<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEALTHCARE FINANCIAL
PARTNERS REIT, INC.
(Exact name of registrant as specified in its governing instrument)
2 WISCONSIN CIRCLE, SUITE 402
CHEVY CHASE, MARYLAND 20815
(301) 347-3100
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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JOHN K. DELANEY
CHAIRMAN AND CEO
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
2 WISCONSIN CIRCLE, SUITE 402
CHEVY CHASE, MARYLAND 20815
(301) 347-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
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G. WILLIAM SPEER, ESQ. TODD H. BAKER, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP GIBSON, DUNN & CRUTCHER LLP
191 PEACHTREE STREET, N.E., SIXTEENTH FLOOR ONE MONTGOMERY STREET, SUITE 3100
ATLANTA, GEORGIA 30303 SAN FRANCISCO, CALIFORNIA 94104
TELEPHONE: (404) 572-6722 TELEPHONE: (415) 393-8200
FACSIMILE: (404) 572-6999 FACSIMILE: (415) 986-5309
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Approximate date of commencement of proposed sale to the public: as soon as
practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
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Common Stock, par value
$0.0001 per share........ $ $86,250,000 $25,443.75
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(1) Includes shares that may be purchased pursuant to an
over-allotment option granted to the Underwriters.
(2) Estimated based on a bona fide estimate of the maximum aggregate offering
price solely for the purposes of calculating the registration fee pursuant
to Rule 457(a) of the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER
NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED AUGUST 7, 1998
SHARES
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
COMMON STOCK
HealthCare Financial Partners REIT, Inc. (the "Company") invests in income
producing real estate and real estate related assets in the healthcare industry.
The Company's investments include real estate acquisitions, permanent real
estate mortgages and other real estate secured debt. The Company primarily
targets investments in skilled nursing facilities, assisted living facilities,
medical office buildings and hospitals, and also pursues opportunities in other
types of healthcare facilities, such as mental health facilities, outpatient
facilities and other specialty healthcare facilities. The Company's day to day
operations are managed by HCFP REIT Management, Inc. (the "Manager"), a
wholly-owned subsidiary of HealthCare Financial Partners, Inc. ("HCFP"), a
leading publicly-traded provider of asset-based financing to the healthcare
industry. The Company intends to qualify as a real estate investment trust
("REIT") for federal income tax purposes.
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR MATERIAL RISKS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING, AMONG OTHERS:
- The Company has limited operating experience and is substantially
dependent on the services of external management;
- Appropriate investments may not be available and full investment of net
proceeds may be delayed;
- The Company, HCFP and the Manager have certain common officers and
directors, which may present conflicts of interest;
- A significant portion of the revenues of the Company's borrowers and
lessees will be dependent upon reimbursement from third-party payors,
including federal and state Medicare and Medicaid programs;
- Operators of healthcare facilities are subject to extensive federal, state
and local regulations;
- Income from properties and yields from investments in healthcare-related
real estate may be affected by many factors, including changes in
governmental regulation, general or local economic conditions, the
existence of competing facilities, a reduction in rental income as the
result of an inability to maintain occupancy levels, natural disasters or
similar factors;
- Most of the Company's properties will be "special purpose" properties
which are not readily convertible to other uses;
- Yield on the Company's investments may be adversely affected by changes in
interest rates, rates of prepayment and credit losses;
- The Company makes mezzanine loans secured by subordinate mortgages and
construction loans which are considered to involve a higher degree of risk
than permanent mortgage loans secured by a first lien on income-producing
real property; and
- To avoid being taxed as a regular corporation, the Company must satisfy
certain requirements relating to its assets and income, which may restrict
the Company's investment opportunities, and the Company must distribute at
least 95% of its taxable income each year, which could result in the
Company needing to sell assets or borrow money in order to satisfy this
requirement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share......................................... $ $ $
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Total(3).......................................... $ $ $
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company, before expenses of this Offering, will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of NationsBanc Montgomery Securities LLC on or
about , 1998.
---------------------
NationsBanc Montgomery Securities LLC
ABN AMRO Incorporated
Credit Suisse First Boston
Friedman, Billings, Ramsey & Co., Inc.
Stephens Inc.
, 1998.
<PAGE> 3
(continued from previous page)
All of the shares of the Company's common stock, par value $0.0001 per
share (the "Common Stock"), offered hereby are being sold by the Company. To
assist the Company in complying with certain federal income tax requirements
applicable to REITs, the Company's charter and bylaws contain certain
restrictions relating to the ownership and transfer of the Common Stock,
including redemption under certain circumstances. See "Description of Capital
Stock -- Restrictions on Transfer."
The initial public offering price of the Common Stock currently is expected
to be between $ and $ per share. Prior to the offering of
Common Stock hereby (the "Offering"), there has been no public market for the
Common Stock. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. Application has been made to list
the Common Stock on the New York Stock Exchange ("NYSE"), subject to official
notice of issuance, under the symbol "HCF."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") (of which
this Prospectus forms a part) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock offered pursuant to this
Prospectus. This Prospectus contains summaries of the material terms of the
documents referred to herein and therein, but does not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits as well as reports and other information filed by the
Company can be inspected without charge and copied at prescribed rates at the
public reference facilities maintained by the Commission at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Chicago Regional Office, Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and
New York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a Web site that contains reports, proxy,
and information statements and other information regarding registrants that file
electronically with the Commission. The Web site is located at
http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document. The Company will be
required to file reports and other information with the Commission pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
addition to applicable legal requirements, if any, holders of Common Stock will
receive annual reports containing information regarding the business and
performance of the Company, including audited financial statements with a report
thereon by the Company's independent certified public accountants, and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
CAUTIONARY STATEMENTS FOR PURPOSES OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Prospectus on the cover page and under the
captions "Prospectus Summary," "Risk Factors," "Business and Growth Strategy,"
"Management's Discussion and Analysis of Liquidity and Capital Resources" and
elsewhere constitute forward-looking statements. When used in this Prospectus,
the words "anticipate," "believe," "estimate," "expect" and similar expressions
are generally intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry trends; competition; changes in business strategy or development plans;
availability, terms and deployment of capital; availability of qualified
personnel; changes in, or the failure or inability to comply with, government
regulation; and other factors referenced in this Prospectus. See "Risk Factors."
These forward-looking statements speak only as of the date of this Prospectus.
The Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
i
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.............................. 1
The Company................................... 1
Business and Growth Strategies................ 2
Investment Program............................ 3
Portfolio..................................... 4
Equity Investment Program..................... 5
Permanent Mortgage Loan Program............... 6
Other Real Estate Secured Debt Program........ 7
Risk Factors.................................. 8
The Manager and HCFP.......................... 9
The Management Agreement...................... 10
Conflicts of Interest......................... 11
Private Placement............................. 12
The Offering.................................. 12
Use of Proceeds............................... 12
Distribution Policy........................... 13
Tax Status of the Company..................... 13
Organization and Relationships................ 14
Summary Financial Data........................ 15
Risk Factors.................................... 16
Limited Operating History; Dependence on
External Management......................... 16
Risks Associated with the Healthcare
Industry.................................... 16
Real Estate Investment Risks.................. 18
Financing Risks............................... 21
Conflicts of Interest......................... 22
Legal and Tax Risks........................... 24
Other Risks................................... 27
Conflicts of Interest........................... 28
Use of Proceeds................................. 29
Distribution Policy............................. 29
Capitalization.................................. 30
Dilution........................................ 31
Business........................................ 32
Investment Opportunities...................... 32
Business and Growth Strategies................ 32
Types of Facilities........................... 34
Investment Programs........................... 35
Management of Operations........................ 37
The Manager................................... 37
The Management Agreement...................... 39
Management of the Company....................... 42
Directors and Executive Officers.............. 42
1998 Stock Option Plan........................ 45
Director Plan................................. 46
Certain Relationships; Conflicts of
Interest.................................... 47
Portfolio....................................... 48
Equity Investment Program..................... 48
Permanent Mortgage Loan Program............... 52
Other Real Estate Secured Debt Program........ 54
Equity Investment Program..................... 58
Permanent Mortgage Loan Program............... 59
Other Real Estate Secured Debt Program........ 60
Selected Financial Data......................... 61
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 62
Overview...................................... 62
Pro Forma Results of Operations............... 62
Results of Operations......................... 63
Liquidity and Capital Resources............... 63
Funds from Operations......................... 64
Year 2000..................................... 64
Inflation..................................... 65
Operating Partnership Agreement................. 66
Management.................................... 66
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Transferability of Interests.................. 66
Capital Contribution.......................... 66
Redemption Rights............................. 67
Operations.................................... 68
Distributions................................. 68
Allocations................................... 68
Term.......................................... 69
Fiduciary Duty................................ 69
Preemptive Rights............................. 69
Tax Matters................................... 69
Policies with Respect to Certain Activities..... 69
Investment Policies........................... 70
Financing Policies............................ 70
Policies with Respect to Certain Other
Activities.................................. 70
Policies with Respect to Interested
Directors................................... 71
Policies with Respect to Transaction Approval
Requirements................................ 71
Policies with Respect to Intercreditor
Arrangements................................ 71
Principal Stockholders.......................... 72
Description of Capital Stock.................... 74
General....................................... 74
Common Stock.................................. 74
Preferred Stock............................... 74
Warrants...................................... 75
Restrictions on Transfer...................... 75
Dividend Reinvestment Plan.................... 77
Reports to Stockholders....................... 78
Transfer Agent and Registrar.................. 78
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws.................. 78
Board of Directors............................ 78
Amendment..................................... 78
Business Combinations......................... 79
Control Share Acquisitions.................... 79
Operations.................................... 80
Advance Notice of Director Nominations and New
Business.................................... 80
Federal Income Tax Considerations............... 80
Taxation of the Company....................... 80
Requirements for Qualification................ 82
Taxation of Taxable U.S. Stockholders......... 88
Taxation of Stockholders on the Disposition of
the Common Stock............................ 90
Capital Gains and Losses...................... 90
Information Reporting Requirements and Backup
Withholding................................. 91
Taxation of Tax-Exempt Stockholders........... 91
Taxation of Non-U.S. Stockholders............. 92
State and Local Taxes......................... 94
Sale of the Company's Property................ 94
Tax Aspects of the Company's Ownership of
Interests in the Operating Partnership...... 94
ERISA Considerations............................ 96
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs.................. 96
Status of the Company Under ERISA............. 97
Shares Eligible for Future Sale................. 99
Sales of Restricted Shares.................... 99
Options....................................... 99
Registration Rights........................... 100
Underwriting.................................... 101
Legal Matters................................... 103
Experts......................................... 103
Glossary of Terms............................... 104
Index to Financial Statements................... F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Although the Company and HCFP
REIT Operating Partnership, L.P. (the "Operating Partnership"), are separate
entities, unless the context otherwise requires, all references in this
Prospectus to the Company refer to the Company and the Operating Partnership,
collectively. Unless otherwise indicated, the information contained in this
Prospectus assumes that (i) the Underwriters' over-allotment option is not
exercised and (ii) the offering price (the "Offering Price") of the Common Stock
is $ per share, the midpoint of the range set forth on the cover page
of this Prospectus. Capitalized terms used but not defined herein shall have the
meanings set forth in the Glossary of Terms beginning on page .
THE COMPANY
The Company was formed in January 1998 to invest in income producing real
estate and real estate related assets in the healthcare industry. The Company's
investments include real estate acquisitions, permanent real estate mortgages
and other real estate secured debt. The Company primarily targets investments in
skilled nursing facilities, assisted living facilities, medical office buildings
and hospitals, and also pursues opportunities in other types of healthcare
facilities, such as mental health facilities, outpatient facilities and other
specialty healthcare facilities. The Company believes that projected growth in
the long-term care industry, anticipated deconsolidation in the hospital
industry and continued consolidation in the physician practice management
industry will, among other factors, continue to provide investment opportunities
for the Company. At July 31, 1998, the Company had actual and probable
investments of $119.4 million, consisting of $55.6 million in income-producing
real estate, $27.0 million in permanent real estate mortgages and $36.8 million
in other real estate secured debt. Of the Company's total dollar amount of
actual and probable investments at July 31, 1998, 58.8%, 25.5% and 15.7% related
to skilled nursing facilities, assisted living facilities and medical office
buildings, respectively.
The Company's day to day operations are managed by the Manager, a
subsidiary of HCFP, a leading publicly-traded provider of asset-based financing
to the healthcare industry. HCFP has an established brand name and reputation in
the healthcare industry which the Company believes uniquely positions HCFP to
assist the Company in identifying investment opportunities and expanding its
business base. The Company seeks to originate investments through joint
marketing efforts with HCFP, direct marketing through its staff of experienced
healthcare real estate professionals and referrals from, and purchases of
mortgage loans under, its arrangement with GMAC Commercial Mortgage Corporation
("GMACCM"). The Company's goal is to use its relationship with HCFP and its
independent origination channels to establish a diversified portfolio of high
quality healthcare real estate related investments.
The Company's activities are conducted through three distinct programs. The
Company's Equity Investment Program includes real estate acquisitions and
purchase leaseback transactions involving healthcare facilities. Its Permanent
Mortgage Loan Program provides traditional, term real estate financing to
operators of healthcare facilities. The Company's Other Real Estate Secured Debt
Program includes construction and expansion loans, mezzanine loans, bridge
financings and other types of non-permanent real estate financings of healthcare
facilities. The Company expects to finance a portion of its permanent mortgage
loans and other real estate secured debt under a $150 million repurchase
facility (the "Repurchase Facility") which is being negotiated with Merrill
Lynch Mortgage Capital, Inc. ("MLMCI"), and may securitize a portion of its
permanent mortgage loans in the future.
The Company intends to qualify as a REIT for federal income tax purposes.
The Company's executive offices are located at 2 Wisconsin Circle, Suite 402,
Chevy Chase, Maryland 20815 and its telephone number is (301) 347-3100.
1
<PAGE> 7
BUSINESS AND GROWTH STRATEGIES
The Company's principal business objectives are to maximize growth in cash
available for distribution and to enhance the value of its portfolio in order to
maximize total return to its stockholders. The Company believes it can achieve
these objectives by implementing the following business and growth strategies
and by capitalizing on its competitive advantages and the investment programs
described below.
Capitalize on Relationships with HCFP and its Affiliates. The Company will
continue to capitalize on its relationships with HCFP and its affiliates. In
their marketing efforts on behalf of the Company, HCFP and its affiliates
recommend the Company as a source for the long-term real estate financing needs
of HCFP's clients. In addition, in an effort to meet all or substantially all of
the financing needs of potential borrowers or lessees, the Company and HCFP may
jointly market their respective financing products through: (i) the officers and
senior managers of HCFP; (ii) HCFP's internal staff of seven marketing
professionals who coordinate advertising in trade magazines and attendance at
trade shows and conferences; and (iii) HCFP's five telemarketers who solicit
clients directly. In addition, HCFP obtains referrals through its network of
professionals such as lawyers, accountants and venture capital firms, and, to a
lesser extent, from paid brokers. Significant referral sources of HCFP own
Common Stock and therefore have an incentive to provide referrals to the
Company. Approximately $65.1 million, or 54.5%, of the Company's actual and
probable investments at July 31, 1998, resulted from leads provided by HCFP. The
Company also utilizes the expertise and resources of HCFP and its affiliates,
including HealthCare Analysis Corporation ("HCAC"), a subsidiary of HCFP, which
specializes in healthcare due diligence and audit services for HCFP and other
lenders, to assist it in evaluating the credit quality of potential borrowers
and lessees of the Company. From its inception in 1993 through June 30, 1998,
HCFP advanced over $3.0 billion to its clients in over 800 transactions. At June
30, 1998, HCFP had approximately $352 million of financing outstanding
(including $80 million of short-term real estate financing) for approximately
195 clients and currently reviews approximately 100 potential asset-based
healthcare related financings each month.
Market Directly and Originate Independently of HCFP. In addition to
utilizing HCFP's marketing and origination capabilities, the Company directly
markets its services through employees of the Manager. Although recently
organized, the Manager has employed real estate investment and investment
management professionals who have an aggregate of over 60 years of experience in
the origination and management of various types of real estate related
investments in the healthcare industry. Through its direct marketing activities,
the Company expects to develop new and expanded relationships with owners and
operators of healthcare facilities which will produce referrals and inquiries
relating to potential investments by the Company. Approximately $54.3 million,
or 45.5%, of the Company's actual and probable investments at July 31, 1998 were
originated by the Manager on behalf of the Company.
Capitalize on Relationship with GMACCM. In May 1998, the Company entered
into a three year agreement (the "GMACCM Agreement") with GMACCM pursuant to
which the Company has a right of first refusal to purchase certain mortgage
loans secured by healthcare facilities which have a loan-to-value ("LTV") ratio
in excess of 80% and which GMACCM determines to sell. The maximum principal
amount of loans to which this right applies in any annual period under the
GMACCM Agreement is $100 million. As of July 31, 1998, the Company had purchased
$14.9 million in principal amount of mortgage loans from GMACCM. The Company
also entered into a Servicing Agreement with GMACCM with respect to all of the
mortgage payments pursuant to which GMACCM receives, holds and applies certain
deposits provided for under such mortgage loans. Although GMACCM has no formal
referral agreement with the Company, GMACCM is also a source of investment leads
for the Company. William E. Shine, the Executive Vice President for the
Healthcare Lending Group of GMACCM, is a member of the Board of Directors of the
Company. See "Management of the Company."
Invest in High Quality Assets. The Company will continue to leverage the
extensive underwriting experience of HCFP and the Manager as it seeks to invest
in healthcare facilities that are operated or managed by established operators
who present an appropriate credit risk. The Company thoroughly underwrites its
investments utilizing the expertise, processes and experience developed and
utilized by HCFP
2
<PAGE> 8
and its affiliates and selectively chooses its investments in compliance with
the Company's investment and operating policies (the "Policies"). See "Policies
with Respect to Certain Activities -- Investment Policies."
Provide Traditional and Innovative Financing. The Company intends to
continue its focus on the acquisition of equity interests in, and mortgages
secured by, skilled nursing facilities, assisted living facilities, medical
office buildings and hospitals, although the Company also pursues opportunities
in other types of healthcare facilities, such as mental health facilities,
outpatient facilities and other specialty healthcare facilities. The Company
offers a broad range of financing products designed to meet the needs of a
variety of potential borrowers and lessees of such facilities. The Company
believes that it is more flexible than most traditional real estate lenders in
its effort to provide solutions for the financing needs of its borrowers and
lessees and is willing to negotiate customized financing terms to fit the
particular needs of such borrowers and lessees. In addition, the Company has the
ability to offer units ("Partnership Units") in the Operating Partnership to
sellers of healthcare facilities who would otherwise recognize taxable gain upon
a sale of assets, which may facilitate purchase leaseback transactions on a tax
deferred basis. The Company believes that its flexible and innovative approach
produces a higher value-added component which should result in more advantageous
terms for the Company as well as for its borrowers and lessees.
Leverage Assets. The Company will borrow against or leverage its assets to
the extent consistent with the Policies in order to increase the size of its
portfolio and increase potential returns to the Company's stockholders. The
Company may engage in a variety of interest rate risk management techniques for
the purpose of managing the effective maturities and interest rates of its
assets.
Manage and Maintain Credit Quality of Portfolio. The Company will manage
and maintain the credit quality of its portfolio by: (i) conducting semi-annual
on-site audits; (ii) monitoring compliance with financial covenants; (iii)
assessing regulatory changes and compliance with clinical standards; (iv)
maintaining appropriate capital levels and allowances for credit losses; and (v)
maintaining regular contact with its borrowers and lessees regarding their
business activities. The Company believes that proactive portfolio management
will enable it to detect and manage potential credit deterioration within its
lending programs, to react promptly to circumstances that may impair the value
of equity investments and to assess and implement changes in its investment
programs to reflect economic and industry trends.
INVESTMENT PROGRAMS
Equity Investment Program. Investments under the Company's equity
investment program (the "Equity Investment Program") may include real estate
acquisitions in which the Company leases the acquired facility, such as a
medical office building, to various tenants, and purchase leaseback transactions
in which the Company acquires a facility and then leases such facility to the
seller or to a different operator under a long-term, triple net lease. These
investments involve all of the risks and benefits of ownership of real estate
and the Company seeks to make a return on such investments commensurate with the
risks involved. At July 31, 1998, the Company had 11 actual and probable
investments under its Equity Investment Program in an aggregate amount of $55.6
million. See "Portfolio."
Permanent Mortgage Loan Program. Mortgage loans under the Company's
permanent mortgage loan program (the "Permanent Mortgage Loan Program") are
issued to finance the acquisition or the refinancing of existing facilities and
are secured by a first mortgage on the facility. Such loans generally have a
ten-year term, bear interest at a fixed rate (providing, in certain
circumstances, for annual rate increases in a set amount or based upon a change
in the CPI), and require monthly installments of principal and interest. The
interest rate is based upon a number of factors including the loan-to-value
("LTV") ratio and debt service coverage ratio. Permanent mortgage loans are
generally underwritten by the Company with the expectation that such loans will
be eligible for leveraging under the Repurchase Facility and for future
securitization by the Company. Although the interest rate on permanent mortgage
loans generally is lower than that charged on other real estate secured debt,
because of the credit characteristics of such loans and because such loans may
be eligible for leveraging or securitization, the Company believes that it will
earn an appropriate risk adjusted return on such loans. At July 31, 1998, the
Company had seven actual and probable investments under its
3
<PAGE> 9
Permanent Mortgage Loan Program in an aggregate original principal amount of
$27.0 million. See "Portfolio."
Other Real Estate Secured Debt Program. Investments under the Company's
other real estate secured debt program (the "Other Real Estate Secured Debt
Program") may include construction and expansion loans, mezzanine loans, bridge
financings and other types of non-permanent real estate financing of healthcare
facilities. Construction and expansion loans may be provided to finance
construction of or an addition to (or renovation of) a facility. Such loans are
secured by a first mortgage on the facility to which the financing relates, and
in some instances by an assignment of licenses and subordination of management
contracts. Mezzanine loans are subordinated in right of payment to senior
mortgage loans and are secured by a second lien mortgage. Construction and
mezzanine loans generally entail greater risks than permanent mortgage loans and
therefore are priced to generate a higher yield to the Company. Bridge financing
is temporary financing secured by a first mortgage. The Company often obtains a
right of first refusal to provide a permanent mortgage loan to refinance bridge
financing provided by the Company. Investments under the Other Real Estate
Secured Debt Program may also include acquisition financing products such as
loans to provide capital to operators of multiple facilities to finance
acquisitions of additional facilities by such operators through lines of credit.
At July 31, 1998, the Company had nine actual and probable investments under its
Other Real Estate Secured Debt Program that, when fully funded, will aggregate
$36.8 million. See "Portfolio."
PORTFOLIO
As of July 31, 1998, the Company had made or expects to make the
investments described below. As indicated in such descriptions, certain of the
investments have not been funded in whole or in part and there can be no
assurance that any of such investments will be funded. See "Portfolio" for
additional information concerning such investments.
4
<PAGE> 10
ACTUAL AND PROBABLE INVESTMENTS
AS OF JULY 31, 1998
EQUITY INVESTMENT PROGRAM:
<TABLE>
<CAPTION>
APPROX.
YEAR PURCHASE RENTABLE
NUMBER BUILT/ TYPE OF PRICE TYPE OF SQUARE ANNUALIZED
NAME AND LOCATION OF BEDS RENOVATED FACILITY(1) ($ MILLIONS) INVESTMENT FEET RENT
- ----------------- ------- ----------- ----------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Colonial Manor Home of Crofton
Crofton, MD(2)................... 15 1995/N/A ALF (3) Purchase 7,100 $133,000
Leaseback
Colonial Manor Home of Bel-Air
Bel-Air, MD(2)................... 15 1996/N/A ALF (3) Purchase 8,600 $133,000
Leaseback
Colonial Manor Home of Severna Park
Severna Park, MD(2).............. 16 1997/N/A ALF (3) Purchase 7,100 $133,000
Leaseback
Sherman Oaks Medical Center
Sherman Oaks, CA(2).............. N/A 1953/1997 MOB $10.5 Real Estate 69,700 $1,310,000
Acquisition
Meadowood Nursing Home
South Hadley, MA(4).............. 120 1987/N/A SNF $ 6.8 Purchase 40,000 $645,000
Leaseback
Winslow Convalescent Center
Winslow, AZ(4)................... 120 Proposed SNF $ 4.0 Purchase N/A N/A
Leaseback
Gulf Health Care Center of
Galveston, TX(4)................. 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Gulf Health Care Center of Texas
City, TX(4)...................... 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Gulf Health Care Center of Port
Arthur, TX(4).................... 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Valencia Medical Center
Valencia, CA(4).................. N/A 1983/NA MOB $ 4.3 Real Estate 27,900 $552,000
Acquisition
Vista Village Shopping Center
Valencia, CA(4).................. N/A 1973,1979, Other $ 3.9 Real Estate 37,500 $461,000
1988/1985 Acquisition
<CAPTION>
ANNUALIZED REMAINING
RENT PER LIFE OF
LEASED ORIGINAL
SQUARE LEASE
NAME AND LOCATION FOOT (YEARS)
- ----------------- ---------- ---------
<S> <C> <C>
Colonial Manor Home of Crofton
Crofton, MD(2)................... $18.73 10
Colonial Manor Home of Bel-Air
Bel-Air, MD(2)................... $15.47 10
Colonial Manor Home of Severna Park
Severna Park, MD(2).............. $18.73 10
Sherman Oaks Medical Center
Sherman Oaks, CA(2).............. $18.79 3 (5)
Meadowood Nursing Home
South Hadley, MA(4).............. $16.13 10
Winslow Convalescent Center
Winslow, AZ(4)................... N/A N/A
Gulf Health Care Center of
Galveston, TX(4)................. $16.56 20
Gulf Health Care Center of Texas
City, TX(4)...................... $16.56 20
Gulf Health Care Center of Port
Arthur, TX(4).................... $16.56 20
Valencia Medical Center
Valencia, CA(4).................. $19.78 3.1
Vista Village Shopping Center
Valencia, CA(4).................. $12.29 4.1
</TABLE>
- ---------------
(1) Skilled nursing facilities ("SNFs") provide extended care and a variety of
acute-care healthcare facilities to the elderly. Assisted living facilities
("ALFs") provide a combination of housing, support services and healthcare
designed to respond to individual needs for daily living. Medical office
buildings ("MOBs") contain individual physician, physician group and other
healthcare provider offices for the administration and treatment of
patients. See "Business -- Investment Programs."
(2) Actual investment as of July 31, 1998.
(3) An aggregate purchase price of $3,750,000 was paid for all three facilities.
(4) Probable investment as of July 31, 1998.
(5) Weighted average remaining term (by rentable square feet).
5
<PAGE> 11
PERMANENT MORTGAGE LOAN PROGRAM:
<TABLE>
<CAPTION>
YEAR
NAME AND LOCATION NUMBER BUILT/ TYPE OF TYPE OF
NAME OF BORROWER OF FACILITY OF BEDS RENOVATED FACILITY INVESTMENT
- ---------------- --------------------------- ------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Applegate Lane, Inc.(1).................. St. Elizabeth Health Care 180 1970/N/A SNF Refinancing,
Center Renovation
East Hartford, CT and
Construction
Loan
Cromwell Crest Convalescent Home,
Inc.(1)................................ Cromwell Crest Convalescent 180 1986/N/A SNF Refinancing,
Center Renovation
Cromwell, CT and
Construction
Loan
JoJeff, Inc. and Alymatt, Inc.(1)........ Nova Gardens Assisted 40 1912/1995 ALF Acquisition
Living Community and
E. Lansdowne, PA Refinancing
Loan
Haskins Personal Care 22 1910/1960 ALF (3)
Center
Secane, PA
Waban Realty Trust
(J. Dennis Morgan, as Trustee)(1)...... Braeburn Nursing Home 84 1962/N/A SNF Acquisition
Newton, MA Loan
Pennswood Manor Assisted Living and
Healthcare Center, Inc.(1)............. Pennswood Manor 68 1968/1988, ALF Acquisition
Scranton, PA 1996 Loan
Mountainside Manor, Inc.(2).............. Mountainside Manor 96 1958/1993, ALF Acquisition
Wilkes-Barre, PA 1994,1997 Loan
Medicore, LLC(2)......................... Kingston Health Care Center 50 1960 SNF Acquisition
Kingston, OH Loan
Twin Oaks 42 1946/1996, SNF (4)
Living/Learning & Care 1997
Center
Mansfield, OH
Chenita Group Home 8 1900/1990 SNF (4)
Mansfield, OH
Whispering Oaks Care 60 1960/1995 SNF (4)
Center
Peshtigo, WI
<CAPTION>
TOTAL
AMOUNT AMOUNT
TO BE INVESTED
INVESTED TO DATE MATURITY
NAME OF BORROWER ($ MILLIONS) ($ MILLIONS) DATE
- ---------------- ------------ ------------- --------
<S> <C> <C> <C>
Applegate Lane, Inc.(1).................. $7.1 $7.1 2/20/08
Cromwell Crest Convalescent Home,
Inc.(1)................................ $7.8 $7.8 2/20/08
JoJeff, Inc. and Alymatt, Inc.(1)........ $2.0 $2.0 6/1/04
(3) (3) (3)
Waban Realty Trust
(J. Dennis Morgan, as Trustee)(1)...... $2.5 $2.5 7/1/08
Pennswood Manor Assisted Living and
Healthcare Center, Inc.(1)............. $1.7 $1.7 8/1/03
Mountainside Manor, Inc.(2).............. $2.3 None 5-year
term
Medicore, LLC(2)......................... $3.7 None 10-year
term
(4) (4) (4)
(4) (4) (4)
(4) (4) (4)
</TABLE>
- ---------------
(1) Actual investment as of July 31, 1998.
(2) Probable investment as of July 31, 1998.
(3) Included in data shown for Nova Gardens Assisted Living Community.
(4) Included in data shown for Kingston Health Care Center.
6
<PAGE> 12
OTHER REAL ESTATE SECURED DEBT PROGRAM:
<TABLE>
<CAPTION>
YEAR
NAME AND LOCATION NUMBER BUILT/ TYPE OF TYPE OF
NAME OF BORROWER OF FACILITY OF BEDS RENOVATED FACILITY INVESTMENT
- ---------------- -------------------- ------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
ACMC Friendswood, Inc.(1).......................... Park Place of 119 Proposed ALF Acquisition
Friendswood and
Friendswood, TX Construction
Loan
ALCO XII, LLC(1)................................... To-be-named facility 82 Proposed ALF Construction/Term
in Hattiesburg, MS Loan
Hildebran Health Investors, LLC(1)................. Cambridge House 60 Proposed ALF Construction/Term
Hildebran, NC Loan
St. Andrews Health Center, Inc.(1)................. Waterbury 120 1966/N/A SNF Acquisition
Convalescent Loan
Center
Waterbury, CT
Construction/Term
Loan
Transylvania Health Investors, LLC(1).............. Kingsbridge House 60 Proposed ALF Construction/Term
Brevard, NC Loan
Cedar Lawn
Investments, LLC(1).............................. Cedar Lawn 120 1966/1996 SNF Acquisition
Convalescent Loan
Center
Abington, VA
Lincolnton Health Investors, LLC(1)................ Lincolnton House 60 Proposed ALF Construction/Term
Lincolnton, NC Loan
Astoria Pines Holding Co., LLC(2).................. New York Center 280 Proposed SNF Mezzanine
for Rehabilitation Loan
Care
Queens, NY
Chancellor Health Services, LLC(2)................. Various SNFs N/A N/A SNFs Mezzanine
Loan
<CAPTION>
TOTAL AMOUNT AMOUNT
TO BE INVESTED INVESTED MATURITY
NAME OF BORROWER ($ MILLIONS) TO DATE DATE
- ---------------- -------------- ------------ --------
<S> <C> <C> <C>
ACMC Friendswood, Inc.(1).......................... $9.1 $ 925,000 10-year
term
ALCO XII, LLC(1)................................... $6.0 $ 498,000 6/10/03
Hildebran Health Investors, LLC(1)................. $1.9 $ 394,000 7/1/09
St. Andrews Health Center, Inc.(1)................. $2.6 $2,600,000 6/1/08
$2.0 $ 181,000 6/1/08
Transylvania Health Investors, LLC(1).............. $1.9 $ 328,000 7/1/09
Cedar Lawn
Investments, LLC(1).............................. $5.7 $5,700,000 7/20/00
Lincolnton Health Investors, LLC(1)................ $1.9 $ 715,000 8/1/09
Astoria Pines Holding Co., LLC(2).................. $2.2 None 4-year
term
Chancellor Health Services, LLC(2)................. $3.5 None 5-year
term
</TABLE>
- ---------------
(1) Actual investment as of July 31, 1998.
(2) Probable investment as of July 31, 1998.
7
<PAGE> 13
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
beginning on page 16 prior to an investment in the Company. Such risks include,
among others, the following:
- The Company was formed in January 1998 and has limited operating
experience.
- The Company has contracted with the Manager to advise the Board of
Directors of the Company and direct the day-to-day business affairs of
the Company. The Company's success therefore substantially depends on the
experience and expertise of the Manager. The Manager is a newly organized
entity with limited management history.
- At July 31, 1998, only $119.4 million ( % of the net proceeds of the
Offering and funds received from a prior private placement which have not
been invested) of the Company's investments have been identified, and the
Company will face significant competition in making additional
investments, which may adversely affect the Company's ability to acquire
assets that meet its investment objectives.
- The Company, HCFP and the Manager have common officers and directors,
which may present conflicts of interest in the Company's dealings with
the Manager, HCFP and their respective affiliates.
- A significant portion of the revenues of the Company's borrowers and
lessees are and will be dependent upon reimbursement from third-party
payors, including federal and state Medicare and Medicaid programs and
other government finance programs and private insurers. These programs
are highly regulated and subject to frequent and substantial changes
resulting from legislation, adoption of rules and regulations, and
administrative and judicial interpretations.
- Operators of healthcare facilities are subject to extensive federal,
state and local regulations relating to their operations and the failure
of the Company's borrowers or lessees to comply with such regulations
could adversely affect their ability to meet obligations to the Company.
- The possibility that the facilities in which the Company invests will not
generate income sufficient to meet operating expenses, will generate
income and capital appreciation, if any, at rates lower than those
anticipated or will yield returns lower than those available through
investments in comparable real estate or other investments are risks of
investing in real estate.
- Substantially all of the facilities in which the Company invests are and
will be "special purpose" properties that could not be readily converted
to general residential, retail or office use. Transfers of operations of
certain healthcare facilities are subject to regulatory approvals not
required for transfers of other types of commercial operations and other
types of real estate. Therefore, if the operation of any of the
facilities in which the Company invests becomes unprofitable due to
competition, age of improvements or other factors such that the borrower
or lessee becomes unable to meet its obligations on the debt or lease,
the liquidation value of the property may be substantially less than
would be the case if the property were readily adaptable to other uses.
- The yield on the Company's investments may be adversely affected by
changes in prevailing interest rates, rates of prepayment and credit
losses.
- In periods of declining interest rates, prepayments on mortgage loans
generally increase, and the Company likely will have to reinvest such
funds in lower-yielding investments. Conversely, in periods of rising
interest rates, prepayments on mortgage loans generally decrease and the
value of the Company's fixed-rate investments generally will decline.
- The Company makes mezzanine loans secured by subordinated mortgages and
construction loans. Such loans are considered to involve a higher degree
of risk than permanent mortgage loans secured by a first lien on
income-producing real property. The higher degree of risk results from a
variety of factors, including, in the case of construction loans,
dependency on successful completion and operation of the project for
repayment of loan, and, in the case of mezzanine loans, the fact that a
8
<PAGE> 14
foreclosure by the holder of the senior loan could result in the
Company's inability to recover the full amount of its investment.
- Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender may be liable
in certain circumstances for the costs of removal or remediation of
certain hazardous or toxic substances at, under, or disposed of in
connection with, such property, as well as certain other potential costs
relating to hazardous or toxic substances (including governmental fines
and damages for injuries to persons and adjacent property).
- Certain property and liability risks may be uninsurable or not
economically insurable and there can be no assurance the Company's
borrowers or lessees will have adequate funds to cover all contingencies
themselves. Should such an uninsured loss occur, the Company could lose
its invested capital.
- The organizational documents and investment guidelines of the Company and
the Operating Partnership do not expressly limit the amount of
indebtedness the Company or the Operating Partnership can incur. The
Company intends to leverage its investments in an amount to be determined
by the Manager and, ultimately, the Board of Directors. If borrowing
costs increase, or if the cash flow generated by the Company's assets
decreases, the Company's use of leverage will increase the likelihood
that the Company will experience reduced or negative cash flow and
reduced liquidity.
- The Company may be taxed as a regular corporation if it fails to qualify
as a REIT.
- In order to qualify as a REIT, the Company must satisfy certain
requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets.
- In order to maintain REIT status, the Company must distribute at least
95% of its taxable income each year, which could result in the Company
needing to sell assets or borrow money in order to satisfy this
requirement.
- Ownership of Common Stock by each stockholder is limited to 9.9% of the
outstanding Common Stock, which may deter third parties from seeking to
control or acquire the Company.
THE MANAGER AND HCFP
In managing the business and investment affairs of the Company, the Board
of Directors is advised by the Manager. The Board of Directors of the Company
consists of seven members, four of whom are unaffiliated with the Manager or
HCFP (the "Independent Directors").
The Manager assists the Board of Directors in the formulation of operating
strategies for the Company, advises the Company concerning investments, monitors
the performance of the Company's investments and provides certain administrative
and managerial services in connection with the operation of the Company. The
Manager currently employs a team of real estate investment and investment
management professionals who have an aggregate of over 60 years of experience in
the origination and management of various types of real estate related
investments in the healthcare industry.
Pursuant to the Management Agreement between the Company and the Manager
(the "Management Agreement"), the Manager may not, directly or through an
affiliate (including HCFP), invest in real estate or originate or acquire loans
secured by real estate which mature in more than three years. The Manager relies
on the employees and other resources of HCFP and its affiliates for much of its
operations, and the Company believes that it will continue to benefit from
HCFP's extensive knowledge of the healthcare industry and from HCFP's
relationships with its clients and other healthcare providers which are
potential borrowers and lessees of the Company.
In their marketing efforts on behalf of the Company, HCFP and its
affiliates recommend the Company as a source for the long-term real estate
financing needs of HCFP's clients. In addition, in an effort to meet all or
substantially all of the financing needs of potential borrowers or lessees, the
Company and HCFP may jointly market their respective financing products through:
(i) the officers and senior managers of HCFP; (ii) HCFP's internal staff of
seven marketing professionals who coordinate advertising in trade magazines and
9
<PAGE> 15
attendance at trade shows and conferences; and (iii) HCFP's five telemarketers
who solicit clients directly. In addition, HCFP obtains referrals through its
network of professionals such as lawyers, accountants and venture capital firms,
and, to a lesser extent, from paid brokers. Significant referral sources of HCFP
own Common Stock and therefore have an incentive to provide referrals to the
Company. Approximately $65.1 million, or 54.5%, of the Company's actual and
probable investments at July 31, 1998, resulted from leads provided by HCFP.
In addition to the extensive marketing efforts of HCFP on behalf of the
Company, employees of the Manager engage in direct and indirect marketing
activities for the Company. Although recently organized, the Manager has
employed real estate investment and investment management professionals who have
an aggregate of over 60 years of experience in the origination and management of
various types of real estate related investments in the health care industry.
Marketing activities of the Manager on behalf of the Company include attendance
at trade shows and conferences, advertising in trade magazines and development
of referral sources similar to those utilized by HCFP. Approximately $54.3
million, or 45.5%, of the Company's actual and probable investments at July 31,
1998 were originated by officers of the Manager.
As a result of HCFP's market focus, lending experience and audit and
underwriting capabilities, the Company believes that HCFP is well positioned to
understand and assess financing issues unique to the healthcare industry,
including compliance with Medicare, Medicaid and other governmental regulations.
This understanding assists the Manager in evaluating and monitoring the credit
quality of the Company's borrowers and lessees. The personnel and services of
HCAC, which specializes in due diligence and audit services for HCFP and other
lenders, is also available to the Manager for the benefit of the Company. HCAC
currently employs 23 healthcare auditors who are trained in audit, financial
modeling and reimbursement processing. Consistent with the policies applicable
to clients of HCFP, to the extent possible, HCAC charges borrowers and lessees
of the Company for services provided by HCAC. The price for such services are
competitive with the price charged by other entities offering similar services.
HCAC will not charge the Company directly for any such services.
THE MANAGEMENT AGREEMENT
The Company and the Manager have entered into the Management Agreement
which has an initial term expiring on May 6, 2001 and allows for successive
extensions, each for a period not to exceed one year, by agreement between the
Company and the Manager. See "Management of Operations -- The Management
Agreement." The Management Agreement has been approved by the Independent
Directors, and any decision not to extend the term of the Management Agreement
will also require the approval of the Independent Directors.
For performing services under the Management Agreement, the Manager will
receive the following compensation, fees and other benefits (including
reimbursement of out-of-pocket expenses):
<TABLE>
<CAPTION>
RECIPIENT PAYOR AMOUNT
- --------- ----- ------
<S> <C> <C>
Manager Company Base management fee (the "Base Management Fee") equal to
1.50% per annum of the first $300 million of Average
Invested Assets, 1.25% of the next $300 million of Average
Invested Assets, 1.00% of the next $300 million of Average
Invested Assets, 0.75% of the next $300 million of Average
Invested Assets, and 0.50% of Average Invested Assets above
$1.20 billion.
Manager Company Incentive compensation (the "Incentive Compensation") based
on the amount, if any, by which the Company's Funds From
Operations and certain net gains exceed a hurdle rate. See
"Management of Operations -- The Management Agreement."
</TABLE>
The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them are officers of the Company,
currently receive no cash compensation directly from the Company. In addition,
the
10
<PAGE> 16
Manager is reimbursed by the Company for costs and expenses in employing
unaffiliated third parties to perform due diligence on assets acquired or
considered for acquisition by the Company to the extent such costs and expenses
are not paid by the Company's borrowers and lessees. See "Risk
Factors -- Conflicts of Interests," "Conflicts of Interests" and "Management of
Operations."
CONFLICTS OF INTEREST
As a result of the Company's relationship with the Manager and HCFP, the
Company will be subject to various potential conflicts of interest. Although the
Company's Board of Directors includes four Independent Directors, the other
three directors and each of the executive officers of the Company also serve as
directors or executive officers of the Manager, and a number of the executive
officers are directors, executive officers and/or employees of HCFP and devote
substantial time to HCFP's business. The Manager receives a management fee for
services rendered to the Company. The Board of Directors may not terminate, or
decline to renew, the Management Agreement without cause before May 6, 2001. If
the Management Agreement is terminated thereafter, the Company is required to
pay a substantial termination or nonrenewal fee to the Manager, or to acquire
the Manager from HCFP for a substantial purchase price. These provisions may
adversely affect the Company's ability to terminate or elect not to renew the
Management Agreement without cause. See "Management of Operations -- The
Management Agreement."
The Company expects that it will from time to time provide permanent
mortgage loan financing to clients of HCFP which will be used to refinance
short-term real estate financing provided by HCFP. The Company and HCFP may also
make loans to the same borrower or to borrowers which are under common control.
Although the Company and HCFP have separate credit committees which review each
investment or financing transaction, such committees have common members.
Directors and officers of the Company who are also employed by or affiliated
with HCFP have fiduciary obligations to act in the best interest of the
stockholders of the Company. The Board of Directors has adopted policies with
respect to approval requirements for these and other transactions. In addition,
the Company's policies require the Company and HCFP to enter into an
intercreditor agreement in situations where loans of the Company and HCFP are
made to the same borrower and require the unanimous approval of the Independent
Directors who consider the matter (with the approval of at least three
Independent Directors being required) for any transaction other than certain
permanent mortgage loans which meet designated criteria established by the
Independent Directors involving the purchase or refinancing by the Company of
any investment originated and initially closed by HCFP or an affiliate of HCFP.
See "Policies with Respect to Certain Activities -- Policies with Respect to
Conflicts of Interest."
In order to increase the amount of its Incentive Compensation, the Manager
may place undue emphasis on the maximization of funds from operations at the
expense of other criteria, such as preservation of capital, which could result
in increased risk to the Company.
William E. Shine, a director of the Company, is an officer of GMACCM. The
Company expects to purchase mortgage loans from time to time from GMACCM
pursuant to the terms of the GMACCM Agreement. Pursuant to an agreement with the
Company, Joshua B. Gillon, a director of the Company, will be paid a finder's
fee of $50,000 by the Company for each full year the Repurchase Facility is in
effect, up to a maximum of $150,000. The Policies require Mr. Shine and Mr.
Gillon to abstain from voting as a member of the Board of Directors on any
matters relating to GMACCM or the Repurchase Facility, respectively. See
"Policies with Respect to Certain Activities -- Policies with Respect to
Interested Directors."
The Independent Directors have approved the execution of the Management
Agreement and the Policies. Although the Manager performs the day-to-day
operations of the Company, the Independent Directors review all transactions on
a quarterly basis to ensure compliance with the Policies. In such review and
approval, the Independent Directors are expected to rely primarily on
information provided by the Manager. See "Policies with Respect to Certain
Activities -- Policies with Respect to Conflicts of Interest."
11
<PAGE> 17
PRIVATE PLACEMENT
In May 1998, the Company sold 1,450,000 units (the "Units") in a private
placement (the "Private Placement") at a price to investors of $100 per Unit,
including 300,000 Units sold directly by the Company to certain accredited
investors, resulting in net proceeds to the Company of $136.2 million. Each Unit
consists of five shares of Common Stock and one stock purchase warrant (a
"Warrant"). Each Warrant entitles the holder to purchase one share of Common
Stock (a "Warrant Share"), subject to certain anti-dilution adjustments. Until
November 5, 1998, the Warrants and Common Stock are required to be traded as
Units. The Warrants become detachable from the Common Stock and exercisable on
November 5, 1998 and will remain exercisable until April 29, 2001 at an exercise
price of $20 per Warrant Share. See "Description of Capital Stock."
The Units are eligible for trading in the Private Offering, Resales and
Trading through Automated Linkages Market of the National Association of
Securities Dealers, Inc. (the "PORTAL Market"). To date, to the knowledge of the
Company, there has been no trading of the Units in the PORTAL Market. Pursuant
to the terms of a Registration Rights Agreement (the "Registration Rights
Agreement") covering the Units, the Company will file a registration statement
(the "Shelf Registration Statement") with the Commission under the Securities
Act relating to the shares of Common Stock, Warrants and Warrant Shares (the
"Registrable Securities"), which holders of the Units now hold or may acquire
upon the exercise of Warrants.
The Shelf Registration Statement is expected to become effective at or
prior to the effective date of the Registration Statement relating to the
Offering. Upon such effectiveness, the Units, and after November 5, 1998, the
shares of Common Stock and the Warrants (and upon exercise of the Warrants, the
Warrant Shares) will be eligible for trading from time to time on the NYSE. The
Company cannot predict whether, to what extent, or when, the holders of Units,
Common Stock, Warrants or Warrant Shares may elect to sell such securities on
the NYSE. Pursuant to the Registration Rights Agreement, the Company will
suspend sales of such securities under the Shelf Registration Statement from the
effective date of the Registration Statement with respect to the Offering until
the end of the 30-day period during which the underwriters' over-allotment
option may be exercised. See "Shares Eligible for Future Sale."
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company(1)......................
Common Stock to be outstanding after the Offering(1)(2).....
NYSE Symbol................................................. HCF
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Assumes that none of the Warrants is exercised. Does not include 1,000,000
shares reserved for issuance pursuant to the Company's 1998 Stock Option
Plan and the Director Plan. As of July 31, 1998, options to purchase 500,000
shares of Common Stock have been granted to certain directors and executive
officers of the Company and the Manager. See "Management of the
Company -- 1998 Stock Option Plan," and "-- Director Plan," "Capitalization"
and "Description of Capital Stock."
USE OF PROCEEDS
The net proceeds of the Offering will be used to make investments under the
Company's Equity Investment Program, Permanent Mortgage Loan Program and Other
Real Estate Secured Debt Program. Approximately $ of such net proceeds
are expected to be used to fund the probable investments described as such under
"Portfolio". The Company intends to invest the balance of the net proceeds of
the Offering, pending investment thereof in income producing real estate and
real estate related assets, in short-term, readily marketable, interest-bearing
securities. See "Policies with Respect to Certain Activities -- Investment
Policies."
12
<PAGE> 18
DISTRIBUTION POLICY
The Company intends to make distributions to its stockholders of at least
95% of the Company's taxable income each year (subject to certain adjustments)
so as to qualify for the tax benefits accorded to REITs under the Code. The
Company intends to make distributions at least quarterly. It is anticipated that
the first distribution to stockholders will be made promptly after September 30,
1998, the first full calendar quarter following the closing of the Private
Placement. See "Distribution Policy."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its short first taxable
year ending December 31, 1998. If the Company qualifies for taxation as a REIT,
the Company generally will not be subject to federal corporate income tax on its
taxable income that is distributed to its stockholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its annual taxable income. Although
the Company does not intend to request a ruling from the Internal Revenue
Service (the "Service") as to its REIT status, the Company has received an
opinion of Powell, Goldstein, Frazer & Murphy LLP that the Company will qualify
as a REIT, which opinion is based on certain assumptions and representations
about the Company's ongoing businesses, investment activities, and other
matters. No assurance can be given that the Company will be able to comply with
such assumptions and representations in the future. Furthermore, such opinion is
not binding on the Service or on any court. Failure to qualify as a REIT would
render the Company subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
distributions to the Company's stockholders would not be deductible but
generally would remain taxable to the Company's stockholders to the extent of
the Company's earnings. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain federal, state, and local taxes on its
income and property. The Company's Bylaws provide for the Company's taxable year
to be the calendar year. In connection with the Company's election to be taxed
as a REIT, the Company's Charter imposes restrictions on the transfer and
ownership of its Common Stock. See "Risk Factors -- Legal and Tax
Risks -- Adverse Consequences of Failure to Maintain REIT Status May Include the
Company Being Subject to Taxation as a Regular Corporation" and "Federal Income
Tax Considerations -- Taxation of the Company."
13
<PAGE> 19
ORGANIZATION AND RELATIONSHIPS
The Company's assets may be owned in whole or in part by, and its
operations may be conducted through, the Operating Partnership and special
purpose limited liability companies and limited partnerships wholly-owned by the
Company and its affiliates. The Company is the sole general partner of the
Operating Partnership.
The Manager manages the day-to-day operations of the Company, subject to
the supervision of the Board of Directors. The relationship among the Company,
the Operating Partnership, the Manager, HCFP and its affiliates is depicted in
the organization chart shown below, which assumes completion of this Offering.
(ORGANIZATION CHART)
- ---------------
(1) HCFP owns 100,000 Units (representing an aggregate of 500,000 shares of
Common Stock and 100,000 Warrants) and 141,665 shares of Common Stock.
(2) HCFP Limited, Inc. (the "Initial Limited Partner") is a qualified REIT
subsidiary, wholly owned by the Company. The Initial Limited Partner holds a
99% limited partnership interest in the Operating Partnership, and the
Company holds a 1% general partnership interest in the Operating
Partnership.
(3) The Company may conduct all or part of its business, including the
acquisition of real estate and real estate related assets, through the
Operating Partnership.
(4) HCFP REIT Management, Inc. (the "Manager") is a wholly-owned subsidiary of
HCFP.
(5) The Company may, from time to time, form additional subsidiaries (such as
limited liability companies) for purposes of carrying out its investment
activities. The Company may also form additional limited partnerships, the
limited partnership interests in which would be exchangeable into shares of
Common Stock, for the purpose of enabling the Company to seek to acquire
real estate or interests therein from real estate owners on a tax deferred
basis in exchange for such limited partnership interests therein.
14
<PAGE> 20
SUMMARY FINANCIAL DATA
The following table sets forth selected historical and pro forma financial
data of the Company as of June 30, 1998 and for the period January 30, 1998
(inception) through June 30, 1998. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 30, 1998 (INCEPTION)
THROUGH JUNE 30, 1998
-----------------------------
HISTORICAL PRO FORMA
------------- -------------
<S> <C> <C>
STATEMENT OF INCOME DATA
Revenues:
Interest on cash and cash equivalents..................... $ 1,078,494 $ 1,042,446
Interest on mortgage notes receivable..................... 45,961 1,819,066
Rental income............................................. 70,678 2,453,003
------------ ------------
Total revenues..................................... 1,195,133 5,314,515
Expenses:
Management fee............................................ 237,923 868,521
Other..................................................... 99,139 656,918
Depreciation.............................................. 6,042 537,636
------------ ------------
Total expenses..................................... 343,104 2,063,075
------------ ------------
Net income.................................................. $ 852,029 $ 3,251,440
============ ============
Earnings per share.......................................... $ .24 $ .40
Weighted average shares outstanding......................... 3,494,297 8,055,555
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------
HISTORICAL PRO FORMA
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA
Income-producing real estate, net........................... $ 10,535,281 $ 50,092,562
Mortgage notes receivable, net.............................. 21,048,755 41,235,099
Cash and cash equivalents................................... 106,882,119 45,681,775
Other assets................................................ 497,289 1,954,008
------------ ------------
Total assets................................................ $138,963,444 $138,963,444
============ ============
Total liabilities........................................... $ 1,565,538 $ 1,565,538
Total stockholders' equity.................................. 137,397,906 137,397,906
------------ ------------
Total liabilities and stockholders' equity.................. $138,963,444 $138,963,444
============ ============
FOR THE PERIOD
JANUARY 30, 1998
(INCEPTION)
THROUGH JUNE 30, 1998
---------------------------
HISTORICAL PRO FORMA
------------ ------------
OTHER OPERATING DATA
Cash flows provided by operating activities................. $ 2,205,135 $ 5,136,140
Cash flows used in investing activities..................... (31,868,893) (93,069,237)
Cash flows provided by financing activities................. 136,545,877 136,545,877
Funds from operations....................................... 858,071 3,789,076
</TABLE>
Industry analysts generally consider funds from operations ("FFO") to be an
appropriate measure of the performance of a REIT. The Company uses the concept
of FFO as defined in NAREIT's White Paper on Funds from Operations approved by
the Board of Governors of NAREIT in March 1995. The White Paper defines FFO as
net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus real estate
related depreciation and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that in order to facilitate a clear
understanding of the operating results of the Company, FFO should be examined in
conjunction with the Company's net income as presented in the Selected Financial
Data and Consolidated Financial Statements and Notes thereto included elsewhere
herein. The Company computes FFO in accordance with standards established by
NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. FFO does
not represent cash generated from operating activities in accordance with GAAP
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
15
<PAGE> 21
RISK FACTORS
An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should consider
carefully the information set forth below, in addition to the information set
forth elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; DEPENDENCE ON EXTERNAL MANAGEMENT
Uncertainty as to the Company's Ability to Successfully Implement Its
Operating Policies and Strategies Resulting from Its Limited Operating
History. The Company was organized in January 1998 and received funds to make
investments from the Private Placement on May 6, 1998. The Company therefore has
limited operating history and has not fully implemented its operating policies
and strategies. The Company is dependent upon the experience and expertise of
the Manager and the affiliates of the Manager in advising the Company and
administering its day-to-day operations.
The Company's Success Will Substantially Depend on the Services of External
Management. The Company has contracted with the Manager to advise the Board of
Directors and direct the day-to-day business affairs of the Company. The
Company's success, therefore, depends on the services of the Manager and its
officers and employees. Certain officers, directors and employees of the Company
and the Manager and its affiliates have experience in creating, evaluating,
acquiring and managing mortgage loans and real estate investments. However,
until joining the Manager, such officers, directors and employees had never
directly managed a REIT. Moreover, the Manager, a newly organized company, will
need to subcontract with third parties or with employees of HCFP and its
affiliates to provide certain services on behalf of the Company. There can be no
assurance that the Company and the Manager will be able to implement
successfully the strategies that the Company intends to pursue. Subject to the
Guidelines, the Manager has significant latitude as to the types of assets it
determines to be proper investments for the Company. No assurance can be made
that the Manager's decisions in this regard will result in a profit for the
Company. Moreover, certain of the Manager's personnel are employees of HCFP or
its affiliates, and accordingly the Company's success may depend in part on the
continuing ability of HCFP and its affiliates, including the Manager, to hire
and retain knowledgeable personnel and the Manager's ability to cause such
personnel to focus their attention to the affairs of the Company rather than the
affairs of HCFP and its affiliates. The ability of HCFP and its affiliates to
attract and retain such personnel may be affected, in turn, by HCFP's continued
financial strength. Finally, the Company is subject to the risk that the Manager
will terminate the Management Agreement and that no suitable replacement will be
found to manage the Company.
RISKS ASSOCIATED WITH THE HEALTHCARE INDUSTRY
Dependence On Reimbursement By Third-Party Payors. A substantial portion
of the revenue of the Company's borrowers and lessees are and will be dependent
upon reimbursement from third-party payors, including federal and state Medicaid
and Medicare programs and other government finance programs and private
insurers. These programs are highly regulated and subject to frequent and
substantial changes resulting from legislative, regulative and judicial
developments. Any reduction in Medicare or Medicaid rates could have an adverse
impact on the Company's borrowers and lessee. The revenues of the Company's
borrowers and lessees will also be affected by the continuing efforts of
third-party payors to contain or reduce the costs of healthcare by lowering
reimbursement rates, increasing case management review of services, negotiating
reduced contract pricing and shifting the risk of adequate funding to the
facilities by capitated plans and other devices. Changes in the mix of patients
of the Company's borrowers and lessees among the Medicaid, Medicare and private
pay categories, and among different types of private pay sources, can
significantly affect the revenues of the operations of such borrowers and
lessees. Any changes in reimbursement levels under Medicaid, Medicare or private
payor programs and any changes in applicable government regulations could
adversely affect the borrowers and the lessees and, therefore, the profitability
of the Company.
Failure by the Company's Borrowers or Lessees to Comply with Applicable
Government Regulations Could Adversely Affect their Ability to Meet Their
Obligations to the Company. Both the Medicaid and Medicare programs contain
specific requirements which must be adhered to at all times by healthcare
16
<PAGE> 22
facilities in order to qualify under the programs. These conditions of
participation are very detailed and demanding. Failure to adhere to these
conditions and requirements may result in borrowers and lessees of the Company
losing Medicaid and Medicare reimbursement.
The Medicaid and Medicare programs are subject to statutory and regulatory
changes, administrative rulings, interpretations of policy, intermediary
determinations and governmental funding restrictions, all of which may
materially increase or decrease program reimbursement to healthcare facilities.
No assurance can be given that the future funding of such programs will remain
at levels comparable to the present levels.
In addition to the requirements to be met by healthcare facilities for
participation in the Medicaid and Medicare programs, the Company's borrowers and
lessees are and will be subject to regulatory and licensing requirements of
state and local authorities. Each healthcare facility is inspected and licensed
on a regular schedule by the licensing agency in each state. In granting and
renewing licenses, a licensing agency considers, among other things, the
physical buildings and equipment, the qualifications of the administrative
personnel and nursing staff, the quality of care and continuing compliance with
the laws and regulations relating to the operation of the facility. Local
agencies may also have a role inspecting and enforcing such requirements. State
licensing of healthcare facilities is a prerequisite to certification under
Medicaid and Medicare programs.
The United States government and states in which the Company may own
facilities or in which its borrowers or lessees may operate facilities regulate
various aspects of the Company's business. Various federal and state laws
regulate relationships among providers of services to the healthcare industry,
including employment or service contracts and investment relationships. The
operation of healthcare facilities and the provision of healthcare services are
also subject to extensive federal, state and local laws relating to, among other
things, the adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, environmental compliance, compliance
with the Americans with Disabilities Act of 1990 ("ADA"), fire prevention and
compliance with building codes. The failure of its borrowers or lessees to
obtain or renew any required regulatory approvals or licenses could adversely
affect the Company's growth. In addition, healthcare is an area of extensive and
frequent regulatory change. Changes in the laws or new interpretations of
existing laws can have a significant effect on methods and costs of doing
business and amounts of payments received from governmental and other payors.
The Company could be adversely affected by, among other things, regulatory
developments such as mandatory increases in the scope and quality of care to be
afforded patients and revisions in licensing and certification standards.
Government at both the federal and state levels has continued in its
efforts to reduce, or at least limit the growth of, spending for healthcare
services. On August 5, 1997, President Clinton signed into law The Balanced
Budget Act of 1997 (the "BBA") which contains numerous Medicare and Medicaid
cost-saving measures. The BBA has been projected to save $115 billion in
Medicare spending over the next five years, and $13 billion in the Medicaid
program. Section 4711 of the BBA, entitled "Flexibility in Payment Methods for
Hospital, Nursing Facility, ICF/MR, and Home Health Services," repealed the
Boren Amendment, which had required that state Medicaid programs pay to nursing
home providers amounts reasonable and adequate to meet the costs which must be
incurred by efficiently and economically operated facilities in order to provide
care and services in conformity with applicable state and federal laws,
regulations and quality and safety standards and to assure access to hospital
services. The Boren Amendment was previously the foundation of litigation by
healthcare facilities seeking rate increases. In place of the Boren Amendment,
the BBA requires only that, for services and items furnished on or after October
1, 1997, a state Medicaid program must provide for a public process for
determination of Medicaid rates of payment for nursing facility services, under
which proposed rates, the methodologies underlying the establishment of such
rates, and justification for the proposed rates are published, and which gives
providers, beneficiaries and other concerned state residents a reasonable
opportunity for review and comment on the proposed rates, methodologies and
justifications. States are actively seeking ways to reduce Medicaid spending for
healthcare by such methods as capitated payments and substantial reductions in
reimbursement rates.
The BBA also requires that nursing homes transition to a prospective
payment system under the Medicare program during a three-year "transition
period" commencing with the first cost reporting period beginning on or after
July 1, 1998. The BBA also contains several new antifraud provisions. Given the
recent
17
<PAGE> 23
enactment of the BBA, the Company is unable to predict the impact of the BBA and
potential changes in state Medicaid reimbursement methodologies on the revenues
of operators of facilities; however, any significant reduction in either
Medicare or Medicaid payments could adversely affect such operators and
therefore the profitability of the Company.
Various state and federal laws also regulate the relationships between
providers of healthcare services, physicians and other clinicians. These laws
impose restrictions and impose monetary penalties on physicians who make
referrals for designated health services to entities with which they have
financial relationships. These laws also prohibit healthcare fraud in the form
of the offering, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare or state healthcare program patients or
patient care opportunities. There can be no assurance that the operations of the
Company's borrowers or lessees will not be subject to review, scrutiny,
penalties or civil and criminal enforcement actions under these laws, or that
these laws will not change in the future. Violations of these laws may result in
substantial civil or criminal penalties for individuals or entities, including
large civil monetary penalties and exclusion from participation in the Medicare
or Medicaid programs. Such exclusions or penalties, if applied to the Company's
borrowers or lessees, could have an adverse effect on the profitability of the
Company.
The BBA and the Health Insurance Portability and Accountability Act of 1996
both expanded enforcement efforts designed to prevent healthcare fraud. Funding
for enforcement activities has been increased, and many state and federal
agencies have increased their enforcement activities. These activities can
result in triple damage claims and penalties as high as $50,000 per fraudulent
claim. Increased enforcement activities can, therefore, result in potentially
significant financial impact on the Company's borrowers and lessees should they
engage in fraudulent activities.
Changes in certification and participation requirements of the Medicare and
Medicaid programs have restricted, and are likely to continue to restrict
further, eligibility for reimbursement under those programs. Programs demanding
that providers accept discounted fees or assume all or a portion of the
financial risk for the delivery of healthcare services are being implemented by
private payors, including managed care payors. Such measures may include
capitated payments whereby the provider is responsible for providing, for a
fixed fee, all services needed by certain patients. Capitated payments can
result in significant losses to the provider if patients require expensive
treatment not adequately covered by the capitated rate. Efforts to impose
reduced payments, greater discounts and more stringent cost controls by
government and other payors are expected to continue. Any reforms that
significantly limit rates of reimbursement under the Medicare or Medicaid
programs, could have a material adverse effect on the revenues of the Company's
borrowers and lessees and, therefore, on the Company's profitability. The
Company is unable to predict what reform proposals or reimbursement limitations
will be adopted in the future or the effect such changes will have on its
operations. No assurance can be given that such reforms will not have a material
adverse effect on the Company.
Many states have adopted certificate of need ("CON") or similar laws that
generally require that a state agency approve certain acquisitions and determine
that a need exists for certain new services, the addition of beds and capital
expenditures or other changes. To the extent that CON or other similar approvals
are required for expansion of Facilities owned by the Company or operated by its
borrowers or lessees, either through facility acquisitions or expansion or
provision of new services or other changes, such expansion could be adversely
affected by the failure or inability to obtain the necessary approvals, changes
in standards applicable to such approvals and possible delays and expenses
associated with obtaining such approvals. CON laws are also subject to being
repealed or modified which could increase competition by lowering competitors'
barriers to enter certain markets.
REAL ESTATE INVESTMENT RISKS
Appropriate Investments May Not Be Available and Full Investment of Net
Proceeds May Be Delayed. As of July 31, 1998, only approximately $119.4 million
of the Company's investments (approximately % of the net proceeds of the
Offering and funds received from the Private Placement which have not yet been
invested) have been identified. See "Portfolio." The Company intends to invest
the net proceeds of the Offering in short-term readily marketable,
interest-bearing securities on a temporary basis until the Company
18
<PAGE> 24
finds appropriate mortgage loans and real property in which to invest. There can
be no assurance, however, that the Company will identify mortgage loans or real
property that meet its investment criteria or that any such assets will produce
a return on the Company's investments. Moreover, the Company and the Manager
have broad discretion in determining how to invest the remaining net proceeds of
the Offering and may change the current investment and operating policies of the
Company without a vote of the stockholders. Such deviations from current
policies might expose the Company to increased risks of loss or liability, which
could affect adversely the Company or the market price of the Common Stock.
Significant Competition May Adversely Affect the Company's Ability to
Acquire Assets at Favorable Spreads Relative to Borrowing Costs. The Company
will engage in a business that may become increasingly competitive in the future
as more people enter the market, which may affect adversely the Company's
ability to achieve its investment objectives. In making investments, the Company
will compete with numerous financing sources, including other REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds and other lenders, and other entities purchasing similar
assets, many of which have established operating histories and procedures, may
have greater access to capital and other resources and may have other advantages
over the Company in conducting certain businesses and providing certain
services. There are several REITs similar to the Company and others may be
organized in the future. The effect of the existence of additional REITs may be
to increase competition for the available supply of investments contemplated to
be made by the Company. The Company's net income will depend, in large part, on
the Company's ability to acquire and originate investments having yields that
produce favorable spreads over the Company's borrowing costs. Increased
competition for the acquisition and origination of mortgage loans and purchase
leaseback transactions involving healthcare facilities or a reduction in the
available supply could result in higher prices and thus lower yields on such
investments, which could narrow (or make negative) the yield spread relative to
the Company's borrowing costs. There can be no assurance that the Company will
be able to make significant investments at favorable spreads relative to the
Company's borrowing costs to achieve the Company's objectives.
Volatility of Value of Real Estate Could Adversely Affect Value of the
Company's Investments. Real property investments in the healthcare industry are
subject to varying degrees of risk. The economic performance and values of
healthcare real estate can be affected by many factors including governmental
regulation, economic conditions and demand for healthcare services. There can be
no assurance that the value of any property acquired by the Company will
appreciate or that the value of property securing any of the Company's mortgage
loans or any property acquired by the Company will not depreciate.
Volatility of Income and Returns Could Adversely Affect Yield on the
Company's Investments. The possibility that facilities in which the Company
invests will not generate income sufficient to meet operating expenses, will
generate income and capital appreciation, if any, at rates lower than those
anticipated or will yield returns lower than those available through investments
in comparable real estate or other investments are risks of investing in real
estate. Income from such properties and yields from investments in such
properties may be affected by many factors, including the existence of and
changes in governmental regulations (such as zoning laws), general or local
economic conditions (such as fluctuations in interest rates and employment
conditions), the existence of competing facilities, a reduction in rental income
as the result of an inability to maintain occupancy levels, natural disasters or
similar factors.
Interest Rate Changes and Prepayments May Adversely Affect the Value of the
Company's Investments. The value of the Company's mortgage loans will be
affected by the prepayment rates on such mortgage loans. Although the mortgage
loans will generally provide for lock-out periods and prepayment penalties that
reduce this risk, no assurance can be made that prepayment penalties will deter
prepayments. Prepayment rates on mortgage loans are influenced by changes in
current interest rates and a variety of economic, geographic and other factors
and cannot be predicted with certainty. In periods of declining mortgage
interest rates, prepayments on mortgage loans generally increase. If general
interest rates also decline, the funds available for reinvestment by the Company
during such periods are likely to be reinvested at lower interest rates than the
Company was earning on the mortgage loans that were prepaid. Mortgage loans may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment. In general, changes in both interest rates and
prepayment
19
<PAGE> 25
rates will affect the total return on the Company's mortgage loans, which in
turn will affect the amount available for distribution to the Company's
stockholders. Under certain interest rate and prepayment rate scenarios, the
Company may not recover fully its investment in such assets.
Illiquidity of Real Estate Investments Could Adversely Affect the Company's
Ability to Liquidate Investments. Real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. All
of the healthcare facilities in which the Company will invest are and will be
"special purpose" properties that could not be readily converted to general
residential, retail or office use. Transfers of operations of healthcare
facilities are often subject to regulatory approvals not required for transfers
of other types of commercial operations and other types of real estate.
Therefore, if the operation of such facilities becomes unprofitable due to
competition, age of improvements or other factors such that the borrower or
lessee becomes unable to meet its obligation on the debt or lease, the
liquidation value of such facility may be substantially less than would be the
case if it were readily adaptable to other uses. The receipt of liquidation
proceeds could be delayed by the approval process of any state agency necessary
for the transfer of the property. In addition, certain significant expenditures
associated with real estate investment (such as real estate taxes and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. Should such event occur, the Company's
income and funds available for distribution would be adversely affected.
Uninsured Loss Could Adversely Affect the Company's Financial
Condition. The Company currently requires, and it is the intention of the
Company to continue to require, all borrowers and lessees to secure adequate
comprehensive property and liability insurance that covers the Company as well
as the borrower and/or lessee. Certain risks may, however, be uninsurable or not
economically insurable and there can be no assurance the Company or a borrower
or lessee will have adequate funds to cover all contingencies itself. Should
such an uninsured loss occur, the Company could lose its invested capital.
Dependence on Lease Income and Mortgage Payments from Real Property.
Since a substantial portion of the Company's income will be derived from
mortgage payments and lease income from real property, the Company's income
would be adversely affected if a significant number of the Company's borrowers
or lessees were unable to meet their obligations to the Company or if the
Company were unable to lease its properties or make mortgage loans on
economically favorable terms.
Liability for Environmental Matters Could Adversely Affect the Company's
Financial Condition. Under various federal, state and local environmental laws,
ordinances and regulations, an owner of real property or a secured lender may be
liable in certain circumstances for the costs of removal or remediation of
certain hazardous or toxic substances at, under or disposed of in connection
with such property, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence or disposal of such substances and may be imposed on the owner in
connection with the activities of an operator of the property or a third party.
The cost of any required remediation, removal, fines or personal or property
damages could be substantial and the owner's liability, therefore, could exceed
the value of the property and/or the assets of the owner. In addition, the
presence of such substances, or the failure to properly dispose of or remediate
such substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn, would
reduce the Company's revenues. Although it is the Company's policy to require an
acceptable Phase I environmental survey for all real property in which it
invests, such surveys are limited in scope and there can be no assurance that
are no hazardous or toxic substances on such property. In addition, although the
Company's mortgage loans and leases require the borrower and the lessee to
indemnify the Company for certain environmental liabilities, the scope of such
obligations may be limited and there can be no assurance that any such borrower
or lessee would be able to fulfill its indemnification obligations.
Construction and Mezzanine Loans Involve Greater Risks of Loss than Loans
Secured by Income Producing Properties. The Company has made construction loans
and mezzanine loans secured by subordinated mortgages. At July 31, 1998,
approximately 23.8% of the Company's actual and probable investments consisted
of construction and mezzanine loans. Construction loans and mezzanine loans are
considered to
20
<PAGE> 26
involve a higher degree of risk than term conventional mortgage lending secured
by income-producing real property. This is because of a variety of factors,
including, in the case of construction loans, dependency on successful
completion and operation of the project for repayment, difficulties in
estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. In addition,
construction loans are subject to the risk that construction and renovation may
not be completed on schedule or within budget, resulting in increased debt
service expense and delays in leasing and cash flow generation, and risks
relating to the inability to obtain, or delays in obtaining, necessary zoning,
occupancy and other required governmental permits and authorizations. To the
extent that new or renovated properties perform below anticipated levels,
reduced cash flow will be produced. In the case of mezzanine loans, the factors
include, among other things, that a foreclosure by the holder of the senior loan
could result in the Company's inability to recover the full amount, or indeed
any, of its investment in such mezzanine loan. The occurrence of one or more of
the foregoing in connection with the Company's construction and mezzanine loans
could have an adverse effect on the Company's financial condition, results of
operations and cash flow.
Adverse Changes in General Economic Conditions Can Adversely Affect the
Company's Business. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of its
investments are located. Adverse changes in national economic conditions or in
the economic conditions of the regions in which the Company conducts substantial
business would likely have an adverse effect on real estate values, interest
rates and, accordingly, the Company's business, income and ability to make
distributions to its stockholders. The general economic conditions in the
geographic areas in which the Company's investments are located will be beyond
the control of the Company.
One Action Rules May Limit the Company's Rights Following
Defaults. Several states have laws that prohibit more than one "judicial
action" to enforce a mortgage obligation, and some courts have construed the
term "judicial action" broadly. The mortgagee may be required to foreclose first
on properties located in states where such "one action" rules apply (and when
non-judicial foreclosure is permitted) before foreclosing on properties located
in states where judicial foreclosure is the only permitted method of
foreclosure.
FINANCING RISKS
Maturity Mismatch between Asset Maturities and Borrowing Maturities May
Adversely Affect the Company's Net Income. The Company's anticipated use of
short-term borrowings under the Repurchase Facility to acquire long term assets,
including mortgage loans, may expose the Company to a maturity mismatch. As a
consequence, in periods of rising interest rates the Company's borrowing costs
could exceed the income earned on the Company's assets acquired with the
borrowed funds, thereby reducing the Company's income and ability to make
distributions to its stockholders.
Interest Rate Mismatch between Asset Yields and Borrowing Rates May
Adversely Affect the Company's Net Income. The Company's borrowings may be at
interest rates based on indexes and repricing terms similar to, but of somewhat
shorter maturities than, the interest rate indexes and repricing terms of
various of the Company's variable rate assets. While the historical spread
between relevant short-term interest rate indexes has been relatively stable,
there have been periods, such as the 1979 through 1982 high interest rate
environment, when the spread between those indexes was volatile. Further,
certain of the Company's assets will bear fixed rates of interest and have long
term maturities. There can be no assurance that such fixed rates of interest
will exceed the variable rates of interest on related borrowings. Interest rate
mismatches could impact the Company's financial condition in a material way, and
affect adversely the Company's income and ability to make distributions to its
stockholders, dividend yield and the market price of the Common Stock. See
"-- Leverage Can Reduce Income Available for Distribution and Cause Losses" and
"-- The Company May Not Be Able to Borrow Money on Favorable Terms."
The Company's Performance May Be Adversely Affected if Its Hedging Strategy
Is Not Successful. The Company may, from time to time, enter into hedging
transactions in an effort to protect itself from interest rate and prepayment
rate fluctuations. There can be no assurance that the Company will enter into
hedging activities or that, if entered into, such activities will have the
desired beneficial impact on the Company's
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results of operations or financial condition. Moreover, no hedging activity can
completely insulate the Company from the risks associated with changes in
interest rates and prepayment rates. Hedging involves risks and typically
involves costs, including transaction costs. Such costs increase dramatically as
the period covered by the hedging increases and during periods of rising and
volatile interest rates. The Company may increase its hedging activity and,
thus, increase its hedging costs during such periods when interest rates are
volatile or rising and hedging costs have increased. The Company intends
generally to hedge as much of the interest rate risk as the Manager determines
is in the best interests of the stockholders of the Company given the cost of
such hedging transactions and the need to maintain the Company's status as a
REIT. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests."
Leverage Can Reduce Income Available for Distribution and Cause Losses.
The Company's Charter and Bylaws do not limit the amount of indebtedness the
Company can incur. The Company intends to leverage its assets through
securitizations and other borrowings, including the Repurchase Facility. The
Company will leverage its assets only when it expects that such leverage will
enhance returns, although there can be no assurance that the Company's use of
leverage will prove to be beneficial. In addition, the Repurchase Facility is
expected to impose maximum leverage limitations on the Company. The extent to
which the Company uses leverage will be determined by the Manager pursuant to
the Policies and ultimately, by the Board of Directors, who may act at any time
without the approval of or notice to the stockholders. The percentage of
leverage used will vary depending on, among other things, the Company's estimate
of the cash flow that its assets will generate, and the stability of that cash
flow. Leverage can reduce the cash flow available for distributions to
stockholders. Moreover, there can be no assurance that the Company will be able
to meet its debt service obligations resulting from leverage and, to the extent
that it cannot, the Company risks the loss of some or all of its assets. If the
returns on the mortgage loans purchased with funds under the Repurchase Facility
fail to cover the cost of such borrowings, the Company will experience net
interest losses and may experience net losses.
The Company May Not Be Able to Borrow Money on Favorable Terms. The
ability of the Company to achieve its investment objectives through leverage
will depend on the Company's ability to borrow money on favorable terms and on
its ability to renew or replace its maturing borrowings on a continuing basis.
Although the Company expects to be able to enter into and renew the Repurchase
Facility or to find alternative sources to borrow money on favorable terms,
there can be no assurance that the Company will be able to do so. Under the
Repurchase Facility, MLMCI will not be obligated to purchase any specific amount
of loans or to purchase loans at any particular discount to face value. In the
event that MLMCI declines to purchase loans at a discount acceptable to the
Company, the Company will be required to seek alternative sources of debt,
securitization or equity financing for a portion of its portfolio. There can be
no assurance that such financing will be available at all or on terms which
would not have an adverse effect on the Company's net income. It is anticipated
that a majority of the loans eligible for the Repurchase Facility will be
generated under the Company's Permanent Mortgage Loan Program. These loans have
relatively lower yields than the Company's other investments. To the extent that
such loans are ultimately funded with equity because of the failure of MLMCI to
purchase such loans, the Company's overall net interest spread could decline.
CONFLICTS OF INTEREST
The Company is subject to various potential conflicts of interests arising
from its relationship with the Manager and its affiliates. The Company has
adopted certain procedures to resolve any conflicts which arise. See "Conflicts
of Interest." There is no assurance that these procedures will be effective or
will not be changed, or that conflicts will be resolved in the best interests of
the Company and its stockholders. Any failure to so resolve conflicts could have
a material adverse effect on the Company's financial condition and ability to
make distributions to stockholders.
Potential conflicts include the following:
Takeout Financing and Loans to Common Borrowers. The Company expects
that it will from time to time provide permanent mortgage loan financing to
clients of HCFP which will be used to refinance short-term real estate
financing provided by HCFP. The Company and HCFP may also make loans to the
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<PAGE> 28
same borrower or to borrowers which are under common control. Although the
Company and HCFP have separate credit committees which will review each
investment or financing transaction, such committees have common members.
Directors and officers of the Company who are also employed by or
affiliated with HCFP have fiduciary obligations to act in the best interest
of the stockholders of the Company. In addition, the Company's policies
require the Company and HCFP to enter into an intercreditor agreement in
situations where loans by the Company and HCFP are made to the same
borrower and require the unanimous approval of the Independent Directors
who consider the matter (with the approval of at least three Independent
Directors being required) for any transaction other than certain permanent
mortgage loans meeting certain designated criteria established by the
Independent Directors involving the purchase or refinancing by the Company
of any investment originated and initially closed by HCFP or an affiliate
of HCFP. See "Policies with Respect to Certain Activities -- Policies with
Respect to Conflicts of Interest."
Competition for Management Time. Certain officers and directors of
each of the Manager and the Company currently are engaged in other
businesses, including HCFP. They will devote only so much of their time to
the business of the Company as they, in their judgment, determine is
reasonably required, which will be substantially less than full-time. These
officers and directors may experience conflicts of interest in allocating
management time, services and functions among the Company, the Manager and
HCFP.
Compensation of the Manager. In order to increase the amount of its
Incentive Compensation, the Manager may place undue emphasis on the
maximization of Funds From Operations at the expense of other criteria,
such as preservation of capital, which could result in increased risk to
the Company.
Termination of Management Agreement. The Management Agreement was
unanimously approved by the Independent Directors. The renewal of the
Management Agreement after the initial three-year term will require the
affirmative vote of a majority of the Independent Directors, and a majority
of the Independent Directors may terminate the Management Agreement at any
time after May 6, 2001 upon 90 days' notice. However, the Company will be
required to pay a substantial termination or nonrenewal fee to HCFP, or to
acquire the Manager from HCFP for a substantial purchase price, prior to
termination or nonrenewal of the Management Agreement without cause. See
"Management of Operations -- The Management Agreement." This requirement
may adversely affect the Company's ability to terminate or elect not to
renew the Management Agreement without cause.
Interested Director Transactions. William E. Shine, a director of the
Company, is an officer of GMACCM. The Company expects to purchase mortgage
loans from time to time from GMACCM pursuant to the GMACCM Agreement.
Pursuant to an agreement with the Company, Joshua B. Gillon, a director of
the Company, will be paid a finder's fee of $50,000 by the Company for each
full year the Repurchase Facility is in effect, up to a maximum of
$150,000. The Policies require Mr. Shine and Mr. Gillon to abstain from
voting as a member of the Board of Directors on any matters relating to
GMACCM or the Repurchase Facility, respectively. See "Policies with Respect
to Certain Activities -- Policies with Respect to Interested Directors."
Independent Directors Will Not Participate in Day-To-Day
Operations. Although the Management Agreement has been approved by the
Independent Directors, daily interactions between the Company and the
Manager and a majority of its affiliates are not required to be approved by
a majority of the Independent Directors. Instead, the Manager conducts the
day-to-day operations of the Company in accordance with the Policies that
were unanimously approved by a majority of the Independent Directors. On a
quarterly basis, the Independent Directors review transactions engaged in
by the Company to monitor compliance with the Policies and will review the
Policies at least annually. Investors should be aware that, in conducting
this review, the Independent Directors are expected to rely primarily on
information provided to them by the Manager.
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LEGAL AND TAX RISKS
Adverse Consequences of Failure to Maintain REIT Status May Include the
Company Being Subject to Taxation as a Regular Corporation. The Company intends
to operate in a manner so as to qualify as a REIT for federal income tax
purposes. A REIT that satisfies all REIT qualification tests generally is exempt
from federal taxation on its income with certain limited exceptions. Although
the Company does not intend to request a ruling from the Service as to its REIT
status, the Company has received an opinion of its legal counsel to the effect
that the Company is organized in conformity with the requirements for
qualification as a REIT and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT. See "Federal
Income Tax Considerations -- Taxation of the Company." Such legal opinion,
however, is based on certain assumptions and factual representations by the
Company regarding the Company's business and assets and the Company's ability to
meet various requirements for qualification as a REIT, and no assurance can be
given that actual operating results will meet these requirements. In addition,
investors should be aware that opinions of counsel are not binding on the
Service or any court. The REIT qualification opinion only represents the view of
counsel as to the status of the Company based on counsel's review and analysis
of existing law. Furthermore, both the validity of the opinion and the continued
qualification of the Company as a REIT will depend on the Company's satisfaction
of certain asset, income, organizational, distribution, and stockholder
ownership requirements on a continuing basis. If the Company were to fail to
qualify as a REIT in any taxable year, the Company would be subject to federal
income tax (including any applicable alternative minimum tax) on all of its
taxable income at regular corporate rates, and distributions to stockholders
would not be deductible by the Company in computing its taxable income but
generally would remain taxable to the stockholders to the extent of the
Company's earnings. Any such corporate tax liability could be substantial and
would reduce the amount of cash available for distribution to stockholders,
which in turn could have an adverse impact on the value of, and trading prices
for, the Common Stock. Unless entitled to relief under certain Code provisions,
the Company also would be disqualified from taxation as a REIT for the four
taxable years following the year during which the Company ceased to qualify as a
REIT.
The Company must distribute annually at least 95% of its taxable income
including income from foreclosure property net of any tax imposed on such
property, (but excluding any net capital gain and excess net income) in order to
avoid corporate income taxation of the earnings that it distributes. In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its net capital gain for that year and (iii) 100% of its
undistributed taxable income from prior years.
The Company intends to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
However, there may be differences in timing between the recognition of taxable
income and the actual receipt of cash, requiring the Company to borrow funds,
issue capital stock or sell assets on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of the Company's taxable income
could cause the Company (i) to sell assets in adverse market conditions, (ii) to
distribute amounts that represent a return of capital, or (iii) to distribute
amounts that would otherwise be spent on future acquisitions, unanticipated
capital expenditures or repayment of debt. Gain from disposition of any assets
sold to provide adequate funds to meet the distributions requirement could
subject the Company to the 100% tax on the net income from prohibited
transactions. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests."
In addition, in order to qualify as a REIT, the Company must satisfy
certain requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets. See
"Federal Income Tax Considerations -- Requirements for Qualification -- Asset
Tests." Without limiting the generality of the foregoing, the Company will not
be able to acquire securities (other than securities which are treated as an
interest in real property) of any single issuer which would represent either
more than 5% of the total value of the Company's assets or 10% of the voting
securities of such issuer. In addition, in order to satisfy the income
requirements of a REIT, the Company generally will be restricted to acquiring
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assets which generate qualifying income for purposes of certain income tests.
See "Federal Income Tax Considerations Requirements for Qualification -- Income
Tests." These restrictions could affect adversely the Company's ability to
optimize its portfolio of assets.
The Company may acquire at less than their face amount mortgage loans and
other debt obligations that are deemed to have market discount for federal
income tax purposes, which generally is equal to the excess of an obligation's
redemption price over the holder's basis in the obligation at the time of
acquisition. All or a portion of the gain recognized by the Company from the
disposition of, or principal payments on, an obligation which has market
discount would be treated as ordinary income and not capital gain, so that the
Company would be required to make a distribution to its stockholders in order to
satisfy the requirement that a REIT distribute 95% of its taxable income to its
stockholders each taxable year.
If a mortgage loan or other debt obligation with market discount is held by
a REMIC in which the Company acquires a REMIC Residual Interest, a portion of
the market discount would be recognized as income each year by the REMIC and,
hence, the Company. As a result, the market discount on obligations held by a
REMIC in which the Company holds a REMIC Residual Interest could increase the
Company's annual distribution requirement.
Certain Special Considerations Will Apply Due to the Nature of the
Company's Assets. The manner in which the Company will derive income from
healthcare facilities in which it has an equity or mortgage interest will be
governed by special considerations in satisfying the requirements for REIT
qualification. The Company would not qualify as a REIT if it directly operated a
healthcare facility. Healthcare facilities owned by the Company will be leased
to healthcare providers. It is essential to the Company's qualification as a
REIT that these arrangements be respected as leases for federal income tax
purposes and that the lessees not be regarded as "related parties" of the
Company (as determined under the applicable Code provisions). See "Federal
Income Tax Considerations -- Requirements for Qualifications as a REIT -- Income
Tests." In the event a lease expires and is not renewed, the Company will be
required to find a new "unrelated" lessee to lease and operate the property
subject to such lease in order to continue to qualify as a REIT. In the event of
a default on either a lease of, or a mortgage secured by, a healthcare facility,
the Company, to maintain its REIT qualification, will be required to engage a
new healthcare provider to operate the facility after the Company takes
possession of such facility. This requirement could deter the Company from
exercising its remedies in the event of a default even though such exercise
otherwise would be in the Company's best interest. Although the Company would be
permitted to operate the facilities for 90 days after taking possession of the
facility without jeopardizing its REIT status, the fact that the facility
licenses would be held by lessees or borrowers could preclude the Company from
doing so under applicable healthcare regulatory requirements.
Investment in the Common Stock of the Company by Certain Plans May Give
Rise to a Prohibited Transaction Under ERISA and the Code. ERISA prohibits
certain transactions that involve (i) pension, profit-sharing or other employee
benefit plans subject to Title I of ERISA (each a "Plan") and (ii) any person
who is a "party in interest" with respect to a Plan. Section 4975 of the Code
contains similar prohibitions against transactions that involve Plans or similar
arrangements, such as individual retirement accounts ("IRAs") and any person who
is a "disqualified person" with respect to any such Plan or similar arrangement.
Consequently, the fiduciary of a Plan or person making investment decisions on
behalf of a similar arrangement who is contemplating an investment in the Common
Stock should consider whether the Company, any other person associated with the
issuance of the Common Stock, or any affiliate of the foregoing is or might
become a "party in interest" or "disqualified person" with respect to the Plan
or similar arrangement and, if so, whether an exemption from such prohibited
transaction rules is applicable. See "ERISA Considerations -- The Treatment of
the Company's Underlying Assets Under ERISA."
Ownership Limitation May Restrict Business Combination Opportunities. In
order for the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose of preserving its REIT qualification, the
Charter generally prohibits direct or indirect ownership of more than 9.9% of
the number of outstanding shares of Common Stock or any series of preferred
stock (the "Ownership Limitation"). The Ownership Limitation could have the
effect of discourag-
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ing a takeover or other transaction in which holders of some, or a majority, of
the shares of Common Stock might receive a premium for their shares of Common
Stock over the then prevailing market price or which such holders might believe
to be otherwise in their best interests. See "Description of Capital Stock --
Restrictions on Transfer" and "Federal Income Tax Considerations -- Requirements
for Qualification."
Preferred Stock May Prevent Change in Control. The Charter authorizes the
Board of Directors to classify and reclassify unissued capital stock into shares
of preferred stock of one or more series and to establish the preferences and
rights of any shares of preferred stock issued. Although the Company has no
current intention to issue any series of preferred stock in the foreseeable
future, the issuance of any series of preferred stock could have the effect of
delaying or preventing a change in control of the Company even if a majority of
the holders of the Company's Common Stock believed such change of control was in
their best interest. See "Description of Capital Stock -- Preferred Stock."
Maryland Anti-Takeover Statutes May Restrict Business Combination
Opportunities. As a Maryland corporation, the Company is subject to various
provisions of Maryland law, which impose certain restrictions and require
certain procedures with respect to certain stock purchases and business
combinations. See "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws -- Business Combinations" and "-- Control Share
Acquisitions."
Board of Directors May Change Certain Policies without Stockholder
Consent. The major policies of the Company, relating to the purchase and sale
of assets, financing, operations, debt and distributions, are determined by its
Board of Directors. The Board of Directors, and in certain cases, the
Independent Directors, may amend or revise these and other policies, or approve
transactions that deviate from these policies, from time to time without a vote
of the stockholders. The effect of any such changes may be positive or negative.
The Company cannot change its policy of seeking to maintain its qualification as
a REIT without the affirmative vote of two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors, voting together as a single
class. See "Investment and Other Policies" and "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws."
Loss of Investment Company Act Exemption Would Adversely Affect the
Company. The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act exempts entities that,
directly or through majority-owned subsidiaries, are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and
also may be required to maintain an additional 25% in Qualifying Interests or
other assets related to real estate. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act.
The Company's Responsibility to Indemnify the Manager and Officers and
Directors of the Company May Result in Liability for the Actions of the Manager
and Officers and Directors of the Company. Maryland law permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Charter contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law. See "Management of the Company -- Directors
and Executive Officers."
The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that the Manager or one or more of its officers or directors is otherwise
accountable or liable for the debts or obligations of the Company or its
affiliates. In addition, the Manager and its officers and directors will not be
liable to the Company, and the Company will indemnify the Manager and its
officers and directors, for acts performed in good faith pursuant to the
Management Agreement, except for claims arising from acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. See "Management of Operations -- The
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Management Agreement." In addition, the Company will indemnify, hold harmless
and pay reasonable expenses in advance of final disposition of a proceeding to
present or former directors and officers and certain other parties to the
fullest extent permitted from time to time by Maryland Law. See "Management of
the Company."
OTHER RISKS
The Failure to Develop a Market for Common Stock May Result in a Decrease
in Its Market Price. Prior to this Offering, there has been no public market for
the shares of Common Stock offered hereby. The initial public offering price
will be determined by negotiations between the Company and representatives of
the Underwriters. There can be no assurance that the price at which the shares
of Common Stock will sell in the public market after this Offering will not be
lower than the price at which they are sold by the Underwriter. Application has
been made to list the Common Stock on the NYSE, subject to official notice of
issuance. Quotation through NYSE does not ensure, however, that an active market
will develop for the Common Stock.
Sales of Units and Underlying Common Stock May Adversely Affect the Market
for the Common Stock. All of the Units sold in the Private Placement (and the
shares of Common Stock and Warrants comprising the Units, and the Warrant Shares
issuable upon exercise of the Warrants) will have been registered pursuant to
the Shelf Registration Statement for sale from time to time on the NYSE. The
Company is unable to predict whether, to what extent, or when, the holders of
such securities may elect to sell them on the NYSE. Sales of significant amounts
of such securities could adversely affect the market for the Common Stock.
Pursuant to the Registration Rights Agreement, the Company will suspend sales of
such securities under the Shelf Registration Statement from the effective date
of the Registration Statement with respect to the Offering until the end of the
30-day period during which the underwriters' over-allotment option may be
exercised.
Increases in Interest Rates May Adversely Affect the Yield of the Common
Stock. The Company's earnings are derived in part from the expected positive
spread between the yield on the Company's investments and the costs to the
Company of its borrowings. This expected positive spread will not necessarily be
larger in high interest rate environments than in low interest rate
environments. In periods of high interest rates, however, the net income of the
Company, and therefore the dividend yield on the Common Stock, may be less
attractive compared to alternative investments of equal or lower risk, which
could impact adversely the prices that stockholders may obtain for their Common
Stock.
Future Offerings of Capital Stock May Result in Dilution of the Book Value
or Earnings Per Share of the Outstanding Common Stock. The Company may increase
its capital resources in the future by making additional offerings of its Common
Stock, securities convertible into its Common Stock or preferred stock. The
actual or perceived effect of such offerings may be the dilution of the book
value or earnings per share of the Common Stock outstanding, which may result in
the reduction of the prices that stockholders may obtain for their Common Stock.
Year 2000. The Company relies upon the computer software programs and
operating systems of the Manager and its affiliates as well as the Company's
borrowers and lessees and third-party payors. The Company has been advised by
the Manager that the Manager has implemented a program designed to ensure that
all software used by the Manager and its affiliates in connection with their
services for the Company will manage and manipulate data involving transition of
dates from 1999 to 2000 without functional or data abnormality and without
inaccurate results related to such data. The Company does not anticipate that
the execution of this program will have a material effect on its operating
results. However, the Company does not know whether its existing or prospective
borrowers and lessees and their respective third-party payors have implemented
programs designed to ensure that all software used will manage and manipulate
data involving the transition of dates from 1999 to 2000 without functional or
data abnormality and without inaccurate results relating to such data.
Disruption of the computerized billing and collection systems of the Company's
borrowers and lessees or their respective third-party payors could result in
material reductions in income to the Company's borrowers and lessees, which
could cause defaults under the Company's leases and/or mortgage loans and could
have an adverse effect on the Company. The Company is in the process of
developing a
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contingency plan for any disruption in the computerized billing and collection
systems of the Company's borrowers and lessees and their respective third-party
payors, and the Company expects to have such a contingency plan in place by
mid-1999.
CONFLICTS OF INTEREST
As a result of the Company's relationship with the Manager and HCFP, the
Company will be subject to various potential conflicts of interest. Although the
Company's Board of Directors includes four Independent Directors, the other
three directors and each of the executive officers of the Company also serve as
directors or executive officers of the Manager, and a number of the executive
officers are directors, officers and/or employees of HCFP and devote substantial
time to HCFP's business. The Manager receives a management fee for services
rendered to the Company. The Board of Directors may terminate, or decline to
renew, the Management Agreement without cause at any time after the first three
years upon 90 days written notice. However, the Company will be required to pay
a substantial termination or nonrenewal fee to the Manager, or to acquire the
Manager from HCFP for a substantial purchase price, prior to such termination or
nonrenewal, which may adversely affect the Company's ability to terminate or
elect not to renew the Management Agreement without cause. See "Management of
Operations -- The Management Agreement." To protect the Company's stockholders
from risks related to potential conflicts, the Management Agreement provides
that HCFP and its affiliates are prohibited from investing in real estate or
purchasing or providing term loans secured by real estate which mature in more
than three years.
The Company expects that it will from time to time provide permanent
mortgage loan financing to clients of HCFP which will be used to refinance
short-term real estate financing provided by HCFP. The Company and HCFP may also
make loans to the same borrower or to borrowers which are under common control.
Although the Company and HCFP have separate credit committees which will review
each investment or financing transaction, such committees have common members.
Directors and officers of the Company who are also employed by or affiliated
with HCFP have fiduciary obligations to act in the best interest of the
stockholders of the Company. In addition, the Policies require the Company and
HCFP to enter into an intercreditor agreement in situations where loans of the
Company and HCFP are made to the same borrower and require the unanimous
approval of the Independent Directors who consider the matter (with the approval
of least three Independent Directors being required) for any transaction (other
than a permanent mortgage loan that meets designated criteria established by the
Independent Directors) involving the purchase or refinancing by the Company of
any investment originated and initially closed by HCFP or an affiliate of HCFP.
See "Policies with Respect to Certain Activities -- Policies with Respect to
Conflicts of Interest."
In order to increase the amount of its Incentive Compensation, the Manager
may place undue emphasis on the maximization of FFO at the expense of other
criteria, such as preservation of capital, which could result in increased risk
to the Company.
William E. Shine, a director of the Company, is an officer of GMACCM. The
Company expects to purchase mortgage loans from time to time from GMACCM
pursuant to the GMACCM Agreement. Pursuant to an agreement with the Company,
Joshua B. Gillon, a director of the Company, will be paid a finder's fee of
$50,000 by the Company for each full year the Repurchase Facility is in effect,
up to a maximum of $150,000. The Company's policies require Mr. Shine and Mr.
Gillon to abstain from voting as a member of the Board of Directors on any
matters relating to GMACCM or the Repurchase Facility, respectively. See
"Policies with Respect to Certain Activities -- Policies with Respect to
Interested Directors."
The Independent Directors have unanimously approved the Management
Agreement and the Policies. Although the Manager performs the day-to-day
operations of the Company, the Independent Directors review all transactions on
a quarterly basis to ensure compliance with the Policies. In such review and
approval, the Independent Directors are expected to rely primarily on
information provided by the Manager. See "Policies with Respect to Certain
Activities -- Policies with Respect to Conflicts of Interest."
28
<PAGE> 34
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the Common
Stock offered hereby, after deducting the underwriting discount and estimated
offering expenses, are estimated to be $ million ($ million if
the Underwriters over-allotment option is exercised in full).
The net proceeds of the Offering will be used to make investments in the
Company's Equity Investment Program, Permanent Mortgage Loan Program and Other
Real Estate Secured Debt Program. Approximately $ of such net proceeds are
expected to be used to fund the probable investments described as such under
"Portfolio." The Company intends to invest the balance of the net proceeds of
the Offering, pending investment thereof in income producing real estate and
real estate related assets, in short-term, readily marketable, interest-bearing
securities. See "Policies with Respect to Certain Activities."
DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that it
distributes, the Company must distribute to its stockholders an amount at least
equal to (i) 95% of its REIT taxable income (determined before the deduction for
dividends paid and excluding any net capital gain but including any market
discount) plus (ii) 95% of the excess of its net income from foreclosure
property over the tax imposed on such income by the Code less (iii) any excess
noncash income (as determined under the Code). See "Federal Income Tax
Considerations." The actual amount and timing of distributions, however, will be
at the discretion of the Board of Directors and will depend upon the financial
condition of the Company in addition to the requirements of the Code. It is
anticipated that the first distribution will be made after September 30, 1998,
the first full fiscal quarter following the completion of the Private Placement.
It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt stockholders of the Company, although a portion of such
distributions may be designated by the Company as long-term capital gain or may
constitute a return of capital. The Company will furnish annually to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal income
tax treatment of distributions by the Company, see "Federal Income Tax
Considerations -- Taxation of the Company", "-- Taxation of Taxable U.S.
Stockholders," "-- Taxation of Tax-Exempt Stockholders" and "-- Taxation of
Non-U.S. Stockholders."
29
<PAGE> 35
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1998, and (ii) as adjusted to reflect the sale of the Common Stock
offered hereby:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
Common Stock, par value $.0001 per share; 500,000,000
shares authorized; 8,055,555 shares issued and
outstanding; shares as adjusted(2)............ $ 806 $
Paid-in capital........................................... 136,545,071
Cumulative net income..................................... 852,029 852,029
------------ ----------
Total stockholders' equity...................... $137,397,906
============ ==========
</TABLE>
- ---------------
(1) Assumes (i) that the initial public offering price to the public is $
per share, (ii) no exercise of the Underwriters' over-allotment option to
purchase up to an additional shares of Common Stock, and (iii) that
none of the Warrants is exercised.
(2) Does not include Warrants to purchase 1,450,000 shares of Common Stock at
$20 per share exercisable after November 4, 1998. See "Private Placement."
30
<PAGE> 36
DILUTION
The net tangible book value of the Company as of June 30, 1998, was $137.4
million or $17.06 per share of Common Stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to
receipt by the Company of the estimated net proceeds from the sale by the
Company of shares of Common Stock (at an assumed initial public
offering price of $ per share), the net tangible book value of the
Company at June 30, 1998 would have been $ or $ per share.
This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to purchasers of Common Stock in
this Offering ("New Investors"). The following table illustrates the dilution in
net tangible book value per share to New Investors:
<TABLE>
<S> <C>
Assumed initial public offering price....................... $
Net tangible book value per share at , 1998..... $
Increase per share attributable to New Investors..........
--------
Net tangible book value per share after this Offering.......
--------
Net tangible book value dilution per share to New
Investors.................................................
========
</TABLE>
The following table sets forth, as of June 30, 1998, the difference between
existing stockholders and New Investors with respect to the number of shares
purchased from the Company, the total consideration paid to the Company and the
average price paid per share, giving effect to the sale of Common Stock offered
hereby at an assumed offering price of $ .
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)......................... $ $
New Investors
Total.................................. 100% 100%
</TABLE>
- ---------------
(1) Assumes that the price to investors of a Unit in the Private Placement
($100) was allocated to the shares of Common Stock comprising the Unit ($20
per share) and that no part of the price to investors was allocated to the
Warrants.
