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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to____________________
Commission File No. 1-10150
STARWOOD FINANCIAL TRUST
(Exact name of registrant as specified in its charter)
California 95-6881527
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
3 Pickwick Plaza, Suite 250 06830
Greenwich, CT (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: (203) 861-0752
Title of each class: Name of Exchange on which registered:
- -------------------- -------------------------------------
Class A Shares, $1.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X.
-
The aggregate market value of the Class A Shares held by non-affiliates on
March 23, 1998 was approximately $10,492,000.
As of March 23, 1998, there were 314,341,744 Shares of Starwood Financial
Trust Class A,$1.00 par value, outstanding.
Total Pages ____
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TABLE OF CONTENTS
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Page
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PART I.......................................................................................... 3
ITEM 1. BUSINESS................................................................................ 3
General........................................................................................ 3
Recapitalization Transactions.................................................................. 3
History........................................................................................ 4
Investment Policy.............................................................................. 4
Advisory Agreement............................................................................. 5
License Agreement.............................................................................. 6
Investment Portfolio........................................................................... 6
The Partnership................................................................................ 12
Competition.................................................................................... 12
Qualification as a Real Estate Investment Trust................................................ 12
Unfunded Commitments........................................................................... 12
Employees...................................................................................... 12
ITEM 2. PROPERTIES.............................................................................. 13
ITEM 3. LEGAL PROCEEDINGS....................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 13
PART II......................................................................................... 14
ITEM 5. MARKET FOR THE TRUST'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS................ 14
ITEM 6. SELECTED FINANCIAL DATA................................................................ 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 17
General........................................................................................ 17
Liquidity and Capital Resources................................................................ 17
Fiscal year 1997 compared to 1996.............................................................. 18
Fiscal year 1996 compared to 1995.............................................................. 18
New Accounting Pronouncements.................................................................. 18
Interest Rate Risks............................................................................ 19
ITEM 8. FINANCIAL STATEMENTS.................................................................... 20
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 33
PART III........................................................................................ 34
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS........................................................ 34
ITEM 11. EXECUTIVE COMPENSATION................................................................. 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 39
PART IV......................................................................................... 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K................................. 40
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PART I
ITEM 1. BUSINESS
The statements contained in this report that are not historical facts,
including statements containing the words "believes," "anticipates," "expects"
and words of similar import, are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. A
number of important factors could cause the Trust's actual results for 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Trust. These factors include, without
limitation, the factors listed below.
GENERAL
Starwood Financial Trust (the "Trust") is a California business trust that was
formed in April 1988. Prior to March 13, 1998, the Trust was known as Angeles
Participating Mortgage Trust. The Trust's capital structure consists of Class A
Shares, par value $1.00 per share ("Class A Shares") and Class B Shares, par
value $.01 per share ("Class B Shares" and together with the Class A Shares, the
"Shares"). The Class A Shares are publicly traded on the American Stock Exchange
under the symbol "APT." As of December 31, 1997, the Trust had 7,550,000
Class A shares outstanding and 3,775,000 Class B Shares outstanding, along with
4,568,944 Units convertible into Class A Shares. On March 18, 1998, following
the consummation of the Recapitalization Transaction (defined below), there were
314,341,744 Class A Shares outstanding and 157,170,872 Class B Shares
outstanding that can be converted into 3,207,568 Class A Shares. The Class B
Shares are entitled to a 1% economic interest and a 33% voting interest in the
Trust. Each of the Shares is entitled to one vote per share.
The Trust is an organization of the type commonly known as a "business trust."
The Declaration of Trust provides that no shareholder of the Trust (a
"Shareholder") will be personally liable for any obligation of the Trust solely
as a result of his status as a Shareholder. The Declaration of Trust further
provides that the Trust shall indemnify each Shareholder against any claim or
liability to which the Shareholder may become subject by reason of his being or
having been a Shareholder. In addition, it is the Trust's policy to include a
clause in its contracts which provides that Shareholders assume no personal
liability for obligations entered into on behalf of the Trust. However, with
respect to certain claims such as tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes, certain environmental
claims and certain statutory liability, the Shareholders may under applicable
law be personally liable to the extent that such claims are not satisfied by the
Trust. The common law in California with respect to business trusts is limited
and does not provide clear guidance with respect to the limited liability of the
Shareholders. The Trust has public liability insurance which it considers
adequate. Any risk of personal liability to Shareholders will be limited to
situations in which the Trust's assets plus its insurance coverage would be
insufficient to satisfy the claims against the Trust and its Shareholders. In
addition, the Trust currently intends to change the domicile of the Trust to a
state with clear guidance with respect to Shareholder liability.
RECAPITALIZATION TRANSACTIONS
On March 18, 1998, the Trust (i) paid $25.5 million of cash, as adjusted, and
issued 55,148,000 Class A Shares at a price of $2.50 per share to Starwood
Mezzanine Investors, L.P. ("Mezzanine") in exchange for the contribution by
Mezzanine to the Trust of its entire interest in a portfolio of mortgage and
partnership loans secured by residential, hotel, office and mixed use real
estate and other assets, (ii) paid $324.3 million in cash, as adjusted, and
issued 247,074,800 Class A Shares at a price of $2.50 per share to Starwood
Opportunity Fund IV, L.P. ("SOF IV") in exchange for the contribution by SOF IV
to the Trust of a portfolio of mortgage loans and leases secured by
residential, hotel, office and mixed use real estate and other assets, a
portfolio of first mortgage loans, cash of $17.9 million and rights under
certain letters of intent (collectively, the "Recapitalization Transactions")
and (iii) borrowed $350 million under a $625.0 million credit facility currently
available to the Trust. Upon consummation of the Recapitalization Transaction,
Mezzanine had a 13.1% voting interest and a 20.6% economic interest and SOF IV
had a 52.4% voting interest and a 78.6% economic interest in the Trust.
In connection with the Recapitalization Transactions: (i) the Trust changed
its name from Angeles Participating Mortgage Trust to Starwood Financial Trust;
(ii) the Trust entered into an advisory agreement (the "Advisory Agreement")
with Starwood Financial Advisors, L.L.C. (the "Advisor") pursuant to which the
Advisor manages the investment affairs of the Trust; (iii) the Declaration of
Trust of the Trust was amended and restated (as amended and restated the
"Declaration of Trust"); (iv) all of the limited partnership interests in APMT
Limited Partnership (the "Partnership") were exchanged for Class A Shares which
left the Trust as the sole partner of Partnership; (v) the Partnership was
dissolved and all of its assets were distributed to the Trust; (vi) the Trust's
1996 Trustees' Share Incentive Plan and 1996 Share Incentive Plan were combined,
amended and restated into the Starwood Financial Trust 1996 Share Incentive
Plan; (vii) the Trust entered into several credit facilities which in the
aggregate provide the Trust up to approximately $625.0 million in new
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financing, with up to an additional $175.0 million available, subject to certain
conditions, to consummate the Recapitalization Transactions and provide funds
for working capital, new loan origination and acquisition and general corporate
purposes; and (viii) certain existing agreements were amended and restated. See
"Recapitalization Transactions," "Investment Policy" and "Advisory Agreement"
below. See "Investment Portfolio" below for a description of the assets
contributed to the Trust by Mezzanine and SOF IV in the Recapitalization
Transactions.
As a result of the consummation of the Recapitalization Transactions, there is
an increase in the Trust's exposure to real estate investment risks, including
the effect of economic and other conditions on property values, the general
illiquidity of real estate investments, the risks of default in respect of
mortgage or other debt covenants (and risks attendant thereto, such as delays
frequently encountered by lenders in enforcing remedies or in gaining control
over the real estate collateral), the abilities of the properties
collateralizing debt instruments held by the Trust or properties which are owned
by the Trust to generate revenues sufficient to meet operating expenses and to
pay scheduled debt service, the risk that prepayment restrictions may be
insufficient to deter prepayments, the existence of junior mortgages that may
affect the Trust's rights, the effect of competition from properties owned by
others, liability associated with uninsurable losses and unknown environmental
liabilities.
HISTORY
The Trust was originally formed by Angeles Corporation ("Angeles") for the
purpose of making various types of mortgage and other loans to entities
affiliated with Angeles. In early 1993, Angeles and its affiliates began
experiencing financial difficulties which resulted in a default on their loans
held by the Trust. In November 1993, the Trust sold all of its loans to an
unaffiliated third party and with the proceeds of such sale and cash on hand
distributed $37.2 million to the Trust's shareholders. Through a series of
transactions during 1994 and 1996, Mezzanine and certain affiliates of the
general partner of Mezzanine acquired control of the Trust.
INVESTMENT POLICY
Prior to September 1996, the purpose and investment policy of the Trust was
primarily to make mortgage loans to entities affiliated with Angeles. However,
since the liquidation of the Trust's portfolio in 1993 until September 1996, the
Trust did not pursue its stated investment policy. Instead, during such period,
the Trust's assets were held in a trust as a reserve against contingent claims.
This contingent claims trust was terminated in August 1996. In September 1996,
the shareholders of the Trust voted to change the purpose and investment policy
of the Trust. In March 1998, the shareholders of the Trust again voted to
change the purpose and investment policy of the Trust.
As approved by the shareholders of the Trust in March 1998, the purpose and
investment policy of the Trust is to acquire a diverse portfolio of debt and
debt-like interests in real estate or real estate related assets, including to
(i) originate mortgage loans and/or acquire mortgage loans or acquire securities
collateralized, in whole or in part, by mortgage loans, as well as make equity
investments in real estate and real estate-related assets, (ii) acquire direct
or indirect interests in short term, medium and long-term real estate-related
debt securities and mortgage interests, which may include warrants, equity
participations or similar rights incidental to a debt investment by the Trust,
(iii) make, hold and dispose of purchase money loans with respect to assets sold
by the Trust, and (iv) acquire positions in non-performing and sub-performing
debt for the purpose of either restructuring it as performing debt or, if such
efforts are unsuccessful, of obtaining shortly thereafter primary management
rights over or equity interests in the underlying assets securing such debt (the
"Diversified Portfolio").
The Trust is restricted from making certain types of investments as a result
of the restrictions and conflicts described below (the "Investment
Restrictions"). These restrictions may limit the flexibility of the Trust in
implementing its investment policy. Specifically, without the amendment,
termination or waiver of provisions of certain non-competition agreements
between Starwood Capital Group, L.P. and Starwood Hotels & Resorts Trust, the
Trust is prohibited from: (i) making investments in loans collateralized by
hotel assets where it is anticipated that the underlying equity will be acquired
by the debt holder within one (1) year from the acquisition of such debt, (ii)
acquiring equity interests in hotels (other than acquisitions of warrants,
equity participations or similar rights incidental to a debt investment by the
Trust or that are acquired as a result of the exercise of remedies in respect of
a loan in which the Trust has an interest) or (iii) selling or contributing to
or acquiring any interests in Starwood Hotels & Resorts Trust, including debt
positions or equity interests obtained by the Trust under, pursuant to or by
reason of the holding of debt positions.
The Trust's authority with respect to the Diversified Portfolio includes the
power to acquire, hold, own, develop, redevelop, construct, improve, maintain,
operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey,
exchange and otherwise dispose of or deal with the Diversified Portfolio and the
Diversified Portfolio may be held by the Trust directly or indirectly. The
Board of Trustees has the ultimate authority over the management of the Trust,
the conduct of its affairs and the management and disposition of its property.
The Diversified Portfolio may include controlling or non-controlling investments
in or relating to any general category of real estate assets, including without
limitation, hotel, office, mixed-use, retail, industrial, mini-storage and
residential improvements to land, excluding any investments prohibited by the
Investment Restrictions.
The Trust currently plans to originate and make investments in various types
of income producing commercial real estate and its investment program will
emphasize senior and junior commercial mortgage loans, including mezzanine
financing (i.e., capital
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representing the level between 65% and 90% of property values), higher yielding
senior mortgage loans, non-performing or sub-performing loans and performing and
non-performing subordinated interests ("Subordinated Interests") in commercial
mortgage-backed securities ("CMBS"). The Trust anticipates that a majority of
the investments to be held in its portfolio for the long-term will be structured
so that the Trust's investment is subordinate to third party first mortgage debt
but senior to the real estate owner/operator's equity position. The Trust
anticipates that it will invest in a diverse array of real estate-related assets
and enterprises that satisfy its investment criteria including but not limited
to the following:
. Mortgage Loans. The Trust will provide high-yielding first mortgage loans to
borrowers in need of flexible, custom-tailored financings. These loans may be
short, medium or long-term in duration. They may include projects under
construction, redevelopment or expansion, which may ultimately be refinanced
through more traditional sources once capital improvements are completed.
. Mezzanine Loans. The Trust intends to take advantage of current market
opportunities to provide high-yielding loans that are subordinated to first lien
mortgage loans and secured lien mortgage or a pledge of the ownership interest
in the borrowing property owner ("Mezzanine Loans"). Mezzanine Loans may also
take the form of a preferred equity investment in the borrower with
substantially similar terms.
. Opportunistic Loans and Minority Participations. The Trust intends to acquire
non-performing and sub-performing debt or minority participations in such loans
at a discount for the purpose of restructuring the debt to a performing
obligation. These assets may be priced below book value or have a deemed book
value which is less than reproduction cost.
. Triple Net Leases. The Trust may acquire properties that are subject to long-
term triple net lease arrangements with tenants that the Trust believes to be
creditworthy. In many cases, the fixed stream of payment from such positions
may have similar risk/reward characteristics as the mortgage loans to be
originated by the Trust.
. Subordinated Interests. The Trust may acquire rated and unrated interests in
short-term, medium and long-term real estate and real estate-related debt
securities. In this regard, the Trust may pursue the acquisition of performing
and non-performing Subordinated Interests in CMBS including non-investment
grade classes as well as unrated classes.
See "Investment Portfolio" for a description of the assets held by the Trust
as of March 18,1998. The investment and financing policies of the Trust and its
policies with respect to all other activities, including its growth, debt,
capitalization, dividends and operating policies, will be determined by the
Board of Trustees. Although the Board of Trustees has no present intention to
do so, these policies may be amended or revised at any time and from time to
time at the discretion of the Board of Trustees, without a vote of the
Shareholders. A change in these policies could adversely affect the Trust's
financial condition or results of operations or the market price of the Class A
Shares.
The results of the Trust's future operations will be dependent upon the
availability of, as well as the Advisor's and management's ability to identify,
complete and realize, real estate investment opportunities. It may take
considerable time for the Advisor and the Trust to find and consummate
appropriate investments. In general, the availability of desirable investment
opportunities and the results of the Trust's operations will be affected by the
level and volatility of interest rates, by conditions in the financial markets,
and general economic conditions. No assurances can be given that the Trust will
be successful in finding and then acquiring economically desirable assets or
that the assets, once acquired, will maintain their economic desirability.
Messrs. Sternlicht, Sugarman, Dishner, Eilian, Kleeman and Silvey
(collectively the "Starwood Trustees and Officers"), each a Trustee and/or
executive officer of the Trust, directly or indirectly, each have substantial
indirect economic interests in and are officers of certain entities that have
substantial investments in real estate-related assets. In the event the Trust
were to invest in debt or equity interests in properties similar to or in close
proximity to properties owned by these entities, it is possible that the
properties owned by such entities may compete with the properties in which the
Trust has such interests in the future. In this regard, affiliates of the
Advisor have agreed that during the Exclusivity Period, they will not form,
manage, or advise a blind pool investment fund, the primary purpose of which is
to invest in debt (a) that is secured by real estate in the United States, (b)
that has current coupon rates in excess of comparable maturity Treasury spreads
plus 400 basis coupon points, and (c) that has maturities longer than four
years, and which debt otherwise has predominantly debt investment
characteristics. The Exclusivity Period is defined as the period commencing
March 18, 1998 and ending at the earlier of (i) February 27, 2000 or (ii) the
date which is six months after the date on which aggregate proceeds of not less
than $400,000,000 have been raised through one or more public offerings of
stock. In addition, the Trust, on the one hand, and these entities, on the other
hand, may possibly compete with each other in the future with respect to the
acquisition of debt and/or equity interests.
Although the Trust did not qualify as a real estate investment trust (a
"REIT") for Federal income tax purposes for its fiscal years 1993 through 1997,
it did not incur any material tax liabilities as a result of its operations. The
Trust is eligible to and intends to make an election to be taxed as a REIT for
its taxable year beginning January 1, 1998.
ADVISORY AGREEMENT
In connection with the Recapitalization Transactions, the Trust and the
Advisor entered into an Advisory Agreement pursuant to which the Advisor
manages the investment affairs of the Trust, subject to the Trust's purpose and
investment policy, the Investment Restrictions and the directives of the Board
of Trustees. The services provided by the Advisor include the following:
identifying investment opportunities for the Trust; advising the Trust with
respect to and effecting acquisitions and dispositions of the Trust's
investments; monitoring, managing and servicing the Trust's loan portfolio; and
arranging debt financing for the Trust. The Advisor will not act in a manner
that is inconsistent with the express direction of the Board of Trustees and
reports to the Board of Trustees and/or the officers of the Trust with respect
to its activities. The Advisor is not responsible for the administration of the
Trust.
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Commencing on the 90th day after the consummation of the Recapitalization
Transactions, the Trust will pay to the Advisor a quarterly base management fee
of 0.3125% (1.25% per annum) of the "Book Equity Value" of the Trust (as defined
in the Advisory Agreement) determined as of the last day of each quarter, but
estimated and paid in advance subject to recomputation.
In addition, commencing on the 90th day after the consummation of the
Recapitalization Transactions, the Trust will pay the Advisor a quarterly
incentive fee of five percent (5%) of the Trust's "Adjusted Net Income" (as
defined in the Advisory Agreement) during each quarter that the Adjusted Net
Income for such quarter restated and annualized as an annualized rate of return
on the Trust's Book Equity Value for such quarter equals or exceeds the
"Benchmark BB Rate" (as defined in the Advisory Agreement). The Advisor will be
also be reimbursed for certain expenses it incurs on behalf of the Trust. As a
result of the delayed commencement of the advisory fee, fees to be incurred in
1998 will be recognized ratably over the period from March 18, 1998 through
December 1998. As a result of this fee deferral, the operating results of the
Trust calendar 1998 will be higher than they would have been if the advisory fee
had not been deferred and therefor may not be reflective of future operating
results of the Trust.
The Advisory Agreement has an initial term of three years subject to automatic
renewal for one year periods unless the Trust has been liquidated or a
Termination Event (as defined in the Advisory Agreement and which generally
includes violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Trust as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) has occurred and is continuing. In addition, the
Advisor may terminate the Advisory Agreement on 60 days' notice to the Trust and
the Trust may terminate the Advisory Agreement upon 60 days' written notice if a
Termination Event has occurred or if the decision to terminate is based on
affirmative vote of the holders of two-thirds or more of the voting shares of
the Trust at the time outstanding.
The Trust's investment affairs are managed by the Advisor, subject to the
supervision of the Board of Trustees. Thus, the Trust is dependent on the
services of the Advisor and its officers and employees for the success of the
Trust. The Trust's success depends in part on the continuing ability of the
Advisor to hire and retain knowledgeable personnel. Finally, the Trust is
subject to the risk that the Advisor will terminate the Advisory Agreement and
that no suitable replacement can be found to manage the investment affairs of
the Trust. The Starwood Trustees and Officers directly or indirectly own a
substantial economic and voting interest in the Advisor. The Advisor is a
recently formed entity with no significant assets and no prior history of
operations or experience managing the investment affairs of any other company.
Mr. Sternlicht, Chairman of the Board of Trustees of the Trust, is also Chairman
of the Advisor and Mr. Sugarman, Chief Executive Officer, President and Trustee
of the Trust is also Chief Executive Officer and President of the
Advisor. All investments larger than $10.0 million must be approved by the
Board of Trustees, however, daily operations relating to the investment affairs
between the Trust and the Advisor and its affiliates are not be required to be
approved by a majority of the independent Trustees. Instead, the majority of the
independent Trustees will establish general guidelines for the Trust's
investments and borrowings. The independent Trustees will review transactions
engaged in by the Trust to monitor the activities of the Advisor on a regular
basis. Moreover, the independent Trustees will review the Trust's investment
policies annually. In conducting this review, the independent Trustees will rely
primarily on information provided to them by the Advisor.
LICENSE AGREEMENT
The Trust licenses the Starwood trademark from Starwood Capital Group, L.L.C.
pursuant to a Trademark License Agreement. The Trust pays Starwood Capital
Group, L.L.C. a royalty of $1.00 per year for use of the Starwood trademark.
Starwood Capital Group, L.L.C. may terminate the Trademark License Agreement on
30 days' written notice; provided, that, Starwood Capital Group L.L.C. may not
terminate the Trademark License Agreement if (i) the Advisory Agreement is in
effect; (ii) the Trust is not in default under the Advisory Agreement; and (iii)
Mezzanine and SOF IV own in the aggregate more than 50% of the Class A Shares.
Notwithstanding the foregoing, Starwood Capital Group, L.L.C. can terminate the
Trademark License Agreement if the Trust engages in activities other than the
acquisition, origination, ownership or servicing of debt investments or
investments that are primarily debt-like in nature. In the event the Trademark
License Agreement is terminated, the Trust would have to cease using the
Starwood name and would have to change its name so that it no longer included
"Starwood."
INVESTMENT PORTFOLIO
As of December 31, 1997 and from such date until the consummation of the
Recapitalization Transactions, the Trust's assets were primarily short term
liquid real estate investments, cash and cash equivalents, some of which were
held indirectly through the Partnership which was liquidated in
connection with the Recapitalization Transactions with all of its assets
distributed to the Trust. On March 18, 1998, the Trust acquired the portfolio
of mortgage and partnership loans and leases secured by residential, hotel,
office and mixed use real estate and other assets, a portfolio of first
mortgage loans and rights under certain letters of intent.
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The following is a summary description of the Assets contributed to the Trust
in the Recapitalization Transactions as of March 18, 1998:
<TABLE>
<CAPTION>
Current Original
UNDERLYING NUMBER OF BALANCE OF Original
-------------- BORROWERS COMMITMENT Balances Ascribed Maturities
Type of Loan/Borrower PROPERTY TYPE IN CLASS AMOUNT OUTSTANDING VALUE DATES
- ----------------------------- -------------- --------- ------------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Senior mortgages Office/Hotel/ 8 $502,114 445,614 449,796 1999-2007
Mixed Use/
Apartment
Subordinated Mortgages Office/Hotel/ 5 175,375 155,538 184,320 2002 to 2007
Resort/Planned
Communities
Opportunistic Mortgages Office/Hotel/ 2 166,644 132,429 81,057 1999 and 2007
Apartment
Unsecured Notes Office/Hotel 2 27,300 27,300 30,850 2002 and 2004
Construction Loans Assisted 2 92,390 85,471 91,985 1999 and 2004
Living/Resorts
Real Estate Under Hotels 1 N/A(3) N/A(3) 195,470 N/A(3)
Long-term Master Lease
Loan Participation Various 3 22,656 22,534 13,660 1999 and 2000
Other Real Estate Related Public bonds 2 43,150 43,150 47,532 2002 and 2007
Investment ___ ---------
Total 25 1,094,670
== =========
<CAPTION>
Interest INTEREST PARTICIPATION
ACCRUAL PAYMENT Principal -------------
Type of Loan/Borrower RATES RATES AMORTIZATION FEATURES
- ----------------------------- ----- ----- ------------ --------
<S> <C> <C> <C> <C>
Senior mortgages Fixed: 8.97 to 16% Fixed 8.0-10.82% Yes (1) Yes(2)
Variable: LIBOR + Variable: LIBOR +
1.25 to 3.25% 1.25 to 3.25%
Subordinated Mortgages Fixed 10 to 15.25% Fixed 10.0 to 15.25% Yes(1) Yes(2)
Variable: LIBOR +
1.75%
Opportunistic Mortgages 6.0 to 7.0% 6.0 to 7.0% Yes (1) Yes(2)
Unsecured Notes 11.25% to 15.0% 11.25% to 15.0% No Yes (2)
Construction Loans 12.0 to 12.5% 10.0 to 12.5% No No
Real Estate Under N/A(3) N/A(3) N/A(3) N/A(3)
Long-term Master Lease
Loan Participation Fixed: 7.13% Fixed: 5.45 to Yes (1) Yes
Viarable: LIBOR + 6.40%
.58 to 1.75% Variable: LIBOR +
.58 to 1.75%
Other Real Estate Related 12.5 to 12.75% 12.5 to 12.75% No No
Investment
Total
</TABLE>
EXPLANATORY NOTES
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(1) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits
additional annual prepayments of principal of up to $1.3 million without
penalty at the borrower's option.
(2) Under some of these loans, the lender receives additional payments
representing additional interest for participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
(3) The lease is a triple net lease of 17 hotels under which the lessee pays
all costs associated with the operation of the hotels, including real
estate taxes, insurance, utilities, services and capital expenditures. The
initial term of the lease expires on December 31, 2010, and can be extended
for up to five, five-year terms at lessee's option. Rent payments under the
lease consist of base rent and additional rent based on the amount by which
the aggregate operating revenue for any given year exceeds the aggregate
operating revenue of the twelve months ended September 30, 1996.
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SENIOR MORTGAGE LOANS
Description of Senior Mortgage Loans and the Collateral. There are eight (8)
loans (the "Senior Mortgage Loans") in this category with an aggregate original
principal balance of $502,114,000 and approximately $445,614,000 outstanding as
of March 18, 1998. The Senior Mortgage Loans bear interest at
either a fixed rate per annum or a variable rate based on LIBOR plus an
additional specified amount, requiring either monthly interest payments or
specified amortization payments. One of the Senior Mortgage Loans permits (i)
accrual of interest on a portion of the principal of such loan, payable at
maturity, and (ii) the deferral of certain additional interest payments under
certain circumstances. The Senior Mortgage Loans are generally secured by
mortgages encumbering real properties comprised of a resort conference center in
New York, office buildings in Seattle, Washington, a mixed use complex in New
York, office buildings in Houston, Texas and Dallas, Texas, an office portfolio
in San Diego, California, a residential complex in San Diego, California, a
commercial office building in San Francisco, California, a mixed used complex in
Boston, Massachusetts, a residential complex in New York, New York and certain
pledges of partnership interests.
Maturity Date and Prepayment Terms. The Senior Mortgage Loans have maturity
dates that range from December, 1999 to December, 2007, with certain extension
rights in some cases. Two (2) of the Senior Mortgage Loans are subject to a
prepayment lock-out period during which time such loans may not be prepaid.
Otherwise, the remaining Senior Mortgage Loans are generally prepayable at
certain specified dates and in certain specified amounts, subject to certain
conditions, including the payment of prepayment penalties based on specified
yield maintenance formulas and/or other required costs.
Participating Equity Interest. Some of the Senior Mortgage Loans require
payments of participating equity based on specified percentages of cash flow,
property appreciation and a share of funds maintained in certain reserve
accounts.
Limited Non-Recourse. The Senior Mortgage Loans are generally nonrecourse
loans as to which, in the event of a default under such loans, recourse
generally may be had only against the collateral, except for certain standard
carve-outs. One of the Senior Mortgage Loans is fully recoursed against the
borrower.
Cross-Default Provisions. Two (2) of the Senior Mortgage Loans are cross-
defaulted with certain lines of credit or loans made to the borrower under such
lines of credit or loans from different lenders.
Prohibition on Sale, Encumbrance and Transfer. The Senior Mortgage Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Senior Mortgage Loans, with certain
specified exceptions.
Guaranties. Some of the Senior Mortgage Loans are supported by certain
secured, limited recourse guaranties of payment and performance.
Environmental Indemnity. Certain of the Senior Mortgage Loans are supported
by environmental indemnities.
Subordinate Financing. Three (3) of the Senior Mortgage Loans are subject to
junior financing in the aggregate original principal amount of $131,935,000
which are part of the Subordinate Mortgage Loans and the Opportunistic Mortgage
Loans that are a part of this portfolio and are referred to below. One (1) of
the other Senior Mortgage Loans may be bifurcated, at the lender's request under
certain circumstances, into a senior lien tranche and a junior lien tranche,
both of which are part of this portfolio. Currently, both such tranches are
secured by a senior mortgage lien.
Forward Additional Loan Commitment. One (1) of the Senior Mortgage Loans
includes an additional commitment for an additional loan of up to $25,000,000 as
construction financing, subject to the satisfaction of certain specified
conditions.
SUBORDINATE MORTGAGE LOANS
Description of Subordinate Mortgage Loans and the Collateral. There are five
(5) loans (the "Subordinate Mortgage Loans") in this category with an aggregate
principal balance of $175,375,000 and approximately $155,538,000 outstanding as
of March 18, 1998. The Subordinate Mortgage Loans bear interest at either fixed
or variable rates per annum requiring either monthly interest payments or
specified amortization payments. Under some of the Subordinate Mortgage Loans,
if for any month the interest paid is less than a specified amount, the
difference shall accrue interest at a specified fixed rate per annum, or cash
flow from subsequent months must be deposited into specified interest accounts
to cover previous interest payments that are not paid. The Subordinate Mortgage
Loans are secured by mortgages encumbering real properties comprised of fifteen
(15) hotels located in seven (7) states, fee and ground leasehold interests in a
mixed use complex of office, retail and hotel space in Washington, D.C., office
buildings in Houston, Texas and Dallas, Texas, and an office portfolio in San
Diego, California.
Maturity Date and Prepayment Terms. The Subordinate Mortgage Loans have
maturity dates that range from May, 2002, to December, 2007, subject to
extension in certain cases. Some of the Subordinate Mortgage Loans are subject
to prepayment lock-out periods during which time such loans may not be prepaid.
At specified periods during the term of the Subordinate Mortgage Loans,
prepayment is generally permitted, subject to certain conditions set forth in
the applicable loan documents, including, in some cases, the payment of
prepayment penalties based on specified yield maintenance formulas or required
internal rates of return.
8
<PAGE>
Limited Non-Recourse Loans. The Subordinate Mortgage Loans are generally
nonrecourse loans as to which, in the event of a default under such loans,
recourse generally may be had only against the collateral, except for certain
standard carve-outs.
Prohibition on Sale, Encumbrances and Transfer. The Subordinate Mortgage
Loans generally prohibit the transfer, sale or encumbrance or release of the
real properties or interests in the borrowers related to such Subordinate
Mortgage Loans, with certain specified exceptions.
Environmental Indemnity. Certain of the Subordinate Mortgage Loans are
supported by environmental indemnities.
Existing Senior Financing. Two (2) of the Subordinate Mortgage Loans are
subject to senior financing in the aggregate original principal amount of
$217,700,060 which are part of the Senior Mortgage Loans that are a part of this
portfolio and are referred to herein. The other two (2) Subordinate Mortgage
Loans are subject to senior financing in the aggregate original principal amount
of $205,000,000 which are not a part of this portfolio. The rights between
senior and junior lenders are generally governed by specified intercreditor
agreements which may provide the junior lender with certain notice and cure
rights, but otherwise limit the rights and remedies of the junior lender.
Management of Hotels. Management of the hotel real properties securing the
Subordinated Mortgage Loans are generally governed by management agreements.
Cross-Default Provisions. One (1) of the Subordinate Mortgage Loans is cross-
defaulted with certain loans entered into by certain partners of the borrower
for such Subordinate Mortgage Loan.
Purchased Promissory Note. One (1) of the promissory notes evidencing a
Subordinate Mortgage Loan was purchased from a third party lending institution.
The original lender has been indemnified for claims relating to acts of the
purchasing lender in connection with the note sale agreement, the debt evidenced
by the subject promissory note, the use or ownership of the real property
securing such note, and any contingency fee contracts with attorneys or
collection agencies.
Guaranties. One (1) of the Subordinate Mortgage Loans is supported by
certain secured, limited recourse unconditional guaranties of payment and
performance, and other limited guaranties of payment and performance.
Participating Equity Interest. One (1) of the Subordinate Mortgage Loans
requires payments of participating equity, payable with monthly interest
payments, based on specified percentages of cash flow and net proceeds generated
from the sale or refinancing of the real property securing such loan.
OPPORTUNISTIC MORTGAGE LOANS
Description of Opportunistic Mortgage Loans. The two (2) loans (the
"Opportunistic Loans") in this category consists of (i) debt (the "Middle
Tranche") with an original principal balance of $72,400,000, secured by, among
other non-real property collateral, a second lien mortgage encumbering a
combination hotel and apartment building in Denver, Colorado and a 50% interest
in an unconsolidated partnership holding debt (the "Junior Tranche") with an
original principal balance of $79,868,613, secured by a third lien mortgage
encumbering the same combined hotel and apartment building and (ii) subordinate
debt with an original principal balance of $54.3 million secured by five
buildings in Seattle, Washington. The Opportunistic Loans bear interest at fixed
or variable rates per annum. One of the loans has monthly compounding of
interest, with payments due on a monthly basis, requiring either monthly
interest payments or specified principal payments at certain times during the
term thereof when certain specified conditions are satisfied.
Maturity Date and Prepayment Terms. The Opportunistic Loans have maturity
dates ranging from December, 1999 to June, 2007, with certain rights for
extensions. The Opportunistic Loans may be prepaid, but where prepayment occurs
before a certain specified date, prepayment must be accompanied by certain
specified yield maintenance payments.
Recourse Loan. The Opportunistic Loans are fully recourse to the borrower
thereunder.
Prohibition on Sale, Encumbrance and Transfer. The Opportunistic Loans
generally prohibit the transfer, sale or encumbrance of the real property or
interests in the borrower related to such Opportunistic Loan, with certain
specified exceptions.
Repayment Guaranty. One of the Opportunistic Loans is supported by a
repayment guaranty, which guaranty terminates upon payment in full of the senior
debt or upon judicial foreclosure by or a deed in lieu to the holder of the
senior debt.
Buy/Sell Agreement. One of the Opportunistic Loans is subject to the terms of
a buy/sell agreement pursuant to which, upon the occurrence of certain events,
the borrower under the Opportunistic Loan would be required to either agree to
buy certain interests or to sell to certain interests in the underlying
collateral. Certain specified parties have the rights to elect to exercise the
buy/sell right, in which event the non-triggering party must either agree to buy
the other party's interest or to sell to the other party the triggering party's
interest in the underlying collateral. In the event that borrower under the
Opportunistic Loans initiates this latter two-way buy/sell option, it must
prepay the Middle Tranche in full.
9
<PAGE>
Senior Financing and Intercreditor Agreement. The underlying collateral is
subject to senior financing in the aggregate original amount of $65,000,000
which is not part of the portfolio and $94,700,000 of which is part of the
portfolio. The rights between senior and junior lenders are generally governed
by specified intercreditor agreements which provides for certain cure rights for
defaults under such senior financing.
Hotel Management. In lieu of a management agreement, the general partner of
the borrower under one of the Opportunistic Loans acts as a manager of the
underlying collateral, and is entitled to receive property management fees,
construction management fees, leasing commissions, and reimbursement of certain
approved items. All fees are subordinated to the Middle Tranche in the event of
a default thereunder.
UNSECURED LOANS
Description of Unsecured Loans and the Collateral. There are two (2) loans
(the "Unsecured Loans") in this category with an aggregate original and current
principal balance of $27,300,000. The Unsecured Loans bear interest at fixed
rates per annum, requiring monthly interest payments. The Unsecured Loans are
generally secured by pledges of partnership, membership or stock interests, and
certain other non-real property collateral. The real properties owned by the
borrowing entities under the Unsecured Loans consist of mixed office and retail
in New York, New York and twenty-one (21) hotel sites in Georgia, Maryland,
North Carolina, Pennsylvania, Tennessee, and Virginia.
Maturity and Prepayment Terms. The Unsecured Loans have maturity dates that
range from April, 2002 to January, 2004. Some of the Unsecured Loans are
subject to prepayment lock-out periods during which time such loans may not be
prepaid. At specified periods during the term of the Unsecured Loans,
prepayment is generally permitted, subject to certain conditions, including the
payment of prepayment penalties based on specified yield maintenance formulas.
Participating Equity Interest. Some of the Unsecured Loans require payments
of participating equity based on specified percentages of cash flow and net
proceeds from sale or refinancings generated from properties related to the
Unsecured Loans.
Prohibition on Sale, Encumbrance and Transfer. The Unsecured Loans generally
prohibit the transfer, sale or encumbrance of the real properties or interests
in the borrowers related to such Unsecured Loan, with certain specified
exceptions.
Recourse Loan. The Unsecured Loans are either recourse or non-recourse to the
personal assets of the borrowing entities, but where a loan is non-recourse, the
borrower is personally liable for certain specified carveouts.
Guarantees. Some of the Unsecured Loans are supported by secured or unsecured
guarantees, subject to specified recourse limitations as to the guarantor.
Environmental Indemnity. Some of the Unsecured Loans are supported by
environmental indemnities.
Existing Senior Loans on the Real Property. The real properties owned by the
borrowers under the Unsecured Loans are subject to senior financing in the
aggregate original amount of $107,800,000 which is not being contributed to the
Trust. The rights between senior and junior lenders are generally governed by
specified intercreditor agreements.
CONSTRUCTION LOANS
Description of Construction Loans and the Collateral. There are two (2) loans
(the "Constructions Loans") in this category with an aggregate available
original principal balance of $92,390,000, of which approximately $6,459,000
had not yet been funded as of March 18, 1998. The Construction Loans
are to be disbursed in accordance with certain approved construction
disbursement schedules and budgets. The Construction Loans bear interest at
fixed rates per annum, requiring monthly interest payments in specified amounts.
The Construction Loans are secured by mortgages encumbering real properties
comprised of a to-be-built condominium project and a to-be-built luxury resort
hotel, conference center and beach club, and golf course both located in
Florida, along with certain other partnership and stock collateral. One (1) of
the Construction Loans is also supported by letters of credit which are subject
to return upon the occurrence of certain repayment conditions and thresholds.
Maturity Date and Prepayment Terms. The Construction Loans have maturity
dates that range from November, 1999, to July, 2004. Periodically during the
term of the Construction Loans, under certain specified conditions, the
Construction Loans may be prepaid either in full or in part, or just in full, as
applicable, upon the satisfaction of certain specified conditions, including,
without limitation, the payment of a specified prepayment fee.
Reserves. The Construction Loans require that the borrowers thereunder fund
certain reserves from, among other specified funds, all of the cash flow and net
sales proceeds generated from the real properties securing the Construction
Loans, which reserves are to be used for the payment of interest, certain
construction costs, or other operating or capital expenses.
Guarantees. The Construction Loans are supported by repayment and/or
completion guarantees. The repayment guaranties range from full repayment to
repayment of only certain specified losses. One of the guarantors under one of
the Construction Loans has provided a promissory note which will be returned to
such guarantor when certain specified funds have been contributed to the reserve
10
<PAGE>
established for such Construction Loan.
Environmental Indemnity. The Construction Loans are supported by
environmental indemnities. A maintenance building on one of the real properties
securing one of the Construction Loans on which a golf course will be developed
is subject to environmental contamination, and such portion of real property is
the subject of a monitoring and remediation plan.
Prohibition on Sale, Encumbrance and Transfer. The Construction Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Construction Loans, with certain
specified exceptions.
Senior Encumbrances. A portion of the real property securing one of the
Construction Loans is subject to certain senior mortgages thereon, including
portions of the property on which a condominium project will be developed.
REAL ESTATE UNDER LONG-TERM OPERATING LEASE
General. Pursuant to the terms of the RLH lease (the "RLH Lease") Red Lion
Hotels, Inc., a Delaware corporation, a wholly owned subsidiary of Doubletree
Corporation ("Tenant") master leases seventeen (17) parcels of real property
(the "RLH Properties") each of which is improved with Doubletree or Red Lion
hotels (the "Leased Hotels"). The RLH Lease is absolutely net so that Tenant
controls all aspects of the RLH Properties operations and management and is
required to pay all rents and other sums to or on behalf of Landlord (as
defined). Tenant is required, at its own cost, to replace fixtures, furnishing
and equipment ("FF&E") and other fixed assets and operating equipment and
inventory as required, which shall be the property of Tenant and to fund an FF&E
reserve account. The Tenant is required to indemnify the Landlord and certain
others for all costs and expenses imposed upon or incurred by an indemnified
party in connection with the use, alteration, operation, management, condition
(including environmental condition and compliance), design, construction,
maintenance, repair or restoration of any of the leased premises and employment
of any person(s) at the leased premises. Doubletree Corporation has executed a
full guarantee of the punctual payment and performance of any and all
liabilities and obligations of Tenant arising out of or related to the RLH
Lease.
Term. The RLH Lease is a long-term lease that extends through 2010, including
five (5) automatic 5-year extension terms unless a proper termination notice is
delivered by the Tenant. The final expiration of the RLH Lease, assuming all
extensions would be in 2035.
Organization. RLH Partnership, L.P., a Delaware limited partnership (the
"Landlord") is the fee owner or ground lessee of the RLH Properties. The
general partner of the Landlord is Red Lion G.P., Inc. and the limited partner
is RLH Net Lease Investment, LLC ("RLH Net"), each of which is wholly owned by a
subsidiary of the Trust. RLH Net is also the sole stockholder of Red Lion G.P.,
Inc. A subsidiary of the Trust has a 99% membership interest in RLH Net and is
the controlling entity of the interest.
Base and Percentage Rent. Landlord collects a specified annual base rent
payable quarterly in arrears, and 7.5% of annual operating revenues in excess of
a base amount for all of the Leased Hotels. Under certain conditions, Tenant's
rent is subject to certain increases if Tenant completes an expansion at any
Leased Hotel.
Operation and Maintenance. Tenant is obligated to keep and maintain the
Leased Hotels in at least as good condition as existed on the commencement date.
Tenant is responsible for the payment of all costs and expenses incurred in the
use, operation or maintenance of the leased premises, including rents and other
amounts owed under any ground lease management fees real estate taxes,
insurance, supplies and materials, the cost of all maintenance, janitorial,
security and service agreements, electricity, water and any other utilities
supplied to the leased premises.
Limited Nonrecourse to Landlord. Any claim based on the Landlord's liability
under the RLH Lease shall be enforced against the leased premises and not
against any other tangible or intangible assets, properties or funds of the
Landlord; provided, however, if, as a result of a judicial foreclosure of any
mortgage, the Landlord's interest in any Leased Hotel is transferred to a
mortgagee or other entity, and at such foreclosure Tenant has a legal proceeding
against the Landlord, Tenant shall have the right to enforce any judgment from
any assets or other properties of the Landlord.
LOAN PARTICIPATIONS
Description of Participation Loans and the Collateral. There are three (3)
loans (the "Participation Loans") in this category which are Participations in
loans that have an aggregate original principal balance of $22,656,000. The
interest in each of the Participation Loans is limited to a certain specified
participation percentage. The Participation Loans bear interest at either a
variable rate per annum based on LIBOR plus an additional specified amount, or
at fixed rates per annum subject to certain scheduled increases, and requiring
either no monthly payments, monthly interest payments or specified amortization
payments. The Participation Loans are secured by mortgages encumbering real
properties comprised of an office building in New York, New York, an office
building in Rockville, Maryland, and a leasehold interest in a hotel in
Uniondale, New York, and certain other non-real property collateral.
Maturity and Prepayment Terms. The Participation Loans have maturity dates
that range from May, 1999, to May, 2000. The Participation Loans may either be
prepaid in full or in part without the payment of a prepayment penalty or are
not prepayable.
11
<PAGE>
Guaranties. Some of the Participation Loans are supported by either a
completion guaranty or a repayment guaranty.
Co-Lending Arrangement. Each of the Participation Loans is subject to the
interest of other participants in the loans and the relationship among
participating lenders is generally governed by the terms of certain
participation or co-lending agreements.
Participating Equity Interest. One (1) of the Participation Loans requires
payment of participating equity upon the sale or refinancing of the real
property securing such loan.
OTHER
This category generally includes publicly traded bonds with a market value of
approximately $47.5 million of two issuers, one of which matures in May 2002
with a coupon of 12.75% per annum that pays semi-annually and the other which
matures in March 2007 with a coupon of 12.5% per annum that pays semi-annually.
LETTERS OF INTENT
In addition to the assets described above, SOF IV also contributed to the
Trust its rights under certain letters of intent. The letters of intent are
non-binding obligations to originate or acquire mortgages on office, residential
and hotel properties. There can be no assurance that definitive agreements with
respect to the transactions contemplated by the letters of intent will be
executed on the terms set forth in the letters of intent or at all, and if
executed that such transactions will be consummated.
THE PARTNERSHIP
Prior to its termination on March 18, 1998, the Partnership was a limited
partnership organized under the Delaware Revised Uniform Limited Partnership
Act. The Trust was the sole general partner and Mezzanine was the sole limited
partner of the Partnership with 8.05% and 91.95% interests in the Partnership,
respectively. On March 18, 1998, Mezzanine exchanged all of its Units in the
Partnership for 4,568,944 Class A Shares. Upon completing this exchange, the
Trust was the sole partner in the Partnership and Partnership was terminated and
its assets and liabilities were distributed to the Trust.
COMPETITION
The Trust is engaged in a highly competitive business. The Trust competes for
investments with many recent entrants into the business, including numerous
public and private real estate investment vehicles, including financial
institutions (such as mortgage banks, pension funds and real estate investment
trusts) and other institutional investors, as well as individuals. The
acquisition of Mortgage Loans, Mezzanine Loans and Subordinated Interests is
often based on competitive bidding. In addition, the Trust's competitors may
seek to establish relationships with the financial institutions and other firms
from whom the Trust intends to purchase such assets. Certain of the Trust's
anticipated competitors are larger than the Trust, have established operating
histories and procedures, may have access to greater capital and other
resources, may have management personnel with more experience than the officers
of the Trust, and may have other advantages over the Trust in conducting certain
businesses and providing certain services.
