legal
Requirements), and such policies shall be subject only to exclusions that
are standard and customary for properties comparable to the applicable
Property and acceptable to the Rating Agencies and Beneficiary. The term
"full insurable value" means the actual replacement cost of the
Improvements and the Building Equipment (without taking into account any
depreciation, and exclusive of excavations, footings and foundations,
landscaping and paving) (but in no event less than 125% of the applicable
Allocated Loan Amount) determined annually by an insurer, a recognized
independent insurance broker or an Independent Appraiser selected and paid
by Grantor and in no event less than the coverage required pursuant to the
terms of any Lease; provided, however, if the terms of the applicable
insurance policies expressly provide for insurance to be provided in the
amount of the actual replacement cost of the Improvements and the Building
Equipment or such policies contain a replacement cost endorsement, no such
annual determination will be necessary;
(ii) Liability Insurance. Comprehensive general liability
-------------------
insurance, including bodily injury, contractual injury, death and property
damage liability, and excess and/or umbrella liability insurance against
any and all claims, including all legal liability that could be imposed
upon Beneficiary, to the extent insurable, and all court costs and
attorneys' fees and expenses, arising out of or connected with the
possession, use, leasing, operation, maintenance or condition of each
Property in such amounts as are generally required by
25
<PAGE>
institutional lenders for properties comparable to the Properties written
on a per occurrence basis with a per occurrence limit of not less than
$1,000,000 and with an aggregate limit of not less than $5,000,000 per
Property;
(iii) Workers' Compensation Insurance. Statutory workers'
-------------------------------
compensation insurance (to the extent the risks to be covered thereby are
not already covered by other policies of insurance maintained by Grantor),
with respect to any work by or for Grantor performed on or about any
Property;
(iv) Loss of Rental Value. Loss of "rental value" or "business
--------------------
interruption" insurance in an amount sufficient to avoid any co-insurance
penalty and to provide Proceeds which will cover the loss of rents
sustained during the period of at least twelve (12) months following the
date of casualty (which casualty shall include damage by reason of
earthquake). Such policies of insurance shall be subject only to
exclusions that are acceptable to Beneficiary and the Rating Agencies. The
term "rental value" means the sum of (A) the total then ascertainable Rents
payable under the Leases and (B) the total ascertainable amount of all
other amounts to be received by Grantor from third parties which are the
legal obligation of Tenants, reduced to the extent such amounts would not
be received because of Operating Expenses not incurred during a period of
non-occupancy of that portion of such Property then not being occupied;
(v) Builder's All-Risk Insurance. During any period of
----------------------------
repair or restoration, builder's "all risk" insurance in an amount equal to
not less than the full insurable value of the applicable Property against
such risks (including fire and extended coverage and collapse of the
Improvements to agreed limits as Beneficiary may request, in form and
substance acceptable to Beneficiary.
(vi) Boiler and Machinery Insurance. To the extent
------------------------------
applicable, broad form boiler and machinery insurance (without exclusion
for explosion) covering all boilers or other pressure vessels, machinery
and equipment, if any, located in, on or about each Property and insurance
against loss of occupancy or use arising from any such breakdown in such
amounts as are generally available at commercially reasonable premiums and
are generally required by institutional lenders for properties comparable
to each Property;
(vii) Flood Insurance. If any Improvement on any Property is
---------------
located within an area designated as "flood prone" or a "special flood
hazard area" (as defined under the regulations adopted under the National
Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973),
flood insurance if available, in an amount equal to the lesser of the
Allocated Loan Amount for the applicable Property and the maximum limit of
coverage available with respect to the applicable Property, acceptable to
Beneficiary, provided, however, that if flood insurance shall be
unavailable from private carriers, flood insurance provided by the federal
or state government, if available;
(viii) Earthquake Insurance. Earthquake coverage with such
--------------------
limits and deductibles as are generally required by institutional lenders
for similar properties in the geographic area where the
26
<PAGE>
Properties are located, in any event at least equal to the lesser of the
Allocated Loan Amount for the applicable Property and the maximum limit of
coverage available with respect to the applicable Property. Such coverage
shall be placed with one or more reputable insurers and may insure
additional properties on a pooled risk basis. Notwithstanding the
foregoing, Grantor shall not be required to carry such earthquake coverage
with respect to Properties as of the date hereof, unless the same shall be
required by any Lease of such Property. In addition, if any Substitute
Property is located in California, if Grantor shall deliver to Beneficiary
a seismic study with respect to such Substitute Property located in
California, quantifying the probable maximum loss with respect thereto in
connection with an earthquake, which report shall be acceptable to
Beneficiary, Beneficiary shall waive the requirements of this clause (viii)
with respect to such Substitute Property, provided that no Lease of such
Substitute Property shall require such coverage; and
(ix) Other Insurance. At Beneficiary's reasonable request,
---------------
such other insurance, including but not limited to earthquake insurance,
with respect to the Trust Estate against loss or damage of the kinds from
time to time customarily insured against and in such amounts as are
generally required by institutional lenders on loans of similar amounts and
secured by properties comparable to the Properties.
(b) Ratings of Insurers. Grantor will maintain the insurance
-------------------
coverage described in Section 5(a) above, in all cases, with one or more
------------
domestic primary insurers acceptable to Beneficiary, having both (x) a claims-
paying-ability rating by Standard & Poor's Ratings Services of not less than
"AA" and its equivalent by any other Rating Agency, and (y) an Alfred M. Best
Company, Inc. ("Best") rating of "A" or better and a financial size category of
----
not less than IX. All insurers providing insurance required by this Mortgage
shall be authorized to issue insurance in the state where the Property insured
is located.
For the purposes hereof, "Maximum Foreseeable Casualty Loss" shall
---------------------------------
mean the estimate of a qualified fire protection engineer in connection with
Grantor's existing insurance package of the maximum probable casualty loss which
would be suffered in respect of the Improvements and Building Equipment for any
Property as a result of damage caused by the perils covered by the insurance
described in Section 59(a)(i).
----------------
The insurance coverage required under Section 5(a) may be effected
----------
under a blanket policy or policies covering the Trust Estate and other
properties and assets not constituting a part of the Trust Estate; provided that
any such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated to
the Trust Estate, and any sublimits in such blanket policy applicable to the
Trust Estate, which amounts shall not be less than the amounts required pursuant
to Section 5(a) and which shall in any case comply in all other respects with
------------
the requirements of this Section 5.
---------
(c) Form of Insurance Policies; Endorsements. All insurance policies
----------------------------------------
shall be in such form and with such endorsements and in such amounts
satisfactory to Beneficiary (and Beneficiary shall have the right to approve
amounts, form, risk coverage, deductibles, loss payees and insureds). A
certificate of insurance with respect to all of the above-mentioned insurance
27
<PAGE>
policies has been delivered to Beneficiary and originals or certified copies of
all such policies shall be delivered to Beneficiary when the same are available
and shall be held by Beneficiary. Grantor shall deliver to Beneficiary annually,
simultaneously with the renewal of the insurance policies required hereunder, an
Officer's Certificate stating that the insurance policies required to be
delivered to Beneficiary pursuant to this Section 5(c) are maintained with
------------
insurers who comply with the terms of Section 5(b) hereof, setting forth a
------------
schedule describing all premiums required to be paid by Grantor to maintain the
policies of insurance required under this Section 5, and stating that Grantor
---------
has paid such premiums. All such policies shall name Beneficiary as an
additional named insured, shall provide that all Proceeds (except with respect
to Proceeds of general liability and workers' compensation insurance) be payable
to Beneficiary as and to the extent set forth in Section 6 hereof, and shall
---------
contain: (i) a standard "non-contributory mortgagee" endorsement or its
equivalent relating, interalia, to recovery by Beneficiary notwithstanding the
negligent or willful acts or omissions of Grantor; (ii) a waiver of subrogation
endorsement in favor of Beneficiary; (iii) an endorsement providing that no
policy shall be impaired or invalidated by virtue of any act, failure to act,
negligence of, or violation of declarations, warranties or conditions contained
in such policy by Grantor, Beneficiary or any other named insured, additional
insured or loss payee, except for the willful misconduct of Beneficiary
knowingly in violation of the conditions of such policy; (iv) an endorsement
providing for a deductible per loss of an amount not more than that which is
customarily maintained by prudent owners of First Class properties comparable to
and in the general vicinities of the Properties, but in no event in excess of
$100,000, except in the case of earthquake coverage, for all applicable
Properties, for which such deductible shall not be in excess of that generally
required by institutional lenders on loans of similar amounts secured by
comparable properties; and (v) a provision that such policies shall not be
cancelled, terminated or expired without at least thirty (30) days' prior
written notice to Beneficiary, in each instance (or ninety (90) days in the case
of reinsurance). Certificates of insurance with respect to all replacement
policies shall be delivered to Beneficiary not less than ten (10) Business Days
prior to the expiration date of any of the insurance policies required to be
maintained hereunder which certificates shall bear notations evidencing payment
of applicable premiums. Originals (or certified copies) of such replacement
insurance policies shall be delivered to Beneficiary promptly after Grantor's
receipt thereof but in any case within thirty (30) days after the effective date
thereof. If Grantor fails to maintain and deliver to Beneficiary the
certificates of insurance required by this Mortgage, upon five (5) Business
Days' prior notice to Grantor, Beneficiary may, in accordance with the
provisions of Section 8 hereof, procure such insurance, and all costs thereof
---------
(and interest thereon at the Default Rate) shall be added to the Indebtedness.
Beneficiary shall not, by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
payment or defense of lawsuits, and Grantor hereby expressly assumes full
responsibility therefor and all liability, if any, with respect thereto.
(d) Compliance with Insurance Requirements. Grantor shall comply
--------------------------------------
with all Insurance Requirements and shall not bring or keep or permit to be
brought or kept any article upon any of the Property or cause or permit
28
<PAGE>
any condition to exist thereon which would be prohibited by any Insurance
Requirement, or would invalidate insurance coverage required hereunder to be
maintained by Grantor on or with respect to any part of any Property pursuant to
this Section 5. Notwithstanding anything to the contrary, it is expressly
---------
understood and agreed that any insurance which Grantor shall cause any Tenant to
provide that shall otherwise be in compliance with all of the terms and
conditions of this Section 5 shall satisfy Grantor's obligations with respect
---------
thereto hereunder.
(e) Separate Insurance. Grantor will not take out separate insurance
------------------
contributing in the event of loss with that required to be maintained pursuant
to this Section 5 unless such insurance complies with this Section 5.
--------- ---------
(f) Blanket Policies. Except in the case of public liability
----------------
upon Beneficiary's request, Grantor shall deliver to Beneficiary an Officer's
Certificate setting forth (i) the number of properties covered by such policy,
(ii) the location by city (if available, otherwise, county) and state of the
properties, (iii) the average square footage of the properties (or the aggregate
square footage), (iv) a brief description of the typical construction type
included in the blanket policy and (v) such other information as Beneficiary may
reasonably request.
6. Condemnation and Insurance Proceeds.
-----------------------------------
(a) Grantor will promptly notify Beneficiary in writing upon
obtaining knowledge of (i) the institution of any proceedings relating to any
Taking, or (ii) the occurrence of any casualty, damage or injury to, any
Property or any portion thereof the restoration of which is estimated by Grantor
in good faith to cost more than the Individual Threshold Amount. In addition,
notice of any casualty, damage, injury or Taking, the restoration of which is
estimated by Grantor in good faith to cost more than the Individual Threshold
Amount, shall set forth such good faith estimate of the cost of repairing or
restoring such casualty, damage, injury or Taking in reasonable detail if the
same is then available and, if not, as soon thereafter as it can reasonably be
provided.
(b) In the event of any Taking of or casualty or other damage or
injury to any Property, Grantor's rights, titles and interests in and to all
compensation, awards, proceeds, damages, claims, insurance recoveries, causes
and rights of action (whether accrued prior to or after the date hereof) and
payments which Grantor may receive or to which Grantor may become entitled with
respect to the Trust Estate or any part thereof other than payments received in
connection with any liability or loss of rental value or business interruption
insurance (collectively, "Proceeds"), in connection with any such Taking of, or
--------
casualty or other damage or injury to, any Property or any part thereof are
hereby assigned by Grantor to, and shall be paid to, Beneficiary. Such Proceeds
shall be applied by Beneficiary to prepay the Note in accordance with the
provisions thereof if (i) the Proceeds shall equal or exceed the Allocated Loan
Amount with respect to the applicable Property, (ii) an Event of Default shall
have occurred and be continuing, (iii) a Total Loss with respect to the
applicable Property shall have occurred, (iv) the Work is not capable of being
completed before the earlier to occur of the date which is six (6) months prior
to the Reset Date (as defined in the Note), and the date on which the business
interruption insurance carried by Grantor with respect to the applicable
Property shall expire, (v) the applicable Property is not
29
<PAGE>
capable of being restored substantially to its condition prior to such Taking or
casualty, or (vi) Grantor is unable to demonstrate to Beneficiary's satisfaction
its continuing ability to pay the Loan. Notwithstanding anything to the contrary
set forth in this Mortgage, however, and excluding situations requiring
prepayment of the Note, to the extent such Proceeds with respect to such
Property do not exceed [$500,000] (the "Casualty Amount"), or, if less than the
Casualty Amount but when aggregated with all other then unapplied Proceeds with
- ---------------
respect to any Property, do not exceed $4,000,000 in the aggregate, such
Proceeds are to be paid directly to Grantor to be applied to restoration of the
Trust Estate in accordance with the terms hereof. Subject to the provisions of
this Section 6(b) and Sections 6(d) and Section 6(c) hereof (except that
------------ ------------------------------
Proceeds paid in respect of the insurance described in Section 5(a)(iv) shall be
----------------
deposited directly into the Operating Account (as defined in the Cash Collateral
Agreement), promptly after the occurrence of any damage or destruction to all or
any portion of such Property or a Taking of a portion of such Property, in
either case which shall not constitute a Total Loss, Grantor shall either cause
such Property to be released from the lien of this Mortgage in accordance with
Section 38 hereof, or shall commence and diligently prosecute to completion,
- ----------
subject to Excusable Delays, the repair, restoration and rebuilding of such
Property (in the case of a partial Taking, to the extent it is capable of being
restored) (such repair, restoration and rebuilding are sometimes hereinafter
collectively referred to as the "Work") so damaged, destroyed or remaining after
----
such Taking in full compliance with all material Legal Requirements and free and
clear of any and all Liens except Permitted Encumbrances; it being understood,
however, that Grantor shall not be obligated to restore such Property to the
precise condition of such Property prior to any partial Taking of, or casualty
or other damage or injury to such Property, if the Work actually performed, if
any, or failed to be performed, shall have no material adverse effect on the
value of such Property from the value that such Property would have had if the
same had been restored to its condition immediately prior to such Taking or
casualty. Grantor will, in good faith and in a commercially reasonable manner,
file and prosecute the adjustment, compromise or settlement of any claim for
Proceeds and, subject to Grantor's right to receive the direct payment of any
Proceeds as provided above, and, with respect to Proceeds from a Total Loss,
subject to the provisions below and subject to the applicable terms of the
Leases, will cause the same to be paid directly to Beneficiary, to be held and
applied in accordance with the provisions of this Mortgage. Except upon the
occurrence and during the continuance of an Event of Default, Grantor may settle
any insurance claim with respect to Proceeds which does not exceed the Casualty
Amount. If an Event of Default shall have occurred and be continuing, or if
Grantor fails to file and/or prosecute any insurance claim for a period of
fifteen (15) Business Days following Grantor's receipt of written notice from
Beneficiary, Grantor hereby irrevocably empowers Beneficiary, in the name of
Grantor as its true and lawful attorney-in-fact, to file and prosecute such
claim (including settlement thereof) with counsel satisfactory to Beneficiary
and to collect and to make receipt for any such payment, all at Grantor's
expense (including payment of interest at the Default Rate for any amounts
advanced by Beneficiary pursuant to this Section 6(b)). In the event of (i) a
-------------
Total Loss resulting from a casualty, damage or destruction, if either (A) the
cost to repair the Property as estimated by the Independent Architect would
exceed the Casualty Amount and the restoration of the Property cannot reason
ably be completed before the date which is the later to occur of the date of
expiration of any business interruption insurance or the date of expiration of
any Letter of Credit posted in lieu thereof or in addition thereto and under
such circumstances Grantor is not required under the applicable Lease to make
30
<PAGE>
Proceeds available for restoration of the Property, or (B) Beneficiary elects
not to permit Grantor to restore such Property or (ii) a Total Loss resulting
from a Taking, Grantor shall be required to comply with the provisions of
Section 6(j) below and Beneficiary shall apply such Proceeds, first toward
- ------------
reimbursement of Beneficiary's reasonable costs and expenses in connection with
recovery of the Proceeds (as further described below), including, without
limitation, reasonable administrative costs and inspection fees, and then as
required by Section 6(j) hereof. Any Proceeds remaining after prepayment in
------------
part as set forth in Section 6(j) hereof shall be paid to Grantor or as it may
------------
direct in writing. Whether or not an Event of Default shall have occurred and
be continuing, Beneficiary shall have the right to approve, such approval not to
be unreasonably withheld, any settlement which might result in any Proceeds in
excess of the Casualty Amount and Grantor will deliver or cause to be delivered
to Beneficiary all instruments reasonably requested by Beneficiary to permit
such approval. Grantor will pay all reasonable costs, fees and expenses
reasonably incurred by Beneficiary (including all reasonable attorneys' fees and
expenses, the reasonable fees of insurance experts and adjusters and reasonable
costs incurred in any litigation or arbitration), and interest thereon at the
Default Rate to the extent not paid within five (5) Business Days after delivery
of a request for reimbursement by Beneficiary, in connection with the settlement
of any claim for insurance or Taking Proceeds and seeking and obtaining of any
payment on account thereof in accordance with the foregoing provisions. If any
Proceeds are received by Grantor and may be retained by Grantor pursuant to this
Section 6, such Proceeds shall, until the completion of the related Work, be
- ---------
held in trust for Beneficiary and shall be segregated from other funds of
Grantor to be used to pay for the cost of the Work in accordance with the terms
hereof, and in the event such Proceeds exceed the Casualty Amount, such Proceeds
shall be forthwith paid directly to and held by Beneficiary in a segregated
account in trust for Grantor, in each case to be applied or disbursed in
accordance with this Section 6.
---------
(c) In the event that any Proceeds (other than Proceeds paid with
respect to the insurance described in Section 5(a)(iv)) are in excess of the
-----------------
Threshold Amount, then all Proceeds (other than any portion of any Proceeds
paid with respect to the insurance described in Section 5(a)(iv) which shall be
----------------
deposited directly into the Operating Account) shall be paid over to Beneficiary
and shall be applied as follows: first, toward reimbursement of Beneficiary's or
its agent's reasonable costs and expenses in connection with recovery of the
Proceeds and disbursement of the Proceeds (as further described below),
including, without limitation, reasonable administrative costs and inspection
fees, and then, to the prepayment of the Indebtedness secured hereby (which
prepayment shall be made on the next Payment Date occurring after an elected or
required prepayment hereunder), without prepayment premium or penalty, only if:
(i) (A) the amount of the Proceeds is equal to or greater than
the outstanding principal amount of the Note, or
(B) the casualty or Taking occurs on a date which is less
than one hundred eighty (180) days prior to the Maturity Date (as defined
in the Note), or
(C) more than twenty-five percent (25%) of the rentable
area of the applicable Property shall have been the subject of a casualty
or shall have been taken,
or
31
<PAGE>
(ii) such Proceeds were the result of a Taking, and after
restoration is completed, there are excess Proceeds which were not required
to effect such restoration, in which event prepayment shall be made to the
extent of such unneeded Proceeds. Any excess Proceeds shall be applied to
the prepayment of the Indebtedness secured hereby (which prepayment shall
be made on the next Payment Date occurring after completion of the Work,
without penalty or premium).
(d) Upon the occurrence and during the continuance of an Event of
Default hereunder, or in the event that any Proceeds are required to be paid to
Beneficiary pursuant to subparagraph (b) above, then all Proceeds while an Event
of Default exists, and any such Proceeds so required to be paid to Beneficiary
shall be paid over to Beneficiary (if not paid directly to Beneficiary) and
shall be applied first toward reimbursement of Beneficiary's reasonable costs
and expenses (plus interest thereon at the Default Rate to the extent not paid
within five (5) Business Days after delivery of a request for reimbursement by
Beneficiary) actually incurred in connection with recovery of the Proceeds and
disbursement of the Proceeds (as further described below), including reasonable
administrative costs and inspection fees, and then to be applied or disbursed in
accordance with this Section 6.
---------
Subject to Grantor's rights pursuant to Section 38(a) to cause a
-------------
Property to be released from the Lien of this Mortgage, Grantor shall be
obligated to restore, or cause the applicable Tenant to restore, each Property
suffering a casualty or which has been subject to a partial Taking in
accordance with the provisions of this Section 6, whether or not the Proceeds
---------
shall be sufficient, provided that, if applicable, the Proceeds shall be made
available to Grantor by Beneficiary in accordance with this Mortgage.
(e) Except as otherwise provided in Section 6(j) below, in the event
------------
that any portion of such Proceeds is applied toward the repayment of the
Indebtedness (in which event Grantor shall not be obligated to restore pursuant
to subparagraph (c) above), Grantor shall be entitled to obtain from Beneficiary
a release without representation or warranty (in the form provided by Grantor)
of the applicable Property from the Lien and security interests created by this
Mortgage and the other Loan Documents and a release without representation or
warranty (in the form provided by Grantor) of Grantor from all liability with
respect to the other Loan Documents as they relate to the Property released from
the Lien of this Mortgage, provided that (i) no Event of Default exists and is
continuing, (ii) Grantor shall comply with the provisions hereof, and (iii)
Grantor pays to Beneficiary the amount, if any, by which one hundred twenty five
percent (125%) of the Allocated Loan Amount for such Property exceeds the
Proceeds received by Beneficiary and applied to repayment of the Indebtedness,
in which case the Allocated Loan Amount for such Property shall be reduced to
zero. If any Proceeds are applied to reduce the Indebtedness, Beneficiary shall
apply the same in accordance with the provisions of the Note. In the event that
Proceeds are used for the Work, any excess Proceeds remaining after completion
of such Work shall be paid to Grantor and shall not be required to be used to
prepay the Obligations.
(f) Upon the occurrence and during the continuance of an Event of
Default hereunder, all Proceeds shall be paid over to Beneficiary and shall be
applied first toward reimbursement of Beneficiary's reasonable costs and
expenses actually incurred in connection with recovery of the Proceeds and
disbursement of the Proceeds (as further described below), including, without
limitation, reasonable administrative costs and inspection fees, and then to
32
<PAGE>
the payment or prepayment of the Indebtedness secured hereby in accordance with
Sections 20 and 21.
- ------------------
(g) If Proceeds are not required to be applied towards payment of the
Indebtedness pursuant to the terms hereof, then Beneficiary shall make the
Proceeds which it is holding pursuant to the terms hereof (after payment of any
reasonable expenses actually incurred by Beneficiary in connection with the
collection thereof plus interest thereon at the Default Rate to the extent the
same are not paid within five (5) Business Days after request for reimbursement
by Beneficiary) available to Grantor for payment of or reimbursement of
Grantor's or the applicable Tenant's expenses incurred with respect to the Work,
upon the terms and subject to the conditions set forth below and in Section 6
---------
hereof:
(i) at the time of loss or damage or at any time thereafter
while Grantor is holding any portion of the Proceeds, there shall be no
continuing Event of Default hereunder;
(ii) if the estimated cost of the Work (as estimated by the
Independent Architect referred to in clause (iii) below) shall exceed the
Proceeds, Grantor shall, at its option (within a reasonable period of time
after receipt of such estimate) either deposit with or deliver to
Beneficiary (and promptly following any such deposit or delivery, Grantor
shall provide written notice of same to the Rating Agencies) (A) Cash and
Cash Equivalents, (B) a Letter or Letters of Credit in an amount equal to
the estimated cost of the Work less the Proceeds available, or (C) such
other evidence of Grantor's ability to meet such excess costs and which is
satisfactory to Beneficiary and the Rating Agencies; and
(iii) Beneficiary shall, within a reasonable period of time prior
to request for initial disbursement, be furnished with an estimate of the
cost of the Work accompanied by an Independent Architect's certification as
to such costs and appropriate plans and specifications for the Work. The
plans and specifications shall require that the Work be done in a first-
class workmanlike manner at least equivalent to the quality and character
of the original work in the Improvements (provided, however, that in the
case of a partial Taking, the Property restoration shall be done to the
extent reasonably practicable after taking into account the consequences of
such partial Taking), so that upon completion thereof, the Property shall
be at least equal in value and general utility to the Property prior to the
damage or destruction; it being understood, however, that neither Grantor
shall be obligated to restore such Property to the precise condition of
such Property prior to any partial Taking of, or casualty or other damage
or injury to, such Property, if the Work actually performed, if any, or
failed to be performed, shall have no material adverse effect on the value
of such Property from the value that such Property would have had if the
same had been restored to its condition immediately prior to such Taking or
casualty. Grantor shall restore all Improvements such that when they are
fully restored and/or repaired, such Improvements and their contemplated
use fully comply with all applicable material Legal Requirements including
zoning, environmental and building laws, codes, ordinances and regulations.
33
<PAGE>
(h) Disbursement of the Proceeds in Cash or Cash Equivalents to
Grantor shall be made from time to time (but not more frequently than once in
any month) by Beneficiary but only for so long as no Event of Default shall have
occurred and be continuing, as the Work progresses upon receipt by Beneficiary
of (i) an Officer's Certificate dated not more than ten (10) days prior to the
application for such payment, requesting such payment or reimbursement and
describing the Work performed that is the subject of such request, the parties
that performed such Work and the actual cost thereof, and also certifying that
such Work and materials are or, upon disbursement of the payment requested to
the parties entitled thereto, will be free and clear of Liens other than
Permitted Encumbrances and (ii) an Independent Architect's certificate
certifying performance of the Work together with an estimate of the cost to
complete the Work. No payment made prior to the final completion of the Work,
except for payment made to contractors whose Work shall have been fully
completed and from which final lien waivers have been received, shall exceed
ninety-five percent (95%) of the value of the Work performed and materials
furnished and incorporated into the Improvements from time to time, and at all
times the undisbursed balance of said Proceeds together with all amounts
deposited, bonded, guaranteed or otherwise provided for pursuant to clause
------
6(g)(ii) above, shall be at least sufficient to pay for the estimated cost of
- --------
completion of the Work; final payment of all Proceeds remaining with Beneficiary
shall be made upon receipt by Beneficiary of a certification by an Independent
Architect, as to the completion of the Work substantially in accordance with the
submitted plans and specifications, final lien releases, and the filing of a
notice of completion and the expiration of the period provided under the law of
the State in which the applicable Property is located for the filing of
mechanic's and materialmen's liens which are entitled to priority as to other
creditors, encumbrances and purchasers, as certified pursuant to an Officer's
Certificate, and delivery of a certificate of occupancy with respect to the
Work, or, if not applicable, an Officer's Certificate to the effect that a
certificate of occupancy is not required.
(i) If, after the Work is completed and all costs of completion have
been paid, there are excess Proceeds, then upon ten (10) days' prior written
notice from Grantor to Beneficiary, provided no Event of Default has occurred
and is then continuing, Grantor shall have the option of directing Beneficiary
to either (1) retain such Proceeds in the Capital and TI Reserve Account to be
applied by Grantor to the cost of improvements, alterations, tenant improvements
or other capital improvements at any of the Properties, or (2) apply such excess
Proceeds with respect to the Taking of or damage or injury to the Trust Estate
to the payment or prepayment of all or any portion of the Indebtedness secured
hereby without penalty or premium, provided, however, that any such prepayment
shall not reduce any Allocated Loan Amount.
(j) If (i) there is any casualty as to a Property that constitutes a
Total Loss and Beneficiary elects not to permit Grantor to restore such
Property, or (ii) there is any Taking as to a Property that constitutes a Total
Loss and Beneficiary elects to apply the Proceeds against the Indebtedness, or
(iii) Grantor is otherwise required to comply with this Section 6(j), then
------------
Grantor, in any such instance, must prepay the Note to the extent of the
Proceeds received up to an amount equal to 125% of the original Allocated Loan
Amount with respect to the relevant Property, and the Allocated Loan Amounts for
all other Properties shall be increased or decreased in the manner provided in
the definition of Allocated Loan Amount.
34
<PAGE>
7. Impositions, Liens and Other Items.
----------------------------------
(a) Grantor shall deliver to Beneficiary annually, no later than
fifteen (15) Business Days after the first day of each fiscal year of Grantor,
and shall update as new information is received, a schedule describing all
Impositions payable or estimated to be payable during such fiscal year
attributable to or affecting the Trust Estate or Grantor. Subject to Grantor's
right of contest set forth in Section 7(c) hereof, as set forth in the next two
------------
sentences, Beneficiary on behalf of Grantor shall pay all Impositions which are
attributable to or affect the Trust Estate or Grantor, prior to the date such
Impositions shall become delinquent or late charges may be imposed thereon,
directly to the applicable taxing authority with respect thereto. Beneficiary
shall direct the Agent under the Cash Collateral Agreement to pay to the taxing
authority such amounts to the extent funds in the Mortgage Escrow Account are
sufficient to pay such Impositions. If Grantor has delivered Mortgage Escrow
Security in lieu of maintaining the Mortgage Escrow Account, Grantor shall
either deposit in the Mortgage Escrow Account not less than three (3) Business
Days prior to the date the same are due an amount sufficient to pay such
Impositions, or Beneficiary shall draw down on the Mortgage Escrow Security in
such amount. Nothing contained in this Mortgage shall be construed to require
Grantor to pay any tax, assessment, levy or charge imposed on Beneficiary in the
nature of a franchise, capital levy, estate, inheritance, succession, income or
net revenue tax.
(b) Subject to its right of contest set forth in Section 7(c) hereof
------------
and its rights set forth in Sections 11(c) and 11(f) and 11(d), 11(f) hereof,
-----------------------------------------
Grantor shall at all times keep the Trust Estate free from all Liens (other than
the Lien hereof and Permitted Encumbrances) and shall pay when due and payable
all claims and demands of mechanics, materialmen, laborers and others which, if
unpaid, might result in or permit the creation of a Lien on the Trust Estate or
any portion thereof and shall in any event cause the prompt, full and
unconditional discharge of all Liens imposed on or against the Trust Estate or
any portion thereof within thirty (30) days after receiving written notice of
the filing (whether from Beneficiary, the lienor or any other Person) thereof.
Grantor shall do or cause to be done, at the sole cost of Grantor, everything
reasonably necessary to fully preserve the first priority of the Lien of this
Mortgage against the Trust Estate subject to the Permitted Encumbrances. Upon
the occurrence of an Event of Default with respect to its Obligations as set
forth in this Section 7, Beneficiary may (but shall not be obligated to) make
---------
such payment or discharge such Lien, and Grantor shall reimburse Beneficiary on
demand for all such advances pursuant to Section 16 hereof (together with
----------
interest thereon at the Default Rate).
(c) Nothing contained herein shall be deemed to require Grantor to
pay, or cause to be paid, any Imposition, to satisfy any Lien, or to comply with
any Legal Requirement or Insurance Requirement, so long as Grantor is in good
faith, and by proper legal proceedings, where appropriate, diligently contesting
the validity, amount or application thereof, provided that in each case, at the
time of the commencement of any such action or proceeding, and during the
pendency of such action or proceeding (i) no Event of Default shall exist and be
continuing hereunder, (ii) Grantor shall keep Beneficiary apprised of the status
of such contest; (iii) if Grantor is not providing security as provided in
clause (vi) below, adequate reserves with respect thereto are maintained on
Grantor's books in accordance with GAAP or in the Mortgage Escrow Account, (iv)
such contest operates to suspend collection or
35
<PAGE>
enforcement as the case may be, of the contested Imposition or Lien and such
contest is maintained and prosecuted continuously and with diligence or the
Imposition or Lien is bonded, (v) in the case of any Insurance Requirement, the
failure of Grantor to comply therewith shall not impair the validity of any
insurance required to be maintained by Grantor under Section 5 hereof or the
---------
right to full payment of any claims thereunder, and (vi) in the case of
Impositions and Liens in excess of $100,000 individually, or in the aggregate,
during such contest, Grantor, subject to the terms and conditions of the
applicable Lease, shall provide security in the form required by Section 6(g)
------------
(ii) hereof in an amount requested by Beneficiary but in no event less than 125%
- ----
of (A) the amount of Grantor's obligations being contested plus (B) any
additional interest, charge, or penalty arising from such contest.
Notwithstanding the foregoing, the creation of any such reserves or the
furnishing of any bond or other security, Grantor promptly shall comply with any
contested Legal Requirement or Insurance Requirement or shall pay any contested
Imposition or Lien, and compliance therewith or payment thereof shall not be
deferred, if, at any time the Trust Estate or any portion thereof shall be, in
Beneficiary's reasonable judgment, in imminent danger of being forfeited or lost
or Beneficiary is likely to be subject to civil or criminal damages as a result
thereof. If such action or proceeding is terminated or discontinued adversely to
Grantor, Grantor shall deliver to Beneficiary reasonable evidence of Grantor's
compliance with such contested Imposition, Lien, Legal Requirements or Insurance
Requirements, as the case may be.
8. Funds for Taxes and Insurance.
-----------------------------
Grantor shall pay into a segregated account (the "Mortgage Escrow
---------------
Account"), amounts sufficient to discharge the obligations of Grantor under
- -------
Sections 5 and 7(a) hereof as and when they become due (such amounts, the
- -------------------
"Mortgage Escrow Amounts"). As of the date hereof, Beneficiary shall initially
-----------------------
require payment into the Mortgage Escrow Account of a sum equal to one-twelfth
of the annual insurance premiums for all insurance being maintained by Grantor
as of the Closing Date. During each month thereafter, Beneficiary shall require
payment with respect to the annual Mortgage Escrow Amounts of a sum equal to
one-twelfth thereof, so that as each installment of such premiums and
Impositions shall become due and payable, Grantor shall have paid a sum
sufficient to pay the same. If the amount of such premiums and Impositions has
not been definitely ascertained by Grantor at the time when any such monthly
deposits are to be paid, Beneficiary shall require payment of Mortgage Escrow
Amounts based upon the amount of such premiums and Impositions paid for the
preceding year, subject to adjustment as and when the amount of such premiums
and Impositions are ascertained by Grantor.
(b) At any time, Grantor may elect to replace any Mortgage Escrow
Amounts then being retained by Agent and satisfy its obligations under this
Section 8 by delivery of a Letter of Credit (which Letter of Credit shall be
- ---------
either an "evergreen" Letter of Credit or shall not expire until a date two
months after the Maturity Date (as defined in the Note) or Cash and Cash
Equivalents (any such security, "Mortgage Escrow Security") in an amount
------------------------
reasonably estimated by Grantor to be one-half of the amount sufficient
(including the amount of any remaining Mortgage Escrow Amounts) to discharge the
Impositions and insurance premiums which shall become due during the twelve (12)
month period immediately after the date of delivery of such Mortgage Escrow
Security (and for each twelve (12) month period thereafter for so long as
Grantor elects to post such security in lieu of Beneficiary's retention of such
amounts). Cash Equivalents shall have maturities
36
<PAGE>
corresponding to the respective due dates of such obligations. Notwithstanding
the foregoing, it shall be a condition to Grantor's delivery of any Mortgage
Escrow Security (other than Cash) in satisfaction of its obligations under this
Section 8, that Grantor, at its expense, execute, acknowledge and deliver or
- ---------
cause to be delivered to Beneficiary such additional security agreements,
financing statements and other documents or instruments including an Opinion of
Grantor's Counsel, and take all such actions which in the reasonable opinion of
Beneficiary or its counsel may be necessary to grant and convey to Beneficiary a
perfected security interest in and to any and all of the Mortgage Escrow
Security.
(c) The Mortgage Escrow Amounts shall be held by Agent pursuant to
the Cash Collateral Agreement (and any Mortgage Escrow Security posted in lieu
thereof pursuant to Section 8(b) hereof shall be held by Beneficiary), and shall
------------
be applied in accordance with the Cash Collateral Agreement to the payment of
the obligations in respect of which such Mortgage Escrow Amounts were retained.
Notwithstanding the foregoing, however, if Grantor shall have posted Mortgage
Escrow Security in lieu of Mortgage Escrow Amounts, and Grantor shall deliver to
Beneficiary and Agent evidence of payment of the obligations in respect of which
such Mortgage Escrow Security was posted not less than thirty (30) days prior to
the date on which the same are due, then, Agent shall continue to hold such
Mortgage Escrow Security. Upon the occurrence of an Event of Default and the
acceleration of the Note, all or any portion of such Mortgage Escrow Amounts (or
any Mortgage Escrow Security posted in lieu thereof) may be applied to the
Indebtedness in such order or priority as Beneficiary may elect (subject to
Sections 20 and 21 hereof) and Beneficiary may exercise any of its rights or
- ------------------
remedies with respect to same hereunder, at law or in equity. In the absence of
such acceleration, any Mortgage Escrow Amounts held by Agent (or Mortgage Escrow
Security posted with Beneficiary) that exceed the actual obligations for which
they were retained, shall be held and applied to the next due obligations or
otherwise applied by Beneficiary in accordance with the terms hereof. Nothing
herein contained shall be deemed to affect any right or remedy of Beneficiary
under this Mortgage or otherwise at law or in equity, to pay any such amount and
to add the amount so paid to the Indebtedness hereby secured. Any such
application of said amounts or any portion thereof to any Indebtedness secured
hereby shall not be construed to cure or waive any Default or notice of Default
hereunder (or invalidate any act done pursuant to any such Default or notice)
until such amounts have been repaid to Beneficiary by Grantor.
(d) Grantor shall deliver to Beneficiary all tax bills, bond and
assessment statements, statements of insurance premiums, and statements for any
obligations referred to above as soon as the same are received by Grantor, and
Beneficiary shall cause the same to be paid when due to the extent of Mortgage
Escrow Amounts or Mortgage Escrow Security available therefor. It is expressly
acknowledged and agreed that Beneficiary shall have no obligation whatsoever to
advance from its own funds any amounts in payment of all or any portion of such
obligations.
9. License to Collect Rents. Beneficiary and Grantor hereby confirm
------------------------
that Beneficiary has granted to Grantor a license to collect and use the Rents
as they become due and payable under the Leases in accordance with the
provisions of the Assignment of Leases and the Cash Collateral Agreement, until
an Event of Default has occurred and is continuing provided that the existence
of such right shall not operate to subordinate this assignment of Leases to any
subsequent assignment, in whole or in part by Grantor, and any
37
<PAGE>
such subsequent assignment shall be subject to Beneficiary's rights under this
Mortgage. Grantor further agrees to execute and deliver such assignments of
leases as Beneficiary may from time to time reasonably request in order to
better assure, transfer and confirm to Beneficiary the rights intended to be
granted to Beneficiary with respect thereto. In accordance with the provisions
of the Assignment of Leases, upon the occurrence and during the continuance of
an Event of Default (1) Grantor agrees that Beneficiary may, but shall not be
obligated to, assume the management of the real property, and collect the Rents,
applying the same upon the Obligations and (2) Grantor hereby authorizes and
directs all tenants, purchasers or other persons occupying or otherwise
acquiring any interest in any part of the real property to pay the Rents due
under the Leases to Beneficiary upon Beneficiary's request. In the event
Beneficiary actually receives such Rents, after an Event of Default, any
application of the Rents by Beneficiary shall not constitute a misappropriation
of the Rents by Grantor pursuant to Section 33 hereof. From and after
----------
the occurrence of an Event of Default, Beneficiary shall have and hereby
expressly reserves the right and privilege (but assumes no obligation) to
demand, collect, sue for, receive and recover the Rents, or any part thereof,
now existing or hereafter made, and apply the same in accordance with this
Mortgage, the Assignment of Leases, and applicable law.
10. Security Agreement.
------------------
(a) Security Intended. Notwithstanding any provision of this
-----------------
Mortgage to the contrary, the parties intend that this document constitutes
security for the payment and performance of the Obligations and shall be a
"mortgage" or "deed of trust" under applicable law. If, despite that intention,
a court of competent jurisdiction determines that this document does not qualify
as a "trust deed" or "deed of trust" under applicable law, then ab initio, this
instrument shall be deemed a realty mortgage under applicable law and shall be
enforceable as a realty mortgage, and Grantor shall be deemed a "mortgagor,"
Beneficiary shall be deemed a "mortgagee," and Trustee shall have no capacity
(but shall be disregarded and all references to "Trustee" shall be deemed to
refer to the "mortgagee" to the extent not inconsistent with interpreting this
instrument as though it were a realty mortgage). As a realty mortgage, Grantor,
as mortgagor, shall be deemed to have conveyed the Property ab initio to
Beneficiary as mortgagee, such conveyance as a security to be void upon
condition that Grantor pay and perform all its Obligations. The remedies for any
violation of the covenants, terms and conditions of the agreements herein
contained shall be as prescribed herein or by general law, or, as to that part
of the security in which a security interest may be perfected under the UCC, by
the specific statutory consequences now or hereafter enacted and specified in
the UCC, all at Beneficiary's sole election.
(b) Fixture Filing. This Mortgage constitutes a financing
--------------
statement and, to the extent required under UCC (S)9-402(f) because portions of
the Property may constitute fixtures, this Mortgage is to be filed in the office
where a mortgage for the Land would be recorded. Beneficiary also shall be
entitled to proceed against all or portions of the Trust Estate in accordance
with the rights and remedies available under UCC (S)9-501(d). Grantor is, for
the purposes of this Mortgage, deemed to be the Debtor, and Beneficiary is
deemed to be the Secured Party, as those terms are defined and used in the UCC.
Grantor agrees that the Indebtedness and Obligations secured by this Mortgage
are further secured by security interests in all of Grantor's right, title and
interest in and to fixtures, equipment, and other property
38
<PAGE>
covered by the UCC, if any, which are used upon, in, or about the Trust Estate
(or any part) or which are used by Grantor or any other person in connection
with the Trust Estate. Grantor grants to Beneficiary a valid and effectual
security interest in all of Grantor's right, title and interest in and to such
personal property (but only to the extent permitted in the case of leased
personal property), together with all replacements, additions, and proceeds.
Except for Permitted Encumbrances, Grantor agrees that, without the written
consent of Beneficiary, no other security interest will be created under the
provisions of the UCC and no lease will be entered into with respect to any
goods, fixtures, equipment, appliances, or articles of personal property now
attached to or used or to be attached to or used in connection with the Trust
Estate except as otherwise permitted hereunder. Grantor agrees that all property
of every nature and description covered by the lien and charge of this Mortgage
together with all such property and interests covered by this security interest
are encumbered as a unit, and upon and during the continuance of an Event of
Default by Grantor, all of the Trust Estate, at Beneficiary's option, may be
foreclosed upon or sold in the same or different proceedings or at the same or
different time, subject to the provisions of applicable law. The filing of any
financing statement relating to any such property or rights or interests shall
not be construed to diminish or alter any of Beneficiary's rights of priorities
under this Mortgage.
11. Transfers, Indebtedness and Subordinate Liens. Unless such
---------------------------------------------
action is permitted by the provisions of this Section 11, Section 15, Section
---------- ---------- -------
38 or Section 45 hereof, Grantor will not (i) Transfer all or any part of the
- -- ----------
Trust Estate, (ii) incur indebtedness for borrowed money, (iii) mortgage,
hypothecate or otherwise encumber or grant a security interest in all or any
part of the Trust Estate, (iv) permit any transfer of any interest in Grantor
(except as set forth in clause (b) of this Section 11), or (v) file a
declaration of condominium with respect to any Property. Grantor shall deliver
to Beneficiary written notice pursuant to the provisions of Section 26 hereof
----------
of any such Transfer permitted pursuant to the provisions of this Section 11 or
----------
Section 15 hereof.
- ----------
In connection with any Transfer or any series of Transfers that
affects (on a cumulative basis) more than 10% of the value of the Trust Estate,
a Tax Opinion and a Nondisqualification Opinion shall be furnished to
Beneficiary.
(a) Sale of the Trust Estate. Grantor may transfer or dispose of
------------------------
Building Equipment which is being replaced or which is no longer necessary in
connection with the operation of a Property free from the Lien of this Mortgage
provided that such transfer or disposal will not materially adversely affect the
value of the Trust Estate taken as a whole, will not materially impair the
utility of such Property, and will not result in a reduction or abatement of, or
right of offset against, the Rents payable under any Lease, in either case as a
result thereof, and provided that any new Building Equipment acquired by Grantor
(and not so disposed of) shall be subject to the Lien of this Mortgage.
Beneficiary shall, from time to time, upon receipt of an Officer's Certificate
requesting the same and confirming satisfaction of the conditions set forth
above, execute a written instrument in form reasonably satisfactory to
Beneficiary to confirm that such Building Equipment which is to be, or has been,
sold or disposed of is free from the Lien of this Mortgage.
39
<PAGE>
(b) Transfer of Interests in Grantor. Notwithstanding anything
--------------------------------
contained herein to the contrary, Beneficiary's consent shall not be required
with respect to Transfers of direct or indirect beneficial interests in Grantor
if such Transfers are as a result of a sale of shares of Kilroy Realty Corp.,
which sale is effected through any recognized stock exchange or through the
"over-the-counter market".
(c) Indebtedness. Grantor shall not incur, create or assume any
------------
Debt or incur any liabilities without the consent of Beneficiary; provided,
however, that if no Event of Default shall have occurred and be continuing,
Grantor may, without the consent of Beneficiary, incur, create or assume any or
all of the following indebtedness (collectively, "Permitted Debt"):
--------------
(i) the Note and the other obligations, indebtedness and
liabilities specifically provided for in any Loan Document and secured by
this Mortgage and the other Loan Documents;
(ii) amounts, not secured by Liens on the Trust Estate (other
than liens being properly contested in accordance with the provisions of
this Mortgage), not to exceed $2,500,000, payable by or on behalf of
Grantor for or in respect of the operation of the Trust Estate in the
ordinary course of operating Grantor's business, provided that (but subject
to the terms of the next sentence) each such amount shall be paid within
sixty (60) days following the date on which each such amount was incurred.
Nothing contained herein shall be deemed to require Grantor to pay any
amount, so long as Grantor is in good faith, and by proper legal
proceedings, diligently contesting the validity, amount or application
thereof, provided that in each case, at the time of the commencement of any
such action or proceeding, and during the pendency of such action or
proceeding (i) no Event of Default shall exist and be continuing hereunder,
(ii) adequate reserves with respect thereto are maintained on the books of
Grantor in accordance with GAAP (as determined by the Independent
Accountant), and (iii) such contest operates to suspend collection or
enforcement, as the case may be, of the contested amount and such contest
is maintained and prosecuted continuously and with diligence.
Notwithstanding anything set forth herein, in no event shall Grantor be
permitted under this provision to enter into a note or other instrument for
borrowed money; and
(iii) amounts, not secured by Liens on the Trust Estate (other
than liens being properly contested in accordance with the provisions of
this Mortgage), payable or reimbursable to any Tenant on account of work
performed at a Property by such Tenant or for costs incurred by such Tenant
in connection with its occupancy of space in the Property, including for
tenant improvements (provided, however, that notwithstanding the foregoing,
in no event shall Grantor be permitted under this provision to enter into a
note or other instrument for borrowed money).
(d) Additional Permitted Transfers. Notwithstanding the above
------------------------------
provisions of this Section 11, Grantor may, without the consent of Beneficiary,
----------
(i) make immaterial transfers of portions of a Property to Governmental
Authorities for dedication or public use (subject to the provisions of Section
-------
6 hereof) or, portions of such Property to third parties, including owners of
- -
outparcels, or other properties for the purpose of erecting and operating
additional structures whose use is integrated with
40
<PAGE>
the use of such Property, and (ii) grant easements, restrictions, covenants,
reservations and rights of way in the ordinary course of business for access,
water and sewer lines, telephone and telegraph lines, electric lines or other
utilities or for other similar purposes or amend the Operating Agreements,
provided that no such transfer, conveyance or encumbrance set forth in the
foregoing clauses (i) and (ii) shall materially impair the utility and operation
of the applicable Property or materially adversely affect the value of the
applicable Property taken as a whole. If Grantor shall receive any net proceeds
in connection with any such transfer or other conveyance, Grantor shall have the
right to use any such proceeds in connection with any Alterations performed in
connection with, or required as a result of, such conveyance. Except as provided
below with respect to any Taking, the amount of any net proceeds received by
Grantor in excess of the cost of such Alterations shall be deposited in the
Capital and TI Reserve Account (which amounts shall be in addition to, and not
in lieu of, amounts otherwise required to be deposited pursuant to Section 48(b)
-------------
hereof, and shall be available to Grantor for use in performing any further or
other Alterations or with respect to the Properties. Any amounts held in such
account shall be invested in accordance with Section 3(j) of the Cash Collateral
Agreement. In connection with any transfer, conveyance or encumbrance permitted
pursuant to this Section 11(d), 11(f), Beneficiary shall execute and deliver any
--------------------
instrument reasonably necessary or appropriate, in the case of the transfers
referred to in clause (i) above, to release the portion of a Property affected
by such Taking or such transfer from the Lien of this Mortgage or, in the case
of clause (ii) above, to subordinate the Lien of this Mortgage to such
easements, restrictions, covenants, reservations and rights of way or other
similar grants by receipt by Beneficiary of:
(i) a copy of the instrument of transfer; and
(ii) an Officer's Certificate stating (x) with respect to
any Transfer, the consideration, if any, being paid for the Transfer and
(y) that such Transfer does not materially impair the utility and operation
of the affected Property or materially reduce its value.
All Taking Proceeds shall be applied in accordance with the provisions
of Section 6 hereof.
---------
(e) Not less than fifteen (15) Business Days prior to the closing of
(x) any transaction subject to the provisions of this Section 11 or (y) any
----------
transfer of a ten percent (10%) direct or indirect beneficial interest in
Grantor or (z) any transfer that shall result in a Person acquiring a greater
than 50% interest in Grantor or of any transfer that shall result in a Person
that had a greater than 50% interest in Grantor having less than a 50% interest
in Grantor, Grantor shall deliver to Beneficiary and the Rating Agencies (i) an
Officer's Certificate describing the proposed transaction and stating that such
transaction is permitted by this Section 11, together with any appraisal or
----------
other documents upon which such Officer's Certificate is based, and (ii) an
Opinion of Counsel to the transferee, addressed to the Rating Agencies and
Beneficiary and dated as of the date of the Transfer, to the effect that, in a
properly presented case, a bankruptcy court in a case involving such transferee
would not disregard the corporate or partnership form of such transferee so as
to consolidate the assets and liabilities of such transferee with those of
Grantor or their respective general partners. In addition, Grantor shall provide
Beneficiary and the Rating Agencies with copies of executed deeds, assignments
of Direct Beneficial Owner interests in
41
<PAGE>
Grantor, mortgages or other similar closing documents within ten (10) days after
such closing. Any Transfer described in clause (z) above shall be subject to the
prior written consent of Beneficiary, as well as delivery by the Rating Agencies
of written confirmation that any such Transfer will not result in the
withdrawal, qualification or downgrading of the then current ratings of any
Securities.
(f) Sale of the Property. (i) Grantor shall have the right to a
--------------------
one-time sale in whole of its interest in all the Properties to a Qualified
Purchaser, subject to the prior written approval of the Beneficiary which shall
not be unreasonably withheld, and the satisfaction of the following conditions:
(A) Beneficiary shall have received from Grantor at least thirty
(30) days' prior written notice of the date proposed for
such sale (the "Sale Date");
---------
(B) No Event of Default shall have occurred and be continuing as
of the date of such notice or the Sale Date;
(C) Grantor shall provide such evidence as may be reasonably
requested by Beneficiary with respect to the Qualified
Purchaser of real estate experience, qualifications and
creditworthiness and management ability of proposed
transferee and its property manager;
(D) The Qualified Purchaser shall have expressly agreed to
assume the obligations of Grantor under this Mortgage and
the other Loan Documents;
(E) All documents evidencing the purchase, including title
insurance endorsements insuring the first priority lien in
favor of Beneficiary pursuant to this Mortgage, are provided
to Beneficiary prior to the transfer and are reasonably
satisfactory to Beneficiary;
(F) Beneficiary shall receive opinions of counsel reasonably
acceptable to Beneficiary that contain equivalent opinions
to the extent applicable with respect to the Qualified
Purchaser that were given with respect to Grantor on the
date hereof, including, but not limited to, opinions that
Qualified Purchaser is duly organized and validly existing,
and that the Qualified Purchaser has duly assumed Grantor's
obligations and liabilities under the Loan Documents, as
well as an Opinion of Counsel addressed to the Rating
Agencies and Beneficiary and dated as of the Sale Date to
the effect that in a properly presented case, a bankruptcy
court in a case involving such transferee, or any Affiliate
thereof, would not disregard the corporate or partnership
forms of such entity, their Affiliates and/or their
partners, as the case may be, so as to consolidate the
assets and
42
<PAGE>
liabilities of such entity or entities and/or their
Affiliates with those of Grantor or their respective members
or general partners;
(G) Grantor shall pay all reasonable expenses and fees incurred
by Beneficiary, including all attorney's fees, as may be
requested by Beneficiary, in connection with the proposed
sale, and Grantor shall pay to Beneficiary upon the
consummation of the sale, a transfer fee equal to one
percent (1%) of the principal amount of the Note as of the
Sale Date;
(H) Grantor shall provide Beneficiary and the Rating Agencies
with copies of executed deeds, assignments of interest in
the Grantor, mortgages or other similar closing documents
within ten (10) days after such closing; and
(I) Any Transfer described in this clause (f),shall be
subject to the prior written consent of Beneficiary, as well
as delivery by the Rating Agencies of written confirmation
that any such Transfer will not result in the withdrawal,
qualification or downgrading of the then current ratings of
any Securities.
Upon the satisfaction of the conditions of this Section 11(f),
-------------
Grantor shall be released and Qualified Purchaser shall assume the rights and
obligations of the Grantor under this Mortgage.
(ii) Qualified Purchaser. A Qualified Purchaser shall mean a
-------------------
Single Purpose Entity, reasonably acceptable to Beneficiary and the Rating
Agencies, meeting such requirements of creditworthiness and real estate
experience ownership and/or management as Beneficiary shall deem pertinent
in its reasonable discretion.
12. Maintenance of Trust Estate; Alterations; Inspection; Utilities.
---------------------------------------------------------------
(a) Maintenance of Trust Estate. Grantor shall keep and maintain the
---------------------------
Trust Estate and every part thereof in good condition and repair, subject to
ordinary wear and tear, and, subject to Excusable Delays and the provisions of
this Mortgage with respect to damage or destruction caused by casualty events or
Takings, shall not permit or commit any waste, impairment, or deterioration of
any portion of the Trust Estate in any material respect. Grantor further
covenants to do all other acts which from the character or use of the Trust
Estate may be reasonably necessary to protect the security hereof, the specific
enumerations herein not excluding the general. Grantor shall not remove or
demolish any Improvement on any Property except as the same may be necessary in
connection with an Alteration or a restoration in connection with a Taking or
casualty in accordance with the terms and conditions hereof.
(b) No Changes in Use. Except as may be necessary in connection
-----------------
with an Alteration permitted by Section 12(c) hereof, Grantor shall not make any
-------------
changes or allow any changes to be made in the nature of the use of any Property
or any part thereof or initiate or take any action in furtherance of
43
<PAGE>
any change in any zoning or other land use classification affecting all or any
portion of a Property.
(c) Conditions to Alteration. Provided that no Event of Default
------------------------
shall have occurred and be continuing hereunder, Grantor shall have the right,
without Beneficiary's consent, to undertake any alteration, improvement,
demolition or removal of any Property or any portion thereof (any such
alteration, improvement, demolition or removal, an "Alteration") so long as (i)
----------
Grantor provides Beneficiary with prior written notice of any Material
Alteration, and (ii) any Alteration is undertaken in accordance with the
applicable provisions of this Mortgage and the other Loan Documents, is not
prohibited by any relevant Operating Agreements and the Leases and shall not
upon completion (giving credit to rent and other charges attributable to Leases
executed upon such completion) materially adversely (A) affect the value, use or
operation of such Property taken as a whole or (B) reduce the Net Operating
Income for such Property from the level available immediately prior to
commencement of such Alteration. Any Material Alteration with respect to any one
Property shall be conducted under the supervision of an Independent Architect
and no such Material Alteration shall be undertaken until five (5) Business Days
after there shall have been filed with Beneficiary, for information purposes
only and not for approval by Beneficiary, detailed plans and specifications and
cost estimates therefor, prepared by such Independent Architect, as well as an
Officer's Certificate stating that such Alteration will involve an estimated
cost of more than (I) the greater of the Individual Threshold Amount and
$_______ with respect to Alterations being undertaken at a single Property at
such time, or (II) the Aggregate Alteration Threshold Amount for Alterations at
all the Properties. Such plans and specifications may be revised at any time and
from time to time by such Independent Architect provided that material revisions
of such plans and specifications are filed with Beneficiary, for information
purposes only. All work done in connection with any Alteration shall be
performed with due diligence in a good and workmanlike manner, all materials
used in connection with any Alteration shall not be less than the standard of
quality of the materials currently used at such Property and all materials used
shall be in accordance with all applicable material Legal Requirements and
Insurance Requirements.
(d) Costs of Alteration. Notwithstanding anything to the contrary
-------------------
contained in Section 12(c) hereof, no Material Alteration nor any Alteration
-------------
which when aggregated with all other Alterations (other than Material
Alterations) then being undertaken by Grantor (exclusive of Alterations being
directly paid for by Tenants) at the Properties exceeds the Aggregate Alteration
Threshold Amount, shall be performed by or on behalf of Grantor unless Grantor
shall have delivered to Beneficiary Cash and Cash Equivalents and/or a Letter of
Credit as security in an amount not less than the estimated cost (exclusive of
costs to be funded from amounts held in any Account) of the Material Alteration
or the Alterations in excess of the Alteration Threshold Amount (as set forth in
the Independent Architect's written estimate referred to above). In addition to
payment or reimbursement from time to time of Grantor's expenses incurred in
connection with any Material Alteration or any such Alteration, the amount of
such security shall be reduced on any given date to the Independent Architect's
written estimate of the cost to complete the Material Alterations or the
Alterations (including any retainages), free and clear of Liens, other than
Permitted Encumbrances. Costs which are subject to retainage (which in no event
shall be less than 5%) shall be treated as due and payable and unpaid from the
date they would be due
44
<PAGE>
and payable but for their characterization as subject to retainage. In the event
that any Material Alteration or Alteration shall be made in conjunction with any
restoration with respect to which Grantor shall be entitled to withdraw Proceeds
pursuant to Sections 6(g) and 6(h) hereof, the amount of the Cash and Cash
----------------------
Equivalents and/or Letter of Credit to be furnished pursuant hereto need not
exceed the aggregate cost of such restoration and such Material Alteration or
Alteration (as estimated by the Independent Architect), less the sum of the
amount of any Proceeds which Grantor may be entitled to withdraw pursuant to
Sections 6(g) and 6(h) hereof and which are held by Beneficiary in accordance
- ----------------------
with Section 6 hereof. Payment or reimbursement of Grantor's expenses incurred
---------
with respect to any Material Alteration or any such Alteration shall be
accomplished upon the terms and conditions specified in Sections 6(g) through
-------------
6(h) hereof. At any time after substantial completion of any Material Alteration
- ----
or any such Alteration in respect whereof Cash and Cash Equivalents and/or a
Letter of Credit was deposited pursuant hereto, the whole balance of any Cash
and Cash Equivalents so deposited by Beneficiary and then remaining on deposit
(together with earnings thereon), as well as all retainages, may be withdrawn by
Grantor and shall be paid by Beneficiary to Grantor, and any other Cash and Cash
Equivalents and/or a Letter of Credit so deposited or delivered shall, to the
extent it has not been called upon, reduced or theretofore released, be released
to Grantor, within ten (10) days after receipt by Beneficiary of an application
for such withdrawal and/or release together with an Officer's Certificate, and
signed also (as to the following clause (i)) by the Independent Architect,
setting forth in substance as follows:
(i) that the Material Alteration or Alteration in respect of
which such Cash and Cash Equivalents and/or a Letter of Credit was
deposited has been substantially completed in all material respects in
accordance with any plans and specifications therefor previously filed with
Beneficiary under Section 12 hereof and that, if applicable, a certificate
----------
of occupancy has been issued with respect to such Material Alteration or
Alteration by the relevant Governmental Authority(ies) or, if not
applicable, that a certificate of occupancy is not required; and
(ii) that to the knowledge of the certifying Person all amounts
which Grantor is or may become liable to pay in respect of such Material
Alteration or Alteration through the date of the certification have been
paid in full or adequately provided for or are being contested in
accordance with Section 7(c) hereof and that lien waivers have been
------------
obtained from the general contractor and major subcontractors performing
such Material Alterations or Alterations (or such waivers are not customary
and reasonably obtainable by prudent managers in the area where such
Property is located).
(e) Right to Inspect. Beneficiary and any Persons authorized by it
----------------
may at all reasonable times and upon reasonable notice enter and examine such
Property and may inspect all work done, labor performed and materials furnished
in and about such Property subject in all instances to the rights of Tenants
under Leases. Beneficiary shall have no duty to make any such inspection and
shall have no liability or obligation for making (except for its negligence or
willful misconduct) or not making any such inspection.
13. Legal Compliance. (a) Grantor and the Trust Estate and the use
----------------
thereof materially comply with all Legal Requirements (as defined below).
Grantor represents and warrants that, as of the date hereof, it has not
45
<PAGE>
received notice of any violation of any Legal Requirement that remains
outstanding. Subject to Grantor's right to contest pursuant to Section 7(c)
------------
hereof, Grantor shall comply with all present and future laws, statutes, codes,
ordinances, orders, judgments, decrees, injunctions, rules, regulations and
requirements, and irrespective of the nature of the work to be done, of every
Governmental Authority including, without limitation, Environmental Laws,
consumer protection laws and all covenants, restrictions and conditions now or
hereafter of record which may be applicable to it or to any Property and the
Building Equipment thereon, or to the use, manner of use, occupancy, possession,
operation, maintenance, alteration, repair or reconstruction of any Property and
the Building Equipment thereon including, without limitation, building and
zoning codes and ordinances (collectively, the "Legal Requirements"), except
------------------
where the failure is not reasonably likely to have a Material Adverse Effect.
(b) Grantor currently holds all certificates of occupancy,
licenses, registrations, permits, consents, franchises and approvals of any
Governmental Authority which are necessary for Grantor's ownership and operation
of the Properties or which are necessary for the conduct of Grantor's business
thereon. All such certificates of occupancy, licenses, registrations, permits,
consents, franchises and approvals are current and will be kept current and in
full force and effect.
14. Books and Records, Financial Statements, Reports and Other
----------------------------------------------------------
Information.
- -----------
(a) Books and Records. Grantor will keep and maintain on a fiscal
-----------------
year basis proper books and records separate from any other Person, in which
accurate and complete entries shall be made of all dealings or transactions of
or in relation to the Note, the Trust Estate and the business and affairs of
Grantor relating to the Trust Estate, in accordance with GAAP. Beneficiary and
its authorized representatives shall have the right at reasonable times and upon
reasonable notice to examine the books and records of Grantor relating to the
operation of the Trust Estate and to make such copies or extracts thereof as
Beneficiary may reasonably require.
(b) Financial Statements.
--------------------
(i) Quarterly Reports. Not later than forty-five (45) days
-----------------
following the end of each calendar quarter (other than the fourth (4th)
quarter of any calendar year), Grantor will deliver to Beneficiary (with a
copy to the Rating Agencies) unaudited financial statements, internally
prepared, in accordance with GAAP, consistently applied, including a
balance sheet as of the end of such quarter, and a statement of revenues
and expenses through the end of such quarter, a statement of net operating
income for such quarter, a statement of profits and losses as to each
Property, and a comparison of the budgeted income and expenses and the
actual income and expenses for each quarter and year to date, together with
a detailed explanation of any variances between budgeted and actual amounts
that are greater than (x) $ , and (y) five percent (5%) or more for each
line item therein. Such statements for each quarter shall be accompanied by
an Officer's Certificate certifying to the best of the signer's knowledge,
(A) that such statements fairly represent the financial condition and
results of operations of Grantor in accordance with GAAP consistently
applied, (B) that as of the date of such Officer's Certificate, no Default
exists
46
<PAGE>
under this Mortgage, the Note or any other Loan Document or, if so,
specifying the nature and status of each such Default and the action then
being taken by Grantor or proposed to be taken to remedy such Default, (C)
the Debt Service Coverage Ratio for the preceding calendar quarter and
calendar year, and (D) that as of the date of each Officer's Certificate,
no litigation exists involving Grantor or the Trust Estate in which the
amount involved is $100,000 or more, or, if so, specifying such litigation
and the actions being taking in relation thereto in accordance with Section
-------
23 hereof. Such financial statements shall contain such other information
--
as shall be reasonably requested by Beneficiary for purposes of
calculations to be made by Beneficiary pursuant to the terms hereof.
(ii) Annual Reports. Not later than ninety (90) days after the
--------------
end of each fiscal year of Grantor's operations, Grantor will deliver to
Beneficiary (with a copy to the Rating Agencies) audited financial
statements certified by an Independent Accountant in accordance with GAAP
consistently applied, including a balance sheet as of the end of such year,
a statement of Net Operating Income for the year and for the fourth quarter
thereof and a statement of revenues and expenses for such year, and stating
in comparative form the figures for the previous fiscal year, as well as
the supplemental schedule of net income or loss presenting the net income
or loss for each Property and occupancy statistics for each Property. Such
annual financial statements shall also be accompanied by an Officer's
Certificate in the form required pursuant to Section 14(b) (i) hereof.
-----------------
Grantor shall pay a late charge equal to one percent (1%) of the
monthly interest and principal payment on the Note for each late submission of
the reports required pursuant to clauses (i) or (ii).
(c) Leasing Reports. (i) Not later than forty-five (45) days
---------------
after the end of each fiscal quarter of Grantor's operations, Grantor will
deliver to Beneficiary (with a copy to the Rating Agencies) a true and complete
rent roll for each Property (and aggregating the occupancy rate with respect to
all the Properties), dated as of the last month of such fiscal quarter, showing
the percentage of gross leasable area of each Property (and in the aggregate)
leased as of the last day of the preceding calendar quarter, the percentage of
lease roll-overs for each Property (and in the aggregate) for the preceding
calendar quarter, a summary of new lease signings [(including tenant name,
square footage occupied and designation of the tenant's operations as national,
regional or local)] and lease terminations for the preceding calendar quarter,
the current annual rent for each Property, the expiration date of each lease,
the various options, if any, available to the tenant with respect to renewal
(including the amount of the rent in the event of renewal), whether to Grantor's
knowledge any portion of the Property has been sublet, and if it has, the name
of the subtenant, and such rent roll shall be accompanied by an Officer's
Certificate certifying that such rent roll is true, correct and complete in all
respects as of its date and stating whether Grantor, within the past three
months, has issued a notice of default with respect to any Lease which has not
been cured and the nature of such default.
(ii) Not later than sixty (60) days after the end of each
calendar year, Grantor shall deliver to Beneficiary a written report containing
the following information: (1) the percentage of Leases
47
<PAGE>
which expired pursuant to scheduled expiration dates during the preceding
calendar year, (2) a list of Leases which are triple net leases and a list of
Leases which are not triple net leases, (3) a summary of each Lease signed
during the preceding calendar year, including tenant name, net rentable or gross
leasable square feet demised, and a designation as to whether the applicable
Tenant's operations are national, regional or local, (4) a list of Leases which
were terminated during the preceding calendar year, (5) a summary of renewal
options available under each Lease (which summary shall specify the rental
amounts due during any such renewal period), (6) whether to Grantor's knowledge
any Tenant has sublet any portion of its premises, and the names of any such
subtenants, and (7) whether any portion of any Property is vacant. The foregoing
report shall be accompanied by an Officer's Certificate of Grantor or by an
Officer's Certificate of Grantor delivering said report certifying that such
report is true, correct and complete in all material respects.
(d) Capital Expenditures Summaries. Grantor shall, within
------------------------------
forty-five (45) days after the end of each calendar year during the term of the
Notes, deliver to Beneficiary and the Rating Agencies an annual summary of any
and all capital expenditures made at each Property during the prior twelve (12)
month period.
(e) Other Information. Grantor will, promptly after written
-----------------
request by Beneficiary or the Rating Agencies, furnish or cause to be furnished
to Beneficiary, in such manner and in such detail as may be reasonably requested
by Beneficiary, such reasonable additional information as may be reasonably
requested by Beneficiary with respect to the Trust Estate.
15. Compliance with Leases and Agreements.
-------------------------------------
(a) Leases and Operating Agreements. The Leases and the Operating
-------------------------------
Agreements, if any, are in full force and effect. Grantor has neither given to,
nor received any notice of default from, any party to any of the Operating
Agreements, if any, or any Lease which remains uncured. To the best of Grantor's
knowledge, except as set forth in estoppel certificates delivered to Beneficiary
and the Rating Agencies prior to the date hereof, no events or circumstances
exist which with or without the giving of notice, the passage of time or both,
may constitute a default under any of the Operating Agreements or the Leases on
the part of Grantor, or party thereunder. Grantor has complied with and
performed all of its material construction, improvement and alteration
obligations with respect to each Property required under the Operating
Agreements and the Leases. Grantor will promptly after receipt thereof deliver
to Beneficiary a copy of any notice received with respect to the Operating
Agreements and the Leases, claiming that Grantor is in default in the
performance or observance of any of the material terms, covenants or conditions
of any of the Operating Agreements or the Leases.
(b) New Leases. Grantor may, at all times, lease to any Person space
----------
within each Property in a manner consistent with other First Class properties
comparable to the applicable Property and then current market conditions
existing in the applicable market area in which such Property is located, and
otherwise in accordance with this Mortgage. Each Material Lease entered into
after the date hereof (including the renewal or extension on or after the date
hereof of any Lease entered into prior to the date hereof if the rent payable
during such renewal or extension, or a formula or other
48
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method to compute such rent, is not provided for in such Lease (such a renewal
or extension a "Renewal Lease")) (A) shall provide for payment of rent and all
-------------
other material amounts payable thereunder at rates at least equal to the fair
market rental value (taking into account the type and creditworthiness of the
tenant, the length of tenancy, free rent periods and all other concessions to be
granted to the tenant by the landlord thereunder, and the location and size of
the unit so rented), as of the date such Material Lease is executed by Grantor,
of the space covered by such Material Lease or Renewal Lease for the term
thereof, including any renewal options, and (B) shall not contain any provision
whereby the rent payable thereunder would be based, in whole or in part, upon
the net income or profits derived by any Person from the Property (provided,
however, that it may contain a provision in which a portion of rent may be
payable based on a percentage of gross income), and (C) shall not prevent
Proceeds from being held and disbursed by Beneficiary in accordance with the
terms hereof, and (D) shall not entitle any tenant to receive and retain
Proceeds except those that may be specifically awarded to it in condemnation
proceedings because of the Taking of its trade fixtures and its leasehold
improvements which have not become part of the realty and such business loss as
tenant may specifically and separately establish. Grantor may not, without the
consent of Beneficiary, amend, modify or waive the provisions of any Material
Lease or terminate, reduce rents under or shorten the term of any Material Lease
in any manner which would have a material adverse effect on the applicable
Property taken as a whole.
(c) No Default Under Leases. Grantor shall (i) promptly perform and
-----------------------
observe all of the material terms, covenants and conditions required to be
performed and observed by Grantor under the Leases and the Operating Agreements,
if the failure to perform or observe the same would materially and adversely
affect the value of any Property; (ii) exercise, within fifteen (15) Business
Days after a written request by Beneficiary, any right to request from the
Tenant under any Lease or the party to any Operating Agreement a certificate
with respect to the status thereof; and (iii) not collect any of the Rents under
the Leases more than one (1) month in advance (except that Grantor may collect
such security deposits as are permitted by Legal Requirements and are
commercially reasonable in the prevailing market and collect other charges in
accordance with the terms of each Lease).
(d) Subordination, Non-Disturbance and Attornment. All Leases
---------------------------------------------
entered into by Grantor after the date hereof, if any, shall be subject and
subordinate to this Mortgage; provided that, Beneficiary shall enter into, and,
if required by applicable law to provide constructive notice, record in the
county where the subject Property is located, a subordination, attornment and
non-disturbance agreement, in form and substance substantially similar to the
form attached hereto as Exhibit "C" (a "Nondisturbance Agreement"), with any
---------- ------------------------
Tenant entering into a Lease after the date hereof or, within ten (10) Business
Days after written request therefor by Grantor, with any other Tenant under any
Lease or prospective Lease (other than a Lease to an Affiliate of Grantor)
existing on the date hereof or made or to be made in accordance with the
provisions of this Section 15, provided that, with respect to any Lease entered
----------
into after the date hereof, such request is accompanied by an Officer's
Certificate stating that such Lease complies in all respects with this Section
-------
15. All reasonable costs and expenses of Beneficiary in connection with the
- --
negotiation, preparation, execution and delivery of any Nondisturbance Agreement
including, without limitation, reasonable attorneys' fees and disbursements
shall be paid by Grantor. Beneficiary shall enter into a Nondisturbance
Agreement or an agreement in any other form reasonably
49
<PAGE>
requested by such Tenant, provided that the same does not materially increase
the obligations or liabilities of Beneficiary from what the same would have been
under the form of Nondisturbance Agreement attached hereto.
16. Beneficiary's Right to Perform. Upon the occurrence and during
------------------------------
the continuance of an Event of Default with respect to the performance of any of
the Obligations contained herein, Beneficiary may, without waiving or releasing
Grantor from any Obligation or Default under this Mortgage, but shall not be
obligated to, at any time perform the same, and the cost thereof, with interest
at the Default Rate from the date of payment by Beneficiary to the date such
amount is paid by Grantor, shall immediately be due from Grantor to Beneficiary
and the same shall be secured by this Mortgage and shall be a Lien on the Trust
Estate prior to any right, title to, interest in or claim upon the Trust Estate
attaching subsequent to the Lien of this Mortgage (subject to the provisions of
Section 11(d), 11(f) hereof). No payment or advance of money by Beneficiary
- --------------------
under this Section 16 shall be deemed or construed to cure Grantor's Default or
-----------
waive any right or remedy of Beneficiary hereunder.
17. Grantor's Existence; Organization and Authority. For so long as
-----------------------------------------------
this Mortgage remains of record with respect to any of the Properties, Grantor
shall do all things necessary to preserve and keep in full force and effect its
existence, rights and privileges as a limited partnership and its right to own
property or transact business in all states in which the Properties are located.
For so long as any portion of the Indebtedness shall remain outstanding, Grantor
shall do all things necessary to continue to be, a Single Purpose Entity
(including without limitation, ensuring that each general partner or managing
member, as applicable, continues as a Single Purpose Entity), and shall prevent
any general partner of Grantor from amending such general partner's articles of
incorporation or bylaws, or other formation documents, in any manner that would
enable such general partner to expand Grantor's business purposes beyond those
specified in such documents as of the date hereof. Grantor hereby represents
and warrants that [each of _______________ and _______________] (i) is a duly
organized and validly existing [limited partnership/corporation/limited
liability company] under the laws of the State of Delaware, (ii) has the
[corporate] power and authority to own its properties and to carry on its
business as now being conducted and as proposed to be conducted and is qualified
to do business in all States in which the Properties are located, and (iii) has
the requisite power to execute and deliver and perform its obligations under
this Mortgage, the Note and each of the other Loan Documents. The execution and
delivery by Grantor of this Mortgage, the Note and each of the other Loan
Documents to be executed by Grantor, Grantor's performance of its respective
obligations thereunder and the creation of the security interest and Liens
provided for in this Mortgage have been duly authorized by all requisite action
on the part of Grantor, and will not violate in any material respect any Legal
Requirement, any order of any court or other Governmental Authority, Grantor's
certificate of limited partnership or partnership agreement or any material
indenture, agreement or other instrument to which Grantor is a party, or by
which Grantor is bound; and will not conflict with, result in a breach of, or
constitute (with due notice or lapse of time or both) a default under any of the
foregoing, or result in the creation or imposition of any Lien, of any nature
whatsoever, upon any of the property or assets of Grantor except the Liens
created hereunder. Grantor is not required to obtain any consent, approval or
authorization from or to file any declaration or statement with, any
Governmental Authority in connection with or as a condition to the execution,
50
<PAGE>
delivery or performance of this Mortgage, the Note or the other Loan Documents
by Grantor other than those which have already been obtained or filed. Grantor
further represents and warrants that it is and, so long as any portion of the
Indebtedness shall remain outstanding, shall do all things necessary to continue
to be, a Single-Purpose Entity.
18. Protection of Security; Costs and Expenses. Grantor shall appear
------------------------------------------
in and defend any action or proceeding of which it has notice purporting to
affect the security hereof or the rights or powers of Beneficiary or Trustee
hereunder and shall pay all costs and expenses, including, without limitation,
cost of evidence of title and reasonable attorneys' fees and disbursements, in
any such action or proceeding, and in any suit brought by Beneficiary to
foreclose this Mortgage or to enforce or establish any other rights or remedies
of Beneficiary hereunder upon the occurrence and during the continuance of an
Event of Default. If an Event of Default occurs under this Mortgage, or if any
action or proceeding is commenced in which it becomes necessary to defend or
uphold the Lien or priority of this Mortgage or which adversely affects
Beneficiary or Beneficiary's interest in the Trust Estate or any part thereof,
including, but not limited to, eminent domain, enforcement of, or proceedings of
any nature whatsoever under any Legal Requirement affecting the Trust Estate or
involving Grantor's bankruptcy, insolvency, arrangement, reorganization or other
form of debtor relief, then Beneficiary, upon reasonable notice to Grantor, may,
but without obligation to do so and without releasing Grantor from any
obligation hereunder, make such appearances, disburse such reasonable sums and
take such action as Beneficiary reasonably deems necessary or appropriate to
protect Beneficiary's interest in the Trust Estate, including, but not limited
to, disbursement of reasonable attorneys' fees, entry upon the Trust Estate to
make repairs or take other action to protect the security hereof, and payment,
purchase, contest or compromise of any encumbrance, charge or lien which in the
reasonable judgment of Beneficiary appears to be prior or superior hereto;
provided, however, that the foregoing shall be subject to Grantor's rights to
contest under Section 7(c) hereof and Beneficiary shall not pay or discharge any
------------
lien, encumbrance or charge being contested by Grantor in accordance with
Section 7(c) hereof. Grantor further agrees to pay all reasonable costs and
- ------------
expenses of Beneficiary or Trustee including reasonable attorneys' fees and
disbursements incurred by Beneficiary or Trustee in connection with (a) the
negotiation, preparation, execution, delivery and performance of this Mortgage,
the Note and the other Loan Documents, and (b) the performance of its
obligations and exercise of its rights under this Mortgage, the Note, and the
other Loan Documents. All of the costs, expenses and amounts set forth in this
Section 18 shall be payable by Grantor, on demand and, together with interest
- ----------
thereon at the Default Rate, if the same are not paid within five (5) Business
Days after demand therefor by Beneficiary (or Trustee), until the date of
repayment by Grantor, shall be deemed to be Indebtedness hereunder and shall be
a Lien on the Trust Estate prior to any right, title, interest or claim upon the
Trust Estate (subject to the provisions of Section 11 hereof). Nothing
----------
contained in this Section 18 shall be construed to require Beneficiary to incur
----------
any expense, make any appearance, or take any other action.
19. Management of the Trust Estate.
------------------------------
(a) For purposes hereof, a "Qualifying Manager" shall mean any
------------------
property manager acceptable to Beneficiary. Beneficiary acknowledges that as of
the date hereof [_________] is a Qualifying Manager. Grantor shall notify
51
<PAGE>
Beneficiary and the Rating Agencies in writing (and shall deliver a copy of the
proposed management agreement) of any entity proposed to be designated as a
Qualifying Manager of all or any of the Properties no less than 30 days before
such Qualifying Manager begins to manage such Property(ies) and shall obtain
prior to any appointment of a Qualifying Manager a written confirmation from the
Rating Agencies that retention of such other Person as Manager shall not result
in a downgrade, withdrawal or qualification of the then ratings of any
securities backed in part by this Mortgage.
(b) It is acknowledged and agreed that a Qualifying Manager may be
retained at Beneficiary's direction at any time following the occurrence and
during the continuance of an Event of Default and at any time following the
eighth (8th) anniversary hereof.
(c) Upon the retention of a Qualifying Manager, Beneficiary shall
have the right to approve (which approval shall not be unreasonably withheld or
delayed) any new management agreement with such Qualifying Manager. Grantor
shall provide a copy of such new management agreement to the Rating Agencies.
(d) It is acknowledged and agreed that, pursuant to the provisions of
the Manager's Consent, Beneficiary has certain rights to terminate the existing
management agreement.
20. Remedies. Upon the occurrence and during the continuation of an
--------
Event of Default, Beneficiary may take such actions against Grantor, subject to
Section 33 hereof, and/or against Trust Estate or any portion thereof as
- ----------
Beneficiary determines is necessary to protect and enforce its rights hereunder,
without notice or demand except as set forth below or as required under
applicable law. Any such actions taken by Beneficiary shall be cumulative and
concurrent and may be pursued independently, singly, successively, together or
otherwise, at such time and in such order as Beneficiary may determine in its
sole discretion, to the fullest extent permitted by law, without impairing or
otherwise affecting the other rights and remedies of Beneficiary permitted by
law, equity or contract or as set forth herein or in the other Loan Documents.
Beneficiary's determination of appropriate action may be based on an appropriate
real estate or other consultant and/or counsel, and Beneficiary may rely
conclusively on such advice. Grantor shall pay such consultant's and attorney's
reasonable fees and expenses incurred by Beneficiary pursuant to this Section
-------
20. Such actions may include, without limitation, the following:
- --
(a) Acceleration. Subject to any applicable provisions of the Note
------------
and the other Loan Documents, Beneficiary may declare all or any portion of the
unpaid principal balance under the Note, together with all accrued and unpaid
interest thereon, and all other unpaid Indebtedness, to be immediately due and
payable.
(b) Entry. Subject to the provisions and restrictions of applicable
-----
law, Beneficiary, personally, or by its agents or attorneys, at Beneficiary's
election, may enter into and upon all or any part of the Trust Estate (including
any Property and any part thereof), and may exclude Grantor, its agents and
servants therefrom (but such entry shall be subject to any Nondisturbance
Agreements then in effect); and Beneficiary, having and holding the same, may
use, operate, manage and control the Trust Estate or any part thereof and
conduct the business thereof, either personally or by its
52
<PAGE>
superintendents, managers, agents, servants, attorneys or receiver. Upon every
such entry, Beneficiary may, at the reasonable expense of the Trust Estate
and/or Grantor, from time to time, either by purchase, repair or construction,
maintain and restore the Trust Estate or any part thereof, and may insure and
reinsure the same in such amount and in such manner as may seem to them to be
advisable. Similarly, from time to time, Beneficiary may, at the expense of
Grantor (which amounts may be disbursed by Beneficiary from the Trust Estate on
behalf of Grantor), make all necessary or proper repairs, renewals,
replacements, alterations, additions, betterments and improvements to and on the
Trust Estate or any part thereof as it may seem advisable. Beneficiary or its
designee shall also have the right to manage and operate the Trust Estate or any
part thereof and to carry on the business thereof and exercise all rights and
powers of Grantor with respect thereto, either in the name of Grantor or
otherwise, as may seem to them to be advisable. In confirmation of the grant
made in Granting Clause (E) hereof, in the case of the occurrence and
continuation of an Event of Default, Beneficiary shall be entitled to collect
and receive all earnings, revenues, rents, issues, profits and income of the
Trust Estate or any part thereof (i.e., the "Rents") to be applied in the order
-----
of priorities and amounts as shall be provided for in Section 21 hereof.
----------
Beneficiary shall be liable to account only for rents, issues and profits and
other proceeds actually received by Beneficiary. All actions which may be taken
by Beneficiary pursuant to this Section 20(b) may be taken by the Jurisdictional
-------------
Trustee, upon the direction of Beneficiary. Beneficiary or the Jurisdictional
Trustee, as applicable, shall be liable to account only for rents, issues and
profits and other proceeds actually received by Beneficiary or the
Jurisdictional Trustee.
(c) Foreclosure. Prior to taking title to any Property (whether by
-----------
foreclosure, deed in lieu or otherwise), Beneficiary shall obtain, in each
instance, at Grantor's reasonable expense a new phase I environmental report
with respect to each Property, and such additional environmental studies as may
be recommended in such phase I reports.
(i) Beneficiary, with or without entry, personally or by
its agents or attorneys, insofar as applicable, and in addition to any and
every other remedy, may (i) sell or instruct the Jurisdictional Trustee, if
applicable, to sell, to the extent permitted by law and pursuant to the
power of sale granted herein, all and singular the Trust Estate, and all
estate, right, title and interest, claim and demand therein, and right of
redemption thereof, at one or more sales, as an entirety or in parcels, and
at such times and places as required or permitted by law and as are
customary in any county or parish in which a Property is located and upon
such terms as Beneficiary may fix and specify in the notice of sale to be
given to Grantor (and on such other notice published or otherwise given as
provided by law), or as may be required by law; (ii) institute (or instruct
the Jurisdictional Trustee to institute) proceedings for the complete or
partial foreclosure of this Mortgage under the provisions of the laws of
the jurisdiction or jurisdictions in which the Trust Estate or any part
thereof is located, or under any other applicable provision of law; or
(iii) take all steps to protect and enforce the rights of Beneficiary,
whether by action, suit or proceeding in equity or at law (for the specific
performance of any covenant, condition or agreement contained in this
Mortgage, or in aid of the execution of any power herein granted, or for
any foreclosure hereunder, or for the enforcement of any other appropriate
legal or equitable remedy), or otherwise, as Beneficiary, being advised by
53
<PAGE>
counsel and its financial advisor, shall deem most advisable to protect and
enforce any of their rights or duties hereunder.
(ii) Beneficiary (or the Jurisdictional Trustee, as
applicable), may conduct any number of sales from time to time. The power
of sale shall not be exhausted by any one or more such sales as to any part
of the Trust Estate remaining unsold, but shall continue unimpaired until
the entire Trust Estate shall have been sold.
(iii) With respect to any Property, this Mortgage is made
upon any statutory conditions of the State in which such Property is
located, and, for any breach thereof or any breach of the terms of this
Mortgage, Beneficiary shall have the statutory power of sale, if any,
provided for by the laws of such State.
(d) Specific Performance. Beneficiary, in its sole and absolute
--------------------
discretion, or the Jurisdictional Trustee, at Beneficiary's election, may
institute an action, suit or proceeding at law or in equity for the specific
performance of any covenant, condition or agreement contained herein or in the
Notes or any other Loan Document, or in aid of the execution of any power
granted hereunder or for the enforcement of any other appropriate legal or
equitable remedy.
(e) Enforcement of Note. Subject to Section 33 hereof and to the
------------------- ----------
extent permitted under the provisions of applicable law, Beneficiary or the
Jurisdictional Trustee, at Beneficiary's election, may recover judgment on the
Note (or any portion of the Indebtedness evidenced thereby), either before,
during or after any proceedings for the foreclosure (or partial foreclosure) or
enforcement of this Mortgage.
(f) Sale of Trust Estate; Application of Proceeds.
---------------------------------------------
(i) Beneficiary (or the Jurisdictional Trustee, if
applicable), may postpone any sale of all or any part of the Trust Estate
to be made under or by virtue of this Section 20 by public announcement at
----------
the time and place of such sale, or by publication, if required by law,
and, from time to time, thereafter, may further postpone such sale by
public announcement made at the time of sale fixed by the preceding
postponement.
(ii) Upon the completion of any sale made by Beneficiary
or the Jurisdictional Trustee under or by virtue of this Section 20,
----------
Beneficiary shall execute and deliver to the accepted purchaser or
purchasers a good and sufficient deed or deeds or other appropriate
instruments, conveying, assigning and transferring all its estate, right,
title and interest in and to the property and rights so sold. Beneficiary
or the Jurisdictional Trustee, as applicable, is hereby appointed the true
and lawful irrevocable attorney-in-fact of Grantor in its name and stead or
in the name of Beneficiary to make all necessary conveyances, assignments,
transfers and deliveries of the property and rights so sold, and, for that
purpose, Beneficiary or the Jurisdictional Trustee, as applicable, may
execute all necessary deeds and other instruments of assignment and
transfer, and may substitute one or more persons with like power, Grantor
hereby ratifying and confirming all that such attorney or attorneys or such
substitute or substitutes shall lawfully do by virtue hereof. Grantor
shall, nevertheless, if so
54
<PAGE>
requested in writing by Beneficiary, ratify and confirm any such sale or
sales by executing and delivering to Beneficiary or to such purchaser or
purchasers all such instruments as may be advisable, in the judgment of
Beneficiary, for such purposes and as may be designated in such request.
Any such sale or sales made under or by virtue of this Section 20 shall
----------
operate to divest all the estate, right, title, interest, claim and demand,
whether at law or in equity, of Grantor in and to the property and rights
so sold, and shall be a perpetual bar, at law and in equity, against
Grantor, its successors and assigns and any Person claiming through or
under Grantor and its successors and assigns.
(iii) The receipt of Beneficiary or the Jurisdictional
Trustee, as applicable, for the purchase money paid as a result of any such
sale shall be a sufficient discharge therefor to any purchaser of the
property or rights, or any part thereof, so sold. No such purchaser, after
paying such purchase money and receiving such receipt, shall be bound to
see to the application of such purchase money upon or for any trust or
purpose of this Mortgage, or shall be answerable, in any manner, for any
loss, misapplication or non-application of any such purchase money or any
part thereof, nor shall any such purchaser be bound to inquire as to the
authorization, necessity, expediency or regularity of such sale.
(iv) Upon any sale made under or by virtue of this Section
-------
20, Beneficiary may bid for and acquire the Trust Estate or any part
--
thereof and, in lieu of paying cash therefor, may make settlement for the
purchase price by crediting upon the Note secured by this Mortgage the net
proceeds of sale, after deducting therefrom the expense of the sale and the
costs of the action and any other sums which Beneficiary is authorized to
deduct under this Mortgage. The person making such sale shall accept such
settlement without requiring the Production of the Note or this Mortgage,
and without such production there shall be deemed credited to the
Indebtedness and Obligations under this Mortgage the net proceeds of such
sale. Beneficiary, upon acquiring the Trust Estate or any part thereof,
shall be entitled to own, hold, lease, rent, operate, manage or sell the
same in any manner permitted by applicable laws.
(g) Voluntary Appearance; Receivers. After the happening, and during
-------------------------------
the continuance of, any Event of Default, and immediately upon commencement of
(i) any action, suit or other legal proceeding by Beneficiary to obtain judgment
for the principal and interest on the Notes and any other sums required to be
paid pursuant to this Mortgage, or (ii) any action, suit or other legal
proceeding by Beneficiary of any other nature in aid of the enforcement of the
Loan Documents or any of them, Grantor will (a) enter their voluntary appearance
in such action, suit or proceeding, and (b) if required by Beneficiary, consent
to the appointment of one or more receivers of the Trust Estate and of the
earnings, revenues, rents, issues, profits and income thereof. After the
happening of any Event of Default, or upon the filing of a bill in equity to
foreclose this Mortgage or to enforce the specific performance hereof or in aid
thereof, or upon the commencement of any other judicial proceeding to enforce
any right of Beneficiary, Beneficiary shall be entitled, as a matter of right,
if it shall so elect, without notice to any other party and without regard to
the adequacy of the security of the Trust Estate, forthwith, either before or
after declaring the principal and interest on the Notes to be due and payable,
to the appointment of such a receiver or
55
<PAGE>
receivers. Any receiver or receivers so appointed shall have such powers as a
court or courts shall confer, which may include, without limitation, any or all
of the powers which Beneficiary is authorized to exercise by the provisions of
this Section 20, and shall have the right to incur such obligations and to issue
----------
such certificates therefor as the court shall authorize. Notwithstanding the
foregoing, Beneficiary as a matter of right may appoint or secure the
appointment of a receiver, trustee, liquidator or similar official of the Trust
Estate or any portion thereof, and Grantor hereby irrevocably consents and
agrees to such appointment, without notice to Grantor and without regard to the
value of the Trust Estate or adequacy of the security for the Indebtedness and
without regard to the solvency of the Grantor or any other Person liable for the
payment of the Indebtedness, and such receiver or other official shall have all
rights and powers permitted by applicable law and such other rights and powers
as the court making such appointment may confer, but the appointment of such
receiver or other official shall not impair or in any manner prejudice the
rights of Beneficiary to receive the Rents with respect to any of the Trust
Estate pursuant to this Mortgage, the Assignment of Leases or the Cash
Collateral Agreement.
(h) UCC Remedies. Beneficiary may exercise any or all of the remedies
------------
granted to a secured party under the UCC, specifically including, without
limitation, the right to recover the attorneys' fees and other expenses incurred
by Beneficiary in the enforcement of this Mortgage or in connection with
Grantor's redemption of the Improvements or Building Equipment. Beneficiary may
exercise its rights under this Mortgage independently of any other collateral or
guaranty that Grantor may have granted or provided to Beneficiary in order to
secure payment and performance of the Obligations, and Beneficiary shall be
under no obligation or duty to foreclose or levy upon any other collateral given
by Grantor to secure any Obligation or to proceed against any guarantor before
enforcing its rights under this Mortgage.
(i) Leases. Beneficiary may, at its option, before any proceeding for
------
the foreclosure (or partial foreclosure) or enforcement of this Mortgage, treat
any Lease which is subordinate by its terms to the Lien of this Mortgage, as
either subordinate or superior to the Lien of this Mortgage.
(j) Other Rights. Beneficiary may pursue against Grantor any other
------------
rights and remedies of Beneficiary permitted by law, equity or contract or as
set forth herein or in the other Loan Documents.
(k) Retention of Possession. Notwithstanding the appointment of any
-----------------------
receiver, liquidator or trustee of Grantor, or any of its property, or of the
Trust Estate or any part thereof, Beneficiary or the Jurisdictional Trustee, as
applicable, to the extent permitted by law, shall be entitled to retain
possession and control of all property now or hereafter granted to or held by
Beneficiary or the Jurisdictional Trustee, as applicable, under this Mortgage.
(l) Suits by Beneficiary. All rights of action under this Mortgage
--------------------
may be enforced by Beneficiary without the possession of the Note and without
the production thereof or this Mortgage at any trial or other proceeding
relative thereto. Any such suit or proceeding instituted by Beneficiary shall be
brought in the name of Beneficiary and any recovery of judgment shall be subject
to the rights of Beneficiary.
56
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(m) Remedies Cumulative. Subject to Section 33 hereof, no remedy
------------------- ----------
herein conferred upon or reserved to Beneficiary shall exclude any other remedy,
and each such remedy shall be cumulative and in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity. No delay or
omission of Beneficiary to exercise any right or power accruing upon any Event
of Default shall impair any such right or power, or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein. Every power and
remedy given to Beneficiary by this Mortgage to the Jurisdictional Trustee
and/or Beneficiary may be exercised from time to time and as often as the
Jurisdictional Trustee (at Beneficiary's discretion) and Beneficiary and each of
them may deem expedient. Nothing in this Mortgage shall affect Grantor's
obligations to pay the principal of, and interest on, the Notes in the manner
and at the time and place expressed in the Notes.
(n) Waiver of Rights. Grantor agrees that, to the fullest extent
----------------
permitted by law, it will not at any time, (1) insist upon, plead or claim or
take any benefit or advantage of any stay, extension or moratorium law, wherever
enacted, now or at any time hereafter in force, which may affect the covenants
and terms of performance of this Mortgage, (2) claim, take or insist upon any
benefit or advantage of any law, now or at any time hereafter in force,
providing for valuation or appraisal of the Trust Estate, or any part thereof,
prior to any sale or sales thereof which may be made pursuant to any provision
herein contained, or pursuant to the decree, judgment or order of any court of
competent jurisdiction, or (3) after any such sale or sales, claim or exercise
any right, under any statute heretofore or hereafter enacted by the United
States of America, any State thereof or otherwise, to redeem the property and
rights sold pursuant to such sale or sales or any part hereof. Grantor hereby
expressly waives all benefits and advantages of such laws, and covenants, to the
fullest extent permitted by law, not to hinder, delay or impede the execution of
any power herein granted or delegated to Beneficiary or the Trustees, but will
suffer and permit the execution of every power as though no such laws had been
made or enacted. Grantor for itself and all who may claim through or under it,
waives, to the extent it lawfully may do so, any and all homestead rights and,
any and all rights to reinstatement, any and all right to have the property
comprising the Trust Estate marshaled upon any foreclosure of the Lien hereof or
to have the mortgaged property hereunder and the property covered by any other
mortgage, deed to secure debt or deed.
21. Application of Proceeds.
-----------------------
(a) Sale Proceeds. The proceeds of any sale or foreclosure of the
-------------
Trust Estate or any portion thereof shall be applied to the following in the
following order of priority the payment of: (i) the costs and expenses of the
foreclosure proceedings with respect to such Property (including reasonable
counsel fees and disbursements actually incurred and advertising costs and
expenses), liabilities and advances made or incurred under this Mortgage, and
reasonable receivers' and trustees' fees and commissions and fees and expenses
incurred by Beneficiary, together with interest at the Default Rate to the
extent payable, (ii) any other sums advanced by Beneficiary (or any advancing
agent on its behalf) in accordance with the terms hereof and not repaid to it by
Grantor, together with interest at the Default Rate to the extent payable, (iii)
all sums due under the Note in the order of priority set forth therein, and (iv)
any surplus to Grantor or other party legally entitled thereto.
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(b) Other Proceeds. All Proceeds or other amounts collected by
--------------
Beneficiary and applied to pay interest or principal of the Note or other
amounts due on this Mortgage following an Event of Default and acceleration of
the Note shall be applied (1) first, to reimburse any expenses related to such
collection and (2) thereafter, as provided in Section 21(a) hereof. If the Note
-------------
has not been accelerated, any amount available to make payments or applied in
lieu of such payments thereon shall be applied (1) first, to interest due or
overdue on the Note, (2) then, any amounts applied to pay or applied in lieu of
paying principal on the Note then due shall be applied to pay or applied in lieu
of paying each Note in order of priority, and (3) thereafter, to Grantor.
22. CERTAIN WAIVERS. TO INDUCE BENEFICIARY TO CONSUMMATE THE
---------------
TRANSACTIONS CONTEMPLATED BY THE NOTES AND THIS MORTGAGE, AND FOR OTHER GOOD AND
VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY
ACKNOWLEDGED, GRANTOR AND EACH OF THE PARTNERS COMPRISING GRANTOR EXPRESSLY AND
IRREVOCABLY HEREBY WAIVES THE FOLLOWING RIGHTS, IN ADDITION TO AND NOT IN
DEROGATION OF ALL OTHER WAIVERS CONTAINED IN THE NOTE, THIS MORTGAGE AND THE
OTHER LOAN DOCUMENTS:
(a) WAIVER OF RIGHT TO TRIAL BY JURY. GRANTOR HEREBY WAIVES AND SHALL
--------------------------------
WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT BY, OR COUNTERCLAIM
ASSERTED BY BENEFICIARY WHICH ACTION, PROCEEDING OR COUNTERCLAIM ARISES OUT OF
OR IS CONNECTED WITH THIS MORTGAGE, THE NOTE OR ANY OTHER LOAN DOCUMENTS.
23. Notice of Certain Occurrences. In addition to all other notices
-----------------------------
required to be given by Grantor hereunder, Grantor shall give notice to
Beneficiary and the Rating Agencies promptly upon the occurrence of: (a) any
Default or Event of Default; (b) any litigation or proceeding affecting Grantor
or the Trust Estate or any part thereof in which the amount involved is Two
Hundred Fifty Thousand Dollars ($250,000) or more and not covered by insurance
or in which injunctive or similar relief is sought and likely to be obtained;
(c) a material adverse change in the business, operations, property or financial
condition of Grantor or the Trust Estate; and (d) together with the quarterly
financial statements required to be delivered hereunder, a list of all
litigation and proceedings affecting Grantor or the Trust Estate or any part
thereof in which the amount involved is Two Hundred Fifty Thousand Dollars
($250,000) or more, whether or not covered by insurance and whether or not
relief is being sought.
24. Trust Funds. To the extent required by applicable law, all
-----------
security deposits paid under the Leases shall be treated as trust funds and not
commingled with any other funds of Grantor. Within ten (10) days after request
by Beneficiary, Grantor shall furnish Beneficiary with satisfactory evidence of
compliance with this Section 24, together with a statement of all security
-----------
deposits by Tenants under the Leases, which statement shall be certified by
Grantor.
25. Taxation. In the event a law is passed after the date hereof of
--------
the United States or of any state in which a Property is located either (a)
changing in any way the laws for the taxation of mortgages or debts secured
thereby for federal, state or local purposes, or the manner of collection of any
such taxes, or (b) imposing a tax, either directly or indirectly, on mortgages
or debts secured thereby, in each case other than income taxes, franchise taxes,
or withholding taxes, that materially adversely
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affects Beneficiary, Beneficiary shall have the right to declare the Note due on
a date to be specified by not less than thirty (30) days' written notice to be
given to Grantor unless within such thirty (30) day period Grantor shall assume
as an obligation hereunder the payment of any tax so imposed until full payment
of the Note provided such assumption shall be permitted by law.
26. Notices. Any notice, election, request or demand which by any
-------
provision of this Mortgage is required or permitted to be given or served
hereunder shall be in writing and shall be given or served by hand delivery
against receipt, by any nationally recognized overnight courier service
providing evidence of the date of delivery or by certified mail return receipt
requested, postage prepaid, addressed to Grantor at:
____________________________, Attention: ____________, with a copy to
________________, Attention: ____________, Esq.; if to Trustee at: Chicago
Title Insurance Company of New York, _______________, Attention: _____________;
if to Beneficiary, to ______________, or at such other address as shall be
designated from time to time by Grantor, Trustee or Beneficiary by notice given
in accordance with the provisions of this Section 26. Any such notice or
-----------
demand given hereunder shall be effective upon receipt. All notices, elections,
requests and demands required or permitted under this Mortgage shall be in the
English language.
27. No Oral Modification. This Mortgage may not be waived, altered,
--------------------
amended, modified, changed, discharged or terminated orally but only by a
written agreement signed by the party against which enforcement is sought.
28. Partial Invalidity. In the event any one or more of the
------------------
provisions contained in this Mortgage shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, but each shall be
construed as if such invalid, illegal or unenforceable provision had never been
included hereunder.
29. Successors and Assigns. All covenants of Grantor contained in
----------------------
this Mortgage are imposed solely and exclusively for the benefit of Beneficiary
and its successors and assigns, and no other Person shall have standing to
require compliance with such covenants or be deemed, under any circumstances, to
be a beneficiary of such covenants, any or all of which may be freely waived in
whole or in part by Beneficiary at any time if in its sole discretion it deems
it advisable to do so. All such covenants of Grantor shall run with the land
and bind Grantor, the successors and assigns of Grantor (and each of them) and
all subsequent owners, encumbrancers and Tenants of the Trust Estate, and shall
inure to the benefit of Beneficiary, its successors and assigns.
30. Governing Law. This Mortgage and the obligations arising
-------------
hereunder shall be governed by and construed in accordance with, the laws of the
State of New York applicable to contracts made and performed in the State of New
York and any applicable laws of the United States of America except that at all
times the provisions for the creation, perfection and enforcement of the Liens
and security interest created pursuant to this Mortgage with respect to any
Property and pursuant to the Assignment of Leases shall be governed by the laws
of the State in which such Property is located. Whenever possible, each
provision of this Mortgage shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision
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of this Mortgage shall be prohibited by, or invalid under, applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remaining provisions of this Mortgage. Nothing
contained in this Mortgage or in any Loan Document shall require either Grantor
to pay or Beneficiary to accept any sum in any amount which would, under
applicable law, subject Beneficiary, or any Trustee to penalty or adversely
affect the enforceability of this Mortgage. In the event that the payment of any
sum due hereunder or under any Loan Document would have such result under
applicable law, then, ipso facto, the obligation of Grantor to make such
---- -----
payments shall be reduced to the highest sum then permitted under applicable law
and appropriate adjustment shall be made by Grantor and Beneficiary.
31. Certain Representations, Warranties and Covenants.
-------------------------------------------------
(a) Recording Fees, Taxes, Etc. Grantor hereby agrees to take all
--------------------------
such further reasonable actions, and to pay all taxes, recording fees, charges,
costs and other expenses including, without limitation, reasonable attorneys'
and professional fees and disbursements which are currently or in the future
shall be imposed, and which may be required or necessary to establish, preserve,
protect or enforce the Lien of this Mortgage.
(b) No Offsets. Grantor warrants, covenants and represents to
----------
Beneficiary there exists no cause of action at law or in equity that would
constitute any offset, counterclaim or deduction against the Indebtedness or
Obligations.
(c) Full and Accurate Disclosure. To the best of Grantor's knowledge,
----------------------------
no statement of fact made by or on behalf of Grantor in this Mortgage or in any
of the other Loan Documents contains any untrue statement of a material fact or
omits to state any material fact necessary to make statements contained herein
or therein not materially misleading as of the date made. There is no fact
presently known to Grantor which has not been disclosed which adversely affects,
nor as far as Grantor can foresee, might adversely affect, the business,
operations or condition (financial or otherwise) of Grantor.
(d) Tax Filings. Grantor has filed all federal, state and local tax
-----------
returns required to be filed prior to the date hereof and has paid or made
adequate provision for the payment of all federal, state and local taxes,
charges and assessments shown to be due from Grantor on such tax returns.
(e) No Litigation. No litigation is pending or, to Grantor's best
-------------
knowledge, threatened against Grantor which, if determined adversely to Grantor,
would have a material adverse effect on any Property or the security created
hereby and no Taking has been commenced or, to Grantor's best knowledge, is
contemplated with respect to all or any portion of the Trust Estate or for the
relocation of roadways providing access to the Trust Estate. Grantor has
delivered to Beneficiary and the Rating Agencies a certificate setting forth all
litigation affecting Grantor or any Property.
(f) Solvency. The fair saleable value of Grantor's assets exceeds and
--------
will, immediately following the issuance and sale of the Note and the
consummation of the other transactions contemplated to take place simultaneously
therewith, exceed Grantor's liabilities, including subordinated, unliquidated,
disputed and contingent liabilities. Grantor's
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<PAGE>
assets do not and, immediately following the issuance and sale of the Note and
the consummation of the other transactions contemplated to take place
simultaneously therewith will not, constitute unreasonably insufficient capital
to carry out its business as conducted or as proposed to be conducted. Grantor
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities) beyond its
ability to pay such debts as they mature.
(g) ERISA. Grantor is not an "employee benefit plan" (within the
-----
meaning of Section 3(3) of ERISA) to which ERISA applies and Grantor's assets do
not constitute plan assets. No actions, suits or claims under any laws and
regulations promulgated pursuant to ERISA are pending or, to Grantor's
knowledge, threatened against Grantor. Grantor has no knowledge of any material
liability incurred by Grantor which remains unsatisfied for any taxes or
penalties with respect to any employee benefit plan or any Multiemployer Plan,
or of any lien which has been imposed on Grantor's assets pursuant to Section
412 of the Code or Sections 302 or 4068 of ERISA.
(h) Claims. No claims, actions, suits, proceedings or investigations
------
whether judicial or otherwise are pending or, to the best knowledge of Grantor,
threatened against Grantor before any domestic or foreign court or
administrative, arbitral, governmental or regulatory authority or agency which,
if determined adversely to Grantor, would have a material adverse effect on the
security created hereby. Grantor has delivered to Beneficiary and the Rating
Agencies a certificate setting forth all claims pending against Grantor.
(i) Liens. No Lien, other than Permitted Encumbrances, which remains
-----
outstanding as of the date hereof, including, without limitation, any tax lien,
has been levied against the Trust Estate.
(j) Outstanding Liabilities. No outstanding liabilities of Grantor
-----------------------
exist which, individually or in the aggregate, would have a material adverse
effect on the security created hereby or would materially adversely affect the
condition (financial or otherwise) of Grantor. Grantor has delivered to
Beneficiary and the Rating Agencies a certificate setting forth all liabilities
of Grantor.
(k) Creditors' Claims. To Grantor's best knowledge, no claim of any
-----------------
creditor of Grantor would have a material adverse effect on the security created
hereby or would materially adversely affect the condition (financial or
otherwise) of Grantor. Grantor has delivered to Beneficiary and the Rating
Agencies a certificate setting forth all such claims of creditors of Grantor.
(l) Enforceability of Loan Documents. This Mortgage and the other
--------------------------------
Loan Documents are the legal, valid and binding obligations of Grantor,
enforceable against Grantor in accordance with their terms.
(m) Contingent Liabilities. Grantor does not have any known material
----------------------
contingent liabilities.
(n) No Other Debt. Grantor has not borrowed or received debt
-------------
financing (other than financing evidenced by the Note) that has not been
heretofore repaid in full.
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(o) Fraudulent Conveyance. Grantor represents and warrants as
---------------------
follows: (i) it has not entered into this Mortgage or the other Loan Documents
or the transactions contemplated hereby or thereby with the actual intent to
hinder, delay, or defraud any creditor, and (ii) it has received reasonably
equivalent value in exchange for its obligations under this Mortgage and the
other Loan Documents. Giving effect to the transactions contemplated by this
Mortgage and the other Loan Documents, the fair saleable value of the assets of
Grantor exceeds and will, immediately following the execution and delivery of
this Mortgage and the other Loan Documents, exceed the total liabilities of
Grantor, including, without limitation, subordinated, unliquidated, disputed or
contingent liabilities. The fair saleable value of the assets of Grantor is and
will, immediately following the execution and delivery of this Mortgage and the
other Loan Documents, be greater than Grantor's probable liabilities, including
the maximum amount of the contingent liabilities of Grantor or their debts as
such debts become absolute and matured. The assets of Grantor do not and,
immediately following the execution and delivery of this Mortgage and the other
Loan Documents will not, constitute unreasonably small capital to carry out the
business of Grantor as conducted or as proposed to be conducted. Grantor does
not intend to, and does not believe that it will, incur debts and liabilities
(including, without limitation, contingent liabilities and other commitments)
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts to be payable on or in respect of obligations of Grantor).
(p) Access/Utilities. The Properties have adequate rights of access
----------------
to public ways and is served by adequate water, sewer, sanitary sewer and storm
drain facilities. All public utilities necessary to the continued use and
enjoyment of each Property as presently used and enjoyed are located in the
public right-of-way abutting the applicable Property, and all such utilities are
connected so as to serve the applicable Property without passing over other
property. All roads necessary for the full utilization of each Property for its
current purpose have been completed and dedicated to public use and accepted by
all governmental authorities or are the subject of access easements for the
benefit of the applicable Property.
(q) Special Assessments. Except to the extent set forth on Schedule
------------------- --------
4, there are no pending or, to the knowledge of Grantor, proposed special or
- -
other assessments for public improvements or otherwise affecting any Property,
nor, to the knowledge of Grantor, are there any contemplated improvements to any
Property that may result in such special or other assessments.
(r) Flood Zone. None of the Properties are located in a flood hazard
----------
area as defined by the Federal Insurance Administration.
(s) Separate Business; Corporate Formalities.
----------------------------------------
(i) Grantor shall maintain its own deposit account or accounts,
separate from those of any Affiliate, with commercial banking institutions.
