<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12675
KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 95-4598246
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
2250 East Imperial Highway, Suite 1200, El Segundo, California 90245
(Address of principal executive offices)
(310) 563-5500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of May 12, 1999, 27,629,210 shares of common stock, par value $.01 per
share, were outstanding.
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<PAGE>
KILROY REALTY CORPORATION
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I--FINANCIAL INFORMATION
<C> <S> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and December
31, 1998 (Unaudited)............................................ 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 (Unaudited)............................. 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (Unaudited)............................. 5
Notes to the Consolidated Financial Statements (Unaudited)...... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 22
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS............................................... 25
Item 2. CHANGES IN SECURITIES........................................... 25
Item 3. DEFAULTS UPON SENIOR SECURITIES................................. 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 25
Item 5. OTHER INFORMATION............................................... 25
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 25
SIGNATURES...................................................... 26
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
ASSETS
------
<S> <C> <C>
INVESTMENT IN REAL ESTATE (Note 2):
Land and improvements................................ $ 258,062 $ 253,500
Buildings and improvements........................... 849,155 828,425
Undeveloped land and construction in progress, net... 176,011 112,359
---------- ----------
Total investment in real estate..................... 1,283,228 1,194,284
Accumulated depreciation and amortization............ (151,939) (145,437)
---------- ----------
Investment in real estate, net...................... 1,131,289 1,048,847
CASH AND CASH EQUIVALENTS.............................. 2,463 6,443
RESTRICTED CASH........................................ 7,457 6,896
TENANT RECEIVABLES, NET................................ 15,814 15,630
NOTES RECEIVABLE FROM RELATED PARTIES.................. 8,798
DEFERRED FINANCING AND LEASING COSTS, NET.............. 17,375 16,168
PREPAID EXPENSES AND OTHER ASSETS...................... 4,423 3,146
---------- ----------
TOTAL ASSETS........................................ $1,178,821 $1,105,928
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Mortgage debt (Note 3)............................... $ 227,836 $ 133,383
Unsecured line of credit (Note 3).................... 232,000 272,000
Accounts payable and accrued expenses................ 18,718 18,091
Accrued distributions (Note 8)....................... 13,567 12,895
Rents received in advance and tenant security
deposits............................................ 13,065 13,160
---------- ----------
Total liabilities................................... 505,186 449,529
---------- ----------
COMMITMENTS AND CONTINGENCIES..........................
MINORITY INTERESTS (Note 4):
8.075% Series A Cumulative Redeemable Preferred
unitholders......................................... 73,716 73,718
9.375% Series C Cumulative Redeemable Preferred
unitholders......................................... 34,471 34,410
Common unitholders................................... 80,412 72,372
Minority interest in Development LLCs................ 9,733
---------- ----------
Total minority interests............................ 198,332 180,500
---------- ----------
STOCKHOLDERS' EQUITY (Note 5):
Preferred stock, $.01 par value, 27,200,000 shares
authorized, none issued and outstanding.............
8.075% Series A Cumulative Redeemable Preferred
stock, $.01 par value, 1,700,000 shares authorized,
none issued and outstanding.........................
Series B Junior Participating Preferred stock, $.01
par value, 400,000 shares authorized, none issued
and outstanding.....................................
9.375% Series C Cumulative Redeemable Preferred
stock, $.01 par value, 700,000 shares authorized,
none issued and outstanding.........................
Common stock, $.01 par value, 150,000,000 shares
authorized, 27,629,210 and 27,639,210 shares issued
and outstanding, respectively....................... 276 276
Additional paid-in capital........................... 488,565 487,467
Distributions in excess of earnings.................. (13,538) (11,844)
---------- ----------
Total stockholders' equity.......................... 475,303 475,899
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $1,178,821 $1,105,928
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES (Note 6):
Rental income....................................... $ 32,818 $ 25,460
Tenant reimbursements............................... 4,123 3,225
Interest income..................................... 400 474
Other income........................................ 209 194
---------- ----------
Total revenues.................................... 37,550 29,353
---------- ----------
EXPENSES:
Property expenses................................... 5,134 3,971
Real estate taxes................................... 3,009 2,088
General and administrative expenses................. 2,314 1,559
Ground leases....................................... 337 305
Interest expense.................................... 5,759 4,786
Depreciation and amortization....................... 7,217 5,854
---------- ----------
Total expenses.................................... 23,770 18,563
---------- ----------
INCOME BEFORE EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARY AND MINORITY INTERESTS 13,780 10,790
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY........... (1)
---------- ----------
INCOME BEFORE MINORITY INTERESTS...................... 13,780 10,789
---------- ----------
MINORITY INTERESTS:
Distributions on Cumulative Redeemable
Preferred units.................................... (2,334) (700)
Minority interest in earnings....................... (1,536) (1,210)
---------- ----------
Total minority interests.......................... (3,870) (1,910)
---------- ----------
NET INCOME............................................ $ 9,910 $ 8,879
========== ==========
Net income per common share--basic (Note 7)........... $ 0.36 $ 0.35
========== ==========
Net income per common share--diluted (Note 7)......... $ 0.36 $ 0.35
========== ==========
Weighted average shares outstanding--basic (Note 7)... 27,632,543 25,230,467
========== ==========
Weighted average shares outstanding--diluted (Note 7). 27,632,594 25,400,890
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 9,910 $ 8,879
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 7,217 5,854
Provision for uncollectable tenant receivables and
deferred rent.......................................... 215 190
Restricted stock compensation........................... 126 115
Minority interest in earnings........................... 1,536 1,210
Other................................................... (217) 1
Changes in assets and liabilities:
Tenant receivables...................................... (696) 290
Deferred leasing costs.................................. (872) (1,318)
Prepaid expenses and other assets....................... (734) (258)
Accounts payable and accrued expenses................... 1,553 (330)
Rents received in advance and tenant security deposits.. (95) 1,097
Accrued distributions to Cumulative Redeemable Preferred
unitholders............................................ 73 700
-------- ---------
Net cash provided by operating activities.............. 18,016 16,427
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties.................... (18,645) (124,716)
Expenditures for undeveloped land and construction in
progress................................................ (43,240) (6,157)
Proceeds from sale of undeveloped land................... 1,387
Increase in escrow deposits.............................. (11,325)
Net investment in and advances (to) from unconsolidated
subsidiary.............................................. (1,173) 19
-------- ---------
Net cash used in investing activities.................. (61,671) (142,179)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common stock.............. 58,992
Net proceeds from issuance of Cumulative Redeemable
Preferred units......................................... 58,377
Net (repayment) borrowings on line of credit............. (40,000) 20,000
Proceeds from issuance of mortgage debt.................. 95,000 5,000
Principal payments on mortgage debt...................... (547) (1,404)
Financing costs.......................................... (1,322) (578)
(Increase) decrease in restricted cash................... (561) 766
Distributions paid to common stockholders and common
unitholders............................................. (12,895) (10,804)
-------- ---------
Net cash provided by financing activities.............. 39,675 130,349
-------- ---------
Net (decrease) increase in cash and cash equivalents...... (3,980) 4,597
Cash and cash equivalents, beginning of period............ 6,443 8,929
-------- ---------
Cash and cash equivalents, end of period ................. $ 2,463 $ 13,526
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest...... $ 5,111 $ 3,528
======== =========
Distributions paid to Cumulative Redeemable Preferred
unitholders............................................. $ 2,261
========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 8)................ $ 13,567 $ 12,413
======== =========
Issuance of common units of the Operating Partnership to
acquire operating properties and undeveloped land (Note
2)...................................................... $ 9,915 $ 13,511
======== =========
Minority interest recorded in connection with Development
LLC undeveloped land acquisitions (Notes 2 and 4)....... $ 9,733
========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1. Organization
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company, which operates as a self-administered real estate investment trust
("REIT"), commenced operations upon the completion of its initial public
offering in January 1997. The Company is the successor to the real estate
business of the Kilroy Group, the Company's predecessor, which had been
engaged in the acquisition, management, financing, construction and leasing of
principally Class A suburban office and industrial properties in select
locations in key suburban submarkets, primarily in Southern California. As of
March 31, 1999, the Company's stabilized portfolio consisted of 82 office
properties and 86 industrial properties, which encompassed approximately 5.7
million and 6.2 million rentable square feet, respectively, and was 95.1%
occupied. In addition, as of March 31, 1999, the Company had under development
five office and one industrial building which when completed are expected to
encompass 408,000 and 212,000 rentable square feet, respectively. The Company
owns its interests in all of its properties through Kilroy Realty, L.P. (the
"Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and
conducts substantially all of its operations through the Operating
Partnership. The Company owned an 85.5% general partnership interest in the
Operating Partnership as of March 31, 1999.
The majority of the Company's 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.
Basis of Presentation
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the interim financial statements presented herein
reflect all adjustments of a normal and recurring nature which are considered
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the interim period are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. These financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. Acquisitions and Dispositions
In February 1999, the Company acquired three acres of undeveloped land in
San Diego, California for $0.4 million in cash and 119,460 common units of the
Operating Partnership valued at $2.5 million based upon the closing share
price of the Company's common stock as reported on the New York Stock Exchange
("NYSE"). The undeveloped land was acquired from The Allen Group, a group of
affiliated real estate development companies based in Visalia, California. An
Executive Vice President of the Company received 76,896 of the total 119,460
common units issued in connection with the acquisition. The acquisition was
based upon terms that the Company believes were comparable to terms obtainable
from third-parties based on arm's-length negotiations.
In March 1999, the Company acquired one office property containing 126,000
aggregate rentable square feet in San Diego, California for $17.5 million in
cash and 168,402 common units of the Operating Partnership
6
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998
(Unaudited)
valued at $3.6 million based upon the closing share price of the Company's
common stock as reported on the NYSE. The office property, which is 100%
leased through February 2014, was acquired pursuant to an existing agreement
executed between the Company and The Allen Group in October 1997. In May 1998,
the Company entered into an agreement to loan up to $2.3 million to a limited
liability company controlled by Richard S. Allen, a former member of the
Company's Board of Directors, to finance tenant improvements to this property.
The $2.3 million balance of the note and the related interest, which accrued
at a rate of Prime plus 1.00%, were repaid to the Company in connection with
the acquisition. An Executive Vice President of the Company received 98,476 of
the total 168,402 common units issued in connection with the acquisition. The
acquisition was based upon terms that the Company believes were comparable to
terms obtainable from third-parties based on arm's-length negotiations and was
funded primarily with existing working capital and borrowings on the Company's
revolving credit facility.
During the three months ended March 31, 1999, the Company acquired a 50%
interest in 55 acres of undeveloped land in San Diego, California for $16.1
million and 184,172 common units of the Operating Partnership valued at $3.8
million based upon the closing share price of the Company's common stock as
reported on the NYSE. The undeveloped land was acquired pursuant to an
existing agreement between the Company and The Allen Group that provided for
the joint development of two office projects, with approximately 1.0 million
aggregate rentable square feet, over the next five years. Both the Company and
The Allen Group contributed their respective 50% interests in the undeveloped
land to two limited liability companies (the "Development LLCs") upon the
completion of the acquisition. In connection with this anticipated
transaction, the Company entered into an agreement in May 1998 to loan up to
$8.5 million to a limited partnership controlled by Richard S. Allen to
finance infrastructure improvements on the undeveloped land. The $8.5 million
balance of the note was assumed by the Development LLCs in connection with the
undeveloped land acquisition. The related interest, which accrued at a rate of
LIBOR plus 1.85%, was paid to the Company by the limited partnership. An
Executive Vice President of the Company received 69,694 of the total 184,172
common units issued in connection with the acquisition. The acquisition was
based upon terms that the Company believes were comparable to terms obtainable
from third-parties based on arm's-length negotiations and was funded primarily
with existing working capital and borrowings on the Company's revolving credit
facility.
In February 1999, the Company sold eight acres of its 18-acre undeveloped
land parcel in Calabasas, California to the City of Calabasas for a total
sales price of $1.4 million. The land is part of a 66-acre development site
which is presently entitled for over 1.0 million rentable square feet of
office, retail and hotel development. The Company presently plans to develop
210,000 rentable square feet of office property on the remaining ten acres it
currently owns. The infrastructure improvements on the land were financed with
Mello Roos bonds which were refinanced in February 1999. In connection with
the refinancing, the portion of the original obligation that related to the
eight acres the Company sold to the City of Calabasas was defeased. The Mello
Roos bonds currently have a principal balance of approximately $12.5 million.
Principal and interest on the bonds will be charged to the Company and other
owners through property tax bills through 2028 based on the relative value of
land and buildings on the site. Based on the planned development of the total
site, the Company's maximum obligation for its portion of the development site
is estimated at $5.5 million but may decrease depending on the actual size and
number of buildings built. The periodic Mello Roos assessments are currently
capitalized as development costs and will be charged to operations upon the
completion of construction.
3. Unsecured Line of Credit and Mortgage Debt
As of March 31, 1999, the Company had borrowings of $232 million and one
letter of credit in the amount of $0.1 million outstanding under its revolving
unsecured line of credit (the "Credit Facility"). Availability under the
Credit Facility was $77.9 million at March 31, 1999 based upon the value of
the Company's unencumbered stabilized operating assets.
7
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998
(Unaudited)
On March 11, 1999, the Company executed a $95.0 million mortgage loan. The
mortgage loan is collateralized by nine office and industrial properties,
requires monthly principal and interest payments based on a fixed interest
rate of 7.20%, amortizes over 25 years, and matures in April 2009. Two letters
of credit totaling $2.0 million, which the Company issued under the Credit
Facility in December 1998 and January 1999 to cover the deposit and
application costs required by the mortgagor, expired upon the closing of the
mortgage loan. The Company used the proceeds from the mortgage loan to repay
borrowings under the Credit Facility and to fund development expenditures.
On April 23, 1999, the Company executed a $30.0 million mortgage loan. The
mortgage loan is collateralized by one office property and the related ground
leases, requires monthly principal and interest payments based on a fixed
interest rate of 7.15%, amortizes over 18 years, and matures in May 2017. The
Company used the proceeds from the mortgage loan to repay an existing mortgage
loan with an outstanding balance of $19.0 million at March 31, 1999, to repay
borrowings under the Credit Facility and to fund development expenditures.
Total interest capitalized for the three months ended March 31, 1999 and
1998 was $1.9 million and $1.4 million, respectively.
4. Minority Interests
Minority interests represent the preferred and common limited partnership
interests in the Operating Partnership and interests held by The Allen Group
in the Development LLCs.
During the three months ended March 31, 1999, the Operating Partnership
issued 472,034 common units of the Operating Partnership in connection with
operating property and undeveloped land acquisitions (see Note 2). As a
result, the Company owned an 85.5% general partnership interest in the
Operating Partnership as of March 31, 1999.
During the three months ended March 31, 1999, the Company became a 50%
managing member in the Development LLCs as a result of the acquisition of
certain undeveloped land and the simultaneous contribution of such land to the
Development LLCs (see Note 2). The Development LLCs are consolidated for
financial reporting purposes since the Company holds significant control over
the entities through a 50% ownership interest, combined with the ability to
control all significant development decisions.
5. Stockholders Equity
In February 1999, the Company filed a registration statement on Form S-3
with the SEC which registered the potential issuance and resale of up to
2,817,476 shares of the Company's common stock to the identified holders of
2,817,476 common units of the Operating Partnership. The 2,817,476 common
units, previously issued in connection with two 1997 transactions, may be
exchanged, at the Company's option, on a one-for-one basis, into shares of the
Company's common stock on or after January 31, 1999. The Company and the
Operating Partnership will not receive any of the proceeds from the issuance
of the common stock to the identified common unitholders. The registration
statement has not yet been declared effective by the SEC.
In March 1999, the Company filed a registration statement on Form S-3 with
the SEC which, in connection with the adoption of the Company's Dividend
Reinvestment and Direct Purchase Plan (the "Plan"), registered 1,000,000
shares of the Company's common stock. The Plan, which is designed to provide
the Company's stockholders and other investors with a convenient and
economical method to purchase shares of the Company's
8
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998
(Unaudited)
common stock, consists of three programs: the Dividend Reinvestment Program
(the "DRIP"), the Cash Option Purchase Plan (the "COPP") and the Waiver
Discount Plan (the "WDP"). The DRIP provides existing common stockholders with
the opportunity to purchase additional shares of the Company's common stock by
automatically reinvesting all or a portion of their cash dividends. The COPP
provides existing common stockholders and other investors with the opportunity
to purchase additional shares of the Company's common stock by making optional
cash purchases, at no discount to market, between $100 to $5,000 and $750 to
$5,000, respectively, in any calendar month. The WDP provides existing common
stockholders and other investors with the opportunity to purchase additional
shares of the Company's common stock by making optional cash purchases, at a
discount to market of up to 2.00% of the average per share price reported on
the NYSE, of greater than $5,000 in any calendar month. The Plan will acquire
shares of the Company's common stock from either new issuances directly from
the Company or from the open market or from privately negotiated transactions,
except for transactions executed under the WDP which will be purchased only
from previously unissued shares of common stock. Participation in the Plan is
entirely voluntary, and can be terminated at any time. The registration
statement has not yet been declared effective by the SEC.
In May 1999, the Company filed a registration statement on Form S-8 with the
SEC that registered the potential issuance and resale of up to 1,500,000
shares of the Company's common stock in connection with shares of the
Company's common stock issuable to the Company's employees and directors under
the 1997 Stock Option and Incentive Plan.
9
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998
(Unaudited)
6. Segment Disclosure
The Company evaluates the performance of its segments based upon net
operating income. Net operating income is defined as operating revenues
(rental income, tenant reimbursements and other property income) less property
and related expenses (property expenses, real estate taxes, and ground leases)
and does not include interest income and expense, depreciation and
amortization, and corporate general and administrative expenses.
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Revenues and Expenses
Office Properties:
Operating revenues(1)...................................... $25,558 $19,858
Property and related expenses.............................. 6,486 5,101
------- -------
Net operating income, as defined........................... 19,072 14,757
------- -------
Industrial Properties:
Operating revenues(1)...................................... 11,592 9,021
Property and related expenses.............................. 1,994 1,263
------- -------
Net operating income, as defined........................... 9,598 7,758
------- -------
Total Reportable Segments:
Operating revenues(1)...................................... 37,150 28,879
Property and related expenses.............................. 8,480 6,364
------- -------
Net operating income, as defined........................... 28,670 22,515
------- -------
Reconciliation to Consolidated Net Income:
Total net operating income, as defined, for reportable
segments.................................................. 28,670 22,515
Other unallocated revenues:
Interest income.......................................... 400 474
Other unallocated expenses:
General and administrative expenses...................... 2,314 1,559
Interest expense......................................... 5,759 4,786
Depreciation and amortization............................ 7,217 5,854
------- -------
Net income before equity in loss of unconsolidated subsidiary
and minority interests...................................... 13,780 10,790
Equity in loss of unconsolidated subsidiary.................. (1)
Minority interests........................................... (3,870) (1,910)
------- -------
Net income................................................... $ 9,910 $ 8,879
======= =======
</TABLE>
- --------
(1) All operating revenues are comprised of amounts received from external
tenants.
10
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998
(Unaudited)
7. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share is computed by dividing net income by the sum of the weighted-
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. The Company does not consider common
units of the Operating Partnership to be dilutive since the exchange of common
units into common stock is on a one-for-one basis and would not have any
effect on diluted earnings per share. The following table reconciles the
numerator and denominator of the basic and diluted per-share computations for
net income.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except share and
per share amounts)
<S> <C> <C> <C>
Basic.................................... $9,910 27,632,543 $0.36
Effect of dilutive securities:
Stock options granted.................. 51
------ ---------- -----
Diluted.................................. $9,910 27,632,594 $0.36
====== ========== =====
<CAPTION>
Three Months Ended March 31, 1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except share and
per share amounts)
<S> <C> <C> <C>
Basic.................................... $8,879 25,230,467 $0.35
Effect of dilutive securities:
Stock options granted.................. 170,423
------ ---------- -----
Diluted.................................. $8,879 25,400,890 $0.35
====== ========== =====
</TABLE>
At March 31, 1999, Company employees and directors held options to purchase
2,343,000 shares of the Company's common stock that were antidilutive to the
diluted earnings per share computation. These options could become dilutive in
future periods if the average market price of the Company's common stock
exceeds the exercise price of the outstanding options.
8. Subsequent Events
On April 12, 1999 distributions aggregating $13.6 million were paid to
common stockholders and common unitholders of record on March 31, 1999.
On April 20, 1999, the Company acquired nine acres of undeveloped land
located in San Diego, California for an aggregate purchase price of
approximately $4.3 million.
On April 23, 1999, the Company executed a $30.0 million mortgage loan (see
Note 3).
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements of
the Company and should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that are not historical facts may be forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
You are cautioned not to place undue reliance on these forward-looking
statements.
Overview and Background
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company, which operates as a self-administered real estate investment trust
("REIT"), commenced operations upon the completion of its initial public
offering in January 1997. The Company is the successor to the real estate
business of the Kilroy Group, the Company's predecessor, which had been
engaged in the acquisition, management, financing, construction and leasing of
principally Class A suburban office and industrial properties in select
locations in key suburban submarkets, primarily in Southern California. The
Company owns its interests in all of its properties through Kilroy Realty,
L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P.
and conducts substantially all of its operations through the Operating
Partnership. The Company owned an 85.5% general partnership interest in the
Operating Partnership as of March 31, 1999.
Results of Operations
During the three months ended March 31, 1999, the Company acquired one
office property totaling 126,000 rentable square feet, for a total purchase
price of $21.1 million. During 1998, the Company acquired 25 office and 16
industrial buildings totaling 1.4 million and 674,000 aggregate rentable
square feet, respectively, for an aggregate acquisition cost of approximately
$254 million. Operating results for acquired properties are included in the
consolidated financial statements of the Company subsequent to their
respective acquisition dates.
As a result of the properties acquired subsequent to March 31, 1998,
rentable square footage in the Company's portfolio of stabilized properties
increased 2.3 million rentable square feet, or 24.2% to 11.9 million rentable
square feet at March 31, 1999 compared to 9.6 million rentable square feet at
March 31, 1998. As of March 31, 1999, the Company's portfolio of stabilized
properties was comprised of 82 office properties (the "Office Properties")
encompassing 5.7 million rentable square feet and 86 industrial properties
(the "Industrial Properties" and together with the Office Properties the
"Properties") encompassing 6.2 million rentable square feet. The Company's
stabilized portfolio consists of all of the Company's Office and Industrial
Properties with the exception of properties and projects included in
construction in progress. With respect to properties developed by the Company,
the Company's policy is to include properties in its stabilized portfolio upon
the earlier of one year from the date of substantial completion or the date
such property reaches stabilized occupancy of 95.0%. The portfolio occupancy
rate at March 31, 1999 was 95.1%, with the Office and Industrial Properties
94.8% and 95.4% occupied, respectively.
12
<PAGE>
Three Months Ended March 31, 1999 compared to Three Months Ended March 31,
1998
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------- Dollar Percentage
1999 1998 Change Change
------- ------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income............................ $32,818 $25,460 $7,358 28.9%
Tenant reimbursements.................... 4,123 3,225 898 27.8
Interest income.......................... 400 474 (74) (15.6)
Other income............................. 209 194 15 7.7
------- ------- ------
Total revenues......................... 37,550 29,353 8,197 27.9
------- ------- ------
Expenses:
Property expenses........................ 5,134 3,971 1,163 29.3
Real estate taxes........................ 3,009 2,088 921 44.1
General and administrative expenses...... 2,314 1,559 755 48.4
Ground leases............................ 337 305 32 10.5
Interest expense......................... 5,759 4,786 973 20.3
Depreciation and amortization............ 7,217 5,854 1,363 23.3
------- ------- ------
Total expenses......................... 23,770 18,563 5,207 28.1
------- ------- ------
Income before equity in income (loss) of
unconsolidated subsidiary and minority
interests................................. $13,780 $10,790 $2,990 27.7%
======= ======= ======
</TABLE>
Rental Operations
Management evaluates the operations of its portfolio based on operating
property type. The following tables compare the net operating income, defined
as operating revenues less property and related expenses (property expenses,
real estate taxes and ground leases) before depreciation, for the Office and
Industrial Properties for three months ended March 31, 1999 and 1998.
Office Properties
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------- Dollar Percentage
1999 1998 Change Change
------- ------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
Rental income............................... $22,541 $17,427 $5,114 29.3%
Tenant reimbursements....................... 2,817 2,321 496 21.4
Other income................................ 200 110 90 81.8
------- ------- ------
Total..................................... 25,558 19,858 5,700 28.7
------- ------- ------
Property and related expenses:
Property expenses........................... 4,285 3,472 813 23.4
Real estate taxes........................... 1,864 1,323 541 40.9
Ground leases............................... 337 306 31 10.1
------- ------- ------
Total..................................... 6,486 5,101 1,385 27.2
------- ------- ------
Net operating income, as defined.............. $19,072 $14,757 $4,315 29.2%
======= ======= ======
</TABLE>
Total revenues from Office Properties increased $5.7 million, or 28.7% to
$25.6 million for the three months ended March 31, 1999 compared to $19.9
million for the three months ended March 31, 1998. Rental income from Office
Properties increased $5.1 million, or 29.3% to $22.5 million for the three
months ended March 31,
13
<PAGE>
1999 compared to $17.4 million for the three months ended March 31, 1998. Of
this increase, $0.1 million was generated by one office property acquired
during 1999 (the "1999 Office Acquisition"), $3.5 million was generated by the
Office Properties acquired during 1998 (the "1998 Office Acquisitions") and
$0.7 million was generated by the Office Properties developed in 1998 (the
"1998 Office Development Properties"). The remaining $0.8 million of the
increase was generated by the stabilized office properties owned at January 1,
1998 and still owned at January 1, 1999 (the "Core Office Portfolio"), and
represented a 5.3% increase in rental income for the Core Office Portfolio.
Average occupancy in the Core Office Portfolio remained consistent for the
three months ended March 31, 1999 compared to the three months ended March 31,
1998. The increase in rental income generated by the Core Office Portfolio was
primarily attributable to increases in rental rates.