QUALIFICATION AS A REIT
The Trust did not meet the qualification requirements of a REIT under Sections
856-860 of the Internal Revenue Code of 1986, as amended (the "Code") for the
years 1993 through 1997, the Trust is eligible to and intends to elect REIT
status in 1998. As a REIT, the Trust will generally not be subject to federal
income tax on that portion of its real estate investment trust taxable income
which is distributed to its shareholders.
UNFUNDED COMMITMENTS
The Trust had no unfunded commitments as of December 31, 1997.
EMPLOYEES
As of December 31, 1997 the Trust had no employees.
12
<PAGE>
ITEM 2. PROPERTIES
None as of December 31, 1997, however, see Item 1 -- "Investment Portfolio:
Real Estate Under Long-Term Operating Lease" for assets acquired subsequent to
year end.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during 1997. The
1997 Annual Meeting of Shareholders was held on March 13, 1998.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE TRUST'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Trust had approximately 1805 Class A Shareholders as of March 23, 1998.
The Class A Shares are traded on the American Stock Exchange under the symbol
APT. All of the Class B Shares are held by B Holdings, L.L.C. and there is no
----
established public trading market for these shares.
The following table sets forth the high and low sales prices of the Trust's
Class A Shares for the quarters ended 1997 and 1996.
Quarter ended: High Low
- ------------- ---- ---
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1997 $6 3/8 $ 3 5/8
September 30, 1997 $ 41/2 $2 1/4
June 30, 1997 $3 1/4 $2 1/2
March 31, 1997 $ 4 $1 9/16
December 31, 1996 $2 1/8 $ 1 3/8
September 30, 1996 $1 7/8 $ 7/8
June 30, 1996 $1 1/8 $ 9/16
March 31, 1996 $ 5/8 $ 1/2
</TABLE>
On March 23, 1998, the last sale price of the Class A Shares as reported by the
American Stock Exchange was $4.56.
The Trust has not declared any cash dividends on the Class A or Class B Shares
during the past two fiscal years. No assurances can be made as to the
declaration of, or if declared, the amount of, future distributions since such
distributions are subject to the Trust's cash flow from operations, earnings,
financial condition, capital requirements and such other factors as the Board of
Trustees deems relevant. The principal factor in the determination of the
amounts of distributions is the requirement of the Internal Revenue Service that
a REIT must distribute at least 95% of its taxable income.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth the selected financial information for the Trust
on a historical and pro forma basis. As more fully described in Note 8 to the
Consolidated Financial Statements, pro forma information includes the effects
of the following; (i) the Recapitalization Transactions, (ii) the exchange of
each outstanding Unit held by holders other than the Trust for one Class A
Share, (iii) liquidation and termination of the Partnership and (iv) Borrowings
necessary to consummate the aforementioned transactions (collectively, the
"Transactions"). The pro forma operating data for the year ended December
31,1997 is presented as if the Transactions had been completed on January 1,
1997 and the pro forma balance sheet due data is presented as if the
Transactions had been completed on December 31, 1997.
The selected financial information on the following page should be read in
conjunction with the discussions set forth in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the financial
statements included elsewhere in this filing. The pro forma financial
information is not necessarily indicative of what the actual financial position
and results of operations of the Trust would have been as of and for the periods
indicated, nor does it purport to represent the future financial position or
results of operations for future periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
PRO
FORMA HISTORICAL
--------- ----------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- ---------- ------- ------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (1)
Interest income $ 61,956 $ 896 $ 478 $ 145 $ 296 $ 2,185
Prepayment and participation income $ 25,137 985 - - - -
Gain from sale of mortgages - - - - - 2,545(2)
Rental income $ 15,311 - - - - -
Other income 887 6 10 3 - -
------- ------- -------- -------- -------- ---------
Total revenue 103,291 1,887 488 148 296 4,730
------- ------- -------- -------- -------- ---------
Interest expense 23,151 - $ 272 $ - $ 270 $ -
Depreciation and amortization 6,875 - - - - -
General and administrative expense 1,510 461 639 283 356 982
Management/advisory fee 8,143 - - - - -
Other expenses 2,117 - - - - -
------- ------- -------- -------- -------- ---------
Total expenses 41,796 461 911 283 626 982
------- ------- -------- -------- -------- ---------
Net income (loss) before minority
interest in Partnership 61,495 1,426 (423) (135) (330) 3,748
Minority interest in Partnership (3) - (1,415) (154) - - -
------- ------- -------- -------- -------- ---------
Net income (loss) $61,495 $ 11 $ (577) $ (135) $ (330) $ 3,748
======= ======= ======== ======== ======== =========
Earnings per Class A Share (4) $ .20 $ .01 $ (0.22) $ (0.05) $ (0.13) $ 1.45
======= ======= ======== ======== ======== =========
SUPPLEMENTAL DATA:
Funds from operations (5) 70,087 1,426 (423) (135) (330) 1,203
Cash flows from:
Operating activities: 3,166 (227) (184) (397) 2,531
Investing activities (6,013) (522) 175 (1,371) 39,400
Financial activities 3,029 - - 101 (39,503)
Dividends - - - - 38,639
Dividends per share $ - $ - $ - $ - $ 15.00(7)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------
PRO FORMA HISTORICAL
-----------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments $ 1,073,877 $ 11,175 $ 5,481 $ 1,196 $ 1,371 $ -
Total assets 1,096,676 13,441 5,674 2,194 2,372 2,680
Debt obligations 350,000 - - - - -
Minority interest in
consolidation
entities - 5,175 3,917 - - -
Shareholders' equity 742,206 6,351 1,578 2,155 2,290 2,519
</TABLE>
EXPLANATORY NOTES:
- -----------------
(1) As a result of the sale of a substantial portion of the Trust's assets and
related distribution of the proceeds in 1993, the Trust's on-going
investment operations were substantially reduced.
(2) During 1993, the Trust sold its entire remaining portfolio then consisting
of four mortgage loans resulting in proceeds in excess of carrying values
and obligations of approximately $2.5 million.
(3) Represents the minority interest in the Partnership which were converted
into Class A Shares on the March 18, 1998, upon which date, the Partnership
was liquidated and terminated.
(4) Earnings per Class A Share is calculated based on the weighted average
shares outstanding during each of the periods after deduction for the Class
B Shares 1% interest.
(5) Management and industry analysts generally consider funds from operations
to be one measure of the financial performance of a REIT which provides a
relevant basis for comparisons among REITs and it is presented to assist
investors in analyzing the performance of the Trust. Funds from operations
is defined as income before minority interest (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, provisions for losses and real
estate related depreciation and amortization (excluding amortization of
financing costs). Funds from operations does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash
needs. Funds from operations should not be considered an alternative to net
income as an indication of the Trust's financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity.
(6) Includes a $14.50 per Class A Share distribution paid in November 1993 from
the proceeds of the sale of as a result of the sale of substantially all of
the Trust's remaining real estate loan investment.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Trust's primary source of cash during 1997 and 1996 was from income earned
on its interest in the participation certificates in the Warwick Hotel mortgage
note and certain investments in government or government sponsored securities as
well as short term cash investments. The Trust's primary source of cash in 1995
was from income earned on its investments in government or government sponsored
securities and short term cash investments.
During 1995 and the first three quarters of 1996, the Trust's only investment
activities were purchases of government obligations. Consequently, its
operations during 1995 and the first three quarters 1996 consisted solely of
interest income from these obligations and the payment of administrative
expenses.
On March 15, 1994, the Trust announced that it had entered into an agreement
with SAHI and SAHI, Inc. for the sale of warrants for the right to purchase five
million Class A Shares at a price of $1 per share and 2,500,000 Class B Shares
for a price of $0.01 per share. SAHI and SAHI, Inc. purchased the warrants for
$101,000, which amount was applied against the purchase price of the first
Class A and Class B Shares purchased pursuant to the warrant.
On September 26, 1996, the Trust became sole general partner of the Partnership
by contributing $400,000 in cash, in exchange for a 8.05% interest in the
Partnership evidenced by 400,000 Units. Mezzanine became the 91.95% limited
partner by contributing to the Partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note valued by the
Trust at approximately $4.6 million at the time of contribution. Mezzanine's
Units were converted into Class A Shares on March 18, 1998 on a one-for-one
basis and the Partnership was terminated.
On January 22, 1997, Mezzanine exercised its rights under a warrant to acquire
5,000,000 Class A Shares. In addition, SAHI, Inc. exercised its rights under
the warrant to acquire 2,500,000 Class B Shares. As a result of the exercise of
the warrants, the Trust's capital increased by $5,025,000, and funds from this
capitalization were used to purchase short-term government securities.
On October 1, 1997 the Warwick Hotel note was repaid and the $4.5 million of
proceeds were invested in government securities that matured in December 1997.
As more fully discussed in Note 7 to the Trust's consolidated financial
statements, for fiscal years 1993 to 1997 the Trust did not qualify as a REIT,
however, the Trust intends to elect to qualify as a REIT under the Code for its
1998 taxable year and, as such, anticipates distributing annually at least 95%
of its taxable income, subject to certain adjustments. Cash for such
distributions is expected to be generated from the Trust's operations, although
the Trust may borrow funds to make distributions. The Trust's operations for any
period may be affected by a number of factors including the investment assets
held, the operations of the collateral underlying secured loans or the business
of the borrowers with respect to unsecured loans or the interest rate
environment.
The Recapitalization Transactions and other related transactions will
materially impact the future operations of the Trust. Accordingly, the currently
reported financial information is not believed to be indicative of the Trust's
future operating results or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Trust requires capital to fund its real estate-related investments and
operating expenses. The Trust's capital sources upon consummation of the
Recapitalization Transactions include cash flow from operations, borrowings
under lines of credit arranged concurrently with the transactions, additional
bank borrowings, mortgage loans on the Trust's real estate and future equity
offerings.
Concurrently with the Recapitalization Transactions, the Trust entered into
bank credit agreements under which the Trust may currently borrow up to $625.0
million, with up to an additional $175.0 million available, subject to certain
conditions, to fund loan originations or acquisitions (including the cash
portion of the Recapitalization Transactions previously described) and provide
working capital to fund new loan originations and for the other general
corporate purposes. The credit agreements are comprised of (i) a $500.0 million
revolving credit facility which bears interest only payable monthly at LIBOR
plus 1.5% and with outstanding principal due at maturity on March 13, 2001 and
(ii) a $125.0 million Term Loan secured by the properties under long term
operating lease which bears interest only payable monthly at LIBOR plus 1.5% and
which matures on March 15, 1999. Availability of amounts to borrow under the
revolving credit facility is subject to having sufficient assets includable as
security under the line under a percentage borrowing base calculation. An
aggregate of $8.0 million in loan fees relating to these arrangements were paid
at closing of the Recapitalization Transactions. These fees will be amortized
over the related loan terms.
In anticipation of consummating these bank financing transactions described
above, effective on March 16, 1998, the Trust entered into LIBOR interest rate
17
<PAGE>
caps at 9% in the notional amounts of $125.0 million and $300.0 million expiring
on March 16, 1999 and 2001, respectively for an aggregate cost of $158,750.
Upon completion of the Recapitalization Transactions and consummation of the
bank credit facilities, the Trust believes that the Trust's significant capital
resources and access to financing will provide the Trust with increased
financial flexibility and market responsiveness at levels sufficient to meet
current and anticipated capital requirements including expected loan origination
or acquisition of additional investments.
FISCAL YEAR 1997 COMPARED TO 1996
Total revenues for 1997 increased 287% as a result of the gain from the
repayment of the Warwick Hotel note combined with an additional two quarters of
income earned on the Warwick Hotel note as compared to 1996 and additional
income from the investment of the proceeds from the warrants exercised in
January 1997.
During 1997 general and administrative expenses decreased 28% compared with
1996 due to a reduction in legal fees and proxy costs combined with the
elimination of payroll, office rental costs, and reduced professional fees.
During 1997, $1.9 million of costs were incurred in connection with the
Recapitalization Transactions and related transactions described below. These
costs were capitalized as deferred proxy costs and will be offset against the
incremental shareholder equity generated by the Recapitalization Transactions.
Total assets increased from the year end 1996 to the year end 1997 by 137%, or
$7.8 million due to the $4.9 million received from the exercise of the warrants,
$1.9 million of deferred proxy costs and $1.4 million of net income (before
minority interest).
FISCAL YEAR 1996 COMPARED TO 1995
Total revenues for 1996 increased 230% as a result of leveraged acquisitions
of Federal Home Loan Mortgage Corporation pass-through certificates ("Government
Securities"), the formation of the Partnership, and the interest generated by
the investments of the Partnership.
During the year ended December 31, 1996, the Trust received approximately
$9,750 as a result of a $75,000 claim filed in connection with the bankruptcy
of a former borrower relating to additional interest owed to the Trust on one of
its loans during 1993. The $9,750 of income received during 1996 represents a
second payment towards this claim.
The Trust's general and administrative expense increased 126% during 1996 due
primarily to an increase in legal and professional fees. The Trust incurred
these fees due to the preparation of a proxy statement and related material for
the Trust's 1996 shareholder meeting, as well as the formation of the
Partnership.
Total assets increased to $5.6 million in 1996 from $2.2 million in 1995
primarily as a result of the contribution to the Partnership of the Warwick
Hotel mortgage participation certificates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128") effective for periods ending after December 15, 1997. SFAS No. 128
simplifies the standard for computing earnings per share and makes them
comparable with international earnings per share standards. The statement
replaces primary earnings per share with basic earnings per share ("Basic EPS")
and fully diluted earnings per share with diluted earnings per share ("Diluted
EPS"). Basic EPS is computed based on the income applicable to Class A Shares
(which is net loss reduced by the dividends on preferred shares) divided by the
weighted-average number of Class A Shares outstanding during the period.
Diluted EPS is based on the net earnings applicable to Class A Shares plus
dividends on convertible preferred shares, divided by the weighted average
number of Class A Shares and dilutive potential Class A Shares that were
outstanding during the period. Dilutive potential Class A Shares include the
convertible preferred shares and dilutive share options. The Trust adopted this
accounting standard effective December 31, 1997, as required.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Trust was
not previously required to present comprehensive income or the components
therewith under generally accepted accounting principles. The Trust intends to
adopt the requirements of this pronouncement in its financial statements for the
year ending December 31, 1998.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS No. 131") effective for financial
statements issued for periods beginning after December 15, 1997. SFAS No. 131
requires disclosures about segments of an enterprise and related information
regarding the different types of business activities in which an
18
<PAGE>
enterprise engages and the different economic environments in which it operates.
The Trust intends to adopt the requirements of this pronouncement in its
financial statements for the year ended December 31, 1998. The adoption of SFAS
No. 131 is not expected to have a material impact on the Trust's financial
statement disclosures.
INTEREST RATE RISKS
The Trust's operating results will depend in part on the difference between
the interest income earned on its interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of mezzanine capital may lead to a lowering of
the interest rate earned on the Trust's interest bearing assets which the Trust
may not be able to offset by obtaining lower interest costs on its borrowings.
Changes in the general level of interest rates prevailing in the economy can
affect the spread between the Trust's interest-earning assets and interest-
bearing liabilities. Any significant compression of the spreads between
interest-earning assets and interest-bearing liabilities could have material
adverse effect on the Trust. In addition, an increase in interest rates could,
among other things, reduce the value of the Trust's interest-bearing assets and
its ability to realize gains from the sale of such assets, and a decrease in the
interest rates could reduce the average life of the Trust's interest earning
assets.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond the control of the Trust. The Trust
may employ various hedging strategies to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts. There can be no
assurance that the profitability of the Trust will not be adversely affected
during any period as a result of changing interest rates. In addition, hedging
transactions involve certain additional risks such as counter-party credit risk,
legal enforceability of hedging contracts and the risk that unanticipated and
significant changes in interest will cause a significant loss of basis in the
contract. With regard to loss of basis in a hedging contract, indices upon
which contracts are priced may be more or less variable than the indices upon
which the hedged loans are priced, thereby making the hedge less effective.
There can be no assurance that the Trust will be able to adequately protect
against the foregoing risks and that the Trust will ultimately realize an
economic benefit from any hedging contract it enters into.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
STARWOOD FINANCIAL TRUST
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants 21
Balance Sheets at December 31, 1997 and 1996 22
Statements of Operations for each of the three years
in the period ended December 31, 1997 23
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 1997 24
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997 25
Notes to Consolidated Financial Statements 26
All schedules are omitted because they are currently not applicable or the
required information is shown in the financial statements or notes thereto.
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Starwood Financial Trust:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Starwood Financial Trust, formerly Angeles Participating Mortgage
Trust, (the "Trust") and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As more fully discussed in Note 8, on March 18, 1998 the Trust consummated
certain transactions which (i) significantly recapitalized the Trust, (ii)
expanded the capital resources of the Trust, (iii) changed the investment policy
of the Trust, (iv) provided for external management under an Advisory Agreement
and (v) amended and restated of the Trust's stock option plan.
Price Waterhouse LLP
New York, NY
March 20, 1998
21
<PAGE>
STARWOOD FINANCIAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------
1997 1996
------- ------
ASSETS
Cash and cash equivalents $ 296 $ 114
Investments 11,175 1,774
Mortgage note receivable - 3,707
Deferred transaction costs 1,895 -
Accrued interest 58 56
Other assets 17 23
------- ------
Total assets $13,441 $5,674
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ - $ 37
Accrued expenses 1,915 142
------- ------
Total liabilities 1,915 179
------- ------
Minority Interest 5,175 3,917
------- ------
Commitments and contingencies - -
Shareholders' equity:
Class A Shares (7,550,000 and 2,550,000 shares
issued and outstanding, $1.00 par value,
unlimited shares authorized respectively) 7,550 2,550
Class B Shares (3,775,000 and 1,275,000 shares
issued and outstanding,
$.01 par value, unlimited shares authorized) 38 13
Net unrealized loss on "available-for-sale"
investments (162) -
Additional paid in capital 42,228 42,329
Accumulated undistributed net realized gain
from sale of mortgages 2,545 2,545
Accumulated distributions in excess of
cumulative net income other than gain from
sale of mortgages (45,848) (45,859)
------- ------
Total Shareholders' equity 6,351 1,578
------- ------
Total liabilities and Shareholders' equity $13,441 $5,674
======= ======
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
STARWOOD FINANCIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
REVENUE:
Interest income from mortgage notes $ 486 $ 166 $ -
Gain from early loan repayment 985 - -
Interest income from investments 410 312 145
Other income 6 10 3
------- ------ ------
Total revenue 1,887 488 148
------- ------ ------
COSTS AND EXPENSES:
Interest expense - 272 -
General and administrative 461 639 283
------- ------ ------
Total costs and expenses 461 911 238
------- ------ ------
MINORITY INTEREST (1,415) (154) -
------- ------ ------
NET INCOME (LOSS) $ 11 $ (577) $ (135)
======= ====== ======
NET INCOME (LOSS) PER
CLASS A SHARE $ 0.01 $(0.22) $(0.05)
======= ====== ======
WEIGHTED AVERAGE NUMBER OF CLASS A
SHARES OUTSTANDING (in thousands) 7,244 2,550 2,550
======= ====== ======
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
STARWOOD FINANCIAL TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
NET DISTRIBUTIONS
UNREALIZED IN EXCESS OF
CLASS A CLASS B LOSSES ON PAID-IN CUMULATIVE
SHARES SHARES INVESTMENTS CAPITAL NET INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 2,550 13 42,329 (42,602) 2,290
Net loss - - - (135) (135)
------ --- ---------- ------ ------- ------
Balance at December 31, 1995 2,550 13 42,329 (42,737) 2,155
Net loss - - - (577) (577)
------ --- ---------- ------ ------- ------
Balance at December 31, 1996 2,550 13 42,329 (43,314) 1,578
Exercise of warrants 5,000 25 (101) - 4,924
Unrealized loss - - (162) - (162)
Net income - - - 11 11
------ --- ---------- ------ ------- ------
Balance of December 31, 1997 7,550 38 $(162) $42,228 $(43,303) $6,351
====== ===== ========== ======= ======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
STARWOOD FINANCIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11 $(577) $(135)
Adjustments to reconcile net (loss) increase to cash flows
from operating activities:
Minority Interest 1,415 154 -
Changes in Assets and Liabilities:
Decrease (increase) in other receivables 4 (54) 6
Decrease (increase) in other assets - 110 (12)
Increase (decrease) in accounts payable and accrued
expenses 1,736 140 (43)
------ ----- ------
Cash flows provided by (used in) operating activities 3,166 (227) (184)
------ ----- ------
Cash flows from investing activities:
Investments in securities (31,346) (19,811) (165)
Principal collections of investment securities 80 1,307 340
Sale of investment securities 21,546 17,926 -
Principal collections from mortgage notes 3,707 56 -
------ ------- -------
Cash flows provided by (used in) investing activities (6,013) (522) 175
------ ------- -------
Cash flows from financing activities:
Repayments related to investment security purchases - (18,886) -
Borrowings related to investment security purchases - 18,886 -
Increase in deferred transaction costs (1,895) - -
Exercise of warrants 4,924 - -
------ ------- -------
Cash flows provided by financing activities 3,029 - -
------ ------- -------
Increase (decrease) in cash and cash equivalents 182 (749) (9)
Cash and cash equivalents at beginning of period 114 863 872
------ ----- ------
Cash and cash equivalents at end of period $ 296 $ 114 $863
====== ======= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $- $ 272 $-
====== ======= ======
Supplemental disclosure of non cash financing activity:
Contribution of Note Receivable $- $3,763 $-
====== ======= ======
The accompanying notes are an integral part of the financial statements.
</TABLE>
25
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Starwood Financial Trust (the "Trust"), formerly Angeles Participating Mortgage
Trust, was formed for the purpose of making and acquiring various types of
mortgage and other loans. During 1993 through 1997, the Trust failed to qualify
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986, as amended (the "Code"). However, pursuant to a Closing Agreement with the
Internal Revenue Service (the "IRS"), the Trust will be eligible to and intends
to elect to be taxed as a REIT for the taxable year beginning January 1, 1998.
The Trust was originally formed by Angeles Corporation ("Angeles") for the
purpose of making various types of mortgage and other loans to entities
affiliated with Angeles. In early 1993, Angeles and its affiliates began
experiencing financial difficulties which resulted in a default on their loans
held by the Trust. In November 1993, the Trust sold all of its loans to an
unaffiliated third party and with the proceeds of such sale and cash on hand
distributed $37.2 million to the Trust's shareholders. Through a series of
transactions during 1994 and 1996, Starwood Mezzanine Investors, L.P.
("Mezzanine")and certain affiliates of the general partner of Mezzanine acquired
control of the Trust.
Prior to September 1996, the purpose and investment policy of the Trust was
primarily to make mortgage loans to entities affiliated with Angeles. However,
since the liquidation of the Trust's portfolio in 1993 until September 1996, the
Trust did not pursue its stated investment policy. Instead, during such period,
the Trust's assets were held in a trust as a reserve against contingent claims.
This contingent claims trust was terminated in August 1996. In September 1996,
the shareholders of the Trust voted to change the purpose and investment policy
of the Trust. As described in Note 8, in March 1998, the shareholders of the
Trust again voted to change the purpose and investment policy of the Trust
On September 26, 1996, the Trust became the sole general partner of the APMT
Limited Partnership (the "Partnership") (see Notes 4 and 5). As discussed in
Note 8, subsequent to year end, all the outstanding interests in the Partnership
not held by the Trust were exchanged for additional Class A Shares of the
Trust, the Trust became the sole partner of the Partnership and the Partnership
was terminated.
Also as more fully described in Note 8, pursuant to the concurrent approval
through a shareholder vote, on March 18, 1998, the Trust entered into a series
of transactions which, among other things, substantially recapitalized the
Trust and modified its investment policy.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The accompanying consolidated financial statements of the
Trust include the accounts of the Trust and the Partnership. These financial
statements were prepared in accordance with GAAP and, therefore, revenue is
recorded as earned and costs and expenses are recorded as incurred. The
consolidated statements reflect eliminated intercompany balances. Certain prior
years amounts have been reclassified to conform to current year classifications.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash held in bank
or invested in money market funds with original maturity terms of less than 90
days.
INCOME TAXES - The Trust did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 7 to these consolidated financial statements for more
information.
As confirmed in a Closing Agreement with the IRS obtained in March, 1998, the
Trust is eligible and intends to elect to be taxed as a REIT for its taxable
year beginning January 1, 1998. As a qualified REIT, the Trust will be subject
to income taxation at corporate rates on its REIT taxable income, however, the
Trust is allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Trust to
taxation at the shareholder level only. For income tax purposes, the Trust
reports revenue and expenses on the accrual method.
NET INCOME (LOSS) PER CLASS A SHARE - The net income per Class A Share was
based upon 7,244,000 weighted average shares outstanding for the year ended
December 31, 1997 and 2,550,000 weighted average shares outstanding during each
of the two years ending December 31, 1996 and 1995, after deduction of the 1%
Class B Shares' interest (see Note 5).
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 - INVESTMENTS
The Trust held two investments in government securities in 1995 that had an
8.5% coupon and matured on January 1, 1996. In 1996, the Trust sold and
subsequently purchased $20 million in government securities which resulted in
interest income, before
26
<PAGE>
financing costs, of approximately $251,000 and a $91,000 trading loss which is
included with interest expense. As of December 31, 1997, the Trust held four
investments in Government National Mortgage Association securities ("GNMA") and
10 investments in Federal Home Loan Mortgage Corporation ("FHLMC") pass-through
certificates aggregating $1.4 million and $9.6 million, respectively. The GNMAs
each have a coupon rate of 7.5%; three of the GNMAs mature in 2027 and the other
GNMA matures in 2026. The FHLMCs have coupon rates ranging from 5.5% to 6.5%
with maturity dates ranging from August 1998 to May 2003. In accordance with
Statement of Financial Accounting Standards No. 115 ("FASB 115") the Trust has
classified all GNMA and FHLMC investments as "available for sale" because they
are freely tradeable. As of December 31, 1997, the Trust recorded a current
unrealized loss of $162,000 from its GNMAs and FHLMCs which is reflected in the
shareholders' equity section of the balance sheet in accordance with FASB 115.
In addition, the Partnership invested approximately $0.1 million in various
other publicly traded REITs during the third quarter of 1997.
NOTE 4 - MORTGAGE NOTE RECEIVABLE
On September 26, 1996, the Trust became the sole general partner of the
Partnership by contributing $400,000 in cash, in exchange for 400,000 Operating
Partnership Units ("Units")(a 8.05% interest) in the Partnership. Mezzanine
contributed to the Partnership its entire interest in certain mortgage
participation certificates valued by the Trust at approximately $4.6 million as
of September 30, 1996, in exchange for 4,568,944 Units (a 91.95% interest) in
the Partnership. These Units were convertible into Class A Shares of the Trust
on a one-for-one basis, cash or a combination of both, at the option of the
Trust.
The Trust and the Partnership are considered to be entities under common
control and the consolidated operations of the Trust and the Partnership have
been accounted in accordance with generally accepted accounting principles
governing such entities. Consequently, the mortgage note contributed by
Starwood Mezzanine into the Partnership was reflected in the financial
statements at its predecessor basis of $3.76 million.
The mortgage participation certificates comprise the first mortgage note on the
Warwick Hotel, a 20-story hotel and apartment complex located in Philadelphia,
PA. The mortgage had a face value of $4.9 million and required monthly
payments of approximately $71,000, representing principal and interest at a rate
of 9% per annum. The note was originally issued with a face amount of $8.5
million on December 1, 1979 with the final payment due November 30, 2004.
Starwood Mezzanine acquired this note at a discount from face value in February
1995 and had been accounting for it under the effective interest method.
On October 1, 1997, the mortgage participation certificates had a basis of $3.5
million. They were repaid on this date for $4.5 million, which was reinvested
in government securities that matured in December 1997.
NOTE 5 - SHAREHOLDERS' EQUITY
The shares of the Trust are of two classes: Class A Shares (par value $1.00
per share) and Class B Shares (par value $.01 per share). There is no limit on
the number of either Class A or Class B Shares which the Trust is authorized to
issue. Class B Shares have been issued by the Trust in an amount equal to one-
half of the number of Class A Shares outstanding. Class A and Class B Shares are
each entitled to one vote per share with respect to the election of Trustees and
other matters. The Class B Shares are convertible at the option of the Class B
Shareholders into Class A Shares on the basis of 49 Class B Shares for one Class
A Share. All distributions of cash will be distributed 99% to the Class A
Shareholders and 1% to the Class B Shareholders.
In November 1993, the Trust was notified that SAHI, Inc. had acquired all of
the Trust's 1,275,000 outstanding Class B Shares. Subsequent to the acquisition
of the Class B Shares, SAHI Partners, ("SAHI") purchased the Class B Shares from
SAHI, Inc. and accumulated 244,100 Class A Shares or 9.57% of the total
outstanding Class A Shares of the Trust as of December 1996.
On March 15, 1994, the Trust announced that it had entered into an agreement
with SAHI and SAHI, Inc., for the sale of a warrant for the right to purchase
five million shares of the Trust's Class A Shares at a price of $1.00 per share
(the " Class A Warrant") and 2,500,000 shares of Class B Shares at a price of
$.01 per share (the "Class B Warrant"). SAHI and SAHI, Inc. purchased the
warrants for $101,000, which amount was applied against the purchase price for
the first Class A and Class B Shares purchased pursuant to the warrants. On
March 28, 1996, the Class A Warrants were assigned to Starwood Mezzanine.
On September 26, 1996, the Trust became sole general partner of the Partnership
by contributing $400,000 in cash, in exchange for a 8.05% interest in the
Partnership and 400,000 Units. Starwood Mezzanine became the 91.95% limited
partner by contributing to the Partnership its entire interest in the
participation certificates in the Warwick Hotel mortgage note valued by the
Trust at approximately $4.6 million as of September 30, 1996. Starwood
Mezzanine's interest in the Partnership is evidenced by 4,568,944 Units, which
were convertible into cash, Class A Shares or a combination of both pursuant an
exchange rights agreement. In addition, Starwood Mezzanine has the right to
require the Trust to register for public sale, any or all of the Class A Shares
in the Partnership issued to it upon the exercise of the Class A Warrant or upon
exchange of the Units issued to Starwood Mezzanine. As described in Note 8, the
Units were converted to Class A Shares in the first quarter of 1998.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 5,000,000 Class A Shares. After its exercise of the
Class A Warrant, Starwood Mezzanine beneficially owned 5,000,000 shares of Class
A Shares and
27
<PAGE>
4,568,944 Units. In addition, SAHI, Inc. exercised its rights under the
Class B Warrant to acquire 2,500,000 Class B Shares. After its exercise of the
Class B Warrant, SAHI Inc. beneficially owned 6,059,471 Shares of Class B Shares
and 244,100 shares of Class A Shares. Each share of Class A Shares and Class B
Shares is entitled to one vote per share. Upon exercise of the entire Class A
and Class B Warrants, SAHI, SAHI, Inc., and Starwood Mezzanine jointly own 70%
of the outstanding Class A Shares and, with the voting interest of the Class B
Shares, control 80% of the voting interest of the Trust. The Trust increased its
capital by $5,025,000, and funds from this capitalization were utilized to
purchase qualified short-term government securities.
As more fully discussed in Note 8, subsequent to year end a recapitalization
transaction was completed which significantly increased the Trust's equity.
NOTE 6 - INCENTIVE PLAN
On September 26, 1996, the shareholders approved an incentive plan for Trustees
and an incentive plan for employees. The Trustee plan provides for the issuance
of up to 50,000 stock options and the employee plan provides for the grant of up
to 377,500 shares in the form of stock options, share appreciation rights,
restricted shares, and deferred shares. On September 26, 1996, 2,000 options
were granted under the plan with an exercise price of $1.38 per share. On
October 24, 1997, additional options to purchase 6,000 Class A Shares at an
exercise price of $2.50 per share were granted. The options are fully vested.
NOTE 7 - INCOME TAXES:
Although originally formed to qualify as a REIT under the Code
for the purpose of making and acquiring various types of mortgage and other
loans, during 1993 through 1997, the Trust failed to qualify as a REIT. As
confirmed by a Closing Agreement with the Internal Revenue Service (the "IRS")
obtained in March, 1998, the Trust will be eligible to and intends to elect to
be taxed as a REIT for the tax year commencing on January 1, 1998. Because the
Trust had net losses for income tax purposes in 1993 through 1997, the Trust
does not owe any Federal income tax for such years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred income tax asset will not be realized. Given the limited nature of the
Trusts' operations and assets and liabilities from 1993 through 1997, the only
significant deferred tax assets are net operating loss carry forwards ("NOL's")
which arose during such periods. Since the Trust intends to elect to be treated
as a REIT for its tax year beginning January 1, 1998, it is anticipated that
such NOL's will expire unutilized. Accordingly, no net value, after
consideration of a 100% valuation allowance, has been reflected in these
financial statements as of December 31, 1997 and 1996.
NOTE 8 - SUBSEQUENT EVENTS:
Subsequent to year end, the Trust consummated certain transactions and entered
into agreements which significantly recapitalize and expand the capital
resources of the Trust as well as modify future operations including the
following:
RECAPITALIZATION TRANSACTIONS
As more fully discussed in Note 5, pursuant to a series of transactions
beginning in March 1994 and including the exercise of certain warrants in
January 1997, Starwood Mezzanine and certain entities affiliated with the
general partners of Starwood Mezzanine (collectively, Starwood Mezzanine,
Starwood Opportunity Fund IV, L.P. and other affiliates are referred to as
''Starwood'') acquired joint ownership of 70% and 100% of the outstanding Class
A Shares and Class B Shares of the Trust, respectively, through which they
controlled approximately 80% of the voting interests in the Trust as of December
31, 1997. Prior to the consummation of the Recapitalization Transactions
(defined below), Starwood Mezzanine also owned 4,568,944 Units which represented
the remaining 91.95% of the Partnership not held by the Trust, which were
convertible into either cash, an additional 4,568,944 Class A Shares of the
Trust, or a combination of the two, as determined by the Trust.
On March 18, 1998, each outstanding Unit held by Starwood Mezzanine was
exchanged for one Class A Share of the Trust and, concurrently, the Partnership
was liquidated through a distribution of its net assets to the Trust, its then
sole Partner.
Simultaneously, Starwood Mezzanine and Starwood Opportunity Fund IV, L.P.
(''SOF IV'') (an affiliate of the general partners of Starwood Mezzanine)
consummated the transactions contemplated by the contribution agreement
("Contribution Agreement") among Mezzanine, SOF IV and the Trust to
substantially recapitalize and increase the size of the Trust's assets and
operations. Pursuant to the Contribution Agreement, Starwood Mezzanine
contributed various real estate loan investments to the Trust in exchange for
55,148,000 Class A Shares and $25.5 million in cash, as adjusted. SOF IV
contributed real estate loans and investments, $17.9 million in cash and certain
letters of intent in exchange for 247,074,800 Class A Shares of the Trust and a
cash payment of $324.3 million. Concurrently, the holders of the Class B Shares
who are affiliates of the general partners of Starwood Mezzanine and SOF IV
acquired 153,395,872 additional Class B Shares sufficient to maintain existing
voting preferences pursuant to the Trust's Amended and Restated Declaration of
Trust (the ''Declaration of Trust''). Immediately after these transactions,
Starwood and its affiliates owned
28
<PAGE>
approximately 99.3% of the outstanding Class A shares of the Trust and 100% of
the Class B Shares. (Collectively, the transactions described in this note are
the ''Recapitalization Transactions'').
NEW CREDIT FACILITIES:
On March 18, 1998 the Trust entered into bank credit agreements under which
the Trust may currently borrow up to $625.0 million, with up to an additional
$175.0 million available, subject to certain conditions, to fund loan
originations (including the cash portion of the Recapitalization Transactions
described above) and provide working capital to fund new loan originations and
for other general corproate purposes. The credit agreement are comprised of a
i) a $500.0 million revolving credit facility which bears interest only
payable monthly at LIBOR plus 1.5% and with outstanding principal due at
maturity on March 13, 2001 and (ii) a $125.0 million Term Loan secured by the
properties under long term operating lease which bears interest only payable
monthly at LIBOR plus 1.5% and which matures on March 15, 1999. Availability of
amounts to borrow under the revolving credit facility is subject to having
sufficient assets includable as security under the line under a percentage
Borrowing Base calculation. An aggregate of $8.0 million in loan fees relating
to these arrangements were paid at closing of the Recapitalization Transactions.
These fees will be amortized over the related loan terms.
In anticipation of consummating these Financing transactions, effective on
March 16, 1998, the Trust entered into LIBOR interest rate caps at 9% in the
notional amounts of $125.0 million and $300.0 million expiring on March 16, 1999
and 2001, respectively, for an aggregate cost of $158,750.
MODIFICATION TO TRUST'S INVESTMENT POLICY
As approved by the shareholders of the Trust in March 1998, the purpose and
investment policy of the Trust is to acquire a diverse portfolio of debt and
debt-like interests in real estate or real estate related assets, including to
(i) originate mortgage loans and/or acquire mortgage loans or acquire securities
collateralized, in whole or in part, by mortgage loans, as well as make equity
investments in real estate and real estate-related assets, (ii) acquire direct
or indirect interests in short term, medium and long-term real estate-related
debt securities and mortgage interests, which may include warrants, equity
participations or similar rights incidental to a debt investment by the Trust,
(iii) make, hold and dispose of purchase money loans with respect to assets sold
by the Trust, and (iv) acquire positions in non-performing and sub-performing
debt for the purpose of either restructuring it as performing debt or, if such
efforts are unsuccessful, of obtaining shortly thereafter primary management
rights over or equity interests in the underlying assets securing such debt (the
"Diversified Portfolio").
The Trust is restricted from making certain types of investments as a result of
the restrictions and conflicts described below (the "Investment Restrictions").
These restrictions may limit the flexibility of the Trust in implementing its
investment policy. Specifically, without the amendment, termination or waiver
of provisions of certain non-competition agreements between Starwood Capital
Group, L.P. and Starwood Hotels & Resorts Trust, the Trust is prohibited from:
(i) making investments in loans collateralized by hotel assets where it is
anticipated that the underlying equity will be acquired by the debt holder
within one (1) year from the acquisition of such debt, (ii) acquiring equity
interests in hotels (other than acquisitions of warrants, equity participations
or similar rights incidental to a debt investment by the Trust or that are
acquired as a result of the exercise of remedies in respect of a loan in which
the Trust has an interest) or (iii) selling or contributing to or acquiring any
interests in Starwood Hotels & Resorts Trust, including debt positions or equity
interests obtained by the Trust under, pursuant to or by reason of the holding
of debt positions.
The Trust's authority with respect to the Diversified Portfolio includes the
power to acquire, hold, own, develop, redevelop, construct, improve, maintain,
operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey,
exchange and otherwise dispose of or deal with the Diversified Portfolio and the
Diversified Portfolio may be held by the Trust directly or indirectly. The
Diversified Portfolio may include controlling or non-controlling investments in
or relating to any general category of real estate assets, including without
limitation, hotel, office, mixed-use, retail, industrial, mini-storage and
residential improvements to land, excluding any investments prohibited by the
Investment Restrictions.
The Trust currently plans to originate and make investments in various types of
income producing commercial real estate and its investment program will
emphasize senior and junior commercial mortgage loans, including mezzanine
financing (i.e., capital representing the level between 65% and 90% of property
values), higher yielding senior mortgage loans, non-performing or sub-performing
loans and performing and non-performing subordinated interests ("Subordinated
Interests") in commercial mortgage-backed securities ("CMBS"). The Trust
anticipates that a majority of the investments to be held in its portfolio for
the long-term will be structured so that the Trust's investment is subordinate
to third party first mortgage debt but senior to the real estate
owner/operator's equity position.
<PAGE>
The investment and financing policies of the Trust and its policies with
respect to all other activities, including its growth, debt, capitalization,
dividends and operating policies, will be determined by the Board of Trustees.
Although the Board of Trustees has no present intention to do so, these policies
may be amended or revised at any time and from time to time at the discretion of
the Board of Trustees, without a vote of the Shareholders.
ADVISORY AGREEMENT
In connection with the Recapitalization Transactions, the Trust and Starwood
Financial Advisors, L.L.C. (the "Advisor") entered into an Advisory Agreement
pursuant to which the Advisor manages the investment affairs of the Trust,
subject to the Trust's purpose and investment policy, the Investment
Restrictions and the directives of the Board of Trustees. The services
provided by the Advisor include the following: identifying investment
opportunities for the Trust; advising the Trust with respect to and effecting
acquisitions and dispositions of the Trust's investments; monitoring, managing
and servicing the Trust's loan portfolio; and arranging debt financing for the
Trust. The Advisor will not act in a manner that is inconsistent with the
express direction of the Board of Trustees and reports to the Board of Trustees
and/or the officers of the Trust with respect to its activities.
Commencing on the 90th day after the consummation of the Recapitalization
Transactions, the Trust will pay to the Advisor a quarterly base management fee
of 0.3125% (1.25% per annum) of the "Book Equity Value" of the Trust (as defined
in the Advisory Agreement) determined as of the last day of each quarter, but
estimated and paid in advance subject to recomputation. Fees to be paid in 1998
will be recognized ratably during the period from March 18, 1998 through
December 31, 1998. As a result of the delayed commencement of the advisory fee,
the operating results of the Trust for fiscal 1998 will be higher than they
would have been if the advisory fee had not been deferred and therefore may not
be reflective of future operating results of the Trust.
In addition, commencing on the 90th day after the consummation of the
Recapitalization Transactions, the Trust will pay the Advisor a quarterly
incentive fee of five percent (5%) of the Trust's "Adjusted Net Income" (as
defined in the Advisory Agreement) during each quarter that the Adjusted Net
Income for such quarter restated and annualized as an annualized rate of return
on the Trust's Book Equity Value for such quarter equals or exceeds the
"Benchmark BB Rate" (as defined in the Advisory Agreement). The Advisor will be
also be reimbursed for certain expenses it incurs on behalf of the Trust.
The Advisory Agreement has an initial term of three years subject to automatic
renewal for one year periods unless the Trust has been liquidated or a
Termination Event (as defined in the Advisory Agreement and which generally
includes violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Trust as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) has occurred and is continuing. In addition, the
Advisor may terminate the Advisory Agreement on 60 days' notice to the Trust and
the Trust may terminate the Advisory Agreement upon 60 days' written notice if a
Termination Event has occurred or if the decision to terminate is based on
affirmative vote of the holders of two-thirds or more of the voting shares of
the Trust at the time outstanding.
1996 SHARE INCENTIVE PLAN
The Trust amended and restated its stock option plan to provide a means of
incentive compensation for officers, key employees, Trustees, consultants and
advisors. Stock options, restricted stock awards and other performance awards
may be granted under the Starwood Financial Trust 1996 Share Incentive Plan (the
''Plan''). Under the amended Plan, up to a maximum of 9.0% of the outstanding
Class A Shares on a fully-diluted basis, as adjusted for subsequent issuances of
Class A Shares, are reserved for issuance under the Plan. All grants of shares
under the Plan, other than automatic grants to non-employee Trustees, will be at
the sole discretion of the Board of Trustees or a specifically designated sub-
committee of such Trustees. Approximately 14,963,057 options to purchase Class A
Shares at $2.50 per share that are immediately exercisable were granted to the
Advisor under the Plan upon consummation of the Recapitalization Transactions
and future grants may be made to the Advisor or employees of the Trust in the
future.
30
<PAGE>
An independent financial advisory firm estimated the value of these options at
date of grant to be approximately $1.07 per share using a Black-Scholes
valuation model. In the absence of comparable historical market information for
the Trust, the advisory firm utilized assumptions consistent with activity of a
comparable peer group of companies including an estimated option life of five
years, a 35% volatility rate and an estimated dividend rate sufficient to
maintain the Trust's status as a REIT (i.e. 95% of taxable income). Options
issued to employees will be accounted for using the intrinsic method and,
accordingly, no earnings charge will be reflected for options issued to direct
employees since the exercise price approximates the concurrent exchange
transaction price at date of grant. Options issued to the Advisor will be
accounted for under the option value method and, accordingly, result in a charge
to earnings upon consummation of the Recapitalization Transactions equal to
the number of options allocated to the Advisor multiplied by the estimated value
at consummation. The charge of approximately $16.0 million will be reflected in
the Trust's first quarter 1998 financial results, however, such charge has been
excluded from the pro forma financial information presented in this note, as it
represents a non-recurring charge. Future charges may be taken to the extent of
additional option grants, which are at the discretion of the Board of Trustees.
The following summary pro forma information includes the effects of the
following transactions consummated in March, 1998: (i) Recapitalization
Transaction, (ii) exchange of each outstanding Unit held by holders other
than the Trust for one Class A Share, and (iii) liquidation and termination of
the Partnership (iv) the borrowings necessary to consummate the aforementioned
transactions. The pro forma balance sheet data is presented as if the
transactions had been completed on December 31, 1997 and the pro forma operating
data for the year ended December 31,1997 is presented as if the transactions had
been completed on January 1, 1997.