31
<PAGE> 37
BUSINESS
The Company was formed in January 1998 to invest in income producing real
estate and real estate related assets in the healthcare industry. The Company's
investments include real estate acquisitions, permanent real estate mortgages
and other real estate secured debt. The Company primarily targets investments in
skilled nursing facilities, assisted living facilities, medical office buildings
and hospitals, and also pursues opportunities in other types of healthcare
facilities, such as mental health facilities, outpatient facilities and other
specialty healthcare facilities. At July 31, 1998, the Company had outstanding
actual and probable investments of $119.4 million, consisting of $55.6 million
in income-producing real estate, $27.0 million in permanent real estate
mortgages and $36.8 million in other real estate secured debt. Of the Company's
total dollar amount of outstanding actual and probable investments at July 31,
1998, 58.8%, 25.5% and 15.7% related to skilled nursing facilities, assisted
living facilities and medical office buildings, respectively.
The Company's day to day operations, are managed by the Manager, a
subsidiary of HCFP, a leading publicly-traded provider of asset-based financing
to the healthcare industry. HCFP has an established brand name and reputation in
the healthcare industry which the Company believes uniquely positions HCFP to
assist the Company in identifying investment opportunities and expanding its
business base. The Company seeks to originate investments through joint
marketing efforts with HCFP, direct marketing through its staff of experienced
healthcare real estate professionals and referrals from, and purchases of
mortgage loans under, its arrangement with GMACCM. The Company's goal is to use
its relationship with HCFP and its independent origination channels to establish
a diversified portfolio of high quality healthcare real estate related
investments.
The Company's principal business objectives are to maximize growth in cash
available for distribution and to enhance the value of its portfolio in order to
maximize total returns to its stockholders. The Company believes it can achieve
these objectives by capitalizing on the investment opportunities and by
implementing its business and growth strategies described below.
INVESTMENT OPPORTUNITIES
The Company believes that the following trends in the healthcare industry
will continue to create investment opportunities for the Company:
- The projected growth in the annual expenditures in the long-term care
industry from $87.2 billion in 1996 to a projected $121.2 billion by the
year 2000((1)) will continue to offer the Company opportunities to
finance skilled nursing facilities, assisted living facilities and
retirement facilities.
- Anticipated deconsolidation in the hospital industry will create
opportunities for the Company to finance the acquisition of hospitals.
- Continued consolidation in the physician practice management industry
will create more opportunities for the Company to finance medical office
buildings.
In addition, the Company believes that traditional lenders generally do not
target certain types of healthcare facilities, including mental health
facilities, out-patient surgery centers and other specialty healthcare
facilities which presents opportunities for the Company to provide financing
with respect to such facilities.
BUSINESS AND GROWTH STRATEGIES
Capitalize on Relationships with HCFP and its Affiliates. The Company will
continue to capitalize on its relationship with HCFP and its affiliates. In
their marketing efforts on behalf of the Company, HCFP and its affiliates
recommend the Company as a source for the long-term real estate financing needs
of HCFP's clients. In addition, in an effort to meet all or substantially all of
the financing needs of potential borrowers or
- ---------------
(1)Source: Healthcare Finance Administration ("HCFA")
32
<PAGE> 38
lessees, the Company and HCFP may jointly market their respect financing
products through: (i) the officers and senior managers of HCFP; (ii) HCFP's
internal staff of seven marketing professionals who coordinate advertising in
trade magazines and attendance at trade shows and conferences; and (iii) HCFP's
five telemarketers who solicit clients directly. In addition, HCFP obtains
referrals through its network of professionals such as lawyers, accountants and
venture capital firms, and, to a lesser extent, from paid brokers. Significant
referral sources of HCFP own Common Stock and therefore have an incentive to
provide referrals to the Company. Approximately $65.1 million, or 54.5%, of the
Company's actual and probable investments at July 31, 1998, resulted from leads
provided by HCFP. The Company also utilizes the expertise and resources of HCFP
and its affiliates, including HCAC which specializes in healthcare due diligence
and audit services for HCFP and other lenders, to assist it in evaluating the
credit quality of potential borrowers and lessees of the Company. From its
inception in 1993 through June 30, 1998, HCFP advanced over $3.0 billion to its
clients in over 800 transactions. At June 30, 1998, HCFP had approximately $352
million of financing outstanding (including $80 million of short-term real
estate financing) for approximately 195 clients and currently reviews
approximately 100 potential asset-based healthcare related financings each
month.
Market Directly and Originate Independently of HCFP. In addition to
utilizing HCFP's marketing and origination capabilities, the Company directly
markets its services through employees of the Manager. Although recently
organized, the Manager has employed real estate investment and investment
management professionals who have an aggregate of over 60 years of experience in
the origination and management of various types of real estate related
investments in the healthcare industry. Through its direct marketing activities,
the Company expects to develop new and expanded relationships with owners and
operators of healthcare facilities which will produce referrals and inquiries
relating to potential investments by the Company. Approximately $54.3 million,
or 45.5%, of the Company's actual and probable investments at July 31, 1998 were
originated by the Manager on behalf of the Company.
Capitalize on Relationship with GMACCM. In May 1998, the Company entered
into the GMACCM Agreement with GMACCM pursuant to which the Company has a right
of first refusal to purchase certain mortgage loans secured by healthcare
facilities which have a LTV ratio in excess of 80% and which GMACCM determines
to sell. The maximum principal amount of loans to which this right applies in
any annual period under the GMACCM Agreement is $100 million. The purchase price
for mortgage loans under the GMACCM Agreement is 100% of the principal amount of
the loan plus accrued and unpaid interest to the date of purchase. As
consideration for the GMACCM Agreement, the Company will grant to GMACCM options
to purchase up to 10,000 shares of Common Stock at the end of each annual period
under the GMACCM Agreement, with the exact number of options to be calculated
based upon the ratio that the aggregate principal amount of mortgage loans
purchased by the Company pursuant to the GMACCM Agreement bears to $100 million.
The Company believes that the stock option-based structure of the GMACCM
Agreement provides an appropriate incentive for GMACCM to make mortgage loans
available for purchase by the Company. As of July 31, 1998, the Company had
purchased $14.9 million in principal amount of mortgage loans from GMACCM. The
Company also entered into a Servicing Agreement with GMACCM with respect to all
of the mortgage payments pursuant to which GMACCM receives, holds and applies
certain deposits provided for under such mortgage loans. Although GMACCM has no
formal referral agreement with the Company, GMACCM is also a source of
investment leads for the Company. William E. Shine, the Executive Vice President
for the Healthcare Lending Group of GMACCM, is a member of the Board of
Directors of the Company. See "Management of the Company."
Invest in High Quality Assets. The Company will continue to leverage the
extensive underwriting experience of HCFP and the Manager as it seeks to invest
in healthcare facilities that are operated or managed by established operators
who present an appropriate credit risk. The Company thoroughly underwrites its
investments utilizing the expertise, processes and experience developed and
utilized by HCFP and its affiliates and selectively chooses its investments in
compliance with the Policies. See "Policies with Respect to Certain
Activities -- Investment Policies."
Provide Traditional and Innovative Financing. The Company intends to
continue its focus on the acquisition of equity interests in and mortgages
secured by skilled nursing facilities, assisted living facilities, medical
office buildings and hospitals, although the Company also pursues opportunities
in other types of
33
<PAGE> 39
healthcare facilities, such as mental health facilities, outpatient facilities
and other specialty healthcare facilities. The Company offers a broad range of
financing products designed to meet the needs of a variety of potential
borrowers and lessees of such facilities. The Company believes that it is more
flexible than most traditional real estate lenders in its effort to provide
solutions for the financing needs of its borrowers and lessees and is willing to
negotiate customized financing terms to fit the particular needs of such
borrowers and lessees. In addition, the Company has the ability to offer
Partnership Units to sellers of healthcare facilities who would otherwise
recognize taxable gain upon a sale of assets, which may facilitate purchase
leaseback transactions on a tax deferred basis. The Company believes that its
flexible and innovative approach produces a higher value-added component which
should result in more advantageous terms for the Company as well as for its
borrowers and lessees.
Leverage Assets. The Company will borrow against or leverage its assets to
the extent consistent with the Policies in order to increase the size of its
portfolio and increase potential returns to the Company's stockholders. The
Company may engage in a variety of interest rate risk management techniques for
the purpose of managing the effective maturities and interest rates of its
assets.
Manage and Maintain Credit Quality of Portfolio. The Company will manage
and maintain the credit quality of its portfolio by: (i) conducting semi-annual
on-site audits; (ii) monitoring compliance with financial covenants; (iii)
assessing regulatory changes and compliance with clinical standards; and (iv)
maintaining appropriate capital levels and allowances for credit losses; and (v)
maintaining regular contact with its borrowers and lessees regarding their
business activities. The Company believes that proactive portfolio management
will enable it to detect and manage potential credit deterioration within its
lending programs, to react promptly to circumstances that may impair the value
of equity investments and to assess and implement changes in its investment
programs to reflect economic and industry trends.
TYPES OF FACILITIES
The Company intends to continue investing in and financing facilities in
the healthcare industry, which may include the following:
Nursing Facilities. Nursing facilities provide a broad range of
healthcare services, which may include skilled or intermediate nursing
care, subacute care, rehabilitation therapy, occupational therapy, speech
therapy and other specialized services to the elderly and to other patients
with medically complex needs who can be cared for outside of the acute care
hospital environment and generally cannot be efficiently and effectively
cared for at home.
Assisted Living Facilities. Assisted living facilities provide a
combination of housing, supportive services and healthcare designed to
respond to individual needs for daily living.
Medical Office Buildings. Medical office building facilities contain
individual physician, physician group and other healthcare provider offices
for the administration and treatment of patients, usually in close
proximity to the general service acute care hospital with which the
physicians are affiliated, and may also include facilities for out-patient
services such as same day surgery, diagnostic radiology, rehabilitative
therapy, clinical laboratory, and pharmaceutical.
Acute Care Hospitals. Acute care hospitals provide services that may
include, among others, general surgery, internal medicine, obstetrics,
emergency room care, radiology, diagnostic services, coronary care,
pediatric services and psychiatric services. On an outpatient basis, the
services include, among others, same day surgery, diagnostic radiology
(e.g., magnetic resonance imaging, CT scanning, X-ray), rehabilitative
therapy, clinical laboratory, pharmaceutical and psychiatric services.
Mental Health Facilities. Mental health facilities offer
comprehensive multidisciplinary adult, adolescent and substance abuse and
psychiatric programs.
Rehabilitation Hospitals. Rehabilitation hospitals provide treatment
to restore physical, psycho-social, educational, vocational and economic
usefulness and independence to disabled persons.
34
<PAGE> 40
Retirement Living Facilities. Retirement living facilities offer
specially designed residential units for active and ambulatory elderly
residents and provide various ancillary services and may contain nursing
facilities to provide a continuum of care.
Continuing Care Retirement Communities ("CCRCs"). CCRCs generally
combine congregate care (independent living), assisted living and nursing
facilities in one campus to create a convenient "age in place" environment.
Out-Patient Facilities. Out-patient facilities are facilities which
offer healthcare services on an out-patient basis which may include same
day surgery, diagnostic radiology, rehabilitative therapy and clinical
laboratory and infusion services.
INVESTMENT PROGRAMS
The Company intends to continue to invest primarily in income producing
real estate and real estate related assets in the healthcare industry with a
view to realizing its principal business objectives of maximizing growth in cash
available for distribution and enhancing the value of its portfolio, consistent
with levels of risk that are perceived by the Company to be acceptable. Pending
investment of its funds in longer term investments, the Company invests those
funds in readily marketable securities or interest-bearing deposit accounts,
consistent in each case with maintaining the Company's status as a REIT. The
Company takes an opportunistic approach to its investments, and may acquire any
of the types of investments described below in any amounts if the Company and
the Manager determine that to do so would be in the Company's best interests.
Equity Investment Program
Real Estate Acquisitions. The Company may acquire and operate facilities
such as medical office buildings, and lease such facilities to various tenants.
The Company will seek to acquire such facilities in markets where there is a
demonstrated demand for healthcare services and a limited supply of available
medical office space. Such facilities will typically be located on or near
hospital campuses or other medical complexes. Consistent with requirements of
the Code applicable to REITs, the Company expects to own such facilities for at
least five years. The returns that the Company expects to earn on its equity
investments in such facilities will depend upon the predictability of the rent
streams for any such facility and other market forces. Initially the Company
will hire third parties to manage the day-to-day operations of such facilities
but over time will hire appropriate personnel to internally manage such
operations.
Purchase Leaseback Transactions. The Company may participate in purchase
leaseback transactions in which the Company will acquire a facility and then
lease such facility to the seller or to a different operator under a long-term,
triple net lease. Purchase leaseback transactions will typically be utilized to
finance the acquisition or the refinancing of existing facilities, and carry
base rents with escalators that provide the Company with unleveraged yields
greater than those earned on permanent mortgage loans.
Permanent Mortgage Loan Program
Permanent mortgage loans are issued to finance the acquisition or the
refinancing of existing facilities and are secured by a first mortgage on the
facility. Such loans typically have a ten-year term, bear interest at a fixed
rate, and require monthly installments of principal and interest. The interest
rate is based upon a number of factors including the LTV ratio and debt service
coverage ratio. Permanent mortgage loans are generally underwritten by the
Company with the expectation that such loans will be eligible for leveraging
under the Repurchase Facility and for future securitization by the Company.
Although the interest rate on permanent mortgage loans generally is lower than
that charged on other real estate secured debt, because of the credit
characteristics of such loans and because such loans may be eligible for
leveraging or securitization, the Company believes that it will earn an
appropriate risk-adjusted equity return on such loans.
35
<PAGE> 41
Other Real Estate Secured Debt Program
Construction and Expansion Loans. Construction and expansion loans may be
provided to finance construction of or an addition to (or renovation of) a
facility. Such loans are short term variable rate loans secured by a first
mortgage on the facility and, in some instances, by an assignment of licenses
and subordination of management contracts.
Mezzanine Loans. Mezzanine loans are subordinated in right of payment to
senior mortgage loans and are secured by a second lien mortgage. Mezzanine loans
typically mature in five years or less and generally entail greater risk than
permanent mortgage loans and are therefore priced to generate a higher yield to
the Company.
Bridge Financing. Bridge financing is temporary financing secured by a
first mortgage. Bridge financing loans typically mature in two years or less.
The Company often obtains a right of first refusal to provide a permanent
mortgage loan to refinance bridge financing provided by the Company.
Acquisition Financing Products. Acquisition financing products offered by
the Company may include loans to provide capital to operators of multiple
facilities to finance acquisitions of additional facilities by such operators
through lines of credit under which the Company will agree to fund such
transactions provided certain agreed upon criteria are met.
Other Investments. The Company may invest in various classes of interests
in mortgage-backed securities involving real estate in the healthcare industry.
Such investments may include senior or subordinated interests and may be
investment grade, sub-investment grade or unrated. Subordinated interests are
subordinated in right of payment of principal and interest to more senior
classes of interests and generally afford a higher yield and entail greater
risks than more senior investment grade securities.
36
<PAGE> 42
MANAGEMENT OF OPERATIONS
THE MANAGER
The Manager was incorporated in March 1998. The following tables set forth
certain information about the directors and executive officers of the Manager.
Each of the directors of the Manager is also a director of the Company. No
director or executive officer is related by blood, marriage or adoption to any
other director or executive officer of the Company or the Manager or any of
their respective affiliates, except Miriam M. Leder who is the sister of Ethan
D. Leder.
Directors and Executive Officers of The Manager
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John K. Delaney............................ 35 Chairman of the Board and Chief Executive
Officer and Director
Ethan D. Leder............................. 35 Vice Chairman of the Board and President
and Director
Edward P. Nordberg, Jr..................... 38 Executive Vice President, Chief Financial
Officer and Director
Steve M. McGee............................. 34 Executive Vice President
Mark H. Hamermesh.......................... 41 Senior Vice President of Development and
Acquisitions
Steven W. Bolen............................ 34 Vice President of Underwriting and
Portfolio Management
Thomas M. Gilmore.......................... 37 Vice President of Acquisitions
Miriam M. Leder............................ 37 Vice President, General Counsel and
Secretary
Daryl McCombs.............................. 30 Vice President
Daniel L. Willison......................... 36 Vice President of Underwriting and
Portfolio Management
</TABLE>
John K. Delaney serves as Chairman of the Board, Chief Executive Officer
and a Director of the Manager and HCFP. Mr. Delaney co-founded HCFP in 1993 and
served as Chairman of the Board, Chief Executive Officer and President from the
formation of HCFP until March 1997. From 1990 through 1992, Mr. Delaney co-owned
and operated American Home Therapies, Inc., a provider of home care and home
infusion therapy services, which was sold in 1992. Prior to 1990, Mr. Delaney
was a practicing attorney with Shaw, Pittman, Potts & Trowbridge in Washington,
D.C. Mr. Delaney received his A.B. degree from Columbia University in 1985 and
his J.D. degree from Georgetown University Law Center in 1988.
Ethan D. Leder serves as Vice-Chairman of the Board, President and a
Director of the Manager and HCFP. Mr. Leder co-founded HCFP in 1993 and served
as Vice-Chairman of the Board and Executive Vice President from the formation of
HCFP until March 1997. From 1993 through September 1996, Mr. Leder also served
as Treasurer of HCFP. From 1990 through 1992, Mr. Leder co-owned and operated
American Home Therapies, Inc., a provider of home care and home infusion therapy
services, which was sold in 1992. Prior to 1990, Mr. Leder was engaged in the
private practice of law in Baltimore, Maryland and Washington, D.C. Mr. Leder
received his B.A. degree from Johns Hopkins University in 1984 and his J.D.
degree from the Georgetown University Law Center in 1987.
Edward P. Nordberg, Jr. serves as Executive Vice President, Chief Financial
Officer and a Director of the Manager and HCFP. Mr. Nordberg co-founded HCFP in
1993 and served as a Senior Vice President and Secretary of HCFP from its
formation until March 1997. From 1993 through April 1996, Mr. Nordberg also
served as General Counsel of HCFP. Prior to 1993, Mr. Nordberg was a practicing
attorney with Williams & Connolly in Washington, D.C. Mr. Nordberg received his
B.A. degree from Washington College in 1982, his
37
<PAGE> 43
M.B.A. degree from Loyola College in 1985, and his J.D. degree from Georgetown
University Law Center in 1989.
Steve M. McGee serves as Executive Vice President of the Manager. Mr. McGee
was Vice President of Acquisitions and Development at Capstone Capital
Corporation, a Birmingham, Alabama based REIT, from June 1996 until early 1998,
when he joined the Manager. Mr. McGee was responsible for overseeing Capstone's
investment in the long-term care industry. From February 1989 until June 1996,
Mr. McGee was employed by the Specialized Healthcare Lending Group of SouthTrust
Bank of Alabama, most recently as Group Vice President and Manager. Mr. McGee
received his B.B.A. degree in Finance from Texas A&M University in 1986.
Mark H. Hamermesh serves as Senior Vice President of Development and
Acquisitions of the Manager. From July 1996 until joining the Manager in early
1998, Mr. Hamermesh was Senior Vice President of G&L Realty Corp., a California
based healthcare REIT, where he was responsible for loan origination and
analysis for that REIT's Senior Care Division. From July 1991 to July 1996, Mr.
Hamermesh served as Executive Vice President of American Capital Resource, Inc.
At American Capital, Mr. Hamermesh served as Director of Marketing during which
period that company opened six branch offices throughout the United Stated.
During his tenure at American Capital, Mr. Hamermesh also was a member of the
Board of Directors and its Investment and Executive Committees. Mr. Hamermesh
received his B.A. degree from the University of California at Los Angeles in
1978 and his M.B.A. degree from Harvard University Graduate School of Business
in 1982.
Thomas M. Gilmore serves as Vice President of the Manager. Mr. Gilmore was
Senior Vice President, Healthcare Financial Services of Signet Bank from January
1996 until joining the Manager in early 1998. From August 1988 to January 1996,
Mr. Gilmore held various officer positions at Signet Bank. In 1994, Mr. Gilmore
formed the Healthcare Financial Services Group at Signet Bank, which specialized
in financing long-term care facilities. From 1984 until joining Signet Bank, Mr.
Gilmore was a National Account Manager with Sovran Bank, N.A. Mr. Gilmore
received his B.A. degree in Economics from the College of William and Mary in
1983 and his M.B.A. degree from George Mason University in 1993.
Steven W. Bolen serves as Vice President of the Manager. Mr. Bolen joined
the Manager in early 1998. From January 1993 to December 1997, Mr. Bolen was a
Vice President and Regional Manager of the Real Estate Appraisal and Market
Analysis Division of Signet Bank where he specialized in commercial and
healthcare property analysis. From 1991 to 1992, Mr. Bolen was Vice President of
Riggs National Bank, Washington, D.C. From 1990 to 1991, Mr. Bolen was an
Associate Consultant in the Real Estate Management Consulting Division of
Kenneth Leventhal & Company. From 1986 to 1989, Mr. Bolen was a Financial
Wholesaler with VMS Realty Partners where he specialized in debt and equity
commercial real estate syndications. From 1985 to 1986, Mr. Bolen was a Mortgage
Loan Officer with Travelers Mortgage. Mr. Bolen received his B.S. degree in
Finance from The University of Maryland at College Park in 1984. Mr. Bolen is a
state certified real estate appraiser and a certified public accountant.
Miriam M. Leder serves as Vice President, General Counsel, and Secretary of
the Manager. Prior to joining the Manager, Ms. Leder was Associate Dean for
Administration of the Stanford University School of Medicine where she had been
employed since January 1995. From December 1990 until January 1995, Ms. Leder
was Assistant General Counsel with the National Science Foundation in Arlington,
Virginia. From February 1988 to December 1990, Ms. Leder was a practicing
attorney with Hale & Dorr in Washington, D.C. where she was a member of the Real
Estate Department. From September 1985 until January 1988, Ms. Leder was a
practicing attorney with Semmes, Bowen & Semmes in Baltimore, Maryland where she
was a member of the Real Estate and Municipal Finance Departments. Ms. Leder
received her B.A. degree from Johns Hopkins University in 1982 and her J.D.
degree from the University of Pennsylvania Law School in 1985. Ms. Leder is the
sister of Ethan D. Leder.
Daryl McCombs serves as Vice President of the Manager. From November 1996
until joining the Manager in early 1998, Mr. McCombs was employed as Assistant
Vice President of Acquisitions and Development at Capstone Capital Corporation,
a Birmingham, Alabama based REIT, where he assisted Mr. McGee in overseeing
Capstone's investment in long-term care industry. From July 1993 until joining
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<PAGE> 44
Capstone, Mr. McCombs was a member of the Specialized Health Care Lending Group
at SouthTrust Bank of Alabama. Mr. McCombs received his B.A. from the University
of Alabama in 1990 and his M.B.A. from such University in 1993.
Daniel L. Willison serves as Vice President of Underwriting and Portfolio
Management of the Manager. From May 1997 until joining the Manager in May 1998,
Mr. Willison was a Vice President, Real Estate Risk Assessment, for NationsBank
Corporation. In that capacity he was responsible for overseeing asset valuation
and investment analysis for the bank's lending activities relative to healthcare
facilities in the eastern United States as well as office and industrial
property markets in the northeastern states. From 1992 to 1997, Mr. Willison was
a Vice President and Regional Manager at Signet Bank with responsibilities in
health care and commercial real estate analysis. Mr. Willison received his B.A.
degree from George Mason University in 1985 and holds the MAI designation from
the Appraisal Institute.
THE MANAGEMENT AGREEMENT
The Management Agreement has an initial term expiring on May 6, 2001.
Thereafter, successive extensions, each for a period not to exceed one year, may
be made by agreement between the Company and the Manager, subject to the
affirmative vote of a majority of the Independent Directors. The Company may
terminate, or decline to renew the term of, the Management Agreement without
cause at any time after the first three years upon 90 days written notice by a
majority vote of the Independent Directors; provided that the Company will be
required upon such termination or nonrenewal, at the option of the Company,
either (i) to acquire the Manager from HCFP for a purchase price equal to the
Acquisition Price, as defined below, or (ii) to pay the Manager a termination or
nonrenewal fee equal to 80% of the Acquisition Price. The "Acquisition Price" is
an amount equal to 10 times the Manager's earnings before taxes for the latest
12 calendar months immediately preceding the date of termination or nonrenewal.
In addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination or nonrenewal fee and without acquiring the Manager upon,
among other things, a material breach by the Manager of any provision contained
in the Management Agreement that remains uncured at the end of the applicable
cure period (including the failure of the Manager to use reasonable efforts to
comply with the Policies).
Pursuant to the provisions of the Management Agreement, the Manager at all
times will be subject to the supervision of the Board of Directors and will have
only such functions and authority as the Company delegates to it. The Manager
advises the Board of Directors as to the activities and operations of the
Company. The Manager may enter into sub-contracts with other parties, including
HCFP and its affiliates, to provide certain services to the Company. The Manager
is responsible for the day-to-day operations of the Company pursuant to the
authority granted to it by the Board of Directors under the Management
Agreement, and the Manager will perform (or cause to be performed) such services
and activities relating to the assets and operations of the Company as may be
directed by the Board of Directors or as the Manager otherwise considers
appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to
sell assets, and the maintenance and administration of its portfolio of
assets and making available to the Company its knowledge and experience
with respect to the healthcare industry, mortgage loans, real estate and
real estate related assets;
(iii) advising and representing the Company in connection with
defaults by the Company's borrowers and lessees, including the exercise of
remedies and collection of amounts owed to the Company;
(iv) advising the Company regarding, and arranging for, borrowings and
the raising of equity capital, as appropriate;
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(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager and regarding market conditions in the area in
which the Company proposes to invest;
(vi) providing executive and administrative personnel, office space
and office services required in rendering services to the Company;
administering the day-to-day operations of the Company; establishing and
maintaining records of the Company's activities; and performing and
supervising the performance of such other administrative functions
necessary in the management of the Company, including the collection of
revenues and the payment of the Company's debts and obligations and the
maintenance of appropriate data processing and computer services to perform
such administrative functions;
(vii) providing marketing services and assistance to the Company;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(ix) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans held by the Company
and arranging for the monitoring and administering of such servicer;
(x) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(xi) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Policies; and
upon request by the Board of Directors and in accordance with the Policies,
investing or reinvesting any money of the Company;
(xii) counseling the Company regarding (A) the maintenance of its
exemption from the Investment Company Act and monitoring compliance with
the requirements for maintaining exemption from that Act; (B) the
maintenance of its status as a REIT and monitoring compliance with the
various REIT qualification tests and other rules set out in the Code and
the income tax regulations promulgated thereunder (the "Treasury
Regulations"); and (C) compliance with all applicable laws, including those
that would require the Company to qualify to do business in particular
jurisdictions;
(xiii) assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its business
activities, including preparing or causing to be prepared all financial
statements required under applicable regulations and contractual
undertakings and all reports and documents, if any, required under the
Exchange Act;
(xiv) taking all necessary actions to enable the Company to make
required tax filings and reports, including soliciting stockholders for
required information to the extent provided in the Code and the Treasury
Regulations;
(xv) handling and resolving all claims, disputes or controversies
(including all litigation, arbitration, settlement or other proceedings or
negotiations) in which the Company may be involved or to which the Company
may be subject arising out of the Company's day-to-day operations, subject
to such limitations or parameters as may be imposed from time to time by
the Board of Directors;
(xvi) using commercially reasonable efforts to cause expenses incurred
by or on behalf of the Company to be reasonable or customary and within any
budgeted parameters or the Policies set by the Board of Directors from time
to time;
(xvii) performing such other services as may be required from time to
time for management and other activities relating to the assets of the
Company as the Board of Directors shall reasonably request or the Manager
shall deem appropriate under the particular circumstances; and
(xviii) using commercially reasonable efforts to cause the Company to
comply with all applicable laws.
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<PAGE> 46
Management Fees. Under the Management Agreement, the Manager receives the
following compensation:
(i) The Base Management Fee payable and calculated quarterly in an
amount equal to the Percentage Amount (as hereinafter defined) of the
Average Invested Assets for such quarter. The term "Average Invested
Assets" for any quarter means the average of the aggregate book value of
the consolidated assets of the Company, before reserves for depreciation or
bad debts or other non-cash reserves, computed by dividing the sum of such
values for each of the three months during such quarter (based on the book
value of such assets on the last day of such month) by three. The
"Percentage Amount" is 1.50% for assets up to and including $300 million;
1.25% for assets in excess of $300 million up to and including $600
million; 1.00% for assets in excess of $600 million up to and including
$900 million; 0.75% for assets in excess of $900 million up to and
including $1.2 billion; and 0.50% for assets in excess of $1.2 billion. The
Base Management Fee is intended to compensate the Manager, among other
things, for its costs in providing management services to the Company.
(ii) Incentive Compensation for each quarter in an amount equal to the
product of (A) 25% of the dollar amount by which (1) (a) Funds From
Operations of the Company (before the Incentive Compensation) per share of
Common Stock (based on the weighted average number of shares outstanding)
for such quarter plus (b) gains (or minus losses) from debt restructuring
and sales of property per share of Common Stock (based on the weighted
average number of shares outstanding), exceeds (2) an amount equal to the
weighted average of the prices per share of Common Stock issued by the
Company (including shares of Common Stock issued upon exercise of options
or warrants and assuming a price of $20 per share for shares sold in the
Private Placement), multiplied by (b) the Ten Year Treasury Rate for such
quarter plus 3.50% multiplied by (B) the weighted average number of shares
of Common Stock outstanding during such quarter. "Funds From Operations" as
defined by NAREIT means net income (computed in accordance with generally
accepted accounting principles) ("GAAP") excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Funds From Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them are officers of the Company,
will initially receive no cash compensation directly from the Company. The Base
Management Fee and Incentive Compensation are payable in arrears. The Manager's
Base Management Fee and Incentive Compensation and reimbursable costs and
expenses will be calculated by the Manager within 45 days after the end of each
of quarter, and such calculation will be promptly delivered to the Company. The
Company is obligated to pay such fees, costs and expenses within 60 days after
the end of each fiscal quarter. See "Risk Factors -- Conflicts of Interests" and
"Conflicts of Interests."
Costs and Expenses. The Company does not currently employ full-time
personnel. Instead it relies on the facilities, personnel and resources of the
Manager to conduct its operations. The Manager will be reimbursed for (or charge
the Company directly for) the Manager's costs and expenses in employing third-
parties to perform due diligence tasks on assets purchased or considered for
purchase by the Company. Expense reimbursement will be made quarterly.
Limits of Responsibility. Pursuant to the Management Agreement, the
Manager does not assume any responsibility other than to render the services
called for thereunder and is not responsible for any action of the Board of
Directors in following or declining to follow its advice or recommendations. The
Manager and its directors and officers will not be liable to the Company, any
subsidiary of the Company, the Independent Directors, the Company's stockholders
or any subsidiary's equity holders for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Company has agreed to indemnify the
Manager, its stockholders, directors, officers and employees with
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respect to all expenses, losses, damages, liabilities, demands, charges and
claims arising from acts of the Manager, its stockholders, directors, officers
and employees made in good faith in performance of the Manager's duties under
the Management Agreement and not constituting bad faith, willful misconduct,
gross negligence or reckless disregard of duties.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria, except that the Manager may not manage or
advise another REIT or other entity that invests or intends to invest primarily
in permanent mortgage loans or purchase leaseback transactions with respect to
healthcare facilities, and may not, directly or through an affiliate, invest in
real property or originate or acquire loans secured by such real property
collateral with initial terms of more than three years.
MANAGEMENT OF THE COMPANY
The Company was incorporated in the State of Maryland on January 30, 1998
and will elect to be taxed as a REIT under the Code. The principal executive
offices of the Company are located at 2 Wisconsin Circle, Suite 402, Chevy
Chase, Maryland 20815. The Company's telephone number is (301) 347-3100.
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John K. Delaney(1)(2)...................... 35 Chairman of the Board and Chief Executive
Officer
Ethan D. Leder(1)(2)....................... 35 Vice Chairman of the Board and President
Edward P. Nordberg, Jr.(1)(2).............. 38 Executive Vice President, Chief Financial
Officer and Director
Steve M. McGee(2).......................... 34 Executive Vice President
Mark H. Hamermesh(2)....................... 41 Senior Vice President of Development and
Acquisitions
Steven W. Bolen............................ 34 Vice President of Underwriting and
Portfolio Management
Thomas M. Gilmore.......................... 37 Vice President of Acquisitions
Miriam M. Leder............................ 37 Vice President, General Counsel and
Secretary
Daryl McCombs.............................. 30 Vice President
Daniel L. Willison......................... 36 Vice President of Underwriting and
Portfolio Management
Donald S. Franyo(3)(4)..................... 56 Director
Joshua B. Gillon(3)(4)..................... 35 Director
Andrew Shoenfeld(3)(5)..................... 36 Director
William E. Shine(3)(5)..................... 46 Director
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Credit Committee
(3) Independent Director
(4) Member of Compensation Committee
(5) Member of Audit Committee
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For biographical information on Messrs. Delaney, Leder, Nordberg, McGee,
Hamermesh, Bolen, Gilmore and McCombs and Ms. Leder, who also are directors
and/or officers of the Manager, see "Management of Operations -- The Manager."
Donald S. Franyo has served as a Director of the Company since May 1998.
Mr. Franyo is a private investor involved in the ownership and development of
real estate properties in the Washington D.C. metropolitan area. From 1980 to
1996, Mr. Franyo was associated with Potomac Investment Associates and its
successor company, Natelli Communities, as a general partner and its vice
president of development, respectively, focused primarily on commercial real
estate development projects in the Washington D.C. metropolitan area. From 1964
to 1978, Mr. Franyo was employed by Southern Railway Systems, most recently as
Director of Commercial Real Estate. Mr. Franyo resigned this position in order
to associate with two private developers involved in the area of commercial real
estate. Mr. Franyo received his B.S. degree in business from the University of
Maryland in 1964.
Joshua B. Gillon has served as a Director of the Company since May 1998.
Mr. Gillon has been a corporate partner in the law firm of Schneck, Weltman &
Hashmall LLP, in New York, New York since 1996. Mr. Gillon was an associate at
Kronish Lieb Weiner & Hellman LLP in New York, New York from 1990 until 1996,
and an associate at Seward & Kissel LLP in New York, New York from 1988 until
1990. Mr. Gillon's legal practice has focused on corporate transactions,
including public and private securities as well as real estate securitizations.
Mr. Gillon received his B.A. degree from the University of Florida in 1984 and
his J.D. degree from the Georgetown University Law Center in 1988.
Andrew Schoenfeld has served as a Director of the Company since May 1998.
Mr. Schoenfeld has been a Director of Societe Generale Securities Corporation
since April 1997, where his responsibilities include assisting in the start-up
of a mortgage and asset backed securities sales, trading and origination
business for the corporation. From September 1996 until April 1997, Mr.
Schoenfeld was a Vice President with Union Bank of Switzerland. From October
1988 until September 1996, Mr. Schoenfeld was a Director of Nomura Securities
and from July 1986 until October 1988, Mr. Schoenfeld was a mortgage backed
securities broker with RMJ Securities. Mr. Schoenfeld received his B.A. degree
in Economics from Johns Hopkins University in 1984.
William E. Shine has served as a Director of the Company since May 1998.
Mr. Shine is Executive Vice President for the Health Care Lending Group with
GMACCM. Prior to joining GMACCM in March 1996, Mr. Shine held various management
positions with South Trust Bank from 1985 and March 1996. Mr. Shine received his
B.A. degree from Vanderbilt University in 1973.
The Company currently does not employ full-time personnel. Instead it
relies on the personnel of the Manager to conduct its operations.
Pursuant to the Charter, the Board of Directors has been divided into three
classes. Class I consists of Messrs. Nordberg, Gillon and Schoenfeld, whose
terms will expire at the annual meeting of stockholders in the 1999; Class II
consists of Messrs. Leder and Franyo, whose terms will expire at the annual
meeting of stockholders in 2000; and Class III consists of Messrs. Delaney and
Shine, whose terms will expire at the annual meeting of stockholders in 2001.
All officers serve at the discretion of the Board of Directors. In the
future the Company may have salaried employees, although it currently does not
have any such employees. The executive officers of the Company have no
employment agreements with the Company and do not receive any salaries or other
cash compensation directly from the Company. Each of the executive officers,
however, receives a salary and other compensation from the Manager or one of its
affiliates. The Company pays an annual director's fee to each Independent
Director equal to $12,500, paid quarterly. All directors are reimbursed for
their costs and expenses in attending all meetings of the Board of Directors and
for their expenses in connection with each property visit and any other service
or activity they perform or engage in as a director. Independent Directors also
participate in the Company's Director Plan, which provides for the issuance of
stock options to non-employee directors. See "Management of
Operations -- Director Plan."
Directors and executive officers of the Company are required to devote only
so much of their time to the Company's affairs as is necessary or required for
the effective conduct and operation of the Company's
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business. Because the Management Agreement provides that the Manager will
assume, subject to the supervision of the Board of Directors, principal
responsibility for managing the day-to-day affairs of the Company, the officers
of the Company, in their capacities as such, are not expected to devote
substantial portions of their time to the affairs of the Company. However, in
their capacities as officers or employees of the Manager, or its affiliates,
they devote such portion of their time to the affairs of the Manager as is
required for the performance of the duties of the Manager under the Management
Agreement.
The Bylaws of the Company provide that a majority of members of the Board
of Directors will at all times be Independent Directors.
The Board of Directors has established an Executive Committee, a
Compensation Committee and an Audit Committee. The Executive Committee,
comprised of Messrs. Delaney, Leder and Nordberg, may exercise all of the powers
and authority of the Board of Directors during the periods between regularly
scheduled Board meetings, except that the Executive Committee may not approve a
merger or consolidation involving the Company, approve a sale of all or
substantially all of its assets, amend the Company's Charter or Bylaws,
authorize the issuance of capital stock of the Company or take action requiring
approval of the Independent Directors. The Compensation Committee, comprised of
Messrs. Franyo and Gillon, has the authority to determine compensation for the
Company's executive officers and to administer the Incentive Plan. Messrs.
Franyo and Gillon are "disinterested persons" within the meaning of Rule 16b-3,
as amended from time to time, under the Exchange Act and "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Audit Committee, comprised of Messrs. Schoenfield and
Shine, has the authority to make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the plan and results of the audit engagement, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
Although not a committee of the Board of Directors, the Company's Credit
Committee reviews each proposed investment by the Company and must approve each
proposed investment before it may be made. The Credit Committee receives a
detailed memorandum prepared by the Manager summarizing each proposed
investment, which generally includes information about the proposed transaction,
the nature of the transaction, the financing terms, the historical and projected
financial performance of the property and/or operator, the identity and
background of the other parties thereto, information regarding competitive
conditions affecting the facility, reports by HCAC and third parties regarding
the results of their underwriting and due diligence investigations and other
relevant information. Certain transactions approved by the Credit Committee are
subject to confirmatory appraisals, environmental assessments, building
condition surveys and market studies.
The Charter limits the liability of its directors and officers to the
Company and its stockholders to the fullest extent permitted from time to time
by Maryland law. Maryland law presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit in money, property or services for the
amount of the benefit or profit in money, property or services actually
received, or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Charter and Bylaws require the Company to indemnify and hold harmless
and, without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland law.
The Maryland General Corporation Law ("MGCL") permits a corporation to indemnify
its directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that (i) the act
or omission of the indemnified party was material to the matter giving
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<PAGE> 50
rise to the proceeding and (x) was committed in bad faith or (y) was the result
of active and deliberate dishonesty, (ii) the indemnified party actually
received an improper personal benefit in money, property or services or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding.
Indemnification is limited to court ordered reimbursement for expenses; however,
if the proceeding is one by or in the right of the corporation, and the director
or officer was adjudged to be liable to the corporation or if the proceeding is
one charging improper personal benefit to the director or officer and the
director or officer was adjudged to be liable on the basis that personal benefit
was improperly received. The termination of any proceeding by conviction, or
upon a plea of nolo contenders or its equivalent, or an entry of any order of
probation prior to judgment, creates a rebuttal presumption that the director or
officer did not meet the requisite standard of conduct required for
indemnification to be permitted. Maryland law requires a corporation (unless its
charter provides otherwise, which the Company's Charter does not) to indemnify a
director or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
1998 STOCK OPTION PLAN
The Company has adopted the HealthCare Financial Partners REIT, Inc. 1998
Stock Option Plan (the "Option Plan") under which the Compensation Committee of
the Board or, if none, the Board (the "Committee") is authorized to grant
options to purchase shares of Common Stock ("Options"). The maximum number of
shares of Common Stock that may be subject to options granted under the Option
Plan is 900,000 shares. The maximum aggregate number of shares of Common Stock
with respect to which Options may be granted during any fiscal year of the
Company to any Company employee may not exceed 100,000.
Eligibility and Awards. All directors and employees (including officers),
of the Company, as well as the Manager, HCFP and HCAC, and directors and
employees (including officers) of the Manager, HCFP or HCAC (collectively, the
"Eligible Recipients"), are eligible to receive Options at the discretion of the
Committee. The Committee is authorized to determine which Eligible Recipients
shall receive Options and the terms and conditions on which Options shall be
granted. Options granted pursuant to the Option Plan may be either nonqualified
stock options or, if otherwise eligible for treatment as such, incentive stock
options. Options granted pursuant to the Option Plan generally are not
transferable except that, to the extent permitted by the Committee, a grantee
may transfer Options to members of his immediate family (including spouse,
parents, children and siblings). Grants of Options under the Option Plan to
persons or entities other than employees (including officers) of the Company may
result in a charge against the Company's earnings for financial reporting
purposes under GAAP. Any such charge to earnings will be recognized over the
period during which such Options become exercisable.
Exercise Price and Exercisability. The exercise price of all Options will
be not less than 100% of the fair market value of the Common Stock subject to
the Options on the date of grant. All Options will become exercisable not
earlier than one year following the date of award or as otherwise determined by
the Committee at the time of the award. Options granted on the Pricing Date
generally will be exercisable in equal installments on each of the first four
anniversaries of the date on which they are granted. The exercise price of an
Option may be paid by any one or more of the following: (i) cash or its
equivalent, (ii) shares of previously owned Common Stock, (iii) cancellation of
any indebtedness owed by the Company, (iv) a full-recourse promissory note, if
approved by the Committee, or (v) a "cashless" exercise pursuant to a sale
through a broker of all or a portion of the shares covered by the option.
Grants. At the closing of the Private Placement, the Committee granted
Options for 460,000 shares to certain officers of the Company and the Manager at
a per share exercise price of $20.00. Of such amount, options with respect to
100,000, 100,000, 100,000, 50,000, and 50,000 shares of Common Stock were
granted to Messrs. Delaney, Leder, Nordberg, McGee and Hamermesh, respectively.
All Options granted on such
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<PAGE> 51
date will become exercisable to the extent of 25% of such Options on each of the
first four anniversaries of the date of grant and will terminate on April 1,
2008.
Termination of Employment. Except in the case of incentive options, any
option awarded under the Option Plan to an Eligible Recipient who suffers a
Termination of Service (as defined in the Option Plan) may be canceled,
accelerated, paid or continued, as provided in the particular option agreement,
or in the absence of such a provision, as the Committee may determine. In the
case of incentive stock options, the option or portion thereof that is
unexercised at the time of the Termination of Service will expire, terminate an
become unexercisable no later than the expiration of three months after the date
of termination; provided, however, that in the case of a holder whose
Termination of Service is due to death or disability, the option or portion
thereof that is unexercised will expire, terminate and become unexercisable no
later than the expiration of one year after the date of Termination of Service.
Amendment and Termination. The Board generally may amend the Option Plan
at any time, except that approval by the Company's stockholders will be required
for any amendment that increases the aggregate number of shares of Common Stock
that may be issued pursuant to the Option Plan, that materially changes the
class of persons eligible to receive such Options, that extends the maximum
Option term, that decreases the exercise price of any Option to less than the
fair market value of the Common Stock on the date of grant or that materially
increases benefits accruing to the participants under the Option Plan. Shares of
Common Stock subject to Options that expire, are terminated or otherwise are
surrendered to the Company will be available for issuance in connection with
future awards under the Option Plan. The Option Plan will expire on April 1,
2008, the tenth anniversary of the date on which it was adopted by the Board.
DIRECTOR PLAN
The Company maintains the Healthcare Financial Partners REIT, Inc. 1998
Director Incentive Plan (the "Director Plan"). The Board of Directors has
reserved 100,000 shares of Common Stock for issuance pursuant to awards that may
be made under the Director Plan, subject to adjustment as provided therein.
Awards under the Director Plan are determined by the express terms of the
Director Plan. Rules, regulations and interpretations necessary for the ongoing
administration of the Director Plan will be made by the full membership of the
Board of Directors.
Only non-employee directors of the Company are eligible to participate in
the Director Plan. The Director Plan contemplates three types of non-statutory
option awards: (a) initial appointment awards that will be granted upon a
non-employee director's initial appointment to the Board of Directors providing
an option to purchase 10,000 shares of Common Stock at a per share exercise
price equal to the then fair market value of a share of Common Stock (options to
purchase an aggregate of 40,000 shares were granted to the Independent Directors
at the closing of the Private Placement at a per share exercise price of
$20.00); (b) annual service awards that will be granted to each non-employee
director who continues to serve as a non-employee director as of each annual
meeting of the stockholders of the Company following his or her initial
appointment providing an option to purchase 5,000 shares of Common Stock at a
per share exercise price equal to the then fair market value of a share of
Common Stock; and (c) discount awards under which each non-employee director
also has the opportunity to elect annually, subject to rules established by the
Board of Directors, to forego receipt of the cash retainer paid to non-employee
members of the Board of Directors that would otherwise be paid during each
fiscal year of the Company, and in lieu thereof that the director be granted an
option to acquire shares of Common Stock with an exercise price per share equal
to 50% of the then fair market value of a share of Common Stock. The number of
shares of Common Stock subject to any option of this type granted for fiscal
year is determined by taking the amount of cash foregone by the director for the
fiscal year in question and dividing that amount by the per share option
exercise price.
Each option granted pursuant to the Director Plan is immediately vested;
becomes exercisable 12 months following the date of grant; and expires upon the
earlier to occur to the tenth anniversary of the grant date or 18 months
following the director's termination of service upon the Board of Directors for
any reason. The options generally are not transferable or assignable during a
holder's lifetime.
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The number of shares of Common Stock reserved for issuance upon exercise of
options granted under the Director Plan, the number of shares of Common Stock
subject to outstanding options and the exercise price of each option are subject
to adjustment in the event of any recapitalization of the Company or similar
event, effected without the receipt of consideration. The number of shares of
stock subject to the options granted in connection with the initial appointments
or as annual service awards are also subject to adjustment in such events. In
the event of certain corporate reorganizations and similar events, the options
may be adjusted or cashed-out, depending upon the nature of the event.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and HCFP and its affiliates, on the other,
have entered into a number of relationships other than those governed by the
Management Agreement, some of which may give rise to conflicts of interest.
Moreover, three of the members of the Board of Directors and all of its officers
are also employed by the Manager or one or more of its affiliates.
The relationships between the Company, on the one hand, and HCFP and its
affiliates, on the other, are governed by the Policies, which are described in
"Policies with Respect to Certain Activities." The Policies establish general
parameters for the Company's investments, borrowings and operations. The
Policies are to assist and instruct the Manager generally, and to establish
restrictions applicable to transactions with HCFP and its affiliates. The
Manager may enter into transactions on behalf of the Company with HCFP and its
affiliates based upon the Policies approved by the Independent Directors. Such
transactions will be reviewed on a quarterly basis to insure compliance with the
Policies.
Although the Independent Directors will review the Policies periodically
and will monitor compliance with the Policies, investors should be aware that,
in conducting this review, the Independent Directors will rely primarily on
information and analysis provided by the Manager to evaluate the Policies,
compliance therewith and other matters relating to the Company's investments.
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Policies,
then the Independent Directors will consider what corrective action, if any, can
be taken. If the transaction is one with HCFP or an affiliate, and if the
Independent Directors so direct, the Manager shall use its best reasonable
efforts to cause HCFP or the relevant affiliate to reverse or rescind the
transaction. Moreover, if transactions are consummated that materially deviate
from the Policies, then the Independent Directors will have the option, under
the terms of the Management Agreement, to terminate the Manager.
HCFP purchased 100,000 Units directly from the Company in the Private
Placement at the price to investors in the Private Placement. All of the
proceeds from such purchase, without reduction for any discounts or commissions,
were paid to the Company. This purchase increased HCFP's ownership, upon
completion of the Private Placement, to 9.2% of the total shares of Common Stock
outstanding. HCFP has agreed to retain its shares of Common Stock and its
Warrant Shares until at least May 6, 2001, but may dispose of such shares any
time thereafter. Notwithstanding the foregoing, if the Company terminates the
Management Agreement, HCFP may dispose of such shares at any time thereafter.
The market in which the Company expects to make investments is
characterized by rapid evolution of products and services and, thus, there may
in the future be relationships between the Company, the Manager, and affiliates
of the Manager in addition to those described herein.
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PORTFOLIO
EQUITY INVESTMENT PROGRAM
Purchase Leaseback Transactions
Actual Investments
Colonial Manor Properties. In July 1998, the Company acquired through the
Operating Partnership and a newly-formed, wholly-owned limited liability company
all of the partnership interests of three limited partnerships, each of which
owns an assisted living facility, for an aggregate purchase price of $3.8
million. The three assisted living facilities are known as Colonial Manor Home
of Crofton, Colonial Manor Home of Bel-Air and Colonial Manor Home of Severna
Park.
Colonial Manor Home of Crofton. Colonial Manor Home of Crofton is a
15-unit assisted living facility located in Crofton, Maryland. The facility
was constructed in 1995 and is comprised of a one-story building
(approximately 7,100 gross square feet), resident courtyards and a parking
lot. The facility is situated on 0.963 of an acre of land. The average unit
size is 189 square feet.
At July 31, 1998, Colonial Manor Home of Crofton was 100% occupied.
The average occupancy rate for 1997 was 86.7%.
The federal tax basis of Colonial Manor Home of Crofton is $1.3
million. Depreciation will be computed on a straight-line basis over a
period of 39 years. The real property tax rate applicable to Colonial Manor
Home of Crofton is $2.59 per $100 of assessed value. The estimated annual
real estate taxes are $6,800. Management of the Company believes that the
facility is adequately covered by insurance. There are currently no plans
for renovation of Colonial Manor Home of Crofton.
Colonial Manor Home of Bel-Air. Colonial Manor Home of Bel-Air is a
15-unit assisted living facility located in Bel-Air, Maryland. The facility
was constructed in 1996 and consists of a renovated house that was expanded
with two, one-story wings (approximately 8,600 gross square feet). The
first story of the original facility contains the resident communal areas
and the resident units are located in the newly-constructed wings. The
facility includes a parking lot and is situated on 1.079 acres of land. The
average unit size is 212 square feet.
At July 31, 1998, Colonial Manor Home of Bel-Air was fully occupied.
The average occupancy rate for 1997 was 91.4%.
The federal tax basis of Colonial Manor Home of Bel-Air is $1.4
million. Depreciation will be computed on a straight-line basis over a
period of 39 years. The real estate tax rate applicable to Colonial Manor
Home of Bel-Air is $2.55 per $100 of assessed value. The estimated annual
real estate taxes are $5,700. Management of the Company believes the
facility is adequately covered by insurance. There are currently no plans
for renovation of Colonial Manor Home of Bel-Air.
Colonial Manor Home of Severna Park. Colonial Manor Home of Severna
Park is a 16-unit assisted living facility located in Severna Park,
Maryland. The building was constructed in 1997. The facility is comprised
of a one-story building (approximately 7,100 gross square feet), resident
courtyards and a parking lot. The facility is situated on 1.44 acres of
land. The average unit size is 190 square feet.
Colonial Manor Home of Severna Park opened in March 1997. At July 31,
1998, the facility was 81.3% occupied. The average occupancy rate for the
nine months of operation in 1997 was 79.5%.
The federal tax basis of Colonial Manor Home of Severna Park is $1.1
million. Depreciation will be computed on a straight-line basis over a
period of 39 years. The real property tax rate applicable to Colonial Manor
Home of Severna Park is $2.59 per $100 of assessed value. The estimated
annual real estate taxes are $7,000. Management of the Company believes
that the facility is adequately covered by insurance. There are currently
no plans for renovation of Colonial Manor of Severna Park.
Through the acquired limited partnerships, the Company holds fee simple
title to the respective properties and has leased the three facilities to
Colonial Manor Homes, LLC ("Colonial Manor") pursuant to
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three triple net leases which require Colonial Manor to pay all costs and
expenses including repairs, maintenance, real property taxes, assessments and
utilities. The respective leases have ten-year terms with options for two
five-year renewals. Colonial Manor has an option to purchase all three
facilities upon expiration of the respective leases for a purchase price equal
to the greater of the fair market value of the facilities or the purchase price
paid by the Company for the facilities. The initial annual rental for each
facility is $133,000, resulting in an initial aggregate annual rental for the
three facilities of $399,000. The rental payments will increase annually by the
greater of either 4% or the increase in the CPI. The obligations of Colonial
Manor under the three leases have been guaranteed by George R. Wentz, Jr.,
President and primary owner of Colonial Manor.
Probable Investments
Meadowood Nursing Home. In July 1998, the Company issued a commitment to
purchase Meadowood Nursing Home, which is a two-story, 120-bed skilled nursing
facility located in South Hadley, Massachusetts. The facility was constructed in
1987 and is comprised of approximately 40,000 square feet of building area on a
four-acre site. The proposed purchase price for the facility is approximately
$6.8 million. If funded, the facility will be acquired by the Company in a
newly-formed, wholly-owned limited liability company and will be leased to
NewCare Nursing of Massachusetts, Inc., a wholly-owned subsidiary of NewCare
Health Corporation, a publicly-traded nursing home company. Annual rent under
the proposed lease is an amount equal to the purchase price multiplied by a rate
equal to the Ten Year Treasury Rate plus 4% with such rate increasing by 12.5
basis points annually. Rent for the first year is estimated to be $645,000. The
proposed lease is a triple net lease with a term of ten years with two,
five-year renewal options.
There are currently no plans for renovation of Meadowood Nursing Home and
it is expected that the facility will continue to be operated as presently
operated. At July 31, 1998, the property was 95% occupied. The average occupancy
rates for 1997, 1996 and 1995 were 96%, 93% and 97%, respectively. The federal
tax basis of Meadowood Nursing Home will be approximately $6.8 million.
Depreciation will be computed on a straight line basis over a period of 39
years. The real property tax rate applicable to Meadowood Nursing Home is $17.21
per $1,000 of the assessed value. The estimated annual real estate taxes are
$52,000.
Winslow Convalescent Center. In July 1998, the Company issued a commitment
to enter into a purchase leaseback transaction with respect to a proposed
120-bed skilled nursing facility to be constructed in Winslow, Arizona. The
proposed purchase price is approximately $4.0 million. Upon completion, the
facility would be purchased from the developer and simultaneously leased to
Winslow Convalescent Center, Inc. The proposed facility is a one-story structure
to be developed on 4.686 acres. The construction period is anticipated to be 18
months. This property represents a replacement of an existing, smaller facility
which is nearing obsolesence (and will be converted for alternative use). The
Company expects that the approximately 40 residents in the existing facility
will be transferred to the proposed new facility. The proposed lease is a triple
net lease with a term of ten years. The initial annual rent is estimated to be
$444,000, increasing to $486,000 for the second through the fifth years and to
$539,000 for the sixth through the tenth years. The lessee would have two
five-year renewal options and a purchase option after the fifth year at a price
of $4.4 million.
Gulf Health Care Properties. In July 1998, the Company issued a commitment
to enter into a purchase-leaseback transaction (the "Gulf Health Care
Transaction") with respect to three skilled nursing facilities in Texas, which
are owned by M.N. Osborne Associates, Inc. ("Osborne"). The three facilities are
known as Gulf Health Care Center of Texas City, Gulf Health Care Center of
Galveston, and Gulf Health Care Center of Port Arthur. Each was constructed in
1994, has 150 beds and is located on approximately 4.5 acres. At April 30, 1998,
the Texas City facility was 82% occupied, the Galveston Facility was 91%
occupied and the Port Arthur facility was 83% occupied. At December 31, 1997,
occupancy rates for the Texas City facility, the Galveston facility and the Port
Arthur facility were 80.7%, 70.0% and 84.6%, respectively, and at December 31,
1996 were 80.5%, 86.9% and 88.0%, respectively. The real estate taxes applicable
to the Texas City facility, the Galveston facility and the Port Arthur facility
are $2.48, $2.71 and $2.96 per $100 of assessed value, respectively. The
estimated annual real estate taxes for the Texas City facility, the Galveston
facility and the Port Arthur facility are $60,000, $67,000 an $64,000,
respectively.
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The proposed aggregate purchase price for the Gulf Health Care Properties
is $22.3 million, representing an allocated purchase price of $7.4 million for
each facility. If the Gulf Health Care Transaction is consummated, each facility
will be acquired by the Company in a separate, newly-formed, wholly-owned
limited liability company, and will be leased to HealthMark Partners, L.L.C.
("HealthMark") for a term of 20 years. Upon consummation of the purchases, the
Company will receive a 9.9% equity interest in HealthMark. Under the proposed
leases, monthly rent for each facility for the first ten years is $60,000 and
for the remaining years is the greater of (i) one twelfth of 9.5% of the fair
market value of such facility or (ii) $72,000, but in no event will such rent
for any of the three facilities be more than $82,000 per month. The proposed
leases are triple net leases. As lessee, HealthMark would have an option in
years ten and 20 to purchase the three facilities together from the Company at a
purchase price equal to the greater of the fair market value of the facilities
at that time or the purchase price paid by the Company for the facilities.
According to the Guide to the Nursing Home Industry published in 1997 by
HCIA, Inc, a healthcare information services company, Texas' senior population
(75+) grew by 5.7% during 1997. Texas uses a prospective reimbursement system
with flat rates based upon the acuity levels of the resident patients. As of
December, 1997, the average per diem Medicaid rate for all acuity levels was
$71.90, a 7.8% increase from the 1996 level.
Gulf Health Care Center of Texas City and Gulf Health Care Center of
Galveston are located in Galveston County, Texas. Based upon information
provided in MAI appraisals, management of the Company believes the average
occupancy rate for skilled nursing facilities in Galveston County as of November
1997 (most recent data available) was 75.5%.
Gulf Health Care Center of Port Arthur is located in Jefferson County,
Texas. Based upon information provided in MAI appraisals, management of the
Company believes the average occupancy rate for skilled nursing facilities in
Jefferson County as of May 1998 was 73.1%.
The federal tax basis for each of the three facilities will be $7.4
million. Depreciation will be computed on a straight line basis over a period of
39 years.
In connection with the proposed Gulf Health Care Transaction the Company
will also lease from Osborne two additional skilled nursing facilities known as
the Arkansas Convalescent Center in Pine Bluff, Arkansas and the Arkansas
Nursing & Rehabilitation Center in Texarkana, Arkansas.
Arkansas Convalescent Center was built in 1988 and currently has 93 beds.
An additional ten beds are being added in a soon-to-be completed addition. At
April 30, 1998 the facility was 95% occupied. If this transaction is
consummated, the Company will lease the facility from Osborne under a proposed
20-year lease that provides for monthly rental of $36,000 and will sublease the
facility to HealthMark under a proposed 20-year sublease that provides for
monthly rental during the first ten years of $41,200 and for the remaining years
the monthly rental under the proposed sublease is an amount equal to the greater
of (i) one twelfth of 9.5% of the fair market value of the facility or (ii)
$49,900, but in no event more than $56,400 per month. The lease and sublease are
triple net leases.
Arkansas Nursing & Rehabilitation Center was built in 1988, and was
expanded in 1989 and 1994 to 173 beds. At April 30, 1998 the facility was 79%
occupied. If this transaction is consummated, the Company will lease the
facility from Osborne under a proposed 20-year lease that provides for monthly
rental of $60,100, and will sublease the facility to HealthMark under a proposed
20-year sublease that provides for monthly rental during the first ten years of
$69,200 and for the remaining years the monthly rental under the proposed
sublease is an amount equal to the greater of (i) one twelfth of 9.5% of the
fair market value of the facility or (ii) $83,800, but in no event more than
$94,700 per month. The lease and sublease are triple net leases.
In connection with the proposed Gulf Health Care Transaction, Osborne will
grant the Company the option to purchase the two Arkansas facilities. Osborne
will have the absolute right to cancel this purchase option at any time prior to
March 31, 1999. If the option is not cancelled on or before March 31, 1999, it
may be exercised by the Company between that date and September 30, 1999.
Because the option is cancellable by Osborne until March 31, 1999, the Company
does not consider the acquisition of the Arkansas facilities to be probable. In
the event the purchase option is terminated by Osborne, the Company will have
the right, but not
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the obligation, to terminate its leases with Osborne at no cost. The total
purchase price under the option is $13.7 million, which is allocated $5.1
million to the Arkansas Convalescent Center and $8.6 million to the Arkansas
Nursing & Rehabilitation Center. If the purchase option is not cancelled and is
exercised by the Company, HealthMark will obtain a purchase option to acquire
the two Arkansas facilities together from the Company at the end of lease years
ten and 20 for a purchase price equal to the greater of the fair market value of
the two facilities at that time or the purchase price paid by the Company for
the facilities.
Real Estate Acquisitions
Actual Investments
Sherman Oaks Medical Center. In June 1998, through the Operating
Partnership the Company acquired Sherman Oaks Medical Center in a newly-formed,
wholly-owned limited liability company for a purchase price of approximately
$10.5 million. The building is located in Sherman Oaks, California. The property
includes a two-story medical office building containing a net rentable area of
approximately 69,700 square feet. The building is situated on 2.92 acres of land
and has parking facilities that accommodate nearly 400 vehicles. The property
was constructed in 1953 and has undergone several renovations, the most recent
of which occurred in 1996-97. At July 31, 1998, the building had a total of 34
tenants, with the following tenants occupying 10% or more of the rentable square
footage:
Mark Greenspan, M.D., leases 9,608 square feet of the building for his
medical practice. Dr. Greenspan has occupied his space since September 1995. His
lease term expires in August 2000. The lease to Dr. Greenspan is a full service
lease with a 1995 operating expense year base stop. The annual rent is $17.16
per square foot and is fixed at that rate for the term of the lease. Dr.
Greenspan has an option to extend the lease for one, five-year term.
The University of California at Los Angeles ("UCLA") leases 12,561 square
feet of the building. UCLA has occupied its space since December 1996. The UCLA
lease expires in November 2006. The lease to UCLA is a full service lease with a
1996 operating expense year base stop. The annual rent is $24.12 per square foot
and is fixed at that rate for the term of the lease. UCLA has an option to
extend the lease term for two, five-year periods.
There are currently no plans for renovation of the Sherman Oaks Medical
Center. At July 31, 1998, Sherman Oaks Medical Center was 98% occupied. The
average occupancy rate for 1997 was 95%. The annual rental per square foot at
July 31, 1998 was $22.92 and for 1997 was an average of $19.12.
The federal tax basis for Sherman Oaks Medical Center is approximately
$10.5 million. Depreciation will be computed on a straight-line basis over a
period of 39 years. The real property tax rate applicable to Sherman Oaks
Medical Center is 1.06% of assessed value. The real estate taxes are estimated
to be $111,000. Management of the Company believes that the facility is
adequately covered by insurance.
Probable Investments
Valencia Medical Center and Vista Village Shopping Center. In 1998 the
Company issued a commitment to acquire Valencia Medical Center and Vista Village
Shopping Center, a multi-tenant medical office building and an adjacent retail
center. The total proposed purchase price is estimated to be $8.2 million,
allocated $4.3 million to Valencia Medical Center and $3.9 million to Vista
Village Shopping Center.
Valencia Medical Center. Valencia Medical Center is a medical office
building located in Valencia, California on approximately 1.46 acres and has a
total net rentable area of 27,887 square feet. At July 31, 1998, the property
was 85.3% occupied. The building was constructed in 1983. At July 31, 1998, the
building had a total of 17 tenants. None of the existing tenants occupy 10% or
more of the rentable square footage. There are no current plans for renovation
of this facility.
Vista Village Shopping Center. Vista Village Shopping Center is a retail
property adjacent to the Valencia Medical Center site. The property, consisting
of three buildings, is located in Valencia, California on 2.85 acres and has a
total net rentable area of 37,482 square feet. At July 31, 1998, the property
had an
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occupancy rate of 89.3%. The three buildings were constructed in 1973, 1979, and
1988. Two of the buildings were renovated in 1985. The property has a total of
15 tenants in-place. Medical tenants include a dental practice and chiropractor.
The following tenants occupy 10% or more of the rentable square footage:
JS Mulligan (retailer) leases 4,570 square feet. JS Mulligan has
occupied this space since September of 1979. The lease expires in August
1999. The annual rent is $14.28 per square foot and is fixed at that rate
for the term of the lease. The lease is structured on a net basis with the
tenant responsible for a pro rata share of all reimbursable operating
expenses.
Sunrise Market (retailer) leases 6,000 square feet. Sunrise Market has
occupied the space since December 1973. The lease expires in December of
2008. The annual rent is $7.71 per square foot and is fixed at that rate
for the term of the lease. The lease is structured on a net basis with the
tenant responsible for a pro rata share of all reimbursable operating
expenses.
PERMANENT MORTGAGE LOAN PROGRAM
Actual Investments
Applegate Lane, Inc. In June 1998, the Company purchased from GMACCM a
permanent mortgage loan in the principal amount of $7.1 million to Applegate
Lane, Inc., a wholly-owned subsidiary of Medway, Inc., to refinance existing
indebtedness on, and to provide funds for renovation of, a 180-bed skilled
nursing facility in East Hartford, Connecticut, known as St. Elizabeth
Healthcare Center and for construction of an outpatient facility. The loan bears
interest at a fixed rate of 9.15% and has a ten-year term maturing on February
20, 2008 with monthly principal and interest payments based on a 25-year
amortization schedule. The St. Elizabeth Healthcare Center was constructed in
1970 and has not undergone any material renovation since that time.
Approximately $4.2 million of the proceeds of the loan were used to refinance
existing indebtedness with respect to the facility and approximately $2.9
million of such proceeds are being used for renovation and for construction of
an outpatient facility. The loan to Applegate Lane, Inc. had a LTV ratio of
92.2% at origination based upon an appraisal prepared by an independent third
party. The occupancy rate of the St. Elizabeth Healthcare Center has averaged
97% during 1998.
Cromwell Crest Convalescent Home, Inc. In June 1998, the Company purchased
from GMACCM a permanent mortgage loan in the principal amount of $7.8 million to
Cromwell Crest Convalescent Home, Inc., a wholly-owned subsidiary of Medway,
Inc., to refinance existing indebtedness on, and to fund renovations and
construction of an addition to, a 180-bed skilled nursing facility in Cromwell,
Connecticut known as the Cromwell Crest Convalescent Center. The loan bears
interest at a fixed rate of 9.15% and has a ten-year term maturing on February
20, 2008 with monthly principal and interest payments based upon a 25-year
amortization schedule. The Cromwell Crest Convalescent Center was built in 1986
and has not undergone any material renovation since that time. Approximately
$5.1 million of the proceeds of the loan were used to refinance the existing
indebtedness and approximately $2.7 million will be used to finance renovations
and the construction of the addition to the facility. The LTV ratio for this
loan was 84.4% at origination based upon an appraisal prepared by an independent
third party. The occupancy rate at the Cromwell Crest Convalescent Center has
averaged 97% during 1998.
JoJeff, Inc. and Alymatt, Inc. In May 1998, the Company funded a permanent
mortgage loan in the principal amount of $1.9 million to JoJeff, Inc. and
Alymatt, Inc. to purchase a 40-bed assisted living facility in East Lansdowne,
Pennsylvania known as the Nova Gardens Assisted Living Community (the "Nova
Gardens Facility") and to refinance existing debt on a 22-bed assisted living
facility in the Philadelphia, Pennsylvania suburb of Secane known as the Haskins
Personal Care Center (the "Haskins Facility"). The loan bears interest at a
fixed rate of 9.4% initially, which rate will increase annually thereafter by
multiplying the rate then in effect by 1.02 up to a cap of 10.25%, and has a
six-year term maturing on June 1, 2004 with monthly principal and interest
payments based on a 25-year amortization schedule. The Nova Gardens Facility was
constructed in 1912, with additions constructed in 1975 and renovations in 1995.
No renovation or development is contemplated for the Nova Gardens Facility in
the near future. The occupancy rate of the Nova Garden Facility has averaged
88.3% during 1998. The Haskins Facility was constructed in 1910 with additions
constructed in the 1960s. No renovation or development is contemplated for the
Haskins Facility in
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the near future. The occupancy rate for the Haskins Facility has averaged 97%
during 1998. The loan to JoJeff, Inc. and Alymatt, Inc. is one loan secured by a
first mortgage on both of the facilities. The LTV ratio for the loan to JoJeff,
Inc. and Alymatt, Inc. was 67.2% at origination based upon an appraisal prepared
by an independent third party measuring the value of the two properties
together.
Waban Realty Trust. In July 1998, the Company funded a permanent mortgage
loan in the principal amount of $2.5 million to J. Dennis Morgan, as Trustee of
the Waban Realty Trust, to provide financing for the acquisition of a 84-bed
skilled nursing facility in Newton, Massachusetts known as the Braeburn Nursing
Home. The loan bears interest at a fixed rate of 9.75% initially, which rate
will increase annually to a rate calculated by multiplying the interest rate
then in effect by the greater of 1.03 or the increase in the CPI. The loan has a
ten-year term maturing on July 1, 2008 with monthly principal and interest
payments based upon a 25-year amortization schedule. The Braeburn Nursing Home
was constructed in 1962 and has not undergone any material renovation since that
time. No renovation or development is contemplated for the Braeburn Nursing Home
in the near future. The LTV ratio for the Waban Realty Trust loan was 83.3% at
origination based upon an appraisal prepared by an independent third party. The
occupancy rate of the Braeburn Nursing Home has averaged 91% over the last two
years.
Pennswood Manor Assisted Living and Healthcare Center, Inc. In July 1998,
the Company funded a permanent mortgage loan in the principal amount of $1.7
million (the "Pennswood Loan") to Pennswood Manor Assisted Living and Healthcare
Center, Inc., a subsidiary of Covenant Care Corporation, to finance the
acquisition of a 68-bed assisted living facility in Scranton, Pennsylvania known
as Pennswood Manor. The loan bears interest at a fixed rate of 9.5% initially,
which rate will increase annually by multiplying the rate then in effect by
1.0275, and has a five-year term maturing on August 1, 2003, with monthly
principal and interest payments based upon a 25-year amortization schedule. In
addition to all interest, fees, prepayment premiums and all other amounts
payable to the Company, the Company is entitled to receive 50% of the residual
equity in connection with the sale or refinancing of Pennswood Manor. Pennswood
Manor was constructed in 1968 and was renovated in 1988 with further
improvements in 1996. The LTV ratio for the Pennswood Loan was 73.0% at
origination based upon an appraisal prepared by an independent third party.
Pennswood Manor was 88% occupied at March 31, 1998.
Probable Investments
Mountainside Manor, Inc. In July 1998, the Company issued a commitment to
make a permanent mortgage loan in the principal amount of $2.3 million to
Mountainside Manor, Inc., a subsidiary of Covenant Care Corporation, to finance
the acquisition of a 96-bed assisted living facility known as Mountainside
Manor. If funded, the loan will bear interest at a fixed rate of 9.5% initially,
which rate will increase annually by multiplying the rate then in effect by
1.0275, and will have a 5-year term with monthly principal and interest payments
based upon 25-year amortization schedule. In addition to all interest, fees,
prepayment premiums and all other amounts payable to the Company, the Company is
entitled to receive 50% of the residual equity in connection with the sale or
refinancing of Mountainside Manor. Mountainside Manor is a 48-unit, 96-bed
assisted living facility in Wilkes-Barre, Pennsylvania. The facility was
constructed in 1958 and was renovated in 1993, 1994 and 1997. At July 31, 1998
the facility was 90% occupied. No further renovations of the facility are
planned except for capital improvements, primarily cosmetic in nature,
aggregating approximately $75,000 to be completed by February 1999. The LTV
ratio for the loan will be limited to 90% of market value as determined by an
independent third-party appraisal.
Medicore, LLC. In May 1998, the Company issued a commitment to provide
permanent mortgage loan financing in an aggregate principal amount of $3.7
million to Medicore, LLC to finance the acquisition of four skilled nursing
facilities, three of which are located in Ohio and one of which is located in
Wisconsin. If funded, the loan will bear interest at a fixed rate equal to the
Ten Year Treasury Rate plus 4% initially, which rate will increase annually by
multiplying the rate then in effect by 1.03, and will have a ten-year term with
monthly principal and interest payments based upon a 25-year amortization
schedule. Kingston Healthcare Center, located in Kingston, Ohio, is a 50-bed,
one-story skilled nursing facility that was constructed in 1960. Twin Oaks
Living/Learning & Care Center, located in Mansfield, Ohio, contains 18 nursing
home beds and 24 intermediate care beds for the mentally retarded. It comprises
a total of approximately 19,000 square feet,
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was constructed in 1946 with additions and/or renovations in 1960 and 1997.
Chenita Group Home, located in Mansfield, Ohio, is a two-story, eight-bed
intermediate care facility for the mentally retarded. The facility was built in
1900 with additions and renovations in 1978 and 1990. Whispering Oaks Care
Center, located in Peshtigo, Wisconsin, is a 60-bed, one-story skilled nursing
home that was built in 1960 with additions and renovations in 1995. The seller
of these facilities is providing financing of $700,000 at 11% (interest only)
for a five-year term. Only minor capital improvements are planned. The LTV ratio
for the loan to Medicore, LLC will be approximately 77.9% at origination, based
upon the aggregate value assigned to all four facilities in an appraisal
prepared by an independent third party.
OTHER REAL ESTATE SECURED DEBT PROGRAM
Actual Investments
ACMC Friendswood, Inc. In May 1998, the Company funded $925,000 of a $9.1
million commitment to ACMC Friendswood, Inc., a subsidiary of Adult Care
Management Corp. (collectively "ACMC"). The amount funded was for the
acquisition of a parcel of land in Friendswood, Texas upon which ACMC plans to
construct a 119-bed assisted living facility to be known as Park Place of
Friendswood. The Company will fund the remainder of the $9.1 million commitment
in the form of a construction loan to ACMC to finance the development and
construction of Park Place of Friendswood.
The Company expects that total development costs will be approximately $9.1
million and that the construction period will last approximately one year. Upon
completion, the construction loan will convert to a permanent mortgage loan.
During the construction phase, the loan bears interest at the floating rate of
prime plus 2% with interest only due and payable monthly. Upon conversion to a
permanent mortgage loan, the rate will become fixed to equal the Ten Year
Treasury Rate prevailing at that time plus 3.75%, but in no event will the fixed
rate be less than 9.5%. The interest rate will increase annually thereafter by
multiplying the rate then in effect by the greater of 1.03 or the increase in
the CPI. The loan will mature ten years after converting to a permanent mortgage
loan and will require principal and interest payments based on a 25-year
amortization schedule. The LTV for this loan will be limited to 90% of the
prospective market value at stabilized occupancy, as determined in an appraisal
prepared by an independent third party.
ALCO XII, LLC. In June 1998, the Company funded the initial draw on a $6.0
million commitment to ALCO XII, LLC to finance the construction of an 82-unit
assisted living facility in Hattiesburg, Mississippi. During the twelve-month
proposed construction period, the loan bears interest at a fixed rate of 10%,
with interest only due and payable monthly. Upon completion of construction, the
loan will convert to a two-year mortgage loan bearing interest at the fixed rate
of 10%, with interest only due and payable monthly until maturity. ALCO XII, LLC
has engaged Emeritus Corporation, a publicly-traded operator of such facilities,
to operate the facility for a management fee which will be subordinate to the
interest payable during the term of the loan.
The loan may result in a purchase-leaseback transaction for the Company. A
single-purpose partnership, in which the Company holds a 1% general partnership
interest and a 69% limited partnership interest, has the option to purchase the
facility after the twelve-month construction period upon the earlier to occur of
(i) break even occupancy at the facility, or (ii) two years from the end of the
construction period. The purchase price in connection with the option shall be
the total project costs at the date of purchase plus $40,000. If the option is
exercised, Emeritus Corporation, the operator, would be obligated to lease the
facility from the Company for an initial term of ten years, with the initial
lease rate established by applying the Ten Year Treasury Rate then in effect
plus 3.5% to an amount equal to the purchase price multiplied by approximately
1.09.
As of July 31, 1998, $498,000 of such loan had been advanced by the
Company. The total cost of development and construction of the facility is
estimated to be $6.2 million including land cost of $346,000. At origination,
the prospective LTV ratio for this loan was 89.4% based upon prospective market
value at stabilized occupancy, effective July 1, 2001, as determined in an
appraisal prepared by an independent third party.
54
<PAGE> 60
Hildebran Health Investors, L.L.C. In June 1998, the Company funded the
initial draw on a $1.9 million commitment for a construction loan to Hildebran
Health Investors, L.L.C. a subsidiary of Chancellor Health Services, LLC, to
finance the construction of a 60-bed assisted living facility in Hildebran,
North Carolina to be known as Cambridge House. The remaining cost of development
and construction is estimated to be $1.5 million. During the 12-month proposed
construction period, the Hildebran Loan will bear interest at a floating rate
equal to prime plus 2%. Upon completion of construction, the loan will convert
to a permanent mortgage loan with a fixed interest rate equal to the Ten Year
Treasury Rate prevailing at that time plus 4%, but in no event will the fixed
rate be less than 9.75%. The fixed rate will increase annually to a rate
calculated by multiplying the rate then in effect by the greater of 1.03 or the
increase in the CPI. After completion of construction and conversion of the
interest rate, the loan is required to be repaid with monthly installments of
principal and interest calculated on the basis of a 25-year amortization
schedule, and matures on July 1, 2009. As of July 31, 1998, $394,000 had been
advanced by the Company on this loan. The LTV ratio for this loan was 82.6% at
origination based upon prospective market value at stabilized occupancy,
effective November 1, 2000, as determined in an appraisal prepared by an
independent third party.
St. Andrews Health Center, Inc. In June 1998, the Company funded $2.6
million of a $4.6 million commitment to St. Andrews Health Center, Inc. (the
"St. Andrews Loan") to finance the acquisition of a 120-bed skilled nursing
facility in Waterbury, Connecticut (the "Waterbury Facility") and the expansion
and renovation of such facility. The Waterbury Facility was built in 1966 and
has undergone renovation as needed as part of a regular maintenance program. The
Waterbury Facility was placed in bankruptcy by the former owner in March 1996.
The Waterbury Facility had average occupancy rates of 87.0%, 92.0% and 81.8% in
1995, 1996 and 1997, respectively. Currently the Waterbury Facility is
configured with 40, three-bed rooms for a total of 120 beds. St. Andrews Health
Center, Inc. plans to de-certify 30-beds, construct a 5,000 square foot
addition, substantially renovate the existing resident rooms and common areas
and reconfigure the facility to 90 beds. In anticipation of such
de-certification, the occupancy of the facility has been allowed to decline to
73%. As part of the renovation, most of the three-bed rooms will be converted to
two-bed rooms, resulting in a maximum capacity of 90 beds. The proposed
expansion includes five new resident rooms and a rehabilitation area. The LTV
ratio for the loan was 92.0% at origination based upon an appraisal prepared by
an independent third party. The St. Andrews Loan is in the form of an
acquisition loan (the "St. Andrews Acquisition Loan") in the principal amount of
$2.6 million (which represents 100% of the "as is" market value of the facility
as determined by an MAI Appraisal), and a construction loan (the "St. Andrews
Construction Loan") in the amount of $2.0 million (which represents 100% of the
proposed construction and renovation costs).
The St. Andrews Acquisition Loan bears interest at a rate equal to 11.5%
initially, which rate will increase annually by multiplying the rate then in
effect by 1.03, and has a ten-year term maturing on June 1, 2008 with monthly
principal and interest payments based upon an 25-year amortization schedule. The
St. Andrews Construction Loan bears interest at a floating rate equal to prime
plus 2% during the twelve-month proposed construction period with interest only
due and payable monthly. After completion of construction, the loan will convert
to a permanent mortgage loan at a fixed rate of interest equal to the Ten Year
Treasury Rate prevailing at that time plus 4.25%, but in no event will the fixed
rate be less than 11.5%. The fixed rate will increase annually by multiplying
the rate then in effect by 1.03. At completion of construction and conversion of
the interest rate, the loan will be required to be repaid over a ten-year term
maturing on June 1, 2008 with monthly payments of principal and interest based
upon a 25-year amortization schedule. At July 31, 1998, the St. Andrews
Acquisition Loan was fully funded in the amount of $2.6 million and $181,000 of
the St. Andrews Construction Loan had been advanced by the Company.
Transylvania Health Investors, L.L.C. In June 1998, the Company funded the
initial draw of a $1.9 million commitment for a construction loan to
Transylvania Health Investors, L.L.C., a subsidiary of Chancellor Health
Services, LLC, to finance the construction of a 60-bed assisted living facility
in Brevard, North Carolina to be known as the Kingsbridge House. During the
12-month proposed construction period, the loan bears interest at a floating
rate equal to prime plus 2%. Upon completion of construction, the loan will
convert to a permanent mortgage loan with a fixed interest rate equal to the Ten
Year Treasury Rate plus 4%, but in no event will the fixed rate be less than
9.75%. The fixed rate will increase annually thereafter to a rate calculated by
multiplying the rate then in effect by the greater of 1.03 or the increase in
the CPI. After conversion of the interest rate, the loan is required to be
repaid with monthly principal and interest payments
55
<PAGE> 61
based on a 25-year amortization schedule. The loan matures on July 1, 2009. At
July 31, 1998, $328,000 of such loan had been advanced by the Company. The
remaining cost of development and construction is estimated to be $1.6 million.
The LTV ratio for this loan is 82.6%, based upon prospective market value at
stabilized occupancy, effective November 1, 2000, as determined in an appraisal
prepared by an independent third party.
Cedar Lawn Investments, LLC. In July 1998, the Company funded a mortgage
loan in the principal amount of $5.7 million to finance the acquisition of a
skilled nursing facility located in Abington, Virginia. The loan is a bridge
financing that bears interest at a fixed rate of 10% and has a two-year term,
with interest only payable prior to maturity on July 20, 2000. Cedar Lawn
Convalescent Home is a 36,247 square foot single-story nursing home facility
originally constructed in 1966 which has undergone several expansions and
renovations, the latest of which was an addition built in 1996. A portion of the
building is leased to a physical therapy company. The facility was 83.3%
occupied at July 31, 1998. The LTV ratio for the loan to Cedar Lawn Investments,
LLC at origination was 106.7% "as is" and 78.1% assuming Medicare certification,
based upon an appraisal prepared by an independent third party. Medicaid
certification has been applied for and is being considered by HCFA.
Lincolnton Health Investors, LLC. In July 1998, the Company funded the
initial draw on a $1.9 million commitment for a construction loan to Lincolnton
Health Investors, LLC, a subsidiary of Chancellor Health Services, LLC, to
finance the construction of a 60-bed assisted living facility in Lincolnton,
North Carolina. The loan bears interest at a floating rate equal to prime plus
2% during the twelve month proposed construction period, and upon completion of
construction, the interest rate will convert to a fixed rate equal to the Ten
Year Treasury Rate prevailing at that time plus 4%, but in no event will the
fixed rate be less than 9.75%. The fixed rate will increase annually to a rate
calculated by multiplying the rate then in effect by the greater of 1.03 or the
increase in the CPI. At the completion of construction and conversion of the
interest rate, the loan will be required to be repaid over a ten-year term
maturing on August 1, 2009 with monthly payments of principal and interest based
upon a 25-year amortization schedule. The proposed facility will total
approximately 18,000 square feet and will contain 30 semi-private rooms. Funding
by the Company will be limited to 90% of prospective market value at stabilized
occupancy. As of July 31, 1998, $715,000 had been advanced by the Company. The
remaining cost of development and construction is estimated to be $1.2 million.
The LTV ratio for this loan was 82.6% at origination, based upon prospective
market value at stabilized occupancy, effective November 1, 2000, as determined
in an appraisal prepared by an independent third party.
Probable Investments
Astoria Pines Holding, Inc. In July 1998, the Company issued a commitment
to provide a $2.2 million mezzanine loan to Astoria Pines Holding, Inc.
("Astoria"). This $2.2 million commitment will represent a 50% participation in
the total mezzanine loan being provided to Astoria. The loan will serve to
provide the additional financing required to complete the construction of a
280-bed skilled nursing facility in Queens, New York which has a total estimated
project cost of $44.0 million and for which the primary construction loan is
being provided by Key Bank. The construction loan provided by Key Bank will be
refinanced upon completion with a permanent loan provided by Dynex Healthcare,
Inc., which is participating in the other 50% of the total mezzanine loan.
The total mezzanine loan of $4.4 million will be advanced approximately 18
months after the construction of the project has begun. The terms of the
Company's investment provide for a $300,000 commitment fee paid at the loan's
closing. The loan initially bears interest at 12% and increases one-half of one
percent annually over its four-year term. The loan has scheduled principal and
interest payments over such term sufficient to provide a payoff balance of
approximately $797,000 upon maturity.
The aggregate LTV ratio for the first mortgage and the mezzanine loan will
be 89.8% at origination, of which 79.8% is the LTV ratio for the first mortgage
and 10.0% is the LTV ratio for the mezzanine loan. All of the foregoing LTV
ratios for the loan to Astoria are based upon prospective market value at
stabilized occupancy, effective June 1, 2001, as determined in an appraisal
prepared by an independent third party.
56
<PAGE> 62
Chancellor Health Services, LLC. In July 1998, the Company made a
commitment to purchase a 50% participation in a mezzanine loan for Chancellor
Health Services, LLC for the repayment of existing indebtedness, to fund certain
reserves and to provide working capital for 13 existing long-term care
facilities, ten of which are skilled nursing facilities and the remaining three
of which are dually licensed with skilled nursing and personal care beds. These
facilities are located in North Carolina and Florida. The principal amount of
the Company's commitment is $3.5 million. The loan will bear interest at a rate
of 12% in the first year, increasing by one-half of one percent annually over
its five-year term with monthly principal and interest payments based on a
25-year amortization schedule. Additional interest on this loan will accrue such
that the yield to the Company as computed by discounting the loan's cash flows
over the term of the loan will equal 22%. This additional interest may be paid
during the term of the loan at any time but is due in full upon maturity.
The properties are generally located in secondary and rural markets. Ten of
the facilities are at stabilized occupancy with rates ranging from 84% to 96%.
Three facilities were opened within the last 12 months and occupancy at such
facilities ranges from 15% to 73%. These facilities contain from 60 to 185 beds
and comprise a total of 1,532 beds located in the nine leased facilities and
four owned facilities. The leased properties have remaining terms of nine to 25
years. The aggregate LTV ratio for the first mortgage and the mezzanine loan is
61.2%, of which 41.4% is the LTV ratio for the first mortgage and 19.8% is the
LTV ratio for the mezzanine loan. All of the foregoing LTV ratios for the loan
to Chancellor Health Services, LLC are based on an aggregate market value of
$34.0 million assigned to the 13 facilities in an appraisal prepared by an
independent third party.
57
<PAGE> 63
ACTUAL AND PROBABLE INVESTMENTS
AS OF JULY 31, 1998
EQUITY INVESTMENT PROGRAM:
<TABLE>
<CAPTION>
APPROX.
YEAR PURCHASE RENTABLE
NUMBER BUILT/ TYPE OF PRICE TYPE OF SQUARE ANNUALIZED
NAME AND LOCATION OF BEDS RENOVATED FACILITY(1) ($ MILLIONS) INVESTMENT FEET RENT
- ----------------- ------- ----------- ----------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Colonial Manor Home of Crofton
Crofton, MD(2)................... 15 1995/N/A ALF (3) Purchase 7,100 $133,000
Leaseback
Colonial Manor Home of Bel-Air
Bel-Air, MD(2)................... 15 1996/N/A ALF (3) Purchase 8,600 $133,000
Leaseback
Colonial Manor Home of Severna Park
Severna Park, MD(2).............. 16 1997/N/A ALF (3) Purchase 7,100 $133,000
Leaseback
Sherman Oaks Medical Center
Sherman Oaks, CA(2).............. N/A 1953/1997 MOB $10.5 Real Estate 69,700 $1,310,000
Acquisition
Meadowood Nursing Home
South Hadley, MA(4).............. 120 1987/N/A SNF $ 6.8 Purchase 40,000 $645,000
Leaseback
Winslow Convalescent Center
Winslow, AZ(4)................... 120 Proposed SNF $ 4.0 Purchase N/A N/A
Leaseback
Gulf Health Care Center of
Galveston, TX(4)................. 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Gulf Health Care Center of Texas
City, TX(4)...................... 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Gulf Health Care Center of Port
Arthur, TX(4).................... 150 1994/N/A SNF $ 7.4 Purchase 43,300 $720,000
Leaseback
Valencia Medical Center
Valencia, CA(4).................. N/A 1983/NA MOB $ 4.3 Real Estate 27,900 $552,000
Acquisition
Vista Village Shopping Center
Valencia, CA(4).................. N/A 1973,1979, Other $ 3.9 Real Estate 37,500 $461,000
1988/1985 Acquisition
<CAPTION>
ANNUALIZED REMAINING
RENT PER LIFE OF
LEASED ORIGINAL
SQUARE LEASE
NAME AND LOCATION FOOT (YEARS)
- ----------------- ---------- ---------
<S> <C> <C>
Colonial Manor Home of Crofton
Crofton, MD(2)................... $18.73 10
Colonial Manor Home of Bel-Air
Bel-Air, MD(2)................... $15.47 10
Colonial Manor Home of Severna Park
Severna Park, MD(2).............. $18.73 10
Sherman Oaks Medical Center
Sherman Oaks, CA(2).............. $18.79 3 (5)
Meadowood Nursing Home
South Hadley, MA(4).............. $16.13 10
Winslow Convalescent Center
Winslow, AZ(4)................... N/A N/A
Gulf Health Care Center of
Galveston, TX(4)................. $16.56 20
Gulf Health Care Center of Texas
City, TX(4)...................... $16.56 20
Gulf Health Care Center of Port
Arthur, TX(4).................... $16.56 20
Valencia Medical Center
Valencia, CA(4).................. $19.78 3.1
Vista Village Shopping Center
Valencia, CA(4).................. $12.29 4.1
</TABLE>
- ---------------
(1) Skilled nursing facilities ("SNFs") provide extended care and a variety of
acute-care healthcare facilities to the elderly. Assisted living facilities
("ALFs") provide a combination of housing, support services and healthcare
designed to respond to individual needs for daily living. Medical office
buildings ("MOBs") contain individual physician, physician group and other
healthcare provider offices for the administration and treatment of
patients. See "Business -- Investment Programs."
(2) Actual investment as of July 31, 1998.
(3) An aggregate purchase price of $3,750,000 was paid for all three facilities.
(4) Probable investment as of July 31, 1998.
(5) Weighted average remaining term (by rentable square feet).
58
<PAGE> 64
PERMANENT MORTGAGE LOAN PROGRAM:
<TABLE>
<CAPTION>
YEAR
NAME AND LOCATION NUMBER BUILT/ TYPE OF TYPE OF
NAME OF BORROWER OF FACILITY OF BEDS RENOVATED FACILITY INVESTMENT
- ---------------- --------------------------- ------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Applegate Lane, Inc.(1).................. St. Elizabeth Health Care 180 1970/N/A SNF Refinancing,
Center Renovation
East Hartford, CT and
Construction
Loan
Cromwell Crest Convalescent Home,
Inc.(1)................................ Cromwell Crest Convalescent 180 1986/N/A SNF Refinancing,
Center Renovation
Cromwell, CT and
Construction
Loan
JoJeff, Inc. and Alymatt, Inc.(1)........ Nova Gardens Assisted 40 1912/1995 ALF Acquisition
Living Community and
E. Lansdowne, PA Refinancing
Loan
Haskins Personal Care 22 1910/1960 ALF (3)
Center
Secane, PA
Waban Realty Trust
(J. Dennis Morgan, as Trustee)(1)...... Braeburn Nursing Home 84 1962/N/A SNF Acquisition
Newton, MA Loan
Pennswood Manor Assisted Living and
Healthcare Center, Inc.(1)............. Pennswood Manor 68 1968/1988, ALF Acquisition
Scranton, PA 1996 Loan
Mountainside Manor, Inc.(2).............. Mountainside Manor 96 1958/1993, ALF Acquisition
Wilkes-Barre, PA 1994,1997 Loan
Medicore, LLC(2)......................... Kingston Health Care Center 50 1960 SNF Acquisition
Kingston, OH Loan
Twin Oaks 42 1946/1996, SNF (4)
Living/Learning & Care 1997
Center
Mansfield, OH
Chenita Group Home 8 1900/1990 SNF (4)
Mansfield, OH
Whispering Oaks Care 60 1960/1995 SNF (4)
Center
Peshtigo, WI
<CAPTION>
TOTAL
AMOUNT AMOUNT
TO BE INVESTED
INVESTED TO DATE MATURITY
NAME OF BORROWER ($ MILLIONS) ($ MILLIONS) DATE
- ---------------- ------------ ------------- --------
<S> <C> <C> <C>
Applegate Lane, Inc.(1).................. $7.1 $7.1 2/20/08
Cromwell Crest Convalescent Home,
Inc.(1)................................ $7.8 $7.8 2/20/08
JoJeff, Inc. and Alymatt, Inc.(1)........ $2.0 $2.0 6/1/04
(3) (3) (3)
Waban Realty Trust
(J. Dennis Morgan, as Trustee)(1)...... $2.5 $2.5 7/1/08
Pennswood Manor Assisted Living and
Healthcare Center, Inc.(1)............. $1.7 $1.7 8/1/03
Mountainside Manor, Inc.(2).............. $2.3 None 5-year
term
Medicore, LLC(2)......................... $3.7 None 10-year
term
(4) (4) (4)
(4) (4) (4)
(4) (4) (4)
</TABLE>
- ---------------
(1) Actual investment as of July 31, 1998.
(2) Probable investment as of July 31, 1998.
(3) Included in data shown for Nova Gardens Assisted Living Community.
(4) Included in data shown for Kingston Health Care Center.
59
<PAGE> 65
OTHER REAL ESTATE SECURED DEBT PROGRAM:
<TABLE>
<CAPTION>
YEAR
NAME AND LOCATION NUMBER BUILT/ TYPE OF TYPE OF
NAME OF BORROWER OF FACILITY OF BEDS RENOVATED FACILITY INVESTMENT
- ---------------- -------------------- ------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
ACMC Friendswood, Inc.(1).......................... Park Place of 119 Proposed ALF Acquisition
Friendswood and
Friendswood, TX Construction
Loan
ALCO XII, LLC(1)................................... To-be-named facility 82 Proposed ALF Construction/Term
in Hattiesburg, MS Loan
Hildebran Health Investors, LLC(1)................. Cambridge House 60 Proposed ALF Construction/Term
Hildebran, NC Loan
St. Andrews Health Center, Inc.(1)................. Waterbury 120 1966/N/A SNF Acquisition
Convalescent Loan
Center
Waterbury, CT
Construction/Term
Loan
Transylvania Health Investors, LLC(1).............. Kingsbridge House 60 Proposed ALF Construction/Term
Brevard, NC Loan
Cedar Lawn
Investments, LLC(1).............................. Cedar Lawn 120 1966/1996 SNF Acquisition
Convalescent Loan
Center
Abington, VA
Lincolnton Health Investors, LLC(1)................ Lincolnton House 60 Proposed ALF Construction/Term
Lincolnton, NC Loan
Astoria Pines Holding Co., LLC(2).................. New York Center 280 Proposed SNF Mezzanine
for Rehabilitation Loan
Care
Queens, NY
Chancellor Health Services, LLC(2)................. Various SNFs N/A N/A SNFs Mezzanine
Loan
<CAPTION>
TOTAL AMOUNT AMOUNT
TO BE INVESTED INVESTED MATURITY
NAME OF BORROWER ($ MILLIONS) TO DATE DATE
- ---------------- -------------- ------------ --------
<S> <C> <C> <C>
ACMC Friendswood, Inc.(1).......................... $9.1 $ 925,000 10-year
term
ALCO XII, LLC(1)................................... $6.0 $ 498,000 6/10/03
Hildebran Health Investors, LLC(1)................. $1.9 $ 394,000 7/1/09
St. Andrews Health Center, Inc.(1)................. $2.6 $2,600,000 6/1/08
$2.0 $ 181,000 6/1/08
Transylvania Health Investors, LLC(1).............. $1.9 $ 328,000 7/1/09
Cedar Lawn
Investments, LLC(1).............................. $5.7 $5,700,000 7/20/00
Lincolnton Health Investors, LLC(1)................ $1.9 $ 715,000 8/1/09
Astoria Pines Holding Co., LLC(2).................. $2.2 None 4-year
term
Chancellor Health Services, LLC(2)................. $3.5 None 5-year
term
</TABLE>
- ---------------
(1) Actual investment as of July 31, 1998.
(2) Probable investment as of July 31, 1998.
60
<PAGE> 66
SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma financial
data of the Company as of June 30, 1998 and for the period January 30, 1998
(inception) through June 30, 1998. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 30, 1998 (INCEPTION)
THROUGH JUNE 30, 1998
-----------------------------
HISTORICAL PRO FORMA
------------- -------------
<S> <C> <C>
STATEMENT OF INCOME DATA
Revenues:
Interest on cash and cash equivalents..................... $ 1,078,494 $ 1,042,446
Interest on mortgage notes receivable..................... 45,961 1,819,066
Rental income............................................. 70,678 2,453,003
------------ ------------
Total revenues..................................... 1,195,133 5,314,515
Expenses:
Management fee............................................ 237,923 868,521
Other..................................................... 99,139 656,918
Depreciation.............................................. 6,042 537,636
------------ ------------
Total expenses..................................... 343,104 2,063,075
------------ ------------
Net income.................................................. $ 852,029 $ 3,251,440
============ ============
Earnings per share.......................................... $ .24 $ .40
Weighted average shares outstanding......................... 3,494,297 8,055,555
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------
HISTORICAL PRO FORMA
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA
Income-producing real estate, net........................... $ 10,535,281 $ 50,092,562
Mortgage notes receivable, net.............................. 21,048,755 41,235,099
Cash and cash equivalents................................... 106,882,119 45,681,775
Other assets................................................ 497,289 1,954,008
------------ ------------
Total assets................................................ $138,963,444 $138,963,444
============ ============
Total liabilities........................................... $ 1,565,538 $ 1,565,538
Total stockholders' equity.................................. 137,397,906 137,397,906
------------ ------------
Total liabilities and stockholders' equity.................. $138,963,444 $138,963,444
============ ============
FOR THE PERIOD
JANUARY 30, 1998
(INCEPTION)
THROUGH JUNE 30, 1998
---------------------------
HISTORICAL PRO FORMA
------------ ------------
OTHER OPERATING DATA
Cash flows provided by operating activities................. $ 2,205,135 $ 5,136,140
Cash flows used in investing activities..................... (31,868,893) (93,069,237)
Cash flows provided by financing activities................. 136,545,877 136,545,877
Funds from operations....................................... 858,071 3,789,076
</TABLE>
Industry analysts generally consider funds from operations ("FFO") to be an
appropriate measure of the performance of a REIT. The Company uses the concept
of FFO as defined in NAREIT's White Paper on Funds from Operations approved by
the Board of Governors of NAREIT in March 1995. The White Paper defines FFO as
net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus real estate
related depreciation and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that in order to facilitate a clear
understanding of the operating results of the Company, FFO should be examined in
conjunction with the Company's net income as presented in the Selected Financial
Data and Consolidated Financial Statements and Notes thereto included elsewhere
herein. The Company computes FFO in accordance with standards established by
NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. FFO does
not represent cash generated from operating activities in accordance with GAAP
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
61
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
"Notes to Consolidated Financial Statements" and "Selected Financial and Other
Data" of the Company. Statements contained herein 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. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
The Company, a Maryland corporation, was organized on January 30, 1998, and
intends to make an election to qualify under the Code as a REIT. The Company was
initially capitalized with the proceeds of a private placement of 805,555 shares
of Common Stock, totaling approximately $309,000. In May 1998, the Company
completed the Private Placement, wherein 1,450,000 Units were sold for net
proceeds of approximately $136.2 million. Following the Private Placement, the
Company began investing net proceeds thereof through its Equity Investment
Program, Permanent Mortgage Loan Program, and the Other Real Estate Secured Debt
Program.
Substantially all of the Company's revenues are, and are expected to be,
derived from: (i) rents received under leases of healthcare-related real estate,
(ii) interest earned from permanent mortgage loans and other real estate secured
loans made by the Company and (iii) interest earned from the temporary
investment of funds in short-term instruments. The Company's leases are
generally structured as either (i) master leases with numerous tenants or (ii)
long-term triple net leases to facility operators. The Company's master leases
are generally short-term and provide for fixed rental payments. The Company's
triple net leases generally provide that the lessee will pay all costs and
expenses of the property (including maintenance, repairs, taxes, assessments and
utilities) and generally provide for annual rent increases. The Company's loans
under its permanent mortgage loan program generally bear interest at fixed rates
ranging from 9% to 11%, or at rates based on the Ten Year Treasury Note rate
plus 4%, and are generally subject to annual interest rate increases. The
Company's loans under its Other Real Estate Secured Debt Program bear interest
at fixed or floating rates depending on the type of loan. Some fixed rate loans
include annual rate escalation clauses.
The Company will incur operating and administrative expenses, including
principally amounts paid to the Manager pursuant to the Management Agreement and
amounts paid to GMACCM under the Company's servicing agreement with GMACCM.
The Company also expects to leverage its portfolio and thus to incur long
and short-term indebtedness, and related interest expense, from time to time.
The extent to which the Company uses leverage will be determined by the Manager
pursuant to the Policies and, ultimately, by the Board of Directors. The
percentage of leverage used will vary depending on, among other things,
estimates of cash flow that the Company's assets will generate and the stability
of that cash flow. See "Risk Factors -- Leverage Can Reduce Income Available for
Distribution and Cause Losses."
The Company intends to declare and pay distributions to its shareholders in
amounts not less than the amounts required to maintain REIT status under the
Code and, in general, in amounts exceeding taxable income. The Company's ability
to pay distributions will depend upon its cash available for distribution.
PRO FORMA RESULTS OF OPERATIONS
Period January 30, 1998 (inception) to June 30, 1998
The pro forma results of operations for the period January 30, 1998
(inception) to June 30, 1998 were prepared as if the Company's investments had
been made on January 30, 1998. The investments include those made during the
period from inception to June 30, 1998; those made subsequent to June 30, 1998
but before the date of this filing; and those investments the Company has
concluded are probable.