The funds of Grantor will not be diverted to any other Person or for other
than business uses of Grantor, nor will such funds be commingled with the
funds of any other Affiliate;
(ii) To the extent that Grantor shares the same officers or
other employees as any of its partners or Affiliates, the salaries of and
the expenses related to providing benefits to such officers and
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other employees shall be fairly allocated among such entities, and each
such entity shall bear its fair share of the salary and benefit costs
associated with all such common officers and employees;
(iii) To the extent that Grantor jointly contracts with any of
its partners or Affiliates to do business with vendors or service providers
or to share overhead expenses, the costs incurred in so doing shall be
allocated fairly among such entities, and each such entity shall bear its
fair share of such costs. To the extent that Grantor contracts or does
business with vendors or service providers where the goods and services
provided are partially for the benefit of any other Person, the costs
incurred in so doing shall be fairly allocated to or among such entities
for whose benefit the goods and services are provided, and each such entity
shall bear its fair share of such costs. All material transactions between
Grantor and any of its Affiliates shall be only on an arm's length basis.
(iv) To the extent that Grantor and any of its constituent
partners or Affiliates have offices in the same location, there shall be a
fair and appropriate allocation of overhead costs among them, and each such
entity shall bear its fair share of such expenses.
(v) Grantor shall conduct its affairs strictly in accordance
with its organizational documents, and observe all necessary, appropriate
and customary partnership formalities, including, but not limited to,
obtaining any and all partners' consents necessary to authorize actions
taken or to be taken, and maintaining accurate and separate books, records
and accounts, including, but not limited to, payroll and intercompany
transaction accounts.
(vi) In addition, Grantor shall: (a) maintain books and records
separate from those of any other person; (b) maintain its assets in such a
manner that it is not costly or difficult to segregate, identify or
ascertain such assets; (c) hold regular meetings of its board of directors,
shareholder, partners or members, as the case may be, and observe all other
corporate, partnership or limited liability company, as the case may be,
formalities; (d) hold itself out to creditors and the public as a legal
entity separate and distinct from any other entity; (e) prepare separate
tax returns and financial statements, or if part of a consolidated group,
then it will be shown as a separate member of such group; (f) transact all
business with Affiliates on an arm's-length basis and pursuant to
enforceable agreements; (g) conduct business in its name and use separates
stationary, invoices and checks; (h) not commingle its assets or funds with
those of any other person; and (i) not assume, guarantee or pay the debts
or obligations of any other person.
(t) Director Consents. The General Partner of Grantor shall obtain
-----------------
the consent of all its directors, including the Independent Director, to (i)
file a bankruptcy or insolvency petition or otherwise institute insolvency
proceedings or to authorize Grantor to do so, (ii) dissolve, liquidate,
consolidate, merge or sell all or substantially all of Grantor's assets, (iii)
engage in any other business activity, or (iv) amend its organizational
documents.
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(u) No Default. As of the date hereof, Grantor is not in material
----------
default under the terms and provisions of any Operating Agreement or any
Material Lease.
(v) Collateral As Entirety of Property. Each Property and the
----------------------------------
Personalty located thereon constitutes all of the real property, equipment and
fixtures currently owned by Grantor or currently used in the operation of the
business located on such Property.
(w) No Property Damage. As of the date hereof, to Grantor's
------------------
knowledge, no portion of the Improvements at any Property has been materially
damaged, destroyed or injured by fire or other casualty which is not now fully
restored or in the process of being restored.
(x) Separate Tax Parcels. Each Property constitutes one or more
--------------------
separate tax lots, with a separate tax assessment, independent of any other land
or improvements.
(y) Title Insurance. Grantor shall cause to be delivered to
---------------
Beneficiary a mortgagee's title insurance policy, issued by the Title Company,
for each Property in an amount (i) not less than 125% of the Allocated Loan
Amount or (ii) in the event each title policy contains a "tie-in" endorsement,
not less than the Allocated Loan Amount so that the aggregate of such title
policies equals the Loan Amount, which title insurance policy shall be dated as
of the date hereof, and shall insure that this Mortgage is a valid first
priority lien on the Land and Improvements, subject only to Permitted
Encumbrances, standard exceptions contained in the current ALTA printed form
policy issued by the Title Company, and any other matter consented to by
Beneficiary.
32. No Waiver. No failure by Beneficiary to insist upon the strict
---------
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof shall constitute a waiver of any such term or
right, power or remedy or of any such breach. No waiver of any breach shall
affect or alter this Mortgage, which shall continue in full force and effect, or
shall affect or alter the rights of Beneficiary with respect to any other then
existing or subsequent breach.
33. Non-Recourse Obligations. Notwithstanding any provision to the
------------------------
contrary in this Mortgage or the Note, Beneficiary shall not have any recourse
to any asset of Grantor or its constituent partners other than the Trust Estate
in order to satisfy the indebtedness for payment of the principal and interest
evidenced by the Note, and Beneficiary's sole recourse for satisfaction of the
payment of principal and interest evidenced by the Note shall be to exercise its
rights against the Trust Estate and the other collateral securing the Note. The
foregoing sentence shall not be deemed or construed to be a release of the
indebtedness evidenced by the Note or in any way impair, limit or otherwise
affect the lien of the Mortgage or any such other instrument securing repayment
of the Note or prevent Beneficiary from naming Grantor, its partners, or their
successors or assigns as a defendant to any action to enforce any remedy for
default so long as there is no personal or deficiency money judgment sought or
entered against Grantor, its partners, or their successors or assigns for
payment of principal and interest evidenced by the Note. Notwithstanding the
foregoing provisions of this Section 33, it is expressly understood and agreed
that the aforesaid limitation of liability
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shall in no way affect or apply to Grantor's or its partners' continued personal
liability for the payment to Beneficiary of:
(i) any breach by Grantor of the environmental indemnification
provisions contained herein;
(ii) Grantor's failure to obtain Lender's prior written consent
to (a) any subordinate financing or any other encumbrance on the Trust
Estate, or (b) any transfer of the Trust Estate or interests in Grantor in
violation of this Mortgage;
(iii) Grantor's failure to pay required taxes,assessments, and
insurance premiums payable with respect to the Trust Estate or to maintain
the required escrows therefor, to the extent of (but not in excess of) all
gross revenues that have been generated by the Trust Estate following the
date which is twelve (12) months prior to the date that such taxes,
assessments or insurance premiums were finally due and payable and that
have not been applied to pay any portion of the Loan, reasonable and
customary operating expenses and capital expenditures for the Trust Estate
paid to third parties not affiliated (directly or indirectly) with Grantor
and except to the extent that monies are paid by Grantor in escrow for the
payment of such amounts and except for any amounts applicable to the period
after foreclosure of Beneficiary's lien on any Property, or the delivery by
Grantor of a deed to any Property in lieu of foreclosure (which deed has
been accepted by Beneficiary in writing), or the appointment of a receiver
for any Property;
(iv) the gross negligence or willful misconduct of Grantor, its
agents, affiliates, officers or employees which causes or results in a loss
of all or a portion of the Trust Estate that is not reimbursed by insurance
or which gross negligence or willful misconduct exposes Beneficiary to
claims, liability or costs of defense in any litigation or other legal
proceeding;
(v) the seizure or forfeiture of the Trust Estate, or any
portion thereof, or Beneficiary's interest therein, resulting from criminal
wrongdoing by any person or entity other than Beneficiary under any
federal, state or local law;
(vi) (i) any physical waste of the Trust Estate caused by the
intentional or grossly negligent act(s) or omission(s) of Grantor, its
agents, affiliates, officers and employees, (ii) the failure by Grantor to
maintain, repair or restore any part of the Trust Estate as may be required
by this Mortgage or any of the other Loan Documents to the extent of all
gross revenues that have been generated by the Trust Estate following the
date which is twelve (12) months prior to notice to Grantor from
Beneficiary of such failure to maintain, repair or restore any part of the
Trust Estate and that have not been applied to pay any portion of the Debt,
reasonable and customary operating expenses and capital expenditures for
the Trust Estate paid to third parties not affiliated (directly or
indirectly) with Grantor, taxes and insurance premiums for the Trust Estate
and escrows deposited with Beneficiary, or (iii) the removal or disposal of
any portion of the Trust Estate after an Event of Default under the Loan
Documents to the extent such property is not replaced by Grantor with like
property of equivalent value, function and design;
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(vii) the misapplication or conversion by Grantor of any
insurance proceeds paid by reason of any loss, damage or destruction to the
Trust Estate; and any awards or amounts received in connection with the
condemnation of all or a portion of the Trust Estate and not used by
Grantor for restoration or repair of the Trust Estate;
(viii) Grantor's failure to deliver any security deposits
collected with respect to the Trust Estate to Beneficiary or any other
party entitled to receive such security deposits under the Loan Documents
following an Event of Default; and
(ix) any rents (including advanced or prepaid rents),issues,
profits, accounts or other amounts generated by or related to the Trust
Estate attributable to, or accruing after an Event of Default, which
amounts were collected by Grantor or its property manager and not deposited
in the Operating Account or turned over to Beneficiary or used to pay
Grantor or its property manager and not turned over to Beneficiary or used
to pay unaffiliated third parties for reasonable and customary operating
expenses and capital expenditures for the Trust Estate, taxes and insurance
premiums with respect to the Trust Estate and any other amounts required to
be paid under the Loan Documents with respect to the Trust Estate.
Notwithstanding anything to the contrary in the Note, this Mortgage or
any of the Loan Documents, Beneficiary shall not be deemed to have waived any
right which Beneficiary may have under Section 506(a), 506(b), 1111(b) or any
other provisions of the Bankruptcy Code to file a claim for the full amount of
the Debt secured by this Mortgage or to require that all collateral shall
continue to secure all of the Debt owing to Beneficiary in accordance with the
Loan Documents.
34. Further Assurances. Grantor, at its own expense, will execute,
------------------
acknowledge and deliver all such reasonable further acts, documents or
instruments including security agreements on any Building Equipment included or
to be included in the Trust Estate and a separate assignment of each Lease and
take all such actions as Beneficiary from time to time may reasonably request to
better assure, transfer and confirm unto Beneficiary the rights now or hereafter
intended to be granted to Beneficiary under this Mortgage or the other Loan
Documents. Grantor shall notify Beneficiary no less than thirty (30) days prior
to a change of address.
35. Estoppel Certificates. Grantor and Beneficiary each will, from
---------------------
time to time, upon twenty (20) days' prior written request by the other party,
execute, acknowledge and deliver to the requesting party, in the case of a
request to Beneficiary, a certificate signed by an authorized officer or
officers and in the case of a request to Grantor, an Officer's Certificate,
stating that this Mortgage is unmodified and in full force and effect (or, if
there have been modifications, that this Mortgage is in full force and effect as
modified and setting forth such modifications) and stating the amount of accrued
and unpaid interest and the outstanding principal amount of the Note. The
estoppel certificate from Grantor shall also state either that, to Grantor's
best knowledge and based on no independent investigation, no Default exists
hereunder or, if any Event of Default shall exist hereunder, specify any Event
of Default of which Grantor has actual knowledge and the steps being taken to
cure such Event of Default.
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36. Intentionally Omitted.
37. INDEMNIFICATION BY GRANTOR.
--------------------------
SUBJECT TO THE PROVISIONS OF SECTION 33 HEREOF, GRANTOR WILL
----------
PROTECT, INDEMNIFY AND SAVE HARMLESS BENEFICIARY, AND ALL OFFICERS, DIRECTORS,
STOCKHOLDERS, PARTNERS, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS THEREOF
(COLLECTIVELY, THE "INDEMNIFIED PARTIES") FROM AND AGAINST ALL LIABILITIES,
-------------------
OBLIGATIONS, CLAIMS, DAMAGES, PENALTIES, CAUSES OF ACTION, COSTS AND EXPENSES
(INCLUDING ALL REASONABLE ATTORNEYS' FEES AND EXPENSES ACTUALLY INCURRED)
IMPOSED UPON OR INCURRED BY OR ASSERTED AGAINST THE INDEMNIFIED PARTIES OR THE
TRUST ESTATE OR ANY PART OF ITS INTEREST THEREIN, BY REASON OF THE OCCURRENCE OR
EXISTENCE OF ANY OF THE FOLLOWING (TO THE EXTENT INSURANCE PROCEEDS PAYABLE ON
ACCOUNT OF THE FOLLOWING SHALL BE INADEQUATE; IT BEING UNDERSTOOD THAT IN NO
EVENT WILL THE INDEMNIFIED PARTIES BE REQUIRED TO ACTUALLY PAY OR INCUR ANY
COSTS OR EXPENSES AS A CONDITION TO THE EFFECTIVENESS OF THE FOREGOING
INDEMNITY) PRIOR TO (I) THE ACCEPTANCE BY BENEFICIARY OF A DEED-IN-LIEU OF
FORECLOSURE WITH RESPECT TO THE APPLICABLE PROPERTY, OR (II) THE INDEMNIFIED
PARTIES TAKING POSSESSION OR CONTROL OF THE APPLICABLE PROPERTY, UNLESS CAUSED
SOLELY BY THE ACTUAL WILLFUL MISCONDUCT OR GROSS NEGLIGENCE OF THE INDEMNIFIED
PARTIES (OTHER THAN SUCH WILLFUL MISCONDUCT OR GROSS NEGLIGENCE IMPUTED TO THE
INDEMNIFIED PARTIES BECAUSE OF THEIR INTEREST IN THE TRUST ESTATE): (1)
OWNERSHIP OF GRANTOR'S INTEREST IN THE TRUST ESTATE, OR ANY INTEREST THEREIN, OR
RECEIPT OF ANY RENTS OR OTHER SUM THEREFROM, (2) ANY ACCIDENT, INJURY TO OR
DEATH OF ANY PERSONS OR LOSS OF OR DAMAGE TO PROPERTY OCCURRING ON OR ABOUT THE
TRUST ESTATE OR ANY APPURTENANCES THERETO, (3) ANY DESIGN, CONSTRUCTION,
OPERATION, REPAIR, MAINTENANCE, USE, NON-USE OR CONDITION OF THE TRUST ESTATE OR
APPURTENANCES THERETO, INCLUDING CLAIMS OR PENALTIES ARISING FROM VIOLATION OF
ANY LEGAL REQUIREMENT OR INSURANCE REQUIREMENT, AS WELL AS ANY CLAIM BASED ON
ANY PATENT OR LATENT DEFECT, WHETHER OR NOT DISCOVERABLE BY BENEFICIARY, ANY
CLAIM THE INSURANCE AS TO WHICH IS INADEQUATE, AND ANY ENVIRONMENTAL CLAIM, (4)
ANY DEFAULT UNDER THIS MORTGAGE OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY
FAILURE ON THE PART OF GRANTOR TO PERFORM OR COMPLY WITH ANY OF THE MATERIAL
TERMS OF ANY LEASE OR OPERATING AGREEMENT WITHIN THE APPLICABLE NOTICE OR GRACE
PERIODS, (5) ANY PERFORMANCE OF ANY LABOR OR SERVICES OR THE FURNISHING OF ANY
MATERIALS OR OTHER PROPERTY IN RESPECT OF THE TRUST ESTATE OR ANY PART THEREOF,
(6) ANY NEGLIGENCE OR TORTIOUS ACT OR OMISSION ON THE PART OF GRANTOR OR ANY OF
ITS AGENTS, CONTRACTORS, SERVANTS, EMPLOYEES, SUBLESSEES, LICENSES OR INVITEES,
(7) ANY CONTEST REFERRED TO IN SECTION 7 HEREOF, (8) ANY OBLIGATION OR
---------
UNDERTAKING RELATING TO THE PERFORMANCE OR DISCHARGE OF ANY OF THE TERMS,
COVENANTS AND CONDITIONS OF THE LANDLORD CONTAINED IN THE LEASES OR (9) THE
PRESENCE AT, IN OR UNDER ANY PROPERTY OR THE IMPROVEMENTS THEREON OF ANY
HAZARDOUS SUBSTANCE IN VIOLATION OF ANY LEGAL REQUIREMENT. ANY AMOUNTS THE
INDEMNIFIED PARTIES ARE LEGALLY ENTITLED TO RECEIVE UNDER THIS SECTION 37 WHICH
----------
ARE NOT PAID WITHIN TEN (10) BUSINESS DAYS AFTER WRITTEN DEMAND THEREFOR BY THE
INDEMNIFIED PARTIES OR BENEFICIARY, SETTING FORTH IN REASONABLE DETAIL THE
AMOUNT OF SUCH DEMAND AND THE BASIS THEREFOR, SHALL BEAR INTEREST FROM THE DATE
OF DEMAND AT THE DEFAULT RATE, AND SHALL, TOGETHER WITH SUCH INTEREST, BE PART
OF THE INDEBTEDNESS AND SECURED BY THIS MORTGAGE. IN CASE ANY ACTION, SUIT OR
PROCEEDING IS BROUGHT AGAINST THE INDEMNIFIED PARTIES BY REASON OF ANY SUCH
OCCURRENCE, GRANTOR SHALL AT GRANTOR'S EXPENSE RESIST AND DEFEND SUCH ACTION,
SUIT OR PROCEEDING OR WILL CAUSE THE SAME TO BE RESISTED AND DEFENDED BY COUNSEL
AT GRANTOR'S REASONABLE EXPENSE FOR THE INSURER OF THE LIABILITY OR BY COUNSEL
DESIGNATED BY GRANTOR (UNLESS REASONABLY DISAPPROVED BY BENEFICIARY PROMPTLY
AFTER BENEFICIARY HAS BEEN NOTIFIED OF SUCH COUNSEL); PROVIDED, HOWEVER, THAT
NOTHING HEREIN SHALL
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COMPROMISE THE RIGHT OF BENEFICIARY (OR ANY INDEMNIFIED PARTY) TO APPOINT ITS
OWN COUNSEL AT GRANTOR'S EXPENSE FOR ITS DEFENSE WITH RESPECT TO ANY ACTION
WHICH IN ITS REASONABLE OPINION PRESENTS A CONFLICT OR POTENTIAL CONFLICT
BETWEEN BENEFICIARY AND GRANTOR THAT WOULD MAKE SUCH SEPARATE REPRESENTATION
ADVISABLE; PROVIDED FURTHER THAT IF BENEFICIARY SHALL HAVE APPOINTED SEPARATE
COUNSEL PURSUANT TO THE FOREGOING, GRANTOR SHALL NOT BE RESPONSIBLE FOR THE
EXPENSE OF ADDITIONAL SEPARATE COUNSEL OF ANY INDEMNIFIED PARTY UNLESS IN THE
REASONABLE OPINION OF BENEFICIARY A CONFLICT OR POTENTIAL CONFLICT EXISTS
BETWEEN SUCH INDEMNIFIED PARTY AND BENEFICIARY. SO LONG AS GRANTOR IS RESISTING
AND DEFENDING SUCH ACTION, SUIT OR PROCEEDING AS PROVIDED ABOVE IN A PRUDENT AND
COMMERCIALLY REASONABLE MANNER, BENEFICIARY AND THE INDEMNIFIED PARTIES SHALL
NOT BE ENTITLED TO SETTLE SUCH ACTION, SUIT OR PROCEEDING AND CLAIM THE BENEFIT
OF THIS SECTION 37 WITH RESPECT TO SUCH ACTION, SUIT OR PROCEEDING AND
----------
BENEFICIARY AGREES THAT IT WILL NOT SETTLE ANY SUCH ACTION, SUIT OR PROCEEDING
WITHOUT THE CONSENT OF GRANTOR; PROVIDED, HOWEVER, THAT IF BENEFICIARY
REASONABLY DETERMINES THAT GRANTOR IS NOT DILIGENTLY DEFENDING SUCH ACTION, SUIT
OR PROCEEDING IN A PRUDENT AND COMMERCIALLY REASONABLE MANNER AS PROVIDED ABOVE,
AND HAS PROVIDED GRANTOR WITH THIRTY (30) DAYS' PRIOR WRITTEN NOTICE, OR SHORTER
PERIOD IF MANDATED BY THE REQUIREMENTS OF APPLICABLE LAW, AND OPPORTUNITY TO
CORRECT SUCH DETERMINATION, BENEFICIARY MAY SETTLE SUCH ACTION, SUIT OR
PROCEEDING SUBJECT ONLY TO GRANTOR'S CONSENT WHICH SHALL NOT BE UNREASONABLY
WITHHELD OR DELAYED, AND CLAIM THE BENEFIT OF THIS SECTION 37 WITH RESPECT TO
----------
SETTLEMENT OF SUCH ACTION, SUIT OR PROCEEDING. ANY INDEMNIFIED PARTY WILL GIVE
GRANTOR PROMPT NOTICE AFTER SUCH INDEMNIFIED PARTY OBTAINS ACTUAL KNOWLEDGE OF
ANY POTENTIAL CLAIM BY SUCH INDEMNIFIED PARTY FOR INDEMNIFICATION HEREUNDER.
38. Release of Property. (a) If Grantor shall pay or cause to be
-------------------
paid, the principal of and interest on the Note in full at maturity or as
permitted in accordance with the terms thereof and all other Indebtedness
payable to Beneficiary hereunder by Grantor or secured hereby or by the other
Loan Documents and all of the payment Obligations shall have been performed,
then this Mortgage and all the other Loan Documents shall be discharged and
satisfied or assigned (to Grantor or to any other Person at Grantor's direction
and without representation or warranty by, or recourse to, Beneficiary), at
Grantor's option, without warranty (except that Beneficiary shall be deemed to
have represented that such release and termination or reassignment has been duly
authorized and that it has not assigned or encumbered this Mortgage or the other
Loan Documents), at the expense of Grantor upon its written request.
Concurrently with such release and satisfaction or assignment of this Mortgage
and all the other Loan Documents, Beneficiary will return to Grantor the Note
and all insurance policies relating to the Trust Estate which may be held by
Beneficiary, any amounts held in escrow pursuant to this Mortgage or the Cash
Collateral Agreement, if applicable, or otherwise, and any part of the Trust
Estate or other Collateral that may be in its possession and, on the written
request and at the expense of Grantor, will execute and deliver such instruments
of conveyance, assignment and release (including appropriate UCC-3 termination
statements) prepared by Grantor and as may reasonably be requested by Grantor to
evidence such release and satisfaction, or assignment, and any such instrument,
when duly executed by Beneficiary and, if appropriate, duly recorded by Grantor
in the places where this Mortgage and each other Loan Document is recorded,
shall conclusively evidence the release and satisfaction or assignment of this
Mortgage and the other Loan Documents.
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(b) Grantor shall be entitled to have one (1) or more of the
specified Properties identified on Schedule 4 attached hereto (collectively, the
----------
"Specified Properties") released from the Lien of this Mortgage, from and after
--------------------
the second anniversary of the Securitization, in connection with a delivery of
Defeasance Collateral, provided that all of the conditions set forth below have
been satisfied. The release of any of the Specified Properties shall be subject
to the satisfaction of the following conditions:
(i) Beneficiary shall have received from Grantor at least 30
days' prior written notice of the date proposed for such
release (the "Release Date"), which Release Date shall be a
------------
Payment Date (as defined in the Note);
(ii) No Event of Default shall have occurred and be continuing as
of the date of such notice and the Release Date;
(iii) Grantor shall deliver to Beneficiary (pursuant to and in
accordance with the provisions of Sections 46 and 47 hereof)
------------------
on the Release Date Defeasance Collateral in such amount as
shall satisfy the Minimum Defeasance Collateral Requirement
with respect to such Property;
(iv) Grantor shall have delivered to Beneficiary an Officer's
Certificate, dated the Release Date, con firming the matters
referred to in clause (ii) above, certifying that the
provisions of clause (iii) above have been complied with and
certifying that all conditions precedent for such release
contained in this Mortgage have been complied with;
(v) Grantor, at its sole cost and expense, shall have delivered
to Beneficiary, one or more endorsements to the mortgagee
policy of title insurance delivered to Beneficiary on the
date hereof in connection with this Mortgage insuring that,
after giving effect to such release, (x) the Liens created
hereby and insured thereunder are first priority Liens on
the respective remaining Properties subject only to the
Permitted Encumbrances applicable to the remaining
Properties and (y) that such policy is in full force and
effect and unaffected by such release;
(vi) After giving effect to such proposed release, the Debt
Service Coverage Ratio would be not less than the greater of
such Debt Service Coverage Ratio without giving effect to
such release, and 1.5:1;
(vii) (as evidenced by appraisals prepared by Independent
Appraisers selected by Beneficiary performed at Grantor's
expense) the fair market value of the Properties that will
remain subject to the lien of this Mortgage as of the date
of the proposed release shall not be less than the fair
market value of such Properties as of the date of this
Mortgage;
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(viii) Beneficiary and the Rating Agencies shall have received
from Grantor with respect to the matters referred to in
clause (vi), (x) statements of the Net Operating Income and
Debt Service (both on a con solidated basis and separately
for the applicable Property(ies) to be released) for the
applicable measuring period, and (y) based on the foregoing
statements of Net Operating Income and Debt Service,
calculations of the Debt Service Coverage Ratio both with
and without giving effect to the proposed release, and (z)
calculations of the ratios referred to in such clause (vi),
accompanied by an Officers' Certificate stating that such
statements, calculations and information are true, correct,
and complete in all material respects.
Upon or after the delivery of Defeasance Collateral in accordance with
Section 38(b)(iii) hereof and the satisfaction of all other conditions provided
- ------------------
for herein in Sections 46 and 47, Beneficiary shall effectuate the following
------------------
(hereinafter referred to as a "Property Release"): the security interest of
----------------
Beneficiary in this Mortgage and other Loan Documents relating to the released
Property shall be released from the Lien of this Mortgage and Beneficiary will
execute and deliver any agreements reasonably requested by Grantor to release
and terminate or reassign, at Grantor's option, this Mortgage as to the released
Property; provided, that such release and termination or reassignment shall be
--------
without recourse to Beneficiary (except as contemplated hereby) and without any
representation or warranty except that Beneficiary shall be deemed to have
represented that such release and termination or reassignment has been duly
authorized and that it has not assigned or encumbered this Mortgage or the other
Loan Documents relating to the released Property (except as contemplated hereby)
and Beneficiary shall return the originals of any Loan Documents that relate
solely to the released Property to Grantor; provided, further, that upon the
-------- -------
release and termination or reassignment of Beneficiary's security interest in
this Mortgage relating to the released Property all references herein to this
Mortgage relating to the released Property shall be deemed deleted, except as
otherwise provided herein with respect to indemnities.
39. Rating Agency Monitoring. After the occurrence of the
------------------------
Securitization and until the Obligations are paid in full, Grantor shall provide
the Rating Agencies with all financial reports required hereunder and such other
information as it shall reasonably request, including copies of any notices
delivered to and received from Beneficiary hereunder, to enable it to
continuously monitor the creditworthiness of Grantor and to permit an annual
surveillance of the implied credit rating of certain securities secured by a
pledge of the Note.
40. Environmental Matters.
---------------------
(a) Representations. Grantor hereby represents and warrants that
except as set forth in the reports listed on Exhibit B hereto (the
---------
"Environmental Reports"), (i) Grantor has not engaged in or knowingly permitted
---------------------
any operations or activities upon, or any use or occupancy of any Property, or
any portion thereof, for the purpose of or in any way involving the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining,
dumping or disposal of any Hazardous Substances on,
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under, in or about the Property, or transported any Hazardous Substances to,
from or across the Property, except in all cases in material compliance with
Environmental Requirements and only in the course of legitimate business
operations at the Property; (ii) to Grantor's knowledge, no tenant, occupant or
user of any Property, nor any other person, has during Grantor's ownership of
such Property, engaged in or permitted any operations or activities upon, or any
use or occupancy of the Property, or any portion thereof, for the purpose of or
in any material way involving the handling, manufacture, treatment, storage,
use, generation, release, discharge, refining, dumping or disposal of any
Hazardous Substances on, in or about the Property, or transported any Hazardous
Substances to, from or across the Property, except in all cases in material
compliance with Environmental Requirements and only in the course of legitimate
business operations at the Property; (iii) to Grantor's knowledge, no Hazardous
Substances are presently constructed, deposited, stored, or otherwise located
on, under, in or about any Property except in material compliance with
Environmental Requirements; (iv) to Grantor's knowledge, no Hazardous Substances
have migrated from any Property upon or beneath other properties which would
reasonably be expected to result in material liability for Grantor; and (v) to
Grantor's knowledge, no Hazardous Substances have migrated or threaten to
migrate from other properties upon, about or beneath any Property which would
reasonably be expected to result in material liability for Grantor.
(b) Covenants. Subject to Grantor's right to contest under Section 7 (c)
--------- -------------
hereof, Grantor covenants and agrees with Beneficiary that it shall comply with
all Environmental Laws. If at any time during the continuance of the Lien of
this Mortgage, a Governmental Authority having jurisdiction over the Trust
Estate requires remedial action to correct the presence of Hazardous Materials
in, around, or under any Property (an "Environmental Event"), Grantor shall
-------------------
deliver prompt notice of the occurrence of such Environmental Event to
Beneficiary. Within (30) thirty days after Grantor has knowledge of the
occurrence of an Environmental Event, Grantor shall deliver to Beneficiary an
Officer's Certificate (an "Environmental Certificate") explaining the
-------------------------
Environmental Event in reasonable detail and setting forth the proposed remedial
action, if any.
(c) ENVIRONMENTAL INDEMNIFICATION. GRANTOR SHALL PROTECT, INDEMNIFY,
-----------------------------
SAVE, DEFEND, AND HOLD HARMLESS BENEFICIARY AND ALL OFFICERS, DIRECTORS,
STOCKHOLDERS, PARTNERS, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS THEREOF
(COLLECTIVELY, THE "INDEMNIFIED ENVIRONMENTAL PARTIES") FROM AND AGAINST ANY AND
---------------------------------
ALL LIABILITY, LOSS, DAMAGE (EXCLUDING ANY AND ALL CONSEQUENTIAL DAMAGES,
INCLUDING, WITHOUT LIMITATION, DIMINUTION IN VALUE), ACTIONS, CAUSES OF ACTION,
COSTS OR EXPENSES WHATSOEVER (INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES)
AND ANY AND ALL CLAIMS, SUITS AND JUDGMENTS WHICH ANY INDEMNIFIED ENVIRONMENTAL
PARTY MAY SUFFER, AS A RESULT OF OR WITH RESPECT TO: (A) ANY ENVIRONMENTAL
CLAIM RELATING TO OR ARISING FROM SUCH PROPERTY; (B) THE VIOLATION OF ANY
ENVIRONMENTAL LAW IN CONNECTION WITH SUCH PROPERTY; (C) ANY RELEASE, SPILL, OR
THE PRESENCE OF ANY HAZARDOUS SUBSTANCES AFFECTING SUCH PROPERTY; AND (D) THE
PRESENCE AT, IN, ON OR UNDER, OR THE RELEASE, ESCAPE, SEEPAGE, LEAKAGE,
DISCHARGE OR MIGRATION AT OR FROM, SUCH PROPERTY OF ANY HAZARDOUS SUBSTANCES,
WHETHER OR NOT SUCH CONDITION WAS KNOWN OR UNKNOWN TO GRANTOR PROVIDED THAT, IN
EACH CASE, GRANTOR MAY BE RELIEVED OF ITS OBLIGATION UNDER THIS SUBSECTION IF
ANY OF THE MATTERS REFERRED TO IN CLAUSES (A) THROUGH (D) ABOVE DID NOT OCCUR
(BUT NEED NOT HAVE BEEN DISCOVERED) PRIOR TO (1) THE FORECLOSURE OF THIS
MORTGAGE WITH RESPECT TO SUCH PROPERTY, (2) THE DELIVERY BY GRANTOR TO
BENEFICIARY OF A DEED-IN-LIEU OF
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FORECLOSURE WITH RESPECT TO SUCH PROPERTY, OR (3) BENEFICIARY'S TAKING
POSSESSION AND CONTROL OF SUCH PROPERTY AFTER THE OCCURRENCE OF AN EVENT OF
DEFAULT HEREUNDER AND SUCH OBLIGATION IS A RESULT OF THE ACTS OR OMISSIONS OF
ANY INDEMNIFIED PARTY. IF ANY SUCH ACTION OR OTHER PROCEEDING SHALL BE BROUGHT
AGAINST BENEFICIARY, UPON WRITTEN NOTICE FROM GRANTOR TO BENEFICIARY (GIVEN
REASONABLY PROMPTLY FOLLOWING BENEFICIARY'S NOTICE TO GRANTOR OF SUCH ACTION OR
PROCEEDING), GRANTOR SHALL BE ENTITLED TO ASSUME THE DEFENSE THEREOF, AT
GRANTOR'S EXPENSE, WITH COUNSEL REASONABLY ACCEPTABLE TO BENEFICIARY; PROVIDED,
HOWEVER, BENEFICIARY MAY, AT ITS OWN EXPENSE, RETAIN SEPARATE COUNSEL TO
PARTICIPATE IN SUCH DEFENSE, BUT SUCH PARTICIPATION SHALL NOT BE DEEMED TO GIVE
BENEFICIARY A RIGHT TO CONTROL SUCH DEFENSE, WHICH RIGHT GRANTOR EXPRESSLY
RETAINS. NOTWITHSTANDING THE FOREGOING, EACH INDEMNIFIED ENVIRONMENTAL PARTY
SHALL HAVE THE RIGHT TO EMPLOY SEPARATE COUNSEL AT GRANTOR'S EXPENSE IF, IN THE
REASONABLE OPINION OF LEGAL COUNSEL, A CONFLICT OR POTENTIAL CONFLICT EXISTS
BETWEEN THE INDEMNIFIED ENVIRONMENTAL PARTY AND GRANTOR THAT WOULD MAKE SUCH
SEPARATE REPRESENTATION ADVISABLE.
41. Recourse Nature of Certain Indemnifications. Notwithstanding
-------------------------------------------
anything to the contrary provided in this Mortgage or in any other Loan
Document, the indemnification provided in Section 40 (c) hereof shall be fully
--------------
recourse to Grantor (but not to (i) any Affiliate of Grantor, (ii) any Person
owning directly or indirectly, any legal or beneficial interest in Grantor or
any Affiliate of Grantor, or (iii) any partner, principal, officer, controlling
person, beneficiary, trustee, advisor, shareholder, employee, agent, Affiliate
or director of Grantor or of any Persons described in clauses (i) through (ii)
above) and shall be independent of, and shall survive, the discharge of the
Indebtedness, the release of the Lien created under this Mortgage, and/or the
conveyance of title to any Property to Beneficiary or any purchaser or designee
in connection with a foreclosure of this Mortgage or conveyance in lieu of
foreclosure.
42. Counterparts. This Mortgage may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
43. Merger, Conversion, Consolidation or Succession to Business of
--------------------------------------------------------------
Beneficiary. Any corporation into which Beneficiary may be merged or converted
- -----------
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which Beneficiary shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of Beneficiary, shall be the successor of Beneficiary hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. Beneficiary shall provide the Rating Agencies with
written notice of any merger or conversion to be undertaken pursuant to this
Section 43 no less than 30 days prior to such merger or conversion.
- ----------
44. No Endorsement. Beneficiary shall not become or be considered to
--------------
be an endorser, co-maker or co-obligor on any Note or on any obligation of
Grantor secured by this Mortgage or otherwise.
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<PAGE>
45. Substitute Property.
-------------------
(a) Generally. At any time and from time to time, in connection with
---------
a Specified Property Release or a Substitute Property Release or a Defeasance
Collateral Release, Grantor may, subject to the conditions in this Section 45,
----------
substitute a property (a "Substitute Property") for an existing Specified
-------------------
Property or Substitute Property (a "Replaced Property") or Defeasance
-----------------
Collateral. From and after the substitution of a Substitute Property in
accordance herewith, such Substitute Property shall thereafter be deemed a
Property under this Mortgage, and the Allocated Loan Amount of such Substitute
Property shall be the same as the Allocated Loan Amount of the Replaced
Property, except as otherwise provided in Section 46(b) below. In the event of a
-------------
substitution, the Note shall remain in full force and effect, and either a new
Mortgage encumbering the Substitute Property (the "Substitute Mortgage") shall
-------------------
be executed and delivered by Grantor to Beneficiary or a counterpart original of
this Mortgage, modified as necessary, shall be executed and delivered by Grantor
to Beneficiary to encumber the Substitute Property and the remainder of the
Trust Estate. Concurrently with the completion of all steps necessary to
substitute a Substitute Property as provided herein, Beneficiary shall execute
or cause to be executed all such documents requested by Grantor as are necessary
or appropriate (i) to release all Liens granted to Beneficiary and affecting the
Replaced Property, and (ii) to cause the Substitute Mortgage to be cross-
collateralized and cross-defaulted with this Mortgage. Grantor shall prepare at
its expense all such documents.
(b) Substitute Property Requirements. To qualify as a Substitute
--------------------------------
Property, the property must, at the time of substitution:
(A) be a property as to which Grantor will hold indefeasible fee
title free and clear of any lien or other encumbrance except for
Permitted Encumbrances and easements, restrictive covenants and other
title exceptions and Leases which do not have a material adverse
effect on the utility or value of such property for its current use;
(B) be free and clear, as shall be demonstrated in an
environmental report issued by a recognized environmental consultant
at Grantor's expense and in form and substance reasonably acceptable
to Beneficiary, of any Hazardous Substance except for nominal amounts
of any such substances commonly incorporated in or used in the
operation of properties similar to the Properties (in either case in
compliance with all Environmental Laws), or such matters as, in the
opinion of Beneficiary, are unlikely to result in any material
liability to the owner thereof or to any liability to a secured lender
with respect to the Property, all as certified by such consultant;
(C) be in reasonably good repair and condition, as shall be
certified by an Officer's Certificate of Grantor in form and substance
reasonably acceptable to Beneficiary;
(D) be in compliance, in all material respects, with Legal
Requirements and Insurance Requirements, as shall be
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<PAGE>
certified in an Officer's Certificate in form and substance reasonably
acceptable to Beneficiary; and
(E) (as evidenced by two appraisals prepared by Independent
Appraisers selected by Beneficiary performed at Grantor's expense)
have a fair market value no less than the greater of
(1) the fair market value of the Replaced Property as of
the date hereof, and
(2) the fair market value of the Replaced Property immediately
prior to the Substitution.
(c) Conditions to Substitution. In addition to the conditions in
--------------------------
this Section 45 above, substitution of any Property pursuant to this
----------
Section 45 shall be subject to the satisfaction of the following, all of
----------
which shall be prepared or obtained at Grantor's expense:
(A) receipt by Beneficiary and the Rating Agencies of written
notice thereof from Grantor at least thirty (30) days before the date
of the proposed substitution (the "Substitution Date"), together with
-----------------
(1) written evidence that the property proposed to be a Substitute
Property complies with Section 45 above and (2) such other
----------
information, including financial information, as Beneficiary or the
Rating Agencies may request;
(B) Beneficiary's receipt of written affirmation from the Rating
Agencies that the credit ratings of the securities secured by a pledge
of the Note immediately prior to such substitution will not be
qualified, downgraded or withdrawn as a result of such substitution,
which affirmation may be granted or withheld in the Rating Agencies'
sole and absolute discretion;
(C) delivery to Beneficiary of an Opinion of Counsel opining as
to the enforceability of the Substitute Mortgage with respect to the
Substitute Property in substantially the same form and substance as
the opinion concerning enforceability originally delivered at the
Closing Date in connection with the Replaced Property, with reasonable
allowance for variations in applicable state law and a
Nondisqualification Opinion and a Tax Opinion;
(D) no Event of Default shall have occurred and be continuing;
(E) the representations and warranties set forth in this
Mortgage and the Loan Documents applicable to the Replaced Property
shall be true and correct (except as to title exceptions) as to the
Substitute Property on the Substitution Date in all material respects;
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(F) delivery to Beneficiary of a copy of the [Partnership
Agreement/organizational documents] of Grantor and all amendments
thereto, certified as true, complete and correct by the managing
general partner; a certificate from the Secretary of State or other
applicable state official or officer in Grantor's state of formation
certifying that it is duly formed and in good standing (with tax
clearance, if applicable), if available, certificates from the
Secretary of State of the state in which the Substitute Property is
located, certifying as to Grantor's good standing as a limited
partnership in such state (with tax clearance, if applicable);
delivery by the managing general partner of Grantor of a certificate,
dated the Substitution Date and signed on behalf of its Secretary or
Assistant Secretary, certifying the names of the officers of the
managing general partner authorized to execute and deliver, in the
name and on behalf of Grantor, the Substitute Mortgage and the other
Loan Documents to which Grantor is a party, together with the original
(not photocopied) signatures of such officers;
(G) delivery to Beneficiary of an Officer's Certificate
certifying to the veracity of the statements in Subsections
-----------
45(a)(ii)(B), 45(a)(ii)(C), 45(a)(ii)(D), 45(a)(iii)(E) and
-----------------------------------------------------------
45(a)(iii)(F) hereof;
-------------
(H) delivery to Beneficiary in form and substance satisfactory
to Beneficiary of originals of the following:
(1) a Substitute Mortgage or an amendment to this Mortgage, duly
executed and acknowledged by Grantor;
(2) a substitute assignment of leases and rents and cash
collateral account agreement with respect to the Substitute
Property or an amendment to the Assignment of Leases and the Cash
Collateral Agreement, duly executed and acknowledged by Grantor,
assigning and transferring to Beneficiary a first priority
security interest in all rents, revenues, issues, profits and
proceeds arising under the Leases relating to the Substitute
Property, subject to the Permitted Encumbrances;
(3) a title insurance policy issued by the Title Company or
another title insurance company reasonably acceptable to
Beneficiary in the amount equal to the Allocated Loan Amount (so
long as a "tie-in" endorsement shall be available, otherwise in
the amount of 125% of the Allocated Loan Amount) containing such
affirmative coverage reasonably acceptable to Beneficiary
available at commercially reasonable rates insuring that the
Substitute Mortgage creates a valid first lien on Grantor's fee
title in the Substitute Property subject to the Permitted
Encumbrances, or if the substitution is accomplished by
modification of this Mortgage an endorsement to the original
title policy insuring this Mortgage and an
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<PAGE>
original title insurance policy endorsement, insuring that
Beneficiary's perfected first priority interest in and to the
other Properties in the Trust Estate is unaffected by such
modification;
(4) a current as-built land title survey and a certificate from
a professional licensed land surveyor with respect to such
Substitute Property, certified to the Title Company and
Beneficiary, and showing the location, dimensions and area of
each parcel of the Substitute Property, including all existing
buildings and improvements, utilities, parking areas and spaces,
internal streets, if any, external streets, rights-of-way, as
well as any easements, setback violations or encroachments on
such Substitute Property and identifying each item with its
corresponding exception, if any, in the title policy relating
thereto and otherwise reasonably acceptable to Beneficiary. Each
survey shall contain the original signature and seal of the
surveyor and any additional matter required by the title
companies. In addition, Grantor shall provide with respect to
each Substitute Property a certificate of a professional land
surveyor to the effect that the Improvements located upon such
Substitute Property are not located in a flood plain area, or, if
such Substitute Property is in a flood plain area, Grantor shall
deliver on the Closing Date evidence of flood insurance;
(5) Uniform Commercial Code financing statements (Form UCC-1)
(or other forms required in any jurisdiction), duly executed by
Grantor, covering all fixtures, Building Equipment and other
personal property collateral and all proceeds thereof, naming
Grantor as debtor and Beneficiary as secured party;
(6) insurance certificates issued by insurance companies
reasonably satisfactory to Beneficiary evidencing the insurance
coverage required under Section 5 hereof; and
---------
(7) payment of all costs and expenses anticipated to be incurred
in connection with such substitution (including reimbursement of
Beneficiary's reasonable costs, title premiums, mortgage
recording taxes, transfer taxes, recording fees, and reasonable
attorneys' fees and disbursements actually incurred).
46. Defeasance.
----------
(a) With respect to a Property Release with respect to which Grantor
proposes to deliver Defeasance Collateral (each, a "Defeasance"), the Grantor
------------
shall deposit Defeasance Collateral in accordance with subsection (B) below to
the Defeasance Collateral Account. In no event shall the deliverance of
Defeasance Collateral cause the Grantor to be released from its obligations to
make payments of principal and interest on the Note.
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<PAGE>
(b) The Defeasance shall be permitted at such time as all of the
following events shall have occurred:
(i) the Defeasance Collateral Account shall have been
established pursuant to Section 47 hereof;
----------
(ii) if the Mortgage Loan is held by a REMIC, a period of more
than two years shall have elapsed since the date on which the Mortgage Loan
is deposited into such REMIC;
(iii) Grantor shall have delivered or caused to have been
delivered to Beneficiary the Defeasance Collateral for deposit into the
Defeasance Collateral Account such that it will satisfy either the Minimum
Defeasance Collateral Requirement with respect to a release of less than
all of the Properties or the Total Defeasance Collateral Requirement with
respect to a release of all of the Properties, as the case may be, at the
time of delivery and all such Defeasance Collateral, if in registered form,
shall be registered in the name of Beneficiary or its nominee (and, if
registered in nominee name endorsed to Beneficiary or in blank) and, if
issued in book-entry form, the name of Beneficiary or its nominee shall
appear as the owner of such securities on the books of the Federal Reserve
Bank or other party maintaining such book-entry system;
(iv) Grantor shall have granted or caused to have been granted
to Beneficiary a valid perfected first priority security interest in the
Defeasance Collateral and all proceeds thereof;
(v) Grantor shall have delivered or caused to be delivered to
Beneficiary an Officers' Certificate, dated as of the date of such delivery
(x) that sets forth the aggregate face amount or unpaid principal amount,
interest rate and maturity of all such Defeasance Collateral, a copy of the
transaction journal, if any, or such other notification, if any, published
by or on behalf of the Federal Reserve Bank or other party maintaining a
book-entry system advising that Beneficiary or its nominee is the owner of
such securities issued in book-entry form, and (y) to the following effect
that states that:
(A) Grantor owns the Defeasance Collateral being delivered
to Beneficiary free and clear of any and all Liens, security
interests or other encumbrances, and has not assigned any
interest or participation therein (or, if any such interest or
participation has been assigned, it has been released), and
Grantor has full power and authority to pledge such Defeasance
Collateral to Beneficiary;
(B) such Defeasance Collateral consists solely of
Defeasance Eligible Investments;
(C) such Defeasance Collateral satisfies the Minimum
Defeasance Collateral Requirement or the Total Defeasance
Collateral Requirement, as the case may be, determined as of the
date of delivery;
(D) the Defeasance contemplated hereby will not give rise
to an Event of Default; and
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(E) the information set forth in the schedule attached to
such Officers' Certificate is correct and complete as of the date
of delivery (such schedule, which shall be attached to and form a
part of such Officers' Certificate, shall demonstrate
satisfaction of the requirement set forth in clause (C) above, in
a form reasonably acceptable to Beneficiary);
(vi) Grantor shall have delivered or caused to be delivered
to Beneficiary (A) the Required Opinion with respect to Beneficiary's
interest in such Defeasance Collateral, (B) a Tax Opinion, (C) if the
Mortgage Loan at such time is included in a REMIC, a Nondisqualification
Opinion, and (D) in the event the aggregate of amounts previously defeased
and currently subject to a Defeasance equals or exceeds in the aggregate
40% of the Principal Amount, an additional Opinion of Counsel, to the
effect that Beneficiary will not be required to be registered under the
Investment Company Act as a result of such Defeasance, and an Opinion of
Counsel that Beneficiary has been granted a first priority perfected
security interest in the Defeasance Collateral;
(vii) Grantor shall have delivered or caused to be
delivered to Beneficiary a certificate, acceptable to Beneficiary, from an
independent certified public accountant confirming that Grantor has
satisfied the provisions of this Section 46(b);
-------------
(viii) Beneficiary shall have received from each of the
Rating Agencies written affirmation that the credit ratings of the
securities secured by a pledge of the Note immediately prior to such
defeasance will not be qualified, downgraded or withdrawn as a result of
such defeasance, which affirmation may be granted or withheld in the Rating
Agencies' sole and absolute discretion; and
(ix) Grantor shall have delivered or caused to be delivered
to Beneficiary such other documents and certificates as Beneficiary may
reasonably request in connection with demonstrating that Grantor has
satisfied the provisions of this Section 46(b).
-------------
(c) For purposes of determining whether sufficient amounts are
on deposit in the Defeasance Collateral Account, there shall be included only
payments of principal and predetermined and certain income thereon (determined
without regard to any reinvestment of such amounts) that will occur on a stated
date for a stated payment on or before the dates when such amounts may be
required to be applied to pay the principal and interest when due on the Note
through and including the Reset Date (as defined in the Note) together with the
outstanding principal balance of the Note as of the Reset Date.
(d) If at any time Grantor shall have delivered Defeasance
Collateral to Beneficiary, Grantor, at its sole option, may elect to substitute
one or more Substitute Properties for all or any portion of the Defeasance
Collateral. If Grantor shall so elect, Grantor shall comply with the provisions
of Section 45 hereof as to the Substitute Property and, upon compliance with
----------
such Section 45, Beneficiary shall deliver to Grantor Defeasance Collateral,
----------
free and clear of all Liens, in an amount equal to the
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<PAGE>
Minimum Defeasance Collateral Requirement that would have been attributable to
such Substitute Property as of the Substitution Date.
47. Defeasance Collateral Account.
-----------------------------
(a) On or before the date on which Grantor delivers Defeasance
Collateral to Beneficiary pursuant to Section 6 or 46 hereof, Grantor shall open
---------------
at any Approved Bank or Banks at the time and acting as custodian for
Beneficiary, a defeasance collateral account (the "Defeasance Collateral
---------------------
Account") which shall at all times be an Eligible Account (as defined in the
- -------
Cash Collateral Agreement), in which Grantor shall grant to Beneficiary or
reconfirm the grant to Beneficiary of a security interest as part of the Trust
Estate hereunder. Should Grantor open the Defeasance Collateral Account at a
bank or banks other than an Approved Bank, such Defeasance Collateral Account
must be maintained as a segregated trust account. The Defeasance Collateral
Account shall contain (i) all Defeasance Collateral delivered by Grantor
pursuant to Sections 38, 46 and 47 hereof, (ii) all payments received on
----------------------
Defeasance Collateral held in the Defeasance Collateral Account and (iii) all
income or other gains from investment of moneys or other property deposited in
the Defeasance Collateral Account, provided, however, that (x) any sums earned
on any Defeasance Collateral, which sums were not included in the determination
of the Minimum Defeasance Collateral Requirement or the Total Defeasance
Collateral, as the case may be, shall be paid monthly by Beneficiary into the
Cash Collateral Account to be held in accordance with the Cash Collateral
Agreement, and (y) any sums earned on any Defeasance Collateral representing the
difference between the assumed interest on the Note at the Default Rate and the
lesser, if applicable, of the actual interest on the Note for the quarter prior
to the preceding Due Date shall be paid quarterly to the Cash Collateral
Account. All such amounts, including all income from the investment or
reinvestment thereof, shall be held by Beneficiary as part of the Trust Estate,
subject to withdrawal by Beneficiary for the purposes set forth in this Section
-------
47. Grantor shall be the owner of the Defeasance Collateral Account and shall
- --
report all income accrued on Defeasance Collateral for federal, state and local
income tax purposes in its income tax return.
(b) Beneficiary shall withdraw, draw on or collect and apply the
amounts that are on deposit in the Defeasance Collateral Account to pay when due
the principal and all installments of interest and principal on the Note and
other amounts due under the Loan Documents.
(c) Funds and other property in the Defeasance Collateral
Account shall not be commingled with any other monies or property of Grantor or
any Affiliate of Grantor.
(d) Beneficiary shall not in any way be held liable by reason of
any insufficiency in the Defeasance Collateral Account.
48. Reserves. (a) On the Closing Date, a portion of the Loan in the
--------
amount of [$850,000] will be deposited into the Repair Reserve Account (as
defined in the Cash Collateral Agreement) held by the Agent (as defined in the
Cash Collateral Agreement) for Beneficiary. Such funds, together with all
investment income earned thereon, are referred to herein as the "Repair Reserve
--------------
Amounts." Grantor shall perform the work more specifically set forth on
- -------
Schedule with respect to the seismic retrofit of the Properties located at
- --------
, on or before the date which is six (6) months from the date
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<PAGE>
hereof. The Repair Reserve Amounts shall be disbursed not more often than
monthly, within ten (10) Business Days after receipt of an Officer's Certificate
stating that certain seismic retrofit items set forth on Schedule have been
--------
substantially completed, together with copies of invoices therefor as well as
lien waivers from the applicable contractors, and provided that no Event of
Default shall have occurred and be continuing, Beneficiary will instruct Agent
to disburse the requested portion of the Repair Reserve Amounts to Grantor. Upon
completion of all work on Schedule and final disbursement to Grantor of the
--------
Repair Reserve Amount, the Repair Reserve Account shall be closed by
Beneficiary.
(b) On the first day of February 1997 and on the first day of
every month thereafter until the Maturity Date, Beneficiary will instruct Agent
to withdraw from the Operating Account and deposit into the TI and Leasing
Reserve Account (as such term is defined in the Cash Collateral Agreement), a
sum equal to $213,000 (such funds, together with all investment income earned
thereon, are referred to herein as the "Monthly TI and Leasing Reserve Amount").
-------------------------------------
Portions of TI and Leasing Reserve Account shall be disbursed by Agent to
Grantor pursuant to instructions from Beneficiary not more frequently than once
per month, provided no Event of Default shall have occurred and be continuing,
upon delivery by Grantor to Beneficiary of an Officer's Certificate stating that
Grantor has executed a Lease for otherwise vacant space in accordance with the
provisions hereof and for a term of not less than ten (10) years, together with
a certified copy of such lease. The amount to be released to Grantor shall be
equal to [$0.20] per square foot of rentable area demised pursuant to any such
lease. If Grantor shall execute Leases and shall be entitled to disbursements
from the TI and Leasing Reserve Account in excess of the amount on deposit
therein, Grantor shall be entitled to a credit against the next due payments of
the Monthly TI and Leasing Reserve Amounts in an amount equal to the difference
between the amounts, if any, on deposit therein and the amounts that would
otherwise be disbursed to Grantor. Within ten (10) Business Days of receipt of
such certification, Beneficiary shall instruct Agent to disburse to Grantor an
amount equal to that requested by Grantor.
(c) On the Closing Date, a portion of the Loan in the amount of
[$________] will be deposited into the Deferred Maintenance Reserve Account (as
defined in the Cash Collateral Agreement) held by the Agent (as defined in the
Cash Collateral Agreement) for Beneficiary. Such funds, together with all
investment income earned thereon, are referred to herein as the "Deferred
--------
Maintenance Reserve Amounts." Grantor shall perform the work more specifically
- ---------------------------
set forth on Schedule with respect to the deferred maintenance items with
--------
respect to the Properties located at , on or before the date which is [six (6)]
months from the date hereof. The Deferred Maintenance Reserve Amounts shall be
disbursed not more often than monthly, within ten (10) Business Days after
receipt of an Officer's Certificate stating that certain deferred maintenance
items set forth on Schedule have been substantially completed, together with
--------
copies of invoices therefor as well as lien waivers from the applicable
contractors, and provided that no Event of Default shall have occurred and be
continuing, Beneficiary will instruct Agent to disburse the requested portion of
the Deferred Maintenance Reserve Amounts to Grantor. Upon completion of all work
on Schedule and final disbursement to Grantor of the Deferred Maintenance
--------
Reserve Amount, the Deferred Maintenance Reserve Account shall be closed by
Beneficiary.
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<PAGE>
(d) On the first day of February 1997 and on the first day of
every month thereafter until the Maturity Date, Beneficiary will instruct Agent
to withdraw from the Operating Account and deposit into the Replacement Reserve
Account (as such term is defined in the Cash Collateral Agreement), a sum equal
to $213,000 (such funds, together with all investment income earned thereon, are
referred to herein as the "Monthly Replacement Reserve Amount"). Portions of the
----------------------------------
Replacement Reserve Account shall be disbursed by Agent to Grantor pursuant to
instructions from Beneficiary not more frequently than once per month, provided
no Event of Default shall have occurred and be continuing, upon delivery by
Grantor to Beneficiary of an Officer's Certificate stating that Grantor has
replaced [list or Schedule items and, as appropriate, indicate requirement of
Officer's Certificate and invoices]. The amount to be released to Grantor shall
be equal to [$0.20] per square foot of rentable area demised pursuant to the
Leases at a Property. If Grantor shall make replacements as contemplated herein
and shall be entitled to disbursements from the Replacement Reserve Account in
excess of the amount on deposit therein, Grantor shall be entitled to a credit
against the next due payments of the Monthly Replacement Reserve Amounts in an
amount equal to the difference between the amounts, if any, on deposit therein
and the amounts that would otherwise be disbursed to Grantor. Within ten (10)
Business Days of receipt of such certification, Beneficiary shall instruct Agent
to disburse to Grantor an amount equal to that requested by Grantor.
49. Substitute or Successor Trustee. Trustee may resign by an
-------------------------------
instrument in writing addressed to Beneficiary, or Trustee may be removed at any
time with or without cause by Beneficiary. In case of death, resignation,
removal or disqualification of Trustee or if for any reason Beneficiary shall
deem it desirable to appoint a substitute or successor trustee to act instead
of the herein named trustee or any substitute or successor trustee, then
Beneficiary shall have the right and is hereby authorized and empowered to
appoint a successor trustee, or a substitute trustee, without other formality
than appointment and designation in writing executed and acknowledged by
Beneficiary and, if required by applicable law to provide constructive notice,
recorded in the county or counties where the Properties are located, and the
authority hereby conferred shall extend to the appointment of other successor
and substitute trustees successively until the indebtedness secured hereby has
been paid in full or until the Properties are sold hereunder. In the event the
indebtedness secured hereby is owned by more than one person or entity, the
holder or holders of not less than a majority in the amount of such indebtedness
shall have the right and authority to make the appointment of a successor or
substitute trustee provided for in the preceding sentence. Such appointment and
designation by Beneficiary or by the holder or holders of not less than a
majority of the indebtedness secured hereby shall be full evidence of the right
and authority to make the same and of all facts therein recited. If Beneficiary
is a corporation or a nationally chartered bank and such appointment is executed
in its behalf by an officer of such corporation or nationally chartered bank,
such appointment shall be conclusively presumed to be executed with authority
and shall be valid and sufficient without proof of any action by the board of
directors or any superior officer of the corporation. Upon the making of any
such appointment and designation, all of the estate and title of Trustee in the
Properties shall vest in the named successor or substitute trustee and he shall
thereupon succeed to and shall hold, possess and execute all the rights, powers,
privileges, immunities and duties herein conferred upon Trustee; but
nevertheless, upon the written request of Beneficiary or of the successor or
substitute trustee, Trustee ceasing to act shall execute and deliver an
instrument transferring to such
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<PAGE>
successor or substitute trustee all of the estate and title in the Properties of
Trustee so ceasing to act, together with all rights, powers, privileges,
immunities and duties herein conferred upon Trustee, and shall duly assign,
transfer and deliver any of the properties and monies held by said Trustee
hereunder to said successor or substitute trustee. All references herein to
Trustee shall be deemed to refer to Trustee (including any successor or
substitute appointed and designated as herein provided) from time to time acting
hereunder. Grantor hereby ratifies and confirms any and all acts which the
herein named Trustee or his successor or successors, substitute or substitutes,
in this trust, shall do lawfully by virtue hereof.
50. Liability of Trustee. Trustee shall not be liable for any
--------------------
error of judgment or act done by Trustee in good faith, or be otherwise
responsible or accountable under any circumstances whatsoever, except for
Trustee's gross negligence or willful misconduct. Trustee shall have the right
to rely on any instrument, document or signature authorizing or supporting any
action taken or proposed to be taken by him hereunder, believed by him in good
faith to be genuine. All monies received by Trustee shall, until used or applied
as herein provided, be held in trust for the purposes for which they were
received, and shall be segregated from all other monies, and Trustee shall be
under no liability for interest on any monies received by him hereunder. Grantor
will reimburse Trustee for, and indemnify and save him harmless against, any and
all liability and expenses which may be incurred by him in the performance of
his duties hereunder.
51. Beneficiary and Trustee.
-----------------------
(a) The Trustees accept the trusts hereby created and agree to
perform the duties herein required of them upon the terms and conditions hereof.
The duties and obligations of the Trustees in respect of this
Mortgage shall be as set forth in this Section 51.
----------
(i) Except upon the occurrence and during the
continuance of an Event of Default actually known to Beneficiary:
(A) The Trustees shall undertake to perform such
duties and obligations and only such duties and obligations as are
specifically set forth in this Mortgage and the other Loan Documents or as
otherwise directed by a letter of direction from Beneficiary, and no
implied covenants or obligations shall be read into this Mortgage or the
other Loan Documents against the Trustees; and
(B) In the absence of bad faith, the Trustees may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustees and conforming to the requirements of this Mortgage and the
other Loan Documents; but in the case of any such certificates or opinions
which by any provision hereof or thereof are specifically required to be
furnished to Beneficiary, the Trustees shall be under a duty to examine the
same to determine whether or not they conform to the requirements of this
Mortgage and the other Loan Documents.
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<PAGE>
(ii) In case an Event of Default known to Beneficiary
has occurred and is continuing, the Trustees shall exercise the rights and
powers vested in the Trustees by this Mortgage and the other Loan
Documents, with reasonable care.
(iii) No provision of this Mortgage shall be construed
to relieve the Trustees from liability for their own negligence or willful
misconduct, except that:
------
(A) Section 51(a) hereof shall not be construed to
-------------
limit the effect of Section 51(b) hereof;
-------------
(B) The Trustees shall not be liable for any error of
judgment made in good faith by an officer of the Trustees, unless it shall
be proved that the Trustees were negligent in ascertaining the pertinent
facts; and
(C) The Trustees shall not be liable with respect to
any action taken or omitted to be taken in good faith in accordance with
the direction of Beneficiary relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustees, or
exercising any trust or power conferred upon the Trustees under this
Mortgage.
(iv) Whether or not therein expressly so provided,
every provision of this Mortgage relating to the conduct or affecting the
liability of or affording protection to the Trustees shall be subject to
the provisions of this Section 51(b).
-------------
(v) No provision of this Mortgage shall require the
Trustees to expend or risk their own funds or otherwise incur any personal
financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers, if they shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to them.
(b) At any time or times for the purpose of meeting the
Legal Requirements of any jurisdiction in which any part of a Trust Estate may
at the time be located, Beneficiary shall have the power to appoint and, upon
the written request of Beneficiary, Grantor shall for such purpose join with
Beneficiary in the execution, delivery and performance of all instruments and
agreements reasonably necessary or proper to appoint one or more Persons
reasonably approved by Beneficiary to act as trustee pursuant to this Mortgage
in such jurisdiction for such portion of the Trust Estate located in such
jurisdiction (the "Jurisdictional Trustee") with such powers as are provided in
----------------------
the instrument of appointment which shall expressly designate the Property
affected and the capacity of the appointee as a Jurisdictional Trustee, and to
vest in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other provisions of
this Section 51. If Grantor does not join in such appointment within fifteen
----------
(15) days after the receipt by it of a request so to do, or in case an Event of
Default has occurred and is continuing, Beneficiary alone shall make such
appointment. Should any written instrument from Grantor be reasonably required
by any Jurisdictional Trustee so appointed for more fully confirming to such
Jurisdictional Trustee such property, title, right or power, any and
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all such instruments shall, on request, be executed, acknowledged and delivered
by Grantor.
(i) Every Jurisdictional Trustee shall, to the extent
permitted by law, but to such extent only, be appointed subject to the
terms set forth in Section 51(b)(iii) hereof.
------------------
(ii) As of the date hereof _______, or any agency thereof,
is hereby appointed Jurisdictional Trustee for the States of California
[and Arizona].
(iii) To the extent permitted by law, but to such extent
only, the Jurisdictional Trustee is appointed herein subject to the
following terms, namely:
(A) Subject to the terms hereof and to the extent permitted
by law, all rights, powers, duties and obligations under this Mortgage
granted to or imposed upon Beneficiary and the Jurisdictional Trustee shall
be exercised solely by Beneficiary.
(B) The rights, powers, duties and obligations hereby
conferred or imposed upon Beneficiary and the Jurisdictional Trustee in
respect of any Property covered by such appointment shall be exercised or
performed by Beneficiary separately, or at the election of Beneficiary by
Beneficiary and the Jurisdictional Trustee jointly, except to the extent
that (i) under any law of any jurisdiction in which any particular act is
to be performed by Beneficiary and/or the 99999 dictional Trustee,
Beneficiary shall be incompetent or unqualified to perform such act or (ii)
Beneficiary shall deem it inconvenient or undesirable to perform such act,
then in any such event such rights, powers, duties and obligations shall be
exercised and performed by the Jurisdictional Trustee at the written
direction of Beneficiary.
(C) Beneficiary at any time, by an instrument in writing
executed by it, may accept the resignation of or remove any Jurisdictional
Trustee. Upon the written request of Beneficiary, Grantor shall join with
Beneficiary in the execution, delivery and performance of all instruments
and agreements reasonably necessary or proper to effectuate such
resignation or removal. A successor to the Jurisdictional Trustee so
resigned or removed may be appointed in the manner provided in this Section
-------
51.
--
(D) Upon the resignation or removal of any Jurisdictional
Trustee, Beneficiary shall have the power to appoint and, upon the written
request of Beneficiary, Grantor shall, for such purpose, join with
Beneficiary in the execution, delivery and performance of all instruments
and agreements reasonably necessary or proper to appoint one or more
Persons reasonably approved by Beneficiary to act as successor
Jurisdictional Trustee together with Beneficiary of all or any part of the
Trust Estate so designated, with such power as provided for in this Section
-------
51, and to vest in such Person or Persons in the capacity aforesaid, any
--
property, title, right or power deemed necessary or desirable, subject to
the other provisions of this Section 51. If Grantor does not join in such
----------
appointment, within fifteen (15) days after the receipt by it of a request
so to do, or in case an Event of Default has occurred and is continuing,
Beneficiary acting alone shall
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<PAGE>
make such appointment. Should any written instrument from Grantor be
required by any successor Jurisdictional Trustee so appointed for more
fully confirming to such trustee such property, title, right or power, any
and all such instruments shall, on request, be executed, acknowledged and
delivered by Grantor.
(E) No Jurisdictional Trustee hereunder shall be personally
liable by reason of any act or omission of Beneficiary or any other trustee
hereunder and Beneficiary shall not be personally liable by reason of any
act or omission of the Jurisdictional Trustee; neither shall knowledge of
Beneficiary be imputed to the Jurisdictional Trustee nor shall knowledge of
the Jurisdictional Trustee be imputed to Beneficiary.
(F) Any notice delivered to Beneficiary shall be deemed to
have been sufficiently delivered without any delivery to the Jurisdictional
Trustee.
(G) Any obligation of Grantor to file or give noticees,
reports or information to Beneficiary hereunder shall be satisfied by the
delivery thereof to Beneficiary.
(H) Any successor to the Jurisdictional Trustee (herein,
called the "Successor Jurisdictional Trustee") shall execute, acknowledge
--------------------------------
and deliver to its predecessor (herein called the "Predecessor
-----------
Jurisdictional Trustee"), Beneficiary and Grantor, an instrument accepting
----------------------
such appointment. Thereupon, the Successor Jurisdictional Trustee shall,
without any further act, deed or conveyance, become vested with the
estates, properties, rights, powers, duties and trusts of the Predecessor
Jurisdictional Trustee in the trusts created by this Mortgage, with the
same effect as if originally named as Jurisdictional Trustee. At the
written request of Grantor, Beneficiary or the Successor Jurisdictional
Trustee, the Predecessor Jurisdictional Trustee shall execute and deliver
an instrument, in recordable form, transferring to the Successor
Jurisdictional Trustee, upon the trusts herein expressed, the Trust Estate
and shall duly assign transfer, deliver and pay over to the Successor
Jurisdictional Trustee, any property and money subject to the Lien hereof
held by it. If any written instrument from Grantor or Beneficiary be
required by the Successor Jurisdictional Trustee for more fully and
certainly vesting in and confirming to the Successor Jurisdictional Trustee
such estates, properties, rights, powers and trusts, then, at the request
of the Successor Jurisdictional Trustee, all such instruments shall be
made, executed, acknowledged and delivered by Grantor or Beneficiary to the
Successor Jurisdictional Trustee.
(c) Grantor covenants and agrees:
(i) to pay to the Trustees from time to time reasonable
compensation for all services rendered by them hereunder;
(ii) to reimburse each of Beneficiary (subject to Section
-------
18) and the Trustees upon request for all reasonable expenses,
--
disbursements and advances incurred or made by it or them in accordance
with any provision of this Mortgage (including reasonable compensation,
expenses and disbursements of agents and counsel), except any such
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<PAGE>
expense, disbursement or advance as may be attributable to its negligence
or bad faith; and
(iii) to indemnify the Trustees for, and to hold each harmless
against, any loss, liability or expense incurred without negligence,
willful misconduct or bad faith on its part, arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder or the enforcement of remedies hereunder including the costs and
expenses of defending against any claim or liability in connection with the
exercise or performance of any of the powers or duties hereunder or
thereunder (except any liability incurred by Trustee and the Jurisdictional
Trustee with negligence, willful misconduct or bad faith on its or their
part).
The obligations of Grantor under this Section 51(c) to compensate or indemnify
-------------
the Trustees and to pay or reimburse the Trustees for expenses, disbursements
and advances shall constitute additional Indebtedness hereunder and shall
survive the satisfaction and discharge of this Mortgage. When the Trustees or
Beneficiary incur expenses or render services after an occurrence of an Event of
Default hereunder, the expenses and compensation for services are intended to
constitute expenses of administration under any bankruptcy law.
(d) To the extent permitted by law, but to such extent only, the
Individual Trustee is appointed herein by Beneficiary subject to the following
terms, namely:
(i) Subject to the terms hereof and to the extent permitted by
law, all the rights, powers, duties and obligations under this Mortgage
granted to or imposed upon the Individual Trustee shall be exercised solely
by Beneficiary except as herein provided.
(ii) The rights, powers, duties and obligations hereby conferred
or imposed upon the Individual Trustee in respect of any property covered
by such appointment shall be exercised or performed by Beneficiary
separately, or at the election of Beneficiary by Beneficiary and the
Individual Trustee jointly, except to the extent that (i) under any law of
any jurisdiction in which any particular act is to be performed by the
Individual Trustee, Beneficiary shall be incompetent or unqualified to
perform such act or (ii) Beneficiary shall deem it inconvenient or
undesirable to perform such act, then in any such event such rights,
powers, duties and obligations shall be exercised and performed by the
Individual Trustee at the written direction of Beneficiary.
(iii) Beneficiary at any time, by an instrument in writing
executed by it, may accept the resignation of or remove any Individual
Trustee. Upon the written request of Beneficiary, Grantor shall join with
Beneficiary in the execution, delivery and performance of all instruments
and agreements reasonably necessary or proper to effectuate such
resignation or removal. A successor to the Individual Trustee so resigned
or removed may be appointed in the manner provided in this Section 51.
----------
(iv) Upon the death, resignation or removal of any Individual
Trustee, Beneficiary shall have power to appoint and, upon the written
request of Beneficiary, Grantor shall, for such purpose,
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<PAGE>
join with Beneficiary in the execution, delivery and performance of all
instruments and agreements reasonably necessary or proper to appoint, one
or more persons approved by Beneficiary to act as Successor Individual
Trustee together with Beneficiary of all or any part of the Trust Estate,
with such powers as provided for in this Section 51, and to vest in such
----------
person or persons in the capacity aforesaid, any property, title, right or
power deemed necessary or desirable, subject to the other provisions of
this Section 51. If Grantor does not join in such appointment, within
----------
fifteen (15) days after the receipt by it of a request so to do, or in case
an Event of Default has occurred and is continuing, Beneficiary acting
alone shall make such appointment.
(v) Should any written instrument from Grantor be reasonably
required by any successor Individual Trustee so appointed for more fully
confirming to such trustee such property, title, right or power, any and
all such instruments shall, on request, be executed, acknowledged and
delivered by Grantor.
(vi) No Individual Trustee hereunder shall be personally liable
by reason of any act or omission of Beneficiary or any other Trustee
hereunder and Beneficiary shall not be personally liable by reason of any
act or omission of the Individual Trustee; neither shall knowledge of
Beneficiary be imputed to the Individual Trustee nor shall knowledge of the
Individual Trustee be imputed to Beneficiary.
(vii) Any notice delivered to Beneficiary shall be deemed to
have been sufficiently delivered without any delivery to the Individual
Trustee.
(viii) Any obligation of Grantor to file or give notices,
reports or information to the Trustees hereunder shall be satisfied by the
delivery thereof to Beneficiary.
Any successor to the Individual Trustee (herein, in this subsection
called the "Successor Individual Trustee") shall execute, acknowledge and
----------------------------
deliver to his predecessor (herein, in this subsection, called the "Predecessor
-----------
Individual Trustee"), Beneficiary and Grantor, an instrument accepting such
- ------------------
appointment. Thereupon, the Successor Individual Trustee shall, without any
further act, deed or conveyance, become vested with the estates, properties,
rights, powers, duties and trusts of the Predecessor Individual Trustee in the
trusts created by this Mortgage, with the same effect as if originally named as
Individual Trustee. At the written request of Grantor, Beneficiary or the
Successor Individual Trustee, the Predecessor Individual Trustee shall execute
and deliver an instrument transferring to the Successor Individual Trustee, upon
the trusts herein expressed, the Trust Estate and shall duly assign, transfer,
deliver and pay over to the Successor Individual Trustee, any property and money
subject to the Lien hereof held by him. If any written instrument from Grantor
or Beneficiary be reasonably required by the Successor Individual Trustee for
more fully and certainly vesting in and confirming to the Successor Individual
Trustee such estates, properties, rights, powers and trusts, then, at the
request of the Successor Individual Trustee, all such instruments shall be made,
executed, acknowledged and delivered by Grantor or Beneficiary to the Successor
Individual Trustee.
(e) At any time or times, (i) for the purpose of meeting the Legal
Requirements of any jurisdiction in which any part of a Trust Estate
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<PAGE>
may at the time be located or (ii) if Beneficiary deems it to be necessary or
desirable for the protection of its interests, Beneficiary shall have the power
to appoint, and upon written request of Beneficiary, Grantor shall for such
purpose join with Beneficiary in the execution, delivery and performance of all
instruments and agreements reasonably necessary or proper to appoint, one or
more Persons approved by Beneficiary either to act as co-trustee, jointly with
Beneficiary, of all or any part of the Trust Estate, or to act as separate
trustee of any such property, in either case with such powers as may be provided
in the instrument of appointment which shall expressly designate the property
affected and the capacity of the appointee as either a co-trustee or separate
trustee, and to vest in such person or persons in the capacity aforesaid, any
property, title, right or power deemed necessary or desirable, subject to the
other provisions of this Section 51. If Grantor does not join in such
----------
appointment within 15 days after the receipt by it of a request so to do, or in
case an Event of Default has occurred and is continuing, Beneficiary alone shall
make such appointment.
Should any written instrument from Grantor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right or power, any and all
such instruments shall, by request, be executed, acknowledged and delivered by
Grantor.
Every co-trustee or separate trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the same terms as
hereinabove set forth for the Individual Trustee.
(a) Grantor and Beneficiary intend that the relationship created
under this Mortgage be solely that of mortgagor and mortgagee. Nothing herein
is intended to create a joint venture, partnership, tenancy-in-common or joint
tenancy relationship between Grantor and Beneficiary.
52. As to Property in Arizona. Notwithstanding anything to the
-------------------------
contrary elsewhere in this Mortgage, as to any property of the Trust Estate
located in the State of Arizona (collectively, the "Arizona Property"):
----------------
(A) The reference, in GRANTING CLAUSES Paragraph VI, to Sections
9-313 and 9-402 of the Uniform Commercial Code shall be deemed to be reference
to 1973 Arizona Revised Statutes Section 47-9313 and 47-9402, respectively.
(B) This instrument shall constitute a security agreement and
continuously perfected fixture filing and financing statement. The Mortgagor
hereby grants the Beneficiary to secure the Obligations of the Mortgagor under
this Mortgage and any of the Loan Documents a security interest pursuant to
Chapter 9 of the Arizona Uniform Commercial Code. The Mortgagor hereby
authorizes the Beneficiary to execute, deliver, file or refile as Secured Party,
without joinder of the Mortgagor, as Debtor, any Financing Statement,
Continuation Statement (as such terms are used in the Arizona Uniform Commercial
Code), or other instruments the Beneficiary may reasonably require from time to
time to perfect or renew such security interest under the Arizona Uniform
Commercial Code. The Mortgagor is, for the purposes of this Mortgage deemed to
be the Debtor, and the Beneficiary is deemed to be the Secured Party. The
addresses of Secured Party and Debtor from which information concerning the
Credit Agreement may be obtained are set forth in the initial paragraph of this
Mortgage.
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<PAGE>
(C) This Mortgage shall be deemed to be and shall be construed
as a Deed of Trust enforceable in accordance with the applicable laws of the
State of Arizona regarding Deeds of Trust or Trust Deeds, as well as an
Indenture of Mortgage, Security Agreement, Financing Statement and Assignment of
Rents. Reference throughout this instrument to this "Mortgage" shall mean, as
appropriate, this Deed of Trust, Indenture or Mortgage, Security Agreement,
Financing Statement and/or Assignment of Rents. References throughout this
instrument to the "Trustee" or "Trustees" or "Jurisdictional Trustee" shall mean
[________________________] whose address is [_________________________].
Nothing herein set forth shall limit the right of the Beneficiary to foreclose
this Mortgage as a mortgage under Arizona law, at the option of the Beneficiary.
The Arizona Property shall be deemed to be, and hereby is, conveyed and
transferred by the Mortgagor, in trust only, to the Trustee, and the reference
to "the Beneficiary" in the Granting Clauses of this Mortgage shall, with regard
to the Arizona Property, be deemed to be a reference to Trustee so that the
Mortgagor mortgages, warrants, grants, bargains, sells, conveys, pledges and
assigns the Arizona Property of the Trust Estate to the Trustee, in trust, for
the benefit and use of the Beneficiary. Other references to "the Beneficiary"
in this Mortgage shall be interpreted to be references to the Beneficiary, the
Trustee or both as the context may require in light of the intent of the parties
that this Mortgage be construed as a Deed of Trust according to the applicable
laws of the State of Arizona regarding Deeds of Trust or Trust Deeds. Nothing
contained herein, however, is intended to limit the rights or powers of the
Beneficiary as set forth in this Mortgage, except only to the extent necessary
to accomplish the purpose stated above.
(D) Subsection (H) of Section 9(b) and Sections 9(d) and 9(e)
are deleted in their entirety as to Arizona Property.
(E) The provisions as to notices and the manner of giving
notices under the Arizona deed of trust statutes (A.R.S. (S) 33-801 et seq.)
-- ---
shall apply to any notice required by such statutes in lieu of the notice
provisions of Section 26 hereof.
53. As to Property in California. Notwithstanding anything to the
----------------------------
contrary elsewhere in this Mortgage, as to any property of the Trust Estate
located in the State of California (the "California Property"):
-------------------
(a) This Mortgage shall constitute a security agreement and
continuously perfected fixture filing and financing statement. The Grantor is,
for the purposes of this Mortgage, deemed to be the Debtor, and Beneficiary is
deemed to be the Secured Party, as those terms are defined and used in the
California Uniform Commercial Code. The addresses of the Secured Party and
Debtor from which information concerning the security agreement may be obtained
are set forth in the initial paragraph of this Mortgage. References to UCC (S)
9-402(f) and UCC (S) 9-501(d) in Section 10(b) of this Mortgage shall be deemed
to refer to UCC (S) 9-402(6) and UCC (S) 9-501, respectively.
(b) This Mortgage shall be deemed to be and shall be construed as a
Deed of Trust enforceable in accordance with the applicable laws of the State of
California regarding deeds of trust, as well as a Security Agreement, Financing
Statement and Assignment of Leases. Reference throughout this instrument to this
"Mortgage" shall mean, as appropriate, this Deed of Trust, Security Agreement,
Financing Statement and/or Assignment of Leases. Reference throughout this
Mortgage to "Grantor" shall mean Trustor, as
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<PAGE>
appropriate. References throughout this instrument to the "Trustee" or
"Trustees" shall mean: ____________________, a ________ corporation, subject to
substitution as provided in California Civil Code Section 2934(a). The
California Property shall be deemed to be and hereby is conveyed and transferred
by Grantor, in trust and with power of sale, to Trustee, and the reference to
the "Beneficiary" in the Granting Clauses of this Mortgage shall, with regard to
the California Property, be deemed to be a reference to Trustee so that Grantor
mortgages, warrants, grants, bargains, sells, conveys, pledges and assigns the
California Property of the Trust Estate to Trustee, in trust, for the benefit
and use of Beneficiary. Other references to "Beneficiary" in this Mortgage shall
be interpreted to be references to Beneficiary, Trustee or both as the context
may require in light of the intent of the parties that this Mortgage be
construed as a Deed of Trust according to the applicable laws of the State of
California. Trustee shall have all the obligations, rights, powers and duties of
a trustee of a deed of trust as explicitly set forth or necessarily implied in
the California Civil Code, as amended; and such rights, powers, duties and
obligations shall be exercised and performed by such Trustee at the written
direction of Beneficiary or the legal holder of the indebtedness secured hereby.
Nothing contained herein, however is intended to limit the rights or powers of
Beneficiary as set forth in this Mortgage, except to the extent necessary to
accomplish the purpose stated above.
Each of the remedies set forth herein, including without limitation
the remedies involving a power of sale of the California Property and the right
of Beneficiary to exercise self-help in connection with the enforcement of the
terms of this Mortgage, shall be exercisable if, and only to the extent,
permitted by the laws of the State of California in force at the time of the
exercise of such remedies without regard to the enforceability of such remedies
at the time of the execution and delivery of this Mortgage.
Beneficiary may elect to foreclose by exercise of the power of sale
contained herein, in which event Beneficiary shall notify Trustee and
shall, if required, deposit with Trustee the Note, the original or a
certified copy of this Mortgage, and such other documents, receipts and
evidences of expenditures made and secured hereby as Trustee may require.
Upon receipt of such notice from Beneficiary, Trustee shall cause
to be recorded and delivered to Grantor such notice as may then be required
by law and this Mortgage. Trustee shall, without demand on Grantor, after
lapse of such time as may then be required by law and after recordation of
such notice of default and after notice of sale has been given as required
by law, sell the California Property at the time and place of sale fixed by
it in said notice of sale, either as a whole or in separate lots of parcel
or items as Trustee shall deem expedient, and in such order as it may
determine, at public auction to the highest bidder for cash in lawful money
of the United States payable at the time of sale. Trustee shall deliver to
the purchaser or purchasers at such sale its good and sufficient deed or
deeds conveying the property so sold, but without any covenant or warranty,
express or implied. The recitals in such deed of any matters or facts
shall be conclusive proof of the truthfulness thereof. Any person,
including, without limitation, Grantor, Trustee or Beneficiary, may
purchase at such sale.
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(iii) Trustee may postpone the sale of all or any portion of the
California Property from time to time in accordance with the laws of the
State of California.
(e) Beneficiary may from time to time rescind any notice of default
or notice of sale before any Trustee's sale as provided above in accordance with
the laws of the State of California.
(f) Grantor, as Trustor under this Mortgage, hereby requests that a
copy of any Notice of Default or Notice of Sale as may be required by law, which
affects the California Property, be mailed to Grantor at the address set forth
in Section 26 hereof. Otherwise, neither Trustee nor Beneficiary is under any
----------
obligation to notify any person or entity of any action or proceeding of any
kind in which Grantor, Beneficiary and/or Trustee shall be a party, unless
brought by Trustee, or of any pending sale under any other deed of trust, except
as may otherwise be required by law or required hereunder.
54. Liability of Assignees of Beneficiary. No assignee of
-------------------------------------
Beneficiary (an "Assignee") shall have any personal liability, directly or
--------
indirectly, under or in connection with this Mortgage or any amendment or
amendments hereto made at any time or times, heretofore or hereafter, any
liability being limited to the assets pledged as security pursuant to this
Mortgage and Grantor hereby forever and irrevocably waives and releases any and
all such personal liability. In addition, no Assignee shall have at any time or
times hereafter any personal liability, directly or indirectly, under or in
connection with or secured by any agreement, lease, instrument, encumbrance,
claim or right affecting or relating to the Properties or to which the
Properties are now or hereafter subject. The limitation of liability provided in
this Section 51 is (i) in addition to, and not in limitation of, any limitation
----------
of liability applicable to the assignee provided by law or by any other
contract, agreement or instrument, and (ii) shall not apply to any Assignee's
negligence or willful misconduct.
55. Securitization.
--------------
(a) Sale of Note and Securitization. The provisions of this
-------------------------------
Section 55(a) are subject to the limitation that the Grantor shall not be
- -------------
required to incur any additional payment obligations or out-of-pocket expenses
except that the 10(b)5 opinion required to be delivered pursuant hereto shall be
delivered at Grantor's sole cost and expense. At the request of the holder of
the Note and, to the extent not already required to be provided by Grantor under
this Mortgage, Grantor shall use reasonable efforts to satisfy the market
standards to which the holder of the Note customarily adheres or which may be
reasonably required in the marketplace or by the Rating Agencies in connection
with the sale of the Note or participation therein or the first successful
securitization (such sale and/or securitization, the "Securitization") of rated
--------------
single or multi-class securities (the "Securities") secured by or evidencing
----------
ownership interests in the Note and the Mortgage, including:
(A) (i) provide such financial and other information with respect to
the Properties, Grantor and its affiliates, the Manager and any Tenants of the
Properties, (ii) provide business plans and budgets relating to the Properties
and (iii) to perform or permit or cause to be performed or permitted such site
inspection, appraisals, market studies, environmental reviews and reports (Phase
I's and, if appropriate, Phase II's), engineering
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<PAGE>
reports and other due diligence investigations of the Properties, as may be
reasonably requested by the holder of the Note or the Rating Agencies or as may
be necessary or appropriate in connection with the Securitization (the "Provided
--------
Information"), together, if customary, with appropriate verification and/or
- -----------
consents of the Provided Information through letters of auditors or opinions of
counsel of independent attorneys acceptable to Beneficiary and the Rating
Agencies, as well as a 10(b)5 opinion from Grantor's counsel with respect to the
description of the Loan Documents and the Properties set forth in any prospectus
or offering memorandum prepared in connection with the Securitization provided
that the Securitization shall close on or before the second anniversary of the
Closing hereof;
(B) make such representations and warranties as of the closing date
of the Securitization with respect to the Properties, Grantor, and the Loan
Documents as are customarily provided in securitization transactions and as may
be reasonably requested by the holder of the Note or the Rating Agencies and
consistent with the facts covered by such representations and warranties as they
exist on the date thereof, including the representations and warranties made in
the Loan Documents; and
(C) execute such amendments to the Loan Documents and Grantor's
organizational documents, and establish and fund such reserve funds (including
reserve funds for deferred maintenance and capital improvements) as may be
requested by the holder of the Note or the Rating Agencies or otherwise to
effect the Securitization, provided, that nothing contained in this subsection
(D) shall result in a material economic change in the transaction.
(b) Cooperation with Rating Agencies. In the event this Loan becomes
--------------------------------
an asset of a securitization underwritten by Beneficiary or any of its
Affiliates, Grantor, prior to such securitization, shall implement any and all
operations and maintenance plans recommended for asbestos or other environmental
matters recommended in any environmental report and complete all surveys in
connection therewith; provided, however, that nothing contained in this
paragraph (b) shall limit the obligations of Grantor contained in this Mortgage
or the other Loan Documents. In addition, Grantor shall (i) gather any
environmental information required by the Rating Agencies in connection with
such a securitization, (ii) at Beneficiary's request, meet with representatives
of such Rating Agencies to discuss the business and operations of the Trust
Estate, and (iii) cooperate with the requests of the Rating Agencies in
connection with all of the foregoing as well as in connection with all other
matters, including, without limitation, entering into any amendments or
modifications to this Mortgage or to any other Loan Document as may be required
by the Rating Agencies.
(c) Securitization Financial Statements. Grantor covenants and
-----------------------------------
agrees that, upon Beneficiary's written request therefor in connection with a
securitization in which this Mortgage is to be included as an asset, Grantor
shall, at Grantor's sole cost and expense, promptly deliver audited financial
statements and related documentation prepared by an independent certified public
accountant that satisfy applicable federal securities law requirements for use
in a Public Registration Statement (which may include up to three (3) years of
historical audited financial statements). A "Public Registration Statement"
shall mean a registration statement meeting the requirements of Section 5 of the
Securities Act of 1933, as amended.
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(d) Securitization Indemnification. Grantor understands that
------------------------------
certain of the Provided Information and the information required to be delivered
by Grantor hereunder (the "Required Records") may be included in disclosure
----------------
documents in connection with the Securitization, including a prospectus or
private placement memorandum (each, a "Disclosure Document") and may also be
-------------------
included in filings with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the Securities and
--------------
Exchange Act of 1934, as amended (the "Exchange Act"), or provided or made
------------
available to investors or prospective investors in the Securities, the Rating
Agencies, and service providers relating to the Securitization. In the event
that the Disclosure Document is required to be revised prior to the sale of all
Securities, Grantor will cooperate with the holder of the Note in updating the
Provided Information or Required Reports for inclusion or summary in the
Disclosure Document by providing all current information pertaining to Grantor
and the Properties necessary to keep the Disclosure Document accurate and
complete in all material respects with respect to such matters.
(ii) In connection with each of (x) a preliminary and a private
placement memorandum or (y) a preliminary and final prospectus, as applicable,
Grantor agrees to provide an indemnification certificate:
(A) certifying that Grantor has carefully examined those portions of such
memorandum or prospectus, as applicable, pertaining to Grantor, the
Properties and the Loan including applicable portions of the sections
entitled "Special Considerations", "Description of the Mortgages",
"Description of the Mortgage Loans and Mortgaged Properties", "The
Manager", "The Grantor" and "Certain Legal Aspects of the Mortgage
Loan", and such sections (and any other sections reasonably requested
and pertaining to Grantor, the Properties or the Loan) do not contain
any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading;
(B) indemnifying Beneficiary and the affiliates of J.P. Morgan Securities,
Inc ("JPM"), that has filed the registration statement relating to the
---
securitization (the "Registration Statement"), each of its directors,
----------------------
each of its officers who have signed the Registration Statement and
each person or entity who controls JPM within the meaning of Section
15 of the Securities Act or Section 30 of the Exchange Act of 1933,
as amended (the "Securities Act") (collectively, the "JPM Group"), and
-------------- ---------
JPM, each of its directors and each person who controls JPM, within
the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act (collectively, the "Underwriter Group") for any losses,
-----------------
claims, damages or liabilities (the "Liabilities") to which
-----------
Beneficiary, the JPM Group or the Underwriter Group may become subject
insofar as the Liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained
in the applicable portions of such sections applicable to Grantor, the
Properties or the Loan, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated in the applicable portions of such sections or necessary in
order to make the statements in the applicable portions of such
sections or in light
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<PAGE>
of the circumstances under which they were made, not misleading; and
(C) agreeing to reimburse Beneficiary and JPM for any legal or other
expenses reasonably incurred by Beneficiary and JPM in connection with
investigating or defending the Liabilities. Grantor's Liability under
clauses (A) or (B) above shall be limited to Liabilities arising out
of or based upon any such untrue statement or omission made therein in
reliance upon and in conformity with information furnished to
Beneficiary by or on behalf of Grantor in connection with the
preparation of those portions of the memorandum or prospectus
pertaining to Grantor, the Properties or the Loan or in connection
with the underwriting of the debt, including financial statements of
Grantor, operating statements, rent rolls, environmental site
assessment reports and property condition reports with respect to the
Properties. This indemnity agreement will be in addition to any
liability which Grantor may otherwise have.
(iii) In connection with filings under the Exchange Act, Grantor
agrees to (i) indemnify Beneficiary, JPM Group and the Underwriter Group for any
Liabilities to which Beneficiary, the JPM Group or the Underwriter Group may
become subject insofar as the Liabilities arise out of or are based upon the
omission or alleged omission to state in the Provided Information or Required
Records a material fact required to be stated in the Provided Information or
Required Records in order to make the statements in the Provided Information or
Required Records, in light of the circumstances under which they were made not
misleading and (ii) reimburse Beneficiary or JPM for any legal or other expenses
reasonably incurred by Beneficiary and JPM in connection with defending or
investigating the Liabilities.
(iv) Promptly after receipt by an indemnified party under this
Section 55 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 55, notify the indemnifying party in writing of the
----------
commencement thereof, but the omission to so notify the indemnifying party will
not relieve the indemnifying party from any liability which the indemnifying
party may have to any indemnified party hereunder except to the extent that
failure to notify causes prejudice to the indemnifying party. In the event that
any action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled, jointly with any other indemnifying party, to participate therein and,
to the extent that it (or they) may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. After notice from the indemnifying party to such
indemnified party under this Section 55 for any legal or other expenses
----------
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party shall have reasonably concluded that there are any legal
defenses available to it and/or other indemnified parties that are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assert such
legal defenses and to otherwise participate in the defense of such action on
behalf of such
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<PAGE>
indemnified party or parties. The indemnifying party shall not be liable for the
expenses of more than one separate counsel unless an indemnified party shall
have reasonably concluded that there may be legal defenses available to it that
are different from or additional to those available to another indemnified
party.
(v) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 55 is for
----------
any reason held to be unenforceable by an indemnified party in respect of any
losses, claims, damages or liabilities (or action in respect thereof) referred
to therein which would otherwise be indemnifiable under Section 55, the
----------
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages or liabilities (or
action in respect thereof); provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. In determining the amount of
contribution to which the respective parties are entitled, the following factors
shall be considered: (i) the JPM Group's and Grantor's relative knowledge and
access to information concerning the matter with respect to which claim was
asserted; (ii) the opportunity to correct and prevent any statement or omission;
and (iii) any other equitable considerations appropriate in the circumstances.
Beneficiary and Grantor hereby agree that it may not be equitable if the amount
of such contribution were determined by pro rata or per capita allocation.
56. Separate Loans. Beneficiary reserves the right, exercisable at
--------------
any time prior to and contemporaneously with a Securitization, to partition the
Loan into two (2) separate components which, together, shall equal the Loan
Amount set forth in this Mortgage and which, together, shall bear interest at
the same combined Applicable Interest Rate(s) set forth in the Note hereby
secured (it being understood that due diligence may result in certain
adjustments to the term and amortization of the Partnership Loan). The first
component shall be a cross-collateralized, cross-defaulted mortgage secured by
the Properties, in substantially the same form as this Mortgage. The second
component shall be structured as a fully recourse partnership loan ("Partnership
-----------
Loan") made by Beneficiary to certain single purpose parents of partners of
- ----
Grantor which shall be secured by a pledge of the partners' partnership
interest in Grantor. The second component shall not exceed $10,000,000. The
Partnership Loan and the loan secured by the mortgage shall be cross defaulted.
In addition, the Cash Collateral Agreement shall be amended to provide that
Beneficiary shall pay all Operating Expenses from the Operating Account and that
the Agent shall disburse the monthly principal and interest payments on the
Partnership Loan to the holder thereof before the balance of any amounts
remaining in the Operating Account are released to Grantor. Beneficiary shall
pay all reasonable, out-of pocket legal fees, title insurance fees and mortgage
recordation costs incurred by Grantor, as well as Beneficiary's own costs, in
connection with the partitioning of the Loan. The loan documents in connection
with the Partnership Loan shall be in form and substance acceptable to
Beneficiary and shall contain such representations, warranties and covenants as
Beneficiary shall require in similar partnership loans. In the event Beneficiary
exercises its option to so partition the Loan, such partitioning shall not
effect the aggregate Loan Amount, the aggregate interest rate or maturity of the
Loan or any other term or condition of the Loan, it being agreed that each
component shall have similar rights with respect to prepayment, release of
individual properties,
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application of insurance proceeds and condemnation awards, provided however,
that provisions required as a result of a contemplated securitization shall not
be applicable with respect to the second component of the Loan.
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<PAGE>
IN WITNESS WHEREOF, this Mortgage has been duly executed by Grantor on
the date first hereinabove written.
"GRANTOR"
Signed and acknowledged in the __________, a _______
presence of:
By: __________________
________________________ By: ________________
Print Name: Name:
Title:
________________________
Print Name:
<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of January, 1997, before me, the undersigned Notary
Public in and for said County and State appeared
__________________________________, personally known to me and, upon oath, did
depose and say that he resides at ________________________________, that he is
the _______ President of ___________, a ________ ___________ (the
"Corporation"), the general partner of ___________, a ________ limited
partnership, and that as such officer, being duly authorized to do so pursuant
to its by-laws or a resolution of its board of directors, executed and
acknowledged the foregoing instrument on behalf of the Corporation for the
purposes therein contained, by signing the name of the Corporation on behalf of
the Corporation by himself as such officer as his free and voluntary act and
deed and the free and voluntary act and deed of said Corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
___________________________
Notary Public
NOTARIAL SEAL My Commission Expires:
___________________________
<PAGE>
EXHIBITS A-1 - A-13
-------------------
Legal Description of Properties
<PAGE>
EXHIBIT B
---------
Environmental Reports
<PAGE>
EXHIBIT C
---------
SUBORDINATION, NONDISTURBANCE
AND ATTORNMENT AGREEMENT
This Agreement is entered into as of ____________, [199__], by and
between ___________________, a _________________ ("Tenant"), and ____________
------
("Lender").
------
W I T N E S S E T H:
- - - - - - - - - -
A. __________ ("Landlord") has executed and delivered a Mortgage
--------
Note, dated as of January , 1997 (the "Note").
----
B. The Note is held by the Lender and is secured in part by an
Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Leases, Rents and Security Deposits dated as of
January , 1997, among Landlord, as grantor, ______________ Title Insurance
Company, as trustee, and Lender, as beneficiary (as amended or modified, the
"Mortgage"), which Mortgage is recorded at Book __, Page __ of the Official
- ---------
Records of ________ County, ________, and covers certain real prop erty which
is commonly known as in , ________ (the "Project") and more
-------
particularly described on Exhibit A attached hereto and made a part hereof.
C. Tenant is entering into a lease with Landlord, dated ____________,
19__, pursuant to which Tenant will let certain premises at the Project (the
"Lease").
- ------
D. Pursuant to Article [ ] of the Lease, Tenant is required to
enter into this Agreement, and upon execution by Lender and Tenant, the Tenant's
leasehold interest in the Project will be subordinate to the interest of Lender
under the Mortgage.
NOW THEREFORE, the parties hereto mutually agree as follows:
1. Subordination. The Lease shall be subject and subordinate in
-------------
all respects to the Mortgage, and to any and all advances to be made thereunder
and all renewals, modifications, consolidations, replace ments and extensions
thereof.
2. Nondisturbance. So long as Tenant pays all rents and other
--------------
charges as specified in the Lease and is not otherwise in default of any of its
obligations and covenants pursuant to the Lease beyond any applicable grace
periods thereunder, Lender agrees for itself and its successors in interest and
for any purchaser of the Project upon a foreclosure of the Mortgage, that
Tenant's possession of the premises as described in the Lease and Tenant's other
rights under the Lease will not be disturbed during the term of the Lease, as
said term may be extended pursuant to the terms of the Lease or said premises
may be expanded as specified in the Lease, and that the successor in interest to
the rights and obligations of the Landlord under the Lease will abide by the
provisions of the Lease, notwithstanding any other provisions in the Mortgage.
For purposes of this paragraph, a foreclosure shall include a sheriff's or
trustee's sale under the power of sale contained in the Mortgage and any other
transfer of the Landlord's interest in the Project under peril of foreclosure,
including without limitation the generality of the foregoing, an assignment or
sale in lieu of foreclosure.
B-1
<PAGE>
3. Attornment. Subject (i) to Landlord's successor in interest's
----------
full compliance with the conditions relating to nondisturbance as set forth in
Section 2 above and (ii) to the performance by the same of all obligations of
the Landlord under the Lease with respect to obligations arising and accrued
from and after the date that said successor in interest acquires its interest in
the Project, Tenant agrees to attorn to, accept and recognize said successor in
interest as the landlord under the Lease for the then remaining balance of the
term of the Lease, and any extensions thereof as made pursuant to the Lease.
Tenant agrees to execute and deliver, at any time and from time to time, upon
the request of Lender or the purchaser at any foreclosure sale or any other suc
cessor to Landlord, as the case may be, any reasonable instrument which may be
necessary or appropriate to such successor landlord to evidence such attornment.
4. Notwithstanding anything to the contrary contained herein or in
the Lease, it is specifically understood and agreed that Lender or any receiver,
purchaser or successor landlord shall not be:
(a) liable for any act, omission, negligence or default of any prior
landlord; provided, however, that such successor landlord shall be liable and
responsible for the performance of all covenants and obligations of landlord
under the Lease from and after the date that it takes title to the Project; or
(b) subject to any offsets, claims or defenses which Tenant might
have against any prior landlord except those permitted under the Mortgage; or
(c) bound by any rent or additional rent which is pay able on a
monthly basis and which Tenant might have paid for more than one (1) month in
advance to any prior landlord.
Notwithstanding the foregoing, Tenant reserves its rights to any and all claims
or causes of action against such prior landlord for prior losses or damages and
against the successor landlord for all losses or damages arising from and after
the date that such successor landlord takes title to the Project.
5. Successors. The obligations and rights of the par ties pursuant
----------
to this Agreement shall bind and inure to the benefit of the successors,
assigns, heirs and legal representatives of the respective parties.
C-2
<PAGE>
IN WITNESS WHEREOF, the parties have executed and deliv ered this
Agreement in _____________, ____________ County, , as of the date set
forth above.
LENDER:
_____________________,
as Lender
By: ______________________
[TENANT]:
By: ______________________
<PAGE>
SCHEDULE 1
----------
Allocated Loan Amounts
Property Allocated Loan Amount
- -------- ---------------------
SCHEDULE 1
<PAGE>
SCHEDULE 2
----------
Permitted Encumbrances and Operating Agreements
SCHEDULE 2
<PAGE>
SCHEDULE 3
----------
Special Assessments
SCHEDULE 3
<PAGE>
SCHEDULE 4
----------
Specified Properties
SCHEDULE 4
<PAGE>
SCHEDULE 5
----------
Seismic Retrofitting Work
<TABLE>
<CAPTION>
================================================================================================
ESTIMATED RCV ESTIMATED UPGRADE
PROPERTY DESCRIPTION @ RISK CONSTRUCTION COST
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
K-FIDO Bldg #213, 185 S. Douglas St.,
El Segundo, CA $ 2,400,000 $ 75,000
- ------------------------------------------------------------------------------------------------
K-FIDO Bldg #214, 2260 El Segundo Bl.,
El Segundo, CA $ 4,000,000 $150,000
- ------------------------------------------------------------------------------------------------
Kilroy Bldg #51, 2031 E. Mariposa Ave.,
El Segundo, CA $ 6,700,000 $ 20,000
- ------------------------------------------------------------------------------------------------
Kilroy Bldg #236, 1230 S. Lewis St.,
Anaheim, CA $ 1,750,000 $ 75,000
- ------------------------------------------------------------------------------------------------
Kilroy Bldg #241, 12681/91 Pala Dr.,
Garden Grove, CA $ 2,500,000 $125,000
- ------------------------------------------------------------------------------------------------
Westlake Plaza II, Ph. I, 2829 T
ownsgate Rd., Thousand Oaks, CA $ 6,000,000 $400,000
- ------------------------------------------------------------------------------------------------
Monarch Industrial Bldg, 12822 Monarch
St., Garden Grove, CA $ 5,700,000 $ 43,000
================================================================================================
TOTAL $29,050,000 $888,000
================================================================================================
</TABLE>
SCHEDULE 5
<PAGE>
EXHIBIT 10.38
This Note has not been registered under the Securities Act of 1933, as
amended, and may not be sold or otherwise transferred except pursuant to an
effective registration under such act or an exemption therefrom.
MORTGAGE NOTE
-------------
New York, New York
$84,000,000 January , 1997
FOR VALUE RECEIVED, [BORROWER ENTITY], a ___________________, having its
principal office at ________________________________________ ("Maker") promises
-----
to pay to the order of MORGAN GUARANTY TRUST COMPANY OF NEW YORK a New York
banking corporation, or its assigns ("Payee") having its principal office at 60
-----
Wall Street, New York, New York 10260, the Principal Amount (as defined below),
together with interest from the date hereof at the Applicable Interest Rate (as
defined below) as provided below. Interest accruing hereunder shall be
calculated on the basis of a 360-day year of twelve 30-day months.
WHEN USED HEREIN, the following capitalized terms shall have the following
meanings:
"Applicable Interest Rate" shall mean (a) from the date of this Note
------------------------
through but not including the Reset Date (as hereinafter defined), a rate of __
percent (__%) per annum (the "Initial Interest Rate") and (b) from and after the
---------------------
Reset Date through and including the date this Note is paid in full, a rate per
annum equal to the greater of (i) the Initial Interest Rate plus five percent or
(ii) the Treasury Rate (as hereinafter defined) plus five percent (5%) (the
"Revised Interest Rate"). For purposes of this Note, (A) the term "Reset Date"
shall mean [the date that is the eight year anniversary of the date of this
Note; actual date to be filled in at closing] and (B) the term "Treasury Rate"
-------------
shall mean, as of the Reset Date, the yield, calculated by linear interpolation
(rounded to the nearest one-thousandth of one percent) of the yields of
noncallable United States Treasury obligations with terms (one longer and one
shorter) having a term of fifteen years, as determined by Payee on the basis of
Federal Reserve Statistical Release H.15 Selected Interest Rates under the
heading U.S. Governmental Security/Treasury Constant Maturities or other
recognized source of financial market information selected by Payee for the week
prior to the Reset Date. In the event that Release H.15 is no longer published,
Payee shall select a comparable publication which is as comparable as is
reasonably possible to Release H.15 or such other recognized source selected by
Payee and the index used therein to determine the Treasury Rate. Provided Maker
delivers to Payee a timely request therefor, Payee shall on the Reset Date
notify Maker of its determination of the Treasury Rate and the calculation
thereof in reasonable detail.
<PAGE>
"Base Rate" shall be, for any day, a rate per annum equal to the higher of
---------
(x) the Prime Rate for such day, and (y) the sum of the Federal Fund's Rate plus
.50%.
"Commencement Date" shall be [the first day of the second full month
----------------- --------------------------------------
following the closing date; actual date to be filled in at closing].
- ------------------------------------------------------------------
"Closing Date" shall be [closing date; actual date to be filled in at
------------ --------------------------------------------
closing].
- -------
"Default Rate" shall be the greater of (x) the Applicable Interest Rate
------------
plus five percent per annum, and (y) the Base Rate plus five percent per annum.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the business day next
succeeding such day; provided that (i) if such day is not a business day, the
--------
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding business day as so published on the next succeeding business day,
and (ii) if no such rate is so published on such next succeeding business day,
the Federal Funds Rate for such day shall be the average rate quoted to Payee by
three (3) Federal funds brokers of recognized standing at approximately 10:00
a.m. New York time on such day on such transactions as determined by Payee.
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System as constituted from time to time.
"Maturity Date" shall be [ date that is 25 years from the first day of the
------------- --------------------------------------------
first full month following the Closing Date; actual date to be filled in at
- -------------------------------------------
closing].
"Monthly Amount" shall be [monthly principal and interest due and payable;
-------------- ----------------------------------------------
amount to be filled in at closing].
"Payment Date" shall be the first business day of each month commencing on
------------
the first business day of the second full month after the Closing Date and
continuing to and including the Maturity Date.
"Principal Amount" shall be $84,000,000.
----------------
1. The Principal Amount and interest thereon shall be due and payable in
lawful money of the United States as follows:
(a) On the date hereof, all interest on the unpaid balance through
the end of the month in which the Closing Date occurs shall be due and
payable. Thereafter, commencing on the Commencement Date and continuing
until the Maturity Date, 300
2
<PAGE>
equal monthly installments of principal and interest at the Monthly Amount
each shall be due and payable. Each installment of the Monthly Amount shall
be applied first to the interest at the Initial Interest Rate and the
remainder thereof to reduction of principal. Each monthly installment
shall be due on each Payment Date. In addition, all amounts advanced by
Payee pursuant to applicable provisions of the Loan Documents (as
hereinafter defined), together with any interest at the Default Rate or
other charges as therein provided, shall be immediately due and payable
hereunder. In the event any such advance is not so repaid by Maker, Payee
may, at its option, first apply any payments received hereunder to repay
said advances together with any interest thereon or other charges as
provided in the Loan Documents, and the balance, if any, shall be applied
in payment of any installment then due. The entire remaining unpaid
balance of principal of this Note, all interest accrued thereon and all
other sums payable hereunder or under the Loan Documents (collectively, the
"Debt") shall be due and payable in full on the Maturity Date.
----
(b) In the event that the Maker does not prepay the entire principal
balance of this Note and any other amounts outstanding on or before the
Reset Date, the following subparagraphs shall also apply:
(i) From and after the Reset Date, interest shall accrue on
the unpaid principal balance from time to time outstanding on this
Note at the Revised Interest Rate. Subject to the provisions of this
subparagraph (b), Maker shall continue to make payments in the Monthly
Amount on each Payment Date. Each Monthly Amount paid on and after the
Reset Date shall be applied first to the payment of interest computed
at the Initial Interest Rate with the remainder of the Monthly Amount
applied to the reduction of the outstanding principal balance of this
Note. Interest accrued at the Revised Interest Rate and not paid
pursuant to the preceding sentence shall be deferred and, as of the
first Payment Date following each month in which such interest
accrues, added to the Debt and shall earn interest at the Revised
Interest Rate to the extent permitted by applicable law (such accrued
interest is hereafter defined as "Accrued Interest"). All of the Debt,
----------------
including Accrued Interest, shall be due and payable at the Maturity
Date.
(ii) Maker shall pay on the Reset Date and on each Payment Date
thereafter up to and including the Maturity Date the following
payments from the Rents (as defined in the Mortgage) received on or
before such day, in the listed order of priority:
(1) First, to payment of Mortgage Escrow Amounts due
pursuant to Section 8(a) of the Mortgage;
(2) Second, to payment of the Monthly Amount;
3
<PAGE>
(3) Third, to payment of monthly Cash Expenses (defined
in paragraph 18 below) pursuant to the terms and conditions of the
related approved Annual Budget (defined in paragraph 18, below):
(4) Fourth, to payment of Extraordinary Expenses (defined
in paragraph 18, below) approved by Payee, if any:
(5) Fifth, to payments to the Payee to be applied against
the outstanding principal due under this Note until such principal
amount is paid in full:
(6) Sixth, to payments to the Payee for Accrued
Interest:
(7) Seventh, to payments to the Payee of any other
amounts due under the Loan Documents; and
(8) Lastly, to payment to the Maker of any excess
amounts.
(c) Amounts due on this Note shall be payable, without any
counterclaim, setoff or deduction whatsoever, at the office of Payee in the
United States of America or its agent or designee at the address set forth
in Exhibit 1 or at such other place in the United States of America as
Payee or its agent or designee may from time to time designate in writing
in a reasonably timely manner.
2. This Note is secured by an Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment of
Leases, Rents and Security Deposits, of even date herewith (the "Mortgage") from
--------
Maker to _________________ , as trustee, for the benefit of Payee, and by an
Assignment of Rents and Leases of even date herewith (the "Assignment") from
----------
Maker to Payee. The Mortgage, the Assignment, and any other instrument given at
any time to secure this Note are hereinafter collectively called the "Loan
----
Documents."