PRO FORMA
CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR NET INCOME PER CLASS A SHARE)
AS OF
DECEMBER 31, 1997
----------------------------
ASSETS:
Real estate investments $1,073,877
Cash and cash equivalents 9,198
Other assets 13,601
----------
$1,096,676
==========
Debt obligations $ 350,000
Other liabilities 2,119
Accounts accrued expenses and payable 2,351
----------
Shareholders equity 742,206
----------
$1,096,676
==========
31
<PAGE>
PRO FORMA
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR NET INCOME PER CLASS A SHARE)
FOR THE YEAR ENDED
DECEMBER 31, 1997
------------------
REVENUE:
Interest income $61,956
Prepayment and Participation Income 25,137
Rental income 15,311
Other 887
---------
103,291
---------
EXPENSES: 23,151
Interest expense 6,875
Depreciative 1,510
General and administrative 8,143
Advisory fee 2,117
---------
Other 41,796
---------
Pro forma net income $61,495
==========
Pro forma net income per Class A Share $ 0.20
==========
Weighted average number of Class A Shares Outstanding 314,342
==========
The pro forma financial information is not necessarily indicative of what the
actual financial position and results of operations of the Trust would have been
as of and for the periods indicated, nor does it purport to represent the future
financial position or results of operations for future periods
NOTE 9 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the selected quarterly financial data for
the Trust (in thousands except for per share amounts).
QUARTER ENDED
-------------------------------------
1997 12/31/97 9/30/97 6/30/97 3/31/97
- ---- -------- ------- ------- -------
Revenue $1,181 $246 $220 $240
Net income/(loss) $(14) $2 $5 $18
Net income/(loss) per Class A Share $0 $0 $0 $0.01
Weighted average Class A Shares outstanding 7,550 7,550 7,550 6,328
1996 12/31/96 9/30/96 6/30/96 3/31/96
- ---- -------- ------- ------- -------
Revenue $424 $35 $21 $8
Net loss $(75) $(246) $(59) $(197)
Net loss per Class A Share $(0.02) $(0.10) $(0.02) $(0.08)
Weighted average Class A Shares outstanding 2,550 2,550 2,550 2,550
32
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
33
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS
The current executive officers and Trustees of the Trust are listed
below, together with their ages and all Trust positions held by them:
<TABLE>
<CAPTION>
<S> <C> <C>
Barry S. Sternlicht 37 Trustee and Chairman
Jay Sugarman 35 Trustee, President, and Chief Executive Officer
Jeffrey G. Dishner(2) 33 Trustee
Jonathan D. Eilian 30 Trustee
Merrick R. Kleeman 34 Trustee
Robin Josephs(1)(2) 38 Trustee
William M. Matthes (1) 37 Trustee
Kneeland C. Youngblood (1)(2) 42 Trustee
Jerome C. Silvey 40 Chief Financial Officer and Secretary
</TABLE>
(1) Member of Compensation Committee
(2) Member of the Audit Committee
Mr. Barry S. Sternlicht became a Trustee of the Trust in March 1994 and was
elected Chairman and Chief Executive Officer in September 1996 and resigned as
Chief Executive Officer in November 1997. He is founder and General Manager of
Starwood Capital Group, L.L.C. (together with its predecessor entities "Starwood
Capital") and co-founder of its predecessor entities in 1991 and has been the
President and Chief Executive Officer of Starwood Capital Group, L. P. since its
formation in 1991. In addition, Mr. Sternlicht is currently the Chief Executive
Officer, Chairman of the Board of Trustees of Starwood Hotels & Resorts Trust,
Chairman of the Board of Directors of Starwood Hotels & Resorts Worldwide, Inc.,
a trustee of Equity Residential Properties Trust, a multi-family REIT and a
director of U.S. Franchise Systems. Mr. Sternlicht is on the Board of Governors
of NAREIT and is a member of the Urban Land Institute and of the National Multi-
Family Housing Council. Mr. Sternlicht is a member of the Board of Directors of
the Council for Christian and Jewish Understanding , is a member of the Young
Presidents Organization, and is on the Board of Directors of Junior Achievement
for Fairfield County, Connecticut. Mr. Sternlicht received a B.A. degree from
Brown University, where he was elected to Phi Beta Kappa, and an MBA with
distinction and honors from Harvard Business School in 1986.
Mr. Jay Sugarman became Chief Executive Officer of the Trust in November
1997 and President and Trustee of the Trust in September 1996. Mr. Sugarman is
Senior Managing Director of Starwood Capital and has been President of Starwood
Mezzanine since November 1994. From 1990 through 1993, Mr. Sugarman managed a
diversified, privately owned investment fund. Earlier in his career, Mr.
Sugarman worked at First Boston Corporation and Goldman, Sachs & Co. Mr.
Sugarman is a director of Commercial Guaranty Assurance, a financial insurance
company, and WCI Communities, Inc., a residential developer in South Florida.
Mr. Sugarman received a B.A. degree from Princeton University, where he
received the Paul Volker award in economics and was nominated for valedictorian,
and is a graduate of Harvard Business School, where he was a Baker Scholar.
Mr. Jeffrey G. Dishner was elected a Trustee in March 1998. Mr. Dishner
has been a Senior Vice President of Starwood Capital since September 1994. From
1993 through September 1994, Mr. Dishner was employed by the commercial mortgage
finance group of J.P. Morgan & Co. Mr. Dishner obtained his M.B.A. during 1991
and 1992 and was employed by JMB Realty Corporation from 1987 through 1991. Mr.
Dishner received a B.A. degree from the Wharton School of Finance at the
University of Pennsylvania and an M.B.A. from the Amos Tuck School at Dartmouth
College.
Mr. Jonathan D. Eilian was elected a Trustee in March 1997.
Mr. Eilian has been a Managing Director of Starwood Capital since its formation
in September, 1991. Prior to being a founding member of Starwood Capital, Mr.
Eilian served as an Associate for JMB Realty Corporation, a real estate
investment firm, and for The Palmer Group, L.P., a private investment firm
specializing in corporate acquisitions. Mr. Eilian received a BA and MBA from
Wharton School of Finance at the University of Pennsylvania.
Mr. Merrick R. Kleeman was elected a Trustee in March 1998. Mr. Kleeman is
a Managing Director of Starwood Capital. Prior to joining Starwood in August
1992, Mr. Kleeman was employed by the investment banking division of Merrill
Lynch and by Coastal Management and Consultant, Inc., a real estate investment
company. Mr. Kleeman received a B.A. degree in biology from Dartmouth College
and an M.B.A. from the Harvard Business School, where he was a Baker Scholar.
Ms. Robin Josephs was elected a Trustee in March 1998. Ms. Josephs
currently advises real estate ventures. Ms. Josephs served as a Vice President
at Goldman, Sachs & Co. from 1986 to 1996 in various capacities. Prior to
working at Goldman,Sachs & Co., Ms. Josephs served as an analyst for Booz Allen
& Hamilton in New York from 1982 to 1984. Ms. Josephs received a B.A. degree
from the Wharton School at the University of Pennsylvania and an M.B.A.
from Columbia University.
Mr. William M. Matthes was elected a Trustee in March 1988. Since April
1996, Mr. Matthes has been a partner of Behrman Capital, a New York and San
34
<PAGE>
Francisco based private equity investment fund with in excess of $600 million of
equity capital under management. From July 1994 to April 1996, Mr. Matthes was
employed as Senior Vice President and Chief Operating Officer of Holsted
Marketing, Inc., a credit card based direct marketing company. Mr. Matthes was a
general partner of Brentwood Associates, a private equity investment firm, from
1986 to July 1994 and previously was employed as an analyst at Morgan Stanley &
Co., Inc. Mr. Matthes is a director of Condor Systems, Inc., Behrman TMNG, Inc.,
Holsted Marketing, Inc. and Holsted, Inc.
Mr. Kneeland C. Youngblood was elected a Trustee in March 1998. Mr.
Youngblood is a Director of the United States Enrichment Corporation, an
independently run, government-owned nuclear fuel corporation scheduled for
privatization in 1998. He is also a fiduciary trustee for the $65 billion
Teacher Retirement System of Texas ("TRS"), in which capacity he has
responsibility for hiring investment advisors, determining asset allocations and
formulating investment/benefit policies. As Chairman of the fund's Real Estate
Committee, he has directed a major restructuring of the TRS portfolio, which has
assets of $1.4 billion, and is responsible for considering and approving
significant transactions within the portfolio. Mr. Youngblood is a Director of
AMR Investments, a $15 billion investment fund and a division of American
Airlines. He is currently involved in private investment and consulting and is
a member of the Council on Foreign Relations.
Mr. Jerome C. Silvey was elected as Chief Financial Officer of the Trust in
September 1996 and Secretary of the Trust in March 1998. Mr. Silvey has been a
Senior Vice President and the Chief Financial Officer of Starwood Capital since
August 1993, after 13 years at Price Waterhouse LLP. Mr. Silvey has overall
responsibilities for Starwood Capital's administration, MIS and finance. He
is a certified public accountant and President of the Board of Directors of the
Stamford Museum. Mr. Silvey is a graduate of Colgate University and received his
M.B.A. from Rutgers Graduate School of Management in 1980.
INFORMATION REGARDING THE BOARD OF TRUSTEES AND ITS COMMITTEES
AUDIT AND COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION.
The Board of Trustees has delegated a portion of its authority to a three-member
Audit Committee and a three-member Compensation Committee. The Audit Committee
makes recommendations to the Board of Trustees concerning the selection of the
Trust's independent auditors, oversees the financial reporting process, develops
and approves plans for the annual duties of the Trust, reviews fees charged by
the independent auditors, reviews the scope and results of the auditors' reports
and reviews and monitors the implementation of suggestions made by the
independent auditors. The Audit Committee is kept apprised by management of the
Trust's internal control procedures. The Audit Committee also reviews and
monitors non-audit services provided by the independent auditors. The
Compensation Committee oversees, reviews and approves the compensation of the
Trustees and officers of the Trust. The Compensation Committee's
responsibilities also include the administration of the Trust's incentive plans.
Messrs. Dishner and Youngblood and Ms. Josephs currently serve on the Audit
Committee with Mr. Youngblood serving as Chairman. Messrs. Matthes and
Youngblood and Ms. Josephs currently serve on the Compensation Committee with
Ms. Josephs serving as Chairman.
ITEM 11. EXECUTIVE COMPENSATION
REMUNERATION OF TRUSTEES. Each Trustee who is not also an officer of the
Trust or of Starwood, receives a fee of $20,000 per year, which is paid
quarterly. Each of the unaffiliated Trustees also receives an additional fee of
$1,000 for each meeting of the Board of Trustees which he or she attends in
person, $750 for each meeting of the Board of Trustees which he or she attends
telephonically, and $500 for each Audit or Compensation Committee meeting which
he or she attends, either personally or telephonically. Trustees are also
reimbursed for any expenses incurred in attending such meetings or incurred as a
result of other work performed for the Trust.
Prior to the Recapitalization Transaction, as of the date of each Annual
Meeting of Shareholders at which a Trustee was reelected, each Trustee of the
Trust who is not also an officer or employee of the Trust or an affiliate (a
"Non-employee Trustee") and who was elected on September 26, 1996, received an
option to purchase 1,000 Class A Shares pursuant to the the Trust 1996 Trustees'
Share Incentive Plan (the "Trustees Plan"). A Non-Employee Trustee who is
appointed or elected after September 26, 1996 received an Option to purchase
1,000 Class A Shares as of the date of his or her initial appointment or
election, and receives an Option to purchase and additional 1,000 Class A Shares
on each anniversary of the initial grant date provided that the individual is a
Non-Employee Trustee on such date. The purchase price of each Class A Share
under the Option was the fair market value of a Class A Share on the date of
grant, and such Options are fully vested and immediately exercisable. The
Trustee Plan provided that Options expire on the earlier of (i) ten years after
the grant date, (ii) the first anniversary of the Non-Employee Trustee's
termination of service because of death or disability, (iii) three months after
the Non-Employee Trustee's termination of service because of death, disability,
or cause, and (iv) the date that the Non-Employee Trustee's service on the Board
voluntarily terminates or is terminated. Fair Market Value means the closing
price per share for each Class A Share on the relevant date, as reported by the
American Stock Exchange. During 1997, there were three Trustees participating
in the Trustee's Plan. Options to purchase 2,000 Class A Shares were granted
on September 26, 1996 with an exercise price of $1.38 per share. An additional
6,000 options to purchase Class A Shares were granted on October 24, 1997 with
an exercise price of $2.50 per share.
The Trustees Plan and the Trust's 1996 Share Incentive Plan were amended
and restated in to a new incentive plan (the "Incentive Plan") on March 13,
1998. The Incentive Plan provides an automatic grant of options to purchase
Class A Shares to Non-Employee Trustees. Generally, under the Incentive Plan
each individual who is first elected or continuing as a Non-Employee Trustee as
of the close of the Annual Meeting of Shareholders will receive an option to
purchase 10,000 Class A Shares. Each individual who is first elected or
appointed as a Non-Employee Trustee on a date other than the date of an Annual
Meeting of Shareholders, shall be granted an option to purchase 10,000 Class A
Shares, reduced to reflect the portion of the period elapsed since the last
grant to Trustee.
35
<PAGE>
The exercise price of the shares subject to the option shall be the fair market
value of a Class A Share on the grant date. Such options shall be fully
vested and expire ten years after the grant date, without regard to whether the
Trustee ceases to be a member of the Board of Trustees prior to such date.
EXECUTIVE OFFICERS' COMPENSATION. For the year ended December 31, 1997,
neither Mr. Sternlicht nor Mr. Sugarman received compensation for their services
as Chief Executive Officer of the Trust or for serving on the Board of Trustees
for the same period. No other executive officer of the Trust received
compensation from the Trust during the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual All Other
Compensation Compensation (1)
------------ -----------------------
Name and Principal Position Year Salary
- ---------------------------- ---- ------
<S> <C> <C> <C>
Jay Sugarman, Chief Executive Officer (2) 1997 $0 $0
1996 $0 $0
1995 $0 $0
Barry S. Sternlicht, Chief Executive Officer (2) 1997 $0 $0
1996 $0 $ 9,000
1995 $0 $12,000
</TABLE>
(1) Represents Trustee Fees
(2) Mr. Sternlicht resigned as Chief Executive Officer in November 1997. Mr.
Sugarman was elected Chief Executive Officer of the Trust in November 1997 and
received no compensation from the Trust in 1995, 1996 or 1997.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 18, 1998 with
respect to any Class A Shares owned by Trustees and individual shareholders
known to be the beneficial owner of more than 5% of the issued and outstanding
voting securities of the Trust. There are no other Trustees or executive
officers of the Trust who beneficially own either Class A or Class B Shares.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS
- ----------------------- ------------------------------------------------------- ------------- ---------------
<S> <C> <C> <C>
Class A Shares Starwood Mezzanine Investors, L.P., Three Pickwick Plaza, 64,716,944 20.6
Suite 250, Greenwich, CT 06830
Class A Shares Starwood Mezzanine Holdings, L.P., Three Pickwick Plaza, 64,716,944 (2) 20.6
Suite 250, Greenwich, CT 06830
Class A Shares Starwood Capital Group I, L.P., Three Pickwick Plaza, Suite 68,077,197 (3) 21.4
250, Greenwich, CT 06830
Class A Shares BSS Capital Partners, L.P., Three Pickwick Plaza, Suite 250, 68,077,197 (4) 21.4
Greenwich, CT 06830
Class A Shares Sternlicht Holdings II, Inc., Three Pickwick Plaza, Suite 68,077,197 (5) 21.4
250, Greenwich, CT 06830
Class A Shares Starwood Financial Advisors, L.L.C., Three Pickwick Plaza, 14,963,057 (6) 4.5
Suite 250, Greenwich, CT 06830
Class A Shares SOFI-IV SMT Holdings, L.L.C., Three Pickwick Plaza, Suite 247,074,800 78.6
250, Greenwich, CT 06830
Class A Shares Starwood Opportunity Fund IV, L.P., Three Pickwick Plaza, 247,074,800 (7) 78.6
Suite 250, Greenwich, CT 06830
Class A Shares SOFI IV Management, L.L.C., Three Pickwick Plaza, Suite 250, 247,074,800 (8) 78.6
Greenwich, CT 06830
Class A Shares Starwood Capital Group, L.L.C., Three Pickwick Plaza, Suite 265,398,110 (9) 79.8
250, Greenwich, CT 06830
Class A Shares B Holdings, L.L.C., Three Pickwick Plaza, Suite 250, 3,360,252 (10) 1.1
Greenwich, CT 06830
Class A Shares SAHI Partners, Three Pickwick Plaza, Suite 250, 244,100
Greenwich, CT 06830
Class A Shares SAHI, Inc., Three Pickwick Plaza, Suite 250, 244,100 (11)
Greenwich, CT 06830
Class A Shares Barry Sternlicht, Three Pickwick Plaza, Suite 250, Greenwich, 330,359,154 (12) 99.3
CT 06830
Class A Shares Robin Josephs, c/o Starwood Capital Group, L.L.C., Three 15,000 (13)
Pickwick Plaza, Suite 250, Greenwich, CT 06830
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS
- ----------------------- ------------------------------------------------------- ------------- ---------------
<S> <C> <C> <C>
Class A Shares William Matthes, c/o Starwood Capital Group, L.L.C., Three 10,000 (13)
Pickwick Plaza, Suite 250, Greenwich, CT 06830
Class A Shares Kneeland C. Youngblood, c/o Starwood Capital Group, L.L.C., 10,000 (13)
Three Pickwick Plaza, Suite 250, Greenwich, CT 06830
Class B. Shares B Holdings, L.L.C., Three Pickwick Plaza, Suite 250, 164,652,401 (14) 100.0
Greenwich, CT 06830
Class B Shares Starwood Opportunity Fund II, L.P., Three Pickwick Plaza, 164,652,401 (15) 100.0
Suite 250, Greenwich, CT 06830
Class B Shares Starwood Capital Group I, L.P., Three Pickwick Plaza, Suite 164,652,401 (16) 100.0
250, Greenwich, CT 06830
Class B Shares BSS Capital Partners, L.P., Three Pickwick Plaza, Suite 250, 164,652,401 (17) 100.0
Greenwich, CT 06830
Class B Shares Sternlicht Holdings, II, Inc., Three Pickwick Plaza, Suite 164,652,401 (18) 100.0
250, Greenwich, CT 06830
Class B Shares Starwood Capital Group, L.L.C., Three Pickwick Plaza, Suite 164,652,401 (19) 100.0
250, Greenwich, CT 06830
Class B Shares Barry Sternlicht, Three Pickwick Plaza, Suite 250, Greenwich, 164,652,401 (20) 100.0
CT 06830
Class A Shares All Executive Officers and Trustees as a group (9 persons) 330,394,154 (21) 99.3
Class B Shares All Executive Officers and Trustees as a group (9 persons) 164,652,401 (22) 100.0
</TABLE>
____________________________
(1) Except as otherwise indicated and subject to applicable community property
laws and similar statutes, the person listed as beneficial owner of shares
has sole voting power and dispositive power with respect to the shares.
(2) Starwood Mezzanine Holdings, L.P. ("Starwood Holdings") is a general
partner of Mezzanine.
(3) Starwood Capital Group I, L.P., is (a) a general partner of Mezzanine, (b)
the general partner of Starwood Holdings, which is the other general
partner of Mezzanine, and (c) the general partner of Starwood Opportunity
Fund II, L.P. (SOFI II"), which is a member of B Holdings, L.L.C. ("BLLC").
BLLC beneficially owns 3,207,569 Class A Shares issuable upon conversion of
157,170,872 Class B Shares and 52,684 Class A Shares issuable upon
conversion of 7,481,529 Class B Shares issuable upon the exercise of
options for 14,693,057 Class A Shares.
(4) BSS Capital Partners, L.P. is the general partner of Starwood Capital Group
I, L.P., which is (a) a general partner of Mezzanine, (b) the general
partner of Starwood Holdings, which is the other general partner of
Mezzanine, and (c) the general partner of SOFI II, which is a member of
BLLC.
(5) Sternlicht Holdings II, Inc. is the general partner of BSS Capital
Partners, L.P., which is the general partner of Capital Group I,
L.P., which is (a) a general partner of Mezzanine, (b) the general
partner of Starwood Holdings, which is the other general partner of
Mezzanine, and (c) the general partner of SOFI II, which is a
member of BLLC.
(6) Includes 14,963,057 Class A Shares issuable upon exercise of outstanding
options.
(7) SOF IV is the sole member and manager of SOFI-IV SMT Holdings, L.L.C.
("SMT").
(8) SOF IV Management, L.L.C. is the general partner of SOF-IV, which is the
sole member and manager of SMT.
(9) Starwood Capital Group, L.L.C. is (a) the general manager of the
Advisor, (b) the general manager of BLLC, and (c ) the
general manager of SOFI IV Management, L.L.C., which is the general partner
of SOF IV, which is the sole member and general manager of SMT. The
Advisor beneficially owns 14,963,057 Class A Shares issuable upon exercise
of options.
(10) Respresnts 3,207,569 Class A Shares issuable upon conversion of 157,170,872
Class B Shares and 52,684 Class A Shares issuable upon conversion of
7,481,529 Class B Shares issuable upon the exercise of options to purchase
14,693,057 Class A Shares.
(11) SAHI, Inc. is a general partner of SAHI Partners.
38
<PAGE>
(12) Represents 68,077,197 Class A Shares beneficially owned by Sternlicht
Holdings II, Inc., of which Mr. Sternlicht is a 100% owner, 244,100
Class A Shares beneficially owned by SAHI, Inc., of which Mr. Sternlicht
is a controlling shareholder, and 265,398,100 Class A Shares
beneficially owned by Starwood Capital Group, L.L.C., of which Mr.
Sternlicht is the general manager.
(13) Includes 10,000 Class A Shares issuable upon the exercise of outstanding
options. Ms. Josephs, Mr. Matthes and Mr. Youngblood each owns less than
0.1% of the Class A Shares.
(14) Includes 7,481,528 Class B Shares issuable upon exercise of options to
purchase 14,963,057 Class A Shares held by the Advisor.
(15) Starwood Opportunity Fund II is a member of BLLC.
(16) Starwood Capital Group I, L.P. is the general partner of SOFI II, which
is a member of BLLC.
(17) BSS Capital Partners, L.P. is the general partner of Starwood Capital
Group I, L.P., which is the general partner of SOFI II, which is a
member of BLLC.
(18) Sternlicht Holdings II, Inc. is the general partner of BSS Capital
Partners, L.P., which is the general partner of Starwood Capital Group
I, L.P., which is the general partner of Starwood Capital Group I, L.P.,
which is the general partner of SOFI II, which is a member of BLLC.
(19) Starwood Capital Group, L.L.C. is a general manager of BLLC.
(20) Barry Sternlicht is the general manager of Starwood Capital Group,
L.L.C., which a general manager of BLLC.
(21) Represents 330,359,154 Class A Shares beneficially owned by Barry S.
Sternlicht, 15,000 Class A Shares beneficially owned by Robin Josephs,
10,000 Class A Shares beneficially owned by William Matthes, and 10,000
Class A Shares beneficially owned by William Matthes, and 10,000 Class A
Shares beneficially owned by Kneeland Youngblood.
(22) Represents 164,652,401 Class A Shares beneficially owned by Barry S.
Sternlicht.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 22, 1997, Mezzanine exercised its rights under the Warrant to
acquire 5,000,000 Class A Shares. Each of the Starwood Trustees and Officers has
a direct and/or indirect interest in each of Mezzanine, SOFI II, SOF IV and the
Advisor. In addition, upon consummation of the Recapitalization Transaction and
conversion of the Units, Mezzanine owned 20.59 % of the outstanding Class A
Shares and SOF IV owned 78.6% of the outstanding Class A Shares.
On March 18, 1998, the Trust, Mezzanine and SOF IV consummated the
Recapitalization Transactions, the Trust and the Advisor entered into the
Advisory Agreement, Mezzanine's Units in the Partnership were exchanged for
Class A Shares and the Advisor was granted immediately exercisable options to
purchase 14, 963,057 Class A Shares for $2.50 per share. See "Recapitalization
Transaction" and "Advisory Agreement." These transactions had been approved by
the shareholders of the Trust at the March 13, 1998 Shareholder Meeting. The
Recapitalization Transactions, the Advisory Agreement and the grant of options
to the Advisor were approved by the members of the Board of Trustees who are
unaffiliated with Mezzanine, SOF IV and the Advisor.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements filed as part of this 10-K and
herein included.
Page No.
--------
Consolidated Balance Sheets at December 31, 1997 and 1996 22
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1997 23
Consolidated Statements of Changes in Shareholders'
Equity for each of the three years in the period
ended December 31, 1997 24
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1997 25
Notes to Consolidated Financial Statements 26
(b) A report on Form 8-K was filed during the last quarter of the year
ending December 31, 1997 as follows: -
On December 19, 1997 a report on Form 8-K was filed to
indicate a change in independent accountants.
On April 2, 1998 a report on Form 8-K was filed in
connection with the Recapitalization Transactions.
(c) Exhibits required by Item 601 of Regulation S-K: -
Refer to Exhibit Index on page 41 of this report.
(d) Supplemental schedules required by Regulation S-X are omitted
because they are not applicable or because the required
information is shown in the financial statements. -
40
<PAGE>
STARWOOD FINANICAL TRUST
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3.1 Amended and Restated Declaration of Trust of Starwood Financial
Trust.
10.1 Amended and Restated Registration Rights Agreement dated
March 18, 1998 among Starwood Financial Trust and Starwood
Mezzanine Investors, L.P, SAHI Partners and SOFI-IV SMT
Holdings, L.L.C.
10.2 Starwood Financial Trust 1996 Share Incentive Plan.
10.3 Contribution Agreement dated as of February 11, 1998, between
Starwood Financial Trust, Starwood Mezzanine Investors, L.P. and
Starwood Opportunity Fund IV, L.P.
10.4 Second Amended and Restated Shareholder's Agreement dated March
18, 1998 among B Holdings, L.L.C. SAHI Partners, Starwood
Mezzanine Investors, L.P., SOFI- IV SMT Holdings, L.L.C., and
Starwood Financial Trust.
10.5 Investment Advisory Agreement dated as of March 18, 1998 between
Starwood Financial Trust and Starwood Financial Advisors, L.L.C.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Trust has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STARWOOD FINANCIAL TRUST
------------------------
Registrant
Date April 2, 1998 /s/ Jay Sugarman
------------------
Jay Sugarman
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the Trust and
in the capacities and on the dates indicated.
Date April 2, 1998 /s/ Barry S. Sternlicht
------------------------
Barry S. Sternlicht
Trustee and Chairman of Board of Trustees
Date April 2, 1998 /s/ Jay Sugarman
-----------------
Jay Sugarman
Trustee, President and Chief Executive Officer
Date April 2, 1998 /s/ Jeffrey G. Dishner
----------------------
Jeffrey G. Dishner
Trustee
Date April 2, 1998 /s/ Jonathan D. Eilian
------------------------
Jonathan D. Eilian
Trustee
Date April 2, 1998 /s/ Merrick R. Kleeman
-------------------------
Merrick R. Kleeman
Trustee
Date April 2, 1998 /s/ Robin Josephs
-------------------
Robin Josephs
Trustee
Date April 2, 1998 /s/ William M. Matthes
---------------------------
William M. Matthes
Trustee
Date April 2, 1998 /s/ Kneeland C. Youngblood
---------------------------
Kneeland C. Youngblood
Trustee
Date April 2, 1998 /s/ Jerome C. Silvey
---------------------
Jerome C. Silvey
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
42
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED DECLARATION OF TRUST
OF
STARWOOD FINANCIAL TRUST
<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
Table of Contents
Section Page
- ------- ----
ARTICLE I
The Trust; Definitions
1.1 Name............................................................6
1.2 Places of Business..............................................6
1.3 Nature of Trust.................................................6
1.4 Purposes........................................................6
1.5 Definitions.....................................................7
ARTICLE II
Trustees
2.1 Number, Terms of Office, Qualifications of Trustees............11
2.2 Compensation and Other Remuneration............................11
2.3 Resignation, Removal and Death of Trustees.....................11
2.4 Vacancies......................................................12
2.5 Successor and Additional Trustees..............................12
2.6 Actions by Trustees and Executive Committee; Quorum............12
ARTICLE III
Trustees' Powers
3.1 Power and Authority of Trustees................................13
3.2 Specific Powers and Authorities................................13
3.3 Trustees' Regulations..........................................18
ARTICLE IV
Advisor
4.1 Employment of Advisor..........................................18
4.2 Term...........................................................18
4.3 Independence of Trustees and Members of Executive Committee....18
4.4 Other Activities of Advisor....................................19
4.5 Limitation on Operating Expenses...............................19
-2-
<PAGE>
ARTICLE V
Investment Policy
5.1 General Statement of Policy....................................20
5.2 Other Permissible Investments..................................20
5.3 Prohibited Investments and Activities..........................20
5.4 Obligor's Default..............................................21
ARTICLE VI
The Shares and Shareholders
6.1 Shares.........................................................21
6.2 Voting Rights..................................................22
6.3 Legal Ownership of Trust Estate................................23
6.4 Shares Deemed Personal Property................................23
6.5 Share Record; Issuance and Transferability of Shares...........23
6.6 Dividends or Distributions to Shareholders.....................24
6.7 Transfer Agent, Dividend Disbursing Agent, and Registrar.......25
6.8 Shareholders' Meeting..........................................25
6.9 Proxies........................................................26
6.10 Reports to Shareholders........................................26
6.11 Fixing Record Dates............................................26
6.12 Notice to Shareholders.........................................26
6.13 Restriction on Transfer, Acquisition and Redemption of Shares..26
6.14 Conversion Rights..............................................26
ARTICLE VII
Liability of Trustees, Shareholders, and
Officers, and Other Matters
7.1 Exculpation of Shareholders, Trustees and Officers.............28
7.2 Express Exculpatory Clauses in Instruments.....................28
7.3 Liability and Indemnification of Trustees......................28
7.4 Rights of Trustees and Officers to Own Shares
or Other Property and to Engage in Other
Business.......................................................29
7.5 Transactions Between the Trust and Certain Affiliates..........30
7.6 Restriction of Duties and Liabilities..........................30
7.7 Persons Dealing with Trustees or Officers......................30
7.8 Reliance.......................................................31
7.9 Trust Only.....................................................31
-3-
<PAGE>
ARTICLE VIII
Duration, Termination, Amendment,
and Qualification of Trust
8.1 Duration of Trust..............................................31
8.2 Termination of Trust...........................................32
8.3 Amendment Procedure............................................32
8.4 Qualification Under the REIT Provisions of the Code............33
ARTICLE IX
Miscellaneous
9.1 Applicable Law.................................................33
9.2 Index and Headings for Reference Only; Gender..................33
9.3 Successors in Interest.........................................33
9.4 Inspections of Records.........................................33
9.5 Counterparts...................................................33
9.6 Correction of Provisions of Declaration........................33
9.7 Certifications.................................................34
9.8 Recording and Filing...........................................34
ARTICLE X
Restriction on Transfer, Acquisition
and Redemption of Shares
10.1 Definitions....................................................34
10.2 Ownership Limitation...........................................36
10.3 Excess Shares..................................................37
10.4 Prevention of Transfer.........................................38
10.5 Notice to Trust................................................38
10.6 Information for Trust..........................................38
10.7 Other Action by Board of Trustees..............................39
10.8 Ambiguities....................................................39
10.9 Modification of Existing Holder Limits.........................39
10.10 Increase or Decrease in Ownership Limit........................39
10.11 Limitations on Changes in Existing Holder and Ownership Limits.39
10.12 Waivers by Board of Trustees...................................40
10.13 Legend.........................................................41
10.14 Severability...................................................41
10.15 Trust for Excess Shares........................................41
-4-
<PAGE>
10.16 Distributions on Excess Shares.................................41
10.17 Voting of Excess Shares........................................41
10.18 Non-Transferability of Excess Shares...........................42
10.19 Call by Trust on Excess Shares.................................42
10.20 Underwritten Offerings.........................................42
-5-
<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
STARWOOD FINANCIAL TRUST
This AMENDED AND RESTATED DECLARATION OF TRUST originally made and entered
into as of the 15th day of April, 1988, as restated as of the 18th day of July,
1988, as further restated as of the 26th day of September 1996 and as further
amended and restated as of the 13th day of March 1998, by the Persons whose
names appear at the end of this Declaration of Trust, as Trustees of Starwood
Financial Trust (formerly known as Angeles Participating Mortgage Trust).
The Trustees do hereby form a trust and do hereby agree to hold in trust as
Trustees any and all property, real, personal, or otherwise, tangible and
intangible, which is transferred, conveyed, or paid to the Trust or to them as
Trustees and all rents, income, profits, and gains therefrom for the benefit of
the Shareholders hereunder subject to the terms and conditions and for the uses
and purposes hereinafter set forth.
ARTICLE I
THE TRUST; DEFINITIONS
1.1 Name. The name of the Trust shall be "Starwood Financial Trust." As far
----
as is practicable and subject to the requirements of a license agreement between
the Trust and Starwood Capital Group, L.L.C. and except as is otherwise provided
in this Declaration, the Trustees shall conduct the Trust's activities, execute
all documents, sue or be sued, and take all actions they deem appropriate in the
name of Starwood Financial Trust.
1.2 Places of Business. The principal office of the Trust shall be at Three
------------------
Pickwick Plaza, Suite 250, Greenwich, Connecticut, 06830. The Trustees,
however, may from time to time change such location and maintain other offices
or places of business.
1.3 Nature of Trust. The Trust is a business trust organized under the laws
---------------
of the State of California, and it is intended that the Trust shall qualify as a
real estate investment trust within the meaning of the Code. The Trust is not
intended to be, shall not be deemed to be, and shall not be treated as a general
partnership, limited partnership, joint stock company, or association (but
nothing herein shall preclude the Trust from being taxable as an association
under the REIT Provisions of the Code), nor shall the Trustees or Shareholders
or any of them for any purpose be, or be deemed to be treated in any way
whatsoever to be, liable or responsible hereunder as partners or joint
venturers. The relationship of the Shareholders to the Trust shall be solely
that of beneficiaries of the Trust and their rights shall be limited to those
expressly conferred upon them by this Declaration.
1.4 Purposes. The primary purposes of the Trust are to acquire a
--------
diversified portfolio of debt and/or debt like interests in real estate and/or
real estate related assets, including (i) originating mortgage loans and/or
acquiring mortgage loans or acquiring securities collateralized, in whole or in
part, by such mortgage loans, as well as making equity investments in real
estate and real estate-related assets, (ii) acquiring direct or indirect
interests in short term, medium and long-term real estate-related debt
securities and mortgage interests, which may include warrants, equity
participations or similar rights incidental to a
-6-
<PAGE>
debt investment by the Trust, (iii) making, holding and disposing of purchase
money loans with respect to assets sold by the Trust, and (iv) acquiring
positions in non-performing and sub-performing debt for the purpose of either
restructuring it as performing debt or if such efforts are unsuccessful, of
obtaining shortly thereafter primary management rights over or equity interests
in the underlying assets securing such debt (the "Diversified Portfolio"). The
Trust's authority with respect to the Diversified Portfolio includes the power
to acquire, hold, own, develop, redevelop, construct, improve, maintain,
operate, manage, sell, lease, rent, transfer, encumber, mortgage, convey,
exchange and otherwise dispose of all or part of the Diversified Portfolio and
the Diversified Portfolio may be held by the Trust directly or indirectly.
Without the amendment, termination or waiver of provisions of certain non-
competition agreements between Starwood Capital Group, L.P. and Starwood Hotels
& Resorts Trust, a publicly traded hotel real estate investment trust the shares
of which are paired and trade with those of Starwood Hotels & Resorts Worldwide,
Inc., the Trust is prohibited from: (i) making investments in loans
collateralized by hotel assets where it is anticipated that the underlying
equity will be acquired by the debt holder within one (1) year from the
acquisition of such debt, (ii) acquiring equity interests in hotels (other than
acquisitions of warrants, equity participations or similar rights incidental to
a debt investment by the Trust or that are acquired as a result of the exercise
of remedies in respect of a loan in which the Trust has an interest) or (iii)
selling or contributing to or acquiring any interests in Starwood Hotels &
Resorts Trust, including debt positions or equity interests obtained by the
Trust under, pursuant to or by reason of the holding of debt positions.
1.5 Definitions. The following terms shall, whenever used in this
-----------
Declaration, unless the context otherwise requires, have the meanings specified
in this Section 1.5. The singular shall refer to the plural, and the masculine
gender shall be deemed to refer to the feminine and neuter, and vice versa, as
the context requires.
(a) "Advisor" means the Person to whom, pursuant to the Advisory
-------
Agreement, the Trustees delegate certain control and management of the Trust and
its assets as provided in Section 4.1.
(b) "Advisory Agreement" means the advisory agreement between the Trust
------------------
and the Advisor as described in Section 4.2.
(c) "Affiliate" means with respect to the Advisor, a Shareholder, or
---------
Trustee (i) any Person directly or indirectly owning, controlling, or holding,
with power to vote, 5% or more of the outstanding voting securities of the
Advisor or such Shareholder, (ii) any Person 5% or more of whose outstanding
voting securities are directly or indirectly owned, controlled, or held, with
power to vote, by the Advisor, such Trustee, or such Shareholder, and (iii) any
officer, director, or partner of the Advisor or such Shareholder.
(d) "Borrower" means those affiliated or unaffiliated Persons which are
--------
the recipients of Trust Loans, guarantees, letters of credit, or other financing
arrangements.
(e) "Capital Contributions" means the gross amount invested in the
---------------------
Trust by the Shareholder. Reference to a "Capital Contribution" means the gross
amount contributed by a respective Shareholder.
-7-
<PAGE>
(f) "Class A Shareholders" means, at any particular time, those Persons
--------------------
who are shown as the holders of record of all Class A Shares on the records of
the Trust at such time.
(g) "Class B Shareholders" means, at any particular time, those Persons
--------------------
who are shown as the holders of record of all Class B Shares on the records of
the Trust at such time.
(h) "Class A Shares" means the designated shares of beneficial interest
--------------
of the Trust as described in Section 6.1.
(i) "Class B Shares" means the designated shares of beneficial interest
--------------
of the Trust as described in Section 6.1.
(j) "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time, including successor statutes thereto.
(k) "Declaration" means this Declaration of Trust and all amendments
-----------
and modifications thereof. References in this Declaration to "herein" and
"hereunder" shall be deemed to refer to this Declaration and shall not be
limited to the particular text, article, or section in which such words appear.
(l) "Disposition" means any Trust transaction not in the ordinary
-----------
course of its business, including, without limitation, principal repayments, all
participation in the cash flow, income, or appreciation in value of property
securing Trust Loan payments, prepayments, sales, or other dispositions of any
Trust Loans held by the Trust and analogous transactions involving any other
assets held by the Trust.
(m) "Distributable Net Proceeds" means the portion of the proceeds from
--------------------------
a Disposition so defined in Section 6.6.
(n) "Gross Proceeds" means the aggregate total of the original Capital
--------------
Contribution of all of the Shareholders.
(o) "Mortgages" means mortgages, deeds of trust, or other security
---------
instruments on real property or rights or interests in real property or entities
owning or controlling real property.
(p) "Net Cash" means, for a period, the interest earned on investments
--------
and deposits made by the Trust and operating revenues of the Trust received
during such period, plus cash proceeds from Dispositions, plus reserves set
aside during prior periods pursuant to clause (iii) below which are no longer
necessary as reserves, less (i) all Operating Expenses (other than any expenses
previously reserved against pursuant to (iii) below) of the Trust paid during
such period, plus all fees and reimbursements payable to the Trustees, the
Advisor, including all incentive fees and compensation, and their Affiliates,
(ii) all payments made during such period to discharge Trust indebtedness, (iii)
all amounts established as reserves during such period, (iv) all amounts
expended during such period for the replacement or preservation of Trust assets,
or any part thereof, to the extent not previously reserved, and (v) all amounts
reinvested in new Trust Loans and other investments.
(q) "Non-Distributable Net Proceeds" means the portion of the proceeds
------------------------------
from a Disposition so defined in Section 6.6.
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(r) "Offering" means the initial public offering of 5,000,000 Class A
--------
Shares.
(s) "Operating Expenses" means the aggregate annual expenses of the
------------------
Trust of every character regarded as operating expenses in accordance with
generally accepted accounting principles, as determined by independent
accountants selected by the Trustees, exclusive of: Organization and Offering
Expenses; interest and discounts and other costs of borrowed money; taxes on
income and real property and all other taxes and assessments applicable to the
Trust and its operations; legal, auditing, underwriting, brokerage, transfer
agent's, registrar's, and indenture trustee's fees and other such fees, whether
paid to Affiliates of the Advisor or independent Persons; fees and expenses paid
to independent contractors, independent advisors, mortgage bankers, brokers, and
services, real property managers, leasing agents, consultants, on-site managers,
real estate brokers, insurance agents and brokers, other brokers and agents, and
all personnel employed by the Trust or on its behalf (including all compensation
and reimbursements of expenses, payable to the Advisor by the Trust under any
Advisory Agreement with the Trust referred to in Article IV hereof and
compensation payable to Affiliates of the Advisor) employed by or on behalf of
the Trust; costs of insurance (including Trustee's liability insurance), whether
paid to Affiliates of the Advisor or independent Persons; expenses of organizing
and terminating the Trust; all expenses connected with distributions and
communications to holders of Securities of the Trust and the other bookkeeping
and clerical work necessary in maintaining relations with holder of Securities,
including the cost of printing and mailing checks, certificates for Securities,
proxy solicitation materials, and reports to such holders; all expenses
connected with the acquisition, disposition, and ownership of Trust Loans, and
all other investments by the Trust, including the costs of appraisal, legal
services, brokerage and sales commissions, processing and foreclosure expenses,
expenses for the maintenance, repair, and improvements of Trust assets, property
management fees and expenses for day-to-day management of Trust assets, whether
paid to Affiliates of the Advisor or other Persons; realized losses (exceeding
provisions therefor) on Dispositions; and all provisions for depletion,
depreciation, amortization, and losses.
(t) "Organization and Offering Expenses" means those expenses incurred
----------------------------------
in connection with the formation and registration of the Trust and in qualifying
and marketing the Shares or other Securities under applicable federal and state
law, and any other expenses actually incurred and directly related to the
qualification, registration, offer, and sale of the Shares or other Securities,
including such expenses as: (i) selling commissions; (ii) all marketing
expenses and payment made to broker-dealers as compensation or reimbursement for
all costs of reviewing the offerings, including due diligence investigations and
fees or expenses of their attorneys, accountants, and other experts; (iii)
registration fees, filing fees, and taxes; (iv) the costs of printing, amending,
supplementing, and distributing the registration statements and Prospectuses;
(v) the costs of obtaining regulatory clearances of, printing, and distributing
sales materials used in connection with the offer and sale of the Shares or
other Securities; (vi) compensation of officers and employees of the Advisor and
its Affiliates while directly engaged in organizing and forming the Trust and in
qualifying, registering, and marketing the Shares or other Securities under
applicable federal and state law; (vii) reimbursements to the Selling Agent,
selected broker-dealers, the Advisor, and its Affiliates for special marketing
and incentive programs sponsored by those entities; (viii) the costs related to
investor and broker-dealer sales meetings; (ix) accounting and legal fees
incurred in connection with any of the foregoing; and (x) a non-accountable
expense allowance equal to 1% of the Gross Proceeds payable to the Selling
Agent.
(u) "Person" means any individual, partnership, corporation,
------
association, trust, or other entity.
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(v) "Prospectus" means the final prospectus, as filed with the
----------
Securities and Exchange Commission, relating to the offering of up to 5,000,000
Class A Shares by the Trust, including all supplements and amendments thereto,
and any subsequent prospectus, including all supplements and amendments thereto,
relating to subsequent securities offering by the Trust.
(w) "REIT Provisions of the Code" means Part II, Subchapter M of Chapter
---------------------------
1 of Subtitle A of the Code, as now enacted or hereafter amended, including
successor statutes and regulations promulgated thereunder.
(x) "Securities" means common and preferred stock in a corporation,
----------
shares of beneficial interest in a trust or other unincorporated association,
general partner interests in a general partnership, interests in a joint
venture, general or limited partnership interests in a limited partnership,
membership interests or non-member manager interests in a limited liability
company, notes, debentures, bonds, and other evidences of indebtedness,
including Mortgages, whether secured or unsecured, and includes any options,
warrants, and rights to subscribe to or convert into any of the foregoing.
(y) "Selling Agent" means Angeles Securities Corporation.
-------------
(z) "Shareholders" means, at any particular time, the Class A
------------
Shareholders, the Class B Shareholders, and all other holders of record of
outstanding Shares on the records of the Trust at such time.
(aa) "Shares" means the Class A Shares, the Class B Shares, and all
------
other shares of beneficial interest of the Trust issued as provided herein.
(bb) "Trust" means the trust created by this Declaration.
-----
(cc) "Trustees" means, as of any particular time, the Persons holding
--------
such office under this Declaration at such time, whether they be the Trustees
named herein or additional or successor Trustees, but shall not include the
officers, representatives, or agents of the Trust or the Shareholders, although
nothing herein shall be deemed to preclude the Trustees from also serving as
officers, representatives, or agents of the Trust or from owning Shares.
(dd) "Trustees' Regulations" means the regulations provided for in
---------------------
Section 3.3.
(ee) "Trust Estate" means, as of any particular time, any and all
------------
property, real, personal, or otherwise, tangible or intangible, which is held,
transferred, conveyed, or paid to the Trust or the Trustees on behalf of the
Trust and all rents, income, profits, and gains therefrom.
(ff) "Trust Loans" means the notes, debentures, bonds, and other
-----------
evidences of indebtedness or obligations acquired or entered into by the Trust
which are secured or collateralized by personal property or fee or leasehold
interests in real estate or other assets, including, but not limited to, first
mortgage loans, junior mortgage loans, construction loans, development loans,
equipment loans, loans secured by general or limited partnership interests,
capital stock, or any other assets or form of equity interest or guarantee of
the Borrower, and any other type of loan or financial arrangement, such as
providing or arranging for letters of credit, providing guarantees of
obligations to third parties, or providing commitments for Trust Loans.