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The Company's pro forma revenue for this period was $5.3 million. Total pro
forma revenue included $2.5 million in rental revenue, $1.8 million in interest
on mortgage notes receivable, and $1.0 million of interest earned on investments
in short-term government securities. Pro forma expenses were $2.1 million,
including management fee expenses of $869,000, depreciation of $538,000, and
other expenses of $657,000. Of the $657,000 of other expenses, $403,000 or 61.3%
of the amount was attributable to operating expenses of real estate operating
properties that were acquired in the Equity Investment Program. The remaining
$254,000 or 38.7% was attributable to other administrative and portfolio
development costs. The resulting pro forma net income was $3.3 million or $0.40
per share based on the pro forma weighted average shares outstanding of
8,055,555.
RESULTS OF OPERATIONS
Period January 30, 1998 (inception) to June 30, 1998
For the period from January 30, 1998 (inception) to June 30, 1998, the
Company's total revenues were $1.2 million. Of the $1.2 million earned for the
period indicated, $1.1 million related to interest earned on short-term
government securities acquired with the net proceeds of the Private Placement.
During May and June 1998, the Company originated mortgage loans aggregating
$21.3 million under both the Permanent Mortgage Loan Program and Other Real
Estate Secured Debt Program. The related interest earned for the period was
approximately $46,000. In mid-June 1998, the Company acquired, under its Equity
Investment Program, the Sherman Oaks Medical Center, a medical office building
in southern California for $10.5 million. Rental income from this property
during the partial month of ownership was $71,000. As mentioned above, the
Company pays the Manager a fee for advisory and management services. The
management fee recognized for this period was $238,000 or 69.3% of the period's
total expenses. The resulting net income for the period was $852,000 or $0.24
per share, based on the weighted average shares outstanding of 3,494,297.
LIQUIDITY AND CAPITAL RESOURCES
The $309,000 proceeds of the Company's initial private placement and the
$136.2 million net proceeds of the Private Placement have been the sole sources
of cash for the Company's investment programs from inception through June 30,
1998. Management believes that the net proceeds of this Offering, together with
the uninvested net proceeds of the Private Placement, cash flows provided by
operations and funds expected to be available through the Repurchase Facility,
will be sufficient to consummate the purchase of properties and to fund loans
with respect to which the Company has commitments. Management believes that its
sources of working capital, including credit expected to be available under the
Repurchase Facility, will be adequate to meet its liquidity needs for the
twelve-month period following the Offering.
Capital Resources
The $150 million Repurchase Facility is expected to include a reverse
repurchase agreement and a custody agreement. Although structured as a sale and
repurchase obligation, the Repurchase Facility is expected to effect a financing
under which the Company pledges mortgage loans as collateral to secure advances
made by MLMCI to the Company. The amount advanced on any single mortgage loan
generally is expected to be 63% of the MAI appraised value of the property
securing the mortgage. Loans eligible for the Repurchase Facility will be
subject to certain LTV, debt service and diversification requirements. The term
of any advance under the Repurchase Facility may not exceed 180 days. Under the
facility, the Company will be subject to other operating and financial
covenants, including leverage restrictions and equity requirements. Advances
made pursuant to this facility will subject the Company to the interest rate
risk resulting from differences between the yield on investments funded on a
long term basis with this facility and the facility's short term cost of funds.
The Company may enter into derivative instruments in order to mitigate its
exposure to this risk.
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Liquidity
At June 30, 1998, the Company had approximately $106.9 million in cash and
cash equivalents. The Company intends to use remaining net proceeds of the
Private Placement and net proceeds of the Offering, cash from operations and
available borrowings under the expected Repurchase Facility to fund its lending
activities, acquisitions and capital expenditures and to provide for general
working capital requirements.
Capital Commitments
As of July 31, 1998, the Company had agreements to purchase five skilled
nursing facilities for an aggregate price of $33.1 million and two real estate
operating properties for an aggregate price of $8.2 million under the Equity
Investment Program. The Company also had commitments to fund $11.8 million in
new loans and $19.7 million committed to future draws on existing construction
loans. The Company presently expects to use remaining net proceeds of the
Private Placement and net proceeds of the Offering to fund these obligations.
The Company expects that these funds and funds available under the Repurchase
Facility will be sufficient to meet expected capital commitments for the next
twelve months.
FUNDS FROM OPERATIONS
Pro forma FFO for the period from inception to June 30, 1998 was $3.8
million. FFO was computed by taking the pro forma net income of $3.3 million for
the same period and adding to it the pro forma depreciation expense of $538,000
for the same period.
FFO for the period from inception to June 30, 1998 was $858,000. FFO was
computed by taking the net income of $852,000 for the same period and adding to
it the depreciation expense of $6,000 for the same period.
Industry analysts generally consider FFO to be an appropriate measure of
the performance of a REIT. The Company believes that in order to facilitate a
clear understanding of the operating results of the Company, FFO should be
examined in conjunction with the Company's net income as presented in the
Selected Financial Data and Consolidated Financial Statements and Notes thereto
included elsewhere herein.
The Company's computation of FFO may not be comparable to FFO reported by
other REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions.
YEAR 2000
The Company relies upon the computer software programs and operating
systems of the Manager and its affiliates as well as the Company's borrowers and
lessees and third-party payors. The Company has been advised by the Manager that
the Manager has implemented a program designed to ensure that all software used
by the Manager and its affiliates in connection with their services for the
Company will manage and manipulate data involving transition of dates from 1999
to 2000 without functional or data abnormality and without inaccurate results
related to such data. The Company does not anticipate that the execution of this
program will have a material effect on its operating results. However, the
Company does not know whether its existing or prospective borrowers and lessees
and their respective third-party payors have implemented programs designed to
ensure that all software used will manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results relating to such data. Disruption of the computerized
billing and collection systems of the Company's borrowers and lessees or their
respective third-party payors could result in material reductions in income to
the Company's borrowers and lessees, which could cause defaults under the
Company's leases and/or mortgage loans and could have an adverse effect on the
Company. The Company is in the process of developing a contingency plan for any
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disruption in the computerized billing and collection systems of the Company's
borrowers, lessees or their respective third-party payors, and the Company
expects to have such a contingency plan in place by mid-1999.
INFLATION
The Company's investments generally contain provisions which mitigate the
adverse impact of inflation. In certain instances, both leases and loans provide
for periodic rent increases and interest rate increases, respectively, in the
forms of fixed increases and/or indexation to the CPI. In addition, under the
equity investment program, leases initiated under sale leaseback transactions
require the lessee to pay all operating costs and expenses including repairs,
maintenance, real property taxes, assessments, utilities, and insurance, thereby
substantially reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation. Also, under the equity investment
program, leases in connection with medical office buildings generally contain
provisions whereby certain common area and other expenses are payable by the
various tenants.
Loans, both under the Permanent Mortgage Loan Program and under the Other
Real Estate Secured Debt Program generally bear interest at fixed rates, and as
explained above, in certain instances, contain provisions that provide for rate
increases. However, the yield of such instruments may not positively correlate
with changes in interest rates. See "Risk Factors."
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OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement, including the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the Agreement of Limited Partnership of the
Operating Partnership (the "Operating Partnership Agreement"). The Company, as
the sole general partner of the Partnership, has exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, and the limited partners have no authority in their capacity as
limited partners to transact business for, or participate in the management
activities or decisions of, the Operating Partnership except as required by
applicable law. However, any amendment to the Operating Partnership Agreement
that would (i) adversely affect operation of the Conversion Factor or the
Redemption Rights (as hereinafter defined), (ii) adversely affect the limited
partners' rights to receive cash distributions, except in the case of the
issuance of additional Partnership Units, (iii) alter the Operating
Partnership's allocations of income or loss, except in the case of the issuance
of additional Partnership Units, (iv) impose on the limited partners any
obligations to make additional contributions to the capital of the Operating
Partnership, or (v) alter the rights respecting transfer by a limited partner of
a partnership interest, or any of the rights set forth in (i) through (v) above,
requires the consent of limited partners (other than the Initial Limited
Partner) holding more than two-thirds of the Partnership Units.
TRANSFERABILITY OF INTERESTS
The Company may not transfer all or any portion of its general interest in
the Operating Partnership or withdraw as general partner except pursuant to: (i)
a merger, consolidation or other combination or sale of substantially all of the
Company's assets in which either (x) consent of limited partners (other than the
Initial Limited Partner) holding more than 50% of the Partnership Units is
obtained, (y) limited partners receive an amount equal to the product of the
Conversion Factor and the greatest amount paid to a holder of Common Stock in
consideration for one share of Common Stock in the transaction, or (z) the
Company is the surviving entity and either holders of Common Stock do not
receive cash, securities or other property in the transaction or all limited
partners (other than the Initial Limited Partner) receive no less than the
product of the Conversion Factor and the greatest amount received by any holder
of the Common Stock; (ii) a merger or consolidation with another entity in which
(x) substantially all of the assets of the successor or surviving entity are
contributed to the Operating Partnership in exchange for Partnership Units and
(y) the successor or surviving entity expressly agrees to assume all of the
Company's obligations under the Operating Partnership Agreement; or (iii) a
transfer to a wholly owned subsidiary of the Company or to the owner of all of
the ownership interests in the Company. With certain limited exceptions, the
limited partners may not transfer their interests in the Operating Partnership,
in whole or in part, without the written consent of the Company, which consent
the Company may withhold in its sole discretion. The Company may not consent to
any transfer that would cause the Operating Partnership to be treated as a
corporation for federal income tax purposes.
CAPITAL CONTRIBUTION
The Company intends to eventually contribute to the Operating Partnership
substantially all of the net proceeds of the Offering (or assets acquired with
such proceeds) in exchange for partnership units in the Operating Partnership.
However, the Company has the option to defer investment of the proceeds in the
Operating Partnership, in order to avoid classification of the Operating
Partnership as an "investment company" within the meaning of Sections 721(b) and
351(e)(1) of the Code, until such time as the Company has identified properties
to be acquired by the Operating Partnership. Although the Operating Partnership
may receive all or a portion of the net proceeds of the Offering, the Company
will be deemed to
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have made a capital contribution to the Operating Partnership in the amount of
the gross proceeds of the Offering, or the portion thereof contributed to the
Operating Partnership, and the Operating Partnership will be deemed
simultaneously to have paid the underwriters' discount and other expenses paid
or incurred in connection with the Offering, or a portion thereof. The Operating
Partnership Agreement provides that if the Company determines that it is in the
best interest of the Operating Partnership to provide for additional funds for
any partnership purpose, the Company may cause the Operating Partnership to
obtain such funds from outside borrowings or elect to provide such funds to the
Operating Partnership through loans or otherwise. The Company is authorized
under the Operating Partnership Agreement to cause the Operating Partnership to
issue partnership interests for less than fair market value if the Company has
concluded in good faith that such issuance is in the best interest of the
Company and the Operating Partnership. Under the Operating Partnership
Agreement, the Company may contribute the proceeds of any offering by the
Company of Common Stock as additional capital to the Operating Partnership
subject to the requirement that capital contributions by the Company to the
Operating Partnership be made in a manner, to the extent possible, to avoid
classification of the Operating Partnership as an "investment company" for
federal income tax purposes. Upon such contribution, the Company will receive
additional Partnership Units and the Company's percentage interest in the
Operating Partnership will be increased on a proportionate basis based upon the
amount of such additional capital contributions. Conversely, the percentage
interests of the limited partners will be decreased on a proportionate basis in
the event of additional capital contributions by the Company. In addition, if
the Company contributes additional capital to the Operating Partnership, the
Company will revalue the property of the Operating Partnership to its fair
market value (as determined by the Company) and the capital accounts of the
partners will be adjusted to reflect the manner in which the unrealized gain or
loss inherent in such property (that has not been reflected in the capital
accounts previously) would be allocated among the partners under the terms of
the Operating Partnership Agreement if there were a taxable disposition of such
property for such fair market value on the date of the revaluation.
REDEMPTION RIGHTS
Pursuant to the Operating Partnership Agreement, the limited partners have
redemption rights ("Redemption Rights") that enable them to cause the Operating
Partnership to redeem their Partnership Units for cash, or at the option of the
Company, shares of Common Stock. At the option of the Company, the redemption
price will be paid in cash or the exercise of the Redemption Rights refused in
the event that the issuance of shares of Common Stock to the redeeming limited
partner (the "Redeeming Partner") would (i) result in any person owning,
directly or indirectly, shares of Common Stock in excess of the Ownership
Limitation, (ii) result in shares of beneficial interest of the Company being
owned by fewer than 100 persons (determined without reference to any to rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, directly
or constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a subsidiary partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of shares of Common Stock by such Redeeming Partner to be
"integrated" with any other distribution of shares of Common Stock for purposes
of complying with the Securities Act. The Redemption Rights may be exercised by
the limited partners at any time beginning after May 5, 1999, provided that the
ability of the limited partners to exercise their redemption rights may be
further restricted if, in the opinion of counsel, the restrictions are necessary
in order to avoid the Operating Partnership being classified as a "publicly
traded partnership" under Section 7704 of the Code. In addition, each limited
partner may not exercise the Redemption Rights for less than 1,000 Partnership
Units or, with respect to any limited partner holding less than 1,000
Partnership Units, all of the Partnership Units held by such limited partner.
The number of shares of Common Stock issuable upon exercise of the Redemption
Rights will be based upon a Conversion Factor, that initially will equal 1.0,
but which will be adjusted upon the occurrence of share splits, mergers,
consolidations or similar pro rata share transactions, which otherwise would
have the effect of diluting the ownership interests of the limited partners or
the stockholders of the Company.
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OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal tax purposes, to avoid any federal
income or excise tax liability imposed by the Code, and to ensure that the
Operating Partnership will not be classified as a "publicly traded partnership"
for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, once fully funded, the Operating Partnership will
pay all administrative costs and expenses of the Company (collectively, the
"Company Expenses") and the Company Expenses will be treated as expenses of the
Operating Partnership. The Company Expenses generally will include, without
limitation, the following: (i) all expenses relating to the formation and
continuity of existence of the Company and any subsidiaries thereof; (ii) all
expenses relating to the public offering and registration of securities by the
Company; (iii) costs and expenses associated with any repurchase of any
securities by the Company; (iv) all expenses associated with the preparation and
filing of any periodic reports by the Company under federal, state or local laws
or regulations, including filings with the Commission; (v) all expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body, including the Commission and any securities
exchange; (vi) costs and expenses associated with any 401(k) plan, incentive
plan, bonus plan or other plan providing for compensation for the employees of
the Company; (vii) costs and expenses incurred by the Company relating to any
issuance or redemption of Partnership Units; (viii) costs and expenses
associated with management of the Company by the Manager; and (ix) all other
operating or administrative costs of the Company incurred in the ordinary course
of its business on behalf of the Operating Partnership, including fees and other
amounts paid pursuant to the Management Agreement.
DISTRIBUTIONS
The Operating Partnership Agreement requires the Operating Partnership to
distribute cash on a quarterly (or, at the election of the Company, more
frequent) basis, in amounts determined by the Company in its sole discretion, to
the partners in accordance with their respective percentage interests in the
Operating Partnership. The Operating Partnership Agreement requires that the
Company use its reasonable discretion to distribute an amount on a quarterly (or
more frequent) basis so that each limited partner receives a cash amount equal
in value to the aggregate cash dividends that would have been payable to such
limited partner in the event that such limited partner owned shares of Common
Stock; provided however, that in the event that the Company and its subsidiaries
own fewer Partnership Units than the number of outstanding shares of Common
Stock, then all distributions will be paid first to those limited partners that
are not subsidiaries of the Company. Until such time as the Operating
Partnership is fully funded, the Company may be required to make additional
contributions to the Operating Partnership in order to enable the Operating
Partnership to make distributions in the required amounts to such limited
partners. Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances.
ALLOCATIONS
Subject to compliance with the provisions of Section 704(b) and (c) of the
Code and Treasury Regulations promulgated thereunder, income, gain and loss of
the Operating Partnership for each fiscal year generally will be allocated among
the partners, proportionately, so that each partner has been allocated income or
profit in an amount equal to the cumulative distributions received by each
partner, and loss shall be allocated to the partners in accordance with their
respective interests in the Operating Partnership. Any income or gain in excess
of the cumulative distributions of the Operating Partnership shall be allocated
in accordance with the partners' respective interests in the Operating
Partnership. Notwithstanding the foregoing, in the event of a sale or other
disposition of all or substantially of the Operating Partnership's assets, any
income, gain or loss shall be allocated in a manner that causes each capital
account to equal zero after the distribution of proceeds to the partners from
such sale or other disposition. Any difference between the amount
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of income, gain or loss required to reduce each partner's capital account to
zero and the actual amount of income, gain or loss resulting from such a sale or
other disposition is generally allocated to the partners in accordance with
their respective interests in the Operating Partnership.
TERM
The Operating Partnership will remain in existence until December 31, 2098,
or until sooner dissolved upon (i) the occurrence of an Event of Bankruptcy (as
defined in the Operating Partnership Agreement) as to the Company or the
dissolution, death, removal or withdrawal of the Company as general partner
(unless the business of the Operating Partnership is continued), (ii) the
passage of 90 days after the sale or other disposition of all or substantially
all of the Operating Partnership's assets, or (iii) at any time after June 5,
1999, the election by the Company to dissolve the Operating Partnership.
FIDUCIARY DUTY
The Operating Partnership Agreement provides that in the event of a
conflict between the interests of the Company's stockholders on the one hand and
the Operating Partnership's limited partners on the other, the Company shall
endeavor to resolve the conflict in a manner not adverse to either the Company's
stockholders or the Operating Partnership's limited partners. For so long as the
Company, as general partner, owns a controlling interest in the Operating
Partnership, any such conflict that the Company determines cannot be resolved in
a manner not adverse to either the Company's stockholders or the Operating
Partnership's limited partners shall be resolved in the favor of the Company's
stockholders.
PREEMPTIVE RIGHTS
None of the limited partners nor any other person shall have any
preemptive, preferential or other similar right to make additional capital
contributions or loans to the Operating Partnership, or to purchase additional
Partnership Units to be issued by the Operating Partnership.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company is the tax
matters partner of the Operating Partnership and, as such, has authority to
handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a summary of the Policies, which set forth the general
parameters for the Company's investments, borrowings and operations. The
Policies may be changed by the Board of Directors without a vote of the
stockholders. The Manager is empowered to make the day-to-day investment
decisions of the Company based on the Policies. Such investment decisions will
include decisions to issue commitments on behalf of the Company to purchase
mortgage loans, healthcare facilities and other assets meeting the investment
criteria of the Company. The Independent Directors will review all transactions
of the Company on a quarterly to ensure compliance with the Policies. The
Independent Directors are expected to rely substantially on information and
analysis provided by the Manager to evaluate the Policies, compliance therewith
and other matters relating to the Company's investments.
The Company intends to invest in a variety of healthcare facilities,
including nursing facilities, assisted living facilities, medical office
buildings, acute care hospitals, mental health facilities, rehabilitation
hospitals, retirement living facilities, CCRCs and out-patient service centers.
The Company's investments may be structured using various types of mortgage
loans, purchase leaseback transactions, joint ventures and partnerships, or any
combination of the foregoing that will best suit the particular investment.
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INVESTMENT POLICIES
The Company, in consultation with the Manager, may establish underwriting
criteria for evaluating potential investments and, if such underwriting criteria
are established, the Company, in consultation with the Manager, may modify such
underwriting criteria at any time and from time to time. The Company's policy
generally is to offer a price for each asset that it contemplates acquiring not
greater than the price that the Manager estimates to be sufficient to generate
an acceptable risk-adjusted return to the Company from the acquisition of that
asset.
In evaluating potential investments, the Company will consider such factors
as (i) the type of facility, (ii) the location, construction quality, condition
and design of the facility, (iii) the facility's current and anticipated cash
flow and its adequacy to meet operational needs and lease obligations or debt
service obligations, (iv) the quality and reputation of the facility's owner or
operator, (v) the growth, tax and regulatory environments of the communities in
which the facilities are located, (vi) the occupancy and demand for similar
facilities in the area surrounding the facility, and (vii) the reimbursement
policies and plans of the state in which the facility is located. The Company
prefers to invest in facilities that have a significant market presence in the
community and where state licensing procedures limit the entry of competing
facilities.
Prior to every investment, the Manager or an affiliate will conduct a
facility site review to access the general physical condition of the facility
and the quality of care the operator provides. In addition, the Manager or an
affiliate will review the environmental reports, real estate survey and
financial statements of the facility before the investment is made.
Although the Company intends to diversify its portfolio over the long term
by type of facility, there are no limitations on the amount or percentage of the
Company's total assets that may be invested in any one facility or type of
facility.
FINANCING POLICIES
The Company expects to enter into the Repurchase Facility with MLMCI.
Although structured as a sale and repurchase obligation, the proposed Repurchase
Facility would effect a financing under which the Company pledges mortgage loans
as collateral to secure advances made by MLMCI to the Company. The maximum
amount that may be advanced to the Company under the proposed Repurchase
Facility is $150 million.
The Company may incur indebtedness when, in the opinion of the Board of
Directors, it is advisable. The Company may incur indebtedness to make
investments in additional facilities or to meet the distribution requirements
imposed upon REITs under the Code (see "Taxation of the Company -- Requirements
for Qualification"). For short-term purposes, the Company may, from time to
time, negotiate lines of credit, or arrange for other short-term borrowings from
banks or otherwise. The Company may also arrange for long-term borrowings
through public offerings or from institutional investors.
In addition, the Company may incur mortgage indebtedness on real estate
which it has acquired through purchase, foreclosure or otherwise. The Company
may also obtain mortgage financing for unleveraged or underleveraged properties
in which it has invested or may refinance properties acquired on a leveraged
basis. There is no limitation on the number or amount of mortgages which may be
placed on any one property, and the Company has no policy with respect to
limitations on borrowing, whether secured or unsecured.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company currently does not intend to invest in the securities of other
issuers for the purpose of exercising control, to issue any series of senior
securities, to underwrite securities of other issuers, to offer securities in
exchange for property (other than the exchange of limited partnership interests
in the Operating Partnership for properties in the Company's Equity Investment
Program). The Company may repurchase or otherwise reacquire shares of its Common
Stock when, in the opinion of the Board of Directors, it is advisable.
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POLICIES WITH RESPECT TO INTERESTED DIRECTORS
William E. Shine, a director of the Company, is an officer of GMACCM. The
Company has purchased and expects to purchase mortgage loans from time to time
from GMACCM pursuant to the GMACCM Agreement. In addition, Joshua B. Gillon, a
director of the Company, will be paid a finder's fee with respect to the
Repurchase Facility. The Company's policies require Mr. Shine and Mr. Gillon to
abstain from voting as a member of the Board of Directors on matters relating to
GMACCM or the Repurchase Facility, respectively.
POLICIES WITH RESPECT TO TRANSACTION APPROVAL REQUIREMENTS
The Board of Directors has established the following policies regarding
approval requirements for certain types of transactions.
The following transactions require approval of Board of Directors: (i)
mortgage loans where the principal amount thereof exceeds 20% of the Company's
total assets; (ii) purchase leaseback transactions which are in the nature of
financing transactions (i.e., a triple net lease) and where the purchase price
exceeds 20% of the Company's total assets; (iii) mortgage loans or purchase
leaseback transactions involving a triple net lease, regardless of the amount
involved, if the amount of the loan or purchase price would cause loans or
leases to a single borrower/lessee (or to a group of related parties or parties
under common control) to exceed 25% of the Company's total assets; (iv) a real
estate purchase of $10 million or more (e.g., of a medical office building,
hospital, etc.), even if a triple net lease is contemplated; (v) extension or
commitment of a line of credit exceeding 20% of the Company's total assets to a
single borrower or 25% in the aggregate to related parties or parties under
common control; and (vi) any transaction involving the purchase or assumption
(or take out) by the Company of a transaction originated and initially closed by
HCFP or an affiliate of HCFP and in such instance requires approval of the
Independent Directors (a majority of those persons and unanimity among all
Independent Directors who considered the matter). Certain permanent mortgage
loans which fully meet certain specified criteria established by the Independent
Directors do not require submission to the Board of Directors for approval, nor
approval by Independent Directors even where such mortgage loan is used to take
out or refinance debt owed to HCFP or an affiliate of HCFP.
Transactions not requiring approval of Board of Directors include: (i)
certain permanent mortgage loans which fully meet certain specified criteria,
which require approval only of the Credit Committee; (ii) other mortgage loans
(other than those within (vi) above) and real estate acquisitions and purchase
leaseback transactions below the thresholds set forth above require approval
only of the Credit Committee; and (iii) in some instances, particularly where
requested or required by the borrower/seller/lessee, transactions not requiring
approval of the Board of Directors may be submitted to the Executive Committee
for approval.
POLICIES WITH RESPECT TO INTERCREDITOR ARRANGEMENTS
The Company's policies require that the Company and HCFP enter into an
intercreditor agreement in situations where loans of the Company and HCFP are
made to the same borrower. These intercreditor agreements will provide that all
of the Company's rights will be (x) senior to the rights of HCFP with respect to
collateral consisting of interests in real estate (including fixtures) and
related proceeds; and (y) subject and subordinate to the rights of HCFP with
respect to the following collateral: (i) all of the borrower's owned and
after-acquired accounts receivable (the "Receivables"), and any contract rights
with respect to the Receivables; (ii) all of the borrowers owned and
after-acquired general intangibles relating to the Receivables and other rights
to payment for delivery of medical and other goods and services; (iii) all of
borrower's property at any time in the possession of or under the control of
HCFP or a bailee or affiliate of HCFP pursuant to the terms of the loan and
security agreement or agreements between HCFP and the borrower; and (iv) the
proceeds of any or all of the foregoing. See "Conflicts of Interest."
The Company may change its policies in connection with any of the foregoing
without the approval of the stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of July 31, 1998, assuming
the exercise of each of the Warrants, and as adjusted to reflect the completion
of this Offering, by: (i) each person or entity known by the Company to own
beneficially five percent or more of the outstanding Common Stock, (ii) each
member of the Board of Directors of the Company, (iii) each executive officer of
the Company, and (iv) all executive officers of the Company and all members of
the Board of Directors as a group. Unless otherwise indicated, the business
address of the stockholders listed below is that of the Company's principal
executive offices. Except as indicated in the footnote to the table, the persons
and entities named in the table have sole voting and investment power with
respect to all shares beneficially owned. The following information was
determined in accordance with Rule 13d-3 under the Exchange Act and is not
designed to reflect ownership as determined under the provisions of the Code.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER(1) PERCENT NUMBER PERCENT
- ------------------------ --------- ------- -------- --------
<S> <C> <C> <C> <C>
Och-Ziff(2)................................................ 870,000 10.6
Wallace Weitz & Company(3)................................. 870,000 10.6
McGlinn Capital Management(4).............................. 870,000 10.6
Fleet Investment Management(5)............................. 870,000 10.6
Wellington Management Company, LLP(6)...................... 870,000 10.6
HealthCare Financial Partners, Inc......................... 841,665 10.3
Bricoleur Partners(7)...................................... 600,000 7.4
Credit Suisse First Boston Corporation(8).................. 600,000 7.4
Farallon Capital Partners, L.P.(9)......................... 350,157 4.3
Farallon Capital Institutional Partners, L.P.(9)........... 332,565 4.1
Farallon Capital Institutional Partners II, L.P.(9)........ 83,447 1.0
Farallon Capital Institutional Partners III, L.P.(9)....... 72,815 1.0
Tinicum Partners, L.P.(9).................................. 72,000 1.0
R.R. Capital Partners L.P.(9).............................. 408 *
Farallon Capital Management, L.L.C.(9)..................... 9,000 *
John K. Delaney............................................ 83,247 *
Ethan D. Leder............................................. 83,247 *
Edward P. Nordberg, Jr..................................... 83,247 *
Steve M. McGee............................................. 18,825 *
Mark H. Hamermesh.......................................... 19,862 *
Steve W. Bolen............................................. 5,098 *
Thomas M. Gilmore.......................................... 5,098 *
Miriam M. Leder............................................ 5,098 *
Daryl McCombs.............................................. 4,706 *
Daniel L. Willison......................................... 0
Donald S. Franyo(10)....................................... 0
Joshua B. Gillon(11)....................................... 1,111 *
Andrew Schoenfeld(12)...................................... 1,274 *
William E. Shine(13)....................................... 0
All present and proposed directors and executive officers
as a group (14 persons).................................. 310,813 3.9
</TABLE>
- ---------------
* Less than one percent.
(1) Includes Warrant Shares for each stockholder, if any, which may be acquired
upon the exercise of Warrants.
(2) Och-Ziff's address is 153 East 53rd Street, 43rd Floor, New York, NY 10022.
(3) Wallace Weitz & Company's address is 1125 South 103rd Street, Suite 600,
Omaha, NE 68124.
(4) McGlinn Capital Management's address is 850 N. Wyomissing Boulevard,
Wyomissing, PA 19610.
(5) Fleet Investment Management's address is 75 State Street, 5th Floor,
Boston, MA.
(6) Wellington Management Company, LLP ("WMC"), in its capacity as investment
adviser, may be deemed to beneficially own 870,000 shares of the Common
Stock. Such shares are owned by numerous
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<PAGE> 78
investment advisory clients of WMC, none of which is known to beneficially
own more than five percent of the Common Stock. WMC's address is 75 State
Street, 19th Floor, Boston, MA 02109.
(7) Bricoleur Partners' address is 8910 University Center Lane, Suite 570, San
Diego, CA 92122.
(8) Credit Suisse First Boston Corporation's address is c/o Credit Suisse First
Boston, 11 Madison Avenue, New York, NY 10010.
(9) Farallon Capital Partners, L.P., Farallon Capital Institutional Partners,
L.P., Farallon Capital Institutional Partners II, L.P., Farallon Capital
Institutional Partners III, L.P., Tinicum Partners, L.P. and R.R. Capital
Partners, L.P. (collectively, the "Farallon Partnerships") each directly
holds the shares listed opposite its name. As the general partner of each
of the Farallon Partnerships, Farallon Partners, L.L.C. ("FPLLC") may be
deemed to own beneficially, for purposes of Rule 13d-3 under the Exchange
Act, the 911,057 shares held by the Farallon Partnerships. By virtue of an
investment management agreement between Farallon Capital Management,
L.L.C., a registered investment adviser ("FCMLLC"), and a managed account,
FCMLLC may be deemed the beneficial owner, for purposes of Rule 13d-3 under
the Exchange Act, of the 9,000 shares held, in aggregate, by such account.
As the managing members of FPLLC, each of Enrique H. Boilini, David I.
Cohen, Joseph F. Downes, Fleur E. Fairman, Jason M. Fish, Andrew B.
Fremder, William F. Mellin, Stephen L. Millham, Meridee A. Moore and Thomas
F. Steyer may, for purposes of Rule 13d-3 under the Exchange Act, be deemed
to own beneficially the 911,057 shares held, in aggregate, by the Farallon
Partnerships. As the managing members of FCMLLC, each of Enrique H.
Boilini, David I. Cohen, Joseph F. Downes, Jason M. Fish, Andrew B.
Fremder, William F. Mellin, Stephen L. Millham, Meridee A. Moore and Thomas
F. Steyer may, for purposes of Rule 13d-3 under the Exchange Act, be deemed
the beneficial owner of the 9,000 shares held in such account managed by
FCMLLC. Each of FCMLLC and FPLLC, and each managing member thereof,
disclaim any beneficial ownership of such shares. All of the above-
mentioned entities and persons disclaim group attribution. The foregoing is
based solely upon information furnished to the Company by the Farallon
Partnerships and FCMLLC. The address of the Farallon Partnerships is One
Maritime Plaza, Suite 1325, San Francisco, CA 94111.
(10) Mr. Franyo's address is 12514 Perryfield Lock Road, Potomac, MD 20854.
(11) Includes 555 shares owned by the spouse of Mr. Gillon.
(12) Mr. Schoenfeld's address is 207 West 106th Street, Apartment 17D, New York,
NY 10025.
(13) Mr. Shine's address is c/o GMACCM, 2200 Woodcrest Place, Suite 305,
Birmingham, AL 35209.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that the Company may issue up to 500,000,000 shares of
capital stock, all of which shall initially be classified as Common Stock
($0.0001 par value). The Board of Directors may classify and reclassify any
unissued shares of capital stock by setting or changing in any one or more
respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of capital stock. Upon completion of the Offering,
shares of Common Stock will be issued and outstanding, and
shares of Common Stock will be reserved for issuance upon
exercise of options and the Warrants, and no preferred stock will be issued and
outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon the Closing. Subject to the preferential rights of any
other shares or series of shares of capital stock, holders of Common Stock are
entitled to receive non-cumulative dividends if and when authorized and declared
by the Board of Directors out of assets legally available therefore and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company. The Company intends to pay quarterly dividends.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders of
Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means in all elections of directors,
each holder of Common Stock has the right to cast one vote for each share of
stock for each candidate. For a discussion of the voting rights of holders of
the Common Stock, including the provisions specifying the vote required by
security holders to take action, see "Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws."
No holder of any Common Stock shall have any preemptive right to subscribe
for a purchase any stock or other securities of the company other than such, if
any, as the Board of Directors, in its sole discretion, may determine.
Certain provisions of the Charter and Bylaws and certain provisions of
Maryland law could have the effect of delaying, deferring or preventing a change
in control of the Company. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify and reclassify
unissued capital stock into shares of preferred stock ("Preferred Stock") of one
or more series without the approval of the stockholders. Because the Board of
Directors has the power to establish the preferences and rights of each class or
series of Preferred Stock, the Board of Directors may afford the holders of any
series or class of Preferred Stock preferences, powers and rights, voting or
otherwise, senior to the rights of the holders of Common Stock. The Board of
Directors could authorize the issuance of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction which holders of some, or a majority, of the shares of Common Stock
might believe to be in their best interests or in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then market price of such shares of Common Stock. As of
the date hereof, no shares of Preferred Stock are outstanding and the Company
has no current plans to issue Preferred Stock.
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WARRANTS
The Warrants were issued pursuant to a warrant agreement (the "Warrant
Agreement") dated as of the closing of the Private Placement between the Company
and the warrant agent (the "Warrant Agent"). The Bank of New York acts as
Warrant Agent. The following is a brief summary of certain provisions of the
Warrant Agreement and does not purport to be complete and is qualified in its
entirety by reference to the Warrant Agreement including the definitions therein
of certain terms used below.
Each Unit consists of five shares of Common Stock and one Warrant. Each
Warrant, when exercised, will entitle the holder thereof to receive one share of
Common Stock. The Warrants will not become detachable from shares of Common
Stock until November 5, 1998. Prior to automatic separation of the related
Warrant, the Units will be represented by the Common Stock, which will bear an
endorsement representing beneficial ownership of the related Warrants on deposit
with the Warrant Agent as custodian for the registered holders of the Common
Stock. Prior to automatic separation, transfer of a share of Common Stock will
also constitute transfer of a holder's beneficial interest in the related
Warrant.
The Warrants will become exercisable on November 5, 1998 and will remain
exercisable until 5:00 p.m. New York City Time on April 29, 2001 (the
"Expiration Date") at an initial exercise price per Warrant Share equal to
$20.00 and will be subject to certain anti-dilution protection.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The holders of the Warrants have no right to vote on matters submitted
to the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants not yet exercised are not entitled to share in the
assets of the Company in the event of liquidation, dissolution or the winding up
of the affairs of the Company.
The exercise price of the Warrants will be appropriately adjusted if the
Company (i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or makes certain other dividends or distributions on
its Common Stock (other than cash dividends out of funds legally available
therefor), (ii) subdivides its outstanding shares of Common Stock into a greater
number of shares, (iii) combines its outstanding shares of Common Stock into a
smaller number of shares, (iv) issues by reclassification of its Common Stock
any other shares of its capital stock.
In case of certain consolidations or mergers of the Company, or the
liquidation of the Company or the sale of all or substantially all of the assets
of the Company to another person or entity, each Warrant will thereafter be
deemed exercised for the right to receive the kind and amount of shares of stock
or other securities or property to which such holder would have been entitled as
a result of such consolidation, merger or sale ha the Warrants been exercised
immediately prior thereto, less the exercise price.
RESTRICTIONS ON TRANSFER
Restrictions under Charter. For the Company to qualify as a REIT under the
Code, it must meet certain requirements concerning the ownership of its
outstanding shares of capital stock. Specifically, not more than 50% in value of
the Company's outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than its 1998 taxable year), and
the Company must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (other than its 1998 taxable year). See "Federal Income Tax
Considerations -- Requirements for Qualification."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions and
waivers described below, provides that no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.9% of the number
of outstanding shares of Common Stock or of any series of Preferred Stock (the
"Ownership Limitation").
Subject to certain exceptions described below, the Charter provides that
any purported transfer of shares of Common Stock or Preferred Stock (or certain
other events) that would (i) result in any person owning, directly or
indirectly, shares of Common Stock or Preferred Stock in excess of the Ownership
Limitation,
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(ii) result in the shares of Common Stock or Preferred Stock, collectively,
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Company's real property, within the meaning of section 856(d)(2)(B) of the Code
or (v) result in such shares being owned by a disqualified organization, (each
of the foregoing shall be referred to herein as a "Prohibited Transfer Event"),
shall be void ab initio as to the transfer of that number of shares that would
otherwise be beneficially owned (determined without reference to any rules of
attribution) by the transferee, and the intended transferee shall acquire no
rights in such shares of Common Stock or Preferred Stock. For purposes of the
foregoing, a "Disqualified Organization" means (A) the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentally of the foregoing, (B) any
organization (other than a cooperative described in section 521 of the Code)
which is exempt from tax unless such organization is subject to the tax imposed
by section 511 of the Code and (C) any organization described in section
1381(a)(2)(C) of the Code.
The Board of Directors may, however, exempt a person from the Ownership
Limitation upon receipt of a satisfactory ruling from the Service or an opinion
of counsel, provided that (i) the Board of Directors obtains such
representations and undertakings from such person as are reasonably necessary to
ascertain that no individual's beneficial or constructive ownership of Common
Stock will result in the Company being "closely held" within the meaning of
Section 856(h) of the Code or cause the Company to constructively own 10% or
more of the interests in a tenant of the real property of the Company, the
Operating Partnership or a subsidiary, within the meaning of Section 856(d) (2)
(B) of the Code, and (ii) such person agrees in writing that any violation or
attempted violation will result in such transfer becoming a transfer to the
Trust (as defined below).
If there is a Prohibited Transfer Event, except as described below, the
purported transferor shall cease to own any right or interest in the number of
shares that would otherwise be transferred and such shares will be designated as
"Shares-in-Trust" and transferred automatically to a trust (the "Trust")
effective on the day before the purported transfer of such shares of Common
Stock or Preferred Stock. The record holder of the shares of Common Stock or
Preferred Stock that are designated as Shares-in-Trust (the "Prohibited Owner")
will be required to submit such number of shares of Common Stock or Preferred
Stock to the Company for registration in the name of the Trust. The trustee of
the Trust (the "Trustee") will be designated by the Company, but will not be
affiliated with the Company. The beneficiary of the Trust (the "Beneficiary")
will be one or more charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common Stock
or Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Shares-in-Trust. The Trustee will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the shares
of Common Stock or Preferred Stock that were designated as Shares-in-Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) or (ii) the price per share received by the
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Trustee in excess of the amounts to be paid to the Prohibited Owner will be
distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-
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Trust (or, in the case of a gift or devise, the Market Price per share on the
date of such transfer) or (ii) the Market Price per share on the date that the
Company, or its designee, accepts such offer. The Company will have the right to
accept such offer for a period of ninety days after the later of (i) the date of
the purported transfer which resulted in such Shares-in-Trust or (ii) the date
the Company determines in good faith that a transfer resulting in such
Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last reported price
on any national securities exchange on which the Common Stock is then listed or
if the Common Stock is not listed on a national securities exchange, shall mean
the average of the high bid and low asked prices in the over-the-counter market,
as last reported by The Nasdaq Stock Market, or, if such system is no longer in
use, the principal other automated quotations system that may then be in use or,
if the shares of Common Stock are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the shares of Common Stock selected by the Board
of Directors. "Trading Day" shall mean any day other than a Saturday, a Sunday
or a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediate written notice to the Company of
such event and (ii) to provide to the Company such other information as it may
request in order to determine the effect, if any, of such transfer on the
Company status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock or Preferred Stock must, within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
shares of Common Stock or Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to insure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing restrictions
will not be removed until the Board of Directors determines that it is no longer
in the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT and there is an affirmative vote of two-thirds of all of the
votes ordinarily entitled to be cast in the election of directors, voting
together as a single class at a regular or special meeting of the stockholders
of the Company.
All certificates representing shares of Common Stock or Preferred Stock
will bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interest.
DIVIDEND REINVESTMENT PLAN
The Company may implement a dividend reinvestment plan whereby stockholders
may automatically reinvest their dividends in the Common Stock. Details about
any such plan would be sent to the Company's stockholders following adoption
thereof by the Board of Directors.
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REPORTS TO STOCKHOLDERS
The Company will furnish its stockholders with annual reports containing
information regarding the business and performance of the Company, including
audited financial statements certified by independent public accountants and
distribute quarterly reports containing unaudited financial information for each
of the first three quarters of the year.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York. The Bank of New York also serves as Warrant Agent.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND BYLAWS
The Company believes that the following is a summary of the material
provisions of Maryland law and of the Charter and Bylaws. Such summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to Maryland law and the Charter and Bylaws. Certain provisions of
Maryland law and the Charter and Bylaws are described elsewhere in this
Prospectus.
BOARD OF DIRECTORS
The Bylaws provide that the number of Directors of the Company may be
increased or decreased by the Board of Directors but may not be fewer than the
minimum number required by Maryland law nor more than nine. Any vacancy on the
Board of Directors may be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors,
except that a vacancy resulting from an increase in the number of Directors may
be filled by a majority of the entire Board of Directors.
The Company's Charter provides that a director may be removed from office
at any time, but only for cause and then only by the affirmative vote of at
least two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors voting together as a single class.
The Charter provides for a Board of Directors divided into three classes of
directors serving staggered three-year terms. The classification of directors
has the effect of marking it more difficult for stockholders to change the
composition of the Board of Directors in a short period of time. At least two
annual meetings of stockholders, instead of one, will generally be required to
effect a change in a majority of the Board of Directors. See "Management of the
Company -- Directors and Executive Officers."
AMENDMENT
The Company reserves the right from time to time to make any amendment to
its Charter now or hereafter authorized by law, including any amendments which
alter the contract rights as expressly set forth in the Charter of any shares of
outstanding stock, provided that no such amendment which changes the terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
outstanding shares entitled to vote thereon. The Charter provides that
provisions relating to the Company's election to be taxed as a REIT, approval of
certain matters by the Independent Directors, dissolution of the Company and
certain restrictions on the transferability of Common Stock or Preferred Stock
cannot be amended without the affirmative vote of at least two-thirds of all of
the votes ordinarily entitled to be cast in the election of directors voting
together as a single class. The Bylaws may be amended by the Board of Directors
or by the affirmative vote of at least two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors voting together as a single
class. The Charter provides that any amendment of its provisions relating to
indemnification of officers and directors shall not retroactively affect any act
or failure to act that occurred prior to the amendment.
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BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate of such an
Interested Stockholder are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation and (b) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquirer or in respect of which the acquirer is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of voting power: (1) one-fifth or more but less than
one-third, (2) one-third or more but less than a majority, or (3) a majority or
more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation. The Charter and Bylaws do not approve any such
acquisition or exempt any acquisition from the control share acquisition
statute.
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OPERATIONS
The Company is generally prohibited from engaging in certain activities and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide (a) with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by such stockholders may be made only (i) pursuant
to the Company's notice of the meeting, (ii) by the Board of Directors or (iii)
by a stockholder who is entitled to vote at the meeting and has complied with
the advance notice procedures set forth in the Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in the Company's
notice of meeting may be brought before the meeting of stockholders, and
nominations of persons for election to the Board of Directors may be made only
(i) pursuant to the Company's notice of meeting, (ii) by the Board of Directors
or (iii) provided that the Board of Directors has determined that directors
shall be elected at such meeting, by a stockholder who is entitled to vote at
the meeting and has complied with the advance notice provisions set forth in the
Bylaws.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. Powell,
Goldstein, Frazer & Murphy LLP has acted as counsel to the Company, has reviewed
this summary and has rendered an opinion that the descriptions of the law and
the legal conclusions contained herein are correct in all material respects, and
the discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to the Company and a holder of the Common Stock.
The discussion contained herein does not address all aspects of taxation that
may be relevant to particular stockholders in light of their personal investment
or tax circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Powell, Goldstein,
Frazer & Murphy LLP are based on current provisions of the Code, existing,
temporary, and currently proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, existing administrative rulings and
practices of the Service, and judicial decisions. No assurance can be given that
future legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company has made an election to be taxed as a REIT under sections 856
through 860 of the Code, commencing with its taxable year ending on December 31,
1998.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
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Powell, Goldstein, Frazer & Murphy LLP has acted as counsel to the Company
in connection with the Offering and the Company's election to be taxed as a
REIT. In the opinion of Powell, Goldstein, Frazer & Murphy LLP, assuming that
the elections and other procedural steps described in this discussion of
"Federal Income Tax Considerations" are completed by the Company in a timely
fashion, commencing with the Company's taxable year ending December 31, 1998,
the Company will qualify to be taxed as a REIT pursuant to sections 856 through
860 of the Code, and the Company's organization and proposed method of operation
will enable it to continue to meet the requirements for qualification and
taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the Service or any court. It must be
emphasized that Powell, Goldstein, Frazer & Murphy LLP's opinion is based on
various assumptions and is conditioned upon certain representations made by the
Company as to factual matters, including representations regarding the nature of
the Company's properties and the future conduct of its business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations" and are set out in the federal income tax
opinion that will be delivered by Powell, Goldstein, Frazer & Murphy LLP at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depends upon the Company's ability to meet on a continuing basis, through actual
annual operating results, asset ownership, distribution levels, and stock
ownership, the various qualification tests imposed under the Code discussed
below. Powell, Goldstein, Frazer & Murphy LLP will not review the Company's
compliance with those tests on a continuing basis. Accordingly, no assurance can
be given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "-- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its stockholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from an investment in a regular corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains. However,
stockholders are entitled to an income tax credit for their proportionate share
of any tax paid with respect to long-term capital gain as designated by the
Company. In addition, each stockholder's basis in the Common Stock is increased
by such stockholder's proportionate share of the Company's undistributed capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference, if any.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions,
(which includes, in general, certain sales or other dispositions of property
(other than foreclosure property) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a tax equal to 100%
of such net income. Fifth, if the Company should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), and nonetheless
has maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income attributable
to the greater of the amount by which the Company fails the 75% or 95% gross
income test. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a merger or other transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the Corporation and the Company recognizes gain on
the disposition of such asset during the 10-year period beginning on the date on
which it acquired such asset, then the Company will be subject to tax at the
highest regular corporate rate applicable to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Company over the adjusted basis in such asset at such
time as provided in Treasury Regulations that have not yet been promulgated).
The tax described above that is imposed on "built-in-gains" assumes that the
Company will elect pursuant to IRS Notice 88-19
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to be subject to the rules described in the preceding sentence if it were to
make any such acquisition. Finally, the Company will be subject to tax at the
highest marginal corporate rate on the portion of any Excess Inclusion derived
by the Company from REMIC Residual Interests equal to the percentage of the
stock of the Company held by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in section 521 of the
Code) that is exempt from taxation under the unrelated business taxable income
provisions of the Code, or any rural electrical or telephone cooperative (each,
a "Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to stock of the Company held by a Disqualified Organization
will reduce the cash available for distribution from the Company to all
stockholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder; and (ix) that meets certain
other tests, described below, regarding the nature of its income and assets.
Conditions (i) to (iv), inclusive, must be met during the entire taxable year
and condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made by the Company to be taxed as a REIT. Prior to 1998, a
REIT that failed to comply with certain regulations regarding condition (v) was
subject to disqualification as a REIT. Recent legislative changes now impose a
$25,000 penalty ($50,000 for intentional violations) for failing to comply with
the ownership recordkeeping regulations, instead of a loss of the REIT's special
tax status. See "-- Recordkeeping Requirements." Finally, for purposes of
determining stock ownership under the 5/50 Rule set forth in condition (vi), a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actual interests in such trust for purposes of the
5/50 Rule.
The Company anticipates issuing sufficient Common Stock with sufficient
diversity of ownership pursuant to the Offering to allow it to continue to
satisfy requirements (v) and (vi). In addition, the Charter provides for
restrictions regarding the transfer of the Common Stock that are intended to
assist the Company in continuing to satisfy the share ownership requirements
described in clauses (v) and (vi) above. See "Description of Capital
Stock -- Restrictions on Transfer."
The Company has established a wholly-owned subsidiary, HCFP Limited, Inc.,
to hold all of its limited partnership interests in the Operating Partnership.
In addition, the Company anticipates that it may establish and acquire all of
the stock of one or more corporate subsidiaries in the future. Code section
856(i) provides that a corporation that is a "qualified REIT subsidiary" shall
not be treated as a separate corporation, and all assets, liabilities, and items
of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" of the Company will be ignored, and
all assets, liabilities, and items of income, deduction, and
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credit of such subsidiaries will be treated as assets, liabilities, and items of
income, deduction, and credit of the Company.
The Company also has decided that, in the future, all or a portion of its
operations will be carried on through an operating partnership. Accordingly, the
Company has organized the Operating Partnership and currently owns (directly and
indirectly) 100% of its Partnership Units. Pursuant to Treasury Regulations
effective January 1, 1997 relating to entity classification (the "Check-the-Box
Regulations"), an unincorporated entity that has two or more owners and that
does not elect to be classified as a corporation is classified as a partnership
for federal income tax purposes. The Company intends that the Operating
Partnership will be characterized as a partnership for federal income tax
purposes, and has represented that the Operating Partnership will not elect to
be treated as an association taxable as a corporation under the "Check-the-Box"
Regulation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. If formed, when the operating
partnership admits a partner other than the Company or a qualified REIT
subsidiary of the Company, the Company's proportionate share of the assets and
gross income of the operating partnership will be treated as assets and gross
income of the Company for purposes of applying the requirements described
herein.
Income Tests. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and interest on obligations secured by mortgages on
real property or on interests in real property) or temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property, mortgages on real property, or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. The specific
application of these tests to the Company is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if the Company held
such assets), the Company will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if the Company
receives interest income with respect to a mortgage loan that is secured by both
real property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date the Company purchased the mortgage loan, the interest
income will be apportioned between the real property and the other property,
which apportionment may cause the Company to recognize income that is not
qualifying income for purposes of the 75% gross income test.
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Most of the income that the Company recognizes with respect to its
investments in mortgage loans will be qualifying income for purposes of both the
75% and 95% gross income tests. In some cases, however, the loan amount of a
mortgage loan may exceed the value of the real property securing the loan, which
will result in a portion of the income from the loan being classified as
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. The Company also may originate or acquire
construction loans or mezzanine loans that have shared appreciation provisions.
To the extent interest from a loan that is based on the cash proceeds from the
sale of property constitutes a "shared appreciation provision" (as defined in
the Code), income attributable to such participation feature will be treated as
gain from the sale of the secured property, which generally is qualifying income
for purposes of the 75% and 95% gross income tests. In addition, the Company may
be required to recognize income from a shared appreciation provision over the
term of the related loan using the constant yield method pursuant to certain
Treasury Regulations.
The Company may acquire and originate mortgage loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such transactions,
the Company will retain an ownership interest in the mortgage loans that has
economic characteristics similar to those of a mortgage backed security. In
addition, the Company may resecuritize mortgage backed securities (or non-REMIC
CMOs) through the issuance of non-REMIC CMOs, retaining an interest in the
mortgage backed securities used as collateral in the resecuritization
transaction. Such transactions will not cause the Company to fail to satisfy the
gross income tests or the asset tests described below.
The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. The Company will
monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the two gross income tests.
The rent received by the Company from the lessees of its real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
the ownership interests in such tenant, taking into account both direct and
constructive ownership (a "Related Party Tenant"). Third, if Rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total Rent received under the lease, then the portion of
Rent attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property," the
Company generally must not operate or manage the real property or furnish or
render services to the tenants of such real property, other than through an
"independent contractor" who is adequately compensated and from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant." A REIT is permitted
to render a de minimis amount of impermissible services to tenants, or to manage
or operate property, and still treat amounts received with respect to that
property as rent, as long as the amount received with respect to the
impermissible services or management does not exceed one percent of the REIT's
gross income from the property. For these purposes, the services may not be
valued at less than 150 percent of the REIT's direct cost of the services.
The Company has represented that it will not charge Rent for any portion of
any real property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company has represented that, to the extent that it receives Rent
from a Related Party Tenant, such Rent will not cause the Company to fail to
satisfy either the 75% or 95% gross income test. The Company also has
represented that it will not allow the Rent attributable to personal property
leased in connection with any lease of real property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy
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either the 75% or 95% gross income test. Furthermore, as a result of
restrictions on the ownership of stock in the Company, no person may own,
directly or indirectly, more than 9.9% of the Company. The Company has
represented that neither HCFP nor any person constructively owned by HCFP will
pay any rent to the Company, so that the Company will not receive any rent from
a Related Party Tenant. Finally, the Company has represented that it will not
operate or manage its real property or furnish or render noncustomary services
to the tenants of its real property other than through an "independent
contractor," to the extent that such operation or the provision of such services
would jeopardize the Company's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to treat
the related property as foreclosure property. If property is not eligible for
the election to be treated as foreclosure property ("Ineligible Property")
because the related loan was acquired by the REIT at a time when default was
imminent or anticipated, income received with respect to such Ineligible
Property may not be qualifying income for purposes of the 75% or 95% gross
income test.
Any net income from a prohibited transaction is subject to a tax equal to
100% of such net income. The term "prohibited transaction" generally includes a
sale or other disposition of property that is held primarily for sale to
customers in the ordinary course of a trade or business. Excluded generally from
the definition of a "prohibited transaction" are sales of foreclosure property,
sales of any property that was involuntarily converted and sales under the
jurisdiction of a bankruptcy court of property subject to a shared appreciation
mortgage. The Company believes that no asset owned by the Company or, if it is
formed, the operating partnership, will be held for sale to customers and that a
sale of any such asset will not be in the ordinary course of the Company's or
the operating partnership's business. Whether property is held "primarily for
sale to customers in the ordinary course of a trade or business" depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. Nevertheless, the Company will attempt
to comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the ordinary
course of a trade or business."
It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that the Company enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. To the extent that the Company hedges
with other types of financial instruments or in other situations, the income
from those transactions also should be treated as qualifying income under the
95% (but not the 75%) gross income test so long as the transaction is entered
into to reduce the interest rate risk of any qualified indebtedness incurred or
to be incurred by the Company. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to
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reasonable cause and not due to willful neglect, the Company attaches a schedule
of the sources of its income to its return, and the Company anticipates that any
incorrect information on the schedule will not be due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of such relief provisions. As
discussed in "Federal Income Tax Considerations -- Taxation of the Company,"
even if such relief provisions apply, a 100% tax would be imposed on the net
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test.
Asset Tests. The Company, at the close of each quarter of each taxable
year, must satisfy, either directly or through partnerships in which it has an
interest, two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the fair market value of the associated real property,
regular or residual interests in a REMIC (except that, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if the Company
held such assets), the Company will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of other REITs. For
purposes of the 75% asset test, the term "interest in real property" includes an
interest in mortgage loans or land and improvements thereon, such as buildings
or other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real property). An
"interest in real property" also generally includes an interest in mortgage
loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75% asset class, the value of any
one issuer's securities owned by the Company may not exceed 5% of the value of
the Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in any
partnership and any qualified REIT subsidiary).
The Company expects that any mortgage backed securities, real estate
related assets and temporary investments that it acquires generally will be
qualifying assets for purposes of the 75% asset test, except to the extent that
less than 95% of the assets of a REMIC in which the Company owns an interest
consists of "real estate assets" and the Company's proportionate share of those
assets includes assets that are nonqualifying assets for purposes of the 75%
asset test. Mortgage loans (including Construction Loans and Mezzanine Loans)
also will be qualifying assets for purposes of the 75% asset test to the extent
that the principal balance of each mortgage loan does not exceed the value of
the associated real property. The Company will monitor the status of the assets
that it acquires for purposes of the various asset tests and has represented
that it will manage its portfolio in order to comply at all times with such
tests.
The Company anticipates that it may securitize a portion of the mortgage
loans which it acquires. The securitization of the mortgage loans may be
accomplished through a non-REMIC securitization, either directly or through one
or more qualified REIT subsidiaries established by the Company. The
securitization of the mortgage loans either directly, or through one or more
qualified REIT subsidiaries, will not affect the qualification of the Company as
a REIT or result in the imposition of corporate income tax under the taxable
mortgage pool rules.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
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Distribution Requirements. The Company, in order to avoid corporate income
taxation of the earnings that it distributes, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its stockholders in an aggregate amount at least equal to (i) the sum of (A) 95%
of its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. However, if a REIT elects to retain and pay income
tax on its long-term capital gains, the REIT stockholders include in their
income as long-term capital gains their proportionate share of the long-term
capital gains as designated by the REIT. The stockholder is deemed to have paid
the stockholder's share of the tax which has been paid by the REIT with respect
to the long-term capital gain. The stockholder can receive a refund of such tax
if his or her liability is less than taxes withheld from or paid by (including
the credit for the tax paid by the REIT) the stockholder. The basis of the
stockholder's shares is increased by the amount of the undistributed long-term
capital gains (less the amount of capital gains tax paid by the REIT) included
in the stockholder's long-term capital gains. Furthermore, if the Company should
fail to distribute during each calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the
calendar year, by the end of the January immediately following such year) at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, the Company may
recognize taxable market discount income upon the receipt of proceeds from the
disposition of, or principal payments on, loans that are "market discount bonds"
(i.e., obligations with a stated redemption price at maturity that is greater
than the Company's tax basis in such obligations), but not have any cash because
such proceeds may be used to make non-deductible principal payments on related
borrowings. Market discount income is treated as ordinary income and not as
capital gain and, thus, is subject to the 95% distribution requirement. The
Company also may recognize Excess Inclusion or other taxable income in excess of
cash flow from REMIC Residual Interests or its retained interests from non-REMIC
securitization transactions. It also is possible that, from time to time, the
Company may recognize net capital gain attributable to the sale of depreciated
property that exceeds its cash receipts from the sale. In addition, pursuant to
certain Treasury Regulations, the Company may be required to recognize the
amount of any payment to be made pursuant to a shared appreciation provision
over the term of the related loan using the constant yield method. Finally, the
Company may recognize taxable income without receiving a corresponding cash
distribution if it forecloses on or makes a "significant modification" (as
defined in Regulations section 1.1001-3(e)) to a loan, to the extent that the
fair market value of the underlying property or the principal amount of the
modified loan, as applicable, exceeds the Company's basis in the original loan.
Therefore, the Company may have less cash than is necessary to meet its annual
95% distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of Preferred Stock or additional Common
Stock, or through the sale of assets.
As a result of the securitization or resecuritization of mortgage loans or
other debt instruments, and the subsequent sale of the senior (or most secure)
securities created in the securitization, the Company may retain subordinated
securities or a residual interest in the assets being securitized on which
interest or discount income will be accrued without the current payment of cash.
This situation could arise because cash payments received on the assets are
required to be paid to the holders of senior securitized interests. In addition,
the Company would have phantom income to the extent of the market discount
attributable to debt securities held
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by a REMIC in which the Company holds a REMIC Residual Interest. In such
situations, the income related to such subordinate debt instruments will be
subject to the 95% distribution requirement. In order to satisfy the REIT
distribution requirements, the Company may need to distribute funds obtained
through borrowing, the issuance of additional capital stock or the sale of
assets. As a result, the maintenance of REIT status could affect the manner in
which the REIT conducts its business operations.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations,
in order to be able to elect to be taxed as a REIT, the Company must maintain
certain records and request on an annual basis certain information from its
stockholders designed to disclose the actual ownership of its outstanding stock.
A penalty is now imposed (instead of immediate loss of REIT status) for any year
in which a REIT fails to comply with regulations to ascertain its ownership. The
penalty is $25,000 ($50,000 for intentional violations) for any year in which
the REIT did not comply with the ownership regulations. The REIT will also be
required, when requested by the IRS, to send curative demand letters. In
addition, a REIT that complied with the regulations for ascertaining its
ownership, and which did not know, or have reason to know, that it was so
closely held as to violate the 5/50 Rule would not be treated as violating the
5/50 Rule. The Company intends to comply with such requirements.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to the Company's stockholders
in any year in which the Company fails to qualify as a REIT will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of the Company's current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. stockholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii)
a corporation, partnership, or other entity created or organized in or under the
laws of the U.S. or of any political subdivision thereof, (iii) an estate whose
income from sources without the United States is includible in gross income for
U.S. federal income tax purposes regardless of its connection with the conduct
of a trade or business within the United States, (iv) any trust with respect to
which (A) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons have the authority
to control all substantial decisions of the trust or (v) certain electing trusts
in existence on August 20, 1996 and treated as "U.S. persons" prior to such
date. Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held his Common Stock. However, corporate stockholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Common Stock, but rather will reduce the
adjusted basis of such stock. To the extent that such distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
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stockholder's Common Stock, such distributions will be included in income
taxable at the maximum long-term capital gain of 20% if the Common Stock has
been held more than twelve months or short-term capital gain taxable at ordinary
income rates if the Common Stock had been held for one year or less, assuming
the Common Stock is a capital asset in the hands of the stockholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a stockholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the stockholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such),
however, will be treated as investment income only if the stockholder so elects,
in which case such capital gains will be taxed at ordinary income rates. The
Company will notify stockholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income or capital gain dividends.
The Company's investment in certain types of assets may cause it under
certain circumstances to recognize phantom income and to experience an
offsetting excess of economic income over its taxable income in later years. As
a result, stockholders may from time to time be required to pay federal income
tax on distributions that economically represent a return of capital, rather
than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if the Company receives
phantom income, its stockholders may be required to pay federal income tax with
respect to such income on an accelerated basis, i.e., before such income is
realized by the stockholders in an economic sense. Taking into account the time
value of money, such an acceleration of federal income tax liabilities would
cause stockholders to receive an after-tax rate of return on an investment in
the Company that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not generate
phantom income. For example, if an investor subject to an effective income tax
rate of 30% purchased a bond (other than a tax-exempt bond) with an annual
interest rate of 10% for its face value, his before-tax return on his investment
would be 10%, and his after-tax return would be 7%. However, if the same
investor purchased stock of the Company at a time when the before-tax rate of
return was 10%, his after-tax rate of return on his stock might be somewhat less
than 7% as a result of the Company's phantom income. In general, as the ratio of
the Company's phantom income to its total income increases, the after-tax rate
of return received by a taxable stockholder of the Company will decrease. The
Company will consider the potential effects of phantom income on its taxable
stockholders in managing its investments.
If the Company owns REMIC Residual Interests, it is possible that
stockholders would not be permitted to offset certain portions of the dividend
income they derive from the Company with their current deductions or net
operating loss carryovers or carrybacks. The portion of a stockholder's
dividends that would be subject to this limitation would equal his allocable
share of any Excess Inclusion income derived by the Company with respect to the
REMIC Residual Interests. The Company's Excess Inclusion income for any calendar
quarter will equal the excess of its income from REMIC Residual Interests over
its "daily accruals" with respect to such REMIC Residual Interests for the
calendar quarter. Daily accruals for a calendar quarter are computed by
allocating to each day on which a REMIC Residual Interest is owned a ratable
portion of the product of (i) the "adjusted issue price" of the REMIC Residual
Interest at the beginning of the quarter and (ii) 120% of the long-term federal
interest rate (adjusted for quarterly compounding) on the date of issuance of
the REMIC Residual Interest. The adjusted issue price of a REMIC Residual
Interest at the beginning of a calendar quarter equals the original issue price
of the REMIC Residual Interest, increased by the amount of
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daily accruals for prior quarters and decreased by all prior distributions to
the Company with respect to the REMIC Residual Interest. To the extent provided
in future Treasury regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by the Company that do not have significant value
will equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a qualified REIT
subsidiary) acquires or originates mortgage loans and uses those loans to
collateralize one or more multiple-class offerings of mortgage backed securities
for which no REMIC election is made ("Non-REMIC Transactions"), it is possible
that, to the extent provided in future Treasury regulations, stockholders will
not be permitted to offset certain portions of the dividend income that they
derive from the Company that are attributable to Non-REMIC Transactions with
current deductions or net operating loss carryovers or carrybacks. Although no
applicable Treasury regulations have yet been issued, no assurance can be
provided that such regulations will not be issued in the future or that, if
issued, such regulations will not prevent the Company's stockholders from
offsetting some portion of their dividend income with deductions or losses from
other sources.
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year (more than eighteen months in order to be eligible for the more
favorable 10%/20% capital gains tax rate applicable to a non-corporate taxpayer)
and otherwise as short-term capital gain or loss. However, any loss upon a sale
or exchange of Common Stock by a stockholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions from the Company
required to be treated by such stockholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of the Common Stock may
be disallowed if other shares of Common Stock are purchased within 30 days
before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the maximum tax rate on long-term capital gains applicable to non-corporate
taxpayers is 20% for sales and exchanges of assets held for more than one year
(10% for taxpayers in the 15% ordinary income tax bracket) for sales and
exchanges of assets held for more than eighteen months. (Prior to the recent
enactment of the Internal Revenue Service Restructuring and Reform Act of 1998
(the "1998 Act"), the maximum tax rate on long-term capital gains applicable to
non-corporate taxpayers was 28% for sales and exchanges of assets held for more
than one year but not more than eighteen months and 20% (10% for taxpayers in
the 15% bracket) for sales and exchanges of assets held for more than eighteen
months.) Thus, the tax rate differential between capital gain and ordinary
income for non-corporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a non-corporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Unused capital losses may be carried forward
indefinitely by non-corporate taxpayers. All net capital gain of a corporate
taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
The Taxpayer Relief Act of 1997 (the "1997 Act") added provisions to the
Code reducing the maximum rate on long-term capital gains of non-corporate
taxpayers from 28% to 20% (10% for taxpayers in the 15% tax bracket). The lower
rates generally apply to sales or exchanges of capital assets occurring after
May 6, 1997. However, the reduced long-term capital gains rates are only
available for sales or exchanges of capital assets held for more than 18 months
(or more than 12 months if the sale or exchange occurred after May 6, 1997 and
before July 29, 1997). Any long-term capital gains from the sale or exchange of
depreciable real property that would be subject to ordinary income taxation
(i.e., "depreciation recapture") if it were treated as personal property will be
subject to a maximum tax rate of 25% instead of the 20% maximum rate for gains
taken into account after July 28, 1997. Also, under the legislation, for taxable
years beginning after December 31, 2000,
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the maximum capital gains rates for assets which are held more than 5 years are
18% and 8% (rather than 20% and 10%). These rates will generally only apply to
assets for which the holding period begins after December 31, 2000.
The Service issued a notice (Notice 97-64) that temporary regulations will
be issued providing guidance to REITs as to the proper computation and reporting
of capital gain eligible for the taxation at the rates set forth in the previous
paragraph. The notice also provides for reporting of such gains in the interim
until such temporary regulations are issued. The notice provides that for
taxable years of a REIT ending on or after May 7, 1997, if a REIT designates to
its shareholders that a dividend is a capital gain dividend, then the REIT also
may designate the dividend as a 20% rate gain distribution, an unrecaptured
section 1250 gain distribution, or a 28% rate gain distribution. If no
additional designation is made regarding a capital gain dividend distributed by
a REIT, the capital gain is deemed to be a 28% rate gain distribution. If a
capital gain dividend is so designated by a REIT as falling in one of the three
(3) categories of capital gain for a taxable year of a shareholder ending on or
after May 7, 1997), then the REIT shareholder may treat the capital gain
dividend distribution so designated as: (1) long-term capital gain in the
20-percent group; (2) unrecaptured section 1250 gain in the 25-percent group;
and/or (3) long-term capital gain in the 28-percent group; as the case may be.
The notice also provides that the additional designations of capital gain shall
be effective only to the extent certain limitations and requirements are met,
including the requirement that the designations comply with the principles of
Rev. Rule. 89-81, 1989-1 C.B. 226. The Company intends to provide notice to its
shareholders designating any capital gain distributions as 20% rate gain
distributions, unrecaptured section 1250 gain distributions, and/or 28% rate
gain distributions, as the case may be, in compliance with the guidelines
established in Notice 97-64, until temporary regulations are issued.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their nonforeign status to the Company. The Treasury
Department recently finalized proposed regulations that were issued in April
1996 regarding the backup withholding rules as applied to Non-U.S. Stockholders
(the "Final Regulations"). The Final Regulations would alter the current system
of backup withholding compliance and would be effective for distributions made
after December 31, 1999. See "-- Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17) and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to
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characterize distributions from the Company as UBTI. In addition, in certain
circumstances, a pension trust that owns more than 10% of the Company's stock is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage"). The UBTI Percentage is the gross income derived by the
Company from an unrelated trade or business (determined as if the Company were a
pension trust) divided by the gross income of the Company for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Company's stock only if (i) the UBTI Percentage is at least 5%,
(ii) the Company qualifies as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (iii) either (A) one pension trust owns more than 25% of the value of
the Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively owns more than 50% of
the value of the Company's stock. The Company's ownership limitations should
prevent an Exempt Organization from owning more than 10% of the value of the
Company's stock.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion income derived by the Company from REMIC Residual Interests
that is allocable to stock of the Company held by Disqualified Organizations.
Any such tax would be deductible by the Company against its income that is not
Excess Inclusion income.
If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on stockholders who are (i) pass-through entities
(i.e., partnerships, estates, trusts, regulated investment companies, REITS,
common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Stock on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds shares of Common Stock in a "street name" account for
a Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class mortgage-backed securities in non-REMIC
transactions. If such Treasury regulations are issued in the future allocating
the Company's Excess Inclusion income from non-REMIC transactions pro rata among
its stockholders, some percentage of the dividends paid by the Company would be
treated as UBTI in the hands of stockholders that are Exempt Organizations. See
"-- Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or
business (or, if an income tax treaty, to a U.S. permanent establishment), the
Non-U.S. Stockholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such distributions (and also may be subject to the 30% branch profits tax in
the case of a Non-U.S. Stockholder that is a non-U.S. corporation). The
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Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Stockholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income (or, if an income tax treaty applies, it is effectively
connected to a U.S. permanent establishment). The Treasury Department Final
Regulations would modify the manner in which the Company complies with these
withholding requirements.
Any portion of the dividends paid to Non-U.S. Stockholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. In addition, if Treasury regulations
are issued in the future allocating the Company's Excess Inclusion income from
non-REMIC transactions among its stockholders, some percentage of the Company's
dividends would not be eligible for exemption from the 30% withholding tax or a
reduced treaty withholding tax rate in the hands of non-U.S. Stockholders. See
"-- Taxation of Taxable U.S. Stockholders."
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. In August 1996, the
U.S. Congress passed the Small Business Job Protection Act of 1996, which
requires the Company to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. Consequently, although
the Company intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualified as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests (which includes certain interests in real property but does
not include mortgage loans or MBS) will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Stockholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Stockholders thus would be
taxed at the normal capital gain rates applicable to U.S. Stockholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a non-U.S.
corporate stockholder not entitled to treaty relief or exemption. The Company is
required to withhold 35% of any distribution that is designated by the Company
as a capital gains dividend. The amount withheld is creditable against the Non-
U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. However, because the Common Stock will be
publicly traded, no assurance can be given that the Company will be or remain a
"domestically controlled REIT." In addition, a Non U.S. Stockholder that owns,
actually or constructively, 5% or less of the Company's stock throughout a
specified "look-back" period will not recognize the gain on the sale of his
stock taxable under FIRPTA if the shares are traded on an established securities
market. Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S.
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Stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the U.S. for 183 days or more
during the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of the Common Stock were to be subject to
taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same
treatment as U.S. Stockholders with respect to such gain (subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations).
STATE AND LOCAL TAXES
The Company or the Company's stockholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The state and local
tax treatment of the Company and its stockholders in such jurisdictions may
differ from the federal income tax treatment described above. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Stock.
SALE OF THE COMPANY'S PROPERTY
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of its trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income tests for REIT status. See "-- Requirements For Qualification -- Income
Tests" above. The Company, however, does not presently intend to acquire or hold
a material amount of property that represents inventory or other property held
primarily for sale to customers in the ordinary course of the Company's trade or
business.
TAX ASPECTS OF THE COMPANY'S OWNERSHIP OF INTERESTS IN THE OPERATING PARTNERSHIP
General. It is anticipated that all or substantially all of the Company's
investments eventually will be held indirectly through the Operating
Partnership. In general, partnerships are "pass-through" entities which are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. The Company
will include in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, the
Company will include its proportionate share of assets held through the
Operating Partnership.
Entity Classification. If the Operating Partnership were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and would
preclude the Company from qualifying as a REIT (see "-- Requirements for
Qualification as a REIT -- Asset Tests" and "-- Income Tests"). The same result
could occur if any subsidiary partnership or limited liability company of the
Operating Partnership failed to qualify for treatment as a partnership.
Prior to January 1, 1997, an organization formed as a partnership or an LLC
was treated as a partnership for federal income tax purposes rather than as a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at the time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated and an entity formed as a partnership or as an limited
liability company will be taxed as a partnership for federal income tax
purposes, unless it specifically elects otherwise or is subject to the rules
regarding publicly-traded partnerships. In general, under the "Check-the-Box"
regulations, an unincorporated entity with at least two owners may elect to be
classified as an association that is taxable as a corporation. If the entity
fails to make the election, it generally will be treated as a partnership for
federal income tax purposes. The Company intends that the
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Operating Partnership will be characterized as a partnership for federal income
tax purposes and has represented that the Operating Partnership will not elect
to be treated as an association that is taxable as a corporation under the
"Check-the-Box" regulations.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocation of taxable income and
loss provided for in the Operating Partnership Agreement is intended to comply
with the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership, must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at such time (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership
will receive contributions of appreciate property. Consequently, the Operating
Partnership Agreement requires that such allocations be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners in the Operating Partnership who contribute
depreciable assets having adjusted tax basis less than their fair market values
at the time of contribution will be allocated depreciation deductions for tax
purposes which are lower than such deductions would be if determined on a pro
rata basis. In addition, in the event of the disposition of any of the
contributed assets which have such a Book-Tax Difference, all income
attributable to such Book-Tax Difference generally will be allocated to such
partners. The allocations will tend to eliminate the Book-Tax Difference over
the life of the Operating Partnership. However, the special allocation rules of
Section 704(c) of the Code do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the Operating Partnership may cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it, as a result of such sale. Such an allocation might cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See "-- Requirements for Qualification as a REIT."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have
determined to use the "traditional method" for accounting for Book-Tax
Differences with respect to the properties initially contributed to the
Operating Partnership. This method is generally the most favorable method from
the perspective of the limited partners at the time of the contribution and will
be less favorable from the perspective of the Company to the extent it
subsequently contributes cash (such as the proceeds of the Offering) to the
Operating Partnership.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
and the prohibited transaction provisions of section 4975 of the Code, that may
be relevant to a prospective purchaser of Common Stock (including, with respect
to the discussion contained in "-- Status of the Company under ERISA," to a
prospective purchaser that is not an employee benefit plan, another
tax-qualified retirement plan, or an IRA). The discussion contained herein does
not purport to deal with all aspects of ERISA or section 4975 of the Code that
may be relevant to particular stockholders (including plans subject to Title I
of ERISA, other retirement plans and IRAs subject to the prohibited transaction
provisions of section 4975 of the Code, and governmental plans or church plans
that are exempt from ERISA and section 4975 of the Code but that may be subject
to state law requirements) in light of their particular circumstances.
The statements in this discussion are based on current provisions of ERISA
and the Code, existing and currently proposed regulations promulgated under
ERISA and the Code, the legislative history of ERISA and the Code, existing
administrative rulings of the Department of Labor ("DOL"), and reported judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to
transactions entered into or contemplated prior to the effective date of such
changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS A TAX-QUALIFIED RETIREMENT PLAN, ANOTHER
EMPLOYEE BENEFIT PLAN OR AN IRA SHOULD CONSULT HIS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a Plan subject to Title I of ERISA should consider
carefully whether an investment in the Common Stock is consistent with his
fiduciary responsibilities under ERISA. In particular, the fiduciary
requirements of Part 4 of Title I of ERISA require a Plan's investment to be (i)
prudent and in the best interests of the Plan, its participants, and its
beneficiaries, (ii) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to diversify, and (iii) permitted under the
terms of the Plan's governing documents (provided the documents are consistent
with ERISA). In determining whether an investment in the Common Stock is prudent
for purposes of ERISA, the appropriate fiduciary of a Plan should consider all
of the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment responsibility, to further the purposes of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, and the diversification, cash flow, and projected return
relative to the funding requirements of the Plan's portfolio. The fiduciary of a
Plan or of an IRA should also take into account the possible recognition of UBTI
as discussed under "Federal Income Tax Considerations -- Taxation of Tax-Exempt
Stockholders."
The persons making the investment decisions for an IRA or for a retirement
plan that is not subject to Title I of ERISA because it is a governmental plan
or a church plan that has not made the election under Section 410(d) of the Code
or because it does not cover common law employees (a "Non-ERISA Plan") should
consider that such an IRA or Non-ERISA Plan may only make investments that are
permitted by the appropriate governing documents and under applicable state law.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an
insurance company's general account may be deemed to include assets of any
Plans, Non-ERISA Plans and IRAs investing in the general account (e.g., through
the purchase of an annuity contract), and the insurance company might be treated
as a party in interest or disqualified person by virtue of such investment.
Fiduciaries of Plans and persons making the investment decision for an IRA
or a Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to a Plan,
a Non-ERISA Plan or IRA subject to section 4975 of the Code is subject to (i) an
initial 15% excise tax on the amount
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involved in any prohibited transaction involving the assets of the Plan,
Non-ERISA Plan or IRA for each year or part thereof during which the transaction
is not corrected, and (ii) an excise tax equal to 100% of the amount involved if
any prohibited transaction is not corrected. A "party in interest" or
"disqualified person" includes any fiduciary or person providing services to a
Plan, Non-ERISA Plan or IRA, the employer maintaining a Plan or Non-ERISA Plan
(and a direct or indirect 50% or more owner of the employer), a union
representing employees covered by a Plan or Non-ERISA Plan, and various
individuals and entities related to any of the foregoing. A "prohibited
transaction" includes (subject to certain exceptions) any direct sale or
exchange of property, extension of credit, or furnishing of goods or facilities,
between a plan and the party in interest or disqualified person; and also
includes the use of plan assets for the benefit of a party in interest or
disqualified person, or a self-dealing or kickback transaction by a fiduciary.
If the disqualified person who engages in the transaction is the individual on
behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (though no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan or Non-ERISA Plan to engage in a transaction that the fiduciary knows or
should know is a prohibited transaction may be liable to the Plan or Non-ERISA
Plan for any loss the Plan or Non-ERISA Plan incurs as a result of the
transaction or for any profits earned by the fiduciary in the transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA, and the prohibited
transaction provisions of ERISA and the Code, apply to an entity and to
transactions by the entity because one or more investors in the equity interests
in the entity is a Plan or Non-ERISA Plan or IRA. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over, or responsibility for, "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy, a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold the Common Stock could be liable under Part 4 of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, and (iv)
certain transactions that the Company might enter into in the ordinary course of
its business and operations might constitute "prohibited transactions" under
ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity, and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's or
Non-ERISA Plan's or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred). The Common Stock is
being sold in an offering registered under the Securities Act and will be
registered under the Exchange Act. The Plan Asset Regulations provide that a
security is "widely held" only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another. A
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security will not fail to be widely held because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company anticipates that upon
completion of this offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, , or an event (such as completion of an offering), prior to
which a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Charter on the transfer of the Company's stock
will not result in the failure of the Common Stock to be "freely transferable."
The Company also is not aware of any other facts or circumstances limiting the
transferability of the Common Stock that are not enumerated in the Plan Asset
Regulations as those not affecting free transferability. However, no assurance
can be given that the DOL or the Treasury Department could not reach a contrary
conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company should
not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that
invests in the Common Stock.
As noted above, based on the reasoning of the United States Supreme Court
in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include assets
of the Plans, Non-ERISA Plans and IRAs investing in the general account (e.g.,
through the purchase of an annuity contract), and the insurance company might be
treated as a party in interest by virtue of such investment. Any purchaser that
is an insurance company using the assets of an insurance company general account
should note section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and section 4975 of the Code.
Pursuant to section 401(c), the DOL is required to issue final regulations (the
"General Account Regulations") with respect to insurance policies issued on or
before December 31, 1998 that are supported by an insurer's general account. The
General Account Regulations are to provide guidance on which assets held by the
insurer constitute "plan assets" for purposes of the fiduciary responsibility
provisions of ERISA and section 4975 of the Code. Section 401(c) also provides
that, except in the case of avoidance of the General Account Regulation and
actions brought by the Secretary of Labor relating to certain breaches of
fiduciary duties that also constitute breaches of state or federal criminal law,
until the date that is 18 months after the General Account Regulations become
final, no liability under the fiduciary responsibility and prohibited
transaction provisions of ERISA and section 4975 may result on the basis of a
claim that the assets of the general account of an insurance company constitute
the assets of any Plan, non ERISA Plan or IRA. The plan asset status of
insurance company separate accounts is unaffected by new section 401(c) of
ERISA, and separate account assets continue to be treated as the plan assets of
any such plan invested in a separate account.
Any fiduciary or other person making the investment decision on behalf of a
Plan, Non-ERISA Plan or IRA that proposes to purchase Common Stock should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment and determine on its own whether any exceptions
or exemptions are applicable and whether all conditions of any such exceptions
or exemptions have been satisfied.
Moreover each fiduciary or other person making the investment decision on
behalf of a Plan, Non-ERISA Plan or IRA should determine whether, under the
general fiduciary standards of investment prudence
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and diversification, an investment in the Common Stock is appropriate for the
Plan, Non-ERISA Plan or IRA, taking into account the overall investment policy
of the Plan, Non-ERISA Plan or IRA, and the composition of its investment
portfolio.
The sale of the Common Stock is in no respect a representation by the
Company or any other person that such an investment meets all relevant legal
requirements with respect to investments by Plans, Non-ERISA Plans or IRAs
generally or that such an investment is appropriate for any particular Plan,
Non-ERISA Plan or IRA.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, and assuming the exercise of each of the
Warrants, shares of Common Stock will be outstanding. Of these
shares, shares will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by Affiliates of the Company may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock which will be held by
certain existing stockholders upon completion of this Offering are deemed
"Restricted Shares" under Rule 144. The Company and the Operating Partnership
have agreed, subject to certain exceptions, from the closing of the Private
Placement until 180 days from the closing of the Offering, not to, directly or
indirectly, sell, offer to sell, grant any option for the purchase or sale of,
or otherwise dispose of any Common Stock or Partnership Units, without the prior
written consent of Nationsbanc Montgomery Securities LLC. HCFP and certain
executive officers of HCFP have agreed, subject to certain exceptions, until
April 29, 2001, not to, directly or indirectly, sell, offer to sell, grant any
option for the purchase or sale of, or otherwise dispose of any Common Stock or
Partnership Units, without the prior written consent of NationsBanc Montgomery
Securities LLC. Subject to these lock-up agreements, the Restricted Shares will
be eligible for sales pursuant to Rule 144 in the public market beginning 90
days after the consummation of this Offering.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any Affiliate of the Company, the acquiror or subsequent holder thereof is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company which will require the Company to file periodic
reports under the Exchange Act. If two years have elapsed since the date of
acquisition of restricted shares from the Company or from any affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an Affiliate of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
OPTIONS
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under Rule
144 without compliance with its one-year minimum holding period, subject to
certain limitations. The Company intends to file one or more registration
statements on Form S-8 under the Securities Act to register all of the shares of
Common Stock subject to outstanding stock options and Common Stock issuable
pursuant to the Company's stock option plans which do not qualify for an
exemption under Rule 701 from the registration requirements of the Securities
Act. The Company expects to file these registration statements as soon as
practicable after the
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closing of this Offering, and such registration statements are expected to
become effective upon filing. Shares covered by these registration statements
will thereupon be eligible for sale in the public markets, subject to the
lock-up agreements described above, if applicable.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the holders of 1,450,000
Units issued in the Private Placement are entitled to certain rights with
respect to registration of such Units under the Securities Act pursuant to the
Shelf Registration Statement. Shortly after the filing of the Registration
Statement, of which this Prospectus is a part, the Company will file the Shelf
Registration Statement with the Commission, which is expected to become
effective at or prior to the effective date of the Registration Statement. This
will result in the shares of Common Stock, Warrants and Warrant Shares
comprising the Units (other than those owned by HCFP, which has agreed not to
sell prior to April 29, 2001) becoming freely tradable without restriction under
the Securities Act (except for underlying shares of Common Stock and Warrants
held by Affiliates of the Company) immediately upon the effectiveness of such
registration, subject to the lock-up agreements referenced above. Pursuant to
the Registration Rights Agreement, the Company will suspend sales of such
securities under the Shelf Registration Statement from the effective date of the
Registration Statement with respect to the Offering until the end of the 30-day
period during which the underwriters' over-allotment option may be exercised.
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of such securities for sale will have on the market
price of the Common Stock. Sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Prospectus Summary -- Private Placement" and "Risk Factors -- Sales of Units
and Underlying Common Stock may adversely affect the Market for the Common
Stock."
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, Credit Suisse
First Boston, Friedman, Billings, Ramsey & Co., Inc. and Stephens, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement among the Company, the Operating
Partnership and the Underwriters (the "Underwriting Agreement"), to purchase
from the Company the number of shares of Common Stock indicated below opposite
their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
ABN AMRO Incorporated.......................................
Credit Suisse First Boston..................................
Friedman, Billings, Ramsey & Co., Inc.......................
Stephens, Inc...............................................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares if any are purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share, and the Underwriters may
allow, and such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Representatives. The shares
of Common Stock are offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject an
order in whole or in part. The Underwriters may offer the shares of Common Stock
through a selling group.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of and additional shares of Common Stock, respectively, to
cover over-allotments, if any, at the offering price less underwriting discount
set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company and the Operating
Partnership will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof.
In connection with the Private Placement, HCFP and certain executive
officers of HCFP agreed that they would not, without the prior written consent
of NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, directly or
indirectly, sell, offer, contract or grant any option to sell, make any short
sale, pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
currently owned either of record or beneficially by them or announce the
intention to do any of the foregoing, until April 29, 2001. All other directors
and executive officers of the Company have agreed that they will not, without
the prior written consent of NationsBanc Montgomery Securities LLC (which
consent may be withheld in its sole discretion) and subject to certain limited
exceptions, directly or indirectly, sell, offer, contract or grant any option to
sell, make any short sale, pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the
101
<PAGE> 107
Exchange Act, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire Common Stock, or securities exchangeable or exercisable for
or convertible into Common Stock currently owned either of record or
beneficially by them or announce the intention to do any of the foregoing, for a
period commencing on the date of this Prospectus and continuing to a date 180
days after such date. NationsBanc Montgomery Securities LLC may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, the Company has
agreed that, for a period of 180 days after the date of this Prospectus, it will
not, without the consent of NationsBanc Montgomery Securities LLC, issue, offer,
sell or grant options to purchase or otherwise dispose of any equity securities
or securities convertible into or exchangeable for equity securities except for
(i) the issuance of shares of Common Stock offered hereby, (ii) the grant of
options to purchase shares of Common Stock pursuant to the 1998 Stock Option
Plan and the Director Plan and shares of Common Stock issued pursuant to the
exercise of such options, provided that such options shall not vest, or the
Company shall obtain the written consent of the grantee not to transfer such
shares, until the end of such 180-day period, and (iii) the issuance of shares
of stock pursuant to the exercise of Warrants. Pursuant to the Registration
Rights Agreement, the Company will suspend sales of securities under the Shelf
Registration Statement from the effective date of the Registration Statement
with respect to the Offering until the end of the 30-day period during which the
Underwriters' over-allotment option may be exercised. See "Description of
Capital Stock -- Shares Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above. The Representatives
may also impose a penalty bid on certain Underwriters and selling group members.
This means that if the Representatives purchase shares of Common Stock in the
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Stock, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price has been
determined through negotiations among the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operations and financial performance,
the prospects for further earnings of the Company, the present state of the
Company's development, the general conditions of the securities markets at the
time of the Offering, the market prices of and demand for the publicly traded
common stock of comparable companies in recent periods and other factors deemed
relevant.
The Representative have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
102
<PAGE> 108
NationsBanc Montgomery Securities LLC acted as an initial purchaser in the
Private Placement, for which compensation was received. Employees of NationsBanc
Montgomery Securities LLC own a total of 32,050 Units, which were acquired in
the Private Placement. Credit Suisse First Boston Corporation, an affiliate of
Credit Suisse First Boston, owns 100,000 Units, which were acquired in the
Private Placement. See "Principal Stockholders." Stephens, Inc. owns 30,000
Units, which were acquired in the Private Placement. Each of NationsBanc
Montgomery Securities LLC, ABN AMRO Incorporated, Stephens Inc., Credit Suisse
First Boston and their respective affiliates has performed various investment
banking and other services for the Company and HCFP in the past, and may do so
from time to time in the future.
LEGAL MATTERS
The validity of the Common Stock offered in the Offering will be passed
upon for the Company by Powell, Goldstein, Frazer & Murphy LLP, Atlanta,
Georgia, and for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco,
California. In addition, the description of federal income tax consequences
contained in this Prospectus under the heading "Federal Income Tax
Considerations" is based upon the opinion of Powell, Goldstein, Frazer & Murphy
LLP. Members of Powell, Goldstein, Frazer & Murphy LLP own in the aggregate
7,647 shares of Common Stock.
EXPERTS
The consolidated financial statements of HealthCare Financial Partners
REIT, Inc. as of May 31, 1998 and for the period January 30, 1998 (inception)
through May 31, 1998 and the combining statement of revenue and certain expenses
of Valencia Medical Center and Vista Village Shopping Center for the year ended
December 31, 1997 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The statement of revenue and certain expenses of Sherman Oaks Medical
Center for the year ended December 31, 1997 appearing in this Prospectus and
Registration Statement have been audited by Solomon, Ross, Grey & Company,
independent auditors, as stated in their report thereon appearing herein, and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
103
<PAGE> 109
GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below. All
terms in the singular shall have the same meanings when used in the plural and
vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.
"ALF" shall mean an assisted living facility.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner.
"Average Invested Assets" for any quarter shall mean the average of the
aggregate book value of the consolidated assets of the Company, before reserves
for depreciation or bad debts or other non-cash reserves, computed by dividing
the sum of such values for each of the three months during such quarter (based
upon the book value of such assets on the last day of such month) by three.
"BBA" shall mean the Balanced Budget Act of 1997.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean the beneficiary of the Trust.
"Board of Directors" shall mean the Board of Directors of the Company.
"Bylaws" shall mean the Bylaws of the Company.
"CCRC" shall mean Continuing Care Retirement Communities.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"CPI" shall mean the U.S. City Average Consumer Price Index for all Urban
Consumers.
"Charter" shall mean the corporate charter of the Company and amendments
thereto, as filed pursuant to MGCL.
"Closing" shall mean the closing of the Offering.
"Closing Date" shall mean the date of the Closing.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $0.0001 per share, of
the Company.
"Company" shall mean HealthCare Financial Partners REIT, Inc., a Maryland
corporation.
"Control Share Acquisition" shall mean the acquisition of control shares,
subject to certain exceptions.
"Control shares" shall mean voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquirer or in
respect of which the acquirer is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (1) one-fifth or more but less
104
<PAGE> 110
than one-third, (2) one-third or more but less than a majority, or (3) a
majority or more of all voting power; but "control shares" shall not include
shares the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval.
"DSCR" shall mean debt service coverage ratio.
"Director Plan" shall mean the Company's 1998 Director Incentive Plan,
which provides for incentive awards to be made to non-employee directors of the
Company.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"FFO" as defined by NAREIT shall mean net income (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring or sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of
1980.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"GMACCM" shall mean GMAC Commercial Mortgage Corporation.
"GMACCM Agreement" shall mean the Agreement Regarding First Right of
Purchase, dated April 29, 1998, between the Company and GMACCM, pursuant to
which, for a three-year term, the Company has a right of first refusal to
purchase certain mortgage loans secured by healthcare facilities which have a
loan-to-value ratio in excess of 80% and which GMACCM determines to sell,
assign, or otherwise transfer.
"HCAC" shall mean HealthCare Analysis Corporation, a Delaware corporation.
"HCFP" shall mean HealthCare Financial Partners, Inc., a Delaware
corporation.
"Identified Assets" shall mean the assets described under
"Portfolio -- Identified Assets".
"Initial Limited Partner" shall mean HCFP Limited, Inc., a Maryland
corporation and a wholly owned subsidiary of the Company.
"Independent Director" shall mean a person who is (i) independent of
management of the Company, HCFP, the Operating Partnership and the Manager, (ii)
not employed by or an officer of the Company, HCFP, the Operating Partnership or
the Manager, (iii) not an "affiliate" (as defined in Rule 405 under the
Securities Act of 1933, as amended) of the Company, HCFP, the Operating
Partnership, the Manager, or of any subsidiary of the Company, HCFP, the
Operating Partnership or the Manager, and (iv) not a person who acts on a
regular basis as an individual or representative of an organization serving as a
professional advisor, legal counsel or consultant to the management of the
Company, HCFP, the Operating Partnership or the Manager.
"Interested Stockholder" shall mean any person who beneficially owns 10% or
more of the voting power of a corporation's shares or an affiliate of a
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of a corporation.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"IRA" shall mean an individual retirement account.
"MAI" shall mean Member, Appraisal Institute.
"MGCL" shall mean the Maryland General Corporation Law.
105
<PAGE> 111
"MLMCI" shall mean Merrill Lynch Mortgage Capital, Inc.
"MOB" shall mean a medical office building.
"Management Agreement" shall mean the Management Agreement, dated May 6,
1998, between the Company and the Manager, as amended, pursuant to which the
Manager performs various services for the Company.
"Manager" shall mean HCFP REIT Management, Inc., a Maryland corporation and
a wholly owned subsidiary of HCFP.
"Mortgage Loan Program" shall mean the program of the Company through which
it currently provides Eligible Mortgage Loans.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"NYSE" shall mean the New York Stock Exchange.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"OID" shall mean original issue discount.
"Offering" shall mean the offering of Common Stock hereby.
"Offering Price" shall mean the initial offering price per share to the
public of the Common Stock offered hereby as set forth on the cover page of the
Company's final Prospectus.
"Operating Partnership" shall mean HCFP REIT Operating Partnership, L.P., a
Delaware limited partnership.
"Operating Partnership Agreement" shall mean the Agreement of Limited
Partnership of HCFP REIT Operating Partnership, L.P.
"Option Plan" shall mean the Company's 1998 Stock Option Plan which
provides for options to purchase Common Stock of the Company.
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more than
9.9% of the outstanding shares of Common Stock by any stockholder, or (b) more
than 9.9% of the shares of any series of Preferred Stock by any stockholder.
"Partnership Units" shall mean the units of ownership in the Operating
Partnership.
"Percentage Amount" shall mean, with respect to the Average Invested Assets
and the calculation of the Management Fee, 1.50% for assets up to and including
$300 million; 1.25% for assets in excess of $300 million up to and including
$600 million; 1.00% for assets in excess of $600 million up to and including
$900 million; 0.75% for assets in excess of $900 million up to and including
$1.2 billion; and 0.50% for assets in excess of $1.2 billion.
"Person" shall mean and include any natural person, corporation,
partnership, association, limited liability company or any other legal entity.
An indirect relationship shall include circumstances in which a person's spouse,
children, parents, siblings or mothers-, fathers-, sisters-, or brothers-in-law
is or has been associated with a person.
"Plan" shall mean a pension, profit-sharing or other employee benefit plans
subject to Title I of ERISA.
"Policies" shall mean policies that set forth general parameters for the
Company's investments, borrowings and operations.
"PORTAL Market" shall mean the Private Offering, Resales and Trading
through Automated Linkages Market of the National Association of Securities
Dealers, Inc.
"Preferred Stock" shall mean the preferred stock of the Company.
"Pricing Date" shall mean the date of the pricing of the Common Stock
pursuant to the Offering.
106
<PAGE> 112
"Private Placement" shall mean the private placement by the Company in May
1998 in which the Company sold 1,450,000 Units at a price to investors of $100
per Unit, resulting in net proceeds to the Company of approximately $136.2
million.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that. are designated as Shares-in-Trust.
"Qualifying Interests" shall mean mortgages and other liens on and
interests in real estate.
"REIT" shall mean a real estate investment trust, as defined in section 856
of the Code.
"REMIC" shall mean a real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of mortgage backed securities
that is designated as the residual interest in one or more REMIC.
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations Act,
18 U.S.C.A. (S) 1961, et seq.
"Registrable Securities" shall mean the Units and the shares of Common
Stock, Warrants and Warrant Shares, which holders of the Units now hold or may
acquire upon the exercise of the Warrants, to be registered under the Securities
Act by means of the Shelf Registration Statement.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated May 6, 1998, among the Company, NationsBanc Montgomery
Securities LLC, Lehman Brothers Inc. and certain other parties thereto, as
amended, pursuant to which the holders of Units issued in the Private Placement
are entitled to certain rights with respect to registration of such Units under
the Securities Act.
"Registration Statement" shall mean the Registration Statement filed with
the Commission of which this Prospectus forms a part.
"Repurchase Facility" shall mean the Company's proposed $150 million
reverse repurchase program with MLMCI.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SNF" shall mean a skilled nursing facility.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of the Company being held by fewer than 100
persons, result in the Company being "closely held," or cause the Company to own
10% or more of the ownership interests in a tenant of the Company's real
property.
"Shelf Registration Statement" shall mean the registration statement to be
filed with the Commission under the Securities Act, pursuant to the Registration
Rights Agreement, relating to the Units and the shares of Common Stock, Warrants
and Warrant Shares which holders of the Units now hold or may acquire upon
exercise of the Warrants.
"Ten-Year Treasury Rate" shall mean the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company.
"Title V" shall mean Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980.
107
<PAGE> 113
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of an impermissible
transfer of shares of Common Stock.
"Trustee" shall mean a trustee of the Trust.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company from
an unrelated trade or business divided by the gross income of the Company for
the year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Unit" shall mean five shares of Common Stock and one Warrant.
"Warrant" shall mean one stock purchase warrant to purchase one share of
Common Stock, included in a Unit.
"Warrant Share" shall mean one share of Common Stock that each holder of a
Warrant is entitled to purchase.
108
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Condensed Consolidated Balance Sheet as of June
30, 1998.................................................. F-3
Pro Forma Condensed Consolidated Statement of Income for the
period January 30, 1998
(inception) through June 30, 1998......................... F-4
Notes to Pro Forma Condensed Consolidated Balance Sheet and
Statement of Income....................................... F-5
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
Report of Independent Auditors.............................. F-9
Consolidated Balance Sheets as of May 31, 1998 and June 30,
1998 (unaudited).......................................... F-10
Consolidated Statements of Income for the period January 30,
1998 (inception) through May 31, 1998, for the one month
period ended June 30, 1998 (unaudited), and for the period
January 30, 1998 (inception) through June 30, 1998
(unaudited)............................................... F-11
Consolidated Statements of Stockholders' Equity as of May
31, 1998 and June 30, 1998 (unaudited).................... F-12
Consolidated Statements of Cash Flows for the period January
30, 1998 (inception) through May 31, 1998, for the one
month period ended June 30, 1998 (unaudited), and for the
period January 30, 1998 (inception) through June 30, 1998
(unaudited)............................................... F-13
Notes to Consolidated Financial Statements.................. F-14
SHERMAN OAKS MEDICAL CENTER
Report of Independent Auditors.............................. F-21
Statements of Revenue and Certain Expenses for the year
ended December 31, 1997 and the period January 1, 1998
through June 18, 1998 (unaudited)......................... F-22
Notes to Financial Statements............................... F-23
VALENCIA MEDICAL CENTER AND VISTA VILLAGE SHOPPING CENTER
Report of Independent Auditors.............................. F-24
Combining Statements of Revenue and Certain Expenses for the
year ended December 31, 1997 and six months ended June 30,
1998 (unaudited).......................................... F-25
Notes to Combining Statements of Revenue and Certain
Expenses.................................................. F-26
</TABLE>
F-1
<PAGE> 115
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited pro forma condensed consolidated balance sheet
is based on the historical consolidated balance sheet of the Company at June 30,
1998 included elsewhere in the Prospectus adjusted to give effect to the
acquisition or funding of income-producing real estate and mortgage notes
receivable, respectively, that were either acquired or funded, respectively,
prior to June 30, 1998 or were probable of being acquired or funded,
respectively, prior to the effective date of the Offering (collectively, the
"Initial Investments") as if they were made on June 30, 1998. The unaudited pro
forma condensed consolidated statement of income for the period January 30, 1998
(inception) through June 30, 1998 gives effect to the Initial Investments as if
they were made on January 30, 1998. The pro forma adjustments are based upon
available information and certain estimates and assumptions that management of
the Company believes are reasonable and factually supportable. The unaudited pro
forma condensed consolidated balance sheet and statement of income do not
purport to present what the Company's financial position or results of
operations would actually have been if the Initial Investments and related
transactions had occurred on June 30, 1998 or January 30, 1998, as the case may
be, or to project the Company's financial position or results of operations for
any future period.
The pro forma financial statements should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto, and
other financial information pertaining to the Company, including such
information contained under the sections captioned "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Prospectus. Capitalized terms used
herein and not defined herein have the respective meanings given them in the
Prospectus.
F-2
<PAGE> 116
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
HEALTHCARE FINANCIAL HEALTHCARE FINANCIAL
PARTNERS REIT, INC. PRO FORMA PARTNERS REIT, INC.
HISTORICAL ADJUSTMENTS PRO FORMA
-------------------- ------------ --------------------
<S> <C> <C> <C>
ASSETS
Income-producing real estate, net...... $ 10,535,281 $ 39,557,281(a) $ 50,092,562
Mortgage notes receivable, net......... 21,048,755 20,186,344(b) 41,235,099
Cash and cash equivalents.............. 106,882,119 (61,200,344)(a),(b) 45,681,775
Other assets........................... 497,289 1,456,719(a) 1,954,008
------------ ------------ ------------
Total Assets................. $138,963,444 $ $138,963,444
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
liabilities.......................... $ 429,841 $ 429,841
Accounts payable to Manager............ 1,135,697 1,135,697
------------ ------------ ------------
Total liabilities............ 1,565,538 1,565,538
Stockholders' equity:
Common stock......................... 806 806
Paid-in capital...................... 136,545,071 136,545,071
Cumulative net income................ 852,029 852,029
------------ ------------ ------------
Total stockholders' equity... 137,397,906 137,397,906
------------ ------------ ------------
Total liabilities and
stockholders' equity....... $138,963,444 $138,963,444
============ ============ ============
</TABLE>
See notes to unaudited pro forma balance sheet and statements of income.