- ---------
3. (a) Maker shall have no right to prepay the principal of this Note in
full or in part at any time prior to the fourth anniversary of the Commencement
Date except as hereinafter set forth in this paragraph 3. From and after the
fourth anniversary of the Commencement Date, Maker shall have the right to
prepay this Note in full but not in part, on any Payment Date, upon not less
than thirty (30) days' prior written notice (the "Prepayment Notice") to Payee,
-----------------
provided that no Event of Default shall have occurred and be outstanding, and
provided further that simultaneously with such prepayment, Maker shall pay a
prepayment premium calculated as specified in Appendix 1 (but in no event less
than one percent (1%) of the principal amount of this Note). Notwithstanding the
foregoing, this Note may be prepaid without a prepayment premium commencing with
the 180 day period prior to the Reset Date. The Prepayment Notice shall be
irrevocable except that Maker shall have the
4
<PAGE>
one time right to revoke the Prepayment Notice upon not less than 10 days' prior
written notice to Payee.
(b) Upon acceleration of this Note in accordance with its terms and
the terms of the Loan Documents, Maker agrees to pay a prepayment premium
calculated as specified in Appendix 1 (but in no event less than one percent
(1%) of the portion of the principal amount of this Note). A tender of payment
of the amount necessary to pay and satisfy the entire unpaid principal balance
of this Note or any portion thereof at any time after an Event of Default under
the Mortgage or an acceleration by Payee of the indebtedness evidenced hereby,
whether such payment is tendered voluntarily, during or after foreclosure of the
Mortgage, or pursuant to realization upon other security, shall constitute a
purposeful evasion of the prepayment terms of this Note, shall be deemed to be a
voluntary prepayment hereof, and Maker shall be required to pay the prepayment
premium as described above. Maker shall not be required to pay any prepayment
premium in connection with partial prepayments of principal in connection with a
casualty or condemnation, which payments are required pursuant to the provisions
of the Mortgage, and such partial prepayments shall not change the Payment Dates
or amounts of subsequent monthly installments, unless Payee shall otherwise
agree in writing.
4. If Maker defaults in the payment of any installment of principal and
interest on the date on which it shall fall due or in the performance of any of
the agreements, conditions, covenants, provisions or stipulations contained in
this Note or in the Loan Documents, and if such default shall continue beyond
any grace period provided for in the Mortgage so as to constitute an Event of
Default thereunder, then Payee, at its option and without further notice to
Maker, may declare immediately due and payable the entire unpaid principal
balance of this Note, together with interest thereon at an annual rate after the
date of such default equal to the Default Rate, together with all sums due by
Maker under the Loan Documents, anything herein or in the Loan Documents to the
contrary notwithstanding. The foregoing provision shall not be construed as a
waiver by Payee of its right to pursue any other remedies available to it under
the Mortgage, this Note or any other Security Document, nor shall it be
construed to limit in any way the application of the Default Rate. Any payment
hereunder may be enforced and recovered in whole or in part at such time by one
or more of the remedies provided to Payee in this Note or in the Loan Documents.
In the event that: (i) this Note or any Security Document is placed in the hands
of an attorney for collection or enforcement or is collected or enforced through
any legal proceeding; (ii) an attorney is retained to represent Payee in any
bankruptcy, reorganization, receivership, or other proceedings affecting
creditors' rights and involving a claim under this Note or any Security
Document; (iii) an attorney is retained to protect or enforce the lien of the
Mortgage or any Security Document; or (iv) an attorney is retained to represent
Payee in any other proceedings whatsoever in connection with this Note, the
Mortgage, any of the Loan Documents or any portion of the Mortgaged Property
subject thereto, then Maker shall pay to Payee all reasonable attorney's fees,
costs and expenses incurred in connection therewith, including costs of appeal,
together with interest on any judgment obtained by Payee at the Default Rate.
5
<PAGE>
5. If Maker defaults in the payment of any monthly installment on the
Payment Date, then Maker shall pay to Payee a late payment charge in an amount
equal to five percent (5%) of the amount of the installment not paid as
aforesaid. An additional late charge equal to five percent (5%) of the monthly
payment due will be charged for each successive month the payment remains
outstanding. Said late charge payments, if payable, shall be secured by the
Mortgage and the other Loan Documents, shall be payable without notice or demand
by Payee, and are independent of and have no effect upon the rights of Payee
under paragraph 4 above.
6. Maker and all endorsers, sureties and guarantors hereby jointly and
severally waive all applicable exemption rights, valuation and appraisement,
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note. Maker and all endorsers, sureties and guarantors
consent to any and all extensions of time, renewals, waivers or modifications
that may be granted by Payee with respect to the payment or other provisions of
this Note and to the release of the collateral or any part thereof, with or
without substitution, and agree that additional makers, endorsers, guarantors or
sureties may become parties hereto without notice to them or affecting their
liability hereunder.
7. Payee shall not be deemed, by any act of omission or commission, to
have waived any of its rights or remedies hereunder unless such waiver is in
writing and signed by Payee, and then only to the extent specifically set forth
in writing. A waiver of one event shall not be construed as continuing or as a
bar to or waiver of any right or remedy to a subsequent event.
8. This Note shall be governed by and construed in accordance with the
laws of the State of New York (the "State").
-----
9. The parties hereto intend and believe that each provision in this Note
comports with all applicable law. However, if any provision in this Note is
found by a court of law to be in violation of any applicable law, and if such
court should declare such provision of this Note to be unlawful, void or
unenforceable as written, then it is the intent of all parties hereto that such
provision shall be given full force and effect to the fullest possible extent
that is legal, valid and enforceable, that the remainder of this Note shall be
construed as if such unlawful, void or unenforceable provision were not
contained therein, and that the rights, obligations and interest of Maker and
the holder hereof under the remainder of this Note shall continue in full force
and effect; provided, however, that if any provision of this Note which is found
-------- -------
to be in violation of any applicable law concerns the imposition of interest
hereunder, the rights, obligations and interests of Maker and Payee with respect
to the imposition of interest hereunder shall be governed and controlled by the
provisions of the following paragraph.
6
<PAGE>
10. It being the intention of Payee and Maker to comply with the laws of
the State with regard to the rate of interest charged hereunder, it is agreed
that, notwithstanding any provision to the contrary in this Note, the Mortgage,
or any of the other Loan Documents, no such provision, including without
limitation any provision of this Note providing for the payment of interest or
other charges, shall require the payment or permit the collection of any amount
("Excess Interest") in excess of the maximum amount of interest permitted by law
------ --------
to be charged for the use or detention, or the forbearance in the collection, of
all or any portion of the indebtedness evidenced by this Note. If any Excess
Interest is provided for, or is adjudicated to be provided for, in this Note,
the Mortgage, or any of the other Loan Documents, then in such event:
(i) the provisions of this paragraph shall govern;
(ii) Maker shall not be obligated to pay any Excess Interest;
(iii) any Excess Interest that Payee may have received hereunder
shall, at the option of Payee, be (x) applied as a credit against the
unpaid principal balance then due under this Note, accrued and unpaid
interest thereon not to exceed the maximum amount permitted by law, or
both, (y) refunded to the payor thereof or (z) any combination of the
foregoing;
(iv) the applicable interest rate or rates provided for herein
shall be automatically subject to reduction to the maximum lawful rate
allowed to be contracted for in writing under the applicable usury
laws of the aforesaid State, and this Note, the Mortgage and the other
Loan Documents shall be deemed to have been, and shall be, reformed
and modified to reflect such reduction in such interest rate or rates;
and
(v) Maker shall not have any action or remedy against Payee
for any damages whatsoever or any defense to enforcement of this Note,
the Mortgage or any other Security Document arising out of the payment
or collection of any Excess Interest.
11. Upon any endorsement, assignment, or other transfer of this Note by
Payee or by operation of law, the term "Payee," as used herein, shall mean such
endorsee, assignee, or other transferee or successor to Payee then becoming the
holder of this Note. This Note shall inure to the benefit of Payee and its
successors and assigns and shall be binding upon the undersigned and its
successors and assigns. The term "Maker" as used herein shall include the
respective successors and assigns, legal and personal representatives,
executors, administrators, devisees, legatees and heirs of Maker. Any assignment
of this Note by Payee shall be made in accordance with any applicable securities
laws.
7
<PAGE>
12. Any notice, demand or other communication which any party may desire
or may be required to give to any other party shall be in writing and shall be
given as provided in the Mortgage.
13. To the extent that Maker makes a payment or Payee receives any payment
or proceeds for Maker's benefit, which are subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver, custodian or any other party under any
bankruptcy law, common law or equitable cause, then, to such extent, the
obligations of Maker hereunder intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by Payee.
14. Maker shall execute and acknowledge (or cause to be executed and
acknowledged) and deliver to Payee all documents, and take all actions,
reasonably required by Payee from time to time to confirm the rights created or
now or hereafter intended to be created under this Note and the Loan Documents,
to protect and further the validity, priority and enforceability of this Note
and the Loan Documents, to subject to the Loan Documents any property of Maker
intended by the terms of any one or more of the Loan Documents to be encumbered
by the Loan Documents, or otherwise carry out the purposes of the Loan Documents
and the transactions contemplated thereunder; provided, however, that no such
-------- -------
further actions, assurances and confirmations shall increase Maker's obligations
under this Note or the other Loan Documents.
15. No modification, amendment, extension, discharge, termination or
waiver (a "Modification") of any provision of this Note, or any one or more of
------------
the other Loan Documents, nor consent to any departure by Maker therefrom, shall
in any event be effective unless the same shall be in a writing signed by the
party against whom enforcement is sought, and then such waiver or consent shall
be effective only in the specific instance, and for the purpose, for which
given. Except as otherwise expressly provided herein, no notice to, or demand
on, Maker shall entitle Maker to any other or future notice or demand in the
same, similar or other circumstances. Payee does not hereby agree to, nor does
Payee hereby commit itself to, enter into any Modification.
16. Maker hereby expressly and unconditionally waives, in connection with
any suit, action or proceeding brought by Payee on this Note, any and every
right it may have to (a) a trial by jury, (b) interpose any counterclaim therein
(other than a counterclaim which can only be asserted in the suit, action or
proceeding brought by Payee on this Note and cannot be maintained in a separate
action) and (c) have the same consolidated with any other or separate suit,
action or proceeding.
17. Notwithstanding any provision to the contrary in the Mortgage or this
Note, Payee shall not have any recourse to any asset of Maker or any of its
partners other than the Mortgaged Property in order to satisfy the Debt, and
Payee's sole recourse for satisfaction of the payment of the Debt shall be to
exercise its rights against the Mortgaged Property encumbered by the Mortgage
and the other collateral securing this Note. The foregoing sentence shall not be
deemed or construed to be a release of the indebtedness evidenced by
8
<PAGE>
this Note or in any way impair, limit or otherwise affect the lien of the
Mortgage or any such other instrument securing repayment of this Note or prevent
Payee from naming Maker, its partners, or their successors or assigns as a
defendant to any action to enforce any remedy for default so long as there is no
personal or deficiency money judgment sought or entered against Maker, its
partners, or their successors or assigns for payment of principal and interest
evidenced by this Note. Notwithstanding the foregoing provisions of this
paragraph 17, it is expressly understood and agreed that the aforesaid
limitation of liability shall in no way affect or apply to Maker's [(but not any
of its partners')] continued personal liability for the payment to Payee of the
Debt as a result of:
(1) any breach by Maker of the environmental indemnification
provisions contained the Mortgage;
(2) Maker's failure to obtain Payee's prior written consent to the
extent required by this Note and the other Loan Documents to (a) any
subordinate financing or any other encumbrance on the Trust Estate, or
(b) any transfer of the Trust Estate or interests in Maker in
violation of the Mortgage;
(3) any litigation or other legal proceeding related to the Loan that
delays or impairs Payee's ability to preserve, enforce or foreclose
its lien on the Trust Estate, including, but not limited to, the
filing of a voluntary or involuntary petition concerning Maker under
the U.S. Bankruptcy Code, in which action a claim, counterclaim, or
defense is asserted against Payee, other than any litigation or other
legal proceeding in which a final, non-appealable judgment for money
damages or injunctive relief is entered against Payee;
(4) Maker's failure to pay required taxes,assessments, and insurance
premiums payable with respect to the Trust Estate or to maintain the
required escrows therefor, to the extent of (but not in excess of) all
gross revenues that have been generated by the Trust Estate following
the date which is twelve (12) months prior to the date that such
taxes, assessments or insurance premiums were finally due and payable
and that have not been applied to pay any portion of the Loan,
reasonable and customary operating expenses and capital expenditures
for the Trust Estate paid to third parties not affiliated (directly or
indirectly) with Maker and except to the extent that monies are paid
by Maker in escrow for the payment of such amounts and except for any
amounts applicable to the period after foreclosure of Payee's lien on
any Property, or the delivery by Maker of a deed to any Property in
lieu of foreclosure (which deed has been accepted by Payee in
writing), or the appointment of a receiver for any Property;
(5) the gross negligence or willful misconduct of Maker, its agents,
affiliates, officers or
9
<PAGE>
employees which causes or results in a diminution, or loss of value,
of the Trust Estate that is not reimbursed by insurance or which gross
negligence or willful misconduct exposes Payee to claims, liability or
costs of defense in any litigation or other legal proceeding;
10
<PAGE>
(6) the seizure or forfeiture of the Trust Estate, or any portion
thereof, or Payee's interest therein, resulting from criminal
wrongdoing by any person or entity other than Payee under any federal,
state or local law;
(7) any physical waste of the Trust Estate caused by the intentional
or grossly negligent act(s) or omission(s) of Maker, its agents,
affiliates, officers and employees, (ii) the failure by Maker to
maintain, repair or restore any part of the Trust Estate as may be
required by the Mortgage or any of the other Loan Documents to the
extent of all gross revenues that have been generated by the Trust
Estate following the date which is twelve (12) months prior to notice
to Maker from Payee of such failure to maintain, repair or restore any
part of the Trust Estate and that have not been applied to pay any
portion of the Debt, reasonable and customary operating expenses and
capital expenditures for the Trust Estate paid to third parties not
affiliated (directly or indirectly) with Maker, taxes and insurance
premiums for the Trust Estate and escrows deposited with Payee, or
(iii) the removal or disposal of any portion of the Trust Estate after
an Event of Default under the Loan Documents to the extent such
property is not replaced by Maker with like property of equivalent
value, function and design;
(8) the misapplication or conversion by Maker of any insurance
proceeds paid by reason of any loss, damage or destruction to the
Trust Estate; and any awards or amounts received in connection with
the condemnation of all or a portion of the Trust Estate and not used
by Maker for restoration or repair of the Trust Estate;
(9) Maker's failure to deliver any security deposits collected with
respect to the Trust Estate to Payee or any other party entitled to
receive such security deposits under the Loan Documents following an
Event of Default; and
(10) any rents (including advanced or prepaid rents), issues, profits,
accounts or other amounts generated by or related to the Trust Estate
attributable to, or accruing after an Event of Default, which amounts
were collected by Maker or its property manager and not turned over to
Payee or used to pay Maker or its property manager and not turned over
to Payee or used to pay unaffiliated third parties for reasonable and
customary operating expenses and capital expenditures for the Trust
Estate, taxes and insurance premiums with respect to the Trust Estate
and any other amounts required to be paid under the Loan Documents
with respect to the Trust Estate.
Notwithstanding anything to the contrary in this Note, the Mortgage or
any of the Loan Documents, Payee shall not be deemed to have waived any right
which Payee may have under Section 506(a), 506(b), 1111(b) or any other
provisions of the Bankruptcy Code to file a claim for the full amount of the
Debt secured by this Mortgage or to require that all
11
<PAGE>
collateral shall continue to secure all of the Debt owing to Payee in accordance
with the Loan Documents.
18. Maker has executed the Cash Collateral Agreement (as defined in
the Mortgage). For each calendar year commencing on the Reset Date and for each
calendar year thereafter, the Maker shall submit to the Payee for the Payee's
written approval an annual budget (an "Annual Budget") not later than sixty (60)
-------------
days prior to (i) the Reset Date and, thereafter, (ii) the commencement of such
calendar year, in form satisfactory to Payee setting forth in reasonable detail
budgeted monthly operating income and monthly operating capital and other
expenses for the Mortgaged Property. Each Annual Budget shall contain, among
other things, limitations on management fees, third party service fees, and
other expenses as the Maker may reasonably determine. Payee shall have the
right to approve such Annual Budget and in the event that Payee objects to the
proposed Annual Budget submitted by Maker, Payee shall advise Maker of such
objections within fifteen (15) days after receipt thereof (and deliver to Maker
a reasonably detailed description of such objections) and Maker shall within
three (3) days after receipt of notice of any such objections revise such Annual
Budget and resubmit the same to Payee. Payee shall advise Maker of any
objections to such revised Annual Budget within ten (10) days after receipt
thereof (and deliver to Maker a reasonably detailed description of such
objections) and Maker shall promptly revise the same in accordance with the
process described in this subparagraph until the Payee approves an Annual
Budget, provided, however, that if Payee shall not advise Maker of its
objections to any proposed Annual Budget within the applicable time period set
forth in this paragraph, then such proposed Annual Budget shall be deemed
approved by Payee. Each such Annual Budget approved by Payee in accordance with
terms hereof shall hereinafter be referred to as an "Approved Annual Budget."
----------------------
Until such time that Payee approves a proposed Annual Budget, the most recently
Approved Annual Budget shall apply provided that, such Approved Annual Budget
shall be adjusted to reflect actual increases in real estate taxes, insurance
premiums and utilities expenses.
In the event that the Maker must incur an extraordinary operating expense
or capital expense not set forth in the Annual Budget (each an, "Extraordinary
-------------
Expense"), the Maker shall promptly deliver to Payee a reasonably detailed
- --------
explanation of such proposed Extraordinary Expense for the Payee's approval. For
the purposes of this Note, "Cash Expenses" shall mean, for any period, the
-------------
operating expenses for the operation and maintenance of the Mortgaged Property
as set forth in an Approved Annual Budget to the extent that such expenses are
actually incurred by Maker minus Mortgage Escrow Amounts (as defined in the
Mortgage) for such period.
19. Any legal action or proceeding with respect to this Note and any
action for enforcement of any judgment in respect thereof may be brought in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and, by execution and delivery of this Note,
Maker hereby accepts for itself and in respect of its property, generally and
unconditionally, the non-exclusive jurisdiction of the aforesaid courts and
appellate courts from any thereof. Maker irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of
12
<PAGE>
copies thereof by registered or certified mail, postage prepaid, to Maker at the
address for notices set forth in the Mortgage. Maker hereby irrevocably waives
any objection which it may now or hereafter have to the laying of venue of any
of the aforesaid actions or pro ceedings arising out of or in connection with
this Note brought in the courts referred to above and hereby further irrevocably
waives and agrees not to plead or claim in any such court that any such action
or proceeding brought in any such court has been brought in an inconvenient
forum. Nothing herein shall affect the right of Payee to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against Maker in any other jurisdiction.
13
<PAGE>
IN WITNESS WHEREOF, Maker has caused this Note to be executed and
delivered as of the day and year first above written.
[MAKER]
-----
By:
By: ____________________________________
Name:
Title:
[WITNESS]
________________________________________
14
<PAGE>
APPENDIX 1
----------
Calculation of Prepayment Premium
---------------------------------
The prepayment premium shall be equal to the present value as of the
date of prepayment of the remaining scheduled payments of principal and
interest from the date of repayment through the Reset Date (including any
balloon payment), determined by discounting such payments at the Discount
Rate, less the amount of principal being prepaid.
For purposes of this Note, "Discount Rate" shall mean the sum of the rate
-------------
which, when compounded monthly, is equivalent to the Treasury Rate, when
compounded semi-annually and 0.25%.
For purposes of this Appendix 1 only, the term "Treasury Rate" shall mean,
-------------
as of the date of prepayment, the yield, calculated by linear
interpolation (rounded to the nearest one-thousandth of one percent) of
the yields of noncallable United States Treasury obligations with terms
(one longer and one shorter) most nearly as reasonably possible
approximating the period from the date of prepayment to the Reset Date, as
determined by Payee on the basis of Federal Reserve Statistical Release
H.15 Selected Interest Rates under the heading U.S. Governmental
Security/Treasury Constant Maturities or other recognized source of
financial market information selected by Payee for the week prior to the
date of prepayment. In the event that Release H.15 is no longer published,
Payee shall select a comparable publication which is as comparable as is
reasonably possible to Release H.15 or such other recognized source
selected by Payee to determine the Treasury Rate.
<PAGE>
EXHIBIT 1
---------
Amounts due on this note shall be payable to
(___________________________________) at the following address:
[NAME]
----------------------------------------------
[Address]_____________________________________
---------
[Loan Number]______________________________
-------------
___________________________________________________
___________________________________________________
<PAGE>
EXHIBIT 10.39
INDEMNITY AGREEMENT
-------------------
This Indemnity Agreement (this "Indemnity Agreement") is entered into
-------------------
as of January __, 1997 , by KILROY REALTY CORP. ("Indemnitor") in favor of
----------
MORGAN GUARANTY TRUST COMPANY OF NEW YORK (together with its successors and
assigns, the "Lender"), with reference to the following facts:
------
A. [BORROWER], a _______ limited partnership (the "Borrower") is the
--------
owner of the thirteen (13) parcels of land (collectively, the "Land") as more
----
particularly described in Exhibit A-1 through Exhibit A-13 and the
----------- -------------
improvements located thereon (collectively, the "Property"); and
--------
B. Indemnitor is the owner of an approximately _ % beneficial
interest in Borrower.
C. Lender has loaned or will loan to Borrower the sum of $84,000,000
(the "Loan"), payment of which is evidenced by a certain mortgage note of even
----
date herewith, from Borrower to Lender (the "Note"), which Note is secured by an
----
Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Leases and Rents, of even date herewith (said
Indenture of Mortgage, Deed of Trust, Deed to Secure Debt, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases and Rents, whether
one or more, and together with all amendments, modifications, consolidations,
increases, supplements and spreaders thereof being herein collectively called
the "Mortgage") encumbering the Property (the Mortgage, the Note, and any other
--------
documents or instruments evidencing or securing the Loan, as amended or modified
from time to time, being herein sometimes called the "Loan Documents").
--------------
D. As a condition to making the Loan, Lender requires Indemnitor to
indemnify Lender for and hold Lender harmless from (i) any Environmental Claim,
any Requirements of Environmental Law, or the violation of any Environmental
Approval (as these terms are defined in Section 1 below) attributable to
Hazardous Substance (as defined in Section 1 below) and related to the Property
and (ii) certain recourse obligations of Borrower under the Mortgage. Lender
would not make the Loan without this Indemnity Agreement and Indemnitor
acknowledges and understands that this Indemnity Agreement is a material
inducement for Lender's agreement to make the Loan.
<PAGE>
NOW, THEREFORE, Indemnitor agrees as follows:
1. Definitions. For purposes of this Indemnity Agreement, the
-----------
following terms shall have the following meanings:
(a) "Environmental Approval" means any permit, license, approval,
----------------------
ruling, variance, exemption or other authorization required under
applicable Environmental Laws.
(b) "Environmental Claim" shall have the meaning set forth in the
-------------------
Mortgage.
(c) "Environmental Laws" shall have the meaning set forth in the
------------------
Mortgage.
(d) "Hazardous Substance" shall have the meaning set forth in the
-------------------
Mortgage.
(e) "Indemnitee" or "Indemnitees" means (individually and
---------- -----------
collectively), Lender, any purchaser or assignee of all or any part of the
Note, including, without limitation, the respective affiliates, officers,
directors, shareholders, and employees of any of the foregoing and their
respective successors and assigns. Notwithstanding the foregoing,
"Indemnitee(s)" does not include any person or entity (other than Lender,
any purchaser or assignee of all or any part of the Note, including,
without limitation, any affiliate of Lender or such purchaser or assignee)
who purchases or acquires all or any part of the Property (i) by any
foreclosure under the Mortgage, whether judicial or non-judicial, or
pursuant to the exercise of any power of sale thereunder, or by deed-in-
lieu of foreclosure or (ii) from Lender or any purchaser or assignee of all
or any part of the Note, including, without limitation, any affiliate of
Lender or such purchaser or assignee.
(f) "Requirements" shall have the meaning set forth in the Mortgage.
------------
(g) Terms not otherwise defined in this Indemnity Agreement shall
have the meanings ascribed to them in the Mortgage.
2. Indemnification. (a) Indemnitor shall protect, defend,
---------------
indemnify, and hold harmless Indemnitees from and against all liabilities,
losses, costs, damages, expenses or claims, including, but not limited to,
remedial, removal, response, abatement, cleanup, legal, investigative,
2
<PAGE>
and monitoring costs and other related costs, expenses, losses, damages
(excluding any and all consequential damages, including, without limitation,
diminution in value), penalties, fines, liabilities, obligations, defenses,
judgments, suits, proceedings, and disbursements (including, without limitation,
reasonable attorneys' and experts' fees and disbursements) of any kind or of any
nature whatsoever (collectively "Costs and Liabilities"), which may at any time
---------------------
be imposed upon Indemnitee or incurred by any Indemnitee and which arise
(directly or indirectly): (i) from Requirements of Environmental Laws applicable
to the Property, or any portion thereof; (ii) with respect to Environmental
Claims related to the Property; (iii) from the failure or alleged failure of
Borrower, or the Indemnitor or any tenant or any other party directly or
indirectly connected with the Property, to obtain, maintain, or comply with any
Environmental Approval; and/or (iv) otherwise from the presence (occurring or
commencing prior to Lender's acquisition of the Property, or any portion
thereof), release, alleged presence, or alleged release of Hazardous Substance
in violation of Requirements of Environmental Laws on or under the Property, or
the soil, groundwater or soil vapor on or under the Property, or the migration,
spreading, alleged migration, or alleged spreading of Hazardous Substance from
the Property in violation of Requirements of Environmental Laws, whether or not
known to Indemnitor, whether foreseeable or unforeseeable, regardless of the
source of such presence or release or, except as expressly provided in Section
2(c) hereof, regardless of when such release or presence occurred. Each
Indemnitee shall give prompt written notice to Lender of any matter for which
such Indemnitee shall seek indemnification hereunder, and Lender shall, after
receiving actual knowledge of any matter for which Indemnitees may seek
indemnification hereunder, give prompt written notice thereof to Indemnitor
(although the failure of Lender and/or any Indemnitee to provide such notice
shall have no effect whatsoever on the obligations of the Indemnitor hereunder
unless such failure adversely affects Indemnitor's obligations under this
Agreement).
(b) In the event that any investigation, site monitoring,
containment, cleanup, removal, restoration or other remedial work of any kind or
nature (the "Remedial Work") is required to be performed or undertaken by
-------------
Borrower or Indemnitor pursuant to any applicable local, state or federal law or
regulation, any judicial order, or by any governmental entity because of, or in
connection with, the current or future presence (occurring or commencing prior
to Lender's acquisition of the Property, or any portion thereof), alleged
presence, release or alleged release of a Hazardous Substance in or into the
air, soil, groundwater, surface water or soil vapor at, on, about, under or
within
3
<PAGE>
the Property (or any portion thereof), Indemnitor shall within thirty (30) days
after written demand for performance thereof by Indemnitees (or such shorter
period of time as may be required under any applicable law, regulation, order or
agreement), (a) commence to perform, or cause to be commenced, and thereafter
diligently prosecuted to completion, all such Remedial Work or (b) contest by
proper proceedings or procedures the requirement to perform the Remedial Work;
provided, that such contest shall be prosecuted diligently and in good faith and
- --------
such contest shall not expose any Indemnitee to any civil or criminal penalty or
liability. Upon demand of Lender or any other Indemnitee, Indemnitor shall
furnish Indemnitees a surety bond or other adequate security reasonably
satisfactory to Indemnitees sufficient both to indemnify Indemnitees against
liability and hold the Property free from adverse effect in the event the
contest is not successful. All Remedial Work shall be performed by one or more
contractors, approved in advance in writing by Lender (which approval shall not
be unreasonably withheld or delayed), and under the supervision of a consulting
engineer approved in advance in writing by Lender (which approval shall not be
unreasonably withheld or delayed). All costs and expenses of such Remedial Work
shall be paid by Indemnitor including, without limitation, the charges of such
contractor(s) and/or the consulting engineer, and the reasonable attorneys' fees
and costs incurred by Indemnitees in connection with the monitoring or review of
such contractors and consulting engineer. In the event Indemnitor shall fail to
commence, or cause to be commenced, such Remedial Work within such thirty (30)
day (or such shorter) period, or shall fail thereafter to prosecute such
Remedial Work to completion in a diligent manner after ten (10) days' written
notice to Indemnitor (or such shorter period as may be appropriate in the case
of emergency), Indemnitees may, but shall not be required to, cause such
Remedial Work to be performed and all reasonable costs and expenses thereof, or
incurred in connection therewith, shall become an Environmental Claim hereunder.
(c) Anything to the contrary set forth in this Indemnity Agreement,
in the Mortgage, or elsewhere notwithstanding, Indemnitor shall not be liable
under this Indemnity Agreement to the extent of that portion of any Costs and
Liabilities which Indemnitor establishes is attributable to the gross negligence
or willful misconduct of any Indemnitee (or its agents or employees) not
affiliated with Indemnitor at the Property which causes (i) the introduction or
initial release of a Hazardous Substance at the Property, or (ii) material
aggravation of a then existing Hazardous Substance condition or occurrence at
the Property. In addition, if Lender or any affiliate(s) thereof or any other
person or entity acquires ownership of
4
<PAGE>
the Property through a foreclosure, or the exercise of a power of sale under the
Mortgage or deed-in-lieu of foreclosure, Indemnitor shall not be liable
hereunder for that portion of any Costs and Liabilities which Indemnitor
establishes is attributable to (y) the introduction or initial release of a
Hazardous Substance at the Property by any party, other than Borrower, any other
Indemnitor or an affiliate of Indemnitor, at any time after Lender, such
affiliate(s) or such other person or entity has acquired title to the Property
or (z) material aggravation of a then existing Hazardous Substance condition or
occurrence at the Property by any party, other than Borrower, Indemnitor or an
affiliate of Indemnitor, at any time after Lender, such affiliate(s) or such
other person or entity has acquired title to the Property.
Notwithstanding the foregoing, the liability of Indemnitor hereunder
shall otherwise remain in full force and effect after Lender, such affiliate(s)
or such other person so acquires title to the Property, including without
limitation with respect to any Hazardous Substance which is discovered at the
Property after the date Lender, such affiliate(s) or such other person acquires
title but which was actually introduced to the Property prior to the date of
such acquisition, and with respect to any continuing migration or release of any
Hazardous Substance introduced at the Property prior to the date that Lender,
such affiliate(s) or such other person acquires title.
(d) Indemnitor shall protect, defend, and hold harmless Indemnitees
from and against, and indemnify Indemnitees for, all liabilities, losses, costs,
damages, expenses or claims, including, but not limited to, related costs,
expenses, losses, damages (excluding any and all consequential damages),
penalties, fines, liabilities, obligations, defenses, judgments, suits,
proceedings, and disbursements (including, without limitation, reasonable
attorneys' fees and disbursements) of any kind or of any nature whatsoever,
which may at any time be imposed upon Indemnitee or incurred by any Indemnitee
and which arise (directly or indirectly) in connection with any of the
obligations of Borrower which are specified in clauses (i) through (x) of
Section 33 of the Mortgage as exceptions to the limitations on Borrower's
- ----------
liability for its obligations under the Loan.
(e) This Indemnity Agreement is solely intended to protect Lender
from the matters set forth in the preceding paragraphs 2(a), 2(b) and 2(d) and
is not intended to secure payment of the Note or amounts due to Lender under the
Mortgage. This Indemnity Agreement is not intended to be, nor shall it be,
secured by the Mortgage or any of the
5
<PAGE>
other Loan Documents. The obligations of Indemnitor under this Indemnity
Agreement shall be as set forth herein notwithstanding any similar provisions in
the Mortgage.
(f) Nothing contained in this Indemnity Agreement shall prevent or in
any way diminish or interfere with any rights and remedies, including without
limitation, the right to contribution, which Lender may have against Borrower
pursuant to the terms of the Mortgage Indemnitor or any other party (or which
Indemnitor or Borrower may have against Lender or any other party) under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (codified at Title 42 U.S.C. (S)(S) 9601 et seq.), as it may be amended
from time to time, or any other applicable Federal or state laws.
3. Notice of Actions. (a) Indemnitor shall give immediate written
-----------------
notice to Lender of each of the following (provided that Indemnitor has
knowledge thereof): (i) any proceeding, written (or material non-written)
inquiry, notice, or other communication by or from any governmental authority,
including, without limitation, the Environmental Protection Agency and state and
local equivalents, regarding the presence or existence of any Hazardous
Substance on, under, or about the Property or any migration thereof from or to
the Property or any actual or alleged violation of the Requirements of
Environmental Laws; (ii) all Environmental Claims and any other written claims
made or threatened against Borrower or Indemnitor or the Property relating to
any loss or injury resulting from or pertaining to any Hazardous Substance or
any alleged breach or violation of any Requirements of Environmental Laws; (iii)
Borrower's or Indemnitor's discovery of any occurrence or condition on any real
property adjoining or in the vicinity of the Property that could reasonably
cause the Property or any part thereof to be subject to any material
restrictions on ownership, occupancy, transferability, or use, or subject the
owner or any person having any interest in the Property to any material
liability, penalty, or disability under any Requirement of Environmental Laws;
and (iv) Borrower's or Indemnitor's receipt of any written notice or discovery
of any information regarding any actual or alleged use, manufacture, production,
storage, spillage, seepage, release, discharge, disposal or any other presence
or existence of any Hazardous Substance on, under, or about the Property, in
violation of any Requirements of Environmental Laws pertaining to Indemnitor or
the Property.
(b) Immediately upon Borrower's or Indemnitor's receipt of the same,
Indemnitor shall deliver to Lender copies of any and all Environmental Claims,
and any and all orders, notices, permits, applications, reports, and other
6
<PAGE>
communications, documents, and instruments pertaining to the actual or alleged
presence or existence of any Hazardous Substance on, under, or about the
Property in violation of any Requirements of Environmental Laws.
4. Procedures Relating to Indemnification. (a) Indemnitor shall at
--------------------------------------
its own cost, expense, and risk: (i) defend all suits, actions, or other legal
or administrative proceedings that may be brought or instituted against an
Indemnitee or Indemnitees, as the case may be, on account of any matter or
matters arising under or within Section 2 above; (ii) pay or satisfy any
judgment or decree that may be recorded against an Indemnitee or Indemnitees, as
the case may be, in any such suit, action, or other legal or administrative
proceedings; and (iii) reimburse Indemnitee or Indemnitees, as the case may be,
for the cost of, or for any payment made by any of them, with respect to any
reasonable expenses incurred in connection with the matters arising under or
within Section 2 above, undertaken as a result of any demands, causes of
actions, lawsuits, proceedings, or any other claims threatened, made, or brought
against any Indemnitee or Indemnitees, as the case may be, arising out of the
obligations of Indemnitor under this Indemnity Agreement or Borrower under the
Mortgage. Indemnitor shall have no liability under this paragraph (a) unless
Lender shall, after receiving actual knowledge of any suit, action or proceeding
for which Indemnitees may seek indemnification under this paragraph (a), have
given reasonable written notice thereof to Indemnitor.
(b) Counsel selected by Indemnitor pursuant to Section 4(a) above
shall be subject to the reasonable approval of the Indemnitee or Indemnitees, as
the case may be, asserting a claim hereunder; provided, however, that Indemnitee
-------- -------
or Indemnitees, as the case may be, may elect to defend any such claim, lawsuit,
action, legal, or administrative proceeding at the cost and expense of
Indemnitor, if, in the reasonable judgment of the Indemnitee or Indemnitees, as
the case may be, (i) the defense is not proceeding or being conducted in a
satisfactory manner, or (ii) there is a conflict of interest between any of the
parties to such lawsuit, action, legal, or administrative proceeding, and in
either case Indemnitor have not provided substitute counsel reasonably
satisfactory to Indemnitees promptly after written request therefor by
Indemnitees.
(c) Notwithstanding anything in this Indemnity Agreement to the
contrary, Indemnitor shall not, nor shall Indemnitor allow Borrower without the
prior written consent of Lender (which consent shall not be unreasonably
withheld or delayed) to (i) settle or compromise any action, suit, proceeding,
or claim relating, directly or indirectly, to
7
<PAGE>
any Hazardous Substance, any Environmental Claim or any matter addressed in
Section 2(d) above, or consent to the entry of any judgment therein for which
Lender might be wholly or partially liable that does not include as an
unconditional term thereof the delivery by the claimant or plaintiff to Lender
of a written release of Lender (in form, scope and substance satisfactory to
Lender in its reasonable judgment) from all liability in respect of such action,
suit, or proceeding; or (ii) settle or compromise any action, suit, proceeding,
or claim relating, directly or indirectly, to any Hazardous Substance, any
Environmental Claim or any matter addressed in Section 2(d) above in any manner
that may materially and adversely affect Lender as determined by Lender in its
reasonable judgment.
(d) Without limiting the rights of Indemnitor pursuant to Section
4(b) above, Lender shall have the right (upon written notice to Indemnitor) to
join and participate in, as a party if they so elect, any legal proceedings or
actions in connection with the Property involving any Environmental Claim, any
Hazardous Substance, any Requirements of Environmental Laws or any matter
addressed in Section 2(d) above. In any circumstance in which this indemnity
applies, Lender may employ its own legal counsel and consultants to prosecute or
defend any claim, action, or cause of action. Indemnitor shall have the right
to compromise or settle the same in good faith without the necessity of showing
actual liability therefor, with the consent of Indemnitees (which consent shall
not be unreasonably withheld or delayed). Indemnitor shall reimburse Lender
upon demand for all reasonable costs and expenses incurred by Lender, including
the amount of all costs of settlements entered into in accordance with the
preceding sentence, and the fees and other costs and expenses of its attorneys
and consultants including without limitation those incurred in connection with
monitoring and participating in any action or proceeding, including costs
incurred pursuant to Section 4(b) above.
5. Binding Effect. This Indemnity Agreement shall be binding upon
--------------
and inure to the benefit of Indemnitor and Indemnitees and their respective
successors and assigns.
6. Limitation of Liability of Indemnitees. Notwithstanding any
--------------------------------------
ownership by any Indemnitee at any time of all or any portion of the Property,
in no event shall any Indemnitee (including any successor or assign as holder of
the Note) be bound by any obligations or liabilities of any of the Indemnitor
under this Indemnity Agreement.
7. Liability of Indemnitor. The liability of Indemnitor under this
-----------------------
Indemnity Agreement shall in no way be
8
<PAGE>
limited or impaired by any amendment or modification of the provisions of the
Loan Documents to or with Lender by Indemnitor or any person who succeeds
Borrower as owner of the Property. In addition, the liability of Indemnitor
under this Indemnity Agreement shall in no way be limited or impaired by (but
subject in all events to the terms set forth in Section 16 hereof) (i) any
extensions of time for performance required by any of the Loan Documents; (ii)
any sale, assignment, or foreclosure of the Note or Mortgage or any sale or
transfer of all or part of the Property or any interest(s) therein; (iii) any
exculpatory provision in any of the Loan Documents limiting Lender's recourse to
property encumbered by the Mortgage or to any other security, or limiting
Lender's rights to a deficiency or other judgment against Indemnitor or any
other obligor or guarantor thereunder; (iv) the accuracy or inaccuracy of the
representations and warranties made by Borrower under any of the Loan Documents;
(v) the release of Borrower or any other person or entity from performance or
observance of any of the agreements, covenants, terms, or conditions contained
in any of the Loan Documents by operation of law, Lender's voluntary act, or
otherwise; (vi) the release or sub stitution in whole or in part of any security
for the Note; or (vii) Lender's failure to record any Mortgage or file any UCC
financing statements (or Lender's improper recording or filing of any thereof)
or otherwise to perfect, protect, secure, or insure any security interest or
lien given as security for the Note; and, in any such case, whether with or
without notice to Indemnitor and with or without consideration.
8. Waiver. Indemnitor waives any right or claim of right to cause a
------
marshaling of the assets of Indemnitor or to cause Lender to proceed against any
of the security for the Loan before proceeding under this Indemnity Agreement
against Indemnitor or to proceed against Indemnitor in any particular order;
Indemnitor agrees that any payments required to be made hereunder shall become
due on demand; Indemnitor expressly waives and relinquishes all rights and
remedies accorded by applicable law to indemnitors or guarantors, except any
rights of subrogation that Indemnitor may have; provided, that the indemnity
--------
provided for hereunder shall neither be contingent upon the existence of any
such rights of subrogation nor subject to any claims or defenses whatsoever that
may be asserted in connection with the enforcement or attempted enforcement of
such subrogation rights, including, without limitation, any claim that such
subrogation rights were abrogated by any acts of Lender. Indemnitor hereby
agrees to postpone the exercise of any and all rights of subrogation to the
rights of Lender against Borrower hereunder and any rights of
9
<PAGE>
subrogation to any collateral securing the Loan until the Loan shall have been
paid in full.
9. Delay. No delay on the Lender's part in exercising any right,
-----
power, or privilege under any of the Loan Documents shall operate as a waiver of
any such privilege, power, or right.
10. Notices. (a) All notices, consents, approvals, elections and
-------
other communications (collectively "Notices") hereunder shall be in writing
-------
(whether or not the other provisions of this Indemnity Agreement expressly so
provide) and shall be deemed to have been duly given if delivered by nationally
recognized overnight courier service or certified mail, with return receipt
requested, postage prepaid, to such parties at the address set forth below (or
at such other addresses as shall be given in writing by any party to the others
pursuant to this Section) and shall be deemed received by the party to whom it
is addressed on the first Domestic Business Day after delivery by the sender to
a nationally recognized overnight courier service or on the third Domestic
Business Day after mailing if sent by certified mail:
To Indemnitor:
Kilroy Realty Corporation
Attention:
with a copy to:
Latham & Watkins
633 West 5th Street
Suite 4000
Los Angeles, CA 90071
Attention: Martha B. Jordan, Esq.
To Lender:
Morgan Guaranty Trust Company
of New York
60 Wall Street
New York, New York 10260
Attention:
10
<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022-3897
Attention: Martha Feltenstein, Esq.
(b) In the event of any strike or occurrence of another similar event
which interrupts mail service, notices may be served personally upon an
individual, trustee, partner, or an officer or director of a corporation which
is or is part of the party being served hereunder (all at the address set forth
in this Section).
11. Attorneys' Fees. In the event that Indemnitor or any Indemnitee
---------------
brings any suit or other proceeding with respect to the subject matter or
enforcement of this Indemnity Agreement, the prevailing party (as determined by
the court, agency or other authority before which such suit or proceeding is
commenced) shall, in addition to such other relief as may be awarded, be
entitled to recover attorneys' fees, expenses and costs of investigation as
actually incurred (including, without limitation, attorneys' fees, expenses and
costs of investigation incurred in appellate proceedings, costs incurred in
establishing the right to indemnification, or in any action or participation in,
or in connection with, any case or proceeding under Chapters 7, 11 or 13 of the
Bankruptcy Code, 11 United States Code Sections 101 et seq., or any successor
-- ---
statutes).
12. Successive Actions. A separate right of action hereunder shall
------------------
arise each time Lender acquires knowledge of any matter described in Sections 2
or 3 hereof. Separate and successive actions may be brought hereunder to
enforce any of the provisions hereof at any time and from time to time. No
action hereunder shall preclude any subsequent action, and Indemnitor hereby
waives and covenants not to assert any defense in the nature of splitting of
causes of action or merger of judgments.
13. Partial Invalidity. If any provision of this Indemnity Agreement
------------------
shall be determined to be unenforceable in any circumstances by a court of
competent jurisdiction, then the balance of this Indemnity Agreement
nevertheless shall be enforceable, and the subject provision shall be
enforceable in all other circumstances.
14. Interest on Unpaid Amounts. All amounts required to be paid or
--------------------------
reimbursed to any Indemnitee hereunder shall bear interest from the date of
expenditure by such Indemnitee or the date of written demand to any
11
<PAGE>
Indemnitor hereunder, whichever is earlier, until paid to Indemnitee(s). The
annual interest rate shall be the lesser of (a) a rate equal to the Default Rate
(as defined in the Mortgage) or (b) the maximum rate then permitted for the
parties to contract for under applicable law.
15. Governing Law. This Indemnity Agreement and the rights and
-------------
obligations of the parties hereunder shall in all respects be governed by, and
construed and enforced in accordance with, the laws of the State of New York
(without giving effect to New York's principles of conflicts of law).
Indemnitor hereby irrevocably submits to the non-exclusive jurisdiction of any
New York state or federal court sitting in the City of New York over any suit,
action or proceeding arising out of or relating to this Indemnity Agreement, and
Indemnitor hereby agrees and consents that, in addition to any other methods of
service of process in any such suit, action or proceeding in any New York state
or federal court sitting in the City of New York, service of process may be made
by certified or registered mail, return receipt requested, directed to
Indemnitor at its address indicated in Section 10 hereof, and service so made
shall be complete five (5) days after the same shall have been so mailed.
16. Termination of Indemnity. Notwithstanding anything to the
------------------------
contrary contained elsewhere in this Indemnity Agreement, subject to the
following sentence, the indemnity provided for herein and this Indemnity
Agreement shall terminate and be of no further force and effect upon the earlier
to occur of (a) repayment in full of all principal, interest and any other sums
due under, or evidenced by, the Mortgage and the other Loan Documents and (b)
with respect to the indemnities set forth in Sections 2(a) and (b) only, two (2)
years after the date on which Lender or any affiliate thereof (or any other
Person (other than the Borrower) acting through or on behalf of the Lender, its
successors and assigns and any affiliate thereof) acquires possession of, or
title to, the Property. Notwithstanding the foregoing, any claim hereunder may
be made at any time before the date described in the preceding sentence, and
once such claim has been made prior to such date, the obligations of Indemnitor
under this Indemnity Agreement shall continue to apply to such claim, to the
extent permitted by applicable law.
12
<PAGE>
IN WITNESS WHEREOF, Indemnitor has executed this Indemnity Agreement
as of the date first set forth above.
KILROY REALTY CORP.
By: ___________________________
Name:
Title:
13
<PAGE>
ACKNOWLEDGMENT FOR INDEMNITOR
-----------------------------
STATE OF )
) ss.:
COUNTY OF )
On January __, 1997 , before me personally came ______________, to me
known to be the person who executed the foregoing instrument.
[Seal]
________________________________
Notary Public
14
<PAGE>
EXHIBIT 10.40
ASSIGNMENT OF LEASES,
RENTS AND SECURITY DEPOSITS
from
__________________________,
as Assignor
to
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
as Assignee
Dated as of January , 1997
___________________________________________________________
Prepared and drafted by and
after recording, return to:
Martha Feltenstein, Esq.
c/o Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
<PAGE>
ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS
THIS ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS (herein,
together with all amendments and supplements thereto, this "Assignment"), dated
----------
as of this ___ day of January, 1997, by and among _________, a ____ [limited
partnership/corporation/limited liability company], having an address c/o
__________, as assignor ("Assignor") and MORGAN GUARANTY TRUST COMPANY OF NEW
--------
YORK, a New York banking corporation, having an address at 60 Wall Street, New
York, New York 10260, as assignee (together with its successors and assigns,
"Assignee").
--------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, simultaneously herewith, Assignee has agreed to make a loan
to Assignor in the aggregate principal amount of Eighty Four Million Dollars
($84,000,000) (the "Loan") evidenced by a mortgage note (the "Note") and secured
---- ----
by the Indenture of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits,
dated as of even date herewith, from Assignor to Assignee (the "Mortgage");
--------
WHEREAS, as a condition to making the Loan, Assignee has required that
Assignor enter into this Assignment for the benefit of Assignee.
NOW, THEREFORE, Assignor, in consideration of TEN DOLLARS ($10.00),
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, does hereby assign, transfer and set over unto Assignee,
subject to the terms hereof, all of the right, title and interest of Assignor in
and to all of those certain leases now or hereafter affecting all or a portion
of the real property more particularly described on Exhibits A-1 - A-13 hereto
-------------------
(the "Properties"), together with all rents, security deposits, income and
----------
profits arising from said leases, all modifications, renewals and extensions
thereof and any guarantees of the lessee's obligations under said leases (each
of said leases and all such guarantees, modifications, renewals and extensions
relating thereto being individually re-
2
<PAGE>
ferred to as a "Lease" and collectively referred to as the "Leases").
----- ------
THIS ASSIGNMENT is an absolute, present and irrevocable assignment and
is made for the purpose of securing:
A. The payment of all sums and indebtedness now or hereafter due and
payable under the Note.
B. Payment of all sums with interest thereon becoming due and
payable to Assignee under this Assignment, the Mortgage or the other Loan
Documents.
C. The performance and discharge of each and every obligation,
covenant, representation, warranty and agreement of Assignor under this
Assignment, the Note, the Mortgage, the Cash Collateral Agreement and any other
Loan Document.
ASSIGNOR hereby covenants and warrants to Assignee that Assignor has
not executed any prior assignment of the Leases or the Rents outstanding as of
the date hereof except for the Mortgage, nor has Assignor performed any act or
executed any other instrument which might prevent Assignee from exercising its
rights under any of the terms and conditions of this Assignment or which would
limit Assignee in such exercise; and Assignor further covenants and warrants to
Assignee that Assignor has not executed or granted any modification whatsoever
of any Lease which individually or in the aggregate is likely to result in a
material adverse effect on the value of any individual Property other than any
amendment heretofore delivered to Assignee, and that the Leases are in full
force and effect and Assignor has neither given to nor received any written
notice of default from any Tenant which remains uncured (which individually or
in the aggregate might have a material adverse effect on the value of any
individual Property) and to the Assignor's knowledge, no events or circumstances
exist which with or without the giving of notice, the passage of time or both
may constitute a default under any of the Leases which individually or in the
aggregate is likely to result in a material adverse effect on the value of any
individual Property.
3
<PAGE>
ASSIGNOR further covenants with Assignee: (i) to observe and perform
all material obligations imposed upon the lessor under the Leases and, except as
permitted under the Mortgage, not to do or permit to be done anything which
individually or in the aggregate is likely to result in a material adverse
effect on the value of the Properties; (ii) not to collect any of the Rents
(exclusive of security deposits) more than thirty (30) days in advance of the
time when the same shall become due, not to execute any other assignment of
lessor's interest in the Leases or assignment of Rents arising or accruing from
the Leases or otherwise with respect to the Properties except for the Mortgage;
none of the foregoing shall be done or suffered to be done without in each
instance obtaining the prior written consent of Assignee (except to the extent
such consent is not required pursuant to the terms of the Mortgage), and any of
such acts done without the prior written consent of Assignee shall be null and
void; and (iii) to execute and deliver, at the request of Assignee, all such
further assurances and assignments with respect to the Leases and Rents assigned
herein as Assignee shall from time to time reasonably require to implement the
terms of this Assignment; provided, however, that no such further assurances
-------- -------
and assignments shall increase Assignor's obligations under this Assignment.
THIS ASSIGNMENT is made on the following terms, covenants and
conditions:
1. All capitalized terms not otherwise defined herein shall have
the meanings set forth in the Mortgage.
2. Prior to the occurrence and continuance of an Event of Default,
Assignor shall have the right to collect, in accordance with the terms hereof
but subject to the provisions of the Cash Collateral Agreement, all Rents and to
retain, use and enjoy the same.
3. At any time after the occurrence and continuance of an Event of
Default, Assignee, without in any way waiving such Event of Default, at its
option, upon notice and without regard to the adequacy of the security for the
said principal sum, interest and indebtedness secured hereby and by the
Mortgage, either in person or by agent, upon bringing any action or proceeding,
or by a
4
<PAGE>
receiver appointed by a court, may enter upon and take possession of the
premises described in the Leases and/or the Mortgage and have, hold, manage,
lease and operate the same on such terms and for such period of time as Assignee
may deem proper. Assignee, either with or without taking possession of said
premises in its own name, may demand, sue for or otherwise collect and receive
all Rents, including any Rents past due and unpaid, and to apply such Rents to
the payment of: (a) all reasonable expenses of managing the Trust Estate,
including, without limitation, the reasonable salaries, fees and wages of any
managing agent and such other employees as Assignee may reasonably deem
necessary and all reasonable expenses of operating and maintaining the Trust
Estate, including, without limitation, all taxes, charges, claims, assessments,
water rents, sewer rents and any other liens, and premiums for all insurance
which are due and payable and the cost of all alterations, renovations, repairs
or replacements, and all reasonable expenses incident to taking and retaining
possession of the Trust Estate; and (b) the principal sum, interest and
indebtedness secured hereby and by the Mortgage, together with all reasonable
costs and reasonable attorneys' fees, actually incurred in such order of
priority as Assignee may elect in its sole discretion. The exercise by Assignee
of the option granted it in this Section 3 and the collection of the Rents and
the application thereof as herein provided shall not be considered a waiver of
any Event of Default under the Note, the Mortgage or under the Leases or this
Assignment. Assignor agrees that the exercise by Assignee of one or more of
its rights and remedies hereunder shall in no way be deemed or construed to make
Assignee a mortgagee in possession unless and until such time as Assignee takes
actual possession of any Property.
4. Assignee shall not be liable for any loss sustained by Assignor
resulting from Assignee's failure to let the premises or any portion thereof or
any other act or omission of Assignee either in collecting the Rents or, if
Assignee shall have taken possession of the premises described in the Leases
and/or the Mortgage, in managing such premises after any such Event of Default
unless such loss is caused by the negligence or willful misconduct of Assignee.
Assignee shall not be obligated to perform or discharge, nor does Assignee
hereby undertake to perform or discharge, any obligation, duty or liability
under any Lease or under or by reason of this
5
<PAGE>
Assignment, and Assignor shall, and does hereby agree to, indemnify Assignee
for, and to hold Assignee harmless prior to the time that Assignee or any
Affiliate, nominee or designee of Assignee becomes a mortgagee in possession or
fee owner of any Property or otherwise takes possession of any Property
following an Event of Default from, any and all liability, loss or damage which
may or might be incurred under said Leases or under or by reason of this
Assignment and the exercise of its remedies hereunder and under the other Loan
Documents and from any and all claims and demands whatsoever which may be
asserted against Assignee by reason of any alleged obligations or undertakings
on its part to perform or discharge any of the terms, covenants or agreements
contained in said Leases. Should Assignee incur any such liability under said
Leases or under or by reason of this Assignment or in defense of any such claims
or demands, the amount thereof, including reasonable costs and expenses and
reasonable attorneys' fees actually incurred, shall be secured hereby, and
Assignor shall reimburse Assignee therefor immediately upon demand, and upon the
failure of Assignor to do so Assignee may, at its option, exercise Assignee's
remedies under the Mortgage as the same relates to the Trust Estate. It is
further understood that unless and until Assignee or its Affiliate, nominee or
designee shall become a mortgagee in possession or the fee owner of the
Properties or otherwise takes possession or control of any Property following an
Event of Default, this Assignment shall not operate to place responsibility for
the control, care, management or repair of said premises upon Assignee, nor for
the carrying out of any of the terms and conditions of any Lease; nor shall it
operate to make Assignee responsible or liable for any waste committed on the
Properties by the tenants or any other parties, or for any dangerous or
defective condition of the premises, or for any negligence in the management,
upkeep, repair or control of said premises resulting in loss or injury or death
to any tenant, licensee, employee or stranger other than any of the foregoing
arising from the gross negligence or willful misconduct of Assignee, its
employees, officers, agents or representatives.
5. Upon payment in full of the principal sum, interest and
indebtedness secured hereby and by the Mortgage, this Assignment shall become
and be void and of no effect, but the affidavit, certificate, letter or
6
<PAGE>
statement of any officer, agent or attorney of Assignee showing any part of said
principal, interest or indebtedness to remain unpaid shall be and constitute
conclusive evidence of the validity, effectiveness and continuing force of
this Assignment, and any person may, and is hereby authorized to, rely thereon.
Assignor hereby authorizes and directs the lessees named in the Leases or any
other or future lessee or occupant of the premises described therein or in the
Mortgage, upon receipt from Assignee of written notice to the effect that
Assignee is then the holder of the Mortgage and that an Event of Default exists
thereunder or under any other Loan Document to pay over to Assignee all Rents
and to continue so to do until otherwise notified by Assignee. Notwithstanding
anything to the contrary contained herein, to the extent all or a portion of any
Property is released from the lien of the Mortgage pursuant to Sections [6, 38
or 45] thereof, Leases covering such portion of the applicable Property shall be
released from this Assignment and Assignee shall execute and deliver to the
owner of the applicable Property a written release hereof in recordable form.
6. Assignee may take or release other security for the payment of
said principal sum, interest and indebtedness, may release any party primarily
or secondarily liable therefor and may apply any other security held by it to
the satisfaction of such principal sum, interest or indebtedness without
prejudice to any of its rights under this Assignment.
7. Each Assignor agrees that it will, after an Event of Default and
the acceleration of indebtedness evidenced by the Note, at the request therefor
by Assignee, deliver to Assignee certified copies of each and every Lease then
affecting all or any part of the Properties, together with assignments thereof.
Such assignments shall be on forms reasonably approved by Assignee or its
designee, and each Assignor agrees to pay all reasonable costs reasonably
incurred in connection with the execution and recording of such assignments or
any other related documents, including, without limitation, reasonable fees of
Assignee's local counsel.
8. Wherever used herein, the singular (including, without
limitation, the term "Lease") shall
7
<PAGE>
include the plural, and the use of any gender shall apply to all genders.
9. Nothing contained in this Assignment and no act done or omitted
by Assignee pursuant to the powers and rights granted it hereunder shall be
deemed to be a waiver by Assignee of any of Assignee's rights and remedies
under the Note, the Mortgage, the Cash Collateral Agreement or any other Loan
Document. This Assignment is made and accepted without prejudice to any of such
rights and remedies possessed by Assignee to collect the principal sum,
interest and indebtedness secured hereby and to enforce any other security
therefor held by it, and said rights and remedies may be exercised by Assignee
either prior to, simultaneously with, or subsequent to any action taken by it
hereunder.
10. All notices, consents, approvals and requests required or
permitted hereunder shall be given in accordance with the terms of Section [26]
of the Mortgage.
11. No consent by Assignor shall be required for any assignment or
reassignment of the rights of Assignee under this Assignment to any purchaser of
the Loan or any interest in or portion of the Loan.
12. This Assignment was negotiated in New York, and made by Assignor
and accepted by Assignee in the State of New York, and the proceeds of the Note
delivered pursuant thereto were disbursed from New York, which State the parties
agree has a substantial relationship to the parties and to the underlying
transaction embodied hereby, and in all respects, including, without limiting
the generality of the foregoing, matters of construction, validity and
performance. This Assignment and the obligations arising hereunder shall be
governed by and construed in accordance with, the laws of the State of New York
applicable to contracts made and performed in the State of New York and any
applicable laws of the United States of America except that at all times the
provisions for the creation, perfection and enforcement of the Liens and
security interest created pursuant to this Assignment with respect to any
Property and pursuant to the Mortgage shall be governed by the laws of the State
in which such Property is located. Whenever possible, each provision of this
Assignment shall be
8
<PAGE>
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Assignment shall be prohibited by, or invalid
under, applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity without invalidating the remaining provisions of
this Assignment. Nothing contained in this Assignment or in any Loan Document
shall require either Assignor to pay or Assignee to accept any sum in any amount
which would, under applicable law, subject Assignee, any Trustee or any Holder
to penalty or adversely affect the enforceability of this Assignment. In the
event that the payment of any sum due hereunder or under any Loan Document would
have such result under applicable law, then, ipso facto, the obligation of
---- -----
Assignor to make such payments shall be reduced to the highest sum then
permitted under applicable law and appropriate adjustment shall be made by
Assignor and Assignee.
13. Recourse with respect to any claim arising under or in connection
with this Assignment by Assignee shall be limited to the same extent as is
provided in Section [33] of the Mortgage with respect to claims against Assignor
and the other parties named therein by Assignee and the terms, covenants and
conditions of Section [33] of the Mortgage are hereby incorporated by reference
as if fully set forth herein.
14. In the event that any provisions of this Assignment and the
Mortgage conflict, the provisions of the Mortgage shall control.
15. Assignor hereby waives and shall waive trial by jury, to the
extent permitted by law, in any action or proceeding brought by, or counterclaim
asserted by Assignee which action proceeding or counterclaim arises out of or is
connected with this Assignment, the Note or any other Loan Document.
16. This Assignment may be executed in any number of counterparts.
9
<PAGE>
IN WITNESS WHEREOF, each Assignor has duly executed this Assignment
on the date first hereinabove written.
ASSIGNOR:
Signed and acknowledged in the ______________________, a
presence of: ____________
By: __________________________
Name:
________________________________ Title
Print Name:
________________________________
Print Name:
ASSIGNEE:
Signed and acknowledged MORGAN GUARANTY TRUST COMPANY
in the presence of: OF NEW YORK, a New York
banking corporation
________________________________
Print Name: By: _____________________________
Name:
________________________________ Title:
Print Name:
10
<PAGE>
STATE OF ______ )
) ss.
COUNTY OF _____ )
On this _____ day of January, 1997, before me, the undersigned
officer, personally appeared __________________________, personally known to me
and, upon oath, did depose and say that he resides at
_______________________________________________, that he is the _______
President of ________, a _______ corporation (the "Corporation"), the sole
general partner of _________________, a ______________, and that as such
officer, being duly authorized to do so pursuant to its by-laws or a resolution
of its board of directors, executed and acknowledged the foregoing instrument
on behalf of the Corporation for the purposes therein contained, by sign ing the
name of the Corporation by himself as such officer as his free and voluntary
act and deed and the free and voluntary act and deed of said Corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_______________________________
Notary Public
State of_______________________
NOTARIAL SEAL My Commission Expires:
_______________________________
<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK)
On this _____ day of January, 1997, before me, the undersigned
officer, personally appeared __________________________, personally known to me
and, upon oath, did depose and say that he resides at
______________________________________________, that he is a __________________
of Morgan Guaranty Trust Company of New York, a New York banking corporation
(the "Corporation"), and that as such officer, being duly authorized to do so
pursuant to its by-laws or a resolution of its board of directors, executed and
acknowledged the foregoing instrument on behalf of the Corporation for the
purposes therein contained, by signing the name of the Corporation by himself as
such officer as his free and voluntary act and deed and the free and voluntary
act and deed of said Corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_________________________________
Notary Public
State of_________________________
NOTARIAL SEAL My Commission Expires:
_________________________________
<PAGE>
EXHIBIT A-1 - A-
------------------
Legal Description of Properties
<PAGE>
EXHIBIT 10.41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
dated as of January __, 1997
among
[BORROWER]
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Bank and as Lead Agent for the Banks,
and
THE BANKS LISTED HEREIN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
<TABLE>
<CAPTION>
ARTICLE I
<S> <C>
DEFINITIONS.............................................. 1
SECTION 1.1. Definitions.............................. 1
SECTION 1.2. Accounting Terms and Determinations...... 18
SECTION 1.3. Types of Borrowings...................... 18
ARTICLE II
THE CREDITS.............................................. 19
SECTION 2.1. Commitments to Lend..................... 19
SECTION 2.2. Notice of Borrowing..................... 19
SECTION 2.3. Notice to Banks; Funding of Loans....... 20
SECTION 2.4. Notes................................... 21
SECTION 2.5. Maturity of Loans; Payment of Principal. 21
SECTION 2.6. Interest Rates.......................... 22
SECTION 2.7. Fees.................................... 23
SECTION 2.8. Mandatory Termination................... 23
SECTION 2.9. Mandatory Prepayment.................... 24
SECTION 2.10. Optional Prepayments.................... 25
SECTION 2.11. General Provisions as to Payments....... 27
SECTION 2.12. Funding Losses.......................... 28
SECTION 2.13. Computation of Interest and Fees........ 28
SECTION 2.14. Method of Electing Interest Rates....... 28
ARTICLE III
CONDITIONS............................................... 30
SECTION 3.1. Closing................................. 30
SECTION 3.2. Borrowings.............................. 34
SECTION 3.3. Conditions Precedent to Additional Real
Property Assets......................... 35
SECTION 3.4. Mortgaged Properties.................... 36
ARTICLE IV
REPRESENTATIONS AND WARRANTIES........................... 38
SECTION 4.1. Existence and Power..................... 38
SECTION 4.2. Power and Authority..................... 38
SECTION 4.3. No Violation............................ 38
SECTION 4.4. Financial Information................... 39
SECTION 4.5. Litigation.............................. 39
SECTION 4.6. Compliance with ERISA................... 40
SECTION 4.7 Environmental Compliance................ 40
SECTION 4.8. Taxes................................... 41
SECTION 4.9. Full Disclosure......................... 42
SECTION 4.10. Solvency................................ 42
SECTION 4.11. Use of Proceeds; Margin Regulations..... 42
SECTION 4.12. Governmental Approvals.................. 42
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.13 Investment Company Act; Public Utility
Holding Company Act..................... 43
SECTION 4.14. Closing Date Transactions............... 43
SECTION 4.15. Representations and Warranties in Loan
Documents............................... 43
SECTION 4.16. Patents, Trademarks, etc................ 43
SECTION 4.17. No Default.............................. 43
SECTION 4.18. Licenses, etc........................... 44
SECTION 4.19. Compliance With Law..................... 44
SECTION 4.20. No Burdensome Restrictions.............. 44
SECTION 4.21. Brokers' Fees........................... 44
SECTION 4.22. Labor Matters........................... 44
SECTION 4.23. Organizational Documents................ 45
SECTION 4.24. Principal Offices....................... 45
SECTION 4.25. REIT Status............................. 45
SECTION 4.26. Ownership of Property................... 45
SECTION 4.27 Security Interests and Liens............ 45
SECTION 4.28 Structural Defects and Violation of Law. 46
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS....................... 46
SECTION 5.1. Information............................. 46
SECTION 5.2. Payment of Obligations.................. 49
SECTION 5.3. Maintenance of Property; Insurance...... 49
SECTION 5.4. Conduct of Business..................... 50
SECTION 5.5. Compliance with Laws.................... 50
SECTION 5.6. Inspection of Property, Books and
Records................................. 50
SECTION 5.7. Existence............................... 51
SECTION 5.8. Financial Covenants..................... 51
SECTION 5.9. Restriction on Fundamental Changes;
Operation and Control................... 51
SECTION 5.10. Changes in Business..................... 52
SECTION 5.11 Sale of the Property.................... 52
SECTION 5.12. Fiscal Year; Fiscal Quarter............. 52
SECTION 5.13. Margin Stock............................ 52
SECTION 5.14. Development Activities.................. 52
SECTION 5.15. Use of Proceeds......................... 52
SECTION 5.16 Borrower Status......................... 52
ARTICLE VI
DEFAULTS................................................. 53
SECTION 6.1. Events of Default....................... 53
SECTION 6.2. Rights and Remedies..................... 56
SECTION 6.3. Notice of Default....................... 57
ARTICLE VII
THE LEAD AGENT........................................... 58
SECTION 7.1. Appointment and Authorization........... 58
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 7.2. Lead Agent and Affiliates............... 58
SECTION 7.3. Action by Lead Agent.................... 58
SECTION 7.4. Consultation with Experts............... 58
SECTION 7.5. Liability of Lead Agent................. 58
SECTION 7.6. Indemnification......................... 59
SECTION 7.7. Credit Decision......................... 59
SECTION 7.8. Successor Lead Agent.................... 59
SECTION 7.9. Lead Agent's Fee........................ 60
SECTION 7.10. Copies of Notices....................... 60
ARTICLE VIII
CHANGE IN CIRCUMSTANCES.................................. 60
SECTION 8.1. Basis for Determining Interest Rate.....
Inadequate or Unfair.................... 60
SECTION 8.2. Illegality.............................. 61
SECTION 8.3. Increased Cost and Reduced Return....... 61
SECTION 8.4. Taxes................................... 63
SECTION 8.5. Base Rate Loans Substituted for Affected
Euro-Dollar Loans....................... 65
ARTICLE IX
MISCELLANEOUS................................................. 66
SECTION 9.1. Notices 66.............................. 66
SECTION 9.2. No Waivers.............................. 66
SECTION 9.3. Expenses; Indemnification............... 66
SECTION 9.4. Sharing of Set-Offs..................... 68
SECTION 9.5. Amendments and Waivers.................. 69
SECTION 9.6. Successors and Assigns.................. 69
SECTION 9.7. Governing Law; Submission to
Jurisdiction............................ 71
SECTION 9.8. Marshaling; Recapture 7................. 2
SECTION 9.9. Counterparts; Integration; Effectiveness 72
SECTION 9.10. WAIVER OF JURY TRIAL.................... 72
SECTION 9.11. Survival................................ 73
SECTION 9.12. Domicile of Loans....................... 73
SECTION 9.13. Limitation of........................... 73
Exhibit A - Form of Note
Exhibit B - Mortgaged Properties
Exhibit C - Assignment and Assumption Agreement
</TABLE>
iii
<PAGE>
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of January __, 1997, among [BORROWER] (the
"Borrower"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank and as Lead
--------
Agent for the Banks and the BANKS listed on the signature pages hereof (the
"Banks").
-----
The parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have
-----------
the following meanings:
"Adjusted London Interbank Offered Rate" has the meaning set forth in
--------------------------------------
Section 2.6(b).
"Administrative Questionnaire" means, with respect to each Bank, an
----------------------------
administrative questionnaire in the form prepared by the Lead Agent and
submitted to the Lead Agent (with a copy to the Borrower) duly completed by such
Bank.
"Agreement" means this Credit Agreement as the same may from time to
---------
time hereafter be modified, supplemented or amended.
"Apartment Property" has the meaning set forth in Section 2.9(a)
------------------
hereof.
"Applicable Lending Office" means, with respect to any Bank, (i) in
-------------------------
the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Appraisals" means, with respect to the Sea-Tac Property, the
----------
independent appraisals, prepared and delivered to the Lead Agent at the
Borrower's sole cost and expense and conforming to the regulations promulgated
pursuant to FIRREA, initially completed by _____________.
<PAGE>
""Assignee" has the meaning set forth in Section 9.6(c).
--------
"Assignments" means, the Assignment of Leases, Rents and Security
-----------
Deposits, each executed by the Borrower on or prior to the date hereof,
securing all or a portion of the Loans.
"Bank" means each bank listed on the signature pages hereof, each
----
Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.
"Bankruptcy Code" means Title 11 of the United States Code, entitled
---------------
"Bankruptcy", as amended from time to time, and any successor statute or
statutes.
"Base Rate" means, for any day, a rate per annum equal to the higher
---------
of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate
plus .50%.
"Base Rate Borrowing" means a Borrowing comprised of Base Rate Loans.
-------------------
"Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan
--------------
in accordance with the applicable Notice of Borrowing or pursuant to Article
VIII.
"Benefit Arrangement" means at any time an employee benefit plan
-------------------
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"Borrower" means [Borrower] and its successors.
--------
"Borrowing" means a borrowing hereunder consisting of Loans made to
---------
the Borrower at the same time by the Banks pursuant to Article II. A Borrowing
is a "Domestic Borrowing" if such Loans are Base Rate Loans or a "Euro-Dollar
------------------ -----------
Borrowing" if such Loans are Euro-Dollar Loans.
- ---------
"Capital Expenditures" shall mean, for any period, the sum of all
--------------------
expenditures by Borrower (other than expenditures paid for with insurance
proceeds or condemnation awards in the case of a casualty to or taking of a
Mortgaged Property), including payments of
2
<PAGE>
Tenant Work Allowances and Tenant Expenses and the cost of any Tenant
Improvements performed by or on behalf of Borrower, which are capitalized on the
balance sheet of Borrower in conformity with GAAP, other than capitalized
interest expense.
"Cash Collateral Agreement" means the Cash Collateral Account
-------------------------
Security, Pledge and Assignment Agreement dated as of even date herewith, by
and among the Borrower, the Lead Agent, and the bank named therein as agent for
the Lead Agent.
"Closing Date" means the date on which the Lead Agent shall have
------------
received the documents specified in or pursuant to Section 3.1.
"Collateral" means all property and interests in property now owned or
----------
hereafter acquired in or upon which a Lien has been or is purported or intended
to have been granted to the Lead Agent on behalf of the Banks under each of the
Mortgages.
"Commitment" means, with respect to each Bank, the amount committed by
----------
such Bank pursuant to this Agreement with respect to any Loans, as such amount
may be reduced from time to time pursuant to Sections 2.8 and 2.9.
"Contingent Obligation" as to any Person means, without duplication,
---------------------
(i) any contingent obligation of such Person required to be shown on such
Person's balance sheet in accordance with GAAP, and (ii) any obligation required
to be disclosed in the footnotes to such Person's financial statements,
guaranteeing partially or in whole any non-recourse Debt, lease, dividend or
other obligation, exclusive of contractual indemnities (including, without
limitation, any indemnity or price-adjustment provision relating to the
purchase or sale of securities or other assets) and guarantees of non-monetary
obligations (other than guarantees of completion) which have not yet been called
on or quantified, of such Person or of any other Person.
"Debt" of any Person means, without duplication, (A) as shown on such
----
Person's consolidated balance sheet (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property and, (ii) all
indebtedness of such Person evidenced by a note,
3
<PAGE>
bond, debenture or similar instrument (whether or not disbursed in full in the
case of a construction loan), (B) the face amount of all letters of credit
issued for the account of such Person and, without duplication, all unreimbursed
amounts drawn thereunder, (C) all Contingent Obligations of such Person, (D) all
payment obligations of such Person under any interest rate protection agreement
(including, without limitation, any interest rate swaps, caps, floors, collars
and similar agreements) and currency swaps and similar agreements which were not
entered into specifically in connection with Debt set forth in clauses (A), (B)
or (C) hereof.
"Debt Service" shall mean, measured as of the last day of each
------------
calendar quarter, an amount equal to the interest actually payable by the
Borrower on the Loans for the previous four consecutive quarters including the
quarter then ended.
"Default" means any condition or event which constitutes an Event of
-------
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Domestic Business Day" means any day except a Saturday, Sunday or
---------------------
other day on which commercial banks in New York City are authorized by law to
close.
"Domestic Lending Office" means, as to each Bank, its office located
-----------------------
within the United States at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Domestic
Lending Office) or such other office within the United States as such Bank may
hereafter designate as its Domestic Lending Office by notice to the Borrower and
the Lead Agent; provided that no Bank shall be permitted to change its Domestic
Lending Office if as a result of such change either (i) pursuant to the
provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain
any Loans as Euro-Dollar Loans; or (ii) Borrower would be required to make any
payment to such Bank pursuant to the provisions of Section 8.3 or Section 8.4.
"Environmental Affiliate" means any partnership, or joint venture,
-----------------------
trust or corporation in which an equity interest is owned by the Borrower,
either directly or indirectly.
4
<PAGE>
"Environmental Approvals" means any permit, license, approval,
-----------------------
ruling, variance, exemption or other authorization required under applicable
Environmental Laws.
"Environmental Claim" means, with respect to any Person, any notice,
-------------------
claim, demand or similar communication (written or oral) by any other Person
alleging potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damage, property damage, personal
injuries, fines or penalties arising out of, based on or resulting from (i) the
presence, or release into the environment, of any Material of Environmental
Concern at any location, whether or not owned by such Person or (ii)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law, in each case as to which could reasonably be expected to have
a Material Adverse Effect.
"Environmental Indemnity" means the Environmental Indemnity[ies]
-----------------------
executed by [the Borrower] on or prior to the date hereof or as of the date of
the addition of a Real Property Asset to the Mortgaged Properties.
"Environmental Laws" means any and all federal, state, local and
------------------
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Material of
Environmental Concern or hazardous wastes into the environment including,
without limitation, ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, Material
of Environmental Concern or hazardous wastes or the clean-up or other
remediation thereof.
"Environmental Report" has the meaning set forth in Section 4.7.
--------------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statute.
5
<PAGE>
"ERISA Group" means the Borrower, any Subsidiary and all members of a
-----------
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"Euro-Dollar Borrowing" has the meaning set forth in Section 1.3.
---------------------
"Euro-Dollar Business Day" means any Domestic Business Day on which
------------------------
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office,
--------------------------
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Euro-
Dollar Lending Office) or such other office, branch or affiliate of such Bank as
it may hereafter designate as its Euro-Dollar Lending Office by notice to the
Borrower and the Lead Agent; provided that no Bank shall be permitted to change
its Euro-Dollar Lending Office if as a result of such change either (i) pursuant
to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to
maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required make
any payment to such Bank pursuant to the provisions of Sections 8.3 or Section
8.4.
"Euro-Dollar Loan" means a Loan to be made by a Bank as a Euro-Dollar
----------------
Loan in accordance with the applicable Notice of Borrowing or Notice of
Interest Rate Election.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
------------------------------
2.6(b).
"Event of Default" has the meaning set forth in Section 6.1.
----------------
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal
6
<PAGE>
funds brokers on such day, as published by the Federal Reserve Bank of New York
on the Domestic Business Day next succeeding such day; provided that (i) if such
--------
day is not a Domestic Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Domestic Business Day as so
published on the next succeeding Domestic Business Day, and (ii) if no such rate
is so published on such next succeeding Domestic Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to Morgan on such day on such
transactions as determined by the Lead Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System as constituted from time to time.
"Financing Statements" means those Uniform Commercial Code Financing
--------------------
Statements executed by the Borrower on or prior to the date hereof or as of the
date of an addition of a Real Property Asset to the Mortgaged Properties for the
purpose of perfecting the security interest in any personal property, both
tangible and intangible, serving as collateral for the Loans pursuant to any
Loan Document.
"FIRREA" means the Financial Institutions Reform, Recovery and
------
Enforcement Act of 1989, as amended.
"GAAP" means generally accepted accounting principles recognized as
----
such in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and Board or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of determination.
"Governmental Authority" means any Federal, state or local government
----------------------
or any other political subdivision thereof or agency exercising executive,
legislative, judicial, regulatory or administrative functions having
jurisdiction over the Borrower or any Mortgaged Property.
"Group of Loans" means, at any time, a group of Loans consisting of
--------------
(i) all Loans which are Base Rate Loans at such time, or (ii) all Loans which
are Euro-Dollar Loans having the same Interest Period at such
7
<PAGE>
time; provided that, if a Loan of any particular Bank is converted to or made as
--------
a Base Rate Loan pursuant to Section 8.2 or 8.4, such Loan shall be included in
the same Group or Groups of Loans from time to time as it would have been in if
it had not been so converted or made.
"Guaranty" means the Guaranty, of even date herewith, given by John
--------
Kilroy, Sr. and John Kilroy, Jr. and certain other Persons therein named, in
favor of Lead Agent.
"Improvements" has the meaning ascribed to it in each of the
------------
Mortgages.
"Indemnitee" has the meaning set forth in Section 9.3(b).
----------
"Interest Period" means: (1) with respect to each Euro-Dollar
---------------
Borrowing, the period commencing on the date of such Borrowing or of any Notice
of Interest Election with respect to such Borrowing and ending one month
thereafter, as the Borrower may elect in the applicable Notice of Borrowing or
Notice of Interest Election; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business
Day of a calendar month; and
(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end on such date, then (i) the principal amount (if any) of each Euro-
Dollar Loan required to be repaid on
8
<PAGE>
such date shall have an Interest Period ending on such date and (ii) the
remainder (if any) of each such Euro-Dollar Loan shall have an Interest
Period determined as set forth above.
(2) with respect to each Base Rate Borrowing, the period commencing on the date
of such Borrowing or Notice of Interest Rate Election and ending 30 days
thereafter; provided that:
--------
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c)(i) above) which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end on such date, then (i) the principal amount (if any) of each Base
Rate Loan required to be repaid on such date shall have an Interest Period
ending on such date and (ii) the remainder (if any) of each such Base Rate
Loan shall have an Interest Period determined as set forth above.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
---------------------
amended, or any successor statute.
"IPO Closing" has the meaning set forth in Section 2.9(b) hereof.
-----------
"Lead Agent" means Morgan Guaranty Trust Company of New York in its
----------
capacity as Lead Agent for the Banks hereunder, and its successors in such
capacity.
"Lease" has the meaning set forth in the Mortgage.
-----
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, each of
the Borrower and any Subsidiary shall be deemed to own subject to a Lien
9
<PAGE>
any asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan" means a Base Rate Loan or a Euro-Dollar Loan and "Loans" means
---- -----
Base Rate Loans or Euro-Dollar Loans or any combination of the foregoing.
"Loan Amount" has the meaning set forth in Section 2.1(a).
-----------
"Loan Documents" means this Agreement, the Notes, the Mortgages, the
--------------
Assignments, the Environmental Indemnity, the Financing Statements, the
Guaranty, the Cash Collateral Agreement and any related documents.
"London Interbank Offered Rate" has the meaning set forth in Section
-----------------------------
2.6(b).
"Margin Stock" shall have the meaning provided such term in Regulation
------------
U and Regulation G of the Federal Reserve Board.
"Material Adverse Effect" means a material adverse effect upon (i) the
-----------------------
business, operations, properties or assets of the Borrower or (ii) the ability
of the Borrower to perform its obligations hereunder in all material respects,
including to pay interest and principal.
"Material Plan" means at any time a Plan having aggregate Unfunded
-------------
Liabilities in excess of $5,000,000.
"Material of Environmental Concern" means and includes pollutants,
---------------------------------
contaminants, hazardous wastes, and toxic, radioactive, caustic or otherwise
hazardous substances, including petroleum, its derivatives, by-products and
other hydrocarbons, or any substance having any constituent elements displaying
any of the foregoing characteristics.
"Maturity Date" has the meaning set forth in Section 2.8.
-------------
"Morgan" means Morgan Guaranty Trust Company of New York, in its
------
individual capacity.
10
<PAGE>
"Mortgaged Properties" means the real property listed in Exhibit B
-------------------- ---------
attached hereto and made a part hereof, excluding any Mortgaged Properties
which have been released from this Agreement, the Mortgage and the other Loan
Documents as of such date in accordance with Section 3.3 and all other terms of
this Agreement.
"Mortgage" shall mean the deed of trust executed by the Borrower on
--------
or prior to the date hereof, securing all or a portion of the Loans, which
Mortgage shall be a first mortgage lien with respect to each Mortgaged Property.
"Multiemployer Plan" means at any time an employee pension benefit
------------------
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group during
such five year period.
"Net Operating Cash Flow" means, as of the first day of each month for
-----------------------
the immediately preceding month, all Property Income as shown on Borrower's
financial statements, less all operating expenses of Borrower during such
----
period, which operating expenses shall not include (i) depreciation,
amortization or other non-cash expenses, (ii) income taxes, (iii) all costs and
expenses (including, without limitation, attorneys' fees and disbursements and
other professional fees and expenses) incurred in connection with the
transactions contemplated by this Agreement and the other Loan Documents, or
(iv) Capital Expenditures.
"Notes" means, collectively, the promissory notes of the Borrower,
-----
each substantially in the form of Exhibit A hereto, evidencing the obligation of
---------
the Borrower to repay the Loans, and "Note" means any one of such promissory
----
notes issued hereunder.
"Notice of Borrowing" has the meaning set forth in Section 2.2.
-------------------
"Notice of Interest Election" has the meaning set forth in Section
---------------------------
2.14(a).
11
<PAGE>
"Obligations" means all obligations, liabilities and indebtedness of
-----------
every nature of the Borrower from time to time owing to any Bank under or in
connection with this Agreement or any other Loan Document.
"Officer's Certificate" has the meaning set forth in Section 5.1(a).
---------------------
"Outstanding Balance" means the aggregate outstanding and unpaid
-------------------
principal balance of all Loans.
"Parent" means, with respect to any Bank, any Person controlling such
------
Bank.
"Participant" has the meaning set forth in Section 9.6(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, a limited
------
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Plan" means at any time an employee pension benefit plan (other than
----
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"Prime Rate" means the rate of interest publicly announced by Morgan
----------
in New York City from time to time as its Prime Rate.
"Property Income" means, when used with respect to any Mortgaged
---------------
Property, cash rents and other cash income and revenues received in the ordinary
course therefrom, including, without limitation, revenues from
12
<PAGE>
any parking leases and lease termination fees amortized over the remaining term
of the lease for which such termination fee was received (other than the paid
rents and revenues and security deposits except to the extent applied in
satisfaction of tenants' obligations for rent).
"Property Release" has the meaning set forth in Section 3.3.
----------------
"Reference Bank" means the principal London offices of Morgan.
--------------
"Regulation U" means Regulation U of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.
"Release" means any release, spill, emission, leaking, pumping,
-------
pouring, dumping, emptying, deposit, discharge, leaching or migration.
"Release Date" has the meaning set forth in Section 3.3.
------------
"Required Banks" means, at any time, Banks having at least 51% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 51% of the aggregate unpaid
principal amount of the Loans.
"Requirements" means all present and future laws, statutes, codes,
------------
ordinances, orders, judgments, decrees, injunctions, rules, regulations and
requirements of every Governmental Authority having jurisdiction over any
Mortgaged Property and all restrictive covenants applicable to any Mortgaged
Property.
"Retail Property" has the meaning set forth in Section 2.9(a) hereof.
---------------
"Sea-Tac Property" means the Sea-Tac ground lease Mortgaged Property
----------------
so identified in Exhibit B attached hereto.
---------
"Solvent" means, with respect to any Person, that the fair saleable
-------
value of such Person's assets exceeds the Debts of such Person.
13
<PAGE>
"Subsidiary" means any corporation or other entity of which securities
----------
or other ownership interests representing either (i) ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions or (ii) a majority of the economic interest therein, are at the time
directly or indirectly owned by the Borrower.
"Survey" means a survey (prepared in accordance with the ALTA
------
appropriate specifications) for each Mortgaged Property, prepared by a land
surveyor duly licensed in the state in which such Mortgaged Property is located.
"Tenant Expenses" means the costs of brokerage commissions, legal
---------------
fees, fees to other outside consultants paid in connection with tenant leases
of space at the Sea Tac Property.
"Tenant Improvements" means tenant improvement work to be funded by
-------------------
Borrower in connection with tenant leases of space in the Sea Tac Property.
"Tenant Work Allowances" means any allowances to be paid to the
----------------------
tenants of the Sea Tac Property by Borrower pursuant to any initial Lease,
regardless of their intended purpose or use.
"Term" has the meaning set forth in Section 2.8.
----
"Title Company" means, with respect to each Mortgaged Property, a
-------------
title insurance company of recognized national standing.
"Title Commitment" means, for each Mortgaged Property, an ALTA fee or
----------------
leasehold title commitment or title policy issued by the Title Company.
"Unfunded Liabilities" means, with respect to any Plan at any time,
--------------------
the amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date
14
<PAGE>
for such Plan, but only to the extent that such excess represents a potential
liability of a member of the ERISA Group to the PBGC or any other Person under
Title IV of ERISA.
"United States" means the United States of America, including the
-------------
States and the District of Columbia, but excluding its territories and
possessions.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP,
applied on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower delivered to the Lead Agent and the Banks;
provided that, if the Borrower notifies the Lead Agent and the Banks that the
- --------
Borrower wishes to amend any covenant in Article V to eliminate the effect of
any change in GAAP on the operation of such covenant (or if the Lead Agent
notifies the Borrower that the Required Banks wish to amend Article V for such
purpose), then the Borrower's compliance with such covenant shall be determined
on the basis of GAAP in effect immediately before the relevant change in GAAP
became effective, until either such notice is withdrawn or such covenant is
amended in a manner satisfactory to the Borrower and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
------------------- ---------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
----
comprised of Euro-Dollar Loans).
15
<PAGE>
ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend.
-------------------
Each Bank severally agrees, on the terms and conditions set forth in
this Agreement, to make the Loans to the Borrower pursuant to this Section from
time to time during the Term in amounts such that the aggregate principal amount
of the Loans by such Bank at any one time outstanding shall not exceed the
amount of its Commitment. The aggregate amount of Loans to be made hereunder
shall not exceed [Seventeen Million Dollars ($17,000,000)] (the Loan Amount").
-----------
Each Borrowing under this subsection (a) shall be in an aggregate principal
amount of at least $2,500,000, or an integral multiple of $1,000,000 in excess
thereof and shall be made from the several Banks ratably in proportion to their
respective Commitments.
SECTION 2.2. Notice of Borrowing. The Borrower shall give the Lead
-------------------
Agent notice (a "Notice of Borrowing") not later than 10:00 a.m. (New York City
-------------------
time) (x) one Domestic Business Day before each Base Rate Borrowing or (y) the
third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day
in the case of a Euro-Dollar Borrowing,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing are to be Base
Rate Loans or Euro-Dollar Loans, and
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period.
16
<PAGE>
SECTION 2.3. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Borrowing, the Lead Agent shall
notify each Bank on the same day as it receives the Notice of Borrowing of the
contents thereof and of such Bank's share of such Borrowing and such Notice of
Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank shall make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Lead Agent
at its address referred to in Section 9.1. The Lead Agent will make the funds
so received from the Banks available to the Borrower at the Lead Agent's
aforesaid address. Upon any change in any of the Commitments in accordance
herewith, there shall be an automatic adjustment to such participations to
reflect such changed shares.
(c) Unless the Lead Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Lead Agent such Bank's share of such Borrowing, the Lead Agent may assume that
such Bank has made such share available to the Lead Agent on the date of such
Borrowing in accordance with subsection (b) of this Section 2.3 and the Lead
Agent may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Bank shall not
have so made such share available to the Lead Agent, such Bank and the Borrower
severally agree to repay to the Lead Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Lead Agent, at (i) in the case of the Borrower, a rate per annum
equal to the higher of the Federal Funds Rate and the interest rate applicable
thereto pursuant to Section 2.6 and (ii) in the case of such Bank, the Federal
Funds Rate. If such Bank shall repay to the Lead Agent such corresponding
amount, such amount so repaid shall constitute such Bank's Loan included in such
Borrowing for purposes of this Agreement.
17
<PAGE>
SECTION 2.4. Notes.
-----
(a) The Loans shall be evidenced by the Notes, each of which shall be
payable to the order of each Bank for the account of its Applicable Lending
Office in an amount equal to each such Bank's Commitment.
(b) Each Bank may, by notice to the Borrower and the Lead Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Note shall be in substantially the form of Exhibit A hereto, with
---------
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Note" of such Bank
----
shall be deemed to refer to and include any or all of such Notes, as the context
may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the
Lead Agent shall forward such Note to such Bank. Each Bank shall record the
date, amount, type and maturity of each Loan made by it and the date and amount
of each payment of principal made by the Borrower with respect thereto, and may,
if such Bank so elects in connection with any transfer or enforcement of its
Note, endorse on the schedule forming a part thereof appropriate notations to
evidence the foregoing information with respect to each such Loan then
outstanding; provided that the failure of any Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so
to endorse its Note and to attach to and make a part of its Note a continuation
of any such schedule as and when required.
(d) There shall be no more than one (1) Euro-Dollar Borrowing
outstanding at any one time pursuant to this Agreement.
SECTION 2.5. Maturity of Loans. The Loans shall mature, and the
-----------------
principal amount thereof shall be due and payable, on the Maturity Date.
18
<PAGE>
SECTION 2.6. Interest Rates.
--------------
(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made until it
becomes due, at a rate per annum equal to the sum of fifty (50) basis points
plus the Base Rate for such day. Such interest shall be payable for each
Interest Period on the last day thereof.
(b) Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for each day during the Interest Period applicable thereto, at a
rate per annum equal to the sum of 3.00% plus the Adjusted London Interbank
Offered Rate applicable to such Interest Period. Such interest shall be payable
for each Interest Period on the last day thereof.
"Adjusted London Interbank Offered Rate" applicable to any Interest
--------------------------------------
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London
Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage.
"Euro-Dollar Reserve Percentage" means for any day that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
"London Interbank Offered Rate" applicable to any Interest Period
-----------------------------
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
the Reference Bank in the London interbank
19
<PAGE>
market at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days
before the first day of such Interest Period in an amount approximately equal to
the principal amount of the Euro-Dollar Loan of such Reference Bank to which
such Interest Period is to apply and for a period of time comparable to such
Interest Period.
(c) In the event that, and for so long as, any Event of Default shall
have occurred and be continuing, the outstanding principal amount of the Loans,
and, to the extent permitted by law, overdue interest in respect of all Loans,
shall bear interest at the annual rate of the sum of the Prime Rate and five
percent (5%).
(d) The Lead Agent shall determine each interest rate applicable to
the Loans hereunder. The Lead Agent shall give prompt notice to the Borrower
and the Banks of each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest error.
(e) The Reference Bank agrees to use its best efforts to furnish
quotations to the Lead Agent as contemplated by this Section. If the Reference
Bank does not furnish a timely quotation, the provisions of Section 8.1 shall
apply.
SECTION 2.7. Fees.
----
(a) Commitment Fee. On the Closing Date, the Borrower shall pay Lead
--------------
Agent for its own account, a commitment fee of $241,500, representing 1.50% of
the Commitments.
(b) Extension Fee. Simultaneously with the delivery of the
-------------
applicable Extension Notice, the Borrower shall pay to the Lead Agent with
respect to such Extension Option for the account of the Banks ratably in
proportion to their Commitments an extension fee of 0.25% of the outstanding
balance of the Loans.
(c) Fees Non-Refundable. All fees set forth in this Section 2.7
-------------------
shall be deemed to have been earned on the date payment is due in accordance
with the provisions hereof and shall be non-refundable. The obligation of the
Borrower to pay such fees in accordance with the provisions hereof shall be
binding upon the Borrower and
20
<PAGE>
shall inure to the benefit of the Lead Agent and the Banks regardless of whether
any Loans are actually made.
SECTION 2.8. Mandatory Termination. The term (the "Term") of the
--------------------- ----
Commitments shall terminate and expire on July 31, 1997, except as otherwise
provided in this Section 2.8 below (as the same may be extended in accordance
with the provisions of this Section 2.8, the "Maturity Date"); except that,
-------------
subject to the following conditions, the Borrower shall have two options (each,
an "Extension Option") exercisable upon delivery by the Borrower of written
----------------
notice thereof to the Lead Agent (the "Extension Notice") on or before the date
----------------
which is thirty (30) days prior to the Maturity Date (which Extension Notice the
Lead Agent shall promptly deliver to the Banks) to extend the Term of the Loans
and the Maturity Date for an additional six month period each (each, an
"Extension Period"), such that the Term shall expire on [January 31, 1998] or
----------------
[July 31, 1998], as the case may be. The Borrower's right to exercise either
Extension Option shall be subject to the following terms and conditions: (i)
no Event of Default shall have occurred and be continuing both on the date the
Borrower delivers the applicable Extension Notice to the Lead Agent and on the
date the applicable Extension Period shall commence (each, an "Extension Date"),
--------------
(ii) the Borrower shall pay the Extension Fee, and (iii) no Material Adverse
Effect shall have occurred. If any Loans are outstanding on the Maturity Date,
the same shall be due and payable (together with accrued interest thereon) on
the Maturity Date, and Borrower shall repay the same in full.
SECTION 2.9. Mandatory Prepayment.
--------------------
(a) In the event that the Mortgaged Property described in Exhibit B
---------
hereto as the "Retail Parcel" (the "Retail Property") is sold in accordance with
---------------
Section 3.4(cd) hereof, the Borrower shall simultaneously with such sale, prepay
to the Lead Agent, for the account of the Banks, the amount of $2,500,000. In
the event that the Mortgaged Property described in Exhibit B hereto as the
---------
"Apartment Parcel" (the "Apartment Property") is sold in accordance with Section
------------------
3.4(cd) hereof, the Borrower shall simultaneously with such sale, prepay to the
Lead Agent, for the account of the Banks, the amount of $1,500,000.
21
<PAGE>
(b) In the event that the closing of initial public offering (the
"IPO Closing") of the equity interests in Kilroy Realty Corporation occurs
- ------------
after the Closing Date, the Borrower shall, simultaneously with such IPO
Closing, prepay to the Lead Agent, for the account of the Banks, the amount of
$4,000,000. Upon the Borrower's payment of such amount, the Retail Property and
the Apartment Property shall be released in accordance with the provisions of
Section 3.4(c) hereof.
(c) All Net Operating Income for the most recent preceding month,
after payment of interest expense and set aside of reserves reasonably approved
by the Lead Agent, and after payment of all costs incurred in connection with
Tenant Improvement, Tenant Work Allowances, Tenant Expenses, and other Capital
Expenditures, in all cases as reasonably approved by the Lead Agent, shall be
paid to the Lead Agent. All such amounts shall be paid to the Lead Agent within
fifteen (15) days after the Domestic Business Day of each month on which
Borrower delivers the monthly report required under Section 5.1(a) hereof, in
reduction of the outstanding Loans (to be applied first to Base Rate Loans and
then to Euro-Dollar Loans), and otherwise in accordance with the terms and
provisions of the Cash Collateral Agreement.
SECTION 2.10. Optional Prepayments.
--------------------
(a) The Borrower may, upon at least one Domestic Business Day's
notice to the Lead Agent, prepay to the Lead Agent, for the account of the
Banks, any Base Rate Borrowing in whole at any time, or from time to time in
part in amounts aggregating One Million Dollars ($1,000,000), or an integral
multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the
outstanding principal balance, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Loans of the several
Banks included in such Borrowing.
(b) The Borrower may, on at least three Euro-Dollar Business Days'
notice to the Lead Agent, prepay to the Lead Agent, for the account of the
Banks, any Euro-Dollar Loan in whole on the last day of an Interest Period, or
from time to time in part in amounts aggregating One Million Dollars
($1,000,000), or an integral
22
<PAGE>
multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the
outstanding principal balance, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Euro-Dollar Loans of
the several Banks included in such Euro-Dollar Loans. Except as provided in
Section 8.2 or this Section 2.10(b), the Borrower may not prepay all or any
portion of the principal amount of any Euro-Dollar Loan prior to the maturity
thereof unless the Borrower shall also pay any applicable expenses pursuant to
Section 2.12. Any such prepayment shall be upon at least three (3) Euro-Dollar
Business Days' notice to the Lead Agent. Any notice of prepayment delivered
pursuant to this Section 2.10(b) shall set forth the amount of such prepayment
which is applicable to any Loan made for working capital purposes. Each such
optional prepayment shall be in the amounts set forth in Section 2.10(a) above
and shall be applied to prepay ratably the Loans of the Banks included.
(c) A Borrower may at any time and from time to time cancel all or
any part of the Commitments in amounts aggregating One Million Dollars
($1,000,000), or an integral multiple of One Million Dollars ($1,000,000) in
excess thereof, by the delivery to the Lead Agent and the Banks of a notice of
cancellation upon at least three (3) Domestic Business Days' notice to Lead
Agent and the Banks, whereupon, all or such portion of the Commitments shall
terminate as to the Banks, pro rata on the date set forth in such notice of
--------
cancellation, and, if there are any Loans then outstanding in an aggregate
amount which exceeds the aggregate Commitments (after giving effect to any such
reduction), the Borrower shall prepay to the Lead Agent, for the account of the
Banks, all or such portion of Loans outstanding on such date in accordance with
the requirements of Sections 2.10(a) and (b). The Borrower shall be permitted to
designate in its notice of cancellation which Loans, if any, are to be prepaid.
(d) Upon receipt of a notice of prepayment or cancellation pursuant
to this Section, the Lead Agent shall promptly, and in any event within one (1)
Domestic Business Day, notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment or cancellation and such
notice shall not thereafter be revocable by the Borrower.
23
<PAGE>
(e) Any amounts so prepaid pursuant to this Section 2.10 may not be
reborrowed. In the event that the Borrower elects to cancel all or any portion
of the Commitments pursuant to Section 2.10(c) hereof, such amounts may not be
reborrowed.
SECTION 2.11. General Provisions as to Payments.
----------------------------------
(a) The Borrower shall make each payment of principal of, and
interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New
York City time) on the date when due, in Federal or other funds immediately
available in New York City, to the Lead Agent at its address referred to in
Section 9.1. The Lead Agent will distribute to each Bank its ratable share of
each such payment received by the Lead Agent for the account of the Banks on the
same day as received by the Lead Agent if received by the Lead Agent by 3:00
p.m. (New York City time), or, if received by the Lead Agent after 3:00 p.m.
(New York City time), on the immediately following Domestic Business Day.
Whenever any payment of principal of, or interest on, the Base Rate Loans or of
fees shall be due on a day which is not a Domestic Business Day, the date for
payment thereof shall be extended to the next succeeding Domestic Business Day.
Whenever any payment of principal of, or interest on, the Euro-Dollar Loans
shall be due on a day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in another calendar month, in
which case the date for payment thereof shall be the next preceding Euro-Dollar
Business Day. If the date for any payment of principal is extended by operation
of law or otherwise, interest thereon shall be payable for such extended time.
(b) Unless the Lead Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Lead Agent may assume
that the Borrower has made such payment in full to the Lead Agent on such date
and the Lead Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount then due
such Bank. If and to the extent that the Borrower shall not have so made such
payment, each Bank
24
<PAGE>
shall repay to the Lead Agent forthwith on demand such amount distributed to
such Bank together with interest thereon, for each day from the date such amount
is distributed to such Bank until the date such Bank repays such amount to the
Lead Agent, at the Federal Funds Rate.
SECTION 2.12. Funding Losses. If the Borrower makes any payment of
--------------
principal with respect to any Euro-Dollar Loan (pursuant to Article II, VI or
VIII or otherwise) on any day other than the last day of the Interest Period
applicable thereto, or if the Borrower fails to borrow any Euro-Dollar Loans,
after notice has been given to any Bank in accordance with Section 2.3(a), the
Borrower shall reimburse each Bank within 15 days after demand for any
resulting loss or expense incurred by it (or by an existing Participant in the
related Loan; provided that no Participant shall be entitled to receive more
than the Bank with respect to which such Participant is a Participant would be
entitled to receive under this Section 2.12), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits from third
parties, but excluding loss of margin for the period after any such payment or
failure to borrow, provided that such Bank shall have delivered to the Borrower
--------
a certificate as to the amount of such loss or expense and the calculation
thereof, which certificate shall be conclusive in the absence of manifest error.
SECTION 2.13. Computation of Interest and Fees. Interest based on
--------------------------------
the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.14. Method of Electing Interest Rates.
---------------------------------
(a) The Loans included in each Borrowing shall bear interest initially
at the type of rate specified by the Borrower in the applicable Notice of
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject in each
case to the provisions of Article VIII), as follows:
25
<PAGE>
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-
Dollar Loans for an additional Interest Period, in each case effective on the
last day of the then current Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
------------------
Rate Election") to the Lead Agent at least three (3) Euro-Dollar Business Days
- -------------
before the conversion or continuation selected in such notice is to be effective
(unless the relevant Loans are to be continued as Base Rate Loans, in which
case such notice shall be delivered to the Lead Agent no later than 12:00 Noon
(New York City time) at least one (1) Domestic Business Day before such
continuation is to be effective). A Notice of Interest Rate Election may, if it
so specifies, apply to only a portion of the aggregate principal amount of the
relevant Group of Loans; provided that (i) such portion is allocated ratably
--------
among the Loans comprising such Group, (ii) the portion to which such notice
applies, and the remaining portion to which it does not apply, are each
$1,000,000 or any larger multiple of $1,000,000, (iii) there shall be no more
than seven (7) Borrowings comprised of Euro-Dollar Loans outstanding at any time
under this Agreement, (iv) no Loan may be continued as, or converted into, a
Euro-Dollar Loan when any Event of Default has occurred and is continuing, and
(v) no Interest Period shall extend beyond the Maturity Date.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if such new
26
<PAGE>
Loans are Euro-Dollar Loans, the duration of the initial Interest Period
applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for an
additional Interest Period, the duration of such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Lead Agent shall notify each Bank
on the same day as it receives such Notice of Interest Rate Election of the
contents thereof and such notice shall not thereafter be revocable by the
Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate
Election to the Lead Agent for any Group of Euro-Dollar Loans, such Loans shall
be converted into Base Rate Loans on the last day of the then current Interest
Period applicable thereto.
ARTICLE III
CONDITIONS
SECTION 3.1. Closing. The closing hereunder shall occur on the date (the
-------
"Closing Date") when each of the following conditions is satisfied (or waived by
------------
the Lead Agent, such waiver to be evidenced by the funding of the Loans made on
the Closing Date), each document to be dated the Closing Date unless otherwise
indicated:
(a) the Borrower shall have executed and delivered to the Lead Agent
a Note for the account of each Bank dated on or before the Closing Date
complying with the provisions of Section 2.4;
(b) the Borrower shall have executed and delivered to the Lead Agent
a duly executed original of this Agreement;
(c) the Lead Agent shall have received an opinion of Latham & Watkins
counsel for the Borrower, to-
27
<PAGE>
gether with opinions of local counsel, in each case acceptable to the Lead
Agent, the Banks and their counsel;
(d) the Lead Agent shall have received all documents the Lead Agent
may reasonably request relating to the existence of the Borrower, the authority
for and the validity of this Agreement and the other Loan Documents, and any
other matters relevant hereto, all in form and substance reasonably satisfactory
to the Lead Agent. Such documentation shall include, without limitation, the
articles of incorporation and by-laws or the partnership agreement and limited
partnership certificate, as applicable, of the Borrower, as amended, modified
or supplemented to the Closing Date, each certified to be true, correct and
complete by a senior officer of the Borrower as of a date not more than forty-
five (45) days prior to the Closing Date, together with a good standing
certificate from the Secretary of State (or the equivalent thereof) of the State
of Delaware with respect to the Borrower and a good standing certificate from
the Secretary of State (or the equivalent thereof) of each other State in which
the Borrower is required to be qualified to transact business, each to be dated
not more than forty-five (45) days prior to the Closing Date;
(e) the Lead Agent shall have received all certificates, agreements
and other documents and papers referred to in this Section 3.1 and Section 3.2,
unless otherwise specified, in sufficient counterparts, satisfactory in form
and substance to the Lead Agent in its sole discretion;
(f) the Borrower shall have taken all actions required to authorize
the execution and delivery of this Agreement and the other Loan Documents and
the performance thereof by the Borrower;
(g) the Lead Agent shall be satisfied that the Borrower is not
subject to any present or contingent environmental liability which could
reasonably be expected to have a Material Adverse Effect;
(h) the Lead Agent shall have received audited consolidated balance
sheet and income statements of the [Borrower] for 1993, 1994 and 1995 and an
[un]audited consolidated balance sheet and income statement of the
28
<PAGE>
Borrower for 1996 including the fiscal quarter ended December 31, 1996;
(i) the Lead Agent shall have received wire transfer instructions in
connection with the Loans to be made on the Closing Date;
(j) the Lead Agent shall have received, for its and any other Bank's
account, all fees due and payable pursuant to Section 2.7 hereof on or before
the Closing Date, and the reasonable fees and expenses accrued through the
Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP, and the Borrower shall
have paid all other fees and expenses in connection with closings of the
transactions contemplated herein;
(k) the Lead Agent shall have received copies of all consents,
licenses and approvals, if any, required in connection with the execution,
delivery and performance by the Borrower, and the validity and enforceability
against the Borrower, of the Loan Documents, or in connection with any of the
transactions contemplated thereby to occur on or prior to the Closing Date, and
such consents, licenses and approvals shall be in full force and effect;
(l) the Lead Agent shall have received satisfactory reports of
Uniform Commercial Code filing searches conducted by a search firm acceptable
to the Lead Agent with respect to the Mortgaged Properties and the Borrower,
such searches to be conducted in each of the locations specified by the Lead
Agent;
(m) the representations and warranties of the Borrower contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date both before and after giving effect to the making of any Loans;
(n) the Lead Agent shall have received certificates of insurance
with respect to each Mortgaged Property demonstrating the coverages required
under this Agreement;
(o) the Lead Agent shall have received with respect to [each
Mortgaged Property] [the Sea-Tac Property], a satisfactory Title Commitment to
be issued and
29
<PAGE>
delivered by each Title Company in an amount equal to that set forth on Exhibit
-------
D annexed hereto;
- -
(p) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory environmental report indicating that (A) the Mortgaged
Property complies with all Environmental Laws in all material respects, (B) is
free of all Material of Environmental Concern in all material respects and (C)
is not subject to any Environmental Claim;
(q) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory engineer's inspection report;
(r) the Lead Agent shall have received with respect to each Mortgaged
Property, evidence of compliance with zoning and other local laws, together
with copies of the certificates of occupancy for each thereof (or evidence
satisfactory to the Lead Agent as to why no certificate of occupancy is
required);
(s) [the Lead Agent shall have received with respect to the Sea-Tac
Property, (i) a description of the Mortgaged Property, (ii) two years of
historical cash flow operating statements, if available, (iii) five years of
cash flow projections (including capital expenditures), (iv) the credit history
of each existing tenant which occupies more than 15% of such Mortgaged Property,
(v) a map and site plan, including an existing Survey of the property dated not
more than six (6) months prior to such submission, (vi) copies of all lease
agreements with each existing tenant which occupies more than 15% of such
Mortgaged Property and lease abstracts thereof, (vii) an estoppel certificate
from each tenant which occupies 15% or more of such Mortgaged Property, (viii)
any investment memorandum prepared by the Borrower and (ix) the credit history
and other financial information with respect to the manager of any Mortgaged
Property;]
(t) receipt by the Lead Agent and the Banks of a certificate of the
chief financial officer or the chief accounting officer of the Borrower
certifying that the Borrower is in compliance with all covenants of the
Borrower contained in this Agreement, including, without limitation, the
requirements of Section 5.8, as of the Closing Date;
30
<PAGE>
(u) the Lead Agent shall have received the Financing Statements
executed by the Borrower, as debtor, naming the Lead Agent, as secured party, to
be filed in the appropriate jurisdictions as is necessary to create perfected
security interests with respect to such portion of the Mortgaged Properties and
the personal property located thereon, with respect to which security interests
are governed by the Uniform Commercial Code;
(v) the Lead Agent shall have received the Mortgages, covering each
Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create perfected mortgage liens
with respect to the Mortgaged Properties;
(w) the Lead Agent shall have received the Assignments, covering each
Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create effective assignments as
contemplated thereby with respect to the Mortgaged Properties;
(x) the Lead Agent shall have received the Environmental Indemnity,
duly executed by the appropriate party acceptable to the Lead Agent in
accordance with the terms of this Agreement; (y) t he Lead Agent shall have
received the Appraisals;
(z) the Borrower shall have established and funded the Accounts (as
defined in the Cash Collateral Agreement) in accordance with the terms and
provisions of the Cash Collateral Agreement and the Mortgage; and
(aa) the Lead Agent shall have received rent rolls with respect to
each Mortgaged Property, certified by an officer of the Borrower as true and
correct as of the Closing Date.
The Lead Agent shall promptly notify the Borrower and the Banks of the Closing
Date, and such notice shall be conclusive and binding on all parties hereto.
SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on the
----------
occasion of any Borrowing is subject to the satisfaction of the following
conditions:
31
<PAGE>
(a) the Closing Date shall have occurred on or prior to January 31,
1997;
(b) receipt by the Lead Agent of a Notice of Borrowing as required by
Section 2.2;
(c) immediately after such Borrowing, the Outstanding Balance will
not exceed the aggregate amount of the Commitments and with respect to each
Bank, such Bank's pro rata portion of the Loans on the amount permitted
--------
pursuant to Section 2.1(b);
(d) immediately before and after such Borrowing, no Default or Event
of Default shall have occurred and be continuing both before and after giving
effect to the making of such Loans;
(e) the representations and warranties of the Borrower contained in
this Agreement (other than representations and warranties which speak as of a
specific date) shall be true and correct in all material respects on and as of
the date of such Borrowing both before and after giving effect to the making of
such Loans;
(f) no law or regulation shall have been adopted, no order, judgment
or decree of any governmental authority shall have been issued, and no
litigation shall be pending or threatened, which does or, with respect to any
threatened litigation, seeks to enjoin, prohibit or restrain, the making or
repayment of the Loans or any participations therein or the consummation of the
transactions contemplated hereby; and
(g) no event, act or condition shall have occurred after the Closing
Date which, in the reasonable judgment of the Lead Agent or the Required Banks,
as the case may be, has had or is likely to have a Material Adverse Effect.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c) through (g) of this Section (except that with respect to clause (f), such
representation and warranty shall be deemed to be limited to laws, regulations,
orders, judgments, decrees and litigation affecting the Borrower and not solely
the Banks).