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ARTICLE II
TRUSTEES
2.1 Number, Terms of Office, Qualifications of Trustees. The initial number
---------------------------------------------------
of Trustees shall be seven, but such number may be changed from time to time by
a vote of the majority of Trustees then in office or by Shareholders voting in
the manner set forth in Section 6.2(e), provided that the number of Trustees so
--------------
fixed shall not be less than seven nor more than 15. The initial Trustees shall
be the signatories hereto. Subject to the provisions of Section 2.3, each
-----------
Trustee shall hold office until the expiration of his term and until the
election and qualification of his successor. The Trustees shall be divided into
two classes of approximate equal size, which classes are hereby designated Class
I and Class II. The term of office of the initial Class I Trustees shall expire
at the 1998 Annual Meeting of Shareholders; and the term of office of the
initial Class II Trustees shall expire at the 1999 Annual Meeting of
Shareholders. For the purposes hereof, the initial Class I and Class II
Trustees shall be those Trustees so designated and elected at the 1997 Annual
Meeting of Shareholders scheduled to be held in March 1998.
At each Annual Meeting of Shareholders after the 1997 Annual Meeting of
Shareholders, Trustees to replace those of the class whose terms expire at such
Annual Meeting of Shareholders shall be elected to hold office until the second
succeeding annual meeting and until their respective successors shall have been
duly elected and qualified.
Trustees may be re-elected indefinitely. A Trustee shall be an individual at
least 21 years of age who is not under legal disability. Such individual shall
qualify as a Trustee when he has either signed this Declaration or agreed in
writing to be bound by it. Unless otherwise required by law, no Trustee shall
be required to give bond, surety, or security in any jurisdiction for the
performance of any duties or obligations hereunder. The Trustees in their
capacity as trustees shall not be required to devote their entire time to the
business and affairs of the Trust, and it is understood that all or some of the
Trustees may be involved in, and/or shareholders, officers, directors,
representatives, agents, partners, or beneficiaries of, businesses and ventures
which may be in direct competition with the Trust.
2.2 Compensation and Other Remuneration. The Trustees shall be entitled to
-----------------------------------
receive such reasonable compensation for their services as Trustees as they may
determine from time to time. The Trustees, either directly or indirectly, shall
also be entitled to receive remuneration for services rendered to the Trust in
any other capacity. Such services may include, without limitation, services as
an officer of the Trust, legal, accounting, or other professional services, or
services as a broker, transfer agent, or underwriter, whether performed by a
Trustee or an Affiliate of a Trustee.
2.3 Resignation, Removal and Death of Trustees. A Trustee may resign at any
------------------------------------------
time by giving written notice in recordable form to the remaining Trustees at
the principal office of the Trust. Such resignation shall take effect on the
date such notice is given or at any later time specified in the notice without
need for prior accounting. A Trustee may be removed for cause at a special
meeting of the Shareholders voting in the manner set forth in Section 6.2, or
-----------
with cause by all remaining Trustees. "Cause" for purposes of this Section 2.3
-----------
shall mean a Trustee's willful violations of this Declaration or the Trustees'
Regulations which violations are materially against the interests of the
Shareholders or gross negligence in the performance of his duties.
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<PAGE>
Upon the resignation or removal of any Trustee, or his otherwise ceasing to
be a Trustee, he shall execute and deliver such documents as the remaining
Trustees shall require for the conveyance of any Trust property held in his
name, shall account to the remaining Trustee or Trustees as they require for all
property which he holds as Trustee, and shall thereupon be discharged as
Trustee. Upon the incapacity or death of any Trustee, his legal representative
shall perform the acts set forth in the preceding sentence, and the discharge
mentioned therein shall run to such legal representative and to the
incapacitated Trustee or the estate of the deceased Trustee as the case may be.
2.4 Vacancies. If any or all of the Trustees ceased to be Trustees
---------
hereunder, whether by reason of resignation, removal, incapacity, death, or
otherwise, such event shall not terminate the Trust or affect its continuity.
Until vacancies are filled, the remaining Trustee or Trustees (even though less
than seven) may exercise the powers of the Trustees hereunder. Vacancies
(including vacancies created by increases in number) may be filled by the
remaining Trustee or by vote of a majority of the remaining Trustees or by the
Shareholders voting in the manner set forth in Section 6.2(a). Any Trustee so
--------------
elected by the remaining Trustees or the Shareholders shall hold office until
his successor is elected and qualified or until his earlier death, resignation,
retirement, disqualification or removal from office. Newly created trusteeships
or decrease in trusteeships shall be so apportioned among the classes so as to
make all classes as nearly equal in number as is practicable. Any additional
Trustee of any class elected to fill a vacancy resulting from any increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of Trustees
shorten the term of any incumbent Trustee. If at any time there shall be no
Trustees in office, successor Trustees shall be elected by the Shareholders as
provided in Section 6.2(a).
--------------
2.5 Successor and Additional Trustees. The right, title, and interest of
---------------------------------
the Trustees in and to the Trust Estate shall also vest in successor and
additional Trustees upon their acceptance of the office, and they shall
thereupon have all the rights and obligations of Trustees hereunder. Such
right, title, and interest shall vest in the Trustees whether or not
conveyancing documents have been executed and delivered pursuant to Section 2.3
or otherwise.
2.6 Actions by Trustees and Executive Committee; Quorum. A quorum for all
---------------------------------------------------
meetings of the Trustees shall be a majority of the Trustees. Unless
specifically provided otherwise in this Declaration, any action of the Trustees
may be taken at a meeting by a vote of a majority of the Trustees. Any
agreement, deed, mortgage, lease, or other instrument or writing executed by one
or more of the Trustees or by any authorized Person shall be valid and binding
upon the Trustees and upon the Trust; provided that such action is pursuant to
authorization of a majority of the Trustees given either at a meeting or in
writing or as provided in the Trustees' Regulations.
The Trustees may appoint a committee (the "Executive Committee") with
authority to exercise the powers of the Trustees and consisting of five or more
of the Trustees. Unless specifically provided otherwise in this Declaration,
any action of the Executive Committee may be taken at a meeting by vote of a
majority of the members of the Committee. A quorum for all meetings of the
Executive Committee shall be a majority of the members thereof. With respect to
the actions of the Trustees and the Executive Committee, Trustees who are
Affiliates of the Advisor may be counted for all quorum purposes.
Unless otherwise specifically provided in this Declaration, any action
required or permitted to be taken at any meeting of the Trustees or of the
Executive Committee may be taken without a meeting if all of the Trustees or
members of the Executive Committee, as the case may be, consent thereto in
writing.
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<PAGE>
Trustees or members of the Executive Committee may participate in a meeting of
the Trustees or the Executive Committee, as the case may be, by means of
conference telephone or similar communications equipment by which all
individuals participating in the meeting can hear each other, and participation
in such meeting pursuant to this paragraph shall constitute presence in person
at such meeting for all purposes of this Declaration.
ARTICLE III
TRUSTEES' POWERS
3.1 Power and Authority of Trustees. The Trustees, subject only to the
-------------------------------
specific limitations contained in this Declaration, shall have, without further
or other authorization, and free from any power or control on the part of the
Shareholders, full, absolute, and exclusive power, control, and authority (a)
over the Trust Estate and over the business and affairs of the Trust to the same
extent as if the Trustees were the sole owners thereof in their own right, and
(b) to do all such acts and things as in their sole judgment and discretion are
necessary or incidental to, or desirable for the carrying out of, any of the
purposes of the Trust or conducting the business of the Trust. Notwithstanding
anything to the contrary in this Declaration, the Trustees shall have continuing
exclusive authority over the management of the Trust, the conduct of its affairs
and the management and disposition of Trust property, all in accordance with the
REIT Provisions of the Code. Any determination made in good faith by the
Trustees of the purposes of the Trust or the existence of any power or authority
hereunder shall be conclusive as to the Trust and its Shareholders. In
construing the provisions of this Declaration, presumption shall be in favor of
the grant of powers and authority to the Trustees. The enumeration of any
specific power or authority herein shall not be construed as limiting the
general powers or authority or any other specified power or authority conferred
herein upon the Trustees.
3.2 Specific Powers and Authorities. Subject only to the express
-------------------------------
limitations contained in this Declaration and in addition to any powers and
authorities conferred by this Declaration or which the Trustees may have by
virtue of any present or future statute or rule or law, the Trustees without any
action or consent by the Shareholders shall have and may exercise at any time
and from time to time the following powers and authorities which may be
exercised by them in their sole judgment and discretion and in such manner and
upon such terms and conditions as they may from time to time deem appropriate:
(a) To retain, invest, and reinvest the capital or other funds of the
Trust in Trust Loans and real or personal property investments of any kind, and
to purchase, invest in, or otherwise acquire for cash or other property or
through the issuance of Shares or other Securities, Trust Loans and fee,
leasehold, or other participating interests in property, real, personal, or
mixed, tangible or intangible, including notes, bonds, or other obligations, all
for such consideration as they deem appropriate and without regard to whether
any such property is authorized by law for the investment of trust funds. In
connection with any such investment, purchase, or acquisition, the Trustees
shall have the power to acquire a share of rents, lease payments, or other
gross income from, or a share of the profits from, or a share in the equity or
ownership of the security for such Trust Loans; to invest in Trust Loans secured
by the pledge or transfer of Mortgages, other assets, and/or contractual
obligations; to develop, operate, pool, unitize, grant production payments out
of or lease or otherwise dispose of mineral, oil and gas properties, and rights.
(b) To possess and exercise all the rights, powers, and privileges
appertaining to the ownership of the Trust Estate and to increase the capital of
the Trust at any time by the issuance of
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<PAGE>
additional Shares or other Securities, in all cases for such consideration and
upon such terms as they deem appropriate.
(c) To sell, rent, lease, hire, exchange, release, partition, assign,
mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate,
convey, transfer, or otherwise dispose of any and all of the Trust Estate by
deeds, trust deeds, assignments, bills of sale, transfers, leases, Mortgages,
financing statements, security agreements, and other instruments for any of such
purposes executed and delivered for and on behalf of the Trust or the Trustees
by one or more of the Trustees or by a duly authorized officer, employee, agent,
or any nominee of the Trust.
(d) To issue Shares or other Securities which may be subordinated to any
indebtedness of the Trust and may be convertible into Shares, including
Preferred Shares in series, and by amending this Declaration of Trust, which
amendment shall not require the vote of shareholders to the extent such
amendment establishes a class or series of Shares or Securities and/or the terms
and preferences thereof, to establish from time to time the number of Shares to
be included in each such series, and to fix the designation, powers, preferences
and rights of the Shares of each such series and the qualifications, limitations
or restrictions thereof, all without vote of or other action by the Shareholders
to such Persons for such cash, property, or other consideration (including
securities issued or created by, or interests in any Person) at such time or
times and on such terms as the Trustees may deem advisable and to list any of
the Securities issued by the Trust on any securities exchange and to purchase or
otherwise acquire, hold, cancel, reissue, sell, and transfer any of the
Securities. The authority of the Board of Trustees with respect to any new
Shares or Securities shall include, but not be limited to, determination of the
following:
(i) The number of Shares or Securities constituting that series
and the distinctive designation of that series;
(ii) The rate of dividend, and whether (and if so, on what terms and
conditions) dividends shall be cumulative (and if so, whether unpaid dividends
shall compound or accrue interest) or shall be payable in preference or in any
other relation to the dividends payable on any other class or classes of Shares
or any other series of Shares or Securities;
(iii) Whether that series shall have voting rights in addition to the
voting rights provided by law and, if so, the terms and extent of such voting
rights;
(iv) Whether the Shares or Securities must or may be redeemed and,
if so, the terms and conditions of such redemption (including, without
limitation, the dates upon or after which they must or may be redeemed and the
price or prices at which they must or may be redeemed, which price or prices may
be different in different circumstances or at different redemption dates);
(v) Whether the Shares shall be issued with the privilege of
conversion or exchange and, if so, the terms and conditions of such conversion
or exchange (including without limitation the price or prices or the rate or
rates of conversion or exchange or any terms for adjustment thereof);
(vi) The amounts, if any, payable upon the Shares in the event of
voluntary liquidation, dissolution or winding up of the Trust in preference of
Shares of any other class or series and whether the Shares shall be entitled to
participate generally in distributions under such circumstances;
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<PAGE>
(vii) The amounts, if any, payable under the Shares thereof in
the event of involuntary liquidation, dissolution or winding up of the Trust in
preference of shares of any other class or series and whether the Shares shall
be entitled to participate generally in distributions under such circumstances;
(viii) Sinking fund provisions, if any, for the redemption or
purchase of the Shares (the term "sinking fund" being understood to include any
similar fund, however designated); and
(ix) Any other relative rights, preferences, limitations and
powers of that series.
(e) To enter into leases, contracts, obligations, easement agreements,
party wall agreements, boundary line agreements, loan commitments of every kind,
nature, and description, guarantees, financing arrangements and participations,
and other agreements, any one of which may be for a term extending beyond the
term of office of the Trustees and beyond the possible termination of the Trust
or for a lesser term.
(f) To borrow money and give negotiable or non-negotiable instruments
therefor; to guarantee, indemnify, or act as surety with respect to payment or
performance of obligations of third parties; to enter into other obligations on
behalf of the Trust and to assign, convey, transfer, mortgage, subordinate,
pledge, grant security interests in, encumber, or hypothecate the Trust Estate
to secure any of the foregoing.
(g) To lend money, whether secured or unsecured, pursuant to Trust Loans
or otherwise.
(h) To create reserve funds for any purpose.
(i) To incur and pay out of the Trust Estate any charges or expenses,
and disburse any funds of the Trust, which charges, expenses, or disbursements
are, in the opinion of the Trustees, necessary or incidental to or desirable for
the carrying out of any of the purposes of the Trust or conducting the business
of the Trust, including, without limitation, all Organization and Offering
Expenses, Operating Expenses, payments, reimbursements, and compensation to the
Trustees, the Advisor, and their Affiliates, taxes and other governmental
levies, charges, and assessments, of whatever kind or nature, imposed upon or
against the Trustees in connection with the Trust or the Trust Estate or upon or
against the Trust Estate or any part thereof, and for any of the purposes
herein.
(j) To deposit funds of the Trust in banks, trust companies, savings and
loan associations, and other depositories, whether or not such deposits will
draw interest, the same to be subject to withdrawal on such terms, in such
manner, and by such Person or Persons (including any one or more Trustees,
officers, agents, representatives, or the Advisor) as the Trustees may
determine.
(k) To posses and exercise all the rights, powers, and privileges
appertaining to the ownership of all or any Mortgages or Securities, issued or
created by, or interests in, any Person, forming part of the Trust Estate, to
the extent that an individual might, and, without limiting the generality of the
foregoing, to vote or give any consent, request, or notice, or waive any notice,
either in person or by proxy or power of attorney, with or without power of
substitution, to one or more Persons, which proxies and powers of attorney may
be for meetings or action generally or for any particular meeting or action and
may include the exercise of discretionary powers.
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<PAGE>
(l) To cause to be organized or assist in organizing any Person under
the laws of any jurisdiction to acquire the Trust Estate or any part or parts
thereof or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, rent, lease, hire, convey, negotiate,
assign, exchange, or transfer the Trust Estate or any part or parts thereof to
or with any such Person in exchange for the Securities thereof or otherwise, and
to lend money to, subscribe for the Securities of, and enter into any contracts
with, any such Person the Securities or any other interest of which the Trust
holds or is about to acquire.
(m) To enter into joint ventures, general or limited partnerships, and
any other lawful combinations or associations.
(n) To elect one of themselves as Managing Trustee or Chairman of the
Board of Trustees and to elect, appoint, engage, or employ other officers for
the Trust (including a Secretary, Treasurer, and such Vice Presidents and other
officers as the Trustees may determine), who may be removed or discharged at the
discretion of the Trustees, such officers to have such powers and duties, and to
serve such terms, as may be prescribed by the Trustees or by the Trustees'
Regulations; to engage or employ any Persons (including, subject to the
provisions of Sections 7.4 and 7.5, any Trustee, officer, or employee of the
Trust or any Affiliate of any of such Trustee, officer, or employee of the
Trust) as agents, representatives, or employees (including, without limitation,
real estate advisors, investment advisors, transfer agents, registrars,
underwriters, accountants, attorneys at law, real estate agents, managers,
appraisers, brokers, architects, engineers, construction managers, general
contractors, or otherwise) in one or more capacities, and to pay compensation
from the Trust for services in as many capacities as such Persons may be so
engaged or employed; and, except as prohibited by law, to delegate any of the
powers and duties of the Trustees to any one or more Trustees, agents,
representatives, officers, employees, independent contractors, the Advisor, or
other Persons.
(o) To determine whether monies, Securities, or other assets received by
the Trust shall be charged or credited to income or capital or allocated between
income and capital, including the power to amortize or fail to amortize any part
or all of any premium or discount, to treat any part or all of the profit
resulting from the maturity or sale of any asset whether purchased at a premium
or at a discount, as income or capital, or apportion the same between income and
capital, to apportion the sales price of any asset between income and capital,
and to determine in what manner any expenses or disbursements are to be borne as
between income and capital, whether or not in the absence of the power and
authority conferred by this subsection such moneys, Securities, or other assets
would be regarded as income or as capital or such expense or disbursement would
be charged to income or to capital; to treat any dividend or other distribution
on any investment as income or capital or apportion the same between income and
capital; to provide or fail to provide reserves for depreciation, amortization,
or obsolescence in respect of all or any part of the Trust Estate subject to
depreciation, depletion, amortization, or obsolescence in such amounts and by
such methods as they shall determine; and to determine the method or form in
which the accounts and records of the Trust shall be kept and to change from
time to time such method or form.
(p) To determine from time to time, the value of all or any part of the
Trust Estate and of any services, Securities, Trust Loans, property, or other
consideration to be furnished to or acquired by the Trust, and from time to time
to revalue all or any part of the Trust Estate in accordance with such
appraisals or other information as are, in the Trustees' sole judgment,
necessary and/or satisfactory.
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<PAGE>
(q) To collect, sue for, and receive all sums of money coming due to the
Trust, and to engage in, intervene in, prosecute, join, defend, compound,
compromise, abandon, or adjust, by arbitration or otherwise, any actions, suits,
proceedings, disputes, claims, controversies, demands, or other litigation
relating to the Trust, the Trust Estate, or the Trust's affairs, to enter into
agreements therefor, whether or not any suit is commenced or claim accrued or
asserted and, in advance of any controversy, to enter into agreements regarding
arbitration, adjudication, or settlement thereof.
(r) To renew, modify, release, compromise, extend, consolidate, or
cancel, in whole or in part, any obligation to or of the Trust.
(s) To purchase and pay for out of the Trust Estate insurance contracts
and policies insuring the Trust Estate against any and all risks and insuring
the Trust and/or any or all of the Trustees, the Shareholders, or officers
against any and all claims and liabilities of every nature asserted by any
Person arising by reason of any action alleged to have been taken or omitted by
the Trust or by the Trustees, Shareholders, or officers, regardless of whether
such insurance contracts and policies are provided by Persons affiliated with
the Advisor or the Trustees.
(t) To cause legal title to any of the Trust Estate to be held by and/or
in the name of the Trustees, and/or, except as prohibited by law, in the name of
the Trust or one or more of the Trustees or any other Person, on such terms, in
such manner, and with such powers in such Person as the Trustees may determine,
and with or without disclosure that the Trust or Trustees are interested
therein.
(u) To adopt a fiscal year for the Trust, and from time to time change
such fiscal year.
(v) To adopt and use a seal (but, the use of a seal shall not be
required for the execution of instruments or obligations of the Trust).
(w) To help ensure that (i) the objectives of the Trust (including the
objectives of providing Shareholders with a pass-through investment vehicle, as
well as minimizing unrelated business taxable income for tax-exempt
Shareholders) will not be defeated by future legislation or other action, (ii)
the Trust will not be deemed to hold assets of an employee benefit plan ("Plan
Assets") for purposes of the Employee Retirement Income Security Act of 1974
("ERISA"), and (iii) the transactions contemplated hereunder will not constitute
prohibited transactions under ERISA or the Code. In order to accomplish the
foregoing, the Trustees and the Advisor have the right (upon notice to all
Shareholders but without the need to obtain the consent of any Shareholder) to
take any actions including (1) restructuring the Trust's activities and, if
deemed necessary by the Trustees and the Advisor, converting the Trust to
another type of entity (including a partnership), (2) restructuring the Trust's
activities to the extent necessary to comply with any exemption in Plan Asset
legislation or the Plan Asset regulations adopted by the Department of Labor
from time to time, including establishing a fixed percentage of Shares permitted
to be held by employee benefit plans or other tax-exempt entities, or
discontinuing sales of Securities to such investors after a given date as
necessary to obtain a prohibited transaction exemption from the Department of
Labor to comply with any exemption in the Plan Asset legislation or Plan Asset
regulations, and/or (3) terminating the Offering or any subsequent offering, or
compelling a dissolution and termination of the Trust.
(x) To do all other such acts and things as are incident to the
foregoing and to exercise all powers which are necessary or useful to carry on
the business of the Trust, to promote any of the purposes for which the Trust is
formed, and to carry out the provisions of this Declaration.
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3.3 Trustees' Regulations. The Trustees may make, adopt, amend, or repeal
---------------------
regulations (the "Trustees' Regulations") containing provisions relating to the
business of the Trust, the conduct of its affairs, its rights or powers, and the
rights or powers of its Shareholders, Trustees, or officers not inconsistent
with law or with this Declaration.
ARTICLE IV
ADVISOR
4.1 Employment of Advisor. The Trustees are responsible for the general
---------------------
policies of the Trust and for such general supervision of the business of the
Trust conducted by all officers, agents, employees, advisors, managers, or
independent contractors of the Trust as may be necessary to insure that such
business conforms to the provisions of this Declaration. However, the Trustees
are not and shall not be required personally to conduct the business of the
Trust and, consistent with their ultimate responsibility as stated above, the
Trustees shall have the power to appoint, employ, or contract with any Person
(including one or more of themselves, or any Affiliate of any of them) as the
Trustees may deem necessary or proper for the transaction of the business of the
Trust. The Trustees may therefore employ or contract with such Person (herein
referred to as the "Advisor"), and the Trustees may grant or delegate such
authority to the Advisor as the Trustees may in their sole discretion deem
necessary or desirable, without regard to whether such authority is normally
granted or delegated by Trustees.
The Trustees shall have the power to determine the terms and compensation of
the Advisor or any other Person whom they may employ or with whom they may
contract. The Trustees may exercise broad or other discretion in allowing the
Advisor to administer and regulate the operations of the Trust, to act as agent
for the Trust, to execute documents on behalf of the Trustees, and to make
executive decisions which conform to general policies and general principles
previously established by the Trustees.
4.2 Term. The Trustees shall enter into a contract with the Advisor
----
("Advisory Agreement") which shall provide for an initial term of three years
and for the automatic annual extension thereafter. The Advisory Agreement may
be terminated, without penalty upon no less than 60 days' written notice of the
Advisor or by vote of a majority of the Trustees upon a Termination Event (as
defined in the Advisory Agreement) or by Shareholders voting as set forth in
Section 6.2.
4.3 Independence of Trustees and Members of Executive Committee. A minimum
-----------------------------------------------------------
of the greater of (i) 33% of the total number of Trustees and (ii) three (3)
members of the Executive Committee and the Board of Trustees shall be Persons
who are not Affiliates of the Advisor or Starwood Capital Group, L.L.C.;
provided, however, that if at any time the number of Trustees or members of the
Executive Committee who are not Affiliates of such Person becomes less than the
minimum number set forth above, whether because of the death, resignation,
removal, or change in affiliation of one or more Trustees or members of the
Executive Committee or otherwise, then such requirement shall not be applicable
for a period of 90 days of such event occurring, during which period the
continuing Trustees or Trustee then in office shall appoint, pursuant to Section
2.4, a sufficient number of other individuals as Trustees or as members of the
Executive Committee so that again a minimum of the greater of (i) 33% of the
total number of Trustees and (ii) three (3) members of the Board of Trustees and
the Executive Committee then in office are not Affiliates of such Person. The
Trustees shall at all times endeavor to comply with the requirement of this
Section 4.3 as to independence, but failure so to comply with such requirement
shall not affect the validity or effectiveness of any action of the Trustees or
of the Executive Committee.
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4.4 Other Activities of Advisor. The Advisor shall not be required to
---------------------------
administer the Trust as its sole and exclusive function and may have other
business interests and may engage in other activities in addition to those
relating to the Trust which may be in direct competition with the Trust,
including acting as a real estate or loan broker, acting as a general partner or
manager, and rendering of advice or services of any kind to any other Person
(including, but not limited to, Affiliates of the Advisor). The Trustees may
request the Advisor and/or its Affiliates to engage in certain other activities
relating to the Trust's investments, including property management, contracting
for the construction of improvements, and the placement or brokerage of real
property, equity investments in real property, Mortgages, or other financing
arrangements; and the Advisor and/or its Affiliates may act as broker or provide
services requested by sellers, mortgagors, prospective sellers, or prospective
mortgagors to the Trust and may receive brokerage commissions and other
compensation from such sellers, mortgagors, prospective sellers, and prospective
mortgagors in addition to compensation paid to the Advisor by the Trust.
The Advisor shall be required to use its best efforts to present a continuing
and suitable investment program to the Trust which is consistent with the
investment policies and objectives of the Trust, but neither the Advisor nor any
Affiliate of the Advisor shall be obligated to present any particular investment
opportunity to the Trust even if such opportunity is of a character which, if
presented to the Trust, could be taken by the Trust, and subject to the
foregoing, each of them shall have the right to take for its own account or to
recommend to others any such particular investment opportunity. The Advisor
shall act on a basis which is fair and reasonable to the Trust and the
Shareholders in selecting from among the various investment opportunities that
come to the Advisor those investment opportunities which it presents to and
approves on behalf of the Trust. So long as there is an Advisor or other Person
performing similar functions, the Trustees shall have no responsibility to
originate investment opportunities for the Trust.
4.5 Limitation on Operating Expenses. The Operating Expenses of the Trust
--------------------------------
for any full fiscal year shall not (except as set forth herein) exceed an amount
equal to the greater of (a) 2% of the average net assets of the Trust Estate for
such year or (b) 25% of the Trust's net income for such year, determined in
accordance with generally accepted accounting principles, before deducting any
non-accountable expense allowances, regular and incentive advisory fees,
administrative fees and expenses, and depreciation, depletion, and amortization.
The Trustees shall limit such expenses to amounts that do not exceed such
limitations unless a majority of the Trustees who are not Affiliates of the
Advisor determine that based upon such factors as they deem sufficient, a higher
level of expenses is justified. Each contract made with the Advisor under this
Article IV shall specifically provide that in the event such Trustees determine
that such excess expenses are not justified, the Advisor shall refund to the
Trust promptly after the end of any such year the amount, if any, by which the
Operating Expenses so exceed said amount; provided, that (i) the maximum
liability of the Advisor for such excess in any year shall be limited to the
amount of the Non-Accountable Expense Allowance and the Administration Fee
received by the Advisor during such year as defined and provided for in the
Advisory Agreement and (ii) to the extent that the Operating Expenses for any
subsequent fiscal year are less than the greater of clauses (a) or (b) above,
the Trust shall reimburse the Advisor the amount(s) it previously refunded to
the Trust pursuant to this Section 4.5.
ARTICLE V
INVESTMENT POLICY
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5.1 General Statement of Policy. While the Trustees are authorized,
---------------------------
pursuant to Article III, to invest the Trust Estate in a wide variety of
investments, it is the present intention of the Trust that it shall be the
principal investment objective and policy of the Trust for the Trustees to
invest the Trust Estate in the Diversified Portfolio.
Investments of the Trust may be made in various combinations and may involve
participations with other Persons, including Affiliates of the Advisor and/or
Trustees. Such investments may incorporate a variety of real property equity
and financing techniques, including, without limitation, partnerships, joint
ventures, purchase and leasebacks, land purchase-leases, net lease financings,
purchase and installment salebacks, and Mortgages.
The general purpose of the Trust is to seek real estate investment trust
income as defined in the REIT Provisions of the Code consistent with the
investment objective and policy of the Trust as set forth above. The Trustees
intend to make investments in such a manner as to comply with the requirements
of the REIT Provisions of the Code with respect to the composition of the
Trust's investments and the derivation of its income; provided, however, that no
Trustee, director, officer, employee, or agent of the Trust or the Advisor shall
be liable to any Person, including any Shareholder, for any act or omission
resulting in the loss of tax benefits, or in the incurrence of tax detriments,
under the Code or for the Trust not being treated for tax purposes as a "real
estate investment trust" under the REIT Provisions of the Code. Subject to
Section 5.3 hereof and subject to such restrictions as may be necessary to
qualify the Trust as a "real estate investment trust" as defined in the REIT
Provisions of the Code, the Trustees may alter the above-declared investment
policy in light of changes in economic circumstances and other relevant factors,
and the methods of implementing the Trust's investment policies may change, in
the discretion of the Trustees as economic and other conditions change.
5.2 Other Permissible Investments. To the extent that the Trust has assets
-----------------------------
not invested in accordance with Section 5.1, the Trustees may employ such assets
by investing them in:
(a) Obligations of, or guaranteed or insured by, the United States
Government or any agency or political subdivision thereof;
(b) Obligations of, or guarantees by, any state, territory, or
possession of the United States of America or any agency or political
subdivision thereof;
(c) Evidences of deposits in, or obligations of, banking institutions,
state and federal savings and loan associations, and savings institutions;
(d) Real and personal property and interests therein; and
(e) Other Securities, liquid short-term investments, and property.
5.3 Prohibited Investments and Activities. The Trustees shall not engage in
-------------------------------------
any of the following investment practices or activities:
(a) Invest in commodities, foreign currencies, or bullion except in
connection with investments in other property;
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(b) Engage in any material trading activities with respect to any of the
assets of the Trust Estate;
(c) Issue "redeemable securities" as defined in Section 2(a)(32) of the
Investment Company Act of 1940, as amended;
(d) Engage in the underwriting or public distribution of Securities
issued by others; and
(e) Purchase any property from or sell any property to the Advisor, nor
shall the Trust lend any funds to the Advisor.
5.4 Obligor's Default. Notwithstanding any provision in any Article of this
-----------------
Declaration, when an obligor to the Trust is in default under the terms of any
obligation (including a Trust Loan) to the Trust, the Trustees or the Advisor
shall have the power to pursue any remedies permitted by law which in their sole
judgment are in the interest of the Trust, and the Trustees or the Advisor shall
have the power to receive and hold any investment and to enter into any
commitment or obligation on behalf of the Trust in connection with or in pursuit
of such remedies which, in the judgment of the Trustees or the Advisor, is
necessary or desirable for the purpose of acquiring property, disposing of
property acquired in the pursuit of such remedies or the preservation of its
investment.
ARTICLE VI
THE SHARES AND SHAREHOLDERS
6.1 Shares. The units into which the beneficial interest in the Trust will
------
be divided shall be designated as Shares, which Shares shall initially be of two
classes, Class A Shares and Class B Shares. The Class A Shares shall have a par
value of $1.00 per Share, and the Class B Shares shall have a par value of $.01
per Share. The certificates evidencing the Shares shall be in such form and
signed (manually or by facsimile) on behalf of the Trust in such manner as the
Trustees may from time to time prescribe or as may be prescribed in the
Trustees' Regulations. The certificates shall be negotiable and title thereto
and to the Shares represented thereby shall be transferred by assignment and
delivery thereof to the same extent and in all respects as a share certificate
of a California corporation. There shall be no limit upon the number or classes
of Shares to be issued. The Shares may be issued for such consideration as the
Trustees shall determine or by way of share dividend or share split in the
discretion of the Trustees. Shares reacquired by the Trust shall no longer be
deemed outstanding and shall have no voting or other rights unless and until
reissued. Shares acquired by the Trust may be canceled and restored to the
status of authorized and unissued Shares by action of the Trustees. All Shares
shall be fully paid and non-assessable by or on behalf of the Trust upon receipt
of full consideration for which they have been issued or without additional
consideration if issued by way of share dividend or share split. The Shares
shall not entitle the holder to preference, pre-emptive, appraisal, conversion,
or exchange rights of any kind, except as provided in Section 6.14.
Upon termination of the Offering, the Trustees shall issue for par a
sufficient number of Class B Shares to the Advisor and/or its nominee(s) such
that the total number of outstanding Class B Shares shall equal one-half of the
total number of outstanding Class A Shares. In order to maintain such
proportion between Class A Shares and Class B Shares, the Trustees are hereby
required to issue additional Class B Shares for par in like proportion on a pro
rata basis to all holders of Class B Shares based on the number of Class B
Shares held by such holder on the date of issuance of the Class A Shares
requiring the issuance
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of the Class B Shares to the extent that (a) additional Class A Shares are
issued by the Trust (provided that if and to the extent such issuance is subject
to the approval of the American Stock Exchange, Inc. or such other exchange or
market on which the Class A Shares or other securities of the Trust are traded,
then such approval shall be obtained), and (b) the Class A Shares are subject to
any stock dividend, stock split, or other recapitalization affecting the number
of Class A Shares outstanding. The additional Class B Shares shall be issued
within 60 days of the issuance of the Class A Shares and the purchase price may
be paid in cash or by delivery of a promissory note. For the purposes of
determining the total number of Class B Shares issued and outstanding following
the termination of the Offering and issuance of Class B Shares pursuant to this
Section 6.1 as required in Sections 6.6(a) and 6.14, all additional Class B
Shares issued pursuant to this paragraph of Section 6.1 shall be deemed to be
issued and outstanding following termination of the Offering.
6.2 Voting Rights. The Shareholders shall be entitled to vote only upon the
-------------
following matters:
(a) Election of Trustees. Trustees shall be elected in accordance with
--------------------
Section 2.1 at the annual meeting of the Shareholders to be held at such time
and place as the Trustees' Regulations shall prescribe. In any election of
Trustees, the Class A Shareholders and the Class B Shareholders shall vote
together as a single class with each Class A Share and Class B Share held of
record entitled to one vote in person or by proxy.
Any vacancy in the office of Trustees may be filled by a vote of the Class A
Shareholders and the Class B Shareholders voting together as a single class with
each Share held of record entitled to one vote in person or by proxy, or, in the
absence of any such Shareholder vote, such vacancy may be filled by the vote of
the remaining Trustees. If the number of Trustees is increased in accordance
with this Declaration, the Trustees' Regulations, or otherwise, any vacancy so
created may be filled by the existing Trustees.
(b) Removal of Trustees. A Trustee may be removed for cause (defined as
-------------------
willful violations of this Declaration or the Trustees' Regulations which
violations are materially against the interests of the Shareholders or gross
negligence in the performance of his duties) by majority vote or written consent
of the Shareholders with the Class A Shareholders and the Class B Shareholders
voting together as a single class with each Share held of record entitled to one
vote in person or by proxy. Any vacancy created by the removal of a Trustee
shall be filled as provided in Section 6.2(a).
(c) Termination of Advisory Agreement. The Advisory Agreement may be
---------------------------------
terminated to the extent provided in Section 4.2 upon approval by vote or
written consent of Shareholders holding two-thirds of the Class A Shares and the
Class B Shares voting together as a single class with each Share held of record
entitled to one vote in person or by proxy.
(d) Termination of the Trust. The Trust may be terminated at a meeting
------------------------
of the Shareholders, specially called for such purpose, upon a vote by the
Shareholders holding 66-2/3% of the Class A Shares and the Class B Shares
voting together as a single class with each Share of record entitled to one vote
in person or by proxy. A merger of the Trust with and into another entity is
not a termination of the Trust if the Trust is the surviving entity or if the
purpose of the merger is primarily to change the domicile of the Trust.
Further, a change of the Trust's form from a business trust to a corporation is
not a termination of the Trust.
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(e) Amendments to the Declaration of Trust. Except as set forth in the
--------------------------------------
next sentence or Section 3.2(d) or 8.3, this Declaration of Trust can be amended
upon approval of a majority vote of the Shareholders with the Class A
Shareholders and the Class B Shareholders voting together as a single class with
each Share held of record entitled to cast one vote in person or by proxy.
Notwithstanding anything in this Declaration of Trust to the contrary, wherever
any provision of this Declaration sets forth a specific percentage of the Shares
outstanding and entitled to vote which is required for approval or ratification
of any action upon which the vote of the Shareholders is required or may be
obtained, such provision can only be amended with the approval of Shareholders
holding the specific percentage of Shares outstanding and entitled to vote which
is set forth in such provision.
(f) Sales of Assets. The Trust may sell, transfer or otherwise dispose
---------------
of all or substantially all of its assets, upon a vote by the Shareholders
holding two-thirds of the Class A Shares and the Class B Shares voting together
as a single class with each Share of record entitled to one vote in person or by
proxy.
(g) Other Matters. All other matters to be voted on, consented to, or
-------------
ratified by the Shareholders shall be passed, consented to, or ratified by a
majority vote of the Shareholders with the Class A Shareholders and the Class B
Shareholders voting together as a single class with each Share held of record
entitled to cast one vote in person or by proxy.
Notwithstanding anything in this Article VI to the contrary, at all times
that there are no Class A Shares outstanding, the Class B Shareholders shall
have exclusive voting power on all matters upon which Shareholders are entitled
to vote pursuant to this Declaration. Wherever any provision of this
Declaration sets forth a specific percentage of the Shares outstanding and
entitled to vote which is required for approval or ratification of any action
upon which the vote of the Shareholders is required or may be obtained, such
provision shall mean such specified percentage of the votes entitled to be cast
by holders of all Shares then outstanding and entitled to vote on such action.
6.3 Legal Ownership of Trust Estate. The legal ownership of the Trust
-------------------------------
Estate and the right to conduct the business of the Trust are vested exclusively
in the Trustees, and the Shareholders shall have no interest therein other than
beneficial interest in the Trust conferred by their Shares issued hereunder, and
they shall have no right to compel any partition, division, dividend, or
distribution of the Trust or any of the Trust Estate.
6.4 Shares Deemed Personal Property. The Shares shall be personal property
-------------------------------
and shall confer upon the holders thereof only the interest and rights
specifically set forth in this Declaration. The death, insolvency, or
incapacity of a Shareholder shall not dissolve or terminate the Trust or affect
its continuity nor give his legal representative any rights whatsoever, whether
against or in respect of other Shareholders, the Trustees, or the Trust Estate
or otherwise, except the sole right to demand and, subject to the provisions of
this Declaration, the Trustees' Regulations, and any requirements of law, to
receive a new certificate for Shares registered in the name of such legal
representative, in exchange for, and upon delivery pursuant to Section 6.5 of,
the certificate held by such Shareholder.
6.5 Share Record; Issuance and Transferability of Shares. Records shall be
----------------------------------------------------
kept by or on behalf of and under the direction of the Trustees, which shall
contain the names and addresses of the Shareholders, the number of Shares held
by them respectively, and the numbers of the certificates representing the
Shares, and in which there shall be recorded all transfers of Shares.
Certificates shall be issued, listed, and
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transferred in accordance with the Trustees' Regulations. The Persons in whose
names certificates are registered on the records of the Trust shall be deemed
the absolute owners of the Shares represented thereby for all purposes of this
Trust; but nothing herein shall be deemed to preclude the Trustees or officers,
or their agents or representatives, from inquiring as to the actual ownership of
Shares. Until a transfer is duly effected on the records of the Trust, the
Trustees shall not be affected by any notice of such transfer, either actual or
constructive. The receipt by the Person in whose name any Shares are registered
on the records of the Trust or of the duly authorized agent of such Person, or
if such Shares are so registered in the names of more than one Person, the
receipt of any one of such Persons, or of the duly authorized agent of any of
such Persons, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of such Shares and from all liability to see
to the application thereof.
Subject to the provisions of Section 6.13, Shares shall be transferable on
the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing upon delivery to the Trustees or a transfer
agent of the certificate or certificates therefor, properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps, together with such evidence of the genuineness of
each such endorsement, execution, or authorization and of other matters as may
reasonably be required by the Trustees or such transfer agent. Upon such
delivery, the transfer shall be recorded in the records of the Trust and a new
certificate for the Shares so transferred shall be issued to the transferee and
in case of transfer of only a part of the Shares represented by an certificate,
a new certificate for the balance shall be issued to the transferor. Any Person
becoming entitled to any Shares in consequences of the death of a Shareholder or
otherwise by operation of law shall be recorded as the holder of such Shares and
shall receive a new certificate therefor, but only upon delivery to the Trustees
or a transfer agent of instruments and other evidence required by the Trustees
or the transfer agent to demonstrate such entitlement, the existing certificate
for such Shares, and such necessary releases from applicable governmental
authorities. In case of the loss, mutilation, or destruction of any certificate
for Shares, the Trustees may issue or cause to be issued a replacement
certificate on such terms and subject to such rules and regulations as the
Trustees may from time to time prescribe. Nothing in this Declaration shall
impose upon the Trustees or a transfer agent a duty, or limit their rights, to
inquire into adverse claims.
6.6 Dividends or Distributions to Shareholders. The Trustees may from time
------------------------------------------
to time declare and pay to Shareholders such dividends or distributions in cash
or other form, out of current or accumulated income, capital, capital gains,
principal, surplus, proceeds from the increase of refinancing of Trust
obligations, or from the Disposition of portions of the Trust Estate or from any
other source as the Trustees in their discretion shall determine. The Trustees
may declare dividends or distributions as far in advance as they shall determine
in their discretion, including the advance declaration of dividends or
distributions with respect to more than one month or other period. Shareholders
shall have no right to any dividend or distribution unless and until the record
date therefor as declared by the Trustees.
(a) Distributions of Net Cash. The Trustees shall endeavor to declare
-------------------------
distributions of Net Cash, which shall be distributed 99% to the Class A
Shareholders and 1% to the Class B Shareholders, in amounts such that the Trust
shall maintain its status as "real estate investment trust" under the Code. To
the extent that Class B Shareholders convert their Class B Shares into Class A
Shares as provided in Section 6.14, the percentage of distributions of Net Cash
to be distributed to the Class B Shareholders, as well as the other
distributions provided for in this Section 6.6, shall be reduced by multiplying
such 1% by a fraction, the numerator of which is the aggregate number of Class B
Shares outstanding as of the record date for any such distribution and the
denominator of which is the aggregate number of Class B Shares issued and
outstanding prior to any such conversion.
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(b) Distributions of Proceeds. Upon any Disposition, the proceeds of
-------------------------
Disposition shall be applied first, to the payment of any selling or refinancing
expenses, fees and commissions, including mortgage brokerage fees, and all other
fees and costs incurred in connection with the Disposition; and second, to the
payment of principal and interest owed in connection with the asset disposed of
immediately prior to the Disposition which is to be repaid in connection with
the Disposition. All proceeds remaining thereafter shall be segregated and not
commingled with the other assets of the Trust except for any amounts thereof
which the Trustees, in their absolute discretion, determine are required for
support of the operations of Trust, or for investment in additional Trust
assets. Any portion of such remaining segregated proceeds in the form of assets
which the Trustees, in their absolute discretion, determine cannot reasonably be
distributed to the Shareholders (including any net interest earned thereon) is
herein called "Non-Distributable Net Proceeds," and any other portion of such
segregated proceeds is herein called "Distributable Net Proceeds."
The Distributable Net Proceeds of any Disposition shall be distributed to the
Shareholders in the same manner as distributions of Net Cash by the Trust. The
Non-Distributable Net Proceeds of any Disposition shall be considered
Distributable Net Proceeds at such time as the Trustees, in their absolute
discretion, determine that the assets comprising such Non-Distributable Net
Proceeds can reasonably be distributed or such assets are transformed into
Distributable Net Proceeds. They shall be distributed to the Shareholders in
the same manner as distributions of Net Cash by the Trust after any such
determination in the same manner as other Distributable Net Proceeds.
(c) Other Distributions. All distributions other than those
-------------------
specifically provided for in Sections 6.6(a) and (b) may be declared by the
Trustees at such time that they, in their absolute discretion, determine that
the Trust has sufficient cash or other property which is not needed in the
operation of the Trust, and shall be distributed in accordance with the first
sentence of Section 6.6(a).
6.7 Transfer Agent, Dividend Disbursing Agent, and Registrar. The Trustees
--------------------------------------------------------
shall have power to employ one or more transfer agents, dividend disbursing
agents, and registrars and to authorize them on behalf of the Trust to keep
records, to hold and disburse any dividends and distributions, and to have and
to perform in respect of all original issues and transfers of Shares, dividends
and distributions, and reports and communications to Shareholders, the powers
and duties usually had and performed by transfer agents, dividend disbursing
agents, and registrars of a California corporation.
6.8 Shareholders' Meeting. There shall be an annual meeting of the
---------------------
Shareholders at such time and place as the Trustees' Regulations shall prescribe
at which the Trustees shall be elected and any other proper business may be
conducted. The annual meeting of Shareholders shall be held after delivery to
the Shareholders of the Annual Report (set forth in Section 6. 10) and within
six months after the end of each fiscal year commencing with the fiscal year
starting in 1989. Special meetings of Shareholders may be called by the
Managing Trustee, if any, the Chairman of the Board of Trustees, or at least two
of the other Trustees and shall be called upon the written request of
Shareholders holding not less than 20% of the outstanding Class A Shares or 20%
of the outstanding Class B Shares, entitled to vote in the manner provided in
the Trustees' Regulations. If there shall be no Trustees, the officers of the
Trust shall promptly call a special meeting of the Shareholders for the election
of successor Trustees. Notice of any special meeting shall state the purposes
of the meeting. A majority of the outstanding Class A Shares and a majority of
the outstanding Class B Shares entitled to vote at any meeting represented in
person or by proxy shall constitute a quorum at any such meeting. Whenever
Shareholders are required or permitted to take any action, such action may be
taken without a meeting on written consent setting forth the action so taken,
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signed by a sufficient proportion of the Class A Shareholders and Class B
Shareholders as would be required for a vote at meeting as provided in Section
6.2; provided that solicitation of such consents complies with Rule 706 of the
American Stock Exchange, Inc. as such Rule or its successor is then in effect.