F-3
<PAGE> 117
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD JANUARY 30, 1998 (INCEPTION) THROUGH JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HEALTHCARE FINANCIAL HEALTHCARE FINANCIAL
PARTNERS REIT, INC. PRO FORMA PARTNERS REIT, INC.
HISTORICAL ADJUSTMENTS PRO FORMA
-------------------- ----------- --------------------
<S> <C> <C> <C>
Revenues:
Interest on cash and cash equivalents....... $1,078,494 $ (36,048)(e) $1,042,446
Interest on mortgage notes receivable....... 45,961 1,773,105(c) 1,819,066
Rental income............................... 70,678 2,382,325(d) 2,453,003
---------- ---------- ----------
Total income........................ 1,195,133 4,119,382 5,314,515
Expenses:
Management fee.............................. 237,923 630,598(f) 868,521
Other....................................... 99,139 402,779(d) 656,918
155,000(g)
Depreciation................................ 6,042 531,594(d) 537,636
---------- ---------- ----------
Total expenses...................... 343,104 1,719,971 2,063,075
---------- ---------- ----------
Net income.................................... $ 852,029 $2,399,411 $3,251,440
========== ========== ==========
Basic and diluted earnings per share.......... $ .24 $ .40
========== ==========
Weighted average shares outstanding........... 3,494,297 8,055,555
========== ==========
</TABLE>
See notes to unaudited pro forma condensed consolidated balance sheet and
statement of income.
F-4
<PAGE> 118
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENT OF INCOME
JUNE 30, 1998 (UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
HealthCare Financial Partners REIT, Inc. (the "Company"), a Maryland
corporation, was organized to qualify as a real estate investment trust ("REIT")
on January 30, 1998 ("Inception"). The Company's principal activity is investing
in income-producing real estate and real estate related assets in the healthcare
industry. Components of the Initial Investments include such income-producing
real estate and mortgage notes receivable that were originated under the
Company's permanent mortgage loan and other real estate secured debt programs.
For the purpose of the pro forma presentation, income-producing real estate
includes healthcare and other facilities acquired or probable of being acquired.
Certain of the facilities are leased to various tenants pursuant to fixed-term
operating leases which require the lessees to pay base rent, additional rent
commencing after the first year based on a set percentage increase in the
consumer price index, maintenance, and other operating costs associated with the
leased space. Other facilities are leased to third-party lessees pursuant to
triple net leases that require the lessees to pay all costs and expenses
including repairs, maintenance, real property taxes, assessments and utilities.
Mortgage loans under the Company's permanent mortgage loan program are
issued to finance the acquisition or the refinancing of existing facilities and
are secured by a first mortgage on the facility. Such loans generally have a
ten-year term, bear interest at a fixed rate (and may provide for an annual
increase to the initial interest rates based upon a contractual increase or a
change in the CPI), and require monthly installments of principal and interest.
Investments under the Company's other real estate secured debt program include
construction and expansion loans, mezzanine loans, bridge financings and other
types of non-permanent real estate financing of healthcare facilities.
Construction and expansion loans may be provided to finance construction of or
an addition to (or renovation of) a facility and, in certain cases, may convert
to permanent mortgages. Notes in this program may bear interest at fixed or
floating rates and generally require interest installments during the
construction term.
2. PRO FORMA ADJUSTMENTS
(a) To record the cost of income-producing real estate that are probable of
being acquired:
<TABLE>
<CAPTION>
LAND AND BUILDING PERSONAL
AND IMPROVEMENTS PROPERTY
----------------- ----------
<S> <C> <C>
Colonial Manor Properties................................. $ 3,591,310 $ 158,690
Gulf Health Care Properties............................... 21,313,765 1,000,235
Meadowood Nursing Home.................................... 6,452,206 297,794
Valencia Medical Center................................... 4,250,000
Vista Village Shopping Center............................. 3,950,000
----------- ----------
$39,557,281 $1,456,719
=========== ==========
</TABLE>
F-5
<PAGE> 119
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENT OF INCOME -- (CONTINUED)
(b) To record the mortgage loans probable of being funded and the actual
draws that have occurred on construction loans since June 30, 1998 and
through July 31, 1998:
<TABLE>
<S> <C>
Permanent Mortgage Loan Program:
Mountainside Manor, Inc................................... $ 2,298,780
Pennswood Manor Assisted Living and Healthcare Center,
Inc.................................................... 1,660,470
Medicore, LLC............................................. 3,702,600
Waban Realty Trust........................................ 2,450,000
-----------
Program total..................................... 10,111,850
Other Real Estate Secured Debt Program:
ALCO XII, LLC............................................. 60,616
Cedar Lawn Investments, LLC............................... 5,614,500
Chancellor Health Services, LLC........................... 3,360,000
Hildebran Health Investors, LLC........................... 53,891
Lincolnton Health Investors, LLC.......................... 715,235
St. Andrews Health Center, Inc............................ 180,980
Transylvania Health Investors, LLC........................ 89,272
-----------
Program total..................................... 10,074,494
-----------
$20,186,344
===========
</TABLE>
F-6
<PAGE> 120
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENT OF INCOME -- (CONTINUED)
(c) To record the interest on mortgage notes receivable that have been
funded or are probable of funding as if the notes were funded on
January 30, 1998. For the purposes of the pro forma presentation,
interest accrued on construction loans is computed according to the
actual draws as if the initial draw occurred on January 30, 1998, and
interest accrued on subsequent draws is calculated for the period
January 30, 1998 (inception) through June 30, 1998 less the number of
days' interest for days that had elapsed since the previous draw.
<TABLE>
<S> <C>
Permanent Mortgage Loan Program:
Applegate Lane, Inc....................................... $ 274,280
Cromwell Crest Convalescent Home, Inc..................... 302,803
JoJeff, Inc. and Alymatt, Inc............................. 82,707
Medicore, LLC............................................. 166,904
Mountainside Manor, Inc................................... 99,501
Pennswood Manor Assisted Living and Healthcare Center,
Inc.................................................... 71,953
Waban Realty Trust........................................ 119,995
Less applicable historical interest income................ (25,401)
----------
1,092,742
Other Real Estate Secured Debt Program:
ALCO XII, LLC............................................. 20,222
ACMC Friendswood, Inc..................................... 40,469
Cedar Lawn Investments, LLC............................... 246,587
Chancellor Health Services, LLC........................... 197,169
Hildebran Health Investors, LLC........................... 16,694
Lincolnton Health Investors, LLC.......................... 31,292
St. Andrews Health Center, Inc............................ 134,878
Transylvania Health Investors, LLC........................ 13,612
Less applicable historical interest income................ (20,560)
----------
680,363
----------
$1,773,105
==========
</TABLE>
F-7
<PAGE> 121
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENT OF INCOME -- (CONTINUED)
(d) To record the rental income, operating expenses and depreciation from
income-producing real estate acquired or probable of being acquired as
if the properties were acquired on January 30, 1998.
<TABLE>
<CAPTION>
RENTAL OPERATING DEPRECIATION
INCOME EXPENSES EXPENSE
------ --------- ------------
<S> <C> <C> <C>
Purchase lease back transactions:
Colonial Manor Homes.................. $ 166,407 $ 45,061
Gulf Health Care Properties........... 897,432 271,839
Meadowood Nursing Home................ 268,723 80,933
Real estate acquisitions:
Sherman Oaks Medical Center........... 627,899 $281,727 69,718
Valencia Medical Center............... 260,643 69,366 36,324
Vista Village Shopping Center......... 231,899 63,912 33,761
Less historical amounts................. (70,678) (12,226) (6,042)
---------- -------- --------
$2,382,325 $402,779 $531,594
========== ======== ========
</TABLE>
(e) To record the interest earned on cash and cash equivalents at a
short-term money market annual rate of 5.5% assuming all mortgage notes
and income-producing real estate were funded as of January 30, 1998.
(f) To record the Base Management Fee which accrues at an annual rate of
1.5% of the total average assets under management between January 30,
1998 and June 30, 1998 in accordance with the Management Agreement.
<TABLE>
<S> <C>
Pro forma total average assets............................. $138,963,444
Annual rate adjusted for the period January 30, 1998
(inception) through June 30, 1998........................ X .625%
------------
868,521
Historical management fee.................................. (237,923)
------------
Total Base Management Fee........................ $ 630,598
============
</TABLE>
(g) To record administrative expenses and the costs of being a public
company of $155,000 for the period January 30, 1998 (inception) through
June 30, 1998, consisting primarily of insurance premiums, professional
fees, and the indirect costs of portfolio development.
F-8
<PAGE> 122
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
HealthCare Financial Partners REIT, Inc.
We have audited the accompanying consolidated balance sheet of HealthCare
Financial Partners REIT, Inc. as of May 31, 1998 and the related consolidated
statements of income, stockholders' equity, and cash flows for the period
January 30, 1998 (inception) through May 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HealthCare
Financial Partners REIT, Inc. as of May 31, 1998 and the consolidated results of
its operations and its cash flows for the period January 30, 1998 (inception)
through May 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Washington, D.C.
July 23, 1998
F-9
<PAGE> 123
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, JUNE 30,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Income-producing real estate:
Land...................................................... $ 4,015,742
Building and improvements................................. 6,525,581
------------
10,541,323
Less accumulated depreciation............................. (6,042)
------------
Income-producing real estate, net................. 10,535,281
Mortgage notes receivable, net.............................. $ 2,648,997 21,048,755
Cash and cash equivalents................................... 135,051,227 106,882,119
Other assets................................................ 278,668 497,289
------------ ------------
Total assets...................................... $137,978,892 $138,963,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 710,455 $ 429,841
Account payable to Manager................................ 447,817 1,135,697
------------ ------------
Total liabilities................................. 1,158,272 1,565,538
Stockholders' equity:
Common stock, par value $.0001 per share; 500,000,000
shares authorized; 8,055,555 shares issued and
outstanding at May 31, 1998 and June 30, 1998.......... 806 806
Paid-in capital........................................... 136,545,071 136,545,071
Cumulative net income..................................... 274,743 852,029
------------ ------------
Total stockholders' equity........................ 136,820,620 137,397,906
------------ ------------
Total liabilities and stockholders' equity........ $137,978,892 $138,963,444
============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE> 124
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
JANUARY 30, FOR THE ONE JANUARY 30,
1998 MONTH 1998
(INCEPTION) PERIOD (INCEPTION)
THROUGH ENDED THROUGH
MAY 31, 1998 JUNE 30, 1998 JUNE 30, 1998
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Interest on cash and cash equivalents................. $ 433,925 $ 644,569 $1,078,494
Interest on mortgage notes receivable................. 2,650 43,311 45,961
Rental income......................................... 70,678 70,678
---------- ---------- ----------
Total revenues................................ 436,575 758,558 1,195,133
Expenses:
Management fee........................................ 123,389 114,534 237,923
Other................................................. 38,443 60,696 99,139
Depreciation.......................................... 6,042 6,042
---------- ---------- ----------
Total expenses................................ 161,832 181,272 343,104
---------- ---------- ----------
Net income.............................................. $ 274,743 $ 577,286 $ 852,029
========== ========== ==========
Basic earnings per share................................ $ .12 $ .07 $ .24
========== ========== ==========
Diluted earnings per share.............................. $ .12 $ .07 $ .24
========== ========== ==========
Weighted average shares outstanding..................... 2,363,406 8,055,555 3,494,297
========== ========== ==========
Diluted weighted average shares outstanding............. 2,363,406 8,055,555 3,494,297
========== ========== ==========
</TABLE>
See accompanying notes.
F-11
<PAGE> 125
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN CUMULATIVE STOCKHOLDERS'
STOCK CAPITAL NET INCOME EQUITY
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Issuance of 805,555 shares of $.0001 par
value common stock at January 30, 1998
(inception)........................... $ 81 $ 309,231 $ 309,312
Issuance of 7,250,000 shares of $.0001
par value common stock................ 725 136,235,840 136,236,565
Net income for the period January 30,
1998 (inception) through May 31,
1998.................................. $ 274,743 274,743
------------ ------------ ------------ ------------
Balance at May 31, 1998................. 806 136,545,071 274,743 136,820,620
Net income for the one month period
ended June 30, 1998 (unaudited)....... 577,286 577,286
------------ ------------ ------------ ------------
Balance at June 30, 1998 (unaudited).... $ 806 $136,545,071 $ 852,029 $137,397,906
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-12
<PAGE> 126
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
JANUARY 30, JANUARY 30,
1998 FOR THE ONE 1998
(INCEPTION) MONTH PERIOD (INCEPTION)
THROUGH ENDED THROUGH
MAY 31, 1998 JUNE 30, 1998 JUNE 30, 1998
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 274,743 $ 577,286 $ 852,029
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 6,042 6,042
Deferred origination fees, net.................. 201,139 78,935 280,074
Amortization of deferred origination fees....... (136) (1,123) (1,259)
Increase in other assets........................ (278,668) (218,621) (497,289)
Increase (decrease) in accounts payable and
accrued liabilities........................... 710,455 (280,614) 429,841
Increase in account payable to Manager.......... 447,817 687,880 1,135,697
------------ ------------ ------------
Net cash provided by operating
activities............................... 1,355,350 849,785 2,205,135
INVESTING ACTIVITIES
Acquisition of income-producing real estate........ (10,541,323) (10,541,323)
Investment in mortgage notes receivable............ (2,850,000) (18,477,570) (21,327,570)
------------ ------------ ------------
Net cash used in investing activities...... (2,850,000) (29,018,893) (31,868,893)
FINANCING ACTIVITIES
Issuance of common stock........................... 136,545,877 136,545,877
------------ ------------ ------------
Net cash provided by financing
activities............................... 136,545,877 136,545,877
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 135,051,227 (28,169,108) 106,882,119
Cash and cash equivalents at beginning of period... 135,051,227
------------ ------------ ------------
Cash and cash equivalents at end of period......... $135,051,227 $106,882,119 $106,882,119
============ ============ ============
</TABLE>
See accompanying notes.
F-13
<PAGE> 127
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(INFORMATION AS OF AND FOR THE PERIODS ENDED JUNE 30, 1998 IS UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY
HealthCare Financial Partners REIT, Inc. (the "Company"), a Maryland
corporation, was organized to qualify as a real estate investment trust ("REIT")
on January 30, 1998 ("inception") and was initially capitalized through the sale
of 805,555 shares of common stock for $309,312 pursuant to a private placement
memorandum. All share information has been restated to reflect a 1 for 2.1332
reverse stock split on April 1, 1998. In May 1998, the Company sold 1,150,000
units consisting of five shares of common stock and one stock purchase warrant
to purchase one share of common stock ("Units") pursuant to a private placement,
and the Company sold 300,000 Units directly to certain accredited investors,
including 100,000 Units sold to HealthCare Financial Partners, Inc. (HCFP).
Neither these Units nor the shares sold on January 30, 1998 were registered
under the Securities Act of 1933 (the "Securities Act"). The holders of the
Units and the aforementioned shares are entitled to certain benefits contained
in a Registration Rights Agreement, which will allow the holders to sell the
Units, warrants or common stock at a later date when registered under the
Securities Act.
Each warrant will become exercisable six months following the closing of
the private placement, and will remain exercisable for a three-year period. The
exercise price per warrant was set initially at one-fifth of the Unit price
($20) and is subject to adjustment based on dividends or distribution on its
common stock or certain other changes in the number of common shares. The value
of the warrants at the date of issue was not material.
The Company is in the process of an initial public offering of common stock
(the "Offering"). The Company intends to file a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the
Offering. With regard to the Offering, the Company has and will incur legal,
accounting and related costs. These costs will be deducted from the gross
proceeds of the Offering.
The Company's principal activity is investing in income-producing real
estate and real estate related assets in the healthcare industry, consisting
principally of mortgage loans and purchase leaseback transactions. The Company
is the sole general partner of the HCFP REIT Operating Partnership, L.P.
("Operating Partnership"). In addition, the Company's day-to-day operations will
be managed by HCFP REIT Management, Inc. (the "Manager"), a wholly-owned
subsidiary of HCFP (see Note 4).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements as of and for the period from
inception to May 31, 1998 include the accounts of the Company, the Operating
Partnership and HCFP Limited, Inc. (Limited), a wholly-owned subsidiary of the
REIT and 99% limited partner in the Operating Partnership. The consolidated
financial statements as of June 30, 1998 and for the one month then ended and
the period January 30, 1998 (inception) to June 30, 1998, include the accounts
of the Company, Limited, the Operating Partnership, and HCFP Sherman, LLC, a
wholly-owned subsidiary formed to facilitate the acquisition of a medical office
building (see Note 8). Such interim financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for such periods are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1998. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-14
<PAGE> 128
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME-PRODUCING REAL ESTATE
Income-producing real estate is recorded at cost, including transaction
fees. The cost of income-producing real estate is allocated between land and
buildings and improvements based upon estimated fair values at the time of
acquisition. Certain acquisition, development and construction mortgage notes
receivable may be accounted for as real estate investments or joint ventures
based on the characteristics of the arrangements. Depreciation is provided for
on a straight-line basis over an estimated useful life of 39 years.
MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are carried at the unpaid principal balance net
of net deferred origination fees. Net deferred origination fees consist of loan
fees collected from the borrower net of certain direct loan origination costs
incurred by the Manager on behalf of the Company. Net deferred origination fees
are amortized over the contractual life of the loan using the effective interest
method. Interest income on mortgage loan receivables is recorded as earned,
including the effects of contractual minimum accrual interest rate increases.
ALLOWANCE FOR LOAN LOSSES
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, determines a note is impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note agreement. When a loan is
considered to be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in an allowance for loan losses
through a charge to bad debt expense. Cash receipts on impaired notes receivable
are applied to reduce the principal amount of such notes until the principal has
been recovered and are recognized as interest income thereafter. At May 31, 1998
and June 30, 1998, the Company has not established an allowance for loan losses.
LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations when
events or changes in circumstances indicate that the assets might be impaired
and the estimated undiscounted cash flows to be generated by those assets are
less than the carrying amounts. Management assesses the recoverability of the
carrying value of its assets on a property by property basis. No allowance for
impairment is recorded at June 30, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
INCOME TAXES
It is the intent of the Company to qualify as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986, as amended. In order to
qualify as a REIT, among other things, the REIT must distribute at least 95% of
its REIT taxable income annually. To the extent the REIT distributes at least
95% but less than 100% of REIT taxable income, it will be subject to tax on the
undistributed portion at regular ordinary and/or capital gains corporate tax
rates. REITs are subject to a number of organizational and operations
requirements. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
F-15
<PAGE> 129
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding excluding any dilutive effects of options, warrants and other
dilutive securities. Diluted earnings per share reflects the assumed conversion
of all dilutive securities.
RENTAL INCOME
Rental income under long-term operating leases is recognized as earned over
the life of the lease agreements. For lease agreements that provide for
scheduled annual rent increases, rental income is recognized on a straight-line
basis over the term of the lease. Additional rental income is recognized as
earned.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. MORTGAGE NOTES RECEIVABLE
As of May 31, 1998, two notes with carrying values aggregating $2.6 million
were outstanding. One of the notes, due June 2004, is collateralized by an
assisted living facility and a personal care facility located in Pennsylvania.
The other note is collateralized by an assisted living facility under
construction in Texas. Under the terms of this note, the Company had advanced
$925,000 for the land acquisition and has a $9.1 million construction loan
commitment as of May 31, 1998. These notes bear interest at the respective rates
of 9.40% and prime plus 2% (10.50% at May 31, 1998).
The mortgage note receivable due June 2004 requires monthly installments of
principal and interest based on a twenty-five year amortization. The
construction note requires monthly payments of interest only during the
construction period. At completion of construction, the note converts to a
permanent mortgage due ten years after the completion of the project (which is
not expected to be more than a year) at which time interest on the note converts
to a fixed rate equal to the Ten Year Treasury Rate plus 3.75% (but not less
than 9.5%). Each note provides for the initial interest rates to be increased
annually by either a set rate or upon an increase in the CPI.
4. TRANSACTIONS WITH AFFILIATES
HCFP REIT MANAGEMENT, INC.
In May 1998, the Company entered a management agreement (the "Management
Agreement") with the Manager. The Manager advises the Company as to activities
and operations of the Company and is responsible for the day-to-day operation of
the Company pursuant to authority granted to it by the Board of Directors under
the Management Agreement.
Under the Management Agreement, the Manager receives the following
compensation:
(i) The Base Management Fee payable and calculated quarterly in an
amount equal to the Percentage Amount (as hereinafter defined) of the
Average Invested Assets for such quarter. The term "Average Invested
Assets" for any quarter means the average of the aggregate book value of
the consolidated assets of the Company, before reserves for depreciation or
bad debts or other non-cash reserves, computed by dividing the sum of such
values for each of the three months during such quarter (based on the book
value of such assets on the last day of such month) by three. The
"Percentage Amount" is 1.50% for assets up to and including $300 million;
1.25% for assets in excess of $300 million up to and including $600
million; 1.00% for assets in excess of $600 million up to and including
$900
F-16
<PAGE> 130
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million; 0.75% for assets in excess of $900 million up to and including
$1.2 billion; and 0.50% for assets in excess of $1.2 billion. The Base
Management Fee is intended to compensate the Manager, among other things,
for its costs in providing management services to the Company.
(ii) Incentive Compensation for each quarter in an amount equal to the
product of (A) 25% of the dollar amount by which (1) (a) Funds From
Operations of the Company (before the Incentive Compensation) per share of
Common Stock (based on the weighted average number of shares outstanding)
for such quarter plus (b) gains (or minus losses) from debt restructuring
and sales of property per share of Common Stock (based on the weighted
average number of shares outstanding), exceeds (2) an amount equal to the
weighted average of the prices per common Stock of all issuances of Common
Stock by the Company (including shares of Common Stock issued upon exercise
of options or Warrants) and assuming a price of $20 per share for shares
sold in the Private Placement, multiplied by (b) the Ten Year U.S. Treasury
Rate for such quarter plus 3.50% multiplied by (b) the weighted average
number of shares of Common Stock outstanding during such quarter. "Funds
From Operations" as defined by NAREIT means net income (computed in
accordance with generally accepted accounting principles) ("GAAP")
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds From
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them are officers of the Company,
will initially receive no cash compensation directly from the Company. The Base
Management Fee and Incentive Compensation are payable in arrears. The Manager's
Base Management Fee and Incentive Compensation and reimbursable costs and
expenses will be calculated by the Manager within 45 days after the end of each
quarter, and such calculation will be promptly delivered to the Company. The
Company is obligated to pay such fees, costs and expenses within 60 days after
the end of each fiscal quarter.
The Company does not currently employ full-time personnel. Instead it
relies on the facilities, personnel and resources of the Manager to conduct its
operations. The Manager will be reimbursed for (or charge the Company directly
for) the Manager's costs and expenses in employing third-parties to perform due
diligence tasks on assets purchased or considered for purchase by the Company.
Expense reimbursement will be made quarterly.
The Company has agreed to indemnify the Manager, its stockholders,
directors, officers and employees with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager, its
stockholders, directors, officers and employees made in good faith in
performance of the Manager's duties under the Management Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
the purchase of, or rendering advice to others, purchasing assets that meet the
Company's policies and criteria, except that the Manager may not manage or
advise another REIT or other entity that invests or intends to invest primarily
in permanent mortgage loans or purchase leaseback transactions with respect to
healthcare facilities, and may not, directly or through an affiliate, invest in
real property or originate or acquire loans secured by such real property
collateral with initial terms of more than three years.
Of the Company's $448,000 account payable to the Manager at May 31, 1998,
approximately $142,000 was attributable to the Management Fee and approximately
$306,000 was attributable to certain amounts paid by the Manager on the
Company's behalf. Of the Company's $1.1 million account payable to the Manager
at
F-17
<PAGE> 131
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1998, approximately $313,000 was attributable to the Management Fee and
approximately $784,000 was attributable to certain amounts paid by the Manager
on the Company's behalf. From inception through June 30, 1998, the management
fee incurred of $313,000 was solely attributable to the Base Management Fee and
was calculated on average invested assets of $138.6 million. From inception
through May 31, 1998 and June 30, 1998, $18,600 and $75,000, respectively, was
deferred as direct costs of origination.
The initial term of the Management Agreement is three years. Upon
termination or non-renewal of the Management Agreement, the Company can either
acquire the Manager at an acquisition price (the "Acquisition Price" as defined
in the Management Agreement) or pay the Manager a termination fee equal to 80%
of the Acquisition Price. The Acquisition Price is equal to ten times the
Manager's earnings before taxes for the latest twelve calendar months
immediately preceding the date of termination or non-renewal.
GMAC COMMERCIAL MORTGAGE CORPORATION
An officer of GMAC Commercial Mortgage Corporation ("GMACCM") is a member
of the board of directors of the Company. The Company has entered into several
agreements with GMACCM, including a loan servicing agreement with respect to the
Company's mortgage loans. As compensation for servicing, GMACCM retains from
each monthly payment collected one-twelfth of .125% of the outstanding principal
amount of each loan being serviced.
The Company has also entered into an agreement with an initial term of
three years pursuant to which GMACCM will grant the Company a right of first
refusal to purchase certain healthcare related mortgage loans which GMACCM has
determined to sell. The maximum principal amount of loans to which this right
applies in any annual period under this agreement is $100 million. As
consideration, the company will grant to GMACCM options to purchase up to 10,000
shares of common stock each year the agreement is in effect at an exercise price
equal to the fair market value on the grant date. In June 1998, the Company
purchased two mortgage loans from GMACCM for an aggregate principal amount of
approximately $15 million (see Note 8).
5. STOCK OPTION PLANS
The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which the Company is authorized to grant options to purchase shares of
common stock to employees, directors and others providing services to the
Company, as well as the Manager, HCFP, and certain affiliates of HCFP. The
Option Plan currently provides that the aggregate number of shares which may be
subject to stock options is 900,000 shares. A total of 460,000 options to
purchase common stock were granted on May 6, 1998 at an exercise price of $20,
which was equal to one-fifth of the initial purchase price of Units sold
pursuant to the private placement that closed that same day.
The exercise price of options granted pursuant to the 1998 Option Plan will
not be less than 100% of the fair market value of the common stock at the date
of grant. Options granted become exercisable in equal installments over a four
year period from the grant date and expire ten years from that date.
The Company also has adopted the 1998 Director Incentive Plan (the
"Director Plan"), for which 100,000 shares of common stock have been reserved
for issuance only to non-employee directors of the Company. Pursuant to the
Director Plan awards can be granted for initial appointments, for which 40,000
shares were granted to Independent Directors at an exercise price of $20 per
share, annual service awards and discount awards. Options granted pursuant to
the Director Plan vest immediately; become exercisable twelve months following
the date of grant and expire at the earlier of the tenth anniversary of the
grant date or eighteen months following the director's termination of service.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its stock-based compensation plans. In
F-18
<PAGE> 132
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with APB 25, no compensation cost is recognized for the Company's
stock options where the exercise price equals the market price of the underlying
stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) requires entities that follow APB 25 to
provide an additional pro forma disclosure regarding net income in the footnotes
to the financial statements as if the fair value recognition provisions of SFAS
123 had been adopted for the periods being presented.
The fair value of options granted was estimated at the date of grant using
a minimum value option pricing model with the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.6%
Dividend yield.............................................. 8.4%
Expected life options (in years)............................ 4.00
</TABLE>
The minimum value option valuation model was developed for use in
estimating the fair value of options of private companies for which there is no
active market for the underlying common stock. In addition, this option
valuation model requires the input of highly subjective assumptions. Since
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
As a result of applying the model as explained above for the purpose of
providing the required pro forma disclosures of SFAS 123, the estimated fair
value of the options granted on May 6, 1998 was not material. The effects of
applying SFAS 123 for providing pro forma disclosures are not likely to be
representative of the effects on reported net income for future years.
6. DIVIDENDS
The Company intends to make distributions to its stockholders of at least
95% of the Company's taxable income each year (subject to certain adjustments)
so as to quality for the tax benefits accorded to REITs under the Code. The
Company intends to make distributions at least quarterly. It is anticipated that
the first distribution to stockholders will be made promptly after the calendar
quarter ending September 30, 1998.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Due to the
short duration from origination to both May 31, 1998 and June 30, 1998, there
are no significant differences between recorded values and fair values.
8. SUBSEQUENT EVENTS (UNAUDITED)
INCOME-PRODUCING REAL ESTATE
In June 1998, the Company acquired one medical office building in southern
California. The aggregate cost of the property was approximately $10.5 million
with $4.0 million and $6.5 million being allocated between the land and building
and improvements, respectively.
Space in the medical office building is leased to various tenants pursuant
to fixed-term operating leases expiring between 1998 and 2006, and these leases
generally provide for extension options. Tenant leases provide for the lessee to
pay base rent, additional rent commencing after the first year based on a set
percentage increase in the consumer price index, maintenance, or other operating
costs associated with the leased space.
F-19
<PAGE> 133
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1998, the future minimum lease payments for the next five
years and thereafter under the non-cancelable operating leases associated with
this building were approximately as follows:
<TABLE>
<S> <C>
For the six months ended December 31, 1998.................. $ 646,000
1999........................................................ 1,044,000
2000........................................................ 828,000
2001........................................................ 680,000
2002........................................................ 496,000
For the six months ended June 30, 2003...................... 230,000
Thereafter.................................................. 1,124,000
----------
$5,048,000
==========
</TABLE>
These amounts include only those increases in lease payments related to
leases that provide for set percentage increases or set minimum increases in the
consumer price index. They do not include increases in lease payments which may
occur based on the increase in the consumer price index without these set
minimums.
In July 1998, the Company acquired three assisted living facilities in
Maryland for an aggregate purchase price of $3.8 million.
As of July 31, 1998, the Company had committed to acquire five skilled
nursing facilities and a medical office building with an adjacent shopping
facility for an aggregate price of $40.6 million.
MORTGAGE AND CONSTRUCTION NOTES RECEIVABLE
In June 1998, the Company funded three additional mortgage notes and three
additional construction notes which had aggregate balances of $17.5 million and
$1.0 million, respectively, at June 30, 1998.
The mortgage notes, which are due between February and June 2008, are each
collateralized by skilled nursing facilities located in Connecticut and require
monthly installments of principal and interest based on twenty five year
amortization periods. The interest rates on two of these mortgages is fixed at
9.15%, and the interest rate on the other is fixed at 11.5%.
The construction notes are financing the construction of three assisted
living facilities of which two are in North Carolina and one is in Mississippi.
Upon the completion of construction, the notes convert to permanent mortgages
with the former two notes being due in July 2009 and the latter note being due
in June 2004. One of the notes bears interest at a fixed rate of 10%, and is
interest only during the construction period and for the first two years of the
permanent loan after which the loan amortizes on a twenty five year basis. The
other notes bear interest at prime plus 2% (10.5% at June 30, 1998) during the
construction period. Upon conversion to permanent mortgages, the loans amortize
on a twenty five year basis with interest determined based on the Ten Year
Treasury Rate plus 4% (but not less than 9.75%) with annual increases at either
a set rate or according to an increase in the CPI. At June 30, 1998, the
remaining unfunded commitments on these notes was $8.8 million. Pursuant to the
terms of the note financing the Mississippi facility, a limited partnership in
which the Company is the general partner has an option to acquire the facility
at a price equal to the outstanding balance of the mortgage note plus $40,000.
In July 1998, the Company funded three mortgage notes for an aggregate
amount of $9.9 million, and the Company funded the initial draw of $715,000 on a
construction loan that had a total commitment of $1.9 million.
As of July 31, 1998, the Company had committed to fund two mortgage notes
aggregating $6.0 million and two mezzanine loans aggregating $5.7 million.
F-20
<PAGE> 134
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
HealthCare Financial Partners REIT, Inc.
Chevy Chase, Maryland
We have audited the accompanying statement of revenue and certain expenses
of Sherman Oaks Medical Center as described in Note 2 for the year ended
December 31, 1997. The statement of revenue and certain expenses is the
responsibility of the property's management. Our responsibility is to express an
opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the statement of revenue
and certain expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the statement of revenue and certain expenses. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a registration statement on Form S-11 as
described in Note 2 and is not intended to be a complete presentation of the
property's revenue and expenses.
In our opinion, the statement of revenue and certain expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses as described in Note 2 of Sherman Oaks Medical Center for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
SOLOMON, ROSS, GREY & COMPANY
Encino, California
August 3, 1998
F-21
<PAGE> 135
SHERMAN OAKS MEDICAL CENTER
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
JANUARY 1, 1998
YEAR ENDED THROUGH
DECEMBER 31, 1997 JUNE 18, 1998
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUE
Rental.................................................... $1,394,045 $631,566
Parking................................................... 97,493 66,536
Tenant reimbursements -- utilities........................ 73,934 44,947
Other..................................................... 13,110 6,738
---------- --------
Total Operating Revenue........................... 1,578,582 749,787
---------- --------
EXPENSES
Property operating and maintenance........................ 257,506 125,755
Utilities................................................. 184,212 83,539
Real estate taxes......................................... 78,751 19,882
Management fees........................................... 69,394 34,638
Insurance................................................. 12,939 22,549
---------- --------
Total Expenses.................................... 602,802 286,363
---------- --------
REVENUE IN EXCESS OF CERTAIN EXPENSES....................... $ 975,780 $463,424
========== ========
</TABLE>
F-22
<PAGE> 136
SHERMAN OAKS MEDICAL CENTER
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(INFORMATION RELATING TO THE PERIOD
ENDED JUNE 18, 1998 IS UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS
Sherman Oaks Medical Center (hereinafter referred to as "the Property") is
a 69,700 square foot medical office building located at 4835-4849 Van Nuys
Boulevard, Sherman Oaks, California. The property was acquired by HealthCare
Financial Partners REIT, Inc. on June 18, 1998.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form S-11
of HealthCare Financial Partners REIT, Inc. The statement is not intended to be
a complete presentation of revenue and expenses of the property for the year
ended December 31, 1997 as certain expenses to the operations of property after
acquisition have been excluded. Such expenses include depreciation,
amortization, mortgage interest and other corporate expenses not directly
related to the future operations of the property.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited statement of revenues and certain expenses for
the period January 1, 1998 to June 18, 1998 have been prepared from financial
statements of the property. In the opinion of management, all adjustments
necessary for a fair presentation of the statement for the interim period have
been included. All such adjustments are of a normal, recurring nature necessary
for a fair presentation of the statement of revenues and certain expenses. The
results of the interim period have not been audited and are not necessarily
indicative of the results for the full fiscal year.
REVENUE AND EXPENSE RECOGNITION
Rental income is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
USES OF ESTIMATES
The preparation of the statement of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from these
estimates.
NOTE 3 RELATED PARTY TRANSACTION
The property was managed by affiliated parties to the seller which included
leasing and tenant improvement services. Management fees for the year ended
December 31, 1997 and for the period ended June 18, 1998, were $69,394 and
$34,638, respectively.
F-23
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
HealthCare Financial Partners REIT, Inc.
We have audited the accompanying combining statement of revenue and certain
expenses, as described in Note 1, of Valencia Medical Center and Vista Village
Shopping Center, which are under common ownership and control (the
"Properties"), for the year ended December 31, 1997. This statement of revenue
and certain expenses is the responsibility of the Properties' management. Our
responsibility is to express an opinion on the statement of revenue and certain
expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of revenue and
certain expenses. An audit also includes assessing the basis of accounting used
and significant estimates made by management, as well as evaluating the overall
presentation of the statement of revenue and certain expenses. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying combining statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Registration Statement
on Form S-11 of HealthCare Financial Partners REIT, Inc., as described in Note
1, and is not intended to be a complete presentation of the Properties' revenue
and expenses.
In our opinion, the combining statement of revenue and certain expenses
referred to above presents fairly, in all material respects, the separate and
combined revenue and certain expenses as described in Note 1, of the Properties
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Washington, DC
July 30, 1998
F-24
<PAGE> 138
VALENCIA MEDICAL CENTER AND VISTA VILLAGE SHOPPING CENTER
COMBINING STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------------------------------- -----------------------------------------
VISTA VISTA
VILLAGE VILLAGE
VALENCIA SHOPPING COMBINED VALENCIA SHOPPING COMBINED
MEDICAL CENTER CENTER TOTAL MEDICAL CENTER CENTER TOTAL
-------------- -------- -------------- ---------------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental income........... $481,876 $418,222 $ 900,098 $262,434 $201,422 $463,856
Tenant reimbursements... 100,095 102,333 202,428 37,106 49,433 86,539
Other income............ 1,162 1,575 2,737 1,018 257 1,275
-------- -------- ---------- -------- -------- --------
Total revenue.... 583,133 522,130 1,105,263 300,558 251,112 551,670
Certain expenses:
Property operating and
maintenance........... 56,906 77,994 134,900 42,580 39,402 81,982
Real estate taxes....... 49,527 66,854 116,381 24,915 33,118 58,033
Management fee.......... 10,051 8,626 18,677 6,000 6,000 12,000
Insurance............... 2,551 2,614 5,165 1,275 1,307 2,582
-------- -------- ---------- -------- -------- --------
Total certain
expenses.............. 119,035 156,088 275,123 74,770 79,827 154,597
-------- -------- ---------- -------- -------- --------
Revenue in excess of
certain expenses........ $464,098 $366,042 $ 830,140 $225,788 $171,285 $397,073
======== ======== ========== ======== ======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 139
VALENCIA MEDICAL CENTER AND VISTA VILLAGE SHOPPING CENTER
NOTES TO COMBINING STATEMENTS
OF REVENUE AND CERTAIN EXPENSES
(INFORMATION RELATED TO THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combining statements of revenue and certain expenses
include the separate and combined operations of Valencia Medical Center and
Vista Village Shopping Center, (the "Properties") owned by a party unaffiliated
with HealthCare Financial Partners REIT, Inc. The Properties are located in
Valencia,California and consist of approximately 28,000 and 37,000 rentable
square feet, respectively, and were approximately 89% and 85% leased,
respectively, at December 31, 1997.
The accompanying statements of revenue and certain expenses have been
prepared in accordance with the applicable regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
HealthCare Financial Partners REIT, Inc., a Maryland corporation. The
accompanying statements of revenue and certain expenses are not representative
of the actual operations of the Properties for the periods presented nor
indicative of future operations as certain expenses, primarily depreciation,
amortization and interest expense, which may not be comparable to the expenses
expected to be incurred by HealthCare Financial Partners REIT, Inc. in future
operations of the Properties, have been excluded.
REVENUE AND CERTAIN EXPENSES RECOGNITION
Rental income is recognized on a straight-line basis over the term of the
related lease. Certain expenses are recognized in the period in which they are
incurred.
USE OF ESTIMATES
The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
statements of revenue and certain expenses and accompanying notes. Actual
results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the combining statements of revenue and
certain expenses for the six month period ended June 30, 1998 reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim period.
2. RENTALS
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis, as
defined in the lease agreements. Tenant reimbursements of such costs are accrued
as the costs are incurred.
F-26
<PAGE> 140
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell or the solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
information contained herein is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of the Company since such
date.
----------------------------------------
TABLE OF CONTENTS
----------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................ 1
Risk Factors.............................. 16
Conflicts of Interest..................... 28
Use of Proceeds........................... 29
Distribution Policy....................... 29
Capitalization............................ 30
Dilution.................................. 31
Business.................................. 32
Management of Operations.................. 37
Management of the Company................. 42
Portfolio................................. 48
Selected Financial Data................... 61
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 62
Operating Partnership Agreement........... 66
Policies with Respect to Certain
Activities.............................. 69
Principal Stockholders.................... 72
Description of Capital Stock.............. 74
Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws........ 78
Federal Income Tax Considerations......... 80
ERISA Considerations...................... 96
Shares Eligible for Future Sale........... 99
Underwriting.............................. 101
Legal Matters............................. 103
Experts................................... 103
Glossary of Terms......................... 104
Index to Financial Statements............. F-1
</TABLE>
----------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NationsBanc Montgomery
Securities LLC
ABN AMRO Incorporated
Credit Suisse First Boston
Friedman, Billings, Ramsey & Co., Inc.
Stephens Inc.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
Company in connection with the Offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC Registration Fee........................................ $ 25,444
NASD Fee.................................................... 9,125
New York Stock Exchange Listing Fee......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be completed.
ITEM 32. SALES TO SPECIAL PARTIES
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On February 2, 1998, the Company sold 805,555 shares (adjusted to reflect a
subsequent reverse 1 for 2.1332 stock split) of Common Stock for an aggregate
offering price of $309,312 to "accredited investors" within the meaning of Rule
501 under the Securities Act of 1933, as amended (the "Securities Act"). No
underwriters were involved in this transaction. The Company relied upon the
exemption provided by Rule 506 under the Securities Act from the registration
provisions of the Securities Act. Such accredited investors included officers
and directors of the Company and HealthCare Financial Partners, Inc. (who
purchased an aggregate of 435,350 shares of Common Stock) and HealthCare
Financial Partners, Inc., which purchased 241,665 shares.
On May 6, 1998, the Company sold 1,150,000 units (the "Units") to
NationsBanc Montgomery Securities LLC and Lehman Brothers Inc. (collectively,
the "Initial Purchasers") in a private placement (the "Private Placement") at a
price to investors of $100 per Unit. Each Unit consists of five shares of Common
Stock and one stock purchase warrant (a "Warrant"). Each Warrant entitles the
holder to purchase one share of Common Stock (a "Warrant Share"), subject to
certain anti-dilution adjustments. Until November 5, 1998, the Warrants and
Common Stock are required to be traded as Units. The Warrants become detachable
from the Common Stock and exercisable on November 5, 1998 and will remain
exercisable until April 29, 2001 at an exercise price of $20 per Warrant Share.
The Units in the Private Placement were sold for an aggregate offering
price of $115,000,000, less an Initial Purchasers' discount of $8,050,000,
resulting in net proceeds to the Company of $106,950,000. The Initial Purchasers
are "accredited investors" within the meaning of Rule 501 under the Securities
Act and the Company relied upon the exemption provided by Rule 506 under the
Securities Act from the registration provisions of the Securities Act.
The Units are eligible for trading in the Private Offering, Resales and
Trading through Automated Linkages Market of the National Association of
Securities Dealers, Inc. (the "PORTAL Market"). To date, to the knowledge of the
Company, there has been no trading of the Units in the PORTAL Market. Pursuant
to the terms of a Registration Rights Agreement (the "Registration Rights
Agreement") covering the Units, the Company will file a registration statement
(the "Shelf Registration Statement") with the Commission
II-1
<PAGE> 142
under the Securities Act relating to the shares of Common Stock, Warrants and
Warrant Shares (the "Registrable Securities"), which holders of the Units now
hold or may acquire upon the exercise of Warrants.
The Registration Rights Agreement, among other things, requires the Company
to: (i) file the Shelf Registration Statement with respect to the resale of the
Registrable Securities within 120 days following the last date of initial
issuance of Units pursuant to the Private Placement (the "Issue Date"); (ii) use
its best efforts to cause such Shelf Registration Statement to be declared
effective as soon as practicable, and in no event later than 180 days after the
Issue Date; (iii) use its best efforts to cause such Shelf Registration
Statement to remain continuously effective (subject to blackout periods) for a
period of two years from the Issue Date, or such shorter period that will
terminate when there are no Registrable Securities outstanding; (iv) use its
best efforts to have the Common Stock approved for listing on the New York Stock
Exchange (the "NYSE") as soon as practicable, and in any event within 180 days
after the Issue Date; and (v) after the effectiveness of any Shelf Registration
Statement, promptly upon request of any holder of Registrable Securities, take
any action reasonably necessary to register the sale of any Registrable Security
of such holder and to identify such holder as a selling stockholder.
On May 6, 1998, the Company also sold 300,000 Units to HealthCare Financial
Partners, Inc., Farallon Capital Partners, L.P., Farallon Capital Institutional
Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon
Capital Institutional Partners III, L.P., Tinicum Partners, L.P., R. R. Capital
Partners, L.P., Farallon Capital Management, L.L.C., on behalf of The Common
Fund, and Credit Suisse First Boston Corp. (collectively, the "Initial
Subscribers"), each an "accredited investor" within the meaning of Rule 501
under the Securities Act. The Units were sold to the Initial Subscribers upon
the same terms as the Units sold to the Initial Purchasers. No underwriters were
involved in this transaction, and the Units were sold for an aggregate offering
price of, and net proceeds to the Company of, $30,000,000. The Company relied
upon the exemption provided by Rule 506 under the Securities Act from the
registration provisions of the Securities Act. Units held by the Initial
Subscribers and their permitted assignees are also entitled to the benefits of
the Registration Rights Agreement.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Charter limits the liability of its directors and officers to
the Company and its stockholders to the fullest extent permitted from time to
time by Maryland law. Maryland law presently permits the liability of directors
and officers to a corporation or its stockholders for money damages to be
limited, except (i) to the extent that it is proved that the director or officer
actually received an improper benefit or profit in money property or services
for the amount of the benefit or profit in money, property or services actually
received, or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Charter and Bylaws require the Company to indemnify and hold harmless
and, without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland law.
The Maryland General Corporation Law ("MGCL") permits a corporation to indemnify
its directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that (i) the act
or omission of the indemnified party was material to the matter giving rise to
the proceeding and (x) was committed in bad faith or (y) was the result of
active and deliberate dishonesty, (ii) the indemnified party actually received
an improper personal benefit in money, property or services or (iii) in the case
of any criminal proceeding, the indemnified party had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding.
Indemnification is limited to court ordered reimbursement for expenses; however,
if the proceeding is one by or in the right of the corporation, and the director
or officer was adjudged to be liable to
II-2
<PAGE> 143
the corporation or if the proceeding is one charging improper personal benefit
to the director or officer and the director or officer was adjudged to be liable
on the basis that personal benefit was improperly received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttal presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted. Maryland law
requires a corporation (unless its charter provides otherwise, which the
Company's Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. It is the
position of the Securities and Exchange Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act. The form of Indemnification Agreement entered into between the
Company and its executive officers and directors is filed as an exhibit to this
Registration Statement.
The Registrant will carry an insurance policy providing directors' and
officers' liability insurance for any liability its directors or officers or the
directors or officers of any of its subsidiaries may incur in their capacities
as such.
The Registrant will indemnify HCFP REIT Management, Inc., a Maryland
corporation (the "Manager"), and its officers and directors from any action or
claim brought or asserted by any party by reason of any allegation that the
Manager or one or more of its officers or directors otherwise is accountable or
liable for the debts or obligations of the Registrant or its affiliates. In
addition, the Manager and its officers and directors will not be liable to the
Registrant, and the Registrant will indemnify the Manager and its officers and
directors for acts performed pursuant to the Management Agreement, filed as
Exhibit 10.1 hereto, except for claims arising from acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties under
the Management Agreement.
The form of Underwriting Agreement filed as an exhibit to this registration
statement provides for the reciprocal indemnifications by the Underwriters of
Registrant, and its directors, officers and controlling persons, and by the
Registrant of the Underwriters, and their respective directors, officers and
controlling persons, against certain liabilities under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements.
See page F-1.
(b) Exhibits
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Articles of Amendment and Restatement of the Registrant.*
3.2 -- Amended and Restated Bylaws of the Registrant.*
4.1 -- Form of Common Stock Certificate.**
5.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP.**
8.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP as to Tax
Matters.**
10.1 -- Management Agreement, dated as of May 6, 1998, by and among
the Registrant and HCFP REIT Management, Inc., as amended*
10.2 -- Agreement of Limited Partnership of HCFP REIT Operating
Partnership, L.P., dated May 6, 1998, among the Registrant
and HCFP Limited, Inc.*
10.3 -- Commercial Mortgage Loan Servicing Agreement, dated May 6,
1998, between the Registrant and GMAC Commercial Mortgage
Corporation.*
</TABLE>
II-3
<PAGE> 144
<TABLE>
<C> <C> <S>
10.4 -- Agreement Regarding Right of First Purchase, dated April 29, 1998, between the Registrant and GMAC
Commercial Mortgage Corporation.*
10.5 -- Registration Rights Agreement, dated May 6, 1998, among the Registrant, NationsBanc Montgomery Securities
LLC, Lehman Brothers Inc. and the parties listed on Schedule 1 thereto, as amended.*
10.6 -- Warrant Agreement, dated May 6, 1998, between the Registrant and The Bank of New York.*
10.7 -- Form of Indemnification Agreement.*
10.8 -- HealthCare Financial Partners REIT, Inc. 1998 Stock Option Plan.*
10.9 -- HealthCare Financial Partners REIT, Inc. 1998 Director Plan.*
10.10 -- Master Repurchase Facility, dated as of , 1998, between the Registrant and Merrill Lynch
Mortgage Capital, Inc., together with related Custody Agreement.**
21.1 -- List of Subsidiaries of Registrant.*
23.1 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (will be included in Exhibit 5.1).**
23.2 -- Consent of Ernst & Young LLP.*
23.3 -- Consent of Solomon, Ross, Grey & Company.*
24.1 -- Powers of Attorney (included on Signature Page).*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issues.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Chevy Chase, State of Maryland, on the 7th day of
August , 1998.
HealthCare Financial Partners REIT,
Inc.,
a Maryland corporation
(Registrant)
By: /s/ JOHN K. DELANEY
------------------------------------
John K. Delaney
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints JOHN K. DELANEY, ETHAN D. LEDER and EDWARD P.
NORDBERG, JR., or any of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments
(including post-effective amendments) to this Registration Statement (as well as
any registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933), and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on August 7, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JOHN K. DELANEY Director, Chairman of the Board of Directors
- --------------------------------------------- and Chief Executive Officer (principal
John K. Delaney executive officer)
/s/ ETHAN D. LEDER Director, Vice Chairman of the Board of
- --------------------------------------------- Directors and President
Ethan D. Leder
/s/ EDWARD P. NORDBERG, JR. Director, Treasurer and Chief Financial
- --------------------------------------------- Officer (principal financial and accounting
Edward P. Nordberg, Jr. officer)
/s/ DONALD S. FRANYO Director
- ---------------------------------------------
Donald S. Franyo
/s/ JOSHUA B. GILLON Director
- ---------------------------------------------
Joshua B. Gillon
Director
- ---------------------------------------------
Andrew Schoenfeld
/s/ WILLIAM E. SHINE Director
- ---------------------------------------------
William E. Shine
</TABLE>
II-5
<PAGE> 146
EXHIBIT INDEX
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Articles of Amendment and Restatement of the Registrant.*
3.2 -- Amended and Restated Bylaws of the Registrant.*
4.1 -- Form of Common Stock Certificate.**
5.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP.**
8.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP as to Tax
Matters.**
10.1 -- Management Agreement, dated as of May 6, 1998, by and among
the Registrant and HCFP REIT Management, Inc., as amended.*
10.2 -- Agreement of Limited Partnership of HCFP REIT Operating
Partnership, L.P., dated May 6, 1998, among the Registrant
and HCFP Limited, Inc.*
10.3 -- Commercial Mortgage Loan Servicing Agreement, dated May 6,
1998, between the Registrant and GMAC Commercial Mortgage
Corporation.*
10.4 -- Agreement Regarding Right of First Purchase, dated April 29,
1998, between the Registrant and GMAC Commercial Mortgage
Corporation.*
10.5 -- Registration Rights Agreement, dated May 6, 1998, among the
Registrant, NationsBanc Montgomery Securities LLC, Lehman
Brothers Inc. and the parties Schedule 1 thereto, as
amended.*
10.6 -- Warrant Agreement, dated May 6, 1998, between the Registrant
and The Bank of New York.*
10.7 -- Form of Indemnification Agreement.*
10.8 -- HealthCare Financial Partners REIT, Inc. 1998 Stock Option
Plan.*
10.9 -- HealthCare Financial Partners REIT, Inc. 1998 Director
Plan.*
10.10 -- Master Repurchase Agreement, dated as of , 1998,
between the Registrant and Merrill Lynch Mortgage Capital,
Inc., together with related Custody Agreement.**
21.1 -- List of Subsidiaries of Registrant.*
23.1 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (will be
included in Exhibit 5.1).**
23.2 -- Consent of Ernst & Young LLP.*
23.3 -- Consent of Solomon, Ross, Grey & Company.*
24.1 -- Powers of Attorney (included on Signature Page).*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
_______________ SHARES
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED _____________, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES.........................................................................3
Compliance with Registration Requirements.....................................................3
Offering Materials Furnished to Underwriters..................................................3
Distribution of Offering Material By the Company and the Operating Partnership................4
The Underwriting Agreement....................................................................4
Authorization of the Common Shares............................................................4
No Applicable Registration or Other Similar Rights............................................4
No Material Adverse Change....................................................................4
Independent Accountants.......................................................................5
Preparation of the Financial Statements.......................................................5
Organization and Good Standing of the Company, the Operating Partnership and their
Subsidiaries...........................................................................5
Capitalization and Other Capital Stock Matters................................................6
Stock Exchange Listing........................................................................6
Non-Contravention of Existing Instruments; No Further Authorizations or Approvals
Required...............................................................................6
No Material Actions or Proceedings............................................................7
Intellectual Property Rights..................................................................7
All Necessary Permits, etc....................................................................8
Title to Properties...........................................................................8
Tax Law Compliance............................................................................8
Investment Advisors Act; Exchange Act.........................................................9
Insurance.....................................................................................9
No Price Stabilization or Manipulation........................................................9
Accounting System.............................................................................9
ERISA Compliance..............................................................................9
Related Party Transactions...................................................................10
REIT Election................................................................................10
Plan Assets..................................................................................10
Information Supplied by the Company..........................................................10
Conflicts of Interest........................................................................10
Environmental Compliance.....................................................................11
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES......................................................11
THE FIRM COMMON SHARES..................................................................................11
THE FIRST CLOSING DATE..................................................................................12
The Optional Common Shares; the Second Closing Date..........................................12
Public Offering of the Common Shares.........................................................12
Payment for the Common Shares................................................................13
DELIVERY OF THE COMMON SHARES...........................................................................13
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS..............................................................13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3. ADDITIONAL COVENANTS..................................................................................13
Representatives' Review of Proposed Amendments and Supplements...............................14
Securities Act Compliance....................................................................14
Amendments and Supplements to the Prospectus and Other Securities Act Matters................14
Copies of any Amendments and Supplements to the Prospectus...................................14
Blue Sky Compliance..........................................................................15
Use of Proceeds..............................................................................15
Transfer Agent...............................................................................15
Earnings Statement...........................................................................15
Periodic Reporting Obligations...............................................................15
Agreement Not To Offer or Sell Additional Securities.........................................15
Future Reports to the Representatives........................................................16
Plan Asset Regulations.......................................................................16
Insurance....................................................................................16
Investment Company Act.......................................................................16
Affiliated Transactions......................................................................16
REIT Status..................................................................................17
Guidelines...................................................................................17
SECTION 4. PAYMENT OF EXPENSES...................................................................................17
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.....................................................18
Accountants' Comfort Letter..................................................................18
Compliance with Registration Requirements; No Stop Order; No Objection from NASD.............18
No Material Adverse Change or Ratings Agency Change..........................................19
Opinion of Counsel for the Company...........................................................19
Opinion of Tax Counsel for the Company.......................................................19
Opinion of Counsel for the Underwriters......................................................19
OFFICERS' CERTIFICATE19
Bring-down Comfort Letter....................................................................20
Lock-Up Agreement from Certain Stockholders of the Company...................................20
Additional Documents.........................................................................20
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES...............................................................20
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.......................................................................21
SECTION 8. INDEMNIFICATION.......................................................................................21
Indemnification of the Underwriters..........................................................21
Indemnification of the Company, the Operating Partnership and the Company Directors
and Officers..........................................................................22
Notifications and Other Indemnification Procedures...........................................23
Settlements..................................................................................24
SECTION 9. CONTRIBUTION..........................................................................................24
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS...................................................25
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 11. TERMINATION OF THIS AGREEMENT........................................................................26
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY..................................................27
SECTION 13. NOTICES..............................................................................................27
SECTION 14. SUCCESSORS..........................................................................................28
SECTION 15. PARTIAL UNENFORCEABILITY.............................................................................28
SECTION 16. GOVERNING LAW PROVISIONS.............................................................................28
SECTION 17. GENERAL PROVISIONS...................................................................................28
SCHEDULE A 1
</TABLE>
iii
<PAGE> 5
UNDERWRITING AGREEMENT
_____________, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
ABN AMRO INCORPORATED CREDIT SUISSE FIRST
BOSTON CORPORATION FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
STEPHENS INC.
As Representatives of the several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. HealthCare Financial Partners REIT, Inc., a Maryland
corporation (the "Company), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of ______
shares (the "Firm Common Shares") of its Common Stock, par value $0.0001 per
share (the "Common Stock"). In addition, the Company has granted to the
Underwriters an option to purchase up to an additional ______ shares (the
"Optional Common Shares") of Common Stock, as provided in Section 2. The Firm
Common Shares and, if and to the extent such option is exercised, the Optional
Common Shares are collectively called the "Common Shares". NationsBanc
Montgomery Securities LLC, ABN AMRO Incorporated, Credit Suisse First Boston
Corporation, Friedman, Billings, Ramsey & Co., Inc. and Stephens Inc. have
agreed to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-11 (File No.
333-___), which contains a form of prospectus to be used in connection with the
public offering and sale of the Common Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement, the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of NationsBanc Montgomery
Securities LLC, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary
<PAGE> 6
prospectus") dated _____________, 1998 (such preliminary prospectus
is called the "Rule 434 preliminary prospectus"), together with the applicable
term sheet (the "Term Sheet") prepared and filed by the Company with the
Commission under Rules 434 and 424(b) under the Securities Act, and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company is the sole 1% general partner of HCFP REIT Operating
Partnership, L.P. (the "Operating Partnership"). HCFP Limited, Inc. is a wholly
owned subsidiary of the Company and the sole 99% limited partner of the
Operating Partnership.
The Company has also filed with the Commission a shelf registration
statement on Form S-11 (File No. 333-___) (the "Shelf Registration Statement")
in order to fulfill its obligations under that certain Registration Rights
Agreement, dated as of May 6, 1998.
The Company and the Operating Partnership hereby confirm their
respective agreements with the Underwriters as follows:
2
<PAGE> 7
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company and the Operating Partnership hereby represent, warrant and
covenant to each Underwriter as follows:
(a) Compliance with Registration Requirements. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company and
the Operating Partnership have complied to the Commission's satisfaction with
all requests of the Commission for additional or supplemental information. No
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of the
Company and the Operating Partnership, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus, when filed,
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the time it
became effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
The Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company or the Operating Partnership in writing by
the Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement that have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company
and the Operating Partnership have delivered to the Representatives one complete
manually signed copy of the Registration Statement and of each consent and
certificate of experts filed as a part thereof, and conformed copies of the
Registration Statement (without exhibits) and preliminary prospectuses and the
Prospectus, as amended or supplemented, in such quantities and at such places as
the Representatives has reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company and the
Operating Partnership. The Company and the Operating Partnership have not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of
3
<PAGE> 8
the Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company and the Operating Partnership, enforceable in accordance with its
terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(e) Authorization of the Common Shares. The Common Shares to
be purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or included
in the offering contemplated by this Agreement.
(g) No Material Adverse Change. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company, the Operating Partnership and their
respective subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company, the Operating Partnership and
their respective subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business, nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or
the Operating Partnership or, except for dividends paid to the Company, the
Operating Partnership or other subsidiaries, any of their respective
subsidiaries on any class of capital stock, or repurchase or redemption by the
Company, the Operating Partnership or any of their respective subsidiaries of
any class of capital stock.
(h) Independent Accountants. Ernst & Young LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company, the Operating Partnership and their respective subsidiaries as of
and at the dates indicated and the results of their operations and cash
4
<PAGE> 9
flows for the periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto. To the best of the Company's and the
Operating Partnership's knowledge, the financial statements of [Sherman Oaks]
filed with the Commission as part of the Registration Statement and included in
the Prospectus present fairly the consolidated financial position of [Sherman
Oaks] and its subsidiaries as of and at the dates indicated, and the results of
their operations and cash flows for the periods specified, and such financial
statements have been prepared in conformity with GAAP applied on a consistent
basis throughout the periods involved, except as may be expressly stated in the
related notes thereof. To the best of the Company's and the Operating
Partnership's knowledge, the financial statements of [Valencia/Vista] filed with
the Commission as part of the Registration Statement and included in the
Prospectus present fairly the consolidated financial position of
[Valencia/Vista] and [its/their] subsidiaries as of and at the dates indicated,
and the results of their operations and cash flows for the periods specified,
and such financial statements have been prepared in conformity with GAAP applied
on a consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. The financial statements of
[Sherman Oaks and Valencia/Vista] are the only financial statements of the
Company's real estate properties that are required to be disclosed in the
Prospectus under Regulation S-X under the Securities Act and the Commission's
other relevant guidance thereunder. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Selected Financial
Data", "Selected Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(j) Organization and Good Standing of the Company, the
Operating Partnership and their Subsidiaries. Each of the Company and the
Operating Partnership (i) has been duly incorporated or organized, as
applicable, and is validly existing as a corporation or limited partnership, as
the case may be, in good standing under the laws of the States of Maryland and
Delaware, respectively; (ii) has corporate or partnership power and authority,
as applicable, to own, lease and operate its properties and assets and to
conduct its business as described in the Registration Statement; and (iii) has
the power and authority to enter into and perform its obligations under this
Agreement. Each of the Company and the Operating Partnership is duly qualified
as a foreign corporation or partnership, as the case may be, to transact
business, and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of its
properties and assets or the conduct of business. The Company does not own or
control, directly or indirectly, any corporation, partnership, association or
other entity other than the subsidiaries listed on Exhibit 21 to the
Registration Statement. The Company is the sole general partner of the Operating
Partnership and, together with its wholly owned subsidiary, HCFP Limited, Inc.,
will, as of each Closing Date, own 100% of all outstanding partnership interests
in the Operating Partnership. Except as described in the Registration Statement,
the Operating Partnership is not currently prohibited, directly or indirectly,
from paying any dividends or distributions to the Company to the extent
permitted by applicable law, from making any other distribution, from repaying
to the Company any loans or advances to the Operating Partnership from the
Company or from transferring any of the Operating Partnership's property or
assets to the Company.
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(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, upon exercise of outstanding options or warrants described in
the Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company, interests in the Operating Partnership or
capital stock or interests in their respective subsidiaries, other than those
accurately described in the Prospectus. The description of the Company's stock
option and stock incentive plans, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, options and rights.
(l) Stock Exchange Listing. The Common Shares have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor the Operating
Partnership nor any of their respective subsidiaries is in violation of its
organizational documents or is in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") under any indenture, mortgage,
loan or credit agreement, note, contract, franchise, lease or other instrument
to which the Company or the Operating Partnership or any of their respective
subsidiaries is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or the Operating Partnership or any
of their respective subsidiaries is subject (each, an "Existing Instrument"),
except for such Defaults as would not, individually or in the aggregate, result
in a Material Adverse Change. The Company's and the Operating Partnership's
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus (i) have been duly
authorized by all necessary corporate and partnership action and will not result
in any violation of the provisions of the organizational documents of the
Company or the Operating Partnership or any of their respective subsidiaries,
(ii) will not conflict with or constitute a breach of, or Default or a Debt
Repayment Triggering Event (as defined below) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or the Operating Partnership or any of their respective subsidiaries
pursuant to, or require the consent of any other party to, any Existing
Instrument, except for such conflicts, breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change and (iii) will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company or the Operating Partnership or any of their respective subsidiaries. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's and the Operating Partnership's execution, delivery
and performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus,
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except such as have been obtained or made by the Company and the Operating
Partnership and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the National Association
of Securities Dealers, Inc. (the "NASD"). As used herein, a "Debt Repayment
Triggering Event" means any event or condition which gives, or with the giving
of notice or lapse of time would give, the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or the Operating Partnership or any of their
respective subsidiaries.
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's or the Operating Partnership's knowledge, threatened (i) against or
affecting the Company or the Operating Partnership or any of their respective
subsidiaries, (ii) which has as the subject thereof any officer or director of,
or property owned or leased by, the Company or the Operating Partnership or any
of their respective subsidiaries or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined adversely
to the Company or the Operating Partnership or their respective subsidiaries and
(B) any such action, suit or proceeding, if so determined adversely, would
reasonably be expected to result in a Material Adverse Change or adversely
affect the consummation of the transactions contemplated by this Agreement. No
material labor dispute with the employees of the Company or the Operating
Partnership or any of their respective subsidiaries exists or, to the best of
the Company's and the Operating Partnership's knowledge, is threatened or
imminent.
(o) Intellectual Property Rights. The Company, the Operating
Partnership and their respective subsidiaries own or possess sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct their businesses as now conducted; and the
expected expiration of any of such Intellectual Property Rights would not result
in a Material Adverse Change. Neither the Company nor the Operating Partnership
nor any of their respective subsidiaries has received any notice of infringement
or conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company, the Operating
Partnership and their respective subsidiaries are conducting their respective
businesses in compliance in all material respects with applicable federal, state
and local laws, rules, regulations, decisions, directives and orders. The
Company, the Operating Partnership and their respective subsidiaries possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor the Operating
Partnership nor any of their respective subsidiaries has received any notice of
proceedings relating to the revocation or modification of, or non-compliance
with, any such certificate, authorization or permit that, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
result in a Material Adverse Change.
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(q) Title to Properties. (a) The Company, the Operating
Partnership and each of their respective subsidiaries has good and marketable
title to all the properties and assets reflected as owned in the financial
statements referred to in Section 1(i) above, in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect the value of such
property and do not materially interfere with the use made or proposed to be
made of such property by the Company or the Operating Partnership or such
subsidiary; (b) the real property, improvements, equipment and personal property
held under lease by the Company, the Operating Partnership or any of their
respective subsidiaries are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company, the Operating Partnership or such subsidiaries
or are disclosed in the Prospectus; (c) neither the Company nor the Operating
Partnership knows of any event that, but for the passage of time, the giving of
notice or both, would constitute a Default under any such lease; (d) each of the
properties and assets reflected as owned in the financial statements referred to
in Section 1(i) above or held under lease by the Company, the Operating
Partnership or any of their respective subsidiaries is in compliance with all
applicable codes and zoning laws and regulations; and (e) neither the Company
nor the Operating Partnership has knowledge of any pending or threatened
condemnation, zoning change or other proceeding or action that will in any
manner affect the size of, use of, improvement on, construction on or access to
the properties or assets of the Company, the Operating Partnership or any of
their respective subsidiaries.
(r) Tax Law Compliance. The Company, the Operating Partnership
and their respective subsidiaries have filed all necessary federal, state and
foreign income and franchise tax returns and have paid all taxes required to be
paid by any of them and, if due and payable, any related or similar assessment,
fine or penalty levied against any of them, except as may be being contested in
good faith and by appropriate proceedings. The Company has made adequate
charges, accruals and reserves in the applicable financial statements referred
to in Section 1(i) above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company,
the Operating Partnership or any of their respective subsidiaries has not been
finally determined.
(s) Investment Advisors Act; Exchange Act. Neither the Company
nor the Operating Partnership is now, or, after receipt of payment for the
Common Shares, use of proceeds of the offering as described in the Registration
Statement and consummation of all related transactions, will be an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such term is defined in the Investment Company
Act of 1940, as amended, or an "investment advisor," as such term is defined in
the Investment Advisors Act of 1940, as amended, or a "broker" within the
meaning of Section 3(a)(4) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or a "dealer" within the meaning of Section 3(a)(5) of the
Exchange Act.
(t) Insurance. Each of the Company, the Operating Partnership
and their respective subsidiaries is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed
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<PAGE> 13
adequate and customary for their businesses, including, but not limited to,
policies covering real and personal property owned or leased by the Company, the
Operating Partnership and their respective subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company and the Operating
Partnership have no reason to believe that they or any of their respective
subsidiaries will not be able (i) to renew their existing insurance coverage as
and when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct their business as now
conducted and at a cost that would not result in a Material Adverse Change.
Neither of the Company nor the Operating Partnership nor any of their respective
subsidiaries has been denied any insurance coverage that it has sought or for
which it has applied.
(u) No Price Stabilization or Manipulation. The Company and
the Operating Partnership have not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Accounting System. The Company and the Operating
Partnership maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) all transactions are executed in accordance with
management's general or specific authorization; (ii) all transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) ERISA Compliance. The Company and the Operating
Partnership are in compliance in all material respects with the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"). No "reportable event" (as
defined under ERISA Section 4043) has occurred or is reasonably expected to
occur with respect to any "employee benefit plan" established or maintained by
the Company or the Operating Partnership or any of their ERISA Affiliates.
Neither the Company nor the Operating Partnership, nor any of their ERISA
Affiliates, has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 497S or 4980B of the
Internal Revenue Code of 1986, as amended (the "Code"). Each "employee benefit
plan" established or maintained by the Company or the Operating Partnership or
any of their ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified, and nothing has occurred, whether by action
or failure to act, that would cause the loss of such qualification.
(x) Policies. The Company has adopted written policies for
each policy referenced in the Prospectus (the "Policies"), including, without
limitation, the Guidelines (as defined in the Prospectus), and the Company and
the Operating Partnership are in compliance with the Policies and the
Guidelines.
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(y) Related Party Transactions. There are no business
relationships or related party transactions involving the Company, the Operating
Partnership, their respective subsidiaries or any other person required to be
described in the Prospectus that have not been described as required.
(z) REIT Election. The Company is organized in conformity with
the requirements for qualification as a real estate investment trust ("REIT")
under the Code and its method of operation, as described in the Registration
Statement, will enable it to meet the requirements for taxation as a REIT under
the Code, commencing with the Company's taxable year ending December 31, 1998.
(aa) Plan Assets. Each of the Company and the Operating
Partnership qualifies and will continue to qualify under an available exception
under the Plan Assets Regulation issued by the Department of Labor so that the
assets of each entity are not assets of an "employee benefit plan" as defined
under ERISA.
(ab) Information Supplied by the Company. All of the
information supplied by the Company to the Underwriters for inclusion in the
Registration Statement is true, accurate and complete in all respects. In
addition, the Company has received written permission from each and every entity
or person that has any right to own or possess or otherwise authorize permission
respecting the information. Further, the public dissemination of such
information will not constitute a Default or Debt Repayment Triggering Event
under any Existing Instruments or create any liability, except in such cases
where the Company has obtained written consents stating that the aggrieved party
will not pursue the claim in any manner.
(ac) Conflicts of Interest. The consummation of the
transactions contemplated by the Registration Statement and this Agreement will
not result in a conflict of interest by or among the Company, the Operating
Partnership or any of their respective subsidiaries or affiliates (as defined in
Section 501(b) of the Securities Act) that has not been or will not be (i)
approved by a majority of the independent members of the Company's Board of
Directors or (ii) disclosed in the Registration Statement.
(ae) Environmental Compliance. Each of the Company and the
Operating Partnership have no knowledge of (a) the unlawful presence of any
substance, material or waste that is regulated by any federal, state or local
governmental or quasi-governmental authority, including, without limitation, (i)
any substance, material or waste defined, used or listed as a "hazardous waste",
"extremely hazardous waste", "restricted hazardous waste", "hazardous
substance", "hazardous material", "toxic substance" or other similar terms as
defined or used in any Environmental Law (as defined below), (ii) any petroleum
products, asbestos, polychlorinated biphenyls, lead-based paint, flammable
explosives or radioactive materials, (iii) any additional substances or
materials that are now or hereafter hazardous or toxic substances under any
Environmental Law relating to the properties or assets and (iv) as of any date
of determination, any additional substances or materials that are hereafter
incorporated in or added to the definitions of "hazardous materials" for
purposes of any Environmental Law (collectively, "Hazardous Materials") on any
of the properties or assets owned by or to be
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transferred to the Company or the Operating Partnership, or on any of the
properties as to which the Company is a secured lender. In the ordinary course
of their respective businesses, the Company and the Operating Partnership
conduct periodic reviews of the effect of Environmental Laws on the business,
operations and the properties and assets of the Company and the Operating
Partnership in the course of which they intend to identify and evaluate
associated costs and liabilities. "Environmental Laws" are any federal, state,
local or foreign laws or regulations relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to emissions,
discharges, releases of threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Matters of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Matters of Environmental Concern.
Any certificate signed by an officer of the Company on behalf
of the Company or on behalf of the Company as general partner of the Operating
Partnership and delivered to the Representatives or to counsel for the
Underwriters shall be deemed to be a representation and warranty to each
Underwriter as to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $___ per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NationsBanc Montgomery Securities LLC, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Representatives) at 6:00 a.m. San Francisco time, on ________________,
1998, or such other time and date not later than 10:30 a.m. San Francisco time,
on _____________, 1998 as the Representatives shall designate by notice to the
Company (the time and date of such closing are called the "First Closing Date").
The Company hereby acknowledges that circumstances under which the
Representatives may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company or the Representatives to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 10 of this Agreement.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to
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<PAGE> 16
purchase, severally and not jointly, up to an aggregate of ___ Optional Common
Shares from the Company at the purchase price per share to be paid by the
Underwriters for the Firm Common Shares. The option granted hereunder is for use
by the Underwriters solely in covering any over-allotments in connection with
the sale and distribution of the Firm Common Shares. The option granted
hereunder may be exercised at any time (but not more than once) upon notice by
the Representatives to the Company, which notice may be given at any time within
30 days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. NationsBanc Montgomery Securities LLC, individually and not as a
Representative of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by the Representatives by the First Closing Date or
the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Firm Common
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Shares at the First Closing Date, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The Company shall also deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters, certificates for
the Optional Common Shares the Underwriters have agreed to purchase at the First
Closing Date or the Second Closing Date, as the case may be, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The certificates for the Common Shares
shall be in definitive form and registered in such names and denominations as
the Representatives shall have requested at least two full business days prior
to the First Closing Date (or the Second Closing Date, as the case may be) and
shall be made available for inspection on the business day preceding the First
Closing Date (or the Second Closing Date, as the case may be) at a location in
New York City as the Representatives may designate. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
The Company and the Operating Partnership further covenant and agree
with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on the
later of the First Closing Date and such date, as in the opinion of counsel for
the Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or supplement,
and the Company shall not file any such proposed amendment or supplement to
which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this
Agreement, the Company shall promptly advise the Representatives in writing (i)
of the receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any proceedings to remove,
suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any
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<PAGE> 18
proceedings for any of such purposes. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. Additionally, the Company
agrees that it shall comply with the provisions of Rules 424(b), 430A and 434,
as applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Representatives or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to promptly prepare (subject to Section 3(a)
hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will comply
with law.
(d) Copies of any Amendments and Supplements to the
Prospectus. The Company agrees to furnish the Representatives, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of) the
state securities or blue sky laws or Canadian provincial securities laws of
those jurisdictions designated by the Representatives, shall comply with such
laws and shall continue such qualifications, registrations and exemptions in
effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the Representatives
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
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(h) Earnings Statement. As soon as practicable, the Company
will make generally available to its security holders and to the Representatives
an earnings statement (which need not be audited) covering the twelve-month
period ending December 31, 1999 that satisfies the provisions of Section 11(a)
of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the Commission
and the New York Stock Exchange all reports and documents required to be filed
under the Exchange Act.
(j) Agreement Not To Offer or Sell Additional Securities.
During the period of 180 days following the date of the Prospectus, the Company
and the Operating Partnership will not, without the prior written consent of
NationsBanc Montgomery Securities LLC (which consent may be withheld at the sole
discretion of NationsBanc Montgomery Securities LLC), directly or indirectly,
sell, offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of or transfer, or announce the offering of,
or file any registration statement under the Securities Act in respect of, any
shares of Common Stock, options or warrants to acquire shares of the Common
Stock or securities exchangeable or exercisable for or convertible into shares
of Common Stock (other than as contemplated by this Agreement with respect to
the Common Shares); provided, however, that (i) the Company may issue shares of
its Common Stock or options to purchase its Common Stock, or Common Stock upon
exercise of options, pursuant to any stock option or stock incentive plan
described in the Prospectus, but only if the holders of such shares, options, or
shares issued upon exercise of such options, agree in writing not to sell,
offer, dispose of or otherwise transfer any such shares or options during such
180 day period without the prior written consent of NationsBanc Montgomery
Securities LLC (which consent may be withheld at the sole discretion of
NationsBanc Montgomery Securities LLC), (ii) the Operating Partnership may issue
limited partnership interests in the Operating Partnership in consideration for
real estate or real estate-related assets in arms-length transactions, and (iii)
the Company may file the Shelf Registration Statement and any amendment thereto.
(k) Future Reports to the Representatives. During the period
of five years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111, Attention: Kathleen Smythe, and
Gibson, Dunn & Crutcher LLP, One Montgomery Street, Telesis Tower, San
Francisco, CA 94104, Attention: Todd H. Baker, Esq.: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the Company
containing the balance sheet of the Company as of the close of such fiscal year
and statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public or certified
public accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form
10-Q, Current Report on Form 8-K or other report filed by the Company with the
Commission, the NASD, the New York Stock Exchange or any other securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its capital stock.
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(l) Plan Asset Regulations. The Company shall promptly notify
the Representatives upon the Company's failure to comply with an available
exception under the Plan Asset Regulations issued by the Department of Labor.
(m) Insurance. As of and at all times subsequent to the First
Closing Date, the Company and the Operating Partnership shall be insured in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate, customary and commercially reasonable for their businesses
against theft, damage, destruction and acts of vandalism.
(n) Investment Company Act. The Company and the Operating
Partnership shall conduct their respective businesses so as not to become
subject to the Investment Company Act.
(o) Affiliated Transactions. The Company and the Operating
Partnership may not engage in transactions with the other, or with Affiliates of
the Company or the Operating Partnership, or any entities owned or controlled by
any employee, officer or director of the Company or the Operating Partnership,
except to the extent that such transactions meet the following criteria: (i) are
in the ordinary course of business, (ii) the compensation therefor is fair and
reasonable, and (iii) the overall terms and conditions thereof are not less
favorable to the Company than the probable overall market-rate terms and
conditions of a similar transaction with an unaffiliated person. Additionally,
prior to entering into any such transaction, such transaction shall be approved
by a majority of the independent members of the Company's Board of Directors; or
in the alternative, such transaction shall be pursuant to the policies and/or
management agreements previously approved by a majority of the independent
members of the Company's Board of Directors.
(p) REIT Status. The Company shall operate and conduct its
business so as to qualify as a REIT in accordance with the requirement of the
Code and shall elect to be taxed as a REIT beginning with its tax year ending
December 31, 1998. The Company shall not thereafter revoke its REIT election nor
conduct its business and operations so as to fail to qualify as a REIT under the
Code.
(q) Guidelines. The Company shall not amend the Guidelines (as
defined in the Registration Statement) without the prior approval of a majority
of the independent members of the Company's Board of Directors.
NationsBanc Montgomery Securities LLC, on behalf of the several
Underwriters may, in its sole discretion, but shall not be required to, waive in
writing the performance by the Company or the Operating Partnership of any one
or more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving
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costs), (ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Common Shares to the Underwriters,
(iv) all fees and expenses of the Company's counsel, independent public or
certified public accountants and other advisors, (v) all costs and expenses
incurred in connection with the preparation, printing, filing, shipping and
distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the state securities or blue sky
laws or the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with listing the Common Stock on the New York Stock Exchange, and
(ix) all other fees, costs and expenses referred to in Item 31 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Common Shares as provided herein on the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Operating Partnership set forth in Section 1 hereof as of the date hereof
and as of the First Closing Date as though then made and, with respect to the
Optional Common Shares, as of the Second Closing Date as though then made, to
the timely performance by the Company and the Operating Partnership of their
covenants and other obligations hereunder, and to each of the following
additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Ernst & Young LLP, independent public
or certified public accountants for the Company, a letter dated the date hereof
addressed to the Underwriters, in form and substance satisfactory to the
Representatives, containing statements and information of the type ordinarily
included in accountant's "comfort letters" to underwriters, delivered according
to Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(b) Compliance with Registration Requirements; No Stop Order;
No Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
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(i) the Company shall have filed the Prospectus
with the Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by Rule 424(b)
under the Securities Act; or the Company shall have filed a post-effective
amendment to the Registration Statement containing the information required by
such Rule 430A, and such post-effective amendment shall have become effective;
or, if the Company elected to rely upon Rule 434 under the Securities Act and
obtained the Representative's consent thereto, the Company shall have filed a
Term Sheet with the Commission in the manner and within the time period required
by such Rule 424(b);
(ii) no stop order suspending the effectiveness
of the Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect and
no proceedings for such purpose shall have been instituted or threatened by the
Commission; and
(iii) the NASD shall have raised no objection to
the fairness and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change.
For the period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second Closing
Date:
(i) in the reasonable judgment of the
Representatives there shall not have occurred any Material Adverse Change; and
(ii) there shall not have occurred any
downgrading, nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any securities of the
Company, the Operating Partnership or their respective subsidiaries by any
"nationally recognized statistical rating organization" as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the
First Closing Date and the Second Closing Date, the Representatives shall have
received the favorable opinion of Powell, Goldstein, Frazer & Murphy LLP,
counsel for the Company, dated as of such Closing Date, the form of which is
attached as Exhibit A and upon which the Underwriters and their counsel can
rely.
(e) Opinion of Tax Counsel for the Company. On each of
the First Closing Date and the Second Closing Date, the Representatives shall
have received the favorable opinion of Powell, Goldstein, Frazer & Murphy LLP,
tax counsel for the Company, dated as of such Closing Date, with respect to
matters set forth on Exhibit B and upon which the Underwriters and their counsel
can rely.
(f) Opinion of Counsel for the Underwriters. On each of
the First Closing Date and the Second Closing Date, the Representatives shall
have received the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel for
the Underwriters, dated as of such Closing Date, with respect to such matters as
may be reasonably requested by the Underwriters.
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(g) Officers' Certificate. On each of the First Closing
Date and the Second Closing Date, the Representatives shall have received a
written certificate executed by the Chief Executive Officer and the Chief
Financial Officer of the Company and the General Partner of the Operating
Partnership, dated as of such Closing Date, to the effect set forth in
subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of
this Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and
covenants of the Company and the Operating Partnership set forth in Section 1 of
this Agreement are true and correct with the same force and effect as though
expressly made on and as of such Closing Date; and
(iii) the Company and the Operating Partnership
have complied with all the agreements and satisfied all the conditions on their
part to be performed or satisfied at or prior to such Closing Date.
(h) Bring-down Comfort Letter. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received from Ernst & Young LLP, independent public or certified public
accountants for the Company, a letter dated such date, in form and substance
satisfactory to the Representatives, to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a) of
this Section 5, except that the specified date referred to therein for the
carrying out of procedures shall be no more than three business days prior to
the First Closing Date or Second Closing Date, as the case may be.
(i) Lock-Up Agreement from Certain Stockholders of the
Company. On the date hereof, the Company shall have furnished to the
Representatives an agreement in the form of Exhibit C hereto from each director
and officer, and such agreement shall be in full force and effect on each of the
First Closing Date and the Second Closing Date.
(j) Additional Documents. On or before each of the First
Closing Date and the Second Closing Date, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
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SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representatives pursuant to
Section 5 or Section 11 (but only with respect to a termination as a result of a
Material Adverse Change relating to the Company), or if the sale to the
Underwriters of the Common Shares on the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Operating
Partnership to any Underwriter, except that the Company and the Operating
Partnership shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company or the Operating Partnership, or (c) of any party hereto to any
other party, except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. Each of the Company and
the Operating Partnership, jointly and severally, agree to indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as incurred,
to which such Underwriter or such controlling person may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make
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the statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company and the Operating Partnership
contained herein; or (iv) in whole or in part upon any failure of the Company
and the Operating Partnership to perform their respective obligations hereunder
or under law; or (v) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as part
of or referred to in any loss, claim, damage, liability or action arising out of
or based upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct; and to reimburse each Underwriter
and each such controlling person for any and all expenses (including the fees
and disbursements of counsel chosen by NationsBanc Montgomery Securities LLC) as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by the Representatives expressly
for use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided, further, that
with respect to any preliminary prospectus, the foregoing indemnity agreement
shall not inure to the benefit of any Underwriter from whom the person asserting
any loss, claim, damage, liability or expense purchased Common Shares, or any
person controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Common Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company and the Operating Partnership may otherwise have.
(b) Indemnification of the Company, the Operating Partnership and
the Company Directors and Officers. Each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, the Operating Partnership,
each of the Company's directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company or the
Operating Partnership within the meaning of the Securities Act or the Exchange
Act, against any loss, claim, damage, liability or expense, as incurred, to
which the Company or the Operating Partnership, or any such director, officer or
controlling person may become subject, under the Securities Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or
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alleged untrue statement of a material fact contained in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Operating Partnership by the Representatives
expressly for use therein; and to reimburse the Company and the Operating
Partnership, or any such director, officer or controlling person for any legal
and other expense reasonably incurred by the Company or the Operating
Partnership, or any such director, officer or controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action. Each of the Company and the
Operating Partnership hereby acknowledges that the only information that the
Underwriters have furnished to the Company and the Operating Partnership
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) as the last paragraph on the inside front cover page of the Prospectus
concerning stabilization by the Underwriters and (B) in the table in the first
paragraph and as the second and [_] paragraphs under the caption "Underwriting"
in the Prospectus; and the Underwriters confirm that such statements are
correct. The indemnity agreement set forth in this Section 8(b) shall be in
addition to any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability that
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties that are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
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<PAGE> 27
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (NationsBanc Montgomery Securities LLC in the case of Section
8(b) and Section 9), representing the indemnified parties who are parties to
such action) or (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Operating Partnership, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Operating Partnership, on the one
hand, and the
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Underwriters, on the other hand, in connection with the statements or omissions
or inaccuracies in the representations and warranties herein that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Operating Partnership, on the one hand, and the Underwriters, on the
other hand, in connection with the offering of the Common Shares pursuant to
this Agreement shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Operating
Partnership, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and the Operating
Partnership, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company and
the Operating Partnership, on the one hand, or the Underwriters, on the other
hand, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company, the Operating Partnership and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company or the Operating Partnership within the meaning of the
Securities Act and the Exchange Act shall have the same rights to contribution
as the Company.
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SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case
may be, any one or more of the several Underwriters shall fail or refuse to
purchase Common Shares that it or they have agreed to purchase hereunder on such
date, and the aggregate number of Common Shares that such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase does not exceed 10% of
the aggregate number of the Common Shares to be purchased on such date, the
other Underwriters shall be obligated, severally, in the proportions that the
number of Firm Common Shares set forth opposite their respective names on
Schedule A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of the
non-defaulting Underwriters, to purchase the Common Shares that such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares are not made within 48 hours
after such default, this Agreement shall terminate without liability of any
party to any other party, except that the provisions of Section 4, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case, either the Representatives or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT.
Prior to the First Closing Date, this Agreement may be terminated by
the Representatives by notice given to the Company if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the New York Stock Exchange, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York or California authorities; (iii) there
shall have occurred any outbreak or escalation of national or international
hostilities or any crisis or calamity, or any change in the United States or
international financial markets, or any substantial change or development
involving a prospective substantial change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable to market the
Common Shares
25
<PAGE> 30
in the manner and on the terms described in the Prospectus or to enforce
contracts for the sale of securities; (iv) in the reasonable judgment of the
Representatives there shall have occurred any Material Adverse Change; or (v)
the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Representatives may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company or the Operating Partnership to any Underwriter,
except that the Company and the Operating Partnership shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 4 and 6 hereof, (b) any Underwriter to the Company and the Operating
Partnership, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, its officers, the Operating Partnership and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company, the Operating Partnership or any of
their respective partners, officers or directors or any controlling person, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES.
All communications hereunder shall be in writing and shall be mailed,
hand delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, CA 94111
Facsimile: (415) 249-5558
Attention: David Baylor, Esq.
with a copy to:
Gibson, Dunn & Crutcher LLP
One Montgomery Street, Telesis Tower
San Francisco, CA 94104
Facsimile: (415) 393-8304
Attention: Todd H. Baker, Esq.
If to the Company or the Operating Partnership:
26
<PAGE> 31
HealthCare Financial Partners REIT, Inc.
One Wisconsin Circle, Suite 402
Chevy Chase, MD 20815
Facsimile: (301) 347-3100
Attention: John K. Delaney, Chairman
with a copy to:
Powell, Goldstein, Frazer & Murphy
16th Floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Facsimile: (404) 572-6999
Attention: G. William Speer, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto and to the benefit of the employees, officers and directors and
controlling persons referred to in Section 8 and Section 9 of this Agreement,
and in each case their respective successors, and no other person will have any
right or obligation hereunder. The term "successors" shall not include any
purchaser of the Common Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED IN SUCH STATE.
SECTION 17. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures
27
<PAGE> 32
thereto and hereto were upon the same instrument. This Agreement may not be
amended or modified unless in writing by all of the parties hereto, and no
condition herein (express or implied) may be waived unless waived in writing by
each party whom the condition is meant to benefit. The Table of Contents and the
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company and the Operating Partnership, their affairs and business in order
to assure that adequate disclosure has been made in the Registration Statement,
any preliminary prospectus and the Prospectus (and any amendments and
supplements thereto), as required by the Securities Act and the Exchange Act.
28
<PAGE> 33
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
HEALTHCARE FINANCIAL PARTNERS REIT, INC.,
a Maryland corporation
By:
---------------------------------------
Name: John K. Delaney
Title: Chairman of the Board and
Chief Executive Officer
HCFP REIT OPERATING
PARTNERSHIP, L.P.
a Delaware limited partnership
By: HealthCare Financial Partners REIT, Inc.
Its: General Partner
By:
---------------------------------------
Name: John K. Delaney
Title: Chairman of the Board and
Chief Executive Officer
29
<PAGE> 34
The foregoing Underwriting Agreement is hereby confirmed and accepted by the
Representatives in San Francisco, California as of the date first above written.
NATIONSBANC MONTGOMERY SECURITIES LLC
ABN AMRO INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
STEPHENS INC.
ACTING AS REPRESENTATIVES OF THE SEVERAL
UNDERWRITERS NAMED IN THE ATTACHED
SCHEDULE A
By: NationsBanc Montgomery Securities LLC
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
30
<PAGE> 35
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM
COMMON SHARES
UNDERWRITERS TO BE PURCHASED
<S> <C>
NationsBanc Montgomery Securities LLC........ [___]
ABN AMRO Incorporated........................ [___]
Credit Suisse First Boston Corporation [___]
Friedman, Billings, Ramsey & Co., Inc........ [___]
Stephens Inc................................. [___]
Total........................................ [___]
</TABLE>
<PAGE> 36
EXHIBIT A
Opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel for the
Company, to be delivered pursuant to Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the First Closing Date or the Second Closing Date. Counsel for the
Underwriters may rely on this opinion.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland.
(ii) The Operating Partnership has been duly organized and
is validly existing as a limited partnership in good standing under the laws of
the State of Delaware.
(iii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iv) The Operating Partnership has the partnership power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(v) Each of the Company and the Operating Partnership is
duly qualified as a foreign corporation or limited partnership, as the case may
be, to transact business and is in good standing as a foreign corporation or
limited partnership, as the case may be, in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(vi) Each significant subsidiary (as defined in Rule 405
under the Securities Act) has been duly organized and is validly existing as a
corporation, limited partnership or limited liability company, as the case may
be, in good standing under the laws of the jurisdiction of its organization, has
corporate or partnership power, as the case may be, and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and, to the best knowledge of such counsel, is duly qualified as a
foreign corporation, limited partnership or limited liability company, as the
case may be, to transact business and is in good standing in each jurisdiction
in which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such jurisdictions
where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change.
(vii) All of the issued and outstanding capital stock or
interests of each such significant subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, to the best knowledge of such counsel, free
and clear of any security interest, mortgage, pledge, lien, encumbrance or, to
the best
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knowledge of such counsel, any pending or threatened claim. The Company is the
sole general partner of the Operating Partnership, and HCFP Limited, Inc. is the
sole limited partner of the Operating Partnership.
(viii) The authorized, issued and outstanding capital stock
of the Company (including the Common Stock) conforms to the descriptions thereof
set forth in the Prospectus. All of the outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable and,
to the best of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable requirements of the charter and
by-laws of the Company and the General Corporation Law of the State of Maryland.
The description of the Company's stock option and stock incentive plans, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
(ix) No stockholder of the Company or any other person has
any preemptive right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company arising (i) by operation of the
charter or by-laws of the Company or the General Corporation Law of the State of
Maryland or (ii) to the best knowledge of such counsel, otherwise.
(x) No person has any preemptive right, right of first
refusal or other similar right to subscribe for securities of or interests in
the Operating Partnership arising (i) by operation of the agreement of limited
partnership of the Operating Partnership or the Delaware Revised Uniform Limited
Partnership Act or (ii) to the best knowledge of such counsel, otherwise.
(xi) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company
and the Operating Partnership, enforceable in accordance with its terms, except
as rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(xii) The Common Shares to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(xiii) The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the Commission
under the Securities Act. To the best knowledge of such counsel, no stop order
suspending the effectiveness of either of the Registration Statement or the Rule
462(b) Registration Statement, if any, has been issued under the Securities Act
and no proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
A-2
<PAGE> 38
(xiv) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to the
Registration Statement and the Prospectus, as of their respective effective or
issue dates (other than the financial statements and supporting schedules
included therein or in exhibits to or excluded from the Registration Statement,
as to which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act.
(xv) The Common Shares have been approved for listing on
the New York Stock Exchange.
(xvi) The statements (i) in the Prospectus under the
captions "Prospectus Summary," "Risk Factors -- Risks Associated with the
Healthcare Industry," "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws," "Partnership Agreement," "Federal Income Tax
Considerations," "ERISA Considerations," and "Shares Eligible for Future Sale,"
insofar as such statements constitute matters of law, summaries of legal
matters, the Company's charter or by-law provisions, documents or legal
proceedings, or legal conclusions, has been reviewed by such counsel and fairly
present and summarize, in all material respects, the matters referred to
therein.
(xvii) To the best knowledge of such counsel, there are no
legal or governmental actions, suits or proceedings pending or threatened that
are required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xviii) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto;
and the descriptions thereof and references thereto are correct in all material
respects.
(xix) No consent, approval, authorization or other order
of, or registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xx) The execution and delivery of the Underwriting
Agreement by the Company and the Operating Partnership and the performance by
the Company and the Operating Partnership of their respective obligations
thereunder (other than performance by the Company and the Operating Partnership
of their respective obligations under the indemnification section of the
Underwriting Agreement, as to which no opinion need be rendered) (i) have been
duly authorized by all necessary corporate or partnership action, as the case
may be, on the part of the Company and the Operating Partnership; (ii) will not
result in any violation of the provisions of the charter or by-laws of the
Company, the agreement of limited partnership of the Operating Partnership, or
the organizational documents of any subsidiary of the Company or the Operating
Partnership; (iii) will not constitute a breach of, or Default or a Debt
Repayment Triggering Event under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company, the
Operating Partnership or any of their respective subsidiaries pursuant to the
best
A-3
<PAGE> 39
knowledge of such counsel, any material Existing Instrument; or (iv) to the
best knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company, the Operating Partnership or any of their respective subsidiaries.
(xxi) The Company is not, and after receipt of payment for
the Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xxii) The Operating Partnership is not, and after the
Closing will not be, an "investment company" within the meaning of the
Investment Company Act.
(xxiii) Except as disclosed in the Prospectus under the
caption "Shares Eligible for Future Sale", to the best knowledge of such
counsel, there are no persons with registration or other similar rights to have
any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, except for such rights as have been duly waived.
(xxiv) To the best knowledge of such counsel, neither the
Company nor the Operating Partnership nor any of their respective subsidiaries
is in violation of its organizational documents or any law, administrative
regulation or administrative or court decree applicable to the Company, the
Operating Partnership or any of their respective subsidiaries or is in Default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any material Existing Instrument, except in each such
case for such violations or Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company and the
Operating Partnership, representatives of the independent public or certified
public accountants for the Company and the Operating Partnership and with
representatives of the Underwriters at which the contents of the Registration
Statement and the Prospectus, and any supplements or amendments thereto, and
related matters were discussed and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (other than as specified above), and any supplements or amendments
thereto, on the basis of the foregoing, nothing has come to their attention that
would lead them to believe that either the Registration Statement or any
amendments thereto, at the time the Registration Statement or such amendments
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or at
the First Closing Date or the Second Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief as to the financial statements or
schedules or other financial or statistical data derived therefrom, included in
the Registration Statement or the Prospectus or any amendments or supplements
thereto).
A-4
<PAGE> 40
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Maryland, the Delaware Revised Uniform Limited
Partnership Act, the law of the State of New York or the federal law of the
United States, to the extent they deem proper and specified in such opinion,
upon the opinion (which shall be dated the First Closing Date or the Second
Closing Date, as the case may be, shall be satisfactory in form and substance to
the Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representative) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
A-5
<PAGE> 41
EXHIBIT B
___________, 1998
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle, Suite 402
Chevy Chase, Maryland 20815
Re: HealthCare Financial Partners REIT, Inc.
Qualification as a
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to HealthCare Financial Partners REIT, Inc., a
Maryland corporation (the "Company"), in connection with the preparation of the
registration statement on Form S-11 (File No. 333-___) dated ___________, 1998
(the "Registration Statement"), with respect to the offering and sale (the
"Offering") of up to ___________ shares of $0.01 par value common stock (the
"Common Stock") of the Company. You have requested our opinion regarding certain
U.S. federal income tax matters in connection with the Offering.
The Company, initially directly, and ultimately through HCFP REIT
Operating Partnership, L.P. (the "Operating Partnership"), plans to invest in
real estate used by a variety of healthcare facilities. The investments may be
structured as mortgage loans, mortgage-backed securities, other mortgage-related
assets, purchase leaseback transactions, joint ventures or partnerships, or
combinations of the foregoing. The Company intends to invest the balance of the
net proceeds of the Offering (pending investment thereof in income producing
real estate assets of the type described above) in readily marketable,
interest-bearing securities.
In giving this opinion letter, we have examined the following:
1. The Company's Articles of Incorporation, as duly filed with
the Department of Assessments and Taxation of the State of Maryland on
_______ __, 1998, and as amended on _____________ ____, 1998, and
____________ _____, 1998.
2. The Company's Bylaws.
3. The Registration Statement, including the prospectus
contained as part of the Registration Statement (the "Prospectus").
4. The Agreement of Limited Partnership of HCFP REIT Operating
Partnership, L.P. (the "Partnership Agreement") between the Company, as
general partner, and HCFP Limited, Inc., as the initial limited partner
(the "Limited Partner"), in the form filed as an exhibit to the
Registration Statement.
B-1
<PAGE> 42
5. Such other documents as we have deemed necessary or
appropriate for purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. Each of the documents referred to above has been duly
authorized, executed, and delivered; is authentic, if an original, or
is accurate, if a copy; and has not been amended.
2. During its short taxable year ending December 31, 1998, and
for all subsequent taxable years, the Company will operate in a manner
that will make the representations contained in a certificate, dated as
of [May 6, 1998] and executed by a duly appointed officer of the
Company (the "Officer's Certificate"), true for such years.
3. The Company will not make any amendments to its
organizational documents or the Partnership Agreement after the date of
this opinion that would affects its qualification as a real estate
investment trust (a "REIT") for any taxable year.
4. Neither the Company, nor the Operating Partnership, nor the
Limited Partner will take any action after the date hereof that would
have the effect of altering the facts upon which the opinions set forth
below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of the facts contained in the
documents and assumptions set forth above, the representations set forth in the
Officer's Certificate, or the Prospectus in a material way. In addition, to the
extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue Code
of 1986, as amended (the "Code"), or the Treasury regulations thereunder (the
"Regulations"), we have reviewed with the individuals making such
representations the relevant portions of the Code and the applicable
Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Offering Memorandum under the caption "Federal Income Tax Considerations"
(which is incorporated herein by reference), we are of the opinion that:
(a) Commencing with the Company's short taxable year beginning
on ________ __, 1998 and ending December 31, 1998, the Company will qualify to
be taxed as a REIT pursuant to Code Sections 856 through 860, and the Company's
organization and proposed method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the Code.
(b) The Operating Partnership will be characterized, for
Federal income tax purposes, as a partnership and not as an association taxable
as a corporation.
B-2
<PAGE> 43
(c) The descriptions of the law and the legal conclusions
contained in the Prospectus under the captions "PROSPECTUS SUMMARY-Tax Status of
the Company," " RISK FACTORS- Legal and Tax Risks," "PARTNERSHIP AGREEMENT-Tax
Matters," and "FEDERAL INCOME TAX CONSIDERATIONS" are correct in all material
respects, and the discussion thereunder fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common Shares.
We will not review on a continuing basis the Company's compliance with
the documents or assumptions set forth above, or the representations set forth
in the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Powell, Goldstein,
Frazer & Murphy LLP under the caption "Federal Income Tax Considerations" in the
Offering Memorandum. In giving this consent, we do not admit that we are in the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended, or the rules and regulations promulgated thereunder by the
SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is for the information and use of the addressee and the purchasers of Company
Common Stock, and it may not be distributed, relied upon for any purpose by any
other person, quoted in whole or in part or otherwise reproduced in any
document, or filed with any governmental agency without our express written
consent.
Very truly yours,
Powell, Goldstein, Frazer & Murphy LLP
B-3
<PAGE> 44
EXHIBIT C
[Date]
NationsBanc Montgomery Securities LLC
ABN AMRO Incorporated Friedman, Billings,
Ramsey & Co., Inc.
Stephens Inc.
Legg Mason Walker Wood, Incorporated
Credit Suisse First Boston Corporation
As Representatives of the Several Underwriters
600 Montgomery Street
San Francisco, California 94111
RE: HealthCare Financial Partners REIT, Inc. (the "Company")
Ladies & Gentlemen:
Reference is made to that certain Underwriting Agreement, dated ________, 1998
(the "Underwriting Agreement"), by and between HealthCare Financial Partners
REIT, Inc., a Maryland corporation (the "Company"), and NationsBanc Montgomery
Securities LLC, ABN AMRO Incorporated, Friedman, Billings, Ramsey & Co., Inc.,
Stephens Inc., Legg Mason Walker Wood, Incorporated and Credit Suisse First
Boston Corporation, as representatives (the "Representatives") of the several
underwriters (the "Underwriters"), pursuant to which the Underwriters intend to
underwrite a proposed public Offering (the "Offering ") of up to ________ shares
of commons stock, par value $0.0001 per share (the "Common Stock") of the
Company.
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company or securities convertible into or exchangeable or
exercisable for Common Stock. The Company proposes to carry out a public
offering of Common Stock, for which you will act as the Representatives of the
Underwriters. The undersigned recognizes that the Offering will be of benefit to
the undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you and
the other underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible
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<PAGE> 45
into shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's intention to
do any of the foregoing, for a period commencing on the date hereof and
continuing through the close of trading on the date 180 days after the date of
the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ------------------------------------------------
Printed Name of Holder
By: ------------------------------------------
Signature
- ------------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
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EXHIBIT 3.1
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
HealthCare Financial Partners REIT, Inc., a Maryland corporation (the
"Corporation"), certifies to the State Department of Assessments and Taxation
of Maryland.