32
<PAGE>
SECTION 3.3. Release. The Borrower shall be entitled to have the Retail
-------
Property and the Apartment Property released from the Lien of the applicable
Mortgage, in connection with a sale of such Mortgaged Property to an
unaffiliated third party; provided that all of the conditions set forth below
--------
have been satisfied. The release of any of the Mortgaged Properties shall be
subject to the satisfaction of the following conditions:
(i) Lead Agent shall have received from the Borrower at least 10
days' prior written notice of the date proposed for such
release (the "Release Date").
------------
(ii) no Event of Default shall have occurred and be continuing
as of the date of such notice and the Release Date.
(iii) on or prior to the Release Date, the Borrower shall pay to
the Lead Agent for the account of the Banks, the amounts
required to be paid pursuant to Section 2.9(a) (or 2.9(b),
as applicable).
(iv) the Borrower shall have delivered to the Lead Agent an
officer's certificate, dated the Release Date, confirming
the matters referred to in clause (ii) above, certifying
that the provisions of clause (iii) above have been complied
with and certifying that all conditions precedent for such
release contained in this Agreement have been complied
with;
Upon or concurrently with payment of all a-mounts required to be paid
pursuant to Section 2.9(a) (or 2.9(b), as applicable) and the satisfaction of
all other conditions provided for herein, the Lead Agent shall effectuate the
following (hereinafter referred to as a "Property Release"): the security
----------------
interest of the Banks in the Mortgage and other Loan Documents relating to the
released Mortgaged Property shall be released from the Lien of the Mortgage and
the Lead Agent will execute and
33
<PAGE>
deliver any agreements reasonably requested by the Borrower to release and
terminate or reassign, at the Borrower's option, the Mortgage as to the released
Mortgaged Property; provided, that such release and termination or
--------
reassignment shall be without recourse to the Lead Agent (except as contemplated
hereby) and without any representation or warranty except that the Lead Agent
shall be deemed to have represented that such release and termination or
reassignment has been duly authorized and that it has not assigned or encumbered
the Mortgage or the other Loan Documents relating to the released Mortgaged
Property (except as contemplated hereby) and the Lead Agent shall return the
originals of any Loan Documents that relate solely to the released Mortgaged
Property to the Borrower; provided, further, that upon the release and
-------- -------
termination or reassignment of the Lead Agent's security interest in the
Mortgage relating to the released Mortgaged Property all references herein to
the Mortgage relating to the released Mortgaged Property shall be deemed
deleted, except as otherwise provided herein with respect to indemnities.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lead Agent and each of the other Banks which
may become a party to this Agreement to make the Loans, the Borrower makes the
following representations and warranties as of the date hereof. Such
representations and warranties shall survive the effectiveness of this
Agreement, the execution and delivery of the other Loan Documents and the making
of the Loans.
SECTION 4.1. Existence and Power. The Borrower is duly organized,
-------------------
validly existing and in good standing as a [ENTITY] under the laws of the State
of [STATE] and has all powers and all material governmental licenses,
authorizations, consents and approvals required to own its property and assets
and carry on its business as now conducted or as it presently proposes to
conduct and has been duly qualified and is in good standing in every
jurisdiction in which the failure to be so qualified and/or in good standing is
likely to have a Material Adverse Effect.
34
<PAGE>
SECTION 4.2. Power and Authority. The Borrower has the corporate
-------------------
power and authority to execute, deliver and carry out the terms and provisions
of each of the Loan Documents to which it is a party and has taken all necessary
action to authorize the execution and delivery on behalf of the Borrower and the
performance by the Borrower of such Loan Documents. The Borrower has duly
executed and delivered each Loan Document to which it is a party, and each such
Loan Document constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms, except as en forceability
may be limited by applicable insolvency, bankruptcy or other laws affecting
creditors rights generally, or general principles of equity, whether such
enforceability is considered in a proceeding in equity or at law.
SECTION 4.3. No Violation. Neither the execution, delivery or
------------
performance by or on behalf of the Borrower of the Loan Documents, nor
compliance by the Borrower with the terms and provisions thereof nor the
consummation of the transactions contemplated by the Loan Documents, (i) will
contravene any applicable provision of any law, statute, rule, regulation,
order, writ, injunction or decree of any court or governmental instrumentality
applicable to Borrower or (ii) will conflict with or result in any breach of,
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of the Borrower
pursuant to the terms of any material indenture, mortgage, deed of trust, or
other agreement or other instrument to which the Borrower (or of any partnership
of which the Borrower is a partner) is a party or by which it or any of its
property or assets is bound or to which it is subject.
SECTION 4.4. Financial Information.
---------------------
(a) The balance sheets of the Borrower required to be delivered to
the Lead Agent pursuant to Sections 3.1(h) hereof, copies of which have been
delivered to the Lead Agent, fairly present, in conformity with GAAP, the
consolidated financial position of the Borrower as of such respective dates and
its consolidated results of operations for such respective fiscal years.
35
<PAGE>
(b) Since December 31, 1996, (i) there has been no material adverse
change in the business, financial position or results of operations of the
Borrower and (ii) except as previously disclosed to the Lead Agent, the Borrower
has not incurred any material indebtedness or guaranty.
SECTION 4.5. Litigation.
----------
(a) There is no action, suit or proceeding pending against, or to the
knowledge of the Borrower, threatened against or affecting, (i) the Borrower or
any of its Subsidiaries, (ii) the Loan Documents or any of the transactions
contemplated by the Loan Documents or (iii) any of their assets, in any case
before any court or arbitrator or any governmental body, agency or official
which could reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of this Agreement or the other
Loan Documents.
(b) There are no final nonappealable judgments or decrees entered by
a court or courts of competent jurisdiction against the Borrower (other than any
judgment as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim in writing).
SECTION 4.6. Compliance with ERISA.
---------------------
(a) Except as previously disclosed to the Lead Agent in writing, each
member of the ERISA Group has fulfilled its obligations under the minimum
funding standards of ERISA and the Internal Revenue Code with respect to each
Plan and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Internal Revenue Code with respect to each Plan. No
member of the ERISA Group has (i) sought a waiver of the minimum funding
standard under Section 412 of the Internal Revenue Code in respect of any Plan,
(ii) failed to make any contribution or payment to any Plan or Multiemployer
Plan or in respect of any Benefit Arrangement, or made any amendment to any
Plan or Benefit Arrangement, which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security under ERISA or
the Internal Revenue Code or (iii) incurred any liability under Title IV of
ERISA
36
<PAGE>
other than a liability to the PBGC for premiums under Section 4007 of ERISA.
(b) The transactions contemplated by the Loan Documents will not
constitute a nonexempt prohibited transaction (as such term is defined in
Section 4975 of the Code or Section 406 of ERISA) that could subject the Lead
Agent or the Banks to any tax or penalty or prohibited transactions imposed
under Section 4975 of the Code or Section 502(i) of ERISA.
SECTION 4.7 Environmental Compliance. To the best of Borrower's
------------------------
knowledge, except as set forth in the Phase I environmental report(s) delivered
to and accepted by the Lead Agent with respect to each of the Mortgaged
Properties (as supplemented or amended, the "Environmental Reports"), (i) there
----------------------
are in effect all Environmental Approvals which are required to be obtained
under all Environmental Laws with respect to the Property, except for such
Environmental Approvals the absence of which would not have a Material Adverse
Effect, (ii) the Borrower is in compliance in all material respects with the
terms and conditions of all such Environmental Approvals, and is also in
compliance in all material respects with all other Environmental Laws or any
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered or approved thereunder, except to the extent failure to comply would not
have a Material Adverse Effect.
Except as set forth in the Environmental Reports or otherwise
disclosed to the Lead Agent as of the Closing Date, to Borrower's actual
knowledge:
(i) There are no Environmental Claims or investigations
pending or threatened by any Governmental Authority with respect to any
alleged failure by the Borrower to have any Environmental Approval required
in connection with the conduct of the business of the Borrower on any of
the Mortgaged Properties, or with respect to any generation, treatment,
storage, recycling, transportation, Release or disposal of any Material of
Environmental Concern generated by the Borrower or any lessee on any of the
Mortgaged Properties;
37
<PAGE>
(ii) No Material of Environmental Concern has been Released at
the Property to an extent that it may reasonably be expected to have a
Material Adverse Effect;
(iii) No PCB (in amounts or concentrations which exceed those
set by applicable Environmental Laws) is present at any of the Mortgaged
Properties;
(iv) No friable asbestos is present at any of the Mortgaged
Properties;
(v) There are no underground storage tanks for Material of
Environmental Concern, active or abandoned, at any of the Mortgaged
Properties;
(vi) No Environmental Claims have been filed with a
Governmental Authority with respect to any of the Mortgaged Properties, and
none of the Mortgaged Properties is listed or proposed for listing on the
National Priority List promulgated pursuant to CERCLA, on CERCLIS or on any
similar state list of sites requiring investigation or clean-up;
(vii) There are no Liens arising under or pursuant to any
Environmental Laws on any of the Mortgaged Properties, and no government
actions have been taken or are in process which could subject any of the
Mortgaged Properties to such Liens; and
(viii) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, or which are in the
possession of, the Borrower in relation to any of the Mortgaged Properties
which have not been made available to the Lead Agent.
SECTION 4.8. Taxes. The initial tax year of the Borrower for federal
-----
income tax purposes was [____]. The federal income tax returns of the Borrower
and its Consolidated Subsidiaries have been [examined and closed through the
fiscal year ended December 31, 1995]. The Borrower and its Subsidiaries have
filed all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or
38
<PAGE>
pursuant to any assessment received by the Borrower or any Subsidiary except
those being contested in good faith. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Borrower, adequate.
SECTION 4.9. Full Disclosure. All information heretofore furnished
---------------
by the Borrower to the Lead Agent or any Bank for purposes of or in connection
with this Agreement or any transaction contemplated hereby is true and accurate
in all material respects on the date as of which such information is stated or
certified. The Borrower has disclosed to the Banks in writing any and all facts
known to the Borrower which materially and adversely affect or are likely to
materially and adversely affect (to the extent the Borrower can now reasonably
foresee), the business, operations or financial condition of the Borrower
considered as one enterprise or the ability of the Borrower to perform its
obligations under this Agreement or the other Loan Documents.
SECTION 4.10. Solvency. On the Closing Date and after giving effect
--------
to the transactions contemplated by the Loan Documents occurring on the Closing
Date, the Borrower is Solvent.
SECTION 4.11. Use of Proceeds; Margin Regulations. All proceeds of
------------------------------------
the Loans will be used by the Borrower only in accordance with the provisions
hereof. No part of the proceeds of any Loan will be used by the Borrower to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock. Neither the making of any Loan nor
the use of the proceeds thereof will violate or be inconsistent with the
provisions of Regulations G, T, U or X of the Federal Reserve Board.
SECTION 4.12. Governmental Approvals. No order, consent, approval,
----------------------
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any governmental or public body or authority, or any
subdivision thereof, is required to authorize, or is required in connection with
the execution, delivery and performance of any Loan Document or the
consummation of any of the transactions contemplated
39
<PAGE>
thereby other than those that have already been duly made or obtained and remain
in full force and effect.
SECTION 4.13. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act. The Borrower is not (x) an "investment company" or a company "controlled"
- --- ------------------ ----------
by an "in vestment company", within the meaning of the Investment Company Act of
-------------------
1940, as amended, (y) a "holding company" or a "subsidiary company" of a
--------------- ------------------
"holding company" or an "affiliate" of either a "holding company" or a
- ---------------- --------- ---------------
"subsidiary company" within the meaning of the Public Utility Holding Company
-----------------
Act of 1935, as amended, or (z) subject to any other federal or state law or
regulation which purports to restrict or regulate its ability to borrow money.
SECTION 4.14. Closing Date Transactions. On the Closing Date and
-------------------------
immediately prior to or concurrently with the making of the Loans, the
transactions (other than the making of the Loans) intended to be consummated on
the Closing Date will have been consummated in accordance with all applicable
laws. On or prior to the Closing Date, all consents and approvals of, and
filings and registrations with, and all other actions by, any Person required in
order to make or consummate such transactions have been obtained, given, filed
or taken and are in full force and effect.
SECTION 4.15. Representations and Warranties in Loan Documents. All
------------------------------------------------
representations and warranties made by the Borrower in the Loan Documents are
true and correct in all material respects.
SECTION 4.16. Patents, Trademarks, etc. The Borrower has obtained
-------------------------
and holds in full force and effect all patents, trademarks, service marks, trade
names, copyrights and other such rights, free from burdensome restrictions,
which are necessary for the operation of its business as presently conducted,
the impairment of which is likely to have a Material Adverse Effect. To the
Borrower's knowledge, no material product, process, method, substance, part or
other material presently sold by or employed by the Borrower in connection with
such business infringes any patent, trademark, service mark, trade name,
copyright, license or other such right owned by any other Person. There is not
pending or, to the Borrower's knowledge, threatened any claim or litigation
40
<PAGE>
against or affecting the Borrower contesting its right to sell or use any such
product, process, method, substance, part or other material.
SECTION 4.17. No Default. No Default or Event of Default exists
----------
under or with respect to any Loan Document. The Borrower is not in default in
any material respect beyond any applicable grace period under or with respect
to any other material agreement, instrument or undertaking to which it is a
party or by which it or any of its property is bound in any respect, the
existence of which default is likely (to the extent that the Borrower can now
reasonably foresee) to result in a Material Adverse Effect.
SECTION 4.18. Licenses, etc. The Borrower has obtained and holds in
--------------
full force and effect, all franchises, licenses, permits, certificates,
authorizations, qualifications, accreditations, easements, rights of way and
other consents and approvals which are necessary for the operation of its
businesses as presently conducted, the absence of which is likely (to the extent
that the Borrower can now reasonably foresee) to have a Material Adverse Effect.
SECTION 4.19. Compliance With Law. The Borrower is in compliance
-------------------
with all laws, rules, regulations, orders, judgments, writs and decrees,
including, without limitation, all building and zoning ordinances and codes, the
failure to comply with which is likely (to the extent that the Borrower can now
reasonably foresee) to have a Material Adverse Effect.
SECTION 4.20. No Burdensome Restrictions. The Borrower is not a
--------------------------
party to any agreement or instrument or subject to any other obligation or any
charter or corporate or partnership restriction, as the case may be, which,
individually or in the aggregate, is likely (to the extent that the Borrower can
now reasonably foresee) to have a Material Adverse Effect.
SECTION 4.21. Brokers' Fees. The Borrower has not dealt with any
-------------
broker or finder with respect to the transactions contemplated by the Loan
Documents or otherwise in connection with this Agreement, and the Borrower has
not done any acts, had any negotiations or conversation, or made any agreements
or promises which will in
41
<PAGE>
any way create or give rise to any obligation or liability for the payment by
the Borrower of any brokerage fee, charge, commission or other compensation to
any party with respect to the transactions contemplated by the Loan Documents
other than the fees payable hereunder.
SECTION 4.22. Labor Matters. Except as set forth in Schedule __,
-------------
there are no collective bargaining agreements or Multiemployer Plans covering
the employees of the Borrower and the Borrower has not suffered any strikes,
walkouts, work stoppages or other material labor difficulty within the last five
(5) years.
SECTION 4.23. Organizational Documents. The documents delivered
------------------------
pursuant to Section 3.1(d) constitute, as of the Closing Date, all of the
organizational documents (together with all amendments and modifications
thereof) of the Borrower. The Borrower represents that it has delivered to the
Lead Agent true, correct and complete copies of each of the documents set forth
in this Section 4.23.
SECTION 4.24. Principal Offices. The principal office, chief
-----------------
executive office and principal place of business of the Borrower is [ADDRESS].
SECTION 4.25. Intentionally Omitted.
---------------------
SECTION 4.26. Ownership of Property. The Borrower owns fee simple
---------------------
title to or a ground leasehold interest in each of the Mortgaged Properties.
SECTION 4.27 Security Interests and Liens. The Mortgages create, as
----------------------------
security for the Obligations, valid and enforceable security interests in and
Liens on all of the Collateral in favor of the Lead Agent as agent for the
ratable benefit of the Banks, and subject to no other Liens (except as may be
permitted under any Mortgage with respect to the Mortgaged Property subject
thereto), except as enforceability may be limited by applicable insolvency,
bankruptcy or other laws affecting creditors' rights generally, or general
principles of equity, whether such enforceability is considered in a proceeding
in equity or at law. Such security interests in and Liens on the Collateral
shall be superior to and prior to the rights of all third parties in the
Collateral (except as may be permitted under any Mortgage with
42
<PAGE>
respect to the Mortgaged Property subject thereto), and, other than in
connection with any future change in Borrower's name or the location of
Borrower's chief executive office, no further recordings or filings are or will
be required in connection with the creation, perfection or enforcement of such
security interests and Liens, other than the filing of continuation statements
in accordance with applicable law.
SECTION 4.28 Structural Defects and Violation of Law. To the best of
---------------------------------------
Borrower's knowledge [and except as set forth in the structural and engineering
report delivered to and accepted by the Lead Agent with respect to the
Mortgaged Properties (as supplemented or amended, the "Engineering Report"),
------------------
there are no structural defects any of the Improvements, none of the
Improvements is in material violation of any Requirements, and the Borrower's
anticipated use of the Improvements will comply in all material respects with
applicable zoning ordinances, regulations, and restrictive covenants affecting
the applicable Mortgaged Property.
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any Bank has any
Commitment hereunder or any Obligations remain unpaid:
SECTION 5.1. Information. The Borrower will deliver to the Lead
-----------
Agent and to each of the Banks:
(a) Not later than [fifteen (15)] days following the end of each
calendar month, the Borrower will deliver to the Lead Agent unaudited financial
statements, internally prepared, in accordance with GAAP, consistently applied,
including a balance sheet as of the end of such month, and a statement of
revenues and expenses through the end of such month, a statement of net
operating income for such month, a statement of profits and losses as to each
Mortgaged Property, and a comparison of the budgeted income and expenses and the
actual income and expenses for each month and year to date, together with a
detailed explanation of any variances between budgeted and actual amounts that
are greater than (x)
43
<PAGE>
$_______, and (y) five percent (5%) or more for each line item therein. Such
statements for each month shall be accompanied by a certificate signed by the
chief financial officer or the chief accounting officer of the Borrower (each,
an "Officer's Certificate") certifying to the best of the signer's knowledge,
---------------------
(A) that such statements fairly represent the financial condition and results
of operations of the Borrower in accordance with GAAP consistently applied, (B)
that as of the date of such Officer's Certificate, no Default exists under this
Agreement, the Mortgage, the Note or any other Loan Document or, if so,
specifying the nature and status of each such Default and the action then being
taken by the Borrower or proposed to be taken to remedy such Default, (C) that
as of the date of each Officer's Certificate, no litigation exists involving the
Borrower or the Trust Estate in which the amount involved is $100,000 or more,
or, if so, specifying such litigation and the actions being taking in relation
thereto in accordance with Section 23 of the Mortgage and (D) that such officer
----------
has reviewed the terms of the Loan Documents and has made, or caused to be made
under his or her supervision, a review in reasonable detail of the business and
condition of the Borrower during the period beginning on the date through which
the last such review was made pursuant to this Section 5.1(a) (or, in the case
of the first certification pursuant to this Section 5.1(a), the Closing Date)
and ending on a date not more than three (3) Domestic Business Days prior to the
date of such delivery and that on the basis of such review of the Loan Documents
and the business and condition of the Borrower, to the best knowledge of such
officer, no Default or Event of Default under any other provision of Section 6.1
occurred or, if any such Default or Event of Default has occurred, specifying
the nature and extent thereof and, if continuing, the action the Borrower
proposes to take in respect thereof. Such financial statements shall contain
such other information as shall be reasonably requested by the Lead Agent for
purposes of calculations to be made by the Lead Agent pursuant to the terms
hereof.
The Borrower shall pay a late charge equal to one percent (1%) of the
monthly interest and principal payment on the Note for each late submission of
the reports required pursuant to this Section 5.1(a).
44
<PAGE>
(b) (i) Not later than [fifteen (15)] days after the end of each
calendar month, the Borrower will deliver to the Lead Agent a true and
complete rent roll for each Mortgaged Property (and aggregating the
occupancy rate with respect to all the Mortgaged Properties), dated as of
the last day of such calendar month, showing the percentage of gross
leasable area of each Mortgaged Property (and in the aggregate) leased as
of the last day of the preceding calendar month, the percentage of lease
rollovers for each Mortgaged Property (and in the aggregate) for the
preceding calendar month, a summary of new lease signings (including tenant
name, square footage occupied and designation of the tenant's operations as
national, regional or local) and lease terminations for the preceding
calendar month, the current annual rent for each Mortgaged Property, the
expiration date of each lease, the various options, if any, available to
the tenant with respect to renewal (including the amount of the rent in the
event of renewal), whether to the Borrower's knowledge any portion of the
Property has been sublet, and if it has, the name of the subtenant, and
such rent roll shall be accompanied by an Officer's Certificate certifying
that such rent roll is true, correct and complete in all respects as of its
date and stating whether the Borrower, within the past three months, has
issued a notice of default with respect to any lease which has not been
cured and the nature of such default.
(ii) Not later than [fifteen (15) days following the end of each
calendar month, the Borrower shall deliver to the Lead Agent a written
report containing the following information: (1) the percentage of leases
which expired pursuant to scheduled expiration dates during the preceding
calendar year, (2) a list of leases which are triple net leases and a list
of leases which are not triple net leases, (3) a summary of each lease
signed during the preceding calendar month, including tenant name, net
rentable or gross leasable square feet demised, and a designation as to
whether the applicable tenant's operations are national, regional or local,
(4) a list of leases which were terminated during the preceding calendar
month, (5) a summary of renewal options available under each lease (which
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summary shall specify the rental amounts due during any such renewal
period), (6) whether any tenant has sublet any portion of its premises, and
the names of any such subtenants, and (7) whether any portion of any
Mortgaged Property is vacant. The foregoing report shall be accompanied by
an Officer's Certificate of the Borrower or by an Officer's Certificate of
the Borrower delivering said report certifying that such report is true,
correct and complete in all material respects.
(c) The Borrower shall, within [fifteen (15)] days after the end of
each calendar month during the term of the Notes, deliver to the Lead Agent a
monthly summary of any and all capital expenditures made at each Mortgaged
Property during the immediately preceding calendar month.
(d) (i) within five (5) days after the president, chief financial
officer, treasurer, controller or other executive officer of the Borrower
obtains knowledge of any Default, if such Default is then continuing, an
Officer's Certificate setting forth the details thereof and the action which the
Borrower is taking or proposes to take with respect thereto; (ii) promptly and
in any event within ten (10) days after the Borrower obtains knowledge thereof,
notice of (x) any litigation or governmental proceeding pending or threatened
against the Borrower which is likely to individually or in the aggregate, result
in a Material Adverse Effect, and (y) any other event, act or condition which is
likely to result in a Material Adverse Effect;
(e) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an
46
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intent to terminate, impose liability (other than for premiums under Section
4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a
copy of such notice; (iv) applies for a waiver of the minimum funding standard
under Section 412 of the Internal Revenue Code, a copy of such application; (v)
gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a
copy of such notice and other information filed with the PBGC; (vi) gives notice
of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could result
in the imposition of a Lien or the posting of a bond or other security, a
certificate of the chief financial officer or the chief accounting officer of
the Borrower setting forth details as to such occurrence and action, if any,
which the Borrower or applicable member of the ERISA Group is required or
proposes to take;
(f) promptly and in any event within five (5) Domestic Business Days
after the Borrower obtains actual knowledge of any of the following events, a
certificate of the Borrower executed by an officer of the Borrower specifying
the nature of such condition and the Borrower's, if the Borrower has actual
knowledge thereof, the Environmental Affiliate's proposed initial response
thereto: (i) the receipt by the Borrower, or, if the Borrower has actual
knowledge thereof, any of the Environmental Affiliates, of any communication
(written or oral), whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Borrower, or, if the Borrower has
actual knowledge thereof, any of the Environmental Affiliates, is not in
compliance with applicable Environmental Laws, and such noncompliance is likely
to have a Material Adverse Effect, (ii) the Borrower shall obtain actual
knowledge that there exists any Environmental Claim which is likely to have a
Material Adverse Effect pending or threatened against the Borrower or any
Environmental Affiliate or (iii) the Borrower obtains actual knowledge of any
release, emission, discharge or disposal of any Material of Environmental
Concern that is likely to form the basis of any Environmental Claim against the
Borrower or any Environmental Affiliate;
47
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(g) promptly and in any event within five (5) Domestic Business Days
after receipt of any material notices or correspondence from any company or
agent for any company providing insurance coverage to the Borrower relating to
any material loss or loss of the Borrower with respect to any of the Mortgaged
Properties, copies of such notices and correspondence; and
(h) promptly upon the mailing thereof to the shareholders or partners
of the Borrower, copies of all financial statements, reports and proxy statement
so mailed;
(i) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(j) simultaneously with delivery of the information required by
Sections 5.1(a), a statement of Net Operating Cash Flow with respect to the
Sea-Tac Property; and
(k) from time to time such additional information regarding the
financial position or business of the Borrower as the Lead Agent, at the request
of any Bank, may reasonably request.
SECTION 5.2. Payment of Obligations. The Borrower will pay and
----------------------
discharge, at or before maturity, all its material obligations and liabilities
including, without limitation, any obligation pursuant to any agreement by
which it or any of its properties is bound and any tax liabilities, in any case,
where failure to do so will likely result in a Material Adverse Effect except
(i) such tax liabilities may be contested in good faith by appropriate
proceedings, and will maintain in accordance with GAAP, appropriate reserves
for the accrual of any of the same; or (ii) such obligation or liability as may
be contested in good faith by appropriate proceedings.
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SECTION 5.3. Maintenance of Property; Insurance.
-----------------------------------
(a) The Borrower will keep each of the Mortgaged Properties in good
repair, working order and condition, subject to ordinary wear and tear and in
accordance with the provisions of the applicable Mortgage.
(b) The Borrower shall (a) maintain insurance as specified in Section
5 of the Mortgage with insurers meeting the qualifications described therein,
which insurance shall in any event not provide for materially less coverage than
the insurance in effect on the Closing Date, and (b) furnish to each Bank from
time to time, upon written request, copies of the policies under which such
insurance is issued, certificates of insurance and such other information
relating to such insurance as such Bank may reasonably request. The Borrower
will deliver to the Banks (i) upon request of any Bank through the Lead Agent
from time to time, full information as to the insurance carried, (ii) within
five (5) days of receipt of notice from any insurer, a copy of any notice of
cancellation or material change in coverage from that existing on the date of
this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of
coverage by the Borrower.
SECTION 5.4. Conduct of Business. The Borrower will continue to
-------------------
engage in business of the same general type as now conducted by it, and will not
acquire any assets in addition to the Mortgaged Properties.
SECTION 5.5. Compliance with Laws. The Borrower will comply in all
--------------------
material respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without limitation,
Environmental Laws, all zoning and building codes and ERISA and the rules and
regulations thereunder) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings.
SECTION 5.6. Inspection of Property, Books and Records. The Borrower
-----------------------------------------
will keep proper books of record and account in which full, true and correct
entries shall be made of all dealings and transactions in relation to its
business and activities; and will permit representatives of any Bank at such
Bank's expense to visit and inspect any of its properties to examine and make
ab-
49
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stracts from any of its books and records and to discuss its affairs, finances
and accounts with its officers and employees, all at such reasonable times, upon
reasonable notice, and as often as may reasonably be desired.
SECTION 5.7. Existence.
---------
(a) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence or its
partnership existence, as applicable.
(b) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its patents, trademarks,
servicemarks, tradenames, copyrights, franchises, licenses, permits,
certificates, authorizations, qualifications, accreditations, easements, rights
of way and other rights, consents and approvals the nonexistence of which is
likely to have a Material Adverse Effect.
SECTION 5.8. Financial Covenants.
-------------------
(a) Negative Pledge. The Borrower will not create, assume or suffer
---------------
to exist any Lien on any Mortgaged Property or any other asset now owned or
hereafter acquired by it, except for any encumbrances created or permitted by
the Loan Documents.
(b) Project Indebtedness. The Borrower shall not, at any time,
--------------------
create, incur, assume, guaranty, suffer to exist or otherwise become or remain
directly or indirectly liable with respect to any Debt.
SECTION 5.9. Restriction on Fundamental Changes; Operation and
--------------------------------------------------
Control. (a) The Borrower shall not enter into any merger or consolidation,
- -------
unless the Borrower is the surviving entity, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution), discontinue its business or convey,
lease, sell, transfer or otherwise dispose of, in one transaction or series of
transactions, any substantial part of its business or property, whether now or
hereafter acquired, hold an interest in any subsidiary which is not controlled
by the Borrower or enter into other business lines, without the prior written
consent of the Lead Agent.
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(b) The Borrower shall not amend its articles of incorporation, by-
laws or agreement of limited partnership, as applicable, in any material
respect, without the Lead Agent's consent, which shall not be unreasonably
withheld or delayed.
SECTION 5.10. Changes in Business. The Borrower shall not enter
-------------------
into any business which is substantially different from that conducted by the
Borrower on the Closing Date after giving effect to the transactions
contemplated by the Loan Documents.
SECTION 5.11 Sale of the Property. Except as provided in Section
--------------------
3.3, the Borrower shall not sell or otherwise transfer its interest in all or
any part of the Mortgaged Properties; provided, however, that nothing in this
-------- -------
Section 5.11 shall be deemed to prohibit the leasing of portions of the
Mortgaged Properties in the ordinary course of business for occupancy by the
tenants thereunder.
SECTION 5.12. Fiscal Year; Fiscal Quarter. The Borrower shall not
---------------------------
change its fiscal year or any of its fiscal quarters without the Lead Agent's
consent, which shall not be unreasonably withheld or delayed.
SECTION 5.13. Margin Stock. None of the proceeds of the Loan will be
------------
used, directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of buying or carrying any Margin Stock.
SECTION 5.14. Development Activities. The Borrower shall not engage
----------------------
in any development activities except for development in connection with the
expansion and/or repositioning or restoration following a casualty or
condemnation of existing improvements on a Mortgaged Property.
SECTION 5.15. Use of Proceeds. The Borrower shall use the proceeds
---------------
of the Loans solely to refinance the Mortgaged Properties as of the date hereof.
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ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred and be continuing:
-----------------
(a) the Borrower shall fail to pay when due any principal of any
Loan, or the Borrower shall fail to pay when due any interest on any Loan;
provided, however, that the Borrower shall be entitled to a three (3) Domestic
- -------- -------
Business Day grace period with respect thereto but only as to two (2) payments
of interest during the Term, or the Borrower shall fail to pay within three (3)
Domestic Business Days after the same is due any fees or other amounts payable
hereunder;
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.8(a)-(g) and Sections 5.8 to 5.16, inclusive, subject to
any applicable grace periods set forth therein;
(c) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a)
or (b) above) for 30 days after written notice thereof has been given to the
Borrower by the Lead Agent;
(d) any representation, warranty, certification or statement made by
the Borrower in this Agreement or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made (or deemed made);
(e) the Borrower shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding
52
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commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the foregoing;
(f) an involuntary case or other proceeding shall be commenced against
the Borrower seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief shall
be entered against the Borrower under the federal bankruptcy laws as now or
hereafter in effect;
(g) the Borrower shall default in its obligations under any Loan
Document other than this Agreement beyond any applicable notice and grace
periods;
(h) any member of the ERISA Group shall fail to pay when due an amount
or amounts aggregating in excess of $1,000,000 which it shall have become liable
to pay under Title IV of ERISA, or notice of intent to terminate a Material Plan
shall be filed under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing, or the PBGC shall
institute proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to
cause a trustee to be appointed to administer any Material Plan, or a condition
shall exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated, or there shall occur a
complete or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which
could cause one or more members of the ERISA Group to incur a current payment
obligation in excess of $1,000,000;
(i) one or more final nonappealable judgments or decrees in an
aggregate amount of $500,000 as of such date shall be entered by a court or
courts of competent jurisdiction against the Borrower (other than any judg-
53
<PAGE>
ment as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim in writing) and (i) any such judgments or
decrees shall not be stayed, discharged, paid, bonded or vacated within thirty
(30) days or (ii) enforcement proceedings shall be commenced by any creditor on
any such judgments or decrees;
(j) (i) any Environmental Claim shall have been asserted against the
Borrower or any Environmental Affiliate, (ii) any release, emission, discharge
or disposal of any Material of Environmental Concern shall have occurred, and
such event is reasonably likely to form the basis of an Environmental Claim
against the Borrower or any Environmental Affiliate, or (iii) the Borrower or
the Environmental Affiliates shall have failed to obtain any Environmental
Approval necessary for the ownership, or operation of its business, property or
assets or any such Environmental Approval shall be revoked, terminated, or
otherwise cease to be in full force and effect, in the case of clauses (i), (ii)
or (iii) above, if the existence of such condition has had or is reasonably
likely to have a Material Adverse Effect;
(k) the Borrower shall not, at all times, be a wholly-owned Subsidiary
of ______________;
(l) at any time, for any reason the Borrower seeks to repudiate its
obligations under any Loan Document; and
(m) any Mortgage or any Lien granted thereunder shall (except in
accordance with the terms hereof or thereof), in whole or in part, terminate,
cease to be effective or cease to be a legally valid, binding and enforceable
obligation of the Borrower, or any Lien securing the Loans shall, in whole or in
part, cease to be a perfected first priority Lien, subject to the Permitted
Exceptions (as defined in the Mortgages).
SECTION 6.2. Rights and Remedies. (a) Upon the occurrence of any
-------------------
Event of Default described in Sections 6.1(f) or (g), the unpaid principal
amount of, and any and all accrued interest on, the Loans and any and all
accrued fees and other Obligations hereunder shall automatically become
immediately due and payable, with all additional interest from time to time
accrued
54
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thereon and without presentation, demand, or protest or other requirements of
any kind (including, without limitation, valuation and appraisement, diligence,
presentment, notice of intent to demand or accelerate and notice of
acceleration), all of which are hereby expressly waived by the Borrower; and
upon the occurrence and during the continuance of any other Event of Default,
the Lead Agent may exercise any of its rights and remedies hereunder and by
written notice to the Borrower, declare the unpaid principal amount of and any
and all accrued and unpaid interest on the Loans and any and all accrued fees
and other Obligations hereunder to be, and the same shall thereupon be,
immediately due and payable with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind other than as provided in the Loan Documents
(including, without limitation, valuation and appraisement, diligence,
presentment, and notice of intent to demand or accelerate), all of which are
hereby expressly waived by the Borrower.
(b) Notwithstanding the foregoing, upon the occurrence and during the
continuance of any Event of Default other than any Event of Default described
in Sections 6.1(f) or (g), the Lead Agent shall not exercise any of its rights
and remedies hereunder nor declare the unpaid principal amount of and any and
all accrued and unpaid interest on the Loans and any and all accrued fees and
other Obligations hereunder to be immediately due and payable, until such time
as the Lead Agent shall have delivered a notice to the Banks specifying the
Event of Default which has occurred and whether Lead Agent recommends the
acceleration of the Obligations due hereunder or the exercise of other remedies
hereunder. The Banks shall notify the Lead Agent if they approve or disapprove
of the acceleration of the Obligations due hereunder or the exercise of such
other remedy recommended by Lead Agent within five (5) Domestic Business Days
after receipt of such notice. If any Bank shall not respond within such five
(5) Domestic Business Day period, then such Bank shall be deemed to have
accepted Lead Agent's recommendation for acceleration of the Obligations due
hereunder or the exercise of such other remedy. If the Required Banks shall
approve the acceleration of the Obligations due hereunder or the exercise of
such other remedy, then Lead Agent shall declare the unpaid principal amount of
and any and all accrued and unpaid inter-
55
<PAGE>
est on the Loans and any and all accrued fees and other Obligations hereunder to
be immediately due and payable or exercise such other remedy approved by the
Required Banks. If the Required Banks shall neither approve nor disapprove the
acceleration of the Obligations due hereunder or such other remedy recommended
by Lead Agent, then Lead Agent may accelerate the Obligations due hereunder or
exercise any of its rights and remedies hereunder in its sole discretion. If
the Required Banks shall disapprove the acceleration of the Obligations due
hereunder or the exercise of such other remedy recommended by Lead Agent, but
approve of another remedy, then to the extent permitted hereunder, Lead Agent
shall exercise such remedy.
SECTION 6.3. Notice of Default. If the Lead Agent shall not already
-----------------
have given any notice to the Borrower under Section 6.1, the Lead Agent shall
give notice to the Borrower under Section 6.1 promptly upon being requested to
do so by the Required Banks and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE LEAD AGENT
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably
-----------------------------
appoints and authorizes the Lead Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Lead Agent by the terms hereof or thereof,
together with all such powers as are reasonably incidental thereto.
SECTION 7.2. Lead Agent and Affiliates. Morgan shall have the same
-------------------------
rights and powers under this Agreement as any other Bank and may exercise or
refrain from exercising the same as though it were not the Lead Agent, and
Morgan and its affiliates may accept deposits from, lend money to, and generally
engage in any kind of business with the Borrower or any subsidiary or affiliate
of the Borrower as if it were not the Lead Agent hereunder, and the term "Bank"
and "Banks" shall include Morgan in its individual capacity.
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<PAGE>
SECTION 7.3. Action by Lead Agent. The obligations of the Lead
--------------------
Agent hereunder are only those expressly set forth herein. Without limiting
the generality of the foregoing, the Lead Agent shall not be required to take
any action with respect to any Default, except as expressly provided in Article
VI.
SECTION 7.4. Consultation with Experts. The Lead Agent may consult
-------------------------
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Lead Agent. Neither the Lead Agent nor any
-----------------------
of its affiliates nor any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks or, where
required by the terms of this Agreement, all of the Banks, or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Lead
Agent nor any of its directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into or verify (i) any
statement, warranty or representation made in connection with this Agreement or
any borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of the Borrower; (iii) the satisfaction of any condition
specified in Article III, except receipt of items required to be delivered to
the Lead Agent; or (iv) the validity, effectiveness or genuineness of this
Agreement, the other Loan Documents or any other instrument or writing furnished
in connection herewith. The Lead Agent shall not incur any liability by acting
in reliance upon any notice, consent, certificate, statement, or other writing
(which may be a bank wire, telex or similar writing) believed by it in good
faith to be genuine or to be signed by the proper party or parties.
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance
---------------
with its Commitment, indemnify the Lead Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, de-
57
<PAGE>
mand, action, loss or liability (except such as result from such indemnitees'
gross negligence or willful misconduct) that such indemnitees may suffer or
incur in connection with this Agreement, the other Loan Documents or any action
taken or omitted by such indemnitees hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
---------------
independently and without reliance upon the Lead Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Lead
Agent or any other Bank, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking any action under this Agreement.
SECTION 7.8. Successor Lead Agent. The Lead Agent may resign at any
--------------------
time by giving notice thereof to the Banks and the Borrower. Upon any such
resignation or the removal of the Lead Agent in accordance with Section 7.11,
the Required Banks shall have the right to appoint a successor Lead Agent with
the consent of the Borrower provided that no Event of Default shall have
occurred and be continuing. If no successor Lead Agent shall have been so
appointed by the Required Banks, and shall have accepted such appointment,
within 30 days after the retiring Lead Agent gives notice of resignation, then
the retiring Lead Agent may, on behalf of the Banks, appoint a successor Lead
Agent, which shall be a commercial bank organized or licensed under the laws of
the United States of America or of any State thereof and having a combined
capital and surplus of at least $50,000,000. Upon the acceptance of its
appointment as the Lead Agent hereunder by a successor Lead Agent, such
successor Lead Agent shall thereupon succeed to and become vested with all the
rights and duties of the retiring Lead Agent, and the retiring Lead Agent shall
be discharged from its duties and obligations hereunder first accruing or
arising after the effective date of such retirement. After any retiring Lead
Agent's resignation hereunder as Lead Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was the Lead Agent.
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SECTION 7.9. Lead Agent's Fee. The Borrower shall pay to the Lead
----------------
Agent for its own account fees in the amounts and at the times previously agreed
upon between the Borrower and the Lead Agent.
SECTION 7.10. Copies of Notices. Lead Agent shall deliver to each
-----------------
Bank a copy of any notice sent to the Borrower by Lead Agent in connection with
the performance of its duties as Lead Agent hereunder.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair. If on or prior to the first day of any Interest Period for any Euro-
Dollar Borrowing:
(a) the Lead Agent is advised by the Reference Bank that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Bank
in the relevant market for such Interest Period, or
(b) Banks having 50% or more of the aggregate amount of the
Commitments advise the Lead Agent that the Adjusted London Interbank Offered
Rate as determined by the Lead Agent will not adequately and fairly reflect the
cost to such Banks of funding their Euro-Dollar Loans for such Interest Period,
the Lead Agent shall forthwith give notice thereof to the Borrower and the
Banks, whereupon until the Lead Agent notifies the Borrower that the
circumstances giving rise to such suspension no longer exist, the obligations of
the Banks to make Euro-Dollar Loans shall be suspended. Unless the Borrower
notifies the Lead Agent at least two Domestic Business Days before the date of
any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been
given that it elects not to borrow on such date, such Borrowing shall instead be
made as a Base Rate Borrowing.
SECTION 8.2. Illegality. If, after the date of this Agreement, the
----------
adoption of any applicable law, rule or regulation, or any change in any
existing applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any govern-
59
<PAGE>
mental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency shall
make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office)
to make, maintain or fund its Euro-Dollar Loans, and such Bank shall so notify
the Lead Agent, the Lead Agent shall forthwith give notice thereof to the other
Banks and the Borrower, whereupon until such Bank notifies the Borrower and the
Lead Agent that the circumstances giving rise to such suspension no longer
exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended.
Before giving any notice to the Lead Agent pursuant to this Section, such Bank
shall designate a different Euro-Dollar Lending Office if such designation will
avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine
that it may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding principal amount of each
such Euro-Dollar Loan, together with accrued interest thereon. Concurrently
with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate
Loan in an equal principal amount from such Bank (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar Loans
of the other Banks), and such Bank shall make such a Base Rate Loan.
SECTION 8.3. Increased Cost and Reduced Return.
---------------------------------
(a) If, after the date hereof, the adoption of any applicable law,
rule or regulation, or any change in any applicable law, rule or regulation, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of
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<PAGE>
the Federal Reserve System (but excluding with respect to any Euro-Dollar Loan
any such requirement reflected in an applicable Euro-Dollar Reserve
Percentage)), special deposit, insurance assessment or similar requirement
against assets of, deposits with or for the account of, or credit extended by,
any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the London interbank market any other
condition affecting its Euro-Dollar Loans, its Note, or its obligation to make
Euro-Dollar Loans, and the result of any of the foregoing is to increase the
cost to such Bank (or its Applicable Lending Office) of making or maintaining
any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable
by such Bank (or its Applicable Lending Office) under this Agreement or under
its Note with respect thereto, by an amount deemed by such Bank to be material,
then, within 15 days after demand by such Bank (with a copy to the Lead Agent),
which demand shall be accompanied by a certificate showing, in reasonable
detail, the calculation of such amount or amounts, the Borrower shall pay to
such Bank such additional amount or amounts as will compensate such Bank for
such increased cost or reduction.
(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of such Bank (or its Parent) as a consequence of such Bank's obligations
hereunder to a level below that which such Bank (or its Parent) could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, within 15 days after
demand by such Bank (with a copy to the Lead Agent), which demand shall be
accompanied by a certificate showing, in reasonable detail, the calculation of
such amount or amounts, the Borrower shall pay to such Bank such addi-
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<PAGE>
tional amount or amounts as will compensate such Bank (or its Parent) for such
reduction.
(c) Each Bank will promptly notify the Borrower and the Lead Agent of
any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank may use any reasonable averaging and attribution methods.
SECTION 8.4. Taxes.
-----
(a) Any and all payments by the Borrower to or for the account of any
Bank or the Lead Agent hereunder or under any other Loan Document shall be made
free and clear of and without deduction for any and all present or future taxes,
duties, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Bank and the
---------
Lead Agent, taxes imposed on its income, and franchise taxes imposed on it, by
the jurisdiction under the laws of which such Bank or the Lead Agent (as the
case may be) is organized or any political subdivision thereof and, in the case
of each Bank, taxes imposed on its income, and franchise or similar taxes
imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or
any political subdivision thereof (and, if different from the jurisdiction of
such Bank's Applicable Lending Office, the jurisdiction of the domicile of its
Loans either established by the Bank pursuant to Section 9.12 or determined by
the applicable taxing authorities)(all such non-excluded taxes, duties, levies,
imposts, deductions, charges, withholdings and liabilities being hereinafter
referred to as "Taxes"). If the Borrower shall be required by law to deduct
-----
any Taxes from or in respect of any sum payable hereunder or under any Note or
participation therein to any Bank or the Lead Agent, (i) the sum payable shall
be increased as necessary so that after making all required deductions
(including deductions
62
<PAGE>
applicable to additional sums payable under this Section 8.4) such Bank or the
Lead Agent (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower shall make
such deductions, (iii) the Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable law
and (iv) the Borrower shall furnish to the Lead Agent, at its address referred
to in Section 9.1, the original or a certified copy of a receipt evidencing
payment thereof.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note or
participation therein or from the execution or delivery of, or otherwise with
respect to, this Agreement or any Note or participation therein (hereinafter
referred to as "Other Taxes").
-----------
(c) The Borrower agrees to indemnify each Bank and the Lead Agent for
the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section 8.4) paid by such Bank or the Lead Agent (as the case may be)
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. Any payment required under this indemnification shall
be made within 15 days from the date such Bank or the Lead Agent (as the case
may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrower (but
only so long as such Bank remains lawfully able to do so), shall provide the
Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which reduces the rate of withholding tax on payments of
interest or certifying that the income receiv-
63
<PAGE>
able pursuant to this Agreement is effectively connected with the conduct of a
trade or business in the United States. If the form provided by a Bank at the
time such Bank first became a party to this Agreement or at any time thereafter
(other than solely by reason of a change in United States law or a change in the
terms of any treaty to which the United States is a party after the date hereof)
indicates a United States interest withholding tax rate in excess of zero (or
would have indicated such a withholding tax rate if such form had been submitted
and completed accurately and completely and either was not submitted or was not
completed accurately and completely), or if a Bank otherwise is subject to
United States interest withholding tax at a rate in excess of zero at any time
for any reason (other than solely by reason of a change in United States law or
regulation or a change in any treaty to which the United States is a party after
the date hereof), withholding tax at such rate shall be considered excluded from
"Taxes" as defined in Section 8.4(a). In addition, any amount that otherwise
would be considered "Taxes" or "Other Taxes" for purposes of this Section 8.4
shall be excluded therefrom if the Bank either has transferred the domicile of
its Loans pursuant to Section 9.12 or changed the Applicable Lending Office with
respect to such Loans and such amount would not have been incurred had such
transfer or change not been made.
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.4(a) with respect to
Taxes imposed by the United States; provided, however, that should a Bank, which
-------- -------
is otherwise exempt from or subject to a reduced rate of withholding tax, become
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.4, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to
64
<PAGE>
eliminate or reduce any such additional payment which may thereafter accrue if
such change, in the judgment of such Bank, is not otherwise disadvantageous to
such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar
----------------------------------------------------
Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been
- -----
suspended pursuant to Sections 8.1 or 8.2 or (ii) any Bank has demanded
compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and
the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to
such Bank through the Lead Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies the
Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as Euro-
Dollar Loans shall be made instead as Base Rate Loans (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar Loans
of the other Banks), and
(b) after each of its Euro-Dollar Loans has been repaid, all payments
of principal which would otherwise be applied to repay such Euro-Dollar Loans
shall be applied to repay its Base Rate Loans instead.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications
-------
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Borrower or the Lead Agent, at its address or telecopy
number set forth on the signature pages hereof, together with copies thereof, in
the case of the Borrower, to Latham & Watkins, 633 West Fifth Street, Suite
4000, Los Angeles, CA 90071, Attention: ___________________, Telephone: (213)
485-1234, Telecopy: (213) 891-8763, and in the case of the Lead Agent, to
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022, Attention: Martha Feltenstein, Esq., Telephone: (212) 735-2272, Telecopy:
(212) 735-2000, (y) in the case of any Bank, at its ad-
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<PAGE>
dress or telecopy number set forth on the signature pages hereof or in its
Administrative Questionnaire or (z) in the case of any party, such other address
or telecopy number as such party may hereafter specify for the purpose by
notice to the Lead Agent, the Banks and the Borrower. Each such notice, request
or other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section, (ii)
if given by mail, 72 hours after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when delivered at the address specified in this Section;
provided that notices to the Lead Agent under Article II or Article VIII shall
- --------
not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Lead Agent or
----------
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification.
-------------------------
(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses
of the Lead Agent (including, without limitation, reasonable fees and
disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP, local
counsel for the Lead Agent, and travel, site visits, third party reports
(including Appraisals), mortgage recording taxes, environmental and engineering
expenses), in connection with the preparation and administration of this
Agreement, the Loan Documents and the documents and instruments referred to
therein, the syndication of the Loans, any waiver or consent hereunder or any
amendment or modification hereof or any Default or alleged Default hereunder and
(ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the
Lead Agent and each Bank, including, without limitation, reasonable fees and
disbursements of counsel for the Lead Agent, in connection with the enforcement
of the Loan Documents and the instruments referred to therein and such Event of
De-
66
<PAGE>
fault and collection, bankruptcy, insolvency and other enforcement proceedings
resulting therefrom.
(b) The Borrower agrees to indemnify the Lead Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
----------
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel and settlements and settlement costs, which may be
incurred by such Indemnitee in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) that may at any time (including, without
limitation, at any time following the payment of the Obligations) be imposed
on, asserted against or incurred by any Indemnitee as a result of, or arising
out of, or in any way related to or by reason of, (i) any of the transactions
contemplated by the Loan Documents or the execution, delivery or performance of
any Loan Document (including, without limitation, the Borrower's actual or
proposed use of proceeds of the Loans, whether or not in compliance with the
provisions hereof), (ii) any violation by the Borrower or the Environmental
Affiliates of any applicable Environmental Law, (iii) any Environmental Claim
arising out of the management, use, control, ownership or operation of property
or assets by the Borrower or any of the Environmental Affiliates, including,
without limitation, all on-site and off-site activities involving Material of
Environmental Concern, (iv) the breach of any environmental representation or
warranty set forth herein, (v) the grant to the Lead Agent and the Banks of any
Lien in any property or assets of the Borrower or any stock or other equity
interest in the Borrower, and (vi) the exercise by the Lead Agent and the Banks
of their rights and remedies (including, without limitation, foreclosure) under
any agreements creating any such Lien (but excluding, as to any Indemnitee, any
such losses, liabilities, claims, damages, expenses, obligations, penalties,
actions, judgments, suits, costs or disbursements incurred solely by reason of
(i) the gross negligence or willful misconduct of such Indemnitee as finally
determined by a court of competent jurisdiction or (ii) any investigative,
administrative or judicial proceeding imposed or asserted against any
Indemnitee by any bank regulatory agency or by any equity holder
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<PAGE>
of such Indemnitee). The Borrower's obligations under this Section shall
survive the termination of this Agreement and the payment of the Obligations.
(c) The Borrower shall pay, and hold the Lead Agent and each of the
Banks harmless from and against, any and all present and future U.S. stamp,
recording, transfer and other similar foreclosure related taxes with respect to
the foregoing matters and hold the Lead Agent and each Bank harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Bank) to pay such taxes.
SECTION 9.4. Sharing of Set-Offs. In addition to any rights now or
-------------------
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance
of any Event of Default, each Bank is hereby authorized at any time or from
time to time, without presentment, demand, protest or other notice of any kind
to the Borrower or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and apply any and all deposits (general or
special, time or demand, provisional or final), other than deposits held for the
benefit of third parties, and any other indebtedness at any time held or owing
by such Bank (including, without limitation, by branches and agencies of such
Bank wherever located) to or for the credit or the account of the Borrower
against and on account of the Obligations of the Borrower then due and payable
to such Bank under this Agreement or under any of the other Loan Documents,
including, without limitation, all interests in Obligations purchased by such
Bank. Each Bank agrees that if it shall, by exercising any right of set-off or
counterclaim or otherwise, receive payment of a proportion of the aggregate
amount of principal and interest due with respect to any Note held by it which
is greater than the proportion received by any other Bank in respect of the
aggregate amount of principal and interest due with respect to any Note held by
such other Bank, the Bank receiving such proportionately greater payment shall
purchase such participations in the Notes held by the other Banks, and such
other adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the Banks shall be
shared by the Banks pro rata; provided that
--------
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<PAGE>
nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes. The Borrower agrees, to the fullest extent that
it may effectively do so under applicable law, that any holder of a
participation in a Note, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of the Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this
----------------------
Agreement, the Notes or other Loan Documents may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the Borrower
and the Required Banks (and, if the rights or duties of the Lead Agent are
affected thereby, by the Lead Agent); provided that no such amendment or waiver
--------
shall, unless signed by all the Banks, (i) increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees specified herein, (iii) postpone the
date fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for any reduction or termination of any Commitment, (iv) release
the Lien of any Mortgage or otherwise release any other collateral, or (v)
change the percentage of the Commitments or of the aggregate unpaid principal
amount of the Notes, or the number of Banks, which shall be required for the
Banks or any of them to take any action under this Section or any other
provision of this Agreement.
SECTION 9.6. Successors and Assigns.
----------------------
(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or otherwise transfer any of
their rights under this Agreement or the other Loan Documents without the prior
written consent of all Banks.
69
<PAGE>
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
-----------
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Lead Agent, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower and the Lead Agent
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement. Any agreement pursuant
to which any Bank may grant such a participating interest shall provide that
such Bank shall retain the sole right and responsibility to enforce the
obligations of the Borrower hereunder including, without limitation, the right
to approve any amendment, modification or waiver of any provision of this
Agreement; provided that such participation agreement may provide that such Bank
--------
will not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii), (iii) or (iv) of Section 9.5 without the consent
of the Participant. The Borrower agrees that each Participant shall, to the
extent provided in its participation agreement, be entitled to the benefits of
Article VIII with respect to its participating interest. An assignment or other
transfer which is not permitted by subsection (c) or (d) below shall be given
effect for purposes of this Agreement only to the extent of a participating
interest granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
--------
rights and obligations under this Agreement, the Notes and the other Loan
Documents, and such Assignee shall assume such rights and obligations, pursuant
to an Assignment and Assumption Agreement in substantially the form of Exhibit C
---------
attached hereto executed by such Assignee and such transferor Bank, with (and
subject to) the subscribed consent of the Lead Agent and, provided no Event of
Default shall have occurred and be continuing, the Borrower, which consent
shall not be unreasonably withheld or delayed. Upon execution and delivery of
such instrument and payment by such Assignee to such transferor Bank of an
amount equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
70
<PAGE>
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Lead Agent and the
Borrower shall make appropriate arrangements so that, if required, a new Note or
Notes are issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Lead Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Lead Agent certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.3 or 8.4 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 9.7. Governing Law; Submission to Jurisdiction.
-----------------------------------------
(a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).
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<PAGE>
(b) Any legal action or proceeding with respect to this Agreement or
any other Loan Document and any action for enforcement of any judgment in
respect thereof may be brought in the courts of the State of New York or of the
United States of America for the Southern District of New York, and, by
execution and delivery of this Agreement, the Borrower hereby accepts for itself
and in respect of its property, generally and unconditionally, the non-
exclusive jurisdiction of the aforesaid courts and appellate courts from any
thereof. The Borrower irrevocably consents to the service of process out of
any of the aforementioned courts in any such action or proceeding by the hand
delivery, or mailing of copies thereof by registered or certified mail, postage
prepaid, to the Borrower at its address set forth below. The Borrower hereby
irrevocably waives any objection which it may now or hereafter have to the
laying of venue of any of the aforesaid actions or proceedings arising out of or
in connection with this Agreement or any other Loan Document brought in the
courts referred to above and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum. Nothing herein shall
affect the right of the Lead Agent, any Bank or any holder of a Note to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Borrower in any other jurisdiction.
SECTION 9.8. Marshaling; Recapture. Neither the Lead Agent nor any
---------------------
Bank shall be under any obligation to marshal any assets in favor of the
Borrower or any other party or against or in payment of any or all of the
Obligations. To the extent any Bank receives any payment by or on behalf of the
Borrower, which payment or any part thereof is subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
the Borrower or its estate, trustee, receiver, custodian or any other party
under any bankruptcy law, state or federal law, common law or equitable cause,
then to the extent of such payment or repayment, the Obligation or part thereof
which has been paid, reduced or satisfied by the amount so repaid shall be
reinstated by the amount so repaid and shall be included within the liabilities
of the Borrower to such Bank as of the date such initial payment, reduction or
satisfaction occurred.
72
<PAGE>
SECTION 9.9. Counterparts; Integration; Effectiveness. This
----------------------------------------
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective upon receipt by the Lead Agent of
counterparts hereof signed by each of the parties hereto (or, in the case of any
party as to which an executed counterpart shall not have been received, receipt
by the Lead Agent in form satisfactory to it of telegraphic, telex or other
written confirmation from such party of execution of a counterpart hereof by
such party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE LEAD
--------------------
AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Survival. All indemnities set forth herein shall
--------
survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Loans hereunder.
SECTION 9.12. Domicile of Loans. Subject to the provisions of
-----------------
Article VIII, each Bank may transfer and carry its Loans at, to or for the
account of any domestic or foreign branch office, subsidiary or affiliate of
such Bank.
SECTION 9.13. Limitation of Liability. No claim may be made by the
-----------------------
Borrower or any other Person against the Lead Agent or any Bank or the
affiliates, directors, officers, employees, attorneys or agent of any of them
for any consequential or punitive damages in respect of any claim for breach of
contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement or by the other Loan Documents, or
any act, omission or event occurring in connection therewith; and the Borrower
hereby waives, releases and agrees not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.
73
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
[BORROWER]
By:_____________________________
Name:
Title:
Commitments
$__________ MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:_____________________________
Name:
Title:
Total Commitments
- -----------------
$[17,000,000]
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lead Agent
By:__________________________
Name:
Title:
60 Wall Street
New York, New York 10260-0060
Attention: Michael Errichetti
Telephone number: (212) 648-8127
Telecopy number: (212) 648-5336
Domestic and Euro-Currency
Lending Office:
Nassau, Bahamas Office
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, Delaware 19173-2107
Attention: Nancy K. Dunbar
Telecopy number: (302) 634-4222
<PAGE>
EXHIBIT A
---------
NOTE
$[17,000,000] New York, New York
[January 31, 1997]
------------------
For value received, [BORROWER], a ___________ _____________] (the
"Borrower") promises to pay to the order of Morgan Guaranty Trust Company of New
- ---------
York (the "Bank"), for the account of its Applicable Lending Office, the unpaid
----
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the Maturity Date. The Borrower promises
to pay interest on the unpaid principal amount of each such Loan on the dates
and at the rate or rates provided for in the Credit Agreement. All such
payments of principal and interest shall be made in lawful money of the United
States in Federal or other immediately available funds at the office of Morgan
Guaranty Trust Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities
thereof and all repayments of the principal thereof shall be recorded by the
Bank and, if the Bank so elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; provided that the failure of the Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This Note is one of the Notes referred to in the Credit Agreement,
dated as of [January 31, 1997], among the Borrower, the Banks parties thereto,
and Morgan Guaranty Trust Company of New York, as Lead Agent (as the same may be
amended from time to time, the "Credit Agreement"). Terms defined in the Credit
----------------
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the prepayment hereof and the acceleration
of the maturity hereof.
[BORROWER]
By:______________________
Name:
Title:
A-1
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
_______________________________________________________________
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
______________________________________________________________
______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
A-2
<PAGE>
EXHIBIT B
---------
MORTGAGED PROPERTIES
1. SeaTac Office Center )(Leasehold Interest)
SeaTac, Washington.
2. Retail Parcel (Parcel 2) of Calabasas Park Centre, California.
3. Apartment Parcel (Parcel 3) of Calabasas Park Centre, California.
B-1
<PAGE>
EXHIBIT C
---------
FORM OF ASSIGNMENT AND ASSUMPTION
C-1
<PAGE>
EXHIBIT 10.42
VARIABLE INTEREST RATE
INDENTURE OF MORTGAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATEMENT,
FIXTURE FILING AND ASSIGNMENT OF
LEASES AND RENTS
from
[BORROWER],
as Debtor, Grantor
and Mortgagor
to
__________________________,
as Trustee
for the benefit of
Morgan Guaranty Trust Company of New York,
as Lead Agent/Beneficiary/Mortgagee
Dated as of ________ ___, 199__
--------------------------------------------------------
Prepared and drafted by and after recording, return to:
Martha Feltenstein, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
--------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
GRANTING CLAUSES........................................................ 3
1. Definitions......................................................... 9
2. Warranty............................................................ 18
3. Payment and Performance of Obligations Secured...................... 19
4. Negative Covenants.................................................. 20
5. Insurance........................................................... 20
6. Condemnation and Insurance Proceeds................................. 25
7. Impositions, Liens and Other Items.................................. 30
8. Funds for Taxes and Insurance....................................... 32
9. The Beneficiary and Trustees........................................ 34
10. Transfers, Additional Indebtedness and Subordinate Liens........... 44
11. Maintenance of Trust Estate; Alterations; Inspection; Utilities.... 45
12. Legal Compliance................................................... 46
13. Books and Records, Financial Statements, Reports and
Other Information.................................................. 47
14. Compliance with Leases and Agreements.............................. 50
15. The Beneficiary's Right to Perform................................. 53
16. The Grantor's Existence; Organization and Authority; Litigation.... 54
17. Protection of Security; Costs and Expenses......................... 54
18. Management of the Properties....................................... 55
19. Environmental Matters.............................................. 55
20. License to Collect Rents........................................... 56
21. Remedies........................................................... 57
22. Application of Proceeds............................................ 65
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23. Notice of Certain Occurrences ..................................... 65
24. WAIVER OF TRIAL BY JURY............................................ 65
25. Taxes.............................................................. 66
26. Notices............................................................ 67
27. No Oral Modification............................................... 68
28. Partial Invalidity................................................. 68
29. Successors and Assigns............................................. 68
30. Governing Law...................................................... 69
31. Recording Fees, Taxes, Etc......................................... 69
32. No Waiver.......................................................... 69
33. Further Assurances................................................. 70
34. Additional Security................................................ 70
35. Indemnification by the Grantor..................................... 70
36. Release............................................................ 72
37. Security Agreement................................................. 73
38. As to Property in California....................................... 75
39. As to Property in Washington....................................... 78
40. Trusts Funds....................................................... 78
41. Reserves........................................................... 78
42. Ground Lease....................................................... 79
</TABLE>
EXHIBIT A Land Parcels
EXHIBIT B Permitted Exception
SCHEDULE 1 Agreements
ii
<PAGE>
VARIABLE INTEREST RATE
INDENTURE OF MORTGAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATEMENT,
FIXTURE FILING AND ASSIGNMENT OF
LEASES AND RENTS
THIS VARIABLE INTEREST RATE INDENTURE OF MORT GAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATE STATEMENT, FIXTURE FILING AND ASSIGNMENT OF
LEASES AND RENTS (herein, together with all amendments and supplements thereto,
called this "Mortgage"), dated as of the ___ day of January, 1997, made by
--------
[BORROWER], a [______ ______] (the "Grantor"), having an address at [ADDRESS] as
-------
debtor, grantor, trustor and mortgagor, in favor of [TRUSTEE], ("Trustee")
-------
having an address at ____________________, as Trustee for the benefit of Morgan
Guaranty Trust Company of New York, (the "Beneficiary"), as Lead Agent
-----------
for the Banks pursuant to the Credit Agreement described herein, having an
address at 60 Wall Street, New York, New York.
W I T N E S S E T H :
--------------------
WHEREAS, Grantor is the record and beneficial owner of the fee simple
interests in the Properties (as defined below), located on and comprising the
land described in Exhibits "A-1" and "A-2" attached hereto (the "Land Parcels");
------------------------ ------------
and
WHEREAS, Grantor is the owner of a ground leasehold interest (the
"Ground Leasehold Estate") in the Property, located on the land described in
- ------------------------
Exhibit A-3; and
- -----------
WHEREAS, a loan (the "Loan") has been made to Grantor, pursuant to the
----
Credit Agreement, dated of even date herewith, among Grantor, the Banks and
Beneficiary (as amended, modified, restated or supplemented from time to time,
the "Credit Agreement") and the Loan is evidenced by a Promissory Note or
----------------
Notes, dated as of the date hereof or to be dated subsequent to the date hereof
pursuant to the terms of the Credit Agreement (such note or notes together with
all amendments, modifications or replacements thereof which may hereafter be
executed, collectively, the "Note"), made by the Grantor, as maker,
----
1
<PAGE>
in favor of Beneficiary and the Banks named therein, as payee, in the aggregate
principal amount of Seventeen Million Dollars $17,000,000 (the "Loan Amount");
-----------
and
WHEREAS, the Grantor and the Beneficiary intend these recitals to be a
material part of this Mortgage.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Grantor hereby agrees as follows:
TO SECURE:
(1) payment and performance of all covenants, liabilities and
obligations contained in, and payment of the indebtedness guaranteed by,
the Note plus all interest, additional interest and additional amounts
payable thereunder; and
(2) payment and performance of all covenants, conditions,
liabilities and obligations of the Grantor to the Beneficiary contained in
this Mortgage and any extensions, renewals or modifications hereof; and
(3) payment and performance of all covenants, liabilities and
obligations of Grantor or any other Consolidated Subsidiary contained in
each of the other Loan Documents (as hereinafter defined); and
(4) without limiting the generality of the foregoing, payment of
all other indebtedness and liabilities, direct or indirect, of the Grantor
to the Beneficiary or the Banks, due or to become due hereunder, or under
any other Loan Document (including, without limitation, any protective
advances, disbursements, payments and reimbursements made, and charges,
expenses and costs (including, without limitation, any enforcement and
collection costs) incurred pursuant to the Note, this Mortgage, or such
other Loan Documents) to protect the security intended to be provided
hereby even if the aggregate amount of indebtedness outstanding at any one
time exceeds the amount of the Note (all of the foregoing indebtedness,
monetary liabilities and
2
<PAGE>
obligations set forth in clauses (1)-(4) above, collectively, the
"Indebtedness"; and payment of the Indebtedness together with the
------------
performance of all covenants and obligations set forth in clauses (1)-(4)
above, collectively, the "Obligations").
-----------
GRANTING CLAUSES
----------------
NOW, THEREFORE, THIS MORTGAGE WITNESSETH: that the Grantor, in
consideration of the premises, the acceptance by the Beneficiary of the trusts
created hereby, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged (a) has mortgaged, warranted,
granted, transferred, bargained, sold, conveyed, pledged, and assigned and (b)
by these presents does hereby mortgage, warrant, grant a security interest in,
grant, transfer, bargain, sell, convey, pledge, and assign unto the Beneficiary
and its successors and assigns forever, or, if any Section hereof provides
that this instrument is a deed of trust, to the Trustee for the benefit of the
Beneficiary in the trusts created hereby, WITH POWER OF SALE, all its estate,
right, title and interest now owned or hereafter acquired in, to and under any
and all of the property (herein called the "Trust Estate") described in the
------------
following Granting Clauses:
I. the Land Parcels;
II. the Ground Leasehold Estate and all right, title and
interest of Grantor in, to and under the Ground Lease, with all rights of
use, occupancy and enjoyment and in and to all rents, income and profits
arising from or pursuant to the Ground Lease together with all amendments,
extensions, renewals and modifications of the Ground Lease and all
credits, deposits, options and privileges of Grantor as lessee under the
Ground Lease including, without limitation, the right to renew or extend
the Ground Lease for a succeeding term or terms and all rights of Grantor
under the Ground Lease in connection with any bankruptcy or insolvency
proceeding of the lessor under the Ground Lease, if any;
III. All right, title and interest of the Grantor in and to all
buildings, structures and
3
<PAGE>
other improvements now standing, or at any time hereafter constructed or
placed, upon the Land Parcels and comprising part of the Ground Leasehold
Estate, including all of the Grantor's right, title and interest in and to
all equipment and fixtures of every kind and nature on the Land Parcels or
relating to the Ground Leasehold Estate or in any such buildings,
structures or other improvements (such buildings, structures, other
improvements, equipment and fixtures being herein collectively called the
"Improvements"), (b) all right, title and interest of the Grantor in and to
------------
all and singular tenements, hereditaments, easements, rights of way,
rights, privileges and appurtenances in and to the Land Parcels and the
Ground Leasehold Estate belonging or in any way appertaining thereto,
including without limitation all right, title and interest of the Grantor
in, to and under any streets, ways, alleys, vaults, gores or strips of land
adjoining the Land Parcels and the land subject to the Ground Leasehold
Estate and (c) all claims or demands of the Grantor, in law or in equity,
in possession or expectancy of, in and to the Land Parcels and the Ground
Leasehold Estate together with rents, income, revenues, issues and profits
from and in respect of the Land Parcels and the Ground Leasehold Estate and
the Improvements and the present and continuing right to make claim for,
collect, receive and receipt for the same as hereinafter provided. It is
the intention of the parties hereto that, so far as may be permitted by
law, all of the foregoing, whether now owned or hereafter acquired by the
Grantor, affixed, attached or annexed to the Land Parcels or relating to
the Ground Leasehold Estate shall be and remain or become and constitute a
part of the Trust Estate and the security covered by and subject to the
lien of this Mortgage. All such right, title and interest of the Grantor
in and to the Land Parcels, the Ground Leasehold Estate, the interest of
the Grantor in and to the Improvements located thereon and such other
property with respect thereto described in Granting Clauses I, II and III
is herein called a "Property" and each such Property, collectively, the
--------
"Properties."
----------
IV. All right, title and interest of the Grantor in and to (i) all
extensions, improvements,
4
<PAGE>
betterments, renewals, substitutes and replacements of and on the Properties
described in the foregoing Granting Clauses I, II and III and (ii) all additions
and appurtenances thereto not presently leased to or owned by the Grantor and
hereafter leased to, acquired by or released to the Grantor or constructed,
assembled or placed upon the Properties (including, but not limited to, the fee
estate in the Land Parcels) immediately upon such leasing, acquisition,
release, construction, assembling or placement, and without any further grant or
other act by the Grantor.
V. All the estate, right, title and interest of the Grantor in and
to (i) all judgments, insurance proceeds, awards of damages and settlements
resulting from condemnation proceedings or the taking of the Properties (or any
of them), or any part thereof, under the power of eminent domain or for any
damage (whether caused by such taking or otherwise) to the Properties (or any of
them) or any part thereof, or to any rights appurtenant thereto, and all
proceeds of any sales or other dispositions of the Properties (or any of them)
or any part thereof; and the Beneficiary is hereby authorized to collect and
receive said awards and proceeds and to give proper receipts and acquittances
thereto, subject to the conditions and limitations hereinafter set forth; and
(ii) all contract rights, general intangibles, actions and rights in action,
relating to the Properties (or any of them) including, without limitation, all
rights to insurance proceeds and unearned premiums arising from or relating to
damage to the Properties (or any of them); and (iii) all proceeds, products,
replacements, additions, substitutions, renewals and accessions of and to the
Properties (or any of them).
VI. The Grantor does hereby pledge and presently and absolutely
assign to the Beneficiary from and after the date hereof (including any period
of redemption), primarily and on a parity with said real estate, and not
secondarily, all the rents, issues and profits of the Properties and all rents,
issues, profits, revenues, royalties, bonuses, rights, and benefits due, payable
or accruing (including all deposits of money as advance rent, for security or as
earnest money or as down payment for the purchase of all or any part of the
Properties) (the "Rents") under any and all present and future leases,
-----
subleases, underlettings, concession agreements,
5
<PAGE>
licenses, contracts or other agreements relative to the ownership or occupancy
of all or any portion of the Properties and does hereby transfer and assign to
the Beneficiary all such leases and agreements (the "Leases"). The Beneficiary
------
hereby grants to the Grantor the right to collect and use the Rents as they
become due and payable under the Leases, until an Event of Default has occurred
and is continuing, provided that the existence of such right shall not operate
--------
to subordinate this assignment to any subsequent assignment, in whole or in part
by the Grantor, and any such subsequent assignment shall be subject to the
rights of the Beneficiary under this Mortgage. The Grantor further agrees to
execute and deliver such assignments of leases or assignments of land sale
contracts as the Beneficiary may from time to time request. Upon the occurrence
and during the continuance of an Event of Default (1) the Grantor agrees, upon
demand, to deliver to the Beneficiary such additional assignments thereof as
the Beneficiary may request and agrees that the Beneficiary may assume the
management of the Properties (or any of them), and collect the Rents, applying
the same upon the Obligations and (2) the Grantor hereby authorizes and directs
all tenants, purchasers or other persons occupying or otherwise acquiring any
interest in any part of the Properties to pay the Rents due under the Leases to
the Beneficiary upon request of the Beneficiary. The Grantor hereby appoints
the Beneficiary as its true and lawful attorney in fact to manage said property
and collect the Rents, with full power to bring suit for collection of the Rents
and possession of the Properties (or any of them), giving and granting unto said
Beneficiary full power and authority to do and perform all and every act and
thing whatsoever requisite and necessary to be done in the protection of the
security hereby conveyed; provided, however, that (i) this power of attorney
-------- -------
coupled with an interest and assignment of rents shall not be construed as an
obligation upon the Beneficiary to manage said property or to make or cause to
be made any repairs or to take any other action that may be needful or necessary
and (ii) the Beneficiary agrees that until such Event of Default has occurred
and is continuing as aforesaid, the Beneficiary shall not exercise its rights
pursuant to said power of attorney coupled with an interest and shall permit the
Grantor to perform the aforementioned management responsibilities and collect
the Rents. Upon the Beneficiary's receipt of the Rents, at the Beneficiary's
option, it may pay: (1)
6
<PAGE>
reasonable charges for collection hereunder, costs of necessary repairs and
other costs requisite and necessary in connection with the management of the
premises, during the continuance of this power of attorney coupled with an
interest and assignment of rents including general and special taxes and
assessments and insurance premiums and (2) the Indebtedness secured hereby.
This power of attorney coupled with an interest and assignment of leases and
rents shall be irrevocable until this Mortgage shall have been satisfied and the
releasing of this Mortgage shall act as a revocation of this power of attorney
coupled with an interest and assignment of leases and rents with respect to such
portion of the Trust Estate so released. The Beneficiary shall have and hereby
expressly reserves the right and privilege (but assumes no obligation) to
demand, collect, sue for, receive and recover the Rents, or any part thereof,
now existing or hereafter made, and apply the same in accordance with law, all
in accordance herewith.
VII. All of the Grantor's right, title and interest in and to all
personal and intangible property and equipment of every nature whatsoever now or
hereafter located in, arising from or on and utilized or to be used in
connection with the Properties (or any of them), including but not limited to
(a) all screens, window shades, blinds, wainscoting, storm doors and windows,
floor coverings, and awnings; (b) all apparatus, machinery, accessions,
equipment and appliances not included as fixtures; (c) all items of furniture,
furnishings, and personal property; (d) all extensions, additions,
improvements, betterments, renewals, substitutions, and replacements to or of
any of the foregoing (a)-(c) (all of said property in (a)-(d) being
collectively, the "Equipment"); (e) all accounts receivable arising from the
---------
sale or other disposition of all or any of the Grantor's real property,
buildings, structures and other improvements, fixtures, furniture, furnishings,
apparatus, machinery, appliances or other equipment, and all extensions,
renewals, improvements, substitutions and replacements thereto whether owned or
leased, now or hereafter acquired in connection with the Properties; (f) all
accounts, including the Escrow Account, general intangibles, chattel paper, cash
or monies of the Grantor, wherever located, whether in the form of cash or
checks, and all cash equivalents including, without limitation, all deposits and
certificates of deposit,
7
<PAGE>
instruments, whether negotiable or non-negotiable, debt notes both certificated
and uncertificated, repurchase obligations for underlying notes of the types
described herein, and commercial paper (i) received in connection with the sale
or other disposition of all or any of the Grantor's real property, buildings,
structures and other improvements, fixtures, furniture, furnishings, apparatus,
machinery, appliances or other equipment, and all extensions, renewals,
improvements, substitutions and replacements thereto whether owned or leased,
now or hereafter acquired, all in connection with the Properties, (ii)
maintained by the Grantor in a segregated account in trust for the benefit of
the Beneficiary or (iii) held by the Beneficiary; and (g) all proceeds (as
defined in the Uniform Commercial Code) of all of the foregoing; it being
mutually agreed, intended and declared, that the Trust Estate and all of the
property rights and fixtures owned by the Grantor shall, so far as permitted by
law, be deemed to form a part and parcel of the Land Parcels and the Ground
Leasehold Estate and for the purpose of this Mortgage to be real estate and
cov ered by this Mortgage, it being also agreed that if any of the property
herein mortgaged is of a nature so that a security interest therein can be
perfected under the Uniform Commercial Code, this instrument shall constitute a
security agreement, fixture filing and financing statement, and the Grantor
agrees to execute, deliver and file or refile any financing statement,
continuation statement, or other instruments the Beneficiary may reasonably
require from time to time to perfect or renew such security interest under the
Uniform Commercial Code. To the extent permitted by law, (i) all of the fixtures
are or are to become fixtures on Land Parcels; and (ii) this instrument, upon
recording or registration in the real estate records of the proper office, shall
constitute a "fixture-filing" within the meaning of Sections [9-313 and 9-402]
of the Uniform Commercial Code. The remedies for any violation of the covenants,
terms and conditions of the agreements herein contained shall be as prescribed
herein or by general law, or, as to that part of the security in which a
security interest may be perfected under the Uniform Commercial Code, by the
specific statutory consequences now or hereafter enacted and specified in the
Uniform Commercial Code, all at the Beneficiary's sole election.
8
<PAGE>
VIII. All of the Grantor's right, title, and interest in, to and
under (i) any reciprocal easement agreements, operating agreements and similar
agreements affecting the ownership, use and operation of the Prop erties (or any
of them) included in the Permitted Exceptions, as such agreements have been or
may hereafter be amended, modified or supplemented; (ii) all contracts,
including the management agreements, if any, and agreements relating to the
Properties (or any of them), and other documents, books and records related to
the operation of the Properties (or any of them); (iii) all consents, licenses
(including, to the extent permitted by law, any licenses permitting the sale of
liquor at the Properties (or any of them)), warranties, guaranties and building
and other permits required or useful for the construction, completion, occupancy
and operation of the Properties (or any of them); (iv) any contracts for the
sale of any portion of the Properties or the Equipment; and (v) all plans and
specifications, engineering reports, land planning, maps, surveys, and any
other reports, exhibits or plans and specifications used or to be used in
connection with the construction, operation or maintenance of the Properties (or
any of them), together with all amendments and modifications thereof.
TO HAVE AND TO HOLD THE TRUST ESTATE, whether now owned or held or
hereafter acquired, unto the Trustee, in trust, for the benefit and use of the
Beneficiary and its successors and assigns, forever.
IN TRUST FOREVER, with power of sale (to the extent permitted by
applicable law), upon the terms and trusts herein set forth and to secure the
performance of, and compliance with, the obligations, covenants and conditions
of this Mortgage and the other Loan Documents all as herein set forth.
1. Definitions. All capitalized terms used but not otherwise
-----------
defined herein shall have the meanings assigned to them in the Credit Agreement.
The words "herein," "hereof" and "hereunder" and other words of like import
refer to this Mortgage as a whole and not to any particular Section, subsection
or other subdivision. In addition, wherever used in this Mortgage, the
following terms, and the singular and plural thereof, shall have the following
meanings:
9
<PAGE>
Affiliate: With respect to any specified Person means any other
---------
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities or other
beneficial interest, by contract or otherwise; and the terms "controlling" and
"controlled" have the meanings correlative to the foregoing.
Agreements: Any reciprocal easement agreements, operating agreements
----------
and similar agreements affecting the ownership, use and operation of the
Properties (or any of them) included in the Permitted Exceptions, as such
agreements have been or may hereafter be amended, modified or supplemented.
Alteration: As defined in Section 11(c) hereof.
----------
Assignment of Leases and Rents: Shall mean the Assignment of Leases,
------------------------------
Rents and Security Deposits, dated the date hereof, by the Grantor in favor of
the Beneficiary.
Banks: All Banks now or hereafter parties to the Credit Agreement.
-----
Beneficiary: As defined in the recitals hereof.
-----------
Casualty Amount: As defined in Section 6(b) hereof.
---------------
Cash Collateral Agreement: The Cash Collateral Account Security
-------------------------
Pledge and Assignment Agreement, dated as of the date hereof, among the Grantor,
the Beneficiary and the bank holding the "Accounts" therein defined and
described.
Credit Agreement: As defined in the recitals hereof.
----------------
Default: The occurrence or existence of any event or condition which
-------
with or without the giving of
10
<PAGE>
notice or the passage of time, or both, would constitute an Event of Default
hereunder.
Default Rate: The rate of interest at the annual rate equal to the
------------
sum of (i) the Prime Rate (as defined in the Credit Agreement) and (ii) four
percent (4%).
Deferred Maintenance Amounts: As defined in Section 40 hereof.
----------------------------
Environmental Certificate: As defined in Section 19(b) hereof.
-------------------------
Environmental Event: As defined in Section 19(b) hereof.
-------------------
Environmental Reports: As defined in Section 19(a) hereof.
---------------------
Equipment: As defined in Granting Clause VII hereof.
---------
Escrow Account: As defined in Section 8(a) hereof.
--------------
Events of Default: The occurrence of any of the following shall
-----------------
constitute an Event of Default under this Mortgage:
a. If the Grantor fails to pay any principal of the Note when
due and payable in accordance with the provisions thereof or the Grantor
shall fail to pay when due and payable in accordance with the provisions
thereof any interest under the Note; provided, however, that the Grantor
-------- -------
shall be entitled to a three (3) Domestic Business Day grace period with
respect thereto, but only as to two (2) payments of interest during the
Term, or the Grantor shall fail to pay within three (3) Domestic Business
Days after the same is due any fees or other amounts payable under the Note
or this Mortgage; or
b. If the Grantor fails to pay any amount payable pursuant to
this Mortgage within fifteen (15) days after notice by Beneficiary that
11
<PAGE>
such amount is due and payable in accordance with the provisions hereof; or
c. Cancellation of the insurance required by Section 5 of this
Mortgage; or
d. Any violation of the terms of Section 7(a), Section 7(b)
(subject to the terms of Section 7(c)), which violation continues for a
period of five (5) days after notice thereof;
e. Any violation of the terms of Sections 10 or 42 of this
Mortgage; or
f. An Event of Default (as defined therein) under the Credit
Agreement; or
g. Any other default in the performance, or breach, of any
material covenant, representation or warranty of the Grantor, in this
Mortgage or in any other Loan Document (other than a covenant,
representation, agreement or warranty, a default in whose performance or
whose breach is specifically dealt with elsewhere in this Section) and
continuance of such default or breach for a period of 30 days after notice
thereof; provided, that in the case of any such failure that is susceptible
--------
of cure but that cannot with reasonable diligence be cured within such 30
day period, if the Grantor shall promptly have commenced to cure the same
and shall thereafter prosecute the curing thereof with reasonable
diligence, the period within which such failure may be cured shall be
extended for such further period as shall be reasonably necessary for the
curing thereof (and in the event such cure has not been completed within 30
days after the end of the initial 30 day period, the Grantor shall inform
the Beneficiary at least once each month thereafter as to the status of
such cure); or
h. Any "Event of Default" as defined in any Loan Document
including any other Mortgage securing the Note.
Notwithstanding anything to the contrary contained in this Mortgage
or the Loan Documents, no grace
12
<PAGE>
period or right to notice granted to the Grantor herein with respect to any
Event of Default is intended to duplicate any other grace period or right to
notice granted to the Grantor herein, in the Credit Agreement or in the other
Loan Documents with respect to such Event of Default and in the event of any
inconsistency, the grace period or right to notice granted in the Credit
Agreement shall apply.
Exculpated Parties: As defined in Section 39 hereof.
------------------
Governmental Authority: Any Federal, state or local government or any
----------------------
other political subdivision thereof exercising executive, legislative, judicial,
regulatory or administrative functions.
Grant: Shall mean grant, grant a security interest in, bargain, sell,
-----
lien, mortgage, convey, pledge, hypothecate, assign, transfer, warrant and set
over.
Ground Leasehold Estate: As defined in the recitals hereof.
-----------------------
Ground Lease: As described and defined in Exhibit A-3 attached
------------ -----------
hereto.
Ground Rent: Shall mean all rent, additional rent and all other
-----------
amounts which the Grantor is obligated to pay as tenant under the Ground Lease.
Guaranty: The Guaranty, dated as of the date hereof, given by Kilroy
--------
Realty Corporation, John Kilroy, Sr. and John Kilroy, Jr., in favor of
Beneficiary, as Lead Agent.
Impositions: All taxes (including, without limitation, all ad
-----------
valorem, sales (including those imposed on lease rentals), use, single
business, gross receipts, value added, intangible transactions, privilege or
license or similar taxes), assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not commenced or completed
within the term of this Mortgage), water, sewer or other rents and charges,
excises, levies, fees (in-
13
<PAGE>
cluding, without limitation, license, permit, inspection, authorization and
similar fees), and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Trust Estate and/or any Rents (including all
interest and penalties thereon), which at any time prior to, during or in
respect of the term hereof may be assessed or imposed on or in respect of or be
a Lien upon (a) the Grantor (including, without limitation, all income,
franchise, single business or other taxes imposed on the Grantor for the
privilege of doing business in the jurisdiction in which the Trust Estate is
located) or the Beneficiary arising as a result of or with respect to its
capacity as the Beneficiary hereunder, (b) the Trust Estate or any other
collateral delivered or pledged by Grantor to the Beneficiary in connection with
the Loan, or any part thereof, or any Rents therefrom or any estate, right,
title or interest therein, or (c) any occupancy, operation, use or possession
of, or sales from, or activity conducted on, or in connection with the Trust
Estate or the leasing or use of all or any part thereof. Nothing contained in
this Mortgage shall be construed to require the Grantor to pay any tax,
assessment, levy or charge imposed on the Beneficiary or any Bank in the nature
of a franchise, capital levy, estate, inheritance, succession, income or net
revenue tax.
Improvements: As defined in Granting Clause III hereof.
------------
Indebtedness: As defined in the recitals hereof.
------------
Indemnified Environmental Parties: As defined in Section 19(c)
---------------------------------
hereof.
Indemnified Parties: As defined in Section 35 hereof.
-------------------
Independent Architect: An independent architect selected by the
---------------------
Grantor, and acceptable to the Beneficiary, such acceptance not to be
unreasonably withheld or delayed, licensed to practice in the State in which the
applicable Property is located, having at least ten (10) years of experience,
and not affiliated with the Grantor.
14
<PAGE>
Individual Trustee: Shall mean such person as is required by
------------------
applicable state law to perform the functions of Individual Trustee pursuant to
Section 9 hereof.
Insurance Requirements: Shall mean all terms of any insurance policy
----------------------
required hereunder or under the Credit Agreement covering or applicable to any
Property or Equipment or any part thereof, all requirements of the issuer of any
such policy, and all orders, rules, regulations and other requirements of the
National Board of Fire Underwriters (or any other body exercising similar
functions) applicable to or affecting any Property or Equipment or any part
thereof or any use of any Property or Equipment or any part thereof.
Jurisdictional Trustee: As defined in Section 9 hereof.
----------------------
Land Parcels: As defined in the recitals hereof.
------------
Leases: As defined in Granting Clause VI hereof.
------
Legal Requirements: As defined in Section 12.
------------------
Lien: Any mortgage, deed of trust, lien, pledge, hypothecation,
----
assignment, security interest, or any other encumbrance of, on or affecting the
Trust Estate or any portion thereof or any interest therein, including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, the filing of any financing statement, and mechanic's, materialmen's
and other similar liens and encumbrances.
Loan: As defined in the recitals hereof.
----
Loan Amount: As defined in the recitals hereof.
-----------
Loan Documents: This Mortgage, the Note, the Credit Agreement, the
--------------
Assignment of Leases and Rents, the Environmental Indemnity and any and all
other agreements, instruments or documents evidencing, securing or delivered by
the Grantor in connection with the Loan and the
15
<PAGE>
transactions contemplated by the Credit Agreement and this Mortgage.
Mortgage: As defined in the recitals hereof.
--------
Mortgage Escrow Amounts: As defined in Section 8(a).
-----------------------
Mortgage Escrow Security: As defined in Setion 8(b).
------------------------
Grantor: As defined in the recitals hereof.
-------
Note: As defined in the recitals hereof.
----
Obligations: As defined in the recitals hereof.
-----------
Officers' Certificate: A certificate delivered to the Beneficiary and
---------------------
signed by the President or a Vice President of the Grantor.
Permitted Exceptions: (a) Liens for taxes, assessments or other
--------------------
governmental charges not yet due and payable or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted in accordance with Section 7(c);
(b) Statutory Liens of carriers, warehousemen, mechanics,
materialmen and other similar liens imposed by law, which are incurred in the
ordinary course of business for sums not more than forty-five (45) days
delinquent or which are being contested in good faith in accordance with Section
7(c);
(c) Deposits made in the ordinary course of business to secure
liability to insurance carriers;
(d) Easements, rights-of-way, restrictions and other similar
charges or encumbrances against real property not interfering in any material
respect with the use of any Property or the ordinary conduct of the business of
Grantor and not diminishing in any material respect the value of any Property
to which it is attached;
16
<PAGE>
(e) Liens and judgments which have been or will be bonded or
released of record within thirty (30) days after the Grantor has received notice
of the filing of such Lien or judgment;
(f) Those matters set forth on EXHIBIT B hereof; and
---------
(g) Liens in favor of the Beneficiary or any Bank under the
other Loan Documents.
Person: Shall mean any individual, corporation, limited liability
------
company, partnership, joint venture, estate, trust, unincorporated association,
any Federal, state, county or municipal government or any political subdivision
thereof.
Proceeds: As defined in Section 6(b) hereof.
--------
Property: As defined in Granting Clause III hereof.
--------
Properties: As defined in Granting Clause III hereof.
----------
Rents: As defined in Granting Clause VI hereof.
-----
State: The State in which the applicable Property is located.
-----
Taking: Shall mean a temporary or permanent taking by any
------
Governmental Authority as the result or in lieu or in anticipation of the
exercise of the right of condemnation or eminent domain, of all or any part of a
Property, or any interest therein or right accruing thereto, including any right
of access thereto or any change of grade affecting the Land Parcels or any part
thereof.
Tenant: Shall mean any Person leasing any portion of a Property and
------
obligated to pay rent pursuant to a Lease.
Transfer: As defined in Section 10(a) hereof.
--------
17
<PAGE>
Trustees: Shall mean the Individual Trustee together with the
--------
Jurisdictional Trustee, all separate trustees and co-trustees appointed as
provided in Section 9.
Trust Estate: As defined in the granting clause to this Mortgage.
------------
Uniform Commercial Code or UCC: Shall mean the Uniform Commercial
------------------------------
Code as adopted in the State.
Work: As defined in Section 6(b) hereof.
----
REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
The Grantor represents and warrants to and covenants and agrees with
the Beneficiary as follows:
2. Warranty.
--------
(a) This Mortgage upon its due execution and proper
recordation is and will remain a valid, enforceable and perfected first
Lien on and a security interest in the Trust Estate subject to the
Permitted Exceptions.
(b) This Mortgage and each of the Loan Documents executed
by the Grantor, is the legal, valid and binding obligation of the Grantor,
enforceable against the Grantor in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws affecting creditor's rights generally in effect
from time to time.
(c) The Grantor owns good, marketable and insurable fee
simple title to the Land Parcels, subject only to the Permitted Exceptions.
The Grantor will preserve such title to its Land Parcels and will forever
warrant and defend same and the validity and priority of the Lien hereof
from and against any and all claims whatsoever;
(d) On the date hereof, to Grantor's knowledge, no portion
of the Improvements at any Property has been materially damaged, destroyed
or
18
<PAGE>
injured by fire or other casualty which is not now fully restored or in the
process of being restored;
(e) The Grantor has and will maintain, in effect at
all times until the Indebtedness and Obligations are satisfied in full, all
necessary material licenses, permits, authorizations, registrations
and approvals to operate its business and own each Property as a commercial
or industrial property, and Grantor has full power and authority to carry
on its business at each Property as currently conducted and has not
received any written notice of any violation of any such licenses, permits,
authorizations, registrations or approvals that materially impair the value
of any Property for which such notice was given or which would adversely
affect the use or operation of any Property in any material respect;
(f) As of the date hereof, the Grantor has not received any
written notice of any Taking or threatened Taking of any Property or any
portion thereof;
(g) The Property and the Equipment located thereon
constitute all of the real property, equipment and fixtures currently owned
by the Grantor and used in the operation of the Property;
(h) Each Property has adequate access to public streets,
roads or highways;
(i) Each Property constitutes one or more separate tax
lots, with a separate tax assessment, independent of any other land or
improvements;
(j) All utility services necessary for the operation of
each Property have been connected and, to the Grantor's knowledge, are
available in adequate capacities for current operations at each Property
directly from utility lines and without the need for private easements not
presently existing; and
(k) To the actual knowledge of the Grantor, the Grantor is
not in material default under the terms, conditions or provisions of any of
19
<PAGE>
the Leases or Agreements described in Section 14 hereof.
3. Payment and Performance of Obligations Secured. The Grantor
----------------------------------------------
shall perform fully and in a timely manner all Obligations of the Grantor
hereunder or under any other Loan Document to which Grantor is a party. All sums
payable by the Grantor hereunder shall be paid without demand, counterclaim,
offset, deduction or defense all without relief from valuation and
appraisement laws. The Grantor waives all rights now or hereafter conferred by
statute or otherwise to any such demand, counterclaim, setoff, deduction or
defense.
4. Negative Covenants. The Grantor covenants and agrees that it
------------------
shall not:
(a) partition any Property;
(b) transfer all or any portion of the Trust Estate or any
interest of the Grantor, except in accordance with the Credit Agreement;
(c) file a petition for voluntary bankruptcy under the
Bankruptcy Code or similar state law;
(d) dissolve, terminate, liquidate, merge with or
consolidate into another Person, except as expressly permitted pursuant to
this Mortgage or the Credit Agreement; or
(e) engage in any activity that would subject it to
regulation as a benefit plan under ERISA.
5. Insurance.
---------
(a) Insurance Coverage Requirements. The Grantor shall keep in
-------------------------------
full force and effect insurance, of the types and minimum limits as follows
during the term of this Mortgage:
(i) Property Insurance. Insurance with respect to each
------------------
Property and the Equipment against any peril included within the
classification
20
<PAGE>
"All Risks of Physical Loss" with extended coverage in an amount equal to
the full insurable value (subject to deductibles as permitted below) of
such Property and the Equipment located thereon, the term "full insurable
value" to mean the actual replacement cost of the Improvements and the
Equipment at such Property (without taking into account any depreciation,
and exclusive of excavations, footings and foundations, landscaping and
paving);
(ii) Liability Insurance. Commercial general liability
-------------------
insurance, including bodily injury, death and property damage liability,
and umbrella liability insurance against any and all claims, including all
legalliability to the extent insurable imposed upon the Beneficiary and
all court costs and attorneys' fees and expenses, arising out of or
connected with the possession, use, leasing, operation, maintenance or
condition of each Property in such amounts as are generally required by
institutional lenders for properties comparable to the applicable Property
but in no event for limits of less than [$1,000,000] per occurrence with
combined single limit coverage for bodily injury or property damage and
excess (umbrella) liability coverage of no less than [$5,000,000] per
occurrence;
(iii) Workers' Compensation Insurance. Statutory workers'
-------------------------------
compensation insurance (to the extent the risks to be covered thereby are
not already covered by other policies of insurance maintained by the
Grantor), with respect to any work on or about each of the Properties;
(iv) Business Interruption. Business interruption and/or
---------------------
loss of "rental value" insurance for each of the Properties in an amount
equal to one (1) year's "rental value" attributable to each such Property
and based on the "rental value" for the immediately preceding year and
otherwise sufficient to avoid any co-insurance penalty, the term "rental
value" to mean the sum of (A) the total Rents payable under the Leases at
the applicable Property and (B) the total amount of all other amounts to
be received by the Grantor or third parties which are the legal obligation
of the Tenants, reduced to the extent such amounts would not
21
<PAGE>
be received because of operating expenses not incurred during a period
of non-occupancy of that portion of such applicable Property then not being
occupied;
(v) Flood Insurance. If all or any portion of any
---------------
Property is located within a Federally designated flood hazard zone, flood
insurance in such amount as generally required by institutional lenders for
properties comparable to the applicable Property (provided, however, that
if the Grantor believes that it is no longer obligated to maintain flood
insurance with respect to any Property pursuant to this provision, the
Grantor shall notify the Beneficiary of such circumstances and the
Beneficiary shall have the opportunity to contest by appropriate legal or
mutually agreeable arbitration proceedings whether or not the Grantor's
obligation remains in effect in light of the criteria set forth in this
provision); and
(vi) Other Insurance. Such other insurance with respect
---------------
to any Property and the Equipment located therein against loss or damage as
are reasonably requested by the Beneficiary, provided such insurance is of
the kind from time to time customarily insured against and in such amounts
as are generally required by institutional lenders for properties
comparable to the applicable Property.
(b) Ratings of Insurers. All insurance coverage shall be
-------------------
provided by one or more domestic primary insurers having an Alfred M. Best
Company, Inc. rating of "A" or better and financial size category of not less
than IX, except to the extent that insurance in force on the date of this
Mortgage does not satisfy such criteria or if otherwise approved by the
Beneficiary. All insurers providing insurance required by this Mortgage shall
be authorized to issue insurance in the state where the applicable Property is
located.
The insurance coverage required under Section 5(a) may be effected
under a blanket policy or policies covering the Trust Estate and other property
and assets not constituting a part of the Trust Estate; provided that any such
--------
blanket policy shall specify, except in the case of public liability insurance,
the portion of the
22
<PAGE>
total coverage of such policy that is allocated to the applicable Property and
the Equipment located thereon, and any sublimits in such blanket policy
applicable to the Trust Estate, which amounts shall not be less than the amounts
required pursuant to Section 5(a) and which shall in any case comply in all
other respects with the requirements of this Section 5.
(c) Form of Insurance Policies; Endorsements. All insurance
-----------------------------------------
policies shall be in such form and with such endorsements as are comparable to
the forms of and endorsements to the Grantor's insurance policies in effect on
the date hereof or otherwise in accordance with commercially reasonable
standards applied by prudent owners of commercial or industrial properties of
the same quality as each of the Properties. Certified copies of all of the
above-mentioned insurance policies and/or certificates of insurance have been
delivered to and shall be held by the Beneficiary. All insurance certificates
from time to time delivered (or required to be delivered) hereunder in order to
evidence the property insurance required by Section (a)(i) of this Article 5
shall be "Accord 27" certificates. The policy or policies required by Section
(a)(i) of this Article 5 shall name the Beneficiary as loss payee/mortgagee, and
all other policies required hereunder shall name the Beneficiary as additional
insured. All policies required to be maintained hereunder shall provide that all
Proceeds be payable to the Beneficiary as set forth in Section 6 hereof, and
shall contain: (i) a standard "non-contributory mortgagee" endorsement or its
equivalent relating, inter alia, to recovery by the Beneficiary notwithstanding
----- ----
the negligent or willful acts or omissions of the Grantor; (ii) to the extent
available, a waiver of subrogation endorsement as to the Beneficiary providing
that no policy shall be impaired or invalidated by virtue of any act, failure to
act, negligence of, or violation of declarations, warranties or conditions
contained in such policy by the Grantor, the Beneficiary or any other named
insured, additional insured or loss payee, except for the willful misconduct of
the Beneficiary knowingly in violation of the conditions of such policy;
provided, however, that if such waiver of subrogation endorsement is not
- -------- -------
available, Grantor shall obtain a substantially similar waiver with respect to
each individual claim filed by Grantor under any such insurance policy; (iii) an
endorsement indicating that neither the Beneficiary nor the
23
<PAGE>
Grantor shall be or be deemed to be a co-insurer with respect to any risk
insured by such policies and shall provide for a deductible per loss of an
amount not more than that which is customarily maintained by prudent owners of
commercial or industrial properties of the same quality as the applicable
Property, but in no event in excess of $100,000; (iv) a provision that such
policies shall not be cancelled or amended, including, without limitation, any
amendment reducing the scope or limits of coverage, without at least thirty (30)
days prior written notice to the Beneficiary in each instance; and (v) include
effective waivers by the insurer of all claims for insurance premiums against
any loss payees, additional insureds, mortgagees and named insureds (other than
the Grantor). Certificates of insurance (in the form of "Accord 27" certificates
with respect to property insurance) with respect to all renewal and replacement
policies shall be delivered to the Beneficiary not less than thirty (30) days
prior to the expiration date of any of the insurance policies required to be
maintained hereunder, which certificates shall bear notations evidencing payment
of applicable premiums and originals (or certified copies) of such insurance
policies shall be delivered to the Beneficiary promptly after the Grantor's
receipt thereof. If the Grantor fails to maintain and deliver to the Beneficiary
the original policies (or certified copies) or certificates of insurance
required by this Mortgage, the Beneficiary may, at its option, after ten (10)
days' prior written notice to the Grantor, procure such insurance, and the
Grantor shall reimburse the Beneficiary for the amount of all premiums paid by
the Beneficiary thereon promptly, upon demand by the Beneficiary, with interest
thereon at the Default Rate from the date paid by the Beneficiary to the date of
repayment, and such sum shall be a part of the Indebtedness secured by this
Mortgage.
The Beneficiary shall not by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
payment or defense of lawsuits, and the Grantor hereby expressly assumes full
responsibility therefor and all liability, if any, with respect thereto.
24
<PAGE>
(d) Compliance with Insurance Require Requirements. The
----------------------------------------------
Grantor shall comply with all Insurance Requirements and shall not bring or keep
any article upon any of the Properties or cause or permit any condition to exist
thereon which would be prohibited by or would invalidate insurance coverage
maintained, or required hereunder or under the Credit Agreement to be
maintained, by the Grantor on or with respect to any part of the Trust Estate
pursuant to this Section 5.
(e) Separate Insurance. The Grantor will not take out separate
------------------
insurance contributing in the event of loss with that required to be maintained
pursuant to this Section 5, unless such insurance complies with this Section 5.
6. Condemnation and Insurance Proceeds.
-----------------------------------
(a) The Grantor will promptly notify the Beneficiary in writing
upon obtaining knowledge of (i) the institution of any proceedings relating to
any Taking of, or (ii) the occurrence of any casualty, damage or injury to, the
Properties (or any of them) or Equipment located thereon or any portion thereof,
the restoration of which is estimated by the Grantor in good faith to cost more
than [$250,000].
(b) In the event of any Taking of, or casualty or other damage
or injury to, any Property, or Equipment located thereon, the Grantor's right,
title and interest in and to all compensation, awards, proceeds, damages,
claims, insurance recoveries, causes and rights of action (whether accrued prior
to or after the date hereof) and payments which the Grantor may receive or to
which the Grantor may become entitled with respect to such Property or any part
thereof (collectively, "Proceeds"), in connection with any such Taking,
---------
casualty or other damage or injury to any Property, or any part thereof, or
Equipment located thereon are hereby assigned to and shall be paid to the
Beneficiary on behalf of the Banks. Notwithstanding anything to the contrary set
forth in this Mortgage, to the extent such Proceeds are not in excess of
[$500,000] (the "Casualty Amount"), then the Beneficiary hereby consents to and
---------------
agrees that such Proceeds are to be paid directly to the Grantor to be applied
to restoration of such Property in accordance with the terms hereof and/or the
applicable terms of the
25
<PAGE>
Lease. Subject to the provisions of Sections 6(c) and 6(d) hereof, promptly
after the occurrence of any damage or destruction to all or any portion of such
Property or a Taking of a portion of such Property, the Grantor shall commence
and diligently prosecute to completion the repair, restoration and rebuilding of
such Property (in the case of a Taking, to the extent it is capable of being
restored) (such repair, restoration and rebuilding are sometimes hereinafter
collectively referred to as the "Work") so damaged, destroyed or remaining after
----
such damage or destruction or such Taking in full compliance with all Legal
Requirements and free and clear of any and all Liens (subject to Section 7(c)
hereof), except the Permitted Exceptions; it being understood, however, that the
Grantor shall not be obligated to restore such Property to the precise condition
of such Property prior to any Taking, casualty or other damage or injury to such
Property (and in fact, so long as the Grantor applies the Proceeds received upon
such Taking or casualty to such Property to restore the damage or injury to such
Property and/or to provide another type of improvement that is reasonably
expected to benefit such Property, no restoration or rebuilding of the damaged
or taken structures must be undertaken), if the Work actually performed, if any,
or failed to be performed, shall have no material adverse effect on the value of
such Property from the value that such Property would have had if the same had
been restored to its condition immediately prior to such Taking or casualty. The
Grantor will, in good faith and in a commercially reasonable manner, file and
prosecute the adjustment, compromise or settlement of any claim for insurance or
Taking Proceeds and, subject to the Grantor's right to receive the direct
payment of any Proceeds up to the Casualty Amount subject to the provisions
below, will cause the same to be collected and the net Proceeds paid over to the
Beneficiary, to be held and applied in accordance with the provisions of this
Mortgage. The Grantor hereby irrevocably authorizes and empowers the
Beneficiary, in the name of the Grantor as its true and lawful attorney-in-fact,
to file and prosecute such claim and to collect and to make receipt for any such
payment, and, in the event the Grantor fails so to act for a period of ten (10)
days following the Grantor's receipt of written notice from the Beneficiary or
if an Event of Default shall have occurred and be continuing, then in such case
the Beneficiary may file such claim and prosecute it with counsel satisfactory
to
26
<PAGE>
it at the expense of the Grantor. The Beneficiary shall have the right to
approve, such approval not to be unreasonably withheld or delayed, any
settlement which might result in any Proceeds in excess of the Casualty Amount,
and the Grantor will deliver to the Beneficiary all instruments reasonably
requested by the Beneficiary to permit such approval. The Grantor will pay all
costs, fees and expenses reasonably and actually incurred by the Beneficiary
(including all reasonable attorneys' fees and expenses actually incurred, the
reasonable fees of insurance experts and adjusters and reasonable costs incurred
in any litigation or arbitration) in connection with the settlement of any claim
for insurance or Taking Proceeds and seeking and obtaining of any payment on
account thereof in accordance with the foregoing provisions. If any insurance or
Taking Proceeds are received by the Grantor, such Proceeds shall be received in
trust for the Beneficiary (on behalf of the Banks), shall be used to pay for the
cost of the Work in accordance with the terms hereof, and in the event such
Proceeds are in excess of the Casualty Amount, shall be forthwith paid to the
Beneficiary to be held by the Beneficiary in a segregated account in trust for
the Grantor, in each case to be applied or disbursed in accordance with the
provisions hereof.
(c) Upon the occurrence and during the continuance of an Event
of Default hereunder, all net Proceeds shall be paid over to the Beneficiary (on
behalf of the Banks) and shall be applied first toward reimbursement of the
Beneficiary's reasonable costs and expenses actually incurred in connection with
recovery of the Proceeds and disbursement of the Proceeds (as further described
below), including, without limitation, reasonable administrative costs and
inspection fees, and then to the payment or prepayment of the Indebtedness
secured hereby in such order as the Beneficiary shall determine.
(d) If Proceeds are not paid directly to Grantor pursuant to
this Section 6 or are not required to be applied towards payment of the
Indebtedness pursuant to Section 6(c) above, then the Beneficiary shall make the
Proceeds which it is holding pursuant to the terms hereof available to the
Grantor (after payment of any reasonable expenses actually incurred by the
Beneficiary in connection with the collection thereof), for payment of or
reimbursement of the Grantor's expenses incurred
27
<PAGE>
with respect to the Work, upon the following terms and subject to the following
conditions:
(i) there shall be no continuing Event of Default
hereunder;
(ii) if the estimated cost of the Work (as estimated by the
architect referred to in clause (iii) below) shall exceed the Proceeds
available, the Grantor shall at its option either deposit with or deliver
to the Beneficiary an amount equal to such excess in the form of (A) Cash
and Cash Equivalents or (B) an unconditional, irrevocable, clean sight
draft letter of credit in commercially reasonable form and issued by an
Approved Bank; and
(iii) the Beneficiary shall be furnished with an estimate of
the cost of the Work accompanied by an Independent Architect's
certification as to such costs and appropriate plans and specifications for
the Work. The plans and specification or construction documents
shall require that the Work be done in a first-class workmanlike manner at
least equivalent to the quality and character of the original Improvements
(provided, however, that in the case of a Taking the restoration of the
-------- -------
applicable Property shall be done to the extent reasonably practicable
after taking into account the consequences of such Taking), so that upon
completion thereof, the applicable Property shall be at least equal in
value and general utility to such Property immediately prior to the damage
or destruction. The Grantor shall restore all Improvements such that when
they are fully restored and/or repaired such Improvements and their
contemplated use fully comply with all applicable Legal Requirements,
including, without limitation, zoning, environmental and building laws,
codes, ordinances and regulations.
(e) Disbursement of the Proceeds to the Grantor shall be made
from time to time (but not more frequently than once in any month) by the
Beneficiary as the Work progresses upon receipt by the Beneficiary of (i) an
Officers' Certificate dated not more than thirty (30) days prior to the
application for such payment, requesting such payment or reimbursement and
setting
28
<PAGE>
forth the Work performed which is the subject of such request, the parties which
performed such Work and the actual cost thereof, and also certifying that such
Work and materials are free and clear of Liens (subject to Section 7(c) hereof)
other than Permitted Exceptions and (ii) an Independent Architect's certificate
certifying performance of the Work together with an estimate of the cost to
complete the Work. No payment made prior to the final completion of the Work
shall exceed ninety percent (90%) of the value of the Work performed or
materials furnished and incorporated into the Improvements from time to time,
and at all times the undisbursed balance of said Proceeds, together with all
amounts deposited, bond ed, guaranteed or otherwise funded pursuant to clause
(ii) above, shall be at least sufficient to pay for the cost of completion of
the Work, free and clear of Liens (subject to Section 7(c) hereof) other than
Permitted Exceptions; final payment shall be made upon receipt by the
Beneficiary of a certification by an Independent Architect as to the completion
substantially in accordance with the submitted plans and specifications, and the
filing of a notice of completion and the receipt by the Beneficiary of final
lien waivers (subject to Section 7(c) hereof) from each contractor or
materialman. The Beneficiary may at its option require an endorsement to its
title insurance policy insuring the continued priority of the Lien of this
Mortgage (subject to Permitted Exceptions) as to all sums advanced hereunder,
such endorsement to be paid for by the Grantor.
(f) In the event that any condition to application of Proceeds
to the Work contained in Section 6(d) above is not satisfied within a reasonable
period of time, then, upon thirty (30) days prior written notice all Proceeds
with respect to the Taking of or damage or injury to the Trust Estate in
question shall be applied by the Beneficiary to the payment or prepayment of all
or any portion of the Indebtedness secured hereby.
(g) In the event that, after the completion of the Work and
payment of all costs of completion, there are excess Proceeds, then, upon thirty
(30) days prior written notice to Grantor such excess Proceeds with respect to
the Taking of or damage or injury to the Trust Estate shall be applied by the
Beneficiary to the payment or prepayment of all or any portion of the
Indebtedness secured hereby.