The vote or consent of Shareholders shall not be required for the pledging,
hypothecating, granting security interests in, mortgaging, or encumbering of all
or any of the Trust Estate.
6.9 Proxies. Whenever the vote or consent of Shareholders is required
-------
or permitted under this Declaration, such vote or consent may be given either
directly by the Shareholders or by a proxy in the form prescribed in the
Trustees' Regulations. The Trustees may solicit such proxies from the
Shareholders or any of them in any matter requiring or permitting the
Shareholders' vote or consent.
6.10 Reports to Shareholders. Not later than 120 days after the close
-----------------------
of each full fiscal year of the Trust, the Trustees shall mail a report of the
business and operation of the Trust during such fiscal year to the Shareholders,
which report shall constitute the accounting of the Trustees for such fiscal
year. The report (herein "Annual Report") shall be in such form and have such
content as the Trustees deem proper. The Annual Report shall include a balance
sheet and a statement of income and surplus of the Trust. Such financial
statement shall be accompanied by the report of an independent public accountant
thereon. A manually signed copy of the accountant's report shall be filed with
the Trustees.
6.11 Fixing Record Dates. The Trustees' Regulations may provide for
-------------------
fixing or, in the absence of such provision, the Trustees may fix, in advance, a
date as the record date for determining the Shareholders entitled to notice of
or to vote at any meeting of the Shareholders or to express consent to any
proposal without a meeting, or for the purpose of determining Shareholders
entitled to receive payment of any dividend or distribution (whether before or
after termination of the Trust) or any Annual Report or other communication from
the Trustees, or for any other purpose. The record date so fixed shall be not
less than ten days nor more than 90 days prior to the date of the meeting or
event for the purpose of which it is fixed.
6.12 Notice to Shareholders. Any notice of meeting or other notice,
----------------------
communication, or report to any Shareholder shall be deemed duly delivered to
such Shareholder when such notice, communication, or report is deposited, with
postage thereon prepaid, in the United States mail, addressed to such
Shareholder at his address as it appears on the records of the Trust or is
delivered in person to such Shareholder.
6.13 Restriction on Transfer, Acquisition and Redemption of Shares.
-------------------------------------------------------------
Article X contains restrictions on transfer, acquisition and redemptions of
Shares.
6.14 Conversion Rights. Subject to the terms and conditions of this
-----------------
Section 6.14, the Class B Shareholders as a group shall at their option be
entitled to convert up to 20% of the total of the Class B Shares, issued and
outstanding following the termination of the Offering and issuance of the Class
B Shares pursuant to Section 6.1, each year commencing with 1990 into fully paid
and non-assessable Class A Shares on the basis of one Class A Share for 49 Class
B Shares. Such conversion rights may be exercised at any time after December
31, 1989, and such rights shall be cumulative for each year thereafter, so that
to the extent that less than 20% of the Class B Shares held of record by a Class
B Shareholder are converted in any year, the percentage of Class B Shares
convertible in the succeeding years shall be increased accordingly. For
example, if only 10% of the total outstanding Class B Shares were converted into
Class A Shares in 1990, up to 30% of such total number of Class B Shares shall
be convertible in 1991, and to the extent that no Class B Shares are converted
from 1990 through 1993, 100% of the total outstanding Class B Shares will be
convertible into Class A Shares in 1994 and each year thereafter. After
conversion of the
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Class B Shares into Class A Shares, the rights of the remaining Class B
Shareholders with respect to distributions of Net Cash shall be adjusted as
provided in Section 6.6.
In order to exercise such conversion rights, the Class B Shareholder shall
surrender the certificate or certificates for such Class B Shares at the office
of said transfer agent (or other place as provided by the Trustees), which
certificate or certificates, if the Trustees shall so request, shall be duly
endorsed to the Trust or in blank or accompanied by proper instruments of
transfer to the Trust (such endorsements or instruments of transfer to be in
form satisfactory to the Trust), and shall give written notice to the Trust at
said office that he elects so to convert said Class B Shares in accordance with
the terms of this Section 6.14, and shall state in writing therein the name or
names in which he wishes the certificate or certificates for Class A Shares to
be registered. Every such notice of election to convert shall constitute a
binding contract between the holder of such Class B Shares and the Trust,
whereby the Class B Shareholder shall be deemed to subscribe for the amount of
Class A Shares which he shall be entitled to receive upon such conversion, and,
in satisfaction of such subscription, to deposit the Class B Shares to be
converted and to release the Trust for all liability thereunder, and thereby the
Trust shall be deemed to agree that the surrender of the certificate or
certificates therefor and the extinguishment of liability thereon shall
constitute full payment of such subscription for Class A Shares to be issued
upon such conversion.
The Trust will, as soon as practicable after such deposit of a certificate or
certificates for Class B Shares accompanied by the written notice and the
statement above prescribed, issue and deliver at the office of said transfer
agent (or other place as provided above) to the Person for whose account such
Class B Shares were so surrendered, or to his nominee or nominees, a certificate
or certificates for the number of Class A Shares to which he shall be entitled
as aforesaid. Subject to the provisions of this Section 6.14, such conversion
shall be deemed to have been made as of the date of such surrender of the Class
B Shares to be converted; and the Person or Persons entitled to receive the
Class A Shares issuable upon conversion of such Class B Shares shall be treated
for all purposes as the record holder or holders of such Class A Shares on such
date. Upon conversion of Class B Shares, the Class B Shares so converted shall
be canceled and retired by the Trust.
The issuance of certificates for Class A Shares upon conversion of Class B
Shares shall be made without charge for any stamp or other similar tax in
respect of such issuance; provided, however, that if any such certificate is to
be issued in a name other than that of the holder of the Class B Shares
converted, the Person or Persons requesting the issuance thereof shall pay to
the Trust the amount of any tax which may be payable in respect of any transfer
involved in such issuance or shall establish to the satisfaction of the Trust
that such tax has been paid or that no such tax is due.
The Trust will at all times reserve and keep available, solely for the
purpose of issuance upon conversion of the outstanding shares of Class B Shares,
such number of Class A Shares as shall be issuable upon the conversion of all
such outstanding Class B Shares; provided that nothing contained herein shall be
construed to preclude the Trust from satisfying its obligations in respect of
the conversion of the outstanding Class B Shares by delivery of Class A Shares
which are held in the treasury of the Trust. The Trust covenants that if any
Class A Shares, required to be reserved for purposes of conversion hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such Class A Shares may be issued upon conversion,
the Trust will use its best efforts at its expense to cause such Class A Shares
to be duly registered or approved, as the case may be. The Trust will also at
its expense endeavor to list the Class A Shares required to be delivered upon
conversion prior to such delivery upon each national securities exchange, if
any, upon which the outstanding Class A Shares are listed at the time
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of such delivery. The Trust covenants that all Class A Shares which shall be
issued upon conversion of the Class B Shares, will, upon issue, be fully paid
and non-assessable and not entitled to any preemptive rights.
ARTICLE VII
LIABILITY OF TRUSTEES, SHAREHOLDERS, AND
OFFICERS, AND OTHER MATTERS
7.1 Exculpation of Shareholders, Trustees and Officers. No Shareholder
--------------------------------------------------
shall be subject to any personal liability whatsoever to any Person in
connection with Trust Estate or the acts, obligations or affairs of the Trust.
No Trustee or officer of the Trust shall be liable to the Trust or to any
Trustee for any act or omission of any other Trustee, Shareholder, officer, or
agent of the Trust, including the Advisor, or be held to any personal liability
whatsoever in tort, contract, or otherwise in connection with the affairs of
this Trust except only that arising from his own willful violation of the
provisions of this Declaration or of the Trustees' Regulations which violation
is materially against the interests of the Shareholders and results in material
harm to such interests, or gross negligence in the performance of his duties.
If any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust,
is made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by reason
of his being or having been a Shareholder, and shall reimburse such Shareholder
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability. The rights accruing to a Shareholder under this
Section 7.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
7.2 Express Exculpatory Clauses in Instruments. The Trustees shall cause
------------------------------------------
any written instrument creating an obligation of the Trust to include a
reference to this Declaration to provide that neither the Shareholders nor the
Trustees nor officers shall be liable thereunder and that the other parties to
such instrument shall look solely to the Trust Estate for the payment of any
claim thereunder or for the performance thereof. However, the omission of such
provision from any such instrument shall not render the Shareholders or any
Trustee or officer liable thereunder.
7.3 Liability and Indemnification of Trustees. The Trustees, officers,
-----------------------------------------
employees, and agents of the Trust, including the Advisor, and their affiliates,
shall not be liable to the Trust or the Shareholders, and the Trust shall
indemnify the Trustees, officers, employees, and agents of the Trust, including
the Advisor, and their Affiliates, against any claim or liability by or to any
Person other than the Trust, in respect of any act or any failure to act so long
as such act or failure to act was performed in a manner determined in good faith
to be within the scope of the Trustees' authority and to be in the best interest
of the Trust, and so long as he, she, or it was not guilty of negligence,
misconduct, or a breach of his fiduciary obligations in such act or failure to
act.
The indemnification authorized by this Section 7.3 shall include payment of
(i) reasonable attorneys' fees or other expenses incurred in settling any such
claim or liability or incurred in any finally adjudicated legal proceeding and
(ii) expenses incurred by the removal of any liens affecting any property of the
Person to be indemnified. Indemnification shall be made from assets of the
Trust, and no Shareholder shall be
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personally liable to any Person to be indemnified. This Section 7.3 shall inure
to the benefit of the Trustees and their Affiliates.
For the purposes of this Section 7.3 only, the term "Affiliates" shall mean
any Person performing services on behalf of the Trust who: (i) directly or
indirectly controls, is controlled by, or is under common control with the
Trustees; or (ii) owns or controls 10% or more of the outstanding voting
securities of the Trustees; or (iii) is an officer, director, partner, or
trustee of the Trustees; or (iv) is any company for which the Trustees act as an
officer, director, partner, or trustee.
7.4 Rights of Trustees and Officers to Own Shares or Other Property and to
----------------------------------------------------------------------
Engage in Other Business.
- ------------------------
(a) Any Trustee, officer, agent, or employee of the Trust and the
Advisor may acquire, own, hold, and dispose of Securities of the Trust, for his
individual account, and may exercise all rights of a holder of such Securities
to the same extent and in the same manner as if he were not a Trustee, officer,
employee, agent, or the Advisor; have personal business interests and engage in
personal business activities, which interests and activities may include the
acquisition, syndication, holding, management, operation, or disposition, for
his own account or for the account of others, of interests in Mortgages, real
property, or other assets, even if the same compete directly with the actual
business being conducted by the Trust; subject to the provisions of Article IV,
be interested as trustee, officer, director, stockholder, partner, member,
advisor, or employee, or otherwise have a direct or indirect interest in a
Person who may be engaged to render advice or services to the Trust (as the
Advisor or otherwise) and receive compensation from such Person and any
Affiliate of such Person as well as compensation as Trustee, officer, agent, or
employee of the Trust; and, in a capacity of trustee, officer, director,
stockholder, partner, member, advisor, or employee of any Person, have business
interests and engage in business activities in addition to those relating to the
Trust, which interests and activities may include the acquisition, syndication,
holding, management, operation, or disposition, for his own account or for the
account of others, of interests in Mortgages, real property, or other assets, or
interests in Persons engaged in the mortgage or real estate business, which
interests or activities may be in direct competition with the Trust; and each
Trustee, officer, employee, and agent of the Trust shall be free of any
obligation to present to the Trust any investment opportunity which comes to him
in any capacity other than solely as Trustee, officer, employee, or agent of the
Trust, even if such opportunity is of a character which, if presented to the
Trust, could be taken by the Trust; and none of the foregoing interests or
activities (singly, or in combination) shall be deemed to conflict with or be
inconsistent with his powers, duties, and responsibilities as Trustee, officer,
agent or employee of the Trust.
(b) Nothing in this Declaration shall be deemed to;
(i) Prohibit a Trustee, officer, employee, or agent of the Trust from
acquiring or owning any amount or percentage of any class of outstanding
Securities of any publicly-owned Person whose shares are listed or traded on a
national securities exchange or in the over-the-counter market;
(ii) Prohibit a Trustee, officer, employee, or agent of the Trust who
is also engaged in rendering legal, accounting, financial advisory, or other
services from rendering such services to any Person or from acting as trustee,
director, member, advisor, officer, or representative of any such Person to whom
he renders or has rendered such services;
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(iii) Require a Trustee, officer, employee, or agent of the Trust to
dispose of a personal business interest acquired, or to discontinue personal
business activities begun, whether acquired or begun before or when he was a
Trustee, officer, employee, or agent, regardless of whether such interests or
activities compete with the business of the Trust; or
(iv) Prohibit a Trustee, officer, employee, or agent of the Trust
from having personal business interests or engaging in personal business
activities regardless of whether;
(A) The Trustees (by vote or consent sufficient for such purpose
including the vote of the interested Trustee(s)) have decided that such
interests or activities should or should not be acquired or engaged in by the
Trust; or
(B) The Trust could have acquired such interests or engaged in
such activities without endangering the qualification of the Trust as a real
estate investment trust under the REIT Provisions of the Code or without
violating any provision of this Declaration or applicable law, even though any
such Person, interests, or activities are or could be in competition, in any
way, with the Trust, or any such Person is in the same or similar business as
the Trust.
7.5 Transactions Between the Trust and Certain Affiliates. Except as
-----------------------------------------------------
prohibited by this Declaration and in the absence of fraud, a contract, act, or
other transaction between the Trust and any other Person, or in which the Trust
is interested, shall be valid even though (i) one or more of the Trustees,
officers of the Trust, or the Advisor are Affiliates of such other Person, or
(ii) one or more of the Trustees, officers, or the Advisor, individually or
jointly with others, is a party or are parties to or directly or indirectly
interested in, or connected with, such contract, act, or transaction. Neither
any such Trustee, officer, nor the Advisor shall be under any disability from or
have any liability as a result of entering into any such contract, act, or
transaction, provided that (a) such interest or connection is disclosed or known
to the Trustees and the Trustees authorized such contract, act, or other
transaction by vote sufficient for such purpose including the vote of the
interested Trustee(s), or (b) such interest or connection is disclosed or known
to the Shareholders, and such contract, act, or transaction is approved or
subsequently ratified by the Shareholders, or (c) such contract, act, or
transaction is fair and reasonable as to the Trust at the time it is authorized
by the Trustees or by the Shareholders.
Notwithstanding any other provision of this Declaration of Trust, Affiliates
of the Advisor may receive compensation from, and/or a share of the proceeds
received by, borrowers in connection with Trust Loans.
7.6 Restriction of Duties and Liabilities. To the extent that the nature of
-------------------------------------
this Trust (that is, a business trust) will permit, the duties and liabilities
of Shareholders, Trustees, and officers shall in no event be greater than the
duties and liabilities of shareholders, directors, and officers of a California
corporation. The Shareholders, Trustees, and officers shall in no event have any
greater duties or liabilities than those imposed by applicable law as shall be
in effect from time to time.
7.7 Persons Dealing with Trustees or Officers. Any act of the Trustees or
-----------------------------------------
officers purporting to be done in their capacity as such, shall, as to any
Persons dealing with such Trustees or officers, be conclusively deemed to be
within the purpose of this Trust and within the powers of the Trustees and
officers. No Person dealing with the Trustees or any of them, or with the
authorized officers, agents, or representatives of the Trust, shall be bound to
see to the application of any funds or property passing into
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their hands or control. The receipt of the Trustees or any of them, or of
authorized officers, agents, or representatives of the Trust, for moneys or
other consideration, shall be binding upon the Trust.
7.8 Reliance. The Trustees and officers may consult with counsel (which may
--------
be a firm in which one or more of the Trustees or officers is or are members)
and the advice or opinion of such counsel shall be full and complete personal
protection to all of the Trustees and officers in respect of any action taken or
suffered by them in good faith and in reliance on or in accordance with such
advice or opinion. In discharging their duties, Trustees and officers, when
acting in good faith, may rely upon financial statements of the Trust
represented to them to be correct by the Managing Trustee or the Chairman of the
Board of Trustees, if any, or the officer of the Trust having charge of its
books of account, or stated in a written report by an independent public
accountant fairly to present the financial position of the Trust. The Trustees
may rely, and shall be personally protected in acting, upon any instrument or
other document believed by them to be genuine.
7.9 Trust Only. It is the intention of the Trustees to create only the
----------
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
ARTICLE VIII
DURATION, TERMINATION, AMENDMENT,
AND QUALIFICATION OF TRUST
8.1 Duration of Trust. The Trust's existence shall be perpetual. In the
-----------------
event that it shall be finally determined by a court of competent jurisdiction
in any state in which the Trust shall own property that the holding of such
property is or shall be in contravention of a law, whether statutory or
otherwise, similar to the common law "rule against perpetuities," then with
respect to the property affected thereby, unless this Trust shall be earlier
terminated as provided in this Section 8, the Trust shall continue only until
the expiration of 20 years after the death of the last survivor of the following
named persons:
NAME DATE OF BIRTH PARENTS RESIDENCE
- ---- ------------- ------- ---------
Adam G. September 10, 1985 Mr. and Mrs. 348 South Citrus
Edwards Steven Edwards Los Angeles, CA 90036
Lindsey M. September 27, 1986 Mr. and Mrs. 5701 West 76th Street
Nicholls Donald G. Nicholls Los Angeles, CA 91316
Daniel L. December 11, 1987 Mr. and Mrs. 4745 Yarmouth Avenue
Reuben Timothy D. Reuben Encino, CA 91316
Lucas J. July 15, 1986 Mr. and Mrs. 9914 Garden Grove
Sexton Phillip J. Sexton Northridge, CA 91325
Taylor C. January 13, 1987 Mr. and Mrs. 2816 Hilary Court
Smith Michael F. Smith Thousand Oaks, CA 91362
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8.2 Termination of Trust.
--------------------
(a) Upon termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust shall have been wound up, including the
power to fulfill or discharge the contracts of the Trust, collect its assets,
sell, convey, assign, exchange, transfer, or otherwise dispose of all or any
part of the remaining Trust Estate to one or more Persons at a public or private
sale for consideration which may consist in whole or in part of cash,
securities, or other property of any kind, discharge or pay its liabilities, and
do all other acts appropriate to liquidate its business.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities, and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Estate, in cash or in kind or partly each, among
the Shareholders according to their respective rights and the Advisor pursuant
to the Advisory Agreement.
(b) After termination of the Trust and distribution to the Shareholders
as herein provided, the Trustees shall execute and lodge among the records of
the Trust an instrument in writing setting forth the fact of such termination,
and the Trustees shall thereupon be discharged from all further liabilities and
duties hereunder, and the rights and interests of all Shareholders shall
thereupon cease.
8.3 Amendment Procedure.
-------------------
(a) Prior to the issuance of any Shares, this Declaration may be amended
by a majority of the Trustees. Hereafter, this Declaration may be amended by
Shareholders voting as provided in Section 6.2. The Trustees may also amend
this Declaration without the vote or consent of Shareholders if they deem it
necessary to (i) conform this Declaration to the requirements of the REIT
Provisions of the Code or to other applicable federal laws or regulations, but
the Trustees shall not be liable for failing so to do, (ii) clarify, supplement,
correct, or otherwise revise any provision of this Declaration as provided in
Section 9.6(a) or (iii) effect a change in the domicile of the Trust or to
change the form of the Trust to a corporation through a merger, incorporation,
sale of assets or similar transaction; provided that the Trustees have
determined in the case of subclause (iii) that such amendment does not
materially and adversely affect the Shareholders.
(b) No amendment may be made, under Section 8.3(a) above, which would
change any rights with respect to any outstanding Shares of the Trust by
diminishing or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the outstanding class of Shares
affected and entitled to vote thereon.
(c) A certification in recordable form signed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or
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a copy of the Declaration, as amended, in recordable form, and executed by a
majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
8.4 Qualification Under the REIT Provisions of the Code. It is intended
---------------------------------------------------
that the Trust shall qualify as a "real estate investment trust" under the REIT
Provisions of the Code during such period as the Trustees shall deem it
advisable to so qualify the Trust.
ARTICLE IX
MISCELLANEOUS
9.1 Applicable Law. This Declaration is executed and acknowledged by the
--------------
Trustees in the State of California and with reference to the statutes and laws
thereof, and the rights of all parties and the construction and effect of every
provision hereof shall be subject to and construed according to statutes and
laws of said State.
9.2 Index and Headings for Reference Only; Gender. The table of contents
---------------------------------------------
and heading preceding the text, articles, and sections hereof have been inserted
for convenience and reference only and shall not be construed to affect the
meaning, construction, or effect of this Declaration. Whenever the context so
requires references to the masculine gender shall include the female and neuter
genders and vice versa, and singular references shall include the plural form.
9.3 Successors in Interest. This Declaration and the Trustees' Regulations
----------------------
shall be binding upon and inure to the benefit of the undersigned Trustees and
their successors, assigns, heirs, distributees, and legal representatives, and
every Shareholder and his successors, assigns, heirs, distributees, and legal
representatives.
9.4 Inspections of Records. Trust records shall be available for inspection
----------------------
by Shareholders at the same time and in the same manner and to the extent that
comparable records of a California corporation would be available for inspection
by stockholders under the laws of the State of California. Except as
specifically provided for in this Declaration, Shareholders shall have no
greater right than stockholders of a California corporation to require financial
or other information from the Trust, Trustees, or officers.
9.5 Counterparts. This Declaration may be simultaneously executed in
------------
several counterparts, each of which when so executed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
9.6 Correction of Provisions of Declaration.
---------------------------------------
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any one or more of
such provisions are in conflict with the REIT Provisions of the Code, or with
other applicable federal or state laws and regulations, or that any provision of
this Declaration should be clarified or supplemented, or contains a mistake,
ambiguity, or inconsistency with any other provision of this Declaration, or
should otherwise be revised, they shall, without the consent or vote of the
Shareholders, immediately amend this Declaration to delete such inconsistency,
clarify or supplement such provision, and/or correct such mistake or ambiguity;
provided, however, that such determination by the Trustees shall not affect or
impair any of the remaining provisions of this Declaration
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or render invalid or improper any action taken or omitted (including, but not
limited to, the election of Trustees) prior to such determination. A
certification in recordable form signed by a majority of the Trustees setting
forth any such determination and reciting that it was duly adopted by the
Trustees, or a copy of this Declaration, with the conflicting provisions amended
or removed pursuant to such a determination, in recordable form, signed by a
majority of the Trustees, shall be conclusive evidence of such determination
when lodged in the records of the Trust. The Trustees shall not be liable for
failure to make any determination under this Section 9.6(a). Nothing in this
Section 9.6(a) shall in any way limit or affect the right of the Trustees to
amend this Declaration as provided in Section 8.3(a).
(b) If any provisions of this Declaration shall be held invalid or
unenforceable, such invalidity or unenforceability shall attach only to such
provisions and shall not in any manner affect or render invalid or unenforceable
any other provision of this Declaration, and this Declaration shall be carried
out as if any such invalid or unenforceable provision were not contained herein.
9.7 Certifications. The following certifications shall be final and
--------------
conclusive as to any Person dealing with the Trust when made in writing by the
Secretary of the Trust or by any Trustee:
(a) A certification as to the number and identity of Persons holding
office as Trustees or officers at any particular time;
(b) A certification that a copy of this Declaration or of the Trustees'
Regulations is a true and correct copy thereof as then in force; and
(c) A certification as to any actions by Trustees, officers, or the
Advisor, other than the above.
9.8 Recording and Filing. A copy of this Declaration and any amendments
--------------------
shall be recorded in the office of the County Recorder of Los Angeles County,
California, and in the office of the County Recorder or its equivalent in every
county where the Trust is or Trustees are the record owner of real property,
provided that provision is made in such county for such recording and further
provided that this Declaration is accepted for recording. This Declaration and
any amendments may also be filed or recorded as in such other places the
Trustees deem appropriate.
ARTICLE X
RESTRICTION ON TRANSFER, ACQUISITION
AND REDEMPTION OF SHARES
10.1 Definitions. For purposes of this Article X, the following terms
-----------
shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of Shares by a
--------------------
Person who would be treated as an owner of such Shares either directly or
constructively through the application of Section 544 of the Code, as modified
by Section 856(h) of the Code. The terms "Beneficial Owner," "Beneficially
---------------- ------------
Owns," "Beneficially Own" and "Beneficially Owned" shall have correlative
---------------- ------------------
meanings.
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(b) "Charitable Beneficiary" shall mean an organization or organizations
----------------------
described in Sections 170(b)(1)(A) and 170(c) of the Code and identified by the
Board of Trustees as the beneficiary or beneficiaries of the Excess Share Trust.
(c) "Debt" shall mean indebtedness of the Trust.
----
(d) "Excess Shares" shall have the meaning given to it in paragraph (a)
-------------
of Section 10.3.
(e) "Excess Share Trust" shall mean the trust created pursuant to
------------------
Section 10.15.
(f) "Excess Share Trustee" shall mean a person, who shall be
--------------------
unaffiliated with the Trust, any Purported Beneficial Transferee and any
Purported Record Transferee, identified by the Board of Trustees as the trustee
of the Excess Share Trust.
(g) "Existing Holder" shall mean (i) any Person who is, or would be upon
---------------
the exchange of Debt or any security of the Trust, the Beneficial Owner of
Shares in excess of the Ownership Limit both upon and immediately after March
13, 1998 (the "Restriction Commencement Date"), so long as, but only so long as,
-----------------------------
such Person Beneficially Owns or would, upon exchange of Debt or any security of
the Trust, Beneficially Own Shares in excess of the Ownership Limit and (ii) any
Person to whom an Existing Holder Transfers, subject to the limitations provided
in this Article X, Beneficial Ownership of Shares causing such transferee to
Beneficially Own Shares in excess of the Ownership Limit.
(h) "Existing Holder Limit" (i) for any Existing Holder who is an
---------------------
Existing Holder by virtue of clause (i) of the definition thereof, shall mean,
initially, the percentage of the outstanding Class A or Class B Shares
Beneficially Owned (with such percentage for each class determined separately)
or which would be Beneficially Owned upon the exchange of Debt or any security
of the Trust, by such Existing Holder upon and immediately after the Restriction
Commencement Date, and, after any adjustment pursuant to Section 10.9, shall
mean such percentage of the outstanding Shares as so adjusted, and (ii) for any
Existing Holder who becomes an Existing Holder by virtue of clause (ii) of the
definition thereof, shall mean, initially, the percentage of the outstanding
Class A or Class B Shares Beneficially Owned (with such percentage for each
class determined separately) by such Existing Holder at the time that such
Existing Holder becomes an Existing Holder, but in no event shall such
percentage be greater than the lesser of (i) the Existing Holder Limit for the
Existing Holder who Transferred Beneficial Ownership of such Shares or, in the
case of more than one transferor, in no event shall such percentage be greater
than the smallest Existing Holder Limit of any transferring Existing Holder, or
(ii) the Ownership Limit if the Existing Holder is a person other than a trust
qualified under Section 401(a) of the Code and exempt from tax under Section
501(a) of the Code, and, after any adjustment pursuant to Section 10.9, shall
mean such percentage of the outstanding Shares as so adjusted. From the
Restriction Commencement Date until the Restriction Termination Date, the Trust
shall maintain and, upon request, make available to each Existing Holder, a
schedule which sets forth the then current Existing Holder Limit for each
Existing Holder.
(i) "Market Price" shall mean the last reported sales price reported on
------------
the American Stock Exchange for a particular class of Shares on the trading day
immediately preceding the relevant date, or if not then traded on the American
Stock Exchange, the last reported sales price for such class of Shares on the
trading day immediately preceding the relevant date as reported on any exchange
or quotation system over or through which such class of Shares may be traded, or
if not then traded over or through any
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<PAGE>
exchange or quotation system, then the market price of such class of Shares on
the relevant date as determined in good faith by the Board of Trustees.
(j) "Ownership Limit" shall initially mean 9.8%, in number of Class A
---------------
Shares, or value of the aggregate outstanding Shares of the Trust, and after
any adjustment as set forth in Section 10.10, shall mean such percentage in
number of Class A Shares, or value of the aggregate outstanding Shares, as so
adjusted. Such number and/or value shall be determined by the Board of Trustees
in good faith, which determination shall be conclusive for all purposes hereof.
For purposes of this Article X, the value of the Class B shares shall be
determined by the Board of Trustees in good faith at least quarterly at the
beginning of each calendar quarter and such determination shall be conclusive
for all purposes hereof until the earlier of (i) the beginning of the next
calendar quarter or (ii) the next determination of the value of Class B shares
by the Board of Trustees.
(k) "Person" shall mean an individual, corporation, partnership, estate,
------
trust (including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), 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.
(l) "Purported Beneficial Transferee" shall mean, with respect to any
-------------------------------
purported Transfer which results in Excess Shares, as defined below in Section
10.3, the beneficial holder of the Shares, if such Transfer had been valid under
Section 10.2.
(m) "Purported Record Transferee" shall mean, with respect to any
---------------------------
purported Transfer which results in Excess Shares, as defined below in Section
10.3, the record holder of the Shares, if such Transfer had been valid under
Section 10.2.
(n) "Restriction Termination Date" shall mean the first day after the
----------------------------
Restriction Commencement Date on which the Board of Trustees determines that it
is no longer in the best interests of the Trust to attempt to, or continue to,
qualify as a real estate investment trust.
(o) "Transfer" shall mean any sale, transfer, gift, assignment, devise
--------
or other disposition of Shares (including (a) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Shares, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Shares, but excluding
the exchange of Debt or any security of the Trust for Shares and (c) any
transfer or other disposition of any interest in Shares as a result of a change
in the marital status of the holder thereof), whether voluntary or involuntary,
whether of record, constructively or beneficially and whether by operation of
law or otherwise. The terms "Transfers" and "Transferred" shall have correlative
--------- -----------
meanings.
10.2 Ownership Limitation.
--------------------
(a) Except as provided in Sections 10.12 and 10.20, and subject to
paragraph (f) of this Section 10.2, from the Restriction Commencement Date until
the Restriction Termination Date, no Person (other than an Existing Holder)
shall Beneficially Own Shares in excess of the Ownership Limit and no Existing
Holder shall Beneficially Own Shares in excess of the Existing Holder Limit for
such Existing Holder.
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<PAGE>
(b) Except as provided in Sections 10.12 and 10.20, and subject to
paragraph (f) of this Section 10.2, from the Restriction Commencement Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in any Person (other than an Existing Holder) Beneficially Owning Shares in
excess of the Ownership Limit shall be void ab initio as to the Transfer of the
Shares which would be otherwise Beneficially Owned by such Person in excess of
the Ownership Limit; and the intended transferee shall acquire no rights in such
Shares .
(c) Except as provided in Sections 10.9 and 10.12, and subject to
paragraph (f) of this Section 10.2, from the Restriction Commencement Date until
the Restriction Termination Date, any Transfer that, if effective, would result
in any Existing Holder Beneficially Owning Shares in excess of the applicable
Existing Holder Limit shall be void ab initio as to the Transfer of the Shares
which would be otherwise Beneficially Owned by such Existing Holder in excess of
the applicable Existing Holder Limit; and such Existing Holder shall acquire no
rights in such Shares.
(d) Subject to paragraph (f) of this Section 10.2, from the
Restriction Commencement Date until the Restriction Termination Date, any
Transfer that, if effective, would result in the Shares being beneficially owned
(as provided in Section 856(a) of the Code) by less than 100 Persons (determined
without reference to any rules of attribution) shall be void ab initio as to the
Transfer of Shares which would be otherwise beneficially owned (as provided in
Section 856(a) of the Code) by the transferee; and the intended transferee shall
acquire no rights in such Shares.
(e) Subject to paragraph (f) of this Section 10.2, from the
Restriction Commencement Date until the Restriction Termination Date, any
Transfer that, if effective, would result in the Trust being "closely held"
within the meaning of Section 856(h) of the Code shall be void ab initio as to
the Transfer of the Shares which would cause the Trust 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 .
(f) Nothing contained in this Article X shall preclude the
settlement of any transaction entered into through the facilities of the
American Stock Exchange. The fact that the settlement of any transaction is
permitted shall not negate the effect of any other provision of this Article X
and any transferee in such a transaction shall be subject to all of the
provisions and limitations set forth in this Article X.
10.3 Excess Shares.
-------------
(a) If, notwithstanding the other provisions contained in this
Article X, at any time from the Restriction Commencement Date until the
Restriction Termination Date, there is a purported Transfer or other change in
the capital structure of the Trust such that any Person would Beneficially Own
Shares in excess of the applicable Ownership Limit or Existing Holder Limit (as
applicable), then, except as otherwise provided in Sections 10.9 and 10.12, and
subject to paragraph (f) of Section 10.2, the Shares Beneficially Owned in
excess of such Ownership Limit or Existing Holder Limit (rounded up to the
nearest whole Share) shall constitute "Excess Shares" and be treated as provided
in this Article X. Such designation and treatment shall be effective as of the
close of business on the business day prior to the date of the purported
Transfer or change in capital structure.
(b) If, notwithstanding the other provisions contained in this
Article X, at any time after the Restriction Commencement Date until the
Restriction Termination Date, there is a purported Transfer or other change in
the capital structure of the Trust which, if effective, would cause the Trust to
become
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<PAGE>
"closely held" within the meaning of Section 856(h) of the Code, then the Shares
being Transferred which would cause the Trust to be "closely held" within the
meaning of Section 856(h) of the Code (rounded up to the nearest whole Share)
shall constitute "Excess Shares" and be treated as provided in this Article X.
Such designation and treatment shall be effective as of the close of business on
the business day prior to the date of the purported Transfer or change in
capital structure (except for a change resulting from the exchange of Units for
Shares).
10.4 Prevention of Transfer. If the Board of Trustees or its designee
----------------------
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 10.2 or that a Person intends to acquire or has attempted
to acquire beneficial ownership (determined without reference to any rules of
attribution) or Beneficial Ownership of any Shares in violation of Section 10.2,
the Board of Trustees or its designee shall take such action as it deems
advisable to refuse to give effect to or to prevent such transfer, including,
but not limited to, refusing to give effect to such Transfer on the books of the
Trust or instituting proceedings to enjoin such Transfer; provided, however,
-------- -------
that any Transfers or attempted Transfers in violation of paragraph (b), (c),
(d) or (e) of Section 10.2 shall automatically result in the designation and
treatment described in Section 10.3, irrespective of any action (or non-action)
by the Board of Trustees.
10.5 Notice to Trust. Any Person who acquires or attempts to acquire
---------------
Shares in violation of Section 10.2, or any Person who is a transferee such that
Excess Shares result under Section 10.3, shall immediately give written notice
or, in the event of a proposed or attempted Transfer, shall give at least 15
days prior written notice to the Trust of such event and shall provide to the
Trust such other information as the Trust may request in order to determine the
effect, if any, of such Transfer or attempted Transfer on the Trust's status as
a REIT.
10.6 Information for Trust. From the Restriction Commencement Date and
---------------------
until the Restriction Termination Date:
(a) every Beneficial Owner of more than 5% (or such other
percentage, between 1/2 of 1% and 5%, as provided under the REIT Provisions
of the Code) of the number or value of outstanding Shares of the Trust shall
upon the Trust's written request, within 30 days after January 1 of each
year, give written notice to the Trust stating the name and address of such
Beneficial Owner, the number of Shares Beneficially Owned, and a description
of how such Shares are held. Each such Beneficial Owner shall provide to the
Trust such additional information as the Trust may reasonably request in
order to determine the effect, if any, of such Beneficial Ownership on the
Trust's status as a REIT.
(b) each Person who is a Beneficial Owner of Shares and each Person
(including the shareholder of record) who is holding Shares for a Beneficial
Owner shall provide to the Trust in writing such information with respect to
direct, indirect and constructive ownership of Shares as the Board of
Trustees deems reasonably necessary to comply with the provisions of the Code
applicable to a REIT, to determine the Trust's status as a REIT, to comply
with the requirements of any taxing authority or governmental agency or to
determine any such compliance.
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<PAGE>
10.7 Other Action by Board of Trustees. Subject to paragraph (f) of
---------------------------------
Section 10.2, nothing contained in this Article X shall limit the authority of
the Board of Trustees to take such other action as it deems necessary or
advisable to protect the Trust and the interests of its shareholders by
preservation of the Trust's status as a REIT; provided, however, that no
-------- -------
provision of this Section 10.7 shall preclude the settlement of any transaction
entered into through the facilities of the American Stock Exchange.
10.8 Ambiguities. In the case of an ambiguity in the application of any
-----------
of the provisions of this Article X, including any definition contained in
Section 10.1, the Board of Trustees shall have the power to determine the
application of the provisions of this Article X with respect to any situation
based on the facts known to it and the Board of Trustees' determination shall be
conclusive for all purposes of this Declaration..
10.9 Modification of Existing Holder Limits. The Existing Holder Limits
--------------------------------------
may be modified as follows:
(a) Subject to the limitations provided in Section 10.11, the Board
of Trustees may grant options which result in Beneficial Ownership of Shares
by an Existing Holder pursuant to an option plan approved by the Board of
Trustees and/or the shareholders. Any such grant shall increase the Existing
Holder Limit for the affected Existing Holder to the maximum extent possible
under Section 10.11 to permit the Beneficial Ownership of the Shares issuable
upon the exercise of such option.
(b) Subject to the limitations provided in Section 10.11, an
Existing Holder may elect to participate in a dividend reinvestment plan
approved by the Board of Trustees which results in Beneficial Ownership of
Shares by such participating Existing Holder. Any such participation shall
increase the Existing Holder Limit for the affected Existing Holder to the
maximum extent possible under Section 10.11 to permit Beneficial Ownership of
the Shares acquired as a result of such participation.
(c) The Board of Trustees shall reduce the Existing Holder Limit
for any Existing Holder after any Transfer permitted in this Article X by
such Existing Holder by the percentage of the outstanding Shares so
Transferred or after the lapse (without exercise) of an option described in
paragraph (a) of this Section 10.9 by the percentage of the Shares that the
option, if exercised, would have represented, but in either case no Existing
Holder Limit shall be reduced to a percentage which is less than the
Ownership Limit.
10.10 Increase or Decrease in Ownership Limit. Subject to the limitations
---------------------------------------
provided in Section 10.11 and Section 5.1, the Board of Trustees may from time
to time increase or decrease the Ownership Limit; provided, however, that any
-------- -------
decrease may only be made prospectively as to subsequent holders (other than a
decrease as a result of a retroactive change in existing law that would require
a decrease to retain REIT status, in which case such decrease shall be effective
immediately).
10.11 Limitations on Changes in Existing Holder and Ownership Limits.
--------------------------------------------------------------
(a) Neither the Ownership Limit nor any Existing Holder Limit may
be increased (nor may any additional Existing Holder Limit be created) if, after
giving effect to such increase (or
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<PAGE>
creation), five Beneficial Owners of Shares (including all of the then Existing
Holders) could Beneficially Own, in the aggregate, more than 49.9% in number or
value of the outstanding Shares.
(b) Prior to the modification of any Existing Holder Limit or
Ownership Limit pursuant to Section 10.9 or 10.10, the Board of Trustees may
require such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary or advisable in order to determine or ensure the Trust's
status as a REIT.
(c) No Existing Holder Limit shall be reduced to a percentage which
is less than the Ownership Limit.
10.12 Waivers by Board of Trustees.
----------------------------
(a) The Board of Trustees, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel or other evidence satisfactory
to the Board of Trustees and upon at least 15 days written notice from a
transferee prior to the proposed Transfer which, if consummated, would result in
the intended transferee owning Shares in excess of the Ownership Limit or the
Existing Holder Limit, as the case may be, and upon such other conditions as the
Board of Trustees may direct, may waive the Ownership Limit or the Existing
Holder Limit, as the case may be, with respect to such transferee.
(b) In addition to waivers permitted under paragraph (a) above, the
Board of Trustees shall waive the Ownership Limit with respect to a Person if:
(i) such Person submits to the Board of Trustees information satisfactory to the
Board of Trustees, in its reasonable discretion, demonstrating that such Person
is not an individual for purposes of Section 542(a)(2) of the Code (determined
taking into account Section 856(h)(3)(A) of the Code); (ii) such Person submits
to the Board of Trustees information satisfactory to the Board of Trustees, in
its reasonable discretion, demonstrating that no Person who is an individual for
purposes of Section 542(a)(2) of the Code (determined taking into account
Section 856(h)(3)(A) of the Code) would be considered to Beneficially Own Shares
in excess of the Ownership Limit by reason of the ownership of Shares in excess
of the Ownership Limit by the Person receiving the waiver granted under this
paragraph (b); (iii) such Person submits to the Board of Trustees information
satisfactory to the Board of Trustees, in its reasonable discretion,
demonstrating that the ownership of Shares in excess of the Ownership Limit by
the Person receiving the waiver granted under this paragraph (b) will not result
in the Trust failing to qualify as a REIT; and (iv) such Person provides to the
Board of Trustees such representations and undertakings, if any, as the Board of
Trustees may, in its reasonable discretion, require to ensure that the
conditions in clauses (i), (ii) and (iii) above are satisfied and will continue
to be satisfied throughout the period during which such Person owns Shares in
excess of the Ownership Limit pursuant to any waiver granted under this
paragraph (b), and such Person agrees that any violation of such representations
and undertakings or any attempted violation thereof will result in the
application of the remedies set forth in Section 10.3 with respect to Shares
held in excess of the Ownership Limit by such Person (determined without regard
to the waiver granted such Person under this paragraph (b)).
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<PAGE>
10.13 Legend. Each certificate for Shares shall bear substantially the
------
following legend:
The securities represented by this certificate are subject to
restrictions on transfer for the purpose of the Trust's maintenance
of its status as a REIT under the Internal Revenue Code of 1986, as
amended. Except as otherwise provided pursuant to the Declaration
of Trust of the Trust, no Person may Beneficially Own Shares in
excess of 9.8% (or such greater percentage as may be determined by
the Board of Trustees of the Trust) of the number or value of the
outstanding Shares of the Trust (unless such Person is an Existing
Holder). Any Person who attempts or proposes to Beneficially Own
Shares in excess of the above limitations must notify the Trust in
writing at least 15 days prior to such proposed or attempted
Transfer. All capitalized terms in this legend have the meanings
defined in the Declaration of Trust of the Trust, a copy of which,
including the restrictions on transfer, will be sent without charge
to each shareholder who so requests. If the restrictions on
transfer are violated, the securities represented hereby shall be
designated and treated as Excess Shares which shall be held in
trust by the Excess Share Trustee for the benefit of the Charitable
Beneficiary.
10.14 Severability. If any provision of this Article X or any application
------------
of any such provision is determined to be void, invalid or unenforceable by any
court having jurisdiction over the issue, the validity and enforceability of the
remaining provisions shall be affected only to the extent necessary to comply
with the determination of such court.
10.15 Trust for Excess Shares. Upon any purported Transfer that results
-----------------------
in Excess Shares pursuant to Section 10.3, such Excess Shares shall be deemed to
have been transferred to the Excess Share Trustee, as trustee of the Excess
Share Trust for the exclusive benefit of the Charitable Beneficiary. Excess
Shares so held in trust shall be issued and outstanding Shares of the Trust. The
Purported Beneficial Transferee shall have no rights in such Excess Shares
except as provided in Section 10.18.
10.16 Distributions on Excess Shares. Any distributions (whether as
------------------------------
dividends, distributions upon liquidation, dissolution or winding up or
otherwise) on Excess Shares shall be paid to the Excess Share Trust for the
benefit of the Charitable Beneficiary. Upon liquidation, dissolution or winding
up, the Purported Record Transferee shall receive the lesser of (a) the amount
of any distribution made upon liquidation, dissolution or winding up or (b) the
price paid by the Purported Record Transferee for the Shares, or if the
Purported Record Transferee did not give value for the Shares, the Market Price
of the Shares on the day of the event causing the Shares to be held in trust.
Any such dividend paid or distribution paid to the Purported Record Transferee
in excess of the amount provided in the preceding sentence prior to the
discovery by the Trust that the Shares with respect to which the dividend or
distribution was made had been exchanged for Excess Shares shall be repaid to
the Excess Share Trust for the benefit of the Charitable Beneficiary.
10.17 Voting of Excess Shares. The Excess Share Trustee shall be entitled
-----------------------
to vote the Excess Shares for the benefit of the Charitable Beneficiary on any
matter. Any vote taken by a Purported Record Transferee prior to the discovery
by the Trust that the Excess Shares were held in trust shall be rescinded ab
initio. The owner of the Excess Shares shall be deemed to have given an
irrevocable
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<PAGE>
proxy to the Excess Share Trustee to vote the Excess Shares for the benefit of
the Charitable Beneficiary.
10.18 Non-Transferability of Excess Shares. Excess Shares shall be
------------------------------------
transferable only as provided in this Section 10.18. At the direction of the
Trust, the Excess Share Trustee shall transfer the Shares held in the Excess
Share Trust to a person whose ownership of the Shares will not violate the
Ownership Limit or Existing Holder Limit. Such transfer shall be made within 60
days after the latest of (x) the date of the Transfer which resulted in such
Excess Shares and (y) the date the Board of Trustees determines in good faith
that a Transfer resulting in Excess Shares has occurred, if the Trust does not
receive a notice of such Transfer pursuant to Section 10.5. If such a transfer
is made, the interest of the Charitable Beneficiary shall terminate and proceeds
of the sale shall be payable to the Purported Record Transferee and to the
Charitable Beneficiary. The Purported Record Transferee shall receive the lesser
of (a) the price paid by the Purported Record Transferee for the Shares or, if
the Purported Record Transferee did not give value for the Shares, the Market
Price of the Shares on the day of the event causing the Shares to be held in
trust, and (b) the price received by the Excess Share Trust from the sale or
other disposition of the Shares. Any proceeds in excess of the amount payable to
the Purported Record Transferee shall be paid to the Charitable Beneficiary.