Tenant reimbursements from Office Properties increased $0.5 million, or
21.4% to $2.8 million for the three months ended March 31, 1999 compared to
$2.3 million for three months ended March 31, 1998. Of this increase, $0.4
million was attributable to the 1999 Office Acquisition, the 1998 Office
Acquisitions and the 1998 Office Development Properties. The remaining $0.1
million of the increase was generated by the Core Office Portfolio. Other
income from office buildings increased $0.1 million, or 81.8% to $0.2 million
for the three months ended March 31, 1999 compared to $0.1 million for the
comparable period in 1998. This increase is primarily due to a $0.1 million
gain on the sale of eight acres of undeveloped land in Calabassas, California.
Total expenses from Office Properties increased $1.4 million, or 27.2% to
$6.5 million for the three months ended March 31, 1999 compared to $5.1
million for the three months ended March 31, 1998. Property expenses increased
$0.8 million, or 23.4% to $4.3 million and real estate taxes increased $0.5
million, or 40.9% to $1.8 million for the three months ended March 31, 1999
compared to $3.5 million and $1.3 million, respectively, for the three months
ended March 31, 1998. Of the collective increase of $1.3 million in property
expenses and real estate taxes, $1.2 million was attributable to the 1998
Office Acquisitions and the 1998 Office Development Properties. The remaining
$0.1 million of the increase at the Core Office Portfolio was primarily due to
an increase in real estate taxes at the SeaTac Office Center which resulted
from the completion of substantial renovations. Ground lease expense remained
consistent for the three months ended March 31, 1999 compared to the
comparable period in 1998.
Net operating income, as defined, from Office Properties increased $4.3
million, or 29.2% to $19.1 million for the three months ended March 31, 1999
compared to $14.8 million for the three ended March 31, 1998. Of this
increase, $3.5 million was generated by the 1999 Office Acquisition, the 1998
Office Acquisitions, and the 1998 Office Development Properties. The remaining
increase of $0.8 million was generated by the Core Office Portfolio and
represents a 6.4% increase in net operating income for the Core Office
Portfolio.
Industrial Properties
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-------------- Dollar Percentage
1999 1998 Change Change
------- ------ ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
Rental income............................... $10,277 $8,032 $2,245 28.0%
Tenant reimbursements....................... 1,305 904 401 44.4
Other income................................ 10 85 (75) (88.2)
------- ------ ------
Total..................................... 11,592 9,021 2,571 28.5
------- ------ ------
Property and related expenses:
Property expenses........................... 850 498 352 70.7
Real estate taxes........................... 1,144 765 379 49.5
------- ------ ------
Total..................................... 1,994 1,263 731 57.9
------- ------ ------
Net operating income, as defined.............. $ 9,598 $7,758 $1,840 23.7%
======= ====== ======
</TABLE>
14
<PAGE>
Total revenues from Industrial Properties increased $2.6 million, or 28.5%
to $11.6 million for the three months ended March 31, 1999 compared to $9.0
million for the three months ended March 31, 1998. Rental income increased
$2.3 million, or 28.0% to $10.3 million for the three months ended March 31,
1999 compared to $8.0 million for the three months ended March 31, 1998. Of
this increase, $1.0 million was generated by the Industrial Properties
acquired during 1998 (the "1998 Industrial Acquisitions") and $1.3 million was
generated by the Industrial Properties developed in 1998 (the "1998 Industrial
Development Properties"). Rental income from the stabilized industrial
properties owned at January 1, 1998 and still owned at January 1, 1999 (the
"Core Industrial Portfolio") remained consistent for the three months ended
March 31, 1999 compared to the comparable period in 1998.
Tenant reimbursements from Industrial Properties increased $0.4 million, or
44.4% to $1.3 million for the three months ended March 31, 1999 compared to
$0.9 million for three months ended March 31, 1998. Of this increase, $0.2
million was attributable to the 1998 Industrial Acquisitions and the 1998
Industrial Development Properties. The remaining $0.2 million was attributable
to the Core Industrial Portfolio, of which $0.1 million correlated with the
increase in real estate taxes reimbursable by tenants. Other income decreased
$75,000 or 88.2% to $10,000 for the three months ended March 31, 1999 compared
to $85,000 for the same period in 1998. Other income for the three months
ended March 31, 1998 included $75,000 in lease termination fees.
Total expenses from Industrial Properties increased $0.7 million, or 57.9%
to $2.0 million for the three months ended March 31, 1999 compared to $1.3
million for the three months ended March 31, 1998. Property expenses increased
$0.3 million, or 70.7% to $0.8 million and real estate taxes increased $0.4
million, or 49.5% to $1.1 million for the three months ended March 31, 1999
compared to $0.5 million and $0.8 million, respectively, for the three months
ended March 31, 1998. Of the collective $0.7 million increase in property
expenses and real estate taxes, $0.5 million was attributable to the 1998
Industrial Acquisitions and the 1998 Industrial Development Properties. The
remaining $0.2 million increase was attributable to the Core Industrial
Portfolio and was primarily due to an increase in real estate taxes
attributable to acquisition-related increases on properties acquired by the
Company in 1997.
Net operating income, as defined, from Industrial Properties increased $1.8
million, or 23.7% to $9.6 million for the three months ended March 31, 1999
compared to $7.8 million for the three months ended March 31, 1998. An
increase of $1.9 million in net operating income generated from the 1998
Industrial Acquisitions and the 1998 Industrial Development Properties was
offset by a decrease of $0.1 million in net operating income from the Core
Industrial Portfolio. This decrease was due primarily to the recognition of
$0.1 million in lease termination fees during the three months ended March 31,
1998.
Non-Property Related Income and Expenses
Interest income decreased $0.1 million, or 15.6% to $0.4 million for the
three months ended March 31, 1999 compared to $0.5 million for the three
months ended March 31, 1998 due to a decrease in cash on hand.
General and administrative expenses increased $0.8 million, or 48.4% to $2.3
million for the three months ended March 31, 1999 compared to $1.5 million for
the three months ended March 31, 1998, due to increased management,
administrative and personnel costs associated with the Company's increased
portfolio size.
Interest expense increased $1.0 million, or 20.3% to $5.8 million for the
three months ended March 31, 1999 compared to $4.8 million for the comparable
period in 1998, primarily due to a general increase in mortgage borrowings and
higher monthly average outstanding balances under the Company's Credit
Facility during the first quarter of 1999. The Company's weighted average
interest rate decreased 0.5% to 7.0% at March 31, 1999 compared to 7.5% at
March 31, 1998.
Depreciation and amortization expense increased $1.4 million, or 23.3% to
$7.2 million for the three months ended March 31, 1999 compared to $5.8
million for the comparable period in 1998. The increase was due to a full
quarter of depreciation on properties acquired during 1998.
15
<PAGE>
Liquidity and Capital Resources
The Company has a $350 million unsecured revolving line of credit (the
"Credit Facility") which bears interest at a rate of either LIBOR plus 1.00%,
LIBOR plus 1.13%, LIBOR plus 1.25% or LIBOR plus 1.38% (6.23% at March 31,
1999) depending on the Company's leverage ratio at the time of borrowing, and
matures in February 2000, with the lender's option to extend for one year.
Availability under the Credit Facility depends upon the value of the Company's
unencumbered stabilized operating assets and was $77.9 million at March 31,
1999. As of March 31, 1999, the Company had borrowings of $232 million and one
letter of credit in the amount of $0.1 million outstanding under the Credit
Facility.
On March 11, 1999, the Company executed a $95.0 million mortgage loan. The
mortgage loan is collateralized by nine office and industrial properties,
requires monthly principal and interest payments based on a fixed interest
rate of 7.20%, amortizes over 25 years, and matures in April 2009. Two letters
of credit totaling $2.0 million, which the Company issued under the Credit
Facility in December 1998 and January 1999 to cover the deposit and
application costs required by the mortgagor, expired upon the closing of the
mortgage loan. The Company used the proceeds from the mortgage loan to repay
borrowings under the Credit Facility and to fund development expenditures.
On April 23, 1999, the Company executed a $30.0 million mortgage loan. The
mortgage loan is collateralized by one office property and the related ground
leases, requires monthly principal and interest payments based on a fixed
interest rate of 7.15%, amortizes over 18 years, and matures in May 2017. The
Company used the proceeds from the mortgage loan to repay an existing mortgage
loan with an outstanding balance of $19.0 million at March 31, 1999, to repay
borrowings under the Credit Facility and to fund development expenditures.
On March 10, 1999, the Company filed a registration statement on Form S-3
with the SEC which, in connection with the adoption of the Company's Dividend
Reinvestment and Direct Purchase Plan (the "Plan"), registered 1,000,000
shares of the Company's common stock. The Plan, which is designed to provide
the Company's stockholders and other investors with a convenient and
economical method to purchase shares of the Company's common stock, consists
of three programs: the DRIP, the COPP and the WDP. The DRIP provides existing
common stockholders with the opportunity to purchase additional shares of the
Company's common stock by automatically reinvesting all or a portion of their
cash dividends. The COPP provides existing common stockholders and other
investors with the opportunity to purchase additional shares of the Company's
common stock by making optional cash purchases, at no discount to market,
between $100 to $5,000 and $750 to $5,000, respectively, in any calendar
month. The WDP provides existing common stockholders and other investors with
the opportunity to purchase additional shares of the Company's common stock by
making optional cash purchases, at a discount to market of up to 2.00% of the
average per share price reported on the NYSE, of greater than $5,000 in any
calendar month. The Plan will acquire shares of the Company's common stock
from either new issuances directly from the Company, from the open market or
from privately negotiated transactions, except for transactions executed under
the WDP which will be purchased only from previously unissued shares of common
stock. Participation in the Plan is entirely voluntary, and can be terminated
at any time. The Company intends to use the proceeds received from the Plan,
less transaction costs, for development and investment activities, repayment
of outstanding indebtedness and general corporate uses. This registration
statement has not yet been declared effective by the SEC.
In January 1998, the Company filed a "shelf" registration statement on Form
S-3 with the SEC that registered $400 million of equity securities of the
Company. As of May 12, 1999, an aggregate of $313 million of equity securities
were available for issuance under the registration statement.
16
<PAGE>
Capital Expenditures
As of March 31, 1999, the Company had approximately 408,000 and 212,000
rentable square feet of office and industrial space, respectively, under
construction at a total budgeted cost of approximately $85.5 million. The
Company has spent an aggregate of $42.1 million on these projects as of March
31, 1999. The Company intends to finance the remaining $43.4 million of
development costs with borrowings under the Credit Facility and working
capital. In addition, at March 31, 1999, the Company has also spent $134
million on land and pre-development costs for phased development projects
which are planned for the next five years.
At March 31, 1999, the Company had escrow deposits of $0.4 million for the
contemplated acquisition of one office building with 50,000 aggregate rentable
square feet. The aggregate acquisition cost of the land and building is
estimated to be approximately $9.0 million. The Company intends to finance the
acquisition with borrowings under the Credit Facility and working capital.
In connection with an agreement signed with The Allen Group in October 1997,
the Company is committed to purchase two office properties totaling 254,000
rentable square feet for an aggregate purchase price of $40.1 million. On
March 19, 1999, the Company acquired the first of the two office properties
encompassing 126,000 rentable square feet for $17.5 million in cash and
168,402 common units of the Operating Partnership valued at approximately $3.6
million based upon the closing share price of the Company's common stock as
reported on the NYSE. The acquisition was based upon what the Company believes
were terms comparable to terms obtainable from third-parties based on arm's-
length negotiations. An Executive Vice President of the Company received
98,476 of the total 168,402 common units. The Company intends to finance the
remaining acquisition with borrowings under the Credit Facility and the
issuance of approximately $7.4 million of common units of the Operating
Partnership.
The transaction with The Allen Group also provides for the development of
two office projects in San Diego, California with approximately 1.0 million
aggregate rentable square feet for an estimated aggregate development cost of
approximately $150 million. The Company agreed to purchase a 50% interest in
the two projects and to manage the development of both projects upon
completion of all necessary entitlements and infrastructure. During the three
months ended March 31, 1999, the Company purchased a 50% managing interest in
both of the development projects for an aggregate purchase price of
$16.1 million and 184,172 common units of the operating Partnership valued at
approximately $3.8 million based upon the closing share price of the Company's
common stock on the NYSE. Both the Company and The Allen Group contributed
their respective 50% interests to the Development LLCs. The acquisitions were
based upon what the Company believes were terms comparable to terms obtainable
from third-parties based on arm's-length negotiations. An Executive Vice
President of the Company received 69,694 of the total 184,172 common units.
The Company has the option to purchase The Allen Group's remaining interest in
both projects for a purchase price to be determined upon completion of the
projects. Construction of phase 1 of both office projects commenced in the
fourth quarter of 1998 and the total budgeted investment of phase 1 of both
projects of $39.4 million is included in the total budgeted cost of
$85.5 million discussed above.
The Company believes that it will have sufficient capital resources to
satisfy its obligations and planned capital expenditures for the next twelve
months. The Company expects to meet its long-term liquidity requirements
including possible future development and property acquisitions, through
retained cash flow, long-term secured and unsecured borrowings, and the
issuance of debt or equity securities or the issuance of common units of the
Operating Partnership.
17
<PAGE>
Building and Lease Information
The following tables set forth certain information regarding the Company's
Office and Industrial Properties at March 31, 1999:
Occupancy by Segment Type
<TABLE>
<CAPTION>
Number of Square Feet
Region Buildings Total Leased Available Occupancy
- ------ --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Office Properties:
Los Angeles................ 27 2,418,339 2,304,466 113,873 95.3%
Orange County.............. 27 1,010,983 914,657 96,326 90.5
San Diego.................. 22 1,587,580 1,535,040 52,540 96.7
Other...................... 6 709,614 671,872 37,742 94.7
--- ---------- ---------- -------
82 5,726,516 5,426,035 300,481 94.8
--- ---------- ---------- -------
Industrial Properties:
Los Angeles................ 8 679,736 679,561 175 100.0
Orange County.............. 62 3,946,456 3,808,447 138,009 96.5
San Diego.................. 3 199,351 199,351 -- 100.0
Other...................... 13 1,326,557 1,181,799 144,758 89.1
--- ---------- ---------- -------
86 6,152,100 5,869,158 282,942 95.4
--- ---------- ---------- -------
Total...................... 168 11,878,616 11,295,193 583,423 95.1%
=== ========== ========== =======
</TABLE>
Lease Expirations by Segment Type
<TABLE>
<CAPTION>
Percentage
Square of Leased Annual Base
Footage Square Feet Rent Under
Number of of Represented Expiring
Expiring Expiring by Expiring Leases
Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3)
- ------------------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Office Properties:
Remaining 1999................... 80 524,016 9.4% $ 9,435
2000............................. 91 394,472 7.1 7,317
2001............................. 93 1,062,137 19.0 14,891
2002............................. 46 534,873 9.6 7,745
2003............................. 35 218,753 3.9 3,736
2004............................. 27 801,467 14.3 15,825
--- --------- -------
372 3,535,718 63.3% 58,949
--- --------- -------
Industrial Properties:
Remaining 1999................... 67 391,289 6.8% $ 2,475
2000............................. 82 952,556 16.5 7,128
2001............................. 51 870,845 15.1 5,172
2002............................. 21 184,885 3.2 1,813
2003............................. 27 735,333 12.7 4,759
2004............................. 8 458,262 7.9 3,394
--- --------- -------
256 3,593,170 62.2% 24,741
--- --------- -------
Total............................ 628 7,128,888 62.6% $83,690
=== ========= =======
</TABLE>
- --------
(1) Represents the total number of tenants. Some tenants have multiple leases.
Excludes leases for amenity, retail, parking and month to month tenants.
(2) Based on total leased square footage for the respective portfolios as of
March 31, 1999.
(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
executed on or before April 1, 1999.
18
<PAGE>
Leasing Activity by Segment Type
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Weighted
Number of Average
Leases Square Feet Lease
----------- --------------- Retention Term (in
New Renewal New(1) Renewal Rate months)
--- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Office Properties................ 18 21 212,506 260,585 66.8% 68
Industrial Properties............ 24 15 109,802 150,269 51.9 49
--- --- ------- -------
Total............................ 42 36 322,308 410,854 60.4% 61
=== === ======= =======
</TABLE>
- --------
(1) The lease-up of 302,308 square feet to new tenants includes re-leasing of
94,344 square feet and first generation leasing of 227,964 square feet.
Historical Cash Flows
The Company's net cash provided by operating activities increased $1.6
million, or 9.7% to $18.0 million for the three months ended March 31, 1999
compared to $16.4 million for the three months ended March 31, 1998. The
increase was primarily due to the increase in net income resulting from a full
quarter of operating results from the 1998 Office and Industrial Acquisitions
and an increase in net operating income, as defined, generated by the Core
Office and Industrial Portfolios. The increase was partially offset by
increased interest expense and general and administrative expenses.
Cash used in investing activities decreased $80.5 million, or 56.6% to $61.7
million for the three months ended March 31, 1999 compared to $142 million for
the three months ended March 31, 1998. The decrease was due primarily to the
purchase of one office property for $15.2 million (net of $3.6 million of
contributed value in exchange for which the Company issued common units of the
Operating Partnership and the repayment of an existing $2.3 million note
receivable), the purchase of 58 acres of undeveloped land for $16.5 million
(net of $6.3 million of contributed value in exchange for which the Company
issued common units of the Operating Partnership), the sale of eight acres of
undeveloped land for $1.4 million, expenditures for construction in progress
of $26.7 million, and $3.1 million in additional tenant improvements and
capital expenditures for the three months ended March 31, 1999 versus the
purchase of 25 office and industrial properties for $120 million (net of $13.5
million of contributed value in exchange for which the Company issued common
units of the Operating Partnership), the purchase of 2 acres of undeveloped
land for $1.6 million, expenditures for construction in progress of $6.2
million, $3.0 million in additional tenant improvements and capital
expenditures and $11.3 million for escrow deposits for the three months ended
March 31, 1998.
Cash provided by financing activities decreased $90.7 million, or 69.6% to
$39.7 million for the three months ended March 31, 1999 compared to $130
million for the three months ended March 31, 1998. Cash provided by financing
activities for the three months ended March 31, 1999 consisted primarily of
proceeds of $95.0 million from the issuance of mortgage debt, partially offset
by $40.0 million in repayments on the Credit Facility and $12.9 million in
distributions paid to common stockholders and common unitholders. Cash
provided by financing activities for the three months ended March 31, 1998
consisted of net proceeds of $59.0 million from common stock offerings, net
proceeds of $58.4 million from the issuance of 8.075% Series A Cumulative
Redeemable Preferred units, $25.0 million in net proceeds from the issuance of
mortgage debt and borrowings under the Credit Facility, partially offset by
$10.8 million in distributions paid to common stockholders and common
unitholders.
Funds from Operations
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) before minority
interests of common unitholders (computed in accordance with GAAP), excluding
gains (or
19
<PAGE>
losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of deferred
financing costs and depreciation of non-real estate assets), and after
adjustment for unconsolidated partnerships and joint ventures. The Company
considers Funds from Operations an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. 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 as presented in the financial
statements included elsewhere in this report. 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
methodologies used by other equity REITs and, accordingly, may not be
comparable to Funds from Operations published by such other REITs. Funds from
Operations should not be considered as an alternative to net income (loss)
(computed in accordance with GAAP) as an indicator of the properties'
financial performance or to cash flow from operating activities (computed in
accordance with GAAP) as an indicator of the properties' liquidity, nor is it
indicative of funds available to fund the properties' cash needs, including
the Company's ability to pay dividends or make distributions.
The following table presents the Company's Funds from Operations for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Net income..................................................... $ 9,910 $ 8,879
Add:
Minority interest in earnings.............................. 1,536 1,210
Depreciation and amortization.............................. 7,217 5,854
Other...................................................... 127 118
------- -------
Funds from Operations.......................................... $18,790 $16,061
======= =======
</TABLE>
Inflation
The majority of the Company's tenant leases require 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.
Year 2000
The Year 2000 issue ("Y2K") refers to the inability of certain computer
systems, as well as certain hardware and equipment containing date sensitive
data, to recognize accurate dates commencing on or after January 1, 2000. This
has the potential to affect those systems adversely. In 1997, the Company's
Information Technology Committee, which is comprised of representatives from
senior management and various departments including accounting, property
management and information systems, identified three phases in the Company's
Y2K efforts: discovery and assessment, remediation and implementation, and
testing and verification. Although many of the phases are being completed
simultaneously, the following sections describe the activities that the
Company has or expects to perform to meet its Y2K objectives, as well as
management's assessment of the Company's risk of non-compliance.
The Company's State of Readiness
The initial phase of discovery and assessment consists of evaluating and
identifying all of the Company's information technology and non-information
technology systems that contain date sensitive data. The following summary
describes the classifications of systems that were identified and the
Company's current state of readiness for each classification.
20
<PAGE>
Information Technology Systems
The Company's information technology systems fall into three general
categories: accounting and property management systems, network operating
systems, and desktop software. The Company replaced its accounting and
property management system, acquired all new network hardware and software,
and updated all of its desktop systems and software after its IPO in early
1997. The new accounting and property management system, which was tested upon
its implementation in 1997, and all the Company's network hardware and
software, desktop systems and software packages are Y2K compliant as asserted
by the software vendors. In addition, management performed additional testing
during 1999 by setting the dates in the operating system and the accounting
and property management system ahead to the year 2000. Management believes
there is no material Y2K exposure with respect to its information technology
systems.
Building Management Systems
The Company has identified five categories of building management systems
that could have potential Y2K exposure: building automation (e.g., HVAC),
security card access, fire and life safety, elevator, and office equipment.
During 1998, property management executives and personnel began gathering data
to identify all of the Company's Y2K sensitive building management systems and
to assess whether such systems are currently Y2K compliant or will need to be
modified or replaced. Management has completed the discovery and assessment
phase and determined the Company's state of readiness as to building
management systems in early 1999. Management expects to complete the
remediation and implementation phase by September 1999 and the testing and
verification phase by the end of fiscal year 1999.
Costs to Address the Company's Y2K Efforts
Since the replacement of the accounting and property management system, the
acquisition of new network hardware and software and the installation of
updated desktop systems and software was performed as a result of the Company
becoming a public traded REIT and not in response to Y2K compliance issues,
and further, since phase 1 of the building management systems efforts are
being performed by 13 salaried Company employees who are not paid for overtime
and who management expects will spend 10% of their annual working hours over a
2 to 3 year period focusing on Y2K compliance issues, Y2K costs incurred to
date have been minimal and have not been material to the Company's financial
position or results of operations.
While expected future costs, which will include costs to complete phases 2
and 3 for the building management systems, are not readily quantifiable at
this time, it is management's belief that a significant portion of such costs
will be treated as operating expenses and will be reimbursed to the Company
under most tenant leases. Consequently, management does not believe that such
expenses will have a material effect on the Company's financial position or
results of operations.
Efforts to Identify the Y2K Issues of Significant Third Parties
Due to the Company's diverse tenant base, the success of the Company's
business is not closely tied to the success of any one particular tenant. In
addition, the success of the Company's business is also not closely tied to
the operations of any one vendor, supplier or manufacturer. However, the
Company is in the process of surveying significant tenants, vendors, suppliers
and other relevant third parties, to determine that their systems will be Y2K
compliant and that the Company's normal operations will continue without
interruption. Management anticipates this project will be completed by
September 1999.
The Risks of Y2K Non-Compliance
Management does not believe that the impact of the Y2K issue will have a
material adverse effect on the Company's financial condition or results of
operations. This belief is based upon both the analysis of the Company's Y2K
issues and the Company's assessment of the Y2K exposure related to tenants,
vendors, and
21
<PAGE>
other significant third parties as discussed above. No assurance can be given
about facts and resultant effects of Y2K issues unknown to the Company at this
time.
The Company's worst case Y2K scenario would be that the Company's
information and building management systems fail. In the event that the
Company's information systems fail, the Company would be forced to manually
perform its accounting and property management record-keeping functions until
the information systems could be restored. In the event that the Company's
building management systems fail, the Company's tenants would not have access
to or be able to conduct their normal business activities at the Company's
properties until the building management systems could be restored. These
events could have a material adverse effect on the Company's financial
position and results of operations.
Developing Contingency Plans
The Company does not currently have a contingency plan in place in the event
of a Y2K failure. Such a contingency plan is expected to be developed by the
end of the third quarter 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in Primary Risk Exposures
In March 1999, the Company executed a fixed rate mortgage loan with a
principal balance of $95.0 million, monthly principal and interest payments
based upon a fixed interest rate of 7.20% and a 25-year amortization schedule,
and a maturity date of April 2009. The Company used a portion of the proceeds
from the new $95.0 million fixed rate mortgage loan to repay borrowings under
its existing variable rate Credit Facility. As a result of the execution of
the new $95.0 million mortgage loan and the simultaneous repayment of a
portion of borrowings outstanding under the Credit Facility, the Company's
ratio of fixed rate debt to total debt (excluding Cumulative Redeemable
Preferred units) increased 17.2% from 28.2% at December 31, 1998 to 45.4% at
March 31, 1999.
In April 1999, the Company executed a second fixed rate mortgage loan with a
principal balance of $30.0 million, monthly principal and interest payments
based upon a fixed rate of 7.15% and an 18-year amortization schedule, and a
maturity date of May 2017. The Company used the proceeds from the new
$30.0 million fixed rate mortgage loan to pay off an existing $19.0 million
variable rate mortgage loan and to repay borrowings under its existing
variable rate Credit Facility. As a result of the execution of the new
$30.0 million mortgage loan and the simultaneous repayment of a the Company's
existing $19.0 million variable rate mortgage loan and a portion of borrowings
outstanding under the Credit Facility, the Company's ratio of fixed rate debt
to total debt (excluding Cumulative Redeemable Preferred units) increased 3.2%
from 45.4% at March 31, 1999 to 48.6% at April 30, 1999.