FIRST: The Corporation desires to and does hereby amend and restate its
charter as currently in effect and as hereinafter provided. The provisions set
forth in these Articles of Amendment and Restatement are all of the provisions
of the charter of the Corporation as currently in effect and have been approved
by the directors and the stockholders of the Corporation. These Articles of
Amendment and Restatement, as they may be amended, supplemented or restated
from time to time, are referred to as the "Charter."
SECOND: The following provisions are all the provisions of the Charter
currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, G. William Speer, whose address is c/o Powell,
Goldstein, Frazer & Murphy LLP, 191 Peachtree Street, Sixteenth Floor, Atlanta,
Georgia 30303, being at least 18 years of age, does hereby form a corporation
under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is HealthCare Financial
Partners REIT, Inc.
ARTICLE III
PURPOSE
The purpose for which the Corporation is formed is to engage in any
lawful act or activity including, without limitation or obligation, engaging in
business as a real estate investment trust ("REIT") under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, or any successor statute
(the "Code") for which corporations may be organized under the general laws of
the State of Maryland as now or hereafter in force.
<PAGE> 2
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815. The
resident agent of the Corporation at such address is Edward P. Nordberg, Jr.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors.
5.1.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation shall be at least three and no more than
nine, the exact number to be determined by the Board of Directors from time to
time. The number of directors may be increased or decreased pursuant to the
Bylaws of the Corporation (which Bylaws as they may be amended, supplemented or
restated from time to time are referred to as the "Bylaws"), but shall never be
less than the minimum number required by the General Laws of the State of
Maryland now or hereafter in force. The directors of the Corporation (exclusive
of directors who are elected from time to time pursuant to the terms of any
series of preferred stock of the Corporation, as provided in paragraph 5.1.2 of
this Article V) shall be divided into three (3) classes, with the first class
referred to herein as "Class I," the second class as "Class II," and the third
class as "Class III." Each class shall consist as nearly as possible of
one-third (1/3) of the total number of directors making up the entire Board of
Directors. The term of office of the initial Class I directors shall expire at
the 1999 annual meeting of stockholders, the term of office of the initial
Class II directors shall expire at the 2000 annual meeting of stockholders, and
the term of office of the initial Class III directors shall expire at the 2001
annual meeting of stockholders, with each director to hold office until his or
her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, directors elected to succeed those directors whose
terms then expire shall be elected to a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
director to hold office until his or her successor shall have been duly elected
and qualified. The names of the persons who shall serve as the initial
directors until their successors are elected and qualified are John K. Delaney
(Class III director), Ethan D. Leder (Class II director), Edward P. Nordberg,
Jr. (Class I director).
5.1.2 Election by Preferred Stockholders. Whenever the holders of
any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the Board of Directors shall consist of said directors so elected
in addition to the number of directors fixed as provided in paragraph 5.1.1 of
this Article V or in the Bylaws. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more
series of preferred stock of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the
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Corporation, the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of stockholders.
Section 5.2 Extraordinary Actions. Notwithstanding any provision of law
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock or of
the total number of shares of any class of capital stock, such action shall be
valid and effective if authorized by an affirmative vote of the holders of a
majority of the total number of shares of all classes outstanding and entitled
to vote thereon, except as otherwise provided in this Charter.
Section 5.3 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of
the Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable (or without consideration in the case of
a stock split or stock dividend), subject to such restrictions or limitations,
if any, as may be set forth in this Charter or the Bylaws.
Section 5.4 Preemptive Rights. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices
and upon such other terms as the Board of Directors, in its sole discretion,
may fix; and any stock or other securities which the Board of Directors may
determine to offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class, series or
type of stock or other securities at the time outstanding to the exclusion of
the holders of any or all other classes, series or types of stock or other
securities at the time outstanding.
Section 5.5 Indemnification.
5.5.1 The Corporation shall indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to (A) its present and former directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Bylaws and be
permitted by law. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is necessary to carry
out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as
may be permitted by law.
5.5.2 Any indemnification, or payment of expenses in advance of the
final disposition of any proceeding, shall be made promptly, and in any event
within 60 days, upon the written request of the director or officer entitled to
seek indemnification (the "Indemnified
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Party"). The right to indemnification and advances hereunder shall be
enforceable by the Indemnified Party in any court of competent jurisdiction, if
(i) the Corporation denies such request, in whole or in part, or (ii) no
disposition thereof is made within 60 days. The Indemnified Party's costs and
expenses incurred in connection with successfully establishing his or her right
to indemnification, in whole or in part, in any such action shall also be
reimbursed by the Corporation. It shall be a defense to any action for advance
for expenses that (a) a determination has been made that the facts then known
to those making the determination would preclude indemnification or (b) the
Corporation has not received both (i) an undertaking as required by law to
repay such advances in the event it shall ultimately be determined that the
standard of conduct has not been met and (ii) a written affirmation by the
Indemnified Party of such Indemnified Party's good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met.
5.5.3 No amendment of this Charter or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment
or repeal.
Section 5.6 Determinations by Board. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount
of assets at any time legally available for the payment of dividends,
redemption of its stock or the payment of other distributions on its stock; the
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses on sales of assets; the amount, purpose, time of creation, increase
or decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged); the fair value, or any sale, bid or asked price to be applied in
determining the fair value, of any asset owned or held by the Corporation; any
matters relating to the acquisition, holding and disposition of any assets by
the Corporation; whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts and documents of the
Corporation shall be open to the inspection of stockholders, except as
otherwise provided by statute or by the Bylaws and, except as so provided, no
stockholder shall have any right to inspect any book, account or document of
the Corporation unless authorized to do so by resolution of the Board of
Directors.
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Section 5.7 REIT Qualification. The Corporation shall seek to elect and
maintain status as a REIT under the Code. The Board of Directors shall use its
reasonable best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of distributions to its
stockholders. The Board of Directors shall take no action to disqualify the
Corporation as a REIT or to otherwise revoke the Corporation's election to be
taxed as a REIT without the affirmative vote of not less than two-thirds of all
of the votes ordinarily entitled to be cast in the election of directors,
voting together as a single class.
Section 5.8 Removal of Directors. Any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.9 Dissolution. The dissolution of the Corporation shall be
approved by the affirmative vote of not less than two-thirds of all of the
votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
Section 5.10 Management Agreement. Subject to such conditions, if any, as
may be required by any applicable statute, rule or regulation, the Board of
Directors may engage a Manager to advise the Board of Directors and be
responsible for directing the day-to-day affairs of the Corporation pursuant to
a written agreement (a "Management Agreement").
Section 5.11 Amendment of Certain Provisions. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation, the provisions of
Sections 5.1.1, 5.7, 5.8, 5.9, and 5.11 shall not be amended, altered, changed
or repealed without the affirmative vote of not less than two-thirds of all of
the votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of shares of stock of all
classes which the Corporation has authority to issue is 500,000,000 shares of
capital stock (par value $.0001 per share), amounting in aggregate par value to
$50,000. All of such shares are initially classified as "Common Stock". The
Board of Directors may classify and reclassify any unissued shares of capital
stock by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares
of capital stock.
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Section 6.2 Common Stock. Subject to Article VII, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
6.2.1 Voting Rights. Each share of Common Stock shall have one
vote, and, except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
6.2.2 Dividends. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time and
in such amounts as the Board of Directors may deem advisable.
6.2.3 Distribution Upon Dissolution. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Common Stock shall be entitled, together with
the holders of any other class of stock hereafter classified or reclassified
not having a preference on distributions in the liquidation, dissolution or
winding up of the Corporation, to share ratably in the net assets of the
Corporation remaining after payment or provision for payment of the debts and
other liabilities of the Corporation and the amount to which the holders of any
class of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled.
Section 6.3 Classification/Reclassification.
6.3.1 Powers of the Board of Directors. Subject to Article VII and
the foregoing, the power of the Board of Directors to classify and reclassify
any of the shares of capital stock shall include, without limitation, subject
to the provisions of this Charter, authority to classify or reclassify any
unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
(a) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that,
unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by
the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such
class or series may be increased by the Board of Directors in connection
with any such classification or reclassification, and any shares of any
class or series which have been redeemed, purchased, otherwise acquired
or converted into shares of Common Stock or any other class or series
shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this subparagraph.
(b) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on
shares of such class or series,
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whether any such dividends shall rank senior or junior to or on a parity
with the dividends payable on any other class or series of stock, and the
status of any such dividends as cumulative, cumulative to a limited
extent or non-cumulative and as participating or non-participating.
(c) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(d) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or exchange
rate in such events or at such times as the Board of Directors shall
determine.
(e) Whether or not shares of such class or series shall be subject
to redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable
and the amount per share payable in case of redemption, which amount may
vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in
respect thereof, and if so, the terms thereof.
(f) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights may
vary depending upon whether such liquidation, dissolution or winding up
is voluntary or involuntary and, if voluntary, may vary at different
dates, and whether such rights shall rank senior or junior to or on a
parity with such rights of any other class or series of stock.
(g) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the
use of moneys for purchase or redemption of, any stock of the
Corporation, or upon any other action of the Corporation, including
action under this subparagraph, and, if so, the terms and conditions
thereof.
(h) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and this Charter.
6.3.2 Ranking. For the purposes hereof and of any articles
supplementary to this Charter providing for the classification or
reclassification of any shares of capital stock or of any other Charter
document of the Corporation (unless otherwise provided in any such articles or
document), any class or series of stock of the Corporation shall be deemed to
rank:
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(a) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation,
dissolution or winding up, as the case may be, in preference or priority
to holders of such other class or series;
(b) on a parity with another class or series either as to dividends
or upon liquidation, whether or not the dividend rates, dividend payment
dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of
stock shall be entitled to receipt of dividends or amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
proportion to their respective dividend rates or redemption or
liquidation prices, without preference or priority over the holders of
such other class or series; and
(c) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as the
case may be.
Section 6.4 Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of this
Charter and the Bylaws.
Section 6.5 Reclassification in the Form of a Reverse Stock Split. As of
5:00 p.m. Atlanta, Georgia time, on the date on which the Articles of Amendment
and Restatement reflecting this amendment are filed with the Department of
Assessments and Taxation of the State of Maryland (the "Effective Time"), each
2.1332 outstanding shares of Common Stock, par value $.0001 per share ("Old
Common Stock"), shall thereupon be reclassified and changed into ONE share of
Common Stock, par value $.0001 per share. Upon such Effective Time, each holder
of Old Common Stock shall thereupon automatically be and become the holder of
ONE share of Common Stock for every 2.1332 shares of Old Common Stock then held
by such holder immediately prior thereto. Upon such Effective Time, each
certificate formerly representing a stated number of shares of Old Common Stock
shall thereupon be deemed for all corporate purposes to evidence ownership of
Common Stock in the appropriately reduced number of shares. As soon as
practicable after such Effective Time, stockholders as of the date of the
reclassification will be notified thereof and, upon their delivery of their
certificates of Old Common Stock to the Corporation or its designated agent,
will be sent stock certificates representing their shares of Common Stock,
rounded down to the nearest whole number, together with cash representing the
fair value of such holder's fractional shares of Old Common Stock. No scrip or
fractional share certificates for Common Stock will be issued in connection
with this reclassification. This amendment shall not effect any change in the
authorized number or par value of the shares of Common Stock. Except as
specifically provided in this paragraph, references to Common Stock in the
Articles of Amendment and Restatement shall be deemed to include Old Common
Stock unless the context otherwise requires.
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ARTICLE VII
Section 7.1 Restrictions on Transfer.
7.1.1 Definitions. For purposes of this Article VII, the following
terms shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of shares of Equity
Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially
Owned" shall have correlative meanings.
(b) "Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than
clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that
are named by the Corporation as the beneficiary or beneficiaries of such
Trust, in accordance with the provisions of Section 7.2.1.
(c) "Board of Directors" shall mean the Board of Directors of the
Corporation.
(d) "Closing Price" on any date shall mean the last reported price
for the Equity Stock on any national securities exchange on which the
Equity Stock is then listed or if the Equity Stock is not listed on a
national securities exchange, shall mean the average of the high bid and
low asked prices in the over-the-counter market, as last reported by The
Nasdaq Stock Market, or, if such system is no longer in use, the
principal other automated quotations system that may then be in use or,
if the shares of Equity Stock are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the shares of Equity Stock
selected by the Board of Directors.
(e) "Constructive Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such shares
of Equity Stock either directly or indirectly through the application of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
The terms "Constructive Owner," "Constructively Owns," and
"Constructively Owned" shall have correlative meanings.
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(f) "Disqualified Person" means (A) the United States, any State or
political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing,
(B) any organization (other than a cooperative described in Section 521
of the Code) which is exempt from tax unless such organization is subject
to the tax imposed by Section 511 of the Code, and (c) any organization
described in Section 1381 (a) (2) (c) of the Code.
(g) "Equity Stock" shall mean the Common Stock and the preferred
stock of the Corporation, including the Common Stock and the preferred
stock of the Corporation that are held as Shares-in-Trust in accordance
with the provisions of Section 7.2.
(h) "Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such date.
(i) "Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership
Limit, including, but not limited to, the granting of any option or
entering into any agreement for the sale, transfer or other disposition
of shares of Equity Stock or the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable
for shares of Equity Stock.
(j) "Offering" means the closing of the first offering by the
Corporation of shares of Common Stock resulting in proceeds to the
Corporation from such offering of $50 million or more.
(k) "Operating Partnership" shall mean HCFP REIT Operating
Partnership, L.P., a Delaware limited partnership.
(l) "Ownership Limit" shall mean the restriction on ownership (or
deemed ownership by virtue of the attribution provisions of the Code) of
more than 9.9% of the outstanding shares of Common Stock or any series of
preferred stock by any stockholder.
(m) "Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section 7.2.5.
(n) "Person" shall mean an individual, corporation, partnership,
estate, trust, a portion of a trust permanently set aside for or to be
used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section
509(a) of the Code, joint stock company or other entity and also includes
a "group" as that term is used for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended.
(o) "Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for the provisions of
Section 7.1.3, would own record title to shares of Equity Stock.
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(p) "Restriction Termination Date" shall mean the first day after
the date of the Offering on which (i) the Board of Directors determines
that it is no longer in the best interests of the Corporation to attempt
to, or continue to qualify as a REIT and (ii) there is an affirmative
vote of not less than two-thirds of all of the votes ordinarily entitled
to be cast in the election of directors, voting together as a single
class, as to the discontinuation of the Corporation's REIT status.
(q) "Shares-in-Trust" shall mean any shares of Equity Stock
designated Shares-in-Trust pursuant to Section 7.1.3.
(r) "Subsidiary" shall mean any direct or indirect subsidiary
(including, without limitation, partnerships and limited liability
companies) of the Corporation or the Operating Partnership.
(s) "Trading Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York
are authorized or obligated by law or executive order to close.
(t) "Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of shares of Equity Stock,
whether voluntary or involuntary, whether of record, constructively or
beneficially and whether by operation of law or otherwise. "Transfer" (as
a verb) shall not have the correlative meaning.
(u) "Trust" shall mean any separate trust created pursuant to
Section 7.1.3 and administered in accordance with the terms of Section
7.2 hereof, for the exclusive benefit of any Beneficiary.
(v) "Trustee" shall mean any Person or entity unaffiliated with
both the Corporation and any Prohibited Owner, such Trustee to be
designated by the Corporation to act as trustee of any Trust, or any
successor trustee thereof.
7.1.2 Restriction on Transfers.
(a) Except as provided in Section 7.1.7, from the date of the
Offering and prior to the Restriction Termination Date, (i) no Person
shall Beneficially Own or Constructively Own outstanding shares of Equity
Stock in excess of the Ownership Limit and (ii) any Transfer that, if
effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Equity Stock in excess of the Ownership
Limit shall be void ab initio as to the Transfer of that number of shares
of Equity Stock which would be otherwise Beneficially Owned or
Constructively Owned by such Person in excess of the Ownership Limit, and
the intended transferee shall acquire no rights in such excess shares of
Equity Stock.
(b) Except as provided in Section 7.1.7, from the date of the
Offering and prior to the Restriction Termination Date, any Transfer
that, if effective, would result in shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without
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reference to any rules of attribution) shall be void ab initio as to the
Transfer of that number of shares which would be otherwise beneficially
owned (determined without reference to any rules of attribution) by the
transferee, and the intended transferee shall acquire no rights in such
shares of Equity Stock.
(c) From the date of the Offering and prior to the Restriction
Termination Date, any Transfer of shares of Equity Stock that, if
effective, would result in the Corporation being "closely held" within
the meaning of Section 856(h) of the Code shall be void ab initio as to
the Transfer of that number of shares of Equity Stock which would cause
the Corporation to be "closely held" within the meaning of Section 856(h)
of the Code, and the intended transferee shall acquire no rights in such
shares of Equity Stock.
(d) From the date of the Offering and prior to the Restriction
Termination Date, any Transfer of shares of Equity Stock that, if
effective, would cause the Corporation to Constructively Own 10% or more
of the ownership interests in a tenant of the real property of the
Corporation, the Operating Partnership or a Subsidiary, within the
meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as
to the Transfer of that number of shares of Equity Stock which would
cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the real property of the Corporation, the
Operating Partnership or a Subsidiary, within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no
rights in such excess shares of Equity Stock.
From the date of the Offering and prior to the Restriction Termination Date,
any Transfer of Shares of Equity Stock that, if effective, would result in
shares of Equity Stock being beneficially owned by a Disqualified Person shall
be void ab initio as to the Transfer of that number of shares which would be
otherwise beneficially owned by the transferee, and the intended transferee
shall acquire no rights in such shares of Equity Stock.
7.1.3 Transfer to Trust.
(a) If, notwithstanding the other provisions contained in this
Section 7.1, at any time after the Offering and prior to the Restriction
Termination Date, there is a purported Transfer or Non-Transfer Event
such that any Person would either Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit, then, (i) except
as otherwise provided in Section 7.1.7, the purported transferee shall
acquire no right or interest (or, in the case of a Non-Transfer Event,
the Person holding record title to the shares of Equity Stock
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such
number of shares of Equity Stock which would cause such Beneficial Owner
or Constructive Owner to Beneficially own or Constructively Own shares of
Equity Stock in excess of the Ownership Limit, (ii) such number of shares
of Equity Stock in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 7.2 hereof, transferred
automatically and by operation of law to the Trust to be held in
accordance with that Section 7.2, and (iii) the Prohibited Owner shall
submit such number of shares of Equity
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Stock to the Corporation for registration in the name of the Trustee.
Such transfer to a Trust and the designation of shares as Shares-in-Trust
shall be effective as of the close of business on the business day prior
to the date of the Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in this
Section 7.1, at any time after the Offering and prior to the Restriction
Termination Date, there is a purported Transfer or Non-Transfer Event
that, if effective, would (i) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (ii) result in the Corporation
being "closely held" within the meaning of Section 856(h) of the Code,
(iii) result in the shares of Equity Stock being beneficially owned by a
Disqualified Person, or (iv) cause the Corporation to Constructively Own
10% or more of the ownership interests in a tenant of the real property
of the Corporation, the Operating Partnership or a Subsidiary, within the
meaning of Section 856(d)(2)(B) of the Code, then (x) the purported
transferee shall not acquire any right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title of the shares of
Equity Stock with respect to which such Non-Transfer Event occurred,
shall cease to own any right or interest) in such number of shares of
Equity Stock, the ownership of which by such purported transferee or
record holder would (A) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (B) result in the Corporation
being "closely held" within the meaning of Section 856(h) of the Code,
(C) result in the shares of Equity Stock being beneficially owned by a
Disqualified Person, or (D) cause the Corporation to Constructively Own
10% or more of the ownership interests in a tenant of the real property
of the Corporation, the Operating Partnership or a Subsidiary, within the
meaning of Section 856(d)(2)(B) of the Code, (y) such number of shares of
Equity Stock (rounded up to the nearest whole share) shall be designated
Shares-in-Trust and, in accordance with the provisions of Section 7.2,
transferred automatically and by operation of law to the Trust to be held
in accordance with that Section 7.2, and (z) the Prohibited Owner shall
submit such number of shares of Equity Stock to the Corporation for
registration in the name of the Trustee. Such transfer to a Trust and the
designation of shares as Shares-in-Trust shall be effective as of the
close of business on the business day prior to the date of the Transfer
or Non-Transfer Event, as the case may be.
7.1.4 Remedies For Breach. If the Corporation, or its designees,
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 7.1.2 or that a Person intends to acquire or has attempted
to acquire Beneficial Ownership or Constructive Ownership of any shares of
Equity Stock in violation of Section 7.1.2, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
7.1.5 Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire shares of Equity Stock in violation of Section 7.1.2, or
any Person who owned shares of Equity Stock that were transferred to the Trust
pursuant to the provisions of Section 7.1.3, shall immediately give written
notice to the Corporation of such event and shall provide to the
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Corporation such other information as the Corporation may request in order to
determine the effect, if any, of such Transfer or Non-Transfer Event, as the
case may be, on the Corporation's status as a REIT.
7.1.6 Owners Required To Provide Information. From the date of the
Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner or Constructive Owner of more than 5%,
or such lower percentages as required pursuant to regulations under the
Code, of the outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each year, provide
to the Corporation a written statement or affidavit stating the name and
address of such Beneficial Owner or Constructive Owner, the number of
shares of Equity Stock Beneficially Owned or Constructively Owned, and a
description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the
effect, if any, of such Beneficial Ownership or Constructive Ownership on
the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
(b) Each Person who is a Beneficial Owner or Constructive Owner of
shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement
or affidavit stating such information as the Corporation may request in
order to determine the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
7.1.7 Exception. The Ownership Limit shall not apply to the
acquisition of shares of Equity Stock by an underwriter that participates in an
offering of such shares for a period of 90 days following the purchase by such
underwriter of such shares provided that the restrictions contained in Section
7.1.2 will not be violated following the distribution by such underwriter of
such shares. In addition, the Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel in each case to the
effect that the restrictions contained in Section 7.2.2, Section 7.2.3, and/or
Section 7.2.4 hereof will not be violated, may exempt a Person from the
Ownership Limit provided that (i) the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary
to ascertain that no individual's Beneficial Ownership or Constructive
Ownership of shares of Equity Stock will result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code or cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the real property of the Corporation, the Operating Partnership or a
Subsidiary, within the meaning of Section 856(d)(2)(B) of the Code, and (ii)
such Person agrees in writing that any violation or attempted violation will
result in such transfer to the Trust of shares of Equity Stock pursuant to
Section 7.1.3.
Section 7.2 Shares-in-Trust.
7.2.1 Trust. Any shares of Equity Stock transferred to a Trust and
designated Shares-in-Trust pursuant to Section 7.1.3 hereof shall be held for
the exclusive benefit of the
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Beneficiary. The Corporation shall name a Beneficiary for each Trust within
five days after discovery of the existence thereof. Any transfer to a Trust,
and subsequent designation of shares of Equity Stock as Shares-in-Trust,
pursuant to Section 7.1.3 shall be effective as of the close of business on the
business day prior to the date of the Transfer or NonTransfer Event that
results in the transfer to the Trust. Shares-in-Trust shall remain issued and
outstanding shares of Equity Stock of the Corporation and shall be entitled to
the same rights and privileges on identical terms and conditions as are all
other issued and outstanding shares of Equity Stock of the same class and
series. When transferred to a Permitted Transferee in accordance with the
provisions of Section 7.2.5, such Shares-in-Trust shall cease to be designated
as Shares-in-Trust.
7.2.2 Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions
as may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay
to the Trust the amount of any dividends or distributions received by it that
(i) are attributable to any shares of Equity Stock designated Shares-in-Trust
and (ii) the record date of which was on or after the date that such shares
became Shares-in-Trust. The Corporation shall take all measures that it
determines reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner, including, if necessary, withholding
any portion of future dividends or distributions payable on shares of Equity
Stock Beneficially Owned or Constructively Owned by the Person who, but for the
provisions of Section 7.1.3, would Constructively Own or Beneficially Own the
Shares-in-Trust; and, as soon as reasonably practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Trust for
the benefit of the Beneficiary the dividends so received or withheld, as the
case may be.
7.2.3 Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be
entitled to receive, ratably with each other holder of shares of Equity Stock
of the same class or series, that portion of the assets of the Corporation
which is available for distribution to the holders of such class and series of
shares of Equity Stock. The Trust shall distribute to the Prohibited Owner the
amounts received upon such liquidation, dissolution, or winding up, or
distribution; provided, however, that the Prohibited Owner shall not be
entitled to receive amounts pursuant to this Section 7.2.3 in excess of, in the
case of a purported Transfer in which the Prohibited Owner gave value for
shares of Equity Stock and which Transfer resulted in the transfer of the
shares to the Trust, the price per share, if any, such Prohibited Owner paid
for the shares of Equity Stock and, in the case of a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer. Any remaining amount in such Trust
shall be distributed to the Beneficiary.
7.2.4 Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect-to such Shares-in-Trust and the
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Prohibited Owner shall be deemed to have given, as of the close of business on
the business day prior to the date of the purported Transfer or Non-Transfer
Event that results in the transfer to the Trust of shares of Equity Stock under
Section 7.1.3, an irrevocable proxy to the Trustee to vote the Shares-in-Trust
in the manner in which the Trustee, in its sole and absolute discretion,
desires.
7.2.5 Designation of Permitted Transferee. The Trustee shall have
the exclusive and absolute right to designate a Permitted Transferee of any and
all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall designate any
Person as Permitted Transferee, provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee
so designated may acquire such Shares-in-Trust without such acquisition
resulting in a transfer to a Trust and the redesignation of such shares of
Equity Stock so acquired as Shares-in-Trust under Section 7.1.3. Upon the
designation by the Trustee of a Permitted Transferee in accordance with the
provisions of this Section 7.2.5, the Trustee shall (i) cause to be transferred
to the Permitted Transferee that number of Shares-in-Trust acquired by the
Permitted Transferee, (ii) cause to be recorded on the books of the Corporation
that the Permitted Transferee is the holder of record of such number of shares
of Equity Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv)
distribute to the Beneficiary any and all amounts held with respect to the
Shares-in-Trust after making that payment to the Prohibited Owner pursuant to
Section 7.2.6.
7.2.6 Compensation to Record Holder of Shares of Equity Stock that
Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 7.2.5 or following the acceptance of the
offer to purchase such shares in accordance with Section 7.2.7) to receive from
the Trustee following the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (a) a purported Transfer in which the Prohibited
Owner gave value for shares of Equity Stock and which Transfer resulted in the
transfer of the shares to the Trust, the price per share, if any, such
Prohibited owner paid for the shares of Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received
by the Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section 7.2.5. Any amounts received by the Trustee in respect
of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 7.2.6 shall be distributed to the Beneficiary in
accordance with the provisions of Section 7.2.5. Each Beneficiary and
Prohibited Owner waive any and all claims that they may have against the
Trustee and the Trust arising out of the disposition of Shares-in-Trust, except
for claims arising out of the gross negligence or willful misconduct of, or any
failure to make payments in accordance with this Section 7.2, by such Trustee
or the Corporation.
7.2.7 Purchase Right in Shares-in-Trust. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case
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of devise, gift or Non-Transfer Event, the Market Price at the time of such
devise, gift or NonTransfer Event) and (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of ninety days after the later of
(i) the date of the Non-Transfer Event or purported Transfer which resulted in
such Shares-in-Trust and (ii) the date the Corporation determines in good faith
that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has
occurred, if the Corporation does not receive a notice of such Transfer or
Non-Transfer Event pursuant to Section 7.1.5.
Section 7.3 Remedies Not Limited. Nothing contained in this Article VII
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of
its stockholders by preservation of the Corporation's status as a REIT and to
ensure compliance with the Ownership Limit.
Section 7.4 Ambiguity. In the case of an ambiguity in the application of
any of the provisions of this Article VII, including any definition contained
in Section 7.1.1, the Board of Directors shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
Section 7.5 Legend. From the date of the Offering and prior to the
Restriction Termination Date, each certificate for shares of Equity Stock shall
bear the following legend:
"The shares of [Common or Preferred] Stock represented by this
certificate are subject to restrictions on transfer for the purpose of
the Corporation's maintenance of its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code").
No Person may (i) Beneficially Own or Constructively Own shares of Common
Stock in excess of 9.9% of the number of outstanding shares of Common
Stock, (ii) Beneficially Own or Constructively Own shares of any class or
series of Preferred Stock in excess of 9.9% of the number of outstanding
shares of such class or series of Preferred Stock, (iii) beneficially own
shares of Equity Stock that would result in the shares of Equity Stock
being beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (iv) beneficially own shares of
Equity Stock that would result in the shares of Equity Stock being
beneficially owned by (A) the United States, any State or political
subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing,
(B) any organization (other than a cooperative described in Section 521
of the Code) which is exempt from tax unless such organization is subject
to the tax imposed by Section 511 of the Code, or (C) any organization
described in Section 1381(a)(2)(C) of the Code, (v) Beneficially Own
shares of Equity Stock that would result in the Corporation being
"closely held" under Section 856(h) of the Code, or (vi) Constructively
Own shares of Equity Stock that would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of
the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who attempts to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the above
limitations must immediately notify the Corporation in
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writing. If the restrictions above are violated, the shares of Equity
Stock represented hereby will be transferred automatically and by
operation of law to a Trust and shall be designated Shares-in-Trust. All
capitalized terms in this legend have the meanings defined in the
Corporation's Charter, as the same may be further amended from time to
time, a copy of which, including the restrictions on transfer, will be
sent without charge to each stockholder who so requests."
Section 7.6 Severability. If any provision of this Article VII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 7.7 Exchange Transactions. Nothing in this Article VII shall
preclude the settlement of any transaction entered into through the facilities
of any national securities exchange or automated inter-dealer quotation system.
The fact that the settlement of any transaction takes place shall not negate
the effect of any other provision of this Article VII and any transferee in
such a transaction shall be subject to all of the provisions and limitations
set forth in this Article VII.
Section 7.8 Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions
of this Article VII.
Section 7.9 Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 7.10 Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of the provision hereof.
Section 7.11 Amendment. Notwithstanding any other provision of this
Charter or the Bylaws, the provisions of Section 7 shall not be amended,
altered, changed or repealed without the affirmative vote of not less than
two-thirds of all of the votes ordinarily entitled to be cast in the election
of directors, voting together as a single class.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendments of this Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly
set forth in this Charter, of any of its outstanding stock by classification,
reclassification or otherwise but, no such amendment which changes such terms
or contract rights of any of its outstanding stock shall be valid unless such
amendment
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shall have been authorized by not less than a majority of the aggregate number
of the votes entitled to be cast thereon.
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional law,
as amended or interpreted, no director or officer of the Corporation shall be
personally liable to the Corporation or its stockholders for money damages. No
amendment of this Charter or repeal of any of its provisions shall limit or
eliminate the limitation on liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
IN WITNESS WHEREOF, HealthCare Financial Partners REIT, Inc. has caused
these Articles of Amendment and Restatement to be signed in its name and on its
behalf by the Chairman of the Board and Chief Executive Officer and attested to
by its Secretary on this 29th day of April, 1998, and its Chairman of the Board
and Chief Executive Officer acknowledge that these Articles of Amendment and
Restatement are the corporate act and deed of the Corporation and, under the
penalties for perjury, that the matters and facts set forth herein are true in
all material respects to the best of his knowledge, information and belief.
ATTEST: HEALTHCARE FINANCIAL PARTNERS
REIT, INC.
By: /s/ Edward P. Nordberg, Jr. By: /s/ John K. Delaney
------------------------------- -----------------------------------
Edward P. Nordberg, Jr. John K. Delaney
Secretary Chairman of the Board and
Chief Executive Officer
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Exhibit 3.2
ADOPTED MAY 5, 1998
AMENDED AND RESTATED BYLAWS OF
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
ARTICLE I
OFFICES
Section 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive office of
the Corporation shall be located at such place or places as the Board of
Directors may designate.
Section 1.2 ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as Board of Directors may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE. All meetings of stockholders shall be held at the
principal executive office of the Corporation or at such other place within the
United States as shall be stated in the notice of the meeting.
Section 2.2 ANNUAL MEETING. The Corporation shall hold an annual meeting
of its stockholders to elect directors and transact any other business within
its powers, either at 10:00 a.m. on the fourth Thursday of May in each year if
not a legal holiday, or at such other time on such other day as shall be set by
the Board of Directors. Failure to hold an annual meeting does not invalidate
the Corporation's existence or affect any otherwise valid corporate acts.
Section 2.3 SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed
to be acted on at such meeting. The secretary shall inform such stockholders of
the reasonably estimated cost of preparing and mailing notice of the meeting
and, upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting.
Section 2.4 NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to
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each stockholder not entitled to vote who is entitled to notice of the meeting
written or printed notice stating the time and place of the meeting and, in the
case of a special meeting or as otherwise may be required by any statute, the
purpose for which the meeting is called, either by mail or by presenting it to
such stockholder personally or by leaving it at his residence or usual place of
business. If mailed, such notice shall be deemed to be given when deposited in
the United States mail addressed to the stockholder at his post office address
as it appears on the records of the Corporation, with postage thereon prepaid.
Section 2.5 SCOPE OF NOTICE. Subject to compliance with Section 2.11 of
these Bylaws, any business of the Corporation may be transacted at an annual
meeting of stockholders without being specifically designated in the notice,
except such business as is required by any statute to be stated in such notice.
No business shall be transacted at a special meeting of stockholders except as
specifically designated in the notice.
Section 2.6 ORGANIZATION. At every meeting of stockholders, the chairman
of the board of directors, if there be one, shall conduct the meeting or, in
the case of vacancy in office or absence of the chairman of the board of
directors, one of the following officers present shall conduct the meeting in
the order stated: the chief executive officer, if there be one, the president,
the vice presidents in their order of rank and seniority, or a chairman chosen
by the stockholders entitled to cast a majority of the votes which all
stockholders present in person or by proxy are entitled to cast, shall act as
chairman, and the secretary, or, in his absence, an assistant secretary, or in
the absence of both the secretary and assistant secretaries, a person appointed
by the chairman shall act as secretary.
Section 2.7 QUORUM. Unless the Corporation's Charter provides otherwise,
at a meeting of stockholders the presence in person or by proxy of stockholders
entitled to cast a majority of all the votes entitled to be cast at the meeting
shall constitute a quorum. Whether or not a quorum is present, a meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
Section 2.8 VOTING; PROXIES. Unless the Corporation's Charter provides
otherwise, each outstanding share of stock, regardless of class, is entitled to
one vote on each matter submitted to a vote at a meeting of stockholders and
majority of all the votes cast at a meeting at which a quorum is present is
sufficient to approve any matter which properly comes before the meeting,
except that a plurality of all the votes cast at a meeting at which a quorum is
present is sufficient to elect a director. A stockholder may sign a writing
authorizing another person to act as executing a valid proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable means, including facsimile signature. A stockholder may
authorize another person to act as proxy by transmitting, or authorizing the
transmission of, a telegram, cablegram, datagram, facsimile, or other means of
electronic transmission to the person authorized to act as proxy or to a proxy
solicitation firm, proxy support service organization, or other person
authorized by the person who will act as proxy to receive the
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transmission. Unless a proxy provides otherwise, it is not valid more than 11
months after its date. A proxy is revocable by a stockholder at any time
without condition or qualification unless the proxy states that it is
irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted
under the proxy or another general interest in the Corporation or its assets or
liabilities.
Section 2.9 VOTING OF STOCK BY CERTAIN HOLDERS. The Board of Directors
may adopt by resolution a procedure by which a stockholder may certify in
writing to the Corporation that any shares of stock registered in the name of
the stockholder are held for the account of a specified person other than the
stockholder. The resolution shall set forth the class of stockholders who may
make the certification, the purpose for which the certification may be made,
the form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the stock transfer
books, the time after the record date or closing of the stock transfer books
within which the certification must be received by the Corporation; and any
other provisions with respect to the procedure which the Board of Directors
considers necessary or desirable. On receipt of such certification, the person
specified in the certification shall be regarded as, for the purposes set forth
in the certification, the stockholder of record of the specified stock in place
of the stockholder who makes the certification.
Section 2.10 INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be prima
facie evidence thereof.
Section 2.11 NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
(a) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record both at the time of giving of
notice provided for in this Section 2.11(a) and at the time of the annual
meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 2.11(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of
this Section 2.11, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation
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and such other business must otherwise be a proper matter for action by
stockholders. To be timely, a stockholder's notice shall be delivered to the
secretary at the principal executive offices of the Corporation not later than
the close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date or if the Corporation has not previously held an annual
meeting, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the 90th day prior to such annual meeting
and not later than the close of business on the later of the 60th day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made by the Corporation. In
no event shall the public announcement of a postponement or adjournment of an
annual meeting to a later date or time commence a new time period for the
giving of a stockholder's notice as described above. Such stockholder's notice
shall set forth (i) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and of the
beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (x) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (y) the number of shares of each class of stock of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2)
of this Section 2.11 to the contrary, in the event that the number of directors
to be elected to the Board of Directors is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 70 days prior
to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 2.11(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth
day following the day on which such public announcement is first made by the
Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected (i) pursuant to
the Corporation's notice of meeting, (ii) by or at the direction of the Board
of Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of
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record both at the time of giving of notice provided for in this Section
2.11(b) and at the time of the special meeting, who is entitled to vote at the
meeting and who complied with the notice procedures set forth in this Section
2.11(b). In the event the Corporation calls a special meeting of stockholders
for the purpose of electing one or more directors to the Board of Directors,
any such stockholder may nominate a person or persons (as the case may be) for
election to such position as specified in the Corporation's notice of meeting,
if the stockholder's notice containing the information required by paragraph
(a)(2) of this Section 2.11 shall be delivered to the secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of a postponement or adjournment of a special meeting to a later
date or time commence a new time period for the giving of a stockholder's
notice as described above.
(c) GENERAL. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 2.11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.11. The chairman of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 2.11 and, if
any proposed nomination or business is not in compliance with this Section
2.11, to declare that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 2.11, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 2.11, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 2.11. Nothing in this Section 2.11 shall
be deemed to affect any rights of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
Section 2.12. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors, which may
exercise all of the powers
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of the Corporation, except such as are by law or by the Corporation's Charter
or by these Bylaws conferred upon or reserved to the stockholders.
Section 3.2 INDEPENDENT MAJORITY. A majority of the members of the Board
of Directors shall at all times after May 6, 1998 be Independent Directors (as
hereinafter defined). "Independent Director" shall mean a person who is (i)
independent of management of the Corporation, HealthCare Financial Partners,
Inc., a Delaware corporation ("HCFP"), HCFP REIT Operating Partnership, L.P., a
Delaware limited partnership (the "Operating Partnership"), and HCFP REIT
Management, Inc., a Maryland corporation ("Manager"), (ii) not employed by or
an officer of the Corporation, HCFP, the Operating Partnership or the Manager,
(iii) not an "affiliate" (as defined in Rule 405 under the Securities Act of
1933, as amended) of the Corporation, HCFP, the Operating Partnership, the
Manager, or of any subsidiary of the Corporation, HCFP, the Operating
Partnership or the Manager, and (iv) not a person who acts on a regular basis
as an individual or representative of an organization serving as a professional
advisor, legal counsel or consultant to the management of the Corporation,
HCFP, the Operating Partnership or the Manager.
Section 3.3 NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, a majority of the entire Board
of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by the General Laws of the State of Maryland, nor more than nine, and
further provided that the tenure of office of a director shall not be affected
by any decrease in the number of directors. The directors of the Corporation
(exclusive of directors who are elected from time to time pursuant to the terms
of any series of preferred stock of the Corporation) shall be divided into
three (3) classes, with the first class referred to herein as "Class I," the
second class as "Class II," and the third class as "Class III." Each class
shall consist as nearly as possible of one-third (1/3) of the total number of
directors making up the entire Board of Directors. The term of office of the
initial Class I directors shall expire at the 1999 annual meeting of
stockholders, the term of office of the initial Class II directors shall expire
at the 2000 annual meeting of stockholders, and the term of office of the
initial Class III directors shall expire at the 2001 annual meeting of
stockholders, with each director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of
stockholders, directors elected to succeed those directors whose terms then
expire shall be elected to a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until his or her successor shall have been duly elected and qualified.
Section 3.4 REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held not less frequently than once per calendar quarter, with one such
regular meeting of the Board of Directors being held immediately after and at
the same place as the annual meeting of stockholders, no notice other than this
Bylaw being necessary. The Board of Directors may provide, by resolution, the
time and place, either within or without the State of Maryland, for the holding
of regular meetings of the Board of Directors without other notice than such
resolution.
Section 3.5 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board of directors,
president or by a majority
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of the directors then in office. The person or persons authorized to call
special meetings of the Board of Directors may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the Board of Directors called by them.
Section 3.6 CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman of the board
of directors shall preside, if present, at all meetings of the Board of
Directors (if the chairman of the board of directors is not present at a
meeting, then the vice chairman of the Board of Directors shall preside at such
meeting). The chairman of the Board of Directors shall see that all orders and
resolutions of the Board of Directors are carried into effect and shall from
time to time report to the Board of Directors all matters within his or her
knowledge which the interests of the Corporation may require to be brought to
their notice. The chairman of the board of directors shall also perform such
other duties and he or she may exercise such other powers as from time to time
may be delegated to him or her by the Board of Directors.
Section 3.7 VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The vice chairman of
the Board of Directors shall perform such duties and may exercise such powers
as from time to time may be delegated to him or her by the Board of Directors.
Section 3.8 NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile
transmission, United States mail or courier to each director at his business or
residence address. Notice by personal delivery, by telephone or a facsimile
transmission shall be given at least two days prior to the meeting. Notice by
mail shall be given at least five days prior to the meeting and shall be deemed
to be given when deposited in the United States mail properly addressed, with
postage thereon prepaid. Telephone notice shall be deemed to be given when the
director is personally given such notice in a telephone call to which he is a
party. Facsimile transmission notice shall be deemed to be given upon
completion of the transmission of the message to the number given to the
Corporation by the director and receipt of a completed answer-back or similar
report indicating receipt. Neither the business to be transacted at, nor the
purpose of, any annual, regular or special meeting of the Board of Directors
need be stated in the notice, unless specifically required by statute or these
Bylaws.
Section 3.9 QUORUM. A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business. In the absence of a
quorum, the directors present by majority vote and without notice other than by
announcement may adjourn the meeting from time to time until a quorum shall
attend. At any such adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 3.10 VOTING. Unless applicable law, the Corporation's Charter or
these Bylaws requires a greater proportion, the action of a majority of the
directors present at a meeting at which a quorum is present is the action of
the Board of Directors.
Section 3.11 TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons
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participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person
at the meeting.
Section 3.12 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required
or permitted to be taken at a meeting of the Board of Directors may be taken
without a meeting, if an unanimous written consent which sets forth the action
is signed by each member of the Board and filed with the minutes of proceedings
of the Board of Directors.
Section 3.13 VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Subject to the rights of the holders of any class of
stock separately entitled to elect one or more directors, the stockholders may
elect a successor to fill a vacancy on the Board of Directors which results
from the removal of a director. A director elected by the stockholders to fill
a vacancy which results from the removal of a director serves for the balance
of the term of the removed director. Subject to the rights of the holders of
any class of stock separately entitled to elect one or more directors, a
majority of the remaining directors, whether or not sufficient to constitute
quorum, may fill a vacancy on the Board of Directors which results from any
cause except an increase in the number of directors, and a majority of the
entire Board of Directors may fill a vacancy which results from an increase in
the number of directors. A director elected by the Board of Directors to fill a
vacancy serves until the next annual meeting of stockholders and until his or
her successor is elected and qualifies. No decrease in the number of directors
constituting the Board of Directors shall affect the tenure of office of any
director.
Section 3.14 COMPENSATION. The Corporation will pay to each Independent
Director (i) an annual director's fee, paid quarterly, and (ii) a fee for each
meeting of the Board of Directors or committee thereof attended in person or by
telephone by such Independent Director, each in such amounts as the Board of
Directors or a committee thereof may determine from time to time. In addition,
any Independent Director who is the chair of any committee of the Board of
Directors may be paid a fee, similarly determined for serving in such capacity.
Affiliated Directors shall not receive any stated salary for their services as
directors. All Directors will be reimbursed for costs and expenses of
attendance, if any, at each annual, regular or special meeting of the Board of
Directors or of any committee thereof and for their expenses, if any, in
connection with each property visit and any other service or activity they
performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 3.15 LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings
and loan association, or other institution with whom moneys or stock have been
deposited.
Section 3.16 SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his or her duties.
Section 3.17 RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his or her duties with respect to the
Corporation, be
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fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the
Corporation, upon an opinion of counsel or upon reports made to the Corporation
by any of its officers or employees or by the adviser, manager, accountants,
appraisers or other experts or consultants selected by the Board of Directors
or officers of the Corporation, regardless of whether such counsel or expert
may also be a director.
Section 3.18 INVESTMENT POLICIES AND RESTRICTIONS. The investment
policies of the Corporation and the restrictions thereon shall be established
from time to time by the Board of Directors, including a majority of the
Independent Directors; provided, however, that the investment policies of the
Corporation and the limitations thereon shall be at all times in compliance
with the restrictions applicable to real estate investment trusts pursuant to
the Internal Revenue Code of 1986, as it may be amended from time to time. The
Independent Directors shall review the investment policies of the Corporation
at least annually to determine that the policies then being followed by the
Corporation are in the best interests of its stockholders.
Section 3.19 MANAGEMENT AGREEMENTS. The Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day business affairs of the Corporation pursuant to a written agreement
or agreements. The approval of any such management agreement and the renewal or
termination thereof shall require the affirmative vote of a majority of the
Independent Directors.
The Board of Directors shall evaluate the performance of the Manager
before entering into or renewing any management agreement. Each extension of
the contract for the services of a Manager entered into by the Board of
Directors shall have a term of no more than one year.
In determining whether to enter into or renew any management agreement,
the Independent Directors shall consider the following factors and all other
factors that they may deem relevant:
(a) The size of management fee in relation to the size and profitability
of the investment portfolio of the Corporation;
(b) The success of the Manager in generating opportunities that meet the
investment objectives of the Corporation;
(c) The quality and extent of service and advice furnished by the Manager
to the Corporation; and
(d) The rates charged to other corporations similar to the Corporation
and to other investors by advisers performing similar services.
Section 3.20 RELATED PARTY TRANSACTIONS. A majority of the Independent
Directors shall approve general guidelines ("Guidelines") for the Corporation's
investments, borrowings and operations, and the Independent Directors shall
conduct a quarterly review of transactions engaged in by the Corporation,
including transactions with the Manager or any
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Affiliate of the Manager, to insure compliance with the Guidelines. The
Independent Directors shall not be required to approve transactions between the
Corporation and the Manager or any Affiliate of the Manager.
Section 3.21 MANAGEMENT BY DIRECTORS. Should the Board of Directors elect
to delegate the duty of management of the Corporation's assets and
administration of the Corporation's day-to-day operations to a Manager, the
directors of the Corporation will not be required to devote their full time to
the affairs of the Corporation; provided that the directors devote so much of
their time to the Corporation's affairs as is necessary or required for the
effective conduct and operation of the Corporation's business.
ARTICLE IV
COMMITTEES
Section 4.1 NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee, and other committees composed of one or more directors
and delegate to these committees any of the powers of the Board of Directors,
except the power to authorize dividends on stock, elect directors, issue stock
other than as provided in the next sentence, recommend to the stockholders any
action which requires stockholder approval, amend these Bylaws, or approve any
merger or share exchange which does not require stockholder approval. If the
Board of Directors has given general authorization for the issuance of stock
providing for or establishing a method or procedure for determining the maximum
number of shares to be issued, a committee of the Board, in accordance with
that general authorization or any stock option or other plan or program adopted
by the Board of Directors, may authorize or fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors.
Section 4.2 MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee may fix the time and
place of its meeting unless the Board shall otherwise provide. In the absence
of any member of any such committee, the members thereof present at any
meeting, whether or not they constitute a quorum, may appoint another director
to act in the place of such absent member. Each committee shall keep minutes of
its proceedings.
Section 4.3 TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting
can hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
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Section 4.4 INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if an unanimous written consent which sets
forth the action is signed by each member of the committee and such written
consent is filed with the minutes of proceedings of such committee.
Section 4.5 VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 5.1 GENERAL PROVISIONS. The officers of the Corporation shall
include a president, a secretary and a treasurer and may include a chairman of
the board, a vice chairman of the board, a chief executive officer, one or more
senior vice presidents or vice presidents, a chief operating officer, a chief
financial officer, one or more assistant secretaries and one or more assistant
treasurers. In addition, the Board of Directors may from time to time appoint
such other officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders, except that the chief executive officer or
president may appoint one or more vice presidents, assistant secretaries and
assistant treasurers. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until his or her successor is elected and
qualifies or until his death, resignation or removal in the manner hereinafter
provided. Any two or more offices except president and vice president may be
held by the same person. In its discretion, the Board of Directors may leave
unfilled any office except that of president, treasurer and secretary. Election
or appointment of an officer or agent shall not of itself create contract
rights between the Corporation and such officer or agent.
Section 5.2 REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Any officer of the Corporation may resign at any time by giving
written notice of his resignation to the Board of Directors, the chairman of
the board, the president or the secretary. Any resignation shall take effect at
any time subsequent to the time specified therein or, if the time when it shall
become effective is not specified therein, immediately upon its receipt. The
acceptance of a resignation shall not be necessary to make it effective unless
otherwise stated in the resignation. Such resignation shall be without
prejudice to the contract rights, if any, of the officer, agent or Corporation.
Section 5.3 VACANCIES. A vacancy in any office may be filled by the Board
of Directors for the balance of the term.
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Section 5.4 CHIEF EXECUTIVE OFFICER. The Board of Directors may designate
a chief executive officer. In the absence of such designation, the president
shall be the chief executive officer of the Corporation. The chief executive
officer shall have general responsibility for implementation of the policies of
the Corporation, as determined by the Board of Directors, and for the
management of the business and affairs of the Corporation. If the chairman of
the board of directors is not present at a meeting of the Board of Directors
then the chief executive officer of the Corporation shall act as the chairman
of the board of directors at such meeting and shall preside over such meeting.
Section 5.5 CHIEF OPERATING OFFICER. The Board of Directors may designate
a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 5.6 CHIEF FINANCIAL OFFICER. The Board of Directors may designate
a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 5.7 PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer. He or she may execute any deed, mortgage, bond, contract or
other instrument, except in cases where the execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some other
officer or agent of the Corporation or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Board of Directors
from time to time.
Section 5.8 VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the senior vice president (or in the event
there be more than one senior vice president, the senior vice presidents in the
order designated at the time of their appointment or election or, in the
absence of any designation, then in the order of their appointment or election,
or if there be no senior vice presidents, the vice president or vice presidents
in the order designated at the time of their appointment or election or, in the
absence of any designation, in the order of their appointment or election)
shall perform the duties of the president and when so acting shall have all the
powers of and be subject to all the restrictions upon the president; and shall
perform such other duties as from time to time may be assigned to him by the
president or by the Board of Directors. The Board of Directors may designate
one or more vice presidents as executive vice president or as vice president
for particular areas of responsibility.
Section 5.9 SECRETARY. The secretary shall: (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal
of the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have
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general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him
or her by the chief executive officer, the president or by the Board of
Directors.
Section 5.10 TREASURER. The treasurer shall have the custody of the funds
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.
The treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.
Section 5.11 REQUIREMENT FOR BOND. If required by the Board of Directors,
the treasurer shall give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, moneys and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 5.12 ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer,
respectively, or by the president or the Board of Directors. The assistant
treasurers shall, if required by the Board of Directors, give bonds for the
faithful performance of their duties in such sums and with such surety or
sureties as shall be satisfactory to the Board of Directors.
Section 5.13 SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he or she is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1 CONTRACTS. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances. Any agreement, deed, mortgage, lease or
other document executed by one or more of the directors or by an authorized
person shall be valid and binding upon the Board of Directors and upon the
Corporation when authorized or ratified by action of the Board of Directors.
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Section 6.2 CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed by such officer or agent of the Corporation
in such manner as shall from time to time be determined by the Board of
Directors.
Section 6.3 DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 7.1 CERTIFICATES. Each stockholder is entitled to certificates
which represent and certify the shares of stock he or she holds in the
Corporation. Each stock certificate shall include on its face the name of the
Corporation, the name of the stockholder or other person to whom it is issued,
and the class of stock and number of shares it represents. It shall also
include on its face or back (a) a statement of any restrictions on
transferability and (b) a statement which provides in substance that the
Corporation will furnish to any stockholder on request and without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue, of the difference in the
relative rights and preferences between the shares of each series of a
preferred or special class in series which the Corporation is authorized to
issue, to the extent they have been set, and of the authority of the Board of
Directors to set the relative rights and preferences of subsequent series of a
preferred or special class of stock and any restrictions on transferability.
Such request may be made to the secretary or to its transfer agent. It shall be
in such form, not inconsistent with law or with the Corporation's Charter, as
shall be approved by the Board of Directors or any officer or officers
designated for such purpose by resolution of the Board of Directors. Each stock
certificate shall be signed by the chairman of the board, the president, or a
senior vice-president, and countersigned by the secretary, an assistant
secretary, the treasurer, or an assistant treasurer. Each certificate may be
sealed with the actual corporate seal or a facsimile of it or in any other form
and the signatures of any of the foregoing officers may be either manual or
facsimile signatures. A certificate is valid and may be issued whether or not
an officer who signed it is still an officer when it is issued. A certificate
may not be issued until the stock represented by it is fully paid.
Section 7.2 TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have
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express or other notice thereof, except as otherwise provided by the laws of
the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the Corporation's Charter and all of the
terms and conditions contained therein.
Section 7.3 REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 7.4 CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled allotment of any other rights, or
stockholders for any other proper prior to the close of business on not more
than 90 days and, in the than ten days, before the date on to receive payment
of any dividend or the in order to make a determination of purpose. Such date,
in any case, shall not be prior to the close of business on the day the record
date is fixed and shall be not more than 90 days and, in the case of a meeting
of stockholders, not less than ten days, before the date on which the meeting
or particular action requiring such determination of stockholders of record is
to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that
the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of stockholders, (a) the record date for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day on which the notice
of meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting; and (b) the record date for the determination of
stockholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer
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books and the stated period of closing has expired or (ii) the meeting is
adjourned to a date more than 120 days after the record date fixed for the
original meeting, in either of which case a new record date shall be determined
as set forth herein.
Section 7.5 STOCK LEDGER. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 7.6 FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any
other provision of the Corporation's Charter or these Bylaws, the Board of
Directors may issue units consisting of different securities of the
Corporation. Any security issued in a unit shall have the same characteristics
as any identical securities issued by the Corporation, except that the Board of
Directors may provide that for a specified period securities of the Corporation
issued in such unit may be transferred on the books of the Corporation only in
such unit.
ARTICLE VIII
ACCOUNTING YEAR
The fiscal year of the Corporation shall end on December 31st of each
year. The Board of Directors shall have the power from time to time to change
the fiscal year provided that such change does not cause the Corporation to
fail to qualify as a REIT.
ARTICLE IX
DISTRIBUTIONS
Section 9.1 AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors and may be paid in cash, property or stock of the Corporation,
subject to the provisions of law and the Corporation's Charter, to insure that
the Corporation satisfies the requirements for qualification as a REIT.
Section 9.2 CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other
distributions, for repairing or maintaining any property of the Corporation or
for such other purpose as the Board of Directors shall determine to be in the
best interest of the Corporation, and the Board of Directors may modify or
abolish any such reserve in the manner in which it was created.
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ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Corporation's Charter, the Board of
Directors, including a majority of the Independent Directors, may from time to
time adopt, amend, revise or terminate any policy or policies with respect to
investments by the Corporation as it shall deem appropriate in its sole
discretion.
ARTICLE XI
SEAL
Section 11.1 SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
any such other information as the Board of Directors may approve. The Board of
Directors may authorize one or more duplicate seals and provide for the custody
thereof.
Section 11.2 AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the
word "(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
The Corporation shall indemnify and hold harmless and, without requiring
a determination of the ultimate entitlement to indemnification, pay reasonable
expenses in advance of the final disposition of any proceeding to (A) its
present and former directors and officers, whether serving the Corporation or
at its request any other entity, to the full extent required or permitted by
the General Laws of the State of Maryland now or hereafter in force, including
the advance of expenses under the procedures and to the full extent permitted
by law and (B) other employees and agents to such extent as shall be authorized
by the Board of Directors or the Corporation's Charter and be permitted by law.
The foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled.
Any indemnification, or payment of expenses in advance of the final
disposition of any proceeding, shall be made promptly, and in any event within
60 days, upon the written request of the director or officer entitled to seek
indemnification (the "Indemnified Party"). The right to indemnification and
advances hereunder shall be enforceable by the Indemnified Party in any court
of competent jurisdiction, if (i) the Corporation denies such request, in whole
or in part, or (ii) no disposition thereof is made within 60 days. The
Indemnified Party's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification, in whole or in part, in any
such action shall also be reimbursed by the Corporation. It shall be a defense
to any action for advance for expenses that (a) a determination has been made
that the facts then known to those making the determination would preclude
indemnification or (b) the Corporation has not received both (i) an undertaking
as required by law to repay such advances in the event it
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shall ultimately be determined that the standard of conduct has not been met
and (ii) a written affirmation by the Indemnified Party of such Indemnified
Party's good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met.
The indemnification and advance of expenses provided by the Corporation's
Charter and these Bylaws shall not be deemed exclusive of any other rights to
which a person seeking indemnification or advance of expenses may be entitled
under any law (common or statutory), or any agreement, vote of stockholders or
disinterested directors or other provision that is consistent with law, both as
to action in his or her official capacity and as to action in another capacity
while holding office or while employed by or acting as agent for the
Corporation, shall continue in respect of all events occurring while a person
was a director or officer after such person has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. The Corporation shall not be liable for any
payment under this Bylaw in connection with a claim made by a director or
officer to the extent such director or officer has otherwise actually received
payment under insurance policy, agreement, vote or otherwise, of the amounts
otherwise indemnifiable hereunder. All rights to indemnification and advance of
expenses under the Corporation's Charter and hereunder shall be deemed to be a
contract between the Corporation and each director or officer of the
Corporation who serves or served in such capacity at any time while this Bylaw
is in effect. Nothing herein shall prevent the amendment of this Bylaw,
provided that no such amendment shall diminish the rights of any person
hereunder with respect to events occurring or claims made before its adoption
or as to claims made after its adoption in respect of events occurring before
its adoption. Any repeal or modification of this Bylaw shall not in any way
diminish any rights to indemnification or advance of expenses of such director
or officer or the obligations of the Corporation arising hereunder with respect
to events occurring, or claims made, while this Bylaw or any provision hereof
is in force.
Neither the amendment nor repeal of this Article XII, nor the adoption or
amendment of any other provision of these Bylaws or the Corporation's Charter
inconsistent with this Article XII, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Corporation's
Charter or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
These Bylaws may be repealed, altered, amended or rescinded by the
stockholders of the Corporation by vote of not less than two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting). In addition, the Board of Directors
may repeal, alter, amend or rescind these Bylaws by vote of a majority of the
Board of Directors at a meeting held in accordance with the provisions of these
Bylaws.
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Exhibit 10.1
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of May 6, 1998 by and among HEALTHCARE FINANCIAL
PARTNERS REIT, INC., a Maryland corporation (the "Company"), and HCFP REIT
MANAGEMENT, INC., a Maryland corporation (the "Manager");
WITNESSETH:
WHEREAS, the Company intends to invest in mortgage loans, real property
and non-real estate assets ("REIT Investments") and expects to qualify for the
tax benefits of a real estate investment trust (a "REIT") accorded by Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, the Company desires to retain the Manager to advise and counsel
the Company as to the acquisition and sale of, and to otherwise manage the
investments of, the Company and to perform administrative services for the
Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used but not defined herein
shall have the respective meanings assigned them in the Offering Memorandum of
the Company dated April 29, 1998. In addition, the following terms shall have
the following:
(a) "Agreement" means this Management Agreement, as amended from time to
time.
(b) "Closing Date" means the date of closing of the Offering.
(c) "GMAC" means GMAC Commercial Mortgage Corporation, a California
corporation.
(d) "Governing Instruments" means the charter and bylaws in the case of a
corporation, or the partnership agreement in the case of a partnership.
(e) "HCFP" means HealthCare Financial Partners, Inc., a Delaware
corporation.
(f) "Loan Servicing Agreement" means the Loan Servicing Agreement between
GMAC and the Company dated May 6, 1998.
(g) The term "permanent mortgage loan" means a loan secured by real
property collateral which has an initial term of more than three years.
<PAGE> 2
(h) "Subsidiary" means any subsidiary of the Company and any partnership,
a general partner of which is the Company or any subsidiary of the Company.
SECTION 2. Duties of the Manager.
(a) The Manager at all times will be subject to the supervision of the
Board of Directors and will have only such functions and authority as the
Company delegates to it. The Manager will advise the Board of Directors as to
the activities and operations of the Company. The Manager may enter into
sub-contracts with other parties, including HCFP and its affiliates, to provide
certain services to the Company. The Manager will be responsible for the
day-to-day operations of the Company pursuant to the authority granted to it by
the Board of Directors under this Agreement, and the Manager will perform (or
cause to be performed) such services and activities relating to the assets and
operations of the Company as may be directed by the Board of Directors or as
the Manager otherwise considers appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to sell
assets, and the maintenance and administration of its portfolio of assets and
making available to the Company its knowledge and experience with respect to
the healthcare industry, mortgage loans, real estate and real estate related
assets;
(iii) advising and representing the Company in connection with defaults
by the Company's borrowers and lessees, including the exercise of remedies and
collection of amounts owed to the Company.
(iv) advising the Company regarding, and arranging for, borrowings and
the raising of equity capital, as appropriate;
(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for the
Company by the Manager and regarding market conditions in the area in which the
Company proposes to invest;
(vi) providing executive and administrative personnel, office space and
office services required in rendering services to the Company; administering
the day-to-day operations of the Company; establishing and maintaining records
of the Company's activities; and performing and supervising the performance of
such other administrative functions necessary in the management of the Company,
including the collection of revenues and the payment of the Company's debts and
obligations and the maintenance of appropriate data processing and computer
services to perform such administrative functions;
(vii) providing marketing services and assistance to the Company;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the reporting
and other requirements of any
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governmental bodies or agencies or trading markets and to maintain effective
relations with such holders;
(ix) to the extent not otherwise subject to an agreement executed by the
Company, designating a servicer for mortgage loans held by the Company and
arranging for the monitoring and administering of such servicer;
(x) counseling the Company in connection with policy decisions to be made
by the Board of Directors;
(xi) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Guidelines; and
upon request by the Board of Directors and in accordance with the Guidelines,
investing or reinvesting any money of the Company;
(xii) counseling the Company regarding (A) the maintenance of its
exemption from the Investment Company Act and monitoring compliance with the
requirements for maintaining exemption from that Act; (B) the maintenance of
its status as a REIT and monitoring compliance with the various REIT
qualification tests and other rules set out in the Code and the income tax
regulations promulgated thereunder (the "Treasury Regulations"); and (C)
compliance with all applicable laws, including those that would require the
Company to qualify to do business in particular jurisdictions;
(xiii) assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its business activities,
including preparing or causing to be prepared all financial statements required
under applicable regulations and contractual undertakings and all reports and
documents, if any, required under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act");
(xiv) taking all necessary actions to enable the Company to make required
tax filings and reports, including soliciting stockholders for required
information to the extent provided in the Code and the Treasury Regulations;
(xv) handling and resolving all claims, disputes or controversies
(including all litigation, arbitration, settlement or other proceedings or
negotiations) in which the Company may be involved or to which the Company may
be subject arising out of the Company's day-to-day operations, subject to such
limitations or parameters as may be imposed from time to time by the Board of
Directors;
(xvi) using commercially reasonable efforts to cause expenses incurred by
or on behalf of the Company to be reasonable or customary and within any
budgeted parameters or the Guidelines set by the Board of Directors from time
to time;
(xvii) performing such other services as may be required from time to
time for management and other activities relating to the assets of the Company
as the Board of Directors
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shall reasonably request or the Manager shall deem appropriate under the
particular circumstances; and
(xviii) using commercially reasonable efforts to cause the Company to
comply with all applicable laws.
(b) Portfolio Management. The Manager will perform portfolio management
services on behalf of the Company with respect to the Company's investments.
Such services will include, but not be limited to, consulting the Company on
purchase, sale and other opportunities, collection of information and
submission of reports pertaining to the Company's assets, interest rates, and
general economic conditions, periodic review and evaluation of the performance
of the Company's portfolio of assets, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with respect to
the purchase, financing and disposition of assets, and other customary
functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including HCFP and its affiliates, to provide
any such services to the Company.
(c) Primary Servicing. The Company has entered into the Loan Servicing
Agreement with GMAC for certain loan servicing activities with respect to the
Company's mortgage loans. The Manager will monitor and administer the loan
servicing activities provided by third-party servicers of the Company's
mortgage loans (including, without limitation, GMAC). Such monitoring and
administrative services will include, but not be limited to, the following
activities: serving as the Company's consultant with respect to the servicing
of loans; collection of information and submission of reports pertaining to the
mortgage loans and to moneys remitted to the Manager or the Company by
servicers; periodic review and evaluation of the performance of each servicer
to determine its compliance with the terms and conditions of the servicing
agreement and, if deemed appropriate, recommending to the Company the
termination of such servicing agreement; acting as a liaison between servicers
and the Company and working with servicers to the extent necessary to improve
their servicing performance. The Manager will provide all loan servicing
activities which are not provided by third-party servicers. Such services shall
include, but not be limited to, the following activities: review of and
recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to the mortgage loans;
preparation of delinquency, foreclosing and other reports on mortgage loans;
and advising as to and supervising claims filed under any insurance policies.
(d) Efforts. The Manager agrees to use commercially reasonable efforts at
all times in performing services for the Company hereunder.
SECTION 3. Additional Activities of Manager. Nothing herein shall limit
or restrict the right of the Manager or any of its officers, directors,
employees or Affiliates to engage in any business or to render services of any
kind to any other person including the purchase of, or rendering advice to
others purchasing, assets that meet the Company's policies and criteria, except
that so long as this Agreement is in effect, the Manager (i) may not manage or
advise another REIT or other entity that invests or intends to invest primarily
in permanent mortgage loans or purchase lease back transactions with respect to
healthcare facilities and (ii) may not
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directly or through an affiliate invest in real property or originate or
acquire permanent mortgage loans.
Directors, officers, employees and agents of the Manager or affiliates of
the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any of its Subsidiaries, to the extent permitted
by their Governing Instruments, as from time to time amended, or by any
resolutions duly adopted by the Board of Directors pursuant to the Company's or
any of its Subsidiaries' Governing Instruments. When executing documents or
otherwise acting in such capacities for the Company, such persons shall use
their respective titles in the Company.
SECTION 4. Commitments. In order to meet the investment requirements of
the Company, as determined by the Board of Directors from time to time, the
Manager agrees at the direction of the Board of Directors to issue on behalf of
the Company commitments on such terms as are established by the Board of
Directors, for the acquisition by the Company of assets.
SECTION 5. Bank Accounts. At the direction of the Board of Directors, the
Manager may establish and maintain one or more bank accounts in the name of the
Company or any of its Subsidiaries, and may collect and deposit funds into any
such account or accounts, and disburse funds from any such account or accounts,
under such terms and conditions as the Board of Directors may approve; and the
Manager shall from time to time render appropriate accountings of such
collections and payments to the Board of Directors and, upon request, to the
auditors of the Company or any of its Subsidiaries.
SECTION 6. Records; Confidentiality. The Manager shall maintain
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any of its Subsidiaries at any
time during normal business hours. The Manager shall keep confidential any and
all information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Board of Directors or as may be required
by law or order of a court or other tribunal having requisite jurisdiction.
SECTION 7. Obligations of Manager.
(a) The Manager shall require each borrower or lessee of the Company to
make such representations and warranties regarding the applicable facilities
financed by the Company as may be directed by the Board of Directors, or, if no
such directions are given, as may, in the judgment of the Manager, be necessary
and appropriate. In addition, the Manager shall take such other action as may
be directed by the Board of Directors, or, if no such directions are given, as
it deems necessary or appropriate with regard to the protection of the
Company's assets.
(b) The Manager shall refrain from any action that, in its sole judgment
made in good faith, would adversely affect the status of the Company as a REIT,
or as exempt from regulation under the Investment Company Act or that, in its
sole judgment made in good faith, would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over
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the Company or any of its Subsidiaries or that would otherwise not be permitted
by their respective Governing Instruments. If the Manager is ordered to take
any such action by the Board of Directors, the Manager shall promptly notify
the Board of Directors of the Manager's judgment that such action would
adversely affect such status or violate any such law, rule or regulation or the
Governing Instruments. Notwithstanding the foregoing, the Manager, its
directors, officers, stockholders and employees shall not be liable to the
Company or any of its Subsidiaries, the Independent Directors, or the Company's
or any of its Subsidiaries' stockholders or partners for any act or omission by
the Manager, its directors, officers, stockholders or employees except as
provided in Section 11 of this Agreement.
SECTION 8. Compensation.
(a) Commencing with the first fiscal quarter after the Closing Date, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee (the "Base Management Fee") payable and calculated
quarterly (prorated based on the number of days elapsed during any partial
fiscal quarter) in an amount equal to a percentage (the "Percentage Amount") of
the Average Invested Assets for such quarter. The term "Average Invested
Assets" for any quarter means the average of the aggregate book value of the
consolidated assets of the Company, before reserves for depreciation or bad
debts or other non-cash reserves, computed by dividing the sum of such values
for each of the three months during such quarter (based on the book value of
such assets on the last day of such month) by three. The "Percentage Amount"
shall be 1.50% for Average Invested Assets up to and including $300 million;
1.25% for Average Invested Assets in excess of $300 million up to and including
$600 million; 1.00% for Average Invested Assets in excess of $600 million up to
and including $900 million; 0.75% for Average Invested Assets in excess of $900
million up to and including $1.2 billion; and 0.50% for Average Invested Assets
in excess of $1.2 billion.
(b) The Company shall pay to the Manager incentive compensation (the
"Incentive Compensation") for each fiscal quarter in an amount equal the product
of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of the
Company (before the Incentive Compensation) per share of Common Stock (based on
the weighted average number of shares outstanding) for such quarter plus (b)
gains (or minus losses) from debt restructuring and sales of property per share
of Common Stock (based on the weighted average number of shares outstanding),
exceeds (2) an amount equal to (a) the weighted average of the prices per share
of Common Stock issued by the Company (including shares of Common Stock issued
upon the exercise of Options or warrant and assuming a price of $20 per share
for shares sold in the Offering) multiplied by (b) the Ten Year U.S. Treasury
Rate for such quarter plus 3.50% multiplied by (B) the weighted average number
of shares of Common Stock outstanding during such quarter. "Funds From
Operations" as defined by NAREIT means net income (computed in accordance with
generally accepted accounting principles) ("GAAP") excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. Funds From Operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. As used in calculating the Manager's compensation, the term "Ten
Year U.S. Treasury Rate" means the arithmetic average of the weekly average
yield to
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<PAGE> 7
maturity for actively traded current coupon U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of ten years) published by the
Federal Reserve Board during a quarter, or, if such rate is not published by
the Federal Reserve Board, any Federal Reserve Bank or agency or department of
the federal government selected by the Company. If the Company determines in
good faith that the Ten Year U.S. Treasury Rate cannot be calculated as
provided above, then the rate shall be the arithmetic average of the per annum
average yields to maturities, based upon closing asked prices on each business
day during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor more
than twelve years from the date of the closing asked prices as chosen and
quoted for each business day in each such quarter in New York City by at least
three recognized dealers in U.S. government securities selected by the Company.
(c) The Manager is expected to use the proceeds from its Base Management
Fee and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them are officers of the
Company, will initially receive no cash compensation directly from the Company.
The Base Management Fee and Incentive Compensation are payable in arrears. The
Manager shall compute the compensation payable under Sections 8(a) and 8(b) of
this Agreement within 45 days after the end of each fiscal quarter. A copy of
the computations made by the Manager to calculate its compensation shall
thereafter promptly be delivered to the Board of Directors and, upon such
delivery, payment of the compensation earned under Sections 8(a) and 8(b) of
this Agreement shown therein shall be due and payable within 60 days after the
end of such fiscal quarter.
(d) The Manager may charge the Company for any out of pocket expenses that
the Manager incurs in connection with employing unaffiliated third parties to
conduct due diligence on assets considered for purchase by the Company.
SECTION 9. Expenses of the Company. The Company or any Subsidiary shall
pay all of its expenses and shall reimburse the Manager for documented expenses
of the Manager incurred on its behalf.
SECTION 10. Calculations of Expenses. Expenses incurred by the Manager on
behalf of the Company shall be reimbursed quarterly to the Manager within 60
days after the end of each quarter. The Manager shall prepare a statement
documenting the expenses of the Company and those incurred by the Manager on
behalf of the Company during each quarter, and shall deliver such statement to
the Company within 45 days after the end of each quarter.
SECTION 11. Limits of Manager Responsibility. The Manager assumes no
responsibility under this Agreement other than to render the services called
for hereunder in good faith and shall not be responsible for any action of the
Board of Directors in following or declining to follow any advice or
recommendations of the Manager, including as set forth in Section 7(b) of this
Agreement. The Manager, its directors, officers, stockholders and employees
under or in connection with this Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. The Manager and its directors and officers will not
be liable to the Company, any subsidiary of the Company, the Independent
Directors, the Company's stockholders or any subsidiary's stockholders for acts
7
<PAGE> 8
performed in accordance with and pursuant to this Agreement, except by reason
of acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of their duties under this Agreement. The Company and its
Subsidiaries shall reimburse, indemnify, defend and hold harmless the Manager,
its stockholders, directors, officers and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, (including attorneys' fees) in respect of or arising from
any acts or omissions of the Manager, its stockholders, directors, officers and
employees made in good faith in the performance of the Manager's duties under
this Agreement and not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of its duties.
SECTION 12. No Joint Venture. The Company and the Manager are not partners
or joint venturers with each other and nothing herein shall be construed to
make them such partners or joint venturers or impose any liability as such on
either of them.
SECTION 13. Term.
(a) This Agreement shall continue in force and effect for an initial term
(the "Initial Term") expiring on the third anniversary of the Closing Date,
subject to being terminated for cause as provided in Section 14 herein.
Thereafter, the term of this Agreement may be extended by agreement between the
Company and the Manager, subject to the affirmative vote of a majority of the
Independent Directors. Each extension shall be executed in writing by all
parties hereto before the expiration of this Agreement or, if applicable, the
most recent extension thereof. Each such extension shall be effective for a
period of one year. At any time after the Initial Term, the Company may
terminate, or decline to renew the term of, this Agreement without cause upon
90 day(s) written notice by a majority vote of the Independent Directors;
provided that the Company will be required upon such termination or nonrenewal,
at the option of the Company, either (i) to acquire the Manager from HCFP for a
purchase price equal to the Acquisition Price, as hereinafter defined, or (ii)
to pay the Manager a termination or nonrenewal fee ("Termination Fee") equal to
80% of the Acquisition Price. The Acquisition Price is an amount equal to 10
times the Manager's earnings before taxes for the latest twelve calendar months
immediately preceding the date of termination or nonrenewal. Such termination
or nonrenewal shall first become effective as of the 90th day after the receipt
by the Manager of such written notice of such termination or nonrenewal from
the Company. A failure to extend the term of this Agreement at the expiration
of its term (or, if the term of this Agreement shall have been extended
pursuant to this Section 13, at the expiration of the most recent extension)
shall be deemed for all purposes of this Agreement to be a termination of this
Agreement pursuant to this Section 13. The Company shall pay the Acquisition
Price or Termination Fee, as applicable, to HCFP on or before the effective
termination date. In the event the Company elects to acquire the Manager in
connection with such termination, HCFP will, upon receipt of the Acquisition
Price, deliver stock certificates representing all of such capital stock
endorsed to the order of the Company.
(b) In addition, the Company has the right at any time during the term of
this Agreement to terminate this Agreement without the payment of any
termination or nonrenewal fee and without acquiring the Manager upon, among
other things, a material breach by the
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<PAGE> 9
Manager of any provision contained in the Management Agreement (including the
failure of the Manager to use reasonable efforts to comply with the
Guidelines).
SECTION 14. Termination for Cause. This Agreement, or any extension
hereof, may be terminated by either party for cause immediately upon written
notice, (i) by a majority vote of the Independent Directors in the case of
termination by the Company, or (ii) by a majority vote of the directors of the
Manager, in the case of termination by the Manager. Grounds for termination for
cause will occur with respect to a party if:
(i) Such party shall have violated any provision of this Agreement
and, after notice of such violation, shall not have cured such default
within 30 days; or
(ii) There is entered an order for relief or similar decree or
order with respect to the other party by a court having jurisdiction in
an involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy,
insolvency or other similar laws; or the other party (A) admits in
writing its inability to pay its debts as they become due and payable, or
makes a general assignment for the benefit of, or enters into any
composition or arrangement with, creditors; (B) applies for, or consents
(by admission of material allegations of a petition or otherwise) to the
appointment of a receiver, trustee, assignee, custodian, liquidator or
sequestrator (or other similar official) of the other party or of any
substantial part of its properties or assets, or authorizes such an
application or consent, or proceedings seeking such appointment are
commenced without such authorization, consent or application against the
other party and continue undismissed for 30 days; (C) authorizes or files
a voluntary petition in bankruptcy, or applies for or consents (by
admission of material allegations of a petition or otherwise) to the
application of any bankruptcy, reorganization, arrangement, readjustment
of debt, insolvency, dissolution, liquidation or other similar law of any
jurisdiction, or authorizes such application or consent, or proceedings
to such end are instituted against the other party without such
authorization, application or consent and are approved as properly
instituted and remain undismissed for 30 days or results in adjudication
of bankruptcy or insolvency; or (D) permits or suffers all or any
substantial part of its properties or assets to be sequestered or
attached by court order and the order remains undismissed for 30 days.
Each party agrees that if any of the events specified in this Section 14
shall occur, it will give prompt written notice thereof to the other party's
Board of Directors after the happening of such event.
If this Agreement is terminated pursuant to this Section 14, such
termination shall be without any further liability or obligation of either
party to the other, except as provided in Section 16 of this Agreement.
SECTION 15. Assignment; Subcontract.
(a) This Agreement shall terminate automatically in the event of its
assignment, in whole or in part, by the Manager, unless such assignment is to a
corporation, association, trust or
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<PAGE> 10
other organization which shall acquire the property and carry on the business
of the Manager, if at the time of such assignment a majority of the voting
stock of such assignee organization shall be owned, directly or indirectly, by
HCFP or unless such assignment is consented to in writing by the Company with
the consent of a majority of the Independent Directors. Such an assignment
shall bind the assignee hereunder in the same manner as the Manager is bound
hereunder and, to further evidence its obligations hereunder the assignee shall
execute and deliver to the Company a counterpart of this Agreement. This
Agreement shall not be assignable by the Company without the consent of the
Manager, except in the case of assignment by the Company to a REIT or other
organization which is a successor (by merger, consolidation or purchase of
assets) to the Company, in which case such successor organization shall be
bound hereunder and by the terms of said assignment in the same manner as the
Company is bound hereunder.
(b) Notwithstanding the foregoing, the Company and the Manager agree that
the Manager may enter into a subcontract with any third party, which third
party shall be approved by the Company's Board of Directors, pursuant to which
such third party will provide such of the management services required
hereunder as the Manager deems necessary, and the Company hereby consents to
the entering into and performance of such subcontract; provided, however, that
no such arrangement between the Manager and any third party shall relieve the
Manager of any of its duties or obligations hereunder.
SECTION 16. Action Upon Termination. From and after the effective date of
termination of this Agreement pursuant to Sections 13 or 14 hereof, the Manager
shall not be entitled to compensation for further services hereunder, but shall
be paid all compensation accruing to the date of termination and, if such
termination is not pursuant to Section 14, the termination fee determined
pursuant to Section 13. The Manager shall forthwith upon such termination
deliver to the Board of Directors all funds and property, documents, corporate
records, reports and software of the Company or any Subsidiary of the Company
then in the custody of Manager.
SECTION 17. Release of Money or Other Property Upon Written Request. The
Manager agrees that any money or other property of the Company and its
Subsidiaries held by the Manager under this Agreement shall be held by the
Manager as custodian for the Company and its Subsidiaries, and the Manager's
records shall be appropriately marked clearly to reflect the ownership of such
money or other property by the Company and its Subsidiaries. Upon the receipt
by the Manager of a written request signed by a duly authorized officer of the
Company requesting the Manager to release to the Company or any such
Subsidiary, respectively, any money or other property then held by the Manager
for the account of the Company or any such Subsidiary under this Agreement, the
Manager shall release such money or other property to the Company or any of its
Subsidiaries within a reasonable period of time, but in no event later than 60
days following such request. The Manager shall not be liable to the Company,
the Independent Directors, or the Company's or any of its Subsidiaries'
stockholders or partners for any acts performed or omissions to act by the
Company or any of its Subsidiaries in connection with the money or other
property released to the Company or any of its Subsidiaries in accordance with
this Section. The Company and its Subsidiaries jointly and severally shall
indemnify, defend and hold harmless the Manager, its directors, officers,
stockholders and
10
<PAGE> 11
employees against any and all expenses, losses, damages, liabilities, demands,
charges and claims of any nature whatsoever, which arise in connection with the
Manager's release of such money or other property to the Company or any of its
Subsidiaries in accordance with the terms of this Section 17 of this Agreement.
Indemnification pursuant to this provision shall be in addition to any right of
the Manager to indemnification under Section 11 of this Agreement.
SECTION 18. Representations and Warranties.
(a) The Company hereby represents and warrants to the Manager as follows:
(i) The Company is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which
it is now engaged and is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership or
lease of property or the conduct of its business requires such
qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect
on the business operations, assets or financial condition of the Company
and its Subsidiaries, taken as a whole. The Company does not do business
under any fictitious business name.
(ii) The Company has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize this Agreement
on the terms and conditions hereof and the execution, delivery and
performance of this Agreement and all obligations required hereunder. No
consent of any other person including, without limitation, stockholders
and creditors of the Company, and no license, permit, approval or
authorization of, exemption by, notice or report to, or registration,
filing or declaration with, any governmental authority is required by the
Company in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and delivered
by a duly authorized officer of each of the Company, and this Agreement
constitutes, and each instrument or document required hereunder when
executed and delivered hereunder will constitute, the legally valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and
the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Company or any
of its subsidiaries, or any order, judgment, award or decree of any
court, arbitrator or governmental authority binding on the Company or any
of its Subsidiaries, or the Governing Instruments of, or any securities
issued by the Company or any of its Subsidiaries, or of any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking
to which the Company or any of its Subsidiaries is a party or by which
the Company or any of its Subsidiaries, or any of their respective
assets, may be bound, the violation of which would have a material
adverse effect on the business operations, assets or financial
11
<PAGE> 12
condition of the Company and its Subsidiaries, taken as a whole ' and
will not result in, or require, the creation or imposition of any lien on
any of its property, assets or revenues pursuant to the provisions of any
such mortgage, indenture, lease, contract or other agreement, instrument
or undertaking.
(b) The Manager hereby represents and warrants to the Company as follows:
(i) the Manager is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which
it is now engaged and is duly qualified to do business and is in good
standing under the laws of each jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualifications,
except for failures to be so qualified, authorized or licensed that could
not in the aggregate have a material adverse effect on the business
operations, assets or financial condition of the Manager and its
subsidiaries, taken as a whole. The Manager does not do business under
any fictitious name.
(ii) The Manager has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize, execute and
deliver this Agreement and perform all obligations required hereunder. No
consent of any other person including, without limitation, stockholders
and creditors of the Manager, and no license, permit, approval or
authorization of, exemption by, notice or report to, or registration,
filing or declaration with, any governmental authority is required by the
Manager in connection with this Agreement or the execution and delivery
of this Agreement and the performance all obligations required hereunder.
This Agreement has been, and each instrument or document required
hereunder will be, executed and delivered by a duly authorized agent of
the Manager, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Manager
enforceable against the Manager in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and
the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Manager, or
any order, judgment, award or decree of any court, arbitrator or
governmental authority binding on the Manager, or the Governing
Instruments of, or any securities issued by, the Manager or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Manager is a party or by which the Manager or
any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its subsidiaries, taken as a whole, and will
not result in, or require, the creation or imposition of any lien on any
of its property, assets or revenues pursuant to the provisions of any
such mortgage, indenture, lease, contract or other agreement, instrument
or undertaking.
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SECTION 19. Notices. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Telephone: (301) 664-9823
Fax: (301) 664-9880
(b) If to the Manager:
HCFP REIT Management, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Telephone: (301) 664-9823
Fax: (301) 664-9880
with a copy given in the manner prescribed above to:
G. William Speer, Esq.
Powell, Goldstein, Frazer & Murphy, LLP
191 Peachtree Street, N.E.
Sixteenth Floor
Atlanta, Georgia 30303
Either party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.
SECTION 20. Entire Agreement. This Agreement contains the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof. This Agreement
may not be modified or amended other than by an agreement in writing.
13
<PAGE> 14
SECTION 21. Binding Nature of Agreement; Successors and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
SECTION 22. Third Party Beneficiaries. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 23. Schedules and Exhibits. All Schedules and Exhibits referred to
herein or attached hereto are hereby incorporated by reference into, and made a
part of, this Agreement.
SECTION 24. Indulgences, Not Waivers. Neither the failure nor any delay on
the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted
such waiver.
SECTION 25. Costs and Expenses. Each party hereto shall bear its own costs
and expenses (including the fees and disbursements of counsel and accountants)
incurred in connection with the negotiations and preparation of and the closing
under this Agreement, and all matters incidental thereto.
SECTION 26. Titles Not to Affect Interpretation. The titles of paragraphs
and subparagraphs contained in this Agreement are for convenience only, and
they neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
SECTION 27. Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 28. Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other or others of them may be invalid or unenforceable in whole
or in part.
SECTION 29. Gender. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
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SECTION 30. Computation of Interest. Interest will be computed on the
basis of a 360-day year consisting of twelve months of thirty days each.
SECTION 31. Professional Fees. If any party becomes involved in litigation
(including bankruptcy proceedings) or arbitration against any other party
arising out of or relating to this Agreement, the court in the litigation
(including bankruptcy proceedings) or arbitrator in the arbitration shall award
legal expenses (including, but not limited to attorneys' fees, court costs and
other legal expenses) to the prevailing party. The award for legal expenses
shall not be computed in accordance with any court schedule, but shall be as
necessary to fully reimburse all attorneys' fees and other legal expenses
actually incurred in good faith, regardless of the size of the judgment, it
being the intention of the parties to fully compensate for all the attorneys'
fees and other legal expenses paid in good faith. For the purpose of this
Agreement, the terms "attorneys' fees" or "attorneys' fees and costs" shall
mean the reasonable fees and expenses of counsel to the parties hereto
(including, without limitation, the cost of in-house counsel employed by such
party, such cost to be determined by imputing a cost for those services
commensurate with such counsel's skills and experience), which may include
printing, duplicating and other expenses, air freight charges, and fees billed
for law clerks, paralegals, librarians and others not admitted to the bar but
performing services under the supervision of an attorney. The terms "attorneys'
fees" or "attorneys' fees and costs" shall also include, without limitation,
all reasonable fees and expenses incurred with respect to appeals, arbitrations
and bankruptcy proceedings, and whether or not any action or proceeding is
brought with respect to the matter for which said fees and expenses were
incurred.
SECTION 32. Controlling Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the
State of Maryland, notwithstanding any Maryland or other conflict-of-law
provisions to the contrary.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
HEALTHCARE FINANCIAL
PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
-----------------------------------
Executive Vice President and Chief
Financial Officer
HCFP REIT MANAGEMENT, INC.
By: /s/ Edward P. Nordberg, Jr.
-----------------------------------
Executive Vice President and Chief
Financial Officer
16
<PAGE> 1
EXHIBIT 10.2
AGREEMENT
OF LIMITED PARTNERSHIP
OF
HCFP REIT OPERATING PARTNERSHIP, L.P.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINED TERMS...........................................................................................1
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION.............................................................9
2.01 Organization...................................................................................9
2.02 Name, Office and Registered Agent..............................................................9
2.03 Partners.......................................................................................9
2.04 Term and Dissolution..........................................................................10
2.05 Filing of Certificate and Perfection of Limited Partnership...................................10
2.06 Certificates Describing Partnership Units.....................................................10
ARTICLE III
BUSINESS OF THE PARTNERSHIP............................................................................11
3.01 Purpose and Business..........................................................................11
3.02 Powers........................................................................................12
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS.....................................................................12
4.01 Capital Contributions.........................................................................12
4.02 Additional Capital Contributions and Issuances of Additional
Partnership Interests.....................................................................12
4.03 Additional Funding............................................................................15
4.04 Capital Accounts..............................................................................15
4.05 Percentage Interests..........................................................................15
4.06 No Interest on Contributions..................................................................16
4.07 Return of Capital Contributions...............................................................16
4.08 No Third Party Beneficiary....................................................................16
4.09 No Preemptive Rights..........................................................................16
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS......................................................................17
5.01 Allocation of Profit and Loss.................................................................17
5.02 Distribution of Cash..........................................................................19
5.03 REIT Distribution Requirements................................................................21
5.04 Distributions in Kind.........................................................................21
5.05 Limitations on Return of Capital Contributions................................................21
5.06 Distributions upon Liquidation................................................................21
5.07 Substantial Economic Effect...................................................................22
5.08 Allocations to Reflect Issuance of Additional Partnership Interests...........................22
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VI
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER..................................................22
6.01 Management of the Partnership.................................................................22
6.02 Delegation of Authority.......................................................................25
6.03 Indemnification and Exculpation of Indemnitees................................................25
6.04 Liability of the General Partner..............................................................27
6.05 Reimbursement of General Partner..............................................................28
6.06 Outside Activities............................................................................28
6.07 Employment or Retention of Affiliates.........................................................28
6.08 General Partner Participation.................................................................29
6.09 Title to Partnership Assets...................................................................29
6.10 Miscellaneous.................................................................................29
ARTICLE VII
CHANGES IN GENERAL PARTNER.............................................................................30
7.01 Transfer of the General Partner's Partnership Interest........................................30
7.02 Admission of a Substitute or Additional General Partner.......................................31
7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner...................32
7.04 Removal of General Partner....................................................................33
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS.........................................................34
8.01 Management of the Partnership.................................................................34
8.02 Power of Attorney.............................................................................34
8.03 Limitation on Liability of Limited Partners...................................................35
8.04 Redemption Right..............................................................................35
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS ............................................................37
9.01 Purchase of Investment........................................................................37
9.02 Restrictions on Transfer of Limited Partnership Interests.....................................38
9.03 Admission of Substitute Limited Partner.......................................................40
9.04 Rights of Assignees of Partnership Interests..................................................41
9.05 Effect of Bankruptcy, Death, Incompetence of
Termination of a Limited Partner..........................................................41
9.06 Joint Ownership of Interests..................................................................42
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS.............................................................42
10.01 Books and Records.............................................................................42
10.02 Custody of Partnership Funds; Bank Accounts...................................................43
10.03 Fiscal and Taxable Year.......................................................................43
10.04 Annual Tax Information and Report.............................................................43
</TABLE>
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<TABLE>
<S> <C> <C> <C>
10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments.................................43
10.06 Reports to Limited Partners...................................................................44
ARTICLE XI
AMENDMENT OF AGREEMENT.................................................................................45
ARTICLE XII
GENERAL PROVISIONS.....................................................................................46
12.01 Notices.......................................................................................46
12.02 Survival of Rights............................................................................46
12.03 Additional Documents..........................................................................46
12.04 Severability..................................................................................46
12.05 Entire Agreement..............................................................................46
12.06 Pronouns and Plurals..........................................................................46
12.07 Headings......................................................................................46
12.08 Counterparts..................................................................................46
12.09 Governing Law.................................................................................46
12.10 Partner Representations and Warranties........................................................47
12.11 Waiver........................................................................................47
12.12 Partition.....................................................................................47
</TABLE>
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
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<PAGE> 5
AGREEMENT OF LIMITED PARTNERSHIP
OF
HCFP REIT OPERATING PARTNERSHIP, L.P.
RECITALS
HCFP REIT Operating Partnership, L.P. (the "Partnership") is being
formed as a limited partnership under the laws of the State of Delaware
pursuant to a Certificate of Limited Partnership filed with the Office of the
Secretary of State of the State of Delaware effective as of April 9, 1998. This
Agreement of Limited Partnership (the "Agreement") is entered into this 6th day
of May 1998 among HealthCare Financial Partners REIT, Inc., a Maryland
corporation (the "General Partner") and HCFP Limited Inc., a Maryland
corporation (the "Initial Limited Partner").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
"Act" means the Delaware Revised Uniform Limited Partnership Act, as
it may be amended from time to time.
"Additional Funds" has the meaning set forth in Section 4.03 hereof.
"Additional Limited Partner" means any Person admitted to the
Partnership as a Limited Partner pursuant to Section 4.02 hereof.
"Additional Securities" means any additional REIT Shares (other than
REIT Shares issued in connection with a redemption pursuant to Section 8.05
hereof) or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase REIT Shares, as set forth in
Section 4.02(a)(ii).
<PAGE> 6
"Adjusted Capital Account Deficit" means, with respect to any partner,
the deficit balance, if any, in such Partner's Capital account as of the end of
the relevant fiscal year, after giving effect to the following adjustments:
(i) Credit to such Capital Account any amounts which such Partner is
obligated to restore pursuant to any provisions of this Agreement or is
otherwise treated as being obligated to restore under Regulations Section
1.704-1(b)(2)(ii)(c) or is deemed to be obligated to restore pursuant to the
penultimate sentence of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5);
and
(ii) Debit to such Capital Account the items described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704(b)(2)(ii)(d) and shall
be interpreted consistently therewith.
"Administrative Expenses" means (i) all administrative and operating
costs and expenses incurred by the Partnership, (ii) those administrative costs
and expenses of the General Partner, including any salaries or other payments
to directors, trustees, officers or employees of the General Partner, and any
accounting and legal expenses of the General Partner, which expenses, the
Partners agree, are expenses of the Partnership and not the General Partner,
and (iii) to the extent not included in clause (ii) above, REIT Expenses;
PROVIDED, HOWEVER, that Administrative Expenses shall not include any
administrative costs and expenses incurred by the General Partner that are
attributable to Properties or partnership interests in a Subsidiary Partnership
that are owned by the General Partner directly.
"Affiliate" means with respect to any Person, (i) any Person that,
directly or indirectly, controls or is controlled by or is under common control
with such Person, (ii) any other Person that owns, beneficially, directly or
indirectly, 10% or more of the outstanding capital stock, shares or equity
interests of such Person, or (iii) any officer, director, trustee, employee,
partner or trustee of such Person or any Person controlling, controlled by or
under common control with such Person (excluding trustees and persons serving
in similar capacities who are not otherwise an Affiliate of such Person). For
the purposes of this definition, "control" (including the correlative meanings
of the terms "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, through the ownership of voting securities, partnership or limited
liability company interests or otherwise.
"Agreed Value" means the fair market value of a Partner's non-cash
Capital Contribution as of the date of contribution as agreed to by such
Partner and the General Partner. The names and addresses of the Partners,
number of Partnership Units issued to each Partner, and the Agreed Value of
non-cash Capital Contributions as of the date of contribution is set forth on
EXHIBIT A.
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<PAGE> 7
"Agreement" means this Agreement of Limited Partnership, as it may be
amended, supplemented or restated from time to time.
"Capital Account" has the meaning provided in Section 4.04 hereof.
"Capital Contribution" means the total amount of cash, cash
equivalents, and the Agreed Value of any Property or other asset contributed or
agreed to be contributed, as the context requires, to the Partnership by each
Partner pursuant to the terms of the Agreement. Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a
predecessor holder of the Partnership Interest of such Partner.
"Cash Amount" means an amount of cash equal to the Value of the REIT
Shares Amount on the date of receipt by the General Partner of a Notice of
Redemption. Notwithstanding the foregoing, if the General Partner raises the
Cash Amount through an offering of securities, borrowings or otherwise, the
cash Amount shall be reduced by an amount equal to the expenses incurred by the
General Partner in connection with raising such funds (to the extent that such
expenses are allocable to funds used to pay the Cash Amount); provided,
however, that the total reduction of the Cash Amount for such expenses shall
not exceed five percent (5%) of the total Cash Amount as determined prior to
reduction for such expenses.
"Certificate" means any instrument or document that is required under
the laws of the State of Delaware, or any other jurisdiction in which the
Partnership conducts business, to be signed or sworn to by one or more Partners
of the Partnership (either by themselves or pursuant to the power-of-attorney
granted to the General Partner in Section 8.02 hereof) and filed for recording
in the appropriate public offices in the State of Delaware or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership,
to effect the admission, withdrawal, or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the State of Delaware or such other
jurisdiction.
"Charter" means the Articles of Incorporation of the General Partner,
as amended, filed with the Maryland State Department of Assessments and
Taxation, as amended, supplemented or restated from time to time.
"Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"Commission" means the U.S. Securities and Exchange Commission.
"Common Stock" means the common stock of the General Partner, $0.0001
par value per share.
"Conversion Factor" means 1.0, PROVIDED THAT, (a) in the event that
the General Partner (i) declares or pays a dividend on its outstanding REIT
Shares in REIT Shares or makes a distribution to all holders of its outstanding
REIT Shares in REIT Shares, (ii) subdivides its
3
<PAGE> 8
outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a
smaller number of REIT Shares, the Conversion Factor shall be adjusted by
multiplying the Conversion Factor by a fraction, the numerator of which shall
be the number of REIT Shares issued and outstanding on the record date for such
dividend, distribution, subdivision or combination (assuming for such purposes
that such dividend, distribution, subdivision or combination has occurred as of
such time), and the denominator of which shall be the actual number of REIT
Shares (determined without the above assumption) issued and outstanding on such
date; and (b) in the event that the General Partner declares or pays a dividend
or other distribution on its outstanding REIT Shares (other than (A) cash
dividends payable in the ordinary course of the General Partner's business or
(B) dividends payable in REIT Shares that give rise to an adjustment in the
Conversion Factor under subsection (a) hereof) and the Value of the REIT Shares
on the 20th trading day following the record date ("Record Date") for such
dividend or distribution (the "Post-Distribution Value") is less than the Value
of the REIT Shares on the business day immediately preceding such Record Date
(the "Pre-Distribution Value"), then the Conversion Factor in effect after the
Record Date shall be adjusted by multiplying the Conversion Factor in effect
prior to the Record Date by a fraction, the numerator of which is the
Pre-Distribution Value and the denominator of which is the Post-Distribution
Value, PROVIDED, HOWEVER, that no adjustment shall be made if (x) with respect
to any cash dividend or distribution with respect to REIT Shares, the
Partnership distributes with respect to each Partnership Unit an amount equal
to the amount of such dividend or distribution multiplied by the Conversion
Factor or (y) with respect to any dividend or distribution of securities or
property other than cash, the Partnership distributes with respect to each
Partnership Unit an amount of securities or other property equal to the amount
distributed with respect to each REIT Share multiplied by the Conversion Factor
or a partnership interest or other security readily convertible into such
securities or other property. Any adjustment to the Conversion Factor shall
become effective immediately after the effective date of such event retroactive
to the record date, if any, for such event; PROVIDED, HOWEVER, that if the
General Partner receives a Notice of Redemption after the record date, but
prior to the effective date of such dividend, distribution, subdivision or
combination, the Conversion Factor shall be determined as if the General
Partner had received the Notice of Redemption immediately prior to the record
date for such dividend, distribution, subdivision or combination.
"Event of Bankruptcy" as to any Person means the filing of a petition
for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of
1978, as amended, or similar provision of law of any jurisdiction (except if
such petition is contested by such Person and has been dismissed within 90
days); insolvency or bankruptcy of such Person as finally determined by a court
proceeding; filing by such Person of a petition or application to accomplish
the same or for the appointment of a receiver or a trustee for such Person or a
substantial part of his assets; commencement of any proceedings relating to
such Person as a debtor under any other reorganization, arrangement,
insolvency, adjustment of debt or liquidation law of any jurisdiction, whether
now in existence or hereinafter in effect, either by such Person or by another,
PROVIDED, HOWEVER, that if such proceeding is commenced by another, such Person
indicates his approval of such proceeding, consents thereto or acquiesces
therein, or such proceeding is contested by such Person and has not been
finally dismissed within 90 days.
4
<PAGE> 9
"General Partner" means HealthCare Financial Partners REIT, Inc., a
Maryland corporation, and any Person who becomes a substitute or additional
General Partner as provided herein, and any of their successors as General
Partner.
"General Partnership Interest" means a Partnership Interest held by
the General Partner that is a general partnership interest.
"HCFP" means HealthCare Financial Partners, Inc., a Delaware
corporation.
"Indemnitee" means (i) any Person made a party to a proceeding by
reason of its status as the General Partner or a director, trustee, officer or
employee of the Partnership or the General Partner, and (ii) such other Persons
(including the Manager and Affiliates of the General Partner or the
Partnership) as the General Partner may designate from time to time, in its
sole and absolute discretion.
"Independent Director" means a person who is (i) independent of
management of the General Partner, HCFP and the Manager, (ii) not employed by
or an officer of the Company, HCFP or the Manager, (iii) not an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Company, HCFP, the
Manager, or of any subsidiary of the Company, HCFP or the Manager, and (iv) not
a person who acts on a regular basis as an individual or representative of an
organization serving as a professional advisor, legal counsel or consultant to
the management of the Company, HCFP or the Manager.
"Initial Limited Partner" means HCFP Limited, Inc., a Maryland
corporation.
"Limited Partner" means any Person named as a Limited Partner on
EXHIBIT A attached hereto, and any Person who becomes a Substitute or
Additional Limited Partner, in such Person's capacity as a Limited Partner in
the Partnership.
"Limited Partnership Interest" means the ownership interest of a
Limited Partner in the Partnership at any particular time, including the right
of such Limited Partner to any and all benefits to which such Limited Partner
may be entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act. A Limited Partnership Interest may be expressed as a
number of Partnership Units.
"Loss" has the meaning provided in Section 5.01(f) hereof.
"Manager" means HCFP REIT Management, Inc., a Maryland corporation.
"Notice Of Redemption" means the Notice of Exercise of Redemption
Right substantially in the form attached as EXHIBIT B hereto.
"NYSE" means the New York Stock Exchange.
"Offer" has the meaning set forth in Section 7.01(c) hereof.