Prior to any transfer of any Excess Shares by the Excess Share Trustee, the
Trust must have waived in writing its purchase rights under Section 10.19. It is
expressly understood that the Purported Record Transferee may enforce the
provisions of this Section 10.18 against the Charitable Beneficiary.
If any of the foregoing restrictions on transfer of Excess Shares is
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Trust, to have acted as an agent of the Trust in acquiring such Excess
Shares and to hold such Excess Shares on behalf of the Trust.
10.19 Call by Trust on Excess Shares. Excess Shares shall be deemed to
------------------------------
have been offered for sale to the Trust, or its designee, at a price per Share
equal to the lesser of (a) the price per Share in the transaction that created
such Excess Shares (or, in the case of a devise, gift or other transaction in
which no value was given for such Excess Shares, the Market Price at the time of
such devise, gift or other transaction) and (b) the Market Price of the common
Shares and/or preferred Shares to which such Excess Shares relates on the date
the Trust, or its designee, accepts such offer (the "Redemption Price"). The
Trust shall have the right to accept such offer for a period of 90 days after
the later of (x) the date of the Transfer which resulted in such Excess Shares
and (y) the date the Board of Trustees determines in good faith that a Transfer
resulting in Excess Shares has occurred, if the Trust does not receive a notice
of such Transfer pursuant to Section 10.5 but in no event later than a permitted
Transfer pursuant to and in compliance with the terms of Section 10.18. Unless
the Board of Trustees determines that it is in the interests of the Trust to
make earlier payments of all of the amount determined as the Redemption Price
per Share in accordance with the preceding sentence, the Redemption Price may be
payable at the option of the Board of Trustees at any time up to but not later
than one year after the date the Trust accepts the offer to purchase the Excess
Shares. In no event shall the Trust have an obligation to pay interest to the
Purported Record Transferee.
10.20 Underwritten Offerings. The Ownership Limit shall not apply to the
----------------------
acquisition of Shares or rights, options or warrants for, or securities
convertible into, Shares by an underwriter in a public offering, provided that
--------
the underwriter makes a timely distribution of such Shares or rights, options or
warrants for, or securities convertible into, Shares.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Declaration of Trust as of the date first hereinabove set forth.
/s/ Jeffrey G. Dishner
-------------------------------------
Jeffrey G. Dishner
/s/ Jonathan D. Eilian
-------------------------------------
Jonathan D. Eilian
/s/ Robin Josephs
-------------------------------------
Robin Josephs
/s/ Merrick R. Kleeman
-------------------------------------
Merrick R. Kleeman
/s/ William Matthes
-------------------------------------
William Matthes
/s/ Barry S. Sternlicht
-------------------------------------
Barry S. Sternlicht
/s/ Jay Sugarman
-------------------------------------
Jay Sugarman
/s/ Kneeland C. Youngblood
-------------------------------------
Kneeland C. Youngblood
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<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this "Agreement")
is made and entered into this 18th day of March, 1998, among Starwood Financial
Trust, a California business trust (the "Trust"), Starwood Mezzanine Investors,
L.P., a Delaware limited partnership ("Starwood Mezzanine"), SAHI Partners, a
Delaware general partnership ("SAHI"), and SOFI-IV SMT Holdings, L.L.C., a
Delaware limited liability company ("SOFI IV"). Unless otherwise indicated,
capitalized terms used herein are used herein as defined in Section 1.1.
-----------
RECITALS
--------
WHEREAS, the Trust and Starwood Mezzanine are parties to the Registration
Rights Agreement, dated September 26, 1996 (the "Original Agreement"); and
WHEREAS, the Trust and Starwood Mezzanine now desire to amend and restate
the Original Agreement in its entirety; and
WHEREAS, pursuant to a Contribution Agreement, dated February 11, 1998,
among the Trust, Starwood Mezzanine and SOFI IV (the "Contribution Agreement"),
on the date hereof, Starwood Mezzanine and SOFI IV are contributing certain
assets to the Trust in return for the issuance by the Trust of Class A Shares,
$.01 par value, of the Trust (the "Class A Shares"); and
WHEREAS, SAHI owns 244,100 Class A Shares on the date hereof; and
WHEREAS, the parties hereto desire to set forth the rights of Starwood
Mezzanine, SOFI IV and SAHI and the obligations of the Trust to cause the
registration of the Registrable Securities pursuant to the Securities Act;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions and Usage.
---------------------
1.1 Definitions. As used in this Agreement:
-----------
"Beneficially Owning" and "Beneficially Own" shall mean owning Class A
Shares directly, indirectly or constructively by a Person through the
application of Section 318(a) of the Code, as modified by Section 856(d)(5) of
the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code.
"Class A Shares" shall have the meaning set forth in the Recitals.
"Code" shall mean the Internal Revenue Code of 1986 and the rules and
regulations thereunder.
<PAGE>
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Contribution Agreement" shall have the meaning set forth in the Recitals.
"Exchange Act" shall mean the Securities Exchange Act of 1934 and the rules
and regulations of the Commission thereunder.
A "Holder" shall mean Starwood Mezzanine, the partners of Starwood
Mezzanine, SAHI, the partners of SAHI, SOFI IV, or the partners of SOFI IV as
long as such Person owns Registrable Securities.
"Independent Trustees", when used with respect to the Trust, has the
meaning set forth in the Amended and Restated Shareholders Agreement of the
Trust, as amended from time to time.
"Majority Selling Holders" means those Selling Holders whose Registrable
Securities included in a given registration pursuant to or in accordance with
this Agreement represent a majority of the Registrable Securities of all Selling
Holders included therein.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"Piggyback Registration" shall have the meaning set forth in Section 3.
---------
"Register", "registered", and "registration" shall refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act, and the declaration or ordering by the
Commission of effectiveness of such registration statement or document.
"Registrable Securities" shall mean: (i) the Class A Shares issued to
Starwood Mezzanine pursuant to the exercise of a Class A Warrant issued by the
Trust on March 15, 1994 and held by Starwood Mezzanine; (ii) the Class A Shares
issued to Starwood Mezzanine pursuant to the Contribution Agreement or in
exchange for interests in the APMT Limited Partnership; (iii) the Class A Shares
issued to SOFI IV pursuant to the Contribution Agreement; (iv) the Class A
Shares owned by SAHI on the date hereof; (v) any Class A Shares or other
securities issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange by the Trust generally for, or in
replacement by the Trust generally of, such Class A Shares; and (vi) any
securities issued in exchange for such Class A Shares or other securities that
are Registrable Securities in any merger, reorganization, recapitalization or
combination of the Trust; provided, however, that Registrable Securities shall
-------- -------
not include any securities which have theretofore been sold in an offering
registered under the Securities Act or which have been sold pursuant to Rule 144
or any similar rule promulgated by the Commission pursuant to the Securities
Act, and, provided further, the Trust shall have no obligation under Sections 2
-------- ------- ----------
and 3 to register any Registrable Securities if the Trust shall deliver to the
-
Holders of such Registrable Securities an opinion of counsel to the effect that
the proposed sale or disposition of all of the Registrable Securities for which
registration was requested does not require registration under the Securities
Act for a sale or disposition in a single public sale, and offers to remove any
and all legends restricting transfer from the certificates evidencing such
Registrable Securities and the term
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<PAGE>
Registrable Securities shall not include such securities if the Trust is willing
to deliver such an opinion and remove such legend.
"Registrable Securities then outstanding" shall mean, with respect to a
specified determination date, the Registrable Securities owned by all Holders on
such date.
"Registration Expenses" shall have the meaning set forth in Section 6.1.
-----------
"REIT Requirements" shall mean the requirements for the Trust to qualify as
a REIT under the Code.
"Securities Act" shall mean the Securities Act of 1933 and the rules and
regulations of the Commission thereunder, all as the same may be in effect at
the time.
"Selling Holders" shall mean, with respect to a specified registration
pursuant to this Agreement, Holders whose Registrable Securities are included in
such registration.
"Shelf Registration" shall have the meaning set forth in Section 2.1.
-----------
"Transfer" shall mean and include the act of selling, giving, transferring,
creating a trust (voting or otherwise), assigning or otherwise disposing of
(other than pledging, hypothecating or otherwise transferring as security) (and
correlative words shall have correlative meanings); provided however, that any
-------- -------
transfer or other disposition upon foreclosure or other exercise of remedies of
a secured creditor after an event of default under or with respect to a pledge,
hypothecation or other transfer as security shall constitute a "Transfer".
"Underwriters' Representative" shall mean the managing underwriter, or, in
the case of a co-managed underwriting, the managing underwriter designated as
the Underwriters' Representative by the co-managers.
"Violation" shall have the meaning set forth in Section 7.1.
-----------
1.2 Usage.
-----
(i) References to a Person are also references to its assigns and
successors in interest (by means of merger, consolidation or sale of all or
substantially all the assets of such Person or otherwise, as the case may be).
(ii) References to Registrable Securities "owned" by a Holder shall include
Registrable Securities beneficially owned by such Person but which are held of
record in the name of a nominee, trustee, custodian, or other agent.
(ii) References to a document are to it as amended, waived and otherwise
modified from time to time and references to a statute or other governmental
rule are to it as amended and otherwise modified from time to time (and
references to any provision thereof shall include references to any successor
provision).
-3-
<PAGE>
(iv) References to Sections or to Schedules are to sections hereof or
schedules hereto, unless the context otherwise requires.
(v) The definitions set forth herein are equally applicable both to the
singular and plural forms and the feminine, masculine and neuter forms of the
terms defined.
(vi) The term "including" and correlative terms shall be deemed to be
followed by "without limitation" whether or not followed by such words or words
of like import.
(vi) The term "hereof" and similar terms refer to this Agreement as a
whole.
(vi) The "date of" any notice or request given pursuant to this Agreement
shall be determined in accordance with Section 12.
----------
Section 2. Shelf Registrations.
-------------------
2.1 The Trust shall use its best efforts to cause to be filed with the
Commission within 90 days from the date hereof but in no event prior to that
date which is 60 days after the date hereof, a registration statement in
accordance with the Securities Act for an offering on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act (a "Shelf Registration") and
the Trust shall include therein all Registrable Securities; provided each Holder
will provide at least 10 business days notice of its intention to effect a
resale of any Registrable Securities pursuant to the Shelf Registration to the
Trust and the Trust's transfer agent. The notice requirement set forth in the
preceding sentence will be shortened to 3 business days for any resale made
within 30 days of a distribution of Registrable Securities by Starwood Mezzanine
or SOFI IV to their limited partners. In no event will any Holder be permitted
to Transfer any Registrable Securities in violation of federal and state
securities laws, including pursuant to the Shelf Registration if the Shelf
Registration has been suspended pursuant to Section 2.2 or prior to delivery by
-----------
the Trust of the requested number of prospectuses. Any Holder may Transfer
Registrable Securities at any time including periods during which the Shelf
Registration is suspended if such transfer is otherwise in compliance with
applicable state and federal securities law. Any notice given pursuant to this
Section 2.1 shall be addressed to the attention of the Secretary of the Trust
- -----------
and the Trust's transfer agent, and shall specify the maximum number of
Registrable Securities to be sold, the intended methods of disposition thereof
and the number of copies of the prospectus included in the Shelf Registration as
the Holder requests.
2.2 Subject to the provisions of this Section 2.2, the Trust shall be
-----------
entitled to postpone or suspend the filing, effectiveness, supplementing or
amending of any registration statement otherwise required to be prepared and
filed pursuant to this Section 2, if the Board of Trustees of the Trust
---------
determines that such registration and the Transfer of Registrable Securities
contemplated thereby would interfere with, or require premature disclosure of,
any material financing, acquisition, disposition, reorganization or other
transaction involving the Trust, including the filing of a registration
statement covering primary sales of securities by the Trust, as to which, in
each instance of the Trust determining that the registration and Transfer would
require premature disclosure, the Trust has a bonafide business purpose for
preserving the confidentiality thereof and the Trust promptly gives Starwood
Mezzanine, SAHI, SOFI IV and each Holder notice of such determination. Upon
receipt of such notice, Starwood Mezzanine, SAHI, SOFI IV and the Holders agree
to cease making offers or Transfers of Registrable Securities pursuant to such
registration statement. Notwithstanding the foregoing, during any period
commencing on the date of a distribution of Class A Shares by Starwood
-4-
<PAGE>
Mezzanine and/or SOFI IV to their limited partners and ending on the date that
all such distributed Class A Shares have been resold by the limited partners or
are otherwise immediately eligible for resale by the limited partners (other
than limited partners that are both affiliates of the Trust and are, or whose
affiliates are, a partner or member, directly or indirectly, of SOFI IV
Management, L.L.C., Starwood Capital Group, L.P. or Starwood Mezzanine Holding,
L.P. or an officer, member or Trustee of the Trust or the Advisor) under Rule
144(k) of the Securities Act, the Trust shall not postpone or suspend the
filing, effectiveness, supplementing or amending of any registration statement
(i) during the thirty-five (35) day period following any distribution of Class A
Shares by Starwood Mezzanine or SOFI IV to their limited partners, (ii) on more
than two (2) occasions during any 12 month period or (iii) for any period longer
than ninety (90) days; provided that in the event of a distribution by Starwood
-------- ----
Mezzanine or SOFI IV to their partners within a thirty (30) day period of more
than twenty five percent (25%) of the Class A Shares received by such
partnership pursuant to the Contribution Agreement, the thirty-five (35) day
period referred to in clause (i) above shall be a ninety (90) day period
commencing on the date of the first distribution in such thirty (30) day period.
Each of Starwood Mezzanine, SAHI, SOFI IV and each Holder hereby acknowledges
that any notice given by the Trust pursuant to this Section 2.2 may constitute
-----------
material non-public information and that the United States securities laws
prohibit any Person who has material non-public information about a company from
purchasing or selling securities of such company or from communicating such
information to any other Person under circumstances in which it is reasonably
foreseeable that such Person is likely to purchase or sell such securities.
2.3 Within 90 days of the date hereof, the Trust shall use its best
efforts to:
(i) file the Shelf Registration with the Commission and have the
registration declared effective under the Securities Act giving due regard to
the need to prepare current financial statements, conduct due diligence and
complete other actions that are reasonably necessary to effect a registered
public offering; and
(ii) subject to Section 2.2, keep the Shelf Registration continuously
-----------
effective until the Holders no longer hold any Registrable Securities.
2.4 Notwithstanding anything in this Agreement to the contrary, no
registration shall be effected under this Agreement and no Transfer of
Registrable Securities may be effected if as a result thereof the Trust would
not satisfy the REIT Requirements in any respect or if such registration or
Transfer would result in any Person Beneficially Owning Class A Shares in excess
of the ownership limitation provisions of the REIT Requirements or the Amended
and Restated Declaration of Trust of the Trust.
2.5 A registration pursuant to this Section 2 shall be on such appropriate
---------
registration form of the Commission as shall be selected by the Trust and shall
permit the disposition of the Registrable Securities in accordance with the
intended method or methods of disposition specified in each notice given
pursuant to Section 2.1.
-----------
2.6 If any Shelf Registration pursuant to Section 2 involves an
---------
underwritten offering (whether on a "firm commitment", "best efforts" or "all
reasonable efforts" basis or otherwise), the Majority Selling Holders
participating therein shall select the underwriter or underwriters and manager
or managers to administer such underwritten offering; provided, however, that
-------- -------
each Person so selected shall be reasonably acceptable to the Trust; provided,
--------
further, that no such underwriter shall be an
- -------
-5-
<PAGE>
entity 5% or more of which is owned by an employer - sponsor of any Holder that
is an "ERISA Partner" within the meaning of the Amended and Restated Agreement
of Limited Partnership of SOFI IV, as in effect on the date hereof.
2.7 During any period that a Shelf Registration remains effective,
Starwood Mezzanine and SOFI IV shall use their respective best efforts to
provide the Trust with at least 5 business days prior notice of a distribution
of Registrable Securities by such partnership to its partners and shall provide
to the Trust notice of all information reasonably necessary for purposes of
Section 12.2 with respect to each partner to which Class A Shares are to be so
- ------------
distributed.
Section 3. Piggyback Registration.
----------------------
3.1 If at any time prior to the later to occur of (a) the first
anniversary of the date on which Starwood Mezzanine and SOFI IV have distributed
all Class A Shares that they own to their limited partners and (b) the eighth
anniversary of the date hereof, the Trust proposes to register securities under
the Securities Act in connection with the public offering solely for cash on
Form S-1, S-2, S-3, or S-11 (or any replacement or successor forms), the Trust
shall promptly give each Holder written notice of such registration. Upon the
written request of each Holder given as promptly as practicable but in any event
within twenty (20) days following the date of such notice, the Trust shall cause
to be included in such registration statement and use its reasonable efforts to
be registered under the Securities Act all the Registrable Securities that each
such Holder shall have requested to be registered; provided, however, that such
-------- -------
right of inclusion shall not apply to any registration statement covering an
offering of debt securities or convertible debt securities (any such
registration in which Holders participate pursuant to this Section 3.1 being
-----------
referred to as a "Piggyback Registration"). The Trust shall have the absolute
right to delay, withdraw or cease to prepare or file any registration statement
for any offering referred to in this Section 3 without any obligation or
---------
liability to Starwood Mezzanine, SAHI, SOFI IV or any other Holder, it being
understood that any Registrable Securities previously included in any such
withdrawn Registration Statement shall not cease to be Registrable Securities by
reason of such inclusion or withdrawal.
3.2 If the Underwriters' Representative shall advise the Trust that, in
its opinion, the amount or type of Registrable Securities requested to be
included in such registration would adversely affect such offering, or the
timing thereof, then the Trust will include in such registration, to the extent
of the amount and class which the Trust is so advised can be sold without such
adverse effect in such offering: first, securities proposed to be sold by the
Trust with a value equal to 80% of the aggregate gross proceeds from the sale of
all securities included in such registration; second, Registrable Securities
requested to be included in such registration by Holders of Registrable
Securities other than SAHI and the partners of SAHI pursuant to this Section 3,
---------
pro rata based on the number of Registrable Securities owned by all such
Holders; provided that if any such Holder does not request inclusion of all of
-------- ----
its pro rata share of Registrable Securities, the other Holders may include
additional Registrable Securities up to the maximum number permitted to be
included for all such Holders, allocated and re-allocated pro rata based on the
aggregate amount of Registrable Securities held by such Holders until such
maximum number is reached; third, the Registrable Securities requested to be
included in such registration by SAHI or its partners pursuant to this Section
-------
3; and fourth, all other securities requested to be included in such
registration.
Section 4. Registration Procedures. Whenever required under Section 2 or
----------------------- ---------
Section 3 to effect the registration of any Registrable Securities, the Trust
- ---------
shall, as promptly as practicable:
-6-
<PAGE>
4.1 Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and in the case of a Shelf Registration,
use best efforts to cause such registration statement to become effective;
provided, however, that before filing a registration statement or prospectus or
- -------- -------
any amendments or supplements thereto, the Trust shall furnish to one firm of
counsel for the Selling Holders, copies of all such documents in the form
substantially as proposed to be filed with the Commission and shall in good
faith consider incorporating in each such document such changes as such counsel
to the Selling Holders reasonably and in a timely manner may suggest.
4.2 Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act and rules thereunder with respect to the disposition of all
securities covered by such registration statement. If the registration is for
an underwritten offering, the Trust shall amend the registration statement or
supplement the prospectus whenever required by the terms of the underwriting
agreement entered into pursuant to Section 5.2. If the registration statement
-----------
is for a Shelf Registration, the Trust shall amend the registration statement or
supplement the prospectus so that it will remain current and in compliance with
the requirements of the Securities Act for the period specified in Section
-------
2.3(ii), and if during such period any event or development occurs as a result
- -------
of which the registration statement or prospectus contains a misstatement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the Trust shall
promptly notify each Selling Holder and one counsel to the Selling Holders,
amend the registration statement or supplement the prospectus so that each will
thereafter comply with the Securities Act and furnish to each Selling Holder and
one counsel to the Selling Holders such amended or supplemented prospectus,
which each such Holder shall thereafter use in the Transfer of Registrable
Securities covered by such registration statement. Following receipt of such
notice and pending any such amendment or supplement described in this Section
-------
4.2, each such Holder shall cease making offers or Transfers of Registrable
- ---
Securities pursuant to the prior prospectus.
4.3 Furnish to each Selling Holder of Registrable Securities, without
charge, such numbers of copies of the registration statement, any pre-effective
or post-effective amendment thereto, the prospectus, including each preliminary
prospectus and any amendments or supplements thereto, in each case in conformity
with the requirements of the Securities Act and the rules thereunder, and such
other related documents as any such Selling Holder may reasonably request in
order to facilitate the disposition of Registrable Securities owned by such
Selling Holder.
4.4 Use best efforts in the case of a Shelf Registration and reasonable
efforts in the case of a registration pursuant to Section 3 (i) to register and
---------
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such states where an exemption from registration
is not available and as shall be reasonably requested by the Underwriters'
Representative or the Selling Holders and (ii) to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of the
offer and transfer of any of the Registrable Securities in any state, at the
earliest possible moment; provided, however, that the Trust shall not be
-------- -------
required in connection therewith or as a condition thereto to qualify to do
business or to consent to general service of process in any state.
4.5 In the event of any underwritten offering, use best efforts to enter
into and perform its obligations under an underwriting agreement (including
indemnification and contribution obligations of underwriters), in usual and
customary form, with the managing underwriter or underwriters of such
-7-
<PAGE>
offering. The Trust shall also cooperate with the Majority Selling Holders, and
the Underwriters' Representative for such offering in the marketing of the
Registrable Securities, including making available the officers, accountants,
counsel, premises, books and records of the Trust for such purpose, but the
Trust shall not be required to incur any material out-of-pocket expense pursuant
to this sentence.
4.6 Promptly notify each Selling Holder of any stop order issued or
threatened to be issued by the Commission in connection therewith and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
4.7 Make available for inspection by any Selling Holder, any underwriter
participating in such offering and the representatives of such Selling Holder
and Underwriter (but not more than one firm of counsel to such Selling Holders),
all financial and other information as shall be reasonably requested by them,
and provide any Selling Holder, any underwriter participating in such offering
and the representatives of such Selling Holder and Underwriter the reasonable
opportunity to discuss the business affairs of the Trust with its principal
executives and independent public accountants who have certified the audited
financial statements included in such registration statement, in each case all
as necessary to enable them to exercise their due diligence responsibility under
the Securities Act; provided, however, that information that the Trust
-------- -------
determines to be confidential and which the Trust advises such Person in
writing, is confidential shall not be disclosed unless such Person signs a
confidentiality agreement reasonably satisfactory to the Trust or the related
Selling Holder of Registrable Securities agrees to be responsible for such
Person's breach of confidentiality on terms reasonably satisfactory to the
Trust.
4.8 Use reasonable efforts to obtain a so-called "comfort letter" from the
independent public accountants of the Trust, and legal opinions of counsel to
the Trust addressed to the Selling Holders, in customary form and covering such
matters of the type customarily covered by such letters, and in a form that
shall be reasonably satisfactory to Starwood Mezzanine and SOFI IV. Delivery of
any such opinion or comfort letter shall be subject to the recipient furnishing
such written representations or acknowledgments as are customarily provided by
selling shareholders who receive such comfort letters or opinions.
4.9 Use reasonable efforts to cause the Registrable Securities covered by
such registration statement (i) if the Class A Shares are then listed on a
securities exchange or included for quotation in a recognized trading market, to
continue to be so listed or included for a reasonable period of time after the
offering, and (ii) to be registered with or approved by such other United States
or state governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Trust to enable the Selling Holders of
Registrable Securities to consummate the disposition of such Registrable
Securities.
4.10 Take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
each such registration.
Section 5. Holders' Obligations. It shall be a condition precedent to the
--------------------
obligations of the Trust to take any action pursuant to this Agreement with
respect to the Registrable Securities of any Selling Holder of Registrable
Securities that such Selling Holder shall:
-8-
<PAGE>
5.1 Furnish to the Trust such information regarding such Selling Holder,
the number of the Registrable Securities owned by it, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Selling Holder's Registrable Securities, and to cooperate fully with the
Trust in preparing such registration statement.
5.2 In the event of an underwritten offering agree to sell their
Registrable Securities to the underwriters at the same price and on
substantially the same terms and conditions as the Trust or the other Persons on
whose behalf the registration statement is being filed have agreed to sell their
securities, and to execute the underwriting agreement agreed to by the Majority
Selling Holders (in the case of a registration under Section 2) or the Trust (in
----------
the case of a registration under Section 3).
----------
Section 6.1 Expenses of Registration. Expenses in connection with
------------------------
registrations pursuant to this Agreement shall be allocated and paid as follows:
6.1 With respect to each Shelf Registration, the Trust shall bear and pay
all expenses incurred in connection with any registration, filing, or
qualification of Registrable Securities with respect to such registration for
each Selling Holder, including all registration, filing and National Association
of Securities Dealers, Inc. fees, all fees and expenses of complying with
securities or blue sky laws, all printing expenses, messenger and delivery
expenses, the reasonable fees and disbursements of counsel for the Trust, and of
the independent public accountants for the Trust, including the expenses of
"cold comfort" letters required by or incident to such performance and
compliance (the "Registration Expenses"), but excluding underwriting discounts
and commissions relating to Registrable Securities (which shall be paid on a pro
rata basis by the Selling Holders) and all fees and expenses of the Selling
Holders including counsel for the Selling Holders.
6.2 The Trust shall bear and pay all Registration Expenses incurred in
connection with any Piggyback Registrations pursuant to Section 3 but excluding
---------
underwriting discounts and commissions relating to Registrable Securities (which
shall be paid on a pro rata basis by the Selling Holders) and all fees and
expenses of counsel for the Selling Holders.
Section 7. Indemnification; Contribution. If any Registrable Securities
-----------------------------
are included in a registration statement under this Agreement:
7.1 To the extent permitted by applicable law, the Trust shall indemnify
and hold harmless each Selling Holder, each Person, if any, who controls such
Selling Holder within the meaning of the Securities Act, and each officer,
director, trustee, partner and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including reasonable attorneys' fees and
disbursements and reasonable expenses of investigation, incurred by such party
pursuant to any actual or threatened action, suit, proceeding or investigation,
or to which any of the foregoing Persons may become subject under the Securities
Act, the Exchange Act or other federal or state laws, insofar as such losses,
claims, damages, liabilities and expenses arise out of or are based upon any of
the following statements, omissions or violations (collectively, a "Violation"):
(i) Any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein, or any amendments or supplements thereto;
or
-9-
<PAGE>
(ii) 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; provided, however, that the indemnification required by this Section
-------- ------- -------
7.1 shall not apply to amounts paid in settlement of any such loss, claim,
- ---
damage, liability or expense if such settlement is effected without the consent
of the Trust (which consent shall not be unreasonably withheld), nor shall the
Trust be liable in any such case for any such loss, claim, damage, liability or
expense to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with information related to the
indemnified party furnished to the Trust by the indemnified party in writing
expressly for use in connection with such registration; and provided, further,
-------- -------
that the indemnity agreement contained in this Section 7 shall not apply to the
---------
extent that any such loss is based on or arises out of an untrue statement or
alleged untrue statement of a material fact, or an omission or alleged omission
to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such person at or prior to
the confirmation of sale to such person if an underwriter was under an
obligation to deliver such final prospectus and failed to do so.
7.2 To the extent permitted by applicable law, each Selling Holder shall
indemnify and hold harmless the Trust, and each of the officers, employees and
Trustees of the Trust who shall have signed the registration statement, each
Person, if any, who controls the Trust within the meaning of the Securities Act,
any other Selling Holder, any controlling Person of any such other Selling
Holder and each officer, director, trustee, partner and employee of such other
Selling Holder and such controlling Person, against any and all losses, claims,
damages, liabilities and expenses (joint and several), including reasonable
attorneys' fees and disbursements and reasonable expenses of investigation,
incurred by such party pursuant to any actual or threatened action, suit,
proceeding or investigation, or to which any of the foregoing Persons may
otherwise become subject under the Securities Act, the Exchange Act or other
federal or state laws, but only insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any Violation, in each
case to the extent that such Violation occurs in reliance upon and in conformity
with information related to the indemnified party seeking indemnification
furnished by such Selling Holder in writing expressly for use in connection with
such registration; provided, however, that (x) the indemnification required by
-------- -------
this Section 7.2 shall not apply to amounts paid in settlement of any such loss,
-----------
claim, damage, liability or expense if such settlement is effected without the
consent of the relevant Selling Holder (which consent shall not be unreasonably
withheld) and (y) in no event shall the amount of any indemnity under this
Section 7.2 exceed the proceeds (net of any underwriting discounts or
- -----------
commissions) from the applicable offering received by such Selling Holder.
7.3 Promptly after receipt by an indemnified party under this Section 7 of
---------
notice of the commencement of any action, suit, proceeding, investigation or
threat thereof made in writing for which such indemnified party may make a claim
under this Section 7, such indemnified party shall deliver to the indemnifying
---------
party a written notice thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
-------- -------
that an indemnified party shall have the right to retain its own counsel, with
the fees and disbursements and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time following the commencement of any
such action, if
-10-
<PAGE>
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 7 to the extent of such prejudice but shall not relieve the indemnifying
- ---------
party of any liability that it may have to any indemnified party otherwise than
pursuant to this Section 7. Any fees and expenses incurred by the indemnified
---------
party (including any fees and expenses incurred in connection with investigating
or preparing to defend such action or proceeding) shall be paid to the
indemnified party, as incurred, within thirty (30) days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). Any such indemnified party shall have the right to employ separate
counsel in any such action, claim or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be the expenses
of such indemnified party unless (i) the indemnifying party has agreed to pay
such fees and expenses or (ii) the indemnifying party shall have failed to
promptly assume the defense of such action, claim or proceeding or (iii) the
named parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel in writing that there
may be one or more legal defenses available to it which are different from or in
addition to those available to the indemnifying party and that the assertion of
such defenses would create a conflict of interest such that counsel employed by
the indemnifying party could not faithfully represent the indemnified party (in
which case, if such indemnified party notifies the indemnifying party in writing
that it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties, unless
in the reasonable judgment of such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such action, claim or proceeding, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels).
7.4 If the indemnification required by this Section 7 from the
---------
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 7:
- ---------
(i) The indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other things,
whether any Violation has been committed by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such Violation. 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 7.1 and
-----------
Section 7.2, any legal or other fees or expenses reasonably incurred by such
- -----------
party in connection with any investigation or proceeding.
-11-
<PAGE>
(ii) The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.4 were determined by pro rata allocation
-----------
or by any other method of allocation which does not take into account the
equitable considerations referred to in Section 7.4(i). 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.
(ii) In no event shall the amount of any contribution from the Selling
Holders under this Section 7.4 exceed the proceeds (net of any underwriting
-----------
commissions or discounts) from the applicable offering received by such Selling
Holder.
7.5 If indemnification is available under this Section 7, the indemnifying
---------
parties shall indemnify each indemnified party to the full extent provided in
this Section 7 without regard to the relative fault of such indemnifying party
---------
or indemnified party or any other equitable consideration referred to in Section
-------
7.4.
- ---
7.6 The obligations of the Trust and the Selling Holders of Registrable
Securities under this Section 7 shall survive the completion of any offering of
---------
Registrable Securities pursuant to a registration statement under this
Agreement, and otherwise.
Section 8. Determinations and Interpretation. All determinations of the
---------------------------------
Trust (or the Board of Trustees of the Trust) provided for in or pursuant to
this Agreement shall be made by the Independent Trustees, including, without
limitation, any determination pursuant to Section 2.2. All interpretations of
-----------
the terms of this Agreement shall be resolved on behalf of the Trust by the
Independent Trustees.
Section 9. Holdback. In connection with an underwritten offering of any
--------
securities covered by a registration statement filed by Trust, Starwood
Mezzanine, SAHI and SOFI IV, whether or not their Registrable Securities are
included in the registration statement, and each Selling Holder, if so requested
by the Underwriters' Representative shall not effect any public sale or
distribution of Class A Shares or any securities convertible into or
exchangeable or exercisable for Class A Shares, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
registration), during the 10-day period prior to, and during the 180-day period
in the case of the first registration statement declared effective after the
date hereof that registers resales of Registrable Securities pursuant to Section
-------
3 and 90 days in the case of any subsequent registration beginning on, the date
- -
such registration statement is declared effective under the Securities Act by
the Commission. In order to enforce the foregoing covenant, the Trust shall be
entitled to impose stop-transfer instructions with respect to the Registrable
Securities of each such Holder until the end of such period. Holders of
Registrable Securities shall have the right to participate in any such
registration on the terms provided in Section 3 hereof.
---------
Section 10. Amendment, Modification and Waivers; Further Assurances.
-------------------------------------------------------
(i) Subject to the partnership agreement of each of Starwood Mezzanine and
SOFI IV, this Agreement may be amended with the consent of the Trust and the
Trust may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Trust shall have obtained the
written consent of Starwood Mezzanine, SAHI and SOFI IV to such amendment,
action or omission to act and no consent or agreement of any other Holder shall
be required for such amendment, action or omission to act, provided that,
-------- ----
commencing on the date that Starwood Mezzanine and SOFI IV no longer own
Registrable Securities, the consent of the Holders owning a
-12-
<PAGE>
majority of the then outstanding Registrable Securities shall be required for
such amendment, action or omissions to act.
(ii) No waiver of any terms or conditions of this Agreement shall operate
as a waiver of any other breach of such terms and conditions or any other term
or condition, nor shall any failure to enforce any provision hereof operate as a
waiver of such provision or of any other provision hereof. No written waiver
hereunder, unless it by its own terms explicitly provides to the contrary, shall
be construed to effect a continuing waiver of the provisions being waived and no
such waiver in any instance shall constitute a waiver in any other instance or
for any other purpose or impair the right of the party against whom such waiver
is claimed in all other instances or for all other purposes to require full
compliance with such provision.
(ii) Each of the parties hereto shall execute all such further instruments
and documents and take all such further action as any other party hereto may
reasonably require in order to effectuate the terms and purposes of this
Agreement.
Section 11. Assignment; Benefit. This Agreement and all of the provisions
-------------------
hereof shall be binding upon and shall inure to the benefit of the parties
hereto, each Holder, each limited partner of Starwood Mezzanine and SOFI IV and
each indemnified party under Section 7 hereof and their respective heirs,
---------
assigns, executors, administrators or successors; provided, however, that
-------- -------
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by the Trust (except in connection with a merger,
reorganization, sale of all or substantially all of the assets of the Trust, or
similar transaction if the primary purpose of such transaction is to change the
domicile of the Trust or to change the form of the Trust to a corporation)
without the consent of Starwood Mezzanine, SAHI and SOFI IV (which consent shall
not be unreasonably withheld) or, in the event of an assignment or delegation
other than in connection with a merger, sale of all or substantially all of the
assets or stock of the Trust, recapitalization or similar transaction, without
the consent of each Holder.
Section 12. Miscellaneous.
-------------
12.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without giving regard to the
conflict of laws principles thereof.
12.2 Notices. All notices and requests given pursuant to this Agreement
-------
shall be in writing and shall be made by hand-delivery, first-class mail
(registered or certified, return receipt requested), confirmed facsimile or
overnight air courier guaranteeing next business day delivery to the relevant
address specified on Schedule I, as otherwise specified to the Trust in writing
or to the address set forth in the stock record books of the Trust. Except as
otherwise provided in this Agreement, the date of each such notice and request
shall be deemed to be, and the date on which each such notice and request shall
be deemed given shall be: at the time delivered, if personally delivered or
mailed; when receipt is acknowledged, if sent by facsimile; and the next
business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next business day delivery.
12.3 Entire Agreement; Integration. This Agreement supersedes all prior
-----------------------------
agreements between or among any of the parties hereto, including the Original
Agreement with respect to the subject matter contained herein and therein, and
such agreements embody the entire understanding among the parties relating to
such subject matter.
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<PAGE>
12.4 Section Headings. Section headings are for convenience of reference
----------------
only and shall not affect the meaning of any provision of this Agreement.
12.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, and all of which shall
together constitute one and the same instrument. All signatures need not be on
the same counterpart.
12.6 Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable, such invalidity or unenforceability shall not affect the validity
and enforceability of the remaining provisions of this Agreement, unless the
result thereof would be unreasonable, in which case the parties hereto shall
negotiate in good faith as to appropriate amendments hereto.
12.7 Termination. Subject to the terms of the Amended and Restated
-----------
Agreement of Limited Partnership of each of Starwood Mezzanine and SOFI IV, as
in effect on the date hereof, this Agreement may be terminated at any time by a
written instrument signed by the Trust and each Holder. Unless sooner
terminated in accordance with the preceding sentence, this Agreement (other than
Section 7 hereof) shall terminate in its entirety on such date as there shall be
- ---------
no Registrable Securities outstanding, provided that any Class A Shares
--------
previously subject to this Agreement shall not be Registrable Securities
following the date such Class A Shares no longer meet the definition of
Registrable Securities.
12.8 Submission to Jurisdiction. Each of the parties hereto and each of
--------------------------
the Holders irrevocably submits and consents to the jurisdiction of the United
States District Court for the Southern District of New York in connection with
any action or proceeding arising out of or relating to this Agreement, and
irrevocably waives any immunity from jurisdiction thereof and any claim of
improper venue, forum non conveniens or any similar basis to which it might
----- --- ----------
otherwise be entitled in any such action or proceeding.
12.9 References to Date Hereof. References to "the date hereof" or "the
-------------------------
date of this Agreement" shall be to the date of this Amended and Restated
Registration Rights Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first written above.
STARWOOD FINANCIAL TRUST
a California business trust
By: /s/ Jay Sugarman
------------------------------------------
Name: Jay Sugarman
Title: CEO
STARWOOD MEZZANINE INVESTORS, L.P.
a Delaware limited partnership
By: Starwood Capital Group, L.P.
its general partner
By: BSS Capital Partners, L.P.
its general partner
By: Sternlicht Holdings II, Inc.
its general partner
By: /s/ Jerome C. Silvey
-------------------------------------------
Name: Jerome C. Silvey
Title: Senior Vice President
SAHI PARTNERS
a Delaware general partnership
By: SAHI, Inc.
a general partner
By: /s/ Jerome C. Silvey
-------------------------------------------
Name: Jerome C. Silvey
Title: Senior Vice President
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<PAGE>
STARWOOD OPPORTUNITY FUND IV, L.P.,
a Delaware limited partnership
By: SOFI IV Management, L.L.C.
Its: General Partner
By: Starwood Capital Group, L.L.C.
Its General Manager
/s/ Jerome C. Silvey
----------------------------------------------
By: Jerome C. Silvey
Its: Senior Vice President
<PAGE>
SCHEDULE I
ADDRESSES FOR NOTICE
If to the Trust to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
If to Starwood Mezzanine to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
If to SAHI Partners to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
<PAGE>
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
If to SOFI IV to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
<PAGE>
Exhibit 10.2
STARWOOD FINANCIAL TRUST
1996 LONG-TERM INCENTIVE PLAN
(AMENDED AND RESTATED AS OF March 13, 1998)
I. INTRODUCTION
1.1 PURPOSES AND GENERAL. Effective as of September 26, 1996, Starwood
Financial Trust (formerly known as Angeles Participating Mortgage Trust) (the
"Trust") established the Angeles Participating Mortgage Trust 1996 Share
Incentive Plan and the Angeles Participating Mortgage Trust 1996 Trustees' Share
Incentive Plan. The following provisions constitute an amendment, restatement,
merger and continuation of the Angeles Participating Mortgage Trust 1996 Share
Incentive Plan and the Angeles Participating Mortgage Trust 1996 Trustees' Share
Incentive Plan into one plan effective as of March 13, 1998 (the "Effective
Date"), which on and after the Effective Date shall be known as the Starwood
Financial Trust 1996 Long-Term Incentive Plan (the "Plan"). The purposes of the
Plan are to align the interests of the Trust's shareholders and the recipients
of awards under this Plan by increasing the proprietary interest of such
recipients in the Trust's growth and success and to advance the interests of the
Trust by attracting and retaining officers, key employees, consultants and
advisers, as well as qualified persons for service as trustees of the Trust
("Trustees"). For purposes of this Plan, references to employment by or service
as an officer, employee, consultant, adviser or Trustee of the Trust shall also
mean employment by or service as an officer, employee, consultant, adviser,
trustee or director of a subsidiary or affiliate of the Trust. In addition,
references to Trustees include persons elected as Trustees who will begin to
serve as Trustee at a future date.
The Plan seeks to accomplish the foregoing purposes by providing a means
whereby (i) options ("Options") to purchase from the Trust Class A Shares of
beneficial interest, par value $.01 per share ("Shares") may be granted in
accordance with Section II to Eligible Persons and shall be granted, in
accordance with Section V, to Trustees, (ii) Shares may be granted in accordance
with Section III to Eligible Persons, and (iii) Performance Awards may be
granted in accordance with Section IV to Eligible Persons.
The Administrator (as defined in Section 1.3) may designate an Option as
an "incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor provision (an
"incentive share option").
1.2 CERTAIN DEFINITIONS. As used herein, the words set forth in the
Glossary contained in Section 6.12 shall have the meanings therein indicated.
1.3 ADMINISTRATION. This Plan shall be administered by the Board or the
Committee (the "Administrator"). Any one or a combination of the following
Awards may be made under this Plan to Eligible Persons: (i) Options; (ii)
Restricted Share Awards; (iii)
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<PAGE>
Performance Awards. The Administrator may, subject to the terms of this Plan,
select Eligible Persons for participation in the Plan and shall determine the
form, amount and timing of each Award and, if applicable, the number of Options,
Shares or Performance Awards subject to such an Award, the exercise price or
base price associated with the Award, the time and conditions of exercise or
settlement of the Award and all other terms and conditions of the Award,
including without limitation the form of the Agreement relating to the Award.
The Administrator may, in its sole discretion and for any reason at any time,
subject to the requirements imposed by Section 162(m) of the Code and
regulations promulgated thereunder in the case of an Award intended to be
qualified performance-based compensation, take action such that (i) any or all
outstanding Options shall become exercisable in part or in full, (ii) all or a
portion of the Restriction Period applicable to any outstanding Restricted Share
Award shall lapse, (iii) all or a portion of the Performance Period applicable
to any outstanding Performance Award shall lapse, (iv) the Performance Measures
applicable to any outstanding Option or Restricted Share Award and to any
outstanding Performance Award shall be deemed to be satisfied in whole or in
part.
The Administrator shall, subject to the terms of this Plan, interpret this
Plan and the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan and may impose,
incidental to the grant of an Award, conditions with respect to the Award, such
as limiting competitive employment or other activities. All such
interpretations, rules, regulations and conditions shall be conclusive and
binding on all parties. Each Award shall be evidenced by a written Agreement
between the Trust and the holder setting forth the terms and conditions
applicable to such Award.
Subject to the express provisions of this Plan, the Administrator shall
have the authority:
(1) to determine from among those persons eligible to receive an
Award the particular Eligible Persons who will receive any Awards;
(2) to grant Awards to Eligible Persons, determine the price at which
Awards will be offered or awarded and the amount of Awards to any of such
Persons, and determine the other specific terms and conditions of such
Awards consistent with the express limits of this Plan, and establish the
installments (if any) in which such Awards shall become exercisable or
shall vest, or determine that no delayed exercisability or vesting is
required, and establish the events of termination or reversion (if any) of
such Awards;
(3) to approve the forms and terms of Agreements, which need not be
identical either as to type of Award or among Eligible Persons;
(4) to construe and interpret this Plan and any Agreements, further
define the terms used in this Plan and prescribe, amend and rescind rules
and regulations relating to the administration of this Plan;
-2-
<PAGE>
(5) to cancel, modify or waive the Trust's rights with respect to,
any or all outstanding Awards;
(6) to accelerate the exercisability or vesting or extend the term of
any or all such outstanding Awards within the maximum term permitted under
this Plan; and
(7) to make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable for the
administration of this Plan and the effectuation of its purposes.
Any action taken by, or inaction of, the Trust, the Board or the Committee
relating or pursuant to this Plan shall be within the absolute discretion of
that entity or body and shall be conclusive and binding upon all persons. No
member of the Board or Committee, or officer of the Trust or any subsidiary,
shall be liable for any such action or inaction of the entity or body, of
another person or, except in circumstances involving bad faith, of himself or
herself. Subject only to compliance with the express provisions hereof, each of
the Board and the Committee may act in its absolute discretion in matters within
its authority related to this Plan.
In making any determination or in taking or not taking any action under
this Plan, the Committee or the Board, as the case may be, may obtain and rely
upon the advice of experts, including professional advisors to the Trust. No
Trustee, officer or Agent of the Trust shall be liable for any such action or
determination taken or made or omitted in good faith.
The Administrator may delegate ministerial, non-discretionary functions to
individuals who are officers or employees of the Trust.
The Administrator may delegate in writing signed by the Chairman of the
Administrator some or all of its power and authority hereunder to the Chief
Executive Officer or Chief Operating Officer or other executive officer of the
Trust as the Administrator deems appropriate; provided, however, that the
Administrator may not delegate its power and authority with regard to (i) the
grant of an Award to any person who is a "covered employee" within the meaning
of Section 162(m) of the Code or who, in the Administrator's judgment, is likely
to be a covered employee at any time during the period an Award hereunder to
such employee would be outstanding, if the Administrator intends that
compensation payable pursuant to such an Award be qualified performance-based
compensation, or (ii) the selection for participation in this Plan of an officer
or other person subject to Section 16 of the Exchange Act or decisions
concerning the timing, pricing or amount of an Award to such an officer or other
person.