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(h) In the event of a Taking of 25% of any Property, the Grantor
shall prepay the Note, without penalty or premium, in an amount equal to the net
Proceeds received by the Grantor for such Property.
(i) In the event of a casualty which damages 25% of any
Property, the Grantor shall prepay the Note, without penalty or premium, in an
amount equal to the net Proceeds received by the Grantor for such Property, and
such Property shall be released from the lien and security interests of the Loan
Documents.
7. Impositions, Liens and Other Items.
----------------------------------
(a) The Grantor shall deliver to the Beneficiary [annually,
no later than fifteen (15) Business Days after the first day of each fiscal year
of the Grantor], and shall update as new information is received, a schedule
describing all Impositions payable or estimated to be payable during such fiscal
year attributable to or affecting the Trust Estate or the Grantor. Subject to
its right of contest set forth in Section 7(c), the Grantor shall pay all
Impositions which are attributable to or affect each of the Properties or the
Grantor with respect to each of the Properties, prior to the date such
Impositions shall become delinquent or late charges may be imposed thereon,
directly to the applicable taxing authority with respect thereto, unless and to
the extent the Beneficiary shall pay such Impositions from any Mortgage Escrow
Amounts pursuant to Section 8 hereof. The Grantor shall deliver to Beneficiary,
not later than forty five (45) days after each payment of Impositions, paid
receipts evidencing the payment of such Impositions.
(b) Subject to its right of contest set forth in Section
7(c), the Grantor shall at all times keep the Properties and the Equipment
located thereon free from all Liens (other than the Lien hereof and Permitted
Exceptions) and shall pay when due and payable all claims and demands of
mechanics, materialmen, laborers and others which, if unpaid, might result in or
permit the creation of a Lien on any Property or any portion thereof and the
Equipment located thereon, whether ranked senior, pari passu or junior to the
priority of the Lien created hereby, and shall in any event cause the prompt,
full and unconditional discharge of all Liens
30
<PAGE>
imposed on or against any Property, or any portion thereof, and the Equipment
located thereon within forty-five (45) Domestic Business Days after receiving
written notice of the filing (whether from the Beneficiary, the lienor or any
other Person) thereof. The Grantor shall do or cause to be done, at the sole
cost of the Grantor, everything necessary to fully preserve the first priority
of the Lien of this Mortgage against the Properties and the Equipment located
thereon, subject to the Permitted Exceptions. Upon the occurrence of an Event
of Default with respect to Grantor's Obligations as set forth in this Section 7,
the Beneficiary may (but shall not be obligated to) make such payment or
discharge such Lien, and the Grantor shall reimburse the Beneficiary on demand
for all such advances pursuant to Section 15 hereof, together with interest
thereon at the Default Rate.
(c) Nothing contained herein shall be deemed to require the
Grantor to pay any Imposition, to satisfy any Lien or to comply with any Legal
Requirement or Insurance Requirement so long as the Grantor is in good faith,
and by proper legal proceedings, diligently contesting the validity, amount or
application thereof, provided that in each case, at the time of the commencement
of any such action or proceeding, and during the pendency of such action or
proceeding, (i) no Event of Default shall exist and be continuing hereunder,
(ii) adequate reserves with respect thereto are maintained on the Grantor's
books in accordance with GAAP, (iii) such contest operates to suspend collection
or enforcement, as the case may be, of the contested Imposition or Lien and such
contest is maintained and prosecuted continuously and with diligence, (iv) in
the case of any Insurance Requirement, the failure of the Grantor to comply
therewith shall not impair the validity of any insurance required to be
maintained by the Grantor under Section 5 or the right to full payment of any
claims thereunder, and (v) in the case of Impositions and Liens, during such
contest, security in the form required by Section 6(d)(ii), assuring the
discharge of the Grantor's obligations being contested and of any additional
interest, charge, or penalty arising from such contest. Notwithstanding the
foregoing, any such reserves or the furnishing of any bond or other security,
the Grantor promptly shall comply with any contested Legal Requirement or
Insurance Requirement or shall pay any contested Impositiontion or Lien, and
compliance therewith or payment thereof
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shall not be deferred, if, at any time a Property or any portion thereof, or any
Equipment located thereon shall be, in the Beneficiary's reasonable judgment, in
danger of being forfeited or lost or the Beneficiary may be subject to civil or
criminal damages as a result thereof. If such action or proceeding is
terminated or discontinued adversely to the Grantor without any right of appeal
exercised by the Grantor within the time period legally permitted therefore, the
Grantor, upon written demand, shall deliver to the Beneficiary reasonable
evidence of the Grantor's compliance with such contested Imposition, Lien, Legal
Requirements or Insurance Requirements, as the case may be.
8. Funds for Taxes and Insurance.
-----------------------------
(a) The Grantor shall pay additional amounts sufficient to
discharge the obligations of the Grantor under Sections 5 and 7 hereof with
respect to insurance premiums and Impositions and all Ground Rent, as and when
such amounts become due (such amounts, the "Mortgage Escrow Amounts"). The
-----------------------
Grantor shall pay to the Beneficiary to be held in an account controlled by the
Beneficiary (the "Escrow Account") the monthly amount of Ground Rent together
--------------
with a sum which bears the same relation to the annual insurance premiums for
all insurance required by the terms hereof and Impositions assessed against
the Properties for the insurance period or tax year then in effect, as the case
may be, as (i) the number of months elapsed as of the date of such election
since the last preceding installment of said premiums or Impositions shall have
become due and payable bears to (ii) twelve (12). For the purpose of this
computation, the month in which such last preceding installment of premiums or
Impositions became due and payable and the month in which the Beneficiary makes
such election shall be included and deemed to have elapsed. During each month
thereafter, until the Beneficiary shall elect in its sole and absolute
discretion that the provisions of this Section 8 shall no longer be applicable,
the Grantor shall pay with respect to the Mortgage Escrow Amounts a sum equal to
the monthly Ground Rent plus one-twelfth of such insurance premiums and such
Impositions for the then-current insurance period and tax year, so that as each
installment of Ground Rent and such premiums and Impositions shall become due
and payable, the Beneficiary shall have received a sum sufficient to pay the
same. If
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the amount of such premiums and Impositions has not been definitely ascertained
at the time when any such monthly deposits are to be made, the Grantor shall pay
Mortgage Escrow Amounts based upon the amount of such premiums and Impositions
for the preceding year, subject to adjustment as and when the amount of such
premiums and Impositions are ascertained.
(b) The Grantor may elect to replace any Mortgage Escrow Amounts
then being retained by the Beneficiary and satisfy its obligations under this
Section 8 by delivery of an unconditional, irrevocable, clean sight draft letter
of credit in commercially reasonable form and issued by an Approved Bank (which
letter of credit shall not expire until a date two months after the Maturity
Date, as defined in the Note or the Credit Agreement) or Cash and Cash
Equivalents (any such security, "Mortgage Escrow Security") in an amount
------------------------
sufficient (including the amount of the Mortgage Escrow Amounts so replaced) to
discharge the Impositions and insurance premiums which shall become due during
the six (6) month period immediately after the date of delivery of such Mortgage
Escrow Security (and for each six (6) month period thereafter for so long as the
Grantor elects to post such security in lieu of the Beneficiary's retention of
such amounts in the Escrow Account) and with maturities corresponding to the
respective due dates of such obligations. Notwithstanding the foregoing, it
shall be a condition to the Grantor's delivery of any Mortgage Escrow Security
(other than cash) in satisfaction of its obligations under this Section 8, that
the Grantor, at its expense, execute, acknowledge and deliver to the Beneficiary
such additional security agreements, financing statements and other documents
or instruments including, without limitation, an Opinion of Counsel, and take
all such actions which in the reasonable opinion of the Beneficiary or its
counsel may be necessary to grant and convey to the Beneficiary a perfected
security interest in and to any and all of the Mortgage Escrow Security.
(c) The Mortgage Escrow Amounts (or any Mortgage Escrow Security
posted in lieu thereof pursuant to Section 8(b)) shall be held by the
Beneficiary and shall be applied by Beneficiary to the payment of the
obligations in respect of which such Mortgage Escrow Amounts were required
except upon the occurrence of an Event of Default and the acceleration of the
Note in
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which case all or any portion of such Mortgage Escrow Amounts (or any Mortgage
Escrow Security posted in lieu thereof) may be so transferred or otherwise
applied to the Indebtedness in such order or priority as the Beneficiary may
elect or the Beneficiary may exercise any of its rights or remedies with respect
to same under any of the Loan Documents, at law or in equity. Any Mortgage
Escrow Amounts paid by the Grantor (or Mortgage Escrow Security posted with the
Beneficiary) in excess of the actual obligations for which they were required,
shall be held and applied to the obligations for the ensuing year or otherwise
applied in accordance with the terms of the Loan Documents. Nothing herein
contained shall be deemed to affect any right or remedy of the Beneficiary under
this Mortgage or otherwise at law or in equity to pay any such amount and to add
the amount so paid to the Indebtedness hereby secured. Any such application of
said amounts or any portion thereof to any Indebtedness secured hereby shall
not be construed to cure or waive any Default or notice of Default hereunder or
invalidate any act done pursuant to any such Default or notice. Beneficiary
may direct its agent under the Cash Collateral Agreement to make withdrawals
from the Escrow Account for the purpose of making payments contemplated in this
Section 8(a).
(d) The Grantor shall deliver to the Beneficiary all tax bills,
bond and assessment statements, statements of insurance premiums, and
statements for any other obligations referred to above as soon as the same are
received by the Grantor, and the Beneficiary shall cause the same to be paid
when due to the extent of Mortgage Escrow Amounts in the Escrow Account
available therefor. It is expressly acknowledged and agreed that the Beneficiary
shall have no obligation whatsoever to advance any amounts in payment of all or
any portion of such obligations to the extent that Mortgage Escrow Amounts
received are insufficient to pay any such obligations as and when the same
become due.
9. The Beneficiary and Trustees. If any section of this Mortgage
----------------------------
provides that this document shall constitute a deed of trust, the provisions of
this Section 9 shall be applicable.
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(a) The Trustees accept the trusts hereby created and agree to
perform the duties herein required of them upon the terms and conditions hereof.
The duties and obligations of the Trustees in respect of this Mortgage
shall be as set forth in this Section 9.
(i) Except upon the occurrence and during the continuance
of an Event of Default actually known to the Beneficiary,
(A) the Trustees shall undertake to perform such duties
and obligations and only such duties and obligations as are specifically
set forth in this Mortgage and the Loan Documents or as otherwise directed
by a letter of direction from the Beneficiary, and no implied covenants or
obligations shall be read into this Mortgage or the Loan Documents against
the Trustees; and
(B) in the absence of bad faith, the Trustees may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustees and conforming to the requirements of this Mortgage and the
Loan Documents.
(ii) In case an Event of Default known to the Beneficiary
has occurred and is continuing, the Trustees shall exercise the rights and
powers vested in the Trustees by this Mortgage and the Loan Documents, with
reasonable care, as directed by Beneficiary.
(iii) No provision of this Mortgage shall be construed to
relieve the Trustees from liability for their own gross negligence or
willful misconduct, except that
------
(A) this Subsection shall not be construed to limit the
effect of subsection (b) of this Section 9;
(B) the Trustees shall not be liable for any error of
judgment made in good faith by an
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<PAGE>
officer of the Trustees, unless it shall be proved that such Trustees were
negligent in ascertaining the pertinent facts; and
(C) the Trustees shall not be liable with respect to any
action taken or omitted to be taken in good faith in accordance with the
direction of the Beneficiary relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustees, or
exercising any trust or power conferred upon the Trustees under this
Mortgage or the other Loan Documents.
(iv) Whether or not therein expressly so provided, every
provision of this Mortgage relating to the conduct or affecting the
liability of or affording protection to the Trustees shall be subject to
the provisions of this Section 9(a).
(v) No provision of this Mortgage shall require the
Trustees to expend or risk their own funds or otherwise incur any personal
financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers.
(b) At any time or times for the purpose of meeting the Legal
Requirements of any jurisdiction in which any part of a Trust Estate may at the
time be located, the Beneficiary shall have the power to appoint and, upon the
written request of the Beneficiary, the Grantor shall for such purpose join with
the Beneficiary in the execution, delivery and performance of all instruments
and agreements necessary or proper to appoint one or more Persons reasonably
approved by the Beneficiary to act as trustee pursuant to this Mortgage in such
jurisdiction for such portion of the Trust Estate located in such jurisdiction
(the "Jurisdictional Trustee") with such powers as are provided in the
----------------------
instrument of appointment which shall expressly designate the Properties
affected and the capacity of the appointee as a Jurisdictional Trustee, and to
vest in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other provisions of
this Section 9. If the Grantor does not join in such appointment within fifteen
(15) days after the receipt by it of a request so to do, or in case an
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<PAGE>
Event of Default has occurred and is continuing, the Beneficiary alone shall
make such appointment. Should any written instrument from the Grantor be
required by any Jurisdictional Trustee so appointed for more fully confirming to
such Jurisdictional Trustee such property, title, right or power, any and all
such instruments shall, on request, be executed, acknowledged and delivered by
the Grantor.
(i) Every Jurisdictional Trustee shall, to the extent
permitted by law, but to such extent only, be appointed subject to the
terms set forth in Section 9(b)(iii) hereof.
(ii) As of the date hereof the Trustee named on page 1
hereof is hereby appointed Jurisdictional Trustee for the State in which
the Properties are located.
(iii) To the extent permitted by law, but to such extent
only, the Jurisdictional Trustee is appointed herein subject to the
following terms, namely:
(A) Subject to the terms hereof and to the extent
permitted by law, all rights, powers, duties and obligations under this
Mortgage granted to or imposed upon the Beneficiary and the Jurisdictional
Trustee shall be exercised solely by the Beneficiary.
(B) The rights, powers, duties and obligations hereby
conferred or imposed upon the Beneficiary and the Jurisdictional Trustee in
respect of any Property covered by such appointment shall be exercised or
performed by the Beneficiary separately, or at the election of the
Beneficiary by the Beneficiary and the Jurisdictional Trustee jointly,
except to the extent that (i) under any law of any jurisdiction in which
any particular act is to be performed by the Beneficiary and/or the
Jurisdictional Trustee and the Beneficiary shall be incompetent or
unqualified to perform such act or (ii) the Beneficiary shall deem it
inconvenient or undesirable to perform such act, then in any such event
such rights, powers, duties and obligations shall be exercised and
performed by the Jurisdic-
37
<PAGE>
tional Trustee at the written direction of the Beneficiary.
(C) The Beneficiary at any time, by an instrument in
writing executed by it, may accept the resignation of or remove any
Jurisdictional Trustee. Upon the written request of the Beneficiary the
Grantor shall join with the Beneficiary in the execution, delivery and
performance of all instruments and agreements necessary or proper to
effectuate such resignation or removal. A successor to the Jurisdictional
Trustee so resigned or removed may be appointed in the manner provided in
this Section 9.
(D) Upon the resignation or removal of any Jurisdictional
Trustee, the Beneficiary shall have power to appoint and, upon the written
request of the Beneficiary, the Grantor shall, for such purpose, join with
the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint one or more
Persons reasonably approved by the Beneficiary to act as successor
Jurisdictional Trustee of all or any part of the Trust Estate so
designated, with such power as provided for in this Section 9, and to vest
in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other
provisions of this Section 9. If the Grantor does not join in such
appointment, within fifteen (15) days after the receipt by it of a request
so to do, or in case an Event of Default has occurred and is continuing,
the Beneficiary acting alone shall make such appointment. Should any
written instrument from the Grantor be required by any successor
Jurisdictional Trustee so appointed for more fully confirming to such
trustee such property, title, right or power, any and all such instruments
shall, on request, be executed, acknowledged and delivered by the Grantor.
(E) No Jurisdictional Trustee hereunder shall be
personally liable by reason of any act or omission of the Beneficiary or
any other trustee hereunder and the Beneficiary shall not be personally
liable by reason of any act or omission
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<PAGE>
of the Jurisdictional Trustee; neither shall knowledge of the Beneficiary
be imputed to the Jurisdictional Trustee nor shall knowledge of the
Jurisdictional Trustee be imputed to the Beneficiary.
(F) Any notice delivered to the Beneficiary shall be deemed
to have been sufficiently delivered without any delivery to the
Jurisdictional Trustee.
(G) Any obligation of the Grantor to file or give notices,
reports or information to the Beneficiary hereunder shall be satisfied by
the delivery thereof to the Beneficiary.
(H) Any successor to the Jurisdictional Trustee (herein,
called the Successor Jurisdictional Trustee) shall execute, acknowledge
and deliver to his predecessor (herein called the Predecessor
Jurisdictional Trustee), the Beneficiary and the Grantor, an instrument
accepting such appointment. Thereupon, the Successor Jurisdictional
Trustee shall, without any further act, deed or conveyance, become vested
with the estates, properties, rights, powers, duties and trusts of the
Predecessor Jurisdictional Trustee in the trusts created by this Mortgage,
with the same effect as if originally named as Jurisdictional Trustee. At
the written request of the Grantor, the Beneficiary or the Successor
Jurisdictional Trustee, the Predecessor Jurisdictional Trustee shall
execute and deliver an instrument, in recordable form, transferring to the
Successor Jurisdictional Trustee, upon the trusts herein expressed, the
Trust Estate and shall duly assign transfer, deliver and pay over to the
Successor Jurisdictional Trustee, any property and money subject to the
lien hereof held by him. If any written instrument from the Grantor or the
Beneficiary be required by the Successor Jurisdictional Trustee for more
fully and certainly vesting in and confirming to the Successor
Jurisdictional Trustee such estates, properties, rights, powers and trusts,
then, at the request of the Successor Jurisdictional Trustee, all such
instruments shall be made, executed, acknowledged and delivered by the
Grantor or the Beneficiary to the Successor Jurisdictional Trustee.
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<PAGE>
(c) The Grantor covenants and agrees:
(i) to reimburse the Beneficiary and the Trustees from
time to time for all reasonable, out-of-pocket costs and expenses incurred
by them hereunder;
(ii) to reimburse each of the Beneficiary and the
Trustees upon request for all reasonable out-of-pocket expenses,
disbursements and advances incurred or made by it or him in accordance with
any provision of this Mortgage (including reasonable compensation, expenses
and disbursements of agents and counsel), except any such expense,
disbursement or advance as may be attributable to Beneficiary's or
Trustee's negligence or bad faith; and
(iii) to indemnify the Beneficiary and the Trustees for,
and to hold each harmless against, any loss, liability or expense incurred
without negligence, willful misconduct or bad faith on its or his part,
arising out of or in connection with the acceptance or administration of
the trust or trusts hereunder or the enforcement of remedies hereunder
including the reasonable costs and expenses of defending against any claim
or liability in connection with the exercise or performance of any of the
powers or duties hereunder or thereunder (except any liability incurred by
the Trustees and the Jurisdictional Trustee with negligence, willful
misconduct or bad faith on its or their part).
The obligations of the Grantor under this Section 9(c) to compensate or
indemnify the Trustees and the Beneficiary and to pay or reimburse the Trustees
and the Beneficiary for reasonable, out-of-pocket expenses, disbursements and
advances shall constitute additional Indebtedness hereunder and shall survive
the satisfaction and discharge of this Mortgage. When the Trustees or the
Beneficiary incur expenses or render services after an occurrence of an Event of
Default hereunder, the expenses and compensation for services are intended to
constitute expenses of administration under any Bankruptcy Law.
(d) If an individual Person is named as Trustee on page 1 hereof,
such individual is hereby
40
<PAGE>
appointed Individual Trustee for the State in which the Properties are located.
To the extent permitted by law, but to such extent only, the Individual Trustee
is appointed herein by the Beneficiary subject to the following terms, namely:
(i) Subject to the terms hereof and to the extent permitted
by law, all the rights, powers, duties and obligations under this Mortgage
granted to or imposed upon the Individual Trustees shall be exercised
solely by the Beneficiary except as herein provided.
(ii) The rights, powers, duties and obligations hereby
conferred or imposed upon the Individual Trustee in respect of any property
covered by such appointment shall be exercised or performed by the
Beneficiary separately, or at the election of the Beneficiary by the
Beneficiary and the Individual Trustee jointly, except to the extent that
(i) under any law of any jurisdiction in which any particular act is to be
performed by the Individual Trustees the Beneficiary shall be incompetent
or unqualified to perform such act or (ii) the Beneficiary shall deem it
inconvenient or undesirable to perform such act, then in any such event
such rights, powers, duties and obligations shall be exercised and
performed by the Individual Trustee at the written direction of the
Beneficiary.
(iii) The Beneficiary at any time, by an instrument in writing
executed by it, may accept the resignation of or remove any Individual
Trustee. Upon the written request of the Beneficiary, the Grantor shall
join with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to the Individual Trustee so resigned
or removed may be appointed in the manner provided in this Section.
(iv) Upon the death, resignation or removal of any Individual
Trustee, the Beneficiary shall have power to appoint and, upon the written
request of the Beneficiary, the Grantor shall, for such purpose, join with
the Beneficiary in the execution, delivery and performance of all instru-
41
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ments and agreements necessary or proper to appoint, one or more persons
approved by the Beneficiary to act as Successor Individual Trustee together
with the Beneficiary of all or any part of the Trust Estate, with such
powers as provided for in this Section 9, and to vest in such person or
persons in the capacity aforesaid, any property, title, right or power
deemed necessary or desirable, subject to the other provisions of this
Section 9. If the Grantor does not join in such appointment, within
fifteen (15) days after the receipt by it of a request so to do, or in case
an Event of Default has occurred and is continuing, the Beneficiary acting
alone shall make such appointment.
(v) Should any written instrument from the Grantor be
required by any successor Individual Trustee so appointed for more fully
confirming to such trustee such property, title, right or power, any and
all such instruments shall, on request, be executed, acknowledged and
delivered by the Grantor.
(vi) No Individual Trustee hereunder shall be personally
liable by reason of any act or omission of the Beneficiary or any other
trustee hereunder and the Beneficiary shall not be personally liable by
reason of any act or omission of the Individual Trustee; neither shall
knowledge of the Beneficiary be imputed to the Individual Trustee nor shall
knowledge of the Individual Trustee be imputed to the Beneficiary.
(vii) Any notice delivered to the Beneficiary shall be deemed
to have been sufficiently delivered without any delivery to the Individual
Trustee.
(viii) Any obligation of the Grantor to file or give notices,
reports or information to the Trustees hereunder shall be satisfied by the
delivery thereof to the Beneficiary.
Any successor to the Individual Trustee (herein, in this subsection
(h) called the "Successor Individual Trustee") shall execute, acknowledge and
----------------------------
deliver to his predecessor (herein, in this subsection (h), called
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the "Predecessor Individual Trustee"), the Beneficiary and the Grantor, an
------------------------------
instrument accepting such appointment. Thereupon, the Successor Individual
Trustee shall, without any further act, deed or conveyance, become vested with
the estates, properties, rights, powers, duties and trusts of the Predecessor
Individual Trustee in the trusts created by this Mortgage, with the same effect
as if originally named as Individual Trustee. At the written request of the
Grantor, the Beneficiary or the Successor Individual Trustee, the Predecessor
Individual Trustee shall execute and deliver an instrument transferring to the
Successor Individual Trustee, upon the trusts herein expressed, the Trust Estate
and shall duly assign, transfer, deliver and pay over to the Successor
Individual Trustee, any property and money subject to the lien hereof held by
him. If any written instrument from the Grantor or the Beneficiary be required
by the Successor Individual Trustee for more fully and certainly vesting in and
confirming to the Successor Individual Trustee such estates, properties, rights,
powers and trusts, then, at the request of the Successor Individual Trustee, all
such instruments shall be made, executed, acknowledged and delivered by the
Grantor or the Beneficiary to the Successor Individual Trustee.
(e) At any time or times, (i) for the purpose of meeting the
Legal Requirements of any jurisdiction in which any part of a Trust Estate may
at the time be located or (ii) if the Beneficiary deems it to be necessary or
desirable for the protection of its interests, the Beneficiary shall have the
power to appoint, and upon written request of the Beneficiary, the Grantor shall
for such purpose join with the Beneficiary in the execution, delivery and
performance of all instruments and agreements necessary or proper to appoint,
one or more Persons approved by the Beneficiary either to act as co-trustee,
jointly with the Beneficiary, of all or any part of the Trust Estate, or to act
as separate trustee of any such property, in either case with such powers as may
be provided in the instrument of appointment which shall expressly designate the
property affected and the capacity of the appointee as either a co-trustee or
separate trustee, and to vest in such person or persons in the capacity
aforesaid, any property, title, right or power deemed necessary or desirable,
subject to the other provisions of this Section 9. If the Grantor does not join
in such appointment within 15 days after the receipt
43
<PAGE>
by it of a request so to do, or in case an Event of Default has occurred and is
continuing, the Beneficiary alone shall make such appointment.
Should any written instrument from the Grantor be required by any co-
trustee or separate trustee so appointed for more fully confirming to such co-
trustee or separate trustee such property, title, right or power, any and all
such instruments shall, by request, be executed, acknowledged and delivered by
the Grantor.
Every co-trustee or separate trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the same terms as
hereinabove set forth for the Individual Trustee.
10. Transfers, Additional Indebtedness and Subordinate Liens.
--------------------------------------------------------
(a) Except as permitted under the Credit Agreement, the Grantor
will not without the Beneficiary's prior written consent, which consent may be
withheld in the Beneficiary's sole discretion, (i) sell, assign, convey,
transfer or otherwise dispose of legal or beneficial interests in all or any
part of the Properties, (ii) incur additional Debt (as such term is defined in
the Credit Agreement), (iii) sell, assign, convey, transfer, or otherwise
dispose of any legal or beneficial interest in the Grantor or any entity
constituting the Grantor, or permit any owner of a legal or beneficial interest
in the Grantor to do the same, or file a declaration of condominium with
respect to any Property, or (iv) mortgage, hypothecate or otherwise encumber or
grant a security interest in the Trust Estate or any interest in the Grantor or
entity constituting the Grantor (the matters referred to in clauses (i) through
(iv) are collectively referred to as a "Transfer").
--------
(b) Any Transfer made in violation of this Mortgage or the
Credit Agreement shall be an immediate Event of Default hereunder and shall be
void and of no force or effect as against the Beneficiary. Upon any such
Transfer made in violation of Section 10(a), the Beneficiary may, at its option
and without limiting any other right or remedy available to the Beneficiary here
under,under any of the other Loan Documents, or otherwise at law or in equity,
accelerate the maturity of the
44
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Note and require the payment of the then existing outstanding principal
balance, accrued interest and all other Indebtedness due under the Note and this
Mortgage and any and all other amounts due to the Beneficiary. The Grantor
shall reimburse the Beneficiary for all reasonable costs and expenses,
including, without limitation, reasonable attorneys' fees, actually incurred by
the Beneficiary in connection with the review by the Beneficiary of the
Grantor's request for the Beneficiary's consent to a Transfer of all or any
portion of the Trust Estate or any interest therein or any interest in the
Grantor.
11. Maintenance of Trust Estate; Alterations; Inspection; Utilities.
---------------------------------------------------------------
(a) The Grantor shall keep and maintain the Trust Estate and
every part thereof in good condition and repair, subject to ordinary wear and
tear, and shall not permit or commit any impairment, deterioration or
intentional waste of any Property and the Equipment located thereon in any
material respect. The Grantor further covenants to do all other acts which from
the character or use of any Property may be reasonably necessary to protect the
security hereof, the specific enumerations herein not excluding the general.
The Grantor shall not remove or demolish any Improvement on any Property except
as the same may be necessary in connection with an Alteration or a restoration
in connection with a Taking or casualty, required under the Leases or in the
ordinary course of business in accordance with the terms and conditions hereof.
(b) Except as may be necessary in connection with an Alteration
permitted by Section 11(c) below, the Grantor shall not make any changes or
allow any changes to be made in the use of a Property as a commercial or
industrial property and related uses or initiate or acquiesce in any change in
any zoning or other land use classification affecting all or any portion of a
Property now or hereafter in effect and affecting all or any portion of a
Property.
(c) The Grantor shall have the right, without the Beneficiary's
consent, to undertake any alteration, improvement, demolition or removal (any
such alteration, improvement, demolition or removal, an "Al-
---
45
<PAGE>
teration") of a Property or any portion thereof so long as any such Alteration
- --------
is (i) required or permitted pursuant to or in connection with any Lease or (ii)
provided that no Event of Default shall have occurred and be continuing
hereunder, does not in the aggregate cost more than [$250,000]. The Beneficiary
shall not unreasonably withhold its consent to any Alteration in excess of
[$250,000] which is not otherwise permitted under the terms of the applicable
Lease. Any Alteration which involves an estimated cost of more than [$250,000]
in the aggregate for any Property shall be conducted under the supervision of an
Independent Architect, and no such Alteration shall be undertaken until five (5)
Domestic Business Days after there shall have been filed with the Beneficiary,
for information purposes only and not for approval by the Beneficiary, detailed
plans and specifications and cost estimates therefor, prepared and approved in
writing by such Independent Architect. Such plans and specifications may be
revised at any time and from time to time, provided that material revisions of
such plans and specifications are filed with the Beneficiary, for information
purposes only, together with the written approval thereof by such Independent
Architect. All work done in connection with any Alteration shall be performed
with due diligence in a good and workmanlike manner, all materials used in
connection with any Alteration shall not be less than the standard of quality of
the materials currently used at such Property and all work performed and all
materials used shall be in accordance with all applicable Legal Requirements
and the insurance requirements of the insurance policies required hereby.
(d) The Beneficiary and any Persons authorized by them may at
all reasonable times, upon reasonable notice and in compliance with the Leases
enter and examine any Property and may inspect all work done, labor performed
and materials furnished in and about any Property
12. Legal Compliance. The Grantor and the Properties and the
----------------
Equipment thereon and the use thereof comply in all material respects with all
Legal Requirements (hereinafter defined). Subject to the Grantor's right of
contest pursuant to Section 7(c), the Grantor shall comply with and conform in
all material respects to all present and future laws, statutes, codes,
ordinances,
46
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orders, judgments, decrees, injunctions, rules, regulations and requirements,
and irrespective of the nature of the work to be done, of every Governmental
Authority including, without limitation, Environmental Laws, consumer
protection laws and all covenants, restrictions and conditions now or hereafter
of record which may be applicable to Grantor or to any Property and the
Equipment thereon, or to the use, manner of use, occupancy, possession,
operation, maintenance, alteration, repair or reconstruction of any Property and
the Equipment thereon, including, without limitation, building and zoning codes
and ordinances (collectively, the "Legal Requirements"), the failure to comply
------------------
with would, in the aggregate, have a material adverse effect on the value of any
Property taken as a whole.
13. Books and Records, Financial Statements, Reports and Other
----------------------------------------------------------
Information.
- -----------
(a) Books and Records. Grantor will keep and maintain on a fiscal
-----------------
year basis proper books and records separate from any other Person, in which
accurate and complete entries shall be made of all dealings or transactions of
or in relation to the Note, the Trust Estate and the business and affairs of
Grantor relating to the Trust Estate, in accordance with GAAP. Beneficiary and
its authorized representatives shall have the right at reasonable times and upon
reasonable notice to examine the books and records of Grantor relating to the
operation of the Trust Estate and to make such copies or extracts thereof as
Beneficiary may reasonably require.
(b) Other Information. Grantor will, promptly after written request
-----------------
by Beneficiary, furnish or cause to be furnished to Beneficiary, in such manner
and in such detail as may be reasonably requested by Beneficiary, such
reasonable additional information as may be reasonably requested by Beneficiary
with respect to the Trust Estate.
14. Compliance with Leases and Agreements.
-------------------------------------
(a) The Grantor has heretofore delivered to the Beneficiary true
and complete copies of all Leases, and all Agreements and any and all
amendments or modifications thereof as required under the Credit Agreement. The
Leases and Agreements are in full force and
47
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effect and the Grantor has neither given to, nor received any written notice of
default from, any Tenants under any Leases or any party to any of the
Agreements, and, to the Grantor's knowledge, no events or circumstances exist
which with or without the giving of notice, the passage of time or both, may
constitute a default under any of the Leases or Agreements. The Grantor will
promptly notify the Beneficiary upon the occurrence of any of the foregoing
events.
(b) The Grantor may, at all times, lease to any Person space
within any Property in a manner consistent with other first-class office
properties comparable to the applicable Property and then current market
conditions existing in the applicable market area in which such Property is
located, and otherwise in accordance with this Mortgage. Each Lease entered into
after the date hereof (including the renewal or extension on or after the date
hereof of any Lease entered into prior to the date hereof if the rent payable
during such renewal or extension, or a formula or other method to compute such
rent, is not provided for in such Lease (such a renewal or extension a "Renewal
-------
Lease")) shall either (i) (A) provide for payment of rent and all other material
- -----
amounts payable thereunder at rates at least equal to the fair market rental
value (taking into account the type and creditworthiness of the tenant, the
length of tenancy and the location and size of the unit so rented), as of the
date such Lease is executed by the Grantor, of the space covered by such Lease
or Renewal Lease for the term thereof, including any renewal options, (B) not
contain any provision whereby the rent payable thereunder would be based, in
whole or in part, upon the net income or profits derived by any Person from the
applicable Property (provided, however, that it may contain a provision in which
-------- -------
a portion of rent may be payable based on a percentage of gross income), (C) not
entitle any Tenant to receive and retain Proceeds of a Taking except those that
may be specifically awarded to it in condemnation proceedings because of the
Taking of its trade fixtures and its leasehold improvements which have not
become part of the realty and such business loss and relocation expenses as
tenant may specifically and separately establish and (D) not have a material
adverse effect on the value of the Property in which it is to be located or (ii)
be consented to by the Beneficiary. Each such Lease (other than Renewal Leases)
in excess of _____
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<PAGE>
rentable square feet shall be subject to the prior consent of Beneficiary,
which consent shall not be unreasonably withheld. Any such Renewal Lease shall
also be subject to the prior consent of Beneficiary, which consent shall not be
unreasonably withheld, in the case of any Renewal Lease which either provides
for (x) any change to any financial provision of the Lease being renewed or
extended, or (y) any other material modification or amendment. Beneficiary
shall grant or deny its consent within five (5) Domestic Business Days after
receipt of request therefor (together with a copy of the proposed Renewal
Lease). If the Beneficiary shall fail to respond within such five (5) Domestic
Business Day period, the Beneficiary shall be deemed to have granted its consent
to the proposed Renewal Lease. In addition, the Grantor shall give the
Beneficiary not less than one (1) Domestic Business Day's prior written notice
(together with a copy of the proposed Renewal Lease) of any other proposed
Renewal Lease prior to the execution thereof. Without the prior consent of
Beneficiary, which consent shall not be unreasonably withheld, the Grantor may
not amend, modify or waive the provisions of any Lease in excess of _____
rentable square feet or terminate, reduce rents under or shorten the term of
any such Lease.
(c) The Grantor shall (i) promptly perform and observe all of
the material terms, covenants and conditions required to be performed and
observed by the Grantor under the Leases and Agreements such that there will be
no material and adverse impairment of the value of the Property to which the
Lease or Agreement relates or the Beneficiary's interest under this Mortgage;
and (ii) collect the Rents under the Leases at such times as are customary in
the ordinary course of the Grantor's business and may collect such security
deposits as are permitted by Legal Requirements and are commercially reasonable
in the prevailing market and collect escalations, percentage rent and other
charges in accordance with the terms of each Lease.
(d) All Leases entered into by the Grantor after the date
hereof shall be subject and subordinate to this Mortgage (through either
subordination provisions in the Leases or separate nondisturbance agreements),
and shall provide that the Tenant thereunder shall attorn to the Beneficiary, or
any other Person
49
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succeeding to the interest of the Beneficiary, on the terms set forth in Section
14(e); provided that the Tenant's rights under the Lease shall not be impaired
or otherwise affected by such subordination or the foreclosure of this
Mortgage, unless such Tenant has defaulted under the Lease and all applicable
grace or cure periods thereunder have expired. The Beneficiary, at the request
of the Grantor, shall enter into a subordination, attornment and nondisturbance
agreement, in form and substance reasonably acceptable to the Beneficiary with
any existing Tenant or any Tenant entering into a Lease after the date hereof
(other than a Lease to an Affiliate of the Grantor) provided, in any event, that
--------
such Tenant leases at least 15% of the rentable square feet of the Improvements.
All actual, out-of-pocket costs and expenses of the Beneficiary in connection
with the negotiation, preparation, execution and delivery of any nondisturbance
agreement, including, without limitation, reasonable attorneys' fees and
disbursements, shall be paid by the Grantor.
(e) Each Lease entered into from and after the date hereof shall
provide that: in the event of the enforcement by the Beneficiary of any remedy
under this Mortgage, the Tenant under such Lease shall, at the option of the
Beneficiary or of any other Person succeeding to the interest of the
Beneficiary as a result of such enforcement, subject to the Beneficiary's and
such Tenant's delivery of any nondisturbance agreement required hereunder
(except with respect to any Lease to an Affiliate of Tenant), attorn to the
Beneficiary or to such Person and shall recognize the Beneficiary or such
successor in interest as lessor under such Lease without change in the
provisions thereof; provided, however, the Beneficiary or such successor in
-------- -------
interest shall not be liable for or bound by (i) any payment of an installment
of rent or additional rent which may have been made more than thirty (30) days
before the due date of such installment, (ii) any amendment or modification to
or termination of any such Lease not in conformity with Section 14(b), (iii) any
act or omission of or default by the Grantor under any such Lease, or (iv) any
credits, claims, setoffs or defenses which any Tenant may have against the
Grantor. Each such Tenant, upon reasonable request by the Beneficiary or such
successor in interest, shall execute and deliver an instrument or instruments
confirming such attornment, subject to the Beneficiary's
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<PAGE>
delivery of a nondisturbance agreement to such Tenant (except with respect to
any Lease to an Affiliate of Tenant).
15. The Beneficiary's Right to Perform. Upon the occurrence and
----------------------------------
continuance of an Event of Default with respect to the performance of any of the
Obligations contained herein, the Beneficiary, without waiving or releasing the
Grantor from any Obligation or Default under this Mortgage, after delivery of
notice thereof to Grantor, may (but shall not be obligated to), at any time
perform the same, and the cost thereof, with interest at the Default Rate from
the date of payment by the Beneficiary to the date such amount is paid by the
Grantor, shall immediately be due from the Grantor to the Beneficiary, and the
same shall be secured by this Mortgage and shall be a Lien on the Trust Estate
prior to any right, title to, interest in or claim upon the Trust Estate
attaching subsequent to the Lien of this Mortgage. No payment or advance of
money by the Beneficiary under this Section 15 shall be deemed or construed to
cure the Grantor's Default or waive any right or remedy of the Beneficiary
hereunder.
16. The Grantor's Existence; Organization and Authority; Litigation.
---------------------------------------------------------------
The Grantor shall do all things necessary to preserve and keep in full force and
effect its existence, franchises, rights and privileges as a corporation and its
right to own property or transact business in the state in which each of the
Properties is located.
17. Protection of Security; Costs and Expenses. The Grantor shall
-------------------------------------------
appear in and defend any action or proceeding purporting to affect the security
hereof or the rights or powers of the Beneficiary or the Trustees hereunder and
shall pay all reasonable costs and expenses, including, without limitation,
cost of evidence of title and reasonable attorneys' fees and disbursements, in
any such action or proceeding in which the Beneficiary may appear, and in any
suit brought by the Beneficiary to foreclose this Mortgage or to enforce or
establish any other rights or remedies of the Beneficiary hereunder. If an
Event of Default occurs and is continuing under this Mortgage, or if any action
or proceeding is commenced in which it becomes necessary to defend or uphold
the Lien or priority of this Mortgage or which adversely
51
<PAGE>
affects the Beneficiary's interest in the Trust Estate, or Property or any part
thereof, including, but not limited to, eminent domain, enforcement of, or
proceedings of any nature whatsoever under any Legal Requirement affecting the
Trust Estate or involving the Grantor's bankruptcy, insolvency, arrangement,
reorganization or other form of debtor relief, then the Beneficiary, upon
reasonable notice to the Grantor, may, but without obligation to do so and
without releasing the Grantor from any obligation hereunder, may make such
appearances, disburse such sums and take such action as the Beneficiary deems
necessary or appropriate to protect the Beneficiary's interest in the Trust
Estate, including, but not limited to, disbursement of reasonable attorneys'
fees, entry upon any Property to make repairs or take other action to protect
the security hereof, and payment, purchase, contest or compromise of any
encumbrance, charge or lien which in the judgment of the Beneficiary appears to
be prior or superior hereto. All of the costs, expenses and amounts set forth
in this Section 17 shall be payable by the Grantor on demand, together with
interest thereon at the rate then in effect with respect to the Note (except
during the continuance of an Event of Default in which case interest shall
accrue at the Default Rate), from the date of notice to Grantor of any such
payment by the Beneficiary (or the Trustees) until the date of repayment by the
Grantor, shall be deemed to be Indebtedness hereunder and shall be secured
hereby. Nothing contained in this Section 17 shall be construed to require the
Beneficiary to incur any expense, make any appearance, or take any other action.
18. Management of the Properties.
----------------------------
(a) The Grantor covenants and agrees with the Beneficiary that the
Properties will be managed at all times in a manner consistent with past
practice by Grantor or by another manager acceptable to the Beneficiary. Upon
the appointment of any manager (other than the Grantor or an affiliate), the
Beneficiary shall have the right to approve (which approval shall not be
unreasonably withheld or delayed) any management agreement with such manager and
any such management agreement shall provide that it is subject and subordinate
to the terms and provisions of this Mortgage.
52
<PAGE>
(b) It is acknowledged and agreed that any management agreement may be
terminated at the direction of the Beneficiary at any time following the
occurrence and continuance of an Event of Default hereunder and, if any such
management agreement is so terminated, a substitute manager shall be appointed
by the Beneficiary.
19. Environmental Matters.
---------------------
(a) The Grantor covenants and agrees with the Beneficiary that it
shall comply with all Environmental Laws, except for such instances of non-
compliance which, singly, or in the aggregate, are not reasonably likely to have
a Material Adverse Effect. If at any time during the continuance of the Lien of
this Mortgage, Material of Environmental Concern are discovered in, around, on,
or under any Property, in such concentrations as a Governmental Authority having
jurisdiction over the Trust Estate would require remedial action to correct (an
"Environmental Event"), the Grantor shall deliver notice of the occurrence of
-------------------
such Environmental Event to the Beneficiary promptly after Grantor becomes aware
of such Environmental Event. Within (30) thirty days after Grantor becomes
aware of the occurrence of an Environmental Event, the Grantor shall deliver to
the Beneficiary an Officers' Certificate (an "Environmental Certificate")
-------------------------
explaining the Environmental Event in reasonable detail, setting forth to the
Beneficiary the estimated cost (as determined at such time) of remedying such
Environmental Event and the proposed method of remediation and time to complete
such remedy. The Grantor shall complete, or cause the appropriate third party
to complete, such remedy as promptly as possible in the ordinary course of
business. If an Environmental Event occurs, the Grantor shall diligently remedy
or diligently cause the appropriate third party to remedy all conditions giving
rise to such Environmental Event in accordance with all Environmental Laws.
(b) Notwithstanding anything to the contrary provided in this
Mortgage or in any other Loan Document, the indemnification provided in the
Environmental Indemnity Agreement shall be fully recourse to the Grantor and
shall be independent of, and shall survive, the discharge of the Indebtedness,
the release of the Lien created under this Mortgage, and/or the conveyance of
title to any Property to the Beneficiary or any pur-
53
<PAGE>
chaser or designee in connection with a foreclosure of this Mortgage or
conveyance in lieu of foreclosure. Notwithstanding the foregoing, in no event
shall the indemnity contained in the Environmental Indemnity Agreement be
assignable by the Beneficiary to any such purchaser at or subsequent to a
foreclosure sale.
20. License to Collect Rents. Beneficiary and the Grantor hereby
------------------------
confirm that Beneficiary has granted to the Grantor a license to collect and use
the Rents as they become due and payable under the Leases in accordance with
the provisions of the Assignment of Leases and Rents, until an Event of Default
has occurred and is continuing; provided that the existence of such right shall
--------
not operate to subordinate the Assignment of Leases and Rents to any subsequent
assignment, in whole or in part by the Grantor, and any such subsequent
assignment shall be subject to Beneficiary's rights under this Mortgage. The
Grantor further agrees to execute and deliver such assignments of leases as
Beneficiary may from time to time reasonably request in order to better assure,
transfer and confirm to Beneficiary the rights intended to be granted to
Beneficiary with respect thereto. In accordance with the provisions of the
Assignment of Leases and Rents, upon the occurrence and during the continuance
of an Event of Default (1) the Grantor agrees that Beneficiary may, but shall
not be obligated to, assume the management of the Properties, and collect the
Rents, applying the same upon the Obligations and (2) the Grantor hereby
authorizes and directs all tenants, purchasers or other persons occupying or
otherwise acquiring any interest in any part of the real property to pay the
Rents due under the Leases to Beneficiary upon Beneficiary's request.
Beneficiary shall have and hereby expressly reserves the right and privilege
(but assumes no obligation) to demand, collect, sue for, receive and recover the
Rents, or any part thereof, now existing or hereafter made, and apply the same
in accordance with this Mortgage, the Assignment of Leases and Rents, and
applicable law.
21. Remedies. Upon the occurrence and continuance of an Event of
--------
Default, the Beneficiary may take such actions against the Grantor and/or
against the Trust Estate or any portion thereof as the Beneficiary determines
is necessary to protect and enforce its rights hereunder, without notice or
demand except as set forth
54
<PAGE>
below. Any such actions taken by the Beneficiary shall be cumulative and
concurrent and may be pursued independently, singly, successively, together or
otherwise, at such time and in such order as the Beneficiary may determine in
its sole discretion, to the fullest extent permitted by law, without impairing
or otherwise affecting the other rights and remedies of the Beneficiary
permitted by law, equity or contract or as set forth herein or in the other Loan
Documents. Such actions may include the following:
(a) Acceleration. Subject to any applicable provisions of the Note
------------
and the other Loan Documents, the Beneficiary may declare all or any portion of
the unpaid principal balance under the Note, together with all accrued and
unpaid interest thereon, and all other unpaid Indebtedness, to be immediately
due and payable.
(b) Entry. The Beneficiary, personally, or by its agents or
-----
attorneys, or the Jurisdictional Trustee, or by the appointment of a receiver,
at the Beneficiary's election, may enter into and upon all or any part of the
Trust Estate (including any Property and any part thereof), and may exclude the
Grantor, its agents and servants, including the manager therefrom; and, the
Beneficiary, having and holding the same, may use, operate, manage and control
the Trust Estate or any part thereof and conduct the business thereof, either
personally or by its superintendents, managers, agents, servants, attorneys or
receiver. Upon every such entry, the Beneficiary may, at the expense of the
Trust Estate or the Grantor, from time to time, either by purchase, repair or
construction, maintain and restore the Trust Estate or any part thereof, and may
insure and reinsure the same in such amount and in such manner as may seem to
them to be advisable. Similarly, from time to time, the Beneficiary may, at the
expense of the Trust Estate or the Grantor make all necessary or proper repairs,
renewals, replacements, alterations, additions, betterments and improvements to
and on the Trust Estate or any part thereof as it may seem advisable. The
Beneficiary shall also have the right to manage and operate the Trust Estate or
any part thereof and to carry on the business thereof and exercise all rights
and powers of the Grantor with respect thereto, either in the name of the
Grantor or otherwise, as may seem to them to be advisable. In
55
<PAGE>
confirmation of GRANTING CLAUSE V, in the case of the occurrence and
continuation of an Event of Default, the Beneficiary shall be entitled to
collect and receive all earnings, revenues, rents, issues, profits and income of
the Trust Estate or any part thereof (collectively, the "Rents") to be applied
-----
to the Obligations in the order of priorities and amounts as the Beneficiary
shall elect in its sole discretion. In the event the Beneficiary elects, in its
sole discretion, to apply the Rents to the Obligations in any order of priority
elected by Beneficiary, the Beneficiary shall not have cause to claim that the
Rents so applied to the Obligations by the Beneficiary were misappropriated by
the Grantor. All actions which may be taken by the Beneficiary pursuant to this
subparagraph (b) may be taken by the Jurisdictional Trustee, upon the direction
of the Beneficiary. The Beneficiary or the Jurisdictional Trustee, as
applicable, shall be liable to account only for rents, issues and profits and
other proceeds actually received by the Beneficiary or the Jurisdictional
Trustee.
(c) Foreclosure.
-----------
(i) The Beneficiary, with or without entry, personally or by
its agents or attorneys, insofar as applicable, may (i) sell or instruct
the Jurisdictional Trustee, if applicable, to sell, to the extent permitted
by law and pursuant to the power of sale granted herein, all and singular
the Trust Estate, and all estate, right, title and interest, claim and
demand therein, and right of redemption thereof, at one or more sales, as
an entirety or in parcels, and at such times and places as required or
permitted by law and as are customary in any county or parish in which a
Property is located and upon such terms as the Beneficiary may fix and
specify in the notice of sale to be given to the Grantor (and on such other
notice published or otherwise given as provided by law), or as may be
required by law; (ii) institute (or instruct the Jurisdictional Trustee to
institute) proceedings for the complete or partial foreclosure of this
Mortgage under the provisions of the laws of the jurisdiction or
jurisdictions in which the Trust Estate or any part thereof is located, or
under any other applicable provision of law; or (iii) take all steps to
protect and enforce the rights of the Beneficiary,
56
<PAGE>
whether by action, suit or proceeding in equity or at law (for the specific
performance of any covenant, condition or agreement contained in this
Mortgage, or in aid of the execution of any power herein granted, or for
any foreclosure hereunder, or for the enforcement or any other appropriate
legal or equitable remedy), or otherwise, as the Beneficiary, being advised
by counsel and its financial advisor, shall deem most advisable to protect
and enforce any of their rights or duties hereunder.
(ii) The Beneficiary (or the Jurisdictional Trustee, as
applicable), may conduct any number of sales from time to time. The power
of sale shall not be exhausted by any one or more such sales as to any part
of the Trust Estate remaining unsold, but shall continue unimpaired until
the entire Trust Estate shall have been sold.
(iii) With respect to any Property, this Mortgage is made upon
any statutory conditions of the state in which such Property is located,
and, for any breach thereof or any breach of the terms of this Mortgage,
the Beneficiary shall have the statutory power of sale, if any, provided
for by the laws of such State.
(d) Specific Performance. The Beneficiary, in its sole and absolute
--------------------
discretion, or the Jurisdictional Trustee, at the Beneficiary's election, may
institute an action, suit or proceeding at law or in equity for the specific
performance of any covenant, condition or agreement contained herein or in the
Note or any other Loan Document, or in aid of the execution of any power granted
hereunder or for the enforcement of any other appropriate legal or equitable
remedy.
(e) Enforcement of Note. The Beneficiary or the Jurisdictional
-------------------
Trustee, at the Beneficiary's election, may recover judgement on the Note (or
any portion of the Indebtedness evidenced thereby), either before, during or
after any proceedings for the foreclosure (or partial foreclosure) or
enforcement of this Mortgage, to the fullest extent permitted by law.
(f) Sale of Trust Estate; Application of Proceeds.
----------------------------------------------
57
<PAGE>
(i) The Beneficiary (or the Jurisdictional Trustee, if
applicable), may postpone any sale of all or any part of the Trust Estate
to be made under or by virtue of this Section 21 by public announcement at
the time and place of such sale, or by publication, if required by law,
and, from time to time, thereafter, may further postpone such sale by
public announcement made at the time of sale fixed by the preceding
postponement.
(ii) Upon the completion of any sale made by the Beneficiary or
the Jurisdictional Trustee under or by virtue of this Section 21, the
Beneficiary shall execute and deliver to the accepted purchaser or
purchasers a good and sufficient deed or deeds or other appropriate
instruments, conveying, assigning and transferring all its estate, right,
title and interest in and to the property and rights so sold. The
Beneficiary or the Jurisdictional Trustee, as applicable, is hereby
appointed the true and lawful irrevocable attorney-in-fact of the Grantor
in its name and stead or in the name of the Beneficiary to make all
necessary conveyances, assignments, transfers and deliveries of the
property and rights so sold under this Section 21, and, for that purpose,
the Beneficiary or the Jurisdictional Trustee, as applicable, may execute
all necessary deeds and other instruments of assignment and transfer, and
may substitute one or more persons with like power, the Grantor hereby
ratifying and confirming all that such attorney or attorneys or such
substitute or substitutes shall lawfully do by virtue hereof. The Grantor
shall, nevertheless, if so requested in writing by the Beneficiary, ratify
and confirm any such sale or sales by executing and delivering to the
Beneficiary or to such purchaser or purchasers all such instruments as may
be advisable, in the reasonable judgment of the Beneficiary, for such
purposes and as may be designated in such request. Any such sale or sales
made under or by virtue of this Section 21 shall operate to divest all the
estate, right, title, interest, claim and demand, whether at law or in
equity, of the Grantor in and to the property and rights so sold, and shall
be a perpetual bar against the Grantor, its successors and assigns and any
Person claiming through or under the Grantor and their successors and
assigns.
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<PAGE>
(iii) The receipt of the Beneficiary or the Jurisdictional
Trustee, as applicable, for the purchase money paid as a result of any such
sale shall be a sufficient discharge therefor to any purchaser of the
property or rights, or any part thereof, so sold. No such purchaser, after
paying such purchase money and receiving such receipt, shall be bound to
see to the application of such purchase money upon or for any trust or
purpose of this Mortgage, or shall be answerable, in any manner, for any
loss, misapplication or non-application of any such purchase money or any
part thereof, nor shall any such purchaser be bound to inquire as to the
authorization, necessity, expediency or regularity of such sale.
(iv) Upon any sale made under or by virtue of this Section 21,
the Beneficiary may bid for and acquire the Trust Estate or any part
thereof and, in lieu of paying cash therefor, may make settlement for the
purchase price by crediting upon the Note secured by this Mortgage the net
proceeds of sale, after deducting therefrom the expense of the sale and the
costs of the action and any other sums which the Beneficiary is authorized
to deduct under this Mortgage. The person making such sale shall accept
such settlement without requiring the production of the Note or this
Mortgage, and without such production there shall be deemed credited to the
Indebtedness and Obligations under this Mortgage the net proceeds of such
sale. The Beneficiary, upon acquiring the Trust Estate or any part thereof
shall be entitled to own, hold, lease, rent, operate, manage or sell the
same in any manner permitted by applicable laws.
(g) Voluntary Appearance; Receivers. After the happening, and during
-------------------------------
the continuance of, any Event of Default, and immediately upon commencement of
(i) any action, suit or other legal proceeding by the Beneficiary to obtain
judgment for the principal and interest on the Note and any other sums required
to be paid pursuant to this Mortgage, or (ii) any action, suit or other legal
proceeding by the Beneficiary of any other nature in aid of the enforcement of
the Loan Documents or any of them, the Grantor will (a) enter its voluntary
appearance in such action, suit or proceeding, and (b) if
59
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required by the Beneficiary, consent to the appointment of one or more receivers
of the Trust Estate and of the earnings, revenues, rents, issues, profits and
income thereof. After the happening, and during the continuance, of any Event
of Default, or upon the filing of a bill in equity to foreclose this Mortgage or
to enforce the specific performance hereof or in aid thereof, or upon the
commencement of any other judicial proceeding to enforce any right of the
Beneficiary, the Beneficiary shall be entitled, as a matter of right, if it
shall so elect, without notice to any other party and without regard to the
adequacy of the security of the Trust Estate, forthwith, either before or after
declaring the principal and interest on the Note to be due and payable, to the
appointment of such a receiver or receivers. Any receiver or receivers so
appointed shall have such powers as a court or courts shall confer, which may
include, without limitation, any or all of the powers which the Beneficiary is
authorized to exercise by the provisions of this Section 21, and shall have the
right to incur such obligations and to issue such certificates therefor as the
court shall authorize.
(h) Retention of Possession. Notwithstanding the appointment of any
-----------------------
receiver, liquidator or trustee of the Grantor, or any of its property, or of
the Trust Estate or any part thereof, the Beneficiary or the Jurisdictional
Trustee, as applicable, to the extent permitted by law, shall be entitled to
retain possession and control of all property now or hereafter granted to or
held by the Beneficiary or the Jurisdictional Trustee, as applicable, under this
Mortgage.
(i) UCC Remedies. Beneficiary may exercise any or all of the
------------
remedies granted to a secured party under the UCC, specifically including,
without limitation, the right to recover the attorneys' fees and other expenses
incurred by Beneficiary in the enforcement of this Mortgage or in connection
with Grantor's redemption of the Improvements or Building Equipment.
Beneficiary may exercise its rights under this Mortgage independently of any
other collateral or guaranty that Grantor may have granted or provided to
Beneficiary in order to secure payment and performance of the Obligations, and
Beneficiary shall be under no obligation or duty to foreclose or levy upon any
other collateral given by Grantor to secure any Obligation or to proceed against
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any guarantor before enforcing its rights under this Mortgage.
(j) Leases. Beneficiary may, at its option, before any
------
proceeding for the foreclosure (or partial foreclosure) or enforcement of this
Mortgage, treat any Lease which is subordinate by its terms to the Lien of this
Mortgage, as either subordinate or superior to the Lien of this Mortgage.
(k) Other Rights. Beneficiary may pursue against Grantor any
------------
other rights and remedies of Beneficiary permitted by law, equity or contract or
as set forth herein or in the other Loan Documents.
(l) Suits by the Beneficiary. All rights of action under this
------------------------
Mortgage may be enforced by the Beneficiary without the possession of the Note
and without the production thereof or this Mortgage at any trial or other
proceeding relative thereto. Any such suit or proceeding instituted by the
Beneficiary shall be brought in the name of the Beneficiary and any recovery of
judgment shall be subject to the rights of the Beneficiary.
(m) Remedies Cumulative. No remedy herein conferred upon or
-------------------
reserved to the Beneficiary is intended to be exclusive of any other remedy, and
each such remedy shall be cumulative and in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity. No delay or
omission of the Beneficiary to exercise any right or power accruing upon any
Event of Default shall impair any such right or power, or shall be construed to
be a waiver of any such Event of Default or an acquiescence therein. Every
power and remedy given by this Mortgage to the Jurisdictional Trustee and/or the
Beneficiary may be exercised from time to time and as often as may be deemed
expedient by the Jurisdictional Trustee (at the Beneficiary's discretion) and
the Beneficiary and each of them. Nothing contained in this Mortgage shall
affect the obligations of the Grantor to pay the principal of, and interest on,
the Note in the manner and at the time and place expressed in the Note.
(n) Waiver of Rights. The Grantor agrees that to the fullest
----------------
extent permitted by law it will not, at any time, (a) insist upon, plead or
claim or take any
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benefit or advantage of any stay, extension or moratorium law, wherever enacted,
now or at any time hereafter in force, which may affect the covenants and terms
of performance of this Mortgage, (b) claim, take or insist upon any benefit or
advantage of any law, now or at any time hereafter in force, providing for
valuation or appraisal of the Trust Estate, or any part thereof, prior to any
sale or sales thereof which may be made pursuant to any provision herein
contained, or pursuant to the decree, judgment or order of any court of
competent jurisdiction, or (c) after any such sale or sales, claim or exercise
any right, under any statute heretofore or hereafter enacted by the United
States of America, any State thereof or otherwise, to redeem the property and
rights sold pursuant to such sale or sales or any part hereof. The Grantor
hereby expressly waives all benefits and advantages of such laws, and
covenants, to the fullest extent permitted by law, not to hinder, delay or
impede the execution of any power herein granted or delegated to the Beneficiary
or Trustees, but will suffer and permit the execution of every power as though
no such laws had been made or enacted. The Grantor for itself, and all who may
claim through or under it, waive, to the extent that they lawfully may do so,
any and all homestead rights, any and all rights to reinstatement, and any and
all right to have the property comprising the Trust Estate marshaled upon any
foreclosure of the lien hereof.
22. Application of Proceeds. The proceeds of any sale or foreclosure
-----------------------
of the Trust Estate shall be applied to the following in such priority as the
Beneficiary shall elect in its sole discretion: (a) to the payment of the
costs and expenses of the foreclosure proceedings (including, without
limitation, reasonable counsel fees and disbursements actually incurred and
advertising costs and expenses), liabilities and advances made or incurred under
this Mortgage, and reasonable receivers' and trustees' fees and commissions,
together with interest at the Default Rate, (b) to the payment of any other sums
advanced by the Beneficiary in accordance with the terms hereof and not repaid
to it by the Grantor, together with interest at the Default Rate from and after
the occurrence of an Event of Default, (c) to the payment of all sums due under
the Note in such order as the Beneficiary may elect, (d) to the payment of all
sums due under any other Loan Document, in such order as the Beneficiary shall
elect, and (e) to the payment to the
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Grantor or other party legally entitled thereto of any surplus.
23. Notice of Certain Occurrences. The Grantor shall give notice to
-----------------------------
the Beneficiary promptly upon the occurrence of: (a) any Default or Event of
Default; (b) any litigation or proceeding affecting the Grantor or any Property
which is reasonably likely, if adversely determined, to have a Material Adverse
Effect; and (c) a material adverse change in the business, operations, property
or financial condition of the Grantor.
24. WAIVER OF TRIAL BY JURY. THE GRANTOR HEREBY WAIVES AND SHALL
-----------------------
WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BROUGHT BY, OR COUNTERCLAIM ASSERTED BY THE BENEFICIARY WHICH ACTION, PROCEEDING
OR COUNTERCLAIM ARISES OUT OF OR IS CONNECTED WITH THIS MORTGAGE, THE NOTE OR
ANY OTHER LOAN DOCUMENTS.
25. Taxes. (a) In the event of the passage after the date hereof of
-----
any law of the United States or of any state in which a Property is located
either (i) deducting from the value thereof, or changing in any way the laws for
the taxation of mortgages or debts secured thereby for federal, state or local
purposes, or the manner of collection of any such taxes, or (ii) imposing a tax,
either directly or indirectly, on mortgages or debts secured thereby, the
Grantor shall assume as an obligation hereunder the payment of any tax so
imposed, until full payment of the Note, provided such assumption shall be
permitted by law within thirty (30) days after written demand therefor from the
Beneficiary.
(b) All payments by Grantor of principal of, and interest on,
the Loan and all other amounts payable hereunder shall be made free and clear of
and without deduction for any present or future income, excise, stamp or
franchise taxes and other taxes, fees, duties, withholdings or other charges of
any nature whatsoever imposed by any taxing authority ("Taxes"), but excluding
-----
(i) United States Federal income taxes, (ii) New York State income taxes, and
(iii) income taxes imposed by any other state. In the event that any withholding
or deduction from any payment to be made by the Grantor hereunder is required in
respect of any Taxes pursuant to any applicable law, rule or regulation, then
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the Grantor will: (i) pay directly to the relevant authority the full amount
required to be so withheld or deducted; (ii) promptly forward to the Beneficiary
an official receipt or other documentation satisfactory to the Beneficiary
evidencing such payment to such authority; and (iii) pay to the Beneficiary such
additional amount or amounts as is necessary to ensure that the net amount
actually received by the Beneficiary will equal the full amount the Beneficiary
would have received had no such withholding or deduction been required.
Moreover, if any Taxes (except taxes discussed in subsections (i) through (iii)
of this paragraph 25 (b)) are directly asserted against the Beneficiary with
respect to any payment received by the Beneficiary under the Note, or
hereunder, the Beneficiary may pay such Taxes and the Grantor will within five
(5) Domestic Business Days pay such additional amounts (including any penalties,
interest or expenses) as are necessary in order that the net amount received by
such person after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted.
(c) If the Grantor fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the Beneficiary the required
receipts or other required documentary evidence, the Grantor shall indemnify the
Beneficiary for any incremental Taxes, interest or penalties that may become
payable by the Beneficiary as a result of any such failure.
26. Notices. All notices, requests and other communications to any
-------
party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or similar writing) and shall be given to such party at the
address, telex number or facsimile number set forth below or at such other
address, telex number or facsimile number as such party may hereafter specify
for the purpose by notice to the other party. Each such notice, request or
other communication shall be effective (i) if given by telex or facsimile
transmission, when such telex or facsimile is transmitted to the telex number or
facsimile number specified in this Section and the appropriate answerback or
facsimile confirmation is received, (ii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, (iii) if given by a nation-
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ally recognized overnight carrier, 24 hours after such communication is
deposited with such carrier with postage prepaid, or (iv) if given by any other
means, when delivered at the address specified in this Section. Notices shall
be addressed as follows:
To Grantor:
[Borrower]
Attn:
Fax:
With a copy to:
Attn:
Fax:
To Beneficiary:
Morgan Note Trust Company of New York
60 Wall Street
New York, New York
Attn: Timothy O'Donovan
Fax: (212) 648-
With a copy to:
Skadden, Arps, Slate, Meagher
& Flom LLP
919 Third Avenue
New York, NY 10022
Attn: Martha Feltenstein, Esq.
Fax: (212) 735-2000
27. No Oral Modification. This Mortgage may not be altered, amended,
--------------------
modified, changed or terminated orally, but only by a written agreement signed
by the party against whom enforcement is sought. This Mortgage is delivered
pursuant to, and upon and subject to, the terms of the Credit Agreement. If
there are any inconsistencies between this Mortgage and the Credit Agreement,
the terms of the Credit Agreement shall prevail.
28. Partial Invalidity. In the event any one or more of the
------------------
provisions contained in this Mortgage
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shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof, but each shall be construed as if such invalid, illegal
or unenforceable provision had never been included hereunder.
29. Successors and Assigns. All covenants of the Grantor contained
----------------------
in this Mortgage are imposed solely and exclusively for the benefit of the
Beneficiary and its successors and assigns, and no other Person shall have
standing to require compliance with such covenants or be deemed, under any
circumstances, to be the beneficiary of such covenants, any or all of which may
be freely waived in whole or in part by the Beneficiary at any time if in its
sole discretion it deems it advisable to do so. All such covenants of the
Grantor shall run with the land and bind the Grantor, the successors and assigns
of the Grantor (and each of them) and all subsequent owners, encumbrances and
Tenants of the Trust Estate, and shall inure to the benefit of the Beneficiary,
its successors and assigns. The word "the Beneficiary" shall be construed to
mean the Beneficiary named herein.
30. Governing Law. This Mortgage and the obligations arising
-------------
hereunder shall be governed by and construed in accordance with, the laws of the
State where the Properties are located. Whenever possible, each provision of
this Mortgage shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Mortgage shall be prohibited
by, or invalid under, applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remaining
provisions of this Mortgage. Nothing contained in this Mortgage or in any Loan
Document shall require either the Grantor to pay or the Beneficiary to accept
any sum in any amount which would, under applicable law, subject the Beneficiary
or any Trustee to penalty or adversely affect the enforceability of this
Mortgage. In the event that the payment of any sum due hereunder or under any
Loan Document would have such result under applicable law, then, ipso facto,
---- -----
the obligation of the Grantor to make such payments shall be reduced to the
highest sum then permitted under applicable law and appropriate adjustment
shall be made by the Grantor and the Beneficiary.
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31. Recording Fees, Taxes, Etc. The Grantor hereby agrees to take
---------------------------
all such further reasonable actions, and to pay all taxes, recording fees,
charges, costs and other reasonable expenses, including, without limitation,
reasonable attorneys' and reasonable professional fees and disbursements which
are currently or in the future shall be imposed, and which may be required or
necessary to establish, preserve, protect or enforce the Lien of this Mortgage.
32. No Waiver. No failure by the Beneficiary to insist upon the
---------
strict performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof shall constitute a waiver of any such term or
right, power or remedy or of any such breach. No waiver of any breach shall
affect or alter this Mortgage, which shall continue in full force and effect, or
shall affect or alter the rights of the Beneficiary with respect to any other
then existing or subsequent breach.
33. Further Assurances.
------------------
(a) The Grantor, at its own expense, will execute, acknowledge
and deliver all such reasonable further documents or instruments including,
without limitation, security agreements on any personalty included or to be
included in the Trust Estate and a separate assignment of each Lease and take
all such actions as the Beneficiary from time to time may reasonably request to
better assure, transfer and confirm unto the Beneficiary the rights now or
hereafter intended to be granted to the Beneficiary under this Mortgage or the
other Loan Documents.
(b) The Grantor covenants to give notice to the Beneficiary no
less than thirty (30) days prior to a change of Grantor's principal place of
business.
34. Additional Security. Without notice to or consent of the Grantor
-------------------
and without impairment of the Lien and rights created by this Mortgage, the
Beneficiary may accept (but the Grantor shall not be obligated to furnish) from
the Grantor additional security for the Note. Neither the giving of this
Mortgage nor the acceptance of any such additional security shall prevent the
Beneficiary from resorting, first, to such additional security, and, second, to
the security created by this Mortgage
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without affecting the Beneficiary's Lien and rights under this Mortgage.
35. Indemnification by the Grantor. The Grantor will protect,
------------------------------
indemnify and save harmless the Beneficiary, the Banks and every Trustee and
all officers, directors, stockholders, partners, employees, successors and
assigns of any of the foregoing (collectively, the "Indemnified Parties") from
-------------------
and against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses (including all reasonable attorneys' fees and
expenses actually incurred) imposed upon or incurred by or asserted against the
Indemnified Parties or the Trust Estate or any part of its interest therein, by
reason of the occurrence or existence of any of the following (to the extent the
insurance Proceeds payable on account of the following shall be inadequate)
prior to (i) the payment in full of the Note, (ii) the acceptance by the
Beneficiary of a deed-in-lieu of foreclosure with respect to the applicable
Property, or (iii) the Beneficiary's taking possession or control of the
applicable Property, except to the extent caused by the actual willful
misconduct or gross negligence of the Beneficiary or any other Indemnified Party
(other than such willful misconduct or gross negligence imputed to the
Beneficiary solely because of its interest in the Trust Estate): (a) ownership
of the Grantor's interest in the Trust Estate, or any interest therein, or
receipt of any Rents or other sum therefrom, (b) any accident, injury to or
death of any persons or loss of or damage to property occurring on or about the
Trust Estate or any appurtenances thereto, (c) any design, construction,
operation, repair, maintenance, use, non-use or condition of the Trust Estate or
appurtenances thereto, including claims or penalties arising from violation of
any Legal Requirement or Insurance Requirement, as well as any claim based on
any patent or latent defect, whether or not discoverable by the Beneficiary, any
claim the insurance as to which is inadequate, and any Environmental Claim, (d)
any failure on the part of the Grantor to perform or comply with any of the
material terms of any Lease within the applicable notice or grace periods, (e)
any performance of any labor or services or the furnishing of any materials or
other property in respect of the Trust Estate or any part thereof, (f) any
negligence or tortious act or omission on the part of the Grantor or any of its
agents, contractors, servants, employees,
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sublessees, licenses or invitees, (g) any contest referred to in Section 7
hereof, or (h) any obligation or undertaking relating to the performance or
discharge of any of the terms, covenants and conditions of the landlord
contained in the Leases. Any amounts payable to the Indemnified Parties under
this Section 35 which are not paid within ten (10) Domestic Business Days after
written demand therefor by the Beneficiary; setting forth in reasonable detail
the amount of such demand and the basis therefor, shall bear interest from the
date of demand at the Default Rate, and shall be part of the Indebtedness and
secured by this Mortgage. In case any action, suit or proceeding is brought
against the Indemnified Parties by reason of any such occurrence, the Grantor
shall at the Grantor's expense resist and defend such action, suit or proceeding
or will cause the same to be resisted and defended by counsel for the insurer of
the liability or by counsel designated by the Grantor (unless reasonably
disapproved by the Beneficiary promptly after the Beneficiary has been notified
of such counsel); provided, however, that nothing herein shall compromise the
-------- -------
right of the Beneficiary to appoint its own counsel for its defense with respect
to any action which in its reasonable opinion presents a conflict or potential
conflict between the Beneficiary and the Grantor that would make such separate
representation advisable. So long as the Grantor is resisting and defending
such action, suit or proceeding as provided above in a prudent and commercially
reasonable manner, the Beneficiary shall not be entitled to settle such action,
suit or proceeding and claim the benefit of this Section 35 with respect to such
action, suit or proceeding and the Beneficiary agrees that it will not settle
any such action, suit or proceeding without the consent of the Grantor;
provided, however, that if the Grantor is not diligently defending such action,
- -------- -------
suit or proceeding in a prudent and commercially reasonable manner as provided
above, the Beneficiary may settle such action, suit or proceeding subject only
to the consent of the Grantor, which consent shall not be unreasonably withheld
or delayed, and claim the benefit of this Section 35 with respect to settlement
of such action, suit or proceeding. The Beneficiary will give the Grantor
prompt notice after it obtains actual knowledge of any potential claim by it for
indemnification hereunder; however, the failure of the Beneficiary to give such
notice to Grantor shall not affect Grantor's obligations hereunder.
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<PAGE>
36. Release. (a) If the Grantor shall pay or cause to be paid the
-------
principal of and interest on the Note in full at maturity or earlier as
permitted in accordance with the terms thereof or the terms of the Credit
Agreement and all other Indebtedness payable to the Beneficiary hereunder by the
Grantor or secured hereby or by the other Loan Documents and all of the
Obligations shall have been performed, then this Mortgage and all Loan Documents
pertaining hereto shall be discharged and satisfied or assigned to the Grantor
or to any other Person at the Grantor's direction and without recourse to the
Beneficiary or any Trustee, at the Grantor's option, without warranty (except as
otherwise provided herein with respect to indemnities) at the expense of the
Grantor upon its written request. Concurrently with such release and
satisfaction or assignment of this Mortgage and all the other Loan Documents,
the Beneficiary shall return to the Grantor or the Borrower all insurance
policies relating solely to the Trust Estate which may be held by the
Beneficiary, and, on the written request and at the expense of the Grantor,
Beneficiary shall execute and deliver such proper instruments of release
(including appropriate UCC-3 termination statements) as may reasonably be
requested by the Grantor to evidence such release and satisfaction or
assignment, and any such instrument, when duly executed by the Beneficiary and
duly recorded in the places where this Mortgage and each other Loan Document is
recorded, shall conclusively evidence the release and satisfaction or assignment
of this Mortgage and the other Loan Documents.
(b) Beneficiary shall release, or cause the Trustee to release,
the Lien of the Mortgage from the applicable Property, upon payment by Grantor
of the amount required under Section 2.9(a) or Section 2.9(b) of the Credit
Agreement and compliance with all other applicable provisions of the Credit
Agreement. Concurrently with such release of this Mortgage and all other Loan
Documents relating solely to the Trust Estate, the Beneficiary shall return to
the Grantor all insurance policies relating solely to the Trust Estate which may
be held by the Beneficiary, and, on the written request and at the expense of
the Grantor, Beneficiary shall execute and deliver such proper instruments of
release (including appropriate UCC-3 termination statements) as may reasonably
be requested by the Grantor to evidence such release, and any such instrument,
when duly executed by the
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<PAGE>
Beneficiary and duly recorded in the places where this Mortgage and each other
Loan Document is recorded, shall conclusively evidence the release of this
Mortgage and the other Loan Documents relating solely to the Trust Estate.
37. Security Agreement.
------------------
(a) Security Intended. Notwithstanding any provision of this
-----------------
Mortgage to the contrary, the parties intend that this document constitutes
security for the payment and performance of the Obligations and shall be a
"mortgage" or "deed of trust" under applicable law as set forth in Section 38 or
Section 39, as applicable. If Section 38, or Section 39 as applicable, provides
that this document is intended to be a deed of trust and, despite that
intention, a court of competent jurisdiction determines that this document does
not qualify as a "trust deed" or "deed of trust" under applicable law, then
ab initio, this instrument shall be deemed a realty mortgage under applicable
law and shall be enforceable as a realty mortgage, and, in such event, or in the
event that Section 38 or Section 39, as applicable, provides that this document
is intended to be a mortgage, the Grantor shall be deemed a "mortgagor,"
Beneficiary shall be deemed a "mortgagee," and Trustee shall have no capacity
(but shall be disregarded and all references to "Trustee" shall be deemed to
refer to the "mortgagee" to the extent not inconsistent with interpreting this
instrument as though it were a realty mortgage). As a realty mortgage, the
Grantor, as mortgagor, shall be deemed to have conveyed the Properties ab initio
to Beneficiary as mortgagee, such conveyance as a security to be void upon
condition that the Grantor pay and perform all its Obligations. The remedies
for any violation of the covenants, terms and conditions of the agreements
herein contained shall be as prescribed herein or by general law, or, as to that
part of the security in which a security interest may be perfected under the
UCC, by the specific statutory consequences now or hereafter enacted and
specified in the UCC, all at Beneficiary's sole election.
(b) Fixture Filing; Personal Property. This Mortgage constitutes
---------------------------------
a financing statement and, to the extent required under UCC [(S)9-402(f)]
because portions of the Properties may constitute fixtures, this
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<PAGE>
Mortgage is to be filed in the office where a mortgage for the Land Parcels and
the Ground Leasehold Estate would be recorded. Beneficiary also shall be
entitled to proceed against all or portions of the Trust Estate in accordance
with the rights and remedies available under UCC (S)9-501(d). The Grantor is,
for the purposes of this Mortgage, deemed to be the Debtor, and Beneficiary is
deemed to be the Secured Party, as those terms are defined and used in the UCC.
The Grantor agrees that the Indebtedness and Obligations secured by this
Mortgage are further secured by security interests in all of the Grantor's
right, title and interest in and to fixtures, Equipment, and other property
covered by the UCC, if any, including all personal property comprising part of
the Trust Estate, which are used upon, in, or about the Trust Estate (or any
part) or which are used by the Grantor or any other person in connection with
the Trust Estate. The Grantor grants to Beneficiary a valid and effective
security interest in all of the Grantor's right, title and interest in and to
such personal property (but only to the extent permitted in the case of leased
personal property), together with all replacements, additions, and proceeds.
Except for Permitted Encumbrances, the Grantor agrees that, without the written
consent of Beneficiary, no other security interest will be created under the
provisions of the UCC and no lease will be entered into with respect to any
goods, fixtures, equipment, appliances, or articles of personal property owned
or leased by Grantor now attached to or used or to be attached to or used in
connection with the Trust Estate, except as otherwise permitted hereunder. The
Grantor agrees that all property of every nature and description covered by the
lien and charge of this Mortgage together with all such property and interests
covered by this security interest are encumbered as a unit, and upon and during
the continuance of an Event of Default by Grantor, all of the Trust Estate, at
Beneficiary's option, may be fore closed upon or sold in the same or different
proceedings or at the same or different time, subject to the provisions of
applicable law. The filing of any financing statement relating to any such
property or rights or interests shall not be construed to diminish or alter any
of Beneficiary's rights of priorities under this Mortgage.
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<PAGE>
(c) As of the Closing Date, the principal office, chief executive
office and principal place of business of the Grantor is [___________].
38. As to Property in California. Notwithstanding anything to the
----------------------------
contrary elsewhere in this Mortgage, as to any property of the Trust Estate
located in the State of California (the "California Property"):
-------------------
(a) This Mortgage shall constitute a security agreement and
continuously perfected fixture filing and financing statement. The Grantor is,
for the purposes of this Mortgage, deemed to be the Debtor, and Beneficiary is
deemed to be the Secured Party, as those terms are defined and used in the
California Uniform Commercial Code. The addresses of the Secured Party and
Debtor from which information concerning the security agreement may be obtained
are set forth in the initial paragraph of this Mortgage. References to UCC (S)
9-402(f) and UCC (S) 9-501(d) in Section 10(b) of this Mortgage shall be deemed
to refer to UCC (S) 9-402(6) and UCC (S) 9-501, respectively.
(b) This Mortgage shall be deemed to be and shall be construed as a
Deed of Trust enforceable in accordance with the applicable laws of the State of
California regarding deeds of trust, as well as a Security Agreement, Financing
Statement and Assignment of Leases. Reference throughout this instrument to
this "Mortgage" shall mean, as appropriate, this Deed of Trust, Security
Agreement, Financing Statement and/or Assignment of Leases. Reference
throughout this Mortgage to "Grantor" shall mean Trustor, as appropriate.
References throughout this instrument to the "Trustee" or "Trustees" shall
mean: ____________________, a ________ corporation, subject to substitution as
provided in California Civil Code Section 2934(a). The California Property
shall be deemed to be and hereby is conveyed and transferred by Grantor, in
trust and with power of sale, to Trustee, and the reference to the "Beneficiary"
in the Granting Clauses of this Mortgage shall, with regard to the California
Property, be deemed to be a reference to Trustee so that Grantor mortgages,
warrants, grants, bargains, sells, conveys, pledges and assigns the California
Property of the Trust Estate to Trustee, in trust, for the benefit and use of
Beneficiary. Other references to "Beneficiary" in this Mortgage shall be
interpreted to be references to Beneficiary, Trustee or both as the context may
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<PAGE>
require in light of the intent of the parties that this Mortgage be construed as
a Deed of Trust according to the applicable laws of the State of California.
Trustee shall have all the obligations, rights, powers and duties of a trustee
of a deed of trust as explicitly set forth or necessarily implied in the
California Civil Code, as amended; and such rights, powers, duties and
obligations shall be exercised and performed by such Trustee at the written
direction of Beneficiary or the legal holder of the indebtedness secured hereby.
Nothing contained herein, however is intended to limit the rights or powers of
Beneficiary as set forth in this Mortgage, except to the extent necessary to
accomplish the purpose stated above.
(c) Each of the remedies set forth herein, including without
limitation the remedies involving a power of sale of the California Property and
the right of Beneficiary to exercise self-help in connection with the
enforcement of the terms of this Mortgage, shall be exercisable if, and only to
the extent, permitted by the laws of the State of California in force at the
time of the exercise of such remedies without regard to the enforceability of
such remedies at the time of the execution and delivery of this Mortgage.
(d) (i) Beneficiary may elect to foreclose by exercise of the
power of sale contained herein, in which event Beneficiary shall notify
Trustee and shall, if required, deposit with Trustee the Note, the original
or a certified copy of this Mortgage, and such other documents, receipts
and evidences of expenditures made and secured hereby as Trustee may
require.
(ii) Upon receipt of such notice from Beneficiary, Trustee
shall cause to be recorded and delivered to Grantor such notice as may then
be required by law and this Mortgage. Trustee shall, without demand on
Grantor, after lapse of such time as may then be required by law and after
recordation of such notice of default and after notice of sale has been
given as required by law, sell the California Property at the time and
place of sale fixed by it in said notice of sale, either as a whole or in
separate lots of parcel or items as Trustee shall deem expedient, and in
such order as it may deter-
74
<PAGE>
mine, at public auction to the highest bidder for cash in lawful money of
the United States payable at the time of sale. Trustee shall deliver to
the purchaser or purchasers at such sale its good and sufficient deed or
deeds conveying the property so sold, but without any covenant or warranty,
express or implied. The recitals in such deed of any matters or facts
shall be conclusive proof of the truthfulness thereof. Any person,
including, without limitation, Grantor, Trustee or Beneficiary, may
purchase at such sale.
(iii) Trustee may postpone the sale of all or any portion of the
California Property from time to time in accordance with the laws of the
State of California.
(e) Beneficiary may from time to time rescind any notice of default
or notice of sale before any Trustee's sale as provided above in accordance with
the laws of the State of California.
(f) Grantor, as Trustor under this Mortgage, hereby requests that a
copy of any Notice of Default or Notice of Sale as may be required by law, which
affects the California Property, be mailed to Grantor at the address set forth
in Section 26 hereof. Otherwise, neither Trustee nor Beneficiary is under any
----------
obligation to notify any person or entity of any action or proceeding of any
kind in which Grantor, Beneficiary and/or Trustee shall be a party, unless
brought by Trustee, or of any pending sale under any other deed of trust, except
as may otherwise be required by law or required hereunder.
39. As to Property in Washington. [Need Local Counsel to provide
----------------------------
language].
40. Trusts Funds. To the extent required by applicable law, all
------------
security deposits paid under the Leases shall be treated as trust funds and not
commingled with any other funds of Grantor. Within ten (10) days after request
by Beneficiary, Grantor shall furnish Beneficiary with satisfactory evidence of
compliance with this Section ?, together with a statement of all security
---------
deposits by Tenants under the Leases, which statement shall be certified by
Grantor.
75
<PAGE>
41. Reserves. On the Closing Date, a portion of the Loan in the
--------
amount of [$ ] will be deposited into the Deferred Maintenance Reserve
Account (as defined in the Cash Collateral Agreement) held by Agent (as defined
in the Cash Collateral Agreement) for Beneficiary. Such funds, together with
all investment income earned thereon, are referred to herein as the "Deferred
--------
Maintenance Amounts". Within five (5) Business Days after receipt of an
- -------------------
Officer's Certificate stating that certain deferred maintenance items set forth
on Schedule _ hereto have been substantially completed, and, upon an inspection
--------
of the remediation work (performed at the discretion of the Beneficiary),
provided that no Event of Default shall have occurred and be continuing,
Beneficiary will instruct Agent to disburse funds from the Deferred
Maintenance Reserve Account to pay specified contractors in accordance with
invoices approved by Beneficiary or to reimburse Grantor for funds disbursed by
Grantor for the remediation of the deferred maintenance. Upon full disbursement
to Grantor of all Deferred Maintenance Amounts, the Deferred Maintenance
Reserve Account shall be closed by Beneficiary.
It shall be a default under this Mortgage if Grantor does not complete
the deferred maintenance at the Property in the required time-frame. Upon the
occurrence of an Event of Default, Beneficiary, at its option, may withdraw all
Deferred Maintenance Amounts and Beneficiary may apply such funds either to
completion of the Deferred Maintenance at the Property or toward prepayment of
the Note in such order, proportion and priority as Beneficiary may determine in
its sole discretion.
42. Ground Lease.
------------
(a) Grantor hereby represents and warrants as follows:
(i) the Ground Lease is in full force and effect, unmodified by any
writing or otherwise except as specifically set forth herein;
(ii) all rent, additional rent and/or other charges reserved in or
payable under the Ground Lease, have been paid to the extent that they are
payable to the date hereof;
76
<PAGE>
(iii) Grantor enjoys the quiet and peaceful possession of the Ground
Leasehold Estate;
(iv) there are no defaults under any of the material terms of the
Ground Lease;
(v) Grantor has delivered to Beneficiary a true, accurate and
complete copy of the Ground Lease;
(vi) this Mortgage is secured by the Ground Leasehold Estate; upon
the occurrence of an Event of Default, Beneficiary has the right to
foreclose or otherwise exercise its rights with respect to the fee interest
in the Trust Estate within a commercially reasonable time;
(vii) the Ground Lease or a memorandum of same has been duly
recorded, the Ground Lease permits the interest of the lessee thereunder to
be encumbered by this Mortgage, and there has not been a material change in
the terms of the Ground Lease since its recordation;
(viii) Except for the Permitted Exceptions, Grantor's interest in the
Ground Lease is not subject to any liens or encumbrances superior to, or
of equal priority with, this Mortgage;
(ix) Grantor's interest in the Ground Lease is assignable to
Beneficiary upon notice to, but without the consent of, the lessor
thereunder, and in the event that such leasehold interest is so assigned,
it is further assignable by Beneficiary and its successors and assigns upon
notice to, but without a need to obtain the consent of, the lessor under
the Ground Lease;
(x) the Ground Lease requires the lessor thereunder to give notice of
any default by Grantor to Beneficiary; and the Ground Lease further
provides that notice of termination given under the Ground Lease is not
effective against Beneficiary unless a copy of such notice has been
delivered to Beneficiary in the manner described in the Ground Lease;
77
<PAGE>
(xi) Beneficiary is permitted a reasonable opportunity (including,
where necessary, sufficient time to gain possession of the interest of
Grantor under the Ground Lease) to cure any default under the Ground Lease,
which is curable after the receipt of notice of any such default before the
lessor thereunder may terminate the Ground Lease;
(xii) the Ground Lease has a term which extends not less than ten
(10) years beyond the Maturity Date;
(xiii) the Ground Lease requires the lessor thereunder to enter into
a new lease with Beneficiary upon termination of the Ground Lease for any
reason, including rejection of the Ground Lease in a bankruptcy proceeding;
(xiv) under the terms of the Ground Lease and this Mortgage, taken
together, any related insurance proceeds will be applied either to the
repair or restoration of all or part of the related Property, with
Beneficiary having the right to hold and disburse the proceeds as the
repair or restoration progresses, or to the payment of the outstanding
principal balance of the Note together with any accrued interest thereon;
and
(xv) the Ground Lease does not impose any restrictions on subletting.
Further, with respect to the Ground Lease, Grantor covenants and
agrees as follows: (i) to promptly and faithfully observe, perform and comply
with all the terms, covenants and provisions of the Ground Lease, on its part to
be observed, performed and complied with, within the applicable grace periods,
if any; (ii) to refrain from doing anything, as a result of which, there could
be a material default under or a breach of any of the terms of the Ground Lease;
(iii) not to do, permit or suffer any event or omission as a result of which
there is likely to occur a default or breach under the Ground Lease after the
passing of the applicable grace periods, if any; (iv) not to cancel, terminate,
surrender, modify, amend or in any way alter or permit the alteration of any of
the provisions of the Ground Lease or grant any consents or waivers thereunder,
and further agrees not to
78
<PAGE>
exercise any right it may have under the Ground Lease to cancel or surrender the
same; (v) to give Beneficiary notice of any default by any party under the
Ground Lease, within three (3) Business Days subsequent to learning of such
default, and promptly to deliver to Beneficiary a copy of each notice of default
and all responses to default notices, similar instruments received or delivered
by Beneficiary, in connection with the Ground Lease; (vi) to furnish within a
reasonable period of time, except in connection with a notice of default which
is governed by the previous clause, to Beneficiary copies of such information
and evidence as Beneficiary may reasonably request concerning the due
observance, performance and compliance by Grantor with the terms, covenants and
provisions of the Ground Lease; and (vii) that any failure by Grantor, as tenant
under the Ground Lease, to perform within any applicable grace period its
obligations under the Ground Lease shall constitute an Event of Default by
Grantor under this Mortgage.
(b) In the event of the occurrence of any event which, with the
giving of notice, the passage of time or both, would constitute an Event of
Default (as defined in the Ground Lease) by Grantor in the performance of its
obligations under the Ground Lease, and which is not cured within any applicable
grace period, including, without limitation, any default in the payment of any
sums payable thereunder, then, in each and every case, Beneficiary may, at its
option cause the default or defaults to be remedied and otherwise exercise any
and all of the rights of Grantor thereunder in the name of and on behalf of
Grantor. Grantor shall, within five (5) Business Days after written demand,
reimburse Beneficiary for all advances made and expenses reasonably incurred by
Beneficiary incuring any such default (including, without limitation,
reasonable attorneys' fees), together with interest thereon from the date that
such advance is made, to and including the date the same is paid to Beneficiary.
The provisions of this subsection (b) are in addition to any other remedy given
to or allowed Beneficiary under the Ground Lease.
(c) If the Ground Lease is cancelled or terminated by reason of an
Event of Default (as defined in the Ground Lease) that Beneficiary was unable to
cure (following a good faith effort to so cure), then, if Beneficiary or its
nominee shall acquire an interest in any new
79
<PAGE>
lease of the Ground Leasehold Estate following such Event of Default, Grantor
shall have no right, title or interest in or to the new lease or the leasehold
estate created by such new lease.
(d) Grantor shall obtain and deliver to Beneficiary, within thirty
(30) days after written demand therefor by Beneficiary, an estoppel certificate
stating (1) that the Ground Lease is in full force and effect and has not been
modified or, if it has been modified, the date of each modification (together
with copies of each such modification), (2) the date to which the fixed rent has
been paid under the Ground Lease, (3) whether a notice of default has been sent
to the tenant under the Ground Lease which has not been cured, and if such
notice has been sent, the date it was sent and the nature of the default, (4)
whether any parties under the Ground Lease are in default in keeping, observing
or performing any material term covenant, agreement, provision, condition or
limitation contained in the Ground Lease, (5) if the tenant under the Ground
Lease shall be in default, the default, (6) the name of the tenant entitled to
possession of the Ground Leasehold Estate under the Ground Lease, (7) whether
to the best of Grantor's knowledge there has occurred any event which, with the
giving of notice or the passage of time or both would constitute a default under
the Ground Lease, and, if there has occurred any such event, setting forth the
nature thereof in reasonable detail.
(e) Notwithstanding anything to the contrary contained herein, this
Mortgage shall not constitute an assignment of the Ground Lease within the
meaning of any provision thereof prohibiting its assignment and Beneficiary
shall have no liability or obligation thereunder by reason of its acceptance of
this Mortgage. Beneficiary shall be liable for the obligations of the tenant
arising under the Ground Lease for only that period of time during which
Beneficiary is in possession of the Ground Leasehold Estate or has acquired, by
foreclosure or otherwise, and is holding, all of the right, title and interest
of Grantor therein.]
80
<PAGE>
IN WITNESS WHEREOF, this Mortgage has been duly executed by the
Grantor on the date first hereinabove written.
WITNESS: Grantor:
[BORROWER]
By:_________________________
Name:
By:_____________________________
WITNESS: Name:
Title:
By:_________________________
<PAGE>
EXHIBIT A
(LAND PARCELS and GROUND LEASE)
A-1
<PAGE>
EXHIBIT B
(PERMITTED EXCEPTIONS)
B-1
<PAGE>
SCHEDULE 1
----------
AGREEMENTS
Schedule 1-i
<PAGE>
EXHIBIT 10.43
ENVIRONMENTAL INDEMNITY AGREEMENT
---------------------------------
This Environmental Indemnity Agreement (this "Indemnity Agreement") is
-------------------
entered into as of January __, 1997, by [__________________________]
("Indemnitor") in favor of each Bank (as defined in the Credit Agreement (as
- ------------
hereinafter defined)) (each, a "Lender" and collectively, the "Lenders") and
------ -------
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as lead agent (together with its
successors in such capacity, the "Agent") for Lenders pursuant to that certain
-----
Credit Agreement (the "Credit Agreement"), dated as of even date herewith, among
----------------
the Borrower (as hereinafter defined), Lenders and the Agent, with reference to
the following facts:
A. [____________________], a [_______________ ______________] (the
"Borrower") is the owner of fee or ground leasehold interest in the three (3)
- ---------
parcels of land (collectively, the "Land") as more particularly described in
----
Exhibit A-1 through Exhibit A-3 and the improvements located thereon
- ----------- -----------
(collectively, the "Property"); and
--------
B. Indemnitor is the sole beneficial owner of the Borrower.
C. Lenders have loaned or will loan to the Borrower the sum of up to
[$17,000,000] (the "Loan"), payment of which is evidenced by certain notes of
----
even date herewith, from the Borrower to each Lender, all as more particularly
described in the Credit Agreement (individually and collectively, the "Note"),
----
which Note is secured by one or more Indenture(s) of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases
and Rents, of even date herewith (said Indenture(s) of Mortgage, Deed of Trust,
Deed to Secure Debt, Security Agreement, Financing Statement, Fixture Filing and
Assignment of Leases and Rents, whether one or more, and together with all
amendments, modifications, consolidations, increases, supplements and spreaders
thereof being herein collectively called the "Deed of Trust") encumbering the
-------------
Property (the Credit Agreement, the Deed of Trust, the Note, and any other
documents or instruments evidencing or securing the Loan, as amended or modified
from time to time, being herein sometimes called the "Loan Documents").
--------------
D. As a condition to making the Loan, Lenders require Indemnitor to
indemnify and hold harmless Lenders from any Environmental Claim, any
Requirements of Environ-
<PAGE>
mental Law, or the violation of any Environmental Approval (as these terms are
defined in Section 1 below) attributable to Material of Environmental Concern
(as defined in Section 1 below) and related to the Property. Lenders would not
make the Loan without this Indemnity Agreement and Indemnitor acknowledges and
understands that this Indemnity Agreement is a material inducement for Lenders'
agreement to make the Loan.
NOW, THEREFORE, Indemnitor agrees as follows:
1. Definitions. For purposes of this Indemnity Agreement, the
-----------
following terms shall have the following meanings:
(a) "Environmental Approval" shall have the meaning set forth in the
----------------------
Credit Agreement.
(b) "Environmental Claim" shall have the meaning set forth in the
-------------------
Credit Agreement.
(c) "Environmental Law" shall have the meaning set forth in the
-----------------
Credit Agreement.
(d) "Indemnitee" or "Indemnitees" means (individually and
---------- -----------
collectively), the Agent, Lenders, any purchaser or assignee of all or any
part of the Note, including, without limitation, any of each Lender's
participants in the Loan, and their respective affiliates, officers,
directors, shareholders, and employees and their respective successors and
assigns. Notwithstanding the foregoing, "Indemnitee(s)" does not include
any person or entity (other than Lenders, any purchaser or assignee of all
or any part of the Note, including, without limitation, any of Lenders'
participants in the Loan, or any affiliate of Lenders or such purchaser,
assignee or participant) who purchases or acquires all or any part of the
Property (i) by any foreclosure under the Deed of Trust, whether judicial
or non-judicial, or pursuant to the exercise of any power of sale
thereunder, or by deed in lieu of foreclosure or (ii) from Lenders, from
any purchaser or assignee of all or any part of the Note, including,
without limitation, any of Lenders' participants in the Loan, or from any
affiliate of Lenders or such purchaser, assignee or participant.
(e) The term "Material of Environmental Concern" shall have the
---------------------------------
meaning set forth in the Credit Agreement.
2
<PAGE>
(f) "Requirements" shall have the meaning set forth in the Credit
------------
Agreement.
(g) Terms not otherwise defined in this Indemnity Agreement shall
have the meanings ascribed to them in the Credit Agreement and the Deed of
Trust.
2. Indemnification. (a) Indemnitor shall protect, defend,
---------------
indemnify, and hold harmless Indemnitees from and against all liabilities,
losses, costs, damages, expenses or claims, including, but not limited to,
remedial, removal, response, abatement, cleanup, legal, investigative, and
monitoring costs and other related costs, expenses, losses, damages (excluding
any and all consequential damages), penalties, fines, liabilities, obligations,
defenses, judgments, suits, proceedings, and disbursements (including, without
limitation, reasonable attorneys' and experts' fees and disbursements) of any
kind or of any nature whatsoever (collectively "Costs and Liabilities"), which
---------------------
may at any time be imposed upon Indemnitee or incurred by any Indemnitee and
which arise (directly or indirectly): (i) from Requirements of Environmental
Law; (ii) with respect to Environmental Claims related to the Property; (iii)
from the failure or alleged failure of the Borrower, or the Indemnitor or any
tenant or any other party directly or indirectly connected with the Property, to
obtain, maintain, or comply with any Environmental Approval; and/or (iv)
otherwise from the presence, release, alleged presence, or alleged release of
Material of Environmental Concern in violation of Requirements of Environmental
Law on or under the Property, or the soil, groundwater or soil vapor on or under
the Property, or the migration, spreading, alleged migration, or alleged
spreading of Material of Environmental Concern from the Property in violation of
Requirements of Environmental Law, whether or not known to Indemnitor, whether
foreseeable or unforeseeable, regardless of the source of such presence or
release or, except as expressly provided in Section 2(c) hereof, regardless of
when such release or presence occurred. Each Indemnitee shall give prompt
written notice to the Agent of any matter for which such Indemnitee shall seek
indemnification hereunder, and the Agent shall, after receiving actual knowledge
of any matter for which Indemnitees may seek indemnification hereunder, give
prompt written notice thereof to Indemnitor (although the failure of the Agent
and/or any Indemnitee to provide such notice shall have no effect whatsoever on
the obligations of the Indemnitor hereunder).
(b) In the event that any investigation, site monitoring,
containment, cleanup, removal, restoration or other remedial work of any kind or
nature (the "Remedial Work") is required to be performed or undertaken by the
-------------
3
<PAGE>
Borrower or Indemnitor pursuant to any applicable local, state or federal law or
regulation, any judicial order, or by any governmental entity because of, or in
connection with, the current or future presence, alleged presence, release or
alleged release of a Material of Environmental Concern in or into the air, soil,
groundwater, surface water or soil vapor at, on, about, under or within the
Property (or any portion thereof), Indemnitor shall within thirty (30) days
after written demand for performance thereof by Indemnitees (or such shorter
period of time as may be required under any applicable law, regulation, order or
agreement), (a) commence to perform, or cause to be com menced, and thereafter
diligently prosecuted to completion, all such Remedial Work or (b) contest by
proper proceedings or procedures the requirement to perform the Remedial Work;
provided, that such contest shall be prosecuted diligently and in good faith and
- --------
such contest shall not expose any Indemnitee to any civil or criminal penalty or
liability. Upon demand of the Agent or any other Indemnitee, Indemnitor shall
furnish Indemnitees a surety bond or other adequate security reasonably
satisfactory to Indemnitees sufficient both to indemnify Indemnitees against
liability and hold the Property free from adverse effect in the event the
contest is not successful. All Remedial Work shall be performed by one or more
contractors, approved in advance in writing by the Agent (which approval shall
not be unreasonably withheld or delayed), and under the supervision of a
consulting engineer approved in advance in writing by the Agent (which approval
shall not be unreasonably withheld or delayed). All costs and expenses of such
Remedial Work shall be paid by Indemnitor including, without limitation, the
charges of such contractor(s) and/or the consulting engineer, and the reasonable
attorneys' fees and costs incurred by Indemnitees in connection with the
monitoring or review of such contractors and consulting engineer. In the event
Indemnitor shall fail to commence, or cause to be commenced, such Remedial Work
within such thirty (30) day (or such shorter) period, or shall fail thereafter
to prosecute such Remedial Work to completion in a diligent manner after ten
(10) days' written notice to Indemnitor (or such shorter period as may be
appropriate in the case of emergency), Indemnitees may, but shall not be
required to, cause such Remedial Work to be performed and all reasonable costs
and expenses thereof, or incurred in connection therewith, shall become an
Environmental Claim hereunder.
(c) Anything to the contrary set forth in this Indemnity Agreement,
in the Deed of Trust, or elsewhere notwithstanding, Indemnitor shall not be
liable under this Indemnity Agreement to the extent of that portion of any Costs
and Liabilities which Indemnitor establishes is attributable to the gross
negligence or willful misconduct
4
<PAGE>
of any Indemnitee (or its agents or employees) not affiliated with Indemnitor at
the Property which causes (i) the introduction or initial release of a Material
of Environmental Concern at the Property, or (ii) material aggravation of a then
existing Material of Environmental Concern condition or occurrence at the
Property. In addition, if the Agent, any Lender(s) or any affiliate(s) of
either or any other person or entity acquire ownership of the Property through a
foreclosure, or the exercise of a power of sale under the Deed of Trust or deed
in lieu of foreclosure, Indemnitor shall not be liable hereunder for that
portion of any Costs and Liabilities which Indemnitor establishes is
attributable to (y) the introduction or initial release of a Material of
Environmental Concern at the Property by any party, other than the Borrower, any
other Indemnitor or an affiliate of Indemnitor, at any time after the Agent,
Lender(s), such affiliate(s) or such other person or entity have acquired title
to the Property or (z) material aggravation of a then existing Material of
Environmental Concern condition or occurrence at the Property by any party,
other than the Borrower, Indemnitor or an affiliate of Indemnitor, at any time
after the Agent, Lender(s), such affiliate(s) or such other person or entity
have acquired title to the Property.
Notwithstanding the foregoing, the liability of Indemnitor hereunder
shall otherwise remain in full force and effect after the Agent, Lender(s) or
such affiliate(s) so acquire title to the Property, including without limitation
with respect to any Material of Environmental Concern which is discovered at the
Property after the date the Agent, Lender(s) or such affiliate(s) acquire title
but which was actually introduced to the Property prior to the date of such
acquisition, and with respect to any continuing migration or release of any
Material of Environmental Concern introduced at the Property prior to the date
that the Agent, Lender(s) or such affiliate(s) acquire title.
(d) This Indemnity Agreement is solely intended to protect Lenders
from the matters set forth in the preceding paragraphs 2(a) and 2(b) and is not
intended to secure payment of the Note or amounts due to Lenders under the Deed
of Trust. This Indemnity Agreement is not intended to be, nor shall it be,
secured by the Deed of Trust or any of the other Loan Documents. The
obligations of Indemnitor under this Indemnity Agreement shall be as set forth
herein notwithstanding any similar provisions in the Deed of Trust.
(e) Nothing contained in this Indemnity Agreement shall prevent or in
any way diminish or interfere with any rights and remedies, including without
limitation, the right to contribution, which Lenders may have against the
Borrower
5
<PAGE>
pursuant to the terms of the Deed of Trust Indemnitor or any other party (or
which Indemnitor or the Borrower may have against Lenders or any other party)
under the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (codified at Title 42 U.S.C. (S)(S) 9601 et seq.), as it
may be amended from time to time, or any other applicable Federal or state laws.
3. Notice of Actions. (a) Indemnitor shall give immediate written
-----------------
notice to the Agent of each of the following (provided that Indemnitor has
knowledge thereof): (i) any proceeding, written (or material non-written)
inquiry, notice, or other communication by or from any governmental authority,
including, without limitation, the Environmental Protection Agency and state and
local equivalents, regarding the presence or existence of any Material of
Environmental Concern on, under, or about the Property or any migration thereof
from or to the Property or any actual or alleged violation of the Requirements
of Environmental Law; (ii) all Environmental Claims and any other written claims
made or threatened against the Borrower or Indemnitor or the Property relating
to any loss or injury resulting from or pertaining to any Material of
Environmental Concern or any alleged breach or violation of any Requirements of
Environmental Law; (iii) the Borrower's or Indemnitor's discovery of any
occurrence or condition on any real property adjoining or in the vicinity of the
Property that could reasonably cause the Property or any part thereof to be
subject to any material restrictions on ownership, occupancy, transferability,
or use, or subject the owner or any person having any interest in the Property
to any material liability, penalty, or disability under any Requirement of
Environmental Law; and (iv) the Borrower's or Indemnitor's receipt of any
written notice or discovery of any information regarding any actual or alleged
use, manufacture, production, storage, spillage, seepage, release, discharge,
disposal or any other presence or existence of any Material of Environmental
Concern on, under, or about the Property, in violation of any Requirements of
Environmental Law pertaining to Indemnitor or the Property.
(b) Immediately upon the Borrower's or Indemnitor's receipt of the
same, Indemnitor shall deliver to the Agent copies of any and all Environmental
Claims, and any and all orders, notices, permits, applications, reports, and
other communications, documents, and instruments pertaining to the actual or
alleged presence or existence of any Material of Environmental Concern on,
under, or about the Property in violation of any Requirements of Environmental
Law.
6
<PAGE>
4. Procedures Relating to Indemnification. (a) Indemnitor shall at
--------------------------------------
its own cost, expense, and risk: (i) defend all suits, actions, or other legal
or admin istrative proceedings that may be brought or instituted against an
Indemnitee or Indemnitees, as the case may be, on account of any matter or
matters arising under or within Section 2 above; (ii) pay or satisfy any
judgment or decree that may be recorded against an Indemnitee or Indemnitees, as
the case may be, in any such suit, action, or other legal or administrative
proceedings; and (iii) reimburse Indemnitee or Indemnitees, as the case may be,
for the cost of, or for any payment made by any of them, with respect to any
reasonable expenses incurred in connection with the Material of Environmental
Concern undertaken as a result of any demands, causes of actions, lawsuits,
proceedings, or any other claims threatened, made, or brought against any
Indemnitee or Indemnitees, as the case may be, arising out of the obligations of
Indemnitor under this Indemnity Agreement or the Borrower under the Deed of
Trust. Indemnitor shall have no liability under this paragraph (a) unless the
Agent shall, after receiving actual knowledge of any suit, action or proceeding
for which Indemnitees may seek indemnification under this paragraph (a), have
given reasonable written notice thereof to Indemnitor.
(b) Counsel selected by Indemnitor pursuant to Section 4(a) above
shall be subject to the reasonable approval of the Indemnitee or Indemnitees, as
the case may be, asserting a claim hereunder; provided, however, that Indemnitee
-------- -------
or Indemnitees, as the case may be, may elect to defend any such claim, lawsuit,
action, legal, or administrative proceeding at the cost and expense of
Indemnitor, if, in the reasonable judgment of the Indemnitee or Indemnitees, as
the case may be, (i) the defense is not proceeding or being conducted in a
satisfactory manner, or (ii) there is a conflict of interest between any of the
parties to such lawsuit, action, legal, or administrative proceeding, and in
either case Indemnitor have not provided substitute counsel reasonably
satisfactory to Indemnitees promptly after written request therefor by
Indemnitees.
(c) Notwithstanding anything in this Indemnity Agreement to the
contrary, Indemnitor shall not, nor shall Indemnitor allow the Borrower without
the prior written con sent of the Agent (which consent shall not be unreasonably
withheld or delayed)to , (i) settle or compromise any action, suit, proceeding,
or claim relating, directly or indirectly, to any Material of Environmental
Concern or any Environmental Claim or consent to the entry of any judgment
therein for which the Agent or Lenders might be wholly or partially liable that
does not include as an unconditional term thereof the delivery by the claimant
or plaintiff to
7
<PAGE>
the Agent and Lenders of a written release of the Agent and Lenders (in form,
scope and substance satisfactory to the Agent and Lenders in their reasonable
judgment) from all liability in respect of such action, suit, or proceeding; or
(ii) settle or compromise any action, suit, proceeding, or claim relating,
directly or indirectly, to any Material of Environmental Concern or any
Environmental Claim in any manner that may materially and adversely affect the
Agent or Lenders as determined by any Lender and/or the Agent in their
reasonable judgment.
(d) Without limiting the rights of Indemnitor pursuant to Section
4(b) above, the Agent and Lenders shall have the right (upon written notice to
Indemnitor) to join and participate in, as a party if they so elect, any legal
proceedings or actions in connection with the Property involving any
Environmental Claim, any Material of Environmental Concern or any Requirements
of Environmental Law. In any circumstance in which this indemnity applies, the
Agent and Lenders may employ their own legal counsel and consultants to
prosecute or defend any claim, action, or cause of action. Indemnitor shall have
the right to compromise or settle the same in good faith without the necessity
of showing actual liability therefor, with the consent of Indemnitees (which
consent shall not be unreasonably withheld or delayed). Indemnitor shall
reimburse the Agent and Lenders upon demand for all reasonable costs and
expenses incurred by the Agent and Lenders, including the amount of all costs of
settlements entered into in accordance with the preceding sentence, and the fees
and other costs and expenses of its attorneys and consultants including without
limitation those incurred in connection with monitoring and participating in any
action or proceeding, including costs incurred pursuant to Section 4(b) above.
5. Binding Effect. This Indemnity Agreement shall be binding upon
--------------
and inure to the benefit of Indemnitor and Indemnitees and their respective
successors and assigns.
6. Limitation of Liability of Indemnitees. Notwithstanding any
--------------------------------------
ownership by any Indemnitee at any time of all or any portion of the Property,
in no event shall any Indemnitee (including any successor or assign as holder of
the Note) be bound by any obligations or liabilities of any of the Indemnitor
under this Indemnity Agreement.