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<PAGE> 10
"Offering" means the initial offer and sale by the General Partner and
the purchase by the Underwriters (as defined in the Prospectus) of REIT Shares
for sale to the public.
"Partner" means any General Partner or Limited Partner.
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section
1.704-2(i)(5).
"Partnership" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor thereto.
"Partnership Interest" means an ownership interest in the Partnership
held by either a Limited Partner or the General Partner and includes any and
all benefits to which the holder of such a Partnership Interest may be entitled
as provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.
"Partnership Minimum Gain" has the meaning set forth in Regulations
Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the
amount of Partnership Minimum Gain is determined by first computing, for each
Partnership nonrecourse liability, any gain the Partnership would realize if it
disposed of the property subject to that liability for no consideration other
than full satisfaction of the liability, and then aggregating the separately
computed gains. A Partner's share of Partnership Minimum Gain shall be
determined in accordance with Regulations Section 1.704-2(g)(1).
"Partnership Record Date" means the record date established by the
General Partner for the distribution of cash pursuant to Section 5.02 hereof,
which record date shall be the same as the record date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
"Partnership Unit" means a fractional, undivided share of the
Partnership Interests of all Partners issued hereunder. The allocation of
Partnership Units among the Partners shall be as set forth on EXHIBIT A, as may
be amended from time to time.
"Percentage Interest" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The Percentage Interest of each Partner shall be as set forth on EXHIBIT A, as
may be amended from time to time.
"Person" means any individual, partnership, limited liability company,
corporation, joint venture, trust or other entity.
"Profit" has the meaning provided in Section 5.01(f) hereof.
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<PAGE> 11
"Property" means any loan, real property or other investment in which
the Partnership holds an ownership interest.
"Prospectus" means the final prospectus delivered to purchasers of
REIT Shares in the Offering.
"Redeeming Partner" has the meaning provided in Section 8.05(a)
hereof.
"Redemption Amount" means either the Cash Amount or the REIT Shares
Amount, as selected by the General Partner in its sole and absolute discretion
pursuant to Section 8.05(b) hereof.
"Redemption Right" has the meaning provided in Section 8.05(a) hereof.
"Regulations" means the Federal Income Tax Regulations issued under
the Code, as amended and as hereafter amended from time to time. Reference to
any particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any successor provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through
860 of the Code.
"REIT Expenses" means (i) costs and expenses relating to the formation
and continuity of existence and operation of the General Partner and any
Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be
included within the definition of General Partner), including taxes, fees and
assessments associated therewith, any and all costs, expenses or fees payable
to any trustee, officer, or employee of the General Partner, (ii) costs and
expenses relating to any public offering and registration of securities by the
General Partner and all statements, reports, fees and expenses incidental
thereto, including, without limitation, underwriting discounts and selling
commissions applicable to any such offering of securities, and any costs and
expenses associated with any claims made by any holders of such securities or
any underwriters or placement agents thereof, (iii) costs and expenses
associated with any repurchase of any securities by the General Partner, (iv)
costs and expenses associated with the preparation and filing of any periodic
or other reports and communications by the General Partner under federal, state
or local laws or regulations, including filings with the Commission, (v) costs
and expenses associated with compliance by the General Partner with laws, rules
and regulations promulgated by any regulatory body, including the Commission
and any securities exchange, (vi) costs and expenses associated with any 401(k)
plan, incentive plan, bonus plan or other plan providing for compensation for
the employees of the General Partner, (vii) costs and expenses incurred by the
General Partner relating to any issuing or redemption of Partnership Interests,
(viii) costs and expenses associated with the management of the General Partner
by the Manager, and (ix) all other operating or administrative costs of the
General Partner incurred in the ordinary course of its business on behalf of or
in connection with the Partnership.
"REIT Share" means a share of Common Stock of the General Partner (or
successor entity, as the case may be).
7
<PAGE> 12
"REIT Shares Amount" means a whole number of REIT Shares equal to the
product of the number of Partnership Units offered for redemption by a
Redeeming Partner, multiplied by the Conversion Factor as adjusted to and
including the Specified Redemption Date (rounded down to the nearest whole
number in the event such product is not a whole number); PROVIDED THAT in the
event the General Partner issues to all holders of REIT Shares rights, options,
warrants or convertible or exchangeable securities entitling the shareholders
to subscribe for or purchase REIT Shares, or any other securities or property
(collectively, the "rights"), and the rights have not expired at the Specified
Redemption Date, then the REIT Shares Amount shall also include the rights
issuable to a holder of the REIT Shares Amount of REIT Shares on the record
date fixed for purposes of determining the holders of REIT Shares entitled to
rights.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Service" means the Internal Revenue Service.
"Share Incentive Plans" means the HealthCare Financial Partners REIT,
Inc. 1998 Stock Incentive Plan, as amended from time to time, or any stock
incentive plan adopted in the future by the General Partner.
"Specified Redemption Date" means (i) with respect any Notice of
Redemption received by the General Partner after one year following the closing
of the Offering and before one year and one month following the closing of
Offering, the first business day that is at least 30 calendar days after the
receipt by the General Partner of the Notice of Redemption and (ii) with
respect any Notice of Redemption received by the General Partner after one year
and one month following the closing of Offering, the first business day that is
at least 15 calendar days after the receipt by the General Partner of the
Notice of Redemption.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"Subsidiary Partnership" means any partnership (or limited liability
company) of which the partnership interests therein are owned by the General
Partner or a wholly-owned subsidiary of the General Partner.
"Substitute Limited Partner" means any Person admitted to the
Partnership as a Limited Partner pursuant to Section 9.03 hereof.
"Surviving General Partner" has the meaning set forth in Section
7.01(d) hereof.
"Transaction" has the meaning set forth in Section 7.01(c) hereof.
"Transfer" has the meaning set forth in Section 9.02(a) hereof.
"Value" means, with respect to any security, the average of the
"closing price" of such security for the ten consecutive trading days
immediately preceding the date of such valuation.
8
<PAGE> 13
The "closing price" for each such trading day means the last sale price,
regular way on such day, or, if no such sale takes place on that day, the
average of the closing bid and asked prices on that day, regular way, in either
case as reported on the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York Stock
Exchange, or if the securities are not so listed or admitted to trading, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
(including the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation System) on which the securities are listed or
admitted to trading or, if the securities are not so listed or admitted to
trading, the last quoted price or, if not quoted, the average of the high bid
and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal automated quotation system
then in use or, if the securities are not so quoted by any such system, the
average of the closing bid and asked prices as furnished by a professional
market maker selected by the General Partner making a market in the securities,
or, if there is no such market maker or such closing prices otherwise are not
available, the fair market value of the securities as of such day, as
determined by the General partner in its sole discretion.
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01 ORGANIZATION. The Partners hereby agree to organize the
Partnership pursuant to the Act and upon the terms and conditions set forth in
this Agreement.
2.02 NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership
is HCFP REIT Operating Partnership, L.P. The specified office and place of
business of the Partnership shall be 2 Wisconsin Circle, Fourth Floor, Chevy
Chase, Maryland 20815. The General Partner may at any time change the name of
the Partnership or the location of its specified office and place of business,
PROVIDED the General Partner gives notice to the Partners of any such change.
The Partnership may maintain offices at such other place or places as the
General Partner deems advisable. The initial registered agent is [THE
CORPORATION TRUST COMPANY, CORPORATION TRUST CENTER, 1209 ORANGE STREET,
WILMINGTON, NEW CASTLE COUNTY, DELAWARE 19801]. The sole duty of the registered
agent as such is to forward to the Partnership any notice that is served on him
as registered agent.
2.03 PARTNERS.
(a) The General Partner of the Partnership is HealthCare
Financial Partners REIT, Inc., a Maryland corporation. Its principal place of
business is the same as that of the Partnership.
(b) The Initial Limited Partner is HCFP Limited Inc., a
Maryland corporation, and the Limited Partners are those Persons identified as
Limited Partners on EXHIBIT A hereto, as amended from time to time.
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<PAGE> 14
2.04 TERM AND DISSOLUTION.
(a) The term of the Partnership shall continue in full force
and effect until December 31, 2098, except that the Partnership shall be
dissolved upon the first to occur of any of the following events:
(i) The occurrence of an Event of Bankruptcy as to a
General Partner or the dissolution, death, removal, or withdrawal of a
General Partner unless the business of the Partnership is continued
pursuant to Section 7.03(b) hereof; PROVIDED THAT if a General Partner
is on the date of such occurrence a partnership, the dissolution of
such General Partner as a result of the dissolution, death,
withdrawal, removal or Event of Bankruptcy of a partner in such
partnership shall not be an event of dissolution of the Partnership if
the business of such General Partner is continued by the remaining
partner or partners, either alone or with additional partners, and
such General Partner and such partners comply with any other
applicable requirements of this Agreement;
(ii) The passage of 90 days after the sale or other
disposition of all or substantially all of the assets of the
Partnership (PROVIDED THAT if the Partnership receives an installment
obligation as consideration for such sale or other disposition, the
Partnership shall continue, unless sooner dissolved under the
provisions of this Agreement, until such time as such note or notes
are paid in full); or
(iii) At any time after 13 months following the closing of
the Offering, the election by the General Partner that the Partnership
should be dissolved.
(b) Upon dissolution of the Partnership (unless the business of
the Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and
apply and distribute the proceeds thereof in accordance with Section 5.06
hereof. Notwithstanding the foregoing, the liquidating General Partner may
either (i) defer liquidation of, or withhold from distribution for a reasonable
time, any assets of the Partnership (including those necessary to satisfy the
Partnership's debts and obligations), or (ii) distribute the assets to the
Partners in kind.
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
2.06 CERTIFICATES DESCRIBING PARTNERSHIP UNITS. The General Partner,
at its option, may issue a certificate summarizing the terms of each Limited
Partner's interest in the Partnership, including the number of Partnership
Units owned and the Percentage Interest represented by such Partnership Units
as of the date of such certificate. Any such certificate (i)
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<PAGE> 15
shall be in form and substance as approved by the General Partner, (ii) shall
not be negotiable and (iii) shall bear a legend to the following effect:
This certificate is not negotiable. The Partnership
Units represented by this certificate are governed
by and transferable only in accordance with the
provisions of the Agreement of Limited Partnership
of HCFP REIT Operating Partnership, L.P., as amended
from time to time. Upon surrender to the General
Partner of any such certificate, accompanied by proper
evidence of authority to transfer, the General Partner
shall cancel the old certificate, issue a new
certificate to the Person entitled thereto and record
the transaction upon its books. The General Partner
may issued a new certificate or certificates in place
of any certificate or certificates previously issued,
which previously-issued certificate or certificates
are alleged to have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the
owner claiming the certificate or certificates to
be lost, stolen or destroyed. When issuing such new
certificate or certificates, the General Partner may,
in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or
its legal representative, to give the Partnership a
bond in such sum as the General Partner may direct as
indemnity against any claim that may be made against
the Partnership with respect to the certificate or
certificates alleged to have been lost, stolen or
destroyed.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
3.01 PURPOSE AND BUSINESS. The purpose and nature of the business to
be conducted by the Partnership is (i) to conduct any business that may be
lawfully conducted by a limited partnership organized pursuant to the Act,
including, without limitation, to acquire, hold own, develop, construct,
improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange,
and otherwise dispose of or deal with real and personal property of all kinds,
PROVIDED, HOWEVER, that such business shall be limited to and conducted in such
a manner as to permit the General Partner at all times to qualify as a REIT,
unless the General Partner otherwise ceases to qualify as a REIT, (ii) to enter
into any partnership, joint venture or other similar arrangement to engage in
any of the foregoing or the ownership of interests in any entity engaged in any
of the foregoing and (iii) to do anything necessary, appropriate, proper,
advisable, desirable, convenient or incidental to the foregoing. In connection
with the foregoing, and without limiting the General Partner's right in its
sole and absolute discretion to cease qualifying as a REIT, the Partners
acknowledge that the General Partner's current status as a REIT and the
avoidance of income and excise taxes on the General Partner inures to the
benefit
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of all the Partners and not solely to the General Partner. Notwithstanding the
foregoing, the Limited Partners agree that the General Partner may terminate
its status as a REIT under the Code at any time to the full extent permitted
under its Charter. The General Partner shall also be empowered to do any and
all acts and things necessary or prudent to ensure that the Partnership will
not be classified as a "publicly traded partnership" for purposes of Section
7704 of the Code.
3.02 POWERS. Subject to all of the terms, covenants, conditions and
limitations contained in this Agreement and any other agreement entered into by
the Partnership, the Partnership shall have full power and authority to do any
and all acts and things necessary, appropriate, proper, advisable, desirable,
incidental to or convenient for the furtherance and accomplishment of the
purposes and business described herein and for the protection and benefit of
the Partnership, including, without limitation, full power and authority,
directly or through its ownership interest in other entities, to enter into,
perform and carry out contract of any kind, borrow money and issue evidences of
indebtedness, whether or not secured by mortgage, deed of trust, pledge or
other lien, acquire and develop real property, and lease, sell, transfer or
otherwise dispose of real property; PROVIDED, HOWEVER, that the Partnership
shall not take, or refrain from taking, any action which, in the judgment of
General Partner, in its sole and absolute discretion, (i) could adversely
affect the ability of the General Partner to achieve or maintain qualifications
a REIT, (ii) could subject the General Partner to any additional taxes under
Section 857, Section 860E(e) or Section 4981 of the Code, (iii) could cause the
Partnership to be classified as a "publicly traded partnership" within the
meaning of Section 7704 of the Code , or (iv) could violate any law or
regulation of any governmental body or agency having jurisdiction over the
General Partner or its securities, unless such action (or inaction) shall have
been specifically consented to by the General Partner in writing.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 CAPITAL CONTRIBUTIONS. The General Partner and the Limited
Partners have made capital contributions to the Partnership in exchange for the
Partnership Units and Partnership Interests set forth opposite their names on
EXHIBIT A, as amended from time to time. The General Partner shall have the
authority to adjust the Percentage Interests of the Partners set forth on
EXHIBIT A from time to time, to the extent necessary to reflect accurately
Capital Contributions, admissions of Additional Limited Partners, the
redemption or transfer of any Partnership Interest or similar events having an
effect on a Partner's Percentage Interest.
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP INTERESTS. Except as provided in this Section 4.02, in Section
4.03, or Section 5.02(a), the Partners shall have no right or obligation to
make any additional Capital Contributions or loans to the Partnership. The
General Partner may contribute additional capital to the Partnership, from time
to time, and receive additional Partnership Interests in respect thereof, in
the manner contemplated in this Section 4.02; provided, however, that the
General Partner in making any determination with respect to additional Capital
Contributions shall arrange, to the extent possible, so that additional Capital
Contributions are
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made in a manner that avoids classification of the Partnership as a "investment
company" within the meaning of Sections 721(b) and 351(e)(1) of the Code.
(a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(i) GENERAL. The General Partner is hereby
authorized to cause the Partnership to issue such additional Partnership Units
or other Partnership Interests for any Partnership purpose at any time or from
time to time, to the Partners (including the General Partner) or to other
Persons for such consideration and on such terms and conditions as shall be
established by the General Partner in its sole and absolute discretion, all
without the approval of any Limited Partners. Any additional Partnership
Interests issued thereby may be issued in one or more classes, or one or more
series of any of such classes, with such designations, preferences and
relative, participating, optional or other special rights, powers and duties,
including rights, powers and duties senior to Limited Partnership Interests,
all as shall be determined by the General Partner in its sole and absolute
discretion and without the approval of any Limited Partner, subject to Delaware
law, including, without limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or series of
Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; PROVIDED, HOWEVER, that no additional
Partnership Interests shall be issued to the General Partner unless
(1) (A) the additional Partnership Interests are issued
in connection with an issuance of REIT Shares of or other interests in the
General Partner, which shares or interests have designations, preferences and
other rights, all such that the economic interests are substantially similar to
the designations, preferences and other rights of the additional Partnership
Interests issued to the General Partner by the Partnership in accordance with
this Section 4.02 and (B) the General Partner shall make a Capital Contribution
to the Partnership in an amount equal to the proceeds raised in connection with
the issuance of such shares of stock of or other interests in the General
Partner;
(2) the additional Partnership Interests are issued in
exchange for property (including cash) owned by the General Partner with a fair
market value, as determined by the General Partner, in good faith, equal to the
value of the Partnership Interests; or
(3) the additional Partnership Interests are issued to
all Partners in proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such
issuance is in the best interests of the General Partner and the Partnership.
(ii) UPON ISSUANCE OF ADDITIONAL SECURITIES. The
General Partner shall not issue any additional REIT Shares (other than REIT
Shares issued in connection with a redemption pursuant to Section 8.05 hereof)
or rights, options, warrants or
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convertible or exchangeable securities containing the right to subscribe for or
purchase REIT Shares (collectively, "Additional Securities") other than to all
holders of REIT Shares, unless (A) the General Partner shall cause the
Partnership to issue to the General Partner Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of the Partnership
having designations, preferences and other rights, all such that the economic
interests are substantially similar to those of the Additional Securities, and
(B) the General Partner contributes the proceeds from the issuance of such
Additional Securities and from any exercise of rights contained in such
Additional Securities to the Partnership; PROVIDED, HOWEVER, that the General
Partner is allowed to issue Additional Securities in connection with an
acquisition of a property to be held directly by the General Partner, but if
and only if, such direct acquisition and issuance of Additional Securities have
been approved and determined to be in the best interests of the General Partner
and the Partnership by a majority of the Independent Directors. Without
limiting the foregoing, the General Partner is expressly authorized to issue
Additional Securities for less than fair market value, and to cause the
Partnership to issue to the General Partner corresponding Partnership
Interests, so long as (x) the General Partner concludes in good faith that such
issuance is in the best interests of the General Partner and the Partnership,
including without limitation, the issuance of REIT Shares and corresponding
Partnership Units pursuant to an employee share purchase plan providing for
employee purchases of REIT Shares at a discount from fair market value or
employee stock options that have an exercise price that is less than the fair
market value of the REIT Shares, either at the time of issuance or at the time
of exercise, and (y) the General Partner contributes all proceeds from such
issuance to the Partnership. For example, in the event the General Partner
issues REIT Shares for a cash purchase price and contributes all of the
proceeds of such issuance to the Partnership as required hereunder, the General
Partner shall be issued a number of additional Partnership Units equal to the
product of (A) the number of such REIT Shares issued by the General Partner,
the proceeds of which were so contributed, multiplied by (B) a fraction, the
numerator of which is 100%, and the denominator of which is the Conversion
Factor in effect on the date of such contribution.
(b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE
OF REIT SHARES. Except as provided in Section 4.02(d), in connection with any
and all issuances of REIT Shares, the General Partner shall make Capital
Contributions to the Partnership of the proceeds therefrom, PROVIDED THAT if
the proceeds actually received and contributed by the General Partner, are less
than the gross proceeds of such issuance as a result of any underwriter's
discount, commission, fee or other expenses paid or incurred in connection with
such issuance, then the General Partner shall be deemed to have made Capital
Contributions to the Partnership in the aggregate amount of the gross proceeds
of such issuance and the Partnership shall be deemed simultaneously to have
paid such offering expenses in accordance with Section 6.05 hereof and in
connection with the required issuance of additional Partnership Units to the
General Partner for such Capital Contributions pursuant to Section 4.02(a)
hereof.
(c) If the General Partner shall repurchase shares of
any class of the General Partner's capital stock, the purchase price thereof
and all costs incurred in connection with such repurchase shall be reimbursed
to the General Partner by the Partnership pursuant to Section 6.05 hereof and
the General Partner shall cause the Partnership to cancel a number of
Partnership Units of the appropriate class held by the General Partner equal to
the quotient of the number of such shares of the General Partner's capital
stock divided by the Conversion Factor.
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(d) Notwithstanding Section 4.02(b) or any other provision of
this Section 4.02, the General Partner may decide, whether in connection with
the issuance of additional REIT Shares or otherwise, to defer making additional
Capital Contributions if the General Partner determines, in its sole
discretion, that such deferral is necessary in order to facilitate the
acquisition of property by the Partnership in the future by avoiding
classification of the Partnership as a "investment company" within the meaning
of Sections 721(b) and 351(e)(1) of the Code.
4.03 ADDITIONAL FUNDING. If the General Partner determines that it is
in the best interests of the Partnership to provide for additional Partnership
funds ("Additional Funds") for any Partnership purpose, the General Partner may
(i) cause the Partnership to obtain such funds from outside borrowings, or (ii)
elect to have the General Partner provide such Additional Funds to the
Partnership through loans or otherwise.
4.04 CAPITAL ACCOUNTS. A separate capital account (a "Capital
Account") shall be established and maintained for each Partner in accordance
with Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner
acquires an additional Partnership Interest in exchange for more than a DE
MINIMIS Capital Contribution, (ii) the Partnership distributes to a Partner
more than a DE MINIMIS amount of Partnership property as consideration for a
Partnership Interest, or (iii) the Partnership is liquidated within the meaning
of Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue
the property of the Partnership to its fair market value (as determined by the
General Partner, in its sole and absolute discretion, and taking into account
Section 7701(g) of the Code) in accordance with Regulations Section
1.704-1(b)(2)(iv)(f); PROVIDED, HOWEVER, that adjustments pursuant to clauses
(i) and (ii) above shall be made only if the General Partner determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership. When the Partnership's property
is revalued by the General Partner, the Capital Accounts of the Partners shall
be adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and
(g), which generally require such Capital Accounts to be adjusted to reflect
the manner in which the unrealized gain or loss inherent in such property (that
has not been reflected in the Capital Accounts previously) would be allocated
among the Partners pursuant to Section 5.01 if there were a taxable disposition
of such property for its fair market value (as determined by the General
Partner, in its sole and absolute discretion, and taking into account Section
7701(g) of the Code) on the date of the revaluation.
4.05 PERCENTAGE INTERESTS. If the number of outstanding Partnership
Units increases or decreases during a taxable year, each Partner's Percentage
Interest shall be adjusted by the General Partner effective as of the effective
date of each such increase or decrease to a percentage equal to the number of
Partnership Units held by such Partner divided by the aggregate number of
Partnership Units outstanding after giving effect to such increase or decrease.
If the Partners' Percentage Interests are adjusted pursuant to this Section
4.05, the Profits and Losses for the taxable year in which the adjustment
occurs shall be allocated between the part of the year ending on the day when
the Partnership's property is revalued by the General Partner and the part of
the year beginning on the following day either (i) as if the taxable year had
ended on the date of the adjustment or (ii) based on the number of days in each
part. The
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General Partner, in its sole and absolute discretion, shall determine which
method shall be used to allocate Profits and Losses for the taxable year in
which the adjustment occurs. The allocation of Profits and Losses for the
earlier part of the year shall be based on the Percentage Interests before
adjustment, and the allocation of Profits and Losses for the later part shall
be based on the adjusted Percentage Interests.
4.06 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to
interest on its Capital Contribution.
4.07 RETURN OF CAPITAL CONTRIBUTIONS. No Partner shall be entitled to
withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Partnership, except as specifically provided
in this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.08 NO THIRD PARTY BENEFICIARY. No creditor or other third party
having dealings with the Partnership shall have the right to enforce the right
or obligation of any Partner to make Capital Contributions or loans or to
pursue any other right or remedy hereunder or at law or in equity, it being
understood and agreed that the provisions of this Agreement shall be solely for
the benefit of, and may be enforced solely by, the parties hereto and their
respective successors and assigns. None of the rights or obligations of the
Partners herein set forth to make Capital Contributions or loans to the
Partnership shall be deemed an asset of the Partnership for any purpose by any
creditor or other third party, nor may such rights or obligations be sold,
transferred or assigned by the Partnership or pledged or encumbered by the
Partnership to secure any debt or other obligation of the Partnership or of any
of the Partners. In addition, it is the intent of the parties hereto that no
distribution to any Limited Partner shall be deemed a return of money or other
property in violation of the Act. However, if any court of competent
jurisdiction holds that, notwithstanding the provisions of this Agreement, any
Limited Partner is obligated to return such money or property, such obligation
shall be the obligation of such Limited Partner and not of the General Partner.
Without limiting the generality of the foregoing, a deficit Capital Account of
a Partner shall not be deemed to be a liability of such Partner nor an asset or
property of the Partnership.
4.09 NO PREEMPTIVE RIGHTS. No Person shall have any preemptive,
preferential or other similar right with respect to (i) additional Capital
Contributions or loans to the Partnership; or (ii) issuance or sale of any
Partnership Units or other Partnership Interests.
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ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.01 ALLOCATION OF PROFIT AND LOSS.
(a) GENERAL. After giving effect to the special allocations set
forth in Sections 5.01(b) through (d), Profit and Loss of the Partnership for
each fiscal year of the Partnership shall be allocated among the Partners as
follows:
(i) Profit shall be allocated first to the Partners (pro
rata, in proportion to the respective amounts allocable to each partner under
this clause (i)), until each Partner has received cumulative allocations of
Profit for the current fiscal year and all prior fiscal years under this clause
(i) equal to the cumulative distributions made to such partner under Section
5.02 hereof for the current fiscal year and all prior fiscal years, with any
remaining profit allocated among the Partners in proportion to their respective
Percentage Interests; and (ii) Loss shall be allocated among the Partners in
accordance with their respective Percentage Interests. Notwithstanding the
foregoing, any income or gain from the sale or other disposition of all or
substantially all of the assets of the Partnership (in one transaction or a
series of related transactions) shall be allocated among the Partners in a
manner so as to cause the positive Capital Account of each Partner (determined
after all other allocations of Profit, Loss and items of income, gain or loss,
including loss realized and recognized in connection with such sale or other
disposition, and all prior distributions under Section 5.02, but prior to any
distribution(s) of proceeds from such sale or other disposition, have been
reflected in such Capital Account) to be equal to an amount that would be
payable to such Partner if any amounts to be distributed in connection with
such sale or other disposition were distributed to the Partners in accordance
with Section 5.02 hereof (the "Final Distribution Amounts"); provided further
that, in the event the amount of such income or gain exceeds the amount
necessary to cause the positive balance of each Partner's Capital Account to
equal such Partner's Final Distribution Amount, the excess income or gain shall
be allocated among the Partners in accordance with their Percentage Interests,
and in the event there is insufficient income or gain to cause the positive
balance of each Partner's Capital Account to equal such Partner's Final
Distribution Amount, then an amount equal to the total of the shortfalls for
all Partners shall be treated as if it were a loss incurred by the Partnership
that is allocated to all the Partners in accordance with their Percentage
Interests and shall serve to reduce the amount of income or gain otherwise
allocable to the Partners as set forth above. In addition, any loss from the
sale or other disposition of all or substantially all of the assets of the
Partnership (in one transaction or a series of related transactions) shall be
allocated among the Partners in a manner so as to cause the positive Capital
Account of each Partner (determined after all other allocations of Profit, Loss
and items of loss, income or gain, including income or gain realized and
recognized in connection with such sale or other disposition, and all
distributions under Section 5.02 and Section 5.06, including the Final
Distribution Amounts, if any, have been reflected in such Capital Account) to
be equal to zero; provided further that, in the event the amount of such loss
exceeds the amount necessary to cause each Partner's Capital Account to equal
zero, such excess loss shall be allocated among the Partners in accordance with
their Percentage Interests, and in the event that there is insufficient loss to
cause each Partner's Capital Account to equal zero, then an amount equal to the
loss
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required to reduce each Partner's Capital Account to zero shall be determined
tentatively for each Partner and that amount shall then be reduced for each
Partner by an amount equal to the difference between the total amount of loss
required to cause each Partner's Capital Account to equal zero and the actual
amount of loss available for allocation to the Partners times the respective
Partner's Percentage Interest in order to determine the actual amount of loss
allocable to each Partner.
(b) NONRECOURSE DEDUCTIONS; MINIMUM GAIN CHARGEBACK.
Notwithstanding any provision to the contrary, (i) any expense of the
Partnership that is a "nonrecourse deduction" within the meaning of Regulations
Section 1.704-2(b)(1) shall be allocated in accordance with the Partners'
respective Percentage Interests, (ii) any expense of the Partnership that is a
"partner nonrecourse deduction" within the meaning of Regulations Section
1.704-2(i)(2) shall be allocated to the Partner that bears the "economic risk
of loss" of such deduction in accordance with Regulations Section
1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum Gain
within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership
taxable year, then, subject to the exceptions set forth in Regulations Section
1.704-2(f)(2), (3), (4) and (5), items of gain and income shall be allocated
among the Partners in accordance with Regulations Section 1.704-2(f) and the
ordering rules contained in Regulations Section 1.704-2(j), and (iv) if there
is a net decrease in Partner Nonrecourse Debt Minimum Gain within the meaning
of Regulations Section 1.704-2(i)(4) for any Partnership taxable year, then,
subject to the exceptions set forth in Regulations Section 1.704(2)(g), items
of gain and income shall be allocated among the Partners in accordance with
Regulations Section 1.704-2(i)(4) and the ordering rules contained in
Regulations Section 1.704-2(j). A Partner's "interest in partnership profits"
for purposes of determining its share of the nonrecourse liabilities of the
Partnership within the meaning of Regulations Section 1.752-3(a)(3) shall be
such Partner's Percentage Interest.
(c) QUALIFIED INCOME OFFSET. If a Partner receives in any
taxable year an adjustment, allocation, or distribution described in
subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that
causes or increases an Adjusted Capital Account Deficit after giving effect to
the allocations in Section 5.01(b) above, as determined in accordance with
Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated
specially for such taxable year (and, if necessary, later taxable years) items
of income and gain in an amount and manner sufficient to eliminate such deficit
Capital Account balance as quickly as possible as provided in Regulations
Section 1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income
or gain to a Partner in accordance with this Section 5.01(c), to the extent
permitted by Regulations Section 1.704-1(b), items of expense or loss shall be
allocated to such Partner in an amount necessary to offset the income or gain
previously allocated to such Partner under this Section 5.01(c).
(d) CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated
to a Limited Partner to the extent that such allocation would cause an Adjusted
Capital Account Deficit. Any Loss in excess of that limitation shall be
allocated to the General Partner. After the occurrence of an allocation of Loss
to the General Partner in accordance with this Section 5.01(d), to the extent
permitted by Regulations Section 1.704-1(b), items of income or gain shall
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be allocated to the General Partner in an amount necessary to offset the Loss
previously allocated to the General Partner under this Section 5.01(d).
(e) ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner
transfers any part or all of its Partnership Interest, the distributive shares
of the various items of Profit and Loss allocable among the Partners during
such fiscal year of the Partnership shall be allocated between the transferor
and the transferee Partner either (i) as if the Partnership's fiscal year had
ended on the date of the transfer, or (ii) based on the number of days of such
fiscal year that each was a Partner without regard to the results of
Partnership activities in the respective portions of such fiscal year in which
the transferor and the transferee were Partners. The General Partner, in its
sole and absolute discretion, shall determine which method shall be used to
allocate the distributive shares of the various items of Profit and Loss
between the transferor and the transferee Partner.
(f) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any
items of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially
allocated pursuant to Sections 5.01(b), 5.01(c), or 5.01(d). All allocations of
income, Profit, gain, Loss, and expense (and all items contained therein) for
federal income tax purposes shall be identical to all allocations of such items
set forth in this Section 5.01, except as otherwise required by Section 704(c)
of the Code and Regulations Section 1.704-1(b)(4). The General Partner shall
have the authority in its sole discretion to elect the method to be used by the
Partnership for allocating items of income, gain, and expense as required by
Section 704(c) of the Code and Regulations Section 1.704-3, including a method
that may result in a Partner receiving a disproportionately larger share of the
Partnership tax depreciation deductions, and such election shall be binding on
all Partners.
5.02 DISTRIBUTION OF CASH.
(a) The Partnership shall distribute cash on a quarterly (or,
at the election of the General Partner, more frequent) basis, in an amount
determined by the General Partner in its sole and absolute discretion, to the
Partners who are Partners on the Partnership Record Date with respect to such
quarter (or other distribution period) in accordance with their respective
Percentage Interests on the Partnership Record Date (other than the proceeds
from a sale or other disposition of all or substantially all of the assets of
the Partnership ( in one transaction or a series of related transactions),
which shall be distributed under Section 5.06); PROVIDED, HOWEVER, that if a
new or existing Partner acquires an additional Partnership Interest in exchange
for a Capital Contribution on any date other than a Partnership Record Date,
the cash distribution attributable to such additional Partnership Interest
relating to the Partnership Record Date next following the issuance of such
additional Partnership Interest shall be reduced in the proportion to (i) the
number of days that such additional Partnership Interest is held by such
Partner bears to (ii) the number of days between such Partnership Record Date
and the immediately preceding Partnership Record Date. The General Partner
shall use its reasonable discretion to distribute an amount of cash on a
quarterly (or, at the election of the General Partner, more frequent) basis so
that each Limited Partner receives under this Section 5.02, with
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respect to each quarter or more frequent period, a cash amount equal in value
to the aggregate cash dividends that would have been payable to such Limited
Partner in the event that such Limited Partner owned REIT Shares equal in
number to the REIT Shares Amount during such period of the Partnership (which
REIT Shares Amount shall be determined as if the Specified Redemption Date had
occurred prior to the dividends paid on any REIT Shares during such period)
reduced, as provided in the first sentence of this Section 5.02(a), to take
into account cash distributions attributable to any Partnership Interests
acquired in exchange for a Capital Contribution on any date other than a
Partnership Record Date; PROVIDED, HOWEVER, that in the event that the number
of Partnership Units held by the General Partner and any Limited Partner that
is a Subsidiary of the General Partner is less than the number of outstanding
REIT Shares of the General Partner, then all distributions of cash shall be
paid first to those Limited Partners (pro rata based upon such Limited
Partner's Partnership Units) that are not Subsidiaries of the General Partner
until the amount distributed to such Limited Partners equals the aggregate cash
dividends that would have been payable to such Limited Partners in the event
that such Limited Partners owned REIT Shares equal in number to the REIT Shares
Amount during such period of the Partnership. In the event that the amount of
cash available to the Partnership is not sufficient to enable the Partnership
to make distributions in the amounts provided in the last clause of the
immediately preceding sentence, the General Partner shall make a Capital
Contribution to the Partnership in an amount sufficient to allow the
Partnership to so make such distributions.
(b) Notwithstanding any other provision of this Agreement,
the General Partner is authorized to take any action that it determines to be
necessary or appropriate to cause the Partnership to comply with any
withholding requirements established under the Code or any other federal, state
or local law including, without limitation, pursuant to Sections 1441, 1442,
1445 and 1446 of the Code. To the extent that the Partnership is required to
withhold and pay over to any taxing authority any amount resulting from the
allocation or distribution of income to the Partner or assignee (including by
reason of Section 1446 of the Code), either (i) if the actual amount to be
distributed to the Partner (the "Distributable Amount") equals or exceeds the
amount required to be withheld by the Partnership (the "Withheld Amount"), the
Withheld Amount withheld shall be treated as a distribution of cash in the
amount of such withholding to such Partner, or (ii) if the Distributable Amount
is less than the Withheld Amount no amount shall be distributed to the Partner,
the Distributable Amount shall be treated as a distribution of cash to such
Partner, and the excess of the Withheld Amount over the Distributable Amount
shall be treated as a loan (a "Partnership Loan") from the Partnership to the
Partner on the day the Partnership pays over such excess to a taxing authority.
A Partnership Loan may be repaid, at the election of the General Partner in its
sole discretion, either (i) through withholding by the Partnership with respect
to subsequent distributions to the applicable Partner or assignee, or (ii) at
any time more than 12 months after a Partnership Loan arises, by cancellation
of Partnership Units with a value equal to the unpaid balance of the
Partnership Loan (including accrued interest). Any amounts treated as a
Partnership Loan pursuant to this Section 5.02(b) shall bear interest at the
lesser of (i) the base rate on corporate loans at large United States money
center commercial banks, as published from time to time in The Wall Street
Journal (or an equivalent successor publication), or (ii) the maximum lawful
rate of interest on such obligation, such interest to accrue from the date the
Partnership is deemed to extend the loan until such loan is repaid in full.
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(c) In no event may a Partner receive a distribution of cash
with respect to a Partnership Unit if such Partner is entitled to receive a
cash dividend as the holder of record of a REIT Share for which all or part of
such Partnership Unit has been or will be redeemed.
5.03 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use
its reasonable efforts to cause the Partnership to distribute amounts
sufficient to enable the General Partner to pay shareholder dividends that will
allow the General Partner to (i) meet its distribution requirement for
qualification as a REIT as set forth in Section 857 of the Code and (ii) avoid
any federal income or excise tax liability imposed by the Code.
5.04 DISTRIBUTIONS IN KIND. (a) Subject to Subsections (b) and (c)
hereof, no Partner shall be entitled to demand property other than cash in
connection with any distributions by the Partnership.
(b) If the General Partner decides to securitize mortgage loans
through the issuance of collateralized mortgage obligations, the General
Partner has the right to redeem a portion of its Partnership Interest in
exchange for the mortgage loans to be securitized. The portion of a Partnership
Interest redeemed pursuant to this Section will be determined based on the fair
market value of the mortgage loans and/or leases distributed to the General
Partner. Such fair market value will be determined by the General Partner, but
will be subject to the review of the Independent Directors.
(c) The General Partner has the authority to make in-kind
distributions of assets to the Partners. Any such distributions in kind shall
be distributed among the Partners in the same manner as set forth in Section
5.02 or 5.06, as applicable. The General Partner shall determine the fair
market value of any assets distributed in kind using such reasonable method of
valuation as it may adopt.
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding
any of the provisions of this Article V, no Partner shall have the right to
receive and the General Partner shall not have the right to make, a
distribution that includes a return of all or part of a Partner's Capital
Contributions, unless after giving effect to the return of a Capital
Contribution, the sum of all Partnership liabilities, other than the
liabilities to a Partner for the return of his Capital Contribution, does not
exceed the fair market value of the Partnership's assets.
5.06 DISTRIBUTIONS UPON LIQUIDATION. Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts and obligations
of the Partnership, including any Partner loans, any remaining assets of the
Partnership shall be distributed to all Partners with positive Capital Accounts
in accordance with their respective positive Capital Account balances. For
purposes of the preceding sentence, the Capital Account of each Partner shall
be determined after all adjustments have been made in accordance with Section
5.01 to reflect from Partnership operations and from all sales and dispositions
of all or any part of the Partnership's assets and all distributions under
Section 5.02 have been reflected. Any distributions pursuant to this Section
5.06 shall be made by the end of the Partnership's taxable year in which the
liquidation occurs
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(or, if later, within 90 days after the date of the liquidation). To the extent
deemed advisable by the General Partner, appropriate arrangements (including
the use of a liquidating trust) may be made to assure that adequate funds are
available to pay any contingent debts or obligations.
5.07 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners
that the allocations of Profit and Loss under the Agreement have substantial
economic effect (or be consistent with the Partners' interests in the
Partnership in the case of the allocation of losses attributable to nonrecourse
debt) within the meaning of Section 704(b) of the Code as interpreted by the
Regulations promulgated pursuant thereto. Article V and other relevant
provisions of this Agreement shall be interpreted in a manner consistent with
such intent.
5.08 ALLOCATIONS TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS. In the event that the Partnership issues additional Partnership
Interests under Section 4.02, the General Partner is authorized to make such
revisions to the provisions for allocation of Profit and Loss and distribution
of cash and other assets set forth above in this Article V as it determines are
necessary to reflect the issuance of such additional Partnership Interests.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.01 MANAGEMENT OF THE PARTNERSHIP.
(a) Except as otherwise expressly provided in this Agreement,
the General Partner shall have full, complete and exclusive discretion to
manage and control the business of the Partnership for the purposes herein
stated, and shall make all decisions affecting the business and assets of the
Partnership, and no Limited Partner shall have any right to participate in or
exercise control or management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner shall have full power and authority to do all things and perform all
acts specified in this Agreement or otherwise deemed necessary or desirable by
it to conduct the business of the Partnership, to exercise all Partnership
powers set forth in Section 3.02 hereof and to effectuate the Partnership
purposes set forth in Section 3.01 hereof, including, without limitation, to
take the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, operate, improve, alter,
demolish, lease, exchange and dispose of any real property and any other
property or assets including, but not limited to notes and mortgages, that the
General Partner determines are necessary or appropriate or in the best
interests of the business of the Partnership
(ii) to construct buildings and make other improvements on
the properties owned or leased by the Partnership;
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(iii) to authorize, issue, sell, redeem or otherwise
purchase any Partnership Interests or any securities (including secured and
unsecured debt obligations of the Partnership, debt obligations of the
Partnership convertible into any class or series of Partnership Interests, or
options, rights, warrants or appreciation rights relating to any Partnership
Interests) of the Partnership;
(iv) to borrow or lend money for the Partnership
(including, without limitation, to prepay loans and borrow money to permit the
Partnership to make distributions to its Partners in such amounts as will
permit the General Partner (so long as the General Partner elects to qualify as
a REIT) to avoid the payment of any federal income tax (including for this
purpose any excise tax pursuant to Section 4981 of the Code) and to make
distributions to its shareholders sufficient to permit the General Partner to
maintain REIT status), issue or receive evidences of indebtedness in connection
therewith, refinance, increase the amount of, modify, amend or change the terms
of, or extend the time for the payment of, any such indebtedness, and secure
such indebtedness by mortgage, deed of trust, pledge or other lien on the
Partnership's assets;
(v) to pay, either directly or by reimbursement, for
all operating costs and general administrative expenses of the Partnership to
third parties or to the General Partner or its Affiliates as set forth in this
Agreement,
(vi) to guarantee or become a comaker of indebtedness of
the General Partner or any Affiliate thereof, refinance, increase the amount
of, modify, amend or change the terms of, or extend the time for the payment
of, any such guarantee or indebtedness, and secure such guarantee or
indebtedness by mortgage, deed of trust, pledge or other lien on the
Partnership's assets;
(vii) to hold, manage, invest and reinvest cash and other
assets of the Partnership and use assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with this Agreement for
any purpose consistent with the terms of this Agreement and on any terms it
sees fit, including, without limitation, payment, either directly or by
reimbursement, of all operating costs and general administrative expenses of
the General Partner, the Partnership or any Subsidiary of either, to third
parties or to the General Partner as set forth in this Agreement;
(viii) to lease all or any portion of any of the
Partnership's assets, whether or not the terms of such leases extend beyond the
termination date of the Partnership and whether or not any portion of the
Partnership's assets so leased are to be occupied by the lessee, or, in turn,
subleased in whole or in part to others, for such consideration and on such
terms as the General Partner may determine;
(ix) to prosecute, defend, arbitrate, or compromise any
and all claims or liabilities in favor of or against the Partnership, on such
terms and in such manner as the General Partner may reasonably determine, and
similarly to prosecute, settle or defend litigation with respect to the
Partners, the Partnership, or the Partnership's assets;
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(x) to file applications, communicate, and otherwise
deal with any and all governmental agencies having jurisdiction over, or in any
way affecting, the Partnership's assets or any other aspect of the Partnership
business;
(xi) to make or revoke any election permitted or
required of the Partnership by any taxing authority;
(xii) to maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance for the
protection of the Partnership, for the conservation of Partnership assets, or
for any other purpose convenient or beneficial to the Partnership, in such
amounts and such types, as it shall determine from time to time;
(xiii) to determine whether or not to apply any insurance
proceeds for any property to the restoration of such property or to distribute
the same;
(xiv) to establish one or more divisions of the
Partnership, to hire and dismiss employees of the Partnership or any division
of the Partnership, (including, without limitation, employees having titles
such as "president," "vice president," "secretary," and "treasurer" of the
partnership or any division thereof) and to retain legal counsel, accountants,
consultants, real estate brokers, and such other persons, as the General
Partner may deem necessary or appropriate in connection with the Partnership
business and to pay therefor such reasonable remuneration as the General
Partner may deem reasonable and proper;
(xv) to retain other services of any kind or nature in
connection with the Partnership business, and to pay therefor such remuneration
as the General Partner may deem reasonable and proper;
(xvi) to negotiate and conclude agreements on behalf of
the Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner;
(xvii) to maintain accurate accounting records and to
file promptly all federal, state and local income tax returns on behalf of the
Partnership;
(xviii) to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;
(xix) to form or acquire an interest in, and contribute
property to, any further limited or general partnerships, joint ventures or
other relationships that it deems desirable (including, without limitation, the
acquisition of interests in, and the contributions of property to, its
Subsidiaries and any other Person in which it has an equity interest from time
to time), and to exercise, directly or indirectly through any attorney-in-fact
acting under a general or limited power of attorney, any right, including the
right to vote, appurtenant to any asset or investment held by the Partnership;
(xx) to establish Partnership reserves for working
capital, capital expenditures, contingent liabilities, or any other valid
Partnership purpose; and
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(xxi) to merge, consolidate or combine the Partnership
with or into another person (to the extent permitted by applicable law);
(xxii) to do any and all acts and things necessary or
prudent to ensure that the Partnership will not be classified as a "publicly
traded partnership" for purposes of Section 7704 of the Code; and
(xxiii) to take such other action, execute, acknowledge,
swear to or deliver such other documents and instruments, and perform any and
all other acts that the General Partner deems necessary or appropriate for the
formation, continuation and conduct of the business and affairs of the
Partnership (including, without limitation, all actions consistent with
allowing the General Partner at all times to qualify as a REIT unless the
General Partner voluntarily terminates its REIT status) and to possess and
enjoy all of the rights and powers of a general partner as provided by the Act.
(b) Except as otherwise provided herein, to the extent the
duties of the General Partner require expenditures of funds to be paid to third
parties, the General Partner shall not have any obligations hereunder except to
the extent that partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend
its individual funds for payment to third parties or to undertake any
individual liability or obligation on behalf of the Partnership.
6.02 DELEGATION OF AUTHORITY. The General Partner may delegate any or
all of its powers, rights and obligations hereunder, and may appoint, employ,
contract or otherwise deal with any Person for the transaction of the business
of the Partnership, which Person may, under supervision of the General Partner,
perform any acts or services for the Partnership as the General Partner may
approve.
6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
(a) The Partnership shall indemnify an Indemnitee from and
against any and all losses, claims, damages, liabilities, joint or several,
expenses (including reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or
investigative, that relate to the operations of the Partnership as set forth in
this Agreement in which any Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established that: (i) the act
or omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active
and deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the
act or omission was unlawful. The termination of any proceeding by judgment,
order or settlement does not create a presumption that the Indemnitee did not
meet the requisite standard of conduct set forth in this Section 6.03(a). The
termination of any proceeding by conviction or upon a plea of nolo contendere
or its equivalent, or an entry of an order of probation prior to
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judgment, creates a rebuttable presumption that the Indemnitee acted in a
manner contrary to that specified in this Section 6.03(a). Any indemnification
pursuant to this Section 6.03 shall be made only out of the assets of the
Partnership. Without limitation, the foregoing indemnity shall extend to any
liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any
indebtedness of the Partnership or any Subsidiary of the Partnership
(including, without limitation, any indebtedness which the Partnership or any
subsidiary of the Partnership has assumed or taken subject to), and the General
Partner is hereby authorized and empowered, on behalf of the Partnership, to
enter into one or more indemnity agreements consistent with the provisions of
this Section 6.03 in favor of any Indemnitee having or potentially having
liability for any such indebtedness.
(b) The Partnership shall reimburse an Indemnitee for
reasonable expenses incurred by an Indemnitee who is a party to a proceeding in
advance of the final disposition of the proceeding upon receipt by the
Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in this Section 6.03 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct has not been met.
(c) The indemnification provided by this Section 6.03
shall be in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided
in a written agreement pursuant to which such Indemnitee is indemnified.
(d) The Partnership may purchase and maintain insurance,
on behalf of the Indemnitees and such other Persons as the General Partner
shall determine, against any liability that may be asserted against or expenses
that may be incurred by such Person in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 6.03, the Partnership
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by it of its duties to the
Partnership also imposes duties on, or otherwise involves services by, it to
the plan or participants or beneficiaries of the plan; excise taxes assessed on
an Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute fines within the meaning of this Section 6.03; and actions
taken or omitted by the Indemnitee with respect to an employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be in
the interest of the participants and beneficiaries of the plan shall be deemed
to be for a purpose which is not opposed to the best interests of the
Partnership.
(f) In no event may an Indemnitee subject any of the
Partners to personal liability by reason of the indemnification provisions set
forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 6.03 because the Indemnitee had an interest
in the transaction with respect to
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which the indemnification applies if the transaction was otherwise permitted by
the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 6.03 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on
the Partnership's liability to any Indemnitee under this Section 6.03 as in
effect immediately prior to such amendment, modification or repeal with respect
to claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
6.04 LIABILITY OF THE GENERAL PARTNER.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership or any Partners for losses sustained or liabilities incurred as a
result of errors in judgment or of any act or omission if the General Partner
acted in good faith. The General Partner shall not be in breach of any duty
that the General Partner may owe to the Limited Partners or the Partnership or
any other Persons under this Agreement or of any duty stated or implied by law
or equity provided the General Partner, acting in good faith, abides by the
terms of this Agreement.
(b) The Limited Partners expressly acknowledge that the General
Partner is acting on behalf of the Partnership, the General Partner and the
General Partner's shareholders collectively, that the General Partner is under
no obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or the
tax consequences of some, but not all, of the Limited Partners) in deciding
whether to cause the Partnership to take (or decline to take) any actions. In
the event of a conflict between the interests of the shareholders of the
General Partner on one hand and the Limited Partners on the other, the General
Partner shall endeavor in good faith to resolve the conflict in a manner not
adverse to either the shareholders of the General Partner or the Limited
Partners; PROVIDED, HOWEVER, that for so long as the General Partner owns a
controlling interest in the Partnership, any such conflict that the General
Partner, in its sole and absolute discretion, determines cannot be resolved in
a manner not adverse to either the shareholders of the General Partner or the
Limited Partners shall be resolved in favor of the shareholders. The General
Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by Limited Partners in connection
with such decisions, PROVIDED that the General Partner has acted in good faith.
(c) Subject to its obligations and duties as General Partner
set forth in Section 6.01 hereof, the General Partner may exercise any of the
powers granted to it under this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part
of any such agent appointed by it in good faith.
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(d) Notwithstanding any other provisions of this Agreement or
the Act, any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or omission
is necessary or advisable in order (i) to protect the ability of the General
Partner to continue to qualify as a REIT or (ii) to prevent the General Partner
from incurring any taxes under Section 857, Section 4981, or any other
provision of the Code, is expressly authorized under this Agreement and is
deemed approved by all of the Limited Partners.
(e) Any amendment, modification or repeal of this Section 6.04
or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner's liability to the Partnership
and the Limited Partners under this Section 6.04 as in effect immediately prior
to such amendment, modification or repeal with respect to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless
of when claims relating to such matters may arise or be asserted.
6.05 REIMBURSEMENT OF GENERAL PARTNER.
(a) Except as provided in this Section 6.05 and elsewhere in
this Agreement (including the provisions of Articles 5 and 6 regarding
distributions, payments, and allocations to which it may be entitled), the
General Partner shall not be compensated for its services as general partner of
the Partnership.
(b) In addition to the expenses that are directly attributable
to the Partnership, the REIT Expenses and Administrative Expenses shall be
obligations of the Partnership, and the Partnership shall pay the REIT Expenses
and Administrative Expenses. If the General Partner pays any REIT Expenses or
Administrative Expenses, the General Partner shall be reimbursed by the
Partnership therefor.
6.06 OUTSIDE ACTIVITIES. The Partners and any officer, director,
employee, agent, trustee, Affiliate, Subsidiary, or shareholder of any Partner
shall be entitled to and may have business interests and engage in business
activities in addition to those relating to the Partnership, including business
interests and activities substantially similar or identical to those of the
Partnership. Neither the Partnership nor any of the Limited Partners shall have
any rights by virtue of this Agreement in any such business ventures, interest
or activities. None of the Limited Partners nor any other Person shall have any
rights by virtue of this Agreement or the partnership relationship established
hereby in any such business ventures, interests or activities, and the General
Partner shall have no obligation pursuant to this Agreement to offer any
interest in any such business ventures, interests and activities to the
Partnership or any Limited Partner, even if such opportunity is of a character
which, if presented to the Partnership or any Limited Partner, could be taken
by such Person.
6.07 EMPLOYMENT OR RETENTION OF AFFILIATES.
(a) Any Affiliate of the General Partner may be employed or
retained by the Partnership and may otherwise deal with the Partnership
(whether as a buyer, lessor, lessee, manager, furnisher of goods or services,
broker, agent, lender or otherwise) and may receive
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from the Partnership any compensation, price, or other payment therefor which
the General Partner determines to be fair and reasonable.
(b) The Partnership may lend or contribute to its Subsidiaries
or other Persons in which it has an equity investment, and such Persons may
borrow funds from the Partnership, on terms and conditions established in the
sole and absolute discretion of the General Partner. The foregoing authority
shall not create any right or benefit in favor of any Subsidiary or any other
Person.
(c) The Partnership may transfer assets to joint ventures,
other partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as the General Partner deems are consistent with
this Agreement and applicable law.
(d) Except as expressly permitted by this Agreement, neither
the General Partner nor any of its Affiliates shall sell, transfer or convey
any property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that are fair and
reasonable to the Partnership.
6.08 GENERAL PARTNER PARTICIPATION. The General Partner agrees that
all business activities of the General Partner shall generally be conducted
through the Partnership or one or more Subsidiary Partnerships, unless
otherwise determined by the Independent Directors.
6.09 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partner,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby
declares and warrants that any Partnership assets for which legal title is held
in the name of the General Partner or any nominee or Affiliate of the General
Partner shall be held by the General Partner for the use and benefit of the
Partnership in accordance with the provisions of this Agreement; PROVIDED,
HOWEVER, that the General Partner shall use its best efforts to cause
beneficial and record title to such assets to be vested in the Partnership as
soon as reasonably practicable. All Partnership assets shall be recorded as the
property of the Partnership in its books and records, irrespective of the name
in which legal title to such Partnership assets is held.
6.10 MISCELLANEOUS. In the event the General Partner redeems any REIT
Shares, then the General Partner shall cause the Partnership to purchase from
the General Partner a number of Partnership Units as determined based on the
application of the Conversion Factor on the same terms that the General Partner
exchanged such REIT Shares. Moreover, if the General Partner makes a cash
tender offer or other offer to acquire REIT Shares, then the General Partner
shall cause the Partnership to make a corresponding offer to the General
Partner to acquire an equal number of Partnership Units held by the General
Partner. In the event any REIT Shares are exchanged by the General Partner
pursuant to such offer, the Partnership shall redeem an
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equivalent number of the General Partner's Partnership Units for an equivalent
purchase price based on the application of the Conversion Factor.
ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) The General Partner shall not transfer all or any portion
of its General Partnership Interest or withdraw as General Partner except as
provided in or in connection with a transaction contemplated by Section 7.01
(b), (c) or (d).
(b) Except as otherwise provided in Section 6.04(b) or Section
7.01(d) or (e) hereof, the General Partner shall not engage in any merger,
consolidation or other combination with or into another Person or sale of all
or substantially all of its assets, (other than in connection with a change in
the General Partner's state of incorporation or organizational form) in each
case which results in a change of control of the General Partner (a
"Transaction"), unless:
(i) the consent of Limited Partners (other than the
General Partner or any Subsidiary) holding more than 50% of the Percentage
Interests of the Limited Partners (other than those held by the General Partner
or any Subsidiary) is obtained;
(ii) as a result of such Transaction all Limited
Partners will receive for each Partnership Unit an amount of cash, securities,
or other property equal to the product of the Conversion Factor and the
greatest amount of cash, securities or other property paid in the Transaction
to a holder of one REIT Share in consideration of one REIT Share, PROVIDED THAT
if, in connection with the Transaction, a purchase, tender or exchange offer
("Offer") shall have been made to and accepted by the holders of more than 50%
of the outstanding REIT Shares, each holder of Partnership Units shall be given
the option to exchange its Partnership Units for the greatest amount of cash,
securities, or other property which a Limited Partner would have received had
it (A) exercised its Redemption Right and (B) sold, tendered or exchanged
pursuant to the Offer the REIT Shares received upon exercise of the Redemption
Right immediately prior to the expiration of the Offer; or
(iii) the General Partner is the surviving entity in the
Transaction and either (A) the holders of REIT Shares do not receive cash,
securities, or other property in the Transaction or (B) all Limited Partners
(other than the General Partner or any Subsidiary) receive an amount of cash,
securities, or other property (expressed as an amount per REIT Share) that is
no less than the product of the Conversion Factor and the greatest amount of
cash, securities, or other property (expressed as an amount per REIT Share)
received in the Transaction by any holder of REIT Shares.
(c) Notwithstanding Section 7.01(b), the General Partner may
merge with or into or consolidate with another entity if immediately after such
merger or consolidation (i)
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substantially all of the assets of the successor or surviving entity (the
"Surviving General Partner"), other than Partnership Units held by the General
Partner, are contributed, directly or indirectly, to the Partnership as a
Capital Contribution in exchange for Partnership Units with a fair market value
equal to the value of the assets so contributed as determined by the Surviving
General Partner in good faith and (ii) the Surviving General Partner expressly
agrees to assume all obligations of the General Partner hereunder. Upon such
contribution and assumption, the Surviving General Partner shall have the right
and duty to amend this Agreement as set forth in this Section 7.01(c). The
Surviving General Partner shall in good faith arrive at a new method for the
calculation of the Cash Amount, the REIT Shares Amount and Conversion Factor
for a Partnership Unit after any such merger or consolidation so as to
approximate the existing method for such calculation as closely as reasonably
possible. Such calculation shall take into account, among other things, the
kind and amount of securities, cash and other property that was receivable upon
such merger or consolidation by a holder of REIT Shares or options, warrants or
other rights relating thereto, and to which a holder of Partnership Units could
have acquired had such Partnership Units been exchanged immediately prior to
such merger or consolidation. Such amendment to this Agreement shall provide
for adjustment to such method of calculation, which shall be as nearly
equivalent as may be practicable to the adjustments provided for with respect
to the Conversion Factor. The Surviving General Partner also shall in good
faith modify the definition of REIT Shares and make such amendments to Section
8.05 hereof so as to approximate the existing rights and obligations set forth
in Section 8.05 as closely as reasonably possible. The above provisions of this
Section 7.01(c) shall similarly apply to successive mergers or consolidations
permitted hereunder.
In respect of any transaction described in the preceding
Paragraph, the General Partner is required to use its commercially reasonable
efforts to structure such transaction to avoid causing the Limited Partners to
recognize a gain for federal income tax purposes by virtue of the occurrence of
or their participation in such transaction, PROVIDED such efforts are
consistent with the exercise of the Board of Directors' fiduciary duties to the
shareholders of the General Partner under applicable law.
(d) Notwithstanding Section 7.01(b),
(i) a General Partner may transfer all or any portion of
its General Partnership Interest to (A) a wholly-owned Subsidiary of such
General Partner or (B) the owner of all of the ownership interests of such
General Partner, and following a transfer of all of its General Partnership
Interest, may withdraw as General Partner; and the General Partner may engage
in a transaction not required by law or by the rules of any national securities
exchange on which the REIT Shares are listed to be submitted to the vote of the
holders of the REIT Shares.
7.02 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER. A
Person shall be admitted as a substitute or additional General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) the Person to be admitted as a substitute or additional
General Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by executing a counterpart thereof and such other
documents or instruments as may be required or
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appropriate in order to effect the admission of such Person as a General
Partner, and a certificate evidencing the admission of such Person as a General
Partner shall have been filed for recordation and all other actions required by
Section 2.05 hereof in connection with such admission shall have been
performed;
(b) if the Person to be admitted as a substitute or additional
General Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such
Person's authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
(c) counsel for the Partnership shall have rendered an opinion
(relying on such opinions from other counsel and the state or any other
jurisdiction as may be necessary) that the admission of the person to be
admitted as a substitute or additional General Partner is in conformity with
the Act, that none of the actions taken in connection with the admission of
such Person as a substitute or additional General Partner will cause (i) the
Partnership to be classified other than as a partnership for federal income tax
purposes, or (ii) the loss of any Limited Partner's limited liability.
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of a General Partner (except that, if
a General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Partnership shall be dissolved and
terminated unless the Partnership is continued pursuant to Section 7.03(b)
hereof. Notwithstanding anything to the contrary contained in this Section
7.03(a) or in Sections 7.03(b) and 7.04(a) below, the merger of the General
Partner with or into any entity in accordance with Section 7.01(b), (c) or (d)
hereof, and the admission of such entity as a substitute or successor General
Partner pursuant to Section 7.02 hereof shall not be deemed to be the
withdrawal, dissolution or removal of the General Partner for purposes of this
Section 7.03(a) or for purposes of Sections 7.03(b) and 7.04(a) below.
(b) Following the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of a General Partner (except that, if
a General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Limited Partners, within 90 days after such
occurrence, may elect to continue the business of the Partnership for the
balance of the term specified in Section 2.04 hereof by selecting, subject to
Section 7.02 hereof and any other provisions of this Agreement, a substitute
General Partner by consent of a majority in interest of the Limited Partners.
If the Limited Partners elect to continue the business of the Partnership and
admit a substitute General Partner, the relationship
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with the Partners and of any Person who has acquired an interest of a Partner
in the Partnership shall be governed by this Agreement.
7.04 REMOVAL OF A GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to, or the
dissolution of, a General Partner, such General Partner shall be deemed to be
removed automatically; PROVIDED, HOWEVER, that if a General Partner is on the
date of such occurrence a partnership, the withdrawal, death, dissolution,
Event of Bankruptcy as to or removal of a partner in such partnership shall be
deemed not to be a dissolution of the General Partner if the business of such
General Partner is continued by the remaining partner or partners. The Limited
Partners may not remove the General Partner, with or without cause.
(b) If a General Partner has been removed pursuant to this
Section 7.04 and the Partnership is continued pursuant to Section 7.03 hereof,
such General Partner shall promptly transfer and assign its General Partnership
Interest in the Partnership to the substitute General Partner approved by a
majority in interest of the Limited Partners in accordance with Section 7.03(b)
hereof and otherwise admitted to the Partnership in accordance with Section
7.02 hereof. At the time of assignment, the removed General Partner shall be
entitled to receive from the substitute General Partner the fair market value
of the General Partnership Interest of such removed General Partner as reduced
by any damages caused to the Partnership by such General Partner. Such fair
market value shall be determined by an appraiser mutually agreed upon by the
General Partner and a majority in interest of the Limited Partners within 10
days following the removal of the General Partner. In the event that the
parties are unable to agree upon an appraiser, the removed General Partner and
a majority in interest of the Limited Partners each shall select an appraiser.
Each such appraiser shall complete an appraisal of the fair market value of the
removed General Partner's General Partnership Interest within 30 days of the
General Partner's removal, and the fair market value of the removed General
Partner's General Partnership Interest shall be the average of the two
appraisals; PROVIDED, HOWEVER, that if the higher appraisal exceeds the lower
appraisal by more than 20% of the amount of the lower appraisal, the two
appraisers, no later than 40 days after the removal of the General Partner,
shall select a third appraiser who shall complete an appraisal of the fair
market value of the removed General Partner's General Partnership Interest no
later than 60 days after the removal of the General Partner. In such case, the
fair market value of the removed General Partner's General Partnership Interest
shall be the average of the two appraisals closest in value.
(c) The General Partnership Interest of a removed General
Partner, during the time after default until transfer under Section 7.04(b),
shall be converted to that of a special Limited Partner; PROVIDED, HOWEVER,
such removed General Partner shall not have any rights to participate in the
management and affairs of the Partnership, and shall not be entitled to any
portion of the income, expense, profit, gain or loss allocations or cash
distributions allocable or payable, as the case may be, to the Limited
Partners. Instead, such removed General Partner shall receive and be entitled
only to retain distributions or allocations of such items that it would have
been entitled to receive in its capacity as General Partner, until the transfer
is effective pursuant to Section 7.04(b).
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(d) All Partners shall have given and hereby do give such
consents, shall take such actions and shall execute such documents as shall be
legally necessary and sufficient to effect all the foregoing provisions of this
Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not
participate in the management or control of Partnership business nor shall they
transact any business for the Partnership, nor shall they have the power to
sign for or bind the Partnership, such powers being vested solely and
exclusively in the General Partner.
8.02 POWER OF ATTORNEY.
(a) Each Limited Partner hereby constitutes and appoints the General
Partner and its authorized officers and attorneys-in-fact of each, and each of
those acting singly, in each case with full power of substitution, as its true
and lawful agent and attorney-in-fact, with full power and authority in its
name, place and stead to:
(i) execute, swear to, acknowledge, deliver, file and record
in the appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, the Agreement and the Certificate
and all amendments to restatements thereof) that the General Partner deems
appropriate or necessary to qualify or continue the existence or qualification
of the Partnership as a limited partnership in the State of Delaware and in all
other jurisdictions in which the Partnership may conduct business or own
property; (b) all instruments that the General Partner deems appropriate or
necessary to reflect any amendment, change, modification or restatement of this
Agreement in accordance with the terms; (c) all conveyances and other
instruments or documents that the General Partner deems appropriate or
necessary to reflect the dissolution and liquidation of the Partnership
pursuant to the terms of this Agreement, including, without limitation, a
certificate of cancellation; (d) all instruments relating tot he admission,
withdrawal, removal or substitution of any Partner pursuant tot he terms of
this Agreement or the Capital Contribution of any Partner; and (e) all
certificates, documents and other instruments relating to the determination of
the rights, preferences and privileges of Partnership Interests; and
(ii) execute, swear to, seal, acknowledge and file all
ballots, consents, approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole and absolute discretion of the General
Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action which is made or given by the
Partners hereunder or is consistent with the terms of this Agreement or
appropriate or necessary, in the sole discretion of the General Partner or any
Liquidator, to effectuate the terms or intent of this Agreement.
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(b) The foregoing power of attorney is hereby declared to be
irrevocable and a power coupled with an interest, in recognition of the fact
that each of the Partners will be relying upon the power of the General Partner
to act as contemplated by this Agreement in any filing or other action by it on
behalf of the Partnership, and it shall survive and not be affected by the
subsequent Bankruptcy, death, dissolution or legal incapacity of any Limited
Partner and the transfer of all or any portion of such Limited Partner's
Partnership Units and shall extend to such Limited Partner's heirs, successors,
assigns and personal representatives. Each such Limited Partner hereby agrees
to be bound by any representation made by the General partner, acting in good
faith pursuant to such power of attorney, and each such Limited Partner hereby
waives any and all defenses which may be available to contest, negate or
disaffirm the action of the General Partner, taken in good faith under such
power of attorney. Each Limited Partner shall execute and deliver to the
General Partner, within fifteen (15) days after receipt of the General
partner's request therefor, such further designations, powers of attorney and
other instruments as the General Partner deems necessary to effectuate this
Agreement and the purposes of the Partnership.
(c) Nothing contained herein shall be construed as authorizing the
General Partner or any Liquidator to amend this Agreement except in accordance
with Article 11 hereof or as may be otherwise expressly provided for in this
Agreement.
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited Partner
in its capacity as such shall be liable for any debts, liabilities, contracts
or obligations of the Partnership. A Limited Partner shall be liable to the
Partnership only to make payments of its Capital Contribution, if any, as and
when due hereunder. After its Capital Contribution is fully paid, no Limited
Partner shall, except as otherwise required by the Act, be required to make any
further Capital Contributions or other payments or lend any funds to the
Partnership.
8.04 REDEMPTION RIGHT.
(a) Subject to Sections 8.05(b), 8.05(c), 8.05(d) and 8.05(e)
and the provisions of any agreements between the Partnership and one or more
Limited Partners with respect to Partnership Units held by them, on or after
the date which is one year after the closing of the Offering, each Limited
Partner, other than the General Partner, shall have the right (the "Redemption
Right") to require the Partnership to redeem on a Specified Redemption Date all
or a portion of the Partnership Units held by such Limited Partner at a
redemption price equal to and in the form of the Cash Amount to be paid by the
Partnership. The Redemption Right shall be exercised pursuant to a Notice of
Redemption delivered to the Partnership (with a copy to the General Partner) by
the Limited Partner who is exercising the Redemption Right (the "Redeeming
Partner"); PROVIDED, HOWEVER, that the Partnership shall not be obligated to
satisfy such Redemption Right if the General Partner elects to purchase, and
does purchase, the Partnership Units subject to the Notice of Redemption
pursuant to Section 8.05(b); and PROVIDED, FURTHER, that no Limited Partner may
deliver more than two Notices of Redemption during each calendar year. A
Limited Partner may not exercise the Redemption Right for less than 1,000
Partnership Units or, if such Limited Partner holds less than 1,000 Partnership
Units, all of the Partnership Units held by such Partner. The Redeeming Partner
shall have no right, with respect to any Partnership Units so redeemed, to
receive any distribution
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paid with respect to Partnership Units if the record date for such distribution
is on or after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), a
Limited Partner that exercises the Redemption Right shall be deemed to have
offered to sell the Partnership Units described in the Notice of Redemption to
the General Partner, and the General Partner may, in its sole and absolute
discretion, elect to purchase directly and acquire such Partnership Units by
paying to the Redeeming Partner either the Cash Amount or the REIT Shares
Amount, as elected by the General Partner (in its sole and absolute
discretion), on the Specified Redemption Date, whereupon the General Partner
shall acquire for the Cash Amount or the REIT Shares Amount, as determined by
the General Partner (as set forth above), the Partnership Units offered for
redemption by the Redeeming Partner and shall be treated for all purposes of
this Agreement as the owner of such Partnership Units. If the General Partner
shall elect to exercise its right to purchase Partnership Units under this
Section 8.05(b) with respect to a Notice of Redemption, it shall so notify the
Redeeming Partner within five business days after the receipt by the General
Partner of such Notice of Redemption. Unless the General Partner (in its sole
and absolute discretion) shall exercise its right to purchase Partnership Units
from the Redeeming Partner pursuant to this Section 8.05(b), the General
Partner shall have no obligation to the Redeeming Partner or the Partnership
with respect to the Redeeming Partner's exercise of the Redemption Right. In
the event the General Partner shall exercise its right to purchase, and does
purchase, Partnership Units with respect to the exercise of a Redemption Right
in the manner described in the first sentence of this Section 8.05(b), the
Partnership shall have no obligation to pay any amount to the Redeeming Partner
with respect to such Redeeming Partner's exercise of such Redemption Right, and
each of the Redeeming Partner, the Partnership, and the General Partner shall
treat the transaction between the General Partner and the Redeeming Partner for
federal income tax purposes as a sale of the Redeeming Partner's Partnership
Units to the General Partner. Each Redeeming Partner agrees to execute such
documents as the General Partner may reasonably require in connection with the
issuance of REIT Shares upon exercise of the Redemption Right.
(c) Notwithstanding the provisions of Section 8.05(a) and
8.05(b), to the extent the delivery of REIT Shares to such Partner on the
Specified Redemption Date by the General Partner pursuant to Section 8.05(b)
(regardless of whether or not the General Partner would in fact exercise its
rights under Section 8.05(b)) would [(i) result in such Partner or any other
person owning, directly or indirectly, REIT Shares in excess of the Ownership
Limit (as defined in the Charter) and calculated in accordance therewith,
except as provided in the Charter, (ii) result in REIT Shares being owned by
fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the General Partner being "closely held" within
the meaning of Section 856(h) of the Code, (iv) cause the General Partner to
own, directly or constructively, 10% or more of the ownership interests in a
tenant of the General Partner's, the Partnership's, or a Subsidiary
Partnership's, real property, within the meaning of Section 856(d)(2)(B) of the
Code, or (v) cause the acquisition of REIT Shares by such Partner to be
"integrated" with any other distribution of REIT Shares for purposes of
complying with the registration provisions of the Securities Act, the
Partnership may elect in its sole and absolute discretion to either (i) pay
(or, to the extent the General Partner has elected to exercise its rights
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under Section 8.04(b), permit the General Partner to elect to pay) the Cash
Amount to the Redeeming Partner, or (ii) refuse, in whole or in part, to accept
the Notice of Redemption.
(d) Any REIT Shares Amounts to be paid to a Redeeming Partner
pursuant to this Section 8.04 shall be paid on the Specified Redemption Date.
Any Cash Amount to be paid to a Redeeming Partner by the Partnership or the
General Partner pursuant to this Section 8.04 shall be paid on the Specified
Redemption Date; PROVIDED, HOWEVER, that, if the Cash Amount is to be paid, the
General Partner, on its own behalf or on behalf of the Partnership, may elect
to cause the Specified Redemption Date to be delayed by providing notice to the
Redeeming Partner. If the General Partner elects to cause the Specified
Redemption Date to be delayed, the General Partner agrees to use its
commercially reasonable best efforts to cause the closing of the acquisition of
redeemed Partnership Units hereunder to occur as quickly as reasonably
possible.
(e) Notwithstanding any other provision of this Agreement, the
General Partner shall place appropriate restrictions on the ability of the
Limited Partners to exercise their Redemption Rights as and if deemed necessary
to ensure that the Partnership does not constitute a "publicly traded
partnership" under section 7704 of the Code. If and when the General Partner
determines that imposing such restrictions is necessary, the General Partner
shall give prompt written notice thereof (a "Restriction Notice") to each of
the Limited Partners, which notice shall be accompanied by a copy of an opinion
of counsel to the Partnership which states that, in the opinion of such
counsel, restrictions are necessary in order to avoid the Partnership being
treated as a "publicly traded partnership" under section 7704 of the Code.
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.01 PURCHASE FOR INVESTMENT.
(a) Each Limited Partner represents and warrants that its
Limited Partnership Interest is being acquired for its own account and not with
a view to the distribution or other sale thereof, except in a transaction which
is exempt from registration under the Securities Act or registered thereunder.
Such Limited Partner further represents and warrants to the Partnership and the
other Partners as follows:
(i) If such Limited Partner is a corporation,
partnership, limited liability company or a Massachusetts business trust or
similar business trust, it has not been formed for the specific purpose of
acquiring the Limited Partnership Interest, and has total assets in excess of
Five Million Dollars ($5,000,000);
(ii) If such limited Partner is an individual, he or she
had an individual income in excess of $200,000 in each of the two most recent
tax years or joint income with his or her spouse in excess of $300,000 in each
of those years and has a reasonable expectation of reaching at least the same
income level in the current year.
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(iii) Such Limited Partner is a sophisticated investor
with the capacity to protect its own interests in investments of this nature,
and is capable of evaluating the merits and risks of an investment in the
Limited Partnership Interest;
(iv) Such Limited Partner has had an opportunity to ask
questions and receive answers concerning the investment in the Limited
Partnership Interest, and has all of the information deemed by it to be
necessary or appropriate to evaluate the investment in the Limited Partnership
Interest and the risks and merits thereof;
(v) Such Limited Partner is aware of the following:
(1) An investment in the Limited Partnership
Interest in speculative, with no assurance of any income therefrom;
(2) No federal or state agency has made any
finding or determination as tot he fairness of the acquisition, or any
recommendation or endorsement of such acquisition;
(3) Transferability of the Limited Partnership
Interest is restricted and, accordingly, it may not be possible for such
Limited Partner to liquidate the Limited Partnership Interest in case of
emergency; and
(4) With respect to the tax aspects of an
investment in the Limited Partnership Interest, such Limited Partner in making
this acquisition is not relying to any degree upon the advice of the General
Partner or the Partnership, or any person affiliated therewith, but rather
solely upon its own legal, financial and tax advisors.
(b) Each Limited Partner agrees that he will not sell, assign
or otherwise transfer his Partnership Interest or any fraction thereof, whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and Section 12.10 hereof.
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.
(a) Subject to the provisions of 9.02(b) through (i), no
Limited Partner may offer, sell, assign, or otherwise transfer all or any
portion of his Limited Partnership Interest, or any of such Limited Partner's
economic rights as a Limited Partner, whether voluntarily or by operation of
law or at judicial sale or otherwise (collectively, a "Transfer") without the
written consent of the General Partner, which consent may be granted or
withheld in its sole and absolute discretion. Any such purported transfer
undertaken without such consent shall be considered to be null and void AB
INITIO and shall not be given effect. The General Partner may require, as a
condition of any Transfer to which it consents, that the transferor assume all
costs incurred by the Partnership in connection therewith. A Transfer shall not
include any pledge, grant of a security interest in, or other hypothecation of
all or any portion of a Limited Partnership Interest.
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(b) No Limited Partner may withdraw from the Partnership other
than as a result of a permitted Transfer (i.e., a Transfer consented to as
contemplated by clause (a) above or clause (c) below or a Transfer pursuant to
9.05 below) of all of his Limited Partnership Interest pursuant to this Article
IX or pursuant to a redemption of all of his Partnership Units pursuant to
8.04. Upon the permitted Transfer or redemption of all of a Limited Partner's
Limited Partnership Interest, such Limited Partner shall cease to be a Limited
Partner.
(c) Subject to 9.02(d), (e), (f) and (g) below, a Limited
Partner may Transfer, with the consent of the General Partner, all or a portion
of his Partnership Interests to (i) a spouse, a parent or parent's spouse,
natural or adopted descendant or descendants, spouse of such descendant, or
brother or sister, or a trust created by such Limited Partner for the benefit
of such Limited Partner and/or any such person(s), of which trust such Limited
Partner or any such person(s) is a trustee, (ii) a corporation, a general
partnership, a limited partnership, or a limited liability company controlled
by a Person or Persons named in (i) above, or (iii) if the Limited Partner is
an entity, its beneficial owners.
(d) No Limited Partner may effect a Transfer of its Limited
Partnership Interest, in whole or in part, if, in the opinion of legal counsel
for the Partnership, such proposed Transfer would require the registration of
the Limited Partnership Interest under the Securities Act, or would otherwise
violate any applicable federal or state securities or blue sky law (including
investment suitability standards).
(e) No Transfer by a Limited Partner of its Limited Partnership
Interest, in whole or in part, may be made to any Person if (i) in the opinion
of legal counsel for the Partnership, the Transfer would result in the
Partnership's being treated as an association taxable as a corporation (other
than a qualified REIT subsidiary within the meaning of Section 856(i) of the
Code) or would result in a termination of the Partnership for federal income
tax purposes, (ii) in the opinion of legal counsel for the Partnership, the
Transfer would adversely affect the ability of the General Partner to continue
to qualify as a REIT or subject the General Partner to any additional taxes
under Section 857 or Section 4981 of the Code, (iii) such Transfer is
effectuated through an "established securities market" or a "secondary market
(or the substantial equivalent thereof)" within the meaning of Section 7704 of
the Code, or (iv) such Transfer would cause the Partnership to have more than
100 Partners (including as Partners, to the extent required under Regulations
Section 1.7704-1(h)(3), those Persons indirectly owning an interest in the
Partnership through a partnership, limited liability company, "S" corporation,
or a grantor trust).
(f) No Transfer, pledge, grant of a security interest in, or
other hypothecation of any Limited Partnership Interest may be made to a lender
to the Partnership or any Person who is related (within the meaning of
Regulations Section 1.752-4(b)) to any lender to the Partnership whose loan
constitutes a nonrecourse liability (within the meaning of Regulations Section
1.752-1(a)(2)), without the consent of the General Partner, which may be
withheld in its sole and absolute discretion, PROVIDED THAT, as a condition to
such consent the lender will be required to enter into an arrangement with the
Partnership and the General Partner to exchange or redeem for the Cash Amount
any Partnership Units in which a security interest is
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held simultaneously with the time at which such lender would be deemed to be a
partner in the Partnership for purposes of allocating liabilities to such
lender under Section 752 of the Code.
(g) No Transfer by a Limited Partner of its Limited Partnership
Interest may be made (i) to any Person who lacks the legal right, power or
capacity to own a Partnership Interest, (ii) in violation of any provision of
any mortgage or trust deed (or the note or bond secured thereby) constituting a
lien against an asset of the Partnership, (iii) in violation of applicable law,
or (iv) if such transfer would, in the opinion of legal counsel to the
Partnership, cause any portion of the assets of the Partnership to constitute
assets of any employee benefit plan pursuant to Department of Labor regulations
section 2510.2-101.
(h) Any Transfer in contravention of any of the provisions of
this Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
(i) Prior to the consummation of any Transfer under this
Article IX, the transferor and/or the transferee shall deliver to the General
Partner such opinions, certificates and other documents as the General Partner
shall request in connection with such Transfer.
9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER.
(a) Subject to the other provisions of this Article IX, an
assignee of the Limited Partnership Interest of a Limited Partner (which shall
be understood to include any purchaser, transferee, donee, or other recipient
of any disposition of such Limited Partnership Interest) shall be deemed
admitted as a Limited Partner of the Partnership only with the written consent
of the General Partner and upon the satisfactory completion of the following:
(i) The assignee shall have accepted and agreed to be
bound by the terms and provisions of this Agreement by executing a counterpart
or an amendment thereof, including a revised EXHIBIT A, and such other
documents or instruments as the General Partner may require in order to effect
the admission of such Person as a Limited Partner.
(ii) To the extent required, an amended Certificate
evidencing the admission of such Person as a Limited Partner shall have been
signed, acknowledged and filed for record in accordance with the Act.
(iii) The assignee shall have delivered a letter
containing the representation set forth in Sections 9.01(a) and 12.10 hereof
and the agreement set forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership,
limited liability company, trust, or other entity, the assignee shall have
provided the General Partner with evidence satisfactory to counsel for the
Partnership of the assignee's authority to become a Limited Partner under the
terms and provisions of this Agreement.
(v) The assignee shall have executed a power of
attorney containing the terms and provisions set forth in Section 8.02 hereof.
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(vi) The assignee shall have paid all legal fees and
other expenses of the Partnership and the General Partner and filing and
publication costs in connection with its substitution as a Limited Partner.
(vii) The assignee has obtained the prior written consent
of the General Partner to its admission as a Substitute Limited Partner, which
consent may be given or denied in the exercise of the General Partner's sole
and absolute discretion.
(b) For the purpose of allocating Profits and Losses and
distributing cash received by the Partnership, a Substitute Limited Partner
shall be treated as having become, and appearing in the records of the
Partnership as, a Partner upon the filing of the Certificate described in
Section 9.03(a)(ii) hereof or, if no such filing is required, the later of the
date specified in the transfer documents or the date on which the General
Partner has received all necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person seeking
to become a Substitute Limited Partner by preparing the documentation required
by this Section and making all official filings and publications. The
Partnership shall take all such action as promptly as practicable after the
satisfaction of the conditions in this Article IX to the admission of such
Person as a Limited Partner of the Partnership.
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.
(a) Subject to the provisions of Sections 9.01 and 9.02 hereof,
except as required by operation of law, the Partnership shall not be obligated
for any purposes whatsoever to recognize the assignment by any Limited Partner
of its Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any portion of a
Limited Partner's Limited Partnership Interest, but does not become a
Substitute Limited Partner and desires to make a further assignment of such
Limited Partnership Interest, shall be subject to all the provisions of this
Article IX to the same extent and in the same manner as any Limited Partner
desiring to make an assignment of its Limited Partnership Interest.
9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited
Partner, the death or termination of a Limited Partner or a final adjudication
that a Limited Partner is incompetent (which term shall include, but not be
limited to, insanity) shall not cause the termination or dissolution of the
Partnership, and the business of the Partnership shall continue if an order for
relief in a bankruptcy proceeding is entered against a Limited Partner, the
trustee or receiver of his estate or, if he dies, his executor, administrator
or trustee, or, if he is finally adjudicated incompetent, his committee,
guardian or conservator, shall have the rights of such Limited Partner for the
purpose of settling or managing his estate property and such power as the
bankrupt, deceased or incompetent Limited Partner possessed to assign all or
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any part of his Partnership Interest and to join with the assignee in
satisfying conditions precedent to the admission of the assignee as a
Substitute Limited Partner.
9.06 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be
acquired by two individuals as joint tenants with right of survivorship,
PROVIDED that such individuals either are married or are related and share the
same home as tenants in common. The written consent or vote of both owners of
any such jointly held Partnership Interest shall be required to constitute the
action of the owners of such Partnership Interest; PROVIDED, HOWEVER, that the
written consent of only one joint owner will be required if the Partnership has
been provided with evidence satisfactory to the counsel for the Partnership
that the actions of a single joint owner can bind both owners under the
applicable laws of the state of residence of such joint owners.
Upon the death of one owner of a Partnership Interest held in a joint
tenancy with a right of survivorship, the Partnership Interest shall become
owned solely by the survivor as a Limited Partner and not as an assignee. The
Partnership need not recognize the death of one of the owners of a jointly-held
Partnership Interest until it shall have received notice of such death. Upon
notice to the General Partner from either owner, the General Partner shall
cause the Partnership Interest to be divided into two equal Partnership
Interests, which shall thereafter be owned separately by each of the former
owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 BOOKS AND RECORDS. At all times during the continuance of the
Partnership, the Partners shall keep or cause to be kept at the Partnership's
specified office true and complete books of account in accordance with
generally accepted accounting principles, including: (a) a current list of the
full name and last known business address of each Partner, (b) a copy of the
Certificate of Limited Partnership and all certificates of amendment thereto,
(c) copies of the Partnership's federal, state and local income tax returns and
reports, (d) copies of the Agreement and any financial statements of the
Partnership for the three most recent years and (e) all documents and
information required under the Act. Any Partner or its duly authorized
representative, upon paying the costs of collection, duplication and mailing,
shall be entitled to inspect or copy such records during ordinary business
hours. Notwithstanding the foregoing, the General Partner may keep confidential
from the Limited Partners, for such period of time as the General Partner
determines in its sole and absolute discretion to be reasonable, any
information that (i) the General Partner believes to be in the nature of trade
secrets or other information the disclosure of which the General Partner in
good faith believes is not in the best interests of the Partnership, or (ii)
the Partnership is required by law or by agreements with unaffiliated third
parties to keep confidential.
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<PAGE> 47
10.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
(a) All funds of the Partnership not otherwise invested shall
be deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be
made only on such signature or signatures as the General Partner may, from time
to time, determine.
(b) All deposits and other funds not needed in the operation
of the business of the Partnership may be invested by the General Partner in
investment grade instruments (or investment companies whose portfolio consists
primarily thereof), government obligations, certificates of deposit, bankers'
acceptances and municipal notes and bonds. The funds of the Partnership shall
not be commingled with the funds of any other Person except for such
commingling as may necessarily result from an investment in those investment
companies permitted by this Section 10.02(b).
10.03 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the
Partnership shall be the calendar
year.
10.04 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the end
of each fiscal year of the Partnership, the General Partner shall furnish to
each person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's individual tax returns as
shall be reasonably required by law.
10.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
(a) The General Partner shall be the "tax matters partner" of
the Partnership within the meaning of Section 6231(a)(7) of the Code. The tax
matters partner is authorized, but not required:
(i) to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings for the adjustment of
Partnership items required to be taken into account by a Partner for income tax
purposes (such administrative proceedings being referred to as a "tax audit"
and such judicial proceedings being referred to as "judicial review"), and in
the settlement agreement the tax matters partner may expressly state that such
agreement shall bind all Partners, except that such settlement agreement shall
not bind any Partner (i) who (within the time prescribed pursuant to the Code
and Regulations) files a statement with the IRS providing that the tax matters
partner shall not have the authority to enter into a settlement agreement on
behalf of such Partner or (ii) who is a "notice partner" (as defined in Section
6231 of the Code) or a member of a "notice group" (as defined in Section
6223(b)(2) of the Code);
(ii) in the event that a notice of a final
administrative adjustment at the Partnership level of any item required to be
taken into account by a Partner for tax purposes (a "final adjustment") is
mailed to the tax matters partner, to seek judicial review of such final
adjustment, including the filing of a petition for readjustment with the Tax
Court or the United
43
<PAGE> 48
States Claims Court, or the filing of a complaint for refund with the District
Court of the United States for the district in which the Partnership's
principal place of business is located;
(iii) to intervene in any action brought by any other
Partner for judicial review of a final adjustment;
(iv) to file a request for an administrative
adjustment with the IRS at any time and, if any part of such request is not
allowed by the IRS, to file an appropriate pleading (petition or complaint) for
judicial review with respect to such request;
(v) to enter into an agreement with the IRS to extend
the period for assessing any tax which is attributable to any item required to
be taken into account by a Partner for tax purposes, or an item affected by
such item; and
(vi) to take any other action on behalf of the
partners of the Partnership in connection with any tax audit or judicial review
proceeding tot he extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax matters
partner in connection with any such proceeding, except to the extent required
by law, is a matter in the sole and absolute discretion of the tax matters
partner and the provisions relating to indemnification of Indemnitees set forth
in Section 6.03 of this Agreement shall be fully applicable to the tax matters
partner in its capacity as such.
(b) The tax matters partner shall have the right to retain
professional assistance to assist it in discharging its duties hereunder. All
third party costs and expenses incurred by the tax matters partner in
performing its duties as such (including legal and accounting fees) shall be
borne by the Partnership.
(c) All elections required or permitted to be made by the
Partnership under the Code or any applicable state or local tax law shall be
made by the General Partner in its sole and absolute discretion.
(d) In the event of a transfer of all or any part of the
Partnership Interest of any Partner, the Partnership, at the option of the
General Partner, may elect pursuant to Section 754 of the Code to adjust the
basis of the Properties. Each Partner will furnish the Partnership with all
information necessary to give effect to such election.
10.06 REPORTS TO LIMITED PARTNERS.
(a) As soon as practicable after the close of each fiscal
quarter (other than the last quarter of the fiscal year), the General Partner
shall cause to be mailed to each Limited Partner a quarterly report containing
financial statements of the Partnership, or of the General Partner if such
statements are prepared solely on a consolidated basis with the General
Partner, for such fiscal quarter, presented in accordance with generally
accepted accounting principles. As soon as practicable after the close of each
fiscal year, the General Partner shall cause to be
44
<PAGE> 49
mailed to each Limited Partner an annual report containing financial statements
of the Partnership, or of the General Partner if such statements are prepared
solely on a consolidated basis with the General Partner, for such fiscal year,
presented in accordance with generally accepted accounting principles. The
annual financial statements shall be audited by accountants selected by the
General Partner.
(b) Any Partner shall further have the right to a private
audit of the books and records of the Partnership, provided such audit is made
for Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
ARTICLE XI
AMENDMENT OF AGREEMENT
The General Partner's consent shall be required for any amendment to
this Agreement. The General Partner, without the consent of the Limited
Partners, may amend this Agreement in any respect or merge or consolidate the
Partnership with or into any other partnership or business entity (as defined
in Section 17-211 of the Act) in a transaction pursuant to Section 7.01(b), (c)
or (d) hereof; PROVIDED, HOWEVER, that the following amendments shall require
the consent of Limited Partners (other than the General Partner and any Limited
Partner that is a Subsidiary of the General Partner) holding more that
two-thirds of the Partnership Units held by such Limited Partners:
(a) any amendment affecting the operation of the Conversion
Factor or the Redemption Right (except as provided in Section 8.05(e) or
7.01(c), as in effect on the date hereof) in a manner adverse to the Limited
Partners;
(b) any amendment that would adversely affect the rights of
the Limited Partners to receive the distributions payable to them hereunder,
except that the Partnership may issue additional Partnership Units or other
Partnership Interests in accordance with Section 4.02 hereof;
(c) any amendment that would alter the Partnership's
allocations of Profit and Loss to the Limited Partners (except that the
Partnership may issue additional Partnership Units or other Partnership
Interests in accordance with Section 4.02 hereof;
(d) any amendment that would impose on the Limited Partners
any obligation to make additional Capital Contributions to the Partnership;
(e) any amendment to Sections 8.04 or Section 9.02; or
(f) any amendment to this Article XI.
45
<PAGE> 50
ARTICLE XII
GENERAL PROVISIONS
12.01 NOTICES. All communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, or transmitted by overnight
commercial courier to the Partners at the addresses set forth in EXHIBIT A
attached hereto; PROVIDED, HOWEVER, that any Partner may specify a different
address by notifying the General Partner in writing of such different address.
Notices to the Partnership shall be delivered at or mailed to its specified
office.
12.02 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of the
Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
12.03 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all
further acts and execute, swear to, acknowledge and deliver all further
documents which may be reasonable, necessary, appropriate or desirable to carry
out the provisions of this Agreement or the Act.
12.04 SEVERABILITY. If any provision of this Agreement shall be
declared illegal, invalid, or unenforceable in any jurisdiction, then such
provision shall be deemed to be severable from this Agreement (to the extent
permitted by law) and in any event such illegality, invalidity or
unenforceability shall not affect the remainder hereof.
12.05 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
12.06 PRONOUNS AND PLURALS. When the context in which words are used
in the Agreement indicates that such is the intent, words in the singular
number shall include the plural and the masculine gender shall include the
neuter or female gender as the context may require.
12.07 HEADINGS. The Article headings or sections in this Agreement
are for convenience only and shall not be used in construing the scope of this
Agreement or any particular Article.
12.08 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
12.09 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the principles of conflicts of law.
46
<PAGE> 51
12.10 PARTNER REPRESENTATIONS AND WARRANTIES. Each Partner represents
and warrants severally and not jointly, and solely on behalf of itself, to the
Partnership and the other Partners as follows:
(a) Organization. If such Partner is not a natural person,
such Partner is duly formed and validly existing and is qualified to do
business and in good standing in the jurisdictions in which it does business.
(b) Due Authorization; Binding Agreement. This Agreement has
been duly executed and delivered by such Partner, or an authorized
representative of such Partner, and constitutes a legal, valid and binding
obligation of such Partner, enforceable against such Partner in accordance with
the terms hereof.
(c) Consents and Approvals. No consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice to,
any governmental unit or any other person is required to be made, obtained or
given by such partner in connection with the execution, delivery and
performance of this Agreement other than consents, waivers, approvals or
authorizations which have been obtained prior to the date hereof.
(d) No Conflict with Other Documents or Violation of Law. The
execution of this Agreement by such Partner and such Partner's performance of
the transactions contemplated herein will not violate any document, instrument,
agreement, stipulation, judgment, order, or any applicable federal, state or
local law, ordinance or regulation to which such Partner is a party or by which
such Partner is bound.
12.11 WAIVER. No failure by any party to insist upon the strict
performances of any covenant, duty agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
12.12 PARTITION. Each Partner hereby waives any right to partition of
the Partnership property.
47
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Agreement of Limited Partnership, all as of the 6th day of
May 1998.
GENERAL PARTNER:
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
---------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Secretary, CFO and Treasurer
INITIAL LIMITED PARTNER:
HCFP LIMITED, INC.
By: /s/ Edward P. Nordberg, Jr.
---------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Secretary and CFO
48
<PAGE> 53
EXHIBIT A
<TABLE>
<CAPTION>
Agreed
Value of
Cash Capital Partnership Percentage
Partner Contribution Contribution Units Interest
- ------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
HealthCare Financial
Partners, Inc. $ 10 $ 10 10 1%
2 Wisconsin Circle
Fourth Floor
Chevy Chase, MD 20815
INITIAL LIMITED PARTNER:
HCFP Limited, Inc. $990 $990 990 99%
2 Wisconsin Circle
Fourth Floor
Chevy Chase, MD 20815
LIMITED PARTNERS:
- ------------------------
- ------------------------
- ------------------------
- ------------------------
</TABLE>
<PAGE> 54
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
In accordance with Section 8.05 of the Agreement of Limited
Partnership (the "Agreement") of HCFP REIT Operating Partnership, L.P., the
undersigned hereby irrevocably (i) presents for redemption ________ Partnership
Units in HCFP REIT Operating Partnership, L.P. in accordance with the terms of
the Agreement and the Redemption Right referred to in Section 8.05 thereof,
(ii) surrenders such Partnership Units and all right, title and interest
therein, and (iii) directs that the Cash Amount or REIT Shares Amount (as
defined in the Agreement) as determined by the General Partner deliverable upon
exercise of the Redemption Right be delivered to the address specified below,
and if REIT Shares (as defined in the Agreement) are to be delivered, such REIT
Shares be registered or placed in the name(s) and at the address(es) specified
below.
Dated: ,
-------------------- ----
Name of Limited Partner:
------------------------------------------
(Signature of Limited Partner)
------------------------------------------
(Mailing Address)
------------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
------------------------------------------
If REIT Shares are to be issued, issue to:
Please insert social security or identifying number:
Name:
<PAGE> 1
EXHIBIT 10.3
COMMERCIAL MORTGAGE LOAN
SERVICING AGREEMENT
THIS COMMERCIAL MORTGAGE LOAN SERVICING AGREEMENT (this "Agreement") is
made as of the 6th day of May, 1998 by and between GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation, having its principal place of business at
650 Dresher Road, Horsham, Pennsylvania, 19044 ("Servicer"), and HEALTHCARE
FINANCIAL PARTNERS REIT, INC., having its principal place of business at 2
Wisconsin Circle, Chevy Chase, Maryland, 20815 ("Company").
RECITALS:
A. Company originated or acquired or will originate or acquire
certain commercial mortgage loans and desires to engage a servicer to perform
limited servicing functions associated with the servicing of those mortgage
loans listed on the Mortgage Loan Schedule attached hereto as Exhibit A (the
"Mortgage Loans") as such schedule may be amended from time to time as other
similar mortgage loans are originated or acquired by Company;
B. Servicer is in the business of servicing commercial mortgage loans
and desires to perform the functions described above with respect to the
Mortgage Loans; C. Company and Servicer wish to prescribe the terms and
conditions for the servicing of the Mortgage Loans.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set
forth, Servicer and Company agree as follows:
1. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Servicer represents, warrants, and covenants to Company that as of the
date of this Agreement:
(i) Servicer is a corporation duly organized, existing,
and in good standing under the laws of the State of California; Servicer is and
throughout the term of this Agreement shall remain, to the extent necessary,
duly authorized and qualified to transact business in all of the states where
the properties securing the borrowers' obligations under the terms of the
related Mortgage Loans (collectively the "Mortgage Properties" and individually
a "Mortgaged Property") are located; Servicer possesses and shall continue to
possess all requisite authority, power, licenses, permits, franchise, and
approvals to conduct its business and to execute, deliver, and comply with its
obligations under this Agreement;
(ii) The execution and delivery of this Agreement and
Servicer's performance of and compliance with the terms hereof in the manner
contemplated by
<PAGE> 2
this Agreement will not violate the Articles of Incorporation or By-Laws of
Servicer or any other instrument governing its operations, or any laws that
could have any material adverse effect upon the validity, performance, and
enforceability of any of the terms of this Agreement applicable to Servicer, and
will not constitute a default (or any event which, with notice of lapse of time
of both, would constitute a default) under any contract, agreement, or other
instrument to which Servicer is a party or which may be applicable to any of its
agents;
(iii) This Agreement constitutes a valid, legal, and
binding obligation of Servicer, enforceable against it in accordance with its
terms, subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance; and
(iv) Servicer is not in violation of, and its execution
and delivery of this Agreement and its performance and compliance with the terms
of this Agreement will not constitute a violation of any law, any order or
decree of any court or arbiter, or any order, regulation or demand of any
federal, state or local government or regulatory authority, which violation is
likely to affect materially and adversely either the ability of Servicer to
perform its obligations under this Agreement or the financial condition of
Servicer; and
(v) No litigation is pending or, to the best of
Servicer's knowledge, threatened against Servicer that would prohibit Servicer
from entering into this Agreement or is likely to affect materially and
adversely either the ability of Servicer to perform its obligations under this
Agreement or the financial condition of Servicer.
2. SERVICING, ADDITIONAL MORTGAGE LOANS.
(a) Servicer shall administer the Mortgage Loans on behalf of and in
the interests of the Company in accordance with the terms of this Agreement and
in the same manner in which, and with the same care, skill, prudence and
diligence with which, it administers similar mortgage loans for its own account
or on behalf of others and consistent with the ordinary practices of prudent
commercial-mortgage-lending institutions of national standing relating to
mortgage loans of the nature and character of the Mortgage Loans, but without
regard to:
(i) any relationship that Servicer or its affiliate or
any subservicer or its affiliate may have with any obligor under any
Mortgage Loan; or
(ii) any right of the Servicer to receive compensation
for its services or reimbursement for any expenses pursuant to the terms
of this Agreement.
Servicer shall at all times exercise all due care and sound
business judgment in performing its duties, responsibilities and obligations
under this Agreement.
Servicer may, at its option and expense, service the Mortgage
Loans through a subservicer reasonably acceptable to Company and selected and
retained by Servicer and may delegate any and all of its rights and duties
hereunder to such subservicer, subject to the approval by Company of such
subservicer, which approval will not be unreasonably withheld. Any such
delegation shall not, however, release Servicer from any of its obligations
hereunder.
2
<PAGE> 3
(b) As soon as practical after the execution of this Agreement or
after the closing of a Mortgage Loan to be serviced by Servicer as an Additional
Mortgage Loan pursuant to Section 2(c) hereof, Company shall deliver to Servicer
(or cause to be delivered as soon as practical in the case of documents
temporarily in the custody of a title company) copies of the Note, Mortgage and
insurance certificates (collectively the "Mortgage File") relating to each
Mortgage Loan.
(c) Servicer shall service, in accordance with the terms of this
Agreement, such additional mortgage loans as the Company requests (each an
"Additional Mortgage Loan"). With respect to any additional mortgage loans to be
serviced by Servicer, Company will satisfy all conditions precedent to the
funding of each such additional loan under the applicable loan documents and
will attend to the closing of each such loan including all disbursements
required at such closing and Servicer will not have any responsibility therefor.
With respect to any additional mortgage loans to be serviced by Servicer
hereunder, Company will wire to Servicer the entire portion of any funds from
such loan in the nature of reserves and escrows as Servicer shall administer
pursuant to the terms hereof and Servicer shall deposit said funds into
appropriate accounts as provided herein. Company shall provide Servicer the
Mortgage File for each Additional Mortgage Loan and with a written description
of each Additional Mortgage Loan including an itemized allocation of the funds
wired setting forth the amounts allocated for each such additional loan to be
serviced hereunder in the form substantially similar to that attached hereto as
Exhibit B.