A majority of the Administrator shall constitute a quorum. The acts of the
Administrator shall be either (i) acts of a majority of the members of the
Administrator present at any meeting at which a quorum is present or (ii) acts
approved in writing by all of the members of the Administrator without a
meeting.
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<PAGE>
1.4 ELIGIBILITY. Participants in this Plan shall consist of such
officers, key employees, consultants, advisers and Trustees of the Trust and its
subsidiaries as the Administrator in its sole discretion may select from time to
time ("Eligible Persons"), provided that only employees of the Trust (or a
subsidiary of the Trust) will be Eligible Persons to whom may be granted an
Option which designated as an incentive share option. The Administrator's
selection of a person to participate in this Plan at any time shall not require
the Administrator to select such person to participate in this Plan at any other
time. Trustees shall also participate in this Plan in accordance with Section
V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.6,
the aggregate number of Shares available from time to time for all Awards of
Options or Share Awards under this Plan shall be 29,926,114 Shares, reduced by
the aggregate number of Shares subject to outstanding Options and outstanding
Share Awards under the Plan. In the event the number of outstanding Shares
increases after the Effective Date, the maximum number of Shares reserved for
Awards will be adjusted automatically so that the maximum number equals 9% of
the outstanding Shares on a fully diluted basis, provided that the number of
Shares reserved for grants of Options designated as incentive share options will
not be so increased over the number of such Shares as of the date shareholders
approve the restatement of the Plan. Subject to adjustment as provided in
Section 6.6, the number of Shares available for grants of Options designated as
incentive share options shall be 29,926,114.
To the extent that Shares subject to (i) an outstanding Option or (ii) a
Share Award, are not issued or delivered or are canceled or forfeited by reason
of the expiration, termination, cancellation or forfeiture of any such Award,
then such Shares shall again be available under this Plan.
Shares to be delivered under this Plan shall be made available (i) by the
Trust from authorized and unissued Shares issued by the Trust directly to the
holder, (ii) from authorized and issued Shares acquired and held by the Trust or
(iii) a combination thereof.
The maximum number of Shares with respect to which Options or Share Awards
or a combination thereof may be granted to any person other than an advisor to
the Trust during any calendar year shall be 8,000,000 subject to adjustment as
provided in Section 6.6.
II. OPTIONS
2.1 AWARDS OF OPTIONS. The Administrator may, in its discretion, grant
Options to such Eligible Persons as may be selected by the Administrator. The
Administrator may designate that an Option is intended to be an incentive share
option. Each Option that is not designated an incentive share option shall be a
non-qualified share option. Each Option that is designated as an incentive
share option shall be granted within ten years of the Effective Date of this
Plan. To the extent that the aggregate Fair Market Value (determined as of the
date of grant) of Shares with respect to which Options designated as incentive
share options are exercisable for the first time by a holder during any calendar
year (under this Plan or any other plan of the Trust
-4-
<PAGE>
or any parent or subsidiary) exceeds the amount (currently $100,000) established
by the Code, such Options shall constitute non-qualified share options.
2.2 TERMS OF OPTIONS. Options shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Administrator shall deem
advisable:
(a) Number of Shares and Purchase Price. The number of Shares subject
to an Option and the purchase price per Share purchasable upon exercise of
the Option shall be determined by the Administrator; provided, however,
that the purchase price per Share under an Option that is designated as an
incentive share option shall not be less than 100% of the Fair Market Value
of a Share on the date of grant of such Option; provided further, that if
an Option designated as an incentive share option is granted to an Eligible
Person who owns shares of beneficial interest possessing more than ten
percent (10%) of the total combined voting power of all classes of shares
of beneficial interest of the Trust (or of any parent or subsidiary) (a
"Ten Percent Holder"), the purchase price per Share shall be the price
(currently 110% of Fair Market Value of a Share) required by the Code in
order to constitute an incentive share option.
(b) Option Period and Exercisability. The period during which an
Option may be exercised shall be determined by the Administrator; provided,
however, that no Option designated as an incentive share option shall be
exercised later than ten years after its date of grant; provided further,
that if an Option designated as an incentive share option shall be granted
to a Ten Percent Holder, such Option shall not be exercised later than five
years after its date of grant. The Administrator shall determine whether
an Option shall become exercisable in cumulative or non-cumulative
installments and in part or in full at any time. An exercisable Option, or
portion thereof, may be exercised only with respect to whole Shares.
Except to the extent otherwise specified in the Agreement relating to an
Option, in the event of a Change of Control, such Option shall become
immediately exercisable for the full amount of Shares subject thereto and
shall be exercisable until expiration of the term of such Option.
(c) Method of Exercise. An Option may be exercised (i) by giving
written notice to the Trust specifying the number of whole Shares to be
purchased and accompanied by payment thereof in full (or arrangement made
for such payment to the Trust's satisfaction) either (A) in cash, (B) by
delivery of previously-owned whole Shares (which the holder has held for at
least six months prior to the delivery of such Shares or which the holder
purchased on the open market and for which the holder has good title, free
and clear of all liens and encumbrances) having a Fair Market Value,
determined as of the date of exercise, equal to the aggregate purchase
price payable by reason of such exercise, (C) in cash by a broker-dealer
acceptable to the Trust to whom the holder has submitted an irrevocable
notice of exercise or (D) a combination of (A) and (B), in each case to the
extent set forth in the Agreement relating to the Option and (ii) by
executing such documents as the Trust may reasonably request. The
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<PAGE>
Administrator shall have sole discretion to disapprove of an election
pursuant to either clause (B) or (C). Any fraction of a Share which would
be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the holder. No certificate
representing a Share shall be delivered until the full purchase price
therefor has been paid.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates by reason of Disability or death,
each Option held by such optionee shall be fully exercisable and may
thereafter be exercised by such optionee (or such optionee's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be) until and including the earlier to occur of (i) the date which
is one year (or such other period as set forth in the Agreement relating to
such Option) after the effective date of such optionee's termination of
employment or service or date of death, as the case may be, and (ii) the
expiration date of the term of such Option.
(b) Termination for Cause. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates for Cause, each Option held by
such optionee, whether or not then exercisable, shall terminate
automatically on the effective date of such optionee's termination of
employment or service.
(c) Other Termination. Subject to paragraph (e) below and unless
otherwise specified in the Agreement relating to an Option, if the
optionee's employment with the Trust or service as an officer or
consultant, adviser or Trustee terminates for any reason other than
Disability, death or termination by the Trust for Cause, each Option held
by such optionee shall be exercisable only to the extent that such Option
is exercisable on the effective date of such optionee's termination of
employment or service and may thereafter be exercised by such optionee (or
such optionee's legal representative or similar person) until and including
the earlier to occur of (i) the date which is three months (or such other
period as set forth in the Agreement relating to such Option) after the
effective date of such optionee's termination of employment or service and
(ii) the expiration date of the term of such Option.
(d) Death Following Termination of Employment or Service. Subject to
paragraph (e) below and unless otherwise specified in the Agreement
relating to an Option, if an optionee dies during the one-year period
following termination of employment or service by reason of Disability or
if an optionee dies during the three-month period following termination of
employment or service for any reason other than
-6-
<PAGE>
Disability or Cause (or, in each case, such other period as the
Administrator may specify in the Agreement relating to an Option), each
Option held by such optionee may thereafter be exercised by such optionee's
executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until and including the earlier to occur of (i)
the date which is three months (or such other period as set forth in the
Agreement relating to such Option) after the date of death (but in the case
of death following termination of employment or service by reason of
Disability, the date which is one year (or such other period as set forth
in the Agreement relating to such Option) after the date of death), and
(ii) the expiration date of the term of such Option.
(e) Termination of Employment -- Incentive Share Options. Unless
otherwise specified in the Agreement relating to an Option designated as an
incentive share option, if the employment with the Trust of an optionee of
such an Option terminates by reason of Permanent and Total Disability (as
defined in Section 22(e) (3) of the Code) or death, each such Option shall
be fully exercisable and may thereafter be exercised by such optionee (or
such optionee's executor, administrator, legal representative, beneficiary
or similar person, as the case may be) until and including the earlier to
occur of (i) the date which is one year (or such shorter period as set
forth in the Agreement relating to such Option) after the effective date of
such optionee's termination of employment by reason of Permanent and Total
Disability or date of death, as the case may be, and (ii) the expiration
date of the term of such Option.
Unless otherwise specified in the Agreement relating to an Option
designated as an incentive share option, if the employment with the Trust
of an optionee of such an Option terminates for Cause, each such Option,
whether or not then exercisable, shall terminate automatically on the
effective date of such optionee's termination of employment.
Unless otherwise specified in the Agreement relating to an Option
designated as an incentive share option, if the employment with the Trust
of an optionee of such an Option terminates for any reason other than
Permanent and Total Disability, death or Cause, each such Option shall be
exercisable only to the extent such Option is exercisable on the effective
date of such optionee's termination of employment and may thereafter be
exercised by such optionee (or such optionee's legal representative or
similar person) until and including the earlier to occur of (i) the date
which is three months after the effective date of such optionee's
termination of employment and (ii) the expiration date of the term of such
Option.
If the optionee of an Option designated as an incentive share option
dies during the one-year period following termination of employment by
reason of Permanent and Total Disability (or such shorter period as set
forth in the Agreement relating to such Option), or if the optionee of such
an Option dies during the three-month period following termination of
employment for any other reason (other than for Cause), each such Option
held by such optionee may thereafter be exercised by the optionee's
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executor, administrator, legal representative, beneficiary or similar
person until and including the earliest to occur of (i) the date which is
three months after the date of death and (ii) the expiration date of the
term of such Option.
III. SHARE AWARDS
3.1 SHARE AWARDS. The Administrator may, in its discretion, grant
Restricted Share Awards to such Eligible Persons as may be selected by the
Administrator.
3.2 TERMS OF SHARE AWARDS. Restricted Share Awards shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions not inconsistent with the terms of this Plan, as the Administrator in
its discretion shall deem advisable.
(a) Number of Shares and Other Terms. The number of Shares subject to
a Restricted Share Award and the Performance Measures (if any) and
Restriction Period applicable to a Restricted Share Award shall be
determined by the Administrator.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted
Share Award shall provide, in the manner determined by the Administrator in
its discretion and subject to the provisions of this Plan, for the vesting
of the Shares subject to such Award either (i) in accordance with the
attainment or satisfaction of specified Performance Measures during the
specified Restriction Period or (ii) over a period of years of employment
by, service to or compliance with agreements with the Trust during the
specified Restriction Period (or both), and for the forfeiture of the
Shares subject to such Award (x) if specified Performance Measures are not
satisfied or met during the specified Restriction Period or (y) if the
holder of such Award does not remain in the employment of or service to the
Trust or in compliance with such agreements with the Trust during the
specified Restriction Period. Except to the extent otherwise specified in
the Agreement relating to a Restricted Share Award, all Shares subject to
such an Award shall immediately vest in full in the event of a Change of
Control.
(c) Share Certificates. During the Restriction Period, a certificate
or certificates evidencing Shares issued as a Restricted Share Award may be
registered in the holder's name and may bear a legend, in addition to any
legend which may be required pursuant to Section 6.6, indicating that the
ownership of the Shares represented by such certificate is subject to the
restrictions, terms and conditions of this Plan and the Agreement relating
to the Restricted Share Award. All such certificates shall be deposited
with the Trust, together with stock powers or other instruments of
assignment (including a power of attorney), each endorsed in blank with a
guarantee of signature if deemed necessary or appropriate by the Trust,
which would permit transfer to the Trust of all or a portion of the Shares
subject to the Restricted Share Award in the event such award is forfeited
in whole or in part. Upon termination of any applicable Restriction Period
(and the satisfaction or attainment of any applicable Performance
Measures),
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subject to the Trust's right to require payment of any taxes in
accordance with Section 6.5, a certificate or certificates evidencing
ownership of the requisite number of Shares shall be delivered to the
holder of such award.
(d) Rights with Respect to Restricted Share Awards. Unless otherwise
set forth in the Agreement relating to a Restricted Share Award, and
subject to the terms and conditions of a Restricted Share Award, the holder
of such award shall have all rights as a shareholder of the Trust,
including, but not limited to, voting rights, the right to receive
dividends and the right to participate in any capital adjustment applicable
to all holders of Shares.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Unless otherwise set forth in the Agreement
relating to a Restricted Share Award, if the holder's employment with the
Trust or service as an officer or consultant, adviser or Trustee terminates
by reason of Disability or death, the Restriction Period shall terminate as
of the effective date of such holder's termination of employment or
service, and any applicable Performance Measures shall be computed through
such date.
(b) Other Termination. Unless otherwise set forth in the Agreement
relating to a Restricted Share Award, if the holder's employment with the
Trust or service as an officer or consultant, adviser or Trustee terminates
for any reason other than Disability or death, the portion of such Award
which is subject to a Restriction Period or any Performance Measure on the
effective date of such holder's termination of employment or service shall
be forfeited by such holder and such portion shall be canceled by the
Trust.
IV. PERFORMANCE AWARDS
4.1 PERFORMANCE AWARDS. The Administrator may, in its discretion, grant
Performance Awards to such Eligible Persons as may be selected by the
Administrator.
4.2 TERMS OF PERFORMANCE AWARDS. Performance Awards shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Administrator
shall in its discretion deem advisable.
(a) Grant of Performance Awards. A Performance Award may be granted
only in tandem with an Option which is being or was granted under Section
II and shall apply to all or such portion of the Shares subject to such
Option as the Administrator may designate. The Performance Period and
Performance Measure of a Performance Award shall be as designated by the
Administrator.
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(b) Vesting and Forfeiture. The Agreement relating to a Performance
Award shall provide, in the manner determined by the Administrator in its
discretion and subject to the provisions of this Plan, for the vesting of
such award if specified Performance Measure(s) are satisfied or met during
the specified Performance Period, and for the forfeiture of such award if
specified Performance Measure(s) are not satisfied or met during the
specified Performance Period. To the extent not otherwise provided in such
Agreement, such vesting and forfeiture provisions shall be as provided in
this Plan.
(c) Settlement of Vested Performance Awards. Vested Performance
Awards shall be settled in cash to the extent that both (i) the applicable
Option has been exercised (whether before or after expiration of the
Performance Period) with respect to Shares subject to the Performance Award
and (ii) the Performance Period has expired. The amount shall be the sum
(without interest or compounding) of all dividends and distributions per
Share (subject to adjustment as provided in Section 6.7) during the
Performance Period and thereafter through any subsequent exercise of
Options, multiplied by the number of such Shares purchased upon such
exercise. Except to the extent otherwise provided in the Agreement
relating to a Performance Award, in the event of a Change of Control the
Performance Period shall expire and the Performance Measure shall be
computed through such date and the applicable Performance Award shall
forthwith be settled on the date of such Change of Control or if later upon
exercise of the applicable Options. Notwithstanding the foregoing, if the
Administrator in good faith determines that a payment in settlement of a
Performance Award will or is likely to render the Trust insolvent, the
Administrator may elect to defer such payment for a reasonable period of
time and to pay at a later date with interest at such reasonable rate as
the Administrator may determine.
4.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) Disability or Death. Except to the extent otherwise set forth in
the Agreement relating to a Performance Award, if the employment of the
holder of a Performance Award or his or her service as an officer or
consultant, adviser or Trustee of the Trust terminates by reason of
Disability or death, the Performance Period with respect to such
Performance Award shall terminate and the Performance Measure shall be
computed through such date and the applicable Performance Award shall be
settled as soon as practicable within 10 days thereafter, or if later, upon
exercise of the applicable Option, subject to the provisions of Section
4.2(c).
(b) Other Termination. Except to the extent otherwise set forth in
the Agreement relating to a Performance Award, if the holder's employment
with the Trust or service as an officer or consultant, adviser or Trustee
terminates for any reason other than Disability or death, the Performance
Period for such Performance Award shall be deemed to end on the date of
such termination, no Performance Measure shall be recognized or deemed
attained, satisfied or met, and the holder's Performance Award shall be
immediately forfeited to and canceled by the Trust.
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V. CERTAIN PROVISIONS RELATING TO TRUSTEES
5.1 ELIGIBILITY. Each Trustee who is not an officer or employee of the
Trust or a subsidiary of the Trust ("Eligible Trustee") shall be granted Options
in accordance with this Section V and may, in the discretion of the
Administrator, be granted additional Options, subject to such terms and
conditions as the Administrator shall deem advisable. All Options granted under
this Section V shall constitute non-qualified share options.
5.2 GRANTS OF OPTIONS. Each Eligible Trustee shall be granted Options as
follows:
(a) Time of Grant. As of the close of each Annual Meeting of
Shareholders held after the Effective Date, each Eligible Trustee on such
date shall be granted an Option to purchase 10,000 Shares. An individual
who becomes an Eligible Trustee after the Effective Date but on a date
other than the date of the Annual Meeting of Shareholders shall receive an
Option to purchase 10,000 Shares on the date he becomes an Eligible
Trustee, subject to a pro rata reduction to reflect the portion of the 12-
month period which has elapsed since the last preceding Annual Meeting of
Shareholders during which the individual was not an Eligible Trustee. The
purchase price per Share subject to each Option shall be equal to 100% of
the Fair Market Value of a Share on the date of grant of such Option.
(b) Option Period and Exercisability. Each Option granted under
paragraph (a) above shall be fully exercisable on and after its date of
grant, shall expire ten years after its date of grant (notwithstanding
termination of service as a Trustee for any reason prior to such ten-year
anniversary date) and may be exercised in whole or in part (only with
respect to whole Shares). Options granted under this Article V shall be
exercisable in accordance with Section 2.2(c).
(c) Death. If a Trustee dies while an Option is outstanding, such
Option may thereafter be exercised by such Trustee's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be, until and including the expiration date of the term of such
Option.
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan, as amended and restated,
shall be submitted to the shareholders of the Trust for approval within one year
after the date of approval of such amendment and restatement by the Board and,
if approved by a majority of all the votes cast at a meeting of shareholders at
which a quorum is present, shall become effective as of the Effective Date and
shall apply, without limitation, to all Awards then or theretofore made or
granted under this Plan. This Plan shall terminate on March 13, 2008 (ten
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years after the Effective Date) unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any Award
granted prior to termination.
Awards may be granted hereunder at any time prior to the termination of
this Plan, provided that no Award may be granted later than ten years after the
Effective Date of this Plan. In the event that this Plan, as amended and
restated, is not approved by the shareholders of the Trust within one year after
the date of approval by the Board, the amendments made as of the Effective Date
and any Awards granted pursuant to the Plan as so amended and restated shall be
null and void; provided that such failure to obtain shareholder approval shall
have no effect on any Options awarded under the Plan as in effect before such
date.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of shareholder approval required by applicable law,
rule or regulation including Rule 16b-3 under the Exchange Act and Sections 422
and 856 of the Code; provided, however, that any amendment with respect to the
persons eligible for Options designated as incentive share options or the number
of Shares reserved therefor or the maximum number of Options or Share Awards
that may be granted to any person in any calendar year under the Plan shall not
be effective without shareholder approval of such amendment within 12 months
before or after the date such amendment is approved by the Board. No amendment
may impair the rights of a holder of an outstanding Award without the consent of
such holder.
6.3 NON-TRANSFERABILITY. No Option or Performance Award shall be
transferable other than by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Trust. Except to
the extent permitted by the foregoing sentence, each Option or Performance Award
may be exercised or settled during the optionee's lifetime only by the optionee
or the optionee's legal representative or similar person. Except as permitted
by the second preceding sentence, no Option or Performance Award shall be sold,
transferred, assigned, pledged, hypothecated, voluntarily encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, voluntarily encumber or otherwise dispose
of any Option or Performance Award, such Option or Performance Award and all
rights thereunder shall, to the extent of any such attempt, immediately become
null and void.
Restricted Share granted under this Plan shall be transferable, subject to
the transferee's receiving such Restricted Share subject to the same
restrictions as those applicable to the transferor. Upon any such transfer, the
transferee shall execute such appropriate documents that may be requested by the
Trust to evidence the transferee's acceptance of the restrictions applicable to
such Restricted Share.
6.4 TAX WITHHOLDING. The Trust shall have the right to require, prior to
the delivery of any Shares or the payment of any cash pursuant to an Award made
hereunder, payment by the holder of such Award of any federal, state, local or
other taxes which may be required to be withheld or paid in connection with such
Award. An Agreement may provide that
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the holder of an Award may satisfy any such obligation by any of the following
means: (A) a cash payment to the Trust, (B) delivery to the Trust of previously-
owned whole Shares (which such holder has held for at least six months prior to
the delivery of such Shares or which such holder purchased on the open market
and for which such holder has good title, free and clear of all liens and
encumbrances) having an aggregate Fair Market Value, determined as of the date
the obligation to withhold or pay taxes arises in connection with an Award (the
"Tax Date"), equal to the amount necessary to satisfy any such obligation, (C)
in the case of the exercise of an Option, a cash payment by a broker-dealer
acceptable to the Trust to whom the holder has submitted an irrevocable notice
of exercise or (D) any combination of (A) and (B), in each case to the extent
set forth in the Agreement relating to the Award; provided, however, that the
Administrator shall have sole discretion to disapprove of an election pursuant
to any of the foregoing clauses (B) through (D). An Agreement may provide for
Shares to be delivered having a Fair Market Value in excess of the minimum
amount required to be withheld, but not in excess of the amount determined by
applying the holder's maximum marginal tax rate. Any fraction of a Share which
would be required to satisfy such an obligation shall be disregarded and the
remaining amount due shall be paid in cash by the holder.
6.5 RESTRICTIONS ON SHARES. Each Award hereunder shall be subject to the
requirement that if at any time the Trust determines that the listing,
registration or qualification of the Shares subject to such Award upon any
securities exchange or under any law, or the consent or approval of any
governmental body, or the taking of any other action is necessary or desirable
as a condition of, or in connection with, the delivery of Shares thereunder,
such Shares shall not be delivered unless such listing, registration,
qualification, consent, approval or other action shall have been effected or
obtained, free of any conditions not acceptable to the Trust. The Trust may
require that certificates evidencing Shares delivered pursuant to any Award made
hereunder bear a legend indicating that the sale, transfer or other disposition
thereof by the holder is prohibited except in compliance with the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
Notwithstanding any other provision hereunder, no Award hereunder shall be
exercisable or eligible for settlement if, as a result of either the ability to
exercise or settle, or the exercise or settlement of such Award, the Trust would
not satisfy the REIT Requirements in any respect. For purposes of the preceding
sentence, "REIT Requirements" shall mean the requirements for the Trust to
qualify as a real estate investment trust under the Code and the rules and
regulations promulgated thereunder.
6.6 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Shares other than a regular cash
dividend, the number and class of Shares available under the Plan, the number
and class of Shares subject to each outstanding Option, the purchase price per
Share, and the number of Shares subject to each Option and the number of Shares
to be granted to Trustees pursuant to
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Article V, the number and class of Shares subject to each outstanding Share
Award and the terms of each outstanding Performance Award shall be appropriately
adjusted by the Administrator, such adjustments to be made in the case of
outstanding Options without an increase in the aggregate purchase price or base
price. The decision of the Administrator regarding any such adjustment shall be
final, binding and conclusive. If any adjustment would result in a fractional
security being (i) available under this Plan, such fractional security shall be
disregarded, or (ii) subject to an Award under this Plan, the Trust shall pay
the holder of such Award, in connection with the first vesting, exercise or
settlement of such Award in whole or in part, occurring after such adjustment,
an amount in cash determined by multiplying (A) the fraction of such security
(rounded to the nearest hundredth) by (B) the excess, if any, of (x) the Fair
Market Value of a Share on the vesting, exercise or settlement date over (y) the
exercise price or base price, if any, of such Award.
With respect to any holder who is subject to Section 16 of the Exchange Act
and notwithstanding the exercise periods set forth in paragraphs (a), (c) and
(d) of Section 2.3, paragraph (b) of Section 5.2 or as set forth in any
Agreement to which such holder is a party, and notwithstanding the expiration
date of the term of an Option (other than an Option designated as an incentive
share option), in the event the Trust is involved in a business combination
which is intended to be treated as a pooling of interests for financial
accounting purposes (a "Pooling Transaction") or pursuant to which such holder
receives a substitute option to purchase securities of any entity, including an
entity directly or indirectly acquiring the Trust, then each Option (or option
in substitution thereof) held by such holder shall be exercisable to the extent
set forth in the Agreement evidencing such option until and including the latest
of (x) the date set forth pursuant to the then applicable paragraph of Section
2.3 or 5.2, or the expiration date of the term of the Option, as the case may
be, (y) the date which is six months and one day after the consummation of such
business combination and (z) the date which is ten business days after the date
of expiration of any period during which such holder may not dispose of a
security issued in the Pooling Transaction in order for the Pooling Transaction
to be accounted for as a pooling of interests.
6.7 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
right to participate in this Plan. Neither this Plan nor any Award made
hereunder shall confer upon any person any right to continued employment by, or
service to, the Trust, any subsidiary or any affiliate of the Trust or affect in
any manner the right of the Trust, any subsidiary or any affiliate of the Trust
to terminate the employment of, or service by, any person at any time without
liability hereunder. For purposes of Sections 2.3(a) through (c), Sections
3.3(a) and (b), and Sections 4.3(a) and (b), employment with the Trust or
service as an officer or consultant, adviser or Trustee includes such employment
or service with or for a subsidiary or affiliate of the Trust.
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6.8 RIGHTS AS SHAREHOLDER. No person shall have any rights as a
shareholder of the Trust with respect to any Shares which are subject to an
Award hereunder until such person becomes a shareholder of record with respect
to such Shares.
6.9 DESIGNATION OF BENEFICIARY. If permitted by the Trust, an Eligible
Person who is granted an Award hereunder may file with the Administrator a
written designation of one or more persons as such Eligible Person's beneficiary
or beneficiaries (both primary and contingent) in the event of the person's
death.
Each beneficiary designation shall become effective only when filed in
writing with the Administrator during such Eligible Person's lifetime on a form
prescribed by the Administrator. Such person's spouse who is domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
other than such spouse. The filing with the Administrator of a new beneficiary
designation shall cancel all previously filed beneficiary designations.
To the extent an outstanding Option granted hereunder is exercisable or an
outstanding Performance Award may be settled in accordance with the terms of
this Plan and the Agreement relating to such Award, such beneficiary of
beneficiaries shall be entitled to exercise such Option or settle such
Performance Award.
If such an Eligible Person fails to designate a beneficiary, or if all
designated beneficiaries predecease him, then each outstanding Award hereunder
held by such Eligible Person to the extent vested, exercisable or eligible for
settlement, may be exercised or settled by such Eligible Person's executor,
administrator, legal representative or similar person.
6.10 GOVERNING LAW. This Plan, each Award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of New York and construed in
accordance therewith without giving effect to principles of conflicts of laws.
6.12 GLOSSARY. As used herein, the following words shall have the
meaning indicated.
"AGREEMENT" shall mean the written agreement evidencing an Award hereunder
between the Trust and the recipient of such Award.
"AWARD" shall include a grant of Options, an award of Restricted Shares and
an award of a Performance Award under this Plan.
"BASE PERFORMANCE MEASURE" shall mean a 15% Shareholder Return over the
Performance Period of five years commencing on the Effective Date.
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"BOARD" shall mean the Board of Trustees of the Trust.
"CAUSE" shall mean embezzlement or misappropriation of the Trust's funds or
other assets, other act deemed by the Administrator in the good faith exercise
of its sole discretion to be an act of dishonesty in respect to the Trust,
significant activities materially harmful to the reputation of the Trust,
willful and repeated refusal to perform or substantial disregard of the duties
properly assigned to the holder by the Trust (other than as a result of
Disability), material violation of any statutory or common law duty of loyalty
to the Trust or a material breach by the holder of the holder's employment
agreement with the Trust, if any (subject to any cure period therein provided).
"CHANGE OF CONTROL" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13 (d) (3) or 14(d)
(2) of the Exchange Act, of beneficial ownership within the meaning of Rule
13d-3 promulgated under the Exchange Act, of 51% or more of either (i) the
then outstanding Shares, (collectively, the "Outstanding Shares") or (ii)
the combined voting power of the then outstanding securities of the Trust
entitled to vote generally in the election of trustees (the "Outstanding
Voting Securities"); excluding, however, the following: (A) any acquisition
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by the Trust, (B) any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Trust or any corporation or trust
controlled by the Trust or (C) any acquisition by any corporation or trust
pursuant to a transaction which complies with clause (i), (ii) or (iii) of
subsection (3) of this definition;
(2) individuals who, as of the Effective Date constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided that any individual who becomes a trustee
of the Trust subsequent to the Effective Date whose election or nomination
for election by the Trust's shareholders was approved (other than in
connection with a material transaction relating to the Trust or its assets
or the Shares or the Class B Shares of the Trust) by the vote of at least a
majority of the Trustees then comprising the Incumbent Board shall be
deemed a member of the Incumbent Board; and provided further, that any
individual who was initially elected as a Trustee of the Trust as a result
of an actual or threatened election contest, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, or any other
actual or threatened solicitation of proxies or consent by or on behalf of
any Person other than the Board shall not be deemed a member of the
Incumbent Board;
(3) consummation by the Trust of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Trust (a "Corporate Transaction"); excluding, however, a
--------- -------
Corporate Transaction pursuant to which (i) all or substantially all of the
individuals or entities who are the beneficial owners, respectively,
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of the Outstanding Shares and the Outstanding Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than 66 2/3% of, respectively, the outstanding shares of
beneficial interest or common stock, and the combined voting power of the
outstanding securities of such trust or corporation entitled to vote
generally in the election of trustees or directors, as the case may be, of
the trust or corporation resulting from such Corporate Transaction
(including, without limitation, an entity which as a result of such
transaction owns the Trust or all or substantially all of the Trust's
assets either directly or indirectly in substantially the same proportions
relative to each other as their ownership, immediately prior to such
Corporate Transaction, of the Outstanding Shares and the Outstanding Voting
Securities as the case may be); (ii) no Person (other than: the Trust; any
employee benefit plan (or related trust) sponsored or maintained by the
Trust or any trust or corporation controlled by the Trust, the trust or
corporation resulting from such Corporate Transaction, and any Person which
beneficially owned, immediately prior to such Corporate Transaction,
directly or indirectly, 33 1/3% or more of the Outstanding Shares or the
Outstanding Voting Securities, as the case may be) will beneficially own,
directly or indirectly, 33 1/3% or more of, respectively, the outstanding
shares of beneficial interest or common stock of the trust or corporation
resulting from such Corporate Transaction or the combined voting power of
the outstanding securities of such trust or corporation entitled to vote
generally in the election of trustees or directors; or (iii) individuals
who were members of the incumbent Board will constitute at least a majority
of the members of the board of trustees or directors of the trust or
corporation resulting from such Corporate Transaction; or
(4) approval by the shareholders of the Trust of a plan of complete
liquidation or dissolution of the Trust.
"COMMITTEE" shall mean the Committee designated by the Board, if any
is so designated (the Board being under no obligation to establish or
maintain such a committee) consisting of two or more members of the Board,
each of whom shall be (i) "Non-Employee Director" within the meaning of
Rule 16b-3 under the Exchange Act, and (ii) at the election of the Board,
an "outside director" within the meaning of Section 162(m) of the Code.
"DISABILITY" shall mean the inability of the holder of an Award
substantially to perform such holder's duties and responsibilities for a
continuous period of at least six months.
"ELIGIBLE PERSONS" shall have the meaning set forth in Section 1.4.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
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"FAIR MARKET VALUE" shall mean the closing transaction price of a
Share as reported in the American Stock Exchange Composite Transactions on
the first business day immediately preceding the date as of which such
value is being determined, or, if there shall be no reported transaction on
such day, on the next preceding business day for which a transaction was
reported; provided that if the Fair Market Value of a Share for any date
cannot be determined as above provided, Fair Market Value of a Share shall
be determined by the Administrator by whatever means or method as to which
the Administrator, in the good faith exercise of its discretion, shall at
such time deem appropriate.
"PERFORMANCE MEASURES" shall mean the criteria and objectives,
established by the Administrator, which shall be satisfied or met (i) as a
condition to the exercisability of all or a portion of an Option, or (ii)
during the applicable Restriction Period or Performance Period as a
condition to the holder's receipt or retention, in the case of a Restricted
Share Award, of the Shares subject to such award, or, in the case of a
Performance Award, of payment with respect to such award. Such criteria
and objectives may include, without limitation, one or more of the
following: the attainment by a Share of a specified Fair Market Value for a
specified period of time, earnings per share, return to shareholders
(including dividends), return on equity, earnings of the Trust, revenues,
market share, funds from operations, cash flow or cost reduction goals, or
any combination of the foregoing. The Administrator may, in its sole
discretion, amend or adjust the Performance Measures or other terms and
conditions of an outstanding award in recognition of unusual or
nonrecurring events affecting the Trust or its financial statements or
changes in law or accounting principles. If the Administrator consists
solely of "outside directors" (withing the meaning of Section 162(m) of the
Code and the regulations promulgated thereunder) and the Administrator
desires that compensation payable pursuant to any award subject to
Performance Measures shall be "qualified performance-based compensation"
within the meaning of Section 162(m) of the Code, the Performance Measures
(i) shall be established by the Administrator no later than the end of the
first quarter of the Performance Period or Restriction Period, as
applicable (or such other time permitted pursuant to Treasury Regulations
promulgated under Section 162(m) of the Code or otherwise permitted by the
Internal Revenue Service) and (ii) shall satisfy all other applicable
requirements imposed under Treasury Regulations promulgated under Section
162(m) of the Code, including the requirement that such Performance
Measures be stated in terms of an objective formula or standard. Unless
otherwise designated by the Administrator, the Performance Measure shall be
the Base Performance Measure.
"PERFORMANCE PERIOD" shall mean any period designated by the
Administrator for which the Performance Measures shall be calculated. The
Performance Period shall be the five-year period commencing on the
Effective Date unless otherwise designated by the Administrator.
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"PERFORMANCE AWARD" shall mean a right, contingent upon the attainment
of specified Performance Measures within a specified Performance Period, to
receive a payment in cash.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
Section 22(c)(3) of the Code or any successor thereto.
"RESTRICTED SHARES" shall mean Shares that are subject to a
Restriction Period.
"RESTRICTION PERIOD" shall mean any period designated by the
Administrator during which the Shares subject to a Restricted Share Award
may not be sold, transferred, assigned, pledged, hypothecated or otherwise
voluntarily encumbered or disposed of, except as provided in this Plan or
the Agreement relating to such award.
"SHAREHOLDER RETURN" shall mean the per annum compounded rate of
increase in the Fair Market Value of an investment in Shares on the first
day of the Performance Period (assuming purchase of Shares at their Fair
Market Value on such day) through the last day of the Performance Period,
plus all dividends or distributions paid with respect to such Shares during
the Performance Period, and assuming reinvestment in Shares of all such
dividends and distributions, adjusted to give effect to Section 6.6 of the
Plan.
"SHARE AWARD" or "RESTRICTED SHARE AWARD" shall mean an award of
Restricted Shares.
-19-
<PAGE>
EXHIBIT 10.3
CONTRIBUTION AGREEMENT
AMONG
ANGELES PARTICIPATING MORTGAGE TRUST,
STARWOOD MEZZANINE INVESTORS, L.P.,
AND
STARWOOD OPPORTUNITY FUND IV, L.P.
____________________
Dated as of February 11, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
CONTRIBUTION OF ASSETS; ISSUANCE OF CLASS A SHARES
Section 1.1 Contributed Assets..........................................2
Section 1.2 Purchase Price..............................................2
Section 1.3 Adjustments to Purchase Price...............................3
Section 1.4 Prorations..................................................4
ARTICLE II
CLOSING
Section 2.1 Closing Date................................................4
Section 2.2 Closing Date Deliveries.....................................4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE TRUST
Section 3.1 Organization of the Trust...................................4
Section 3.2 No Subsidiaries.............................................5
Section 3.3 Capitalization..............................................5
Section 3.4 Authority...................................................5
Section 3.5 Litigation..................................................6
Section 3.6 Certain Matters.............................................6
Section 3.7 SEC Documents...............................................6
Section 3.8 Shareholder Agreement.......................................6
Section 3.9 Financial Information.......................................6
Section 3.10 No Finder...................................................7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
STARWOOD MEZZANINE
Section 4.1 Organization of Starwood Mezzanine..........................7
Section 4.2 Authority...................................................7
Section 4.3 Investment Representations..................................8
Section 4.4 Litigation..................................................8
Section 4.5 Proxy Statement.............................................8
Section 4.6 Employee Benefit Plans......................................8
Section 4.7 No Finder...................................................9
Section 4.8 Environmental...............................................9
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
SOFI IV
Section 5.1 Organization of SOFI IV.....................................9
Section 5.2 Authority...................................................9
Section 5.3 Investment Representations.................................10
Section 5.4 Litigation.................................................10
i
<PAGE>
Section 5.5 Proxy Statement............................................11
Section 5.6 Employee Benefit Plans.....................................11
Section 5.7 No Finder..................................................11
Section 5.8 Environmental. .........................................11
ARTICLE VI
REPRESENTATIONS OF BOTH CONTRIBUTORS
Section 6.1 Good Title.................................................12
Section 6.2 Record Keeping; Mortgage Files; Escrow Deposits............12
Section 6.3 Additional Representations.................................12
ARTICLE VII
ACTIONS PRIOR TO THE CLOSING DATE
Section 7.1 Proxy Statement............................................16
Section 7.2 Action by the Trust and Shareholders of the Trust..........17
Section 7.3 Lawsuits, Proceedings, etc.................................17
Section 7.4 Conduct of Business by the Trust, Starwood Mezzanine and
SOFI IV Pending the Closing................................17
Section 7.5 Mortgagor Solicitations....................................19
Section 7.6 Mutual Cooperation; Best Efforts...........................19
Section 7.7 No Public Announcement.....................................19
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST
Section 8.1 No Misrepresentation or Breach of Covenants and Warranties.19
Section 8.2 No Material Adverse Effect.................................20
Section 8.3 Opinion of Counsel for Starwood............................20
Section 8.4 No Injunctions or Restraints...............................20
Section 8.5 Necessary Governmental Approvals...........................20
Section 8.6 Transaction Agreements.....................................20
Section 8.7 Shareholder and Stockholder Action.........................20
Section 8.8 Termination of Partnership and Exchange Rights Agreement. .20
Section 8.9 Fairness Opinion...........................................20
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF STARWOOD MEZZANINE AND SOFI IV
Section 9.1 No Misrepresentation or Breach of Covenants and Warranties.21
Section 9.2 No Material Adverse Effect.................................21
Section 9.3 Opinion of Counsel for the Trust...........................21
Section 9.4 No Injunctions or Restraints...............................21
Section 9.5 Necessary Governmental Approvals...........................21
Section 9.6 Transaction Agreements; Advisory Agreement.................21
Section 9.7 Shareholder and Stockholder Action.........................22
ARTICLE X
INDEMNIFICATION; SURVIVAL
Section 10.1 Indemnification............................................22
Section 10.2 Notice of Claims...........................................23
Section 10.3 Third-Party Claims.........................................23
Section 10.4 Survival of Representations and Warranties.................24
ii
<PAGE>
ARTICLE XI
TERMINATION
Section 11.1 Termination................................................24
ARTICLE XII
OTHER PROVISIONS
Section 12.1 Confidential Nature of Information.........................25
Section 12.2 Expenses...................................................25
Section 12.3 Notices....................................................26
Section 12.4 Definitions................................................27
Section 12.5 Partial Invalidity.........................................29
Section 12.6 Successors and Assigns.....................................29
Section 12.7 Execution in Counterparts..................................29
Section 12.8 Titles and Headings........................................29
Section 12.9 Schedules and Exhibits.....................................29
Section 12.10 Entire Agreement; Amendments and Waivers; Assignment.......29
Section 12.11 Governing Law..............................................29
Section 12.12 No Third-Party Beneficiaries...............................30
Section 12.13 The Trust; Starwood General Partners.......................30
Section 12.14 Determinations and Interpretations by the Trust............30
Section 12.15 Submission to Jurisdiction.................................30
Section 12.16 Approvals and Consents.....................................30
SCHEDULE 1.1(a) Starwood Mezzanine Interests
SCHEDULE 1.1(b) SOFI IV Interests
EXHIBIT A - Form of Registration Rights Agreement
EXHIBIT B - Form of Shareholders Agreement
EXHIBIT C - Form of Advisory Agreement
iii
<PAGE>
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "Agreement") is made and entered into
this 11th day of February, 1998, by and between ANGELES PARTICIPATING MORTGAGE
TRUST, a California business trust, ("the Trust"), STARWOOD MEZZANINE INVESTORS,
L.P., a Delaware limited partnership ("Starwood Mezzanine") and STARWOOD
OPPORTUNITY FUND IV, L.P., a Delaware limited partnership ("SOFI IV", and
together with Starwood Mezzanine, the "Contributors"). Unless otherwise
indicated, certain terms used herein are used as defined in Section 12.4 hereof.
------------
W I T N E S S E T H:
--------------------
WHEREAS, Starwood Mezzanine intends, subject to the terms of this
Agreement, to contribute certain assets (the "Starwood Mezzanine Interests") to
the Trust in exchange for cash and Class A Shares, par value $0.01 per share, of
the Trust ("Class A Shares");
WHEREAS, SOFI IV intends, subject to the terms of this Agreement, to
contribute cash, certain letters of intent to purchase or originate debt
interests (the "Letters of Intent"), a portfolio of mortgage loans and leases
and other debt related assets, (the "SOFI IV Interests") and a portfolio of
first mortgage loans (the "First Mortgage Portfolio" and together with the
Letters of Intent, the SOFI IV Interests and the Starwood Mezzanine Interests,
the "Interests") to the Trust in exchange for cash and Class A Shares to be
issued to SOFI-IV SMT Holdings, L.L.C. ("SOFI Holdings");
WHEREAS, the Trust is the sole general partner and Starwood Mezzanine is
the sole limited partner of Angeles Participating Mortgage Trust, L.P. (the
"Partnership");
WHEREAS, on the Closing Date pursuant to an Exchange Rights Agreement
dated as of September 26, 1996 between the Trust and Starwood Mezzanine (the
"Exchange Rights Agreement") each of the outstanding interests in the
Partnership, which are referred to as "Units," will be exchanged for one Class A
Share and the Partnership and the Exchange Rights Agreement will be terminated;
WHEREAS, the Trust and Starwood Mezzanine are parties to a Registration
Rights Agreement that will be amended and restated (as amended and restated the
"Registration Rights Agreement") on the Closing Date by the Trust, Starwood
Mezzanine, SOFI Holdings and SAHI Partners in substantially the form attached
hereto as Exhibit A.
---------
WHEREAS, the Trust, Starwood Mezzanine and certain other parties are
parties to a Shareholders Agreement originally made and entered into as of March
15, 1994, as restated as of April 27, 1994, and as amended March 15, 1996 (the
"Original Shareholders Agreement") that will be amended and restated by the
Trust, B Holdings, LLC ("BLLC"), SAHI Partners, Starwood Mezzanine and SOFI
Holdings (as amended and restated, the "Shareholders Agreement") in
substantially the form attached hereto as Exhibit B on the Closing Date;
---------
WHEREAS, the general partner of each of Starwood Mezzanine and SOFI IV and
the Advisory Committee of SOFI IV and the requisite number of limited partners
of Starwood Mezzanine have approved the transactions provided for in this
Agreement, and the Board of Trustees of the Trust has
<PAGE>
approved the transactions provided for in this Agreement and has directed that
the transactions contemplated by this Agreement be submitted for adoption to the
shareholders of the Trust; and
WHEREAS, the Trust, Starwood Mezzanine and SOFI IV desire to make certain
representations, warranties and agreements in connection with the transactions
contemplated by this Agreement and also to prescribe various conditions to the
consummation of such transactions.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
CONTRIBUTION OF ASSETS; ISSUANCE OF CLASS A SHARES
Section 1.1 Contributed Assets. (a) Subject to the terms and conditions
------------------
set forth in this Agreement, at the Closing, each of Starwood Mezzanine and
SOFI IV shall contribute, assign, transfer and deliver to the Trust all of their
rights, title and interests in and to the Mortgage Files, the Letters of Intent
and the Interests, regardless of when such rights, title and interests arise and
such obligation to contribute, assign and transfer all of their rights, title
and interests in the Mortgage Files, the Letters of Intent and the Interests
shall continue after the date of this Agreement and the Trust shall acquire and
take assignment and delivery of, the Mortgage Files, the Letters of Intent and
the Interests as described on Schedules 1.1(a) and (b) hereto, subject to
---------------- ---
changes occurring after the date of this Agreement and prior to the Closing Date
as provided herein.
(b) In the event that the transactions contemplated by any Letter of Intent
are consummated prior to the Closing Date, the asset acquired or originated will
be contributed to the Trust in place of the Letter of Intent and the amount of
cash required to consummate the transaction to which it relates. The value of
the acquired or originated asset shall be equal for purposes of this Agreement
to the value of the amount of cash paid by SOFI IV to acquire or originate the
asset.
(c) Starwood Mezzanine and SOFI IV shall have the option to contribute at
the Closing additional assets to the Trust with a value equal to the amount of
any decrease in the value attributable to the payment of principal of any
Interest; provided that the new asset shall be reasonably acceptable to the
Trust and Schedule 1.1(a) and/or Schedule 1.1 (b), as applicable, shall be
updated accordingly. The value of any substituted assets shall be the actual
amount paid by Starwood Mezzanine or SOFI IV to acquire or originate the asset.