7. Liability of Indemnitor. The liability of Indemnitor under this
-----------------------
Indemnity Agreement shall in no way be limited or impaired by any amendment or
modification of the provisions of the Loan Documents to or with the Agent or
Lenders by Indemnitor or any person who succeeds the
8
<PAGE>
Borrower as owner of the Property. In addition, the liability of Indemnitor
under this Indemnity Agreement shall in no way be limited or impaired by (but
subject in all events to the terms set forth in Section 16 hereof) (i) any
extensions of time for performance required by any of the Loan Documents; (ii)
any sale, assignment, or foreclosure of the Note or Deed of Trust or any sale or
transfer of all or part of the Property or any interest(s) therein; (iii) any
exculpatory provision in any of the Loan Documents limiting Lenders' recourse to
property encumbered by the Deed of Trust or to any other security, or limiting
Lenders' rights to a deficiency or other judgment against Indemnitor or any
other obligor or guarantor thereunder (including, without limitation, Section
9.13(b) of the Credit Agreement and the corresponding exculpation provisions set
forth in the Note, the Deed of Trust and this Indemnity Agreement); (iv) the
accuracy or inaccuracy of the representations and warranties made by the
Borrower under any of the Loan Documents; (v) the release of the Borrower or any
other person or entity from performance or observance of any of the agreements,
covenants, terms, or conditions contained in any of the Loan Documents by
operation of law, Lenders' voluntary act, or otherwise; (vi) the release or
substitution in whole or in part of any security for the Note; or (vii) Lenders'
failure to record any Deed of Trust or file any UCC financing statements (or
Lenders' improper recording or filing of any thereof) or otherwise to perfect,
protect, secure, or insure any security interest or lien given as security for
the Note; and, in any such case, whether with or without notice to Indemnitor
and with or without consideration.
8. Waiver. Indemnitor waives any right or claim of right to cause a
------
marshaling of the assets of Indemnitor or to cause Lenders and/or the Agent to
proceed against any of the security for the Loan before proceeding under this
Indemnity Agreement against Indemnitor or to proceed against Indemnitor in any
particular order; Indemnitor agrees that any payments required to be made
hereunder shall become due on demand; Indemnitor expressly waives and
relinquishes all rights and remedies accorded by applicable law to indemnitors
or guarantors, except any rights of subrogation that Indemnitor may have;
provided, that the indemnity provided for hereunder shall neither be contingent
- --------
upon the existence of any such rights of subrogation nor subject to any claims
or defenses whatsoever that may be asserted in connection with the enforcement
or attempted enforcement of such subrogation rights, including, without
limitation, any claim that such subrogation rights were abrogated by any acts of
Lenders and/or the Agent. Indemnitor hereby agrees to postpone the exercise of
any and all rights of subrogation to the rights of Lenders and/or the Agent
9
<PAGE>
against the Borrower hereunder and any rights of subrogation to any collateral
securing the Loan until the Loan shall have been paid in full.
9. Delay. No delay on the Lenders' and/or the Agent's part in
-----
exercising any right, power, or privilege under any of the Loan Documents shall
operate as a waiver of any such privilege, power, or right.
10. Notices. (a) All notices, consents, approvals, elections and
-------
other communications (collectively "Notices") hereunder shall be in writing
-------
(whether or not the other provisions of this Indemnity Agreement expressly so
provide) and shall be deemed to have been duly given if delivered by nationally
recognized overnight courier service or certified mail, with return receipt
requested, postage prepaid, to such parties at the address set forth below (or
at such other addresses as shall be given in writing by any party to the others
pursuant to this Section) and shall be deemed received by the party to whom it
is addressed on the first Domestic Business Day after delivery by the sender to
a nationally recognized overnight courier service or on the third Domestic
Business Day after mailing if sent by certified mail:
To Indemnitor:
Attention:
with a copy to:
Attention:
To the Lenders and/or the Agent:
Morgan Note Trust Company
of New York
60 Wall Street
New York, New York 10260
Attention: Timothy O'Donovan
10
<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022-3897
Attention: Martha Feltenstein, Esq.
(b) In the event of any strike or occurrence of another similar event
which interrupts mail service, notices may be served personally upon an
individual, trustee, partner, or an officer or director of a corporation which
is or is part of the party being served hereunder (all at the address set forth
in this Section).
11. Attorneys' Fees. In the event that Indemnitor or any Indemnitee
---------------
brings any suit or other proceeding with respect to the subject matter or
enforcement of this Indemnity Agreement, the prevailing party (as determined by
the court, agency or other authority before which such suit or proceeding is
commenced) shall, in addition to such other relief as may be awarded, be
entitled to recover attorneys' fees, expenses and costs of investigation as
actually incurred (including, without limitation, attorneys' fees, expenses and
costs of investigation incurred in appellate proceedings, costs incurred in
establishing the right to indemnification, or in any action or participation in,
or in connection with, any case or proceeding under Chapters 7, 11 or 13 of the
Bankruptcy Code, 11 United States Code Sections 101 et seq., or any successor
-- ---
statutes).
12. Successive Actions. A separate right of action hereunder shall
------------------
arise each time the Agent or the Lenders acquire knowledge of any matter
described in Sections 2 or 3 hereof. Separate and successive actions may be
brought hereunder to enforce any of the provisions hereof at any time and from
time to time. No action hereunder shall preclude any subsequent action, and
Indemnitor hereby waives and covenants not to assert any defense in the nature
of splitting of causes of action or merger of judgments.
13. Partial Invalidity. If any provision of this Indemnity Agreement
------------------
shall be determined to be unenforceable in any circumstances by a court of
competent jurisdiction, then the balance of this Indemnity Agreement
nevertheless shall be enforceable, and the subject provision shall be
enforceable in all other circumstances.
14. Interest on Unpaid Amounts. All amounts required to be paid or
--------------------------
reimbursed to any Indemnitee hereunder shall bear interest from the date of
expenditure by such Indemnitee or the date of written demand to any
11
<PAGE>
Indemnitor hereunder, whichever is earlier, until paid to Indemnitee(s). The
annual interest rate shall be the lesser of (a) a rate equal to the Default Rate
(as defined in the Deed of Trust) or (b) the maximum rate then permitted for the
parties to contract for under applicable law.
15. Governing Law. This Indemnity Agreement and the rights and
-------------
obligations of the parties hereunder shall in all respects be governed by, and
construed and enforced in accordance with, the laws of the State of New York
(without giving effect to New York's principles of conflicts of law).
Indemnitor hereby irrevocably submits to the non-exclusive jurisdiction of any
New York state or federal court sitting in the City of New York over any suit,
action or proceeding arising out of or relating to this Indemnity Agreement, and
Indemnitor hereby agrees and consents that, in addition to any other methods of
service of process in any such suit, action or proceeding in any New York state
or federal court sitting in the City of New York, service of process may be made
by certified or registered mail, return receipt requested, directed to
Indemnitor at its address indicated in Section 10 hereof, and service so made
shall be complete five (5) days after the same shall have been so mailed.
16. Termination of Indemnity. Notwithstanding anything to the
------------------------
contrary contained elsewhere in this Indemnity Agreement, subject to the
following sentence, the indemnity provided for herein and this Indemnity
Agreement shall terminate and be of no further force and effect upon the earlier
to occur of (a) repayment in full of all principal, interest and any other sums
due under, or evidenced by, the Credit Agreement, the Deed of Trust and the
other Loan Documents and (b) two (2) years after the date on which the Lenders
or any affiliate of either of them acquires the Property. Notwithstanding the
foregoing, any claim hereunder may be made at any time before the date described
in the preceding sentence, and once such claim has been made prior to such date,
the obligations of Indemnitor under this Indemnity Agreement shall continue to
apply to such claim, to the extent permitted by applicable law.
12
<PAGE>
IN WITNESS WHEREOF, Indemnitor has executed this Indemnity Agreement
as of the date first set forth above.
[__________________________]
By: _______________________
Name:
Title:
13
<PAGE>
ACKNOWLEDGMENT FOR INDEMNITOR
-----------------------------
STATE OF )
) ss.:
COUNTY OF )
On January __, 1997, before me personally came ______________, to me
known to be the person who executed the foregoing instrument.
[Seal]
_____________________________
Notary Public
14
<PAGE>
EXHIBIT 10.44
ASSIGNMENT OF LEASES,
RENTS AND SECURITY DEPOSITS
from
[BORROWER],
as Assignor
to
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS LEAD AGENT,
as Assignee
Dated as of January __, 1997
________________________________________________________
After recording, please return to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
ATTN: Martha Feltenstein, Esq.
Prepared and drafted by:
Martha Feltenstein, Esq., attorney at law
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
<PAGE>
ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS
THIS ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS (this
"Assignment"), dated as of this ___ day of January, 1997, between [KILROY REALTY
----------
CORPORATION], a Maryland corporation ("Assignor") and MORGAN GUARANTY TRUST
--------
COMPANY OF NEW YORK, AS LEAD AGENT ("Assignee").
--------
WHEREAS, the Banks have provided a line of credit loan (the "Loan") to
----
Assignor in the aggregate principal amount of [$17,000,000] evidenced by one or
more promissory notes dated as of the date hereof and those promissory notes to
be executed subsequent to the date hereof (collectively, the "Note") in
----
accordance with the Revolving Credit Agreement, dated as of the date hereof,
among Assignor, Assignee, and the banks listed therein (as the same may
hereafter be modified, amended, restated or supplemented, the "Credit
------
Agreement");
- ---------
WHEREAS, as a condition to funding the Loan, Assignee has required
that Assignor enter into this Agreement for the benefit of Assignee.
NOW, THEREFORE, Assignor, in consideration of TEN DOLLARS ($10.00),
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, does hereby assign, transfer and set over unto Assignee,
subject to the terms hereof, all of the right, title and interest of Assignor in
and to all of those certain leases now or hereafter affecting all or a portion
of the real property more particularly described on Exhibits A-1 - A-3 hereto
------------------
(the "Real Property"), together with all rents, income and profits
-------------
(collectively, "Rents") arising from said lease(s), all modifications, renewals
-----
and extensions thereof and any assignable guarantees of the lessee's
obligations under said lease(s) (each of said lease(s) and all such guarantees,
modifications, renewals and extensions relating thereto being individually
referred to as a "Lease" and collectively referred to as the "Leases"); and,
----- ------
further, together with all Rents generated with respect to the Real Property and
from all future Leases relating to portions of the Real Property.
<PAGE>
THIS ASSIGNMENT is an absolute, present and irrevocable assignment and
is made for the purpose of securing:
A. The payment of all sums and indebtedness now or hereafter due and
payable under the Note, which Note is secured by an Indenture of Mortgage, Deed
of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents, dated as of even date herewith, from Assignor to Assignee
relating to the Real Property (as such may hereafter be extended, modified,
supplemented or amended, the "Mortgage").
--------
B. Payment of all sums with interest thereon becoming due and
payable to Assignee under this Assignment, the Note, the Mortgage, or the other
Loan Documents to which Assignor is a party.
C. The performance and discharge of each and every obligation,
covenant, representation, warranty and agreement of Assignor under this
Assignment, the Note, the Mortgage and any other Loan Document to which Assignor
is a Party.
ASSIGNOR hereby covenants and warrants to Assignee that Assignor has
not executed any prior unreleased assignment of the Leases or the Rents, nor has
Assignor performed any act or executed any other instrument which might prevent
Assignee from operating under any of the terms and conditions of this Assignment
or which would limit Assignee in such operation; and Assignor further covenants
and warrants to Assignee that Assignor has not executed or granted any
modification whatsoever of any Lease which might have a Material Adverse
Effect, and that the Leases are in full force and effect and the Assignor has
neither given to nor received from any tenant any written notice of default
under any Lease which might have a Material Adverse Effect and to the Assignor's
knowledge, no events or circumstances exist which with or without the giving of
notice, the passage of time or both may constitute a default under any of the
Leases which in the aggregate might have a Material Adverse Effect.
ASSIGNOR further covenants with the Assignee (l) to observe and
perform all the obligations imposed upon the lessor under the Leases and not to
do or permit
2
<PAGE>
to be done anything to impair the security thereof; (2) not to collect any of
the Rents (exclusive of security deposits) more than thirty (30) days in advance
of the time when the same shall become due (except to the extent expressly
provided otherwise in any Lease), not to execute any other assignment of
lessor's interest in the Leases or assignment of rents arising or accruing from
the Leases or otherwise with respect to the Real Property; none of the
foregoing shall be done or suffered to be done without in each instance
obtaining the prior written consent of Assignee (except to the extent such
consent is not required pursuant to the terms of the Credit Agreement and the
Mortgage), and any of such acts done without the prior written consent of
Assignee shall be null and void; (3) to assign and transfer to Assignee any and
all subsequent Leases demising all or any part of the Real Property; and (4) to
execute and deliver, at the request of Assignee, all such further assurances and
assignments with respect to the Real Property as Assignee shall from time to
time reasonably request to implement the terms of this Assignment; provided,
--------
however, that no such further assurances and assignments shall increase
- -------
Assignee's obligations under this Assignment.
THIS ASSIGNMENT is made on the following terms, covenants and
conditions:
1. All capitalized terms not otherwise defined herein shall have
the meanings set forth in the Credit Agreement or the Mortgage, as applicable.
2. Prior to the occurrence and continuance of an Event of Default,
Assignor shall have the right to collect, in accordance with the terms hereof,
all Rents and to retain, use and enjoy the same.
3. At any time after the occurrence and during the continuance of an
Event of Default, Assignee, without in any way waiving such Event of Default, at
its option, upon notice and without regard to the adequacy of the security for
the said principal sum, interest and indebtedness secured hereby, by the
Mortgage and the other Loan Documents, either in person or by agent, upon
bringing any action or proceeding, or by a receiver appointed by a court, may
take possession of the Real Property and have, hold, manage, lease, use and
operate the same on such terms and for such period of time as
3
<PAGE>
Assignee may deem proper. Assignee, either with or without taking possession of
said Real Property in its own name, may demand, sue for or otherwise collect and
receive all Rents, including any Rents past due and unpaid, and to apply such
Rents to the payment of: (a) all expenses of managing the Trust Estate,
including, without limitation, the reasonable salaries, fees and wages of any
managing agent and such other employees as Assignee may reasonably deem
necessary and all reasonable expenses of operating and maintaining the Trust
Estate, including, without limitation, all taxes, charges, claims, assessments,
water rents, sewer rents and any other liens, and premiums for all insurance
which are due and payable and the reasonable cost of all alterations,
renovations, repairs or replacements, and all reasonable expenses incident to
taking and retaining possession of the Trust Estate, including the maintenance
of the Trust Estate in accordance with all Environmental Laws, although nothing
in this Assignment shall be construed so as to impose such an obligation upon
Assignee; and (b) the principal sum, interest and indebtedness secured hereby
and by the Mortgage and the other Loan Documents, together with all reasonable
costs and reasonable attorneys' fees actually incurred, in such order of
priority as Assignee may elect in its sole discretion. The exercise by Assignee
of the option granted it in this Paragraph 3 and the collection of the Rents and
the application thereof as herein provided shall not be considered a waiver of
any Event of Default under the Note, the Mortgage, the other Loan Documents or
under the Leases or this Assignment. Assignor agrees that the exercise by
Assignee of one or more of its rights and remedies hereunder shall in no way be
deemed or construed to make Assignee a mortgagee in possession unless and until
such time as Assignee takes actual possession of the Real Property.
4. Assignee shall not be liable for any loss sustained by Assignor
resulting from Assignee's failure to let the Real Property or any portion
thereof or any other act or omission of Assignee either in collecting the Rents
or, if Assignee shall have taken possession of the Real Property, in managing
such Real Property after any such Event of Default, except to the extent such
loss is caused by the gross negligence or willful misconduct of Assignee.
Assignee shall not be obligated to perform or discharge, nor does Assignee
hereby undertake to perform or discharge, any obligation, duty or liability
4
<PAGE>
under any Lease or under or by reason of this Assignment, and Assignor shall,
and does hereby agree to, indemnify Assignee for, and to hold Assignee harmless
from, prior to the time that Assignee becomes a mortgagee in possession or fee
owner of any Property or otherwise takes possession of any Property following an
Event of Default, any and all liability, loss or damage which may or might be
incurred under said Leases or under or by reason of this Assignment and the
exercise of Assignee's remedies hereunder and under the other Loan Documents and
from any and all claims and demands whatsoever which may be asserted against
Assignee by reason of any alleged obligations or undertakings on its part to
perform or discharge any of the terms, covenants or agreements contained in said
Leases, except to the extent caused by Assignee's gross negligence or willful
misconduct. Should Assignee incur any such liability under said Leases or under
or by reason of this Assignment or in defense of any such claims or demands, the
amount thereof, including reasonable costs and expenses and reasonable
attorneys' fees actually incurred, shall be secured hereby, and Assignor shall
reimburse Assignee therefor immediately upon demand, and upon the failure of
Assignor so to do Assignee may, at its option, exercise Assignee's remedies
under the Mortgage as same relates to the Trust Estate. It is further
understood that unless and until Assignee shall become a mortgagee in possession
or the fee owner of the Real Property or otherwise takes possession or control
of any Property following an Event of Default, this Assignment shall not
operate to place responsibility for the control, care, management or repair of
said Real Property upon Assignee, nor for the carrying out of any of the terms
and conditions of any Lease; nor shall it operate to make Assignee responsible
or liable for any waste committed on the Real Property by the tenants or any
other parties, or for any dangerous or defective condition of the premises, or
for any negligence in the management, upkeep, repair or control of said Real
Property resulting in loss or injury or death to any tenant, licensee, employee
or stranger, except to the extent caused by Assignee's gross negligence or
willful misconduct.
5. Upon payment in full of the principal sum, interest and
indebtedness secured hereby and by the Mortgage and the other Loan Documents, or
if the Mortgage is otherwise released pursuant to Section 36 of the Mort-
5
<PAGE>
gage or Section 2.9(b) of the Credit Agreement, this Assignment shall become
and be void and of no effect, but the affidavit, certificate, letter or
statement of any officer, agent or attorney of Assignee showing any part of said
principal, interest or indebtedness to remain unpaid shall be and constitute
conclusive evidence of the validity, effectiveness and continuing force of this
Assignment, and any person may, and is hereby authorized to, rely thereon.
Assignor hereby authorizes and directs the lessees named in the Leases or any
other or future lessee or occupant of the Real Property, upon receipt from
Assignee of written notice to the effect that Assignee is then the holder of
the Mortgage and that an Event of Default exists thereunder or under any other
Loan Document, to pay over to Assignee all Rents, and to continue so to do until
otherwise notified by Assignee.
6. Assignee may take or release other security for the payment of
said principal sum, interest and indebtedness, may release any party primarily
or secondarily liable therefor and may apply any other security held by it to
the satisfaction of such principal sum, interest or indebtedness, without
prejudice to any of its rights under this Assignment.
7. Assignor agrees that it will, after an Event of Default and the
acceleration of indebtedness evidenced by the Note, at the request therefor by
Assignee, deliver to Assignee certified copies of each and every Lease then
affecting all or any part of the Real Property, together with assignments
thereof. Such assignments shall be on forms approved by Assignee or its
designee in its reasonable discretion, and Assignor agrees to pay all costs
reasonably incurred in connection with the examination of said Leases and the
preparation, execution and recording of such assignments or any other related
documents, including, without limitation, reasonable fees of Assignee's local
counsel.
8. The term "Lease" as used herein shall include any lease affecting
-----
the Real Property executed after the date hereof and during the term of this
Assignment.
9. Wherever used herein, the singular (including, without
limitation, the term "Lease") shall include
-----
6
<PAGE>
the plural, and the use of any gender shall apply to all genders.
10. Nothing contained in this Assignment and no act done or omitted
by Assignee pursuant to the powers and rights granted it hereunder shall be
deemed to be a waiver by Assignee of any of Assignee's rights and remedies
under the Note, the Mortgage or any other Loan Document. This Assignment is
made and accepted without prejudice to any of such rights and remedies possessed
by Assignee to collect the principal sum, interest and indebtedness secured
hereby and to enforce any other security therefor held by it, and said rights
and remedies may be exercised by Assignee either prior to, simultaneously with,
or subsequent to any action taken by it hereunder.
11. All notices, consents, approvals and requests required or
permitted hereunder shall be given in accordance with the terms of Section 26 of
the Mortgage.
12. No consent by Assignor shall be required for any assignment or
reassignment of the rights of Assignee under this Assignment to any purchaser of
the Loan or any interest in or portion of the Loan.
13. Enforcement of this Assignment against any Property shall be
governed by the laws of the State in which such Property is located. Whenever
possible, each provision of this Assignment shall be interpreted in such a
manner as to be effective and valid under applicable law, but if any provision
of this Assignment shall be prohibited by, or invalid under, applicable law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remaining provisions of this Assignment.
14. This Assignment is delivered pursuant to, and upon and subject
to, the terms of the Credit Agreement. In the event that any provisions of
this Assignment and the Credit Agreement conflict, the provisions of the Credit
Agreement shall control. In the event that any provisions of this Assignment
and the Mortgage conflict, the provisions of the Mortgage shall control.
15. Assignor hereby waives and shall waive trial by jury, to the
extent permitted by law, in any
7
<PAGE>
action or proceeding brought by, or counterclaim asserted by Assignee, which
action proceeding or counterclaim arises out of or is connected with this
Assignment, the Note or any other Loan Document.
16. This Assignment may be executed in any number of counterparts.
8
<PAGE>
IN WITNESS WHEREOF, Assignor has duly executed this Assignment on the
date first hereinabove written.
WITNESS: ASSIGNOR:
By:____________________ [BORROWER]
Name:
By:____________________ By: ___________________________
Name: Name:
Title:
ASSIGNEE:
WITNESS: MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, AS LEAD AGENT
By:_____________________ By:__________________________________
Name: Name:
Title:
By:_____________________
Name:
<PAGE>
ACKNOWLEDGEMENTS
[INSERT ACKNOWLEDGEMENT FOR APPLICABLE JURISDICTION]
<PAGE>
Exhibit A
LEGAL DESCRIPTIONS
A-1
<PAGE>
EXHIBIT 10.45
_________________________________________________________
_________________________________________________________
REVOLVING CREDIT AGREEMENT
dated as of January __, 1997
among
KILROY REALTY, L.P.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Bank and as Lead Agent for the Banks,
and
THE BANKS LISTED HEREIN
_________________________________________________________
_________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS......................................... 1
SECTION 1.1. Definitions............................................... 1
-----------
SECTION 1.2. Accounting Terms and Determinations....................... 20
-----------------------------------
SECTION 1.3. Types of Borrowings....................................... 21
-------------------
ARTICLE II
THE CREDITS......................................... 21
SECTION 2.1. Commitments to Lend....................................... 21
-------------------
SECTION 2.2. Notice of Borrowing....................................... 21
-------------------
SECTION 2.3. Notice to Banks; Funding of Loans......................... 22
---------------------------------
SECTION 2.4. Notes..................................................... 23
-----
SECTION 2.5. Maturity of Loans......................................... 24
-----------------
SECTION 2.6. Interest Rates............................................ 24
--------------
SECTION 2.7. Fees...................................................... 26
----
SECTION 2.8. Mandatory Termination..................................... 26
---------------------
SECTION 2.9. Mandatory Prepayment...................................... 26
--------------------
SECTION 2.10. Optional Prepayments..................................... 27
--------------------
SECTION 2.11. General Provisions as to Payments........................ 29
---------------------------------
SECTION 2.12. Funding Losses........................................... 30
--------------
SECTION 2.13. Computation of Interest and Fees......................... 30
--------------------------------
SECTION 2.14. Method of Electing Interest Rates................... 30
---------------------------------
ARTICLE III
CONDITIONS.......................................... 32
SECTION 3.1. Closing.............................................. 32
-------
SECTION 3.2. Borrowings................................................ 36
----------
SECTION 3.3. Conditions Precedent to Additional Real
---------------------------------------
Property Assets.................................................... 37
---------------
SECTION 3.4. Mortgaged Properties...................................... 38
--------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES...................... 41
SECTION 4.1. Existence and Power....................................... 41
-------------------
SECTION 4.2. Power and Authority....................................... 41
-------------------
SECTION 4.3. No Violation.............................................. 42
------------
SECTION 4.4. Financial Information..................................... 42
---------------------
SECTION 4.5. Litigation................................................ 43
----------
SECTION 4.6. Compliance with ERISA..................................... 43
---------------------
SECTION 4.7 Environmental Compliance.................................. 44
------------------------
SECTION 4.8. Taxes..................................................... 45
-----
SECTION 4.9. Full Disclosure........................................... 46
---------------
SECTION 4.10. Solvency................................................. 46
--------
SECTION 4.11. Use of Proceeds; Margin Regulations...................... 46
-----------------------------------
SECTION 4.12. Governmental Approvals................................... 46
----------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.13. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act................................................................ 47
---
SECTION 4.14. Closing Date Transactions................................ 47
-------------------------
SECTION 4.15. Representations and Warranties in Loan Documents......... 47
------------------------------------------------
SECTION 4.16. Patents, Trademarks, etc................................. 47
------------------------
SECTION 4.17. No Default............................................... 48
----------
SECTION 4.18. Licenses, etc............................................ 48
-------------
SECTION 4.19. Compliance With Law...................................... 48
-------------------
SECTION 4.20. No Burdensome Restrictions............................... 48
--------------------------
SECTION 4.21. Brokers' Fees............................................ 48
-------------
SECTION 4.22. Labor Matters............................................ 49
-------------
SECTION 4.23. Organizational Documents................................. 49
------------------------
SECTION 4.24. Principal Offices........................................ 49
-----------------
SECTION 4.25. REIT Status.............................................. 49
SECTION 4.26. Ownership of Property.................................... 49
--------------------
SECTION 4.27 Security Interests and Liens.............................. 49
----------------------------
SECTION 4.28 Structural Defects and Violation of Law................... 50
---------------------------------------
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS.................. 50
SECTION 5.1. Information............................................... 50
-----------
SECTION 5.2. Payment of Obligations.................................... 54
----------------------
SECTION 5.3. Maintenance of Property; Insurance........................ 54
----------------------------------
SECTION 5.4. Conduct of Business....................................... 55
-------------------
SECTION 5.5. Compliance with Laws...................................... 55
--------------------
SECTION 5.6. Inspection of Property, Books and Records................. 55
-----------------------------------------
SECTION 5.7. Existence................................................. 55
---------
SECTION 5.8. Financial Covenants....................................... 56
-------------------
SECTION 5.9. Restriction on Fundamental Changes; Operation and
-------------------------------------------------
Control............................................................ 57
-------
SECTION 5.10. Changes in Business...................................... 57
-------------------
SECTION 5.11 Sale of the Property...................................... 57
--------------------
SECTION 5.12. Fiscal Year; Fiscal Quarter.............................. 57
---------------------------
SECTION 5.13. Margin Stock............................................. 58
------------
SECTION 5.14.................................................. 58
SECTION 5.15. Use of Proceeds................................ 58
---------------
SECTION 5.16 Borrower Status.......................................... 58
---------------
ARTICLE VI
DEFAULTS............................................ 58
SECTION 6.1. Events of Default......................................... 58
-----------------
SECTION 6.2. Rights and Remedies....................................... 62
-------------------
SECTION 6.3. Notice of Default......................................... 64
-----------------
ARTICLE VII
THE LEAD AGENT...................................... 64
SECTION 7.1. Appointment and Authorization............................. 64
-----------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 7.2. Lead Agent and Affiliates................................. 64
-------------------------
SECTION 7.3. Action by Lead Agent...................................... 64
--------------------
SECTION 7.4. Consultation with Experts................................. 64
-------------------------
SECTION 7.5. Liability of Lead Agent................................... 65
-----------------------
SECTION 7.6. Indemnification........................................... 65
---------------
SECTION 7.7. Credit Decision........................................... 65
---------------
SECTION 7.8. Successor Lead Agent...................................... 66
--------------------
SECTION 7.9. Lead Agent's Fee.......................................... 66
----------------
SECTION 7.10. Copies of Notices........................................ 66
-----------------
ARTICLE VIII
CHANGE IN CIRCUMSTANCES. ........................... 67
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair.. 67
--------------------------------------------------------
SECTION 8.2. Illegality................................................ 67
----------
SECTION 8.3. Increased Cost and Reduced Return......................... 68
---------------------------------
SECTION 8.4. Taxes..................................................... 70
-----
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar
----------------------------------------------------
Loans.............................................................. 72
-----
ARTICLE IX
MISCELLANEOUS....................................... 73
SECTION 9.1. Notices................................................... 73
-------
SECTION 9.2. No Waivers................................................ 74
----------
SECTION 9.3. Expenses; Indemnification................................. 74
-------------------------
SECTION 9.4. Sharing of Set-Offs....................................... 75
-------------------
SECTION 9.5. Amendments and Waivers.................................... 76
----------------------
SECTION 9.6. Successors and Assigns.................................... 77
----------------------
SECTION 9.7. Governing Law; Submission to Jurisdiction................. 79
-----------------------------------------
SECTION 9.8. Marshaling; Recapture..................................... 80
---------------------
SECTION 9.9. Counterparts; Integration; Effectiveness.................. 80
----------------------------------------
SECTION 9.10. WAIVER OF JURY TRIAL..................................... 81
--------------------
SECTION 9.11. Survival................................................. 81
--------
SECTION 9.12. Domicile of Loans........................................ 81
-----------------
SECTION 9.13. Limitation of............................................ 81
-------------
</TABLE>
iii
<PAGE>
Exhibit A - Form of Note
Exhibit B - Mortgaged Properties
Exhibit C - Assignment and Assumption Agreement
Exhibit D - Allocated Mortgaged Property Loan Amounts
iv
<PAGE>
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT, dated as of January __, 1997, among KILROY
REALTY, L.P.(the "Borrower"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank
--------
and as Lead Agent for the Banks and the BANKS listed on the signature pages
hereof (the "Banks").
-----
The parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have
-----------
the following meanings:
"Adjusted London Interbank Offered Rate" has the meaning set forth in
--------------------------------------
Section 2.6(b).
"Administrative Questionnaire" means, with respect to each Bank, an
----------------------------
administrative questionnaire in the form prepared by the Lead Agent and
submitted to the Lead Agent (with a copy to the Borrower) duly completed by such
Bank.
"Agreement" means this Revolving Credit Agreement as the same may
---------
from time to time hereafter be modified, supplemented or amended.
"Allocated Mortgaged Property Loan Amount" means (x) as to the
----------------------------------------
Mortgaged Properties as of the date hereof, sixty percent (60%) of the Appraised
Value thereof, and (y) as to properties that become Mortgaged Properties after
the date hereof, an amount equal to the lesser of sixty percent (60%) of (x) the
purchase price thereof and (y) the Appraised Value thereof.
"Annual EBITDA" means, measured as of the last day of each calendar
-------------
quarter, an amount derived from (i) total revenues relating to all Real Property
Assets of the Borrower and its Consolidated Subsidiaries or to the Borrower's
interest in Minority Holdings for the previous four consecutive calendar
quarters including the quarter then ended, on a cash basis, plus (ii) interest
----
and other
<PAGE>
income of the Borrower and its Consolidated Subsidiaries, including, without
limitation, real estate service revenues, for such period, less (iii) total
----
operating expenses and other expenses relating to such Real Property Assets and
to the Borrower's interest in Minority Holdings for such period (other than
interest, taxes, depreciation, amortization, and other non-cash items), less
----
(iv) total corporate operating expenses (including general overhead expenses)
and other expenses of the Borrower, its Consolidated Subsidiaries and the
Borrower's interest in Minority Holdings (other than interest, taxes,
depreciation, amortization and other non-cash items), for such period.
"Applicable Interest Rate" means the lesser of (x) the rate at which
------------------------
the interest rate applicable to any floating rate Debt could be fixed, at the
time of calculation, by the Borrower entering into an unsecured interest rate
swap agreement (or, if such rate is incapable of being fixed by entering into an
unsecured interest rate swap agreement at the time of calculation, a reasonably
determined fixed rate equivalent), and (y) the rate at which the interest rate
applicable to such floating rate Debt is actually capped, at the time of
calculation, if the Borrower has entered into an interest rate cap agreement
with respect thereto or if the documentation for such Debt contains a cap.
"Applicable Lending Office" means, with respect to any Bank, (i) in
-------------------------
the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Appraisals" means, with respect to each Mortgaged Property, the
----------
independent appraisals, prepared and delivered to the Lead Agent at the
Borrower's sole cost and expense and conforming to the regulations promulgated
pursuant to FIRREA, initially completed by _____________ in the case of
Appraisals for the Mortgaged Properties as of the date of this Agreement.
"Appraised Value" means the value of any Mortgaged Property as
---------------
indicated on the most recent Appraisal thereof.
"Assignee" has the meaning set forth in Section 9.6(c).
--------
2
<PAGE>
"Assignments" means, the Assignment[s] of Leases, Rents and Security
-----------
Deposits, each executed by the Borrower on or prior to the date hereof or as of
the date of acquisition of a Mortgaged Property, securing all or a portion of
the Loans.
"Bank" means each bank listed on the signature pages hereof, each
----
Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.
"Bankruptcy Code" means Title 11 of the United States Code, entitled
---------------
"Bankruptcy", as amended from time to time, and any successor statute or
statutes.
"Base Rate" means, for any day, a rate per annum equal to the higher
---------
of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate
plus .50%.
"Base Rate Borrowing" means a Borrowing comprised of Base Rate Loans.
-------------------
"Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan
--------------
in accordance with the applicable Notice of Borrowing or pursuant to Article
VIII.
"Benefit Arrangement" means at any time an employee benefit plan
-------------------
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"Borrower" means Kilroy Realty, L.P. and its successors.
--------
"Borrowing" means a borrowing hereunder consisting of Loans made to
---------
the Borrower at the same time by the Banks pursuant to Article II. A Borrowing
is a "Domestic Borrowing" if such Loans are Base Rate Loans or a "Euro-Dollar
------------------ -----------
Borrowing" if such Loans are Euro-Dollar Loans.
- ---------
"Capital Expenditures" means, for any period, the sum of all
--------------------
expenditures (whether paid in cash or accrued as a liability) by the Borrower
which are capitalized on the consolidated balance sheet of the Borrower in
conformity with GAAP, but less (i) all expenditures made with respect to the
acquisition by the Borrower and its
3
<PAGE>
Consolidated Subsidiaries of any interest in real property within nine months
after the date such interest in real property is acquired and (ii) capital
expenditures made from the proceeds of insurance or condemnation awards (or
payments in lieu thereof) or indemnity payments received during such period by
Borrower or any of its Consolidated Subsidiaries from third parties.
"Capital Leases" means, with respect to any Person, any lease of any
--------------
property by such Person as lessee that, in conformity with GAAP, is required to
be accounted for as a capital lease.
"Cash or Cash Equivalents" means (i) cash, (ii) direct obligations of
------------------------
the United States Government, including, without limitation, treasury bills,
notes and bonds, (iii) interest bearing or discounted obligations of Federal
agencies and Government sponsored entities or pools of such instruments offered
by banks rated AA or better by S&P or Aa2 by Moody's and dealers, including,
without limitation, Federal Home Loan Mortgage Corporation participation sale
certificates, Government National Mortgage Association modified pass-through
certificates, Federal National Mortgage Association bonds and notes, Federal
Farm Credit System securities, (iv) time deposits, domestic and Eurodollar
certificates of deposit, bankers acceptances, commercial paper rated at least
A-1 by S&P and P-1 by Moody's, and/or guaranteed by an Aa rating by Moody's, an
AA rating by S&P, or better rated credit, floating rate notes, other money
market instruments and letters of credit each issued by banks which have a
long-term debt rating of at least AA by S&P or Aa2 by Moody's, (v) obligations
of domestic corporations, including, without limitation, commercial paper,
bonds, debentures, and loan participations, each of which is rated at least AA
by S&P, and/or Aa2 by Moody's, and/or unconditionally guaranteed by an AA rating
by S&P, an Aa2 rating by Moody's, or better rated credit, (vi) obligations
issued by states and local governments or their agencies, rated at least MIG-1
by Moody's and/or SP-1 by S&P and/or guaranteed by an irrevocable letter of
credit of a bank with a long-term debt rating of at least AA by S&P or Aa2 by
Moody's, (vii) repurchase agreements with major banks and primary government
securities dealers fully secured by U.S. Government or agency collateral equal
to or exceeding the principal amount on a daily basis and held in safekeeping,
(viii) real estate loan
4
<PAGE>
pool participations, guaranteed by an entity with an AA rating given by S&P or
an Aa2 rating given by Moody's, or better rated credit, and (ix) shares of any
mutual fund that has its assets primarily invested in the types of investments
referred to in clauses (i) through (v).
"Closing Date" means the date on which the Lead Agent shall have
------------
received the documents specified in or pursuant to Section 3.1.
"Collateral" means all property and interests in property now owned or
----------
hereafter acquired in or upon which a Lien has been or is purported or intended
to have been granted to the Lead Agent on behalf of the Banks under each of the
Mortgages.
"Combined Asset Value" shall mean the book value of the assets of the
--------------------
Borrower (including Minority Holdings) and its Consolidated Subsidiaries,
calculated on a consolidated basis, in accordance with GAAP, but without
deduction for depreciation and net of monetary obligations which are not for
borrowed money (such as accounts payable and working capital liabilities).
"Commitment" means, with respect to each Bank, the amount committed by
----------
such Bank pursuant to this Agreement with respect to any Loans, as such amount
may be reduced from time to time pursuant to Sections 2.8 and 2.9.
"Consolidated Subsidiary" means at any date any Subsidiary or other
-----------------------
entity which is consolidated with the Borrower in accordance with GAAP.
"Consolidated Tangible Net Worth" means at any date the consolidated
-------------------------------
stockholders' equity of the Borrower (determined on a book basis), less its
consolidated Intangible Assets, all determined as of such date. For purposes of
this definition "Intangible Assets" means with respect to any such intangible
-----------------
assets, the amount (to the extent reflected in determining such consolidated
stockholders' equity) of (i) all write-ups subsequent to December 31, 1996 in
the book value of any asset owned by the Borrower or a Consolidated Subsidiary
and (ii) goodwill, patents, trademarks, service marks, trade names, anticipated
future benefit of tax loss carry forwards, copyrights, organization or
developmental expenses and other intangible assets.
"Contingent Obligation" as to any Person means, without duplication,
---------------------
(i) any contingent obligation of such Person required to be shown on such
Person's balance sheet in accordance with GAAP, and (ii) any obligation
5
<PAGE>
required to be disclosed in the footnotes to such Person's financial statements,
guaranteeing partially or in whole any non-recourse Debt, lease, dividend or
other obligation, exclusive of contractual indemnities (including, without
limitation, any indemnity or price-adjustment provision relating to the
purchase or sale of securities or other assets) and guarantees of non-monetary
obligations (other than guarantees of completion) which have not yet been called
on or quantified, of such Person or of any other Person. The amount of any
Contingent Obligation described in clause (ii) shall be deemed to be (a) with
respect to a guaranty of interest or interest and principal, or operating income
guaranty, the sum of all payments required to be made thereunder (which in the
case of an operating income guaranty shall be deemed to be equal to the debt
service for the note secured thereby), calculated at the Applicable Interest
Rate, through (i) in the case of an interest or interest and principal guaranty,
the stated date of maturity of the obligation (and commencing on the date
interest could first be payable thereunder), or (ii) in the case of an operating
income guaranty, the date through which such guaranty will remain in effect, and
(b) with respect to all guarantees not covered by the preceding clause (a), an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such guaranty is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder) as recorded on the balance sheet and
on the footnotes to the most recent financial statements of the applicable
Borrower required to be delivered pursuant to Section 4.6 hereof.
Notwithstanding anything contained herein to the contrary, guarantees of
completion shall not be deemed to be Contingent Obligations unless and until a
claim for payment or performance has been made thereunder, at which time any
such guaranty of completion shall be deemed to be a Contingent Obligation in an
amount equal to any such claim. Subject to the preceding sentence, (i) in the
case of a joint and several guaranty given by such Person and another Person
(but only to the extent such guaranty is recourse, directly or indirectly to the
applicable Borrower), the amount of the guaranty shall be deemed to be 100%
thereof unless and only to the extent that such other Person has delivered Cash
or Cash Equivalents to secure all or any part of such Person's guaranteed
obligations, (ii) in the case of joint and several guarantees
6
<PAGE>
given by a Person in whom the applicable Borrower owns an interest (which
guarantees are non-recourse to the applicable Borrower), to the extent the
guarantees, in the aggregate, exceed 15% of total real estate investments, the
amount in excess of 15% shall be deemed to be a Contingent Obligation of the
applicable Borrower, and (iii) in the case of a guaranty (whether or not joint
and several) of an obligation otherwise constituting Debt of such Person, the
amount of such guaranty shall be deemed to be only that amount in excess of the
amount of the obligation constituting Debt of such Person. Notwithstanding
anything contained herein to the contrary, "Contingent Obligations" shall not be
deemed to include guarantees of Unused Commitments or of construction loans to
the extent the same have not been drawn.
"Debt" of any Person means, without duplication, (A) as shown on such
----
Person's consolidated balance sheet (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property and, (ii) all
indebtedness of such Person evidenced by a note, bond, debenture or similar
instrument (whether or not disbursed in full in the case of a construction
loan), (B) the face amount of all letters of credit issued for the account of
such Person and, without duplication, all unreimbursed amounts drawn thereunder,
(C) all Contingent Obligations of such Person, (D) all payment obligations of
such Person under any interest rate protection agreement (including, without
limitation, any interest rate swaps, caps, floors, collars and similar
agreements) and currency swaps and similar agreements which were not entered
into specifically in connection with Debt set forth in clauses (A), (B) or (C)
hereof. For purposes of this Agreement, Debt (other than Contingent
Obligations) of the Borrower shall be deemed to include only the Borrower's pro
rata share (such share being based upon the Borrower's percentage ownership
interest as shown on the Borrower's annual audited financial statements) of the
Debt of any Person in which the applicable Borrower, directly or indirectly,
owns an interest, provided that such Debt is nonrecourse, both directly and
indirectly, to the applicable Borrower.
"Debt Service" shall mean, measured as of the last day of each
------------
calendar quarter, an amount equal to the greater of (i) interest actually
payable by the Borrower on the Loans for the previous four consecutive quarters
7
<PAGE>
including the quarter then ended and (ii) the sum of the Pro-Forma Debt Service
for the previous four consecutive quarters including the quarter then ended.
"Default" means any condition or event which constitutes an Event of
-------
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Domestic Business Day" means any day except a Saturday, Sunday or
---------------------
other day on which commercial banks in New York City are authorized by law to
close.
"Domestic Lending Office" means, as to each Bank, its office located
-----------------------
within the United States at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Domestic
Lending Office) or such other office within the United States as such Bank may
hereafter designate as its Domestic Lending Office by notice to the Borrower and
the Lead Agent; provided that no Bank shall be permitted to change its Domestic
Lending Office if as a result of such change either (i) pursuant to the
provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain
any Loans as Euro-Dollar Loans; or (ii) Borrower would be required to make any
payment to such Bank pursuant to the provisions of Section 8.3 or Section 8.4.
"Due Diligence Package" has the meaning provided in Section 3.3.
---------------------
"Environmental Affiliate" means any partnership, or joint venture,
-----------------------
trust or corporation in which an equity interest is owned by the Borrower,
either directly or indirectly.
"Environmental Approvals" means any permit, license, approval,
-----------------------
ruling, variance, exemption or other authorization required under applicable
Environmental Laws.
"Environmental Claim" means, with respect to any Person, any notice,
-------------------
claim, demand or similar communication (written or oral) by any other Person
alleging potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damage, property damage, personal
injuries, fines or
8
<PAGE>
penalties arising out of, based on or resulting from (i) the presence, or
release into the environment, of any Material of Environmental Concern at any
location, whether or not owned by such Person or (ii) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law, in each
case as to which could reasonably be expected to have a Material Adverse Effect.
"Environmental Indemnity" means the Environmental Indemnity[ies]
-----------------------
executed by [the Borrower] on or prior to the date hereof or as of the date of
the addition of a Real Property Asset to the Mortgaged Properties.
"Environmental Laws" means any and all federal, state, local and
------------------
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Material of
Environmental Concern or hazardous wastes into the environment including,
without limitation, ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, Material
of Environmental Concern or hazardous wastes or the clean-up or other
remediation thereof.
"Environmental Report" has the meaning set forth in Section 4.7.
--------------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
-----------
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"Euro-Dollar Borrowing" has the meaning set forth in Section 1.3.
---------------------
9
<PAGE>
"Euro-Dollar Business Day" means any Domestic Business Day on which
------------------------
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office,
--------------------------
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its Euro-
Dollar Lending Office) or such other office, branch or affiliate of such Bank as
it may hereafter designate as its Euro-Dollar Lending Office by notice to the
Borrower and the Lead Agent; provided that no Bank shall be permitted to change
its Euro-Dollar Lending Office if as a result of such change either (i) pursuant
to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to
maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required make
any payment to such Bank pursuant to the provisions of Sections 8.3 or Section
8.4.
"Euro-Dollar Loan" means a Loan to be made by a Bank as a Euro-Dollar
----------------
Loan in accordance with the applicable Notice of Borrowing or Notice of
Interest Rate Election.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
------------------------------
2.6(b).
"Event of Default" has the meaning set forth in Section 6.1.
----------------
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day; provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
10
<PAGE>
day shall be the average rate quoted to Morgan on such day on such transactions
as determined by the Lead Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System as constituted from time to time.
"FFO" means "funds from operations," defined to mean net income (or
---
loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructurings and sales of properties, plus depreciation and amortization,
after adjustments for Minority Hold ings. Adjustments for Minority Holdings
will be calculated to reflect FFO on the same basis.
"Financing Statements" means those Uniform Commercial Code Financing
--------------------
Statements executed by the Borrower on or prior to the date hereof or as of the
date of an addition of a Real Property Asset to the Mortgaged Properties for the
purpose of perfecting the security interest in any personal property, both
tangible and intangible, serving as collateral for the Loans pursuant to any
Loan Document.
"FIRREA" means the Financial Institutions Reform, Recovery and
------
Enforcement Act of 1989, as amended.
"FMV Cap Rate" means 10%.
------------
"GAAP" means generally accepted accounting principles recognized as
----
such in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and Board or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of determination.
"Governmental Authority" means any Federal, state or local government
----------------------
or any other political subdivision thereof or agency exercising executive,
legislative, judicial, regulatory or administrative functions having
jurisdiction over the Borrower or any Mortgaged Property.
"Group of Loans" means, at any time, a group of Loans consisting of
--------------
(i) all Loans which are Base Rate Loans at such time, or (ii) all Loans which
are Euro-
11
<PAGE>
Dollar Loans having the same Interest Period at such time; provided that, if a
--------
Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant
to Section 8.2 or 8.4, such Loan shall be included in the same Group or Groups
of Loans from time to time as it would have been in if it had not been so
converted or made.
"Improvements" has the meaning ascribed to it in each of the
------------
Mortgages.
"Indemnitee" has the meaning set forth in Section 9.3(b).
----------
"Interest Period" means: (1) with respect to each Euro-Dollar
---------------
Borrowing, the period commencing on the date of such Borrowing or of any Notice
of Interest Election with respect to such Borrowing and ending one, two, three
or six months thereafter, as the Borrower may elect in the applicable Notice of
Borrowing or Notice of Interest Election; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business
Day of a calendar month; and
(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end on such date, then (i) the principal amount (if any) of each Euro-
Dollar Loan required to be repaid on such date shall have an Interest
Period ending on such date and (ii) the remainder (if any) of each such
Euro-Dollar Loan shall have an Interest Period determined as set forth
above.
12
<PAGE>
(2) with respect to each Base Rate Borrowing, the period commencing on the
date of such Borrowing or Notice of Interest Rate Election and ending 30 days
thereafter; provided that:
--------
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c)(i) above) which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.9 but does
not end on such date, then (i) the principal amount (if any) of each Base
Rate Loan required to be repaid on such date shall have an Interest Period
ending on such date and (ii) the remainder (if any) of each such Base Rate
Loan shall have an Interest Period determined as set forth above.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
---------------------
amended, or any successor statute.
"Lead Agent" means Morgan Guaranty Trust Company of New York in its
----------
capacity as Lead Agent for the Banks hereunder, and its successors in such
capacity.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, each of
the Borrower and any Subsidiary shall be deemed to own subject to a Lien any
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan" means a Base Rate Loan or a Euro-Dollar Loan and "Loans" means
---- -----
Base Rate Loans or Euro-Dollar Loans or any combination of the foregoing.
"Loan Amount" has the meaning set forth in Section 2.1(a).
-----------
13
<PAGE>
"Loan Documents" means this Agreement, the Notes, the Mortgages, the
--------------
Assignments, the Environmental Indemnity, the Financing Statements and any
related documents.
"London Interbank Offered Rate" has the meaning set forth in Section
-----------------------------
2.6(b).
"LTV Ratio" means, as of any date of determination, the ratio,
---------
expressed as a percentage, of the aggregate amount of the Loans outstanding as
of such date of determination to the Mortgaged Properties Value as of the date
of determination.
"Margin Stock" shall have the meaning provided such term in Regulation
------------
U and Regulation G of the Federal Reserve Board.
"Material Adverse Effect" means a material adverse effect upon (i) the
-----------------------
business, operations, properties or assets of the Borrower or (ii) the ability
of the Borrower to perform its obligations hereunder in all material respects,
including to pay interest and principal.
"Material Plan" means at any time a Plan having aggregate Unfunded
-------------
Liabilities in excess of $5,000,000.
"Material of Environmental Concern" means and includes pollutants,
---------------------------------
contaminants, hazardous wastes, and toxic, radioactive, caustic or otherwise
hazardous substances, including petroleum, its derivatives, by-products and
other hydrocarbons, or any substance having any constituent elements displaying
any of the foregoing characteristics.
"Maturity Date" has the meaning set forth in Section 2.8.
-------------
"Maximum Total Debt Ratio" means the ratio as of the date of
------------------------
determination of (i) the sum of (x) the aggregate Debt of the Borrower and its
Consolidated Subsidiaries and (y) the Borrower's pro rata share of the Debt of
any Subsidiaries of the Borrower which are not Consolidated Subsidiaries, at the
time of determination to (ii) the Tangible FMV of the Borrower and its
Consolidated Subsidiaries.
14
<PAGE>
"Minimum Debt Service Coverage" means as of the last day of each
-----------------------------
calendar quarter, Net Operating Cash Flow equal to or greater than 175% of Debt
Service.
"Minority Holdings" means partnerships, limited liability companies
-----------------
and corporations held or owned by the Borrower which are not consolidated with
the Borrower on its financial statements.
"Moody's" means Moody's Investors Service, Inc. or any successor
-------
thereto.
"Morgan" means Morgan Guaranty Trust Company of New York, in its
------
individual capacity.
"Mortgaged Properties" means, as of any date, the Real Property Assets
--------------------
listed in Exhibit B attached hereto and made a part hereof, each of which is
---------
100% owned in fee (or leasehold in the case of assets listed as such on Exhibit
-------
B) by the Borrower, together with all Real Property Assets which have become
- -
part of the Mortgaged Properties on or prior to such date in accordance with
Section 3.3 and excluding any Mortgaged Properties which have been released from
this Agreement, the Mortgage and the other Loan Documents as of such date in
accordance with Sections 3.4(c) and 5.11 and all other terms of this Agreement.
"Mortgaged Properties Value" means the aggregate of the Appraised
--------------------------
Value of each of the Mortgaged Properties.
"Mortgages" shall mean the mortgage[s], deed[s] to secure debt, and/or
---------
deed[s] of trust executed by the Borrower on or prior to the date hereof or as
of the date of the addition of a Real Property Asset to the Mortgaged
Properties, securing all or a portion of the Loans, each of which Mortgages
shall be a first mortgage lien with respect to each Real Property Asset which is
the subject thereof.
"Multiemployer Plan" means at any time an employee pension benefit
------------------
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
these purposes
15
<PAGE>
any Person which ceased to be a member of the ERISA Group during such five year
period.
"Net Operating Cash Flow" means, as of any date of determination, with
-----------------------
respect to all Mortgaged Properties, Property Income for the previous four
consecutive quarters including the quarter then ended, but less (x) Property
Expenses with respect to all such Mortgaged Properties for the previous four
consecutive quarters including the quarter then ended, and (y) the greater of
(i) Capital Expenditures which are not related to new construction for the
previous four consecutive quarters including the quarter then ended, and (ii)
appropriate reserves for replacements of not less than $.20 per square foot of
space subject to leases per annum for each Mortgaged Property which is an office
property, and $.15 per square foot of space subject to leases per annum for each
Mortgaged Property which is an industrial property.
"Non-Recourse Debt" means Debt of the Borrower on a consolidated basis
-----------------
for which the right of recovery of the obligee thereof is limited to recourse
against the Real Property Assets securing such Debt (subject to such limited
exceptions to the non-recourse nature of such Debt such as fraud,
misappropriation, misapplication and environmental indemnities, as are usual and
customary in like transactions at the time of the incurrence of such Debt).
"Notes" means, collectively, the promissory notes of the Borrower,
-----
each substantially in the form of Exhibit A hereto, evidencing the obligation of
---------
the Borrower to repay the Loans, and "Note" means any one of such promissory
----
notes issued hereunder.
"Notice of Borrowing" has the meaning set forth in Section 2.2.
-------------------
"Notice of Interest Election" has the meaning set forth in Section
---------------------------
2.14(a).
"Obligations" means all obligations, liabilities and indebtedness of
-----------
every nature of the Borrower from time to time owing to any Bank under or in
connection with this Agreement or any other Loan Document.
16
<PAGE>
"Outstanding Balance" means the aggregate outstanding and unpaid
-------------------
principal balance of all Loans.
"Parent" means, with respect to any Bank, any Person controlling such
------
Bank.
"Participant" has the meaning set forth in Section 9.6(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permitted LTV Ratio" means 60%.
-------------------
"Person" means an individual, a corporation, a partnership, a limited
------
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Plan" means at any time an employee pension benefit plan (other than
----
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"Prime Rate" means the rate of interest publicly announced by Morgan
----------
in New York City from time to time as its Prime Rate.
"Pro-Forma Debt Service" means, for any calendar quarter, the amount
----------------------
of debt service payments determined by applying a 25-year mortgage style
amortization schedule to the Loans outstanding as of the last day of such
calendar quarter, using an interest rate equal to the Treasury Rate plus 1.75%.
"Property Expenses" means, when used with respect to any Mortgaged
-----------------
Property, the costs of maintaining such Real Property Asset which are the
responsi-
17
<PAGE>
bility of the owner thereof and that are not paid directly by the tenant
thereof, including, without limitation, taxes, insurance, repairs and
maintenance, but provided that if such tenant is more than 60 days in arrears in
the payment of base or fixed rent, then such costs will also constitute
"Property Expenses", but excluding depreciation, amortization and interest
costs.
"Property Income" means, when used with respect to any Mortgaged
---------------
Property, cash rents and other cash revenues received in the ordinary course
therefrom, including, without limitation, revenues from any parking leases and
lease termination fees amortized over the remaining term of the lease for which
such termination fee was received (other than the paid rents and revenues and
security deposits except to the extent applied in satisfaction of tenants'
obligations for rent).
"Property Release" has the meaning set forth in Section 3.4(c).
----------------
"Real Property Assets" means as of any time, the real property assets
--------------------
owned directly or indirectly by the Borrower at such time.
"Recourse Debt" shall mean Debt of the Borrower or any Consolidated
-------------
Subsidiary that is not Non-Recourse Debt.
"Reference Bank" means the principal London offices of Morgan.
--------------
"Regulation U" means Regulation U of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.
"Release" means any release, spill, emission, leaking, pumping,
-------
pouring, dumping, emptying, deposit, discharge, leaching or migration.
"Release Date" has the meaning set forth in Section 3.4(c).
------------
"Request to Extend" has the meaning set forth in Section 2.8(b).
-----------------
18
<PAGE>
"Required Banks" means, at any time, Banks having at least 51% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 51% of the aggregate unpaid
principal amount of the Loans.
"Requirements" means all present and future laws, statutes, codes,
------------
ordinances, orders, judgments, decrees, injunctions, rules, regulations and
requirements of every Governmental Authority having jurisdiction over any
Mortgaged Property and all restrictive covenants applicable to any Mortgaged
Property.
"S&P" means Standard & Poor's Ratings Services, a Division of The
---
McGraw-Hill Companies, Inc., or any successor thereto.
"Solvent" means, with respect to any Person, that the fair saleable
-------
value of such Person's assets exceeds the Debts of such Person.
"Subsidiary" means any corporation or other entity of which securities
----------
or other ownership interests representing either (i) ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions or (ii) a majority of the economic interest therein, are at the time
directly or indirectly owned by the Borrower.
"Survey" means a survey (prepared in accordance with the ALTA
------
appropriate specifications) for each Mortgaged Property, prepared or re-
certified on a date not earlier than six (6) months prior to the date of the
applicable Mortgage, by a land surveyor duly licensed in the state in which such
Mortgaged Property is located.
"Tangible FMV" means the sum of (x) (i) with respect to Real Property
------------
Assets owned by the Borrower or its Consolidated Subsidiaries for a period of at
least one year, the quotient of Net Operating Income with respect to such Real
Property Assets determined for the four fiscal quarter period ending as of the
last day of the previous calendar quarter, as divided by the FMV Cap Rate, (ii)
with respect to Real Property Assets owned the Borrower or its Consolidated
Subsidiaries for a period of less than six months, the purchase price of such
Real Property Assets and (iii) with respect to Real Property
19
<PAGE>
Assets owned by the Borrower or its Consolidated Subsidiaries for a period of
at least six months but less than one year, the lesser of (A) the purchase price
of such Real Property Assets or (B) the quotient of Property Income attributable
to such Real Property Assets for the period during which the Borrower or its
Consolidated Subsidiaries owned such Real Property Assets, but less Property
Expenses attributable to such Real Property Assets for the period during which
the Borrower or its Consolidated Subsidiaries owned such Real Property Assets,
on an annualized basis, as divided by the FMV Cap Rate and (y) Cash or Cash
Equivalents of the Borrower and its Consolidated Subsidiaries as of the date of
determination.
"Term" has the meaning set forth in Section 2.8.
----
"Title Company" means, with respect to each Mortgaged Property, a
-------------
title insurance company of recognized national standing.
"Title Commitment" means, for each Mortgaged Property, an ALTA fee or
----------------
leasehold title commitment or title policy issued by the Title Company.
"Total Debt Service" shall mean, as of the last day of each calendar
------------------
quarter, an amount equal to the sum of (i) interest (whether accrued, paid or
capitalized) actually payable by Borrower on its Debt for the previous four
consecutive quarters including the quarter then ended, plus (ii) scheduled
payments of principal on such Debt, whether or not paid by the Borrower
(excluding balloon payments) for the previous four consecutive quarters
including the quarter then ended.
"Treasury Rate" means, as of any date, a rate equal to the annual
-------------
yield to maturity on the U.S. Treasury Constant Maturity Series with a ten-year
maturity, as such yield is reported in Federal Reserve Statistical Release H.15
- -- Selected Interest Rates, published most recently prior to the date the
applicable Treasury Rate is being determined. Such yield shall be determined by
straight line linear interpolation between the yields reported in Release H.15,
if necessary. In the event Release H.15 is no longer published, the Lead Agent
shall select, in its reasonable discretion, an alternate basis
20
<PAGE>
for the determination of Treasury yield for U.S. Treasury Constant Maturity
Series with ten-year maturities.
"Unfunded Liabilities" means, with respect to any Plan at any time,
--------------------
the amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America, including the
-------------
States and the District of Columbia, but excluding its territories and
possessions.
"Unused Commitments" means an amount equal to all unadvanced funds
------------------
(other than unadvanced funds in connection with any construction loan) which any
third party is obligated to advance to the Borrower or otherwise, pursuant to
any Loan Document, written instrument or otherwise.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
------------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP,
applied on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower delivered to the Lead Agent and the Banks;
provided that, if the Borrower notifies the Lead Agent and the Banks that the
- --------
Borrower wishes to amend any covenant in Article V to eliminate the effect of
any change in GAAP on the operation of such covenant (or if the Lead Agent
notifies the Borrower that the Required Banks wish to amend Article V for such
purpose), then the Borrower's compliance with such covenant shall be determined
on the basis of GAAP in effect immediately before the relevant change in GAAP
became effective, until either such notice
21
<PAGE>
is withdrawn or such covenant is amended in a manner satisfactory to the
Borrower and the Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
------------------- ---------
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article II on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
----
comprised of Euro-Dollar Loans).
ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend.
-------------------
(a) Each Bank severally agrees, on the terms and conditions set forth
in this Agreement, to make the Loans to the Borrower pursuant to this Section
from time to time during the Term in amounts such that the aggregate principal
amount of the Loans by such Bank at any one time outstanding shall not exceed
the amount of its Commitment. The aggregate amount of Loans to be made
hereunder shall not exceed One Hundred Million Dollars ($100,000,000) (the Loan
----
Amount"). Each Borrowing under this subsection (a) shall be in an aggregate
- ------
principal amount of at least $2,500,000, or an integral multiple of $500,000 in
excess thereof and shall be made from the several Banks ratably in proportion to
their respective Commitments. Subject to the limitations set forth herein, any
amounts repaid may be reborrowed. Notwithstanding anything to the contrary,
the number of new Borrowings shall be limited to one Borrowing per month.
(b) Notwithstanding anything in the preceding subparagraph (a) to the
contrary, the Loan Amount shall in no event exceed (and no Bank shall be deemed
to have committed to fund its pro rata share of an amount which exceeds) (A) the
--- ----
Mortgaged Properties Value or (B) an amount which would result in the violation
of any provision of Section 5.8.
SECTION 2.2. Notice of Borrowing. The Borrower shall give the Lead
-------------------
Agent notice (a "Notice of
---------
22
<PAGE>
Borrowing") not later than 10:00 a.m. (New York City time) (x) one Domestic
- ---------
Business Day before each Base Rate Borrowing or (y) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic Business
Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the
case of a Euro-Dollar Borrowing,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing are to be Base
Rate Loans or Euro-Dollar Loans,
(iv) in the case of a Euro-Dollar Borrowing, the duration of
the Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period, and
(v) the intended use for the proceeds of such Borrowing.
SECTION 2.3. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Borrowing, the Lead Agent shall
notify each Bank on the same day as it receives the Notice of Borrowing of the
contents thereof and of such Bank's share of such Borrowing and such Notice of
Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank shall make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Lead Agent
at its address referred to in Section 9.1. The Lead Agent will make the funds
so received from the Banks available to the Borrower at the Lead Agent's
aforesaid address. Upon any change in any of the Commitments in accordance
herewith, there shall be an automatic adjustment to such participations to
reflect such changed shares.
23
<PAGE>
(c) Unless the Lead Agent shall have received notice from a Bank
prior to the date of any Borrowing that such Bank will not make available to the
Lead Agent such Bank's share of such Borrowing, the Lead Agent may assume that
such Bank has made such share available to the Lead Agent on the date of such
Borrowing in accordance with subsection (b) of this Section 2.3 and the Lead
Agent may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Bank shall not
have so made such share available to the Lead Agent, such Bank and the Borrower
severally agree to repay to the Lead Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Lead Agent, at (i) in the case of the Borrower, a rate per annum
equal to the higher of the Federal Funds Rate and the interest rate applicable
thereto pursuant to Section 2.6 and (ii) in the case of such Bank, the Federal
Funds Rate. If such Bank shall repay to the Lead Agent such corresponding
amount, such amount so repaid shall constitute such Bank's Loan included in such
Borrowing for purposes of this Agreement.
SECTION 2.4. Notes.
-----
(a) The Loans shall be evidenced by the Notes, each of which shall be
payable to the order of each Bank for the account of its Applicable Lending
Office in an amount equal to each such Bank's Commitment.
(b) Each Bank may, by notice to the Borrower and the Lead Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Note shall be in substantially the form of Exhibit A hereto, with
---------
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Note" of such Bank
----
shall be deemed to refer to and include any or all of such Notes, as the context
may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the
Lead Agent shall forward such Note to such Bank. Each Bank shall record the
date, amount,
24
<PAGE>
type and maturity of each Loan made by it and the date and amount of each
payment of principal made by the Borrower with respect thereto, and may, if such
Bank so elects in connection with any transfer or enforcement of its Note,
endorse on the schedule forming a part thereof appropriate notations to evidence
the foregoing information with respect to each such Loan then outstanding;
provided that the failure of any Bank to make any such recordation or
- --------
endorsement shall not affect the obligations of the Borrower hereunder or under
the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to
endorse its Note and to attach to and make a part of its Note a continuation of
any such schedule as and when required.
(d) There shall be no more than seven (7) Euro-Dollar Borrowings
outstanding at any one time pursuant to this Agreement.
SECTION 2.5. Maturity of Loans. The Loans shall mature, and the
-----------------
principal amount thereof shall be due and payable, on the Maturity Date.
SECTION 2.6. Interest Rates.
--------------
(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made until it
becomes due, at a rate per annum equal to the sum of fifty (50) basis points
plus the Base Rate for such day. Such interest shall be payable for each
Interest Period on the last day thereof.
(b) Euro-Dollar Loan shall bear interest on the outstanding principal
amount thereof, for each day during the Interest Period applicable thereto, at a
rate per annum equal to the sum of 1.625% plus the Adjusted London Interbank
Offered Rate applicable to such Interest Period. Such interest shall be payable
for each Interest Period on the last day thereof and, if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof.
"Adjusted London Interbank Offered Rate" applicable to any Interest
--------------------------------------
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i) the
25
<PAGE>
applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.
"Euro-Dollar Reserve Percentage" means for any day that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
"London Interbank Offered Rate" applicable to any Interest Period
-----------------------------
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
the Reference Bank in the London interbank market at approximately 11:00 a.m.
(London time) two Euro-Dollar Business Days before the first day of such
Interest Period in an amount approximately equal to the principal amount of the
Euro-Dollar Loan of such Reference Bank to which such Interest Period is to
apply and for a period of time comparable to such Interest Period.
(c) In the event that, and for so long as, any Event of Default shall
have occurred and be continuing, the outstanding principal amount of the Loans,
and, to the extent permitted by law, overdue interest in respect of all Loans,
shall bear interest at the annual rate of the sum of the Prime Rate and four
percent (4%).
(d) The Lead Agent shall determine each interest rate applicable to
the Loans hereunder. The Lead Agent shall give prompt notice to the Borrower
and the Banks of each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest error.
26
<PAGE>
(e) The Reference Bank agrees to use its best efforts to furnish
quotations to the Lead Agent as contemplated by this Section. If the Reference
Bank does not furnish a timely quotation, the provisions of Section 8.1 shall
apply.
SECTION 2.7. Fees.
----
(a) Commitment Fee. During the Term, the Borrower shall pay Lead
--------------
Agent for the account of the Banks ratably in proportion to their respective
Commitments, a commitment fee at an annual rate of .25% on the daily average
undrawn Commitments in any given quarter, payable quarterly, in arrears.
(b) Administration Fee. On the Closing Date and quarterly thereafter
------------------
during the Term the Borrower shall pay to the Lead Agent, for its own account, a
fee (an "Administration Fee") of $18,750.
------------------
(c) Extension Fee. Within one week of the notification by the Lead
-------------
Agent to the Borrower that a Request to Extend has been accepted pursuant to
Section 2.08(b), the Borrower shall pay to the Lead Agent for the account of the
Banks ratably in proportion to their Commitments an extension fee of 1/4 of 1%
of the Commitments then outstanding.
(d) Fees Non-Refundable. All fees set forth in this Section 2.7
-------------------
shall be deemed to have been earned on the date payment is due in accordance
with the provisions hereof and shall be non-refundable. The obligation of the
Borrower to pay such fees in accordance with the provisions hereof shall be
binding upon the Borrower and shall inure to the benefit of the Lead Agent and
the Banks regardless of whether any Loans are actually made.
SECTION 2.8. Mandatory Termination. (a) The term (the "Term") of
--------------------- ----
the Commitments shall terminate and expire on [INSERT DATE WHICH IS 2 YEARS FROM
CLOSING] (the "Maturity Date").
-------------
(b) The Borrower may request a one-year extension of the
Maturity Date by delivering a written request therefor to the Lead Agent not
more than eight months or less than six months prior to the Maturity Date (a
"Request to Extend"). The Lead Agent shall notify the Banks
- ------------------
27
<PAGE>
of the receipt of such request and each Bank shall give notice in writing to the
Lead Agent not less than five months prior to the Maturity Date of such Bank's
acceptance or rejection of such request. If all the Banks shall have notified
the Lead Agent on or prior to the date which is five months prior to the
Maturity Date that they accept such request, the Maturity Date shall be extended
for one year. If any Bank shall not have notified the Lead Agent on or prior to
the date which is five months prior to the Maturity Date that it accepts such
request, the Maturity Date shall not be extended. The Lead Agent shall notify
the Borrower whether the Request to Extend has been accepted or rejected as well
as which Bank or Banks rejected the Borrower's Request to Extend.
SECTION 2.9. Mandatory Prepayment.
--------------------
(a) If as of the last day of any calendar quarter the LTV Ratio
exceeds the Permitted LTV Ratio, provided that no Event of Default has occurred
and is continuing, either (i) the Borrower shall add additional Real Property
Assets to the Mortgaged Properties within [30] days of the date of delivery of
the financial statements (or the date on which such statements should have been
delivered) of Borrower with respect to such calendar quarter the LTV Ratio
exceeded the Permitted LTV Ratio, in accordance with the provisions of Section
3.3, or (ii) the Borrower shall pay to the Lead Agent, for the account of the
Banks, within [30] days of the date of delivery of the financial statements (or
the date on which such statements should have been delivered) of Borrower with
respect to such calendar quarter the LTV Ratio exceeded the Permitted LTV Ratio,
an amount such that the Loans outstanding subsequent to such payment do not
cause the LTV Ratio to exceed the Permitted LTV Ratio.
(b) In the event that a Mortgaged Property is sold in accordance with
Section 3.4(c) hereof, the Borrower shall simultaneously with such sale, prepay
to the Lead Agent, for the account of the Banks, an amount equal to 125% of the
Allocated Mortgaged Property Loan Amount for such Mortgaged Property. Sale of a
Mortgaged Property in violation of this Section 2.9 shall constitute an Event
of Default.
(c) In the event that the Minimum Debt Service Coverage is not
maintained as of the last day of a calen-
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<PAGE>
dar quarter, either (i) the Borrower will add a Real Property Asset to the
Mortgaged Properties in accordance with this Agreement which, on a pro forma
---------
basis (i.e. the Minimum Debt Service Coverage shall be recalculated to include
----
such Real Property Asset as though the same had been a Mortgaged Property for
the entire applicable period) would result in compliance with the Minimum Debt
Service Coverage or (ii) the Borrower shall prepay to the Lead Agent, for the
account of the Banks, an amount necessary to cause the Minimum Debt Service
Coverage to be in compliance within [90] days of the date on which the Minimum
Debt Service Coverage failed to be maintained. Failure by the Borrower to
comply with the Minimum Debt Service Coverage within [90] days of the date of
such non-compliance shall be an Event of Default.
SECTION 2.10. Optional Prepayments.
--------------------
(a) The Borrower may, upon at least one Domestic Business Day's
notice to the Lead Agent, prepay to the Lead Agent, for the account of the
Banks, any Base Rate Borrowing in whole at any time, or from time to time in
part in amounts aggregating One Million Dollars ($1,000,000), or an integral
multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the
outstanding principal balance, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied to prepay ratably the Loans of the several
Banks included in such Borrowing.
(b) Except as provided in Section 8.2, the Borrower may not prepay
all or any portion of the principal amount of any Euro-Dollar Loan prior to the
maturity thereof unless the Borrower shall also pay any applicable expenses
pursuant to Section 2.12. Any such prepayment shall be upon at least three (3)
Euro-Dollar Business Days' notice to the Lead Agent. Any notice of prepayment
delivered pursuant to this Section 2.10(b) shall set forth the amount of such
prepayment which is applicable to any Loan made for working capital purposes.
Each such optional prepayment shall be in the amounts set forth in Section
2.10(a) above and shall be applied to prepay ratably the Loans of the Banks
included.
(c) A Borrower may at any time and from time to time cancel all or
any part of the Commitments in
29
<PAGE>
amounts aggregating One Million Dollars ($1,000,000), or an integral multiple of
One Million Dollars ($1,000,000) in excess thereof, by the delivery to the Lead
Agent and the Banks of a notice of cancellation upon at least three (3) Domestic
Business Days' notice to Lead Agent and the Banks, whereupon, all or such
portion of the Commitments shall terminate as to the Banks, pro rata on the date
--------
set forth in such notice of cancellation, and, if there are any Loans then
outstanding in an aggregate amount which exceeds the aggregate Commitments
(after giving effect to any such reduction), the Borrower shall prepay to the
Lead Agent, for the account of the Banks, all or such portion of Loans
outstanding on such date in accordance with the requirements of Sections 2.10(a)
and (b). The Borrower shall be permitted to designate in its notice of
cancellation which Loans, if any, are to be prepaid.
(d) Upon receipt of a notice of prepayment or cancellation pursuant
to this Section, the Lead Agent shall promptly, and in any event within one (1)
Domestic Business Day, notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment or cancellation and such
notice shall not thereafter be revocable by the Borrower.
(e) Any amounts so prepaid pursuant to this Section 2.10 may be
reborrowed subject to the other terms of this Agreement. In the event that the
Borrower elects to cancel all or any portion of the Commitments pursuant to
Section 2.10(c) hereof, such amounts may not be reborrowed.
SECTION 2.11. General Provisions as to Payments.
---------------------------------
(a) The Borrower shall make each payment of principal of, and
interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New
York City time) on the date when due, in Federal or other funds immediately
available in New York City, to the Lead Agent at its address referred to in
Section 9.1. The Lead Agent will distribute to each Bank its ratable share of
each such payment received by the Lead Agent for the account of the Banks on the
same day as received by the Lead Agent if received by the Lead Agent by 3:00
p.m. (New York City time), or, if received by the Lead Agent after 3:00 p.m.
(New York City time), on the immediately fol-
30
<PAGE>
lowing Domestic Business Day. Whenever any payment of principal of, or interest
on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic
Business Day, the date for payment thereof shall be extended to the next
succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-
Dollar Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
in another calendar month, in which case the date for payment thereof shall be
the next preceding Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.
(b) Unless the Lead Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Lead Agent may assume
that the Borrower has made such payment in full to the Lead Agent on such date
and the Lead Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount then due
such Bank. If and to the extent that the Borrower shall not have so made such
payment, each Bank shall repay to the Lead Agent forthwith on demand such amount
distributed to such Bank together with interest thereon, for each day from the
date such amount is distributed to such Bank until the date such Bank repays
such amount to the Lead Agent, at the Federal Funds Rate.
SECTION 2.12. Funding Losses. If the Borrower makes any payment of
--------------
principal with respect to any Euro-Dollar Loan (pursuant to Article II, VI or
VIII or otherwise) on any day other than the last day of the Interest Period
applicable thereto, or if the Borrower fails to borrow any Euro-Dollar Loans,
after notice has been given to any Bank in accordance with Section 2.3(a), the
Borrower shall reimburse each Bank within 15 days after demand for any
resulting loss or expense incurred by it (or by an existing Participant in the
related Loan; provided that no Participant shall be entitled to receive more
than the Bank with respect to which such Participant is a Participant would be
entitled to receive under this Section 2.12), including (without limitation) any
loss incurred in obtaining, liquidating or employing deposits
31
<PAGE>
from third parties, but excluding loss of margin for the period after any such
payment or failure to borrow, provided that such Bank shall have delivered to
--------
the Borrower a certificate as to the amount of such loss or expense and the
calculation thereof, which certificate shall be conclusive in the absence of
manifest error.
SECTION 2.13. Computation of Interest and Fees. Interest based on
--------------------------------
the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.14. Method of Electing Interest Rates.
---------------------------------
(a) The Loans included in each Borrowing shall bear interest
initially at the type of rate specified by the Borrower in the applicable Notice
of Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject in each
case to the provisions of Article VIII), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-
Dollar Loans for an additional Interest Period, in each case effective on the
last day of the then current Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
------------------
Rate Election") to the Lead Agent at least three (3) Euro-Dollar Business Days
- -------------
before the conversion or continuation selected in such notice is to be effective
(unless the relevant Loans are to be continued as Base Rate Loans, in which
case such notice shall be delivered to the Lead Agent no later than 12:00 Noon
(New York City time) at least one (1) Domestic Business Day before such
continuation is to be effective). A
32
<PAGE>
Notice of Interest Rate Election may, if it so specifies, apply to only a
portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
- --------
such Group, (ii) the portion to which such notice applies, and the remaining
portion to which it does not apply, are each $1,000,000 or any larger multiple
of $1,000,000, (iii) there shall be no more than seven (7) Borrowings comprised
of Euro-Dollar Loans outstanding at any time under this Agreement, (iv) no Loan
may be continued as, or converted into, a Euro-Dollar Loan when any Event of
Default has occurred and is continuing, and (v) no Interest Period shall extend
beyond the Maturity Date.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in
such notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the
initial Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for an
additional Interest Period, the duration of such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Lead Agent shall notify each Bank
on the same day as it receives such Notice of Interest Rate Election of the
contents thereof and such notice shall not thereafter be revocable by the
Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate
Election to the Lead Agent for any Group of Euro-Dollar Loans, such Loans shall
be converted into Base Rate Loans
33
<PAGE>
on the last day of the then current Interest Period applicable thereto.
ARTICLE III
CONDITIONS
SECTION 3.1. Closing. The closing hereunder shall occur on the date (the
-------
"Closing Date") when each of the following conditions is satisfied (or waived by
------------
the Lead Agent, such waiver to be evidenced by the funding of the Loans made on
the Closing Date), each document to be dated the Closing Date unless otherwise
indicated:
(a) the Borrower shall have executed and delivered to the Lead Agent
a Note for the account of each Bank dated on or before the Closing Date
complying with the provisions of Section 2.4;
(b) the Borrower shall have executed and delivered to the Lead Agent
a duly executed original of this Agreement;
(c) the Lead Agent shall have received an opinion of Latham & Watkins
counsel for the Borrower, together with opinions of local counsel, in each case
acceptable to the Lead Agent, the Banks and their counsel;
(d) the Lead Agent shall have received all documents the Lead Agent
may reasonably request relating to the existence of the Borrower, the authority
for and the validity of this Agreement and the other Loan Documents, and any
other matters relevant hereto, all in form and substance reasonably satisfactory
to the Lead Agent. Such documentation shall include, without limitation, the
articles of incorporation and by-laws or the partnership agreement and limited
partnership certificate, as applicable, of the Borrower, as amended, modified
or supplemented to the Closing Date, each certified to be true, correct and
complete by a senior officer of the Borrower as of a date not more than forty-
five (45) days prior to the Closing Date, together with a good standing
certificate from the Secretary of State (or the equivalent thereof) of the State
of Delaware with respect to the Borrower and a good standing certificate from
the Secretary of State (or the equivalent thereof) of each other
34
<PAGE>
State in which the Borrower is required to be qualified to transact business,
each to be dated not more than forty-five (45) days prior to the Closing Date;
(e) the Lead Agent shall have received all certificates, agreements
and other documents and papers referred to in this Section 3.1 and Section 3.2,
unless otherwise specified, in sufficient counterparts, satisfactory in form
and substance to the Lead Agent in its sole discretion;
(f) the Borrower shall have taken all actions required to authorize
the execution and delivery of this Agreement and the other Loan Documents and
the performance thereof by the Borrower;
(g) the Lead Agent shall be satisfied that the Borrower is not
subject to any present or contingent environmental liability which could
reasonably be expected to have a Material Adverse Effect;
(h) the Lead Agent shall have received an unaudited consolidated
balance sheet and income statement of the Borrower for the fiscal quarter ended
December 31, 1996;
(i) the Lead Agent shall have received wire transfer instructions in
connection with the Loans to be made on the Closing Date;
(j) the Lead Agent shall have received, for its and any other Bank's
account, all fees due and payable pursuant to Section 2.7 hereof on or before
the Closing Date, and the reasonable fees and expenses accrued through the
Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP;
(k) the Lead Agent shall have received copies of all consents,
licenses and approvals, if any, required in connection with the execution,
delivery and performance by the Borrower, and the validity and enforceability
against the Borrower, of the Loan Documents, or in connection with any of the
transactions contemplated thereby to occur on or prior to the Closing Date, and
such consents, licenses and approvals shall be in full force and effect;
35
<PAGE>
(l) the Lead Agent shall have received satisfactory reports of
Uniform Commercial Code filing searches conducted by a search firm acceptable
to the Lead Agent with respect to the Mortgaged Properties and the Borrower,
such searches to be conducted in each of the locations specified by the Lead
Agent;
(m) the representations and warranties of the Borrower contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date both before and after giving effect to the making of any Loans;
(n) the Lead Agent shall have received certificates of insurance
with respect to each Mortgaged Property demonstrating the coverages required
under this Agreement;
(o) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory Title Commitment to be issued and delivered by each
Title Company in an amount equal to that set forth on Exhibit D annexed hereto;
---------
(p) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory environmental report indicating that (A) the Mortgaged
Property complies with all Environmental Laws in all material respects, (B) is
free of all Material of Environmental Concern in all material respects and (C)
is not subject to any Environmental Claim;
(q) the Lead Agent shall have received with respect to each Mortgaged
Property, a satisfactory engineer's inspection report;
(r) the Lead Agent shall have received with respect to each Mortgaged
Property, evidence of compliance with zoning and other local laws, together
with copies of the certificates of occupancy for each thereof (or evidence
satisfactory to the Lead Agent as to why no certificate of occupancy is
required);
(s) the Lead Agent shall have received with respect to each Mortgaged
Property, (i) a description of the Mortgaged Property, (ii) two years of
historical cash flow operating statements, if available, (iii) five years
36
<PAGE>
of cash flow projections (including capital expenditures), (iv) the credit
history of each existing tenant which occupies more than 15% of such Mortgaged
Property, (v) a map and site plan, including an existing Survey of the property
dated not more than six (6) months prior to such submission, (vi) copies of all
lease agreements with each existing tenant which occupies more than 15% of such
Mortgaged Property and lease abstracts thereof, (vii) an estoppel certificate
from each tenant which occupies 15% or more of such Mortgaged Property and
(viii) any investment memorandum prepared by the Borrower; and
(t) receipt by the Lead Agent and the Banks of a certificate of the
chief financial officer or the chief accounting officer of the Borrower
certifying that the Borrower is in compliance with all covenants of the Borrower
contained in this Agreement, including, without limitation, the requirements of
Section 5.8, as of the Closing Date;
(u) the Lead Agent shall have received the Financing Statements
executed by the Borrower, as debtor, naming the Lead Agent, as secured party, to
be filed in the appropriate jurisdictions as is necessary to create perfected
security interests with respect to such portion of the Mortgaged Properties and
the personal property located thereon, with respect to which security interests
are governed by the Uniform Commercial Code;
(v) the Lead Agent shall have received the Mortgages, covering each
Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create perfected mortgage liens
with respect to the Mortgaged Properties;
(w) the Lead Agent shall have received the Assignments, covering
each Mortgaged Property, duly executed by the Borrower to be recorded in the
appropriate jurisdictions as is necessary to create effective assignments as
contemplated thereby with respect to the Mortgaged Properties;
(x) the Lead Agent shall have received the Environmental Indemnity,
duly executed by the appropriate party acceptable to the Lead Agent in
accordance with the terms of this Agreement;
37
<PAGE>
(y) the Lead Agent shall have received the Appraisals;
(z) The Borrower shall have completed successfully the initial
public offering of equity interests, including, without limitation, having
satisfied and complied with all applicable requirements under the Securities
Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and
other applicable law and all registration, filing and other requirements of the
Securities Exchange Commission; and
(aa) the Borrower shall have qualified and shall intend to continue
to qualify as a real estate investment trust under the Internal Revenue Code.
The Lead Agent shall promptly notify the Borrower and the Banks of the Closing
Date, and such notice shall be conclusive and binding on all parties hereto.
SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on the
----------
occasion of any Borrowing is subject to the satisfaction of the following
conditions:
(a) the Closing Date shall have occurred on or prior to February 15,
1997;
(b) receipt by the Lead Agent of a Notice of Borrowing as required by
Section 2.2;
(c) immediately after such Borrowing, the Outstanding Balance will
not exceed the aggregate amount of the Commitments and with respect to each
Bank, such Bank's pro rata portion of the Loans on the amount permitted
--------
pursuant to Section 2.1(b);
(d) immediately before and after such Borrowing, no Default or Event
of Default shall have occurred and be continuing both before and after giving
effect to the making of such Loans;
(e) the representations and warranties of the Borrower contained in
this Agreement (other than representations and warranties which speak as of a
specific date) shall be true and correct in all material respects on and as of
the date of such Borrowing both before and after giving effect to the making of
such Loans;
38
<PAGE>
(f) no law or regulation shall have been adopted, no order, judgment
or decree of any governmental authority shall have been issued, and no
litigation shall be pending or threatened, which does or, with respect to any
threatened litigation, seeks to enjoin, prohibit or restrain, the making or
repayment of the Loans or any participations therein or the consummation of the
transactions contemplated hereby; and
(g) no event, act or condition shall have occurred after the Closing
Date which, in the reasonable judgment of the Lead Agent or the Required Banks,
as the case may be, has had or is likely to have a Material Adverse Effect.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c) through (g) of this Section (except that with respect to clause (f), such
representation and warranty shall be deemed to be limited to laws, regulations,
orders, judgments, decrees and litigation affecting the Borrower and not solely
the Banks).
SECTION 3.3. Conditions Precedent to Additional Real Property Assets.
-------------------------------------------------------
(a) All Real Property Assets to be added to the Mortgaged Properties
shall be approved by all of the Banks.
(b) The Borrower shall submit to the Lead Agent and the Banks as
provided in subsection (c) below the materials set forth below (the "Due
---
Diligence Package") relating to each Real Property Asset to be added to the
- -----------------
Mortgaged Properties. The Due Diligence Package shall include (i) a description
of the Real Property Asset, (ii) two years of historical cash flow operating
statements, if available, (iii) five years of cash flow projections (including
capital expenditures), (iv) the credit history of each existing tenant which
occupies more than 15% of such Real Property Asset, (v) a map and site plan,
including an existing Survey of the property dated not more than twelve (12)
months prior to such submission, (vi) copies of all lease agreements and
abstracts thereof with each existing tenant which occupies more than 15% of
such Real Property Asset and lease
39
<PAGE>
abstracts thereof, (vii) an environmental report incompliance with Section
3.1(p), (viii) an engineer's inspection report satisfactory to the Lead Agent,
(ix) an estoppel certificate from each tenant which occupies 15% or more of the
Real Property Asset, (x) evidence of compliance with zoning and other local
laws, (xi) a Title Commitment satisfactory to the Lead Agent, (xii) a final
investment memorandum prepared by the Borrower in connection with the Real
Property Asset, (xiii) a property inspection report satisfactory to the Lead
Agent, and (xiv) an Appraisal. The Borrower shall permit the Lead Agent at all
reasonable times and upon reasonable prior notice to make an inspection of such
Real Property Asset.
(c) The Borrower shall distribute a copy of each item constituting
the Due Diligence Package by overnight mail to each of the Banks for their
review and approval. Failure to respond to the Lead Agent in writing by any
Bank within twenty (20) Domestic Business Days after receipt of the Due
Diligence Package, shall be deemed to be an approval by such Bank of such
potential Real Property Asset.
SECTION 3.4. Mortgaged Properties. (a) On the Closing Date, and on
--------------------
the date of the addition of any Real Property Asset to the Mortgaged Properties,
as applicable, or as soon thereafter as is practicable, the Lead Agent shall
cause all of the Mortgages, the Assignments, the Environmental Indemnities and
the Financing Statements (collectively, the "Security Documents") (which are to
------------------
be recorded and/or filed) to be recorded and/or filed in the appropriate
offices, as security for the Loans, at the Borrower's sole cost and expense.
Upon such addition, the Borrower shall cause to be delivered to the Lead Agent,
at the Borrower's sole cost and expense, the Title Policies, and the Borrower
will cooperate with the Lead Agent and execute such further instruments and
documents and perform such further acts as the Lead Agent or the Title Company
shall reasonably request to carry out the creation and perfection of the liens
and security interests contemplated by the Security Documents.
(b) The Lead Agent shall have the annual (based on the date of the
most recent applicable Appraisal) right with respect to each Real Property
Asset which is or becomes a Mortgaged Property, prior to the Maturity
40
<PAGE>
Date, to commission, at the Borrower's sole cost and expense, an updated
Appraisal, and shall deliver copies of each such Appraisal to each Bank and to
the Borrower promptly after receipt thereof by the Lead Agent.
(c) The Borrower shall be entitled to have one (1) or more of the
Mortgaged Properties released from the Lien of the applicable Mortgage, in
connection with a sale of such Mortgaged Property to an unaffiliated third
party; provided that all of the conditions set forth below have been satisfied.
--------
The release of any of the Mortgaged Properties shall be subject to the
satisfaction of the following conditions:
(i) Lead Agent shall have received from the Borrower at least 10
days' prior written notice of the date proposed for such
release (the "Release Date").
------------
(ii) no Event of Default shall have occurred and be continuing
as of the date of such notice and the Release Date.
(iii) on or prior to the Release Date, the Borrower shall pay to
the Lead Agent for the account of the Banks, the amounts
required to be paid pursuant to Section 2.9(b).
(iv) the Borrower shall have delivered to the Lead Agent an
officer's certificate, dated the Release Date, confirming
the matters referred to in clause (ii) above, certifying
that the provisions of clause (iii) above have been complied
with and certifying that all conditions precedent for such
release contained in this Agreement have been complied
with;
Upon or concurrently with payment of all amounts required to be paid
pursuant to Section 2.9(b) and the satisfaction of all other conditions provided
for herein, the Lead Agent shall effectuate the following (hereinafter referred
to as a "Property Release"): the
----------------
41
<PAGE>
security interest of the Banks in the Mortgage and other Loan Documents relating
to the released Mortgaged Property shall be released from the Lien of the
Mortgage and the Lead Agent will execute and deliver any agreements reasonably
requested by the Borrower to release and terminate or reassign, at the
Borrower's option, the Mortgage as to the released Mortgaged Property; provided,
--------
that such release and termination or reassignment shall be without recourse to
the Lead Agent (except as contemplated hereby) and without any representation
or warranty except that the Lead Agent shall be deemed to have represented that
such release and termination or reassignment has been duly authorized and that
it has not assigned or encumbered the Mortgage or the other Loan Documents
relating to the released Mortgaged Property (except as contemplated hereby) and
the Lead Agent shall return the originals of any Loan Documents that relate
solely to the released Mortgaged Property to the Borrower; provided, further,
-------- -------
that upon the release and termination or reassignment of the Lead Agent's
security interest in the Mortgage relating to the released Mortgaged Property
all references herein to the Mortgage relating to the released Mortgaged
Property shall be deemed deleted, except as otherwise provided herein with
respect to indemnities.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lead Agent and each of the other Banks which
may become a party to this Agreement to make the Loans, the Borrower makes the
following representations and warranties as of the date hereof. Such
representations and warranties shall survive the effectiveness of this
Agreement, the execution and delivery of the other Loan Documents and the
making of the Loans.
SECTION 4.1. Existence and Power. The Borrower is duly organized,
-------------------
validly existing and in good standing as a limited partnership under the laws of
the State of Delaware and has all powers and all material governmental licenses,
authorizations, consents and approvals required to own its property and assets
and carry on its business as now conducted or as it presently proposes to
conduct and has been duly qualified and is in good standing in every
jurisdiction in which the failure
42
<PAGE>
to be so qualified and/or in good standing is likely to have a Material Adverse
Effect.
SECTION 4.2. Power and Authority. The Borrower has the corporate
-------------------
power and authority to execute, deliver and carry out the terms and provisions
of each of the Loan Documents to which it is a party and has taken all necessary
action to authorize the execution and delivery on behalf of the Borrower and the
performance by the Borrower of such Loan Documents. The Borrower has duly
executed and delivered each Loan Document to which it is a party, and each such
Loan Document constitutes the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms, except as enforceability
may be limited by applicable insolvency, bankruptcy or other laws affecting
creditors rights generally, or general principles of equity, whether such
enforceability is considered in a proceeding in equity or at law.
SECTION 4.3. No Violation. Neither the execution, delivery or
------------
performance by or on behalf of the Borrower of the Loan Documents, nor
compliance by the Borrower with the terms and provisions thereof nor the
consummation of the transactions contemplated by the Loan Documents, (i) will
contravene any applicable provision of any law, statute, rule, regulation,
order, writ, injunction or decree of any court or governmental instrumentality
applicable to Borrower or (ii) will conflict with or result in any breach of,
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of the Borrower
pursuant to the terms of any material indenture, mortgage, deed of trust, or
other agreement or other instrument to which the Borrower (or of any partnership
of which the Borrower is a partner) is a party or by which it or any of its
property or assets is bound or to which it is subject or (iii) will cause a
default by the Borrower under any organizational document of any Subsidiary, or
cause a default under the Borrower's general partner's articles of
incorporation or by-laws.
SECTION 4.4. Financial Information.
---------------------
43
<PAGE>
(a) The unaudited consolidated balance sheet of the Borrower as of
December 31, 1996, a copy of which has been delivered to the Lead Agent, fairly
presents, in conformity with GAAP, the consolidated financial position of the
Borrower as of such date and its consolidated results of operations for such
fiscal year.
(b) Since December 31, 1996, (i) there has been no material adverse
change in the business, financial position or results of operations of the
Borrower and (ii) except as previously disclosed to the Lead Agent, the Borrower
has not incurred any material indebtedness or guaranty.
SECTION 4.5. Litigation.
----------
(a) There is no action, suit or proceeding pending against, or to the
knowledge of the Borrower, threatened against or affecting, (i) the Borrower or
any of its Subsidiaries, (ii) the Loan Documents or any of the transactions
contemplated by the Loan Documents or (iii) any of their assets, in any case
before any court or arbitrator or any governmental body, agency or official
which could reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of this Agreement or the other
Loan Documents.
(b) There are no final nonappealable judgments or decrees in an
aggregate amount of One Million Dollars ($1,000,000) or more entered by a court
or courts of competent jurisdiction against the Borrower (other than any
judgment as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim in writing).
SECTION 4.6. Compliance with ERISA.
---------------------
(a) Except as previously disclosed to the Lead Agent in writing, each
member of the ERISA Group has fulfilled its obligations under the minimum
funding standards of ERISA and the Internal Revenue Code with respect to each
Plan and is in compliance in all material respects with the presently
applicable provisions of ERISA and the Internal Revenue Code with respect to
each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum
funding standard under Section 412 of the
44
<PAGE>
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability under Title IV of ERISA other than a liability to the
PBGC for premiums under Section 4007 of ERISA.
(b) Except for each "employee benefit plan" (as such term is defined
in Section 3(3) of ERISA) that is maintained, or contributed to, by one or more
members of the ERISA Group, no member of the ERISA Group is a "party in
interest" (as such term is defined in Section 3(14) of ERISA or a "disqualified
person" (as such term is defined in Section 4975(e)(2) of the Code) with respect
to any funded employee benefit plan and none of the assets of any such plans
have been invested in a manner that would cause the transactions contemplated by
the Loan Documents to constitute a nonexempt prohibited transaction (as such
term is defined in Section 4975 of the Code or Section 406 of ERISA).
SECTION 4.7 Environmental Compliance. To the best of Borrower's
------------------------
knowledge, except as set forth in the Phase I environmental report(s) delivered
to and accepted by the Lead Agent with respect to each of the Mortgaged
Properties (as supplemented or amended, the "Environmental Reports"), (i) there
---------------------
are in effect all Environmental Approvals which are required to be obtained
under all Environmental Laws with respect to the Property, except for such
Environmental Approvals the absence of which would not have a Material Adverse
Effect, (ii) the Borrower is in compliance in all material respects with the
terms and conditions of all such Environmental Approvals, and is also in
compliance in all material respects with all other Environmental Laws or any
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered or approved thereunder, except to the extent failure to comply would not
have a Material Adverse Effect.
Except as set forth in the Environmental Reports or otherwise
disclosed to the Lead Agent as of the Closing Date, to Borrower's actual
knowledge:
45
<PAGE>
(i) There are no Environmental Claims or investigations
pending or threatened by any Governmental Authority with respect to any
alleged failure by the Borrower to have any Environmental Approval required
in connection with the conduct of the business of the Borrower on any of
the Mortgaged Properties, or with respect to any generation, treatment,
storage, recycling, transportation, Release or disposal of any Material of
Environmental Concern generated by the Borrower or any lessee on any of the
Mortgaged Properties;
(ii) No Material of Environmental Concern has been Released at
the Property to an extent that it may reasonably be expected to have a
Material Adverse Effect;
(iii) No PCB (in amounts or concentrations which exceed those
set by applicable Environmental Laws) is present at any of the Mortgaged
Properties;
(iv) No friable asbestos is present at any of the Mortgaged
Properties;
(v) There are no underground storage tanks for Material of
Environmental Concern, active or abandoned, at any of the Mortgaged
Properties;
(vi) No Environmental Claims have been filed with a
Governmental Authority with respect to any of the Mortgaged Properties, and
none of the Mortgaged Properties is listed or proposed for listing on the
National Priority List promulgated pursuant to CERCLA, on CERCLIS or on
any similar state list of sites requiring investigation or clean-up;
(vii) There are no Liens arising under or pursuant to any
Environmental Laws on any of the Mortgaged Properties, and no government
actions have been taken or are in process which could subject any of the
Mortgaged Properties to such Liens; and
(viii) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, or which are in the
possession of, the Borrower in relation to any of
46
<PAGE>
the Mortgaged Properties which have not been made available to the Lead
Agent.
SECTION 4.8. Taxes. The initial tax year of the Borrower for federal
-----
income tax purposes was [____]. The federal income tax returns of the Borrower
and its Consolidated Subsidiaries have been [examined and closed through the
fiscal year ended December 31, 1995]. The Borrower and its Subsidiaries have
filed all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the Borrower
or any Subsidiary except those being contested in good faith. The charges,
accruals and reserves on the books of the Borrower and its Subsidiaries in
respect of taxes or other governmental charges are, in the opinion of the
Borrower, adequate.
SECTION 4.9. Full Disclosure. All information heretofore furnished
---------------
by the Borrower to the Lead Agent or any Bank for purposes of or in connection
with this Agreement or any transaction contemplated hereby is true and accurate
in all material respects on the date as of which such information is stated or
certified. The Borrower has disclosed to the Banks in writing any and all facts
known to the Borrower which materially and adversely affect or are likely to
materially and adversely affect (to the extent the Borrower can now reasonably
foresee), the business, operations or financial condition of the Borrower
considered as one enterprise or the ability of the Borrower to perform its
obligations under this Agreement or the other Loan Documents.
SECTION 4.10. Solvency. On the Closing Date and after giving effect
--------
to the transactions contemplated by the Loan Documents occurring on the Closing
Date, the Borrower is Solvent.
SECTION 4.11. Use of Proceeds; Margin Regulations. All proceeds of
-----------------------------------
the Loans will be used by the Borrower only in accordance with the provisions
hereof. No part of the proceeds of any Loan will be used by the Borrower to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock. Neither the making of any Loan nor
the use of the proceeds thereof will violate or
47
<PAGE>
be inconsistent with the provisions of Regulations G, T, U or X of the Federal
Reserve Board.
SECTION 4.12. Governmental Approvals. No order, consent, approval,
----------------------
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any governmental or public body or authority, or any
subdivision thereof, is required to authorize, or is required in connection with
the execution, delivery and performance of any Loan Document or the
consummation of any of the transactions contemplated thereby other than those
that have already been duly made or obtained and remain in full force and
effect.
SECTION 4.13. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act. The Borrower is not (x) an "investment company" or a company "controlled"
- --- ------------------ ----------
by an "investment company", within the meaning of the Investment Company Act of
------------------
1940, as amended, (y) a "holding company" or a "subsidiary company" of a
--------------- ------------------
"holding company" or an "affiliate" of either a "holding company" or a
- ---------------- --------- ---------------
"subsidiary company" within the meaning of the Public Utility Holding Company
------------------
Act of"subsid 1935, as amended, or (z) subject to any other federal or state law
or regulation which purports to restrict or regulate its ability to borrow
money.
SECTION 4.14. Closing Date Transactions. On the Closing Date and
-------------------------
immediately prior to or concurrently with the making of the Loans, the
transactions (other than the making of the Loans) intended to be consummated on
the Closing Date will have been consummated in accordance with all applicable
laws. On or prior to the Closing Date, all consents and approvals of, and
filings and registrations with, and all other actions by, any Person required in
order to make or consummate such transactions have been obtained, given, filed
or taken and are in full force and effect.
SECTION 4.15. Representations and Warranties in Loan Documents. All
------------------------------------------------
representations and warranties made by the Borrower in the Loan Documents are
true and correct in all material respects.
SECTION 4.16. Patents, Trademarks, etc. The Borrower has obtained
-------------------------
and holds in full force and effect all patents, trademarks, service marks, trade
names,
48
<PAGE>
copyrights and other such rights, free from burdensome restrictions, which are
necessary for the operation of its business as presently conducted, the
impairment of which is likely to have a Material Adverse Effect. To the
Borrower's knowledge, no material product, process, method, substance, part or
other material presently sold by or employed by the Borrower in connection with
such business infringes any patent, trademark, service mark, trade name,
copyright, license or other such right owned by any other Person. There is not
pending or, to the Borrower's knowledge, threatened any claim or litigation
against or affecting the Borrower contesting its right to sell or use any such
product, process, method, substance, part or other material.
SECTION 4.17. No Default. No Default or Event of Default exists
----------
under or with respect to any Loan Document. The Borrower is not in default in
any material respect beyond any applicable grace period under or with respect
to any other material agreement, instrument or undertaking to which it is a
party or by which it or any of its property is bound in any respect, the
existence of which default is likely (to the extent that the Borrower can now
reasonably foresee) to result in a Material Adverse Effect.
SECTION 4.18. Licenses, etc. The Borrower has obtained and holds in
--------------
full force and effect, all franchises, licenses, permits, certificates,
authorizations, qualifications, accreditations, easements, rights of way and
other consents and approvals which are necessary for the operation of its
businesses as presently conducted, the absence of which is likely (to the extent
that the Borrower can now reasonably foresee) to have a Material Adverse Effect.
SECTION 4.19. Compliance With Law. The Borrower is in compliance
-------------------
with all laws, rules, regulations, orders, judgments, writs and decrees,
including, without limitation, all building and zoning ordinances and codes, the
failure to comply with which is likely (to the extent that the Borrower can now
reasonably foresee) to have a Material Adverse Effect.
SECTION 4.20. No Burdensome Restrictions. The Borrower is not a
--------------------------
party to any agreement or instrument or subject to any other obligation or any
charter or corpo-
49
<PAGE>
rate or partnership restriction, as the case may be, which, individually or in
the aggregate, is likely (to the extent that the Borrower can now reasonably
foresee) to have a Material Adverse Effect.
SECTION 4.21. Brokers' Fees. The Borrower has not dealt with any
-------------
broker or finder with respect to the transactions contemplated by the Loan
Documents (except with respect to the acquisition or disposition of Real
Property Assets) or otherwise in connection with this Agreement, and the
Borrower has not done any acts, had any negotiations or conversation, or made
any agreements or promises which will in any way create or give rise to any
obligation or liability for the payment by the Borrower of any brokerage fee,
charge, commission or other compensation to any party with respect to the
transactions contemplated by the Loan Documents (except with respect to the
acquisition or disposition of Real Property Assets), other than the fees payable
hereunder.
SECTION 4.22. Labor Matters. Except as set forth in Schedule __,
-------------
there are no collective bargaining agreements or Multiemployer Plans covering
the employees of the Borrower and the Borrower has not suffered any strikes,
walkouts, work stoppages or other material labor difficulty within the last five
(5) years.
SECTION 4.23. Organizational Documents. The documents delivered
------------------------
pursuant to Section 3.1(d) constitute, as of the Closing Date, all of the
organizational documents (together with all amendments and modifications
thereof) of the Borrower. The Borrower represents that it has delivered to the
Lead Agent true, correct and complete copies of each of the documents set forth
in this Section 4.23.
SECTION 4.24. Principal Offices. The principal office, chief
-----------------
executive office and principal place of business of the Borrower is 2250 East
Imperial Highway, Suite 1200, El Segundo, California 90245.
SECTION 4.25. REIT Status. For the fiscal year ended December 31,
-----------
1997, the general partner of the Borrower will qualify, and the general partner
of the Borrower intends to continue to qualify as a real estate investment trust
under the Code.
50
<PAGE>
SECTION 4.26. Ownership of Property. The Borrower owns fee simple
---------------------
title to or a ground leasehold interest in each of the Mortgaged Properties.
SECTION 4.27 Security Interests and Liens. The Mortgages create, as
----------------------------
security for the Obligations, valid and enforceable security interests in and
Liens on all of the Collateral in favor of the Lead Agent as agent for the
ratable benefit of the Banks, and subject to no other Liens (except as may be
permitted under any Mortgage with respect to the Mortgaged Property subject
thereto), except as enforceability may be limited by applicable insolvency,
bankruptcy or other laws affecting creditors' rights generally, or general
principles of equity, whether such enforceability is considered in a proceeding
in equity or at law. Such security interests in and Liens on the Collateral
shall be superior to and prior to the rights of all third parties in the
Collateral (except as may be permitted under any Mortgage with respect to the
Mortgaged Property subject thereto), and, other than in connection with any
future change in Borrower's name or the location of Borrower's chief executive
office, no further recordings or filings are or will be required in connection
with the creation, perfection or enforcement of such security interests and
Liens, other than the filing of continuation statements in accordance with
applicable law.
SECTION 4.28 Structural Defects and Violation of Law. To the best of
---------------------------------------
Borrower's knowledge [and except as set forth in the structural and engineering
report delivered to and accepted by the Lead Agent with respect to the
Mortgaged Properties (as supplemented or amended, the "Engineering Report"),
------------------
there are no structural defects any of the Improvements, none of the
Improvements is in material violation of any Requirements, and the Borrower's
anticipated use of the Improvements will comply in all material respects with
applicable zoning ordinances, regulations, and restrictive covenants affecting
the applicable Mortgaged Property.
51
<PAGE>
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any Bank has any
Commitment hereunder or any Obligations remain unpaid:
SECTION 5.1. Information. The Borrower will deliver to the Lead
-----------
Agent and to each of the Banks:
(a) as soon as available and in any event within 105 days after the
end of each fiscal year of the Borrower, an audited consolidated balance sheet
of the Borrower as of the end of such fiscal year and the related consolidated
statements of cash flow and operations for such fiscal year, setting forth in
each case in comparative form the figures for the previous fiscal year, audited
by Delloite & Touche or other independent public accountants of similar
standing;
(b) as soon as available and in any event within sixty (60) days
after the end of each quarter of each fiscal year (other than the last quarter
in any fiscal year) of the Borrower, a statement of the Borrower, prepared in
accordance with GAAP, setting forth the operating income and operating expenses
of the Borrower, in sufficient detail so as to calculate net operating cash flow
of the Borrower for the immediately preceding quarter;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the chief
financial officer or the chief accounting officer of the Borrower (i) setting
forth in reasonable detail the calculations required to establish whether the
Borrower was in compliance with the requirements of Section 5.8 on the date of
such financial statements;(ii) stating whether any Default exists on the date
of such certificate and, if any Default then exists, setting forth the details
thereof and the action which the Borrower is taking or proposes to take with
respect thereto; and (iii) certifying (x) that such financial statements fairly
present the financial condition and the results of operations of the Borrower
as of the dates and for the periods indicated, in accordance with GAAP, subject,
in the case of interim
52
<PAGE>
financial statements, to normal year-end adjustments, and (y) that such officer
has reviewed the terms of the Loan Documents and has made, or caused to be made
under his or her supervision, a review in reasonable detail of the business and
condition of the Borrower during the period beginning on the date through which
the last such review was made pursuant to this Section 5.1(c) (or, in the case
of the first certification pursuant to this Section 5.1(c), the Closing Date)
and ending on a date not more than ten (10) Domestic Business Days prior to the
date of such delivery and that on the basis of such review of the Loan Documents
and the business and condition of the Borrower, to the best knowledge of such
officer, no Default or Event of Default under any other provision of Section 6.1
occurred or, if any such Default or Event of Default has occurred, specifying
the nature and extent thereof and, if continuing, the action the Borrower
proposes to take in respect thereof;
(d) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements confirming the
calculations set forth in the officer's certificate delivered simultaneously
therewith pursuant to clause (c) above;
(e) (i) within five (5) days after the president, chief financial
officer, treasurer, controller or other executive officer of the Borrower
obtains knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer or the president of the Borrower
setting forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto; (ii) promptly and in any event within ten
(10) days after the Borrower obtains knowledge thereof, notice of (x) any
litigation or governmental proceeding pending or threatened against the
Borrower which is likely to individually or in the aggregate, result in a
Material Adverse Effect, and (y) any other event, act or condition which is
likely to result in a Material Adverse Effect;
(f) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute
53
<PAGE>
grounds for a termination of such Plan under Title IV of ERISA, or knows that
the plan administrator of any Plan has given or is required to give notice of
any such reportable event, a copy of the notice of such reportable event given
or required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an
intent to terminate, impose liability (other than for premiums under Section
4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a
copy of such notice; (iv) applies for a waiver of the minimum funding standard
under Section 412 of the Internal Revenue Code, a copy of such application; (v)
gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a
copy of such notice and other information filed with the PBGC; (vi) gives notice
of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such
notice; or (vii) fails to make any payment or contribution to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could result
in the imposition of a Lien or the posting of a bond or other security, a
certificate of the chief financial officer or the chief accounting officer of
the Borrower setting forth details as to such occurrence and action, if any,
which the Borrower or applicable member of the ERISA Group is required or
proposes to take;
(g) promptly and in any event within five (5) Domestic Business Days
after the Borrower obtains actual knowledge of any of the following events, a
certificate of the Borrower executed by an officer of the Borrower specifying
the nature of such condition and the Borrower's, if the Borrower has actual
knowledge thereof, the Environmental Affiliate's proposed initial response
thereto: (i) the receipt by the Borrower, or, if the Borrower has actual
knowledge thereof, any of the Environmental Affiliates, of any communication
(written or oral), whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Borrower, or, if the Borrower has
actual knowledge thereof, any of the Environmental Affiliates, is not in
compliance with applicable Environmental Laws, and such noncompliance is likely
to have a Material Adverse Ef-
54
<PAGE>
fect, (ii) the Borrower shall obtain actual knowledge that there exists any
Environmental Claim which is likely to have a Material Adverse Effect pending or
threatened against the Borrower or any Environmental Affiliate or (iii) the
Borrower obtains actual knowledge of any release, emission, discharge or
disposal of any Material of Environmental Concern that is likely to form the
basis of any Environmental Claim against the Borrower or any Environmental
Affiliate;
(h) promptly and in any event within five (5) Domestic Business Days
after receipt of any material notices or correspondence from any company or
agent for any company providing insurance coverage to the Borrower relating to
any material loss or loss of the Borrower with respect to any of the Mortgaged
Properties, copies of such notices and correspondence; and
(i) promptly upon the mailing thereof to the shareholders or partners
of the Borrower, copies of all financial statements, reports and proxy statement
so mailed;
(j) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(k) simultaneously with delivery of the information required by
Sections 5.1(a) and (b), a statement of Net Operating Cash Flow with respect to
each Mortgaged Property and a list of all Mortgaged Properties; and
(l) from time to time such additional information regarding the
financial position or business of the Borrower as the Lead Agent, at the request
of any Bank, may reasonably request.
SECTION 5.2. Payment of Obligations. The Borrower will pay and
----------------------
discharge, at or before maturity, all its material obligations and liabilities
including, without limitation, any obligation pursuant to any agreement by
which it or any of its properties is bound and any tax liabilities, in any case,
where failure to do so will likely result in a Material Adverse Effect except
55
<PAGE>
(i) such tax liabilities may be contested in good faith by appropriate
proceedings, and will maintain in accordance with GAAP, appropriate reserves
for the accrual of any of the same; or (ii) such obligation or liability as may
be contested in good faith by appropriate proceedings.
SECTION 5.3. Maintenance of Property; Insurance.