3. COLLECTIONS AND APPLICATION OF MORTGAGE PAYMENT.
Until all principal and interest under the Mortgage Loans are paid
in full (or until all remaining Mortgage Loans become Specially Serviced
Mortgaged Loans as defined in Section 9 hereof), Servicer shall be responsible
for the servicing functions with respect to each of the Mortgage Loans (other
than Specially Serviced Mortgage Loans) described below:
(a) Proceed diligently to collect all payments due under the
related note (the "Note") and mortgage (the "Mortgage") for each Mortgage Loan
as they come due;
(b) Keep a complete and accurate account of all sums collected
by Servicer from the mortgagor under the terms of the related Mortgage Loan (the
"Mortgagor") on account of each Note and Mortgage and applied to ground rents,
water rents, taxes, assessments and other public charges, insurance premiums for
hazard insurance policies, servicing fees, principal, premiums and interest
payments on the Note, and any other escrows or funds required under the terms of
the documents executed or delivered in connection with the origination of the
related Mortgage Loan (the "Mortgage Loan Documents");
(c) Notify the Company in writing in the event that any
Mortgagor fails to make any payment to Servicer required to be made under any
Note or Mortgage, such notice to be given on or before the fifteenth day of the
month during which such failure occurs (or on or before the next succeeding
business day if the fifteenth is not a business day) or if such failure occurs
after the fifteenth day of such month, notice of such failure shall be given by
the first business day of next succeeding month;
3
<PAGE> 4
(d) Accept prepayment on any Note from the related Mortgagor
only to the extent expressly permitted in the Note or Mortgage and then only if
such prepayments comply fully with the terms of such Note and Mortgage and
include all applicable prepayment penalties or other fees and accept
condemnation and hazard insurance proceeds in accordance with the Mortgage;
(e) Segregate from its corporate funds all funds received on
account of the Mortgage Loans and deposit such funds, subject to withdrawal on
demand, in a trust or custodial account for the benefit of the Company with an
institution whose accounts are insured by an agency or instrumentality of the
United States government to the maximum extent permitted by law; Servicer shall
maintain such records and take all such actions as may be necessary to secure
and obtain the maximum insurance for such account; deposits for principal,
interest, mortgage insurance premiums, ground rents, if any, insurance premiums,
sewer and water rates, and taxes and special assessments, shall be invested at
the option of the Servicer, in short-term investments, and interest or other
income earned on such deposits, shall be retained by the Servicer. Any losses
resulting from investment of such funds shall be deposited by the Servicer in
the custodial account; to the extent required by a Note or Mortgage or by
applicable law funds in any reserve fund shall be invested by Servicer at
Mortgagor's option in investments selected by Mortgagor, and interest or other
income earned on such funds, less amounts necessary to reimburse Servicer for
expenses directly related to the investment of such funds, shall be added to the
replacement reserve account or paid to Mortgagor in accordance with the
Mortgage;
(f) Remit to the Company by wire transfer all payments,
prepayment premiums and interest under the Mortgage Loans, all prepayments of
principal made in accordance with the terms of the Mortgage Loans, prepayments
attributable to condemnation, hazard insurance proceeds to be applied to the
principal balance of the Mortgage Loan, less the servicing fee allowed Servicer
as provided in Section 11 hereof.
Servicer shall remit such amounts to Company, in accordance
herewith, by 4:00 p.m., Eastern Time, on the twenty-fifth day of each month (or
on the next succeeding business day if the twenty-fifth day is not a business
day);
(g) From the funds remitted by the Mortgagor to Servicer, pay
promptly to the proper parties when due, the mortgage insurance premiums, ground
rents, water rents, taxes, assessments and other public charges, premiums on
hazard insurance policies, and other such payments required under the Mortgage;
(h) Provide Company with a certification annually as to the
status of payment of all such taxes and assessments with respect to the
Mortgaged Property, and notify Company of any nonpayment of taxes and
assessments with respect to any Mortgaged Property, within fifteen days after
Servicer receives notice of such nonpayment;
(i) Provide Company, on or before the twenty-fifth day of each
month (or on or before the next succeeding business day if the twenty-fifth is
not a business day) with a statement of the Mortgage Loans setting forth the
outstanding principal balance of each Note after accounting for the current
month's financial activity, including itemization of principal, if any, interest
and any other mortgage payments collected, and delinquency in payments under the
Mortgage or Note and the remittance to Company;
4
<PAGE> 5
(j) Provide Company annually with a statement of payment of
ground rents, water rents, taxes, assessments or other public charges and hazard
insurance premiums, the escrow account balances as to mortgage insurance
premiums, ground rents, water rates, taxes, assessments, other public charges
and hazard insurance premiums, and any release from the reserve fund for
replacements (and the purpose of such release);
(k) Hold in accordance with terms of the Mortgage Loan
Documents, and appropriately monitor, all mortgage escrows, including without
limitation, all tax and insurance, latent defect, on-site or off-site escrows,
and any other such escrows or accounts relating to the Mortgage Loan (including
the principal and interest account, to the extent that any interest earnings on
any of the foregoing escrows or accounts are not required to be remitted to
Mortgagor, such interest earnings shall be retained by Servicer for its own
account);
(l) Provide Company with a certification annually, stating that
all amounts collected by Servicer under the Notes and Mortgage Loans have been
properly applied in accordance with the provisions thereof and this Agreement;
(m) Request the Mortgagor to furnish Servicer, within 120 days after the end of
each fiscal year of Mortgagor, with its annual financial statements, audited by
an independent public accountant, copies of which statements Servicer shall
promptly furnish to Company; and
(n) Provide the Mortgagor, within 30 days after the end of each
calendar year, with a statement showing for such year the interest paid and
escrow activity, and the outstanding balance of the Mortgage as of year end.
4. Insurance.
Servicer shall comply with the following insurance requirements:
(a) Servicer shall maintain or cause to be maintained property
and liability insurance in such types and amounts as required under the Notes
and Mortgages or would normally be maintained by a prudent commercial mortgage
loan servicer but in no event less than as required under the terms of the
relevant FNMA guide.
(b) Any amounts collected by Servicer under any policies
required by this Section 4 shall be held and applied as provided in Section 4(d)
hereof.
(c) To the extent any insurance coverages described above are
not maintained by the Mortgagor Servicer shall not be required to advance its
own funds to pay for such coverage.
(d) During the term of this Agreement, Servicer shall retain
custody of all insurance policies or renewals thereof that are required to be
provided by Mortgagors under the Mortgage Loan Documents. Servicer will not make
any agreement with respect to the repair or restoration of the Mortgaged
Property or the disposition of insurance or condemnation proceeds without the
prior written consent of Company (or the Mortgagor, if, under the terms of the
Mortgage, the Mortgagor may choose the application of the insurance or
condemnation proceeds). Payment for losses under any such policy or condemnation
award, to the extent paid to Servicer, shall be held in trust by Servicer for
the benefit of the Company prior to the
5
<PAGE> 6
application of such amounts to the repair or restoration of the Mortgaged
Property or distribution of such amounts to Company. In the event that repair or
restoration of the Mortgaged Property is approved by Company (or the Mortgagor,
if, under the terms of the Mortgage, the Mortgagor may choose the application of
the insurance or condemnation proceeds), Servicer shall release the casualty or
insurance proceeds to the Mortgagor for the restoration of the Mortgaged
Property in accordance with Servicer's normal servicing procedures.
5. PROPERTY STATUS REPORTS; CORRESPONDENCE.
(a) Servicer shall have no duty to inspect any of the Mortgaged
Properties.
(b) Servicer shall, within ten business days after such
information comes to its attention, notify Company of any material change in
condition of the Mortgaged Property, maintenance problems which would materially
affect the Mortgaged Property, any sale or transfer by the Mortgagor of the
legal or equitable title to the Mortgaged Property or any abandonment of the
Mortgaged Property.
(c) Servicer shall monitor the performance by the Mortgagor of
its payment obligations under the Mortgage Loan Documents and will advise
Company as to the status of such performance whenever appropriate.
(d) Upon request by Company, Servicer shall furnish Company
such information relating to each Mortgage Loan, the Mortgaged Property or the
Servicer's servicing as Company may from time to time reasonably request.
(e) Company shall have the right to inspect and copy the
mortgage records of the Servicer with respect to the Mortgaged Property.
6. FIDELITY BOND; ERRORS AND OMISSIONS INSURANCE.
Servicer agrees to keep in force at all times, at no cost to
Company, in such amounts as required by the provisions of Section 2(a) and in no
event less than that required FNMA for approved seller servicers:
(a) A fidelity bond of an incorporated surety company securing
full protection and indemnity against loss of any money or other property
entrusted to Servicer or Servicer's officers, employees or agents or coming into
their control, caused by any dishonest, fraudulent or criminal act, direct or
indirect, of Servicer or of its officers, employees or agents. Servicer shall
notify Company if such fidelity bond coverage is decreased or exhausted.
(b) A policy of errors and omissions insurance.
Servicer may provide such fidelity and errors and omissions
coverage by means of a blanket fidelity bond or a blanket errors and omissions
insurance policy.
7. NO VARIATION OF MORTGAGE LOAN DOCUMENTS.
6
<PAGE> 7
With respect to the Mortgage Loans, Servicer shall not modify,
waive or vary any terms of any Note, Mortgage or any other Mortgage Loan
Document in any respect, or consent to any postponement, delay or other
deviation from strict compliance by the Mortgagor with any provision of the
Note, Mortgage, or any other Mortgage Loan Document or consent to any transfer
of assets or other change of ownership in the Mortgaged Property.
8. ADVANCES BY SERVICER.
Servicer has no obligation to remit principal or interest payments or any
other sums payable by the Mortgagor under the terms of any Mortgage Loan unless
and until such payments or sums are received by Servicer from such Mortgagor.
Servicer shall not be responsible for making advances relating to the payment of
hazard insurance premiums, water rates, taxes, assessments or other public
charges, or other items deemed for the protection of the security of the
Mortgages to the extent funds held in mortgage escrows are insufficient to pay
for such items.
9. DEFAULT MANAGEMENT.
Servicer shall have no obligation or authority to pursue default
remedies with respect to any Specially Serviced Mortgaged Loan. A "Specially
Serviced Mortgage Loan" is any Mortgage Loan with respect to which:
(i) the related Mortgagor has not made any payment
required to be made under the terms of the related
Mortgage Loan;
(ii) the related Mortgagor has expressed to the Servicer
an inability to pay or a hardship in paying the
Mortgage Loan in accordance with its terms;
(iii) the Servicer has received notice that the Mortgagor
has become the subject of any bankruptcy, insolvency
or similar proceeding, admitted in writing the
inability to pay its debts as they come due or made
an assignment for the benefit of creditors; and
(iv) the Servicer has received notice of a foreclosure or
threatened foreclosure of any lien on the Mortgaged
Property securing the Mortgage Loan.
Servicer shall continue to perform the servicing obligations under this
Agreement even as to a Specially Serviced Mortgage Loan to the extent possible
unless specifically advised in writing by Company that Servicer cease such
activity and the Mortgage Loan is being withdrawn from this Agreement (any such
Mortgage Loan a "Withdrawn Loan")
10. COMPLIANCE WITH LAW.
Servicer shall, in the performance of its obligations hereunder, comply
with all applicable federal, state and local law and regulations.
11. SERVICING COMPENSATION.
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<PAGE> 8
As compensation for its services hereunder, Servicer shall retain
from each monthly payment collected 1/12th of .00125 times the aggregate
principal amount of the Mortgage Loans other than a mortgage that has become a
Withdrawn Loan (the "Servicing Fee"). It is understood and agreed that Servicer
shall be entitled to the Servicing Fee out of interest only if and to the extent
paid by the Mortgagors. Servicer shall be entitled to retain as part of the
Servicing Fee (i) any and all earnings on investment of funds in accounts for or
related to the Mortgage Loans and (ii) all interest earnings on all escrows or
accounts for or relating to the Mortgage Loans (to the extent that such interest
earnings are not required to be remitted to the Mortgagors) held by Servicer or
any subservicer. Servicer shall not be entitled to retain any payments received
from the Mortgagors as late charges, default interest, assumption fees, loan
modification fees, extension fees and loan service transactions fees or similar
charges otherwise due and payable pursuant to the terms of the Mortgage Loan
Documents.
12. TERM OF AGREEMENT
Unless sooner terminated as provided in this Agreement, this
Agreement shall continue until the Mortgage Loans have been paid in full or
become Specially Serviced Mortgage Loans.
13. TERMINATION WITH CAUSE.
This Agreement shall immediately terminate, at the option of the
Company, without payment of compensation by the Company, upon the happening of
any of the following events, and Company shall be under no liability to Servicer
by reason of such termination:
(a) Any material representation or warranty of Servicer shall
be found to be untrue in any material respect;
(b) Servicer shall fail to remit to Company any amount due to
Company under this Agreement, and such failure shall continue and remain uncured
for a period of five business days commencing upon Servicer's receipt of notice
of such failure;
(c) Servicer shall commit fraud or misappropriation of funds or
fail, in any material respect, to perform any of its duties hereunder and shall
fail, within 30 days after its receipt of written notice from Company, to
correct or cure such failure;
(d) Servicer shall otherwise become incapacitated by operation
of law for the faithful performance of its duties pursuant to the terms of this
Agreement;
(e) Servicer shall assign, hypothecate, pledge or transfer in
any manner this Agreement or any of the Servicer's rights hereunder or suffer
the creation of any lien upon, or security interest in, or the transfer of, any
of Servicer's rights hereunder, by operation of law or otherwise; and
(f) Servicer shall institute proceedings for voluntary
bankruptcy, or shall file a petition seeking reorganization under the Federal
Bankruptcy Laws or for relief under any other law for the relief of debtors, or
shall consent to the appointment of a conservator or receiver of all or
substantially all of its property, or shall make a general assignment for the
benefit of its creditors, or shall admit in writing its inability to pay its
debts as they become due,
8
<PAGE> 9
or shall be adjudged a bankrupt or insolvent by a court of competent
jurisdiction appointing a receiver, liquidator or trustee of Servicer or of all
or substantially all of its property or approving any petition filed against
Servicer for its reorganization, and such adjudication or order shall remain in
force or unstayed for a period of ninety (90) days, or a final judgment or
decree for the payment of money is entered against Servicer in an amount in
excess of $250,000 and such judgment or decree is not discharged or stayed
within 90 days from the date of entry thereof.
14. TERMINATION WITHOUT CAUSE.
This Agreement shall be terminable by the Company without cause
upon 30 days written notice to Servicer. Servicer shall be entitled to any
Servicing Fee accrued prior to the termination date specified in the written
notice from Company
15. ASSIGNMENT AND TERMINATION PROCEDURES.
In the event of termination of this Agreement, Servicer shall: (i)
pay over to Company or its designee all moneys and other property collected and
held by it pursuant to this Agreement with respect to the Mortgage Loans within
ten (10) business days of such termination and (ii) deliver to Company a full
account, including a statement of moneys held in escrow by it for the payment of
ground rents, water rates, taxes, assessments, other public charges, hazard
insurance premiums, or other charges with respect to the Mortgage Loans within
twenty (20) business days of such termination.
16. TRANSFER OF INTEREST BY SERVICER.
Servicer may not assign its servicing rights hereunder without the
prior written consent of the Company, which consent shall not be unreasonably
withheld.
17. BORROWER CONTACT.
Servicer's contact with any Mortgagor under the terms of any
Mortgage Loan shall be limited to that reasonably necessary for Servicer to
perform its obligations hereunder and Servicer (together with its employees,
officer and directors) shall not use the proprietary and nonpublic information
that it becomes aware of in servicing the Mortgage Loans to render advice in
connection with, solicit, or otherwise participate in the refinancing of any
Mortgage Loans whether at maturity or otherwise.
18. BOOKS AND RECORDS.
The accounts and records of Servicer relating to the Mortgage
Loans, the Mortgaged Properties, and the servicing relating thereto shall be
maintained in accordance with generally accepted accounting principles. Upon
termination of this Agreement, all such books and records shall be promptly
delivered to Company.
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<PAGE> 10
19. REPORTS AND STATEMENTS.
Servicer shall annually within 120 days after the close of its
fiscal year furnish Company with a statement of its financial condition,
prepared and audited by a firm of independent certified public accountants.
20. PARTICIPATION NOT PARTNERSHIP.
Neither the executing of this Agreement, nor any sharing in the
benefits and burdens by Servicer and Company in respect of the Mortgage Loan or
in the proceeds thereof, is intended nor shall be construed to constitute the
formation of a partnership or joint venture between Servicer and Company, nor
shall it be construed to be an extension of credit or a loan by Company to
Servicer.
21. LOSSES AND EXPENSES.
Unless otherwise provided by this Agreement, Servicer and Company
shall each bear its own expenses, including legal expenses, relating to the
execution of and compliance under this Agreement.
22. AMENDMENT.
No amendment or modification of this Agreement shall be valid
unless evidenced by an instrument, in writing, signed by Servicer and Company.
23. SEVERABILITY.
If any one or more of the covenants, agreements, provisions, or
terms of this Agreement shall be for any reason whatsoever held invalid, then
such covenants, agreements, provisions or terms shall be deemed severable from
the remaining covenants, agreements, provisions or terms of this Agreement and
shall in no way affect the validity or enforceability of the other provisions of
this Agreement.
24. NOTICE.
Notices hereunder shall be in writing, and may be delivered by
hand, express delivery, or telecopy or other telecommunication device capable of
confirmation of receipt, addressed as follows (or at such other address as may
hereafter be furnished in writing by one party to the other):
10
<PAGE> 11
If to Servicer:
GMAC Commercial Mortgage Corporation
650 Dresher Road
Horsham, PA 19044
Attn: Commercial Servicing Manager
with a copy to:
GMAC Commercial Mortgage Corporation
650 Dresher Road
Horsham, PA 19044
Attn: Maria Corpora-Buck, Corporate Counsel
If to Company:
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle, Suite 402
Chevy Chase, Maryland 20815
Attn: Edward P. Nordberg, Jr.
25. GOVERNING LAW.
This Agreement shall be governed by and interpreted in accordance
with the law of the State of Maryland.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date first written above.
SERVICER:
GMAC COMMERCIAL MORTGAGE CORPORATION
By: /s/ Joseph A. Funk
--------------------------------------
Name: Joseph A. Funk
Title: Senior Vice President
COMPANY:
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
--------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Chief Financial Officer
12
<PAGE> 13
EXHIBIT A
MORTGAGE LOAN SCHEDULE
To be completed as Mortgage Loans are originated.
13
<PAGE> 14
EXHIBIT B
ADDITIONAL SERVICED LOAN INFORMATION SHEET
Loan #
------------------
Borrower:
---------------------------------------------------------------
Borrower Contact:
------------------------------------------------------
Phone :
-----------------------------------------------
Fax:
-----------------------------------------------
Property Location:
-----------------------------------------------
Title Company:
-----------------------------------------------
Title Policy No.:
-----------------------------------------------
Closing Date:
-----------------------------------------------
Listing of Reserve/Escrow Amounts:
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
14
<PAGE> 1
EXHIBIT 10.4
AGREEMENT REGARDING FIRST RIGHT OF PURCHASE
THIS AGREEMENT REGARDING FIRST RIGHT OF PURCHASE is made as of the 29th
day of April, 1998, by and between HEALTHCARE FINANCIAL PARTNERS REIT, INC. (the
"Company") and GMAC COMMERCIAL MORTGAGE CORPORATION ("GMACCM").
WITNESSETH
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company and GMACCM have executed an agreement under the terms of
which GMACCM has agreed to provide certain loan servicing functions on behalf of
the Company with respect to certain mortgage loans held by the Company; and
WHEREAS, GMACCM wishes to enter into this Agreement pursuant to which
GMACCM grants the Company the right to purchase certain mortgage loans held by
GMACCM and secured principally by healthcare facilities.
NOW, THEREFORE, in consideration of the foregoing, the agreements set
forth below, and other good and valuable consideration, the receipt and
sufficiency of which is acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
The following terms used in this Agreement have the meaning set forth
below:
"Agreement" means this Agreement, together with any addenda and
amendments made in the manner described herein.
"Common Stock" means the common stock of the Company, $.0001 par value
per share.
"Fair Market Value" shall mean, if the Common Stock is actively traded
on any national securities exchange or any Nasdaq quotation or market system,
the closing price at which shares of Common Stock shall have been sold on the
most recent trading date immediately prior to the date of determination, as
reported by such exchange or system, and if the shares of Common Stock are not
actively traded on any such exchange or system, the arithmatic mean of the bid
and asked prices for the shares of Common Stock on the most trading date or
dates within a reasonable period prior to the determination date as reported by
such exchange or system. If there are not bids and asked prices within a
reasonable period or if the shares of Common Stock on any exchange or system as
of the determination date, Fair Market Value shall mean the Fair Market Value of
a share of Common Stock as determined in good faith by the Board of Directors of
Company.
<PAGE> 2
"Healthcare Facility" means, without limitation, a nursing facility,
hospital, medical office building, mental health facility, assisted living
facility, retirement facility or out-patient surgery center, or any other
similar facility utilized in the provision of healthcare services.
"Loan to Value Ratio" means, with respect to any obligation, the ratio
(expressed as a percentage) of the then outstanding principal balance of the
obligation to the Value of the related Mortgaged Property.
"Mortgaged Property" means the underlying property securing an
obligation and consisting of a fee simple estate together with any personal
property, fixtures, leases and other property rights pertaining thereto.
"Qualifying Mortgage Loan" means any obligation (i) that is secured by
Mortgaged Property that is comprised of a Healthcare Facility and (ii) as to
which GMACCM has full legal power and authority to transfer good title free and
clear of any lien or other encumbrance.
"Value" means, with respect to any Mortgaged Property, the lesser of
(a) the appraised value of such Mortgaged Property determined in an appraisal
obtained by the originator of the related obligation at origination and (b) the
purchase price of such Mortgaged Property in the transaction, if any, financed
by such Mortgage Loan.
ARTICLE 2
FIRST RIGHT OF PURCHASE
2.1 FIRST RIGHT OF PURCHASE. During each year that this Agreement
remains in effect, the Company shall have the right to purchase (the "First
Right of Purchase") at the purchase price and under the terms provided in this
Article 2, each Qualifying Mortgage Loan with a Loan to Value Ratio in excess of
80% held by GMACCM which GMACCM determines to sell, assign or otherwise
transfer, up to an aggregate principal amount of $100 million (the "Annual
Commitment Amount"). GMACCM may, but is not obligated to, make available for
purchase by the Company under the terms of this Agreement Qualifying Mortgage
Loans with a Loan to Value Ratio of 80% or less, and the principal amount of
such Qualifying Mortgage Loans shall be applied to the Annual Commitment Amount.
GMACCM shall not sell, assign or otherwise transfer any Qualifying Mortgage Loan
with a Loan to Value Ratio in excess of 80% to anyone other than the Company
during any year that this Agreement remains in effect unless and until (i)
GMACCM has made available for purchase by the Company Qualifying Mortgage Loans
during such year in an aggregate principal amount equal to or greater than the
Annual Commitment Amount or (ii) the Company has either notified GMACCM in
writing that the Company does not intend to purchase such Qualifying Mortgage
Loan or the Company either fails to deliver the Exercise Notice with respect to
such Qualifying Mortgage Loan or fails to purchase such Qualifying Mortgage Loan
within the time provided in this Article 2. The Annual Commitment Amount under
this Section 2.1 will be measured on a 12-month basis as of each of the first,
second and third anniversary of the date of this Agreement.
2.2 NOTIFICATION; EXERCISE OF RIGHTS. GMACCM shall provide to the
Company the information and documents described on Exhibit A attached hereto,
concerning each Qualifying
2
<PAGE> 3
Mortgage Loan which is made available for purchase by the Company pursuant to
Section 2.1 hereof. The Company shall have twenty (20) days from the date of
receipt of such information and documentation to notify GMACCM in writing of its
intent to purchase such Qualifying Mortgage Loan (the "Exercise Notice"). The
Exercise Notice shall specify a closing date and time for the purchase of such
Qualifying Mortgage Loan which date shall be no later than ten (10) days from
the date of such Exercise Notice.
2.3 LIMITATIONS. It is expressly understood by the parties hereto
that GMACCM's obligation to offer to sell Qualifying Mortgage Loans to the
Company is limited as provided in this Article 2 and that GMACCM is under no
obligation to offer to sell to the Company all Qualifying Mortgage Loans held by
GMACCM at a particular time.
2.4 PURCHASE PRICE. The purchase price to be paid by the Company
to GMACCM to purchase any Qualifying Mortgage Loan under this Article 2 equals
100% of the principal balance of such Qualifying Mortgage Loan plus accrued and
unpaid interest due and owing from the related borrower under the terms of such
Qualifying Mortgage Loan as of the date of such purchase.
ARTICLE 3
STOCK OPTIONS
So long as this Agreement is in effect, on each anniversary date
hereof, the Company will grant GMACCM options to purchase up to 10,000 shares of
Common Stock, the exact number of shares for each anniversary date to be
determined by multiplying 10,000 by a fraction, the numerator of which is the
aggregate principal amount of Qualified Mortgage Loans purchased by the Company
from GMACCM pursuant to Article 2 hereof during the preceding 12 months and the
denominator of which shall be $100 million. Such options will be granted at a
per share exercise price equal to the Fair Market Value of a share of Common
Stock at the time of the grant, will be immediately exercisable, and will expire
two years after the date of grant, if not theretofore exercised. Such options
will be evidenced by a stock option agreement in the form of Exhibit B attached
hereto and will not be transferable, except that GMACCM may transfer such
options to a corporation which is an affiliate of GMACCM.
ARTICLE 4
TERM
Unless extended by the mutual agreement of the parties hereto, this
Agreement will terminate and be of no force and effect as of the third
anniversary of the date hereof.
ARTICLE 5
MISCELLANEOUS
5.1 NOTICES. All notices, requests, consents, and other
communications required or permitted hereunder will be in writing and will be
delivered in person or mailed by certified or registered mail, return receipt
requested, addressed as follows (or at such other address for the parties as
specified by like notice):
3
<PAGE> 4
If to the Company:
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle, Suite 402
Chevy Chase, Maryland 20815
Attn: President
With a copy to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, NE
16th Floor
Atlanta, Georgia 30303
Attn: G. William Speer
If to GMACCM:
650 Dresher Road
Horsham, PA 19044
Attn: Maria Corpora-Buck, Corporate Counsel
5.2 ASSIGNMENT. This Agreement is not assignable by either of the
parties hereto without the written consent of the other party.
5.3 GOVERNING LAW. This Agreement has been executed and delivered
in the State of Maryland and will be construed and enforced in accordance with
the internal laws of the State of Maryland, without reference to the conflicts
of laws principles thereof.
5.4 AMENDMENT. This Agreement may be amended, supplemented,
extended or interpreted at any time, but only by a written instrument executed
by the parties hereto.
5.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
constitutes one and the same instrument.
5.6 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto concerning the transactions contemplated herein and
supersedes all prior agreements or understandings between the parties hereto
relating to the subject matter hereof. No oral representation, agreement or
understanding made by either party hereto is valid or binding upon such party or
the other party hereto.
5.7 FURTHER ASSURANCE. Each party hereto will do and perform, or
cause to be done and performed, all such further acts and things and will
execute and deliver all such other agreements, certificates, instruments and
documents as the other party hereto may reasonably
4
<PAGE> 5
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated hereby.
5.8 CAPTIONS AND SECTION HEADINGS. Except as used in Article I,
captions and section headings used herein are for convenience only and are not a
part of this Agreement and will not be used in construing it.
5.9 WAIVER. Any waiver by either party hereto of any rights
hereunder will be without prejudice of the future assertion of any such rights,
and any delay in exercising any rights will not operate as a waiver thereof.
[SIGNATURES APPEAR ON NEXT PAGE.]
5
<PAGE> 6
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first written above.
HEALTHCARE FINANCIAL
PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
------------------------------
Title: Chief Financial Officer
GMAC COMMERCIAL MORTGAGE
CORPORATION
By: /s/ William E. Shine
------------------------------
Title: Executive Vice President
6
<PAGE> 7
EXHIBIT A
1. Credit Offering Memorandum with respect to the subject Qualified
Mortgage Loan.
2. Collateral/Loan file for the subject Qualified Mortgage Loan,
including, without limitation, the closing binder and all third-party
reports with respect thereto (appraisals, environmental reports, etc.)
3. Such other information or documents as may be reasonably requested by
the Company and which are in the possession or control of GMACCM.
<PAGE> 8
EXHIBIT B
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the ________ day of _______________, _____
(the "Grant Date"), by and between HEALTHCARE FINANCIAL PARTNERS REIT, INC. (the
"Company") and GMAC COMMERCIAL MORTGAGE CORPORATION (the "Optionee").
WITNESSETH:
WHEREAS, the Board of Directors of the Company has authorized the grant
to Optionee of a non-qualified stock option authorizing Optionee to purchase
shares of common stock of the Company; and
WHEREAS, the Company and Optionee wish to confirm the terms and
conditions of the option;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, it is hereby agreed between the parties hereto as follows:
1. Grant of Option. Subject to the terms, restrictions,
limitations and conditions stated herein, the Company hereby grants to the
Optionee an option (the "Option") to purchase, all or any part of ______________
shares of common stock of the Company (the "Common Stock").
2. Term and Exercise of Option. Subject to the further provisions
of this Agreement:
(a) The Option is exercisable during the Option Period
(as defined in Section 4 hereof) but only to the extent provided by the
vesting provisions of Section 5.
(b) Any vested portion of the Option may be exercised at
any time during the Option Period by the delivery to the Company, at
its principal place of business, of (i) a written notice of exercise in
substantially the form attached hereto as Exhibit 1, which shall be
actually delivered to the Company no earlier than thirty (30) days and
no later than ten (10) days prior to the date upon which Optionee
desires to exercise all or any portion of the Option; (ii) payment to
the Company of the Exercise Price, defined in Section 3 below,
multiplied by the number of shares being purchased (the "Purchase
Price") in cash or a certified check; and (iii) cash or a certified
check representing payment of all withholding tax obligations (whether
federal, state or local), imposed by reason of the exercise of the
Option. Upon acceptance of such notice, receipt of payment in full of
the Purchase Price, and receipt of payment of all withholding tax
obligations, the Company shall cause to be issued a certificate
representing the shares of Common Stock purchased.
<PAGE> 9
(c) The Purchase Price must be paid in full upon the
exercise of an Option and no shares of Common Stock will be issued or
delivered until full payment therefor has been made.
3. Exercise Price. The exercise price for each share of Common
Stock for which the Option is exercised is $________, subject to adjustment as
set forth in Section 8 hereof (the "Exercise Price").
4. Term and Termination of Option. Except as otherwise provided
in Section 8 below, the term of the Option (the "Option Period") will commence
on the Grant Date and terminate on the second anniversary of the Grant Date.
Upon the expiration of the Option Period, this Option and all unexercised rights
granted to Optionee hereunder will terminate, and thereafter be null and void.
5. Vesting. The Option will become fully vested and exercisable
upon the Grant Date.
6. Rights as Shareholder. Until the stock certificates reflecting
the Common Stock accruing to the Optionee upon exercise of the Option are issued
to the Optionee, the Optionee shall have no rights as a shareholder with respect
to such Common Stock. The Company will make no adjustment for any dividends or
distributions or other rights on or with respect to shares of Common Stock
purchased pursuant to the Option for which the record date is prior to the
issuance of that stock certificate, except as this Agreement otherwise provides.
7. Restriction on Transfer of Option. The Option evidenced hereby
is nontransferable and is exercisable only by the Optionee, except that the
Optionee may transfer the Option to a corporation which is an affiliate of the
Optionee, provided the Optionee gives the Company notice of such transfer.
8. Changes in Capitalization.
(a) In the event of reorganization, recapitalization,
stock split, reverse stock split, stock dividend, combination of
shares, merger, consolidation, acquisition of property or stock, or any
change in the capital structure of the Company, the Board of Directors
of the Company shall make those adjustments as may be appropriate in
the number and kind of shares as to which this Option is exercisable,
to the end that, to the extent practicable, Optionee's proportionate
interest will be maintained as before the occurrence of such event.
Adjustments will be made without change in the total price applicable
to the Option and with a corresponding adjustment in the Exercise Price
if necessary. No fractional shares will be issued or optioned in making
the foregoing adjustments.
(b) The creation or increase of authorized stock or
securities of any class of the Company or the issuance for
consideration by the Company of stock or securities of any class of the
Company or of securities convertible into such stock or securities will
not affect, and no adjustment by reason thereof will be made with
respect to, the number or price of shares of Common Stock subject to
this Option.
B-2
<PAGE> 10
(c) The grant of this Option will not affect in any way
the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure or to merge or consolidate, or to dissolve,
liquidate, sell, or transfer all or part of its business or assets.
(d) A dissolution or liquidation of the Company will
cause this Option to terminate as to any portion thereof not exercised
as of the effective date of the dissolution or liquidation.
(e) The foregoing adjustments and the manner of
application of the foregoing provisions will be determined by the Board
of Directors of the Company in its sole discretion. Any adjustment may
provide for the elimination of any fractional share which might
otherwise become subject to an Option.
9. Special Limitation on Exercise. Notwithstanding anything
contained herein to the contrary, no purported exercise of the Option will be
effective without the written approval of the Company, which may be withheld to
the extent that its exercise, either individually or in the aggregate together
with the exercise of other previously exercised stock options and/or offers and
sales pursuant to any prior or contemplated offering of securities, would, in
the sole and absolute judgment of the Company, require the filing of a
registration statement with the United States Securities and Exchange
Commission, or with the securities commission of any state. The Company shall
avail itself of any exemptions from registration contained in applicable federal
and state securities laws which are reasonably available to the Company on terms
which, in its sole and absolute discretion, it deems reasonable and not unduly
burdensome or costly. If the Option cannot be exercised at the time it would
otherwise expire due to the restrictions contained in this Section, the exercise
period will be extended for successive one-year periods until it can be
exercised in accordance with this Section. The Optionee shall deliver to the
Company, prior to the exercise of the Option, such information, representations
and warranties as the Company may reasonably request in order for the Company to
be able to satisfy itself that the Common Stock to be acquired pursuant to the
exercise of the Option is being acquired in accordance with the terms of an
applicable exemption from the securities registration requirements of applicable
federal and state securities laws.
10. Legend on Stock Certificates. Certificates evidencing Common
Stock to be distributed pursuant to the Agreement will, to the extent
appropriate at the time, have noted conspicuously on the certificates a legend
to the following effect, which is intended to give all persons full notice of
the existence of the conditions, restrictions, rights and obligations set forth
in this Agreement:
(a) That the securities evidenced by the certificate were
issued without registration under the Securities Act of 1933, as
amended (the "1933 Act"), or under the applicable laws of any state or
states (collectively referred to as the "State Acts"), in reliance upon
certain exemptive provisions of the 1933 Act or any applicable State
Acts;
(b) That the securities cannot be sold or transferred
unless, in the opinion of counsel reasonably acceptable to the Company,
the sale or transfer would be:
B-3
<PAGE> 11
(1) Pursuant to an effective registration
statement under the 1933 Act or pursuant to an available
exemption form registration; and
(2) A transaction which is exempt under any
applicable State Acts or pursuant to an effective registration
statement under or in a transaction which is otherwise in
compliance with the State Acts; and
(c) That the securities evidenced by the certificate were
issued in accordance with the provisions of the Agreement and are
subject to the provisions thereof and may not be sold or transferred
except in compliance with said provisions.
11. Governing Laws. This Agreement is construed, administered and
enforced according to the laws of the State of Maryland; provided, however, no
option may be exercised except, in the reasonable judgment of the Board of
Directors of the Company, in compliance with exemptions under applicable state
securities laws.
12. Successors. This Agreement is binding upon and inure to the
benefit of the heirs, legal representatives, successors and permitted assigns of
the parties.
13. Notice. Except as otherwise specified herein, all notices and
other communications under this Agreement must be in writing and will be deemed
to have been given if personally delivered or if sent by registered or certified
United States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices must be sent by giving notice of
the address to the other parties in the same manner as provided herein.
14. Severability. In the event that any one or more of the
provisions or portion thereof contained in this Agreement is for any reason held
to be invalid, illegal or unenforceable in any respect, the same will not
invalidate or otherwise affect any other provisions of this Agreement, and this
Agreement will be construed as if the invalid, illegal or unenforceable
provision or portion thereof had never been contained herein.
15. Entire Agreement. This Agreement expresses the entire
understanding and agreement of the parties. This Agreement may be executed in
two or more counterparts, each of which will be deemed an original but all of
which will constitute one and the same instrument.
16. Violation. Any transfer, pledge, sale, assignment, or
hypothecation of the Option or any portion thereof will be a violation of the
terms of this Agreement and will be void and without effect.
17. Headings. Paragraph headings used herein are for convenience
of reference only and will not be considered in construing this Agreement.
18. Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are
B-4
<PAGE> 12
thereby aggrieved will have the right to specific performance and injunction in
addition to any and all other rights and remedies at law or in equity, and all
such rights and remedies shall be cumulative.
IN WITNESS WHEREOF, the parties have executed and sealed this Agreement
on the day and year first set forth above.
HEALTHCARE FINANCIAL PARTNERS REIT,
INC.
By:
---------------------------------
Title:
------------------------------
ATTEST:
By:
---------------------------------
Title:
---------------------------------
(CORPORATE SEAL)
GMAC COMMERCIAL MORTGAGE
CORPORATION
By:
---------------------------------
Title:
---------------------------------
ATTEST:
By:
---------------------------------
Title:
---------------------------------
(CORPORATE SEAL)
B-5
<PAGE> 13
EXHIBIT 1
NOTICE OF EXERCISE OF
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
TO PURCHASE COMMON STOCK OF
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
Name: GMAC Commercial Mortgage
Corporation
Address:
-------------------------
-------------------------
Date:
-------------------------
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Re: Exercise of Non-Qualified Stock Option
Gentlemen:
Subject to acceptance hereof in writing by HealthCare Financial
Partners REIT, Inc. (the "Company") pursuant to the provisions of that certain
HealthCare Financial Partners REIT, Inc. Non-Qualified Stock Option Agreement
(the "Agreement"), the undersigned hereby gives at least ten days but not more
than thirty days prior notice of its election to exercise options granted to it
to purchase ___________ shares of common stock, $.0001 par value per share, of
the Company (the "Common Stock") under the Agreement dated as of
________________, _____. The purchase will take place as of __________, _____
(the "Exercise Date").
On or before the Exercise Date, the undersigned will pay the applicable
purchase price by delivery of cash or a certified check for $___________ for the
full purchase price payable to the order of HealthCare Financial Partners REIT,
Inc.
As soon as the stock certificate is registered in the name of the
undersigned, please delivery it to the undersigned at the above address.
If the Common Stock being acquired is not registered for issuance to
and resale by the Optionee pursuant to an effective registration statement on
Form S-8 (or successor form) filed under the Securities Act of 1933, as amended
(the "1933 Act"), the undersigned hereby represents, warrants, covenants, and
agrees with the Company as follows:
The shares of the Common Stock being acquired by the
undersigned will be acquired for its own account without the
participation of any other person, with the
B-6
<PAGE> 14
intent of holding the Common Stock for investment and without the
intent of participating, directly or indirectly, in a distribution of
the Common Stock and not with a view to, or for resale in connection
with, any distribution of the Common Stock, nor is the undersigned
aware of the existence of any distribution of the Common Stock;
The undersigned is not acquiring the Common Stock based upon
any representation, oral or written, by any person with respect to the
future value of, or income from, the Common Stock but rather upon an
independent examination and judgment as to the prospects of the
Company;
The Common Stock was not offered to the undersigned by means
of publicly disseminated advertisements or sales literature, nor is the
undersigned aware of any offers made to other persons by such means;
The undersigned is able to bear the economic risks of the
investment in the Common Stock, including the risk of a complete loss
of its investment therein;
The undersigned understands and agrees that the Common Stock
will be issued and sold to it without registration under any state law
relating to the registration of securities for sale, and will be issued
and sold in reliance on the exemptions from registration under the 1933
Act, provided by Sections 3(b) and/or 4(2) thereof and the rules and
regulations promulgated thereunder;
The Common Stock cannot be offered for sale, sold or
transferred by the undersigned other than pursuant to: (A) an effective
registration under the 1933 Act or in a transaction otherwise in
compliance with the 1933 Act; and (B) evidence satisfactory to the
Company of compliance with the applicable securities laws of other
jurisdictions. The Company shall be entitled to rely upon an opinion of
counsel satisfactory to it with respect to compliance with the above
laws;
The Company will be under no obligation to register the Common
Stock or to comply with any exemption available for sale of the Common
Stock without registration or filing, and the information or conditions
necessary to permit routine sales of securities of the Company under
Rule 144 under the 1933 Act are not now available and no assurance has
been given that it or they will become available. The Company is under
no obligation to act in any manner so as to make Rule 144 available
with respect to the Common Stock;
The undersigned has and has had complete access to and the
opportunity to review and make copies of all material documents related
to the business of the Company, including, but not limited to,
contracts, financial statements, tax returns, leases, deeds and other
books and records. The undersigned has examined such of these documents
as it wished and is familiar with the business and affairs of the
Company. The undersigned realizes that the purchase of the Common Stock
is a speculative investment and that any possible profit therefrom is
uncertain;
B-7
<PAGE> 15
The undersigned has had the opportunity to ask questions of
and receive answers from the Company and any person acting on its
behalf and to obtain all material information reasonably available with
respect to the Company and its affairs. The undersigned has received
all information and data with respect to the Company which it has
requested and which it has deemed relevant in connection with the
evaluation of the merits and risks of my investment in the Company;
The undersigned has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and
risks of the purchase of the Common Stock hereunder and it is able to
bear the economic risk of such purchase; and
The agreements, representations, warranties and covenants made
by the undersigned herein extend to and apply to all of the Common
Stock of the Company issued to the undersigned pursuant to this Option.
Acceptance by the undersigned of the certificate representing such
Common Stock shall constitute a confirmation by the undersigned that
all such agreements, representations, warranties and covenants made
herein shall be true and correct at that time.
The undersigned understands that the certificates representing the
shares being purchased by it in accordance with this notice will bear a legend
referring to the foregoing covenants, representations and warranties and
restrictions on transfer, and the undersigned agrees that a legend to that
effect may be placed on any certificate which may be issued to it as a
substitute for the certificates being acquired by me in accordance with this
notice.
Very truly yours,
GMAC COMMERCIAL MORTGAGE
CORPORATION
By:
------------------------------
Title:
----------------------------
B-8
<PAGE> 16
AGREED TO AND ACCEPTED:
HEALTHCARE FINANCIAL PARTNERS REIT,
INC.
By:
--------------------------------
Title:
------------------------------
Number of Shares
Exercised:
--------------------------
Number of Shares
Remaining: Date:
-------------------------- -------------------------
B-9
<PAGE> 1
EXHIBIT 10.5
===============================================================================
REGISTRATION RIGHTS AGREEMENT
DATED AS OF MAY 6, 1998
BETWEEN
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
AND
NATIONSBANC MONTGOMERY SECURITIES LLC AND
LEHMAN BROTHERS INC.
AS INITIAL PURCHASERS
AND
THE PARTIES IDENTIFIED ON
SCHEDULE 1 ATTACHED HERETO
AS INITIAL SUBSCRIBERS
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1 Definitions ................................................ 1
2 Shelf Registration ......................................... 3
3 Registration Procedures .................................... 3
4 Registration Expenses ...................................... 8
5 Indemnification and Contribution ........................... 8
6 Underwritten Offering ...................................... 11
7 Miscellaneous .............................................. 12
</TABLE>
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of May 6, 1998 by and between HealthCare Financial Partners
REIT, Inc., a Maryland corporation (the "Company") and Lehman Brothers Inc. and
NationsBanc Montgomery Securities LLC (the "Initial Purchasers") and the parties
identified on Schedule 1 hereto (the "Initial Subscribers").
This Agreement is entered into in connection with the Purchase
Agreement, dated as of April 29, 1998, between the Company and the Initial
Purchasers (the "Purchase Agreement"), which provides for the sale by the
Company to the Initial Purchasers of an aggregate of 1,150,000 Units (the "Firm
Units"), each Unit consisting of five shares of the Company's common stock, par
value $.0001 per share (the "Common Stock") and one stock purchase Warrant (a
"Warrant"). The Purchase Agreement also provides for the Company's grant of an
option to the Initial Purchasers to purchase up to 172,000 additional Units (the
"Optional Units") solely for the purpose of covering over-allotments, if any.
Concurrently with the sale of the Firm Units to the Initial Purchasers, the
Company is selling an aggregate of 300,000 Units (the "Initial Subscriber
Units") to the Initial Subscribers. The Firm Units, the Initial Subscriber Units
and the Optional Units are collectively referred to as the "Units." Capitalized
terms used but not specifically defined herein have the respective meanings
ascribed to them in the Purchase Agreement.
The terms of the Warrants shall be as set forth in the Warrant
Agreement (the "Warrant Agreement") to be entered into by the Company and the
Warrant agent on the Closing Date (as hereinafter defined). Each Warrant
entitles the holders thereof for $20.00 to purchase one share (subject to
antidilution provisions) of the Common Stock. The Warrants will become
exercisable six months after the Closing Date and will remain exercisable until
the third anniversary of the Closing Date.
The shares of Common Stock which in part comprise the Units are herein
referred to as the Unit Shares. The shares of Common Stock issuable upon
exercise of the Warrants are herein referred to as the Warrant Shares. The Unit
Shares and the Warrant Shares are herein collectively referred to as the Shares.
The Company agrees with the Initial Purchasers and the Initial
Subscribers (i) for their benefit as Initial Purchasers and Initial Subscribers,
respectively, and (ii) for the benefit of the holders from time to time of the
Units, Warrants, Unit Shares and Warrant Shares (collectively, the
"Securities"), including the Initial Purchasers and Initial Subscribers, (each,
a "Holder" and together the "Holders"), as follows:
1. Definitions. As used in this Agreement, the following
capitalized terms shall have the following meanings:
Affiliate: Any person that, directly or indirectly, is in
control of, is controlled by, or is under common control with a
specified person. For purposes of this definition, control of a person
means the power, direct or indirect, to direct or cause the direction
of the management or policies of such person, whether by contract or
otherwise; the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
<PAGE> 4
Commission: The Securities and Exchange Commission.
Closing Date: The date of the payment for and delivery of the
Firm Units to the Initial Purchasers pursuant to the Purchase
Agreement.
DTC: The Depository Trust Company.
Effectiveness Period: As defined in Section 2(b).
Exchange Act: The Securities Exchange Act of 1934, as amended.
Managing Underwriter: The investment banker or bankers and
manager or managers that administer an underwritten offering, if any,
as set forth in Section 6 of this Agreement.
Person: An individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a
government or agency or political subdivision thereof.
Prospectus: The prospectus included in any Shelf Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A under the
Securities Act), as amended or supplemented by any prospectus
supplement and by all other amendments thereto, including
post-effective amendments, and all material incorporated by reference
into such prospectus.
Registrable Securities: All or any portion of the Units, Unit
Shares, Warrants, Warrant Shares issued from time to time; provided,
however, that a security ceases to be a Registrable Security when it is
no longer a Restricted Security.
Restricted Security: Each Unit, Unit Share, Warrant, Warrant
Share, except any Unit, Unit Share, Warrant, Warrant Share that (i) has
been effectively registered under the Securities Act and sold in a
manner contemplated by the Shelf Registration Statement, or (ii) has
been transferred in compliance with Rule 144 under the Securities Act
(or any successor provision thereto) or is transferable pursuant to
paragraph (k) of Rule 144 (or any successor provision thereto).
Securities Act: The Securities Act of 1933, as amended.
Shelf Registration Statement: A "shelf" registration statement
of the Company pursuant to Section 2 of this Agreement filed with the
Commission, which covers some or all of the Registrable Securities, as
applicable, on an appropriate form under Rule 415 of the Securities
Act, or any similar rule that may be adopted by the Commission,
amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated
by reference therein.
2
<PAGE> 5
Shelf Registration: A registration effected pursuant to
Section 2 of this Agreement.
Underwriter: Any underwriter of Registrable Securities in
connection with an offering thereof under a Shelf Registration
Statement.
2. Shelf Registration.
(a) The Company shall, within 120 days after the latest
date of initial issuance of the Units (the "Issue Date"), file with the
Commission a Shelf Registration Statement relating to the offer and sale of the
Registrable Securities by the Holders from time to time in accordance with the
method of distribution elected by such Holders and set forth in such Shelf
Registration Statement and, thereafter, shall use its best efforts to cause such
Shelf Registration Statement to be declared effective under the Securities Act
as soon as practicable and in no event later than 180 days after the Issue Date;
provided, however, that no Holder shall be entitled to have the Registrable
Securities held by it covered by such Shelf Registration unless such Holder is
in compliance with Section 3(m) of this Agreement.
(b) The Company shall use its best efforts (i) to keep
the Shelf Registration Statement continuously effective in order to permit the
Prospectus forming a part thereof to be usable by Holders for a period of two
years from the Issue Date or such shorter period that will terminate when there
are no Registrable Securities outstanding (in either case, such period being
referred to as the "Effectiveness Period"), and (ii) after the effectiveness of
the Shelf Registration Statement, promptly upon the request of any Holder, to
take promptly any action reasonably necessary to register the sale of any
Registrable Security of such Holder and to identify such Holder as a selling
stockholder. The Company will be deemed not to have used its best efforts to
keep the Shelf Registration Statement continuously effective during the
requisite period if the Company voluntarily takes any action that would result
in Holders of Registrable Securities covered thereby not being able to offer and
sell any such Registrable Securities during that period, unless (i) such action
is required by applicable law or the rules of any national securities exchange
or other market on which any of the Registrable Securities are then listed or
quoted, (ii) such action is taken upon the occurrence of any event contemplated
by paragraph 3(c)(2)(iii) of this Agreement and in good faith and for valid
business reasons, or (iii) the continued effectiveness of the Shelf Registration
Statement would require the Company to disclose a material financing,
acquisition or other corporate transaction, and the Board of Directors of the
Company shall have determined in good faith that such disclosure is not in the
best interest of the Company and its shareholders and, in the case of clause (i)
or (ii) above, the Company thereafter promptly complies with the requirements of
paragraph 3(i) of this Agreement.
3. Registration Procedures. In connection with any Shelf
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to the Initial Subscribers
and Initial Purchasers, prior to the filing thereof with the Commission, a copy
of any Shelf Registration Statement, and each amendment thereof and each
amendment or supplement, if any, to the Prospectus included therein, and shall
use its best efforts to reflect in each such document, when
3
<PAGE> 6
so filed with the Commission, such comments as the Initial Purchasers or the
Initial Subscribers reasonably may propose in a timely manner.
(b) The Company shall take such action as may be
necessary so that (i) any Shelf Registration Statement and any amendment thereto
and any Prospectus forming a part thereof and any amendment or supplement
thereto (and each report or other document incorporated therein by reference in
each case) complies in all material respects with the applicable provisions of
the Securities Act and the Exchange Act and the respective rules and regulations
thereunder, (ii) any Shelf Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (iii) any Prospectus forming part
of any Shelf Registration Statement, and any amendment or supplement to such
Prospectus, does not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they were made, not misleading.
(c) (1) The Company shall advise the Initial
Subscribers and the Initial Purchasers and, in the case of clause (i), the
Holders and, if requested by the Initial Purchasers or any such Holder, confirm
such advice in writing: (i) when a Shelf Registration Statement and any
amendment thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has become
effective; and (ii) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the Prospectus included
therein or for additional information.
(2) The Company shall advise the Initial
Purchasers and the Holders and, if requested by the Initial Purchasers or any
such Holder, confirm such advice in writing of: (i) the issuance by the
Commission of any stop order suspending effectiveness of the Shelf Registration
Statement or the initiation of any proceedings for that purpose; (ii) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the securities included therein for sale in any jurisdiction or
the initiation of any proceeding for such purpose; and (iii) the happening of
any event that requires the making of any changes in the Shelf Registration
Statement or the Prospectus so that, as of such date, the Shelf Registration
Statement and the Prospectus do not contain an untrue statement of a material
fact and do not omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the Prospectus, in
light of the circumstances under which they were made) not misleading (which
advice shall be accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made).
(d) The Company shall exercise its best efforts to
prevent the issuance, and if issued to obtain the withdrawal at the earliest
possible time, of any order suspending the effectiveness of any Shelf
Registration Statement.
(e) The Company shall furnish to each Holder of
Registrable Securities included within the coverage of any Shelf Registration
Statement, without charge, at least one copy of such Shelf Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and, if the Holder so requests in writing, all
reports, other documents and exhibits (including those incorporated by
reference).
4
<PAGE> 7
(f) The Company shall, during the Effectiveness Period,
deliver to each Holder of Registrable Securities included within the coverage of
any Shelf Registration Statement, without charge, as many copies of the
Prospectus (including each preliminary Prospectus) included in such Shelf
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents (except upon and during the
continuance of any event described in paragraph 3(c)(2)(iii) above) to the use
of the Prospectus or any amendment or supplement thereto by each of the selling
Holders of Registrable Securities in connection with the offering and sale of
the Registrable Securities covered by the Prospectus or any amendment or
supplement thereto during the Effectiveness Period.
(g) Prior to any offering of Registrable Securities
pursuant to any Shelf Registration Statement, the Company shall register or
qualify or cooperate with the Holders of Registrable Securities included therein
and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions as any such Holders reasonably
request in writing and do any and all other acts or things necessary or
advisable to enable the offer and sale in such United States jurisdictions of
the Registrable Securities covered by such Shelf Registration Statement;
provided, however, that in no event shall the Company be obligated to (i)
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to so qualify but for this
Section 3(g), (ii) file any general consent to service of process in any
jurisdiction where it is not as of the date hereof so subject or (iii) subject
itself to taxation in any such jurisdiction if it is not so subject.
(h) To the extent that any Registrable Securities are not
in book-entry only form, the Company shall cooperate with the Holders of
Registrable Securities to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold pursuant to any
Shelf Registration Statement free of any restrictive legends and in such
permitted denominations and registered in such names as Holders may request in
connection with the sale of Registrable Securities pursuant to such Shelf
Registration Statement.
(i) Upon the occurrence of any event contemplated by
paragraph 3(c)(2)(iii) above, the Company shall prepare as soon as reasonably
practicable a post-effective amendment to any Shelf Registration Statement or an
amendment or supplement to the related Prospectus or file any other required
document so that, as thereafter delivered to purchasers of the Registrable
Securities included therein, the Prospectus will not include an untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Company notifies the Holders of the occurrence of any
event contemplated by paragraph 3(c)(2)(iii) above, the Holders shall suspend
the use of the Prospectus until the requisite changes to the Prospectus have
been made.
(j) Not later than the effective date of any Shelf
Registration Statement hereunder, the Company shall provide a CUSIP number for
the securities registered under such Shelf Registration Statement.
5
<PAGE> 8
(k) The Company shall use its best efforts to comply with
all applicable rules and regulations of the Commission and shall make generally
available to its security holders or otherwise provide in accordance with
Section 11(a) of the Securities Act as soon as practicable after the effective
date of the applicable Shelf Registration Statement an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act.
(l) The Company shall use its best efforts to cause the
Registrable Securities covered by any Shelf Registration Statement to be
approved for listing on the New York Stock Exchange as soon as possible, subject
to official notice of issuance, and in any event within 180 days after the Issue
Date.
(m) The Company may require each Holder of Registrable
Securities to be sold pursuant to any Shelf Registration Statement to furnish to
the Company such information regarding the Holder and the distribution of such
Registrable Securities as the Company may from time to time reasonably request
for inclusion in such Shelf Registration Statement, and the Company may exclude
from such registration the Registrable Securities of any Holder that fails to
furnish such information within a reasonable time after receiving such request.
(n) The Company shall, if requested, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to a Shelf
Registration Statement, such information as the Managing Underwriters reasonably
agree should be included therein and to which the Company does not reasonably
object, and shall make all required filings of such Prospectus supplement or
post-effective amendment as soon as practicable after it is notified of the
matters to be included or incorporated in such Prospectus supplement or
post-effective amendment.
(o) The Company shall enter into such customary
agreements (including underwriting agreements in customary form) and take all
other appropriate actions in order to expedite or facilitate the registration or
the disposition of the Registrable Securities, and in connection therewith, if
an underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures substantially identical to those set
forth in Section 5 of this Agreement (or such other provisions and procedures
reasonably acceptable to the Managing Underwriters, if any) with respect to all
parties to be indemnified pursuant to Section 5 of this Agreement.
(p) The Company shall (i) make reasonably available for
inspection by the Holders of Registrable Securities to be registered thereunder,
any Underwriter participating in any disposition pursuant to such Shelf
Registration Statement, and any attorney, accountant or other agent retained by
such Holders or any such Underwriter, all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries; (ii) cause the Company's officers, directors and employees to make
reasonably available for inspection all relevant information reasonably
requested by such Holders or any such Underwriter, attorney, accountant or agent
in connection with any Registration Statement, in each case as is customary for
similar due diligence examinations; provided, however, that any information that
is designated in writing by the Company, in good faith, as confidential at the
time of delivery of such information shall not be used for any purpose other
than the preparation and filing of the Shelf Registration Statement and shall be
kept confidential by such Holders or
6
<PAGE> 9
any such Underwriter, attorney, accountant or agent, unless such disclosure is
made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third party
without an accompanying obligation of confidentiality; and provided further,
that the foregoing inspection and information gathering shall, to the greatest
extent possible, be coordinated on behalf of the Holders and other parties;
(iii) make such representations and warranties to the Holders of Registrable
Securities registered thereunder and the Underwriters, if any, in form,
substance and scope as are customarily made to Underwriters in primary
underwritten offerings and covering matters including, but not limited to, those
set forth in the Purchase Agreement; (iv) use its best efforts to obtain
opinions of counsel to the Company (who may be the general counsel of the
Company) and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Managing Underwriters, if
any) in customary form addressed to each selling Holder and the Underwriters, if
any, covering such matters as are customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
such Holders and the Managing Underwriters (it being agreed that the matters to
be covered by such opinion or a written statement by such counsel delivered in
connection with such opinions shall include, without limitation, as of the date
of the opinion and as of the effective date of the Shelf Registration Statement
or most recent post-effective amendment thereto, as the case may be, that
nothing has come to the attention of such counsel that causes such counsel to
believe that such Shelf Registration Statement or the prospectus included
therein, as then amended or supplemented, including the documents incorporated
by reference therein, included an untrue statement of a material fact or omitted
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading); (v) use its best efforts to obtain
"cold comfort" letters and updates thereof from the independent public
accountants of the Company (and, if necessary, any other independent public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data are, or are required
to be, included in the Shelf Registration Statement), addressed to each such
Holder of Registrable Securities registered thereunder and the Underwriters, if
any, in customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with primary underwritten offerings; and
(vi) deliver such other customary documents and certificates as may be
reasonably requested by any such Holders and the Managing Underwriters, if any,
including those to evidence compliance with Section 3(i) and with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company. The foregoing actions set forth in clauses (iii), (iv) and
(v) of this Section 3(p) shall be performed at each closing under any
underwritten offering to the extent required thereunder.
(q) In the event that any broker-dealer registered under
the Exchange Act shall underwrite any Registrable Securities or participate as a
member of an underwriting syndicate or selling group or "assist in the
distribution" (within the meaning of the Rules of Fair Practice and the By-Laws
of the National Association of Securities Dealers, Inc. ("NASD")) thereof,
whether as a Holder of such Registrable Securities or as an underwriter, a
placement or sales agent or a broker or dealer in respect thereof, or otherwise,
the Company shall assist such broker-dealer in complying with the requirement of
such Rules and By-Laws, including, without limitation, by (A) if such Rules or
By-Laws, including Schedule E thereto, shall so require, engaging at the expense
of the Holders a "qualified independent underwriter" (as defined in Schedule E)
to participate in the preparation of the Shelf Registration Statement relating
to such
7
<PAGE> 10
Registrable Securities and to exercise usual standards of due diligence with
respect thereto, (B) indemnifying any such qualified independent underwriter to
the extent of the indemnification of Underwriters provided in Section 5 hereof
and (C) providing such information to such broker-dealer as may be reasonably
required in order for such broker-dealer to comply with the requirements of the
Rules of Fair Practice of the NASD.
(r) The Company shall use its best efforts to take all
other steps necessary to effect the registration, offering and sale of the
Registrable Securities covered by the Shelf Registration Statement contemplated
hereby.
4. Registration Expenses.
Except as otherwise provided in Sections 3(q) and 6 of this
Agreement, the Company shall bear all fees and expenses incurred by it in
connection with the performance of its obligations under Sections 2 and 3 of
this Agreement and shall bear or reimburse the Holders for the reasonable fees
and disbursements of one firm of counsel designated by the Initial Purchasers
and reasonably acceptable to the Company and the Holders of the majority of the
Registrable Securities covered by the Shelf Registration Statement to act as
counsel therefor in connection therewith, including any Underwritten Offering
pursuant to Section 6 of this Agreement.
5. Indemnification and Contribution.
(a) In connection with a Shelf Registration Statement,
the Company shall indemnify and hold harmless the Initial Purchasers, each
Holder, each Underwriter who participates in an offering of Registrable
Securities, each of their respective directors, officers, employees and agents,
and each Person, if any, who controls the Initial Purchasers or any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act:
(i) from and against any loss, liability, claim,
damage and expense whatsoever, including any amounts paid in
settlement of any investigation, litigation, proceeding or
claim, joint or several, as incurred, arising out of any
untrue statement or alleged untrue statement of a material
fact contained in any Shelf Registration Statement (or any
amendment thereto) covering Registrable Securities, including
all documents incorporated therein by reference, or the
omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the
statements therein not misleading, or arising out of any
untrue statement or alleged untrue statement of a material
fact contained in any Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided however, that the Company shall not be liable under
this clause (i) for any settlement of any action effected
without its written consent, which consent shall not be
unreasonably withheld; and
8
<PAGE> 11
(ii) against any and all expenses (including
reasonable fees and disbursements of counsel chosen by the
Holders, such Holder or any Underwriter (except to the extent
otherwise expressly provided in Section 5(c) of this
Agreement)), reasonably incurred in investigating, preparing
or defending against any litigation, or any investigation or
proceeding by any court or governmental agency or body,
commenced or threatened, or any claim whatsoever based upon
any such untrue statement or omission, or any such alleged
untrue statement or omission, as such expenses are incurred
and to the extent that such expense is not paid under clause
(i) of this Section 5(a);
provided, however, that the indemnity provided for in this Section 5(a) shall
not apply to any loss, liability, claim, damage or expense to the extent arising
out of, or based upon, any untrue statement or alleged untrue statement or
omission or alleged omission (i) made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Initial
Purchasers, such Holder or any Underwriter expressly for use in the Shelf
Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto), or (ii) contained in any preliminary
prospectus or the Prospectus if the Initial Purchasers, such Holder or such
Underwriter failed to send or deliver a copy of the Prospectus (or any amendment
or supplement thereto) to the Person asserting such losses, claims, damages or
liabilities on or prior to the delivery of written confirmation of any sale of
securities covered thereby to such person in any case where such Prospectus
corrected such untrue statement or omission. Any amounts advanced by the Company
to an indemnified party pursuant to this Section 5 as a result of such losses
shall be returned to the Company if it is finally determined by such a court in
a judgment not subject to appeal or final review that the indemnified party was
not entitled to indemnification by the Company.
(b) Each Holder, severally and not jointly, shall
indemnify and hold harmless the Company, the Initial Purchasers, each
Underwriter who participates in an offering of Registrable Securities and other
selling Holders, and each of their respective directors, officers (including
each officer of the Company who signs the Shelf Registration Statement),
employees or agents and each person, if any, who controls the Company, the
Initial Purchasers, any Underwriter or any other selling Holder within the
meaning of Section 15 of the Securities Act Section 20 of the Exchange Act, from
and against any loss, liability, claim, damage and expense whatsoever described
in the indemnity described in Section 5(a) of this Agreement, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Shelf Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such selling Holder expressly for use in the Shelf Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto); provided, however, that no such Holder shall be liable for
any claims hereunder in excess of the amount of gross proceeds received by such
Holder from the sale of Registrable Securities pursuant to the Shelf
Registration Statement.
(c) Promptly after receipt by an indemnified party under
this Section 5 of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 5, notify the indemnifying party in
writing of the claim or the commencement of that action, provided,
9
<PAGE> 12
however, that the failure to notify the indemnifying party shall not relieve it
from any liability that it may have under this Section 5 except to the extent it
has been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
that it may have to an indemnified party otherwise than under this Section 5. If
any such claim or action shall be brought against an indemnified party, and it
shall have notified the indemnifying party thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party shall not be
liable to the indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that the indemnified
party shall have the right to employ counsel to represent jointly the
indemnified party and other Holders, Initial Purchasers or Underwriters and
their respective officers, employees and controlling persons who may be subject
to liability arising out of any claim in respect of which indemnity may be
sought against the indemnifying party under this Section 5 if, in the reasonable
judgment of the indemnified party it is advisable for the indemnified party and
those, officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the indemnifying party. In no event shall the
indemnifying parties be liable for the fees and expenses of more than one
counsel (in addition to local counsel). Each indemnified party, as a condition
of the indemnity agreements contained in this Section 5, shall use its best
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
for any such action effected without its written consent (which consent shall
not be unreasonably withheld), but if settled with its written consent or if
there be a final judgment of the plaintiff in any such action, the indemnifying
party agrees to indemnify and hold harmless any indemnified party from and
against any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 5
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 5(a) or 5(b) in respect of any loss, claim,
damage or liability, or any action in respect thereof, referred to therein, then
each indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, in such
proportion as shall be appropriate to reflect the relative fault of the Company
on the one hand and the Holders and Initial Purchasers on the other with respect
to the statements or omissions that resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Holders and Initial Purchasers, the intent
10
<PAGE> 13
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Holders and Initial Purchasers agree that it would not be just and equitable
if contributions pursuant to this Section 5(d) were to be determined by pro rata
allocation (even if the Holders and Initial Purchasers were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim, damage
or liability, or action in respect thereof, referred to above in this Section
5(d) shall be deemed to include, for purposes of this Section 5(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5(d), no Holder or Initial Purchaser shall be
required to contribute any amount in excess of the amount by which proceeds
received by such Holder or Initial Purchaser from an offering of Registrable
Securities exceeds the amount of any damages such Holder or Initial Purchaser
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' and Initial Purchasers' obligations
to contribute as provided in this Section 5(d) are several and not joint.
6. Underwritten Offering.
The Holders of Registrable Securities covered by the Shelf
Registration Statement who desire to do so may sell such Registrable Securities
in an Underwritten Offering. In any such Underwritten Offering, the investment
banker or investment bankers and manager or managers that will administer the
Offering will be selected by, and the underwriting arrangements with respect
thereto will be approved by, the Holders of a majority of the Registrable
Securities to be included in such offering; provided, however, that (a) such
investment bankers and managers and underwriting arrangements (including
indemnification arrangements) must be reasonably satisfactory to the Company,
and (ii) the Company shall not be obligated to cooperate with the Initial
Purchasers or Holders in more than one Underwritten Offering during the
Effectiveness Period. No Holder may participate in an Underwritten Offering
contemplated hereby unless such Holder (a) agrees to sell such Holder's
Registrable Securities in accordance with any approved underwriting
arrangements, (b) completes and executes all reasonable questionnaires, powers
of attorney, indemnities, underwriting agreements, lock-up letters and other
documents required under the terms of such approved underwriting arrangements,
and (c) at least 20% of the outstanding Registrable Securities are included in
such Underwritten Offering. The Holders participating in the Underwritten
Offering shall be responsible for all underwriting discounts and commissions.
The Company shall pay all expenses customarily borne by issuers, including but
not limited to filing fees, the fees and disbursements of its counsel, its
independent public accountants and any printing and other out-of-pocket expenses
incurred by it in connection with such Underwritten Offering, and in accordance
with Section 4 of this Agreement the reasonable fees and disbursements of one
firm of counsel to the selling Holders. Notwithstanding the foregoing or the
provisions of Section 3(n) of this Agreement, upon receipt of a request from the
Managing Underwriter or a representative of the Holders of a majority of the
Registrable Securities outstanding to prepare and file an amendment or
supplement to the Shelf Registration Statement or Prospectus in connection with
an Underwritten Offering, the Company may delay the filing of any such amendment
or supplement for up to 90 days if the Company has a valid business reason for
such delay.
11
<PAGE> 14
7. Miscellaneous.
(a) Other Registration Rights.
The Company may grant registration rights that would permit
any Person that is a third party the right to piggy-back on any Shelf
Registration Statement, provided that if the Managing Underwriter, if any, of
such offering delivers an opinion to the selling Holders that the total amount
of securities that they and the holders of such piggy-back rights intend to
include in any Shelf Registration Statement is so large as to materially
adversely affect the success of such offering (including the price at which such
securities can be sold), then (except to the extent otherwise required under the
terms of any registration rights granted by the Company prior to the date
hereof) only the amount, number or kind of securities to be offered for the
account of holders of such piggy-back rights will be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount, number or kind recommended by the Managing Underwriter
prior to any reduction in the amount of Registrable Securities to be included.
(b) Amendments and Waiver.
The provision of this Agreement, including the provisions of
this sentence, may not be amended, qualified, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of the Initial Purchasers
and the Initial Subscribers. Any such written consent of the Initial Purchasers
and the Initial Subscribers shall be binding upon each Holder and each
subsequent Holder.
(c) Information Requirements.
The Company shall use its best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act, and if
at any time the Company is not required to file such reports, it will, upon the
request of any Holder of Registrable Securities, make publicly available other
information so long as necessary to permit sales pursuant to Rule 144 and Rule
144A under the Securities Act. The Company further covenants that it will
cooperate with any Holder of Registrable Securities and take such further
reasonable action as any Holder of Registrable Securities may reasonably request
(including without limitation making such reasonable representations as any such
Holder may reasonably request), all to the extent required from time to time to
enable such Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144 and
Rule 144A under the Securities Act. Upon the request of any Holder of
Registrable Securities, the Company shall deliver to such Holder a written
statement as to whether it has complied with such filing requirements.
Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to
require the Company to register any of its securities under any section of the
Exchange Act.
12
<PAGE> 15
(d) Remedies
Subject to Section 2 hereof, in the event of a breach by the
Company of its obligations under this Agreement, each Holder of Registrable
Securities, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The Company agrees that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach by it of
any of the provisions of this Agreement and hereby further agrees that, in the
event of any action for specific performance in respect of such breach, it shall
waive the defense that a remedy at law would be adequate.
(e) Notices.
All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, first-class mail, telex,
telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address
given by such Holder to the Company in accordance with the provisions
of this Section 7(e);
(2) if to the Initial Purchasers, initially at
the address set forth in the Purchase Agreement; and
(3) if to the Company, initially at its address
set forth in the Purchase Agreement.
(4) if to the Initial Subscribers, at their
respective addresses set forth on Schedule 2 attached hereto.
All such notices and communications shall be deemed
to have duly given when received.
The Initial Purchasers, the Initial Subscribers or the
Company, by notice to the other, may designate additional or different addresses
for subsequent notices or communications.
13
<PAGE> 16
(f) Successors and Assigns.
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties and the Holders,
including, without the need for an express assignment or any consent by the
Company thereto, subsequent Holders of Registrable Securities. The Company
hereby agrees to extend the benefits of this Agreement to any Holder of
Registrable Securities and any such Holder may specifically enforce the
provisions of this Agreement as if an original party hereto.
(g) Counterparts.
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(h) Headings.
The headings herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
(i) Governing law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
(j) Severability.
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected thereby, it being
intended that all of the rights and privileges of the parties shall be
enforceable to the fullest extent permitted by law.
[SIGNATURES APPEAR ON NEXT PAGE]
14
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
----------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Chief Financial Officer
INITIAL PURCHASERS:
NATIONSBANC MONTGOMERY SECURITIES LLC
LEHMAN BROTHERS INC.
By: NATIONSBANC MONTGOMERY SECURITIES
LLC
By: /s/ Randall R. Horsey
----------------------------------------
Name: Randall R. Horsey
Title: Senior Managing Director
INITIAL SUBSCRIBERS:
FARALLON CAPITAL PARTNERS, L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS,
L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS II,
L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS III,
L.P.
TINICUM PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its General Partner
By: /s/ Jason M. Fish
---------------------------------------
Name: Jason M. Fish
Title: Managing Member
15
<PAGE> 18
THE COMMON FUND
By: Farallon Capital Management, L.L.C.,
its Agent and Attorney-in-Fact
By: /s/ Jason M. Fish
--------------------------------------
Name: Jason M. Fish
Title: Managing Member
CREDIT SUISSE FIRST BOSTON CORP.
By: /s/ Michael Szwajkowski
--------------------------------------
Name: Michael Szwajkowski
Title: Vice President
16
<PAGE> 19
SCHEDULE 1
INITIAL SUBSCRIBERS
Farallon Capital Partners, L.P.
Farallon Capital Institutional Partners, L.P.
Farallon Capital Institutional Partners II, L.P.
Farallon Capital Institutional Partners III, L.P.
Tinicum Partners, L.P.
Farallon Capital Management, L.L.C., on
behalf of The Common Fund
Credit Suisse First Boston Corp.
17
<PAGE> 20
SCHEDULE 2
ADDRESSES FOR NOTICES TO INITIAL SUBSCRIBERS
Farallon Capital Partners, L.P.
Farallon Capital Institutional Partners, L.P.
Farallon Capital Institutional Partners II, L.P.
Farallon Capital Institutional Partners III, L.P.
Tinicum Partners, L.P.
Farallon Capital Management, L.L.C., on
behalf of The Common Fund
c/o Farallon Capital Management, L.L.C.
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
Attention: Meridee Moore and Kirstin Lynch
and
Credit Suisse First Boston Corp.
c/o Credit Suisse First Boston
11 Madison Avenue
New York, New York 10010
Attention: Michael Szwajkowski
18
<PAGE> 21
AGREEMENT
This AGREEMENT is made by and between HealthCare Financial Partners
REIT, Inc. (the "Company"), NationsBanc Montgomery Securities LLC, Lehman
Brothers Inc. (NationsBanc Montgomery Securities LLC and Lehman Brothers Inc.,
collectively, the "Initial Purchasers") and the parties on Schedule 1 attached
in this Agreement (the "Initial Subscribers"). All capitalized terms used but
not defined in this agreement have the meanings given to them in that certain
Registration Rights Agreement (the "Registration Rights Agreement"), dated May
6, 1998, between the Company, the Initial Purchasers and the Initial
Subscribers.
WHEREAS, the Company, the Initial Purchasers and the Initial
Subscribers entered into the Registration Rights Agreement in
connection with the Purchase Agreement, dated as of April 29, 1998,
between the Company and the Initial Purchasers, which provided for the
sale by the Company to the Initial Purchasers of an aggregate of
1,150,000 Units, each Unit consisting of five shares of the Company's
common stock, par value $0.0001 per share (the "Common Stock") and one
stock purchase warrant, and in connection with the concurrent sale by
the Company of an aggregate of 300,000 Units to the Initial
Subscribers; and
WHEREAS, Section 7(b) of the Registration Rights Agreement
provides that the Registration Rights Agreement may not be amended
unless the Company has obtained the written consent of the Initial
Purchasers and the Initial Subscribers, which consent shall be binding
on each Holder and each subsequent Holder; and
WHEREAS, the Company, the Initial Purchasers and the Initial
Subscribers each desire to amend the Registration Rights Agreement to
allow the Company to delay the effectiveness of, or suspend sales of
Registrable Securities pursuant to, the Shelf Registration Statement
for a temporary period for the purpose of facilitating the Company's
initial public offering of Common Stock.
NOW, THEREFORE, for good and valuable consideration, the
sufficiency of which is hereby acknowledged by the Company, the Initial
Purchasers and the Initial Subscribers hereby agree as follows.
1. The Registration Rights Agreement is hereby amended as
follows:
(a) the following definition is added to Section 1:
Underwritten Offering: A sale of securities of the
Company to an underwriter or underwriters for
reoffering to the public.
(b) the second sentence of Section 2(b) of the Registration
Rights Agreement is deleted in its entirety; and
<PAGE> 22
(c) the following language is inserted as the second
sentence of Section 2(b) of the Registration Rights Agreement:
The Company will be deemed not to have used its best
efforts to keep the Shelf Registration Statement
continuously effective during the requisite period if the
Company voluntarily takes any action that would result in
Holders of Registrable Securities covered thereby not
being able to offer and sell any such Registrable
Securities during that period, unless (i) such action is
required by applicable law or the rules of any national
securities exchange or other market on which any of the
Registrable Securities are then listed or quoted, (ii)
such action is taken upon the occurrence of any event
contemplated by paragraph 3(c)(2)(iii) of this Agreement
and in good faith and for valid business reasons, (iii)
the continued effectiveness of the Shelf Registration
Statement would require the Company to disclose a material
financing, acquisition or other corporate transaction, and
the Board of Directors of the Company shall have
determined in good faith that such disclosure is not in
the best interest of the Company and its shareholders, or
(iv) the Company directs the Holders to suspend offers and
sales of the Registrable Securities pursuant to the Shelf
Registration Statement in connection with an Underwritten
Offering by the Company that is the its initial public
offering of Common Stock (the "IPO") where the Company is
advised by the Managing Underwriter that the sale of
Registrable Securities pursuant to the Shelf Registration
Statement would have a material adverse effect on the IPO,
and (x) in the case of clause (i) or (ii) above, the
Company thereafter promptly complies with the requirements
of paragraph 3(i) of this Agreement, and (y) in the case
of clause (iv) above, the period during which Holders of
Registrable Securities may not offer or sell such
Registrable Securities pursuant to the Shelf Registration
Statement (the "Suspension Period") shall commence on the
date on which the registration statement filed with the
Commission in connection with the IPO is declared
effective by the Commission and shall expire concurrently
with the expiration of the 30-day period during which the
underwriters of the IPO may exercise the over-allotment
option granted in the underwriting agreement executed in
connection with the IPO.
In the case that the Company determines to direct the
Holders to suspend offers and sales of the Registrable
Securities pursuant to the Shelf Registration Statement as
contemplated in clause (iv) above, the Company may give
written notice (a "Suspension Notice") to the Holders, the
Initial Purchasers and the Initial Subscribers. The
Holders, the Initial Purchasers and the Initial
Subscribers shall not effect any sales of the Registrable
Securities pursuant to the Shelf Registration Statement
during the Suspension Period.
2
<PAGE> 23
2. The Company, the Initial Purchasers and the Initial
Subscribers agree that at any time and from time to time, upon written
request, they will execute and deliver such further documents and do
such further acts and things as may be reasonably requested in order to
effectuate the purposes of this Agreement and the transactions
contemplated by this Agreement.
3. Except as provided in this Agreement, all other terms of
the Registration Rights Agreement remain in full force and effect.
Dated: August __, 1998
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
-----------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Chief Financial Officer
INITIAL PURCHASERS:
NATIONSBANC MONTGOMERY SECURITIES LLC
By:
-----------------------------------------
Name: Richard A. Smith
Title: Senior Managing Director
LEHMAN BROTHERS, INC.
By:
-----------------------------------------
Name:
Title:
3
<PAGE> 24
INITIAL SUBSCRIBERS:
HEALTHCARE FINANCIAL PARTNERS, INC.
By:
-----------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Chief Financial Officer
FARALLON CAPITAL PARTNERS, L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS, II L.P.
FARALLON CAPITAL INSTITUTIONAL PARTNERS, II L.P.
TINICUM PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its General Partner
By:
-----------------------------------------
Name:
Title:
THE COMMON FUND
By: Farallon Capital Management, L.L.C.
Its Agent and Attorney-in-Fact
By:
-----------------------------------------
Name:
Title:
4
<PAGE> 25
CREDIT SUISSE FIRST BOSTON CORP.
By:
-----------------------------------------
Name:
Title:
5
<PAGE> 26
SCHEDULE 1
INITIAL SUBSCRIBERS
HealthCare Financial Partners, Inc.
Farallon Capital Partners, L.P.
Farallon Capital Institutional Partners, L.P.
Farallon Capital Institutional Partners II, L.P.
Farallon Capital Institutional Partners III, L.P.
Tinicum Partners, L.P.
Farallon Capital Management, L.L.C., on behalf of The Common Fund
Credit Suisse First Boston Corp.
6
<PAGE> 1
EXHIBIT 10.6
WARRANT AGREEMENT
BETWEEN
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
AND
THE BANK OF NEW YORK
AS WARRANT AGENT
1,450,000 WARRANTS TO PURCHASE COMMON STOCK
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 DEFINITIONS ............................................................2
Section 1.0. Definitions.....................................................2
ARTICLE 2 THE WARRANT AGENT ......................................................3
Section 2.1. Appointment of Warrant Agent....................................3
Section 2.2. Duties of Warrant Agent.........................................4
Section 2.3. Compensation; Indemnification...................................5
Section 2.4. Resignation; Successor Warrant Agents...........................6
ARTICLE 3 THE WARRANTS ...........................................................7
Section 3.1. Number of Warrants..............................................7
Section 3.2. Issuance of Warrants............................................7
Section 3.3. Reserved........................................................8
Section 3.4. Registration of Transfer and Exchange...........................8
Section 3.5 Execution and Delivery.........................................13
Section 3.6. Destroyed, Lost, Mutilated or Stolen Warrant Certificates......13
Section 3.7. Persons Deemed Owners..........................................14
Section 3.8. Cancellation of Warrant Certificates...........................14
Section 3.9. No Rights as Stockholders......................................14
ARTICLE 4 EXERCISE OF WARRANTS ..................................................14
Section 4.1. Exercise Period................................................14
Section 4.2. Shares Issuable Upon Exercise; Exercise Price..................15
Section 4.3. Method of Exercise.............................................15
Section 4.4. Issuance of Common Stock.......................................16
Section 4.5. Fractions of Shares............................................16
Section 4.6. Adjustment of Exercise Price...................................16
Section 4.7. Reserved.......................................................19
Section 4.8. Notice of Certain Corporate Action.............................19
Section 4.9. Company to Reserve Common Stock................................19
Section 4.10. Taxes on Exercises.............................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 4.11. Covenant as to Common Stock....................................20
Section 4.12. Provisions in Case of Consolidation, Merger or Sale of Assets..20
Section 4.13. No Change of Warrant Necessary.................................21
Section 4.14. Enforcement of Rights..........................................21
Section 4.15. Available Information..........................................21
ARTICLE 5 RESERVED ..............................................................21
ARTICLE 6 RESERVED ..............................................................21
ARTICLE 7 AMENDMENTS.............................................................21
Section 7.1. Amendment of Agreement.........................................21
Section 7.2. Record Date....................................................22
ARTICLE 8 MISCELLANEOUS PROVISIONS ............................................. 22
Section 8.1. Counterparts...................................................22
Section 8.2. GOVERNING LAW..................................................22
Section 8.3. Descriptive Headings...........................................22
Section 8.4. Notices........................................................22
Section 8.5. Maintenance of Office..........................................23
Section 8.6. Successors and Assigns.........................................24
Section 8.7. Separability...................................................24
Section 8.8. Persons Having Rights under Agreement..........................24
</TABLE>
EXHIBIT A FORM OF WARRANT CERTIFICATE
EXHIBIT B TRANSFER INSTRUCTION
SCHEDULE I - ADDITIONAL PURCHASERS
ii
<PAGE> 4
WARRANT AGREEMENT
This Agreement, dated as of the date set forth on the signature page,
by and between HealthCare Financial Partners REIT, Inc., a Maryland corporation
with an office at 2 Wisconsin Circle, Suite 402, Chevy Chase, MD 20815 (the
"Company"), and The Bank of New York, with an office at 101 Barclay Street, 12
West, New York, New York 10286, Attention: Stock Transfer Administration (the
"Warrant Agent").
WITNESSETH
A. The Company has authorized the issuance of up to 1,450,000
units ("Units") (1,622,500 if the Initial Purchasers' over-allotment option is
exercised in full), each Unit consisting of five shares of its Common Stock, par
value $0.0001 per share, (the "Common Stock"), and one Common Stock purchase
warrant (the "Warrants"), each Warrant initially entitling the holders thereof
to purchase one additional share of its Common Stock, which Warrants are to be
attached initially to the shares of Common Stock issued as provided in Paragraph
C below;
B. Such Units are to be purchased from the Company (i) by the
Initial Purchasers named in that certain Purchase Agreement dated April 29, 1998
and thereafter, subject to the terms thereof, offered to (A) Qualified
Institutional Buyers ("QIBs") (as defined in Rule 144A under the Securities Act
of 1933, as amended (the "Securities Act")), and (B) (i) to a limited number of
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act), and (ii) to individual "accredited investors" (as
defined in Rule 501(a)(4), (5) or (6) of the Securities Act) (collectively,
"Accredited Investors") pursuant to that certain Offering Memorandum, dated
April 29, 1998 (the "Offering Memorandum"), and (ii) by the additional
purchasers whose names appear on Schedule I hereto (the "Additional
Purchasers"), pursuant to those certain Purchase Agreements dated April 30,
1998, subject to the terms thereof;
C. In accordance with the provisions of Section 3 of this
Agreement, the Warrants will not be detachable from the Common Stock until six
months after issuance of the Common Stock. After six months, the Warrants may be
detached and transferred separately from the shares of Common Stock to which
they were attached upon issuance of the Units. The Warrants will expire on the
date that is three years after the date of the Offering Memorandum; and
D. The Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange, replacement and exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
<PAGE> 5
ARTICLE 1
DEFINITIONS
SECTION 1.0. DEFINITIONS.
Capitalized terms used herein and not otherwise defined shall have the
following meanings:
Accredited Investors: Institutional "accredited investors" as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act and individual
"accredited investors" as defined in Rule 501(a)(4), (5) or (6) under the
Securities Act.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which banking institutions in the City of New York are
authorized or obligated by federal, state or local law or executive order to
close.
Commission: Securities and Exchange Commission.
Common Stock: The Company's Common Stock, par value $0.0001 per share.
Corporate Trust Office: The principal office of the Warrant Agent at
101 Barclay Street, 12 West, New York, New York 10286, Attention: Stock Transfer
Administration, or such other address in New York, New York at which at any
particular time its corporate trust business shall be administered.
Corporation: A corporation, association, company, joint-stock company
or business trust.
Definitive Warrant Certificates: A Warrant Certificate that is in the
form set forth in Exhibit A to this Agreement and that does not include the
information called for by footnote 1 of Exhibit A to this Agreement.
Depositary: The Depository Trust Company as the depositary with respect
to the Warrants issuable or issued in whole or in part in global form, until a
successor shall have been appointed and become such pursuant to the applicable
provision of this Agreement, and thereafter "Depositary" shall mean or include
such successor.
Detachment Date: The date that is six months after the date of initial
issuance of the Units.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Expiration Date: The date that is three years after the date of the
Offering Memorandum.
Global Warrant Certificate: A Warrant Certificate that is in the form
set forth in Exhibit A to this Agreement and that includes the information
called for by footnote 1 of Exhibit A to this Agreement.
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<PAGE> 6
Holder: A Person in whose name a Warrant Certificate is registered in
the Warrant Register.
Person: An individual, limited or general partnership, Corporation,
joint venture, trust or unincorporated organization, or any other entity,
including a government or agency or political subdivision thereof.
QIB: A "qualified institutional buyer" as defined in Rule 144A.
Registration Rights Agreement: The Registration Rights Agreement, dated
as of the date hereof, among the Company, the Initial Purchasers of the Units
and the Additional Purchasers other than HealthCare Financial Partners, Inc.
Rule 144: Rule 144 promulgated under the Securities Act.
Rule 144A: Rule 144A promulgated under the Securities Act.
Securities Act: The Securities Act of 1933, as amended.
Trading Day: Any day other than a Saturday or Sunday or a day on which
securities are not traded on any national securities exchange.
Transfer Restricted Warrants: Each Warrant until the date on which such
Warrant (i) has been disposed of pursuant to an effective registration statement
under the Securities Act, (ii) is distributed to the public pursuant to Rule 144
or is freely salable pursuant to Rule 144(k) (or any similar provisions then in
force), (iii) is otherwise freely tradable without registration under the
Securities Act or (iv) has been acquired by the Company.
Warrant Agent: The Bank of New York until a successor Warrant Agent
shall have become such pursuant to the applicable provisions of this Agreement,
and thereafter "Warrant Agent" shall mean such successor Warrant Agent.
Warrant Certificate: A certificate representing Warrants issued under
this Agreement.
Warrant Custodian: The Warrant Agent or such other entity that is a
"fast agent" meeting the requirements of the Depositary as the Warrant Agent
shall designate from time to time, to act as custodian with respect to the
Warrants in global form, or any successor entity thereto.
ARTICLE 2
THE WARRANT AGENT
SECTION 2.1. APPOINTMENT OF WARRANT AGENT.
The Company hereby appoints the Warrant Agent as its agent in respect
of the Warrants and the Warrant Certificates, upon the terms and subject to the
conditions set forth herein, and subject to resignation or removal of the
Warrant Agent as provided herein. The Warrant Agent agrees to accept such
appointment, upon the terms and subject to the conditions set forth herein.
3
<PAGE> 7
The Warrant Agent shall have the powers and authority granted to it by this
Agreement and such further powers and authority to act on behalf of the Company
as the Company may hereafter grant to or confer upon it.
SECTION 2.2. DUTIES OF WARRANT AGENT.
The Warrant Agent accepts its obligations set forth herein upon the
terms and conditions hereof, including the following, to all of which the
Company agrees and to all of which the rights hereunder of the Holders from time
to time of the Warrant Certificates shall be subject:
(a) The Warrant Agent shall act hereunder as agent and in a
ministerial capacity for the Company, and its duties shall be determined solely
by the provisions hereof. In acting under this Agreement and with respect to the
Warrant Certificates, the Warrant Agent does not assume any obligation or
relationship of agency or trust for or with any Holder.
(b) The Warrant Agent shall be obligated to perform such duties as
are specifically set forth herein and in the Warrant Certificates and no implied
duties or obligations shall be read into this Agreement or the Warrant
Certificates against the Warrant Agent. The Warrant Agent shall have no duty or
responsibility in case of any default by the Company in the performance of its
covenants or agreements contained in this Agreement or the Warrant Certificates
or in the case of the receipt of any written demand from any Holder with respect
to such default, including, without limiting the generality of the foregoing,
any duty or responsibility to initiate or attempt to initiate any proceeding at
law or otherwise, or to make any demand upon the Company.
(c) The Warrant Agent is hereby authorized and directed to accept
written instructions with respect to the performance of its duties hereunder
from any one of the Chief Executive Officer, the President or the Chief
Financial Officer of the Company (each a "Responsible Officer") or from any
other officer of the Company authorized by resolutions duly adopted by the Board
of Directors of the Company to give such instructions, and to apply to such
Responsible Officers for advice or instructions in connection with its duties,
and it shall not be liable for any action taken or suffered to be taken by it in
good faith in accordance with instructions from any Responsible Officer with
respect to any matter arising in connection with the Warrant Agent's duties and
obligations arising under this Agreement.
(d) The Warrant Agent shall not be liable for any action taken,
suffered or omitted to be taken by it in good faith in accordance with any
notice, statement, instruction, request, direction, order or demand of a
Responsible Officer of the Company believed by it to be genuine. Any such
notice, statement, instruction, request, direction, order or demand of the
Company shall be sufficiently evidenced by an instrument signed by a Responsible
Officer.
(e) Whenever in the performance of its duties under this
Agreement, the Warrant Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by a Responsible Officer, and
such certificate shall
4
<PAGE> 8
be full authorization to the Warrant Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(f) The Warrant Agent, to the extent permitted by applicable law,
may engage or be interested in any financial or other transaction with the
Company and may act on, or as depository, trustee or agent for, any committee or
body of holders of shares or other obligations of the Company as freely as if it
were not the Warrant Agent hereunder. Nothing in this Agreement shall be deemed
to prevent the Warrant Agent from acting in any other capacity for the Company.
(g) The Warrant Agent shall not, by countersigning or delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity, value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property issued or issuable upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(h) The Warrant Agent shall not at any time be under any duty or
responsibility to any Holder to determine whether any fact exists that may
require any adjustment to the Exercise Price, or with respect to the nature or
extent of any adjustment, when made, or with respect to the method employed in
making any adjustment to the Exercise Price.
(i) The Warrant Agent shall not be liable for any act or omission
in connection with this Agreement except for its own negligence or willful
misconduct.
(j) The Warrant Agent may at any time consult with counsel
satisfactory to it and shall incur no liability or responsibility in respect of
any action taken, suffered or omitted to be taken by it in good faith in
accordance with the opinion or advice of such counsel.
(k) The Company agrees that it will perform, execute, acknowledge
and deliver, or cause to be performed, executed, acknowledged and delivered, all
such further and other acts, instruments and assurances as may reasonably be
required by the Warrant Agent for the carrying out or performing by the Warrant
Agent of the provisions of this Agreement.
(l) The Warrant Agent shall not be required to risk or expend its
own funds in the performance of its obligations and duties hereunder unless it
has obtained an indemnity reasonably satisfactory to it to reimburse it for such
expenditure.
(m) The Warrant Agent shall not be under any liability for
interest on, and shall not be required to invest, any monies at any time
received by it pursuant to any of the provisions of this Agreement or of the
Warrant Certificates. The Warrant Agent shall not be accountable for the use or
application by the Company of the proceeds of the exercise of any Warrant.
SECTION 2.3. COMPENSATION; INDEMNIFICATION.
The Company agrees to pay the Warrant Agent from time to time such
compensation as shall be agreed upon by the Company and the Warrant Agent, and
the Company agrees to reimburse the Warrant Agent for its reasonable
out-of-pocket expenses and disbursements
5
<PAGE> 9
incurred without negligence or willful misconduct on its part in connection with
the services rendered by it hereunder.
The Company also agrees to indemnify the Warrant Agent for, and to hold
it harmless against, any loss, liability or expense, including judgments, costs
and reasonable counsel fees, incurred without negligence or willful misconduct
on the part of the Warrant Agent, arising out of or in connection with its
acting as Warrant Agent hereunder. The obligations of the Company under this
Section 2.3 shall survive the exercise and the expiration of the Warrants and
the resignation and removal of the Warrant Agent.
SECTION 2.4. RESIGNATION; SUCCESSOR WARRANT AGENTS.
The Warrant Agent may at any time resign as Warrant Agent and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Warrant Agent's own negligence or willful
misconduct), by giving written notice to the Company and each holder of Warrants
of such resignation, specifying the date on which such resignation shall be
effective; provided, that such notice shall be given no less than 90 days prior
to such effective date. Upon receiving such notice of resignation, the Company
shall promptly appoint a successor Warrant Agent by written instrument in
duplicate signed on behalf of the Company by a Responsible Officer, one copy of
which shall be delivered to the resigning Warrant Agent and one copy to the
successor Warrant Agent. Such resignation shall become effective upon the
acceptance of the appointment by the successor Warrant Agent.
The Company may, at any time and for any reason, remove the Warrant
Agent and appoint a successor Warrant Agent by written instrument in duplicate,
specifying such removal and the date on which it is to become effective, signed
by a Responsible Officer of the Company, one copy of which shall be delivered to
the Warrant Agent being removed and one copy to the successor Warrant Agent.
Upon resignation or removal of the Warrant Agent, if the Company shall
fail to appoint a successor Warrant Agent within a period of 90 days after
receipt of such notice of resignation or removal, then any Holder may apply to a
court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Pending appointment of a successor to the Warrant Agent, either
by the Company or by such a court, the duties of the Warrant Agent shall be
carried out by the Company.
Any appointment of a successor Warrant Agent shall become effective
upon acceptance of appointment by the successor Warrant Agent as provided in
this Section 2.4. As soon as practicable after the appointment of the successor
Warrant Agent, the Company shall cause written notice of the change in the
Warrant Agent to be given to each of Holder.
Each successor Warrant Agent shall execute and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder and all the provisions of this Agreement, and thereupon such successor
Warrant Agent shall, without any further act, deed or conveyance, become vested
with the same powers, rights, duties and responsibilities of its predecessor
hereunder, with like effect as if it had been originally named herein, and the
Warrant
6
<PAGE> 10
Agent shall thereupon become obligated to transfer, deliver and pay over, and
such successor Warrant Agent shall be entitled to receive, all moneys,
securities, records or other property on deposit with or held by the Warrant
Agent under this Agreement.
Any Person into which the Warrant Agent may be converted or merged, or
any corporation resulting from any consolidation to which the Warrant Agent
shall be a party, or any corporation succeeding to the trust business of the
Warrant Agent, shall be a successor Warrant Agent under this Agreement without
any further act on the part of any party. Any such successor Warrant Agent shall
promptly cause notice of its succession as Warrant Agent to be mailed to the
Company and to each Holder.
ARTICLE 3
THE WARRANTS
SECTION 3.1. NUMBER OF WARRANTS.
The number of Warrants that may be issued and delivered under this
Agreement is limited to 1,450,000 Warrants (or 1,622,500 if the Initial
Purchasers' over-allotment option is exercised in full pursuant to Section 2(e)
of the Purchase Agreement), except for Warrants issued and delivered in
connection with any transfer of, in exchange for, or in lieu of, other Warrants
(which other Warrants shall be canceled) in accordance with the terms of this
Agreement.
SECTION 3.2. ISSUANCE OF WARRANTS.
Prior to the Detachment Date, beneficial ownership of each Warrant
shall be evidenced by the Common Stock certificate to which such Warrant
relates, bearing the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE INCLUDE THE BENEFICIAL
OWNERSHIP IN A STOCK PURCHASE WARRANT FOR A NUMBER OF WARRANT SHARES EQUAL TO
ONE-FIFTH OF THE NUMBER OF SHARES OF COMMON STOCK SET FORTH ON THE FACE HEREOF,
SUBJECT TO ADJUSTMENTS AS SET FORTH IN THE WARRANT AGREEMENT GOVERNING THE
WARRANTS, WHICH STOCK PURCHASE WARRANT IS HELD BY THE WARRANT AGENT AND IS
DEEMED TO BE ATTACHED HERETO AND IS NOT DETACHABLE HEREFROM NOR EXERCISABLE
EXCEPT AS SET FORTH IN THE WARRANT AGREEMENT. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE PROVISIONS AND ENTITLED TO THE BENEFITS OF SUCH
WARRANT AGREEMENT, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY AND
WILL BE MADE AVAILABLE TO ANY SHAREHOLDER UPON REQUEST WITHOUT CHARGE. UPON
DETACHMENT OF THE WARRANT FOLLOWING THE DETACHMENT DATE, A SEPARATE COMMON STOCK
CERTIFICATE AND A WARRANT CERTIFICATE REPRESENTING OWNERSHIP OF THE COMMON STOCK
AND THE WARRANTS, RESPECTIVELY, WILL BE ISSUED TO THE REGISTERED HOLDER OF THIS
COMMON STOCK CERTIFICATE.
7
<PAGE> 11
After the Detachment Date, Warrants offered and sold to QIBs will be,
except as provided in the last paragraph of this Section 3.2, issued in the form
of a single, permanent Global Warrant Certificate in definitive, fully
registered form, in substantially the form set forth in Exhibit A to this
Agreement (including the information called for by footnotes 1, 2, 3 and 4
thereof) (the "Restricted Global Warrant Certificate"), which will be deposited
with the Warrant Custodian and registered in the name of the Depositary or a
nominee of the Depositary.
Warrants transferred pursuant to an effective registration statement
under the Securities Act or in reliance on Rule 144 (and, in each such case, in
accordance with Section 3.4 of this Agreement) will be, upon request of the
transferor, represented by a single, permanent Global Warrant Certificate in
definitive, fully registered form, in substantially the form set forth in
Exhibit A to this Agreement (including the information called for by footnotes
1, 3 and 4 thereof) (the "Unrestricted Global Warrant Certificate"), which will
be held by the Warrant Custodian and registered in the name of the Depositary or
a nominee of the Depositary.
Each Global Warrant Certificate shall represent such of the outstanding
Warrants as shall be specified therein and each shall provide that it shall
represent the aggregate number of outstanding Warrants from time to time
endorsed thereon and that the aggregate amount of outstanding Warrants
represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges, transfers and exercises. Any endorsement of a
Global Warrant Certificate to reflect the amount of any increase or decrease in
the amount of outstanding Warrants represented thereby shall be made by the
Warrant Agent or the Warrant Custodian, at the direction of the Warrant Agent,
in accordance with instructions given by the Holder of the Global Warrant
Certificate and in accordance with Section 3.4 of this Agreement.
After the Detachment Date, Warrants offered and sold (i) to Accredited
Investors who are not QIBs or (ii) to QIBs who elect by written notice to the
Company to take physical delivery of Definitive Warrant Certificates rather than
a beneficial interest in a Global Warrant Certificate, will be issued in the
form of Definitive Warrant Certificates. Definitive Warrant Certificates may
also be issued in accordance with Section 3.4 of this Agreement.
SECTION 3.3. RESERVED.
SECTION 3.4. REGISTRATION OF TRANSFER AND EXCHANGE.
(a) General. The Company shall cause to be kept at the Corporate
Trust Office of the Warrant Agent a register (the register maintained in such
office and in any other office or agency designated pursuant to Section 8.5 of
this Agreement being herein collectively referred to as the "Warrant Register")
in which the Warrant Agent shall provide for the registration of Warrant
Certificates and of transfers and exchanges of Warrants.
(b) Transfer of a Beneficial Interest in a Global Warrant
Certificate. The transfer and exchange of a beneficial interest in a Global
Warrant Certificate shall be effected through the Depositary in accordance with
this Agreement (including the restrictions on transfer set forth herein) and the
procedures of the Depositary therefor.
8
<PAGE> 12
(c) Transfer and Exchange of Definitive Warrant Certificates. A
Holder of a Definitive Warrant Certificate may at any time transfer such
Definitive Warrant Certificate or exchange such Definitive Warrant Certificate
for Definitive Warrant Certificates representing an equal number of Warrants in
accordance with this subsection (c). Upon receipt by the Warrant Agent of:
(i) a Definitive Warrant Certificate, duly endorsed or
accompanied by appropriate instruments of transfer, in form reasonably
satisfactory to the Warrant Agent, and
(ii) if such Definitive Warrant Certificate represents
Transfer Restricted Warrants, a certificate in substantially the form
set forth in Exhibit B to this Agreement from the Holder thereof
requesting Definitive Warrant Certificates and stating that such
Warrants are being:
(A) delivered to the Warrant Agent for registration
in the name of such Holder, without transfer; or
(B) transferred pursuant to an effective registration
statement under the Securities Act; or
(C) transferred to a QIB in accordance with Rule
144A; or
(D) transferred in reliance on an exemption from the
registration requirements of the Securities Act other than
that provided by Rule 144A (in which case the Definitive
Warrant Certificate surrendered shall also be accompanied by
an opinion of counsel reasonably acceptable to the Company and
the Warrant Agent to the effect that such transfer is in
compliance with the Securities Act),
then the Warrant Agent will cancel the surrendered Definitive Warrant
Certificate, the Company will execute one or more Definitive Warrant
Certificates representing the amount of Warrants to be transferred or exchanged
and the Warrant Agent will countersign and deliver to the transferee or Holder
such Definitive Warrant Certificates and the Warrant Agent will register such
Definitive Warrant Certificates in the name of the transferee or Holder.