The table below provides information about the Company's interest rate
sensitive financial and derivative instruments as of March 31, 1999. All of
the Company's interest rate sensitive financial and derivative instruments are
designated as held for purposes other than trading.
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at March 31, 1999 will be paid upon the Credit
Facility's maturity in February 2000, and that the option to extend the term
of the Credit Facility until February 2001 will not be exercised. The table
also presents the related maximum interest rate index for outstanding Credit
Facility borrowings in 1999 and 2000.
For variable rate mortgage debt, the table presents the assumption that the
outstanding principal balance at March 31, 1999 will be paid in April 1999,
since as discussed above, the Company subsequently repaid this loan in April
1999. The table also presents the related interest rate index.
22
<PAGE>
For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at March 31, 1999 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related weighted-
average interest rate for outstanding fixed rate mortgage debt borrowings from
1999 through 2003 and thereafter.
For the Series A and Series C Preferred units, the table presents the
assumption that the outstanding Preferred Units at March 31, 1999 will be
exchanged into shares of the Company's 8.075% Series A and 9.375% Series C
Cumulative Redeemable Preferred stock, respectively, in 2008 when the
Preferred units become exchangeable at the option of the majority of the
holders. The table also presents the related weighted-average interest rate
for outstanding Preferred units from 1999 through the exchange date, however
the same interest rates will apply when the Preferred units are exchanged into
the Cumulative Redeemable Preferred stock.
For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at March 31, 1999.
Interest Rate Sensitivity Analysis
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date
------------------------------------------------ Fair Value at
There- March 31,
1999 2000 2001 2002 2003 after Total 1999
------ ------ ------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Line of credit:
Variable rate......... $232.0 $232.0 $232.0
Average interest rate LIBOR LIBOR
index................ +1.38% +1.38%
Mortgage debt:
Variable rate......... $ 19.0 $ 19.0 $ 19.0
Average interest rate LIBOR
index................ +1.50%
Fixed rate............ $ 2.6 $ 3.9 $ 4.2 $ 4.6 $ 5.0 $188.5 $208.8 $211.9
Average interest
rate................. 7.83% 7.83% 7.83% 7.83% 7.83% 7.83%
Series A and C Preferred
units:
Fixed rate............ $107.0 $107.0 $ 99.2
Average interest
rate................. 8.49% 8.49% 8.49% 8.49% 8.49% 8.49%
</TABLE>
23
<PAGE>
Interest Rate Sensitivity Analysis
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Unamortized
----------------------------------------- Cost at
There- March 31,
1999 2000 2001 2002 2003 after Total 1999
----- ------ ---- ---- ---- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge the Line of
Credit:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $0.1
Cap rate.............. 6.50% 6.50%
Forward rate index.... LIBOR LIBOR
</TABLE>
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended March 31, 1999, no legal proceedings were
initiated against or on behalf of the Company, the adverse determination of
which would have a material adverse effect upon the financial condition and
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES--None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*10.1 Promissory Notes Aggregating $95.0 Million Payable to Teachers
Insurance and Annuity Association of America.
*10.2 Form of Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement Securing Promissory Notes
Payable to Teachers Insurance and Annuity Association of America.
*27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
(b) Reports on Form 8-K--None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on May 14, 1999.
Kilroy Realty Corporation
By: /s/ John B. Kilroy, Jr.
-------------------------------------
John B. Kilroy, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Richard E. Moran Jr.
-------------------------------------
Richard E. Moran Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Ann Marie Whitney
-------------------------------------
Ann Marie Whitney
Vice President and Controller
(Principal Accounting Officer)
26
<PAGE>
EXHIBIT 10.1
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 1)
$20,000,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Twenty
Million Dollars ($20,000,000.00) (the principal sum or so much of the principal
sum as may be advanced and outstanding from time to time, whichever is less, the
"Principal"), in lawful money of the United States of America, with interest on
---------
the Principal from and after the date advanced at the fixed rate of seven and
two-tenths percent (7.20%) per annum (the "Fixed Interest Rate") and as
-------------------
otherwise provided herein.
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of One Hundred Forty-Three Thousand Nine Hundred Seventeen and 74/100
Dollars ($143,917.74) (subject to adjustment as provided in Section
2(b)(iv) below), each of which will be applied first to accrued interest on
the Principal at the Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
Section 2. Prepayment Provisions.
--------- ---------------------
(a) The following definitions apply:
"Discount Rate" means the yield on a U.S. Treasury issue selected by Lender, as
-------------
published in The Wall Street Journal two weeks prior to the date as of which a
Prepayment Premium, Evasion Premium or Reconveyance Premium is calculated (as
specified below), having a maturity date corresponding (or most closely
corresponding, if not identical) to the Maturity Date and, if applicable, a
coupon rate corresponding (or most closely corresponding, if not identical) to
the Fixed Interest Rate.
"Default Discount Rate" means the Discount Rate less 300 basis points.
---------------------
"Discounted Value" means the Discounted Value of a Note Payment based on the
----------------
following formula:
<TABLE>
<CAPTION>
NP
-------------
(1 + R/12)/n/ = Discounted Value
<S> <C> <C>
NP = amount of Note Payment
R = Discount Rate, Default Discount Rate or Reconveyance Discount
Rate as the case may be
n = the number of months between the date as of which a
Prepayment Premium, Evasion Premium or Reconveyance
Premium, as the case may be, is calculated (as specified
below) and the scheduled date of the Note Payment being
discounted rounded to the nearest integer
</TABLE>
"Evasion Premium" means the greater of (i) an amount equal to the product of one
---------------
percent (1%) plus 300 basis points times the Prepayment Date Principal, and (ii)
the amount by which the sum of the Discounted Values of the Note Payments,
calculated at the Default Discount Rate, exceeds the Prepayment Date Principal.
"Note Payments" means (i) the scheduled Debt Service Payments for the period
-------------
from the date as of which the Prepayment Premium, Evasion Premium or
Reconveyance Premium is calculated (as specified below) through the Maturity
Date and (ii) the scheduled repayment of Principal, if any, on the Maturity
Date.
"Prepayment Date Principal" means the Principal outstanding under this Note on
-------------------------
the date as of which a Prepayment Premium, Evasion Premium or Reconveyance
Premium is calculated (as specified below).
"Prepayment Premium" means the greater of (i) an amount equal to the product of
------------------
one percent (1%) times the Prepayment Date Principal and (ii) the amount by
which the sum of the Discounted Values of Note Payments, calculated at the
Discount Rate, exceeds the Prepayment Date Principal.
"Reconveyance Discount Rate" means the Discount Rate plus 50 basis points.
--------------------------
2
<PAGE>
"Reconveyance Premium" means the greater of the following, calculated as of the
--------------------
date of such prepayment: (i) an amount equal to the product of one percent (1%)
times the Prepayment Date Principal and (ii) the amount by which the sum of the
Discounted Values of Note Payments, calculated at the Reconveyance Discount
Rate, exceeds the Prepayment Date Principal.
(b) This Note may not be prepaid in full or in part before the second
anniversary of the date specified in Section 1(a)(i) above. Commencing on such
second anniversary, this Note may be prepaid only as follows:
(i) Provided there is no Event of Default, Borrower may prepay this
Note in full, but not in part, simultaneously with all of the other Notes,
upon not less than 90 days prior notice to Lender and upon payment in full
of the Debt then due and owing on the date of such prepayment, which will
include a Prepayment Premium calculated as of the date of such prepayment.
(ii) Provided there is no Event of Default, this Note may be prepaid
in full, but not in part, simultaneously with all of the other Notes, upon
payment in full of the Debt then due and owing on the date of such
prepayment, without payment of the Prepayment Premium, during the last 90
days of the Term upon not less than 3 Business Days notice to Lender.
(iii) Provided there is no Event of Default, Borrower may prepay this
Note in full, but not in part, as provided in the Section of the Related
Deed of Trust entitled "Reconveyance Rights," upon payment in full of all
-------------------
amounts due under this Note, which will include a Reconveyance Premium
calculated as of the date of such prepayment, together with the required
partial prepayment of the principal amount of the other Notes as provided
in such Section.
(iv) Provided there is no Event of Default, Borrower may prepay this
Note in part when required as a condition to prepayment in full of another
Note as provided in the Section entitled "Reconveyance Rights" of one of
-------------------
the Deeds of Trust other than the Related Deed of Trust. No prepayment
premium shall be due under this Note in the event of such partial
prepayment. In the event of any such partial prepayment, the monthly
payments due thereafter under this Note pursuant to Section 1(a)(ii) above
shall be reduced so as to equal the monthly payment amount which would
fully amortize the then-remaining Principal at the Fixed Interest Rate in
blended level payments over the number of full calendar months between the
date of such partial prepayment and the twenty-fifth anniversary of the
date specified in Section 1(a)(i) above, all as determined by Lender.
(c) After an Acceleration or upon any prepayment not permitted by the Loan
Documents, any tender of payment of the amount necessary to satisfy the Debt
accelerated, any judgment of foreclosure, any statement of the amount due at the
time of foreclosure (including foreclosure by power of sale) and any tender of
payment made during any redemption period after foreclosure, will include an
Evasion Premium, calculated as of the date of the Acceleration or the date of
such unpermitted prepayment, as the case may be.
3
<PAGE>
(d) Borrower acknowledges that:
(i) a prepayment of this Note without payment of the Prepayment
Premium, Reconveyance Premium or Evasion Premium (the "Premiums"), as
--------
applicable, will cause damage to Lender;
(ii) the Premiums are intended to compensate Lender for the loss of
its investment and the expense incurred and time and effort associated
with making the Loan, which will not be fully repaid if the Loan is
prepaid without payment of the applicable Premium;
(iii) it will be extremely difficult and impractical to ascertain the
extent of Lender's damages caused by a prepayment after an Event of
Default or any other prepayment not permitted by the Loan Documents;
and
(iv) the Premiums represent Lender and Borrower's reasonable estimate
of Lender's damages for a prepayment and is not a penalty.
(e) BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT LENDER WOULD NOT LEND TO
BORROWER THE LOAN EVIDENCED BY THIS NOTE WITHOUT (1) BORROWER'S WAIVER OF ANY
RIGHTS IT MAY HAVE UNDER CALIFORNIA CIVIL CODE SECTION 2954.10 TO PREPAY THIS
NOTE IN WHOLE OR IN PART, WITHOUT PENALTY, UPON ACCELERATION OF THE MATURITY
DATE OF THIS NOTE, AND (2) BORROWER'S AGREEMENT, AS SET FORTH ABOVE, TO PAY
LENDER THE APPLICABLE PREMIUM UPON THE SATISFACTION OF ALL OR ANY PORTION OF THE
PRINCIPAL INDEBTEDNESS EVIDENCED HEREBY FOLLOWING THE ACCELERATION OF THE
MATURITY DATE HEREOF BY REASON OF A DEFAULT HEREUNDER OR UNDER ONE OR MORE OF
THE DEEDS OF TRUST INCLUDING, WITHOUT LIMITATION, A DEFAULT ARISING FROM THE
CONVEYANCE OF ANY RIGHT, TITLE OR INTEREST IN THE PROPERTY ENCUMBERED BY ANY OF
THE DEEDS OF TRUST WHICH IS NOT PERMITTED THEREBY, AND BORROWER HAS CAUSED THOSE
PERSONS SIGNING THIS NOTE ON BORROWER'S BEHALF TO SEPARATELY EXECUTE THE
AGREEMENT CONTAINED IN THIS PARAGRAPH, IN COMPLIANCE WITH CALIFORNIA CIVIL CODE
SECTION 2954.10. BY PLACING ITS SIGNATURE BELOW, BORROWER ACKNOWLEDGES THAT (I)
THE GENERAL PARTNERS, PRINCIPALS OR MEMBERS, AS THE CASE MAY BE, OF BORROWER ARE
KNOWLEDGEABLE REAL ESTATE DEVELOPERS OR INVESTORS, (II) BORROWER FULLY
UNDERSTANDS THE EFFECT OF THE ABOVE WAIVER, (III) THE MAKING OF THE LOAN BY
LENDER AT THE RATE SET FORTH ABOVE IS SUFFICIENT CONSIDERATION FOR SUCH WAIVER,
AND (IV) LENDER WOULD NOT MAKE THE LOAN WITHOUT SUCH WAIVER.
KILROY REALTY, L.P.,
a Delaware limited partnership
By: KILROY REALTY CORPORATION,
a Maryland corporation, its general partner
By /s/ Tyler H. Rose
_________________________________
Tyler H. Rose,
Senior Vice President and Treasurer
4
<PAGE>
Section 3. Events of Default:
--------- ------------------
(a) It is an "Event of Default" under this Note:
----------------
(i) if Borrower fails to pay any amount due, as and when required,
under this Note or any other Loan Document and the failure continues
for a period of 5 days; or
(ii) if an Event of Default occurs under (and as defined in) any other
Loan Document.
(b) If an Event of Default occurs, Lender may declare all or any portion of
the Debt immediately due and payable ("Acceleration") and exercise any of the
------------
other Remedies.
Section 4. Default Rate. Interest on the Principal will accrue at the
--------- ------------
Default Interest Rate from the date an Event of Default occurs, and such
interest shall be payable upon demand.
Section 5 . Late Charges.
--------- ------------
(a) If Borrower fails to pay any Debt Service Payment when due and the
failure continues for a period of 5 days or more or fails to pay any amount then
due and payable under the Loan Documents on the Maturity Date, Borrower agrees
to pay to Lender an amount (a "Late Charge") equal to five cents ($.05) for each
-----------
one dollar ($1.00) of the delinquent payment.
(b) Borrower acknowledges that:
(i) a delinquent payment will cause damage to Lender;
(ii) the Late Charge is intended to compensate Lender for loss of use
of the delinquent payment and the expense incurred and time and effort
associated with recovering the delinquent payment;
(iii) it will be extremely difficult and impractical to ascertain the
extent of Lender's damages caused by the delinquency; and
(iv) the Late Charge represents Lender and Borrower's reasonable
estimate of Lender's damages from the delinquency and is not a
penalty.
Section 6. Limitation of Liability. This Note is subject to the
--------- -----------------------
limitations on liability set forth in the Article of the Deeds of Trust entitled
"Limitation of Liability".
-----------------------
Section 7. WAIVERS. IN ADDITION TO THE WAIVERS SET FORTH IN THE ARTICLE
--------- -------
OF THE DEEDS OF TRUST ENTITLED "WAIVERS", BORROWER WAIVES PRESENTMENT FOR
-------
PAYMENT, DEMAND, DISHONOR AND, EXCEPT AS EXPRESSLY SET FORTH IN THE LOAN
DOCUMENTS, NOTICE OF ANY OF THE FOREGOING. BORROWER FURTHER WAIVES ANY PROTEST,
LACK OF DILIGENCE OR DELAY IN COLLECTION OF THE DEBT OR ENFORCEMENT OF THE LOAN
DOCUMENTS. BORROWER AND ALL INDORSERS, SURETIES AND GUARANTORS OF
5
<PAGE>
THE OBLIGATIONS CONSENT TO ANY EXTENSIONS OF TIME, RENEWALS, WAIVERS AND
MODIFICATIONS THAT LENDER MAY GRANT WITH RESPECT TO THE OBLIGATIONS AND TO THE
RELEASE OF ANY SECURITY FOR THIS NOTE AND AGREE THAT ADDITIONAL MAKERS MAY
BECOME PARTIES TO THIS NOTE AND ADDITIONAL INDORSERS, GUARANTORS OR SURETIES MAY
BE ADDED WITHOUT NOTICE AND WITHOUT AFFECTING THE LIABILITY OF THE ORIGINAL
MAKER OR ANY ORIGINAL INDORSER, SURETY OR GUARANTOR.
Section 8. Commercial Loan. The Loan is made for the purpose of carrying
--------- ---------------
on a business or commercial activity or acquiring real or personal property as
an investment or carrying on an investment activity and not for personal or
household purposes.
Section 9. Usury Limitations. Borrower and Lender intend to comply with
--------- -----------------
all Laws with respect to the charging and receiving of interest. Any amounts
charged or received by Lender for the use or forbearance of the Principal to the
extent permitted by Law, will be amortized and spread throughout the Term until
payment in full so that the rate or amount of interest charged or received by
Lender on account of the Principal does not exceed the Maximum Interest Rate. If
any amount charged or received under the Loan Documents that is deemed to be
interest is determined to be in excess of the amount permitted to be charged or
received at the Maximum Interest Rate, the excess will be deemed to be a
permitted prepayment of Principal when paid, without premium, and any portion of
the excess not capable of being so applied will be promptly refunded to
Borrower. If during the Term the Maximum Interest Rate, if any, is eliminated,
then for purposes of the Loan, there will be no Maximum Interest Rate.
Section 10. Applicable Law. This Note is governed by and will be
---------- --------------
construed in accordance with the Laws of California, without regard to conflict
of law provisions.
Section 11. Time of the Essence. Time is of the essence with respect to
---------- -------------------
the payment and performance of the Obligations.
Section 12. Cross-Default. A default under any other note now or
---------- -------------
hereafter secured by the Loan Documents or under any loan document related to
such other note constitutes a default under this Note and under the other Loan
Documents. When the default under the other note constitutes an Event of
Default under that note or the related loan document, an Event of Default also
will exist under this Note and the other Loan Documents.
Section 13. Construction. Unless expressly provided otherwise in this
---------- ------------
Note, this Note will be construed in accordance with the Exhibit attached to the
Deeds of Trust entitled "Rules of Construction".
---------------------
Section 14. Mortgage Provisions Incorporated. To the extent not otherwise
---------- --------------------------------
set forth in this Note, the provisions of the Articles of the Deeds of Trust
entitled "Expenses and Duty to Defend", "Waivers", "Notices", and
--------------------------- ------- -------
"Miscellaneous" and the Section of the Deeds of Trust entitled "General
------------- -------
Provisions Pertaining to Remedies" are applicable to this Note and deemed
- ---------------------------------
incorporated by reference as if set forth at length in this Note.
6
<PAGE>
Section 15. Joint and Several Liability; Successors and Assigns. This
---------- ---------------------------------------------------
Note binds Borrower and its successors, assigns, heirs, administrators,
executors, agents and representatives and inures to the benefit of Lender and
its successors, assigns, heirs, administrators, executors, agents and
representatives.
Section 16. Absolute Obligation. Except for the Section of this Note
---------- -------------------
entitled "Limitation of Liability", no reference in this Note to the other Loan
-----------------------
Documents and no other provision of this Note or of the other Loan Documents
will impair or alter the obligation of Borrower, which is absolute and
unconditional, to pay the Principal, interest at the Fixed Interest Rate and any
other amounts due and payable under this Note, as and when required.
IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the
date first set forth above.
KILROY REALTY, L.P.,
a Delaware limited partnership
By: KILROY REALTY CORPORATION,
a Maryland corporation, its general partner
By /s/ Tyler H. Rose
_________________________________
Tyler H. Rose,
Senior Vice President and Treasurer
7
<PAGE>
The following pages include the facing pages for the following Promissory Notes
payable to Teachers Insurance and Annuity Association of America in the
following amounts:
<TABLE>
<CAPTION>
<S> <C>
Promissory Note 2 $ 9,200,000.00
Promissory Note 3 $ 5,100,000.00
Promissory Note 4 $ 8,900,000.00
Promissory Note 5 $18,300,000.00
Promissory Note 6 $ 9,200,000.00
Promissory Note 7 $ 9,800,000.00
Promissory Note 8 $ 6,600,000.00
Promissory Note 9 $ 7,900,000.00
</TABLE>
The remaining pages of these Promissory Notes are identical to Promissory Note 1
and have been intentionally omitted.
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 2)
$9,200,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Nine
Million Two Hundred Thousand Dollars ($9,200,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Sixty-Six Thousand Two Hundred Two and 16/100 Dollars ($66,202.16)
(subject to adjustment as provided in Section 2(b)(iv) below), each of
which will be applied first to accrued interest on the Principal at the
Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 3)
$5,100,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Five
Million One Hundred Thousand Dollars ($5,100,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Thirty-Six Thousand Six Hundred Ninety-Nine and 02/100 Dollars
($36,699.02) (subject to adjustment as provided in Section 2(b)(iv) below),
each of which will be applied first to accrued interest on the Principal at
the Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 4)
$8,900,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Eight
Million Nine Hundred Thousand Dollars ($8,900,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Sixty-Four Thousand Forty-Three and 39/100 Dollars ($64,043.39) (subject
to adjustment as provided in Section 2(b)(iv) below), each of which will be
applied first to accrued interest on the Principal at the Fixed Interest
Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 5)
$18,300,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of
Eighteen Million Three Hundred Thousand Dollars ($18,300,000.00) (the principal
sum or so much of the principal sum as may be advanced and outstanding from time
to time, whichever is less, the "Principal"), in lawful money of the United
---------
States of America, with interest on the Principal from and after the date
advanced at the fixed rate of seven and two-tenths percent (7.20%) per annum
(the "Fixed Interest Rate") and as otherwise provided herein.
-------------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of One Hundred Thirty-One Thousand Six Hundred Eighty-Four and 73/100
Dollars ($131,684.73) (subject to adjustment as provided in Section
2(b)(iv) below), each of which will be applied first to accrued interest on
the Principal at the Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 6)
$9,200,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Nine
Million Two Hundred Thousand Dollars ($9,200,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Sixty-Six Thousand Two Hundred Two and 16/100 Dollars ($66,202.16)
(subject to adjustment as provided in Section 2(b)(iv) below), each of
which will be applied first to accrued interest on the Principal at the
Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 7)
$9,800,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Nine
Million Eight Hundred Thousand Dollars ($9,800,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Seventy Thousand Five Hundred Nineteen and 69/100 Dollars ($70,519.69)
(subject to adjustment as provided in Section 2(b)(iv) below), each of
which will be applied first to accrued interest on the Principal at the
Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 8)
$6,600,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Six
Million Six Hundred Thousand Dollars ($6,600,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Forty-Seven Thousand Four Hundred Ninety-Two and 85/100 Dollars
($47,492.85) (subject to adjustment as provided in Section 2(b)(iv) below),
each of which will be applied first to accrued interest on the Principal at
the Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
TIAA Appl. #CA-3207
M-000459100
PROMISSORY NOTE
---------------
(Note No. 9)
$7,900,000.00 El Segundo, California
March 11, 1999
FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited
partnership ("Borrower"),having its principal place of business at 2250 East
--------
Imperial Highway, El Segundo, California 90245, promises to pay to TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
or order, at Lender's offices at 730 Third Avenue, New York, New York 10017 or
at such other place as Lender designates in writing, the principal sum of Seven
Million Nine Hundred Thousand Dollars ($7,900,000.00) (the principal sum or so
much of the principal sum as may be advanced and outstanding from time to time,
whichever is less, the "Principal"), in lawful money of the United States of
---------
America, with interest on the Principal from and after the date advanced at the
fixed rate of seven and two-tenths percent (7.20%) per annum (the "Fixed
-----
Interest Rate") and as otherwise provided herein.
- -------------
This Promissory Note (the "Note") is one of nine promissory notes
----
executed and delivered by Borrower evidencing a loan (the "Loan") in the
----
original aggregate amount of Ninety-Five Million Dollars ($95,000,000.00) (the
"Notes"). This Note is secured by, among other things, nine Deeds of Trust,
- ------
Assignments of Leases and Rents, Security Agreements and Fixture Filing
Statements (the "Deeds of Trust"), dated the date of this Note, made by Borrower
--------------
for the benefit of Lender as security for the Loan. The Deed of Trust which, in
its Recitals, identifies this Note as the "Related Note" is referred to herein
as the "Related Deed of Trust". All capitalized terms not expressly defined in
---------------------
this Note will have the definitions set forth in the Related Deed of Trust.
Section 1. Payments of Principal and Fixed Interest.
--------- ----------------------------------------
(a) Borrower will make monthly installment payments ("Debt Service
------------
Payments") as follows:
- --------
(i) On April 1, 1999, a payment of accrued interest on the Principal at
the Fixed Interest Rate; and
(ii) On May 1, 1999, and on the first Business Day of each succeeding
calendar month through and including March 1, 2009, payments in the amount
of Fifty-Six Thousand Eight Hundred Forty-Seven and 51/100 Dollars
($56,847.51) (subject to adjustment as provided in Section 2(b)(iv) below),
each of which will be applied first to accrued interest on the Principal at
the Fixed Interest Rate and then to the Principal.
(b) On April 1, 2009 (the "Maturity Date"), Borrower will pay the
-------------
Principal in full together with accrued interest at the Fixed Interest Rate and
all other amounts due under the Loan Documents.