----------------------------------
(a) The Borrower will keep each of the Mortgaged Properties in good
repair, working order and condition, subject to ordinary wear and tear and in
accordance with the provisions of the applicable Mortgage.
(b) The Borrower shall (a) maintain insurance as specified in Section
5 of the Mortgage with insurers meeting the qualifications described therein,
which insurance shall in any event not provide for materially less coverage than
the insurance in effect on the Closing Date, and (b) furnish to each Bank from
time to time, upon written request, copies of the policies under which such
insurance is issued, certificates of insurance and such other information
relating to such insurance as such Bank may reasonably request. The Borrower
will deliver to the Banks (i) upon request of any Bank through the Lead Agent
from time to time, full information as to the insurance carried, (ii) within
five (5) days of receipt of notice from any insurer, a copy of any notice of
cancellation or material change in coverage from that existing on the date of
this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of
coverage by the Borrower.
SECTION 5.4. Conduct of Business. The Borrower will continue to
-------------------
engage in business of the same general type as now conducted by it.
SECTION 5.5. Compliance with Laws. The Borrower will comply in all
--------------------
material respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without limitation,
Environmental Laws, all zoning and building codes and ERISA and the rules and
regulations thereunder) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings.
56
<PAGE>
SECTION 5.6. Inspection of Property, Books and Records. The Borrower
-----------------------------------------
will keep proper books of record and account in which full, true and correct
entries shall be made of all dealings and transactions in relation to its
business and activities; and will permit representatives of any Bank at such
Bank's expense to visit and inspect any of its properties to examine and make
abstracts from any of its books and records and to discuss its affairs, finances
and accounts with its officers and employees, all at such reasonable times, upon
reasonable notice, and as often as may reasonably be desired.
SECTION 5.7. Existence.
---------
(a) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence or its
partnership existence, as applicable.
(b) The Borrower shall do or cause to be done all things necessary to
preserve and keep in full force and effect its patents, trademarks,
servicemarks, tradenames, copyrights, franchises, licenses, permits,
certificates, authorizations, qualifications, accreditations, easements, rights
of way and other rights, consents and approvals the nonexistence of which is
likely to have a Material Adverse Effect.
SECTION 5.8. Financial Covenants.
-------------------
(a) Debt Service Coverage. Measured as of the last day of each
---------------------
calendar quarter, the ratio of (i) Net Operating Cash Flow to (ii) Debt Service
will not be less than 1.75:1.
(b) LTV Ratio. As of the last day of each calendar quarter and as of
---------
the date of any addition of a Mortgaged Property, the LTV Ratio shall not exceed
60%, subject, however, to the Borrower's rights to cure pursuant to Section
2.9(a). Failure to restore compliance with this Section 5.8(b) in accordance
with Section 2.9(a) shall be an immediate Event of Default.
(c) Maximum Total Debt to Tangible FMV. As of the last day of each
----------------------------------
calendar quarter, the Maximum Total Debt Ratio will not be greater than 50%
during the then current calendar year.
57
<PAGE>
(d) EBITDA Coverage. As of the last day of each calendar quarter,
---------------
the ratio of Annual EBITDA to Total Debt Service will not be less than 2.0:1.
(e) Dividends. The Borrower will not, as determined on an aggregate
---------
annual basis, pay any dividends in excess of the greater of (i) 95% of its
consolidated FFO for such year, and (ii) an amount which results in
distributions to the general partner of the Borrower in an amount sufficient to
permit such general partner to make distributions to its shareholders which it
reasonably believes are necessary for it to (A) maintain its qualification as a
real estate investment trust for federal and state income tax purposes, and (B)
avoid the payment of federal or state income or excise tax. During the
continuance of an Event of Default under Section 6.1(a), the Borrower shall pay
only those dividends necessary to make distributions to the general partner of
the Borrower to make distributions to its shareholders which it reasonably
believes are necessary to maintain its status as a real estate investment trust
for federal and state income tax purposes.
(f) Minimum Consolidated Tangible Net Worth. The Consolidated
---------------------------------------
Tangible Net Worth will at no time be less than 90% of the Consolidated Tangible
Net Worth [on the Closing Date.
(g) Negative Pledge. The Borrower will not create, assume or suffer
---------------
to exist any Lien on any Mortgaged Property or any other asset now owned or
hereafter acquired by it, except for any encumbrances created or permitted by
the Loan Documents.
(h) Project Indebtedness. The Borrower shall not, at any time,
--------------------
create, incur, assume, guaranty, suffer to exist or otherwise become or remain
directly or indirectly liable with respect to any Debt other than Non-Recourse
Debt.
SECTION 5.9. Restriction on Fundamental Changes; Operation and
--------------------------------------------------
Control. (a) The Borrower shall not enter into any merger or consolidation,
- -------
unless the Borrower is the surviving entity, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution), discontinue its business or convey,
lease, sell, transfer or otherwise dispose of, in one transaction or series of
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transactions, any substantial part of its business or property, whether now or
hereafter acquired, hold an interest in any subsidiary which is not controlled
by the Borrower or enter into other business lines, without the prior written
consent of the Lead Agent.
(b) The Borrower shall not amend its articles of incorporation,
by-laws or agreement of limited partnership, as applicable, in any material
respect, without the Lead Agent's consent, which shall not be unreasonably
withheld or delayed.
SECTION 5.10. Changes in Business. The Borrower shall not enter
-------------------
into any business which is substantially different from that conducted by the
Borrower on the Closing Date after giving effect to the transactions
contemplated by the Loan Documents.
SECTION 5.11 Sale of the Property. Except as provided in Section
--------------------
3.4(c), the Borrower shall not sell or otherwise transfer its interest in all or
any part of the Mortgaged Properties; provided, however, that nothing in this
-------- -------
Section 5.11 shall be deemed to prohibit the leasing of portions of the
Mortgaged Properties in the ordinary course of business for occupancy by the
tenants thereunder.
SECTION 5.12. Fiscal Year; Fiscal Quarter. The Borrower shall not
---------------------------
change its fiscal year or any of its fiscal quarters without the Lead Agent's
consent, which shall not be unreasonably withheld or delayed.
SECTION 5.13. Margin Stock. None of the proceeds of the Loan will be
------------
used, directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of buying or carrying any Margin Stock.
SECTION 5.14. Development Activities. The Borrower shall not engage
----------------------
in any development activities except for development in connection with the
expansion and/or repositioning or restoration following a casualty or
condemnation of existing improvements on Real Property Assets. Notwithstanding
the foregoing, the Borrower may engage in all other development activities where
there is construction completion risk provided that in no event shall the value
(determined in accordance with the definition of Combined Asset Value) of the
Real Property
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Assets under such other type of development exceed twenty percent (20%) of the
Borrower's Combined Asset Value.
SECTION 5.15. Use of Proceeds. The Borrower shall use the proceeds
---------------
of the Loans solely to refinance the Mortgaged Properties as of the date hereof,
to finance the acquisition of additional Mortgaged Properties which are
industrial or office properties and for its general business purposes.
SECTION 5.16 Borrower Status. The general partner of the Borrower
---------------
shall at all times (i) maintain its status as a self-directed and
self-administered real estate investment trust under the Code, and (ii) remain a
publicly traded company listed on the New York Stock Exchange.
ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred and be continuing:
-----------------
(a) the Borrower shall fail to pay when due any principal of any
Loan, or the Borrower shall fail to pay when due any interest on any Loan;
provided, however, that the Borrower shall be entitled to a three (3) Domestic
- -------- -------
Business Day grace period with respect thereto but only as to two (2) payments
of interest during the Term, or the Borrower shall fail to pay within three (3)
Domestic Business Days after the same is due any fees or other amounts payable
hereunder;
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.8(a)-(g) and Sections 5.8 to 5.16, inclusive, subject to
any applicable grace periods set forth therein;
(c) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a) or
(b) above) for 30 days after written notice thereof has been given to the
Borrower by the Lead Agent;
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(d) any representation, warranty, certification or statement made by
the Borrower in this Agreement or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made (or deemed made);
(e) the Borrower shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any Recourse Debt or Debt guaranteed by the
Borrower (other than the Obligations) and such de fault shall continue beyond
the giving of any required notice and the expiration of any applicable grace
period (as the same may be extended by the applicable lender) and such default
shall not be waived by the applicable lender (which waiver shall serve to
reinstate the applicable loan), or the Borrower shall default in the
performance or observance of any obligation or condition with respect to any
such Debt or any other event shall occur or condition exist beyond the giving of
any required notice and the expiration of any applicable grace period (as the
same may be extended by the applicable lender), if in any such case as a result
of such default, event or condition, the lender thereof shall accelerate the
maturity of any such Debt or to permit (without any further requirement of
notice or lapse of time) the holder or holders thereof, or any trustee or agent
for such holders, to accelerate the maturity of any such Debt and such default
shall not be waived by the applicable lender (which waiver shall serve to
reinstate the applicable loan), or any such Debt shall become or be declared to
be due and payable prior to its stated maturity other than as a result of a
regularly scheduled payment;
(f) the Borrower shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, or shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to
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pay its debts as they become due, or shall take any corporate action to
authorize any of the foregoing;
(g) an involuntary case or other proceeding shall be commenced
against the Borrower seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order for relief shall
be entered against the Borrower under the federal bankruptcy laws as now or
hereafter in effect;
(h) the Borrower shall default in its obligations under any Loan
Document other than this Agreement beyond any applicable notice and grace
periods;
(i) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $1,000,000 which it shall have become
liable to pay under Title IV of ERISA, or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the ERISA
Group, any plan administrator or any combination of the foregoing, or the PBGC
shall institute proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan, or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated, or there shall
occur a complete or partial withdrawal from, or a default, within the meaning of
Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
which could cause one or more members of the ERISA Group to incur a current
payment obligation in excess of $1,000,000;
(j) one or more final nonappealable judgments or decrees in an
aggregate amount of $10,000,000 as of such date shall be entered by a court or
courts of competent jurisdiction against the Borrower (other than any judgment
as to which, and only to the extent, a reputable insurance company has
acknowledged coverage of such claim
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in writing) and (i) any such judgments or decrees shall not be stayed,
discharged, paid, bonded or vacated within thirty (30) days (or bonded or
vacated within thirty (30) after any stay is lifted) or (ii) enforcement
proceedings shall be commenced by any creditor on any such judgments or decrees;
(k) (i) any Environmental Claim shall have been asserted against the
Borrower or any Environmental Affiliate, (ii) any release, emission, discharge
or disposal of any Material of Environmental Concern shall have occurred, and
such event is reasonably likely to form the basis of an Environmental Claim
against the Borrower or any Environmental Affiliate, or (iii) the Borrower or
the Environmental Affiliates shall have failed to obtain any Environmental
Approval necessary for the ownership, or operation of its business, property or
assets or any such Environmental Approval shall be revoked, terminated, or
otherwise cease to be in full force and effect, in the case of clauses (i), (ii)
or (iii) above, if the existence of such condition has had or is reasonably
likely to have a Material Adverse Effect;
(l) during any consecutive two year period commencing on or after the
date hereof, individuals who at the beginning of such period constituted the
Board of Directors of the Borrower (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
Borrower stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in the office who either were members of
the Board of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
(m) the general partner of the Borrower shall cease at any time to
qualify as a real estate investment trust under the Internal Revenue Code;
(n) at any time, for any reason the Borrower seeks to repudiate its
obligations under any Loan Document;
(o) any Mortgage or any Lien granted thereunder shall (except in
accordance with the terms hereof or
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thereof), in whole or in part, terminate, cease to be effective or cease to be a
legally valid, binding and enforceable obligation of the Borrower, or any Lien
securing the Loans shall, in whole or in part, cease to be a perfected first
priority Lien, subject to the Permitted Exceptions (as defined in the
Mortgages).
SECTION 6.2. Rights and Remedies. (a) Upon the occurrence of any
-------------------
Event of Default described in Sections 6.1(f) or (g), the unpaid principal
amount of, and any and all accrued interest on, the Loans and any and all
accrued fees and other Obligations hereunder shall automatically become
immediately due and payable, with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind (including, without limitation, valuation and
appraisement, diligence, presentment, notice of intent to demand or accelerate
and notice of acceleration), all of which are hereby expressly waived by the
Borrower; and upon the occurrence and during the continuance of any other Event
of Default, the Lead Agent may exercise any of its rights and remedies hereunder
and by written notice to the Borrower, declare the unpaid principal amount of
and any and all accrued and unpaid interest on the Loans and any and all accrued
fees and other Obligations hereunder to be, and the same shall thereupon be,
immediately due and payable with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind other than as provided in the Loan Documents
(including, without limitation, valuation and appraisement, diligence,
presentment, and notice of intent to demand or accelerate), all of which are
hereby expressly waived by the Borrower.
(b) Notwithstanding the foregoing, upon the occurrence and during the
continuance of any Event of Default other than any Event of Default described
in Sections 6.1(f) or (g), the Lead Agent shall not exercise any of its rights
and remedies hereunder nor declare the unpaid principal amount of and any and
all accrued and unpaid interest on the Loans and any and all accrued fees and
other Obligations hereunder to be immediately due and payable, until such time
as the Lead Agent shall have delivered a notice to the Banks specifying the
Event of Default which has occurred and whether Lead Agent recommends the
acceleration of the Obligations due hereunder
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<PAGE>
or the exercise of other remedies hereunder. The Banks shall notify the Lead
Agent if they approve or disapprove of the acceleration of the Obligations due
hereunder or the exercise of such other remedy recommended by Lead Agent within
five (5) Domestic Business Days after receipt of such notice. If any Bank shall
not respond within such five (5) Domestic Business Day period, then such Bank
shall be deemed to have accepted Lead Agent's recommendation for acceleration of
the Obligations due hereunder or the exercise of such other remedy. If the
Required Banks shall approve the acceleration of the Obligations due hereunder
or the exercise of such other remedy, then Lead Agent shall declare the unpaid
principal amount of and any and all accrued and unpaid interest on the Loans and
any and all accrued fees and other Obligations hereunder to be immediately due
and payable or exercise such other remedy approved by the Required Banks. If the
Required Banks shall neither approve nor disapprove the acceleration of the
Obligations due hereunder or such other remedy recommended by Lead Agent, then
Lead Agent may accelerate the Obligations due hereunder or exercise any of its
rights and remedies hereun der in its sole discretion. If the Required Banks
shall disapprove the acceleration of the Obligations due here under or the
exercise of such other remedy recommended by Lead Agent, but approve of another
remedy, then to the extent permitted hereunder, Lead Agent shall exercise such
remedy.
SECTION 6.3. Notice of Default. If the Lead Agent shall not already
-----------------
have given any notice to the Borrower under Section 6.1, the Lead Agent shall
give notice to the Borrower under Section 6.1 promptly upon being requested to
do so by the Required Banks and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE LEAD AGENT
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably
-----------------------------
appoints and authorizes the Lead Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Lead Agent by the
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terms hereof or thereof, together with all such powers as are reasonably
incidental thereto.
SECTION 7.2. Lead Agent and Affiliates. Morgan shall have the same
-------------------------
rights and powers under this Agreement as any other Bank and may exercise or
refrain from exercising the same as though it were not the Lead Agent, and
Morgan and its affiliates may accept deposits from, lend money to, and generally
engage in any kind of business with the Borrower or any subsidiary or affiliate
of the Borrower as if it were not the Lead Agent hereunder, and the term "Bank"
and "Banks" shall include Morgan in its individual capacity.
SECTION 7.3. Action by Lead Agent. The obligations of the Lead
--------------------
Agent hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Lead Agent shall not be required to take any
action with respect to any Default, except as expressly provided in Article VI.
SECTION 7.4. Consultation with Experts. The Lead Agent may consult
-------------------------
with legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Lead Agent. Neither the Lead Agent nor any
-----------------------
of its affiliates nor any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks or, where
required by the terms of this Agreement, all of the Banks, or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Lead
Agent nor any of its directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into or verify (i) any
statement, warranty or representation made in connection with this Agreement or
any borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of the Borrower; (iii) the satisfaction of any condition
specified in Article III, except receipt of items required to be delivered to
the Lead Agent; or (iv) the validity, effectiveness or genuineness of this
Agree-
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ment, the other Loan Documents or any other instrument or writing furnished in
connection herewith. The Lead Agent shall not incur any liability by acting in
reliance upon any notice, consent, certificate, statement, or other writing
(which may be a bank wire, telex or similar writing) believed by it in good
faith to be genuine or to be signed by the proper party or parties.
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance
---------------
with its Commitment, indemnify the Lead Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement, the other
Loan Documents or any action taken or omitted by such indemnitees here under.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
---------------
independently and without reliance upon the Lead Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Lead
Agent or any other Bank, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking any action under this Agreement.
SECTION 7.8. Successor Lead Agent. The Lead Agent may resign at any
--------------------
time by giving notice thereof to the Banks and the Borrower. Upon any such
resignation or the removal of the Lead Agent in accordance with Section 7.11,
the Required Banks shall have the right to appoint a successor Lead Agent with
the consent of the Borrower provided that no Event of Default shall have
occurred and be continuing. If no successor Lead Agent shall have been so
appointed by the Required Banks, and shall have accepted such appointment,
within 30 days after the retiring Lead Agent gives notice of resignation, then
the retiring Lead Agent may, on behalf of the Banks, appoint a successor Lead
Agent, which shall be a commercial bank organized or licensed under the laws of
the United States
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of America or of any State thereof and having a combined capital and surplus of
at least $50,000,000. Upon the acceptance of its appointment as the Lead Agent
hereunder by a successor Lead Agent, such successor Lead Agent shall thereupon
succeed to and become vested with all the rights and duties of the retiring Lead
Agent, and the retiring Lead Agent shall be discharged from its duties and
obligations hereunder first accruing or arising after the effective date of such
retirement. After any retiring Lead Agent's resignation hereunder as Lead
Agent, the provisions of this Article shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was the Lead Agent.
SECTION 7.9. Lead Agent's Fee. The Borrower shall pay to the Lead
----------------
Agent for its own account fees in the amounts and at the times previously agreed
upon between the Borrower and the Lead Agent.
SECTION 7.10. Copies of Notices. Lead Agent shall deliver to each
-----------------
Bank a copy of any notice sent to the Borrower by Lead Agent in connection with
the performance of its duties as Lead Agent hereunder.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair. If on or prior to the first day of any Interest Period for any Euro-
- ------
Dollar Borrowing:
(a) the Lead Agent is advised by the Reference Bank that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Bank
in the relevant market for such Interest Period, or
(b) Banks having 50% or more of the aggregate amount of the
Commitments advise the Lead Agent that the Adjusted London Interbank Offered
Rate as determined by the Lead Agent will not adequately and fairly reflect the
cost to such Banks of funding their Euro-Dollar Loans for such Interest Period,
the Lead Agent shall forthwith give notice thereof to the Borrower and the
Banks, whereupon until the Lead Agent notifies the Borrower that the
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circumstances giving rise to such suspension no longer exist, the obligations of
the Banks to make Euro-Dollar Loans shall be suspended. Unless the Borrower
notifies the Lead Agent at least two Domestic Business Days before the date of
any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been
given that it elects not to borrow on such date, such Borrowing shall instead be
made as a Base Rate Borrowing.
SECTION 8.2. Illegality. If, after the date of this Agreement, the
----------
adoption of any applicable law, rule or regulation, or any change in any
existing applicable law, rule or regulation, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank (or its Euro-Dollar Lending Office) with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency shall make it unlawful or impossible for any
Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-
Dollar Loans, and such Bank shall so notify the Lead Agent, the Lead Agent shall
forthwith give notice thereof to the other Banks and the Borrower, whereupon
until such Bank notifies the Borrower and the Lead Agent that the circumstances
giving rise to such suspension no longer exist, the obligation of such Bank to
make Euro-Dollar Loans shall be suspended. Before giving any notice to the Lead
Agent pursuant to this Section, such Bank shall designate a different Euro-
Dollar Lending Office if such designation will avoid the need for giving such
notice and will not, in the judgment of such Bank, be otherwise disadvantageous
to such Bank. If such Bank shall determine that it may not lawfully continue to
maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall
so specify in such notice, the Borrower shall immediately prepay in full the
then outstanding principal amount of each such Euro-Dollar Loan, together with
accrued inter est thereon. Concurrently with prepaying each such Euro-Dollar
Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount
from such Bank (on which interest and principal shall be payable
contemporaneously with the related Euro-Dollar Loans of the other Banks), and
such Bank shall make such a Base Rate Loan.
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SECTION 8.3. Increased Cost and Reduced Return.
---------------------------------
(a) If, after the date hereof, the adoption of any applicable law,
rule or regulation, or any change in any applicable law, rule or regulation, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System (but excluding
with respect to any Euro-Dollar Loan any such requirement reflected in an
applicable Euro-Dollar Reserve Percentage)), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending Office)
or shall impose on any Bank (or its Applicable Lending Office) or on the London
interbank market any other condition affecting its Euro-Dollar Loans, its Note,
or its obligation to make Euro-Dollar Loans, and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount
of any sum received or receivable by such Bank (or its Applicable Lending
Office) under this Agreement or under its Note with respect thereto, by an
amount deemed by such Bank to be material, then, within 15 days after demand by
such Bank (with a copy to the Lead Agent), which demand shall be accompanied by
a certificate showing, in reasonable detail, the calculation of such amount or
amounts, the Borrower shall pay to such Bank such additional amount or amounts
as will compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date hereof,
the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital
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adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on capital of such Bank (or its Parent) as a consequence of such Bank's
obligations hereunder to a level below that which such Bank (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies with respect to capital adequacy) by an amount
deemed by such Bank to be material, then from time to time, within 15 days
after demand by such Bank (with a copy to the Lead Agent), which demand shall be
accompanied by a certificate showing, in reasonable detail, the calculation of
such amount or amounts, the Borrower shall pay to such Bank such additional
amount or amounts as will compensate such Bank (or its Parent) for such
reduction.
(c) Each Bank will promptly notify the Borrower and the Lead Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate
of any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, such Bank may use
any reasonable averaging and attribution methods.
SECTION 8.4. Taxes.
-----
(a) Any and all payments by the Borrower to or for the account of any
Bank or the Lead Agent hereunder or under any other Loan Document shall be made
free and clear of and without deduction for any and all present or future taxes,
duties, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Bank and the
---------
Lead Agent, taxes imposed on its income, and franchise taxes imposed on it, by
the jurisdiction under the laws of which such Bank or the Lead Agent (as the
case may be) is organized or any political subdivision thereof and, in the case
of each Bank, taxes imposed on its income, and franchise or similar taxes
imposed on it, by the juris-
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diction of such Bank's Applicable Lending Office or any political subdivision
thereof (and, if different from the jurisdiction of such Bank's Applicable
Lending Office, the jurisdiction of the domicile of its Loans either established
by the Bank pursuant to Section 9.12 or determined by the applicable taxing
authorities)(all such non-excluded taxes, duties, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
-----
If the Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder or under any Note or participation therein to any
Bank or the Lead Agent, (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section 8.4) such Bank or the Lead Agent (as
the case may be) receives an amount equal to the sum it would have received had
no such deductions been made, (ii) the Borrower shall make such deductions,
(iii) the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) the
Borrower shall furnish to the Lead Agent, at its address referred to in Section
9.1, the original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note or
participation therein or from the execution or delivery of, or otherwise with
respect to, this Agreement or any Note or participation therein (hereinafter
referred to as "Other Taxes").
-----------
(c) The Borrower agrees to indemnify each Bank and the Lead Agent for
the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable
under this Section 8.4) paid by such Bank or the Lead Agent (as the case may be)
and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto. Any payment required under this
indemnification shall be made within 15 days from the date such Bank or the Lead
Agent (as the case may be) makes demand therefor.
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(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrower (but
only so long as such Bank remains lawfully able to do so), shall provide the
Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any
successor form prescribed by the Internal Revenue Service, certifying that such
Bank is entitled to benefits under an income tax treaty to which the United
States is a party which reduces the rate of withholding tax on payments of
interest or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States. If the form provided by a Bank at the time such Bank first became a
party to this Agreement or at any time thereafter (other than solely by reason
of a change in United States law or a change in the terms of any treaty to which
the United States is a party after the date hereof) indicates a United States
interest withholding tax rate in excess of zero (or would have indicated such a
withholding tax rate if such form had been submitted and completed accurately
and completely and either was not submitted or was not completed accurately and
completely), or if a Bank otherwise is subject to United States interest
withholding tax at a rate in excess of zero at any time for any reason (other
than solely by reason of a change in United States law or regulation or a change
in any treaty to which the United States is a party after the date hereof),
withholding tax at such rate shall be considered excluded from "Taxes" as
defined in Section 8.4(a). In addition, any amount that otherwise would be
considered "Taxes" or "Other Taxes" for purposes of this Section 8.4 shall be
excluded therefrom if the Bank either has transferred the domicile of its Loans
pursuant to Section 9.12 or changed the Applicable Lending Office with respect
to such Loans and such amount would not have been incurred had such transfer or
change not been made.
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation
73
<PAGE>
occurring subsequent to the date on which a form originally was required to be
provided), such Bank shall not be entitled to indemnification under Section
8.4(a) with respect to Taxes imposed by the United States; provided, however,
-------- -------
that should a Bank, which is otherwise exempt from or subject to a reduced rate
of withholding tax, become subject to Taxes because of its failure to deliver a
form required hereunder, the Borrower shall take such steps as such Bank shall
reasonably request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.4, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to eliminate or reduce
any such additional payment which may thereafter accrue if such change, in the
judgment of such Bank, is not otherwise disadvantageous to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar
----------------------------------------------------
Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been
- -----
suspended pursuant to Sections 8.1 or 8.2 or (ii) any Bank has demanded
compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and
the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to
such Bank through the Lead Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies the
Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as Euro-
Dollar Loans shall be made instead as Base Rate Loans (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar Loans
of the other Banks), and
(b) after each of its Euro-Dollar Loans has been repaid, all payments
of principal which would otherwise be applied to repay such Euro-Dollar Loans
shall be applied to repay its Base Rate Loans instead.
74
<PAGE>
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications
-------
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Borrower or the Lead Agent, at its address or telecopy
number set forth on the signature pages hereof, together with copies thereof, in
the case of the Borrower, to Latham & Watkins, 633 West Fifth Street, Suite
4000, Los Angeles, CA 90071, Attention: Martha Jordan, Esq., Telephone: (213)
485-1234, Telecopy: (213) 891-8763, and in the case of the Lead Agent, to
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022, Attention: Martha Feltenstein, Esq., Telephone: (212) 735-2272, Telecopy:
(212) 735-2000, (y) in the case of any Bank, at its address or telecopy number
set forth on the signature pages hereof or in its Administrative Questionnaire
or (z) in the case of any party, such other address or telecopy number as such
party may hereafter specify for the purpose by notice to the Lead Agent, the
Banks and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section, (ii) if given by mail, 72 hours after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Lead Agent
--------
under Article II or Article VIII shall not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Lead Agent or
----------
any Bank in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification.
-------------------------
75
<PAGE>
(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses
of the Lead Agent (including, without limitation, reasonable fees and
disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP, local
counsel for the Lead Agent, and travel, site visits, third party reports
(including Appraisals), mortgage recording taxes, environmental and engineering
expenses), in connection with the preparation and administration of this
Agreement, the Loan Documents and the documents and instruments referred to
therein, the syndication of the Loans, any waiver or consent hereunder or any
amendment or modification hereof or any Default or alleged Default hereunder and
(ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the
Lead Agent and each Bank, including, without limitation, reasonable fees and
disbursements of counsel for the Lead Agent, in connection with the enforcement
of the Loan Documents and the instruments referred to therein and such Event of
Default and collection, bankruptcy, insolvency and other enforcement
proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Lead Agent and each Bank,
their respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
----------
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel and settlements and settlement costs, which may be
incurred by such Indemnitee in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) that may at any time (including, without
limitation, at any time following the payment of the Obligations) be imposed
on, asserted against or incurred by any Indemnitee as a result of, or arising
out of, or in any way related to or by reason of, (i) any of the transactions
contemplated by the Loan Documents or the execution, delivery or performance of
any Loan Document (including, without limitation, the Borrower's actual or
proposed use of proceeds of the Loans, whether or not in compliance with the
provisions hereof), (ii) any violation by the Borrower or the Environmental
Affiliates of any applicable Environmental Law, (iii) any Environmental Claim
arising out of the management, use, control, ownership or operation of property
or assets by the Borrower or any of the Environmental Affiliates, in-
76
<PAGE>
cluding, without limitation, all on-site and off-site activities involving
Material of Environmental Concern, (iv) the breach of any environmental
representation or warranty set forth herein, (v) the grant to the Lead Agent and
the Banks of any Lien in any property or assets of the Borrower or any stock or
other equity interest in the Borrower, and (vi) the exercise by the Lead Agent
and the Banks of their rights and remedies (including, without limitation,
foreclosure) under any agreements creating any such Lien (but excluding, as to
any Indemnitee, any such losses, liabilities, claims, damages, expenses,
obligations, penalties, actions, judgments, suits, costs or disbursements
incurred solely by reason of (i) the gross negligence or willful misconduct of
such Indemnitee as finally determined by a court of competent jurisdiction or
(ii) any investigative, administrative or judicial proceeding imposed or
asserted against any Indemnitee by any bank regulatory agency or by any equity
holder of such Indemnitee). The Borrower's obligations under this Section shall
survive the termination of this Agreement and the payment of the Obligations.
(c) The Borrower shall pay, and hold the Lead Agent and each of the
Banks harmless from and against, any and all present and future U.S. stamp,
recording, transfer and other similar foreclosure related taxes with respect to
the foregoing matters and hold the Lead Agent and each Bank harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Bank) to pay such taxes.
SECTION 9.4. Sharing of Set-Offs. In addition to any rights now or
-------------------
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance
of any Event of Default, each Bank is hereby authorized at any time or from
time to time, without presentment, demand, protest or other notice of any kind
to the Borrower or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and apply any and all deposits (general or
special, time or demand, provisional or final), other than deposits held for the
benefit of third parties, and any other indebtedness at any time held or owing
by such Bank (including, without limitation, by branches and agencies of such
Bank wherever located) to or for the credit or the
77
<PAGE>
account of the Borrower against and on account of the Obligations of the
Borrower then due and payable to such Bank under this Agreement or under any of
the other Loan Documents, including, without limitation, all interests in
Obligations purchased by such Bank. Each Bank agrees that if it shall, by
exercising any right of set-off or counterclaim or otherwise, receive payment of
a proportion of the aggregate amount of principal and interest due with respect
to any Note held by it which is greater than the proportion received by any
other Bank in respect of the aggregate amount of principal and interest due with
respect to any Note held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
held by the other Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest with respect to the
Notes held by the Banks shall be shared by the Banks pro rata; provided that
--------
nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes. The Borrower agrees, to the fullest extent that
it may effectively do so under applicable law, that any holder of a
participation in a Note, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-off or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of the Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this
----------------------
Agreement, the Notes or other Loan Documents may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the Borrower
and the Required Banks (and, if the rights or duties of the Lead Agent are
affected thereby, by the Lead Agent); provided that no such amendment or waiver
--------
shall, unless signed by all the Banks, (i) increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or any fees specified herein, (iii) postpone the
date fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for any reduction or termination of any
78
<PAGE>
Commitment, (iv) release the Lien of any Mortgage or otherwise release any other
collateral, or (v) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Notes, or the number of Banks, which shall be
required for the Banks or any of them to take any action under this Section or
any other provision of this Agreement.
SECTION 9.6. Successors and Assigns.
----------------------
(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or otherwise transfer any of
their rights under this Agreement or the other Loan Documents without the prior
written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
-----------
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Lead Agent, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower and the Lead Agent
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement. Any agreement pursuant
to which any Bank may grant such a participating interest shall provide that
such Bank shall retain the sole right and responsibility to enforce the
obligations of the Borrower hereunder including, without limitation, the right
to approve any amendment, modification or waiver of any provision of this
Agreement; provided that such participation agreement may provide that such Bank
--------
will not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii), (iii) or (iv) of Section 9.5 without the consent
of the Participant. The Borrower agrees that each Participant shall, to the
extent provided in its participation agreement, be entitled to the benefits of
Article VIII with respect to its participating interest. An assignment or other
transfer which is not permitted by subsection (c) or (d) below shall be given
effect for purposes of this Agreement only to the extent of a participating
interest granted in accordance with this subsection (b).
79
<PAGE>
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
--------
rights and obligations under this Agreement, the Notes and the other Loan
Documents, and such Assignee shall assume such rights and obligations, pursuant
to an Assignment and Assumption Agreement in substantially the form of Exhibit C
---------
attached hereto executed by such Assignee and such transferor Bank, with (and
subject to) the subscribed consent of the Lead Agent and, provided no Event of
Default shall have occurred and be continuing, the Borrower, which consent
shall not be unreasonably withheld or delayed. Upon execution and delivery of
such instrument and payment by such Assignee to such transferor Bank of an
amount equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Lead Agent and the
Borrower shall make appropriate arrangements so that, if required, a new Note or
Notes are issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Lead Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Lead Agent certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.3 or 8.4
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with
80
<PAGE>
the Borrower's prior written consent or by reason of the provisions of Section
8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending
Office under certain circumstances or at a time when the circumstances giving
rise to such greater payment did not exist.
SECTION 9.7. Governing Law; Submission to Jurisdiction.
-----------------------------------------
(a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).
(b) Any legal action or proceeding with respect to this Agreement or
any other Loan Document and any action for enforcement of any judgment in
respect thereof may be brought in the courts of the State of New York or of the
United States of America for the Southern District of New York, and, by
execution and delivery of this Agreement, the Borrower hereby accepts for itself
and in respect of its property, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts and appellate courts from any thereof. The
Borrower irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the hand delivery, or
mailing of copies thereof by registered or certified mail, postage prepaid, to
the Borrower at its address set forth below. The Borrower hereby irrevocably
waives any objection which it may now or hereafter have to the laying of venue
of any of the aforesaid actions or proceedings arising out of or in connection
with this Agreement or any other Loan Document brought in the courts referred to
above and hereby further irrevocably waives and agrees not to plead or claim in
any such court that any such action or proceeding brought in any such court has
been brought in an inconvenient forum. Nothing herein shall affect the right of
the Lead Agent, any Bank or any holder of a Note to serve process in any other
manner permitted by law or to commence legal proceedings or otherwise proceed
against the Borrower in any other jurisdiction.
SECTION 9.8. Marshaling; Recapture. Neither the Lead Agent nor any
---------------------
Bank shall be under any obligation
81
<PAGE>
to marshal any assets in favor of the Borrower or any other party or against or
in payment of any or all of the Obligations. To the extent any Bank receives
any payment by or on behalf of the Borrower, which payment or any part thereof
is subsequently invalidated, declared to be fraudulent or preferential, set
aside or required to be repaid to the Borrower or its estate, trustee, receiver,
custodian or any other party under any bankruptcy law, state or federal law,
common law or equitable cause, then to the extent of such payment or repayment,
the Obligation or part thereof which has been paid, reduced or satisfied by the
amount so repaid shall be reinstated by the amount so repaid and shall be
included within the liabilities of the Borrower to such Bank as of the date such
initial payment, reduction or satisfaction occurred.
SECTION 9.9. Counterparts; Integration; Effectiveness. This
----------------------------------------
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective upon receipt by the Lead Agent of
counterparts hereof signed by each of the parties hereto (or, in the case of any
party as to which an executed counterpart shall not have been received, receipt
by the Lead Agent in form satisfactory to it of telegraphic, telex or other
written confirmation from such party of execution of a counterpart hereof by
such party).
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE LEAD
--------------------
AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Survival. All indemnities set forth herein shall
--------
survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Loans hereunder.
SECTION 9.12. Domicile of Loans. Subject to the provisions of
-----------------
Article VIII, each Bank may transfer and carry its Loans at, to or for the
account of any
82
<PAGE>
domestic or foreign branch office, subsidiary or affili ate of such Bank.
SECTION 9.13. Limitation of Liability. No claim may be made by the
-----------------------
Borrower or any other Person against the Lead Agent or any Bank or the
affiliates, directors, officers, employees, attorneys or agent of any of them
for any consequential or punitive damages in respect of any claim for breach of
contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement or by the other Loan Documents, or
any act, omission or event occurring in connection therewith; and the Borrower
hereby waives, releases and agrees not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
[BORROWER]
By:_____________________________
Name:
Title:
Commitments
$__________ MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:_____________________________
Name:
Title:
Total Commitments
- -----------------
$100,000,000
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Lead Agent
83
<PAGE>
By:__________________________
Name:
Title:
60 Wall Street
New York, New York 10260-0060
Attention: Michael Errichetti
Telephone number: (212) 648-8127
Telecopy number: (212) 648-5336
Domestic and Euro-Currency
Lending Office:
Nassau, Bahamas Office
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, Delaware 19173-2107
Attention: Nancy K. Dunbar
Telecopy number: (302) 634-4222
<PAGE>
EXHIBIT A
---------
NOTE
$_________ New York, New York
_______, 199_
For value received, [Kilroy Realty Corporation], a ___________
_____________] (the "Borrower") promises to pay to the order of
_____________________ (the "Bank"), for the account of its Applicable Lending
----
Office, the unpaid principal amount of each Loan made by the Bank to the
Borrower pursuant to the Credit Agreement referred to below on the Maturity
Date. The Borrower promises to pay interest on the unpaid principal amount of
each such Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New
York, New York.
All Loans made by the Bank, the respective types and maturities
thereof and all repayments of the principal thereof shall be recorded by the
Bank and, if the Bank so elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding may be endorsed by the Bank on the schedule
attached hereto, or on a continuation of such schedule attached to and made a
part hereof; provided that the failure of the Bank to make any such recordation
--------
or endorsement shall not affect the obligations of the Borrower hereunder or
under the Credit Agreement.
This Note is one of the Notes referred to in the Revolving Credit
Agreement, dated as of ________ __, 199_, among the Borrower, the Banks parties
thereto, and Morgan Guaranty Trust Company of New York, as Lead Agent (as the
same may be amended from time to time, the "Credit Agreement"). Terms defined
----------------
in the Credit Agreement are used herein with the same meanings. Reference is
made to the Credit Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.
[BORROWER]
By:______________________
Name:
Title:
A-1
<PAGE>
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount of
Amount of Type of Principal Maturity Notation
Date Loan Loan Repaid Date Made By
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE>
EXHIBIT B
---------
MORTGAGED PROPERTIES
B-1
<PAGE>
EXHIBIT C
---------
FORM OF ASSIGNMENT AND ASSUMPTION
C-1
<PAGE>
EXHIBIT D
---------
ALLOCATED BORROWING BASE LOAN AMOUNTS
D-1
<PAGE>
EXHIBIT 10.46
INDENTURE OF MORTGAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATEMENT,
FIXTURE FILING AND ASSIGNMENT OF
LEASES AND RENTS
from
KILROY REALTY, L.P.,
as Debtor, Grantor
and Mortgagor
to
__________________________,
as Trustee
for the benefit of
Morgan Guaranty Trust Company of New York,
as Lead Agent/Beneficiary/Mortgagee
Dated as of January ___, 1997
-------------------------------------------------------
Prepared and drafted by and after recording, return to:
Martha Feltenstein, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
-------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
GRANTING CLAUSES............................................................. 3
1. Definitions.............................................................. 9
2. Warranty................................................................. 17
3. Payment and Performance of Obligations Secured........................... 19
4. Negative Covenants....................................................... 19
5. Insurance................................................................ 19
6. Condemnation and Insurance Proceeds...................................... 24
7. Impositions, Liens and Other Items....................................... 29
8. Funds for Taxes and Insurance............................................ 31
9. The Beneficiary and Trustees............................................. 34
10. Transfers, Additional Indebtedness and Subordinate Liens................ 43
11. Maintenance of Trust Estate; Alterations; Inspection; Utilities......... 44
12. Legal Compliance........................................................ 46
13. Books and Records, Financial Statements, Reports and Other Information.. 46
14. Compliance with Leases and Agreements................................... 47
15. The Beneficiary's Right to Perform...................................... 50
16. The Mortgagor's Existence; Organization and Authority; Litigation....... 50
17. Protection of Security; Costs and Expenses.............................. 51
18. Management of the Properties............................................ 52
19. Environmental Matters................................................... 52
20. Assignment of Rents..................................................... 53
21. Remedies................................................................ 54
22. Application of Proceeds................................................. 61
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
23. Notice of Certain Occurrences........................................... 61
24. WAIVER OF TRIAL BY JURY................................................. 62
25. Taxes................................................................... 62
26. Notices................................................................. 63
27. No Oral Modification.................................................... 64
28. Partial Invalidity...................................................... 64
29. Successors and Assigns.................................................. 64
30. Governing Law........................................................... 65
31. Recording Fees, Taxes, Etc.............................................. 65
32. No Waiver............................................................... 65
33. Further Assurances...................................................... 66
34. Additional Security..................................................... 66
35. Indemnification by the Mortgagor........................................ 66
36. Release................................................................. 68
37. Security Agreement...................................................... 70
38. As to Property in California............................................ 71
EXHIBIT A Land Parcels
EXHIBIT B Permitted Exception
SCHEDULE 1 Agreements
</TABLE>
iii
<PAGE>
INDENTURE OF MORTGAGE, DEED OF TRUST,
SECURITY AGREEMENT, FINANCING STATEMENT,
FIXTURE FILING AND ASSIGNMENT OF
LEASES AND RENTS
THIS INDENTURE OF MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
FINANCING STATEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS (herein,
together with all amendments and supplements thereto, called this "Mortgage"),
--------
dated as of the ___ day of January, 1997, made by KILROY REALTY, L.P., a
Delaware limited partnership (the "Mortgagor"), having an address at 2250 East
---------
Imperial Highway, Suite 1200, El Segundo, California 90245 as debtor, grantor,
trustor and mortgagor, in favor of [TRUSTEE], ("Trustee") having an address at
-------
____________________, as Trustee for the benefit of Morgan Guaranty Trust
Company of New York, (the "Beneficiary"), as Lead Agent for the Banks pursuant
-----------
to the Credit Agreement described herein, having an address at 60 Wall Street,
New York, New York.
W I T N E S S E T H :
-------------------
WHEREAS, Mortgagor is the owner of the ground leasehold interests (the
"Ground Leasehold Estate") in the Property (as hereinafter defined), located on
-----------------------
the land described in Exhibits A-1 and A-2 attached hereto (each, a "Land
------------ --- ----
Parcel" and collectively, the "Land Parcels"); and
------------
WHEREAS, Beneficiary and the Banks named in the Credit Agreement have
made a revolving line of credit loan (the "Loan") available to Mortgagor,
----
pursuant to the Revolving Credit Agreement, dated of even date herewith, among
Mortgagor, the Banks and Beneficiary (as amended, modified, restated or
supplemented from time to time, the "Credit Agreement"). The Loan is evidenced
----------------
by a Promissory Note or Notes, dated as of the date hereof or to be dated
subsequent to the date hereof pursuant to the terms of the Credit Agreement
(such note or notes together with all amendments, modifications or replacements
thereof which may hereafter be executed, collectively, the "Note"), made by the
----
Mortgagor, as maker, in favor of Beneficiary and the Banks named therein, as
payee, in the
1
<PAGE>
aggregate principal amount of One Hundred Million Dollars ($100,000,000) (the
"Loan Amount"); and
-----------
WHEREAS, the Mortgagor and the Beneficiary intend these recitals to be
a material part of this Mortgage.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Mortgagor hereby agrees as follows:
TO SECURE:
(1) payment and performance of all covenants, liabilities and
obligations contained in, and payment of the indebtedness guaranteed by,
the Note plus all interest, additional interest and additional amounts
payable thereunder; and
(2) payment and performance of all covenants, conditions,
liabilities and obligations of the Mortgagor to the Beneficiary contained
in this Mortgage and any extensions, renewals or modifications hereof; and
(3) payment and performance of all covenants, liabilities and
obligations of Mortgagor or any other Consolidated Subsidiary contained in
each of the other Loan Documents (as hereinafter defined); and
(4) without limiting the generality of the foregoing, payment of
all other indebtedness and liabilities, direct or indirect, of the
Mortgagor to the Beneficiary or the Banks, due or to become due hereunder,
or under any other Loan Document (including, without limitation, any
protective advances, disbursements, payments and reimbursements made, and
charges, expenses and costs (including, without limitation, any enforcement
and collection costs) incurred pursuant to the Note, this Mortgage, or such
other Loan Documents) to protect the security intended to be provided
hereby even if the aggregate amount of indebtedness outstanding at any one
time exceeds the amount of the Note (all of the foregoing indebtedness,
monetary liabilities and
<PAGE>
obligations set forth in clauses (1)-(4) above, collectively, the
"Indebtedness"; and payment of the Indebtedness together with the
------------
performance of all covenants and obligations set forth in clauses (1)-(4)
above, collectively, the "Obligations").
-----------
GRANTING CLAUSES
----------------
NOW, THEREFORE, THIS MORTGAGE WITNESSETH: that the Mortgagor, in
consideration of the premises, the acceptance by the Beneficiary of the trusts
created hereby, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged (a) has mortgaged, warranted,
granted, transferred, bargained, sold, conveyed, pledged, and assigned and (b)
by these presents does hereby mortgage, warrant, grant a security interest in,
grant, transfer, bargain, sell, convey, pledge, and assign unto the Beneficiary
and its successors and assigns forever, or, if Section 38 provides that this
instrument is a deed of trust, to the Trustee for the benefit of the Beneficiary
in the trusts created hereby, WITH POWER OF SALE, all its estate, right, title
and interest now owned or hereafter acquired in, to and under any and all of the
property (herein called the "Trust Estate") described in the following Granting
------------
Clauses:
I. The Ground Leasehold Estate and all right, title and interest of
Mortgagor in, to and under the Ground Lease, with all rights of use, occupancy
and enjoyment and in and to all rents, income and profits arising from or
pursuant to the Ground Lease together with all amendments, extensions, renewals
and modifications of the Ground Lease and all credits, deposits, options and
privileges of Mortgagor as lessee under the Ground Lease including, without
limitation, the right to renew or extend the Ground Lease for a succeeding term
or terms and all rights of Mortgagor under the Ground Lease in connection with
any bankruptcy or insolvency proceeding of the lessor under the Ground Lease,
if any;
II. All right, title and interest of the Mortgagor in and to all
buildings, structures and other improvements now standing, or at any time
hereafter constructed or placed, upon the Land Parcels, including all of the
Mortgagor's right, title and interest in and to all equipment and fixtures of
every kind and nature on
3
<PAGE>
the Land Parcels or in any such buildings, structures or other improvements
(such buildings, structures, other improvements, equipment and fixtures being
herein collectively called the "Improvements"), (b) all right, title and
------------
interest of the Mortgagor in and to all and singular tenements, hereditaments,
easements, rights of way, rights, privileges and appurtenances in and to the
Land Parcel belonging or in any way appertaining thereto, including without
limitation all right, title and interest of the Mortgagor in, to and under any
streets, ways, alleys, vaults, gores or strips of land adjoining any Land Parcel
and (c) all claims or demands of the Mortgagor, in law or in equity, in
possession or expectancy of, in and to any Land Parcel together with rents,
income, revenues, issues and profits from and in respect of any Land Parcel and
the Improvements and the present and continuing right to make claim for,
collect, receive and receipt for the same as hereinafter provided. It is the
intention of the parties hereto that, so far as may be permitted by law, all of
the foregoing, whether now owned or hereafter acquired by the Mortgagor,
affixed, attached or annexed to any Land Parcel shall be and remain or become
and constitute a part of the Trust Estate and the security covered by and
subject to the lien of this Mortgage. All such right, title and interest of the
Mortgagor in and to a Land Parcel, the interest of the Mortgagor in and to the
Improvements located thereon and such other property with respect thereto
described in Granting Clauses I and II is herein called a "Property" and each
--------
such Property, collectively, the "Properties."
----------
III. All right, title and interest of the Mortgagor in and to (i) all
extensions, improvements, betterments, renewals, substitutes and replacements of
and on the Properties described in the foregoing Granting Clauses I and II and
(ii) all additions and appurtenances thereto not presently leased to or owned by
the Mortgagor and hereafter leased to, acquired by or released to the Mortgagor
or constructed, assembled or placed upon the Properties (including, but not
limited to, the fee estate in any Land Parcel) immediately upon such leasing,
acquisition, release, construction, assembling or placement, and without any
further grant or other act by the Mort gagor.
IV. All the estate, right, title and interest of the Mortgagor in and
to (i) all judgments, insurance
4
<PAGE>
proceeds, awards of damages and settlements resulting from condemnation
proceedings or the taking of the Properties (or any of them), or any part
thereof, under the power of eminent domain or for any damage (whether caused by
such taking or otherwise) to the Properties (or any of them) or any part
thereof, or to any rights appurtenant thereto, and all proceeds of any sales or
other dispositions of the Properties (or any of them) or any part thereof; and
the Beneficiary is hereby authorized to collect and receive said awards and
proceeds and to give proper receipts and acquittances thereto, subject to the
conditions and limitations hereinafter set forth; and (ii) all contract rights,
general intangibles, actions and rights in action, relating to the Properties
(or any of them) including, without limitation, all rights to insurance proceeds
and unearned premiums arising from or relating to damage to the Properties (or
any of them); and (iii) all proceeds, products, replacements, additions,
substitutions, renewals and accessions of and to the Properties (or any of
them).
V. The Mortgagor does hereby pledge and presently and absolutely
assign to the Beneficiary from and after the date hereof (including any period
of redemption), primarily and on a parity with said real estate, and not
secondarily, all the rents, issues and profits of the Properties and all rents,
issues, profits, revenues, royalties, bonuses, rights, and benefits due, payable
or accruing (including all deposits of money as advance rent, for security or as
earnest money or as down payment for the purchase of all or any part of the
Properties) (the "Rents") under any and all present and future leases,
-----
subleases, underlettings, concession agreements, licenses, contracts or other
agreements relative to the ownership or occupancy of all or any portion of the
Properties and does hereby transfer and assign to the Beneficiary all such
leases and agreements (the "Leases"). The Beneficiary hereby grants to the
------
Mortgagor the right to collect and use the Rents as they become due and payable
under the Leases, until an Event of Default has occurred and is continuing,
provided that the existence of such right shall not operate to subordinate this
- --------
assignment to any subsequent assignment, in whole or in part by the Mortgagor,
and any such subsequent assignment shall be subject to the rights of the
Beneficiary under this Mortgage. The Mortgagor further agrees to execute and
deliver such assignments of leases or assignments of
5
<PAGE>
land sale contracts as the Beneficiary may from time to time request. Upon the
occurrence and during the continuance of an Event of Default (1) the Mortgagor
agrees, upon demand, to deliver to the Beneficiary such additional assignments
thereof as the Beneficiary may request and agrees that the Beneficiary may
assume the management of the Properties (or any of them), and collect the Rents,
applying the same upon the Obligations and (2) the Mortgagor hereby authorizes
and directs all tenants, purchasers or other persons occupying or otherwise
acquiring any interest in any part of the Properties to pay the Rents due under
the Leases to the Beneficiary upon request of the Beneficiary. The Mortgagor
hereby appoints the Beneficiary as its true and lawful attorney in fact to
manage said property and collect the Rents, with full power to bring suit for
collection of the Rents and possession of the Properties (or any of them),
giving and granting unto said Beneficiary full power and authority to do and
perform all and every act and thing whatsoever requisite and necessary to be
done in the protection of the security hereby conveyed; provided, however, that
-------- -------
(i) this power of attorney coupled with an interest and assignment of rents
shall not be construed as an obligation upon the Beneficiary to manage said
property or to make or cause to be made any repairs or to take any other action
that may be needful or necessary and (ii) the Beneficiary agrees that until such
Event of Default has occurred and is continuing as aforesaid, the Beneficiary
shall not exercise its rights pursuant to said power of attorney coupled with an
interest and shall permit the Mortgagor to perform the aforementioned management
responsibilities and collect the Rents. Upon the Beneficiary's receipt of the
Rents, at the Beneficiary's option, it may pay: (1) reasonable charges for
collection hereunder, costs of necessary repairs and other costs requisite and
necessary in connection with the management of the premises, during the
continuance of this power of attorney coupled with an interest and assignment of
rents including general and special taxes and assessments and insurance premiums
and (2) the Indebtedness secured hereby. This power of attorney coupled with
an interest and assignment of leases and rents shall be irrevocable until this
Mortgage shall have been satisfied and the releasing of this Mortgage shall act
as a revocation of this power of attorney coupled with an interest and
assignment of leases and rents with respect to such portion of the Trust Estate
so released. The
6
<PAGE>
Beneficiary shall have and hereby expressly reserves the right and privilege
(but assumes no obligation) to demand, collect, sue for, receive and recover
the Rents, or any part thereof, now existing or hereafter made, and apply the
same in accordance with law, all in accordance herewith.
VI. All of the Mortgagor's right, title and interest in and to all
personal and intangible property and equipment of every nature whatsoever now or
hereafter located in, arising from or on and utilized or to be used in
connection with the Properties (or any of them), including but not limited to
(a) all screens, window shades, blinds, wainscoting, storm doors and windows,
floor coverings, and awnings; (b) all apparatus, machinery, accessions,
equipment and appliances not included as fixtures; (c) all items of furniture,
furnishings, and personal property; (d) all extensions, additions,
improvements, betterments, renewals, substitutions, and replacements to or of
any of the foregoing (a)-(c) (all of said property in (a)-(d) being
collectively,the "Equipment"); (e) all accounts receivable arising from the
---------
sale or other disposition of all or any of the Mortgagor's real property,
buildings, structures and other improvements, fixtures, furniture, furnishings,
apparatus, machinery, appliances or other equipment, and all extensions,
renewals, improvements, substitutions and replacements thereto whether owned or
leased, now or hereafter acquired in connection with the Properties; (f) all
accounts, including the Escrow Account, general intangibles, chattel paper, cash
or monies of the Mortgagor, wherever located, whether in the form of cash or
checks, and all cash equivalents including, without limitation, all deposits and
certificates of deposit, instruments, whether negotiable or non-negotiable, debt
notes both certificated and uncertificated, repurchase obligations for
underlying notes of the types described herein, and commercial paper (i)
received in connection with the sale or other disposition of all or any of the
Mortgagor's real property, buildings, structures and other improvements,
fixtures, furniture, furnishings, apparatus, machinery, appliances or other
equipment, and all extensions, renewals, improvements, substitutions and
replacements thereto whether owned or leased, now or hereafter acquired, all in
connection with the Properties, (ii) maintained by the Mortgagor in a
segregated account in trust for the benefit of the Beneficiary or
7
<PAGE>
(iii) held by the Beneficiary; and (g) all proceeds (as defined in the Uniform
Commercial Code) of all of the foregoing; it being mutually agreed, intended and
declared, that the Trust Estate and all of the property rights and fixtures
owned by the Mortgagor shall, so far as permitted by law, be deemed to form a
part and parcel of the Land Parcels and for the purpose of this Mortgage to be
real estate and covered by this Mortgage, it being also agreed that if any of
the property herein mortgaged is of a nature so that a security interest therein
can be perfected under the Uniform Commercial Code, this instrument shall
constitute a security agreement, fixture filing and financing statement, and the
Mortgagor agrees to execute, deliver and file or refile any financing statement,
continuation statement, or other instruments the Beneficiary may reasonably
require from time to time to perfect or renew such security interest under the
Uniform Commercial Code. To the extent permitted by law, (i) all of the
fixtures are or are to become fixtures on the Land Parcels; and (ii) this
instrument, upon recording or registration in the real estate records of the
proper office, shall constitute a "fixture-filing" within the meaning of
Sections 9-313 and 9-402 of the Uniform Commercial Code. The remedies for any
violation of the covenants, terms and conditions of the agreements herein
contained shall be as prescribed herein or by general law, or, as to that part
of the security in which a security interest may be perfected under the Uniform
Commercial Code, by the specific statutory consequences now or hereafter enacted
and specified in the Uniform Commercial Code, all at the Beneficiary's sole
election.
VII. All of the Mortgagor's right, title, and interest in, to and
under (i) any reciprocal easement agreements, operating agreements and similar
agreements affecting the ownership, use and operation of the Properties (or any
of them) included in the Permitted Exceptions, as such agreements have been or
may hereafter be amended, modified or supplemented; (ii) all contracts,
including the management agreements, if any, and agreements relating to the
Properties (or any of them), and other documents, books and records related to
the operation of the Properties (or any of them); (iii) all consents, licenses
(including, to the extent permitted by law, any licenses permitting the sale of
liquor at the Properties (or any of them)), warranties, guaranties and building
and other permits required or useful for the
8
<PAGE>
construction, completion, occupancy and operation of the Properties (or any of
them); (iv) any contracts for the sale of any portion of the Properties or the
Equipment; and (v) all plans and specifications, engineering reports, land
planning, maps, surveys, and any other reports, exhibits or plans and
specifications used or to be used in connection with the construction, operation
or maintenance of the Properties (or any of them), together with all amendments
and modifications thereof.
TO HAVE AND TO HOLD THE TRUST ESTATE, whether now owned or held or
hereafter acquired, unto the Trustee, in trust, for the benefit and use of the
Beneficiary and its successors and assigns, forever.
IN TRUST FOREVER, with power of sale (to the extent permitted by
applicable law), upon the terms and trusts herein set forth and to secure the
performance of, and compliance with, the obligations, covenants and conditions
of this Mortgage and the other Loan Documents all as herein set forth.
1. Definitions. All capitalized terms used but not otherwise
-----------
defined herein shall have the meanings assigned to them in the Credit Agreement.
The words "herein," "hereof" and "hereunder" and other words of like import
refer to this Mortgage as a whole and not to any particular Section, subsection
or other subdivision. In addition, wherever used in this Mortgage, the
following terms, and the singular and plural thereof, shall have the following
meanings:
Affiliate: With respect to any specified Person means any other
---------
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities or other
beneficial interest, by contract or otherwise; and the terms "controlling" and
"controlled" have the meanings correlative to the foregoing.
Agreements: Any reciprocal easement agreements, operating agreements
----------
and similar agreements affecting the ownership, use and operation of the
Proper-
9
<PAGE>
ties (or any of them) included in the Permitted Exceptions, as such agreements
have been or may hereafter be amended, modified or supplemented.
Alteration: As defined in Section 11(c) hereof.
----------
Assignment of Leases and Rents: Shall mean the Assignment of Leases,
------------------------------
Rents and Security Deposits, dated the date hereof, by the Mortgagor in favor of
the Beneficiary.
Banks: All Banks now or hereafter parties to the Credit Agreement.
-----
Beneficiary: As defined in the recitals hereof.
-----------
Casualty Amount: As defined in Section 6(b) hereof.
---------------
Credit Agreement: As defined in the recitals hereof.
----------------
Default: The occurrence or existence of any event or condition which
-------
with or without the giving of notice or the passage of time, or both, would
constitute an Event of Default hereunder.
Default Rate: The rate of interest at the annual rate equal to the
------------
sum of (i) the Prime Rate (as defined in the Credit Agreement) and (ii) four
percent (4%).
Environmental Certificate: As defined in Section 19(b) hereof.
-------------------------
Environmental Event: As defined in Section 19(b) hereof.
-------------------
Environmental Reports: As defined in Section 19(a) hereof.
---------------------
Equipment: As defined in Granting Clause VI hereof.
---------
10
<PAGE>
Escrow Account: As defined in Section 8(a) hereof.
--------------
Events of Default: The occurrence of any of the following shall
-----------------
constitute an Event of Default under this Mortgage:
a. If the Mortgagor fails to pay any amount payable pursuant to
this Mortgage within fifteen (15) days after notice by Beneficiary that
such amount is due and payable in accordance with the provisions hereof; or
b. Cancellation of the insurance required by Section 5 of this
Mortgage; or
c. Any violation of the terms of Section 7(a), Section 7(b)
(subject to the terms of Section 7(c)), which violation continues for a
period of five (5) days after notice thereof;
d. Any violation of the terms of Section 10 of this Mortgage;
or
e. An Event of Default (as defined therein) under the Credit
Agreement; or
f. Any other default in the performance, or breach, of any
material covenant, representation or warranty of the Mortgagor, in this
Mortgage or in any other Loan Document (other than a covenant,
representation, agreement or warranty, a default in whose performance or
whose breach is specifically dealt with elsewhere in this Section) and
continuance of such default or breach for a period of 30 days after notice
thereof; provided, that in the case of any such failure that is
--------
susceptible of cure but that cannot with reasonable diligence be cured
within such 30 day period, if the Mortgagor shall promptly have commenced
to cure the same and shall thereafter prosecute the curing thereof with
reasonable diligence, the period within which such failure may be cured
shall be extended for such further period as shall be reasonably necessary
for the curing thereof (and in the event such cure has not been completed
within 30 days
11
<PAGE>
after the end of the initial 30 day period, the Mortgagor shall inform the
Beneficiary at least once each month thereafter as to the status of such
cure); or
g. Any "Event of Default" as defined in any other Loan Document
including any other Mortgage securing the Notes.
Notwithstanding anything to the contrary contained in this Mortgage
or the Loan Documents, no grace period or right to notice granted to the
Mortgagor herein with respect to any Event of Default is intended to duplicate
any other grace period or right to notice granted to the Mortgagor herein, in
the Credit Agreement or in the other Loan Documents with respect to such Event
of Default and in the event of any inconsistency, the grace period or right to
notice granted in the Credit Agreement shall apply.
Exculpated Parties: As defined in Section 39 hereof.
------------------
Governmental Authority: Any Federal, state or local government or any
----------------------
other political subdivision thereof exercising executive, legislative, judicial,
regulatory or administrative functions.
Grant: Shall mean grant, grant a security interest in, bargain, sell,
-----
lien, mortgage, convey, pledge, hypothecate, assign, transfer, warrant and set
over.
Ground Leasehold Estate: As defined in the recitals hereof.
-----------------------
Ground Lease(s): Shall mean, as appropriate, the ground lease or
---------------
ground leases which are the subject of the Ground Leasehold Estate.
Ground Rent: Shall mean all rent, additional rent and all other
-----------
amounts which the Grantor is obligated to pay as tenant under the Ground Lease.
Impositions: All taxes (including, without limitation, all ad
-----------
valorem, sales (including those imposed on lease rentals), use, single
business, gross
12
<PAGE>
receipts, value added, intangible transactions, privilege or license or similar
taxes), assessments (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not commenced or completed within the term of this
Mortgage), water, sewer or other rents and charges, excises, levies, fees
(including, without limitation, license, permit, inspection, authorization and
similar fees), and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Trust Estate and/or any Rents (including all
interest and penalties thereon), which at any time prior to, during or in
respect of the term hereof may be assessed or imposed on or in respect of or be
a Lien upon (a) the Mortgagor (including, without limitation, all income,
franchise, single business or other taxes imposed on the Mortgagor for the
privilege of doing business in the jurisdiction in which the Trust Estate is
located) or the Beneficiary arising as a result of or with respect to its
capacity as the Beneficiary hereunder, (b) the Trust Estate or any other
collateral delivered or pledged by Mortgagor to the Beneficiary in connection
with the Loan, or any part thereof, or any Rents therefrom or any estate, right,
title or interest therein, or (c) any occupancy, operation, use or possession
of, or sales from, or activity conducted on, or in connection with the Trust
Estate or the leasing or use of all or any part thereof. Nothing contained in
this Mortgage shall be construed to require the Mortgagor to pay any tax,
assessment, levy or charge imposed on the Beneficiary or any Bank in the nature
of a franchise, capital levy, estate, inheritance, succession, income or net
revenue tax.
Improvements: As defined in Granting Clause II hereof.
------------
Indebtedness: As defined in the recitals hereof.
------------
Indemnified Environmental Parties: As defined in Section 19(c)
---------------------------------
hereof.
Indemnified Parties: As defined in Section 35 hereof.
-------------------
13
<PAGE>
Independent Architect: An independent architect selected by the
---------------------
Mortgagor, and acceptable to the Beneficiary, such acceptance not to be
unreasonably withheld or delayed, licensed to practice in the State in which the
applicable Property is located, having at least ten (10) years of experience,
and not affiliated with the Mortgagor.
Individual Trustee: Shall mean such person as is required by
------------------
applicable state law to perform the functions of Individual Trustee pursuant to
Section 9 hereof.
Insurance Requirements: Shall mean all terms of any insurance policy
----------------------
required hereunder or under the Credit Agreement covering or applicable to any
Property or Equipment or any part thereof, all requirements of the issuer of any
such policy, and all orders, rules, regulations and other requirements of the
National Board of Fire Underwriters (or any other body exercising similar
functions) applicable to or affecting any Property or Equipment or any part
thereof or any use of any Property or Equipment or any part thereof.
Jurisdictional Trustee: As defined in Section 9 hereof.
----------------------
Land Parcel(s): As defined in the recitals hereof.
--------------
Leases: As defined in Granting Clause V hereof.
------
Legal Requirements: As defined in Section 12.
------------------
Lien: Any mortgage, deed of trust, lien, pledge, hypothecation,
----
assignment, security interest, or any other encumbrance of, on or affecting the
Trust Estate or any portion thereof or any interest therein, including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, the filing of any financing statement, and mechanic's, materialmen's
and other similar liens and encumbrances.
Loan: As defined in the recitals hereof.
----
14
<PAGE>
Loan Amount: As defined in the recitals hereof.
-----------
Loan Documents: This Mortgage, the Note, the Credit Agreement, the
--------------
Assignment of Leases and Rents, the Environmental Indemnity and any and all
other agreements, instruments or documents evidencing, securing or delivered by
the Mortgagor in connection with the Loan and the transactions contemplated by
the Credit Agreement and this Mortgage.
Mortgage: As defined in the recitals hereof.
--------
Mortgage Escrow Amounts: As defined in Section 8(a).
-----------------------
Mortgage Escrow Security: As defined in Section 8(b).
------------------------
Mortgagor: As defined in the recitals hereof.
---------
Note: As defined in the recitals hereof.
----
Obligations: As defined in the recitals hereof.
-----------
Officers' Certificate: A certificate delivered to the Beneficiary and
---------------------
signed by the President or a Vice President of the Mortgagor.
Permitted Exceptions: (a) Liens for taxes, assessments or other
--------------------
governmental charges not yet due and payable or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted in accordance with Section 7(c);
(b) Statutory Liens of carriers, warehousemen, mechanics,
materialmen and other similar liens imposed by law, which are incurred in the
ordinary course of business for sums not more than forty-five (45) days
delinquent or which are being contested in good faith in accordance with Section
7(c);
(c) Deposits made in the ordinary course of business to secure
liability to insurance carriers;
15
<PAGE>
(d) Easements, rights-of-way, restrictions and other similar
charges or encumbrances against real property not interfering in any material
respect with the use of any Property or the ordinary conduct of the business of
Mortgagor and not diminishing in any material respect the value of any Property
to which it is attached;
(e) Liens and judgments which have been or will be bonded or
released of record within thirty (30) days after the Mortgagor has received
notice of the filing of such Lien or judgment;
(f) Those matters set forth on EXHIBIT B hereof; and
---------
(g) Liens in favor of the Beneficiary or any Bank under the
other Loan Documents.
Person: Shall mean any individual, corporation, limited liability
------
company, partnership, joint venture, estate, trust, unincorporated association,
any Federal, state, county or municipal government or any political subdivision
thereof.
Proceeds: As defined in Section 6(b) hereof.
--------
Property: As defined in Granting Clause II hereof.
--------
Properties: As defined in Granting Clause II hereof.
----------
Rents: As defined in Granting Clause V hereof.
-----
State: The State in which the applicable Property is located.
-----
Taking: Shall mean a temporary or permanent taking by any
------
Governmental Authority as the result or in lieu or in anticipation of the
exercise of the right of condemnation or eminent domain, of all or any part of a
Property, or any interest therein or right accruing thereto, including any right
of access thereto or any change of grade affecting a Land Parcel or any part
thereof.
16
<PAGE>
Tenant: Shall mean any Person leasing any portion of a Property and
------
obligated to pay rent pursuant to a Lease.
Transfer: As defined in Section 10(a) hereof.
--------
Trustees: Shall mean the Individual Trustee together with the
--------
Jurisdictional Trustee, all separate trustees and co-trustees appointed as
provided in Section 9.
Trust Estate: As defined in the granting clause to this Mortgage.
------------
Uniform Commercial Code or UCC: Shall mean the Uniform Commercial
------------------------------
Code as adopted in the State.
Work: As defined in Section 6(b) hereof.
----
REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
The Mortgagor represents and warrants to and covenants and agrees with
the Beneficiary as follows:
2. Warranty.
--------
(a) This Mortgage upon its due execution and proper
recordation is and will remain a valid, enforceable and perfected first
Lien on and a security interest in the Trust Estate subject to the
Permitted Exceptions, subject to applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other laws affecting
creditor's rights generally in effect from time to time.
(b) This Mortgage and each of the Loan Documents executed
by the Mortgagor, is the legal, valid and binding obligation of the
Mortgagor, enforceable against the Mortgagor in accordance with their
terms, subject to applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other laws affecting creditor's rights
generally in effect from time to time.
17
<PAGE>
(c) The Mortgagor owns good, marketable and insurable
leasehold title to the Groundleasehold Estate, subject only to the
Permitted Exceptions. The Mortgagor will preserve such title to its Ground
Leasehold Estate and will forever warrant and defend same and the validity
and priority of the Lien hereof from and against any and all claims
whatsoever;
(d) On the date hereof, to Mortgagor's knowledge, no
portion of the Improvements at any Property has been materially damaged,
destroyed or injured by fire or other casualty which is not now fully
restored or in the process of being restored;
(e) The Mortgagor has and will maintain, in effect at all
times until the Indebtedness and Obligations are satisfied in full, all
necessary material licenses, permits, authorizations, registrations and
approvals to operate its business and own each Property as a commercial or
industrial property, and Mortgagor has full power and authority to carry on
its business at each Property as currently conducted and has not received
any written notice of any current violation of any such licenses, permits,
authorizations, registrations or approvals that materially impair the value
of any Property for which such notice was given or which would adversely
affect the use or operation of any Property in any material respect, except
for those matters which have been disclosed to Beneficiary in writing and
are in the process of being cured and/or remediated;
(f) As of the date hereof, the Mortgagor has not received
any written notice of any Taking or threatened Taking of any Property or
any material portion thereof;
(g) The Property and the Equipment located thereon
constitute all of the real property, equipment and fixtures currently owned
by the Mortgagor and used in the operation of the Property;
(h) Each Property has adequate access to public streets,
roads or highways;
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<PAGE>
(i) Each Property constitutes one or more separate tax
lots, with a separate tax assessment, independent of any other land or
improvements;
(j) All utility services necessary for the operation of
each Property have been connected and, to the Mortgagor's knowledge, are
available in adequate capacities for current operations at each Property
directly from utility lines and without the need for private easements not
presently existing; and
(k) To the actual knowledge of the Mortgagor, the Mortgagor
is not in material default under the terms, conditions or provisions of any
of the Leases or Agreements described in Section 14 hereof.
3. Payment and Performance of Obligations Secured. The Mortgagor
-----------------------------------------------
shall perform fully and in a timely manner all Obligations of the Mortgagor
hereunder or under any other Loan Document to which Mortgagor is a party. All
sums payable by the Mortgagor hereunder shall be paid without demand,
counterclaim, offset, deduction or defense all without relief from valuation and
appraisement laws. The Mortgagor waives all rights now or hereafter conferred
by statute or otherwise to any such demand, counterclaim, setoff, deduction
(except as required by law) or defense.
4. Negative Covenants. The Mortgagor covenants and agrees that it
------------------
shall not:
(a) partition any Property;
(b) transfer all or any portion of the Trust Estate or any
interest of the Mortgagor, except in accordance with the Credit Agreement;
(c) file a petition for voluntary bankruptcy under the
Bankruptcy Code or similar state law; or
(d) dissolve, terminate, liquidate, merge with or
consolidate into another Person, except as expressly permitted pursuant to
this Mortgage or the Credit Agreement.
19
<PAGE>
5. Insurance.
---------
(a) Insurance Coverage Requirements. The Mortgagor shall
-------------------------------
keep in full force and effect insurance, of the types and minimum limits as
follows during the term of this Mortgage:
(i) Property Insurance. Insurance with respect to
------------------
each Property and the Equipment against any peril included within the
classification "All Risks of Physical Loss" with extended coverage in an
amount equal to the full insurable value (subject to deductibles as
permitted below) of such Property and the Equipment located thereon, the
term "full insurable value" to mean the actual replacement cost of the
Improvements and the Equipment at such Property (without taking into
account any depreciation, and exclusive of excavations, footings and
foundations, landscaping and paving);
(ii) Liability Insurance. Commercial general
-------------------
liability insurance, including bodily injury, death and property damage
liability, and umbrella liability insurance against any and all claims,
including all legal liability to the extent insurable imposed upon the
Beneficiary and all court costs and attorneys' fees and expenses, arising
out of or connected with the possession, use, leasing, operation,
maintenance or condition of each Property in such amounts as are generally
required by institutional lenders for properties comparable to the
applicable Property but in no event for limits of less than [$1,000,000]
per occurrence with combined single limit coverage for bodily injury or
property damage and excess (umbrella) liability coverage of no less than
[$10,000,000] per occurrence;
(iii) Workers' Compensation Insurance. Statutory
-------------------------------
workers' compensation insurance (to the extent the risks to be covered
thereby are not already covered by other policies of insurance maintained
by the Mortgagor), with respect to any work on or about each of the
Properties;
(iv) Business Interruption. Business interruption
---------------------
and/or loss of "rental value"
20
<PAGE>
insurance for each of the Properties in an amount equal to one (1) year's
"rental value" attributable to each such Property and based on the "rental
value" for the immediately preceding year and otherwise sufficient to
avoid any co-insurance penalty, the term "rental value" to mean the sum of
(A) the total Rents payable under the Leases at the applicable Property
and (B) the total amount of all other amounts to be received by the
Mortgagor or third parties which are the legal obligation of the Tenants,
reduced to the extent such amounts would not be received because of
operating expenses not incurred during a period of non-occupancy of that
portion of such applicable Property then not being occupied;
(v) Flood Insurance. If all or any portion of any
---------------
Property is located within a Federally designated flood hazard zone, flood
insurance in such amount as generally required by institutional lenders for
properties comparable to the applicable Property (provided, however, that
if the Mortgagor believes that it is no longer obligated to maintain flood
insurance with respect to any Property pursuant to this provision, the
Mortgagor shall notify the Beneficiary of such circumstances and the
Beneficiary shall have the opportunity to contest by appropriate legal or
mutually agreeable arbitration proceedings whether or not the Mortgagor's
obligation remains in effect in light of the criteria set forth in this
provision); and
(vi) Other Insurance. Such other insurance with
---------------
respect to any Property and the Equipment located therein against loss or
damage as are reasonably requested by the Beneficiary, provided such
insurance is of the kind from time to time customarily insured against and
in such amounts as are generally required by institutional lenders for
properties comparable to the applicable Property.
(b) Ratings of Insurers. All insurance coverage shall be
-------------------
provided by one or more domestic primary insurers having an Alfred M. Best
Company, Inc. rating of "A" or better and financial size category of not less
than IX, except to the extent that insurance in force on the date of this
Mortgage does not satisfy such criteria
21
<PAGE>
or if otherwise approved by the Beneficiary. All insurers providing insurance
required by this Mortgage shall be authorized to issue insurance in the state
where the applicable Property is located.
The insurance coverage required under Section 5(a) may be effected
under a blanket policy or policies covering the Trust Estate and other property
and assets not constituting a part of the Trust Estate; provided that any such
--------
blanket policy shall specify, except in the case of public liability insurance,
the portion of the total coverage of such policy that is allocated to the
applicable Property and the Equipment located thereon, and any sublimits in such
blanket policy applicable to the Trust Estate, which amounts shall not be less
than the amounts required pursuant to Section 5(a) and which shall in any case
comply in all other respects with the requirements of this Section 5.
(c) Form of Insurance Policies; Endorsements. All insurance
----------------------------------------
policies shall be in such form and with such endorsements as are comparable to
the forms of and endorsements to the Mortgagor's insurance policies in effect on
the date hereof or otherwise in accordance with commercially reasonable
standards applied by prudent owners of commercial or industrial properties of
the same quality as each of the Properties. Certified copies of all of the
above-mentioned insurance policies and/or certificates of insurance have been
delivered to and shall be held by the Beneficiary. All insurance certificates
from time to time delivered (or required to be delivered) hereunder in order to
evidence the property insurance required by Section (a)(i) of this Article 5
shall be "Accord 27" certificates. The policy or policies required by Section
(a)(i) of this Article 5 shall name the Beneficiary as loss payee/mortgagee, and
all other policies required hereunder shall name the Beneficiary as additional
insured. All policies required to be maintained hereunder shall provide that
all Proceeds be payable to the Beneficiary as set forth in Section 6 hereof, and
shall contain: (i) a standard "non-contributory mortgagee" endorsement or its
equivalent relating, inter alia, to recovery by the Beneficiary notwithstanding
----- ----
the negligent or willful acts or omissions of the Mortgagor; (ii) to the extent
available, a waiver of subrogation endorsement as to the Beneficiary providing
that no policy shall be impaired or invalidated by virtue
22
<PAGE>
of any act, failure to act, negligence of, or violation of declarations,
warranties or conditions contained in such policy by the Mortgagor, the
Beneficiary or any other named insured, additional insured or loss payee, except
for the willful misconduct of the Beneficiary knowingly in violation of the
conditions of such policy; provided, however, that if such waiver of subrogation
-------- -------
endorsement is not available, Mortgagor shall obtain a substantially similar
waiver with respect to each individual claim filed by Mortgagor under any such
insurance policy; (iii) an endorsement indicating that neither the Beneficiary
nor the Mortgagor shall be or be deemed to be a co-insurer with respect to any
risk insured by such policies and shall provide for a deductible per loss of an
amount not more than that which is customarily maintained by prudent owners of
commercial or industrial properties of the same quality as the applicable
Property, but in no event in excess of $100,000; (iv) a provision that such
policies shall not be cancelled or amended, including, without limitation, any
amendment reducing the scope or limits of coverage, without at least thirty (30)
days prior written notice to the Beneficiary in each instance; and (v) include
effective waivers by the insurer of all claims for insurance premiums against
any loss payees, additional insureds, mortgagees and named insureds (other than
the Mortgagor). Certificates of insurance (in the form of "Accord 27"
certificates with respect to property insurance) with respect to all renewal
and replacement policies shall be delivered to the Beneficiary not less than
thirty (30) days prior to the expiration date of any of the insurance policies
required to be maintained hereunder, which certificates shall bear notations
evidencing payment of applicable premiums and originals (or certified copies) of
such insurance policies shall be delivered to the Beneficiary promptly after
the Mortgagor's receipt thereof. If the Mortgagor fails to maintain and deliver
to the Beneficiary the original policies (or certified copies) or certificates
of insurance required by this Mortgage, the Beneficiary may, at its option,
after ten (10) days' prior written notice to the Mortgagor, procure such
insurance, and the Mortgagor shall reimburse the Beneficiary for the amount of
all premiums paid by the Beneficiary thereon promptly, upon demand by the
Beneficiary, with interest thereon at the Default Rate from the date paid by the
Beneficiary to the date of repayment, and such sum shall be a part of the
Indebtedness secured by this Mortgage.
23
<PAGE>
The Beneficiary shall not by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
payment or defense of lawsuits, and the Mortgagor hereby expressly assumes full
responsibility therefor and all liability, if any, with respect thereto.
(d) Compliance with Insurance Requirements. The Mortgagor shall
--------------------------------------
comply with all Insurance Requirements and shall not bring or keep any article
upon any of the Properties or cause or permit any condition to exist thereon
which would be prohibited by or would invalidate insurance coverage maintained,
or required hereunder or under the Credit Agreement to be maintained, by the
Mortgagor on or with respect to any part of the Trust Estate pursuant to this
Section 5.
(e) Separate Insurance. The Mortgagor will not take out
------------------
separate insurance contributing in the event of loss with that required to be
maintained pursuant to this Section 5, unless such insurance complies with this
Section 5.
(f) Blanket Policies. Except in the case of public liability
----------------
insurance, upon Beneficiary's request, the Mortgagor shall deliver to
Beneficiary an officer's certificate setting forth (i) the number of properties
covered by such policy, (ii) the location by city (if available, otherwise,
county) and state of the properties, (iii) the average square footage of the
properties (or the aggregate square footage), (iv) a brief description of the
typical construction type included in the blanket policy and (v) such other
information as Beneficiary may reasonably request.
6. Condemnation and Insurance Proceeds.
-----------------------------------
(a) The Mortgagor will promptly notify the Beneficiary in
writing upon obtaining knowledge of (i) the institution of any proceedings
relating to any Taking of, or (ii) the occurrence of any casualty, damage or
injury to, the Properties (or any of them) or Equipment located thereon or any
portion thereof, the restora-
24
<PAGE>
tion of which is estimated by the Mortgagor in good faith to cost more than
$500,000.
(b) In the event of any Taking of, or casualty or other damage
or injury to, any Property, or Equipment located thereon, the Mortgagor's right,
title and interest in and to all compensation, awards, proceeds, damages,
claims, insurance recoveries, causes and rights of action (whether accrued prior
to or after the date hereof) and payments which the Mortgagor may receive or to
which the Mortgagor may become entitled with respect to such Property or any
part thereof (collectively, "Proceeds"), in connection with any such Taking,
--------
casualty or other damage or injury to any Property, or any part thereof, or
Equipment located thereon are hereby assigned to and shall be paid to the
Beneficiary on behalf of the Banks. Notwithstanding anything to the contrary
set forth in this Mortgage, to the extent such Proceeds are not in excess of
$1,000,000 (the "Casualty Amount"), then the Beneficiary hereby consents to and
---------------
agrees that such Proceeds are to be paid directly to the Mortgagor to be applied
to restoration of such Property in accordance with the terms hereof and/or the
applicable terms of the Lease. Subject to the provisions of Sections 6(c) and
6(d) hereof, promptly after the occurrence of any damage or destruction to all
or any portion of such Property or a Taking of a portion of such Property, the
Mortgagor shall commence and diligently prosecute to completion the repair,
restoration and rebuilding of such Property (in the case of a Taking, to the
extent it is capable of being restored) (such repair, restoration and rebuilding
are sometimes hereinafter collectively referred to as the "Work") so damaged,
----
destroyed or remaining after such damage or destruction or such Taking in full
compliance with all Legal Requirements and free and clear of any and all Liens
(subject to Section 7(c) hereof), except the Permitted Exceptions; it being
understood, however, that the Mortgagor shall not be obligated to restore such
Property to the precise condition of such Property prior to any Taking, casualty
or other damage or injury to such Property (and in fact, so long as the
Mortgagor applies the Proceeds received upon such Taking or casualty to such
Property to restore the damage or injury to such Property and/or to provide
another type of improvement that is reasonably expected to benefit such
Property, no restoration or rebuilding of the damaged or taken structures must
be undertaken), if the Work actually per-
25
<PAGE>
formed, if any, or failed to be performed, shall have no material adverse effect
on the value of such Property from the value that such Property would have had
if the same had been restored to its condition immediately prior to such Taking
or casualty. The Mortgagor will, in good faith and in a commercially reasonable
manner, file and prosecute the adjustment, compromise or settlement of any claim
for insurance or Taking Proceeds and, subject to the Mortgagor's right to
receive the direct payment of any Proceeds up to the Casualty Amount subject to
the provisions below, will cause the same to be collected and the net Proceeds
paid over to the Beneficiary, to be held and applied in accordance with the
provisions of this Mortgage. The Mortgagor hereby irrevocably authorizes and
empowers the Beneficiary, in the name of the Mortgagor as its true and lawful
attorney-in-fact, to file and prosecute such claim and to collect and to make
receipt for any such payment, and, in the event the Mortgagor fails so to act
for a period of ten (10) days following the Mortgagor's receipt of written
notice from the Beneficiary or if an Event of Default shall have occurred and
be continuing, then in such case the Beneficiary may file such claim and
prosecute it with counsel satisfactory to it at the expense of the Mortgagor.
The Beneficiary shall have the right to approve, such approval not to be
unreasonably withheld or delayed, any settlement which might result in any
Proceeds in excess of the Casualty Amount, and the Mortgagor will deliver to
the Beneficiary all instruments reasonably requested by the Beneficiary to
permit such approval. The Mortgagor will pay all costs, fees and expenses
reasonably and actually incurred by the Beneficiary (including all reasonable
attorneys' fees and expenses actually incurred, the reasonable fees of insurance
experts and adjusters and reasonable costs incurred in any litigation or
arbitration) in connection with the settlement of any claim for insurance or
Taking Proceeds and seeking and obtaining of any payment on account thereof in
accordance with the foregoing provisions. If any insurance or Taking Proceeds
are received by the Mortgagor, such Proceeds shall be received in trust for the
Beneficiary (on behalf of the Banks), shall be used to pay for the cost of the
Work in accordance with the terms hereof, and in the event such Proceeds are in
excess of the Casualty Amount, shall be forthwith paid to the Beneficiary to be
held by the Beneficiary in a segregated account in trust for the Mortgagor, in
each
26
<PAGE>
case to be applied or disbursed in accordance with the provisions hereof.
(c) Upon the occurrence and during the continuance of an Event
of Default hereunder, all net Proceeds shall be paid over to the Beneficiary (on
behalf of the Banks) and shall be applied first toward reimbursement of the
Beneficiary's reasonable costs and expenses actually incurred in connection with
recovery of the Proceeds and disbursement of the Proceeds (as further described
below), including, without limitation, reasonable administrative costs and
inspection fees, and then to the payment or prepayment of the Indebtedness
secured hereby in such order as the Beneficiary shall determine.
(d) If Proceeds are not paid directly to Mortgagor pursuant to
this Section 6 or are not required to be applied towards payment of the
Indebtedness pursuant to Section 6(c) above, then the Beneficiary shall make the
Proceeds which it is holding pursuant to the terms hereof available to the
Mortgagor (after payment of any reasonable expenses actually incurred by the
Beneficiary in connection with the collection thereof), for payment of or
reimbursement of the Mortgagor's expenses incurred with respect to the Work,
upon the following terms and subject to the following conditions:
(i) there shall be no continuing Event of Default
hereunder;
(ii) if the estimated cost of the Work (as estimated by
the architect referred to in clause (iii) below) shall exceed the Proceeds
available, the Mortgagor shall at its option either deposit with or deliver
to the Beneficiary an amount equal to such excess in the form of (A) Cash
and Cash Equivalents or (B) an unconditional, irrevocable, clean sight
draft letter of credit in commercially reasonable form and issued by an
Approved Bank; and
(iii) the Beneficiary shall be furnished with an estimate
of the cost of the Work accompanied by an Independent Architect's
certification as to such costs and appropriate plans and specifications for
the Work. The plans and specifications or construction documents shall
require that
27
<PAGE>
the Work be done in a first-class workmanlike manner at least equivalent to
the quality and character of the original Improvements (provided, however,
-------- -------
that in the case of a Taking the restoration of the applicable Property
shall be done to the extent reasonably practicable after taking into
account the consequences of such Taking), so that upon completion thereof,
the applicable Property shall be at least equal in value and general
utility to such Property immediately prior to the damage or destruction.
The Mortgagor shall restore all Improvements such that when they are fully
restored and/or repaired such Improvements and their contemplated use
fully comply with all applicable Legal Requirements, including, without
limitation, zoning, environmental and building laws, codes, ordinances and
regulations.
(e) Disbursement of the Proceeds to the Mortgagor shall be made
from time to time (but not more frequently than once in any month) by the
Beneficiary as the Work progresses upon receipt by the Beneficiary of (i) an
Officers' Certificate dated not more than thirty (30) days prior to the
application for such payment, requesting such payment or reimbursement and
setting forth the Work performed which is the subject of such request, the
parties which performed such Work and the actual cost thereof, and also
certifying that such Work and materials are free and clear of Liens (subject to
Section 7(c) hereof) other than Permitted Exceptions and (ii) an Independent
Architect's certificate certifying performance of the Work together with an
estimate of the cost to complete the Work. No payment made prior to the final
completion of the Work shall exceed ninety percent (90%) of the value of the
Work performed or materials furnished and incorporated into the Improvements
from time to time, and at all times the undisbursed balance of said Proceeds,
together with all amounts deposited, bonded, guaranteed or otherwise funded
pursuant to clause (ii) above, shall be at least sufficient to pay for the cost
of completion of the Work, free and clear of Liens (subject to Section 7(c)
hereof) other than Permitted Exceptions; final payment shall be made upon
receipt by the Beneficiary of a certification by an Independent Architect as to
the completion substantially in accordance with the submitted plans and
specifications, and the filing of a notice of completion and the receipt by
28
<PAGE>
the Beneficiary of final lien waivers (subject to Section 7(c) hereof) from each
contractor or materialman. The Beneficiary may at its option require an
endorsement to its title insurance policy insuring the continued priority of
the Lien of this Mortgage (subject to Permitted Exceptions) as to all sums
advanced hereunder, such endorsement to be paid for by the Mortgagor.
(f) In the event that any condition to application of Proceeds
to the Work contained in Section 6(d) above is not satisfied within a reasonable
period of time, then, upon thirty (30) days prior written notice all Proceeds
with respect to the Taking of or damage or injury to the Trust Estate in
question shall be applied by the Beneficiary to the payment or prepayment of all
or any portion of the Indebtedness secured hereby.
(g) In the event that, after the completion of the Work and
payment of all costs of completion, there are excess Proceeds, then, upon thirty
(30) days prior written notice to Mortgagor such excess Proceeds with respect to
the Taking of or damage or injury to the Trust Estate shall be applied by the
Beneficiary to the payment or prepayment of all or any portion of the
Indebtedness secured hereby.
(h) In the event of a Taking of 100% of any Property, the
Mortgagor shall prepay the Note, without penalty or premium, in an amount equal
to the net Proceeds received by the Mortgagor for such Property.
(i) In the event of a casualty which damages 100% of any
Property, the Mortgagor shall prepay the Note, without penalty or premium, in an
amount equal to the net Proceeds received by the Mortgagor for such Property,
and such Property shall be released from the lien and security interests of the
Loan Documents.
7. Impositions, Liens and Other Items.
----------------------------------
(a) The Mortgagor shall deliver to the Beneficiary annually, no
later than fifteen (15) Business Days after the first day of each fiscal year of
the Mortgagor, and shall update as new information is received, a schedule
describing all Impositions payable or estimated to be payable during such fiscal
year attributable to or affecting the Trust Estate or the Mortgagor.
29
<PAGE>
Subject to its right of contest set forth in Section 7(c), the Mortgagor shall
pay all Impositions which are attributable to or affect each of the Properties
or the Mortgagor with respect to each of the Properties, prior to the date such
Impositions shall become delinquent or late charges may be imposed thereon,
directly to the applicable taxing authority with respect thereto, unless and to
the extent the Beneficiary shall pay such Impositions from any Mortgage Escrow
Amounts pursuant to Section 8 hereof. The Mortgagor shall deliver to
Beneficiary, not later than forty five (45) days after each payment of
Impositions, paid receipts evidencing the payment of such Impositions.
(b) Subject to its right of contest set forth in Section 7(c), the
Mortgagor shall at all times keep the Properties and the Equipment located
thereon free from all Liens (other than the Lien hereof and Permitted
Encumbrances) and shall pay when due and payable all claims and demands of
mechanics, materialmen, laborers and others which, if unpaid, might result in or
permit the creation of a Lien on any Property or any portion thereof and the
Equipment located thereon, whether ranked senior, pari passu or junior to the
priority of the Lien created hereby, and shall in any event cause the prompt,
full and unconditional discharge of all Liens imposed on or against any
Property, or any portion thereof, and the Equipment located thereon within
forty-five (45) Domestic Business Days after receiving written notice of the
filing (whether from the Beneficiary, the lienor or any other Person) thereof.
The Mortgagor shall do or cause to be done, at the sole cost of the Mortgagor,
everything necessary to fully preserve the first priority of the Lien of this
Mortgage against the Properties and the Equipment located thereon, subject to
the Permitted Encumbrances. Upon the occurrence of an Event of Default with
respect to Mortgagor's Obligations as set forth in this Section 7, the
Beneficiary may (but shall not be obligated to) make such payment or discharge
such Lien, and the Mortgagor shall reimburse the Beneficiary on demand for all
such advances pursuant to Section 15 hereof, together with interest thereon at
the Default Rate.
(c) Nothing contained herein shall be deemed to require the
Mortgagor to pay any Imposition, to satisfy any Lien or to comply with any Legal
Requirement
30
<PAGE>
or Insurance Requirement so long as the Mortgagor is in good faith, and by
proper legal proceedings, diligently contesting the validity, amount or
application thereof, provided that in each case, at the time of the
commencement of any such action or proceeding, and during the pendency of such
action or proceeding, (i) no Event of Default shall exist and be continuing
hereunder, (ii) adequate reserves with respect thereto are maintained on the
Mortgagor's books in accordance with GAAP, (iii) such contest operates to
suspend collection or enforcement, as the case may be, of the contested
Imposition or Lien and such contest is maintained and prosecuted continuously
and with diligence, (iv) in the case of any Insurance Requirement, the failure
of the Mortgagor to comply therewith shall not impair the validity of any
insurance required to be maintained by the Mortgagor under Section 5 or the
right to full payment of any claims thereunder, and (v) in the case of
Impositions and Liens, during such contest, security in the form required by
Section 6(d)(ii), assuring the discharge of the Mortgagor's obligations being
contested and of any additional interest, charge, or penalty arising from such
contest. Notwithstanding the foregoing, any such reserves or the furnishing of
any bond or other security, the Mortgagor promptly shall comply with any
contested Legal Requirement or Insurance Requirement or shall pay any contested
Imposition or Lien, and compliance therewith or payment thereof shall not be
deferred, if, at any time a Property or any portion thereof, or any Equipment
located thereon shall be, in the Beneficiary's reasonable judgment, in danger of
being forfeited or lost or the Beneficiary may be subject to civil or criminal
damages as a result thereof. If such action or proceeding is terminated or
discontinued adversely to the Mortgagor without any right of appeal exercised by
the Mortgagor within the time period legally permitted therefore, the Mortgagor,
upon written demand, shall deliver to the Beneficiary reasonable evidence of the
Mortgagor's compliance with such contested Imposition, Lien, Legal Requirements
or Insurance Requirements, as the case may be.
8. Funds for Taxes and Insurance.
-----------------------------
(a) From and after the occurrence of any Event of Default by the
Mortgagor hereunder, the Beneficiary may at its sole election, upon three (3)
business day's written notice to the Mortgagor, require the Mort-
31
<PAGE>
gagor to pay additional amounts sufficient to discharge the obligations of the
Mortgagor under Sections 5 and 7 hereof with respect to insurance premiums and
Impositions and all Ground Rent, as and when they become due (such amounts, the
"Mortgage Escrow Amounts"). Upon the Beneficiary's election to require Mortgage
-----------------------
Escrow Amounts in accordance with the foregoing, the Mortgagor shall pay to the
Beneficiary to be held in an account controlled by the Beneficiary (the "Escrow
------
Account") the monthly amount of Ground Rent together with a sum which bears the
- -------
same relation to the annual insurance premiums for all insurance required by
the terms hereof and Impositions assessed against the Properties for the
insurance period or tax year then in effect, as the case may be, as (i) the
number of months elapsed as of the date of such election since the last
preceding installment of said premiums or Impositions shall have become due and
payable bears to (ii) twelve (12). For the purpose of this computation, the
month in which such last preceding installment of premiums or Impositions became
due and payable and the month in which the Beneficiary makes such election shall
be included and deemed to have elapsed. During each month thereafter, until the
Beneficiary shall elect that the provisions of this Section 8 shall no longer be
applicable, the Mortgagor shall pay with respect to the Mortgage Escrow Amounts
a sum equal to the monthly Ground Rent plus one-twelfth of such insurance
premiums and such Impositions for the then-current insurance period and tax
year, so that as each installment of Ground Rent and such premiums and
Impositions shall become due and payable, the Beneficiary shall have received a
sum sufficient to pay the same. If the amount of such premiums and Impositions
has not been definitely ascertained at the time when any such monthly deposits
are to be made, the Mortgagor shall pay Mortgage Escrow Amounts based upon the
amount of such premiums and Impositions for the preceding year, subject to
adjustment as and when the amount of such premiums and Impositions are
ascertained.
(b) At any time after the Beneficiary's election to require Mortgage
Escrow Amounts pursuant to Section 8(a) above, subject to the conditions of the
next succeeding sentence, the Mortgagor may elect to replace any Mortgage Escrow
Amounts then being retained by the Beneficiary and satisfy its obligations under
this Section 8 by delivery of an unconditional, irrevocable, clean sight draft
letter of credit in commercially rea-
32
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sonable form and issued by an Approved Bank (which letter of credit shall not
expire until a date two months after the Maturity Date, as defined in the Note
or the Credit Agreement) or Cash and Cash Equivalents (any such security,
"Mortgage Escrow Security") in an amount sufficient (including the amount of the
- -------------------------
Mortgage Escrow Amounts so replaced) to discharge the Impositions and insurance
premiums which shall become due during the six (6) month period immediately
after the date of delivery of such Mortgage Escrow Security (and for each six
(6) month period thereafter for so long as the Mortgagor elects to post such
security in lieu of the Beneficiary's retention of such amounts in the Escrow
Account) and with maturities corresponding to the respective due dates of such
obligations. Notwithstanding the foregoing, it shall be a condition to the
Mortgagor's delivery of any Mortgage Escrow Security (other than cash) in
satisfaction of its obligations under this Section 8, that the Mortgagor, at its
expense, execute, acknowledge and deliver to the Beneficiary such additional
security agreements, financing statements and other documents or instruments
including, without limitation, an Opinion of Counsel, and take all such actions
which in the reasonable opinion of the Beneficiary or its counsel may be
necessary to grant and convey to the Beneficiary a perfected security interest
in and to any and all of the Mortgage Escrow Security.
(c) The Mortgage Escrow Amounts (or any Mortgage Escrow Security
posted in lieu thereof pursuant to Section 8(b)) shall be held by the
Beneficiary and shall be applied by Beneficiary to the payment of the
obligations in respect of which such Mortgage Escrow Amounts were required
except upon the occurrence of an Event of Default and the acceleration of the
Note in which case all or any portion of such Mortgage Escrow Amounts (or any
Mortgage Escrow Security posted in lieu thereof) may be so transferred or
otherwise applied to the Indebtedness in such order or priority as the
Beneficiary may elect or the Beneficiary may exercise any of its rights or
remedies with respect to same under any of the Loan Documents, at law or in
equity. Any Mortgage Escrow Amounts paid by the Mortgagor (or Mortgage Escrow
Security posted with the Beneficiary) in excess of the actual obligations for
which they were required, shall be held and applied to the obligations for the
ensuing year or otherwise applied in accordance with the terms of the Loan
Documents. Nothing herein contained shall be deemed
33
<PAGE>
to affect any right or remedy of the Beneficiary under this Mortgage or
otherwise at law or in equity to pay any such amount and to add the amount so
paid to the Indebtedness hereby secured. Any such application of said amounts
or any portion thereof to any Indebtedness secured hereby shall not be
construed to cure or waive any Default or notice of Default hereunder or
invalidate any act done pursuant to any such Default or notice.
(d) If the Beneficiary elects to require Mortgage Escrow Amounts
pursuant to this Section 8, the Mortgagor shall deliver to the Beneficiary all
tax bills, bond and assessment statements, statements of insurance premiums, and
statements for any other obligations referred to above as soon as the same are
received by the Mortgagor, and the Beneficiary shall cause the same to be paid
when due to the extent of Mortgage Escrow Amounts in the Escrow Account
available therefor. It is expressly acknowledged and agreed that the
Beneficiary shall have no obligation whatsoever to advance any amounts in
payment of all or any portion of such obligations to the extent that Mortgage
Escrow Amounts received are insufficient to pay any such obligations as and
when the same become due.
9. The Beneficiary and Trustees. If any section of this Mortgage
----------------------------
provides that this document shall constitute a deed of trust, the provisions of
this Section 9 shall be applicable.
(a) The Trustees accept the trusts hereby created and agree to
perform the duties herein required of them upon the terms and conditions hereof.
The duties and obligations of the Trustees in respect of this Mortgage
shall be as set forth in this Section 9.
(i) Except upon the occurrence and during the continuance
of an Event of Default actually known to the Beneficiary,
(A) the Trustees shall undertake to perform such duties and
obligations and only such duties and obligations as are specifically set
forth in this Mortgage and the Loan Documents or as otherwise directed by
a letter of direction from the
34
<PAGE>
Beneficiary, and no implied covenants or obligations shall be read into
this Mortgage or the Loan Documents against the Trustees; and
(B) in the absence of bad faith, the Trustees may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustees
and conforming to the requirements of this Mortgage and the Loan Documents.
(ii) In case an Event of Default known to the Beneficiary has
occurred and is continuing, the Trustees shall exercise the rights and
powers vested in the Trustees by this Mortgage and the Loan Documents, with
reasonable care, as directed by Beneficiary.
(iii) No provision of this Mortgage shall be construed to
relieve the Trustees from liability for their own gross negligence or
willful misconduct, except that
------
(A) this Subsection shall not be construed to limit the effect
of subsection (b) of this Section 9;
(B) the Trustees shall not be liable for any error of judgment
made in good faith by an officer of the Trustees, unless it shall be proved
that such Trustees were negligent in ascertaining the pertinent facts; and
(C) the Trustees shall not be liable with respect to any action
taken or omitted to be taken in good faith in accordance with the direction
of the Beneficiary relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustees, or exercising any
trust or power conferred upon the Trustees under this Mortgage or the other
Loan Documents.
(iv) Whether or not therein expressly so provided, every
provision of this Mortgage relating to the conduct or affecting the
liability
35
<PAGE>
of or affording protection to the Trustees shall be subject to the
provisions of this Section 9(a).
(v) No provision of this Mortgage shall require the Trustees to
expend or risk their own funds or otherwise incur any personal financial
liability in the performance of any of their duties hereunder, or in the
exercise of any of their rights or powers.
(b) At any time or times for the purpose of meeting the Legal
Requirements of any jurisdiction in which any part of a Trust Estate may at the
time be located, the Beneficiary shall have the power to appoint and, upon the
written request of the Beneficiary, the Mortgagor shall for such purpose join
with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint one or more Persons
reasonably approved by the Beneficiary to act as trustee pursuant to this
Mortgage in such jurisdiction for such portion of the Trust Estate located in
such jurisdiction (the "Jurisdictional Trustee") with such powers as are
----------------------
provided in the instrument of appointment which shall expressly designate the
Properties affected and the capacity of the appointee as a Jurisdictional
Trustee, and to vest in such Person or Persons in the capacity aforesaid, any
property, title, right or power deemed necessary or desirable, subject to the
other provisions of this Section 9. If the Mortgagor does not join in such
appointment within fifteen (15) days after the receipt by it of a request so to
do, or in case an Event of Default has occurred and is continuing, the
Beneficiary alone shall make such appointment. Should any written instrument
from the Mortgagor be required by any Jurisdictional Trustee so appointed for
more fully confirming to such Jurisdictional Trustee such property, title, right
or power, any and all such instruments shall, on request, be executed,
acknowledged and delivered by the Mortgagor.
(i) Every Jurisdictional Trustee shall, to the extent permitted
by law, but to such extent only, be appointed subject to the terms set
forth in Section 9(b)(iii) hereof.
(ii) As of the date hereof the Trustee named on page 1 hereof is
hereby appointed
36
<PAGE>
Jurisdictional Trustee for the State in which the Properties are located.
(iii) To the extent permitted by law, but to such extent only,
the Jurisdictional Trustee is appointed herein subject to the following
terms, namely:
(A) Subject to the terms hereof and to the extent permitted by
law, all rights, powers, duties and obligations under this Mortgage granted
to or imposed upon the Beneficiary and the Jurisdictional Trustee shall be
exercised solely by the Beneficiary.
(B) The rights, powers, duties and obligations hereby conferred
or imposed upon the Beneficiary and the Jurisdictional Trustee in respect
of any Property covered by such appointment shall be exercised or performed
by the Beneficiary separately, or at the election of the Beneficiary by the
Beneficiary and the Jurisdictional Trustee jointly, except to the extent
that (i) under any law of any jurisdiction in which any particular act is
to be performed by the Beneficiary and/or the Jurisdictional Trustee and
the Beneficiary shall be incompetent or unqualified to perform such act or
(ii) the Beneficiary shall deem it inconvenient or undesirable to perform
such act, then in any such event such rights, powers, duties and
obligations shall be exercised and performed by the Jurisdictional Trustee
at the written direction of the Beneficiary.
(C) The Beneficiary at any time, by an instrument in writing
executed by it, may accept the resignation of or remove any Jurisdictional
Trustee. Upon the written request of the Beneficiary, the Mortgagor shall
join with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to the Jurisdictional Trustee so
resigned or removed may be appointed in the manner provided in this Section
9.
37
<PAGE>
(D) Upon the resignation or removal of any Jurisdictional
Trustee, the Beneficiary shall have power to appoint and, upon the written
request of the Beneficiary, the Mortgagor shall, for such purpose, join
with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint one or more
Persons reasonably approved by the Beneficiary to act as successor
Jurisdictional Trustee of all or any part of the Trust Estate so
designated, with such power as provided for in this Section 9, and to vest
in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other
provisions of this Section 9. If the Mortgagor does not join in such
appointment, within fifteen (15) days after the receipt by it of a request
so to do, or in case an Event of Default has occurred and is continuing,
the Beneficiary acting alone shall make such appointment. Should any
written instrument from the Mortgagor be required by any successor
Jurisdictional Trustee so appointed for more fully confirming to such
trustee such property, title, right or power, any and all such instruments
shall, on request, be executed, acknowledged and delivered by the
Mortgagor.
(E) No Jurisdictional Trustee hereunder shall be personally
liable by reason of any act or omission of the Beneficiary or any other
trustee hereunder and the Beneficiary shall not be personally liable by
reason of any act or omission of the Jurisdictional Trustee; neither shall
knowledge of the Beneficiary be imputed to the Jurisdictional Trustee nor
shall knowledge of the Jurisdictional Trustee be imputed to the
Beneficiary.
(F) Any notice delivered to the Beneficiary shall be deemed to
have been sufficiently delivered without any delivery to the Jurisdictional
Trustee.
(G) Any obligation of the Mortgagor to file or give notices,
reports or information to the Beneficiary hereunder shall be satisfied by
the delivery thereof to the Beneficiary.
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<PAGE>
(H) Any successor to the Jurisdictional Trustee (herein, called
the Successor Jurisdictional Trustee) shall execute, acknowledge and
deliver to his predecessor (herein called the Predecessor Jurisdictional
Trustee), the Beneficiary and the Mortgagor, an instrument accepting such
appointment. Thereupon, the Successor Jurisdictional Trustee shall,
without any further act, deed or conveyance, become vested with the
estates, properties, rights, powers, duties and trusts of the Predecessor
Jurisdictional Trustee in the trusts created by this Mortgage, with the
same effect as if originally named as Jurisdictional Trustee. At the
written request of the Mortgagor, the Beneficiary or the Successor
Jurisdictional Trustee, the Predecessor Jurisdictional Trustee shall
execute and deliver an instrument, in recordable form, transferring to the
Successor Jurisdictional Trustee, upon the trusts herein expressed, the
Trust Estate and shall duly assign transfer, deliver and pay over to the
Successor Jurisdictional Trustee, any property and money subject to the
lien hereof held by him. If any written instrument from the Mortgagor or
the Beneficiary be required by the Successor Jurisdictional Trustee for
more fully and certainly vesting in and confirming to the Successor
Jurisdictional Trustee such estates, properties, rights, powers and trusts,
then, at the request of the Successor Jurisdictional Trustee, all such
instruments shall be made, executed, acknowledged and delivered by the
Mortgagor or the Beneficiary to the Successor Jurisdictional Trustee.
(c) The Mortgagor covenants and agrees:
(i) to reimburse the Beneficiary and the Trustees from time
to time for all reasonable, out-of-pocket costs and expenses incurred by
them hereunder;
(ii) to reimburse each of the Beneficiary and the Trustees
upon request for all reasonable out-of-pocket expenses, disbursements and
advances incurred or made by it or him in accordance with any provision of
this Mortgage (including reasonable compensation, expenses and
disbursements of agents and counsel), except any such expense,
39
<PAGE>
disbursement or advance as may be attributable to Beneficiary's or
Trustee's negligence or bad faith; and
(iii) to indemnify the Beneficiary and the Trustees for, and to
hold each harmless against, any loss, liability or expense incurred without
negligence, willful misconduct or bad faith on its or his part, arising out
of or in connection with the acceptance or administration of the trust or
trusts hereunder or the enforcement of remedies hereunder including the
reasonable costs and expenses of defending against any claim or liability
in connection with the exercise or performance of any of the powers or
duties hereunder or thereunder (except any liability incurred by the
Trustees and the Jurisdictional Trustee with negligence, willful misconduct
or bad faith on its or their part).
The obligations of the Mortgagor under this Section 9(c) to compensate or
indemnify the Trustees and the Beneficiary and to pay or reimburse the Trustees
and the Beneficiary for reasonable, out-of-pocket expenses, disbursements and
advances shall constitute additional Indebtedness hereunder and shall survive
the satisfaction and discharge of this Mortgage. When the Trustees or the
Beneficiary incur expenses or render services after an occurrence of an Event of
Default hereunder, the expenses and compensation for services are intended to
constitute expenses of administration under any Bankruptcy Law.
(d) If an individual Person is named as Trustee on page 1 hereof,
such individual is hereby appointed Individual Trustee for the State in which
the Properties are located. To the extent permitted by law, but to such extent
only, the Individual Trustee is appointed herein by the Beneficiary subject to
the following terms, namely:
(i) Subject to the terms hereof and to the extent permitted by
law, all the rights, powers, duties and obligations under this Mortgage
granted to or imposed upon the Individual Trustees shall be exercised
solely by the Beneficiary except as herein provided.
40
<PAGE>
(ii) The rights, powers, duties and obligations hereby conferred
or imposed upon the Individual Trustee in respect of any property covered
by such appointment shall be exercised or performed by the Beneficiary
separately, or at the election of the Beneficiary by the Beneficiary and
the Individual Trustee jointly, except to the extent that (i) under any law
of any jurisdiction in which any particular act is to be performed by the
Individual Trustees the Beneficiary shall be incompetent or unqualified to
perform such act or (ii) the Beneficiary shall deem it inconvenient or
undesirable to perform such act, then in any such event such rights,
powers, duties and obligations shall be exercised and performed by the
Individual Trustee at the written direction of the Beneficiary.
(iii) The Beneficiary at any time, by an instrument in writing
executed by it, may accept the resignation of or remove any Individual
Trustee. Upon the written request of the Beneficiary, the Mortgagor shall
join with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to the Individual Trustee so resigned
or removed may be appointed in the manner provided in this Section.
(iv) Upon the death, resignation or removal of any Individual
Trustee, the Beneficiary shall have power to appoint and, upon the written
request of the Beneficiary, the Mortgagor shall, for such purpose, join
with the Beneficiary in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint, one or more
persons approved by the Beneficiary to act as Successor Individual Trustee
together with the Beneficiary of all or any part of the Trust Estate, with
such powers as provided for in this Section 9, and to vest in such person
or persons in the capacity aforesaid, any property, title, right or power
deemed necessary or desirable, subject to the other provisions of this
Section 9. If the Mortgagor does not join in such appointment, within
fifteen (15) days after the receipt by it of a request so to do, or in case
an Event of Default has
41
<PAGE>
occurred and is continuing, the Beneficiary acting alone shall make such
appointment.