(d) Transfer of a Definitive Warrant Certificate for a Beneficial
Interest in a Global Warrant Certificate. A Holder of a Definitive Warrant
Certificate may at any time, subject to the rules and procedures of the
Depositary, transfer such Definitive Warrant Certificate for an equivalent
beneficial interest in the appropriate Global Warrant Certificate in
accordance with this subsection (d). Upon receipt by the Warrant Agent of:
(i) a Definitive Warrant Certificate, duly endorsed or
accompanied by appropriate instruments of transfer, in form reasonably
satisfactory to the Warrant Agent, together with an instruction of the
transferor thereof requesting an equivalent beneficial interest in the
appropriate Global Warrant Certificate; and
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<PAGE> 13
(ii) if such Definitive Warrant Certificate represents Transfer
Restricted Warrants, a certificate in substantially the form set forth in
Exhibit B to this Agreement from the transferor thereof stating that such
Warrants are being transferred:
(A) to a QIB in accordance with Rule 144A (in which
case the appropriate Global Warrant Certificate shall be the
Restricted Global Warrant Certificate); or
(B) pursuant to an effective registration statement
under the Securities Act or in reliance on Rule 144 (in each of
which cases the appropriate Global Warrant Certificate shall be the
Unrestricted Global Warrant Certificate and, in the case of a
transfer in reliance on Rule 144, the Warrant Agent shall also
receive an opinion of counsel reasonably acceptable to the Company
and to the Warrant Agent to the effect that such transfer is in
compliance with the Securities Act),
then the Warrant Agent will cancel the surrendered Definitive Warrant
Certificate, the Warrant Custodian, in accordance with the standing instructions
and procedures existing among the Depositary and the Warrant Custodian, will
increase the aggregate number of Warrants covered by the appropriate Global
Warrant Certificate in the amount to be transferred and the Depositary will
effect the transfer in accordance with its procedures therefor.
(e) Transfer or Exchange of a Beneficial Interest in a Global Warrant
Certificate for a Definitive Warrant Certificate. A Holder of a beneficial
interest in a Global Warrant Certificate may at any time, subject to the rules
and procedures of the Depositary, transfer or exchange such beneficial
interest for one or more Definitive Warrant Certificates in accordance with this
subsection (e). Upon receipt by the Warrant Custodian of:
(i) an instruction given in accordance with the
procedures of the Depositary on behalf of a Holder of a beneficial
interest in a Global Warrant Certificate to reduce the Global Warrant
Certificate by the number of Warrants to be transferred or exchanged; and
(ii) if such Global Warrant Certificate is the
Restricted Global Warrant Certificate, a certificate (which may be
submitted by facsimile promptly followed by an original) in substantially
the form set forth in Exhibit B to this Agreement from the Holder of such
beneficial interest stating that such Warrants are being:
(A) delivered to the Warrant Agent for registration
in the name of such Holder, without change of beneficial
ownership; or
(B) transferred pursuant to an effective
registration statement under the Securities Act; or
(C) transferred to a QIB in accordance with Rule
144A; or
(D) transferred in reliance on an exemption from the
registration requirements of the Securities Act other than that
provided by Rule 144A (in
10
<PAGE> 14
which case the Warrant Custodian shall also receive an opinion
of counsel reasonably acceptable to the Company and to the
Warrant Custodian to the effect that such transfer is in
compliance with the Securities Act),
then the Warrant Custodian, in accordance with the standing instructions and
procedures existing among the Depositary the Warrant Custodian, will reduce the
amount of Warrants covered by the appropriate Global Warrant Certificate, the
Company will execute one or more Definitive Warrant Certificates in the
aggregate amount of Warrants to be transferred or exchanged and the Warrant
Agent will countersign and deliver to the transferee or Holder such Definitive
Warrant Certificates and the Warrant Agent shall register the Definitive Warrant
Certificates in the name of such transferee or Holder.
(f) RESERVED.
(g) RESERVED.
(h) Transfer of a Beneficial Interest in the Restricted
Global Warrant Certificate for a Beneficial Interest in the Unrestricted Global
Warrant Certificate. A Holder of a beneficial interest in the Restricted Global
Warrant Certificate may at any time, subject to the rules and procedures of the
Depositary, transfer all or part of its interest in the Restricted Global
Warrant Certificate for an equivalent interest in the Unrestricted Global
Warrant Certificate in accordance with this subsection (h). Upon receipt by the
Warrant Custodian of:
(i) an instruction given in accordance with the
procedures of the Depositary on behalf of a Holder of a beneficial
interest in the Restricted Global Warrant Certificate to reduce such
Global Warrant Certificate by the amount of the interest to be
transferred and increase the Unrestricted Global Warrant Certificate by
a like amount, and
(ii) a certificate (which may be submitted by
facsimile promptly followed by an original) in substantially the form
set forth in Exhibit B to this Agreement from the Person designated by
the Depositary as such Holder, to the effect that such interest is
being transferred in reliance on Rule 144 (in which case the Warrant
Custodian shall also receive an opinion of counsel reasonably
acceptable to the Company and to the Warrant Custodian to the effect
that such transfer is in compliance with the Securities Act) or
pursuant to an effective registration statement under the Securities
Act,
then the Warrant Custodian, in accordance with the standing instructions and
procedures existing among the Depositary and the Warrant Custodian, will so
reduce the Restricted Global Warrant Certificate and increase the Unrestricted
Global Warrant Certificate, and the transfer and exchange of such beneficial
interest shall be effected through the Warrant Custodian and the Depositary in
accordance with this Agreement and the procedures of the Depositary and the
Warrant Custodian therefor.
(i) Restrictions on Transfer of Global Warrant Certificates.
Notwithstanding any other provisions of this Agreement (other than
the provisions set forth in subsection (j) of this Section 3.4), a Global
Warrant Certificate may not be transferred except as a whole by the
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<PAGE> 15
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary.
(j) Issuance of Definitive Warrant Certificates in the Absence of
a Depositary. If at any time the Depositary notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global
Warrant Certificates and a successor Depositary for the Global Warrant
Certificates is not appointed by the Company within 90 days after delivery of
such notice, then the Warrant Custodian, in accordance with the standing
instructions and procedures existing among the Depositary and the Warrant
Custodian, will cancel the Global Warrant Certificates, the Company will execute
Definitive Warrant Certificates representing an aggregate number of Warrants
equal to the aggregate number of Warrants evidenced by the Global Warrant
Certificates, and the Warrant Agent will countersign and deliver to each Person
designated by the Depositary as a Holder of a beneficial interest in the Global
Warrant Certificates a Definitive Warrant Certificate evidencing a number of
Warrants equal to such interest.
(k) Legends. Except as permitted by this subsection (k), the
Restricted Global Warrant Certificate and the Definitive Warrant Certificates
(and all Warrant Certificates issued in exchange therefor or substitution
thereof) shall bear a legend in substantially the form set forth in Exhibit A to
this Agreement. A Definitive Warrant Certificate that does not bear the legends
set forth in Exhibit A to this Agreement will be executed, countersigned and
delivered in the case of (i) a transfer pursuant to an effective registration
statement under the Securities Act of a Transfer Restricted Warrant in
accordance with subsection (c)(ii)(B) of this Section 3.4, (ii) a transfer in
reliance on Rule 144 of a Transfer Restricted Warrant in accordance with
subsection (c)(ii)(D) of this Section 3.4; (iii) a transfer pursuant to an
effective registration statement under the Securities Act of a beneficial
interest in the Restricted Global Warrant Certificate in accordance with
subsection (e)(ii)(B) of this Section 3.4; (iv) a transfer in reliance on Rule
144 of a beneficial interest in the Restricted Global Warrant Certificate in
accordance with subsection (e)(ii)(D) of this Section 3.4; or (v) a transfer or
exchange of a beneficial interest in the Unrestricted Global Warrant Certificate
or of a Warrant represented by a Definitive Warrant Certificate that is not a
Transfer Restricted Warrant.
(l) Cancellation and/or Adjustment of Global Warrant Certificate.
At such time as all interests in a Global Warrant Certificate have either been
exchanged for Definitive Warrant Certificates, exercised for shares of Common
Stock or canceled, such Global Warrant Certificate shall be returned to or
retained and canceled by the Warrant Agent. At any time prior to such
cancellation, if any beneficial interest in a Global Warrant Certificate is
exchanged for Definitive Warrant Certificates, exercised for shares of Common
Stock or canceled, the number of Warrants represented by such Global Warrant
Certificate shall be reduced and an endorsement shall be made on such Global
Warrant Certificate, by the Warrant Agent or the Warrant Custodian, at the
direction of the Warrant Agent, to reflect such reduction.
(m) No service charge shall be payable by any Holder for any
registration of transfer or exchange of Warrant Certificates, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any
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registration of transfer or exchange of Warrant Certificates other than
exchanges not involving any transfer.
SECTION 3.5 EXECUTION AND DELIVERY.
The Warrant Certificates shall be executed on behalf of the Company
by its Chief Executive Officer, its President or its Chief Financial Officer,
under its corporate seal reproduced thereon, attested by its Secretary or one of
its Assistant Secretaries. The signature of any of these officers on the Warrant
Certificates may be manual or facsimile. Warrant Certificates bearing the manual
or facsimile signatures of individuals who were at any time the proper officers
of the Company shall bind the Company, notwithstanding that such individuals or
any of them have ceased to hold such offices prior to the delivery of such
Warrant Certificates or the date they are countersigned by the Warrant Agent.
No Warrant Certificate or the Warrants represented thereby
shall be valid or be entitled to any benefit under this Agreement unless such
Warrant Certificate has been countersigned by an authorized officer of the
Warrant Agent by manual signature. All Warrant Certificates shall be dated the
date they are countersigned by the Warrant Agent.
At any time and from time to time after the execution and delivery
of this Agreement, the Company shall deliver Warrant Certificates executed by
the Company in accordance with this Section 3.5 to the Warrant Agent. Subject to
Section 3.1 of this Agreement, the Warrant Agent shall, upon the written request
of a Responsible Officer of the Company, countersign and deliver Warrant
Certificates representing such number of Warrants, registered in such names and
bearing such legends as may be specified in such request. The Warrant Agent
shall also countersign and deliver Warrant Certificates as otherwise provided in
this Agreement.
SECTION 3.6. DESTROYED, LOST, MUTILATED OR STOLEN WARRANT CERTIFICATES.
If there shall be delivered to the Company and the Warrant
Agent evidence to their satisfaction of the destruction, loss, mutilation or
theft of any Warrant Certificate and such security and indemnity as may be
required by them to save each of them and any agent of either of them harmless,
then, in the absence of notice to the Company or the Warrant Agent that such
Warrant Certificate has been acquired by a bona fide purchaser, and in the case
of mutilation, upon surrender of such Warrant Certificate to the Warrant Agent
for cancellation, the Company shall execute and the Warrant Agent shall
countersign and deliver, in lieu of or exchange for any such destroyed, lost,
mutilated or stolen Warrant Certificate, a new Warrant Certificate for a like
number of Warrants, bearing a number not contemporaneously outstanding.
Upon the issuance of any new Warrant Certificate under this
Section 3.6, the Company may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Warrant Agent)
connected therewith.
Every substitute Warrant Certificate issued and delivered pursuant
to this Section 3.6 in lieu of any destroyed, lost or stolen Warrant Certificate
shall constitute an original additional
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contractual obligation of the Company, whether or not the destroyed, lost or
stolen Warrant Certificate shall be at any time enforceable by anyone, and shall
be entitled to all the benefits of, and be subject to all the limitations of
rights set forth in, this Agreement equally and proportionately with any and all
other Warrant Certificates duly issued and delivered hereunder.
The provisions of this Section 3.6 are exclusive and shall
preclude (to the extent lawful) any and all other rights and remedies with
respect to the replacement of destroyed, lost, mutilated or stolen Warrant
Certificates notwithstanding any law or statute existing or hereafter enacted to
the contrary.
SECTION 3.7. PERSONS DEEMED OWNERS.
The Company and the Warrant Agent, and any agent of the Company or
the Warrant Agent, may deem and treat the Person in whose name a Warrant
Certificate is registered in the Warrant Register as the absolute, true and
lawful owner of such Warrant Certificate and the Warrants represented thereby
(notwithstanding any notation of ownership or other writing thereon made by any
Person) for all purposes, and neither the Company nor the Warrant Agent nor any
of their respective agents shall be affected by any notice or knowledge to the
contrary.
SECTION 3.8. CANCELLATION OF WARRANT CERTIFICATES.
All Warrant Certificates surrendered for registration of transfer,
exchange or exercise shall be delivered to the Warrant Agent and shall be
promptly canceled by the Warrant Agent. The Company may at any time deliver to
the Warrant Agent for cancellation any Warrant Certificates previously delivered
hereunder that the Company may have acquired in any manner whatsoever, and all
Warrant Certificates so delivered shall be promptly canceled by the Warrant
Agent. No Warrant Certificates shall be delivered in lieu of or in exchange for
any Warrant Certificates canceled by the Warrant Agent, except as expressly
permitted by this Agreement.
SECTION 3.9. NO RIGHTS AS STOCKHOLDERS.
Nothing contained in this Agreement or in the Warrant Certificates
shall be construed as conferring upon the Holders or any transferees any of the
rights of stockholders of the Company, including without limitation, the right
to vote or to receive dividends or to receive notice as stockholders in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter. Nothing contained in this Agreement shall be construed as
imposing any liabilities on such holder to purchase any securities or as a
stockholder of the Company, whether such liabilities are assumed by the Company
or by creditors or stockholders of the Company or otherwise.
NO. ARTICLE 4
EXERCISE OF WARRANTS
SECTION 4.1. EXERCISE PERIOD.
Subject to and upon compliance with the provisions of this
Agreement, at the option of the Holder thereof, a Warrant may be exercised at
the Exercise Price in effect at the time of
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exercise, at any time on any Business Day during the period (the "Exercise
Period") commencing on the Detachment Date and ending 5:00 P.M., New York time,
on April 29, 2001 (the "Expiration Date"), unless the Exercise Period is
extended by the Company. Following the Expiration Date, any Warrant not
previously exercised shall expire and be null and void, and all rights of the
Holder under the Warrant Certificate evidencing such Warrant and under this
Agreement shall cease.
SECTION 4.2. SHARES ISSUABLE UPON EXERCISE; EXERCISE PRICE.
Subject to and upon compliance with the provisions of this
Agreement, each Warrant shall entitle the Holder thereof to purchase from the
Company one share of Common Stock of the Company at an exercise price (the
"Exercise Price") of $20.00 per share of Common Stock. The Exercise Price and
the number and kind of securities or other property issuable upon exercise of
the Warrants shall be adjusted in certain instances as provided in Section 4.6
of this Agreement.
SECTION 4.3. METHOD OF EXERCISE.
Each Warrant may be exercised in whole or in part. In order to
exercise any Warrants, the Holder thereof shall present and surrender the
Warrant Certificate evidencing the Warrants to the Warrant Agent at the office
or agency of the Company maintained for that purpose pursuant to Section 8.5,
with the Notice of Exercise on the Warrant Certificate duly completed and
executed by the Holder or by the Holder's legal representative or attorney duly
authorized in writing to the satisfaction of the Warrant Agent, and accompanied
by payment in full of the aggregate Exercise Price for the number of shares of
Common Stock specified in the Notice of Exercise, and of any other amounts
required to be paid in connection with such exercise, (i) by cash or certified
or official bank check, (ii) by surrendering additional Warrants or shares of
Common Stock for cancellation to the extent that the Company may lawfully accept
shares of Common Stock in the Company, or (iii) by such other means as is
acceptable to the Company in the lawful currency of the United States of America
which as of the time of payment is legal tender for payment of public or private
debts. In the event the holder exercising its Warrants holds an interest in a
Global Warrant Certificate, such holder shall exercise Warrants owned of record
by such holder and represented by a Global Warrant Certificate by delivering (i)
proof of record ownership of such Warrants if required by the Company and (ii) a
notice of exercise in substantially the form set forth in the Warrant as
appropriately adjusted. The value per share of Common Stock surrendered in
accordance with this Section 4.3 equals the current market price per share of
Common Stock as defined in Section 4.6(e) of this Agreement as of the business
day next preceding the date the Warrant Certificates are surrendered for
exercise and the value of a Warrant being equal to the difference between such
current market price and the Exercise Price.
Warrants shall be deemed to have been exercised immediately
prior to the close of business on the date of surrender of the Warrant
Certificate representing such Warrants for exercise in accordance with the
foregoing provisions, and at such time the Person or Persons entitled to receive
the Common Stock issuable upon exercise shall be treated for all purposes as the
record holder or holders of such Common Stock at the close of business on the
date of such surrender, notwithstanding that the stock transfer books of the
Company shall then be closed or
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that certificates representing such shares of Common Stock shall not then be
actually delivered to such Person or Persons.
If any Warrant Certificate is surrendered for the exercise of
less than all the Warrants represented thereby, the Company shall execute, and
the Warrant Agent shall countersign and deliver to the Holder thereof, at the
expense of the Company, a new Warrant Certificate, dated the date of such
exercise, evidencing the number of Warrants remaining unexercised unless such
Warrants shall have expired.
SECTION 4.4. ISSUANCE OF COMMON STOCK.
Upon the exercise of any Warrants, the Warrant Agent shall (i)
cause an amount equal to the amount paid by the Holder upon exercise to be paid
to the Company by depositing the same in an account designated by the Company
for that purpose or delivering such payment in such other manner as is
acceptable to the Company, and (ii) immediately inform the Company in writing of
such exercise and deposit or delivery, including the number of Warrants
exercised and the instructions of the exercising Holder with respect to delivery
of the shares of Common Stock issuable upon such exercise. The Company shall
then issue within five days and deliver or cause to be delivered at such office
or agency maintained pursuant to Section 8.5 a certificate or certificates
evidencing the number of full shares of Common Stock issuable upon exercise of
such Warrants, registered in such name or names as may be directed by such
Holder in the Notice of Exercise, together with a check for payment in lieu of
any fractional share, as provided in Section 4.5 of this Agreement.
SECTION 4.5. FRACTIONS OF SHARES.
No fractional shares of Common Stock shall be issued upon exercise
of any Warrants. If more than one Warrant shall be exercised at one time by the
same Holder, the number of full shares which shall be issuable upon exercise
thereof shall be computed on the basis of the aggregate number of shares of
Common Stock issuable under the Warrants so exercised. In lieu of any fractional
share of Common Stock that would otherwise be issuable upon exercise of any
Warrant or Warrants, the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the market price per share
of Common Stock (as determined by the Board of Directors of the Company or in
any manner prescribed by the Board of Directors) at the close of business on the
day such exercise is deemed to have occurred.
SECTION 4.6. ADJUSTMENT OF EXERCISE PRICE.
(a) In the event the Company after the date hereof shall (i) pay a
dividend or make a distribution in shares of capital stock of the Company, or
(ii) subdivide its outstanding shares of Common Stock, or (iii) combine its
outstanding shares of Common Stock into a smaller number of shares, or (iv)
issue by reclassification of its shares of Common Stock any shares of capital
stock of the Company, the exercise right and the Exercise Price in effect
immediately prior to such action shall be adjusted so that the holder of any
Warrant thereafter surrendering such Warrant for exercise shall be entitled to
receive the number of shares of capital stock of the Company that such holder
would have owned immediately following such action had such
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Warrant been exercised immediately prior to the record date for such action or
to such action, as appropriate. An adjustment made pursuant to this Section 4.6
shall, in the case of a subdivision, combination or reclassification become
effective retroactively immediately after the record date thereof. If, as a
result of an adjustment made pursuant to this Section 4.6, the holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company (whose determination shall be described in a
certificate filed with the Warrant Agent) shall in good faith determine the
allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock.
(b) In the event the Company after the date hereof shall
distribute to all the holders of Common Stock any dividend or other distribution
(other than a cash distribution made as a dividend payable out of earnings or
out of any earned surplus legally available for dividends under the laws of the
jurisdiction of incorporation of the Company) or any evidence of indebtedness or
any assets in respect of the Common Stock, or rights to subscribe or purchase
shares of Common Stock at a price per share less than the current market price
per share of Common Stock (as defined in Section 4.6(e) of this Agreement) at
the record date referenced below, then, and thereafter successively upon each
such distribution, the Exercise Price in effect immediately prior to such
distribution shall forthwith be reduced to a price determined by multiplying the
Exercise Price in effect immediately prior to such distribution by a fraction
the numerator of which shall be the current market price per share of Common
Stock (as defined in Section 4.6(e) of this Agreement) at the record date
referenced below, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
certificate filed with the Warrant Agent) of the portion of such evidences of
indebtedness or such assets so distributed, or of such subscription or purchase
rights, applicable to one share of Common Stock and the denominator of which
shall be such current market price per share of Common Stock. An adjustment made
pursuant to Section 4.6(b) shall become effective retroactively immediately
after the record date for the determination of stockholders entitled to receive
such distribution.
(c) After each adjustment of the Exercise Price pursuant to
Section 4.6(a) and 4.6(b), the total number of shares of Common Stock or
fractional part thereof purchasable upon the exercise of each Warrant shall be
proportionately adjusted to such number of shares or fractional part thereof as
the total Exercise Price of the number of shares or fractional part thereof
purchasable immediately prior to such adjustment will buy at the adjusted
Exercise Price.
(d) The certificate of any independent firm of public
accountants of recognized national standing selected by the Board of Directors
of the Company shall be conclusive evidence of the correctness of any
computations under Sections 4.6(a) and 4.6(b) of this Agreement.
(e) For the purposes of Sections 4.3, 4.6(a) and 4.6(b) of this
Agreement, the current market price per share of Common Stock as of any date of
determination shall be deemed to be the average of the daily closing prices for
the consecutive 20 trading days preceding the day of determination. The closing
price for the day shall be the last reported sale price regular way or, in case
no such reported sale takes place on that day, the average of the reported
closing bid and
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asked pries regular way, in either case as officially reported by the principal
stock exchange on which the Common Stock is listed or admitted to trading, or,
if the Common Stock is not listed or admitted to trading on any national
securities exchange, the average of closing bid and asked prices as furnished by
the National Association of Securities Dealers, Inc. through the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or
similar organization if NASDAQ is no longer reporting such information.
(f) No adjustment of the Exercise Price shall be required under
Sections 4.6(a) and 4.6(b) of this Agreement if the amount of such adjustment is
less than 1%; provided, however, that any adjustments that by reason of the
foregoing are not required at the time to be made shall be carried forward and
taken into account and included in determining the amount of any subsequent
adjustment. If the Company shall take a record of holders of Common Stock for
the purpose of entitling them to receive any dividend or distribution and
thereafter and before the distribution to stockholders of any such dividend or
distribution, legally abandon its plan to pay or deliver such dividend or
distribution, then no adjustment of the Exercise Price shall be required by
reason of the taking of such record. All calculations under this Section 4.6
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to this
Section 4.6, the Company shall promptly file with the Warrant Agent and with
each transfer agent for the Common Stock a certificate signed by the Chief
Executive Officer, President or Chief Financial Officer and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company
setting forth in reasonable detail the events requiring the adjustment, the
method by which such adjustment was calculated, and specifying the Exercise
Price and the number or kind or class of shares or other securities or property
purchasable upon exercise of the Warrants after giving effect to such
adjustment, and will cause to be mailed, first class, postage prepaid a summary
thereof to the registered holders of the Warrant Certificates at their last
addressees as they appear on the registry books of the Warrant Agent.
(h) For the purposes of this Section 4.6, the term "Common Stock"
shall mean (i) the class of stock designated as the common stock, par value
$0.0001 per share, of the Company, at the date of this Agreement and (ii) any
other class of stock resulting from successive changes or reclassifications of
such Common Stock consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at any
time, as a result of an adjustment made pursuant to Section 4.6(a) of this
Agreement, shares of capital stock of the Company other than shares of Common
Stock are issuable upon exercise of the Warrants, thereafter the number of such
other shares so issuable shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section 4.6, and all other
provisions of this Agreement with respect to Common Stock shall apply on like
terms to any such other shares. Subject to the foregoing, and unless the context
requires otherwise, all references to Common Stock in this Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to this
Section 4.6, be deemed to refer also to any other securities or property then
issuable upon exercise of the Warrants as a result of such adjustments.
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SECTION 4.7. RESERVED.
SECTION 4.8. NOTICE OF CERTAIN CORPORATE ACTION.
In case:
(a) the Company shall declare a dividend (or any
other distribution) on the Common Stock payable otherwise than
exclusively in cash; or
(b) the Company shall authorize the granting to the
holders of the Common Stock of rights, options or warrants to subscribe
for or purchase any shares of capital stock of any class or of any
other rights; or
(c) of any reclassification of the Common Stock of
the Company (other than a merger which is effected solely to change the
jurisdiction of incorporation of the Company), or of any consolidation
or merger to which the Company is a party and for which approval of any
stockholders of the Company is required, or of the sale or transfer of
all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall, if notice of such event is sent to the holders of the
Company's Common Stock generally, cause to be filed at each office or agency
maintained pursuant to Section 8.5 for the purpose of exercising Warrants, and
shall cause to be mailed to all Holders at their last addresses as they shall
appear in the Warrant Register, on or prior to the date information regarding
such corporate action is sent to holders of the Company's Common Stock
generally, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights, options or warrants, or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights, options or
warrants are to be determined, or (y) the date on which such reclassification,
consolidation, merger, transfer, dissolution, liquidation or winding up (or
amendment thereto) is expected to become effective, and the date as of which it
is expected that holders of record of such class of Common Stock shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger,
transfer, dissolution, liquidation or winding up. The Warrant Agent shall not be
responsible for giving such notice or for the contents of any such notice to the
Holders.
SECTION 4.9. COMPANY TO RESERVE COMMON STOCK.
The Company shall, at all times during the Exercise Period,
reserve and keep available, free from preemptive rights, out of its authorized
but unissued Common Stock, for the purpose of effecting the exercise of
Warrants, the full number of shares of Common Stock then issuable upon the
exercise of all outstanding Warrants.
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SECTION 4.10. TAXES ON EXERCISES.
The Company shall pay any and all taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on exercise of Warrants
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of (i) income of the Holder or (ii) any transfer
involved in the issue and delivery of shares of Common Stock in name other than
that of the Holder of the Warrant or Warrants to be exercised, and no such issue
or delivery shall be made unless and until the Person requesting such issue has
paid to the Company the amount of any such taxes or has established to the
satisfaction of the Company that such tax has been paid.
SECTION 4.11. COVENANT AS TO COMMON STOCK.
The Company covenants that all shares of Common Stock that may be
issued upon exercise of any Warrants will, upon issue and payment of the
Exercise Price therefor, be validly issued, fully paid and nonassessable and
free and clear from all taxes, liens, charges, security interests, encumbrances
and other restrictions created by or through the Company.
SECTION 4.12. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any sale or transfer of all or substantially all of the assets of the Company
(each, a "Transaction"), the Person formed by such Transaction or which acquires
such assets, as the case may be (the "Acquiror"), shall execute and deliver to
the Warrant Agent prior to the consummation of the Transaction a warrant
agreement (or supplement to this Warrant Agreement) providing that the Holder of
each Warrant then outstanding shall have the right thereafter, during the period
such Warrant shall be exercisable in accordance with this Warrant Agreement, to
exercise such Warrant only into the kind and amount of securities, cash and
other property (collectively, the "Consideration") receivable upon such
Transaction by a holder of the number of shares of Common Stock of the Company
into which such Warrant might have been exercised immediately prior to such
Transaction, assuming such holder of Common Stock of the Company (i) is not a
Person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which such sale or transfer was made, as the
case may be (a "constituent person"), or an affiliate of a constituent person
and (ii) failed to exercise such Holder's rights of election, if any, as to the
kind or amount of Consideration receivable upon such Transaction (provided that
if the kind or amount of Consideration receivable upon such Transaction is not
the same for each share of Common Stock held immediately prior to such
Transaction by Persons other than a constituent person or an affiliate thereof
and in respect of which such rights of election shall not have been exercised
("non-electing share"), then for the purpose of this Section 4.12 the kind and
amount of Consideration receivable upon such Transaction by each non-electing
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the non-electing shares). Such warrant agreement shall provide for
adjustments upon the occurrence of events with respect to the Acquiror similar
to the events described in Section 4(a) and (b) of this Agreement, which, for
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events subsequent to the effective date of such warrant agreement, shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Article of this Agreement. The above provisions of this Section shall similarly
apply to successive Transactions.
SECTION 4.13. NO CHANGE OF WARRANT NECESSARY.
Irrespective of any adjustment in the Exercise Price or in the number
or kind of shares or other property issuable upon exercise of the Warrants, the
Warrant Certificates theretofore or thereafter issued may continue to express
the same Exercise Price and number and kind of shares issuable upon exercise per
Warrant as are stated in the Warrant Certificates initially issued pursuant to
this Agreement.
SECTION 4.14. ENFORCEMENT OF RIGHTS.
Notwithstanding any of the provisions of this Agreement, any Holder,
without the consent of the Warrant Agent or any other Holder, may enforce, and
may institute and maintain any suit, action or proceeding against the Company to
enforce, such Holder's right to exercise the Warrants evidenced by such Holder's
Warrant Certificate in the manner provided in such Warrant Certificate and this
Agreement.
SECTION 4.15. AVAILABLE INFORMATION.
The Company shall promptly file with the Warrant Agent (and cause the
Warrant Agent to deliver to the holders of the Warrants upon request to the
Company) copies of its annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) that the Company is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
ARTICLE 5
RESERVED
ARTICLE 6
RESERVED
ARTICLE 7
AMENDMENTS
SECTION 7.1. AMENDMENT OF AGREEMENT.
The Warrant Agent and the Company may, without the consent of any
Holders, amend this Agreement in such manner as they shall deem appropriate to
cure any ambiguity, to correct any defective or inconsistent provision or
manifest mistake or error herein contained, or in any other manner that they may
deem necessary or desirable and which shall not adversely affect the
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rights of the Holders of Warrants. This Agreement shall not otherwise be
modified, supplemented or amended in any respect by the Warrant Agent and the
Company, except with the consent in writing of the Holders of outstanding
Warrants representing not less than a majority of the Warrants then outstanding;
provided, however, that the consent in writing of each and every Holder shall be
required for any such modification, supplement or amendment which (a) changes
the Exercise Period (except to extend the expiration of the Exercise Period to a
later date) or increases the Exercise Price, or (b) reduces the percentage of
Holders of outstanding Warrants the consent of who is required to modify,
supplement or amend this Agreement.
Any modification, supplement or amendment pursuant to this Section 7.1
shall be binding upon all present and future Holders, whether or not they have
consented to such modification, supplement or amendment, and whether or not
notation of such modification, supplement or amendment is made upon any Warrant
Certificate issued to such Holder. Section 7.2. Record Date.
The Company may set a record date for purposes of determining the
identity of Holders entitled to consent to any modification, supplement or
amendment to this Agreement. If the Company does not set a record date, the
record date shall be 30 days prior to the first solicitation of such consent.
ARTICLE 8
MISCELLANEOUS PROVISIONS
SECTION 8.1. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which together shall constitute
the same instrument.
SECTION 8.2. GOVERNING LAW.
THIS AGREEMENT AND THE WARRANT CERTIFICATES ISSUED HEREUNDER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF.
SECTION 8.3. DESCRIPTIVE HEADINGS.
The descriptive headings of this Agreement are for convenience only and
shall not control or affect the meaning or construction of any provision of this
Agreement.
SECTION 8.4. NOTICES.
Any notice, request or other document permitted or required hereunder
to be given to any Holder shall be sufficiently given if in writing and mailed
first-class postage prepaid, to each Holder affected by such event, at its
address as it appears in the Warrant Register. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in
22
<PAGE> 26
any notice so mailed, to any particular Holders shall affect the
sufficiency of such notice with respect to other Holders. Any notice required
hereunder to be given to any Holder may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Warrant Agent, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
Any notice, request, waiver, consent or other document provided or
permitted by this Agreement to be given to (i) the Warrant Agent by any Holder
or by the Company shall be sufficient for every purpose hereunder if in writing
and mailed, first-class postage prepaid, to and received by the Warrant Agent at
its Corporate Trust Office, and (ii) the Company by the Warrant Agent or by any
Holder shall be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
the Company at the address of its principal office specified in the first
paragraph of this Agreement or at any other address previously furnished in
writing to the Warrant Agent by the Company.
In the event the Warrant Agent shall receive any notice, demand or
other document addressed to the Company by any Holder, the Warrant Agent shall
promptly forward such notice or demand to the Company.
SECTION 8.5. MAINTENANCE OF OFFICE.
So long as any of the Warrants remain outstanding, the Company shall
designate and maintain in the State of New York an office or agency where
Warrant Certificates may be surrendered for registration of transfer or for
exchange, where Warrants may be surrendered for exercise and where notices and
demands to or upon the Company in respect of the Warrants and this Warrant
Agreement may be served. The Company may from time to time change or rescind
such designation as it may deem desirable or expedient. The Company will give
prompt written notice to the Warrant Agent of the location, and any change in
the location, of such office or agency. The Company hereby designates the
Corporate Trust Office of the Warrant Agent as the initial agency maintained for
each such purpose. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to notify the Warrant Agent of the
location thereof or of any change in the location thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Warrant Agent, and the Company hereby appoints the Warrant Agent
as its agent to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside the State of New York) where Warrant
Certificates may be presented or surrendered for any or all such purposes and
may from time to time rescind such designations; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in the State of New York for such
purposes. The Company shall give prompt written notice to the Warrant Agent of
any such designation or rescission, and of any change in the location of, any
such other office or agency.
23
<PAGE> 27
SECTION 8.6. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Agreement by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 8.7. SEPARABILITY.
In case any provision in this Agreement or in the Warrant Certificates
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 8.8. PERSONS HAVING RIGHTS UNDER AGREEMENT.
Nothing in this Agreement or in the Warrant Certificates, expressed or
implied, is intended, or shall be construed, to give any Person, other than the
parties hereto and their successors hereunder, and the Holders of Warrants, any
benefit, right, remedy or claim under or by reason of this Agreement.
24
<PAGE> 28
IN WITNESS WHEREOF, the Company and the Warrant Agent have caused this
Agreement to be executed by their duly authorized officers as of the date set
forth below.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
--------------------------------------
Name: Edward P. Nordberg, Jr.
Title: Chief Financial Officer
Witness: Dated: May 6, 1998
By: /s/ Suzanne Roberts
--------------------------
Name: Suzanne Roberts
THE BANK OF NEW YORK
By: /s/ John I. Sivertson
--------------------------------------
Name: John I. Sivertson
Title: Vice President
Witness: Dated: May 6, 1998
By: /s/ Ray Poplasky
--------------------------
Name: Ray Poplasky
25
<PAGE> 29
EXHIBIT A
FORM OF WARRANT CERTIFICATE
Certificate Number ____________ Warrants
VOID AFTER 5:00 p.m. on April 29, 2001
WARRANTS TO PURCHASE
__________ SHARES OF COMMON STOCK
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
(1)UNLESS AND UNTIL EXCHANGED IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THE SECURITIES EVIDENCED HEREBY MAY NOT
BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH
NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW
YORK, NEW YORK) ("DTC") TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
(2)THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED
- ------------------------
(1) Paragraph to be included in a Warrant Certificate issued in the form of a
Global Warrant Certificate.
(2)Paragraph to be included in a Warrant Certificate representing Transfer
Restricted Warrants.
<PAGE> 30
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THE
SECURITIES EVIDENCED HEREBY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS CERTIFICATE BY ITS ACCEPTANCE HEREOF AGREES
TO OFFER, SELL OR OTHERWISE TRANSFER ANY SECURITY EVIDENCED HEREBY,
PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") THAT IS
TWO YEARS AFTER THE LATER OF (X) THE ORIGINAL ISSUE DATE HEREOF AND (Y)
THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE
COMPANY WAS THE OWNER OF SUCH SECURITY (OR ANY PREDECESSOR OF SUCH
SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT,
(C) FOR SO LONG AS THE SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER," AS SUCH TERM IS DEFINED IN, AND IN COMPLIANCE WITH, RULE 144A
PROMULGATED UNDER THE SECURITIES ACT, THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING
OF SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 PROMULGATED UNDER
THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT,
OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT,
OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE
WARRANT AGENT'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
PURSUANT TO CLAUSES (D) OR (E), TO REQUIRE THE DELIVERY OF AN OPINION
OF COUNSEL, CERTIFICATIONS AND OTHER INFORMATION SATISFACTORY TO EACH
OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER
AFTER THE RESALE RESTRICTION TERMINATION DATE.
This Warrant Certificate certifies that ________, or
registered assigns, is the Holder of _________ Warrants (the
"Warrants") to purchase shares of Common Stock, par value $0.0001 per
share (the "Class A Common Stock"), of HealthCare Financial Partners
REIT, Inc., a Maryland corporation (the
2
<PAGE> 31
"Company"). Each Warrant entitles the Holder, at any time on any
Business Day during the Exercise Period (as defined in the Warrant
Agreement), to purchase from the Company one share of Common Stock of
the Company at an Exercise Price of $20.00 per share (as such Exercise
Price may be amended in accordance with this Warrant Certificate or the
Warrant Agreement) upon surrender of this Warrant Certificate and
payment of the Exercise Price at any office or agency maintained for
that purpose by the Company.
Any Warrants not exercised on or prior to 5:00 p.m., New York
City time, on the Expiration Date shall thereafter be null and void.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
THE CONFLICT OF LAW PROVISIONS THEREOF.
Reference is hereby made to the further provisions of this
Warrant Certificate on the reverse hereof, which provisions shall for
all purposes have the same effect as though fully set forth at this
place.
This Warrant Certificate shall not be entitled to any benefit
under the Warrant Agreement between the Company and The Bank of New
York, as Warrant Agent (the "Warrant Agreement") or valid for any
purpose unless countersigned by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed and a facsimile of its corporate seal
to be imprinted thereon.
Dated:
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
-------------------------------------
Name:
Title:
Attest:
--------------------
3
<PAGE> 32
THE BANK OF NEW YORK, as Warrant Agent
By:
-------------------------------------
Name:
Title:
4
<PAGE> 33
[Reverse Side]
The Warrants represented by this Warrant Certificate are part
of a duly authorized issue of Warrants of HealthCare Financial Partners
REIT, Inc. (the "Company") expiring 5:00 p.m., New York City time, on
the Expiration Date. The Warrants represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), by and
between the Company and The Bank of New York (the "Warrant Agent"),
which Warrant Agreement and any amendments thereto are hereby
incorporated by reference in and made a part of this instrument, and to
which reference is hereby made for a description of the respective
rights, limitations of rights, obligations, duties and immunities
thereunder of the Company, the Warrant Agent and the Holders of
Warrants. A copy of the Warrant Agreement may be obtained from the
Company at 2 Wisconsin Circle, Suite 402, Chevy Chase, MD 20815 or the
Warrant Agent at 101 Barclay Street, 12 West, New York, New York 10286,
Attention: Stock Transfer Administration, by a written request from the
Holder hereof or which may be inspected by any Holder or such Holder's
agent at the principal office of the Company or the Warrant Agent. [The
Warrants represented hereby are entitled to the benefits of a
Registration Rights Agreement dated as of May 6, 1998.](3)
Subject to and upon compliance with the provisions of the
Warrant Agreement, each Warrant entitles the Holder, at any time on any
Business Day during the Exercise Period to purchase from the Company
one share of Common Stock, $0.0001 par value ("Common Stock") (or such
other number of shares of Common Stock if an adjustment has been made
as provided in the Warrant Agreement), of the Company at an Exercise
Price of $20.00 per share (or at the current adjusted Exercise Price if
an adjustment has been made as provided in the Warrant Agreement) The
Warrants may be exercised upon the presentation and surrender of this
Warrant Certificate to the Company at its office or agency maintained
for that purpose, with the form of Notice of Exercise set forth hereon
duly completed and executed, accompanied by payment of the Exercise
Price for each such Warrant exercised and any other amounts required to
be paid, as provided in the Warrant Agreement. In the event the holder
exercising its Warrants holds an interest in a Global Warrant
Certificate, such holder shall exercise Warrants owned of record by
such holder and represented by a Global Warrant Certificate by
delivering (i) proof of record ownership of such Warrants if required
by the Company and (ii) a notice of exercise in substantially the form
set forth below as appropriately adjusted. The Exercise Price shall be
payable
- --------------------------
(3) Bracketed language to be included if the Warrant Certificate represents
Transfer Restricted Warrants.
5
<PAGE> 34
(i) by cash or certified or official bank check, (ii) by surrendering
additional Warrants or shares of Common Stock for cancellation to the
extent that the Company may lawfully accept shares of Common Stock in
the Company, or (iii) by such other means as is acceptable to the
Company in the lawful currency of the United States of America which as
of the time of payment is legal tender for payment of public or private
debts. The value per share of Common Stock surrendered in accordance
with this provision equals the current market price per share of Common
Stock as defined in the Warrant Agreement as of the business day next
preceding the date the Warrant is surrendered for exercise and the
value of this Warrant being equal to the difference between such
current market price and the Exercise Price. The Exercise Price and the
number and kind of securities or other property issuable upon exercise
of each Warrant is subject to adjustment as provided in the Warrant
Agreement.
As soon as practicable after the exercise of any Warrants, the
Company shall issue and deliver, or cause to be delivered, to the
Holder, at such office or agency maintained for such purpose pursuant
to the Warrant Agreement, a certificate or certificates evidencing the
number of full shares of Common Stock to which such Holder is entitled,
registered in such name or names as may be directed by such Holder
pursuant to the Notice of Exercise set forth on this Warrant
Certificate. No fractional shares of Common Stock will be issued upon
exercise of any Warrant, but instead of any fractional interest, the
Company shall pay to the Holder a cash adjustment as provided in the
Warrant Agreement.
In the case of the exercise of less than all the Warrants
represented hereby, this Warrant Certificate shall be canceled upon the
surrender hereof and a new Warrant Certificate or Warrant Certificates
shall be issued and delivered for the balance of such Warrants
represented hereby.
Prior to the exercise of any Warrant represented hereby, the
Holder shall not be entitled to any rights of a stockholder of the
Company by reason of such Person being a Holder, including, without
limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant
Agreement.
The Warrant Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modification of the
rights and obligations of the Company and the rights of the Holders of
Warrants under the Warrant Agreement at any time by the Company and the
Warrant Agent with the consent of the Holders of at least a majority of
the Warrants at the time outstanding. Any such consent shall be
conclusive and binding upon the Holder of this Warrant Certificate and
upon all future Holders of any Warrant Certificate issued upon the
registration of transfer of the Warrants evidenced hereby, or in
exchange hereof or in lieu hereof, whether or not notation of such
consent or waiver is made thereon.
6
<PAGE> 35
As provided in the Warrant Agreement and subject to the
limitations set forth therein, transfer of the Warrants represented by
this Warrant Certificate is registrable upon surrender of this Warrant
Certificate at the office or agency of the Company maintained for that
purpose, and thereupon one or more new Warrant Certificates
representing the Warrants so transferred will be issued to the
designated transferee or transferees. As provided in the Warrant
Agreement and subject to the limitations set forth therein, this
Warrant Certificate is exchangeable for new Warrant Certificates
representing a like number of Warrants, as requested by the Holder
surrendering the same.
No service charge shall be payable by a Holder for any such
registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Prior to due presentment of this Warrant Certificate for
registration of transfer, the Company and the Warrant Agent and any
agent of the Company or the Warrant Agent may treat the Person in whose
name this Warrant Certificate is registered as the absolute, true and
lawful owner hereof and of the Warrants represented hereby
(notwithstanding any notation or ownership or other writing hereon made
by any Person) for all purposes, and shall not be affected by any
notice or knowledge to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in
the Warrant Agreement.
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise ________
of the Warrants represented by this Warrant Certificate and purchase
the whole number of shares issuable and deliverable upon exercise of
such Warrants, and herewith tenders payment for such shares in
accordance with the terms of the Warrant Agreement. The undersigned
hereby directs that the certificate or certificates for the shares
issuable and deliverable upon exercise, together with any check in
payment for fractional shares and any Warrant Certificate representing
any unexercised Warrants represented by this Warrant Certificate, be
issued in the name of and delivered to the undersigned, unless a
different name is indicated below. The undersigned will pay any
transfer taxes or other governmental charge payable with respect to any
such shares to be issued in the name of a person other than the
undersigned.
7
<PAGE> 36
INSTRUCTIONS FOR REGISTRATION OF SHARES
(please typewrite or print)
Name:_________________________________________________________________
Address:______________________________________________________________
Social Security or Other Taxpayer Identification Number:______________
Dated: ____________________
Signature: ___________________________
Note: Signature must conform to name of Holder appearing on face
hereof)
Signature must be guaranteed by a member of an accepted medallion
guarantee program if shares of Common Stock are to be issued, or
Warrant Certificate(s) are to be delivered, other than to and in the
name of the Holder.
___________________________________
Signature Guarantee
Fill in for registration of shares of Common Stock and Warrant
Certificate(s) if to be issued otherwise than to the Holder:
____________________________________ Social Security or other
(Name) Taxpayer Identification Number:
____________________________________ ______________________________
(Name)
____________________________________ ______________________________
Please print name and address
(including zip code)
8
<PAGE> 37
EXHIBIT B
TRANSFER INSTRUCTION
RE: HEALTHCARE FINANCIAL PARTNERS REIT, INC.
WARRANTS
Reference is made to the Warrant Agreement dated as of April __, 1998,
relating to the Warrants (the "Agreement"). This Instruction and
Certification relates to Warrants held by ___________________________
(the "Transferor/Holder"). Capitalized terms not otherwise defined
herein have the meanings set forth in the Agreement.
Instruction of Transfer or Exchange
(to be completed whether or not the Warrants to be transferred or
exchanged are Transfer Restricted Warrants)
1. The Transferor/Holder hereby instructs the Warrant Agent to
(check one box):
[ ] Transfer or exchange one or more Definitive Warrant
Certificates in accordance with Section 3.4(c) of the
Agreement; or
[ ] Transfer one or more Definitive Warrant Certificates for a
beneficial interest in a Global Warrant Certificate in
accordance with Section 3.4(d) of the Agreement; or
[ ] Transfer or exchange a beneficial interest in a Global Warrant
Certificate for one or more Definitive Warrant Certificates in
accordance with Section 3.4(e) of the Agreement; or
[ ] Transfer a beneficial interest in the Restricted Global
Warrant Certificate for a beneficial interest in the
Unrestricted Global Warrant Certificate in accordance with
Section 3.4(h) of the Agreement.
2. The Transferor/Holder has requested Definitive
Warrant Certificates above and hereby further instructs the Warrant
Agent to issue such Definitive Warrant Certificates without the
restrictive legends referenced in Section 3.4(k) of the Agreement
(check box if applicable): [ ]
9
<PAGE> 38
Certification
(to be completed for a transfer or exchange of
Transfer Restricted Warrants only)
3. In connection with the transfer or exchange requested
above, the Transferor/Holder does hereby certify that (check one box):
[ ] One or more Definitive Warrant Certificates, or an interest in
a Global Warrant Certificate, is being obtained by the
Transferor/Holder, without transfer or change in beneficial
ownership (in accordance with Section 3.4(c)(ii)(A) or Section
3.4(e)(ii)(A) of the Agreement); or
[ ] one or more Definitive Warrant Certificates, or an interest in
a Global Warrant Certificate, is being transferred pursuant to
an effective registration statement under the Securities Act
(in satisfaction of Section 3.4(c)(ii)(B), Section
3.4(d)(ii)(B), Section 3.4(e)(ii)(B) or Section 3.4(h) of the
Agreement).
[ ] one or more Definitive Warrant Certificates, or an interest in
a Global Warrant Certificate, is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A) in
reliance on Rule 144A (in satisfaction of Section
3.4(c)(ii)(C), Section 3.4(d)(ii)(A) or Section 3.4(e)(ii)(C);
or
[ ] one or more Definitive Warrant Certificates, or an interest in
a Global Warrant Certificate, is being obtained in reliance on
and in compliance with an exemption from the registration
requirements of the Securities Act, other than Rule 144A under
the Securities Act, and an opinion of counsel to the effect
that such transfer complies with, and does not require
registration under, the Securities Act accompanies this
Instruction and Certification (in satisfaction of Section
3.4(c)(ii)(D), Section 3.4(d)(ii)(B), Section 3.4(e)(ii)(D) or
Section 3.4(h) of the Agreement.
- --------------------------------------------
[INSERT NAME OF TRANSFEROR/HOLDER]
Date: By:
---------------------- -----------------------
10
<PAGE> 39
SCHEDULE I
The Additional Purchasers are as follows:
HealthCare Financial Partners, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Farallon Capital Partners, L.P.
Farallon Capital Institutional Partners, L.P.
Farallon Capital Institutional Partners II, L.P.
Farallon Capital Institutional Partners III, L.P.
Tinicum Partners, L.P.
Farallon Capital Management, L.L.C.,, on
behalf of The Common Fund
c/o Farallon Capital Management, L.L.C.
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
Attention: Meridee Moore and Kirstin Lynch
Credit Suisse First Boston Corp.
c/o Credit Suisse First Boston
11 Madison Avenue
New York, New York 10010
Attention: Michael Szwajkowski
11
<PAGE> 1
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into as of May ___, 1998, by and between HEALTHCARE FINANCIAL PARTNERS REIT,
INC., a Maryland corporation (the "Corporation"), and the individual signing as
Indemnitee on the signature page hereto ("Indemnitee").
WHEREAS, the Indemnitee is an officer and/or a director of the
Corporation; and
WHEREAS, the Articles of Amendment and Restatement (the "Articles of
Incorporation") of the Corporation provides for indemnification of officers and
directors of the Corporation; and
WHEREAS, the parties believe it appropriate to further memorialize and
reaffirm the Corporation's obligation to indemnify the Indemnitee as set forth
in the Articles of Incorporation;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties agree as follows:
1. AGREEMENT TO INDEMNIFY.
(a) Subject to Section 4 hereof and except as otherwise
provided in this Agreement, the Corporation shall indemnify and hold
harmless the Indemnitee (i) against any reasonable expenses (including
attorneys' fees) in advance of the final disposition of any threatened,
pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, and whether civil,
criminal, administrative or investigative ("Proceeding"), without
requiring a determination of the ultimate entitlement to
indemnification, or (ii) against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the Indemnitee in connection with any Proceeding in which
the Indemnitee was or is or is threatened to be made a party because he
is or was an officer and/or a director of the Corporation or was
serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise unless it is
established that (a) the act or omission of the Indemnitee was material
to the matter giving rise to the Proceeding and (x) was committed in
bad faith or (y) was the result of active or deliberate dishonesty; (b)
the Indemnitee actually received an improper personal benefit in money,
property, or services; or (c) in the case of a criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful. If the Proceeding is one by or in the right of the
Corporation, indemnification may not be made in respect of any
Proceeding in which the Indemnitee shall have been adjudged to be
liable to the Corporation.
<PAGE> 2
(b) The termination of any Proceeding by judgment, order, or
settlement does not create a presumption that the Indemnitee did not
meet the requisite standard of conduct set forth in subsection 1(a)
above. The termination of any Proceeding by conviction, or by plea of
nolo contendre or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the Indemnitee
did not meet the requisite standard of conduct.
(c) An Indemnitee may not be indemnified under Section 1(a) in
respect of any Proceeding charging improper personal benefit to the
Indemnitee, whether or not involving action in the Indemnitee's
official capacity, in which the Indemnitee was adjudged to be liable on
the basis that personal benefit was improperly received.
2. INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
(a) Indemnification may be against judgments, penalties,
fines, settlements, and reasonable expenses (including attorneys' fees)
actually incurred by the Indemnitee in connection with the Proceeding;
(b) Reasonable expenses incurred by the Indemnitee who is a
party to a Proceeding may be paid or reimbursed by the Corporation in
advance of the final disposition of the Proceeding upon receipt by the
Corporation of a written undertaking, substantially in the form of
Annex I attached hereto, by the Indemnitee (i) of the Indemnitee's good
faith belief that the standard of conduct necessary for indemnification
by the Corporation as authorized in this Agreement has been met; and
(ii) to repay the amount if it shall ultimately be determined that the
standard of conduct has not been met.
(c) The undertaking required by 2(b) shall be an unlimited
general obligation of the Indemnitee but need not be secured and may be
accepted without reference to financial ability to make the repayment.
(d) This Agreement does not limit the Corporation's power to
pay or reimburse expenses incurred by the Indemnitee in connection with
an appearance as a witness in a Proceeding at a time when the
Indemnitee has not been made a named defendant or respondent in the
Proceeding.
3. DETERMINATION OF RIGHT OF INDEMNIFICATION.
(a) Indemnification and advancement of expenses under this
Agreement may not be made by the Corporation unless authorized for a
specific Proceeding after a
-3-
<PAGE> 3
determination has been made that indemnification of the Indemnitee is
permissible in the circumstances because the Indemnitee has met the
standard of conduct set forth in Section 1 hereof. Such determination
shall be made:
(i) by the Corporation's Board of Directors (the "Board") by a
majority vote of a quorum consisting of directors not, at the
time, parties to the Proceeding, or, if such a quorum cannot
be obtained, then by a majority vote of a committee of the
Board consisting solely of two or more directors not, at the
time, parties to such Proceeding and who were duly designated
to act in the matter by a majority vote of the full Board in
which the designated directors who are parties may
participate;
(ii) by special legal counsel selected by the Board or a committee
of the Board by vote as set forth in Section 3(a)(i) hereof,
or, if the requisite quorum of the full Board cannot be
obtained therefor and the committee cannot be established, by
a majority vote of the full Board in which director who are
parties may participate; or
(iii) by the stockholders of the Corporation.
(b) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is made by special legal counsel,
authorization of indemnification and determination as to reasonableness
of expenses shall be made in the manner specified in Section 3(a)(ii)
hereof for selection of such counsel.
(c) Shares held by directors who are parties to the Proceeding
may not be voted on the subject matter under Section 3 hereof.
4. PROCEDURE FOR MAKING DEMANDS. Any indemnification or advancement of
expenses hereunder shall be made promptly, and in any event within sixty (60)
days, upon the written request of the Indemnitee, unless a determination is
reasonably and promptly made by a majority vote of a quorum of disinterested
directors, independent legal counsel or the stockholders, as provided in Section
3 hereof, that the applicable standards of conduct set forth in Section 1 have
been met. The right to indemnification or advancement hereunder shall be
enforceable by the Indemnitee in any court of competent jurisdiction if the
Board or independent legal counsel denies the claim, in whole or in part, or if
no disposition of such claim is made within sixty (60) days after application by
the Indemnitee for indemnification or advancement of expenses. The Indemnitee's
expenses incurred in connection with successfully establishing the Indemnitee's
right to indemnification or advancement of expenses, in whole or in part, in any
such proceeding shall also be indemnified by the Corporation.
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<PAGE> 4
5. SUCCESSORS. This Agreement establishes contract rights which shall
be binding upon, and shall inure to the benefit of, the successors, assigns,
heirs and legal representatives of the parties hereto.
6. CONTRACT RIGHTS NOT EXCLUSIVE. The contract rights conferred by
this Agreement shall be in addition to, but not exclusive of, any other right
which the Indemnitee may have or may hereafter acquire under any statute, the
Articles of Incorporation, any agreement by the vote of stockholders or
disinterested directors of the Corporation, or otherwise.
7. INDEMNITEE'S OBLIGATIONS. The Indemnitee shall promptly advise the
Corporation in writing of the institution of any Proceeding which is or may be
subject to this Agreement and keep the Corporation generally informed of, and
consult with the Corporation with respect to, the status of any such Proceeding.
Notices to the Corporation shall be directed to HealthCare Financial Partners
REIT, Inc., 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815, Attn:
President (or such other address as the Corporation shall designate in writing
to the Indemnitee), and shall be given by personal delivery or by mailing the
same by United States Postal Service, postage prepaid, certified or registered
mail, with return receipt requested. In addition, the Indemnitee shall give the
Corporation such information and cooperation as it may reasonably require and as
shall be within the Indemnitee's power.
8. SEVERABILITY. Should any provision of this Agreement, or any clause
hereof, be held to be invalid, illegal or unenforceable, in whole or in part,
the remaining provisions and clauses of this Agreement shall remain fully
enforceable and binding on the parties.
9. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
10. CHOICE OF LAW. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
Maryland.
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<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
INDEMNITEE
By:
-------------------------------------
Name:
-----------------------------------
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<PAGE> 6
ANNEX I
UNDERTAKING AGREEMENT
This UNDERTAKING AGREEMENT (this "Agreement") is made on
_______________, between HEALTHCARE FINANCIAL PARTNERS REIT, INC., a Maryland
corporation (the "Corporation"), and _________________________, an officer
and/or a member of the Board of Directors of the Corporation ("Indemnitee").
WHEREAS, Indemnitee has become involved in investigations, claims,
actions, suits or proceedings which have arisen as a result of Indemnitee's
service to the Corporation; and
WHEREAS, Indemnitee desires that the Corporation pay any and all
expenses (including, but not limited to, attorneys' fees and court costs)
actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in
defending or investigating any such suits or claims and that such payment be
made in advance of the final disposition of such investigations, claims,
actions, suits or proceedings to the extent that Indemnitee has not been
previously reimbursed by insurance; and
WHEREAS, the Corporation is willing to make such payments but, in
accordance with Section 2-418 of the General Corporation Law of the State of
Maryland, the Corporation may make such payments only if it receives an
undertaking to repay from Indemnitee; and
WHEREAS, Indemnitee is willing to give such an undertaking.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
1. In regard to any payments made by the Corporation to Indemnitee
pursuant to the terms of the Indemnification Agreement dated as of May 6, 1998
(the "Indemnification Agreement"), between the Corporation and Indemnitee,
Indemnitee hereby undertakes and agrees to repay to the Corporation any and all
amounts so paid promptly and in any event within thirty (30) days after the
disposition, including any appeals, of any litigation or threatened litigation
on account of which payments were made; provided, however, that Indemnitee shall
not be required to repay the amount as to which he is determined to be entitled
to be indemnified by the Corporation under Section 2-418 of the General
Corporation Law of the State of Maryland or other applicable law.
2. The Indemnitee in good faith believes that the standard of conduct
necessary for
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<PAGE> 7
indemnification by the Corporation as authorized in the Indemnification
Agreement has been met.
3. This Agreement shall not affect in any manner the rights which
Indemnitee may have against the Corporation, any insurer or any other person to
seek indemnification for or reimbursement of any expenses referred to herein or
any judgment which may be rendered in any litigation or proceeding.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first above written.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
INDEMNITEE
Name:
-----------------------------------
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<PAGE> 1
EXHIBIT 10.8
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
1998 STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
SECTION 1 DEFINITIONS............................................................... 1
1.1 Definitions........................................................ 1
SECTION 2 THE STOCK INCENTIVE PLAN.................................................. 4
2.1 Purpose of the Plan................................................ 4
2.2 Stock Subject to the Plan.......................................... 4
2.3 Administration of the Plan......................................... 4
2.4 Eligibility and Limits............................................. 5
SECTION 3 TERMS OF OPTIONS.......................................................... 6
3.1 General Terms and Conditions....................................... 6
3.2 Other Terms and Conditions......................................... 7
(a) Option Price.............................................. 7
(b) Option Term............................................... 7
(c) Payment................................................... 7
(d) Conditions to the Exercise of an Option................... 8
(e) Termination of Incentive Stock Option..................... 8
(f) Special Provisions for Certain Substitute Options......... 8
3.3 Treatment of Awards Upon Termination of Service..................... 8
SECTION 4 RESTRICTIONS ON STOCK..................................................... 9
4.1 Escrow of Shares................................................... 9
4.2 Restrictions on Transfer........................................... 9
SECTION 5 GENERAL PROVISIONS........................................................ 9
5.1 Withholding........................................................ 9
5.2 Changes in Capitalization; Merger; Liquidation..................... 10
5.3 Compliance with Code............................................... 10
5.4 Right to Terminate Service......................................... 10
5.5 Restrictions on Delivery and Sale of Shares; Legends............... 11
5.6 Non-alienation of Benefits......................................... 11
5.7 Termination and Amendment of the Plan.............................. 11
5.8 Stockholder Approval............................................... 11
5.9 Choice of Law...................................................... 11
5.10 Term of Plan....................................................... 12
</TABLE>
<PAGE> 3
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
1998 STOCK OPTION PLAN
SECTION 1 DEFINITIONS
1.1 Definitions. Whenever used herein, the masculine pronoun shall be
deemed to include the feminine, and the singular to include the plural, unless
the context clearly indicates otherwise, and the following capitalized words and
phrases are used herein with the meaning thereafter ascribed:
(a) "Board of Directors" means the board of directors of the
Company.
(b) "Cause" has the same meaning as provided in the
employment agreement between the Participant and the Company or, if applicable,
any affiliate of the Company on the date of Termination of Service, or if no
such definition or employment agreement exists, "Cause" means conduct amounting
to (1) fraud or dishonesty against the Company or its affiliates, (2)
Participant's willful misconduct, repeated refusal to follow the reasonable
directions of the board of directors of the Company or any of its affiliates, or
knowing violation of law in the course of performance of the duties of
Participant's service with the Company or its affiliates, (3) repeated absences
from work without a reasonable excuse, (4) repeated intoxication with alcohol or
drugs while on the Company or affiliates' premises during regular business
hours, (5) a conviction or plea of guilty or nolo contendere to a felony or a
crime involving dishonesty, or (6) a breach or violation of the terms of any
agreement to which the Participant and the Company or any of its affiliates are
party.
(c) "Change in Control" means any one of the following events:
(1) the acquisition by any individual, entity or "group",
within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities
Exchange Act of 1934, as amended, (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934)
of voting securities of the Company where such acquisition causes any such
Person to own twenty-five percent (25%) or more of the combined voting power of
the then outstanding voting securities then entitled to vote generally in the
election of directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this Section 1.1(c)(1), the following shall not be deemed
to result in a Change in Control, (i) any acquisition directly from the Company,
unless such Person subsequently acquires additional shares of Outstanding Voting
Securities other than from the Company, in which case any such subsequent
acquisition shall be deemed to be a Change in Control; or (ii) any acquisition
by any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company;
(2) a merger, consolidation, share exchange, combination,
reorganization or like transaction involving the Company in which the
stockholders of the Company immediately prior to such transaction do not own at
least fifty percent (50%) of the value or voting power of the issued and
outstanding capital stock of the Company or its successor immediately after such
transaction;
<PAGE> 4
(3) the sale or transfer (other than as security for the
Company's obligations and other than a sale or transfer of assets by the Company
to a limited partnership of which the Company is the sole general partner) of
more than fifty percent (50%) of the assets of the Company in any one
transaction or a series of related transactions occurring within a one (1) year
period in which the Company, any corporation controlled by the Company or the
stockholders of the Company immediately prior to the transaction do not own at
least fifty percent (50%) of the value or voting power of the issued and
outstanding equity securities of the acquiror immediately after the transaction;
(4) the sale or transfer of more than fifty percent (50%)
of the value or voting power of the issued and outstanding capital stock of the
Company by the holders thereof in any one transaction or a series of related
transactions occurring within a one (1) year period in which the Company, any
corporation controlled by the Company or the stockholders of the Company
immediately prior to the transaction do not own at least fifty percent (50%) of
the value or voting power of the issued and outstanding equity securities of the
acquiror immediately after the transaction; or
(5) the dissolution or liquidation of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the committee appointed by the Board of
Directors to administer the Plan pursuant to Plan Section 2.3.
(f) "Company" means HealthCare Financial Partners REIT, Inc., a
corporation chartered under the laws of the State of Maryland.
(g) "Disability" has the same meaning as provided in the
long-term disability plan or policy maintained or, if applicable, most recently
maintained, by the Company or, if applicable, any affiliate of the Company for
the Participant. If no long-term disability plan or policy was ever maintained
on behalf of the Participant or, if the determination of Disability relates to
an Incentive Stock Option, Disability shall mean that condition described in
Code Section 22(e)(3), as amended from time to time. In the event of a dispute,
the determination of Disability shall be made by the Board of Directors and
shall be supported by advice of a physician competent in the area to which such
Disability relates.
(h) "Disposition" means any conveyance, sale, transfer,
assignment, pledge or hypothecation, whether outright or as security, inter
vivos or testamentary, with or without consideration, voluntary or involuntary.
(i) "Fair Market Value" refers to the determination of value of a
share of Stock. If the Stock is actively traded on any national securities
exchange or any Nasdaq quotation or market system, Fair Market Value shall mean
the closing price at which shares of Stock shall have
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<PAGE> 5
been sold on the most recent trading date immediately prior to the date of
determination, as reported by any such exchange or system selected by the
Committee on which the shares of Stock are then traded. If the shares of Stock
are not actively traded on any such exchange or system, Fair Market Value shall
mean the arithmetic mean of the bid and asked prices for the shares of Stock on
the most recent trading date or dates within a reasonable period prior to the
determination date as reported by such exchange or system. If there are no bid
and asked prices within a reasonable period or if the shares of Stock are not
traded on any exchange or system as of the determination date, Fair Market Value
shall mean the fair market value of a share of Stock as determined by the
Committee taking into account such facts and circumstances deemed to be material
by the Committee to the value of the Stock in the hands of the Participant;
provided that, for purposes of granting awards other than Incentive Stock
Options, Fair Market Value of a share of Stock may be determined by the
Committee by reference to the price at which the Stock is first offered to the
public, to the average market value determined over a period certain or as of
specified dates, to a tender offer price for the shares of Stock (if settlement
of an award is triggered by such an event) or to any other reasonable measure of
fair market value, and provided further that, for purposes of granting Incentive
Stock Options, Fair Market Value of a share of Stock shall be determined in
accordance with the valuation principles described in the regulations
promulgated under Code Section 422.
(j) "Incentive Stock Option" means an incentive stock option, as
defined in Code Section 422, described in Plan Section 3.2.
(k) "Non-Qualified Stock Option" means a stock option, other
than an option qualifying as an Incentive Stock Option, described in Plan
Section 3.2.
(l) "Option" means a Non-Qualified Stock Option or an Incentive
Stock Option.
(m) "Over 10% Owner" means an individual who at the time
an Incentive Stock Option is granted owns Stock possessing more than 10% of the
total combined voting power of the Company or one of its Parents or
Subsidiaries, determined by applying the attribution rules of Code Section
424(d).
(n) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, with respect to
Incentive Stock Options, at the time of granting of the Incentive Stock Option,
each of the corporations other than the Company owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.
(o) "Participant" means a person who receives an Option hereunder.
(p) "Plan" means the HealthCare Financial Partners REIT, Inc. 1998
Stock Option Plan.
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<PAGE> 6
(q) "Stock" means the Company's common stock, $.0001 par value per
share.
(r) "Stock Incentive Agreement" means an agreement between the
Company and a Participant or other documentation evidencing an award of an
Option.
(s) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, with respect to
Incentive Stock Options, at the time of the granting of the Incentive Stock
Option, each of the corporations other than the last corporation in the unbroken
chain owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain.
(t) "Termination of Service" means the termination of the service
relationship, whether employment or otherwise, between a Participant and the
Company and its affiliates, regardless of the fact that severance or similar
payments are made to the Participant for any reason, including, but not by way
of limitation, a termination by resignation, discharge, death, Disability or
retirement. The Committee shall, in its absolute discretion, determine the
effect of all matters and questions relating to Termination of Service,
including, but not by way of limitation, the question of whether a leave of
absence constitutes a Termination of Service, or whether a Termination of
Service is for Cause.
SECTION 2 THE STOCK INCENTIVE PLAN
2.1 Purpose of the Plan. The Plan is intended to (a) provide incentive
to officers and employees of the Company and any affiliates to stimulate their
efforts toward the continued success of the Company and to operate and manage
the business in a manner that will provide for the long-term growth and
profitability of the Company; (b) encourage stock ownership by officers and
employees by providing them with a means to acquire a proprietary interest in
the Company by acquiring shares of Stock or to receive compensation which is
based upon appreciation in the value of Stock; and (c) provide a means of
obtaining and rewarding key personnel.
2.2 Stock Subject to the Plan. Subject to adjustment in accordance with
Section 5.2, 900,000 shares of Stock (the "Maximum Plan Shares") are hereby
reserved exclusively for issuance pursuant to Options. At no time shall the
Company have outstanding Options and shares of Stock issued in respect of
Options in excess of the Maximum Plan Shares. The shares of Stock attributable
to the nonvested, unpaid, unexercised, unconverted or otherwise unsettled
portion of any Option that is forfeited or cancelled or expires or terminates
for any reason without becoming vested, paid, exercised, converted or otherwise
settled in full shall again be available for purposes of the Plan.
2.3 Administration of the Plan. The Plan shall be administered by the
Committee. The Committee shall have full authority in its discretion to
determine the officers and employees of the Company or any affiliates to whom
Options shall be granted and the terms and provisions of
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<PAGE> 7
Options, subject to the Plan. Subject to the provisions of the Plan, the
Committee shall have full and conclusive authority to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan; to
determine the terms and provisions of the respective Stock Incentive Agreements
and to make all other determinations necessary or advisable for the proper
administration of the Plan. The Committee's determinations under the Plan need
not be uniform and may be made by it selectively among persons who receive, or
are eligible to receive, awards under the Plan (whether or not such persons are
similarly situated). The Committee's decisions shall be final and binding on all
Participants.
The Committee shall consist of at least two members of the Board of
Directors and, during those periods that the Company is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934, the Board of
Directors shall consider the advisability of whether each such appointee shall
qualify as a "non-employee director", as that term is defined in Rule 16b-3 as
then in effect under the Securities Exchange Act of 1934, and, during those
periods that the Company has issued equity securities required to be registered
under Section 12 of the Securities Exchange Act of 1934, the Board of Directors
shall consider the advisability of whether each such appointee shall separately
qualify as an "outside director", within the meaning of Code Section 162(m) and
the regulations promulgated thereunder. Each member of the Committee shall serve
at the pleasure of the Board of Directors and the Board of Directors may from
time to time remove members from or add members to the Committee.
Vacancies on the Committee shall be filled by the Board of Directors.
The Committee shall select one of its members as Chairman and shall
hold meetings at the times and in the places as it may deem advisable. Acts
approved by a majority of the Committee in a meeting at which a quorum is
present, or acts reduced to or approved in writing by a majority of the members
of the Committee, shall be the valid acts of the Committee.
2.4 Eligibility and Limits. Options may be granted only to officers,
employees and directors of the Company or of any Parent or Subsidiary of the
Company; to HealthCare Financial Partners, Inc., HCFP REIT Management, Inc. or
HealthCare Analysis Corporation; or to officers, employees and directors of
HealthCare Financial Partners, Inc., HCFP REIT Management, Inc. or HealthCare
Analysis Corporation; provided, however, that an Incentive Stock Option may only
be granted to an employee of the Company or any Parent or Subsidiary. In the
case of Incentive Stock Options, the aggregate Fair Market Value (determined as
at the date an Incentive Stock Option is granted) of stock with respect to which
stock options intended to meet the requirements of Code Section 422 become
exercisable for the first time by an individual during any calendar year under
all plans of the Company and its Parents and Subsidiaries shall not exceed
$100,000; provided further, that if the limitation is exceeded, the Incentive
Stock Option(s) which cause the limitation to be exceeded shall be treated as
Non-Qualified Stock Option(s); except as the terms of the Stock Incentive
Agreement may expressly provide otherwise. To the extent required under Code
Section 162(m) and regulations thereunder for compensation to be treated as
qualified performance-based compensation, subject to adjustment in accordance
with Section 5.2, the maximum number of shares of Stock with respect to which
Options may be granted during any single fiscal year of the
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<PAGE> 8
Company to any employee shall not exceed 50,000.
SECTION 3 TERMS OF OPTIONS
3.1 General Terms and Conditions.
(a) The number of shares of Stock as to which an Option
shall be granted shall be determined by the Committee in its sole discretion,
subject to the provisions of Section 2.2 as to the total number of shares
available for grants under the Plan and to the limitations imposed by Section
2.4. If a Stock Incentive Agreement so provides, a Participant may be granted a
new Option to purchase a number of shares of Stock equal to the number of
previously owned shares of Stock tendered in payment of the Exercise Price (as
defined below) for each share of Stock purchased pursuant to the terms of the
Stock Incentive Agreement.
(b) Each Option shall be evidenced by a Stock Incentive
Agreement in such form and containing such terms, conditions and restrictions as
the Committee may determine is appropriate. Each Stock Incentive Agreement shall
be subject to the terms of the Plan and any provision in a Stock Incentive
Agreement that is inconsistent with the Plan shall be null and void.
(c) The date an Option is granted shall be the date on
which the Committee has approved the terms and conditions of the Stock Incentive
Agreement and has determined the recipient of the Option and the number of
shares covered by the Option and has taken all such other action necessary to
complete the grant of the Option.
(d) The Committee may provide in any Stock Incentive
Agreement (or subsequent to the award of an Option but prior to its expiration
or cancellation, as the case may be) that, in the event of a Change in Control,
the Option shall or may be cashed out on the basis of any price not greater than
the highest price paid for a share of Stock in any transaction reported by any
market or system selected by the Committee on which the shares of Stock are then
actively traded during a specified period immediately preceding or including the
date of the Change in Control or offered for a share of Stock in any tender
offer occurring during a specified period immediately preceding or including the
date the tender offer commences; provided that, in no case shall any such
specified period exceed one (1) year (the "Change in Control Price"). For
purposes of this Subsection, the cash-out of an Option shall be on the basis of
the excess, if any, of the Change in Control Price (but not more than the Fair
Market Value of the Stock on the date of the cash-out in the case of Incentive
Stock Options) over the Exercise Price with or without regard to whether the
Option may otherwise be exercisable only in part.
(e) Any Option may be granted in connection with all or
any portion of a previously or contemporaneously granted Option. Exercise or
vesting of an Option granted in connection with another Option may result in a
pro rata surrender or cancellation of any related Option, as specified in the
applicable Stock Incentive Agreement.
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<PAGE> 9
(f) Options shall not be transferable or assignable
except by will or by the laws of descent and distribution or, during the
Participant's lifetime, by the Participant to members of the Participant's
immediate family and shall be exercisable in the event of the Disability of the
Participant, by the legal representative of the Participant; or in the event of
the death of the Participant, by the personal representative of the
Participant's estate or if no personal representative has been appointed, by the
successor in interest determined under the Participant's will.
3.2 Other Terms and Conditions. Each Option granted under the Plan
shall be evidenced by a Stock Incentive Agreement. At the time any Option is
granted, the Committee shall determine whether the Option is to be an Incentive
Stock Option or a Non-Qualified Stock Option, and the Option shall be clearly
identified as to its status as an Incentive Stock Option or a Non-Qualified
Stock Option. At the time any Incentive Stock Option is exercised, the Company
shall be entitled to place a legend on the certificates representing the shares
of Stock purchased pursuant to the Option to clearly identify them as shares of
Stock purchased upon exercise of an Incentive Stock Option. An Incentive Stock
Option may only be granted within ten (10) years from the earlier of the date
the Plan is adopted by the Board of Directors or approved by the Company's
stockholders.
(a) Option Price. Subject to adjustment in accordance
with Section 5.2 and the other provisions of this Section 3.2, the exercise
price (the "Exercise Price") per share of Stock purchasable under any Option
shall be as set forth in the applicable Stock Incentive Agreement. With respect
to each grant of an Incentive Stock Option to a Participant who is not an Over
10% Owner and each grant of any Non-Qualified Stock Option to a Participant, the
Exercise Price per share shall not be less than the Fair Market Value on the
date the Option is granted. With respect to each grant of an Incentive Stock
Option to a Participant who is an Over 10% Owner, the Exercise Price shall not
be less than 110% of the Fair Market Value on the date the Option is granted.
(b) Option Term. The term of an Option shall be as
specified in the applicable Stock Incentive Agreement; provided, however that
any Incentive Stock Option granted to a Participant who is not an Over 10% Owner
and any Non-Qualified Stock Option granted to a Participant shall not be
exercisable after the expiration of ten (10) years after the date the Option is
granted and any Incentive Stock Option granted to an Over 10% Owner shall not be
exercisable after the expiration of five (5) years after the date the Option is
granted.
(c) Payment. Payment for all shares of Stock purchased
pursuant to exercise of an Option shall be made in any form or manner authorized
by the Committee in the Stock Incentive Agreement or by amendment thereto,
including, but not limited to, cash or, if the Stock Incentive Agreement
provides, (1) by delivery to the Company of a number of shares of Stock which
have been owned by the holder for at least six (6) months prior to the date of
exercise having an aggregate Fair Market Value of not less than the product of
the Exercise Price multiplied by the number of shares the Participant intends to
purchase upon exercise of the Option on the date of delivery; (2) in a cashless
exercise through a broker; (3) by cancellation of any indebtedness owed by the
Company to the Participant; or (4) by acceptance of a full-recourse promissory
note from the
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<PAGE> 10
Participant. Payment shall be made at the time that the Option or
any part thereof is exercised, and no shares shall be issued or delivered upon
exercise of an Option until full payment has been made by the Participant. The
holder of an Option, as such, shall have none of the rights of a stockholder.
(d) Conditions to the Exercise of an Option. Each Option
granted under the Plan shall be exercisable by whom, at such time or times, or
upon the occurrence of such event or events, and in such amounts, as the
Committee shall specify in the Stock Incentive Agreement; provided, however,
that subsequent to the grant of an Option, the Committee, at any time before
complete termination of such Option, may accelerate the time or times at which
such Option may be exercised in whole or in part, including, without limitation,
upon a Change in Control and may permit the Participant or any other designated
person to exercise the Option, or any portion thereof, for all or part of the
remaining Option term notwithstanding any provision of the Stock Incentive
Agreement to the contrary.
(e) Termination of Incentive Stock Option. With respect
to an Incentive Stock Option, in the event of the Termination of Service of a
Participant, the Option or portion thereof held by the Participant which is
unexercised shall expire, terminate, and become unexercisable no later than the
expiration of three (3) months after the date of Termination of Service;
provided, however, that in the case of a holder whose Termination of Service is
due to death or Disability, one (1) year shall be substituted for such three (3)
month period. For purposes of this Subsection (e), Termination of Service of the
Participant shall not be deemed to have occurred if the Participant is employed
by another corporation (or a parent or subsidiary corporation of such other
corporation) which has assumed the Incentive Stock Option of the Participant in
a transaction to which Code Section 424(a) is applicable.
(f) Special Provisions for Certain Substitute Options.
Notwithstanding anything to the contrary in this Section 3.2, any Option issued
in substitution for an option previously issued by another entity, which
substitution occurs in connection with a transaction to which Code Section
424(a) is applicable, may provide for an exercise price computed in accordance
with such Code Section and the regulations thereunder and may contain such other
terms and conditions as the Committee may prescribe to cause such substitute
Option to contain as nearly as possible the same terms and conditions (including
the applicable vesting and termination provisions) as those contained in the
previously issued option being replaced thereby.
3.3 Treatment of Awards Upon Termination of Service. Except as
otherwise provided by Plan Section 3.2(e), any award under this Plan to a
Participant who suffers a Termination of Service may be cancelled, accelerated,
paid or continued, as provided in the Stock Incentive Agreement or, in the
absence of such provision, as the Committee may determine. The portion of any
award exercisable in the event of continuation or the amount of any payment due
under a continued award may be adjusted by the Committee to reflect the
Participant's period of service from the date of grant through the date of the
Participant's Termination of Service or such other factors as the Committee
determines are relevant to its decision to continue the award.
-8-
<PAGE> 11
SECTION 4 RESTRICTIONS ON STOCK
4.1 Escrow of Shares. Any certificates representing the shares of Stock
issued under the Plan shall be issued in the Participant's name, but, if the
Stock Incentive Agreement so provides, the shares of Stock shall be held by a
custodian designated by the Committee (the "Custodian"). Each applicable Stock
Incentive Agreement providing for transfer of shares of Stock to the Custodian
shall appoint the Custodian as the attorney-in-fact for the Participant for the
term specified in the applicable Stock Incentive Agreement, with full power and
authority in the Participant's name, place and stead to transfer, assign and
convey to the Company any shares of Stock held by the Custodian for such
Participant, if the Participant forfeits the shares under the terms of the
applicable Stock Incentive Agreement. During the period that the Custodian holds
the shares subject to this Section, the Participant shall be entitled to all
rights, except as provided in the applicable Stock Incentive Agreement,
applicable to shares of Stock not so held. Any dividends declared on shares of
Stock held by the Custodian shall, as the Committee may provide in the
applicable Stock Incentive Agreement, be paid directly to the Participant or, in
the alternative, be retained by the Custodian until the expiration of the term
specified in the applicable Stock Incentive Agreement and shall then be
delivered, together with any proceeds, with the shares of Stock to the
Participant or to the Company, as applicable.
4.2 Restrictions on Transfer. The Participant shall not have the right
to make or permit to exist any Disposition of the shares of Stock issued
pursuant to the Plan except as provided in the Plan or the applicable Stock
Incentive Agreement. Any Disposition of the shares of Stock issued under the
Plan by the Participant not made in accordance with the Plan or the applicable
Stock Incentive Agreement shall be void. The Company shall not recognize, or
have the duty to recognize, any Disposition not made in accordance with the Plan
and the applicable Stock Incentive Agreement, and the shares so transferred
shall continue to be bound by the Plan and the applicable Stock Incentive
Agreement.
SECTION 5 GENERAL PROVISIONS
5.1 Withholding. Whenever the Company proposes or is required to issue
or transfer shares of Stock under the Plan, the Company shall have the right to
require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state and local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares. A Participant may pay the
withholding tax in cash, or, if the applicable Stock Incentive Agreement
provides, a Participant may elect to have the number of shares of Stock such
Participant is to receive reduced by the smallest number of whole shares of
Stock which, when multiplied by the Fair Market Value of the shares of Stock
determined as of the Tax Date (defined below), is sufficient to satisfy federal,
state and local, if any, withholding taxes arising from exercise of an Option (a
"Withholding Election"). A Participant may make a Withholding Election only if
both of the following conditions are met:
(a) The Withholding Election must be made on or prior to the
date on which the amount of tax required to be withheld is determined (the "Tax
Date") by executing and delivering
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<PAGE> 12
to the Company a properly completed notice of Withholding Election as prescribed
by the Committee; and
(b) Any Withholding Election made will be irrevocable;
however, the Committee may in its sole discretion disapprove and give no effect
to the Withholding Election.
5.2 Changes in Capitalization; Merger; Liquidation.
(a) The number of shares of Stock reserved for the grant of
Options; the number of shares of Stock reserved for issuance upon the exercise
of each outstanding Option and the Exercise Price of each outstanding Option
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Stock resulting from a subdivision or combination of shares or
the payment of an ordinary stock dividend in shares of Stock to holders of
outstanding shares of Stock or any other increase or decrease in the number of
shares of Stock outstanding effected without receipt of consideration by the
Company.
(b) In the event of any merger, consolidation, extraordinary
dividend (including a spin-off), reorganization or other change in the corporate
structure of the Company or its Stock or tender offer for shares of Stock, the
Committee, in its sole discretion, may make such adjustments with respect to
awards and take such other action as it deems necessary or appropriate to
reflect or in anticipation of such merger, consolidation, extraordinary
dividend, reorganization, other change in corporate structure or tender offer,
including, without limitation, the substitution of new awards, the termination
or adjustment of outstanding awards, the acceleration of awards or the removal
of restrictions on outstanding awards, all as may be provided in the applicable
Stock Incentive Agreement or, if not expressly addressed therein, as the
Committee subsequently may determine in the event of any such merger,
consolidation, extraordinary dividend (including a spin-off), reorganization or
other change in the corporate structure of the Company or its Stock or tender
offer for shares of Stock. Any adjustment pursuant to this Section 5.2 may
provide, in the Committee's discretion, for the elimination without payment
therefor of any fractional shares that might otherwise become subject to any
Option.
(c) The existence of the Plan and the Options granted
pursuant to the Plan shall not affect in any way the right or power of the
Company to make or authorize any adjustment, reclassification, reorganization or
other change in its capital or business structure, any merger or consolidation
of the Company, any issue of debt or equity securities having preferences or
priorities as to the Stock or the rights thereof, the dissolution or liquidation
of the Company, any sale or transfer of all or any part of its business or
assets, or any other corporate act or proceeding.
5.3 Compliance with Code. All Incentive Stock Options to be granted
hereunder are intended to comply with Code Section 422, and all provisions of
the Plan and all Incentive Stock Options granted hereunder shall be construed in
such manner as to give effect to that intent.
5.4 Right to Terminate Service. Nothing in the Plan or in any Stock
Incentive Agreement shall confer upon any Participant the right to continue as
an employee or officer of the Company or any of its affiliates or affect the
right of the Company or any of its affiliates to
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<PAGE> 13
terminate the Participant's service at any time.
5.5 Restrictions on Delivery and Sale of Shares; Legends. Each Option
is subject to the condition that if at any time the Committee, in its
discretion, shall determine that the listing, registration or qualification of
the shares of Stock covered by such Option upon any securities exchange or under
any state or federal law is necessary or desirable as a condition of or in
connection with the granting of such Option or the purchase or delivery of
shares of Stock thereunder, the delivery of any or all shares pursuant to such
Option may be withheld unless and until such listing, registration or
qualification shall have been effected. If a registration statement is not in
effect under the Securities Act of 1933 or any applicable state securities laws
with respect to the shares of Stock purchasable or otherwise deliverable under
Options then outstanding, the Committee may require, as a condition of exercise
of any Option or as a condition to any other delivery of Stock pursuant to an
Option, that the Participant or other recipient of an Option represent, in
writing, that the shares received pursuant to the Option are being acquired for
investment and not with a view to the distribution thereof and agree that the
shares will not be disposed of except pursuant to an effective registration
statement, unless the Company shall have received an opinion of counsel
satisfactory to the Company that such disposition is exempt from such
requirement under the Securities Act of 1933 and any applicable state securities
laws. The Company may include on certificates representing shares of Stock
delivered pursuant to an Option such legends referring to the foregoing
representations or restrictions or any other applicable restrictions on resale
as the Company, in its discretion, shall deem appropriate.
5.6 Non-alienation of Benefits. Other than as specifically provided in
Section 3.1(f), no benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge; and any attempt to do so shall be void. No such benefit shall, prior to
receipt by the Participant, be in any manner liable for or subject to the debts,
contracts, liabilities, engagements or torts of the Participant.
5.7 Termination and Amendment of the Plan. The Board of Directors at
any time may amend or terminate the Plan without stockholder approval; provided,
however, that the Board of Directors shall seek stockholder approval for any
amendment that increases the aggregate number of shares of Stock reserved for
issuance under the Plan; that materially changes the class of persons eligible
to receive Options; that extends the maximum term for any Option; that decreases
the exercise price of any Option to less than Fair Market Value; or that
materially increases benefits accruing to Participants. No such termination or
amendment without the consent of the holder of an Option shall adversely affect
the rights of the Participant under such Option.
5.8 Stockholder Approval. The Plan shall be submitted to the
stockholders of the Company for their approval within twelve (12) months before
or after its adoption by the Board of Directors. If such approval is not
obtained, any Option granted under the Plan shall be void.
5.9 Choice of Law. The laws of the State of Maryland shall govern the
Plan, to the extent not preempted by federal law.
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<PAGE> 14
5.10 Term of Plan. The Plan shall become effective upon the date the
Plan is approved by the Board of Directors and shall expire upon the close of
business on the tenth anniversary thereof.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed as
of this ___________ day of __________________________, 1998.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
---------------------------------------
Title:
------------------------------------
Attest:
- ------------------------------
Secretary
[CORPORATE SEAL]
-12-
<PAGE> 1
EXHIBIT 10.9
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
1998 DIRECTOR INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS.......................................................................................... 1
1.1 Definitions................................................................................... 1
SECTION 2 GENERAL PROVISIONS................................................................................... 2
2.1 The Purpose of the Plan....................................................................... 2
2.2 Stock Subject to the Plan..................................................................... 2
2.3 Administration of the Plan.................................................................... 2
2.4 Eligibility................................................................................... 2
SECTION 3 TYPES OF OPTION AWARDS............................................................................... 3
3.1 General....................................................................................... 3
3.2 Initial Appointment Awards.................................................................... 3
3.3 Annual Awards................................................................................. 3
3.4 Discount Options.............................................................................. 3
3.5 Exercise and Payment of Options............................................................... 4
3.6 Non-Transferability........................................................................... 4
3.7 Condition to All Option Grants................................................................ 4
SECTION 4 MISCELLANEOUS PROVISIONS............................................................................. 4
4.1 Changes in Capitalization; Merger; Liquidation................................................ 4
4.2 Right to Remove Director...................................................................... 5
4.3 Restrictions on Delivery and Sale of Shares; Legends.......................................... 5
4.4 Non-alienation of Benefits.................................................................... 5
4.5 Termination and Amendment of the Plan......................................................... 6
4.6 Choice of Law................................................................................. 6
4.7 Effective Date of Plan........................................................................ 6
</TABLE>
-i-
<PAGE> 3
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
1998 DIRECTOR INCENTIVE PLAN
SECTION 1 DEFINITIONS
1.1 Definitions. Whenever used herein, the masculine pronoun
shall be deemed to include the feminine, and the singular to include the
plural, unless the context clearly indicates otherwise, and the following
capitalized words and phrases are used herein with the meaning thereafter
ascribed:
(a) "Annual Director Compensation" shall mean the amount
of fees which a director will be entitled to receive during a Plan Year or, if
later, as of the first day an individual becomes a Participant, for serving as a
director or as a member of any committee of the Board of Directors pursuant to
the policy in effect for such Plan Year, including retainers paid periodically
and fees paid for attendance at or participation in meetings of the Board of
Directors or any committee thereof. Annual Director Compensation shall not
include expenses reimbursed by the Company for attendance at or participation in
meetings of the Board of Directors or any committee thereof or fees for any
other services to be provided to the Company.
(b) "Board of Directors" means the board of directors of
the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Board of Directors.
(e) "Company" means HealthCare Financial Partners REIT,
Inc., a Maryland corporation.
(f) "Disability" means that condition described in Code
Section 22(e)(3), as amended from time to time. In the event of a dispute, the
determination of Disability shall be made by the Board of Directors and shall be
supported by advice of a physician competent in the area to which such
Disability relates.
(g) "Effective Date" means the date non-employee
directors are first appointed to the Board of Directors.
(h) "Fair Market Value" refers to the determination of
value of a share of Stock. If the Stock is actively traded on any national
securities exchange or any Nasdaq quotation or market system, Fair Market Value
shall mean the closing price at which shares of Stock shall have been sold on
the most recent trading date immediately prior to the date of determination, as
reported by any such exchange or system selected by the Committee on which the
shares of Stock are then traded. If the shares of Stock are not actively traded
on any such exchange or system, Fair Market Value shall mean the arithmetic mean
of the bid and asked prices for the shares of Stock on the most recent trading
date or dates within a reasonable period prior to the determination date as
reported by such exchange or system. If there are no bid and asked prices within
a reasonable period or if the shares of Stock are not traded on any exchange or
system as of the determination date, Fair Market Value shall mean the fair
market value of a share of Stock as determined by the Committee taking into
account such facts and circumstances deemed to be material by the Committee to
the value of the Stock in the hands of the Participant.
<PAGE> 4
(i) "Option" means an option granted under the Plan to buy
shares of Stock as set forth in Plan Section 3.
(j) "Option Exercise Price" refers to the per share purchase
price for Stock subject to each Option granted under Section 3.4 and that per
share purchase price shall be fifty percent (50%) of the Fair Market Value of
the Stock as of the date the Option is granted.
(k) "Participant" means an individual who, pursuant to Plan
Section 2.4, is eligible to participate in the Plan.
(l) "Plan" means the Healthcare Financial Partners REIT, Inc.
1998 Director Incentive Plan.
(m) "Stock" means the Company's common stock, $.0001 par
value.
(n) "Stock Incentive Agreement" means an agreement between
the Company and a Participant or other documentation evidencing an award Of
a Stock Incentive.
SECTION 2 GENERAL PROVISIONS
2.1 The Purpose of the Plan. The Plan is intended to (a) provide
incentive to non-employee directors of the Company to stimulate their efforts
toward the continued success of the Company and to manage the business of the
Company in a manner that will provide for the long-term growth and profitability
of the Company; (b) encourage stock ownership by non-employee directors by
providing them with a means to acquire a proprietary interest in the Company;
and (c) provide a means of obtaining and rewarding non-employee directors.
Accordingly, the Plan is intended to promote a close identity of interests among
the Company, the directors and its stockholders, as well as to provide a means
to attract and retain well-qualified directors.
2.2 Stock Subject to the Plan. Subject to adjustment in accordance with
Section 4.1, 100,000 shares of Stock (the "Maximum Plan Shares") are hereby
reserved exclusively for issuance pursuant to Options. At no time shall the
aggregate of (a) shares of Stock issuable pursuant to outstanding Options; and
(b) shares of Stock issued pursuant to Options exceed the Maximum Plan Shares.
If an Option expires or terminates for any reason without being exercised in
full, the unpurchased shares subject to such Option shall again be available for
purposes of the Plan.
2.3 Administration of the Plan. The Plan shall be administered by the
Committee. Subject to the provisions of the Plan, the Committee shall have full
and conclusive authority to interpret the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of the respective Stock Incentive Agreements consistent with the
provisions of the Plan and to make all other determinations necessary or
advisable for the proper administration of the Plan. The Committee's decisions
shall be final and binding on all Participants.
2.4 Eligibility. Any member of the Board of Directors who is not an
employee or officer of the Company or an affiliate of the Company shall be a
Participant.
-2-
<PAGE> 5
SECTION 3 TYPES OF OPTION AWARDS
3.1 General. Each Option contemplated by this Section 3 shall be
evidenced by a Stock Incentive Agreement which shall incorporate the applicable
terms of the Plan. The terms of each Stock Incentive Agreement shall provide:
(a) that the Option is immediately vested; (b) that the Option is exercisable as
to all of the shares of Stock subject thereto after the expiration of twelve
(12) months from the date of grant; and (c) that the Option shall expire upon
the earlier of the tenth (10th) anniversary following the date of grant or
eighteen (18) months from the date of the director's termination of service upon
the Board of Directors for any reason.
3.2 Initial Appointment Awards. Each non-employee director of the Board
of Directors shall be granted as of the date of his or her initial appointment
to the Board of Directors coincident with or following the Effective Date an
Option to purchase 10,000 shares of Stock. The exercise price for each share of
Stock subject to an Option granted pursuant to this Section 3.2 shall equal the
Fair Market Value of a share of Stock as of the date of the Option grant.
3.3 Annual Awards. Each non-employee director of the Board of Directors
shall be granted as of the date of each annual meeting of the stockholders of
the Company, commencing with the annual meeting of the stockholders of the
Company that is held in calendar year 1999, an Option to purchase 5,000 shares
of Stock; provided that such director's service on the Board of Directors
continues through the date of that annual meeting. The exercise price for each
share of Stock subject to an Option granted pursuant to this Section 3.3 shall
equal the Fair Market Value of a share of Stock as of the date of the Option
grant.
3.4 Discount Options.
(a) Election. Options shall be granted as of the first
day of a Plan Year (as hereafter defined), to each non-employee director who, no
later than the last day of the preceding Plan Year or, if later, no later than
the effective date of the non-employee director's appointment to the Board of
Directors (and subject to such other rules as the Committee may adopt from time
to time), has filed with the Company an irrevocable election to receive an
Option to purchase shares of Stock in lieu of all or a specified percentage of
the Annual Director Compensation expected to be earned by such director for the
upcoming twelve-month period beginning on the first day of the first fiscal
quarter of the Company and ending on the last day of the fourth fiscal quarter
of the Company ("Plan Year"). A separate election may be made for each Plan
Year; provided, however, that no amendment or revocation may be made during a
Plan Year with respect to such Plan Year. A non-employee director shall not be
entitled to receive in cash any portion of the Annual Director Compensation for
which an election has been made to receive an Option pursuant to this Section
3.4.
(b) Formula for Discount Options. The number of shares of
Stock subject to each Option granted to any director for a Plan Year pursuant to
this Section shall be equal to the nearest number of whole shares of Stock, with
cash payment for fractional shares, determined in accordance with the following
formula:
Foregone Annual Director Compensation = Number of Shares
-------------------------------------
Option Exercise Price
-3-
<PAGE> 6
(c) Forfeiture. That portion of an Option granted
pursuant to this Section which is attributable to any portion of the Annual
Director Compensation which is not earned due to termination of service as a
member of the Board of Directors or as a member of a committee of the Board of
Directors (for any reason) or because of lack of attendance or participation in
any meeting of the Board of Directors or any committee thereof shall
automatically abate and be forfeited.
3.5 Exercise and Payment of Option Awards. All Options may be
exercised only by written notice to the Company. Payment for all shares of Stock
purchased pursuant to exercise of an Option shall be made (a) in cash; (b) by
delivery to the Company of a number of shares of Stock which have been
beneficially owned by the director for at least six (6) months prior to the date
of exercise having an aggregate Fair Market Value of not less than the product
of the exercise price multiplied by the number of shares the director intends to
purchase upon exercise of the Option on the date of delivery; or (c) in a
cashless exercise through a broker. Payment shall be made at the time that the
Option or any part thereof is exercised, and no shares shall be issued or
delivered upon exercise of an Option until full payment has been made by the
Participant. The holder of an Option, as such, shall have none of the rights of
a stockholder.
3.6 Non-Transferability. An Option shall not be transferable or
assignable except by will or by the laws of descent and distribution and shall
be exercisable, during the Participant's lifetime, only by the Participant, or
in the event of the Participant's Disability, by his or her legal
representative.
3.7 Condition to All Option Grants. In the event the remaining number
of shares of Stock reserved for issuance under the Plan is insufficient to grant
Options for the appropriate number of shares of Stock to all eligible
non-employee directors as of any grant date, then no Options shall be granted as
of that grant date.
SECTION 4 MISCELLANEOUS PROVISIONS
4.1 Changes in Capitalization; Merger; Liquidation.
(a) The number of shares of Stock reserved with respect
to Options that may be granted under the Plan, the number of shares of Stock
reserved for issuance upon the exercise of each outstanding Option, the number
of shares of Stock that may be awarded under Sections 3.2 and 3.3 and the
exercise price of each outstanding Option shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Stock resulting from
a subdivision or combination of shares or the payment of a stock dividend
(including, but limited to, an extraordinary dividend (including a spin-off)) in
shares of Stock to holders of outstanding shares of Stock or any other increase
or decrease in the number of shares of Stock outstanding effected without
receipt of consideration by the Company.
(b) If the Company shall be the surviving corporation in
any merger or consolidation, recapitalization, reclassification of shares or
similar reorganization, an appropriate adjustment shall be made in each Stock
Incentive Agreement such that the Participant shall be entitled to purchase or
receive the number and class of securities to which a holder of the number of
shares of Stock subject to the Stock Incentive Agreement at the time of such
transaction would have
-4-
<PAGE> 7
been entitled to receive as a result of such transaction, and a corresponding
adjustment shall be made in the exercise price of each outstanding Option. A
dissolution or liquidation of the Company shall cause Options to terminate as to
any portion thereof not exercised as of the effective date of the dissolution or
liquidation. In the event of a sale of substantially all the Stock or property
of the Company or the merger or consolidation of the Company into another
corporation where the purchaser does not agree to the assumption of the Options,
the Option shall be terminated in consideration of the payment to the
Participant of the difference between the then Fair Market Value of the Stock
subject to the unexercised portion of the Option and the aggregate exercise
price.
(c) The existence of the Plan and the Options granted
pursuant to the Plan shall not affect in any way the right or power of the
Company to make or authorize any adjustment, reclassification, reorganization or
other change in its capital or business structure, any merger or consolidation
of the Company, any issue of debt or equity securities having preferences or
priorities as to the Stock or the rights thereof, the dissolution or liquidation
of the Company, any sale or transfer of all or any part of its business or
assets, or any other corporate act or proceeding.
4.2 Right to Remove Director. Nothing in the Plan or in any Stock
Incentive Agreement shall confer upon any Participant the right to continue as a
member of the Board of Directors or affect the right of the Company to terminate
a Participant's directorship at any time.
4.3 Restrictions on Delivery and Sale of Shares; Legends. Each Option
is subject to the condition that if at any time the Committee, in its
discretion, shall determine that the listing, registration or qualification of
the shares of Stock covered by such Option upon any securities exchange or under
any state or federal law is necessary or desirable as a condition of or in
connection with the granting of such Option or the purchase or delivery of
shares of Stock thereunder, the delivery of any or all shares pursuant to such
Option may be withheld unless and until such listing, registration or
qualification shall have been effected. If a registration statement is not in
effect under the Securities Act of 1933 or any applicable state securities laws
with respect to the shares of Stock purchasable or otherwise deliverable under
Options then outstanding, the Participant shall, as a condition of exercise of
any Option or as a condition to any other delivery of Stock pursuant to an
Option, represent, in writing, that the shares received pursuant to the Option
are being acquired for investment and not with a view to distribution and agree
that the shares will not be disposed of except pursuant to an effective
registration statement, unless the Company shall have received an opinion of
counsel satisfactory to the Company that such disposition is exempt from such
requirement under the Securities Act of 1933 and any applicable state securities
laws. The Company may include on certificates representing shares of Stock
delivered pursuant to an Option such legends referring to the foregoing
representations or restrictions or any other applicable restrictions on resale
as the Company, in its discretion, shall deem appropriate.
4.4 Non-alienation of Benefits. Other than as specifically provided
with regard to the death of a Participant, no benefit under the Plan shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge; and any attempt to do so shall be void. No such
benefit shall, prior to receipt by the Participant, be in any manner liable for
or subject to the debts, contracts, liabilities, engagements or torts of the
Participant.
-5-
<PAGE> 8
4.5 Termination and Amendment of the Plan. The Board of Directors at
any time may amend or terminate the Plan without stockholder approval; provided,
however, that the Board of Directors may condition any amendment on the approval
of stockholders of the Company if such approval is necessary or advisable with
respect to tax, securities or other applicable laws. No termination,
modification or amendment of the Plan, without the consent of a Participant who
has been awarded an Option shall adversely affect the rights of that Participant
under such Option.
4.6 Choice of Law. The laws of the State of Maryland shall govern the
Plan, to the extent not preempted by federal law.
4.7 Effective Date of Plan. The Plan shall become effective on the
Effective Date.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
this _____ day of _______________________, 1998.
HEALTHCARE FINANCIAL PARTNERS REIT, INC.
By:
Print Name:
-------------------------------
Title:
-----------------------------------
ATTEST:
- ----------------------------------
Print Name:
----------------------
Secretary
[CORPORATE SEAL]
-6-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
HCFP Limited, Inc., a Maryland corporation
HCFP REIT Operating Partnership, L.P., a Delaware limited partnership
HCFP Sherman, LLC, a Maryland limited liability company
Constellation Severna Park Associates, L.P., a Maryland limited liability
company
Constellation Crofton Associates, L.P., a Maryland limited partnership
Constellation Bel-Air, L.P., a Maryland limited partnership
HCFP Colonial Manor, LLC, a Delaware limited liability company
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated July 23, 1998, with respect to the consolidated
financial statements of HealthCare Financial Partners REIT, Inc., and July 30,
1998 with respect to the combining statements of revenue and certain expenses of
Valencia Medical Center and Vista Village Shopping Center in the Registration
Statement (Form S-11 No. 333- ) and related Prospectus of HealthCare
Financial Partners REIT, Inc. dated August 7, 1998.
ERNST & YOUNG LLP
Washington, D.C.
August 5, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 3, 1998, in the Registration Statement (Form
S-11 No. 333- ) and related Prospectus of HealthCare Financial Partners
REIT, Inc. for the registration of its common stock.
SOLOMON-ROSS-GREY & COMPANY
Encino, California
August 3, 1998