1
<PAGE>
Exhibit 10.2
After Recordation This Deed of Trust
Should Be Returned To:
Margaret E. Taylor, Esquire
c/o Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, New York 10017
DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS,
----------------------------------------------
SECURITY AGREEMENT AND FIXTURE FILING STATEMENT
-----------------------------------------------
(Deed of Trust No. )
by and between
KILROY REALTY, L.P., a Delaware limited partnership,
as Borrower
and
CHICAGO TITLE INSURANCE COMPANY,
as Trustee
for the benefit of
TEACHERS INSURANCE AND ANNUITY ASSOCIATION
OF AMERICA,
as Lender
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
RECITALS........................................................................ 1
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION....................... 2
-------------------------------------
Section 1.1. Definitions............................................. 2
Section 1.2. Rules of Construction................................... 2
ARTICLE II GRANTING CLAUSES............................................ 2
----------------
Section 2.1. Encumbered Property..................................... 2
Section 2.2. Habendum Clause......................................... 4
Section 2.3. Security Agreement...................................... 4
Section 2.4. Conditions to Grant..................................... 4
ARTICLE III OBLIGATIONS SECURED......................................... 5
-------------------
Section 3.1. The Obligations......................................... 5
ARTICLE IV TITLE AND AUTHORITY......................................... 5
-------------------
Section 4.1. Title to the Property................................... 5
Section 4.2. Authority............................................... 5
Section 4.3. No Foreign Person....................................... 6
Section 4.4. Litigation.............................................. 6
ARTICLE V PROPERTY STATUS, MAINTENANCE AND LEASES..................... 6
---------------------------------------
Section 5.1. Status of the Property.................................. 6
Section 5.2. Maintenance of the Property............................. 7
Section 5.3. Change in Use........................................... 7
Section 5.4. Waste................................................... 7
Section 5.5. Inspection of the Property.............................. 7
Section 5.6. Leases and Rents........................................ 7
Section 5.7. Parking................................................. 8
Section 5.8. Separate Tax Lot........................................ 8
Section 5.9. Changes in Zoning or Restrictive Covenants.............. 8
Section 5.10. Lender's Right to Appear................................ 8
ARTICLE VI IMPOSITIONS AND ACCUMULATIONS............................... 8
-----------------------------
Section 6.1. Impositions............................................. 8
Section 6.2. Accumulations........................................... 9
Section 6.3. Changes in Tax Laws..................................... 10
ARTICLE VII INSURANCE, CASUALTY, CONDEMNATION AND RESTORATION........... 10
-------------------------------------------------
Section 7.1. Insurance Coverages..................................... 10
Section 7.2. Casualty and Condemnation............................... 12
Section 7.3. Application of Proceeds................................. 13
Section 7.4. Conditions to Availability of Proceeds for Restoration.. 13
Section 7.5. Restoration............................................. 14
ARTICLE VIII COMPLIANCE WITH LAW AND AGREEMENTS.......................... 16
----------------------------------
Section 8.1. Compliance with Law..................................... 16
Section 8.2. Compliance with Agreements.............................. 16
Section 8.3. ERISA Compliance........................................ 16
Section 8.4. Section 6045(e) Filing.................................. 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX ENVIRONMENTAL............................................... 17
-------------
Section 9.1. Environmental Representations and Warranties............ 17
Section 9.2. Environmental Covenants................................. 17
ARTICLE X FINANCIAL REPORTING......................................... 19
-------------------
Section 10.1. Financial Reporting..................................... 19
ARTICLE XI EXPENSES AND DUTY TO DEFEND................................. 19
---------------------------
Section 11.1. Payment of Expenses..................................... 19
Section 11.2. Duty to Defend.......................................... 20
ARTICLE XII TRANSFERS, LIENS AND ENCUMBRANCES........................... 20
---------------------------------
Section 12.1. Prohibitions on Transfers, Liens and Encumbrances....... 20
Section 12.2. Permitted Transfers..................................... 21
Section 12.3. Right to Contest Liens.................................. 23
Section 12.4. Reconveyance Rights..................................... 23
Section 12.5. Substitution of Properties.............................. 25
ARTICLE XIII ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS........ 26
----------------------------------------------------
Section 13.1. Further Assurances...................................... 26
Section 13.2. Estoppel Certificates................................... 26
ARTICLE XIV DEFAULTS AND REMEDIES....................................... 27
---------------------
Section 14.1. Events of Default....................................... 27
Section 14.2. Remedies................................................ 28
Section 14.3. General Provisions Pertaining to Remedies............... 29
Section 14.4. Foreclosure by Power of Sale............................ 29
Section 14.5. General Provisions Pertaining to Receiver and other
Remedies................................................ 30
Section 14.6. General Provisions Pertaining to Foreclosures and
the Power of Sale....................................... 31
Section 14.7. Application of Proceeds................................. 32
Section 14.8. Power of Attorney....................................... 32
Section 14.9. Tenant at Sufferance.................................... 32
ARTICLE XV LIMITATION OF LIABILITY..................................... 33
-----------------------
Section 15.1. Limitation of Liability................................. 33
ARTICLE XVI WAIVERS..................................................... 35
-------
Section 16.1. WAIVER OF STATUTE OF LIMITATIONS........................ 35
Section 16.2. WAIVER OF NOTICE........................................ 35
Section 16.3. WAIVER OF MARSHALLING AND OTHER MATTERS................. 35
Section 16.4. WAIVER OF TRIAL BY JURY................................. 35
Section 16.5. WAIVER OF COUNTERCLAIM.................................. 35
Section 16.6. [INTENTIONALLY OMITTED]................................. 35
Section 16.7. WAIVER OF SUBROGATION................................... 35
Section 16.8. GENERAL WAIVER.......................................... 35
ARTICLE XVII NOTICES..................................................... 36
-------
Section 17.1. Notices................................................. 36
Section 17.2. Change in Borrower's Name or Place of Business.......... 37
Section 17.3. Request for Notice...................................... 37
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE XVIII MISCELLANEOUS............................................... 37
-------------
Section 18.1. Applicable Law.......................................... 37
Section 18.2. Usury Limitations....................................... 37
Section 18.3. Lender's Discretion..................................... 37
Section 18.4. Unenforceable Provisions................................ 37
Section 18.5. Survival of Borrower's Obligations...................... 38
Section 18.6. Relationship Between Borrower and Lender;
No Third Party Beneficiaries............................ 38
Section 18.7. Partial Reconveyances or Releases, Extensions, Waivers . 38
Section 18.8. Service of Process...................................... 39
Section 18.9. Entire Agreement........................................ 39
Section 18.10. No Oral Amendment....................................... 39
Section 18.11. Severability............................................ 39
Section 18.12. Covenants Run with the Land............................. 39
Section 18.13. Time of the Essence..................................... 39
Section 18.14. Subrogation............................................. 39
Section 18.15. [INTENTIONALLY OMITTED]................................. 39
Section 18.16. Successors and Assigns.................................. 39
Section 18.17. Duplicates and Counterparts............................. 40
ARTICLE XIX TRUSTEE PROVISIONS.......................................... 40
------------------
Section 19.1. Acceptance of Trust..................................... 40
Section 19.2. Reconveyance After Payment.............................. 40
</TABLE>
iii
<PAGE>
DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS,
----------------------------------------------
SECURITY AGREEMENT AND FIXTURE FILING STATEMENT
-----------------------------------------------
(Deed of Trust No. 1)
THIS DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT
AND FIXTURE FILING STATEMENT is made this 11th day of March, 1999, by and
between KILROY REALTY, L.P., a Delaware limited partnership ("Borrower"), having
--------
its principal place of business at 2250 East Imperial Highway, El Segundo,
California 90245, and CHICAGO TITLE INSURANCE COMPANY ("Trustee"), having an
-------
office at 16969 Von Karman, Irvine, CA 92614, for the benefit of TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ("Lender"), a New York corporation,
------
having an address at 730 Third Avenue, New York, New York 10017.
RECITALS:
--------
A. Lender agreed to make and Borrower agreed to accept a loan (the
"Loan") in the maximum aggregate principal amount of Ninety-Five Million Dollars
- -----
($95,000,000.00).
B. To evidence the Loan, Borrower executed and delivered to Lender
nine promissory notes dated the date of this Deed of Trust (the "Notes") in the
-----
principal amounts set forth in Schedule 1 (those amounts, or so much as is
----------
outstanding from time to time under the Notes (whichever is less), are referred
to collectively as the "Principal"), promising to pay the Principal with
---------
interest thereon to the order of Lender as respectively set forth in each of the
Notes and with the balance, if any, of the Debt then outstanding being due and
payable on April 1, 2009 (the "Maturity Date"). The Note in the principal
-------------
amount of indicated as No. in Schedule 1, is referred to in
----------
this Deed of Trust as the "Related Note".
------------
C. To secure the Notes, Borrower has executed and delivered to
Lender this Deed of Trust, Assignment of Leases and Rents, Security Agreement
and Fixture Filing Statement (the "Deed of Trust"), which is one of nine Deeds
-------------
of Trust, Assignments of Leases and Rents, Security Agreements and Fixture
Filing Statements of the same date (the "Deeds of Trust"). The real and
--------------
personal property which is encumbered by the other eight Deeds of Trust is
referred to as the "Other Property". Upon any substitution as provided in the
--------------
Section of this Deed of Trust entitled "Substitution of Properties," the
--------------------------
Substitute Property shall be considered one of the Other Properties for all
purposes, and the deed of trust encumbering the Substitute Property shall be
considered one of the Deeds of Trust for all purposes. This Deed of Trust
conveys, among other things, Borrower's fee interest in the real property
located in the County of Los Angeles, State of California, more particularly
described in Exhibit A (the "Land").
--------- ----
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
1
<PAGE>
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
-------------------------------------
Section 1.1. Definitions. Capitalized terms used in this Deed of Trust
----------- -----------
are defined in Exhibit B or in the text with a cross-reference in Exhibit B.
--------- ---------
Section 1.2. Rules of Construction. This Deed of Trust will be
----------- ---------------------
interpreted in accordance with the rules of construction set forth in Exhibit
-------
C.
- -
ARTICLE II
GRANTING CLAUSES
----------------
Section 2.1. Encumbered Property. Borrower irrevocably grants,
----------- -------------------
mortgages, warrants, conveys, assigns and pledges to Trustee in trust, WITH
POWER OF SALE, and grants to Trustee a security interest in, the following
property, rights, interests and estates now or in the future owned or held by
Borrower (the "Property") for the uses and purposes set forth in this Deed of
--------
Trust:
(i) the Land;
(ii) all buildings and improvements located on the Land (the "Improve-
-------
ments");
-----
(iii) all easements; rights of way or use, including any rights of in-
gress and egress; streets, roads, ways, sidewalks, alleys and passages;
strips and gores; sewer rights; water, water rights, water courses,
riparian rights and drainage rights; air rights and development rights; oil
and mineral rights; and tenements, hereditaments and appurtenances, in each
instance adjoining or otherwise appurtenant to or benefitting the Land or
the Improvements;
(iv) all materials intended for construction, re-construction, alteration
or repair of the Improvements, such materials to be deemed included in the
Land and the Improvements immediately on delivery to the Land; all fixtures
and personal property that are attached to, contained in or used in
connection with the Land or the Improvements (excluding personal property
owned by tenants), including: furniture; furnishings; machinery; motors;
elevators; fittings; microwave ovens; refrigerators; office systems and
equipment; plumbing, heating, ventilating and air conditioning systems and
equipment; maintenance and landscaping equipment; lighting, cooking,
laundry, dry cleaning, refrigerating, incinerating and sprinkler systems
and equipment; telecommunications systems and equipment; computer or word
processing systems and equipment; security systems and equipment; and
equipment leases for any of the property described in this subsection (the
"Fixtures and Personal Property");
------------------------------
(v) all agreements, ground leases, grants of easements or rights-of-way,
permits, declarations of covenants, conditions and restrictions, dispo-
sition and development agreements, planned unit development agreements,
cooperative, condominium or similar ownership or conversion plans,
management, leasing, brokerage or parking agreements or other material
documents affecting Borrower or the Land, the Improvements or the Fixtures
2
<PAGE>
and Personal Property, expressly excluding the Leases (the "Property
--------
Documents");
---------
(vi) all inventory (including all goods, merchandise, raw materials,
incidentals, office supplies and packaging materials) held for sale, lease
or resale or furnished or to be furnished under contracts of service, or
used or consumed in the ownership, use or operation of the Land, the
Improvements or the Fixtures and Personal Property, all documents of title
evidencing any part of any of the foregoing and all returned or repossessed
goods arising from or relating to any sale or disposition of inventory;
(vii) all intangible personal property relating to the Land, the Improve-
ments or the Fixtures and Personal Property, including choses in action and
causes of action (except those personal to Borrower), corporate and other
business records, inventions, designs, promotional materials, blueprints,
plans, specifications, patents, patent applications, trademarks, trade
names, trade secrets, goodwill, copyrights, registrations, licenses,
franchises, claims for refunds or rebates of taxes, insurance surpluses,
refunds or rebates of taxes and any letter of credit, guarantee, claim,
security interest or other security held by or granted to Borrower to
secure payment by an account debtor of any of the accounts of Borrower
arising out of the ownership, use or operation of the Land, the
Improvements or the Fixtures and Personal Property, and documents covering
all of the foregoing; all accounts, accounts receivable, documents, in-
struments, money, deposit accounts, funds deposited in accounts estab-
lished with a bank, savings and loan association, trust company or other
financial institution in connection with the ownership, use or operation of
the Land, the Improvements or the Fixtures and Personal Property, including
any reserve accounts or escrow accounts, and all investments of the funds
and all other general intangibles;
(viii) all awards and other compensation paid after the date of this Deed
of Trust for any Condemnation (the "Condemnation Awards");
-------------------
(ix) all proceeds of and all unearned premiums on the Policies arising
from or relating to the Property (the "Insurance Proceeds");
------------------
(x) all licenses, certificates of occupancy, contracts, management agree-
ments, operating agreements, operating covenants, franchise agreements,
permits and variances relating to the Land, the Improvements or the Fix-
tures and Personal Property;
(xi) all books, records and other information, wherever located, which are
in Borrower's possession, custody or control or to which Borrower is
entitled at law or in equity and which are related to the Property,
including all computer or other equipment used to record, store, manage,
manipulate or access the information;
(xii) all deposits held from time to time by the Accumulations Depositary
to provide reserves for Taxes and Assessments, together with interest
thereon, if any (the "Accumulations"), and the account or accounts in which
-------------
such deposits are or may be held;
3
<PAGE>
(xiii) without limiting the above, all goods, accounts, documents, in-
struments, money, deposit accounts, chattel paper and general intangibles,
as those terms are defined in the Uniform Commercial Code, in any way
relating to any of the property described in this Section (including the
design, development, construction, improvement, equipping, furnishing, use,
operation, management, occupancy, financing or sale thereof); and
(xiv) all after-acquired title to or remainder or reversion in any of the
property described in this Section; all additions, accessions and
extensions to, improvements of and substitutions or replacements for any of
such property; all products and all cash and non-cash proceeds, immediate
or remote (including proceeds which are goods, equipment, inventory,
instruments, chattel paper, documents, accounts, deposit accounts or
general intangibles), of any sale or other disposition of any of such
property, excluding sales or other dispositions of inventory in the
ordinary course of the business of operating the Land or the Improvements;
and all additional lands, estates, interests, rights or other property
acquired by Borrower after the date of this Deed of Trust for use in
connection with the Land and Improvements, all without the need for any
additional mortgage, assignment, pledge or conveyance to Lender but
Borrower will execute and deliver to Lender, upon Lender's request, any
documents reasonably requested by Lender to further evidence the foregoing.
Section 2.2. Habendum Clause. [Intentionally Deleted]
----------- ---------------
Section 2.3. Security Agreement.
----------- ------------------
(a) The Property includes both real and personal property and this Deed of
Trust is a real property deed of trust and also a "security agreement" and a
"financing statement" within the meaning of the Uniform Commercial Code. By
executing and delivering this Deed of Trust, Borrower grants to Lender, as
security for the Obligations, a security interest in the Property to the full
extent that any of the Property may be subject to the Uniform Commercial Code.
(b) Borrower desires and intends that this Deed of Trust also constitute a
Fixture Filing between Borrower as debtor and Lender as secured party, as
defined in Section 9313 (1)(b) of the California Commercial Code. To this end,
Borrower acknowledges that (i) this Deed of Trust covers goods which are or are
to become fixtures on the Land; (ii) this financing statement is to be recorded;
(iii) Borrower is the record owner of such property; and (iv) products of
collateral are also covered. Except as otherwise provided in the Loan Documents
and subject to any Permitted Exceptions and Permitted Liens, no financing
statement in favor of any secured party other than Lender covering the personal
property described herein or any portion thereof is on file in any public
office. Borrower will not remove or permit the removal of the collateral or any
part thereof without the prior written permission of Lender, provided that
obsolete and worn-out articles may be removed concurrently with the replacement
or renewal thereof with property of at least equal value or usefulness in the
operation of the Property without Lender's consent.
Section 2.4. Conditions to Grant. This Deed of Trust is made on the
----------- -------------------
express condition that if Borrower pays and performs the Obligations in full in
4
<PAGE>
accordance with the Loan Documents, then unless expressly provided otherwise in
the Loan Documents, the Loan Documents will be released at Borrower's expense.
ARTICLE III
OBLIGATIONS SECURED
-------------------
Section 3.1. The Obligations. This Deed of Trust secures the Principal,
----------- ---------------
the Interest, the Late Charges, the Prepayment Premiums, the Expenses, any
additional advances made by Lender in connection with the Property, the Other
Property or the Loan and all other amounts payable under the Loan Documents (the
"Debt") and also secures both the timely payment of the Debt as and when
----
required and the timely performance of all other obligations and covenants to be
performed under the Loan Documents (such payment and performance collectively
the "Obligations"). Notwithstanding any other provision herein to the contrary,
-----------
this Deed of Trust does not secure any separate environmental indemnity provided
to Lender in connection with the Loan.
ARTICLE IV
TITLE AND AUTHORITY
-------------------
Section 4.1. Title to the Property.
----------- ---------------------
(a) Subject to the conveyance effectuated by this Deed of Trust, Borrower
has and will continue to have good and marketable title in fee simple absolute
to the Land and the Improvements and good and marketable title to the Fixtures
and Personal Property, all free and clear of liens, encumbrances and charges
except the Permitted Exceptions and Permitted Liens. To Borrower's knowledge,
there are no facts or circumstances that might give rise to a lien, encumbrance
or charge on the Property that is not a Permitted Exception or Permitted Lien.
(b) Borrower owns and will continue to own all of the other Property free
and clear of all liens, encumbrances and charges except the Permitted Exceptions
and Permitted Liens.
(c) This Deed of Trust is and will remain a valid and enforceable first
lien on and security interest in the Property, subject only to the Permitted
Exceptions and Permitted Liens.
Section 4.2. Authority.
----------- ---------
(a) Borrower is and will continue to be (i) duly organized, validly exis-
ting and in good standing under the Laws of the State of Delaware and (ii) duly
qualified to conduct business, in good standing, in the State of California.
(b) Borrower has and will continue to have all approvals required by Law
or otherwise and full right, power and authority to (i) own and operate the
Property and carry on Borrower's business as now conducted or as proposed to be
conducted; (ii) execute and deliver the Loan Documents; (iii) grant, mortgage,
warrant the title to, convey, assign and pledge the Property to Lender pursuant
to the provisions of this Deed of Trust; and (iv) perform the Obligations.
(c) The execution and delivery of the Loan Documents and the performance
of the Obligations do not and will not conflict with or result in a default
under
5
<PAGE>
any Laws or any Leases or Property Documents and do not and will not conflict
with or result in a default under any agreement binding upon Borrower.
(d) The Loan Documents constitute and will continue to constitute legal,
valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Section 4.3. No Foreign Person. Borrower is not a "foreign person"
----------- -----------------
within the meaning of Section 1445(f)(3) of the Code.
Section 4.4. Litigation. There are no Proceedings (other than Proceedings
------------ ----------
the defense of which, and any liability potentially arising from which, is
covered by insurance) or, to Borrower's knowledge, investigations against or
affecting Borrower or the Property and, to Borrower's knowledge, there are no
facts or circumstances that might give rise to a Proceeding or an investigation
against or affecting Borrower or the Property. Borrower will give Lender prompt
notice of the commencement of any Proceeding or investigation against or
affecting the Property or Borrower which could have a material adverse effect on
the Property or on Lender's interests in the Property or under the Loan
Documents. Borrower also will deliver to Lender such additional information
relating to the Proceeding or investigation as Lender may request from time to
time.
ARTICLE V
PROPERTY STATUS, MAINTENANCE AND LEASES
---------------------------------------
Section 5.1. Status of the Property.
----------- ----------------------
(a) Borrower has obtained and will maintain in full force and effect all
certificates, licenses, permits and approvals that are issued or required by Law
or by any entity having jurisdiction over the Property or over Borrower or that
are necessary for the Permitted Use, for occupancy and operation of the Property
for the conveyance described in this Deed of Trust and for the conduct of
Borrower's business on the Property in accordance with the Permitted Use.
(b) The Property is and will continue to be serviced by all public util-
ities required for the Permitted Use of the Property.
(c) All roads and streets necessary for service of and access to the Prop-
erty for the current or contemplated use of the Property have been completed and
are, and to the best of Borrower's knowledge will continue to be, serviceable,
physically open and dedicated to and accepted by the Government for use by the
public.
(d) The Property is free from damage caused by a Casualty.
(e) All costs and expenses of labor, materials, supplies and equipment
used in the construction of the Improvements and due and owing as of the date
hereof have been paid in full.
6
<PAGE>
Section 5.2. Maintenance of the Property. Borrower will maintain the
----------- ---------------------------
Property in thorough repair and good and safe condition, subject to ordinary
wear and tear, suitable for the Permitted Use, including, to the extent
necessary, replacing the Fixtures and Personal Property with property at least
equal in quality and condition to that being replaced and free of liens other
than Permitted Exceptions and Permitted Liens. Borrower will not erect any new
buildings, building additions or other structures on the Land or otherwise
materially alter the Improvements without Lender's prior consent which may be
withheld in Lender's sole discretion. In the event Borrower does not manage the
Property directly, the Property will be managed by a property manager
satisfactory to Lender pursuant to a management agreement satisfactory to Lender
and terminable by Borrower upon 30 days' notice to the property manager.
Section 5.3. Change in Use. Borrower will use and permit the use of
----------- -------------
the Property for the Permitted Use and for no other purpose.
Section 5.4. Waste. Borrower will not commit or permit any waste
----------- -----
(including economic and non-physical waste), impairment or deterioration of the
Property or any alteration, demolition or removal of any of the Property without
Lender's prior consent which may be withheld in Lender's sole discretion.
Section 5.5. Inspection of the Property. Subject to the rights of
----------- --------------------------
tenants under the Leases, Lender and its agents, attorneys, employees and
contractors have the right to enter and inspect the Property on reasonable prior
notice, during regular business hours, except during the existence of an Event
of Default, when no prior notice is necessary. Borrower shall cooperate in such
entries and inspections as Lender may request. Lender has the right to engage
an independent expert to review and report on Borrower's compliance with
Borrower's obligations under this Deed of Trust to maintain the Property, comply
with Law and refrain from waste, impairment or deterioration of the Property and
the alteration, demolition or removal of any of the Property except as may be
permitted by the provisions of this Deed of Trust. If the independent expert's
report discloses material failure to comply with such obligations or if Lender
engages the independent expert after the occurrence of an Event of Default, then
the independent expert's review and report will be at Borrower's expense,
payable on demand.
Section 5.6. Leases and Rents.
----------- ----------------
(a) Borrower assigns the Leases and the Rents to Lender absolutely and
unconditionally and not merely as additional collateral or security for the
payment and performance of the Obligations, but subject to a license back to
Borrower of the right to collect, receive and use the Rents unless and until an
Event of Default occurs at which time the license will terminate automatically,
all as more particularly set forth in the Assignment, the provisions of which
are incorporated in this Deed of Trust by reference.
(b) Borrower appoints Lender as Borrower's attorney-in-fact to execute
unilaterally and record, at Lender's election, a document subordinating this
Deed of Trust to the Leases, provided that the subordination will not affect (i)
--------
the priority of Lender's entitlement to Insurance Proceeds or Condemnation
Awards or (ii) the priority of this Deed of Trust over intervening liens or
liens arising under or with respect to the Leases.
7
<PAGE>
Section 5.7. Parking. Borrower will provide, maintain, police and
----------- -------
light parking areas within the Property, including any sidewalks, aisles,
streets, driveways, sidewalk cuts and rights-of-way to and from the adjacent
public streets, in a manner consistent with the Permitted Use and sufficient to
accommodate the greatest of: (i) the number of parking spaces required by Law;
(ii) the number of parking spaces required by the Leases and the Property
Documents; or (iii) the number of parking spaces shown in Schedule 1 corres-
----------
ponding to the Related Note. The parking areas will be reserved and used
exclusively for ingress, egress and parking for Borrower and the tenants under
the Leases and their respective employees, customers and invitees and in accord-
ance with the Leases and the Property Documents.
Section 5.8. Separate Tax Lot. The Property is and will remain assessed
----------- ----------------
for real estate tax purposes as one or more wholly independent tax lots,
separate from any property that is not part of the Property.
Section 5.9. Changes in Zoning or Restrictive Covenants. Borrower
----------- ------------------------------------------
will not (i) initiate, join in or consent to any change in any Laws pertaining
to zoning, any restrictive covenant or other restriction which would restrict
the Permitted Uses for the Property; (ii) permit the Property to be used to
fulfill any requirements of Law for property that is not part of the Property,
including any such requirements for the construction or maintenance of any
improvements on or for the benefit of property that is not part of the Property;
(iii) permit the Property to be used for any purpose not included in the
Permitted Use; or (iv) impair the integrity of the Property as a single, legally
subdivided zoning lot separate from all other property.
Section 5.10. Lender's Right to Appear. Lender has the right to appear in
------------ ------------------------
and defend any Proceeding brought regarding the Property and to bring any
Proceeding, in the name and on behalf of Borrower or in Lender's name, which
Lender, in its sole discretion, determines should be brought to protect Lender's
interest in the Property.
ARTICLE VI
IMPOSITIONS AND ACCUMULATIONS
-----------------------------
Section 6.1. Impositions.
----------- -----------
(a) Subject to Borrower's right to contest Taxes and Assessments as
provided below, Borrower will pay each Imposition before the date (the
"Imposition Penalty Date") that is the earlier of (i) the date on which the
- ------------------------
Imposition becomes delinquent and (ii) the date on which any penalty, interest
or charge for non-payment of the Imposition accrues.
(b) Not more than 45 days after each Imposition Penalty Date, Borrower
will deliver to Lender a receipted bill or canceled checks evidencing payment.
(c) Borrower, at its own expense, may contest any Imposition, provided
--------
that the following conditions are met:
(i) not less than 30 days prior to the Imposition Penalty Date, Borrower
delivers to Lender notice of the proposed contest;
8
<PAGE>
(ii) the contest is by a Proceeding promptly initiated and conducted
diligently and in good faith;
(iii) there is no Event of Default;
(iv) the Proceeding suspends the collection and enforcement of the con-
tested Taxes or Assessments;
(v) the Proceeding is permitted under and is conducted in accordance with
the Leases and the Property Documents;
(vi) Lender does not reasonably believe that, as a result of such contest
or the non-payment of an Imposition during the pendency of such contest,
(A) Borrower may be subject to the imposition of criminal or civil
penalties, (B) the Property may be subject to sale or forfeiture, or (C)
Lender may be subject to any civil suit; and
(vii) Borrower either deposits with the Accumulations Depositary reserves
or furnishes a bond or other security satisfactory to Lender, in either
case in an amount sufficient to pay the contested Taxes or Assessments,
together with all interest and penalties or Borrower pays all of the
contested Taxes or Assessments under protest.