(v) Should any written instrument from the Mortgagor be
required by any successor Individual Trustee so appointed for more fully
confirming to such trustee such property, title, right or power, any and
all such instruments shall, on request, be executed, acknowledged and
delivered by the Mortgagor.
(vi) No Individual Trustee hereunder shall be personally liable
by reason of any act or omission of the Beneficiary or any other trustee
hereunder and the Beneficiary shall not be personally liable by reason of
any act or omission of the Individual Trustee; neither shall knowledge of
the Beneficiary be imputed to the Individual Trustee nor shall knowledge of
the Individual Trustee be imputed to the Beneficiary.
(vii) Any notice delivered to the Beneficiary shall be deemed to
have been sufficiently delivered without any delivery to the Individual
Trustee.
(viii) Any obligation of the Mortgagor to file or give notices,
reports or information to the Trustees hereunder shall be satisfied by the
delivery thereof to the Beneficiary.
Any successor to the Individual Trustee (herein, in this subsection
(h) called the "Successor Individual Trustee") shall execute, acknowledge and
-----------------------------
deliver to his predecessor (herein, in this subsection (h), called the
"Predecessor Individual Trustee"), the Beneficiary and the Mortgagor, an
- -------------------------------
instrument accepting such appointment. Thereupon, the Successor Individual
Trustee shall, without any further act, deed or conveyance, become vested with
the estates, properties, rights, powers, duties and trusts of the Predecessor
Individual Trustee in the trusts created by this Mortgage, with the same effect
as if originally named as Individual Trustee. At the written request of the
Mortgagor, the Beneficiary or the Successor Individual Trustee, the Predecessor
Individual Trustee shall execute and deliver an instrument transferring to the
Successor Individual Trustee, upon
42
<PAGE>
the trusts herein expressed, the Trust Estate and shall duly assign, transfer,
deliver and pay over to the Successor Individual Trustee, any property and
money subject to the lien hereof held by him. If any written instrument from
the Mortgagor or the Beneficiary be required by the Successor Individual Trustee
for more fully and certainly vesting in and confirming to the Successor
Individual Trustee such estates, properties, rights, powers and trusts, then, at
the request of the Successor Individual Trustee, all such instruments shall be
made, executed, acknowledged and delivered by the Mortgagor or the Beneficiary
to the Successor Individual Trustee.
(e) At any time or times, (i) for the purpose of meeting the Legal
Requirements of any jurisdiction in which any part of a Trust Estate may at the
time be located or (ii) if the Beneficiary deems it to be necessary or desirable
for the protection of its interests, the Beneficiary shall have the power to
appoint, and upon written request of the Beneficiary, the Mortgagor shall for
such purpose join with the Beneficiary in the execution, delivery and
performance of all instruments and agreements necessary or proper to appoint,
one or more Persons approved by the Beneficiary either to act as co-trustee,
jointly with the Beneficiary, of all or any part of the Trust Estate, or to act
as separate trustee of any such property, in either case with such powers as may
be provided in the instrument of appointment which shall expressly designate
the property affected and the capacity of the appointee as either a co-trustee
or separate trustee, and to vest in such person or persons in the capacity
aforesaid, any property, title, right or power deemed necessary or desirable,
subject to the other provisions of this Section 9. If the Mortgagor does not
join in such appointment within 15 days after the receipt by it of a request so
to do, or in case an Event of Default has occurred and is continuing, the
Beneficiary alone shall make such appointment.
Should any written instrument from the Mortgagor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right or power, any and all
such instruments shall, by request, be executed, acknowledged and delivered by
the Mortgagor.
43
<PAGE>
Every co-trustee or separate trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the same terms as
hereinabove set forth for the Individual Trustee.
10. Transfers, Additional Indebtedness and Subordinate Liens.
--------------------------------------------------------
(a) Except as permitted under the Credit Agreement, the
Mortgagor will not without the Beneficiary's prior written consent, which
consent may be withheld in the Beneficiary's sole discretion, (i) sell, assign,
convey, transfer or otherwise dispose of legal or beneficial interests in all or
any part of the Properties, (ii) incur additional Debt (as such term is defined
in the Credit Agreement), (iii) sell, assign, convey, transfer, or otherwise
dispose of any legal or beneficial interest in the Mortgagor or any entity
constituting the Mortgagor, or permit any owner of a legal or beneficial
interest in the Mortgagor to do the same, or file a declaration of condominium
with respect to any Property, or (iv) mortgage, hypothecate or otherwise
encumber or grant a security interest in the Trust Estate or any interest in the
Mortgagor or entity constituting the Mortgagor (the matters referred to in
clauses (i) through (iv) are collectively referred to as a "Transfer").
---------
(b) Any Transfer made in violation of this Mortgage or the
Credit Agreement shall be an immediate Event of Default hereunder and shall be
void and of no force or effect as against the Beneficiary. Upon any such
Transfer made in violation of Section 10(a), the Beneficiary may, at its option
and without limiting any other right or remedy available to the Beneficiary
hereunder, under any of the other Loan Documents, or otherwise at law or in
equity, accelerate the maturity of the Note and require the payment of the then
existing outstanding principal balance, accrued interest and all other
Indebtedness due under the Note and this Mortgage and any and all other amounts
due to the Beneficiary. The Mortgagor shall reimburse the Beneficiary for all
reasonable costs and expenses, including, without limitation, reasonable
attorneys' fees, actually incurred by the Beneficiary in connection with the
review by the Beneficiary of the Mortgagor's request for the Beneficiary's
consent to a Transfer of all or any portion
44
<PAGE>
of the Trust Estate or any interest therein or any interest in the Mortgagor.
11. Maintenance of Trust Estate; Alterations; Inspection; Utilities.
---------------------------------------------------------------
(a) The Mortgagor shall keep and maintain the Trust Estate and
every part thereof in good condition and repair, subject to ordinary wear and
tear, and shall not permit or commit any impairment, deterioration or
intentional waste of any Property and the Equipment located thereon in any
material respect. The Mortgagor further covenants to do all other acts which
from the character or use of any Property may be reasonably necessary to
protect the security hereof, the specific enumerations herein not excluding the
general. The Mortgagor shall not remove or demolish any Improvement on any
Property except as the same may be necessary in connection with an Alteration
or a restoration in connection with a Taking or casualty, required under the
Leases or in the ordinary course of business in accordance with the terms and
conditions hereof.
(b) Except as may be necessary in connection with an Alteration
permitted by Section 11(c) below, the Mortgagor shall not make any changes or
allow any changes to be made in the use of a Property as a commercial or
industrial property and related uses or initiate or acquiesce in any change in
any zoning or other land use classification affecting all or any portion of a
Property now or hereafter in effect and affecting all or any portion of a
Property in a manner which could result in a Material Adverse Effect.
(c) The Mortgagor shall have the right, without the
Beneficiary's consent, to undertake any alteration, improvement, demolition or
removal (any such alteration, improvement, demolition or removal, an
"Alteration") of a Property or any portion thereof so long as any such
----------
Alteration is (i) required or permitted pursuant to or in connection with any
Lease or (ii) provided that no Event of Default shall have occurred and be
continuing hereunder, does not in the aggregate cost more than $1,000,000. The
Beneficiary shall not unreasonably withhold its consent to any Alteration in
excess of $1,000,000 which is not otherwise permitted under the terms of the
applicable Lease. Any Alteration which in-
45
<PAGE>
volves an estimated cost of more than $1,000,000 in the aggregate for any
Property shall be conducted under the supervision of an Independent Architect,
and no such Alteration shall be undertaken until five (5) Domestic Business Days
after there shall have been filed with the Beneficiary, for information purposes
only and not for approval by the Beneficiary, detailed plans and specifications
and cost estimates therefor, prepared and approved in writing by such
Independent Architect. Such plans and specifications may be revised at any time
and from time to time, provided that material revisions of such plans and
specifications are filed with the Beneficiary, for information purposes only,
together with the written approval thereof by such Independent Architect. All
work done in connection with any Alteration shall be performed with due
diligence in a good and workmanlike manner, all materials used in connection
with any Alteration shall not be less than the standard of quality of the
materials currently used at such Property and all work performed and all
materials used shall be in accordance with all applicable Legal Requirements
and the insurance requirements of the insurance policies required hereby.
(d) The Beneficiary and any Persons authorized by them may at
all reasonable times, upon reasonable notice and in compliance with the Leases
enter and examine any Property and may inspect all work done, labor performed
and materials furnished in and about any Property
12. Legal Compliance. The Mortgagor and the Properties and the
----------------
Equipment thereon and the use thereof comply in all material respects with all
Legal Requirements (hereinafter defined). Subject to the Mortgagor's right of
contest pursuant to Section 7(c), the Mortgagor shall comply with and conform in
all material respects to all present and future (when enacted) laws, statutes,
codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations
and requirements, and irrespective of the nature of the work to be done, of
every Governmental Authority including, without limitation, Environmental Laws,
consumer protection laws and all covenants, restrictions and conditions now or
hereafter of record which may be applicable to Mortgagor or to any Property and
the Equipment thereon, or to the use, manner of use, occupancy, possession,
operation, maintenance,
46
<PAGE>
alteration, repair or reconstruction of any Property and the Equipment thereon,
including, without limitation, building and zoning codes and ordinances
(collectively, the "Legal Requirements"), the failure to comply with would, in
------------------
the aggregate, have a material adverse effect on the value of any Property taken
as a whole.
13. Books and Records, Financial Statements, Reports and Other
----------------------------------------------------------
Information.
- -----------
(a) Books and Records. The Mortgagor will keep and maintain on a
-----------------
fiscal year basis proper books and client records, in which accurate and
complete entries shall be made of all dealings or transactions of or in relation
to the Note and the Trust Estate and the business and affairs of the Mortgagor
relating to the Trust Estate, in accordance with GAAP and the Credit Agreement.
The Beneficiary and its authorized representatives shall have the right at
reasonable times and upon reasonable notice to examine the books and records of
the Mortgagor relating to the operation of the Trust Estate and to make such
copies or extracts thereof as the Beneficiary may reasonably require.
(b) Other Information. The Mortgagor will, within a reasonable
-----------------
time after written request by the Beneficiary, furnish to the Beneficiary, in
such manner and in such detail as may be reasonably requested by the
Beneficiary, such reasonable additional information which has been prepared by
the Mortgagor in the ordinary course of business, as may be reasonably requested
by the Beneficiary with respect to the Trust Estate.
14. Compliance with Leases and Agreements.
-------------------------------------
(a) The Mortgagor has heretofore delivered to the Beneficiary
true and complete copies of all Leases, and all Agreements and any and all
amendments or modifications thereof as required under the Credit Agreement.
Except as disclosed in writing to Beneficiary (and which such matters do not
have a Material Adverse Effect), the Leases and Agreements are in full force
and effect and the Mortgagor has neither given to, nor received any written
notice of default from, any Tenants under any Leases or any party to any of the
Agreements, and, to the Mortgagor's knowledge, no events or circum-
47
<PAGE>
stances exist which with or without the giving of notice, the passage of time or
both, may constitute a default under any of the Leases or Agreements. The
Mortgagor will promptly notify the Beneficiary upon the occurrence of any of the
foregoing events.
(b) The Mortgagor may, at all times, lease to any Person space within
any Property in a manner consistent with other first-class office properties
comparable to the applicable Property and then current market conditions
existing in the applicable market area in which such Property is located, and
otherwise in accordance with this Mortgage. Each Lease entered into after the
date hereof (including the renewal or extension on or after the date hereof of
any Lease entered into prior to the date hereof if the rent payable during such
renewal or extension, or a formula or other method to compute such rent, is not
provided for in such Lease (such a renewal or extension a "Renewal Lease"))
-------------
shall either (i) (A) provide for payment of rent and all other material amounts
payable thereunder at rates at least equal to the fair market rental value
(taking into account the type and creditworthiness of the tenant, the length of
tenancy and the location and size of the unit so rented), as of the date such
Lease is executed by the Mortgagor, of the space covered by such Lease or
Renewal Lease for the term thereof, including any renewal options, (B) not
contain any provision whereby the rent payable thereunder would be based, in
whole or in part, upon the net income or profits derived by any Person from the
applicable Property (provided, however, that it may contain a provision in which
-------- -------
a portion of rent may be payable based on a percentage of gross income), (C) not
entitle any Tenant to receive and retain Proceeds of a Taking except those that
may be specifically awarded to it in condemnation proceedings because of the
Taking of its trade fixtures and its leasehold improvements which have not
become part of the realty and such business loss and relocation expenses as
tenant may specifically and separately establish and (D) not have a material
adverse effect on the value of the Property in which it is to be located or (ii)
be consented to by the Beneficiary. Each such Lease (other than Renewal Leases)
in excess of 15% of the rentable area of any Property (a "Material Lease") shall
--------------
be subject to the prior consent of Beneficiary, which consent shall not be
unreasonably withheld. Any such Renewal Lease shall also be subject to the
prior
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<PAGE>
consent of Beneficiary, which consent shall not be unreasonably withheld, in
the case of any Renewal Lease which either provides for (x) any change to any
financial provision of the Lease being renewed or extended, or (y) any other
material modification or amendment. Beneficiary shall grant or deny its
consent within five (5) Domestic Business Days after receipt of request
therefor (together with a copy of the proposed Renewal Lease). If the
Beneficiary shall fail to respond within such five (5) Domestic Business Day
period, the Beneficiary shall be deemed to have granted its consent to the
proposed Renewal Lease. In addition, the Mortgagor shall give the Beneficiary
not less than one (1) Domestic Business Day's prior written notice (together
with a copy of the proposed Renewal Lease) of any other proposed Renewal Lease
prior to the execution thereof. Without the prior consent of Beneficiary,
which consent shall not be unreasonably withheld, the Mortgagor may not amend,
modify or waive the provisions of any Material Lease or terminate, reduce rents
under or shorten the term of any such Lease.
(c) The Mortgagor shall (i) promptly perform and observe all of the
material terms, covenants and conditions required to be performed and observed
by the Mortgagor under the Leases and Agreements such that there will be no
material and adverse impairment of the value of the Property to which the Lease
or Agreement relates or the Beneficiary's interest under this Mortgage; and
(ii) collect the Rents under the Leases at such times as are customary in the
ordinary course of the Mortgagor's business and may collect such security
deposits as are permitted by Legal Requirements and are commercially reasonable
in the prevailing market and collect escalations, percentage rent and other
charges in accordance with the terms of each Lease.
(d) All Leases entered into by the Mortgagor after the date hereof
shall be subject and subordinate to this Mortgage (through either subordination
provisions in the Leases or separate nondisturbance agreements), and shall
provide that the Tenant thereunder shall attorn to the Beneficiary, or any
other Person succeeding to the interest of the Beneficiary, on the terms set
forth in Section 14(e); provided that the Tenant's rights under the Lease shall
not be impaired or otherwise affected by such subordination or the foreclosure
of this Mortgage, unless such Tenant has defaulted
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<PAGE>
under the Lease and all applicable grace or cure periods thereunder have
expired. The Beneficiary, at the request of the Mortgagor, shall enter into a
subordination, attornment and nondisturbance agreement, in form and substance
reasonably acceptable to the Beneficiary with any existing Tenant or any Tenant
entering into a Lease after the date hereof (other than a Lease to an Affiliate
of the Mortgagor) provided, in any event, that such Tenant leases at least 15%
--------
of the rentable square feet of the Improvements. All actual, out-of-pocket
costs and expenses of the Beneficiary in connection with the negotiation,
preparation, execution and delivery of any nondisturbance agreement, including,
without limitation, reasonable attorneys' fees and disbursements, shall be paid
by the Mortgagor.
(e) Each Lease entered into from and after the date hereof shall
provide that: in the event of the enforcement by the Beneficiary of any remedy
under this Mortgage, the Tenant under such Lease shall, at the option of the
Beneficiary or of any other Person succeeding to the interest of the
Beneficiary as a result of such enforcement, subject to the Beneficiary's and
such Tenant's delivery of any nondisturbance agreement required hereunder
(except with respect to any Lease to an Affiliate of Tenant), attorn to the
Beneficiary or to such Person and shall recognize the Beneficiary or such
successor in interest as lessor under such Lease without change in the
provisions thereof; provided, however, the Beneficiary or such successor in
-------- -------
interest shall not be liable for or bound by (i) any payment of an installment
of rent or additional rent which may have been made more than thirty (30) days
before the due date of such installment, (ii) any amendment or modification to
or termination of any such Lease not in conformity with Section 14(b), (iii) any
act or omission of or default by the Mortgagor under any such Lease, or (iv) any
credits, claims, setoffs or defenses which any Tenant may have against the
Mortgagor. Each such Tenant, upon reasonable request by the Beneficiary or such
successor in interest, shall execute and deliver an instrument or instruments
confirming such attornment, subject to the Beneficiary's delivery of a
nondisturbance agreement to such Tenant (except with respect to any Lease to an
Affiliate of Tenant).
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15. The Beneficiary's Right to Perform. Upon the occurrence and
----------------------------------
continuance of an Event of Default with respect to the performance of any of the
Obligations contained herein, the Beneficiary, without waiving or releasing the
Mortgagor from any Obligation or Default under this Mortgage, after delivery of
notice thereof to Mortgagor, may (but shall not be obligated to), at any time
perform the same, and the cost thereof, with interest at the Default Rate from
the date of payment by the Beneficiary to the date such amount is paid by the
Mortgagor, shall immediately be due from the Mortgagor to the Beneficiary, and
the same shall be secured by this Mortgage and shall be a Lien on the Trust
Estate prior to any right, title to, interest in or claim upon the Trust Estate
attaching subsequent to the Lien of this Mortgage. No payment or advance of
money by the Beneficiary under this Section 15 shall be deemed or construed to
cure the Mortgagor's Default or waive any right or remedy of the Beneficiary
hereunder.
16. The Mortgagor's Existence; Organization and Authority;
------------------------------------------------------
Litigation. The Mortgagor shall do all things necessary to preserve and keep in
- ----------
full force and effect its existence, franchises, rights and privileges as a
limited partnership and its right to own property or transact business in the
state in which each of the Properties is located.
17. Protection of Security; Costs and Expenses. The Mortgagor shall
------------------------------------------
appear in and defend any action or proceeding purporting to affect the security
hereof or the rights or powers of the Beneficiary or the Trustees hereunder and
shall pay all reasonable costs and expenses, including, without limitation,
cost of evidence of title and reasonable attorneys' fees and disbursements, in
any such action or proceeding in which the Beneficiary may appear, and in any
suit brought by the Beneficiary to foreclose this Mortgage or to enforce or
establish any other rights or remedies of the Beneficiary hereunder. If an
Event of Default occurs and is continuing under this Mortgage, or if any action
or proceeding is commenced in which it becomes necessary to defend or uphold
the Lien or priority of this Mortgage or which adversely affects the
Beneficiary's interest in the Trust Estate, or Property or any part thereof,
including, but not limited to, eminent domain, enforcement of, or proceedings
of any nature whatsoever under any Legal Requirement
51
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affecting the Trust Estate or involving the Mortgagor's bankruptcy, insolvency,
arrangement, reorganization or other form of debtor relief, then the
Beneficiary, upon reasonable notice to the Mortgagor, may, but without
obligation to do so and without releasing the Mortgagor from any obligation
hereunder, may make such appearances, disburse such sums and take such action as
the Beneficiary deems necessary or appropriate to protect the Beneficiary's
interest in the Trust Estate, including, but not limited to, disbursement of
reasonable attorneys' fees, entry upon any Property to make repairs or take
other action to protect the security hereof, and payment, purchase, contest or
compromise of any encumbrance, charge or lien which in the judgment of the
Beneficiary appears to be prior or superior hereto. All of the costs, expenses
and amounts set forth in this Section 17 shall be payable by the Mortgagor on
demand, together with interest thereon at the rate then in effect with respect
to the Note (except during the continuance of an Event of Default in which case
interest shall accrue at the Default Rate), from the date of notice to Mortgagor
of any such payment by the Beneficiary (or the Trustees) until the date of
repayment by the Mortgagor, shall be deemed to be Indebtedness hereunder and
shall be secured hereby. Nothing contained in this Section 17 shall be
construed to require the Beneficiary to incur any expense, make any appearance,
or take any other action.
18. Management of the Properties.
----------------------------
(a) The Mortgagor covenants and agrees with the Beneficiary that
the Properties will be managed at all times in a manner consistent with past
practice by Mortgagor or by another manager acceptable to the Beneficiary. Upon
the appointment of any manager (other than the Mortgagor or an affiliate), the
Beneficiary shall have the right to approve (which approval shall not be
unreasonably withheld or delayed) any management agreement with such manager
and any such management agreement shall provide that it is subject and
subordinate to the terms and provisions of this Mortgage.
(b) It is acknowledged and agreed that any management agreement
may be terminated at the direction of the Beneficiary at any time following the
occurrence and continuance of an Event of Default hereunder
52
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and, if any such management agreement is so terminated, a substitute manager
shall be appointed by the Beneficiary.
19. Environmental Matters.
---------------------
(a) The Mortgagor covenants and agrees with the Beneficiary that
it shall comply with all Environmental Laws, except for such instances of non-
compliance which, singly, or in the aggregate, are not reasonably likely to
have a Material Adverse Effect. If at any time during the continuance of the
Lien of this Mortgage, Material of Environmental Concern are discovered in,
around, on, or under any Property, in such concentrations as a Governmental
Authority having jurisdiction over the Trust Estate would require remedial
action to correct (an "Environmental Event"), the Mortgagor shall deliver
-------------------
notice of the occurrence of such Environmental Event to the Beneficiary promptly
after Mortgagor becomes aware of such Environmental Event. Within (30) thirty
days after Mortgagor becomes aware of the occurrence of an Environmental Event,
the Mortgagor shall deliver to the Beneficiary an Officers' Certificate (an
"Environmental Certificate") explaining the Environmental Event in reasonable
- ---------------------------
detail, setting forth to the Beneficiary the estimated cost (as determined at
such time) of remedying such Environmental Event and the proposed method of
remediation and time to complete such remedy. The Mortgagor shall complete, or
cause the appropriate third party to complete, such remedy as promptly as
possible in the ordinary course of business. If an Environmental Event occurs,
the Mortgagor shall diligently remedy or diligently cause the appropriate third
party to remedy all conditions giving rise to such Environmental Event in
accordance with all Environmental Laws.
(b) Notwithstanding anything to the contrary provided in this
Mortgage or in any other Loan Document, the indemnification provided in the
Environmental Indemnity Agreement shall be fully recourse to the Mortgagor and
shall be independent of, and shall survive, the discharge of the Indebtedness,
the release of the Lien created under this Mortgage, and/or the conveyance of
title to any Property to the Beneficiary or any purchaser or designee in
connection with a foreclosure of this Mortgage or conveyance in lieu of
foreclosure. Notwithstanding the foregoing, in no event shall the indemnity
contained in the Environmental Indemnity Agree-
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ment be assignable by the Beneficiary to any such purchaser at or subsequent to
a foreclosure sale.
20. Assignment of Rents. Beneficiary and the Mortgagor hereby
-------------------
confirm that Beneficiary has granted to the Mortgagor a license to collect and
use the Rents as they become due and payable under the Leases in accordance
with the provisions of the Assignment of Leases and Rents, until an Event of
Default has occurred and is continuing; provided that the existence of such
--------
right shall not operate to subordinate the Assignment of Leases and Rents to any
subsequent assignment, in whole or in part by the Mortgagor, and any such
subsequent assignment shall be subject to Beneficiary's rights under this
Mortgage. The Mortgagor further agrees to execute and deliver such assignments
of leases as Beneficiary may from time to time reasonably request in order to
better assure, transfer and confirm to Beneficiary the rights intended to be
granted to Beneficiary with respect thereto. In accordance with the provisions
of the Assignment of Leases and Rents, upon the occurrence and during the
continuance of an Event of Default (1) the Mortgagor agrees that Beneficiary
may, but shall not be obligated to, assume the management of the Properties, and
collect the Rents, applying the same upon the Obligations and (2) the Mortgagor
hereby authorizes and directs all tenants, purchasers or other persons occupying
or otherwise acquiring any interest in any part of the real property to pay the
Rents due under the Leases to Beneficiary upon Beneficiary's request.
Beneficiary shall have and hereby expressly reserves the right and privilege
(but assumes no obligation) to demand, collect, sue for, receive and recover the
Rents, or any part thereof, now existing or hereafter made, and apply the same
in accordance with this Mortgage, the Assignment of Leases and Rents, and
applicable law.
21. Remedies. Upon the occurrence and continuance of an Event of
--------
Default, the Beneficiary may take such actions against the Mortgagor and/or
against the Trust Estate or any portion thereof as the Beneficiary determines is
necessary to protect and enforce its rights hereunder, without notice or demand
except as set forth below. Any such actions taken by the Beneficiary shall be
cumulative and concurrent and may be pursued independently, singly,
successively, together or otherwise, at such time and in such order as the
Beneficiary may deter-
54
<PAGE>
mine in its sole discretion, to the fullest extent permitted by law, without
impairing or otherwise affecting the other rights and remedies of the
Beneficiary permitted by law, equity or contract or as set forth herein or in
the other Loan Documents. Such actions may include the following:
(a) Acceleration. Subject to any applicable provisions of the Note
------------
and the other Loan Documents, the Beneficiary may declare all or any portion of
the unpaid principal balance under the Note, together with all accrued and
unpaid interest thereon, and all other unpaid Indebtedness, to be immediately
due and payable.
(b) Entry. The Beneficiary, personally, or by its agents or
-----
attorneys, or the Jurisdictional Trustee, or by the appointment of a receiver,
at the Beneficiary's election, may enter into and upon all or any part of the
Trust Estate (including any Property and any part thereof), and may exclude the
Mortgagor, its agents and servants, including the manager therefrom; and, the
Beneficiary, having and holding the same, may use, operate, manage and control
the Trust Estate or any part thereof and conduct the business thereof, either
personally or by its superintendents, managers, agents, servants, attorneys or
receiver. Upon every such entry, the Beneficiary may, at the expense of the
Trust Estate or the Mortgagor, from time to time, either by purchase, repair or
construction, maintain and restore the Trust Estate or any part thereof, and may
insure and reinsure the same in such amount and in such manner as may seem to
them to be advisable. Similarly, from time to time, the Beneficiary may, at the
expense of the Trust Estate or the Mortgagor make all necessary or proper
repairs, renewals, replacements, alterations, additions, betterments and
improvements to and on the Trust Estate or any part thereof as it may seem
advisable. The Beneficiary shall also have the right to manage and operate the
Trust Estate or any part thereof and to carry on the business thereof and
exercise all rights and powers of the Mortgagor with respect thereto, either in
the name of the Mortgagor or otherwise, as may seem to them to be advisable. In
confirmation of GRANTING CLAUSE IV, in the case of the occurrence and
continuation of an Event of Default, the Beneficiary shall be entitled to
collect and receive all earnings, revenues, rents, issues, profits
55
<PAGE>
and income of the Trust Estate or any part thereof (collectively, the "Rents")
-----
to be applied to the Obligations in the order of priorities and amounts as the
Beneficiary shall elect in its sole discretion. In the event the Beneficiary
elects, in its sole discretion, to apply the Rents to the Obligations in any
order of priority elected by Beneficiary, the Beneficiary shall not have cause
to claim that the Rents so applied to the Obligations by the Beneficiary were
misappropriated by the Mortgagor. All actions which may be taken by the
Beneficiary pursuant to this subparagraph (b) may be taken by the Jurisdictional
Trustee, upon the direction of the Beneficiary. The Beneficiary or the
Jurisdictional Trustee, as applicable, shall be liable to account only for
rents, issues and profits and other proceeds actually received by the
Beneficiary or the Jurisdictional Trustee.
(c) Foreclosure.
-----------
(i) The Beneficiary, with or without entry, personally or by its
agents or attorneys, insofar as applicable, may (i) sell or instruct the
Jurisdictional Trustee, if applicable, to sell, to the extent permitted by
law and pursuant to the power of sale granted herein, all and singular the
Trust Estate, and all estate, right, title and interest, claim and demand
therein, and right of redemption thereof, at one or more sales, as an
entirety or in parcels, and at such times and places as required or
permitted by law and as are customary in any county or parish in which a
Property is located and upon such terms as the Beneficiary may fix and
specify in the notice of sale to be given to the Mortgagor (and on such
other notice published or otherwise given as provided by law), or as may be
required by law; (ii) institute (or instruct the Jurisdictional Trustee to
institute) proceedings for the complete or partial foreclosure of this
Mortgage under the provisions of the laws of the jurisdiction or
jurisdictions in which the Trust Estate or any part thereof is located, or
under any other applicable provision of law; or (iii) take all steps to
protect and enforce the rights of the Beneficiary, whether by action, suit
or proceeding in equity or at law (for the specific performance of any
covenant, condition or agreement contained in this Mortgage, or in aid of
the execution of any power herein
56
<PAGE>
granted, or for any foreclosure hereunder, or for the enforcement or any
other appropriate legal or equitable remedy), or otherwise, as the
Beneficiary, being advised by counsel and its financial advisor, shall deem
most advisable to protect and enforce any of their rights or duties
hereunder.
(ii) The Beneficiary (or the Jurisdictional Trustee, as
applicable), may conduct any number of sales from time to time. The power
of sale shall not be exhausted by any one or more such sales as to any part
of the Trust Estate remaining unsold, but shall continue unimpaired until
the entire Trust Estate shall have been sold.
(iii) With respect to any Property, this Mortgage is made upon
any statutory conditions of the state in which such Property is located,
and, for any breach thereof or any breach of the terms of this Mortgage,
the Beneficiary shall have the statutory power of sale, if any, provided
for by the laws of such State.
(d) Specific Performance. The Beneficiary, in its sole and absolute
--------------------
discretion, or the Jurisdictional Trustee, at the Beneficiary's election, may
institute an action, suit or proceeding at law or in equity for the specific
performance of any covenant, condition or agreement contained herein or in the
Note or any other Loan Document, or in aid of the execution of any power granted
hereunder or for the enforcement of any other appropriate legal or equitable
remedy.
(e) Enforcement of Note. The Beneficiary or the Jurisdictional
-------------------
Trustee, at the Beneficiary's election, may recover judgement on the Note (or
any portion of the Indebtedness evidenced thereby), either before, during or
after any proceedings for the foreclosure (or partial foreclosure) or
enforcement of this Mortgage, to the fullest extent permitted by law.
(f) Sale of Trust Estate; Application of Proceeds.
----------------------------------------------
(i) The Beneficiary (or the Jurisdictional Trustee, if
applicable), may postpone any sale of all or any part of the Trust Estate
to be
57
<PAGE>
made under or by virtue of this Section 21 by public announcement at the
time and place of such sale, or by publication, if required by law, and,
from time to time, thereafter, may further postpone such sale by public
announcement made at the time of sale fixed by the preceding postponement.
(ii) Upon the completion of any sale made by the Beneficiary or
the Jurisdictional Trustee under or by virtue of this Section 21, the
Beneficiary shall execute and deliver to the accepted purchaser or
purchasers a good and sufficient deed or deeds or other appropriate
instruments, conveying, assigning and transferring all its estate, right,
title and interest in and to the property and rights so sold. The
Beneficiary or the Jurisdictional Trustee, as applicable, is hereby
appointed the true and lawful irrevocable attorney-in-fact of the Mortgagor
in its name and stead or in the name of the Beneficiary to make all
necessary conveyances, assignments, transfers and deliveries of the
property and rights so sold under this Section 21, and, for that purpose,
the Beneficiary or the Jurisdictional Trustee, as applicable, may execute
all necessary deeds and other instruments of assignment and transfer, and
may substitute one or more persons with like power, the Mortgagor hereby
ratifying and confirming all that such attorney or attorneys or such
substitute or substitutes shall lawfully do by virtue hereof. The Mortgagor
shall, nevertheless, if so requested in writing by the Beneficiary, ratify
and confirm any such sale or sales by executing and delivering to the
Beneficiary or to such purchaser or purchasers all such instruments as may
be advisable, in the reasonable judgment of the Beneficiary, for such
purposes and as may be designated in such request. Any such sale or sales
made under or by virtue of this Section 21 shall operate to divest all the
estate, right, title, interest, claim and demand, whether at law or in
equity, of the Mortgagor in and to the property and rights so sold, and
shall be a perpetual bar against the Mortgagor, its successors and assigns
and any Person claiming through or under the Mortgagor and their successors
and assigns.
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(iii) The receipt of the Beneficiary or the Jurisdictional
Trustee, as applicable, for the purchase money paid as a result of any such
sale shall be a sufficient discharge therefor to any purchaser of the
property or rights, or any part thereof, so sold. No such purchaser, after
paying such purchase money and receiving such receipt, shall be bound to
see to the application of such purchase money upon or for any trust or
purpose of this Mortgage, or shall be answerable, in any manner, for any
loss, misapplication or non-application of any such purchase money or any
part thereof, nor shall any such purchaser be bound to inquire as to the
authorization, necessity, expediency or regularity of such sale.
(iv) Upon any sale made under or by virtue of this Section 21,
the Beneficiary may bid for and acquire the Trust Estate or any part
thereof and, in lieu of paying cash therefor, may make settlement for the
purchase price by crediting upon the Note secured by this Mortgage the net
proceeds of sale, after deducting therefrom the expense of the sale and the
costs of the action and any other sums which the Beneficiary is authorized
to deduct under this Mortgage. The person making such sale shall accept
such settlement without requiring the production of the Note or this
Mortgage, and without such production there shall be deemed credited to the
Indebtedness and Obligations under this Mortgage the net proceeds of such
sale. The Beneficiary, upon acquiring the Trust Estate or any part thereof
shall be entitled to own, hold, lease, rent, operate, manage or sell the
same in any manner permitted by applicable laws.
(g) Voluntary Appearance; Receivers. After the happening, and during
-------------------------------
the continuance of, any Event of Default, and immediately upon commencement of
(i) any action, suit or other legal proceeding by the Beneficiary to obtain
judgment for the principal and interest on the Note and any other sums required
to be paid pursuant to this Mortgage, or (ii) any action, suit or other legal
proceeding by the Beneficiary of any other nature in aid of the enforcement of
the Loan Documents or any of them, the Mortgagor will (a) enter its voluntary
appearance in such action, suit or proceeding, and (b) if
59
<PAGE>
required by the Beneficiary, consent to the appointment of one or more receivers
of the Trust Estate and of the earnings, revenues, rents, issues, profits and
income thereof. After the happening, and during the continuance, of any Event
of Default, or upon the filing of a bill in equity to foreclose this Mortgage or
to enforce the specific performance hereof or in aid thereof, or upon the
commencement of any other judicial proceeding to enforce any right of the
Beneficiary, the Beneficiary shall be entitled, as a matter of right, if it
shall so elect, without notice to any other party and without regard to the
adequacy of the security of the Trust Estate, forthwith, either before or after
declaring the principal and interest on the Note to be due and payable, to the
appointment of such a receiver or receivers. Any receiver or receivers so
appointed shall have such powers as a court or courts shall confer, which may
include, without limitation, any or all of the powers which the Beneficiary is
authorized to exercise by the provisions of this Section 21, and shall have the
right to incur such obligations and to issue such certificates therefor as the
court shall authorize.
(h) Retention of Possession. Notwithstanding the appointment of any
-----------------------
receiver, liquidator or trustee of the Mortgagor, or any of its property, or of
the Trust Estate or any part thereof, the Beneficiary or the Jurisdictional
Trustee, as applicable, to the extent permitted by law, shall be entitled to
retain possession and control of all property now or hereafter granted to or
held by the Beneficiary or the Jurisdictional Trustee, as applicable, under this
Mortgage.
(i) Suits by the Beneficiary. All rights of action under this
------------------------
Mortgage may be enforced by the Beneficiary without the possession of the Note
and without the production thereof or this Mortgage at any trial or other
proceeding relative thereto. Any such suit or proceeding instituted by the
Beneficiary shall be brought in the name of the Beneficiary and any recovery of
judgment shall be subject to the rights of the Beneficiary.
(j) Remedies Cumulative. No remedy herein conferred upon or reserved
-------------------
to the Beneficiary is intended to be exclusive of any other remedy, and each
such remedy shall be cumulative and in addition to every other remedy given
hereunder or now or hereafter existing
60
<PAGE>
at law or in equity. No delay or omission of the Beneficiary to exercise any
right or power accruing upon any Event of Default shall impair any such right or
power, or shall be construed to be a waiver of any such Event of Default or an
acquiescence therein. Every power and remedy given by this Mortgage to the
Jurisdictional Trustee and/or the Beneficiary may be exercised from time to time
and as often as may be deemed expedient by the Jurisdictional Trustee (at the
Beneficiary's discretion) and the Beneficiary and each of them. Nothing
contained in this Mortgage shall affect the obligations of the Mortgagor to pay
the principal of, and interest on, the Note in the manner and at the time and
place expressed in the Note.
(k) Waiver of Rights. The Mortgagor agrees that to the fullest
----------------
extent permitted by law it will not, at any time, (a) insist upon, plead or
claim or take any benefit or advantage of any stay, extension or moratorium law,
wherever enacted, now or at any time hereafter in force, which may affect the
covenants and terms of performance of this Mortgage, (b) claim, take or insist
upon any benefit or advantage of any law, now or at any time hereafter in force,
providing for valuation or appraisal of the Trust Estate, or any part thereof,
prior to any sale or sales thereof which may be made pursuant to any provision
herein contained, or pursuant to the decree, judgment or order of any court of
competent jurisdiction, or (c) after any such sale or sales, claim or exercise
any right, under any statute heretofore or hereafter enacted by the United
States of America, any State thereof or otherwise, to redeem the property and
rights sold pursuant to such sale or sales or any part hereof. The Mortgagor
hereby expressly waives all benefits and advantages of such laws, and
covenants, to the fullest extent permitted by law, not to hinder, delay or
impede the execution of any power herein granted or delegated to the Beneficiary
or Trustees, but will suffer and permit the execution of every power as though
no such laws had been made or enacted. The Mortgagor for itself, and all who
may claim through or under it, waive, to the extent that they lawfully may do
so, any and all homestead rights, any and all rights to reinstatement, and any
and all right to have the property comprising the Trust Estate marshaled upon
any foreclosure of the lien hereof.
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22. Application of Proceeds. The proceeds of any sale or foreclosure
-----------------------
of the Trust Estate shall be applied to the following in such priority as the
Beneficiary shall elect in its sole discretion: (a) to the payment of the
costs and expenses of the foreclosure proceedings (including, without
limitation, reasonable counsel fees and disbursements actually incurred and
advertising costs and expenses), liabilities and advances made or incurred under
this Mortgage, and reasonable receivers' and trustees' fees and commissions,
together with interest at the Default Rate, (b) to the payment of any other sums
advanced by the Beneficiary in accordance with the terms hereof and not repaid
to it by the Mortgagor, together with interest at the Default Rate from and
after the occurrence of an Event of Default, (c) to the payment of all sums due
under the Note in such order as the Beneficiary may elect, (d) to the payment of
all sums due under any other Loan Document, in such order as the Beneficiary
shall elect, and (e) to the payment to the Mortgagor or other party legally
entitled thereto of any surplus.
23. Intentionally Omitted.
---------------------
24. WAIVER OF TRIAL BY JURY. THE MORTGAGOR HEREBY WAIVES AND SHALL
-----------------------
WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BROUGHT BY, OR COUNTERCLAIM ASSERTED BY THE BENEFICIARY WHICH ACTION, PROCEEDING
OR COUNTERCLAIM ARISES OUT OF OR IS CONNECTED WITH THIS MORTGAGE, THE NOTE OR
ANY OTHER LOAN DOCUMENTS.
25. Taxes. (a) In the event of the passage after the date hereof of
-----
any law of the United States or of any state in which a Property is located
either (i) deducting from the value thereof, or changing in any way the laws for
the taxation of mortgages or debts secured thereby for federal, state or local
purposes, or the manner of collection of any such taxes, or (ii) imposing a tax,
either directly or indirectly, on mortgages or debts secured thereby, the
Mortgagor shall assume as an obligation hereunder the payment of any tax so
imposed, until full payment of the Note, provided such assumption shall be
permitted by law within thirty (30) days after written demand therefor from the
Beneficiary.
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(b) All payments by Mortgagor of principal of, and interest on, the
Loan and all other amounts payable hereunder shall be made free and clear of and
without deduction for any present or future income, excise, stamp or franchise
taxes and other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed by any taxing authority ("Taxes"), but excluding (i) United
-----
States Federal income taxes, (ii) New York State income taxes, and (iii) income
taxes imposed by any other state. In the event that any with holding or
deduction from any payment to be made by the Mortgagor hereunder is required in
respect of any Taxes pursuant to any applicable law, rule or regulation, then
the Mortgagor will: (i) pay directly to the relevant authority the full amount
required to be so withheld or deducted; (ii) promptly forward to the Beneficiary
an official receipt or other documentation satisfactory to the Beneficiary
evidencing such payment to such authority; and (iii) pay to the Beneficiary
such additional amount or amounts as is necessary to ensure that the net amount
actually received by the Beneficiary will equal the full amount the Beneficiary
would have received had no such withholding or deduction been required.
Moreover, if any Taxes (except taxes discussed in subsections (i) through (iii)
of this paragraph 25 (b)) are directly asserted against the Beneficiary with
respect to any payment received by the Beneficiary under the Note, or hereunder,
the Beneficiary may pay such Taxes and the Mortgagor will within five (5)
Domestic Business Days pay such additional amounts (including any penalties,
interest or expenses) as are necessary in order that the net amount received by
such person after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted.
(c) If the Mortgagor fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the Beneficiary the required
receipts or other required documentary evidence, the Mortgagor shall indemnify
the Beneficiary for any incremental Taxes, interest or penalties that may become
payable by the Beneficiary as a result of any such failure.
26. Notices. All notices, requests and other communications to any
-------
party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or
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similar writing) and shall be given to such party at the address, telex number
or facsimile number set forth below or at such other address, telex number or
facsimile number as such party may hereafter specify for the purpose by notice
to the other party. Each such notice, request or other communication shall be
effective (i) if given by telex or facsimile transmission, when such telex or
facsimile is transmitted to the telex number or facsimile number specified in
this Section and the appropriate answerback or facsimile confirmation is
received, (ii) if given by mail, 72 hours after such communication is deposited
in the mails with first class postage prepaid, addressed as aforesaid, (iii) if
given by a nationally recognized overnight carrier, 24 hours after such
communication is deposited with such carrier with postage prepaid, or (iv) if
given by any other means, when delivered at the address specified in this
Section. Notices shall be addressed as follows:
To Mortgagor:
Kilroy Realty, L.P.
2250 East Imperial Highway
Suite 1200
El Segundo, California 90245
Attn:
Fax: (213) 322-5981
With a copy to:
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071
Attn: Martha Jordan, Esq.
Fax:
To Beneficiary:
Morgan Note Trust Company of New York
60 Wall Street
New York, New York
Attn: Carolyn Steffey
Fax: (212) 648-
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With a copy to:
Skadden, Arps, Slate, Meagher
& Flom LLP
919 Third Avenue
New York, NY 10022
Attn: Martha Feltenstein, Esq.
Fax: (212) 735-2000
27. No Oral Modification. This Mortgage may not be altered, amended,
--------------------
modified, changed or terminated orally, but only by a written agreement signed
by the party against whom enforcement is sought. This Mortgage is delivered
pursuant to, and upon and subject to, the terms of the Credit Agreement. If
there are any inconsistencies between this Mortgage and the Credit Agreement,
the terms of the Credit Agreement shall prevail.
28. Partial Invalidity. In the event any one or more of the
------------------
provisions contained in this Mortgage shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, but each shall be
construed as if such invalid, illegal or unenforceable provision had never been
included hereunder.
29. Successors and Assigns. All covenants of the Mortgagor contained
----------------------
in this Mortgage are imposed solely and exclusively for the benefit of the
Beneficiary and its successors and assigns, and no other Person shall have
standing to require compliance with such covenants or be deemed, under any
circumstances, to be the beneficiary of such covenants, any or all of which may
be freely waived in whole or in part by the Beneficiary at any time if in its
sole discretion it deems it advisable to do so. All such covenants of the
Mortgagor shall run with the land and bind the Mortgagor, the successors and
assigns of the Mortgagor (and each of them) and all subsequent owners,
encumbrancers and Tenants of the Trust Estate, and shall inure to the benefit of
the Beneficiary, its successors and assigns. The word "the Beneficiary" shall
be construed to mean the Beneficiary named herein.
30. Governing Law. This Mortgage and the obligations arising
-------------
hereunder shall be governed by and
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construed in accordance with, the laws of the State where the Properties are
located. Whenever possible, each provision of this Mortgage shall be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Mortgage shall be prohibited by, or invalid under,
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remaining provisions of this
Mortgage. Nothing contained in this Mortgage or in any Loan Document shall
require either the Mortgagor to pay or the Beneficiary to accept any sum in any
amount which would, under applicable law, subject the Beneficiary or any
Trustee to penalty or adversely affect the enforceability of this Mortgage. In
the event that the payment of any sum due hereunder or under any Loan Document
would have such result under applicable law, then, ipso facto, the obligation of
---- -----
the Mortgagor to make such payments shall be reduced to the highest sum then
permitted under applicable law and appropriate adjustment shall be made by the
Mortgagor and the Beneficiary.
31. Recording Fees, Taxes, Etc. The Mortgagor hereby agrees to take
---------------------------
all such further reasonable actions, and to pay all taxes, recording fees,
charges, costs and other reasonable expenses, including, without limitation,
reasonable attorneys' and reasonable professional fees and disbursements which
are currently or in the future shall be imposed, and which may be required or
necessary to establish, preserve, protect or enforce the Lien of this Mortgage.
32. No Waiver. No failure by the Beneficiary to insist upon the
---------
strict performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof shall constitute a waiver of any such term or
right, power or remedy or of any such breach. No waiver of any breach shall
affect or alter this Mortgage, which shall continue in full force and effect, or
shall affect or alter the rights of the Beneficiary with respect to any other
then existing or subsequent breach.
33. Further Assurances.
------------------
(a) The Mortgagor, at its own expense, will execute, acknowledge
and deliver all such reasonable further documents or instruments including,
without limitation, security agreements on any personalty includ-
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ed or to be included in the Trust Estate and a separate assignment of each Lease
and take all such actions as the Beneficiary from time to time may reasonably
request to better assure, transfer and confirm unto the Beneficiary the rights
now or hereafter intended to be granted to the Beneficiary under this Mortgage
or the other Loan Documents.
(b) The Mortgagor covenants to give notice to the Beneficiary no less
than thirty (30) days prior to a change of Mortgagor's principal place of
business.
34. Additional Security. Without notice to or consent of the
-------------------
Mortgagor and without impairment of the Lien and rights created by this
Mortgage, the Beneficiary may accept (but the Mortgagor shall not be obligated
to furnish) from the Mortgagor additional security for the Note. Neither the
giving of this Mortgage nor the acceptance of any such additional security
shall prevent the Beneficiary from resorting, first, to such additional
security, and, second, to the security created by this Mortgage without
affecting the Beneficiary's Lien and rights under this Mortgage.
35. Indemnification by the Mortgagor. The Mortgagor will protect,
--------------------------------
indemnify and save harmless the Beneficiary, the Banks and every Trustee and all
officers, directors, stockholders, partners, employees, successors and assigns
of any of the foregoing (collectively, the "Indemnified Parties") from and
-------------------
against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses (including all reasonable attorneys' fees and
expenses actually incurred) imposed upon or incurred by or asserted against the
Indemnified Parties or the Trust Estate or any part of its interest therein, by
reason of the occurrence or existence of any of the following (to the extent the
insurance Proceeds payable on account of the following shall be inadequate)
prior to (i) the payment in full of the Note, (ii) the acceptance by the
Beneficiary of a deed-in-lieu of foreclosure with respect to the applicable
Property, or (iii) the Beneficiary's taking possession or control of the
applicable Property, except to the extent caused by the actual willful
misconduct or gross negligence of the Beneficiary or any other Indemnified Party
(other than such willful misconduct or gross negli-
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gence imputed to the Beneficiary solely because of its interest in the Trust
Estate): (a) ownership of the Mortgagor's interest in the Trust Estate, or any
interest therein, or receipt of any Rents or other sum therefrom, (b) any
accident, injury to or death of any persons or loss of or damage to property
occurring on or about the Trust Estate or any appurtenances thereto, (c) any
design, construction, operation, repair, maintenance, use, non-use or condition
of the Trust Estate or appurtenances thereto, including claims or penalties
arising from violation of any Legal Requirement or Insurance Requirement, as
well as any claim based on any patent or latent defect, whether or not
discoverable by the Beneficiary, any claim the insurance as to which is
inadequate, and any Environmental Claim, (d) any failure on the part of the
Mortgagor to perform or comply with any of the material terms of any Lease
within the applicable notice or grace periods, (e) any performance of any labor
or services or the furnishing of any materials or other property in respect of
the Trust Estate or any part thereof, (f) any negligence or tortious act or
omission on the part of the Mortgagor or any of its agents, contractors,
servants, employees, sublessees, licenses or invitees, (g) any contest referred
to in Section 7 hereof, or (h) any obligation or undertaking relating to the
performance or discharge of any of the terms, covenants and conditions of the
landlord contained in the Leases. Any amounts payable to the Indemnified Parties
under this Section 35 which are not paid within ten (10) Domestic Business Days
after written demand therefor by the Beneficiary; setting forth in reasonable
detail the amount of such demand and the basis therefor, shall bear interest
from the date of demand at the Default Rate, and shall be part of the
Indebtedness and secured by this Mortgage. In case any action, suit or
proceeding is brought against the Indemnified Parties by reason of any such
occurrence, the Mortgagor shall at the Mortgagor's expense resist and defend
such action, suit or proceeding or will cause the same to be resisted and
defended by counsel for the insurer of the liability or by counsel designated by
the Mortgagor (unless reasonably disapproved by the Beneficiary promptly after
the Beneficiary has been notified of such counsel); provided, however, that
-------- -------
nothing herein shall compromise the right of the Beneficiary to appoint its own
counsel for its defense with respect to any action which in its reasonable
opinion presents a conflict or potential conflict between the Beneficiary and
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the Mortgagor that would make such separate representation advisable. So long
as the Mortgagor is resisting and defending such action, suit or proceeding as
provided above in a prudent and commercially reasonable manner, the Beneficiary
shall not be entitled to settle such action, suit or proceeding and claim the
benefit of this Section 35 with respect to such action, suit or proceeding and
the Beneficiary agrees that it will not settle any such action, suit or
proceeding without the consent of the Mortgagor; provided, however, that if the
-------- -------
Mortgagor is not diligently defending such action, suit or proceeding in a
prudent and commercially reasonable manner as provided above, the Beneficiary
may settle such action, suit or proceeding subject only to the consent of the
Mortgagor, which consent shall not be unreasonably withheld or delayed, and
claim the benefit of this Section 35 with respect to settlement of such action,
suit or proceeding. The Beneficiary will give the Mortgagor prompt notice after
it obtains actual knowledge of any potential claim by it for indemnification
hereunder; however, the failure of the Beneficiary to give such notice to
Mortgagor shall not affect Mortgagor's obligations hereunder.
36. Release. (a) If the Mortgagor shall pay or cause to be paid the
-------
principal of and interest on the Note in full at maturity or earlier as
permitted in accordance with the terms thereof or the terms of the Credit
Agreement and all other Indebtedness payable to the Beneficiary hereunder by the
Mortgagor or secured hereby or by the other Loan Documents and all of the
Obligations shall have been performed, then this Mortgage and all Loan Documents
pertaining hereto shall be discharged and satisfied or assigned to the
Mortgagor or to any other Person at the Mortgagor's direction and without
recourse to the Beneficiary or any Trustee, at the Mortgagor's option, without
warranty (except as otherwise provided herein with respect to indemnities) at
the expense of the Mortgagor upon its written request. Concurrently with such
release and satisfaction or assignment of this Mortgage and all the other Loan
Documents, the Beneficiary shall return to the Mortgagor or the Borrower all
insurance policies relating solely to the Trust Estate which may be held by the
Beneficiary, and, on the written request and at the expense of the Mortgagor,
Beneficiary shall execute and deliver such proper instruments of release
(including appropriate UCC-
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3 termination statements) as may reasonably be requested by the Mortgagor to
evidence such release and satisfaction or assignment, and any such instrument,
when duly executed by the Beneficiary and duly recorded in the places where this
Mortgage and each other Loan Document is recorded, shall conclusively evidence
the release and satisfaction or assignment of this Mortgage and the other Loan
Documents.
(b) Beneficiary shall release, or cause the Trustee to release, the
Lien of the Mortgage from the applicable Property, upon payment by Mortgagor of
the amount required under Section 2.9(b) of the Credit Agreement and compliance
with all other applicable provisions of the Credit Agreement. Concurrently with
such release of this Mortgage and all other Loan Documents relating solely to
the Trust Estate, the Beneficiary shall return to the Mortgagor all insurance
policies relating solely to the Trust Estate which may be held by the
Beneficiary, and, on the written request and at the expense of the Mortgagor,
Beneficiary shall execute and deliver such proper instruments of release
(including appropriate UCC-3 termination statements) as may reasonably be
requested by the Mortgagor to evidence such release, and any such instrument,
when duly executed by the Beneficiary and duly recorded in the places where this
Mortgage and each other Loan Document is recorded, shall conclusively evidence
the release of this Mortgage and the other Loan Documents relating solely to the
Trust Estate.
37. Security Agreement.
------------------
(a) Security Intended. Notwithstanding any provision of this
-----------------
Mortgage to the contrary, the parties intend that this document constitutes
security for the payment and performance of the Obligations and shall be a
"mortgage" or "deed of trust" under applicable law as set forth in Section 38.
If Section 38 provides that this document is intended to be a deed of trust and,
despite that intention, a court of competent jurisdiction determines that this
document does not qualify as a "trust deed" or "deed of trust" under applicable
law, then ab initio, this instrument shall be deemed a realty mortgage under
applicable law and shall be enforceable as a realty mortgage, and, in such
event, or in the event that Section 38 provides that this document is intended
to be a mortgage, the Mortgagor shall be deemed a "mort-
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gagor," Beneficiary shall be deemed a "mortgagee," and Trustee shall have no
capacity (but shall be disregarded and all references to "Trustee" shall be
deemed to refer to the "mortgagee" to the extent not inconsistent with
interpreting this instrument as though it were a realty mortgage). As a realty
mortgage, the Mortgagor, as mortgagor, shall be deemed to have conveyed the
Properties ab initio to Beneficiary as mortgagee, such conveyance as a security
to be void upon condition that the Mortgagor pay and perform all its
Obligations. The remedies for any violation of the covenants, terms and
conditions of the agreements herein contained shall be as prescribed herein or
by general law, or, as to that part of the security in which a security interest
may be perfected under the UCC, by the specific statutory consequences now or
hereafter enacted and specified in the UCC, all at Beneficiary's sole election.
(b) Fixture Filing; Personal Property. This Mortgage constitutes a
---------------------------------
financing statement and, to the extent required under UCC (S)9-402(f) because
portions of the Properties may constitute fixtures, this Mortgage is to be filed
in the office where a mortgage for the Land Parcels would be recorded.
Beneficiary also shall be entitled to proceed against all or portions of the
Trust Estate in accordance with the rights and remedies available under UCC
(S)9-501(d). The Mortgagor is, for the purposes of this Mortgage, deemed to be
the Debtor, and Beneficiary is deemed to be the Secured Party, as those terms
are defined and used in the UCC. The Mortgagor agrees that the Indebtedness and
Obligations secured by this Mortgage are further secured by security interests
in all of the Mortgagor's right, title and interest in and to fixtures,
Equipment, and other property covered by the UCC, if any, including all personal
property comprising part of the Trust Estate, which are used upon, in, or about
the Trust Estate (or any part) or which are used by the Mortgagor or any other
person in connection with the Trust Estate. The Mortgagor grants to Beneficiary
a valid and effective security interest in all of the Mortgagor's right, title
and interest in and to such personal property (but only to the extent permitted
in the case of leased personal property), together with all replacements,
additions, and proceeds. Except for Permitted Encumbrances, the Mortgagor
agrees that, without the written consent of Beneficiary, no other security
interest will be created under the provisions of the UCC
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and no lease will be entered into with respect to any goods, fixtures,
equipment, appliances, or articles of personal property owned or leased by
Mortgagor now attached to or used or to be attached to or used in connection
with the Trust Estate, except as otherwise permitted hereunder. The Mortgagor
agrees that all property of every nature and description covered by the lien and
charge of this Mortgage together with all such property and interests covered by
this security interest are encumbered as a unit, and upon and during the
continuance of an Event of Default by Mortgagor, all of the Trust Estate, at
Beneficiary's option, may be foreclosed upon or sold in the same or different
proceedings or at the same or different time, subject to the provisions of
applicable law. The filing of any financing statement relating to any such
property or rights or interests shall not be construed to diminish or alter any
of Beneficiary's rights of priorities under this Mortgage.
(c) As of the Closing Date, the principal office, chief executive
office and principal place of business of the Mortgagor is 2250 East Imperial
Highway, Suite 1200, El Segundo, California 90245.
38. As to Property in California. Notwithstanding anything to the
----------------------------
contrary elsewhere in this Mortgage, as to any property of the Trust Estate
located in the State of California (the "California Property"):
-------------------
(a) This Mortgage shall constitute a security agreement and
continuously perfected fixture filing and financing statement. The Mortgagor
is, for the purposes of this Mortgage, deemed to be the Debtor, and Beneficiary
is deemed to be the Secured Party, as those terms are defined and used in the
California Uniform Commercial Code. The addresses of the Secured Party and
Debtor from which information concerning the security agreement may be obtained
are set forth in the initial paragraph of this Mortgage. References to UCC (S)
9-402(f) and UCC (S) 9-501(d) in Section 10(b) of this Mortgage shall be deemed
to refer to UCC (S) 9-402(6) and UCC (S) 9-501, respectively.
(b) This Mortgage shall be deemed to be and shall be construed as a
Deed of Trust enforceable in accordance with the applicable laws of the State of
California regarding deeds of trust, as well as a Security Agreement, Financing
Statement and Assignment of Leases.
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Reference throughout this instrument to this "Mortgage" shall mean, as
appropriate, this Deed of Trust, Security Agreement, Financing Statement and/or
Assignment of Leases. Reference throughout this Mortgage to "Mortgagor" shall
mean Trustor, as appropriate. References throughout this instrument to the
"Trustee" or "Trustees" shall mean: ____________________, a ________
corporation, subject to substitution as provided in California Civil Code
Section 2934(a). The California Property shall be deemed to be and hereby is
conveyed and transferred by Mortgagor, in trust and with power of sale, to
Trustee, and the reference to the "Beneficiary" in the Granting Clauses of this
Mortgage shall, with regard to the California Property, be deemed to be a
reference to Trustee so that Mortgagor mortgages, warrants, grants, bargains,
sells, conveys, pledges and assigns the California Property of the Trust Estate
to Trustee, in trust, for the benefit and use of Beneficiary. Other references
to "Beneficiary" in this Mortgage shall be interpreted to be references to
Beneficiary, Trustee or both as the context may require in light of the intent
of the parties that this Mortgage be construed as a Deed of Trust according to
the applicable laws of the State of California. Trustee shall have all the
obligations, rights, powers and duties of a trustee of a deed of trust as
explicitly set forth or necessarily implied in the California Civil Code, as
amended; and such rights, powers, duties and obligations shall be exercised and
performed by such Trustee at the written direction of Beneficiary or the legal
holder of the indebtedness secured hereby. Nothing contained herein, however is
intended to limit the rights or powers of Beneficiary as set forth in this
Mortgage, except to the extent necessary to accomplish the purpose stated above.
(c) Each of the remedies set forth herein, including without
limitation the remedies involving a power of sale of the California Property and
the right of Beneficiary to exercise self-help in connection with the
enforcement of the terms of this Mortgage, shall be exercisable if, and only to
the extent, permitted by the laws of the State of California in force at the
time of the exercise of such remedies without regard to the enforceability of
such remedies at the time of the execution and delivery of this Mortgage.
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(d) (i) Beneficiary may elect to foreclose by exercise of the power
of sale contained herein, in which event Beneficiary shall notify Trustee
and shall, if required, deposit with Trustee the Note, the original or a
certified copy of this Mortgage, and such other documents, receipts and
evidences of expenditures made and secured hereby as Trustee may require.
(ii) Upon receipt of such notice from Beneficiary, Trustee shall
cause to be recorded and delivered to Mortgagor such notice as may then be
required by law and this Mortgage. Trustee shall, without demand on
Mortgagor, after lapse of such time as may then be required by law and
after recordation of such notice of default and after notice of sale has
been given as required by law, sell the California Property at the time and
place of sale fixed by it in said notice of sale, either as a whole or in
separate lots of parcel or items as Trustee shall deem expedient, and in
such order as it may determine, at public auction to the highest bidder for
cash in lawful money of the United States payable at the time of sale.
Trustee shall deliver to the purchaser or purchasers at such sale its good
and sufficient deed or deeds conveying the property so sold, but without
any covenant or warranty, express or implied. The recitals in such deed of
any matters or facts shall be conclusive proof of the truthfulness thereof.
Any person, including, without limitation, Mortgagor, Trustee or
Beneficiary, may purchase at such sale.
(iii) Trustee may postpone the sale of all or any portion of the
California Property from time to time in accordance with the laws of the
State of California.
(e) Beneficiary may from time to time rescind any notice of default
or notice of sale before any Trustee's sale as provided above in accordance with
the laws of the State of California.
(f) Mortgagor, as Trustor under this Mortgage, hereby requests that a
copy of any Notice of Default or Notice of Sale as may be required by law, which
affects the California Property, be mailed to Mortgagor at the
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address set forth in Section 26 hereof. Otherwise, neither Trustee nor
----------
Beneficiary is under any obligation to notify any person or entity of any action
or proceeding of any kind in which Mortgagor, Beneficiary and/or Trustee shall
be a party, unless brought by Trustee, or of any pending sale under any other
deed of trust, except as may otherwise be required by law or required hereunder.
39. Ground Lease.
------------
(a) Mortgagor hereby represents and warrants as follows:
(i) each Ground Lease is in full force and effect, unmodified by any
writing or otherwise except as specifically set forth herein;
(ii) all rent, additional rent and/or other charges reserved in or
payable under each Ground Lease, have been paid to the extent that they are
payable to the date hereof;
(iii) Mortgagor enjoys the quiet and peaceful possession of the
Ground Leasehold Estate;
(iv) there are no defaults under any of the material terms of any
Ground Lease;
(v) Mortgagor has delivered to Beneficiary a true, accurate and
complete copy of each Ground Lease;
(vi) this Mortgage is secured by the Ground Leasehold Estate; upon
the occurrence of an Event of Default, Beneficiary has the right to
foreclose or otherwise exercise its rights with respect to the fee interest
in the Trust Estate within a commercially reasonable time;
(vii) each Ground Lease or a memorandum of same has been duly
recorded, each Ground Lease permits the interest of the lessee thereunder
to be encumbered by this Mortgage, and there has not been a material change
in the terms of either Ground Lease since its recordation;
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(viii) Except for the Permitted Exceptions, Mortgagor's interest in
each Ground Lease is not subject to any liens or encumbrances superior to,
or of equal priority with, this Mortgage;
(ix) Mortgagor's interest in each Ground Lease is assignable to
Beneficiary upon notice to, but without the consent of, the lessor
thereunder, and in the event that such leasehold interest is so assigned,
it is further assignable by Beneficiary and its successors and assigns upon
notice to, but without a need to obtain the consent of, the lessor under
such Ground Lease;
(x) each Ground Lease requires the lessor thereunder to give notice
of any default by Mortgagor to Beneficiary; and each Ground Lease further
provides that notice of termination given under Ground Lease is not
effective against Beneficiary unless a copy of such notice has been
delivered to Beneficiary in the manner described in such Ground Lease;
(xi) Beneficiary is permitted a reasonable opportunity (including,
where necessary, sufficient time to gain possession of the interest of
Mortgagor under each Ground Lease) to cure any default under each Ground
Lease, which is curable after the receipt of notice of any such default
before the lessor thereunder may terminate such Ground Lease;
(xii) each Ground Lease has a term which extends not less than ten
(10) years beyond the Maturity Date;
(xiii) each Ground Lease requires the lessor thereunder to enter into
a new lease with Beneficiary upon termination of such Ground Lease for any
reason, including rejection of the Ground Lease in a bankruptcy proceeding;
(xiv) under the terms of each Ground Lease and this Mortgage, taken
together, any related insurance proceeds will be applied either to the
repair or restoration of all or part of the related Property, with
Beneficiary having the right to hold and disburse the proceeds as the
repair or restoration
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progresses, or to the payment of the outstanding principal balance of the
Note together with any accrued interest thereon; and
(xv) neither Ground Lease imposes any restrictions on subletting.
Further, with respect to each Ground Lease, Mortgagor covenants and
agrees as follows: (i) to promptly and faithfully observe, perform and comply
with all the terms, covenants and provisions of such Ground Lease, on its part
to be observed, performed and complied with, within the applicable grace
periods, if any; (ii) to refrain from doing anything, as a result of which,
there could be a material default under or a breach of any of the terms of such
Ground Lease; (iii) not to do, permit or suffer any event or omission as a
result of which there is likely to occur a default or breach under such Ground
Lease after the passing of the applicable grace periods, if any; (iv) not to
cancel, terminate, surrender, modify, amend or in any way alter or permit the
alteration of any of the provisions of such Ground Lease or grant any consents
or waivers thereunder, and further agrees not to exercise any right it may have
under such Ground Lease to cancel or surrender the same; (v) to give Beneficiary
notice of any default by any party under such Ground Lease, within three (3)
Business Days subsequent to learning of such default, and promptly to deliver to
Beneficiary a copy of each notice of default and all responses to default
notices, similar instruments received or delivered by Beneficiary, in
connection with such Ground Lease; (vi) to furnish within a reasonable period of
time, except in connection with a notice of default which is governed by the
previous clause, to Beneficiary copies of such information and evidence as
Beneficiary may reasonably request concerning the due observance, performance
and compliance by Mortgagor with the terms, covenants and provisions of such
Ground Lease; and (vii) that any failure by Mortgagor, as tenant under such
Ground Lease, to perform within any applicable grace period its obligations
under such Ground Lease shall constitute an Event of Default by Mortgagor under
this Mortgage.
(b) In the event of the occurrence of any event which, with the
giving of notice, the passage of time or both, would constitute an Event of
Default (as
77
<PAGE>
defined in the applicable Ground Lease) by Mortgagor in the performance of its
obligations under either Ground Lease, and which is not cured within any
applicable grace period, including, without limitation, any default in the
payment of any sums payable thereunder, then, in each and every case,
Beneficiary may, at its option cause the default or defaults to be remedied and
otherwise exercise any and all of the rights of Mortgagor thereunder in the name
of and on behalf of Mortgagor. Mortgagor shall, within five (5) Business Days
after written demand, reimburse Beneficiary for all advances made and expenses
reasonably incurred by Beneficiary in curing any such default (including,
without limitation, reasonable attorneys' fees), together with interest thereon
from the date that such advance is made, to and including the date the same is
paid to Beneficiary. The provisions of this subsection (b) are in addition to
any other remedy given to or allowed Beneficiary under the Ground Lease.
(c) If either Ground Lease is canceled or terminated by reason of an
Event of Default (as defined in the applicable Ground Lease) that Beneficiary
was unable to cure (following a good faith effort to so cure), then, if
Beneficiary or its nominee shall acquire an interest in any new lease of the
Ground Leasehold Estate with respect to such Ground Lease following such Event
of Default, Mortgagor shall have no right, title or interest in or to the new
lease or the leasehold estate created by such new lease.
(d) Mortgagor shall obtain and deliver to Beneficiary, within thirty
(30) days after written demand therefor by Beneficiary, an estoppel certificate
stating, with respect to either Ground Lease, (1) that the Ground Lease is in
full force and effect and has not been modified or, if it has been modified,
the date of each modification (together with copies of each such
modification), (2) the date to which the fixed rent has been paid under the
Ground Lease, (3) whether a notice of default has been sent to the tenant under
the Ground Lease which has not been cured, and if such notice has been sent, the
date it was sent and the nature of the default, (4) whether any parties under
the Ground Lease are in default in keeping, observing or performing any material
term covenant, agreement, provision, condition or limitation contained in the
Ground Lease, (5) if the tenant under the Ground Lease shall be in default, the
default, (6)
78
<PAGE>
the name of the tenant entitled to possession of the Ground Leasehold Estate
under the Ground Lease, (7) whether to the best of Mortgagor's knowledge there
has occurred any event which, with the giving of notice or the passage of time
or both would constitute a default under the Ground Lease, and, if there has
occurred any such event, setting forth the nature thereof in reasonable detail.
(e) Notwithstanding anything to the contrary contained herein, this
Mortgage shall not constitute an assignment of either Ground Lease within the
meaning of any provision thereof prohibiting its assignment and Beneficiary
shall have no liability or obligation thereunder by reason of its acceptance of
this Mortgage. Beneficiary shall be liable for the obligations of the tenant
arising under either Ground Lease for only that period of time during which
Beneficiary is in possession of the Ground Leasehold Estate under such Ground
Lease or has acquired, by foreclosure or otherwise, and is holding, all of the
right, title and interest of Mortgagor therein.
79
<PAGE>
IN WITNESS WHEREOF, this Mortgage has been duly executed by the
Mortgagor on the date first hereinabove written.
WITNESS: Mortgagor:
KILROY REALTY, L.P.
By:_________________________
Name:
By:_____________________________
_______________________________ Name:
WITNESS: Title:
By:__________________________
<PAGE>
EXHIBIT A
(LAND PARCELS)
A-1
<PAGE>
EXHIBIT B
(PERMITTED EXCEPTIONS)
B-1
<PAGE>
SCHEDULE 1
----------
AGREEMENTS
Schedule 1-i
<PAGE>
EXHIBIT 10.47
ASSIGNMENT OF LEASES,
RENTS AND SECURITY DEPOSITS
from
KILROY REALTY CORPORATION,
as Assignor
to
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS LEAD AGENT,
as Assignee
Dated as of January __, 1997
________________________________________________________
After recording, please return to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
ATTN: Martha Feltenstein, Esq.
Prepared and drafted by:
Martha Feltenstein, Esq., attorney at law
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
<PAGE>
ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS
THIS ASSIGNMENT OF LEASES, RENTS AND SECURITY DEPOSITS (this
"Assignment"), dated as of this ___ day of January, 1997, between KILROY REALTY,
- -----------
L.P., a Delaware limited partnership ("Assignor") and MORGAN GUARANTY TRUST
--------
COMPANY OF NEW YORK, as Lead Agent ("Assignee").
--------
WHEREAS, the Banks have provided a revolving line of credit loan (the
"Loan") to Assignor in the aggregate principal amount of $100,000,000 evidenced
----
by promissory notes dated as of the date hereof and those promissory notes to be
executed subsequent to the date hereof (collectively, the "Note") in accordance
----
with the Revolving Credit Agreement, dated as of the date hereof, among
Assignor, Assignee, and the banks listed therein (as the same may hereafter be
modified, amended, restated or supplemented, the "Credit Agreement");
----------------
WHEREAS, as a condition to funding the Loan, Assignee has required
that Assignor enter into this Agreement for the benefit of Assignee.
NOW, THEREFORE, Assignor, in consideration of TEN DOLLARS ($10.00),
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, does hereby assign, transfer and set over unto Assignee,
subject to the terms hereof, all of the right, title and interest of Assignor in
and to all of those certain leases now or hereafter affecting all or a portion
of the real property more particularly described on Exhibit A hereto (the "Real
--------- ----
Property"), together with all rents, income and profits (collectively, "Rents")
- -------- -----
arising from said lease(s), all modifications, renewals and extensions thereof
and any assignable guarantees of the lessee's obligations under said lease(s)
(each of said lease(s) and all such guarantees, modifications, renewals and
extensions relating thereto being individually referred to as a "Lease" and
-----
collectively referred to as the "Leases"); and, further, together with all Rents
------
generated with respect to the Real Property and from all future Leases relating
to portions of the Real Property.
2
<PAGE>
THIS ASSIGNMENT is an absolute, present and irrevocable assignment and
is made for the purpose of securing:
A. The payment of all sums and indebtedness now or hereafter due and
payable under the Note, which Note is secured by an Indenture of Mortgage, Deed
of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents, dated as of even date herewith, from Assignor to Assignee
relating to the Real Property (as such may hereafter be extended, modified,
supplemented or amended, the "Mortgage").
--------
B. Payment of all sums with interest thereon becoming due and
payable to Assignee under this Assignment, the Note, the Mortgage, or the other
Loan Documents to which Assignor is a party.
C. The performance and discharge of each and every obligation,
covenant, representation, warranty and agreement of Assignor under this
Assignment, the Note, the Mortgage and any other Loan Document to which Assignor
is a Party.
ASSIGNOR hereby covenants and warrants to Assignee that Assignor has
not executed any prior unreleased assignment of the Leases or the Rents, nor has
Assignor performed any act or executed any other instrument which might prevent
Assignee from operating under any of the terms and conditions of this Assignment
or which would limit Assignee in such operation; and Assignor further covenants
and warrants to Assignee that Assignor has not executed or granted any
modification whatsoever of any Lease which might have a Material Adverse
Effect, and that the Leases are in full force and effect and the Assignor has
neither given to nor received from any tenant any written notice of default
under any Lease which might have a Material Adverse Effect and to the Assignor's
knowledge, no events or circumstances exist which with or without the giving of
notice, the passage of time or both may constitute a default under any of the
Leases which in the aggregate might have a Material Adverse Effect.
ASSIGNOR further covenants with the Assignee (l) to observe and
perform all the obligations imposed upon the lessor under the Leases and not to
do or permit
3
<PAGE>
to be done anything to impair the security thereof; (2) not to collect any of
the Rents (exclusive of security deposits) more than thirty (30) days in advance
of the time when the same shall become due (except to the extent expressly
provided otherwise in any Lease), not to execute any other assignment of
lessor's interest in the Leases or assignment of rents arising or accruing from
the Leases or otherwise with respect to the Real Property; none of the
foregoing shall be done or suffered to be done without in each instance
obtaining the prior written consent of Assignee (except to the extent such
consent is not required pursuant to the terms of the Credit Agreement and the
Mortgage), and any of such acts done without the prior written consent of
Assignee shall be null and void; (3) to assign and transfer to Assignee any and
all subsequent Leases demising all or any part of the Real Property; and (4) to
execute and deliver, at the request of Assignee, all such further assurances and
assignments with respect to the Real Property as Assignee shall from time to
time reasonably request to implement the terms of this Assignment; provided,
--------
however, that no such further assurances and assignments shall increase
- -------
Assignee's obligations under this Assignment.
THIS ASSIGNMENT is made on the following terms, covenants and
conditions:
1. All capitalized terms not otherwise defined herein shall have
the meanings set forth in the Credit Agreement or the Mortgage, as applicable.
2. Prior to the occurrence and continuance of an Event of Default,
Assignor shall have the right to collect, in accordance with the terms hereof,
all Rents and to retain, use and enjoy the same.
3. At any time after the occurrence and during the continuance of an
Event of Default, Assignee, without in any way waiving such Event of Default, at
its option, upon notice and without regard to the adequacy of the security for
the said principal sum, interest and indebtedness secured hereby, by the
Mortgage and the other Loan Documents, either in person or by agent, upon
bringing any action or proceeding, or by a receiver appointed by a court, may
take possession of the Real Property and have, hold, manage, lease, use and
operate the same on such terms and for such period of time as
4
<PAGE>
Assignee may deem proper. Assignee, either with or without taking possession of
said Real Property in its own name, may demand, sue for or otherwise collect and
receive all Rents, including any Rents past due and unpaid, and to apply such
Rents to the payment of: (a) all expenses of managing the Trust Estate,
including, without limitation, the reasonable salaries, fees and wages of any
managing agent and such other employees as Assignee may reasonably deem
necessary and all reasonable expenses of operating and maintaining the Trust
Estate, including, without limitation, all taxes, charges, claims, assessments,
water rents, sewer rents and any other liens, and premiums for all insurance
which are due and payable and the reasonable cost of all alterations,
renovations, repairs or replacements, and all reasonable expenses incident to
taking and retaining possession of the Trust Estate, including the maintenance
of the Trust Estate in accordance with all Environmental Laws, although nothing
in this Assignment shall be construed so as to impose such an obligation upon
Assignee; and (b) the principal sum, interest and indebtedness secured hereby
and by the Mortgage and the other Loan Documents, together with all reasonable
costs and reasonable attorneys' fees actually incurred, in such order of
priority as Assignee may elect in its sole discretion. The exercise by Assignee
of the option granted it in this Paragraph 3 and the collection of the Rents and
the application thereof as herein provided shall not be considered a waiver of
any Event of Default under the Note, the Mortgage, the other Loan Documents or
under the Leases or this Assignment. Assignor agrees that the exercise by
Assignee of one or more of its rights and remedies hereunder shall in no way be
deemed or construed to make Assignee a mortgagee in possession unless and until
such time as Assignee takes actual possession of the Real Property.
4. Assignee shall not be liable for any loss sustained by Assignor
resulting from Assignee's failure to let the Real Property or any portion
thereof or any other act or omission of Assignee either in collecting the Rents
or, if Assignee shall have taken possession of the Real Property, in managing
such Real Property after any such Event of Default, except to the extent such
loss is caused by the gross negligence or willful misconduct of Assignee.
Assignee shall not be obligated to perform or discharge, nor does Assignee
hereby undertake to perform or discharge, any obligation, duty or liability
5
<PAGE>
under any Lease or under or by reason of this Assignment, and Assignor shall,
and does hereby agree to, indemnify Assignee for, and to hold Assignee harmless
from, prior to the time that Assignee becomes a mortgagee in possession or fee
owner of any Property or otherwise takes possession of any Property following an
Event of Default, any and all liability, loss or damage which may or might be
incurred under said Leases or under or by reason of this Assignment and the
exercise of Assignee's remedies hereunder and under the other Loan Documents and
from any and all claims and demands whatsoever which may be asserted against
Assignee by reason of any alleged obligations or undertakings on its part to
perform or discharge any of the terms, covenants or agreements contained in said
Leases, except to the extent caused by Assignee's gross negligence or willful
misconduct. Should Assignee incur any such liability under said Leases or under
or by reason of this Assignment or in defense of any such claims or demands, the
amount thereof, including reasonable costs and expenses and reasonable
attorneys' fees actually incurred, shall be secured hereby, and Assignor shall
reimburse Assignee therefor immediately upon demand, and upon the failure of
Assignor so to do Assignee may, at its option, exercise Assignee's remedies
under the Mortgage as same relates to the Trust Estate. It is further
understood that unless and until Assignee shall become a mortgagee in possession
or the fee owner of the Real Property or otherwise takes possession or control
of any Property following an Event of Default, this Assignment shall not
operate to place responsibility for the control, care, management or repair of
said Real Property upon Assignee, nor for the carrying out of any of the terms
and conditions of any Lease; nor shall it operate to make Assignee responsible
or liable for any waste committed on the Real Property by the tenants or any
other parties, or for any dangerous or defective condition of the premises, or
for any negligence in the management, upkeep, repair or control of said Real
Property resulting in loss or injury or death to any tenant, licensee, employee
or stranger, except to the extent caused by Assignee's gross negligence or
willful misconduct.
5. Upon payment in full of the principal sum, interest and
indebtedness secured hereby and by the Mortgage and the other Loan Documents, or
if the Mortgage is otherwise released pursuant to Section 36 of the Mort-
6
<PAGE>
gage or Section 2.9(b) of the Credit Agreement, this Assignment shall become
and be void and of no effect, but the affidavit, certificate, letter or
statement of any officer, agent or attorney of Assignee showing any part of said
principal, interest or indebtedness to remain unpaid shall be and constitute
conclusive evidence of the validity, effectiveness and continuing force of this
Assignment, and any person may, and is hereby authorized to, rely thereon.
Assignor hereby authorizes and directs the lessees named in the Leases or any
other or future lessee or occupant of the Real Property, upon receipt from
Assignee of written notice to the effect that Assignee is then the holder of
the Mortgage and that an Event of Default exists thereunder or under any other
Loan Document, to pay over to Assignee all Rents, and to continue so to do until
otherwise notified by Assignee.
6. Assignee may take or release other security for the payment of
said principal sum, interest and indebtedness, may release any party primarily
or secondarily liable therefor and may apply any other security held by it to
the satisfaction of such principal sum, interest or indebtedness, without
prejudice to any of its rights under this Assignment.
7. Assignor agrees that it will, after an Event of Default and the
acceleration of indebtedness evidenced by the Note, at the request therefor by
Assignee, deliver to Assignee certified copies of each and every Lease then
affecting all or any part of the Real Property, together with assignments
thereof. Such assignments shall be on forms approved by Assignee or its
designee in its reasonable discretion, and Assignor agrees to pay all costs
reasonably incurred in connection with the examination of said Leases and the
preparation, execution and recording of such assignments or any other related
documents, including, without limitation, reasonable fees of Assignee's local
counsel.
8. The term "Lease" as used herein shall include any lease
-----
affecting the Real Property executed after the date hereof and during the term
of this Assignment.
9. Wherever used herein, the singular (including, without
limitation, the term "Lease") shall include
-----
7
<PAGE>
the plural, and the use of any gender shall apply to all genders.
10. Nothing contained in this Assignment and no act done or omitted
by Assignee pursuant to the powers and rights granted it hereunder shall be
deemed to be a waiver by Assignee of any of Assignee's rights and remedies
under the Note, the Mortgage or any other Loan Document. This Assignment is
made and accepted without prejudice to any of such rights and remedies possessed
by Assignee to collect the principal sum, interest and indebtedness secured
hereby and to enforce any other security therefor held by it, and said rights
and remedies may be exercised by Assignee either prior to, simultaneously
with, or subsequent to any action taken by it hereunder.
11. All notices, consents, approvals and requests required or
permitted hereunder shall be given in accordance with the terms of Section 26 of
the Mortgage.
12. No consent by Assignor shall be required for any assignment or
reassignment of the rights of Assignee under this Assignment to any purchaser of
the Loan or any interest in or portion of the Loan.
13. Enforcement of this Assignment against any Property shall be
governed by the laws of the State in which such Property is located. Whenever
possible, each provision of this Assignment shall be interpreted in such a
manner as to be effective and valid under applicable law, but if any provision
of this Assignment shall be prohibited by, or invalid under, applicable law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remaining provisions of this Assignment.
14. This Assignment is delivered pursuant to, and upon and subject
to, the terms of the Credit Agreement. In the event that any provisions of
this Assignment and the Credit Agreement conflict, the provisions of the Credit
Agreement shall control. In the event that any provisions of this Assignment
and the Mortgage conflict, the provisions of the Mortgage shall control.
15. Assignor hereby waives and shall waive trial by jury, to the
extent permitted by law, in any
8
<PAGE>
action or proceeding brought by, or counterclaim asserted by Assignee, which
action proceeding or counterclaim arises out of or is connected with this
Assignment, the Note or any other Loan Document.
16. This Assignment may be executed in any number of counterparts.
9
<PAGE>
IN WITNESS WHEREOF, Assignor has duly executed this Assignment on the
date first hereinabove written.
WITNESS: ASSIGNOR:
By:_______________________ KILROY REALTY, L.P.
Name:
By: Kilroy Realty Corp.
By:_______________________ By: ___________________________
Name: Name:
Title:
ASSIGNEE:
WITNESS: MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, AS LEAD AGENT
By:_______________________ By: __________________________________
Name: Name:
Title:
By:_______________________
Name:
<PAGE>
ACKNOWLEDGEMENTS
[INSERT ACKNOWLEDGEMENT FOR APPLICABLE JURISDICTION]
<PAGE>
Exhibit A
LEGAL DESCRIPTIONS
A-1
<PAGE>
EXHIBIT 10.48
ENVIRONMENTAL INDEMNITY AGREEMENT
---------------------------------
This Environmental Indemnity Agreement (this "Indemnity Agreement") is
-------------------
entered into as of ________ __, 199_, by [INDEMNITOR] ("Indemnitor") in favor of
----------
each Bank (as defined in the Credit Agreement (as hereinafter defined)) (each, a
"Lender" and collectively, the "Lenders") and MORGAN GUARANTY TRUST COMPANY OF
------ -------
NEW YORK, as lead agent (together with its successors in such capacity, the
"Agent") for Lenders pursuant to that certain Revolving Credit Agreement (the
- ------
"Credit Agreement"), dated as of even date herewith, among the Borrower (as
----------------
hereinafter defined), Lenders and the Agent, with reference to the following
facts:
A. [Kilroy Realty Corporation], a _______________ corporation (the
"Borrower") is the owner of the _____ (_) parcels of land (collectively, the
--------
"Land") as more particularly described in Exhibit A-1 through Exhibit A- and
- ----- ----------- -----------
the improvements located thereon (collectively, the "Property"); and
--------
B. Indemnitor is the sole beneficial owner of the Borrower.
C. Lenders have loaned or will loan to the Borrower the sum of up to
$75,000,000 (the "Loan"), payment of which is evidenced by certain notes of even
----
date herewith, from the Borrower to each Lender, all as more particularly
described in the Credit Agreement (individually and collectively, the "Note"),
----
which Note is secured by one or more Indenture(s) of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases
and Rents, of even date herewith (said Indenture(s) of Mortgage, Deed of Trust,
Deed to Secure Debt, Security Agreement, Financing Statement, Fixture Filing and
Assignment of Leases and Rents, whether one or more, and together with all
amendments, modifications, consolidations, increases, supplements and spreaders
thereof being herein collectively called the "Deed of Trust") encumbering the
-------------
Property (the Credit Agreement, the Deed of Trust, the Note, and any other
documents or instruments evidencing or securing the Loan, as amended or modified
from time to time, being herein sometimes called the "Loan Documents").
--------------
D. As a condition to making the Loan, Lenders require Indemnitor to
indemnify and hold harmless Lenders from any Environmental Claim, any
Requirements of Environ-
<PAGE>
mental Law, or the violation of any Environmental Approval (as these terms are
defined in Section 1 below) attributable to Material of Environmental Concern
(as defined in Section 1 below) and related to the Property. Lenders would not
make the Loan without this Indemnity Agreement and Indemnitor acknowledges and
understands that this Indemnity Agreement is a material inducement for Lenders'
agreement to make the Loan.
NOW, THEREFORE, Indemnitor agrees as follows:
1. Definitions. For purposes of this Indemnity Agreement, the
-----------
following terms shall have the following meanings:
(a) "Environmental Approval" shall have the meaning set forth in the
----------------------
Credit Agreement.
(b) "Environmental Claim" shall have the meaning set forth in the
-------------------
Credit Agreement.
(c) "Environmental Law" shall have the meaning set forth in the Credit
-----------------
Agreement.
(d) "Indemnitee" or "Indemnitees" means (individually and
---------- -----------
collectively), the Agent, Lenders, any purchaser or assignee of all or any
part of the Note, including, without limitation, any of each Lender's
participants in the Loan, and their respective affiliates, officers,
directors, shareholders, and employees and their respective successors and
assigns. Notwithstanding the foregoing, "Indemnitee(s)" does not include
any person or entity (other than Lenders, any purchaser or assignee of all
or any part of the Note, including, without limitation, any of Lenders'
participants in the Loan, or any affiliate of Lenders or such purchaser,
assignee or participant) who purchases or acquires all or any part of the
Property (i) by any foreclosure under the Deed of Trust, whether judicial
or non-judicial, or pursuant to the exercise of any power of sale
thereunder, or by deed in lieu of foreclosure or (ii) from Lenders, from
any purchaser or assignee of all or any part of the Note, including,
without limitation, any of Lenders' participants in the Loan, or from any
affiliate of Lenders or such purchaser, assignee or participant.
(e) The term "Material of Environmental Concern" shall have the
---------------------------------
meaning set forth in the Credit Agreement.
2
<PAGE>
(f) "Requirements" shall have the meaning set forth in the Credit
------------
Agreement.
(g) Terms not otherwise defined in this Indemnity Agreement shall
have the meanings ascribed to them in the Credit Agreement and the Deed of
Trust.
2. Indemnification. (a) Indemnitor shall protect, defend,
---------------
indemnify, and hold harmless Indemnitees from and against all liabilities,
losses, costs, damages, expenses or claims, including, but not limited to,
remedial, removal, response, abatement, cleanup, legal, investigative, and
monitoring costs and other related costs, expenses, losses, damages (excluding
any and all consequential damages, including, without limitation, diminution in
value), penalties, fines, liabilities, obligations, defenses, judgments, suits,
proceedings, and disbursements (including, without limitation, reasonable
attorneys' and experts' fees and disbursements) of any kind or of any nature
whatsoever (collectively "Costs and Liabilities"), which may at any time be
---------------------
imposed upon Indemnitee or incurred by any Indemnitee and which arise (directly
or indirectly): (i) from Requirements of Environmental Law applicable to the
Property, or any portion thereof; (ii) with respect to Environmental Claims
related to the Property; (iii) from the failure or alleged failure of the
Borrower, or the Indemnitor or any tenant or any other party directly or
indirectly connected with the Property, to obtain, maintain, or comply with any
Environmental Approval; and/or (iv) otherwise from the presence (occurring or
commencing prior to Lender's acquisition of the Property, or any portion
thereof), release, alleged presence, or alleged release of Material of
Environmental Concern in violation of Requirements of Environmental Law on or
under the Property, or the soil, groundwater or soil vapor on or under the
Property, or the migration, spreading, alleged migration, or alleged spreading
of Material of Environmental Concern from the Property in violation of
Requirements of Environmental Law, whether or not known to Indemnitor, whether
foreseeable or unforeseeable, regardless of the source of such presence or
release or, except as expressly provided in Section 2(c) hereof, regardless of
when such release or presence occurred. Each Indemnitee shall give prompt
written notice to the Agent of any matter for which such Indemnitee shall seek
indemnification hereunder, and the Agent shall, after receiving actual knowledge
of any matter for which Indemnitees may seek indemnification hereunder, give
prompt written notice thereof to Indemnitor (although the failure of the Agent
and/or any Indemnitee to provide such notice shall have no effect whatsoever on
the obligations of the Indemnitor hereunder unless such failure adversely
affects Indemnitor's obligations under this Agreement).
3
<PAGE>
(b) In the event that any investigation, site monitoring,
containment, cleanup, removal, restoration or other remedial work of any kind or
nature (the "Remedial Work") is required to be performed or undertaken by the
-------------
Borrower or Indemnitor pursuant to any applicable local, state or federal law or
regulation, any judicial order, or by any governmental entity because of, or in
connection with, the current or future presence (occurring or commencing prior
to Lender's acquisition of the Property, or any portion thereof), alleged
presence, release or alleged release of a Material of Environmental Concern in
or into the air, soil, groundwater, surface water or soil vapor at, on, about,
under or within the Property (or any portion thereof), Indemnitor shall within
thirty (30) days after written demand for performance thereof by Indemnitees (or
such shorter period of time as may be required under any applicable law,
regulation, order or agreement), (a) commence to perform, or cause to be
commenced, and thereafter diligently prosecuted to completion, all such Remedial
Work or (b) contest by proper proceedings or procedures the requirement to
perform the Remedial Work; provided, that such contest shall be prosecuted
--------
diligently and in good faith and such contest shall not expose any Indemnitee to
any civil or criminal penalty or liability. Upon demand of the Agent or any
other Indemnitee, Indemnitor shall furnish Indemnitees a surety bond or other
adequate security reasonably satisfactory to Indemnitees sufficient both to
indemnify Indemnitees against liability and hold the Property free from adverse
effect in the event the contest is not successful. All Remedial Work shall be
performed by one or more contractors, approved in advance in writing by the
Agent (which approval shall not be unreasonably withheld or delayed), and under
the supervision of a consulting engineer approved in advance in writing by the
Agent (which approval shall not be unreasonably withheld or delayed). All costs
and expenses of such Remedial Work shall be paid by Indemnitor including,
without limitation, the charges of such contractor(s) and/or the consulting
engineer, and the reasonable attorneys' fees and costs incurred by Indemnitees
in connection with the monitoring or review of such contractors and consulting
engineer. In the event Indemnitor shall fail to commence, or cause to be
commenced, such Remedial Work within such thirty (30) day (or such shorter)
period, or shall fail thereafter to prosecute such Remedial Work to completion
in a diligent manner after ten (10) days' written notice to Indemnitor (or such
shorter period as may be appropriate in the case of emergency), Indemnitees may,
but shall not be required to, cause such Remedial Work to be performed and all
reasonable costs and expenses thereof, or incurred in connection therewith,
shall become an Environmental Claim hereunder.
4
<PAGE>
(c) Anything to the contrary set forth in this Indemnity Agreement,
in the Deed of Trust, or elsewhere notwithstanding, Indemnitor shall not be
liable under this Indemnity Agreement to the extent of that portion of any Costs
and Liabilities which Indemnitor establishes is attributable to the gross
negligence or willful misconduct of any Indemnitee (or its agents or employees)
not affiliated with Indemnitor at the Property which causes (i) the introduction
or initial release of a Material of Environmental Concern at the Property, or
(ii) material aggravation of a then existing Material of Environmental Concern
condition or occurrence at the Property. In addition, if the Agent, any
Lender(s) or any affiliate(s) of either or any other person or entity acquire
ownership of the Property through a foreclosure, or the exercise of a power of
sale under the Deed of Trust or deed in lieu of foreclosure, Indemnitor shall
not be liable hereunder for that portion of any Costs and Liabilities which
Indemnitor establishes is attributable to (y) the introduction or initial
release of a Material of Environmental Concern at the Property by any party,
other than the Borrower, any other Indemnitor or an affiliate of Indemnitor, at
any time after the Agent, Lender(s), such affiliate(s) or such other person or
entity have acquired title to the Property or (z) material aggravation of a then
existing Material of Environmental Concern condition or occurrence at the
Property by any party, other than the Borrower, Indemnitor or an affiliate of
Indemnitor, at any time after the Agent, Lender(s), such affiliate(s) or such
other person or entity have acquired title to the Property.
Notwithstanding the foregoing, the liability of Indemnitor hereunder
shall otherwise remain in full force and effect after the Agent, Lender(s) or
such affiliate(s) so acquire title to the Property, including without limitation
with respect to any Material of Environmental Concern which is discovered at the
Property after the date the Agent, Lender(s) or such affiliate(s) acquire title
but which was actually introduced to the Property prior to the date of such
acquisition, and with respect to any continuing migration or release of any
Material of Environmental Concern introduced at the Property prior to the date
that the Agent, Lender(s) or such affiliate(s) acquire title.
(d) This Indemnity Agreement is solely intended to protect Lenders
from the matters set forth in the preceding paragraphs 2(a) and 2(b) and is not
intended to secure payment of the Note or amounts due to Lenders under the Deed
of Trust. This Indemnity Agreement is not intended to be, nor shall it be,
secured by the Deed of Trust or any of the other Loan Documents. The
obligations of Indemnitor
5
<PAGE>
under this Indemnity Agreement shall be as set forth herein notwithstanding any
similar provisions in the Deed of Trust.
(e) Nothing contained in this Indemnity Agreement shall prevent or in
any way diminish or interfere with any rights and remedies, including without
limitation, the right to contribution, which Lenders may have against the
Borrower pursuant to the terms of the Deed of Trust Indemnitor or any other
party (or which Indemnitor or the Borrower may have against Lenders or any other
party) under the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (codified at Title 42 U.S.C. (S)(S) 9601 et seq.), as it
may be amended from time to time, or any other applicable Federal or state laws.
3. Notice of Actions. (a) Indemnitor shall give immediate written
-----------------
notice to the Agent of each of the following (provided that Indemnitor has
knowledge thereof): (i) any proceeding, written (or material non-written)
inquiry, notice, or other communication by or from any governmental authority,
including, without limitation, the Environmental Protection Agency and state and
local equivalents, regarding the presence or existence of any Material of
Environmental Concern on, under, or about the Property or any migration thereof
from or to the Property or any actual or alleged violation of the Requirements
of Environmental Law; (ii) all Environmental Claims and any other written claims
made or threatened against the Borrower or Indemnitor or the Property relating
to any loss or injury resulting from or pertaining to any Material of
Environmental Concern or any alleged breach or violation of any Requirements of
Environmental Law; (iii) the Borrower's or Indemnitor's discovery of any
occurrence or condition on any real property adjoining or in the vicinity of the
Property that could reasonably cause the Property or any part thereof to be
subject to any material restrictions on ownership, occupancy, transferability,
or use, or subject the owner or any person having any interest in the Property
to any material liability, penalty, or disability under any Requirement of
Environmental Law; and (iv) the Borrower's or Indemnitor's receipt of any
written notice or discovery of any information regarding any actual or alleged
use, manufacture, production, storage, spillage, seepage, release, discharge,
disposal or any other presence or existence of any Material of Environmental
Concern on, under, or about the Property, in violation of any Requirements of
Environmental Law pertaining to Indemnitor or the Property.
(b) Immediately upon the Borrower's or Indemnitor's receipt of the
same, Indemnitor shall deliver to the Agent copies of any and all Environmental
Claims, and
6
<PAGE>
any and all orders, notices, permits, applications, reports, and other
communications, documents, and instruments pertaining to the actual or alleged
presence or existence of any Material of Environmental Concern on, under, or
about the Property in violation of any Requirements of Environmental Law.
4. Procedures Relating to Indemnification. (a) Indemnitor shall at
--------------------------------------
its own cost, expense, and risk: (i) defend all suits, actions, or other legal
or administrative proceedings that may be brought or instituted against an
Indemnitee or Indemnitees, as the case may be, on account of any matter or
matters arising under or within Section 2 above; (ii) pay or satisfy any
judgment or decree that may be recorded against an Indemnitee or Indemnitees, as
the case may be, in any such suit, action, or other legal or administrative
proceedings; and (iii) reimburse Indemnitee or Indemnitees, as the case may be,
for the cost of, or for any payment made by any of them, with respect to any
reasonable expenses incurred in connection with the Material of Environmental
Concern undertaken as a result of any demands, causes of actions, lawsuits,
proceedings, or any other claims threatened, made, or brought against any
Indemnitee or Indemnitees, as the case may be, arising out of the obligations of
Indemnitor under this Indemnity Agreement or the Borrower under the Deed of
Trust. Indemnitor shall have no liability under this paragraph (a) unless the
Agent shall, after receiving actual knowledge of any suit, action or proceeding
for which Indemnitees may seek indemnification under this paragraph (a), have
given reasonable written notice thereof to Indemnitor.
(b) Counsel selected by Indemnitor pursuant to Section 4(a) above
shall be subject to the reasonable approval of the Indemnitee or Indemnitees, as
the case may be, asserting a claim hereunder; provided, however, that Indemnitee
-------- -------
or Indemnitees, as the case may be, may elect to defend any such claim, lawsuit,
action, legal, or administrative proceeding at the cost and expense of
Indemnitor, if, in the reasonable judgment of the Indemnitee or Indemnitees, as
the case may be, (i) the defense is not proceeding or being conducted in a
satisfactory manner, or (ii) there is a conflict of interest between any of the
parties to such lawsuit, action, legal, or administrative proceeding, and in
either case Indemnitor have not provided substitute counsel reasonably
satisfactory to Indemnitees promptly after written request therefor by
Indemnitees.
(c) Notwithstanding anything in this Indemnity Agreement to the
contrary, Indemnitor shall not, nor shall Indemnitor allow the Borrower without
the prior written consent of the Agent (which consent shall not be unreasonably
7
<PAGE>
withheld or delayed)to , (i) settle or compromise any action, suit, proceeding,
or claim relating, directly or indirectly, to any Material of Environmental
Concern or any Environmental Claim or consent to the entry of any judgment
therein for which the Agent or Lenders might be wholly or partially liable that
does not include as an unconditional term thereof the delivery by the claimant
or plaintiff to the Agent and Lenders of a written release of the Agent and
Lenders (in form, scope and substance satisfactory to the Agent and Lenders in
their reasonable judgment) from all liability in respect of such action, suit,
or proceeding; or (ii) settle or compromise any action, suit, proceeding, or
claim relating, directly or indirectly, to any Material of Environmental Concern
or any Environmental Claim in any manner that may materially and adversely
affect the Agent or Lenders as determined by any Lender and/or the Agent in
their reasonable judgment.
(d) Without limiting the rights of Indemnitor pursuant to Section
4(b) above, the Agent and Lenders shall have the right (upon written notice to
Indemnitor) to join and participate in, as a party if they so elect, any legal
proceedings or actions in connection with the Property involving any
Environmental Claim, any Material of Environmental Concern or any Requirements
of Environmental Law. In any circumstance in which this indemnity applies, the
Agent and Lenders may employ their own legal counsel and consultants to
prosecute or defend any claim, action, or cause of action. Indemnitor shall have
the right to compromise or settle the same in good faith without the necessity
of showing actual liability therefor, with the consent of Indemnitees (which
consent shall not be unreasonably withheld or delayed). Indemnitor shall
reimburse the Agent and Lenders upon demand for all reasonable costs and
expenses incurred by the Agent and Lenders, including the amount of all costs of
settlements entered into in accordance with the preceding sentence, and the fees
and other costs and expenses of its attorneys and consultants including without
limitation those incurred in connection with monitoring and participating in any
action or proceeding, including costs incurred pursuant to Section 4(b) above.
5. Binding Effect. This Indemnity Agreement shall be binding upon
--------------
and inure to the benefit of Indemnitor and Indemnitees and their respective
successors and assigns.
6. Limitation of Liability of Indemnitees. Notwithstanding any
--------------------------------------
ownership by any Indemnitee at any time of all or any portion of the Property,
in no event shall any Indemnitee (including any successor or assign as holder of
8
<PAGE>
the Note) be bound by any obligations or liabilities of any of the Indemnitor
under this Indemnity Agreement.
7. Liability of Indemnitor. The liability of Indemnitor under this
-----------------------
Indemnity Agreement shall in no way be limited or impaired by any amendment or
modification of the provisions of the Loan Documents to or with the Agent or
Lenders by Indemnitor or any person who succeeds the Borrower as owner of the
Property. In addition, the liability of Indemnitor under this Indemnity
Agreement shall in no way be limited or impaired by (but subject in all events
to the terms set forth in Section 16 hereof) (i) any extensions of time for
performance required by any of the Loan Documents; (ii) any sale, assignment, or
foreclosure of the Note or Deed of Trust or any sale or transfer of all or part
of the Property or any interest(s) therein; (iii) any exculpatory provision in
any of the Loan Documents limiting Lenders' recourse to property encumbered by
the Deed of Trust or to any other security, or limiting Lenders' rights to a
deficiency or other judgment against Indemnitor or any other obligor or
guarantor thereunder (including, without limitation, Section 9.13(b) of the
Credit Agreement and the corresponding exculpation provisions set forth in the
Note, the Deed of Trust and this Indemnity Agreement); (iv) the accuracy or
inaccuracy of the representations and warranties made by the Borrower under any
of the Loan Documents; (v) the release of the Borrower or any other person or
entity from performance or observance of any of the agreements, covenants,
terms, or conditions contained in any of the Loan Documents by operation of law,
Lenders' voluntary act, or otherwise; (vi) the release or substitution in whole
or in part of any security for the Note; or (vii) Lenders' failure to record any
Deed of Trust or file any UCC financing statements (or Lenders' improper
recording or filing of any thereof) or otherwise to perfect, protect, secure, or
insure any security interest or lien given as security for the Note; and, in any
such case, whether with or without notice to Indemnitor and with or without
consideration.
8. Waiver. Indemnitor waives any right or claim of right to cause a
------
marshaling of the assets of Indemnitor or to cause Lenders and/or the Agent to
proceed against any of the security for the Loan before proceeding under this
Indemnity Agreement against Indemnitor or to proceed against Indemnitor in any
particular order; Indemnitor agrees that any payments required to be made
hereunder shall become due on demand; Indemnitor expressly waives and
relinquishes all rights and remedies accorded by applicable law to indemnitors
or guarantors, except any rights of subrogation that Indemnitor may have;
provided, that the indemnity provided for hereunder shall neither be contingent
- --------
upon the
9
<PAGE>
existence of any such rights of subrogation nor subject to any claims or
defenses whatsoever that may be asserted in connection with the enforcement or
attempted enforcement of such subrogation rights, including, without limitation,
any claim that such subrogation rights were abrogated by any acts of Lenders
and/or the Agent. Indemnitor hereby agrees to postpone the exercise of any and
all rights of subrogation to the rights of Lenders and/or the Agent against the
Borrower hereunder and any rights of subrogation to any collateral securing the
Loan until the Loan shall have been paid in full.
9. Delay. No delay on the Lenders' and/or the Agent's part in
-----
exercising any right, power, or privilege under any of the Loan Documents shall
operate as a waiver of any such privilege, power, or right.
10. Notices. (a) All notices, consents, approvals, elections and
-------
other communications (collectively "Notices") hereunder shall be in writing
-------
(whether or not the other provisions of this Indemnity Agreement expressly so
provide) and shall be deemed to have been duly given if delivered by nationally
recognized overnight courier service or certified mail, with return receipt
requested, postage prepaid, to such parties at the address set forth below (or
at such other addresses as shall be given in writing by any party to the others
pursuant to this Section) and shall be deemed received by the party to whom it
is addressed on the first Domestic Business Day after delivery by the sender to
a nationally recognized overnight courier service or on the third Domestic
Business Day after mailing if sent by certified mail:
To Indemnitor:
Kilroy Realty Corporation
Attention:
with a copy to:
Latham & Watkins
633 West 5th Street
Suite 4000
Los Angeles, CA 90071
Attention: Martha B. Jordan
10
<PAGE>
To the Lenders and/or the Agent:
Morgan Note Trust Company
of New York
60 Wall Street
New York, New York 10260
Attention: Timothy O'Donovan
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022-3897
Attention: Martha Feltenstein, Esq.
(b) In the event of any strike or occurrence of another similar event
which interrupts mail service, notices may be served personally upon an
individual, trustee, partner, or an officer or director of a corporation which
is or is part of the party being served hereunder (all at the address set forth
in this Section).
11. Attorneys' Fees. In the event that Indemnitor or any Indemnitee
---------------
brings any suit or other proceeding with respect to the subject matter or
enforcement of this Indemnity Agreement, the prevailing party (as determined by
the court, agency or other authority before which such suit or proceeding is
commenced) shall, in addition to such other relief as may be awarded, be
entitled to recover attorneys' fees, expenses and costs of investigation as
actually incurred (including, without limitation, attorneys' fees, expenses and
costs of investigation incurred in appellate proceedings, costs incurred in
establishing the right to indemnification, or in any action or participation in,
or in connection with, any case or proceeding under Chapters 7, 11 or 13 of the
Bankruptcy Code, 11 United States Code Sections 101 et seq., or any successor
-- ---
statutes).
12. Successive Actions. A separate right of action hereunder shall
------------------
arise each time the Agent or the Lenders acquire knowledge of any matter
described in Sections 2 or 3 hereof. Separate and successive actions may be
brought hereunder to enforce any of the provisions hereof at any time and from
time to time. No action hereunder shall preclude any subsequent action, and
Indemnitor hereby waives and covenants not to assert any defense in the nature
of splitting of causes of action or merger of judgments.
13. Partial Invalidity. If any provision of this Indemnity Agreement
------------------
shall be determined to be unenforceable in any circumstances by a court of
competent jurisdiction,
11
<PAGE>
then the balance of this Indemnity Agreement nevertheless shall be enforceable,
and the subject provision shall be enforceable in all other circumstances.
14. Interest on Unpaid Amounts. All amounts required to be paid or
--------------------------
reimbursed to any Indemnitee hereunder shall bear interest from the date of
expenditure by such Indemnitee or the date of written demand to any Indemnitor
hereunder, whichever is earlier, until paid to Indemnitee(s). The annual
interest rate shall be the lesser of (a) a rate equal to the Default Rate (as
defined in the Deed of Trust) or (b) the maximum rate then permitted for the
parties to contract for under applicable law.
15. Governing Law. This Indemnity Agreement and the rights and
-------------
obligations of the parties hereunder shall in all respects be governed by, and
construed and enforced in accordance with, the laws of the State of New York
(without giving effect to New York's principles of conflicts of law).
Indemnitor hereby irrevocably submits to the non-exclusive jurisdiction of any
New York state or federal court sitting in the City of New York over any suit,
action or proceeding arising out of or relating to this Indemnity Agreement, and
Indemnitor hereby agrees and consents that, in addition to any other methods of
service of process in any such suit, action or proceeding in any New York state
or federal court sitting in the City of New York, service of process may be made
by certified or registered mail, return receipt requested, directed to
Indemnitor at its address indicated in Section 10 hereof, and service so made
shall be complete five (5) days after the same shall have been so mailed.
16. Termination of Indemnity. Notwithstanding anything to the
------------------------
contrary contained elsewhere in this Indemnity Agreement, subject to the
following sentence, the indemnity provided for herein and this Indemnity
Agreement shall terminate and be of no further force and effect upon the earlier
to occur of (a) repayment in full of all principal, interest and any other sums
due under, or evidenced by, the Credit Agreement, the Deed of Trust and the
other Loan Documents and (b) two (2) years after the date on which the Lenders
or any affiliate thereof (or any other Person (other than the Borrower) acting
through or on behalf of the Lenders, there respective successors and assigns,
and any affiliates thereof) acquires possession of or title to, the Property.
Notwithstanding the foregoing, any claim hereunder may be made at any time
before the date described in the preceding sentence, and once such claim has
been made prior to such date, the obligations of Indemnitor under this Indemnity
Agreement shall continue to apply to such claim, to the extent permitted by
applicable law.
12
<PAGE>
IN WITNESS WHEREOF, Indemnitor has executed this Indemnity Agreement
as of the date first set forth above.
[INDEMNITOR]
By: _______________________
Name:
Title:
13
<PAGE>
ACKNOWLEDGMENT FOR INDEMNITOR
-----------------------------
STATE OF )
) ss.:
COUNTY OF )
On ________ __, 199_, before me personally came ______________, to me
known to be the person who executed the foregoing instrument.
[Seal]
_____________________________
Notary Public
14
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
------------------ ----------------------
<S> <C>
Kilroy Realty, L.P................................. Delaware
Kilroy Realty Finance, Inc......................... Delaware
Kilroy Realty Finance Partnership, L.P............. Delaware
Kilroy Services, Inc............................... Maryland
</TABLE>
<PAGE>
EXHIBIT 23.3
REPORT AND CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Kilroy Realty
Corporation on Form S-11 of our reports on Kilroy Realty Corporation, dated
October 25, 1996, Kilroy Group ("Predecessor Affiliates"), dated December 20,
1996, and the Acquisition Properties dated December 20, 1996, appearing in
this Registration Statement, and to the references to us under the captions
"Selected Combined Financial Data" and "Experts."
Our audits of the financial statements referred to in our aforementioned
report also included the combined financial statement schedule of Kilroy Group
listed in Item 35. This combined financial statement schedule is the
responsibility of the management of Kilroy Group. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
January 27, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF ROBERT CHARLES LESSER & CO.
To Kilroy Realty Corporation:
As experts in real estate consulting and urban economics, we hereby consent
to the use of our Regional Economic Overview and Market Analysis dated January
2, 1997 and to all references to our firm included in or made a part of this
Registration Statement.
/s/ Robert Charles Lesser & Co.
-------------------------------------
Robert Charles Lesser & Co.
Los Angeles, California
January 27, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ William P. Dickey, Esq.
-------------------------------------
William P. Dickey, Esq.
January 27, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ Matthew J. Hart
-------------------------------------
Matthew J. Hart
January 27, 1997
<PAGE>
EXHIBIT 23.7
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ Dale F. Kinsella, Esq.
-------------------------------------
Dale F. Kinsella, Esq.
January 27, 1997