(d) Installment Payments. If any Assessment is billed separately from the
--------------------
Taxes and is payable in installments, Borrower will nevertheless pay the
Assessment in its entirety on the day the first installment becomes due and pay-
able or a lien, unless Lender approves payment of the Assessment in
installments.
Section 6.2. Accumulations.
----------- -------------
(a) Borrower made an initial deposit with either Lender or a mortgage
servicer or financial institution designated or approved by Lender from time to
time (the "Accumulations Depositary") to receive, hold and disburse the
------------------------
Accumulations in accordance with this Section and a Real Estate Tax Escrow and
Security Agreement and Notice to Depositary of Security Interest of even date
herewith (the "Impound Agreement"). On the first Business Day of each calendar
-----------------
month commencing on the date specified in Section 1(a)(i) of the Related Note,
Borrower will deposit with the Accumulations Depositary an amount equal to one-
twelfth of the annual Taxes and Assessments as determined by Lender or its
designee. Borrower will deliver to the Accumulations Depositary any bills and
other documents that are necessary to pay the Taxes and Assessments, and will do
so sufficiently in advance of the Imposition Penalty Date that the payments will
be made timely as required by this Deed of Trust. Borrower will deliver to
Lender copies of all bills for Taxes and/or Assessments within 30 days of
Borrower's receipt thereof.
(b) The Accumulations will be applied to the payment of Taxes and
Assessments. Any excess Accumulations after payment of Taxes and Assessments
and not applied by Lender to the Debt will remain on deposit with the
Accumulations Depositary. If the Accumulations are not sufficient to pay Taxes
and Assessments, Borrower will pay the deficiency to the Accumulations
Depositary within 5 days of demand therefor.
9
<PAGE>
(c) The Accumulations Depositary will hold the Accumulations as security
for the Obligations until applied in accordance with the provisions of this Deed
of Trust and the Impound Agreement. If Lender is not the Accumulations
Depositary, the Accumulations Depositary will deliver the Accumulations to
Lender upon Lender's demand at any time after an Event of Default.
(d) If the Property is sold or conveyed other than by foreclosure or
transfer in lieu of foreclosure, all right, title and interest of Borrower to
the Accumulations will automatically, and without necessity of further
assignment, be held for the account of the new owner, subject to the provisions
of this Section, and Borrower will have no further interest in the
Accumulations.
(e) The Accumulations Depositary has deposited the initial deposit and
will deposit any monthly deposits into a separate interest bearing account with
Lender denominated as secured party, all in accordance with the Impound
Agreement.
(f) At any time after an Event of Default has occurred, Lender has the
right to pay, or to direct the Accumulations Depositary to pay, any Taxes or
Assessments unless Borrower is contesting the Taxes or Assessments in accordance
with the provisions of this Deed of Trust, in which event any payment of the
contested Taxes or Assessments will be made under protest in the manner
prescribed by Law or, at Lender's election, will be withheld.
(g) If Lender assigns this Deed of Trust, Lender will pay, or cause the
Accumulations Depositary to pay, the unapplied balance of the Accumulations to
or at the direction of the assignee. Simultaneously with the payment, Lender
and the Accumulations Depositary will be released from all liability with
respect to the Accumulations and Borrower will look solely to the assignee with
respect to the Accumulations. When the Obligations have been fully satisfied,
any unapplied balance of the Accumulations will be returned to Borrower.
Section 6.3. Changes in Tax Laws. If a Law requires the deduction
------------ -------------------
of the Debt from the value of the Property for the purpose of taxation or
imposes a tax, either directly or indirectly, on the Debt, any Loan Document or
Lender's interest in the Property, Borrower will pay the tax with interest and
penalties, if any. If Lender determines, based on an opinion of counsel, that
Borrower's payment of the tax may be unlawful, unenforceable, usurious or
taxable to Lender, the Debt will become immediately due and payable on 60 days'
prior notice unless the tax must be paid within the 60-day period, in which case
the Debt will be due and payable within such lesser period.
ARTICLE VII
INSURANCE, CASUALTY, CONDEMNATION
---------------------------------
AND RESTORATION
---------------
Section 7.1. Insurance Coverages.
----------- -------------------
(a) Borrower will maintain such insurance coverages and endorsements in
form and substance and in amounts as Lender may require, from time to time.
Until Lender notifies Borrower of changes in Lender's requirements, Borrower
will maintain not less than the insurance coverages and endorsements Lender
required for closing of the Loan.
10
<PAGE>
(b) The insurance, including renewals, required under this Section will be
issued on valid and enforceable policies and endorsements satisfactory to Lender
(the "Policies"). Each Policy will contain a standard waiver of subrogation
--------
(where applicable) and a replacement cost endorsement and will provide that
Lender will receive not less than 30 days' prior written notice of any
cancellation, termination or non-renewal of a Policy or any material change
other than an increase in coverage and that Lender will be named under a
standard mortgagee endorsement as loss payee.
(c) The insurance companies issuing the Policies (the "Insurers") must be
--------
authorized to do business in the State of California, must have been in business
for at least 5 years, must carry an A.M. Best Company, Inc. policy holder rating
of A or better and an A.M. Best Company, Inc. financial category rating of Class
X or better and must be otherwise satisfactory to Lender. Lender may select an
alternative credit rating agency and may impose different credit rating
standards for the Insurers. Notwithstanding Lender's right to approve the
Insurers and to establish credit rating standards for the Insurers, Lender will
not be responsible for the solvency of any Insurer.
(d) Notwithstanding Lender's rights under this Article, Lender will not be
liable for any loss, damage or injury resulting from the inadequacy or lack of
any insurance coverage.
(e) Borrower will comply with the provisions of the Policies and with the
requirements, notices and demands imposed by the Insurers and applicable to
Borrower or the Property.
(f) Borrower will pay the Insurance Premiums for each Policy not less than
30 days before the expiration date of the Policy being replaced or renewed and
will deliver to Lender an original or, if a blanket policy, a certified copy of
each Policy marked "Paid" not less than 15 days prior to the expiration date of
the Policy being replaced or renewed; provided, however, that if an Insurer
--------
permits payment of the Insurance Premium on a Policy in installments, Borrower
may elect to pay in installments, in which event Borrower will timely pay each
such installment when due and will deliver to Lender, not more than 30 days
after payment of the first such installment, the Insurer's written
acknowledgment of receipt of payment of such installment together with a
schedule of all installment amounts and due dates.
(g) Borrower will not carry separate insurance concurrent in kind or form
or contributing in the event of loss with any other insurance carried by
Borrower.
(h) Borrower will not carry any of the insurance required under this
Section on a blanket or umbrella policy without in each instance Lender's prior
approval. If Lender approves, Borrower will deliver to Lender a certified copy
of the blanket policy which will allocate to the Property the amount of coverage
required under this Section and otherwise will provide the same coverage and
protection as would a separate policy insuring only the Property.
(i) Borrower will give the Insurers prompt notice of any change in
ownership or occupancy of the Property. This subsection does not abrogate the
prohibitions on transfers set forth in this Deed of Trust.
11
<PAGE>
(j) If the Property is sold at a foreclosure sale or otherwise is
transferred so as to extinguish the Obligations, all of Borrower's right, title
and interest in and to the Policies then in force will be transferred
automatically to the purchaser or transferee.
Section 7.2. Casualty and Condemnation.
----------- -------------------------
(a) Upon recordation of this Deed of Trust and periodically thereafter as
may be necessary, Borrower will instruct the Insurers in writing to give written
notice to Lender of each claim relating to the Property that is made under a
Policy promptly after such claim is made. Borrower will give Lender notice of
any Casualty as to which the cost of Restoration would exceed $10,000 and for
which a claim will not be made under a Policy, immediately after such Casualty
occurs, and will give Lender notice of any Condemnation Proceeding immediately
after Borrower receives notice of commencement or notice that such a
Condemnation Proceeding will be commencing. Borrower immediately will deliver
to Lender copies of all documents Borrower delivers or receives relating to the
Casualty or the Condemnation Proceeding, as the case may be.
(b) Borrower authorizes Lender, at Lender's option, to act on Borrower's
behalf to collect, adjust and compromise any claims for loss, damage or
destruction under the Policies on such terms as Lender determines in Lender's
sole discretion. Borrower authorizes Lender to act, at Lender's option, on
Borrower's behalf in connection with any Condemnation Proceeding. Borrower will
execute and deliver to Lender all documents requested by Lender and all
documents as may be required by Law to confirm such authorizations. Nothing in
this Section will be construed to limit or prevent Lender from joining with
Borrower either as a co-defendant or as a co-plaintiff in any Condemnation
Proceeding.
(c) If Lender elects not to act on Borrower's behalf as provided in this
Section, then Borrower promptly will, diligently, in good faith and in a
commercially reasonable manner, file and prosecute all claims (including
Lender's claims) relating to the Casualty and will prosecute or defend
(including defense of Lender's interest) any Condemnation Proceeding. Borrower
will have the authority to settle or compromise the claims or Condemnation
Proceeding, as the case may be, provided that Lender has approved in Lender's
--------
sole discretion any compromise or settlement that exceeds the then-applicable
Destruction Event Threshold. If a check for Insurance Proceeds or Condemnation
Awards, as the case may be (the "Proceeds"), is in payment of all or any part of
--------
a Casualty claim or a Condemnation Award which is in excess of the then-
applicable Destruction Event Threshold (irrespective of whether such check is
itself in excess of such Destruction Event Threshold), such check will be made
payable to Lender and Borrower. Borrower will endorse any such check to Lender
immediately upon Lender presenting the check to Borrower for endorsement or, if
Borrower receives the check first, will endorse the check immediately upon
receipt and forward it to Lender. If any Proceeds are paid to Borrower in
payment of all or any part of a Casualty claim or Condemnation Award which is in
excess of the then-applicable Destruction Event Threshold (irrespective of
whether such Proceeds are themselves in excess of such Destruction Event
Threshold), Borrower immediately will deposit the entire Proceeds with Lender,
to be applied or disbursed in accordance with the provisions of this Deed of
Trust. Lender will be responsible for only the Proceeds actually received by
Lender.
12
<PAGE>
Section 7.3. Application of Proceeds. After deducting the costs incurred
----------- -----------------------
by Lender in collecting the Proceeds, Lender may, in its sole discretion, (i)
apply the Proceeds as a credit against any portion of the Debt selected by
Lender in its sole discretion; (ii) apply the Proceeds to restore the
Improvements, provided that Lender will not be obligated to see to the proper
--------
application of the Proceeds ,and provided further that any amounts released for
-------- -------
Restoration will not be deemed a payment on the Debt; or (iii) deliver the
Proceeds to Borrower.
Section 7.4. Conditions to Availability of Proceeds for Restoration.
----------- ------------------------------------------------------
Notwithstanding the preceding Section, after a Casualty or a Condemnation (a
"Destruction Event"), Lender will make the Proceeds (less any costs incurred by
- ------------------
Lender in collecting the Proceeds) available for Restoration in accordance with
the conditions for disbursements set forth in the Section entitled
"Restoration", provided that the following conditions are met:
----------- --------
(i) Kilroy Realty, L.P., a Delaware limited partnership, or the
transferee under a Permitted Transfer, if any, continues to be Borrower at
the time of the Destruction Event and at all times thereafter until the
Proceeds have been fully disbursed;
(ii) no Event of Default exists at the time of the Destruction Event and
no Event of Default has occurred during the 12 months prior to the
Destruction Event;
(iii) all Leases in effect immediately prior to the Destruction Event and
all Property Documents in effect immediately prior to the Destruction Event
that are essential to the use and operation of the Property continue in
full force and effect notwithstanding the Destruction Event;
(iv) if the Destruction Event is a Condemnation, Borrower delivers to
Lender evidence satisfactory to Lender that the Improvements can be
restored to an economically and architecturally viable unit;
(v) Borrower delivers to Lender evidence satisfactory to Lender that the
Proceeds are sufficient to complete Restoration or, if the Proceeds are
insufficient to complete Restoration, Borrower first (A) deposits with
Lender funds ("Additional Funds") that when added to the Proceeds will be
----------------
sufficient to complete Restoration (and Lender shall maintain the
Additional Funds in an interest-bearing account under a disbursement and
security agreement satisfactory to Lender), or (B) delivers an
unconditional irrevocable clean sight draft letter of credit in
commercially reasonable form in such amount;
(vi) if the Destruction Event is a Casualty, Borrower delivers to Lender
evidence satisfactory to Lender that the Insurer under each affected Policy
has not denied liability under the Policy as to Borrower or the insured
under the Policy;
(vii) Lender is satisfied that the proceeds of any business interruption
insurance in effect together with other available gross revenues from the
Property are sufficient to pay Debt Service Payments on the Related Note
after paying the Impositions, Insurance Premiums, reasonable and customary
operating expenses and capital expenditures until Restoration is complete;
13
<PAGE>
(viii) Lender is satisfied that Restoration will be completed on or before
the date (the "Restoration Completion Date") that is the earliest of: (A)
---------------------------
12 months prior to the Maturity Date; (B) 12 months after the Destruction
Event; (C) the earliest date required for completion of Restoration under
any Lease or any Property Document; or (D) any date required by Law; and
(ix) the annual Rents (excluding security deposits) under Leases in
effect on the date of the Destruction Event are providing a debt service
coverage ratio for the annual Debt Service Payments on the Related Note of
1.15:1.0 after payment of annual Insurance Premiums, Impositions and
operating expenses of the Property (including ground rent, if any),
provided that, if the Rents do not provide such debt service coverage, then
--------
Borrower expressly authorizes and directs Lender to apply an amount from
the Proceeds to reduction of the principal amount of the Related Note in
order to reduce the annual Debt Service Payments on the Related Note
sufficiently for such debt service coverage to be achieved. The reduction
of the Debt Service Payments will be calculated using the Fixed Interest
Rate and an amortization schedule that will achieve the same proportionate
amortization of the reduced principal amount of the Related Note over the
then remaining Term as would have been achieved if the principal amount of
the Related Note and the originally scheduled Debt Service Payments on the
Related Note had not been reduced. Borrower will execute any documentation
that Lender deems reasonably necessary to evidence the reduced principal
amount and debt service payments of the Related Note.
Section 7.5. Restoration.
------------ -----------
(a) If the total Proceeds for any Destruction Event are less than the
then-applicable Destruction Event Threshold and Lender elects or is obligated by
Law or under this Article to make the Proceeds available for Restoration, Lender
will promptly disburse to Borrower the entire amount received by Lender (or will
promptly endorse and deliver to Borrower any check for any such Proceeds which
is payable to Lender and is received by Lender or is presented by Borrower to
Lender for such endorsement) and Borrower will commence Restoration promptly
after the Destruction Event and complete Restoration not later than the
Restoration Completion Date.
(b) If the Proceeds for any Destruction Event are in payment of all or any
part of a Casualty claim or Condemnation Award which is in excess of the then-
applicable Destruction Event Threshold (irrespective of whether such Proceeds
are themselves in excess of such Destruction Event Threshold) and Lender elects
or is obligated by Law or under this Article to make the Proceeds available for
Restoration, Lender will disburse all such Proceeds and any Additional Funds
(the "Restoration Funds") upon Borrower's request as Restoration progresses,
-----------------
generally in accordance with normal construction lending practices for
disbursing funds for construction costs, provided that the following conditions
--------
are met:
(i) Borrower commences Restoration promptly after the Destruction Event
and completes Restoration on or before the Restoration Completion
Date;
14
<PAGE>
(ii) if Lender requests, Borrower delivers to Lender prior to commencing
Restoration, for Lender's approval, plans and specifications and a
detailed budget for the Restoration;
(iii) Borrower delivers to Lender satisfactory evidence of the costs of
Restoration incurred prior to the date of the request, and such
other documents as Lender may request, including mechanics' lien
waivers and title insurance endorsements;
(iv) Borrower pays all costs of Restoration whether or not the
Restoration Funds are sufficient and, if at any time during
Restoration, Lender determines that the undisbursed balance of the
Restoration Funds is insufficient to complete Restoration, Borrower
deposits with Lender, as part of the Restoration Funds, an amount
equal to the deficiency within 30 days of receiving notice of the
deficiency from Lender; and
(v) there is no default under the Loan Documents at the time Borrower
requests funds or at the time Lender disburses funds.
(c) If an Event of Default occurs at any time after the Destruction Event,
then Lender will have no further obligation to make any remaining Proceeds
available for Restoration and may apply any remaining Proceeds as a credit
against any portion of the Debt selected by Lender in its sole discretion.
(d) Lender may elect at any time prior to commencement of Restoration or
while work is in progress to retain, at Borrower's expense, an independent
engineer or other consultant to review the plans and specifications, to inspect
the work as it progresses and to provide reports. If any matter included in a
report by the engineer or consultant is unsatisfactory to Lender, Lender may
suspend disbursement of the Restoration Funds until the unsatisfactory matters
contained in the report are resolved to Lender's satisfaction.
(e) If Borrower fails to commence and complete Restoration in accordance
with the terms of this Article, then in addition to the Remedies, Lender may
elect to restore the Improvements on Borrower's behalf and reimburse itself out
of the Restoration Funds for costs and expenses incurred by Lender in restoring
the Improvements, or Lender may apply the Restoration Funds as a credit against
any portion of the Debt selected by Lender in its sole discretion.
(f) Lender may commingle the Restoration Funds with its general assets.
Lender will not hold any Restoration Funds in trust. Lender may elect to
deposit the Restoration Funds in an interest-bearing account with a depositary
satisfactory to Lender under a disbursement and security agreement satisfactory
to Lender.
(g) Borrower will pay all of Lender's reasonable expenses incurred in
connection with a Destruction Event or Restoration. If Borrower fails to do so,
then in addition to the Remedies, Lender may from time to time reimburse itself
out of the Restoration Funds.
(h) If any excess Proceeds remains after Restoration, Lender may elect, in
its sole discretion either to apply the excess as a credit against any portion
15
<PAGE>
of the Debt as selected by Lender in its sole discretion or to deliver the
excess to Borrower.
ARTICLE VIII
-------------
COMPLIANCE WITH LAW AND AGREEMENTS
----------------------------------
Section 8.1. Compliance with Law. Borrower, the Property and the
----------- -------------------
use of the Property comply and will continue to comply with Law and with all
agreements and conditions necessary to preserve and extend all rights, licenses,
permits, privileges, franchises and concessions (including zoning variances,
special exceptions and non-conforming uses) relating to the Property or
Borrower, the violation of which could be reasonably expected to have a material
adverse effect on Borrower, the Property or Lender's interests therein. Borrower
will notify Lender of the commencement of any investigation or Proceeding
relating to an alleged violation of Law immediately after Borrower receives
notice thereof and, will deliver promptly to Lender copies of all documents
Borrower receives or delivers in connection with the investigation or
Proceeding. Borrower will not alter the Property in any manner that would
increase Borrower's responsibilities for compliance with Law.
Section 8.2. Compliance with Agreements. There are no defaults, events of
----------- --------------------------
defaults or events which, with the passage of time or the giving of notice,
would constitute an event of default under any material Property Document, which
event of default could be reasonably expected to have a material adverse effect
on Borrower, the Property or Lender's interests therein. Borrower will pay and
perform all of its obligations under all material Property Documents as and when
required thereby. Borrower will use its commercially reasonable best efforts to
cause all other parties to all material Property Documents to pay and perform
their obligations thereunder as and when required thereby. Borrower will not
amend or waive any material provisions of any material Property Document;
exercise any material options under any material Property Document; give any
approval required or permitted under any material Property Document that would
adversely affect the Property or Lender's rights and interests under the Loan
Documents; cancel or surrender any material Property Document; or release or
discharge or permit the release or discharge of any party to or entity bound by
any material Property Document, without, in each instance, Lender's prior
approval (excepting therefrom all service contracts or other agreements entered
into in the normal course of business that are cancelable upon not more than 30
days' notice), which approval shall not be unreasonably delayed. Borrower
promptly will deliver to Lender copies of any notices of default or of
termination that Borrower receives or delivers relating to any material Property
Document.
Section 8.3. ERISA Compliance.
----------- ----------------
(a) Neither Borrower nor any of Borrower's constituent entities is or will
be an "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA") that is subject to Title I of
-----
ERISA or a "plan" as defined in Section 4975(e)(1) of the Code that is subject
to Section 4975 of the Code, and none of the assets of Borrower are or will
constitute "plan assets" of one or more such plans for purposes of Title I of
ERISA or Section 4975 of the Code.
16
<PAGE>
(b) Borrower is not and will continue not to be a "governmental plan"
-----------------
within the meaning of Section 3(32) of ERISA and transactions by or with
Borrower are not and will not be subject to any Laws regulating investments of
and fiduciary obligations with respect to governmental plans.
(c) Borrower will not engage in any transaction which would cause any
obligation or any action under the Loan Documents, including Lender's exercise
of the Remedies, to be a non-exempt prohibited transaction under ERISA.
Section 8.4. Section 6045(e) Filing. Borrower will supply or cause
----------- ----------------------
to be supplied to Lender either (i) a copy of a completed Form 1099-S, Statement
for Recipients of Proceeds from Real Estate, Broker and Barter Exchange Proceeds
prepared by Borrower's attorney or other person responsible for the preparation
of the form, together with a certificate from the person who prepared the form
to the effect that the form has, to the best of the preparer's knowledge, been
accurately prepared and that the preparer will timely file the form; or (ii) a
certification from Borrower that the Loan is a refinancing of the Property or is
otherwise not required to be reported to the Internal Revenue Service pursuant
to Section 6045(e) of the Code. Under no circumstances will Lender or Lender's
counsel be obligated to file the reports or returns.
ARTICLE IX
ENVIRONMENTAL
-------------
Section 9.1. Environmental Representations and Warranties. Except
----------- --------------------------------------------
as disclosed in the Environmental Report and to Borrower's knowledge as of the
date of this Deed of Trust:
(i) no Environmental Activity has occurred or is occurring on the Property
other than the use, storage, and disposal of Hazardous Substances
which (A) is in the ordinary course of business consis tent with the
Permitted Use; (B) is in compliance with all Environmental Laws and
(C) has not resulted in Material Environmental Contamination of the
Property; and
(ii) no Environmental Activity has occurred or is occurring on any property
in the vicinity of the Property which has resulted in Material
Environmental Contamination of the Property.
Section 9.2. Environmental Covenants.
----------- -----------------------
(a) Borrower will not cause or permit any Material Environmental
Contamination of the Property.
(b) No Environmental Activity will occur on the Property other than the
use, storage and disposal of Hazardous Substances which (A) is in the ordinary
course of business consistent with the Permitted Use; (B) is in compliance with
all Environmental Laws; and (C) does not create a risk of Material Environmental
Contamination of the Property.
(c) Borrower will notify Lender immediately upon Borrower becoming aware
of (i) any Material Environmental Contamination of the Property or (ii) any
Environmental Activity with respect to the Property that is not in accordance
17
<PAGE>
with the preceding subsection (b). Borrower promptly will deliver to Lender
copies of all documents delivered to or received by Borrower regarding the
matters set forth in this subsection, including notices of Proceedings or
investigations concerning any Material Environmental Contamination of the
Property or Environmental Activity affecting or relating to the Property or
concerning Borrower's status as a potentially responsible party (as defined in
the Environmental Laws) relating to the Property. Borrower's notification of
Lender in accordance with the provisions of this subsection will not be deemed
to excuse any default under the Loan Documents resulting from the violation of
Environmental Laws or the Material Environmental Contamination of the Property
or Environmental Activity that is the subject of the notice. If Borrower
receives notice of a suspected violation of Environmental Laws in the vicinity
of the Property that poses a risk of Material Environmental Contamination of the
Property, Borrower will give Lender notice and copies of any documents received
relating to such suspected violation.
(d) From time to time at Lender's request, Borrower will deliver to Lender
any information known and documents available to Borrower relating to the
environmental condition of the Property.
(e) Lender may perform or engage an independent consultant to perform an
assessment of the environmental condition of the Property and of Borrower's
compliance with this Section on an annual basis, or at any other time for
reasonable cause, or after an Event of Default. In connection with the
assessment: (i) Lender or consultant may enter and inspect the Property, upon
reasonable notice, during regular business hours, and perform tests of the air,
soil, ground water and building materials; (ii) Borrower will cooperate and use
best efforts to cause tenants and other occupants of the Property to cooperate
with Lender or consultant; (iii) Borrower will receive a copy of any final
report prepared after the assessment, to be delivered to Borrower not more than
10 days after Borrower requests a copy and executes Lender's standard
confidentiality and waiver of liability letter; (iv) Borrower will accept
custody of and arrange for lawful disposal of any Hazardous Substances required
to be disposed of under Environmental Laws as a result of the tests; (v) Lender
will not have liability to Borrower with respect to the results of the
assessment; and (vi) Lender will not be responsible for any damage to the
Property resulting from the tests described in this subsection and Borrower will
look solely to the consultants to reimburse Borrower for any such damage. The
consultant's assessment and reports will be at Borrower's expense (i) if the
reports disclose any material adverse change in the environmental condition of
the Property from that disclosed in the Environmental Report; (ii) if Lender
engaged the consultant when Lender had reasonable cause to believe Borrower was
not in compliance with the terms of this Article and, after written notice from
Lender, Borrower failed to provide promptly reasonable evidence that Borrower is
in compliance; or (iii) if Lender engaged the consultant or after the occurrence
of an Event of Default.
(f) If Lender has reasonable cause to believe that there is Environmental
Activity at the Property, Lender may elect in its sole discretion to direct the
Trustee to reconvey any portion of the Property affected by the Environmental
Activity and Borrower will accept the reconveyance.
18
<PAGE>
ARTICLE X
FINANCIAL REPORTING
-------------------
Section 10.1. Financial Reporting.
------------ -------------------
(a) Borrower will deliver to Lender within 90 days after the close of each
Fiscal Year:
(i) an annual financial statement (the "Annual Financial Statement")
--------------------------
for the Property for the Fiscal Year, consisting of an income and
expense statement and such other information as Lender may require.
The Annual Financial Statement will be:
(A) audited by a CPA and accompanied by an opinion of the CPA
that, in all material respects, the Annual Financial Statement fairly
presents the financial position of the Property (provided, however,
--------
that prior to the occurrence of any Event of Default, the Annual
Financial Statement may be unaudited, if accompanied by a
certification of Borrower and an authorized officer of Kilroy Realty
Corporation, a Maryland corporation ("KRC"), which certification shall
---
state that, in all material respects, the Annual Financial Statement
fairly presents the financial position of the Property); and
(B) separate and distinct from any consolidated statement or
report for Borrower or any other entity or any other property; and
(ii) upon Lender's request, an annual financial statement for
Borrower for the Fiscal Year, prepared on a consolidated basis with
KRC, certified by Borrower and KRC.
(b) Borrower will keep full and accurate Financial Books and Records for
each Fiscal Year. Borrower will permit Lender or Lender's accountants or
auditors to inspect or audit the Financial Books and Records from time to time
and without notice, during regular business hours. Borrower will maintain the
Financial Books and Records for each Fiscal Year for not less than 3 years after
the date Borrower delivers to Lender the Annual Financial Statement and the
other financial certificates, statements and information to be delivered to
Lender for the Fiscal Year. Financial Books and Records will be maintained at
Borrower's address set forth in the section entitled "Notices" or at any other
-------
location as may be approved by Lender.
ARTICLE XI
EXPENSES AND DUTY TO DEFEND
---------------------------
Section 11.1. Payment of Expenses.
------------- -------------------
(a) Borrower is obligated to pay all fees and expenses (the "Expenses")
--------
actually incurred by Lender, Trustee or that are otherwise payable in connection
with the Loan, the Property or Borrower, including reasonable attorneys' fees
and expenses of outside counsel (if outside counsel is engaged) and any fees and
expenses relating to (i) the preparation, execution, acknowledgement, delivery
19
<PAGE>
and recording or filing of the Loan Documents; (ii) any Proceeding or other
claim asserted against Lender; (iii) any inspection, assessment, survey and test
permitted under the Loan Documents; (iv) any Destruction Event; (v) the
preservation of Trustee's title or Lender's security; (vi) the enforcement of
the Loan Documents or any of their terms or the exercise of any rights or
remedies available at Law, in equity or otherwise, whether or not any Proceeding
is filed; (vii) the representation of Lender in any bankruptcy, insolvency,
reorganization or other debtor-relief or similar proceeding of or relating to
Borrower, to any person liable (by way of guaranty, assumption, endorsement or
otherwise) upon any of the Obligations, to the Property, to any of the Other
Property, or to any other property which secures any of the Obligations; and
(viii) the Leases and the Property Documents.
(b) Borrower will pay the Expenses promptly on demand, together with any
applicable interest, premiums or penalties. If Lender pays any of the Expenses,
Borrower will reimburse Lender the amount paid by Lender promptly upon demand,
together with interest on such amount at the Default Interest Rate from the date
Lender paid the Expenses through and including the date Borrower reimburses
Lender. The Expenses, together with any applicable interest, premiums or
penalties, constitute a portion of the Debt secured by this Deed of Trust.
Section 11.2. Duty to Defend. If Lender or any of its trustees,
------------ --------------
officers, participants, employees or affiliates is a party in any Proceeding
relating to the Property, Borrower or the Loan, Borrower will indemnify and hold
harmless such party (other than for liabilities for such party's willful
misconduct or gross negligence) and will defend the party with attorneys and
other professionals retained by Borrower and approved by Lender. Lender may
elect to engage its own attorneys and other professionals, at Borrower's
reasonable expense, to defend or to assist in the defense of the party. In all
events, Lender shall have full consultation rights with respect to case strategy
if Lender so elects and no Proceeding will be settled without Lender's prior
approval, which may be withheld in its sole discretion.
ARTICLE XII
TRANSFERS, LIENS AND ENCUMBRANCES
---------------------------------
Section 12.1. Prohibitions on Transfers, Liens and Encumbrances.
------------ -------------------------------------------------
(a) Borrower acknowledges that in making the Loan, Lender is relying to a
material extent on the business expertise and net worth of Borrower and
Borrower's general partner and on the continuing interest that it has, directly
or indirectly, in the Property. Accordingly, except as specifically set forth
in this Deed of Trust, Borrower (i) will not, and will not permit its partners,
members or principals to, effect a Transfer without Lender's prior approval,
which may be withheld in Lender's sole discretion, and (ii) will keep the
Property free from all liens and encumbrances other than the lien of this Deed
of Trust and the Permitted Exceptions and Permitted Liens. A "Transfer" is
--------
defined as any sale, grant, lease (other than space leases with tenants
permitted by the Assignment), conveyance, assignment or other transfer of, or
any encumbrance or pledge against, the Property, any interest in the Property,
any interest of Borrower's partners, members or principals in the Property, or
any change in Borrower's composition, in each instance whether voluntary or
involuntary, direct or indirect, by operation of law or otherwise and including
20
<PAGE>
the grant of an option or the execution of an agreement relating to any of the
foregoing matters.
(b) Borrower represents, warrants and covenants as of the date hereof
that:
(i) Borrower is a Delaware limited partnership whose sole general partner
is KRC, owning approximately 87% of the partnership interests in Borrower,
and Borrower's five principal limited partners own the majority of the
remaining partnership interests in Borrower as follows:
Kilroy Industries 4.0%
John Kilroy, Jr. 3.4%
Richard Allen and
Related Entities 2.4%
Steve Black 1.3%
John Kilroy, Sr. 0.9%
---
11.9%
(ii) KRC is a publicly-held corporation traded on the New York Stock
Exchange.
Section 12.2. Permitted Transfers.
------------ -------------------
(a) Notwithstanding the prohibitions regarding Transfers, a Permitted
Transfer may occur without Lender's prior consent (except as otherwise
provided), provided that the following conditions are met:
--------
(i) if the proposed Permitted Transfer is or would result in the
admission of a new general partner (whether by transfer of an interest to
or change in the status of a limited partner, transfer of an interest to a
third party, or otherwise), or is a transfer of general partnership
interests in excess of five percent (5%) of the general partnership
interests (and for this purposes, all transfers to a single entity within a
12-month period shall be considered in the aggregate), at least 15 Business
Days prior to the proposed Permitted Transfer, Borrower delivers to Lender
a notice that is sufficiently detailed to enable Lender to determine that
the proposed Permitted Transfer complies with the terms of this Section;
(ii) if the proposed Permitted Transfer is a transfer of a general
partnership interest, there is no default under the Loan Documents either
when Lender receives the notice (if notice is required) or when the
proposed Permitted Transfer occurs;
(iii) any proposed Permitted Transfer will not result in a violation of any
of the covenants contained in the Section entitled, "ERISA Compliance" and
----------------
Borrower will deliver to Lender such documentation of compliance as Lender
requests in its sole discretion;
(iv) if the proposed Permitted Transfer is a transfer of a general
partnership interest, when Lender receives the notice (if notice is
required) and when the proposed Permitted Transfer occurs, the transferee
has never
21
<PAGE>
been an adverse party to Lender in any litigation to which Lender was a
party; the transferee has never defaulted on a loan from Lender or on any
contract or other agreement with Lender; and the transferee has never
threatened litigation against Lender (for purposes of this subsection
"transferee" includes the transferee's constituent entities at all levels
and "Lender" includes Lender's subsidiaries);
(v) Borrower pays all of Lender's expenses relating to the Transfer,
including Lender's reasonable attorneys' fees (if outside counsel is
engaged);
(vi) the proposed Transferee is not the subject of a case in bankruptcy,
and Lender is satisfied that the Property will continue to be managed by
Borrower directly or by a manager satisfactory to Lender;
(vii) KRC shall at all times remain the managing general partner of
Borrower, with the right on its authority alone without the consent of any
other general or limited partner to take all actions on behalf of Borrower
in accordance with Borrower's partnership agreement in connection with the
Loan and the Property and the Other Property; and KRC shall at all times
retain not less than 51% of all of the partnership interests in Borrower,
and not less than 51% of all general partnership interests in Borrower; and
(viii) if the proposed Permitted Transfer is or would result in the
admission of a new general partner (whether by transfer of an interest to
or change in the status of a limited partner, transfer of an interest to a
third party, or otherwise), Borrower obtains Lender's prior written consent
thereto.
(b) Upon compliance with such of the conditions set forth in the preceding
subsection as are applicable, the following Transfers (the "Permitted
---------
Transfers") may occur without Lender's prior consent (except as otherwise
- ---------
provided):
(i) Transfers of limited partnership interests in Borrower between
limited partners, and redemptions of limited partnership interests pursuant
to Borrower's partnership agreement;
(ii) admission of new limited partners to Borrower;
(iii) pledges of a limited partner's interest in Borrower;
(iv) admission of new general partners to Borrower,;
(v) transfer of a general partnership interest in Borrower; and
(vi) public trading of the shares of KRC and pledges thereof.
(c) Borrower shall pay all out-of-pocket expenses incurred by Lender in
the review and processing of a proposed Transfer, regardless of whether the
Transfer is consummated.
22
<PAGE>
Section 12.3. Right to Contest Liens. Borrower, at its own expense,
------------ -----------------------
may contest the amount, validity or application, in whole or in part, of any
mechanic's, materialmen's or environmental liens in which event Lender will
refrain from exercising any of the Remedies, provided that the following
--------
conditions are met:
(i) Borrower delivers to Lender notice of the proposed contest not more
than 30 days after receiving notice that the lien is filed;
(ii) the contest is by a Proceeding promptly initiated and conducted in
good faith and with due diligence;
(iii) there is no Event of Default other than the Event of Default arising
from the filing of the lien;
(iv) the Proceeding suspends enforcement and collection of the lien,
imposition of criminal or civil penalties and sale or forfeiture of the
Property and Lender will not be subject to any civil suit;
(v) the Proceeding is permitted under and is conducted in accordance with
the Leases and the Property Documents;
(vi) with respect to liens in excess of $250,000, Borrower sets aside
reserves or furnishes a bond or other security satisfactory to Lender, in
either case in an amount sufficient to pay the claim giving rise to the
lien, together with all interest and penalties, or Borrower pays the
contested lien under protest; and
(vii) with respect to an environmental lien, Borrower is using commercial
best efforts to mitigate or prevent any deterioration of the Property
resulting from the alleged violation of any Environmental Laws or the
alleged Environmental Activity.
Section 12.4. Reconveyance Rights. On or after the second anniversary
------------ -------------------
of the date specified in Section 1(a)(i) of the Related Note, Borrower may
obtain the reconveyance from Trustee of this Deed of Trust provided that
--------
the following conditions are met:
(i) the reconveyance is solely for the purpose of a transfer or ground
lease of the Property to a bona fide purchaser or ground lessee;
(ii) not less than 60 days prior to the date of the reconveyance,
Borrower delivers to Lender a notice setting forth (A) the proposed date of
the reconveyance; (B) the name of the proposed transferee; (C) any other
information reasonably necessary for Lender to analyze the terms of the
reconveyance;
(iii) on the date Borrower delivers to Lender notice of the proposed
reconveyance and on the date of the reconveyance, no default has occurred
and is continuing under the Loan Documents;
(iv) Borrower delivers to Lender evidence satisfactory to Lender that
Borrower has complied with any requirements of the Property Documents or
23
<PAGE>
the Leases applicable to the reconveyance, that the reconveyance does not
violate any of the provisions of the Property Documents and to the extent
necessary to comply with the Property Documents or the Leases, that the
transferee has assumed all of Borrower's obligations relating to the
Property under the Property Documents;
(v) Borrower delivers to Lender an endorsement to Lender's title
insurance policy satisfactory to Lender that (A) extends the effective date
of the policy to the effective date of the reconveyance; (B) confirms no
change in the priority of the other Deeds of Trust or in the amount of
coverage; (C) consents to the reconveyance; (D) waives any defense
resulting from the reconveyance; (E) to the extent of the value of the
Property, waives any right of subrogation; and (F) confirms that the
Property and the Other Property constitute separate tax lots;
(vi) not less than 10 days prior to the date of the reconveyance,
Borrower delivers to Lender consents to the reconveyance by entities
holding liens affecting the Property or holding any other interest in the
Property that would be affected by the reconveyance, including parties to
any Property Documents or to the Leases;
(vii) Borrower delivers to Lender evidence satisfactory to Lender that (A)
the Property and the Other Property each separately conforms to and is in
compliance with Law, the violation of which could be reasonably expected to
have a material adverse effect on Borrower, the Property, the Other
Property or Lender's interests therein, and (B) the Other Property
constitutes self-contained units, having direct on-site connection to all
utilities and direct access to one or more public streets;
(viii) Borrower pays all expenses relating to the reconveyance, including
Lender's and Trustee's reasonable attorneys' fees if outside counsel is
engaged;
(ix) Borrower delivers to Lender copies of the executed documents
evidencing the transfer or ground lease of the Property;
(x) Borrower delivers to Lender any other information, approvals and
documents reasonably required by Lender relating to the reconveyance;
(xi) Borrower will not obtain reconveyances of more than two of the nine
Deeds of Trust pursuant to the Sections therein entitled "Reconveyance
------------
Rights";
------
(xii) Borrower pays to Lender an amount equal to 120% of the outstanding
principal amount of the Related Note, which payment shall be applied first
to pay in full the outstanding principal amount of the Related Note, with
the remaining balance of such payment applied pro rata to partial
prepayment of the principal amounts then due on all other remaining Notes
(without premium for such prepayments);
(xiii) Borrower pays to Lender all other amounts due under the Related
Note including the Reconveyance Premium, and all other amounts due under
this Deed of Trust;
24
<PAGE>
(xiv) the total of the principal amounts which will remain due on the
other remaining Notes, after application of the partial prepayments to be
made in connection with the reconveyance as set forth above, shall not
exceed sixty-five percent (65%) of the fair market value of the Other
Property, as reasonably determined by Lender; and
(xv) the annual Rents (excluding security deposits) under Leases in
effect on all of the Other Property will provide a debt service coverage
ratio for the annual Debt Service Payments on all of the remaining Notes of
1.55:1.0 after payment of annual Insurance Premiums, Impositions and
operating expenses of such properties, as determined by Lender, and in
connection therewith, not less than 30 days prior to the date of the
reconveyance, Borrower will deliver to Lender certified rent rolls and
certified operating statements for the preceding 12 calendar months for the
Other Property (prepared on a cash basis, using methodology satisfactory to
Lender, with income and expenses treated consistently and in the ordinary
course of business), together with such other information as Lender may
require to make its determination.
Section 12.5. Substitution of Properties. Borrower may request Lender's
------------ --------------------------
permission to substitute, for the Property, a different parcel of real property
together with improvements thereon and personal property related thereto
(collectively the "Substitute Property"). Approval of any such request shall be
-------------------
subject to all of the following:
(i) Under no circumstances shall more than two such substitutions occur
under all of the nine Deeds of Trust in the aggregate.
(ii) The proposed Substitute Property shall:
(A) be of a quality comparable to that of the Property; and
(B) have a fair market value, as evidenced to Lender's satisfaction,
of no less than the greater of (1) the fair market value of the
Property as of the date of recordation of this Deed of Trust, and (2)
the fair market value of the Property immediately prior to such
proposed substitution.
(iii) Any such substitution shall be on terms, conditions and documents
acceptable to Lender and shall be subject to Lender's internal approval
process.
(iv) The outstanding Principal at the time of such proposed substitution
shall not exceed sixty-five percent (65%) of the fair market value of the
proposed Substitute Property and the Other Property, as reasonably
determined by Lender.
(v) The annual Rents (excluding security deposits) under Leases in
effect on the proposed Substitute Property shall provide debt service
coverage for the annual Debt Service Payments on the Related Note (after
payment of annual Insurance Premiums, Impositions and operating expenses)
not less than the debt service coverage provided by the Property, and the
lease
25
<PAGE>
expiration profile of the proposed Substitute Property shall be acceptable
to Lender.
(vi) Borrower shall pay all costs and expenses, including reasonable
attorney's fees if outside counsel is engaged by Lender, incurred by Lender
in connection with any proposed substitution.
ARTICLE XIII
ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
----------------------------------------------------
Section 13.1. Further Assurances.
------------ ------------------
(a) Borrower will execute, acknowledge and deliver to Lender or to any
other entity Lender designates any additional or replacement documents and
perform any additional actions that Lender determines are reasonably necessary
to evidence, perfect or protect Lender's first lien on and prior security
interest in the Property or to carry out the intent or facilitate the
performance of the provisions of the Loan Documents.
(b) Borrower appoints Lender as Borrower's attorney-in-fact to perform, at
Lender's election, any actions and to execute and record any of the additional
or replacement documents referred to in this Section, in each instance only at
Lender's election and only to the extent Borrower has failed to comply with the
terms of this Section.
Section 13.2. Estoppel Certificates.
------------ ---------------------
(a) Within 10 days of Lender's request, but not more frequently than
monthly, Borrower will deliver to Lender or to any entity Lender designates a
certificate certifying, with respect to any one or more of the Notes as Lender
may specify: (i) the original principal amount; (ii) the unpaid principal
amount; (iii) the Fixed Interest Rate; (iv) the amount of the then current Debt
Service Payments; (v) the Maturity Date; (vi) the date a Debt Service Payment
was last made; (vii) that, except as may be disclosed in the statement, there
are no defaults or events which, with the passage of time or the giving of
notice, would constitute an Event of Default; and (viii) there are no offsets or
defenses against any portion of the Obligations except as may be disclosed in
the statement.
(b) If Lender requests, but not more frequently than once (or, following
an Event of Default, twice) in any twelve-month period with respect to any one
Property Document Borrower will use its commercially reasonable best efforts to
promptly deliver to Lender or to any entity Lender designates a certificate from
each party to any Property Document, certifying that the Property Document is in
full force and effect with no defaults or events which, with the passage of time
or the giving of notice, would constitute an event of default under the Property
Document and that there are no defenses or offsets against the performance of
its obligations under the Property Document.
(c) If Lender requests, but not more frequently than once (or, following
an Event of Default, twice) in any twelve-month period with respect to any one
tenant, Borrower will use its commercially reasonable best efforts to promptly
deliver to Lender, or to any entity Lender designates, a certificate from each
26
<PAGE>
tenant under a Lease then affecting the Property, certifying to any facts
regarding the Lease as Lender may require, including that the Lease is in full
force and effect with no defaults or events which, with the passage of time or
the giving of notice, would constitute an event of default under the Lease by
any party thereto, that the rent has not been paid more than one month in
advance and that the tenant claims no defense or offset against the performance
of its obligations under the Lease, except in each case as may be disclosed in
the estoppel.
ARTICLE XIV
DEFAULTS AND REMEDIES
---------------------
Section 14.1. Events of Default. The term "Event of Default" means the
------------ ----------------- ----------------
occurrence of any of the following events:
(i) if Borrower fails to pay any amount due, as and when required, under
any Loan Document and the failure continues for a period of 5 days;
(ii) if Borrower makes a general assignment for the benefit of creditors
or generally is not paying, or is unable to pay, or admits in writing its
inability to pay, its debts as they become due; or if Borrower or any other
party commences any Proceeding (A) relating to bankruptcy, insolvency,
reorganization, conservatorship or relief of debtors, in each instance with
respect to Borrower; (B) seeking to have an order for relief entered with
respect to Borrower; (C) seeking attachment, distraint or execution of a
judgment with respect to Borrower; (D) seeking to adjudicate Borrower as
bankrupt or insolvent; (E) seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with
respect to Borrower or Borrower's debts; or (F) seeking appointment of a
Receiver, trustee, custodian, conservator or other similar official for
Borrower or for all or any substantial part of Borrower's assets, provided
--------
that if the Proceeding is commenced by a party other than Borrower or any
of Borrower's general partners or members, Borrower will have 120 days to
have the Proceeding dismissed or discharged before an Event of Default
shall be deemed to have occurred;
(iii) if Borrower is in default beyond any applicable grace and cure
period under any other mortgage, deed of trust, deed to secure debt or
other security agreement encumbering the Property, whether junior or senior
to the lien of this Deed of Trust;
(iv) if a Transfer occurs except in accordance with the provisions of this
Deed of Trust;
(v) if Borrower abandons the Property or ceases to perform or cause to be
performed the business of operating, managing, leasing and maintaining the
Property; or
(vi) if there is a default in the performance by Borrower of any other
provision of any Loan Document or if there is any material inaccuracy or
falsehood in any representation or warranty contained in any Loan Document
which is not remedied within 30 days after Borrower receives notice
thereof, provided that if the default, inaccuracy or falsehood is of a
--------
27
<PAGE>
nature that it cannot be cured within the 30-day period and during that
period Borrower commences to cure, and thereafter diligently continues to
cure, the default, inaccuracy or falsehood, then the 30-day period will be
extended for a reasonable period not to exceed 120 days after the notice to
Borrower.
Section 14.2. Remedies.
------------ --------
(a) If an Event of Default occurs, Lender may take any of the following
actions (the "Remedies") without notice to Borrower:
--------
(i) declare all or any of the Notes and all or any portion of the Debt
immediately due and payable ("Acceleration");
------------
(ii) pay or perform any Obligation;
(iii) institute a Proceeding for the specific performance of any
Obligation;
(iv) apply for and obtain the appointment of a Receiver to be vested with
the fullest powers permitted by Law, without bond being required, which
appointment may be made ex parte, as a matter of right and without regard
-- -----
to the value of the Property, the amount of the Debt or the solvency of
Borrower or any other person liable for the payment or performance of any
portion of the Obligations;
(v) directly, by its agents or representatives or through a Receiver
appointed by a court of competent jurisdiction, enter on the Land and
Improvements, take possession of the Property, dispossess Borrower and
exercise Borrower's rights with respect to the Property, either in
Borrower's name or otherwise;
(vi) institute Proceedings for foreclosure of this Deed of Trust, or for
the partial foreclosure of this Deed of Trust for the portion of the Debt
then due and payable, subject to the continuing lien of this Deed of Trust
for the balance of the Debt not then due;
(vii) deliver to Trustee a declaration of default and demand for sale and
a notice of default and election to cause Borrower's interest in the
Property to be sold, which notice Trustee or Lender will file in the
official records of the county in which the Property is located;
(viii) exercise any and all rights and remedies granted to a secured party
under the Uniform Commercial Code;
(ix) require Borrower to assemble any or all of the Property which is
personal property and make it available to Lender in a place designated by
Lender which is not unreasonably inconvenient to the Property; sell
Property which is personal property at the Land or elsewhere, with or
without having such personal property at the place of sale; without
removal, render Property which is personal property unusable and dispose of
it on the Land; enter upon the Land and Improvements and possess and remove
any or all of the Property which is personal property without legal
28
<PAGE>
process, if Lender can do so without a breach of the peace or violation of
any Leases, or by legal action for possession; and
(x) pursue any other right or remedy available to Lender at Law, in equity
or otherwise.
(b) If an Event of Default occurs, the license granted to Borrower in the
Loan Documents to collect Rents will terminate automatically without any action
required of Lender.
Section 14.3. General Provisions Pertaining to Remedies.
------------ -----------------------------------------
(a) The Remedies are cumulative and may be pursued by Lender or Trustee
concurrently or otherwise, at such time and in such order as Lender or Trustee
may determine in their sole discretion and without presentment, demand, protest
or further notice of any kind, all of which are expressly waived by Borrower.
(b) The enumeration in the Loan Documents of specific rights or powers
will not be construed to limit any general rights or powers or impair Lender's
or Trustee's rights with respect to the Remedies.
(c) If Lender or Trustee exercises any of the Remedies, Lender will not be
deemed a mortgagee-in-possession unless Lender has elected affirmatively to be a
mortgagee-in-possession.
(d) Lender and Trustee will not be liable for any act or omission of
Lender or Trustee (other than gross negligence or willful misconduct) in
connection with the exercise of the Remedies.
(e) Lender's and Trustee's right to exercise any Remedy will not be
impaired by any delay in exercising or failure to exercise the Remedy and the
delay or failure will not be construed as extending any cure period or
constitute a waiver of the default or Event of Default or of the right to
exercise any Remedy in the event of any subsequent default or Event of Default.
(f) If an Event of Default occurs, Lender's payment or performance or
acceptance of payment or performance will not be deemed a waiver or cure of the
Event of Default.
(g) Lender's acceptance of partial payment or receipt of Rents will not
extend or affect any grace period or constitute a waiver of a default or Event
of Default or constitute a rescission of Acceleration, but will be credited
against the Debt in accordance with the Loan Documents.
Section 14.4. Foreclosure by Power of Sale.
------------ ----------------------------
(a) Should Lender elect following an Event of Default to foreclose this
Deed of Trust by exercise of the power of sale contained in this Deed of Trust,
Lender will notify Trustee and deposit, if required by Trustee, with Trustee
this Deed of Trust and such of the Notes and other Loan Documents as Trustee may
require.
29
<PAGE>
(b) Upon receipt of the notice from Lender, Trustee will have recorded,
published and delivered to Borrower any notice of default as is then required by
Law. Trustee will, without demand on Borrower after lapse of any time as may
then be required by Law and after notice of sale having been given as required
by Law, sell the Property at the time and place of sale fixed by it in the
notice of sale, at public auction to the highest bidder as provided by Law.
Trustee will deliver to the purchaser of the Property a good and sufficient deed
or deeds conveying the Property so sold, but without any covenant or warranty,
express or implied. The recitals in the deed of any matter or fact will be
conclusive proof of the truthfulness of the recitals. Any person, including
Borrower, Trustee or Lender may purchase at the sale, and Borrower will warrant
and defend the title of the purchaser.
(c) After deducting all costs, fees and expenses of Lender and Trustee,
including costs of evidence of title in connection with sale, Lender will apply
the proceeds of sale in the following priority, to payment of (i) first, all
sums expended under the terms of the Loan Documents, not then repaid, with
accrued interest at the Default Rate; (ii) second, the Debt (whether or not
previously accelerated) in such order as Lender determines; and (iii) the
remainder, if any, to the person or persons legally entitled to it.
(d) Trustee may postpone sale of all or any portion of the Property as
permitted by Law, and without further notice make such sale at the time fixed by
the last postponement, or may, in its discretion, give a new notice of sale.
(e) A sale of less than the whole of the Property or any defective or
irregular sale made under this Deed of Trust will not exhaust the power of sale
provided for in this Deed of Trust; and subsequent sales may be made until the
Obligations have been satisfied, or the entire Property sold, without defect or
irregularity.
Section 14.5. General Provisions Pertaining to Receiver and other
------------ ---------------------------------------------------
Remedies.
- --------
(a) If an Event of Default occurs, any court of competent jurisdiction
may, upon application by Lender, appoint a Receiver as designated in the
application and issue an injunction prohibiting Borrower from interfering with
the Receiver, collecting Rents, disposing of any Rents or any part of the
Property, committing waste or doing any other act that will tend to affect the
preservation of the Leases, the Rents and the Property, and Borrower approves
the appointment of the designated Receiver or any other Receiver appointed by
the court. Borrower agrees that the appointment may be made ex parte and as a
-- -----
matter of right to Lender or Trustee, either before or after sale of the
Property, without further notice, and without regard to the solvency or
insolvency, at the time of application for the Receiver, of the person or
persons, if any, liable for the payment of any portion of the Debt and the
performance of any portion of the Obligations and without regard to the value of
the Property or whether the Property is occupied as a homestead and without bond
being required of the applicant.
(b) The Receiver will be vested with the fullest powers permitted by Law
including all powers necessary or usual in similar cases for the protection,
possession and operation of the Property and all the powers and duties of Lender
30
<PAGE>
as a mortgagee-in-possession as provided in this Deed of Trust and may continue
to exercise all the usual powers and duties until the Receiver is discharged by
the court.
(c) In addition to the Remedies and all other available rights, Lender or
the Receiver may take any of the following actions:
(i) take exclusive possession, custody and control of the Property and
manage the Property so as to prevent waste;
(ii) require Borrower to deliver to Lender or the Receiver all keys,
security deposits, operating accounts, prepaid Rents, past due Rents, the
Financial Books and Records and all original counterparts of the Leases and
the Property Documents;
(iii) collect, sue for and give receipts for the Rents and, after paying
all expenses of collection, including reasonable receiver's, broker's and
attorney's fees, apply the net collections to any portion of the Debt
selected by Lender in its sole discretion,
(iv) enter into, modify, extend, enforce, renew or accept surrender of
Leases, and terminate Leases and evict tenants in accordance with the
Leases, except that in the case of a Receiver, such actions may be taken
only with the written consent of Lender as provided in this Deed of Trust
and in the Assignment;
(v) enter into, modify, extend, enforce or renew Property Documents, and
terminate Property Documents in accordance with the Property Documents,
except that in the case of a Receiver, such actions may be taken only with
the written consent of Lender as provided in this Deed of Trust and in the
Assignment;
(vi) appear in and defend any Proceeding brought in connection with the
Property and bring any Proceeding to protect the Property as well as
Borrower's and Lender's respective interests in the Property (unless any
such Proceeding has been assigned previously to Lender in the Assignment,
or if so assigned, Lender has not expressly assigned such Proceeding to the
Receiver and consented to such appearance or defense by Receiver); and
(vii) perform any act in the place of Borrower that Lender or the Receiver
deems necessary (A) to preserve the value, marketability or rentability of
the Property; (B) to increase the gross receipts from the Property; or (C)
otherwise to protect Borrower's and Lender's respective interests in the
Property.
(d) Borrower appoints Lender as Borrower's attorney-in-fact, at Lender's
election, to perform any actions and to execute and record any instruments
necessary to effectuate the actions described in this Section, in each instance
only at Lender's election and only to the extent Borrower has failed to comply
with the provisions of this Section.
Section 14.6. General Provisions Pertaining to Foreclosures and the
------------ -----------------------------------------------------
Power of Sale. The following provisions will apply to any Proceeding to
- -------------
foreclose and
31
<PAGE>
to any sale of the Property by power of sale or pursuant to a judgment of
foreclosure and sale:
(i) Lender's or Trustee's right to institute a Proceeding to foreclose or
to sell by power of sale will not be exhausted by a Proceeding or a sale
that is defective or not completed or by conducting separate sales of
portions of the Property;
(ii) any sale may be postponed or adjourned by Lender by public announce
ment at the time and place appointed for the sale without further notice;
(iii) with respect to any sale pursuant to a judgment of foreclosure and
sale or by power of sale, the Property may be sold as an entirety or in
separate lots or parcels, at one or more sales, at the time and place, on
terms and in the order that Lender deems expedient in its sole discretion,
and any such sale may be conducted together with a sale of some or all of
the Other Property pursuant to the other Deeds of Trust, as an entirety or
in separate lots or parcels, at the time and place, on terms and in the
order that Lender deems expedient in its sole discretion;
(iv) if a portion of the Property is sold pursuant to this Article, the
Loan Documents will remain in full force and effect with respect to any
unmatured portion of the Debt and this Deed of Trust will continue as a
valid and enforceable first lien on and security interest in the remaining
portion of the Property, subject only to the Permitted Exceptions and
Permitted Liens, without loss of priority and without impairment of any of
Lender's or Trustee's rights and remedies with respect to the unmatured
portion of the Debt;
(v) Lender may bid for and acquire the Property at a sale and, in lieu of
paying cash, may credit the amount of Lender's bid against any portion of
the Debt selected by Lender in its sole discretion after deducting from the
amount of Lender's bid the expenses of the sale, costs of enforcement and
other amounts that Lender is authorized to deduct at Law, in equity or
otherwise; and
(vi) Lender's receipt of the proceeds of a sale will be sufficient
consideration for the portion of the Property sold and Lender will apply
the proceeds as set forth in this Deed of Trust.
Section 14.7. Application of Proceeds. Lender may apply the proceeds of
------------ -----------------------
any sale of the Property pursuant to a judgment of foreclosure and sale and any
other amounts collected by Lender in connection with the exercise of the
Remedies to payment of the Debt (whether or not previously accelerated) in such
priority and proportions as Lender may determine in its sole discretion or in
such priority and proportions as required by Law.
Section 14.8. Power of Attorney. Borrower appoints Lender as Borrower's
------------ -----------------
attorney-in-fact to perform any actions necessary and incidental to exercising
the Remedies.
Section 14.9. Tenant at Sufferance. If Lender, Trustee, or a Receiver
------------ --------------------
enters the Property in the exercise of the Remedies and Borrower is allowed to
32
<PAGE>
remain in occupancy of the Property, Borrower will pay to Lender, Trustee, or
the Receiver, as the case may be, in advance, a reasonable rent for the Property
occupied by Borrower. If Borrower fails to pay the rent, Borrower may be dispos
sessed by the usual Proceedings available against defaulting tenants.
ARTICLE XV
LIMITATION OF LIABILITY
-----------------------
Section 15.1. Limitation of Liability.
------------ -----------------------
(a) Notwithstanding any provision in the Loan Documents to the contrary,
except as set forth in subsections (b) and (c), if Lender seeks to enforce the
collection of the Debt, Lender will foreclose the Deeds of Trust instead of
instituting suit on the Notes. If a lesser sum is realized from a foreclosure
of the Deeds of Trust and sale of the Property and the Other Property than the
then outstanding Debt, Lender will not institute any Proceeding against Borrower
or Borrower's general partners, if any, for or on account of the deficiency,
except as set forth in subsections (b) and (c).
(b) The limitation of liability in subsection (a) will not affect or
impair (i) the lien of the Deeds of Trust or Lender's other rights and Remedies
under the Loan Documents, including Lender's right as beneficiary or secured
party to commence an action to foreclose any lien or security interest Lender
has under the Loan Documents; (ii) the validity of the Loan Documents or the
Obligations; (iii) Lender's rights under any Loan Document that are expressly
recourse; or (iv) Lender's right to present and collect on any letter of credit
or other credit enhancement document held by Lender in connection with the
Obligations.
(c) The following are excluded and excepted from the limitation of
liability in subsection (a) and Lender may recover personally against Borrower
and its general partners, if any, for the following:
(i) all losses suffered and liabilities and expenses incurred by Lender
relating to any fraud or intentional misrepresentation or omission by
Borrower or any of Borrower's partners, officers, directors, or principals
in connection with (A) the performance of any of the conditions to Lender
making the Loan; (B) any inducements to Lender to make the Loan; (C) the
execution and delivery of the Loan Documents; (D) any certificates,
representations or warranties given in connection with the Loan; or (E)
Borrower's performance of the Obligations;
(ii) all Rents derived from the Property or the Other Property after a
default under the Loan Documents which default is a basis of a Proceeding
by Lender to enforce collection of the Debt and all moneys that, on the
date such a default occurs, are on deposit in one or more accounts used by
or on behalf of Borrower relating to the operation of the Property or the
Other Property, except to the extent properly applied to payment of Debt
Service Payments on the Notes, Impositions, Insurance Premiums and any
reasonable and customary expenses incurred by Borrower in the operation,
maintenance and leasing of the Property or the Other Property or delivered
to Lender;
33
<PAGE>
(iii) the cost of remediation of any Environmental Activity affecting the
Property or the Other Property, any material diminution in the value of the
Property or the Other Property arising from any Environmental Activity
affecting the Property or the Other Property and any other losses suffered
and liabilities and expenses actually incurred by Lender relating to a
default under the Article entitled "Environmental"(other than such
-------------
liabilities and expenses attributable to the gross negligence or willful
misconduct of Lender or its agents);
(iv) all security deposits collected by Borrower or any of Borrower's
predecessors and not refunded to Tenants in accordance with their
respective Leases, applied in accordance with the Leases or Law or
delivered to Lender, and all advance rents collected by Borrower or any of
Borrower's predecessors and not applied in accordance with the Leases or
delivered to Lender;
(v) the replacement cost of any Fixtures or Personal Property removed
from the Property or the Other Property by Borrower or its agents after a
default occurs and not replaced in the ordinary course of business with
property of equal value and utility;
(vi) all losses suffered and liabilities and expenses incurred by Lender
relating to any acts or omissions by Borrower that result in waste
(including economic and non-physical waste, but excluding ordinary wear and
tear in the absence of gross negligence or willful misconduct) on the
Property or the Other Property;
(vii) all protective advances and other payments made by Lender pursuant
to express provisions of the Loan Documents to protect Lender's security
interest in the Property or the Other Property or to protect the assignment
of the property described in and effected by the Assignment or by
assignments of leases and rents with respect to the Other Property, but
only to the extent that the Rents would have been sufficient to permit
Borrower to make the payment and Borrower failed to do so;
(viii) [INTENTIONALLY OMITTED]
(ix) all Proceeds that are not applied in accordance with the Deeds of
Trust or not paid to Lender as required under the Deeds of Trust;
(x) all losses suffered and liabilities and expenses incurred by Lender
relating to a Transfer that is not permitted under the Section entitled
"Permitted Transfers";
--------------------
(xi) all losses suffered and liabilities and expenses incurred by Lender
relating to forfeiture or threatened forfeiture of the Property or the
Other Property to the Government; and
(xii) all losses suffered and liabilities and expenses incurred by Lender
relating to any default by Borrower under any of the provisions of the
Deeds of Trust relating to ERISA including the prohibition on any Transfer
that results in a violation of ERISA.
34
<PAGE>
(d) Nothing under subparagraph (a) above will be deemed to be a waiver of
any right which Lender may have under Section 506(a), 506(b), 1111(b) or any
other provisions of the Bankruptcy Code or under any other Law relating to
bankruptcy or insolvency to file a claim for the full amount of the Debt or to
require that all collateral will continue to secure all of the Obligations in
accordance with the Loan Documents.
ARTICLE XVI
WAIVERS
-------
Section 16.1. WAIVER OF STATUTE OF LIMITATIONS. BORROWER WAIVES THE RIGHT
------------ --------------------------------
TO CLAIM ANY STATUTE OF LIMITATIONS AS A DEFENSE TO BORROWER'S PAYMENT AND
PERFORMANCE OF THE OBLIGATIONS.
Section 16.2. WAIVER OF NOTICE. BORROWER WAIVES THE RIGHT TO RECEIVE ANY
------------ ----------------
NOTICE FROM LENDER OR TRUSTEE WITH RESPECT TO THE LOAN DOCUMENTS EXCEPT FOR
THOSE NOTICES THAT LENDER OR TRUSTEE IS EXPRESSLY REQUIRED TO DELIVER PURSUANT
TO THE LOAN DOCUMENTS.
Section 16.3. WAIVER OF MARSHALLING AND OTHER MATTERS. BORROWER WAIVES
------------- ---------------------------------------
THE BENEFIT OF ANY RIGHTS OF MARSHALLING OR ANY OTHER RIGHT TO DIRECT THE ORDER
IN WHICH ANY OF THE PROPERTY WILL BE (i) SOLD; OR (ii) MADE AVAILABLE TO ANY
ENTITY IF THE PROPERTY IS SOLD BY POWER OF SALE OR PURSUANT TO A JUDGMENT OF
FORECLOSURE AND SALE. BORROWER ALSO WAIVES THE BENEFIT OF ANY LAWS RELATING TO
APPRAISEMENT, VALUATION, STAY, EXTENSION, REINSTATEMENT, MORATORIUM, HOMESTEAD
AND EXEMPTION RIGHTS OR A SALE IN INVERSE ORDER OF ALIENATION.
Section 16.4. WAIVER OF TRIAL BY JURY. BORROWER WAIVES TRIAL BY JURY IN
------------ -----------------------
ANY PROCEEDING BROUGHT BY, OR AGAINST, OR COUNTERCLAIM OR CROSS-COMPLAINT
ASSERTED BY OR AGAINST, LENDER OR TRUSTEE RELATING TO THE LOAN, THE PROPERTY
DOCUMENTS OR THE LEASES.
Section 16.5. WAIVER OF COUNTERCLAIM. BORROWER WAIVES THE RIGHT TO ASSERT
------------ ----------------------
A COUNTERCLAIM OR CROSS-COMPLAINT, OTHER THAN COMPULSORY OR MANDATORY
COUNTERCLAIMS OR CROSS-COMPLAINTS, IN ANY PROCEEDING LENDER OR TRUSTEE BRINGS
AGAINST BORROWER RELATING TO THE LOAN, INCLUDING ANY PROCEEDING TO ENFORCE
REMEDIES.
Section 16.6. [INTENTIONALLY OMITTED]
------------
Section 16.7. WAIVER OF SUBROGATION. BORROWER WAIVES ALL RIGHTS OF
------------ ---------------------
SUBROGATION TO LENDER'S RIGHTS OR CLAIMS RELATED TO OR AFFECTING THE PROPERTY OR
ANY OTHER SECURITY FOR THE LOAN UNTIL THE LOAN IS PAID IN FULL AND ALL FUNDING
OBLIGATIONS UNDER THE LOAN DOCUMENTS HAVE BEEN TERMINATED.
Section 16.8. GENERAL WAIVER. BORROWER ACKNOWLEDGES THAT
------------ --------------
(a) BORROWER AND BORROWER'S PARTNERS, MEMBERS OR PRINCIPALS, AS THE CASE
MAY BE, ARE KNOWLEDGEABLE BORROWERS OF COMMERCIAL FUNDS AND EXPERIENCED REAL
ESTATE DEVELOPERS OR INVESTORS WHO UNDERSTAND FULLY THE EFFECT OF THE ABOVE
PROVISIONS;
35
<PAGE>
(b) LENDER WOULD NOT MAKE THE LOAN WITHOUT THE PROVISIONS OF THIS
ARTICLE;
(c) THE LOAN IS A COMMERCIAL OR BUSINESS LOAN UNDER THE LAWS OF THE STATE
OR COMMONWEALTH WHERE THE PROPERTY IS LOCATED NEGOTIATED BY LENDER AND BORROWER
AND THEIR RESPECTIVE ATTORNEYS AT ARMS' LENGTH; AND
(d) ALL WAIVERS BY BORROWER IN THIS ARTICLE HAVE BEEN MADE VOLUNTARILY,
INTELLIGENTLY AND KNOWINGLY, AFTER BORROWER FIRST HAS BEEN INFORMED BY COUNSEL
OF BORROWER'S OWN CHOOSING AS TO POSSIBLE ALTERNATIVE RIGHTS, AND HAVE BEEN MADE
AS AN INTENTIONAL RELINQUISHMENT AND ABANDONMENT OF A KNOWN RIGHT AND PRIVILEGE.
THE FOREGOING ACKNOWLEDGEMENT IS MADE WITH THE INTENT THAT LENDER AND ANY
SUBSEQUENT HOLDER OF ANY OF THE NOTES WILL RELY ON THE ACKNOWLEDGMENT.
ARTICLE XVII
NOTICES
-------
Section 17.1. Notices. All acceptances, approvals, consents,
------------ -------
demands, notices, requests, waivers and other communications (the "Notices")
required or permitted to be given under the Loan Documents must be in writing
and (a) delivered personally by a process server providing a sworn declaration
evidencing the date of service, the individual served, and the address where the
service was made; (b) sent by certified mail, return receipt requested; or (c)
delivered by nationally recognized overnight delivery service that provides
evidence of the date of delivery, with all charges prepaid (for next available
morning delivery if sent by overnight delivery service), addressed to the
appropriate party at its address listed below:
If to Lender: Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017
Attention: Director Portfolio Management
Mortgage and Real Estate
West Coast Region
Application #CA-3207
Mortgage #000459100
with a courtesy copy to: Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017
Attention: Vice President and Chief Counsel
Mortgage and Real Estate Law
Application #CA-3207
Mortgage #000459100
If to Borrower: Kilroy Realty, L.P.
2250 East Imperial Highway
El Segundo, California 90245
Attn: Tyler H. Rose
36
<PAGE>
with a courtesy copy to: Latham & Watkins
633 W. 5th Street, Suite 4000
Los Angeles, California 90071
Attn: Jennifer Upham Saunders, Esq.
Lender and Borrower each may change from time to time the address to which
Notices must be sent, by notice given in accordance with the provisions of this
Section. All Notices given in accordance with the provisions of this Section
will be deemed to be effective as of the earliest of (i) actual receipt; (ii)
Borrower's rejection of delivery; or (iii) the third Business Day after having
been deposited in any mail depository regularly maintained by the United States
postal service, if sent by certified mail, or the first Business Day after
having been deposited with a nationally recognized overnight delivery service,
if sent by overnight delivery, or on the date of personal service, if served by
a process server.
Section 17.2. Change in Borrower's Name or Place of Business. Borrower
------------ ----------------------------------------------
will immediately notify Lender in writing of any change in Borrower's name or
the place of business set forth in the beginning of this Deed of Trust.
Section 17.3. Request for Notice. Borrower requests that a copy of any
------------ ------------------
statutory notice of default or sale hereunder be mailed to Borrower at the
address set forth in this Article.
ARTICLE XVIII
MISCELLANEOUS
-------------
Section 18.1. Applicable Law. The Loan Documents are governed by and will
------------ --------------
be construed in accordance with the Laws of the state or commonwealth in which
the Property is located without regard to conflict of law provisions.
Section 18.2. Usury Limitations. Borrower and Lender intend to comply
------------ -----------------
with all Laws with respect to the charging and receiving of interest. Any
amounts charged or received by Lender for the use or forbearance of the
Principal to the extent permitted by Law, will be amortized and spread
throughout the Term until payment in full so that the rate or amount of interest
charged or received by Lender on account of the Principal does not exceed the
Maximum Interest Rate. If any amount charged or received under the Loan
Documents that is deemed to be interest is determined to be in excess of the
amount permitted to be charged or received at the Maximum Interest Rate, the
excess will be deemed to be a prepayment of Principal when paid, without
premium, and any portion of the excess not capable of being so applied will be
refunded to Borrower. If during the Term the Maximum Interest Rate, if any, is
eliminated, then for purposes of the Loan, there will be no Maximum Interest
Rate.
Section 18.3. Lender's Discretion. Wherever under the Loan Documents any
------------ -------------------
matter is required to be satisfactory to Lender, Lender has the right to make
requests or approve or determine any matter or Lender has an election, Lender's
request, approval, determination or election will be made in Lender's reasonable
discretion unless expressly provided to the contrary.
Section 18.4. Unenforceable Provisions. If any provision in the Loan
------------ ------------------------
Documents is found to be illegal or unenforceable or would operate to invalidate
37
<PAGE>
any of the Loan Documents, then the provision will be deemed expunged and the
Loan Documents will be construed as though the provision was not contained in
the Loan Documents and the remainder of the Loan Documents will remain in full
force and effect.
Section 18.5. Survival of Borrower's Obligations. Borrower's represen-
------------ ----------------------------------
tations, warranties and covenants contained in the Loan Documents will continue
in full force and effect and survive (i) satisfaction of the Obligations; (ii)
reconveyance of the lien of this property by Trustee; (iii) assignment or other
transfer of all or any portion of Lender's interest in the Loan Documents or the
Property; (iv) Lender's or Trustee's exercise of any of the Remedies or any of
Lender's or Trustee's other rights under the Loan Documents; (v) a Transfer;
(vi) amendments to the Loan Documents; and (vii) any other act or omission that
might otherwise be construed as a release or discharge of Borrower.
Section 18.6. Relationship Between Borrower and Lender; No Third Party
------------ --------------------------------------------------------
Beneficiaries.
- -------------
(a) Lender is not a partner of or joint venturer with Borrower or any
other entity as a result of the Loan or Lender's rights under the Loan
Documents; the relationship between Lender and Borrower is strictly that of
creditor and debtor. Each Loan Document is an agreement between the parties to
that Loan Document for the mutual benefit of such parties, and no entities other
than the parties to that Loan Document will be a third party beneficiary or will
have any claim against Lender or Borrower by virtue of the Loan Document. As
between Lender and Borrower, any actions taken by Lender under the Loan
Documents will be taken for Lender's protection only, and Lender has not and
will not be deemed to have assumed any responsibility to Borrower or to any
other entity by virtue of Lender's actions.
(b) All conditions to Lender's performance of its obligations under the
Loan Documents are imposed solely for the benefit of Lender. No entity other
than Lender will have standing to require satisfaction of the conditions in
accordance with their provisions or will be entitled to assume that Lender will
refuse to perform its obligations in the absence of strict compliance with any
of the conditions.
Section 18.7. Partial Reconveyances or Releases, Extensions, Waivers.
------------ ------------------------------------------------------
Lender may: (i) permit the reconveyance of any part of the Property or release
any entity obligated for the Obligations; (ii) extend the time for payment or
performance of any of the Obligations or otherwise amend the provisions for
payment or performance by agreement with any entity that is obligated for the
Obligations or that has an interest in the Property; (iii) accept additional
security for the payment and performance of the Obligations; and (iv) waive any
entity's performance of an Obligation, release any entity or individual now or
in the future liable for the performance of the Obligation or waive the exercise
of any Remedy or option. Lender may exercise any of the foregoing rights
without notice, without regard to the amount of any consideration given, without
affecting the priority of the Loan Documents, without releasing any entity not
specifically released from its obligations under the Loan Documents, without
releasing any guarantor(s) or surety(ies) of the Obligations, without effecting
a novation of the Loan Documents and, with respect to a waiver, without waiving
future performance of the Obligation or exercise of the Remedy waived.
38
<PAGE>
Section 18.8. Service of Process. Borrower and Lender each irrevocably
------------ ------------------
consent to service of process by registered or certified mail, postage prepaid,
return receipt requested, to it at its address set forth in the Article entitled
"Notices".
-------
Section 18.9. Entire Agreement. Oral agreements or commitments between
------------ ----------------
Borrower and Lender to lend money, to extend credit or to forbear from enforcing
repayment of a debt, including promises to extend or renew the debt, are not
enforceable. Any agreements among Borrower, Lender and Trustee relating to the
Loan are contained in the Loan Documents, which contain the complete and
exclusive statement of the agreements among Borrower, Lender and Trustee, except
as Borrower, Lender and, if applicable, Trustee may later agree in writing to
amend the Loan Documents. The language of each Loan Document will be construed
as a whole according to its fair meaning and will not be construed against the
party by or for whom it was drafted.
Section 18.10. No Oral Amendment. The Loan Documents may not be amended,
------------- -----------------
waived or terminated orally or by any act or omission made individually by
Borrower, Lender or Trustee but may be amended, waived or terminated only by a
written document signed by the party against which enforcement of the amendment,
waiver or termination is sought.
Section 18.11. Severability. The invalidity, illegality or unenforce-
------------- ------------
ability of any provision of any of the Loan Documents will not affect any other
provisions of the Loan Documents, which will be construed as if the invalid,
illegal or unenforceable provision never had been included.
Section 18.12. Covenants Run with the Land. Subject to the restrictions
------------- ---------------------------
on transfer contained in the Article entitled "TRANSFERS, LIENS AND ENCUM-
--------------------------
BRANCES", all of the covenants of this Deed of Trust and the Assignment run with
- -------
the Land, will bind all parties hereto and all tenants and subtenants of the
Land or the Improvements and their respective heirs, executors, administrators,
successors and assigns, and all occupants and subsequent owners of the Property,
and will inure to the benefit of Lender and all subsequent holders of any of the
Notes and this Deed of Trust.
Section 18.13. Time of the Essence. Time is of the essence with respect
------------- -------------------
to Borrower's payment and performance of the Obligations.
Section 18.14. Subrogation. If the Principal or any other amount advanced
------------- -----------
by Lender is used directly or indirectly to pay off, discharge or satisfy all or
any part of an encumbrance affecting the Property, then Lender is subrogated to
the encumbrance and to any security held by the holder of the encumbrance, all
of which will continue in full force and effect in favor of Lender as additional
security for the Obligations.
Section 18.15. [INTENTIONALLY OMITTED]
-------------
Section 18.16. Successors and Assigns. The Loan Documents bind the
------------- ----------------------
parties to the Loan Documents and their respective successors, assigns, heirs,
administrators, executors, agents and representatives and inure to the benefit
of Lender and its successors, assigns, heirs, administrators, executors, agents
and representatives and, to the extent applicable, inure to the benefit of
39
<PAGE>
Trustee and its successors, assigns, heirs, administrators, executors, agents
and representatives.
Section 18.17. Duplicates and Counterparts. Duplicate counterparts of
------------- ---------------------------
any of the Loan Documents, other than the Notes, may be executed and together
will constitute a single original document.
ARTICLE XIX
TRUSTEE PROVISIONS
------------------
Section 19.1. Acceptance of Trust.
------------ -------------------
(a) Trustee accepts this Trust upon recordation of this Deed of Trust as
provided by Law. Except as provided by Law, Trustee is not obligated to notify
any party of a pending sale under this Deed of Trust or of a Proceeding in which
Borrower, Lender or Trustee is a party.
(b) Lender may from time to time unilaterally substitute a successor to
Trustee pursuant to a recordable instrument that complies with Law for
substitution of Trustees. The recorded substitution will be conclusive proof of
proper substitution of trustee who will, without conveyance from predecessor
trustee, succeed to all of the predecessor trustee's title, estate, rights,
powers and duties.
Section 19.2. Reconveyance After Payment. Upon written request of Lender
------------ --------------------------
stating that all of the Obligations have been paid, upon surrender of this Deed
of Trust to Trustee for cancellation and retention and upon payment to Trustee
of its fees, costs and expenses incurred or to be incurred thereby, Trustee
shall reconvey, without warranty, the Property then held hereunder. The
recitals in such reconveyance of any matters or facts shall be conclusive proof
of the truthfulness thereof. The grantee in such reconveyance may be described
as "the person or persons legally entitled thereto."
IN WITNESS WHEREOF, Borrower has executed and delivered this Deed of Trust
as of the date first set forth above.
KILROY REALTY, L.P.,
a Delaware limited partnership
By KILROY REALTY CORPORATION,
a Maryland corporation, its general partner
By
--------------------------------------
Tyler H. Rose,
Senior Vice President and Treasurer
40
<PAGE>
ACKNOWLEDGEMENTS
STATE OF CALIFORNIA )
) SS:
COUNTY OF )
On , 1999, before me, the undersigned, a Notary Public in and for
---------------
said State, personally appeared Tyler H. Rose, personally known to me or proved
to me on the basis of satisfactory evidence to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
Signature:
- ------------------------------
Name (Typed or Printed)
41
<PAGE>
Exhibit A
---------
LEGAL DESCRIPTION
(Deed of Trust No. 1)
The land referred to herein is situated in the State of California, County
of Los Angeles and is described as follows:
PARCEL 1:
LOT 7 OF TRACT NO. 49694, IN THE CITY OF SANTA MONICA, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 1175 PAGES 37 TO 40 INCLUSIVE
OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
PARCEL 2:
EASEMENTS FOR THE PURPOSES OF VEHICULAR AND PEDESTRIAN INGRESS AND EGRESS, AND
AN EASEMENT FOR THE CONSTRUCTION, MAINTENANCE, OPERATION, REPAIR AND REPLACEMENT
OF A PARKING GARAGE, TOGETHER WITH THE RIGHT OF INGRESS AND EGRESS THERETO, THE
RIGHT TO PARK THEREIN, AND THE RIGHT TO USE A PARKING TICKET COLLECTION BOOTH,
AS PROVIDED FOR IN THAT CERTAIN DOCUMENT ENTITLED "SECOND DECLARATION OF
PROTECTIVE COVENANTS AND RESTRICTIONS AND RECIPROCAL EASEMENT AGREEMENT FOR THE
ARBORETUM" RECORDED NOVEMBER 23, 1994 AS INSTRUMENT NO. 94-2115484 AND AMENDED
MAY 2, 1995 AS INSTRUMENT NO. 95-717712, OVER LOTS 1, 2, 3, 6 AND THOSE PORTIONS
OF LOTS 4 AND 5 OF TRACT NO. 49694, RECORDED IN BOOK 1175 PAGES 37 TO 40
INCLUSIVE OF MAPS, SHOWN AS PARCEL C OF THE CERTIFICATE OF COMPLIANCE NO. WPM
96-01, RECORDED APRIL 4, 1997 AS INSTRUMENT NO. 97-512250.
PARCEL 3:
AN EASEMENT FOR THE CONSTRUCTION, MAINTENANCE, OPERATION, REPAIR AND REPLACEMENT
OF A WASTEWATER TREATMENT FACILITY FOR THE RECYCLING OF WATER FOR IRRIGATION AND
SUCH OTHER PURPOSES, AS PROVIDED FOR IN THAT CERTAIN DOCUMENT ENTITLED "SECOND
DECLARATION OF PROTECTIVE COVENANTS AND RESTRICTIONS AND RECIPROCAL EASEMENT
AGREEMENT FOR THE ARBORETUM" RECORDED NOVEMBER 23, 1994 AS INSTRUMENT NO. 94-
2115484, AND AMENDED MAY 2, 1995 AS INSTRUMENT NO. 95-717712, OVER LOTS 1, 2, 3,
6 AND THOSE PORTIONS OF LOTS 4 AND 5 OF TRACT NO. 49694, RECORDED IN BOOK 1175
PAGES 37 TO 40 INCLUSIVE OF MAPS, SHOWN AS PARCEL C OF THE CERTIFICATE OF
COMPLIANCE NO. WPM 96-01, RECORDED APRIL 4, 1997 AS INSTRUMENT NO. 97-512250.
42
<PAGE>
Exhibit B
---------
DEFINITIONS
"Acceleration" is defined in Section 14.2(a)(i).
------------
"Accumulations" is defined in Section 2.1(xii).
-------------
"Accumulations Depositary" is defined in Section 6.2(a).
------------------------
"Additional Funds" is defined in Section 7.4(v).
----------------
"Annual Financial Statement" is defined in Section 10.1(a).
--------------------------
"Assessments" is defined as all assessments now or hereafter levied, assessed or
- ------------
imposed against the Property.
"Assignment" is defined as the Assignment of Leases and Rents dated of even date
----------
with this Deed of Trust made by Borrower for the benefit of Lender with respect
to the Leases and Rents.
"Bankruptcy Code" means Title 11 of the United States Code.
---------------
"Borrower" is defined in the introductory paragraph.
- ---------
"Business Day" is defined as any day on which commercial banks are not
------------
authorized or required by Law to close in Los Angeles, California.
"Casualty" is defined as damage to or destruction of the Property (or, where
--------
expressly specified, the Other Property) by fire or other casualty.
"Code" is defined as the Internal Revenue Code of 1986 and the regulations
----
promulgated thereunder.
"Condemnation" is defined as the permanent or temporary taking of all or any
------------
portion of the Property (or, where expressly specified, the Other Property), or
any interest therein or right accruing thereto, by the exercise of the right of
eminent domain (including any transfer in lieu of or in anticipation of the
exercise of the right), inverse condemnation or any similar injury or damage to
or decrease in the value of the Property (or, where expressly specified, the
Other Property), including severance and change in the grade of any streets
"Condemnation Awards" is defined in Section 2.1(viii).
-------------------
"Condemnation Proceeding" is defined as a Proceeding that could result in a
-----------------------
Condemnation.
"CPA" is defined as an independent certified public accountant satisfactory to
- ----
Lender.
"Debt" is defined in Section 3.1.
----
43
<PAGE>
"Debt Service Payments" is, with respect to a specified Note or Notes, defined
---------------------
as the monthly installments of principal and interest payable by Borrower to
Lender as set forth in such Note or Notes.
"Deed of Trust" and "Deeds of Trust" are defined in the Recitals.
------------- --------------
"Default Interest Rate" is defined as the lower of twelve and two-tenths percent
---------------------
(12.20%) per annum or the Maximum Interest Rate, if any.
"Destruction Event" is defined in Section 7.4.
-----------------
"Destruction Event Threshold" is defined as $1,000,000 minus the following, each
---------------------------
determined as of each occasion that the Destruction Event Threshold is to be
applied:
(i) the aggregate cost of all Restorations necessitated by all Casualties
and Condemnations which have occurred to the Property and the Other
Property, except such Restorations as have been completed and paid for in
full and all insurance claims and/or condemnation awards for which have
been paid and the funds applied as provided in the Deeds of Trust; and
(ii) with respect to all Condemnations which have occurred to the Property
and the Other Property and as to which Restoration is not possible, the
aggregate amount of all condemnation award claims with respect thereto,
except such claims which have been paid and the proceeds of which have been
applied as provided in the Deeds of Trust.
"Environmental Activity" is defined as any actual, suspected or threatened
- -----------------------
abatement, cleanup, disposal, generation, handling, manufacture, possession,
release, remediation, removal, storage, transportation, treatment or use of any
Hazardous Substances. The actual, suspected or threatened presence of any
Hazardous Substances, or the actual, suspected or threatened noncompliance with
any Environmental Laws, will be deemed Environmental Activity.
"Environmental Laws" is defined as all Laws pertaining to the effect of the
------------------
environment on human health or safety, protection of the environment, natural
resources, conservation, wildlife, waste management, Environmental Activities
and pollution.
"Environmental Report" is defined as the report shown in Schedule 1
-------------------- ----------
corresponding to the Related Note.
"ERISA" is defined in Section 8.3(a).
-----
"Event of Default" is defined in Section 14.1.
- -----------------
"Expenses" is defined in Section 11.1(a).
--------
"Financial Books and Records" is defined as detailed accounts of the income and
---------------------------
expenses of the Property and the business and affairs of
44
<PAGE>
Borrower relating to the Property and all other data, records and information
that either are specifically referred to in the Article entitled "FINANCIAL
---------
REPORTING" or are necessary to the preparation of any of the statements,
- ---------
reports or certificates required under such Article and includes all supporting
schedules prepared or used in connection with the preparation or certification
of the Annual Financial Statement.
"Fiscal Year" is defined as any calendar year or partial calendar year during
-----------
the Term.
"Fixed Interest Rate" is defined as seven and two-tenths percent (7.20%) per
-------------------
annum.
"Fixtures and Personal Property" is defined in Section 2.1(iv).
------------------------------
"Government" is defined as any federal, state or municipal governmental or
----------
quasi-governmental authority including executive, legislative or judicial
branch, division and any subdivision or agency of any of them and any entity to
which any of them has delegated authority.
"Hazardous Substances" is defined as (i) any by-product, chemical, compound,
--------------------
material, mixture or substance that is now or hereafter defined or listed in, or
otherwise classified pursuant to, any Environmental Laws, as a "hazardous
substance", "hazardous material", "hazardous waste", "extremely hazardous
waste", infectious waste", "toxic substance", "toxic pollutant", or any other
formulation intended to define, list, or classify substances by reason of
deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, or "EP toxicity", (ii) any
petroleum, natural gas, natural gas liquid, liquified natural gas, synthetic gas
usable for fuel (or mixtures of natural gas and such synthetic gas), ash
produced by a resource recovery facility utilizing a municipal solid waste
stream, and drilling fluids, produced waters, and other wastes associated with
the exploration, development or production of crude oil, natural gas, or
geothermal resources, and (iii) any underground storage tanks.
"Imposition Penalty Date" is defined in Section 6.1(a).
-----------------------
"Impositions" is defined as all Taxes, Assessments, ground rent, if any, water
-----------
and sewer rents, fees and charges, levies, permit, inspection and license fees
and other dues, charges or impositions, including all charges and license fees
for the use of vaults, chutes and similar areas adjoining the Land, maintenance
and similar charges and charges for utility services, in each instance whether
now or in the future, directly or indirectly, levied, assessed or imposed on the
Property or Borrower and whether levied, assessed or imposed as excise,
privilege or property taxes, in each case relating to the Property.
"Impound Agreement" is defined in Section 6.2(a).
-----------------
"Improvements" is defined in Section 2.1(ii).
------------
45
<PAGE>
"Insurance Premiums" is defined as all present and future premiums and other
------------------
charges due and payable on policies of fire, rental value and other insurance
covering the Property and required pursuant to the provisions of this Deed of
Trust.
"Insurance Proceeds" is defined in Section 2.1(ix).
------------------
"Insurers" is defined in Section 7.1(c).
--------
"Interest" is defined as the amount of all interest payable under the Notes and
--------
any other sums which could be deemed to be interest under Law.
"KRC" is defined in Section 10.1(a).
---
"Land" is defined in the Recitals.
----
"Late Charges" is defined as all amounts payable under the Notes as a "Late
------------
Charge" as that term is defined in each Note.
"Law" is defined as all present and future codes, constitutions, cases,
---
opinions, rules, manuals, regulations, determinations, laws, orders, ordinances,
requirements and statutes, as amended, of any Government that affect or that may
be interpreted to affect the Property, Borrower or the Loan, including
amendments and all guidance documents and publications promulgated thereunder.
"Leases" is defined as all present and future leases, subleases, licenses and
------
other agreements for the use and occupancy of the Land and Improvements, any
related guarantees and including any use and occupancy arrangements created
pursuant to Section 365 (h) of the Bankruptcy Code or otherwise in connection
with the commencement or continuation of any bankruptcy, reorganization,
arrangement, insolvency, dissolution, receivership or similar Proceedings, or
any assignment for the benefit of creditors, in respect of any tenant or other
occupant of the Land and Improvements.
"Lender" is defined in the introductory paragraph.
------
"Loan" is defined in the Recitals.
----
"Loan Documents" is defined as the Notes, the Deeds of Trust, the Assignment,
--------------
the Assignments of Leases and Rents executed by Borrower with respect to the
Other Property, and all documents now or hereafter executed by Borrower or held
by Lender or Trustee relating to the Loan, including all amendments, but not
including any separate environmental indemnity provided to Lender in connection
with the Loan.
"Material Environmental Contamination" is defined as contamination of the
------------------------------------
Property with Hazardous Substances (i) that constitutes a violation of one or
more Environmental Laws; (ii) for which there is a significant possibility that
remediation will be required under Environmental Laws; (iii) that results in a
material risk of liability or expense to Lender; or (iv) that materially
diminishes the value of the Property.
46
<PAGE>
"Maturity Date" is defined in the Recitals.
-------------
"Maximum Interest Rate" is defined as the maximum rate of interest, if any,
---------------------
permitted by Law to be charged with respect to the Loan as the maximum rate may
be increased or decreased from time to time.
"Notes" is defined in the Recitals.
-----
"Notices" is defined in Section 17.1.
-------
"Obligations" is defined in Section 3.1.
-----------
"Other Property" is defined in the Recitals.
--------------
"Permitted Exceptions" is defined as the matters shown in Schedule B, Part 1 and
--------------------
2 of the title insurance policy insuring the lien of this Deed of Trust.
"Permitted Liens" is defined as the following: (i) liens for taxes, assessments
---------------
or other governmental charges not yet due and payable or (if later) not yet
required by this Deed of Trust to be paid or which are being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted in
accordance with Section 6.1; (ii) 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 yet due and payable or
(if later) not yet required by this Deed of Trust to be paid or which are being
contested in good faith in accordance with Section 12.3; (iii) the interests of
lessors under leases of personal property to Borrower, made in the ordinary
course of business and on fair market terms, which personal property does not
have a fair market value at the time of execution of the lease in excess of
$10,000 for any single item or $50,000 in the aggregate for all leased items,
and (iv) liens in favor of Lender under the Loan Documents.
"Permitted Transfers" is defined in Section 12.2(b).
-------------------
"Permitted Use" is defined as the use shown in Schedule 1 corresponding to the
------------- ----------
Related Note, and uses incidentally and directly related to such use.
"Policies" is defined in Section 7.1(b).
--------
"Prepayment Premiums" is defined as all amounts payable under the Notes as a
-------------------
"Prepayment Premium," "Evasion Premium" or "Reconveyance Premium" as those terms
are defined in each Note.
"Principal" is defined in the Recitals.
---------
"Proceeding" is defined as a pending or threatened action, claim or litigation
----------
before a legal, equitable or administrative tribunal having proper jurisdiction.
47
<PAGE>
"Proceeds" is defined in Section 7.2(c).
--------
"Property" is defined in Section 2.1.
--------
"Property Documents" is defined in Section 2.1(v).
------------------
"Receiver" is defined as a receiver, custodian, trustee, liquidator or
--------
conservator of the Property.
"Reconveyance Premium" is defined in the Related Note.
--------------------
"Related Note" is defined in the Recitals.
------------
"Remedies" is defined in Section 14.2(a).
--------
"Rents" is defined as all present and future rents, prepaid rents, percentage,
-----
participation or contingent rents, issues, profits, proceeds, parking fees,
revenues and other consideration accruing under or in connection with the Leases
or otherwise derived from the use and occupancy of the Land or the Improvements,
including tenant contributions to expenses, security deposits, royalties and
contingent rent, if any, all other fees, accounts, accounts receivable or
payments paid to or for the benefit of Borrower, including liquidated damages
after a default under a lease, any termination, cancellation, modification or
other fee or premium payable by tenant for any reason and the proceeds of any
rental insurance, and any payments received pursuant to Sections 502(b) or 365
of the Bankruptcy Code or otherwise in connection with the commencement or
continuance of any bankruptcy, reorganization, arrangement, insolvency,
dissolution, receivership or similar proceedings, or any assignment for the
benefit of creditors, in respect of any tenant or other occupant of the Land or
the Improvements and all claims as a creditor in connection with any of the
foregoing.
"Restoration" is defined as the restoration of the Property (or, where expressly
-----------
specified, the Other Property) after a Destruction Event as nearly as possible
to its condition immediately prior to the Destruction Event, in accordance with
the plans and specifications, in a first-class workmanlike manner using
materials substantially equivalent in quality and character to those used for
the original improvements, in accordance with Law and free and clear of all
liens, encumbrances or other charges other than this Deed of Trust, the
Permitted Exceptions and the Permitted Liens (or, with respect to any Other
Property, the corresponding Deed of Trust and the Permitted Exceptions and
Permitted Liens as defined therein).
"Restoration Completion Date" is defined in Section 7.4(viii).
---------------------------
"Restoration Funds" is defined in Section 7.5(b).
-----------------
"Substitute Property" is defined in Section 12.5.
-------------------
"Taxes" is defined as all present and future real estate taxes levied, assessed
-----
or imposed against the Property.
48
<PAGE>
"Term" is defined as the scheduled term of this Deed of Trust commencing on the
----
date Lender makes the first disbursement of the Loan and terminating on the
Maturity Date.
"Transfer" is defined in Section 12.1(a).
--------
"Trustee" is defined in the introductory paragraph.
-------
"Uniform Commercial Code" is defined as the Uniform Commercial Code in effect in
-----------------------
the jurisdiction where the Land is located.
49
<PAGE>
Exhibit C
---------
RULES OF CONSTRUCTION
(a) References in any Loan Document to lettered or numbered Exhibits or
Schedules are references to the Exhibits or Schedules attached to that Loan
Document, all of which are incorporated in and constitute a part of that Loan
Document. Article, Section, Exhibit and Schedule captions used in any Loan
Document are for reference only and do not describe or limit the substance,
scope or intent of that Loan Document or the individual Articles, Sections,
Exhibits or Schedules of that Loan Document.
(b) the terms "include", "including" and similar terms are construed as if
followed by the phrase "without limitation".
(c) The terms "Land", "Improvements", "Fixtures and Personal Property",
"Condemnation Awards", "Insurance Proceeds" and "Property" are construed as if
followed by the phrase "or any part thereof".
(d) Any agreement by or duty imposed on Borrower in any Loan Document to
perform any obligation or to refrain from any act or omission constitutes a
covenant running with the ownership or occupancy of the Land and the
Improvements, which will bind all parties hereto and their respective successors
and assigns, and all lessees, subtenants and assigns of same, and all occupants
and subsequent owners of the Property, and will inure to the benefit of Lender
and all subsequent holders of any of the Notes and this Deed of Trust and
includes a covenant by Borrower to cause its partners, members, principals,
agents, representatives and employees to perform the obligation or to refrain
from the act or omission in accordance with the Loan Documents. Any statement
or disclosure contained in any Loan Document about facts or circumstances
relating to the Property, Borrower or the Loan constitutes a representation and
warranty by Borrower made as of the date of the Loan Document in which the
statement or disclosure is contained.
(e) The term "to Borrower's knowledge" is construed as meaning to the best
of Borrower's knowledge after diligent inquiry.
(f) The singular of any word includes the plural and the plural includes
the singular. The use of any gender includes all genders.
(g) The terms "person", "party" and "entity" include natural persons,
firms, partnerships, limited liability companies and partnerships, corporations
and any other public or private legal entity.
(h) The term "provisions" includes terms, covenants, conditions,
agreements and requirements.
(i) The term "amend" includes modify, supplement, renew, extend, replace
or substitute and the term "amendment" includes modification, supplement,
renewal, extension, replacement and substitution.
50
<PAGE>
(j) Reference to any specific Law or to any document or agreement,
including the Notes, this Deed of Trust, any of the other Loan Documents, the
Leases and the Property Documents, includes any future amendments to the Law,
document or agreement, as the case may be.
(k) No inference in favor of or against a party with respect to any
provision in any Loan Document may be drawn from the fact that the party drafted
the Loan Document.
(l) The term "certificate" means the sworn, notarized statement of the
entity giving the certificate, made by a duly authorized person satisfactory to
Lender affirming the truth and accuracy of every statement in the certificate.
Any document that is "certified" means the document has been appended to a
certificate of the entity certifying the document that affirms the truth and
accuracy of everything in the document being certified. In all instances the
entity issuing a certificate must be satisfactory to Lender.
(m) Any appointment of Lender as Borrower's attorney-in-fact is
irrevocable and coupled with an interest. Lender may appoint a substitute
attorney-in-fact. Borrower ratifies all actions taken by the attorney-in-fact
but, nevertheless, if Lender requests, Borrower will specifically ratify any
action taken by the attorney-in-fact by executing and delivering to the
attorney-in-fact or to any entity designated by the attorney-in-fact all
documents necessary to effect the ratification.
(n) Any document, instrument or agreement to be delivered by Borrower will
be in form and content satisfactory to Lender.
(o) All obligations, rights, remedies and waivers contained in the Loan
Documents will be construed as being limited only to the extent required to be
enforceable under the Law.
(p) The unmodified word "days" means calendar days.
51
<PAGE>
SCHEDULE 1
----------
Promissory Notes, Parking Spaces, Uses, Environmental Reports
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
No. Property* Principal Amount Parking Permitted Use Environmental
of Note Spaces Report
===================================================================================================================
<S> <C> <C> <C> <C> <C>
1 Sony Building $20,000,000.00 230, plus 83 first-class Dated: February 1999
2100 Colorado Blvd. on adjoining commercial office Prepared by: ENSR
Santa Monica, CA* Lot 6 building
- -------------------------------------------------------------------------------------------------------------------
2 501 Santa Monica Blvd. $ 9,200,000.00 295 first-class Dated: February 1999
Santa Monica, CA* commercial office Prepared by: ENSR
building
- -------------------------------------------------------------------------------------------------------------------
3 111 Pacifica $ 5,100,000.00 275 first-class Dated: February 1999
Irvine, CA* commercial office Prepared by: ENSR
building
- -------------------------------------------------------------------------------------------------------------------
4 17150 Von Karman Ave. $ 8,900,000.00 501 office, research Dated: February 1999
Irvine, CA* & development Prepared by: ENSR
- -------------------------------------------------------------------------------------------------------------------
5 6340 & 6350 Sequence Dr. $18,300,000.00 792 office, research Dated: February 1999
San Diego, CA* & development Prepared by: ENSR
- -------------------------------------------------------------------------------------------------------------------
6 10350 Barnes Canyon Rd. $ 9,200,000.00 317 first-class Dated: February 1999
& commercial office Prepared by: ENSR
10120 Pacific Heights Blvd. building
San Diego, CA*
- -------------------------------------------------------------------------------------------------------------------
7 10398 & 10394 Pacific $ 9,800,000.00 301** first-class Dated: February 1999
Court Center commercial office Prepared by: ENSR
San Diego, CA* building
- -------------------------------------------------------------------------------------------------------------------
8 10455 Pacific Court Center $ 6,600,000.00 212 first-class Dated: February 1999
San Diego, CA* commercial office Prepared by: ENSR
building
- -------------------------------------------------------------------------------------------------------------------
9 10421 & 10445 Pacific $ 7,900,000.00 374 first-class Dated: February 1999
Court Center commercial office Prepared by: ENSR
San Diego, CA* building
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* THESE REFERENCES TO PROPERTY FORM NO PART OF THE DESCRIPTION OF PROPERTY
ENCUMBERED BY THIS DEED OF TRUST.
** Plus any additional spaces which may be required pursuant to tenant leases,
if and as required by the tenants thereunder.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 2,463 13,526
<SECURITIES> 0 0
<RECEIVABLES> 16,391 7,323
<ALLOWANCES> (577) (436)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,283,228 978,991
<DEPRECIATION> (151,939) (127,075)
<TOTAL-ASSETS> 1,178,821 912,709
<CURRENT-LIABILITIES> 0 0
<BONDS> 459,836 296,959
0 0
0 0
<COMMON> 276 267
<OTHER-SE> 475,027 455,739
<TOTAL-LIABILITY-AND-EQUITY> 1,178,821 912,709
<SALES> 0 0
<TOTAL-REVENUES> 37,550 29,353
<CGS> 0 0
<TOTAL-COSTS> 18,011 13,777
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,759 4,786
<INCOME-PRETAX> 13,780 10,790
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 13,780 10,790
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,910<F1> 8,879
<EPS-PRIMARY> 0.36 0.35
<EPS-DILUTED> 0.36 0.35
<FN>
<F1>NET INCOME IS AFTER MINORITY INTERESTS OF ($3,870).
</FN>
</TABLE>