Section 1.2 Purchase Price. On the Closing Date, the Trust shall (i) pay
--------------
cash to Starwood Mezzanine in an amount equal to $28.5 million, (ii) issue to
Starwood Mezzanine that number of Class A Shares equal to (a) the dollar value
of the Starwood Mezzanine Interests on December 31, 1997 as set forth on
Schedule 1.1(a) less $28.5 million (b) divided by $2.50, (ii) issue to SOFI
Holdings that number of Class A Shares equal to 302,222,800 less the aggregate
number of Class A Shares issued to Starwood Mezzanine and (iii) pay cash to SOFI
IV in an amount equal (x) to the aggregate value of the cash, the Letters of
Intent, the SOFI IV Interests and the First Mortgage Portfolio contributed by
SOFI IV on December 31, 1997 as set forth on Schedule 1.1(b) less (y) the sum of
----
(1) the aggregate number of Class A Shares issued to SOFI Holdings on the
Closing Date multiplied by (2) $2.50. The value of the assets to
-------------
2
<PAGE>
be contributed by Starwood Mezzanine and SOFI IV will be adjusted as set forth
in Sections 1.1(c) and 1.3. Subject to adjustment as set forth in Sections
-------- ------ --- --------
1.1(c) and 1.3,the value of the Starwood Mezzanine Interests as of December 31,
- ------ ---
1997 is set forth on Schedule 1.1(a) and based on such value Starwood Mezzanine
will receive 55,148,000 Class A Shares, and the value of the SOFI IV Interests,
the Letters of Intent and the First Mortgage Portfolio as of December 31, 1997
is set forth on Schedule 1.1(b) and based on such value SOFI IV will receive
$313 million in cash and SOFI Holdings will receive 247,074,800 Class A Shares
(collectively, the "Purchase Price").
Section 1.3 Adjustments to Purchase Price. (a) Adjustments shall be
-----------------------------
made, at the Closing, to the Purchase Price in the event of any full or partial
repayment of principal of any Mortgage Loan or the termination of any Letter of
Intent during the period from January 1, 1998 to the Closing Date (the
"Adjustment Period") by adjusting the value of the Interests. In the event of
the full repayment of any Mortgage Loan, the value of the Interests shall be
reduced by the value given to such Mortgage Loan on Schedule 1.1(a) or (b). In
the event of a regularly scheduled payment of principal or any other partial
repayment of principal occurring during the Adjustment Period, the value of the
Interests shall be reduced by the dollar amount of the principal repayment. In
the event of any principal draw by the borrower with respect to any Mortgage
Loan occurring during the Adjustment Period in excess of that anticipated on
Schedule 1.1(b), the Purchase Price shall be adjusted upward in the amount of
such excess. In the event that principal draws by the borrower with respect to
any Mortgage Loan occurring during the Adjustment Period do not equal or exceed
the anticipated amount of such draws as set forth in Schedule 1.1(b), the
Purchase Price shall be reduced by such shortfall. With respect to SOFI IV
only, adjustments to the Purchase Price shall be made by first reducing the cash
portion of the Purchase Price as set forth in Section 1.2, if any, by the amount
-----------
of any reduction in dollar value of the Interests. In the case of SOFI IV only,
when the entire cash portion of the Purchase Price has been used to offset the
reduction in dollar value of the Interests, and in the case of Starwood
Mezzanine in the event of any adjustment, the number of Class A Shares issued in
exchange for the Interests will be reduced by a number of Class A Shares
determined by dividing (i) the amount of any additional reduction in dollar
value of the Interests contributed by the Contributors by (ii) $2.50.
(b) The purchase price per share of Class A Shares issued to Starwood
Mezzanine and SOFI Holdings will be adjusted in the event of any stock split,
reverse stock split or other recapitalization of the capital stock of the Trust,
so that the percentage of issued and outstanding Class A Stock purchased by each
of Starwood Mezzanine and SOFI Holdings is equal to the percentage of issued and
outstanding Class A Stock that such party would have purchased had such split,
reverse split or other recapitalization not occurred.
(c) If cash adjustments result in a decrease of the cash portion of the
Purchase Price payable to SOFI IV below $313 million, SOFI IV may, at its
option, elect to reduce the number of Class A Shares that SOFI Holdings will
acquire and instead of issuing Class A Shares the Trust will pay cash to SOFI IV
equal to the number of Class A Shares SOFI IV elects not to receive multiplied
by $2.50, provided that SOFI IV may not elect to receive cash pursuant to
Section in excess of $313 million.
3
<PAGE>
Section 1.4 Prorations. Interest which has accrued, whether or not paid,
----------
on the Starwood Mezzanine Interests and the SOFI IV Interests during the
Adjustment Period shall be paid by Starwood Mezzanine or SOFI IV, as applicable,
to the Trust on the Closing Date and interest which has accrued, and not been
paid, on the First Mortgage during the Adjustment Period shall be paid by the
Trust to SOFI IV on the Closing Date. All interest accruing on the Interests
subsequent to December 31, 1997 shall be payable to the Trust.
ARTICLE II
CLOSING
Section 2.1 Closing Date. Upon the terms and subject to the conditions
------------
set forth in this Agreement, the transactions contemplated by this Agreement
shall be consummated (the "Closing") at 10:00 a.m., local time, on the next
business day after the meeting of the shareholders of the Trust provided for in
Section 7.2 at which the Trust Shareholders Matters are approved, or such other
- -----------
date as may be agreed upon by the parties hereto, at the offices of Mayer, Brown
& Platt, 1675 Broadway, New York, New York 10019, or at such other place or at
such other time as shall be agreed upon by the parties hereto (such date and
time being herein called the "Closing Date").
Section 2.2 Closing Date Deliveries. On the Closing Date, the Trust,
-----------------------
Starwood Mezzanine, SOFI IV, SOFI Holdings, BLLC and SAHI Partners, as
appropriate, shall execute and deliver (a) the Registration Rights Agreement,
(b) the Shareholders Agreement (c) a consent to terminate the Partnership and
the Exchange Rights Agreement, (d) the Mortgage Files and (e) all the other
documents, instruments and agreements (including instruments of transfer)
reasonably necessary to carry out the terms and provisions of this Agreement and
each of the other documents referred to in this Section 2.2 and each outstanding
-----------
Unit will be exchanged for one Class A Share. The documents described in
clauses (a) and (b) above shall hereinafter be referred to as the "Transaction
- ----------- ---
Agreements."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE TRUST
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, the Trust represents, warrants
and agrees as follows:
Section 3.1 Organization of the Trust. The Trust is a business trust
-------------------------
duly organized and validly existing under the laws of the State of California
and no personal liability attaches to the holders of the Class A Shares by
reason of the ownership thereof. The Trust is duly qualified to transact
business in each of the jurisdictions in which the ownership or leasing of the
properties used in its business or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified would not have a Material Adverse Effect on the Trust. The Trust has
all requisite trust power and authority to own or lease and operate its
properties and to carry on its business as now conducted.
4
<PAGE>
Section 3.2 No Subsidiaries. The Trust has no subsidiaries of any kind
---------------
whatsoever except for its interest in the Partnership.
Section 3.3 Capitalization. On the date hereof, (i) 7,550,000 Class A
--------------
Shares are validly issued and outstanding and are fully paid and nonassessable,
and (ii 3,775,000 Class B Shares are validly issued and outstanding and are
fully paid and nonassessable. Subject to approval by the Shareholders of the
Trust of the Trust Shareholder Matters (as defined in Section 7.2), the Class A
-----------
Shares to be issued to Starwood Mezzanine and SOFI Holdings on the Closing Date,
upon issuance on the terms and conditions specified in the instrument pursuant
to which such shares are issuable, shall be duly authorized, validly issued,
fully paid and nonassessable. Except for this Agreement and any options or
other awards issued pursuant to the Incentive Plans, and except as contemplated
by the Transaction Agreements, the Exchange Agreement and the Trust Declaration,
there are no options, warrants or other rights to acquire, or agreements or
commitments pursuant to which the Trust is obligated to issue, sell, purchase or
redeem, shares of capital stock of the Trust. The Class A Shares are currently
publicly traded on the American Stock Exchange ("AMEX") and will remain so at
Closing.
Section 3.4 Authority.
---------
(a) The Trust has full trust power and authority to enter into this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby to be entered into by the Trust and, subject to
the approval by the shareholders of the Trust of the Trust Shareholder Matters,
to consummate the transactions contemplated hereby and thereby.
(b) The execution, delivery and performance by the Trust of this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby and the consummation by the Trust of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary trust action on the part of the Trust, subject to the approval by the
shareholders of the Trust of the Trust Shareholder Matters. This Agreement is,
and each other agreement or instrument contemplated hereby (including, without
limitation, the Transaction Agreements) to be executed by the Trust, when
executed and delivered by the Trust, will be, the legal, valid and binding
agreement of the Trust, enforceable against the Trust in accordance with its
respective terms.
(c) Neither the execution nor delivery by the Trust of this Agreement,
the Transaction Agreements or the other agreements and instruments contemplated
hereby or thereby, nor consummation of the transactions contemplated hereby or
thereby or compliance with or fulfillment of the terms and provisions hereof or
thereof by the Trust, will (i) conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights, or result in the creation or imposition of any encumbrance upon any of
the assets of the Trust or the Partnership, under any organizational document of
the Trust or the Partnership or any other instrument, agreement, mortgage,
indenture, deed of trust, permit, concession, grant, franchise, license,
judgment, order, award, decree or other restriction to which the Trust or the
Partnership is a party or any of their properties are subject or by which either
the Trust or the Partnership is bound or any statute, other law or regulatory
provision affecting either the Trust or the Partnership, (ii require the
approval, consent or authorization of, or the making of any declaration, filing
or registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body, by or on behalf of the Trust
or the Partnership, (ii cause personal liability to attach to
5
<PAGE>
the holders of the Class A Shares by reason of the ownership thereof or (iv)
cause the Trust to fail to qualify to be taxed as a "real estate investment
trust," as defined in Section 856 of the Code ("REIT"), for the taxable year
ending December 31, 1998, except for (A) the filing of appropriate documents
with the Securities and Exchange Commission (the "SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (B) approval by the
shareholders of the Trust of the Trust Shareholder Matters, (C) the filing of
the Trust's Declaration of Trust with certain governmental authorities and (D)
such conflicts, breaches, defaults, events, creations, impositions, approvals,
consents, declarations, filings or authorizations which would not reasonably be
expected to either (x) have a Material Adverse Effect on the Trust or (y)
prevent or hinder the consummation of the transactions contemplated hereby.
Section 3.5 Litigation. To the knowledge of the Trust, there are no
----------
actions, suits or proceedings or court orders or decrees pending or threatened
to which the Trust is a party or any of its assets is subject or by which the
Trust is bound before or by any court or governmental agency, which if
determined adversely to the interests of the Trust, would reasonably be expected
to either (a) have a Material Adverse Effect on the Trust or (b) prevent or
hinder the consummation of the transactions contemplated hereby.
Section 3.6 Certain Matters.
---------------
(a) As of the date hereof, the Trust has no assets or properties other
than short term real estate investments, cash and cash equivalents and a 8.05%
interest in the Partnership, or as otherwise disclosed in the SEC Documents (as
defined in Section 3.7).
-----------
(b) The Trust will continue to qualify to be taxed as a REIT for the
taxable year ending December 31, 1998.
(c) As of the close of the 1997 taxable year, the Trust has no
material current or accumulated earnings and profits. The Trust has no material
liabilities for U.S. Federal or state income taxes.
Section 3.7 SEC Documents. The Trust has previously delivered or made
-------------
available to Starwood Mezzanine and SOFI IV complete and correct copies of all
reports and statements filed by the Trust with the SEC since September 26, 1996
(the "SEC Documents"). As of their respective dates, none of the SEC Documents
contained any 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.
Section 3.8 Shareholder Agreement. The Trust has delivered to each of
---------------------
Starwood Mezzanine and SOFI IV a true and complete copy of the Original
Shareholders Agreement. Said document is in full force and effect and no
defaults or breaches exist thereunder.
Section 3.9 Financial Information. The financial statements (excluding
---------------------
the pro forma financial data) included in the SEC Documents present fairly the
financial condition, results of operation and changes in the financial condition
of the Trust at the dates and for the periods indicated and have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated (except as otherwise indicated
therein). The pro forma financial data included in the Proxy Statement (as
defined in Section 7.1) has been prepared in accordance with all
-----------
6
<PAGE>
applicable rules and guidelines of the SEC with respect to pro forma financial
data, and the adjustments used therein are appropriate to give effect to the
transaction or circumstance referred to therein.
Section 3.1 No Finder. Neither the Trust nor any party acting on the
---------
behalf of the Trust has paid or become obligated to pay any fee or commission to
any broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
STARWOOD MEZZANINE
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, Starwood Mezzanine represents,
warrants and agrees as follows:
Section 4.1 Organization of Starwood Mezzanine. Starwood Mezzanine is a
----------------------------------
limited partnership duly formed, validly existing and in good standing as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act.
Starwood Mezzanine is duly qualified to transact business and is in good
standing in each of the jurisdictions in which the ownership or leasing of the
properties used in its business or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not have a Material Adverse Effect on
Starwood Mezzanine. Starwood Mezzanine has all requisite partnership power and
authority to carry on its business as now conducted.
Section 4.2 Authority.
---------
(a) Starwood Mezzanine has full partnership power and authority to
enter into this Agreement, the Transaction Agreements and the other agreements
and instruments contemplated hereby and thereby to be entered into by it and to
consummate the transactions contemplated hereby and thereby.
(b) The execution, delivery and performance by Starwood Mezzanine of
this Agreement, the Transaction Agreements and the other agreements and
instruments contemplated hereby and thereby and the consummation by Starwood
Mezzanine of the transactions contemplated hereby and thereby have been duly
authorized by all necessary partnership action except for the required consent
of its limited partners and the amendment to the partnership agreement that will
be obtained prior to the Closing Date. This Agreement is, and each other
agreement or instrument contemplated hereby (including, without limitation, the
Transaction Agreements) to be executed by Starwood Mezzanine, when executed and
delivered by Starwood Mezzanine, will be, the legal, valid and binding agreement
of Starwood Mezzanine, enforceable against Starwood Mezzanine in accordance with
its respective terms.
(c) Except for consents and approvals that will be obtained prior to
the Closing Date, neither the execution and delivery by Starwood Mezzanine of
this Agreement, the Transaction Agreements or the other agreements and
instruments contemplated hereby and thereby, nor consummation of the
transactions contemplated hereby or thereby or compliance with or fulfillment of
the terms and provisions hereof or thereof by Starwood Mezzanine will (i)
conflict with, result in a breach of the terms, conditions or provisions of, or
constitute a default, an event of default or an event creating
7
<PAGE>
rights of acceleration, termination or cancellation or a loss of rights under
the agreement of limited partnership of Starwood Mezzanine, any document
relating to the Starwood Mezzanine Interests, any instrument, agreement,
mortgage, indenture, deed of trust, permit, concession, grant, franchise,
license, judgment, order, award, decree or other restriction to which Starwood
Mezzanine is a party or any statute, other law or regulatory provision affecting
any of them, or (ii require the approval, consent or authorization of, or the
making of any declaration, filing or registration with, any third party or any
foreign, federal, state or local court, governmental authority or regulatory
body, by or on behalf of Starwood Mezzanine, except for conflicts, breaches,
defaults, events, creations, impositions, approvals, consents, declarations,
filings or authorizations which would not reasonably be expected to either (x)
have a Material Adverse Effect on Starwood Mezzanine or (y) prevent or hinder
the consummation of the transactions contemplated hereby.
Section 4.3 Investment Representations. Starwood Mezzanine is an
--------------------------
"accredited investor" within the meaning of Rule 501 under the Securities Act of
1933, as amended (the "Securities Act"), and was not organized for the purpose
of acquiring Class A Shares. Starwood Mezzanine has sufficient knowledge and
experience in financial and business matters and in investing in entities
similar to the Trust so as to be able to evaluate the risks and merits of its
investment in the Trust and it is able financially to bear the risks thereof.
Starwood Mezzanine has had an opportunity to discuss the business, management
and financial affairs of the Trust with the management of the Trust. The Class
A Shares of the Trust are being acquired by Starwood Mezzanine for its own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof in violation of the securities laws.
Starwood Mezzanine understands that (i) the Class A Shares have not been
registered under the Securities Act by reason of their issuance in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof or Rule 505 or 506 promulgated under the Securities Act,
and (ii such Class A Shares must be held indefinitely unless such Class A Shares
are registered upon receipt thereof, or unless a subsequent disposition thereof
is registered under the Securities Act and applicable state securities laws or
is exempt from such registration.
Section 4.4 Litigation. To the knowledge of Starwood Mezzanine, there
----------
are no actions, suits or proceedings or court orders or decrees pending or
threatened to which Starwood Mezzanine is a party or the Starwood Mezzanine
Interests are subject or by which it is bound before or by any court or
governmental agency, which if determined adversely to the interests of Starwood
Mezzanine would reasonably be expected to either (a) have a Material Adverse
Effect on Starwood Mezzanine or (b) prevent or hinder the consummation of the
transactions contemplated hereby.
Section 4.5 Proxy Statement. None of the information respecting Starwood
---------------
Mezzanine or its partners or the Starwood Mezzanine Interests supplied or to be
supplied by Starwood Mezzanine, its partners or any of its representatives for
inclusion in the Proxy Statement (as defined in Section 7.1) will, at the time
-----------
of the mailing of the Proxy Statement to the shareholders of the Trust and at
the time of the meetings of such shareholders referred to in Section 7.2,
-----------
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein relating to Starwood
Mezzanine or its partners not misleading.
Section 4.6 Employee Benefit Plans. Starwood Mezzanine is not (a) an
----------------------
"employee benefit plan" as defined in and subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (b) a "plan" as defined in
and subject to Section 4975 of the Code or (c) an entity any portion
8
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or all of the assets of which are deemed pursuant to United States Department of
Labor Regulation (S)2510.3-101 or otherwise pursuant to ERISA to be, for any
purpose of ERISA or Section 4975 of the Code, assets of any "employee benefit
plan" or "plan" described in clause (a) or (b) above which invests in such
---------- ---
entity by virtue of such investment.
Section 4.7 No Finder. Neither Starwood Mezzanine nor any party acting
---------
on its behalf has paid or become obligated to pay any fee or any commission to
any broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
Section 4.8 Environmental. Starwood Mezzanine has no actual knowledge
-------------
(without independent investigation) of any violation of Environmental Laws
related to the properties secured by the Starwood Mezzanine Interests or the
presence or release of Hazardous Materials on or from such properties, except as
reflected in the environmental reports acknowledged and approved by the Trust at
or prior to the Closing. The term "Environmental Laws" includes, without
limitation, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response Compensation and Liability Act and other federal laws
governing the environment as in effect on the date of this Agreement together
with their implementing regulations and guidelines as of the date of this
Agreement, and all state, regional, county, municipal and other local laws,
regulations and ordinances that are equivalent or similar to the federal laws
recited above or that purport to regulate Hazardous Materials. The term
"Hazardous Materials" includes petroleum, including crude oil or any fraction
thereof, natural gas, natural gas liquids, liquefied natural gas or synthetic
gas usable for fuel (or mixtures of natural gas or such synthetic gas), and any
substance, material waste, pollutant or contaminant listed or defined as
hazardous or toxic, or otherwise regulated, under any Environmental Law.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
SOFI IV
As an inducement to the other parties to enter into this Agreement and to
consummate the transactions contemplated hereby, SOFI IV represents, warrants
and agrees as follows:
Section 5.1 Organization of SOFI IV. SOFI IV is a limited partnership
-----------------------
duly formed, validly existing and in good standing as a limited partnership
under the Delaware Revised Uniform Limited Partnership Act. SOFI IV is duly
qualified to transact business and is in good standing in each of the
jurisdictions in which the ownership or leasing of the properties used in its
business or the conduct of its business requires such qualification, other than
in such jurisdictions where the failure to be so qualified and in good standing
would not have a Material Adverse Effect on SOFI IV. SOFI IV has all requisite
partnership power and authority to carry on its business as now conducted.
Section 5.2 Authority.
---------
(a) SOFI IV has full partnership power and authority to enter into
this Agreement, the Transaction Agreements and the other agreements and
instruments contemplated hereby and thereby to be entered into by it and to
consummate the transactions contemplated hereby and thereby.
9
<PAGE>
(b) The execution, delivery and performance by SOFI IV of this
Agreement, the Transaction Agreements and the other agreements and instruments
contemplated hereby and thereby and the consummation by SOFI IV of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary partnership action except for the required consent of its Advisory
Committee and the related amendment to its partnership agreement that will be
obtained prior to the Closing Date. This Agreement is, and each other agreement
or instrument contemplated hereby (including, without limitation, the
Transaction Agreements), to be executed by SOFI IV when executed and delivered
by SOFI IV, will be, the legal, valid and binding agreement of SOFI IV,
enforceable against SOFI IV in accordance with its respective terms.
(c) Except for consents and approvals that will be obtained prior to
the Closing Date, neither the execution and delivery by SOFI IV of this
Agreement, the Transaction Agreements or the other agreements and instruments
contemplated hereby and thereby, nor consummation of the transactions
contemplated hereby or thereby or compliance with or fulfillment of the terms
and provisions hereof or thereof by SOFI IV will (i) conflict with, result in a
breach of the terms, conditions or provisions of, or constitute a default, an
event of default or an event creating rights of acceleration, termination or
cancellation or a loss of rights under the agreement of limited partnership of
SOFI IV, any document relating to the Letters of Intent, SOFI IV Interests or
First Mortgage Portfolio any instrument, agreement, mortgage, indenture, deed of
trust, permit, concession, grant, franchise, license, judgment, order, award,
decree or other restriction to which SOFI IV is a party or any statute, other
law or regulatory provision affecting any of them, or (ii require the approval,
consent or authorization of, or the making of any declaration, filing or
registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body, by or on behalf of SOFI IV,
except for conflicts, breaches, defaults, events, creations, impositions,
approvals, consents, declarations, filings or authorizations which would not
reasonably be expected to either (x) have a Material Adverse Effect on SOFI IV
or (y) prevent or hinder the consummation of the transactions contemplated
hereby.
Section 5.3 Investment Representations. SOFI Holdings is an "accredited
--------------------------
investor" within the meaning of Rule 501 under the Securities Act of 1933, as
amended (the "Securities Act"), and was not organized for the purpose of
acquiring the Class A Shares. SOFI Holdings has sufficient knowledge and
experience in financial and business matters and in investing in entities
similar to the Trust so as to be able to evaluate the risks and merits of its
investment in the Trust, and it is able financially to bear the risks thereof.
SOFI Holdings has had an opportunity to discuss the business, management and
financial affairs of the Trust with the management of the Trust. The Class A
Shares are being acquired by SOFI Holdings for its own account for the purpose
of investment and not with a view to or for sale in connection with any
distribution thereof in violation of the securities laws. SOFI Holdings
understands that (i) the Class A Shares of the Trust have not been registered
under the Securities Act by reason of their issuance in a transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, and (ii
such Class A Shares must be held indefinitely unless such Class A Shares are
registered upon receipt thereof, or unless a subsequent disposition thereof is
registered under the Securities Act and applicable state securities laws or is
exempt from such registration.
Section 5.4 Litigation. To the knowledge of SOFI IV, there are no
----------
actions, suits or proceedings or court orders or decrees pending or threatened
to which SOFI IV is a party or the Letters of Intent, SOFI IV Interests or First
Mortgage Portfolio are subject or by which it is bound before or by any court or
10
<PAGE>
governmental agency, which if determined adversely to the interests of SOFI IV
would reasonably be expected to either (a) have a Material Adverse Effect on
SOFI IV or (b) prevent or hinder the consummation of the transactions
contemplated hereby.
Section 5.5 Proxy Statement. None of the information respecting SOFI IV
---------------
or its partners or the Letters of Intent, SOFI IV Interests or First Mortgage
Portfolio supplied or to be supplied by SOFI IV, its partners or any of its
representatives for inclusion in the Proxy Statement (as defined in Section 7.1)
-----------
will, at the time of the mailing of the Proxy Statement to the shareholders of
the Trust and at the time of the meetings of such shareholders referred to in
Section 7.2, contain any untrue statement of a material fact or omit to state
- -----------
any material fact necessary in order to make the statements therein relating to
SOFI IV or its partners not misleading.
Section 5.6 Employee Benefit Plans. SOFI IV is not (a) an "employee
----------------------
benefit plan" as defined in and subject to ERISA, (b) a "plan" as defined in and
subject to Section 4975 of the Code or (c) an entity any portion or all of the
assets of which are deemed pursuant to United States Department of Labor
Regulation (S)2510.3-101 or otherwise pursuant to ERISA to be, for any purpose
of ERISA or Section 4975 of the Code, assets of any "employee benefit plan" or
"plan" described in clause (a) or (b) above which invests in such entity by
---------- ---
virtue of such investment.
Section 5.7 No Finder. Neither SOFI IV nor any party acting on its
---------
behalf has paid or become obligated to pay any fee or any commission to any
broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
Section 5.8 Environmental. SOFI IV has no actual knowledge (without
-------------
independent investigation) of any violation of Environmental Laws related to the
properties which are the subject of the Letters of Intent or secured by the SOFI
IV Interests or the First Mortgage Portfolio or the presence or release of
Hazardous Materials on or from such properties, except as reflected in the
environmental reports acknowledged and approved by the Trust at or prior to the
Closing. The term "Environmental Laws" includes, without limitation, the
Resource Conservation and Recovery Act and the Comprehensive Environmental
Response Compensation and Liability Act and other federal laws governing the
environment as in effect on the date of this Agreement together with their
implementing regulations and guidelines as of the date of this Agreement, and
all state, regional, county, municipal and other local laws, regulations and
ordinances that are equivalent or similar to the federal laws recited above or
that purport to regulate Hazardous Materials. The term "Hazardous Materials"
includes petroleum, including crude oil or any fraction thereof, natural gas,
natural gas liquids, liquefied natural gas or synthetic gas usable for fuel (or
mixtures of natural gas or such synthetic gas), and any substance, material
waste, pollutant or contaminant listed or defined as hazardous or toxic, or
otherwise regulated, under any Environmental Law.
11
<PAGE>
ARTICLE VI
REPRESENTATIONS OF BOTH CONTRIBUTORS
Each of Starwood Mezzanine and SOFI IV severally, and not jointly,
represents, warrants and agrees as follows with respect to Schedule 1.1(a) and
Schedule 1.1(b), respectively:
Section 6.1 Good Title. The Contributor has and will have, until the
----------
consummation of the transactions contemplated by this Agreement, good title to,
and is and shall be the sole owner of (i) each Mortgage Loan and the related
Mortgage File (except to the extent any Mortgage Loan is prepaid in full prior
to the consummation of the transactions contemplated by this Agreement) and (ii)
the Ground Lease, in each case of clauses (i) and (ii) above free and clear of
any and all adverse claims, liens, pledges , assignments, charges or security
interests of any nature (including, without limitation, liens arising under the
federal tax laws or ERISA), except as shall be released or discharged at the
Closing.
Section 6.2 Record Keeping; Mortgage Files; Escrow Deposits. The
-----------------------------------------------
origination, servicing, record keeping, collection and foreclosure practices
used by the Contributor with respect to each Mortgage Loan have been in all
respects legal. The Contributor will deliver to the Trust on the Closing Date
all documents, instruments and files in its possession relating to each Letter
of Intent, Mortgage Loan and Ground Lease. All copies of the material, original
loan documents forwarded to the Trust are true and correct and include all
documents and other instruments known to the Contributor relating to each Letter
of Intent, Mortgage Loan and Ground Lease. Schedule 1.1(a) or (b) as applicable
is true, correct and complete in all material respects. With respect to any
escrow deposits and payments, all of these deposits and payments, if any, which
have been made and not expended for their intended purposes, are in the
possession of, or under the control of, the Contributor, except in those cases
in which the Contributor holds only a minority participation interest or the
interest of a junior lender in a Mortgage Loan, in which event the terms and
conditions of such minority participation interest are contained in an
intercreditor agreement, or similar agreement, which agreements have been
disclosed in writing to the Trust. Concurrently with the closing of this
transaction, the Contributor will, to the extent permitted by the documents
pertaining to a Mortgage Loan, deliver possession and control of all such
deposits and payments (or its rights to and under any escrow) to the Trust or
its designee, provided that the Contributor makes no representation or warranty
as to the sufficiency of such deposits and payments for their intended purposes.
There are no documents or other instruments in the possession of, or actually
known to the Contributor, which would cause the materials provided to the Trust
to be inaccurate or misleading, and, to the knowledge of the Contributor, all
documents and other instruments provided to the Trust are accurate and truthful.
Section 6.3 Additional Representations.
--------------------------
(a) each Mortgage Loan of the Contributor either (A) was originated by
the Contributor or (B) was purchased by the Contributor in the ordinary course
of its business, for valuable consideration to the transferor, and neither the
transferor nor any other person or entity has any residual or other rights to
such Mortgage Loan, except in those cases in which the Contributor holds only a
minority participation interest or the interest of a junior lender in a Mortgage
Loan;
12
<PAGE>
(b) the proceeds of each Mortgage Loan of the Contributor have been
fully disbursed and there is no requirement for future advances under such
Mortgage Loan except as expressly provided in documents evidencing or securing
any Mortgage Loan as disclosed to the Trust, and all costs and expenses incurred
in making, or closing or recording, the Mortgage Loans have been paid; the
Contributor has no continuing obligations under such Mortgage Loan relating to
stop notices, set aside letters, letters of credit, subdivision agreements or
bonds except as expressly provided in documents evidencing or securing any
Mortgage Loan as disclosed to the Trust;
(c) to the knowledge of the Contributor, each Mortgage Loan of the
Contributor, as of the date of its origination complied with or is exempt from,
and as of the date hereof complies with or is exempt from, (x) applicable state
or federal laws, regulations and other requirements pertaining to usury, and (y)
any and all other requirements of any federal, state or local law, including,
without limitation, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws,
applicable to each such Mortgage Loan;
(d) the Contributor has not received any notice asserting that any
Mortgage Note, related Mortgage or other agreements executed in connection
therewith of the Contributor has not been duly authorized, executed and
delivered, or is not the legal, valid and binding obligation of the maker
thereof (subject to any non-recourse provisions therein), enforceable in
accordance with its terms, except as such enforcement may be limited by (x)
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally, and (y) general principles of equity
(regardless of whether such enforcement is considered in a proceeding in equity
or at law) and (z) contractual provisions and laws limiting or eliminating
recourse to the Mortgagor or any other obligor or surety (including, without
limitation, principles such as the so-called "one action rule" and anti-
deficiency legislation). Except as disclosed to the Trust in writing, the
Contributor has not received notice asserting any offset, defense (including
without limitation the defense of usury), claim, counterclaim, or right to
rescission with respect to such Mortgage Note, Mortgage or other related
agreements;
(e) except as disclosed in the schedules attached to the assignment of
loan relating to the Mortgage, each Mortgage of the Contributor has not been
waived, impaired, modified, altered, superseded, amended, satisfied, cancelled,
subordinated or otherwise changed in any material respect in writing by any
Person, or otherwise by the Contributor, or rescinded, and the related mortgaged
property has not been released from the lien or other encumbrance of, nor has
the Mortgagor been released from, its obligations under the Mortgage, in whole
or in any part, nor has any instrument been executed that would effect any such
amendment, satisfaction, cancellation, subordination, rescission or release,
except, in each case, by a written instrument which is part of the related
Mortgage File;
(f) Each Mortgage of the Contributor is insured by an ALTA lender's
title insurance policy (each, a "Title Policy"), and the Contributor will
provide true and complete copies of each such Title Policy to the Trust. To the
actual knowledge of the Contributor, without any inquiry, each such Title Policy
is in full force and effect. Unless disclosed in the applicable Mortgage File,
the Contributor has not done, by act or omission, anything which would impair
the coverage of any such Title Policies, and the Contributor has not received
any notice by the title insurer of any such Title Policy of any impairment,
diminution or negation of such coverage;
13
<PAGE>
(g) to the actual knowledge of the Contributor, without any inquiry,
each Mortgaged Property (including all improvements thereon) of the Contributor
is insured by a hazard insurance policy as required by the applicable Mortgage,
and the Contributor has provided true and complete copies of each policy to the
Trust. To the actual knowledge of the Contributor, without any inquiry, if upon
origination of the Mortgage Loan the Mortgaged Property was in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available),
and if required by applicable law, a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
is in effect;
(h) there is no monetary default, breach, violation or event of
acceleration existing under any Mortgage or the related Mortgage Note of the
Contributor and no event has occurred during the last twelve months that, with
the passage of time or with notice and the expiration of any grace or cure
period, would constitute a monetary default, breach, violation or event of
acceleration; to the current actual knowledge of the Contributor without inquiry
or investigation, except as set forth in the applicable Mortgage File there is
no non-monetary default, breach, violation or event of acceleration existing
under any Mortgage or the related Mortgage Note;
(i) the Contributor has not waived any material default, breach,
violation or event of acceleration under any Mortgage Loan of the Contributor,
which would materially impair the Trust's rights to enforce the documents
evidencing, securing or pertaining to such Mortgage Loan (the "Mortgage Loan
Documents");
(j) with respect to the Ground Lease of the Contributor, to the
knowledge of the Contributor, after due inquiry:
(i) the Ground Lease is valid and enforceable, is in full force
and effect, and is binding upon the parties thereto and their respective
successors and assigns, in accordance with its terms;
(ii) the Ground Lease has not been amended, restated,
supplemented, extended or otherwise modified in any respect, and a true and
correct copy of the Ground Lease has been provided to the Trust;
(iii) the Contributor, as the lessor under the Ground Lease, has
fully performed all obligations under the Ground Lease to be performed by
the lessor thereunder, and the lessee under the Ground Lease has fully
performed all obligations under the Ground Lease to be performed by the
lessee thereunder;
(iv) neither the Contributor, as lessor under the Ground Lease nor
the lessee thereunder, is in default under the Ground Lease; and
(v) no consents or approvals of any party having an interest in
the Ground Lease, including, without limitation, the lessee, is required,
under the Ground Lease or otherwise, in order for the Contributor to
validly transfer all right, title and interest of the Contributor in and to
the Ground Lease to the Trust, or, to the extent such consent is required
or necessary, upon
14
<PAGE>
consummation of the transactions contemplated by this Agreement, such
consent will have been delivered to the Trust in full satisfaction of such
consent requirements;
(k) with respect to each Letter of Intent of the Contributor:
(i) the Letter of Intent is valid and enforceable, is in full
force and effect, and is binding upon the parties thereto except as
otherwise specified in the Letter of Intent and their respective successors
and assigns, in accordance with its terms;
(ii) the Letter of Intent has not been amended, restated,
supplemented, extended or otherwise modified in any respect, and a true and
correct copy of the Letter of Intent has been provided to the Trust;
(iii) the Contributor has fully performed all obligations under the
Letter of Intent to be performed by the acquiror or originator thereunder,
and the borrower or seller under the Letter of Intent has fully performed
all obligations under the Letter of Intent to be performed by the seller
or borrower thereunder;
(iv) neither the Contributor nor the counter party is in default
under the Letter of Intent; and
(v) no consents or approvals of any party having an interest in
the Letter of Intent, including, without limitation, the seller or
borrower, is required, under the Letter of Intent or otherwise, in order
for the Contributor to validly transfer all right, title and interest of
the Contributor in and to the Letter of Intent to the Trust, or, to the
extent such consent is required or necessary, upon consummation of the
transactions contemplated by this Agreement, such consent will have been
delivered to the Trust in full satisfaction of such consent requirements;
(l) there has been no fraud, dishonesty, or material misrepresentation
by Contributor, and Contributor has not received from any borrower any notice
that any predecessor to Contributor engaged in fraud, dishonesty or material
misrepresentation, in connection with the origination, servicing, collection or
foreclosure under any Mortgage or the related Mortgage Note of the Contributor;
and the Contributor has made no oral or written promises with respect to any
Mortgage Loan of the Contributor not reflected in the Mortgage File provided to
the Trust;
(m) if any Mortgage Loan of the Contributor has been participated with
other lenders, such participation is indicated on Schedule 1.1(a) or (b), as
applicable, and unless otherwise indicated, the Contributor is the lead lender
in such participation and either has the right under the related participation
agreement to sell its interest in the Mortgage Loan and to transfer the
servicing thereof without the consent of any participant required or, as of the
Closing Date for such Mortgage Loan, has obtained all required consents;
(n) there has been no fraud, dishonesty, or material misrepresentation
in connection with the Contributor's actions as lead lender in the
participations described in subsection (l) above;
15
<PAGE>
(o) each Mortgage Loan of the Contributor (except in those cases in
which the Contributor holds only a minority participation interest or the
interest of a junior lender in a Mortgage Loan) is being and has been serviced
by the Contributor, and from the date hereof until the Closing Date the
Contributor or its affiliate shall service and administer the Mortgage Loans of
the Contributor, in accordance with Contributor's customary servicing standards.
ARTICLE VII
ACTIONS PRIOR TO THE CLOSING DATE
Each of the Trust, Starwood Mezzanine and SOFI IV, as applicable, covenants
and agrees to take the following actions between the date hereof and the Closing
Date:
Section 7.1 Proxy Statement. The Trust has prepared and filed with the
---------------
SEC a proxy statement to solicit proxies in connection with the meeting of the
shareholders of the Trust referred to in Section 7.2 (the form of definitive
-----------
such proxy statement, together with any amendments thereof or supplements
thereto, mailed to the shareholders of the Trust in connection with such meeting
is herein referred to as the "Proxy Statement"). A true and complete copy of
the Proxy Statement (and all exhibits thereto) filed with the SEC has been and
to the extent amended will be delivered to Starwood Mezzanine and SOFI IV
promptly when available. The Trust will cause the Proxy Statement to comply as
to form in all material respects with the applicable requirements of the
Exchange Act and the respective rules and regulations thereunder and will cause
the Proxy Statement, at the time of its mailing or delivery to the shareholders
of the Trust and at the time of the meeting referred to above, to not include
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; provided, however, that the foregoing shall not apply to the extent
-------- -------
that any such untrue statement of a material fact or omission to state a
material fact was made by the Trust in reliance upon and in conformity with
information concerning Starwood Mezzanine, SOFI IV and their partners or
representatives or the Interests for inclusion in the Proxy Statement. Each of
Starwood Mezzanine and SOFI IV shall, and shall cause their representatives to,
furnish the Trust all information concerning themselves and their partners and
the Interests reasonably required for use in the Proxy Statement. If, at any
time prior to the Closing Date, any event should occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement, the Trust
will cause such event to be so described, and such amendment shall be promptly
filed with the SEC and, as required by law, disseminated to any shareholders of
the Trust. Starwood Mezzanine and SOFI IV and their partners will cooperate
fully in connection with such amendment or supplement, including supplying any
and all information with respect to Starwood Mezzanine, SOFI IV, and their
partners and the Interests which is necessary to prepare any such amendment or
supplement. The Proxy Statement includes many proposals for shareholder
approval in addition to the transaction contemplated hereby. Subject to the
last sentence of Section 7.2, the Trust shall not amend or delete any of
-----------
proposals relating to the transactions contemplated hereby without the approval
of both Starwood Mezzanine and SOFI IV, it being understood that shareholder
approval of all such proposals (without any amendments thereto objectionable to
Starwood Mezzanine or SOFI IV, notwithstanding the last sentence of Section 7.2)
-----------
shall be a condition to the obligation of Starwood Mezzanine and SOFI IV to
close the transactions contemplated hereby.
16
<PAGE>
Section 7.2 Action by the Trust and Shareholders of the Trust. The Trust
-------------------------------------------------
shall, as soon as practicable after the Proxy Statement shall be cleared by the
SEC, duly call, give notice of, convene and hold a meeting of the shareholders
of the Trust for the purposes set forth in the Proxy Statement (collectively,
the "Trust Shareholders Matters"). Subject to the fiduciary duties of the Board
of Trustees of the Trust under applicable law and to the last sentence of this
Section 7.2 , the Board of Trustees of the Trust will recommend to its
- ------------
shareholders approval of the Trust Shareholder Matters. The Board of Trustees
of the Trust may at any time prior to the Closing Date withdraw, modify or
change any recommendation regarding the Trust Shareholder Matters, this
Agreement or the transactions contemplated hereby or recommend and declare
advisable any other offer, proposal or transaction if in any such case it
determines upon advice of legal counsel that the failure to so withdraw, modify
or change such recommendation could reasonably be expected to involve it in a
breach of fiduciary duties under applicable law.
Section 7.3 Lawsuits, Proceedings, etc. Each party hereto shall notify
---------------------------
the other party hereto promptly upon becoming aware of any lawsuit, proceeding,
claim or investigation that may be threatened, brought, asserted or commenced
against it (a) involving in any way the transactions contemplated by this
Agreement or (b) that would have been listed or specified as an exception to
Sections 3.5, 4.4 or 5.4, as the case may be, if such lawsuit, proceeding, claim
- ------------ --- ---
or investigation had arisen prior to the date hereof.
Section 7.4 Conduct of Business by the Trust, Starwood Mezzanine and SOFI
-------------------------------------------------------------
IV Pending the Closing.
- ----------------------
(a) During the period from the date of this Agreement through the
Closing Date, except as expressly contemplated by this Agreement, each of the
Trust and the Partnership and each of Starwood Mezzanine and SOFI IV with
respect to the Interests only, shall carry on its business in accordance with
the ordinary course and shall not enter into any material transaction outside of
the ordinary course of business with respect thereto without the prior written
consent of the Trust in the case of Starwood Mezzanine or SOFI IV, or Starwood
Mezzanine and SOFI IV in the case of the Trust (not to be unreasonably
withheld).
(b) Without limiting the generality of the foregoing, and except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement through the Closing Date, the Trust shall not, without the prior
written consent of Starwood Mezzanine and SOFI IV (not to be unreasonably
withheld):
(i) take any action or omit to take any action that would cause it
to fail to be taxed as a REIT, for its taxable year ending December 31,
1998 or omit to take any action necessary to cause the Trust to be taxed as
a REIT for such taxable year;
(ii) take any action or omit to take any action that would cause
personal liability to attach to the holders of the Class A Shares by reason
of the ownership thereof;
(iii) acquire any real estate or other assets (other than receipt
of cash or investments of cash in short term, liquid real estate assets or
cash equivalents);
(iv) issue or enter into any executory agreement to issue any new
debt securities;
17
<PAGE>
(v) issue or enter into any executory agreement to issue any new
equity securities other than common shares issued in replacement of lost,
stolen or transferred outstanding shares or as described in the Proxy
Statement;
(vi) declare and pay any dividends or make other distributions to
holders of shares other than as are necessary to preserve the REIT status
of the Trust; or
(vii) repay any indebtedness.
(c) Without limiting the generality of the foregoing, and except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement through the Closing Date, Starwood Mezzanine and SOFI IV shall
not, without the prior written consent of the Trust (not to be unreasonably
withheld), except as required by law, or the documents evidencing, securing or
pertaining to the Mortgage Loans, or in the ordinary course in accordance with
Starwood Mezzanine's and SOFI IV's customary practice:
(i) voluntarily dispose of any portion of the Interests or of the
underlying collateral other than as required to maintain the venture
capital operating company status of Starwood Mezzanine;
(ii) release any collateral or any party from any liability on or
with respect to the Mortgage Loans;
(iii) compromise or settle any claims of any kind or character with
respect to the Letters of Intent, the Mortgage Loans or the Ground Lease;
(iv) initiate, complete or otherwise take any action with respect
to a foreclosure on any of the Mortgaged Property or exercise any remedies
under the related Mortgage Note or Mortgage or under any Letter of Intent
or Ground Lease;
(v) sell or encumber, or contract to sell or encumber, the
Interests, or any portion thereof or any interest therein;
(vi) agree to any amendments or modifications to any Letter of
Intent, Mortgage Loan or Ground Lease;
(vii) subordinate any Mortgage Loan or Ground Lease;
(viii) accept any prepayment of any Mortgage Note at a discount from
the face amount thereof;
(ix) give any notice of default or make any demand on any Mortgagor
or any party to a Letter of Intent or Ground Lease;
(x) accelerate the maturity of any Mortgage Loan, except in case
of a default; or
18
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(xi) initiate any litigation against any Mortgagor or any party to
a Letter of Intent or Ground Lease.
Section 7.5 Mortgagor Solicitations. Other than in connection with
-----------------------
solicitations or promotions directed at the general public, each Contributor
agrees severally that it will not after the Closing Date solicit any Mortgagor
for the purpose of refinancing the related Mortgage Loan or otherwise agree at
any time to refinance, restructure or replace any Mortgage Loan.
Section 7.6 Mutual Cooperation; Best Efforts. Subject to the fiduciary
--------------------------------
duties of the Board of Trustees of the Trust under applicable law, the fiduciary
duties of general partners of Starwood Mezzanine under applicable law, and the
fiduciary duties of the general partner of SOFI IV, the parties hereto shall
cooperate with each other, and shall use their respective best efforts to cause
the fulfillment of the conditions to the parties' obligations hereunder and to
obtain as promptly as possible all consents, authorizations, orders or approvals
from each and every third party, whether private or governmental, required in
connection with the transactions contemplated by this Agreement; provided,
--------
however, that the foregoing shall not require Starwood Mezzanine, any partner
- -------
thereof, SOFI IV, any partner thereof, or the Trust to make any divestiture or
consent to any divestiture in order to obtain any waiver, consent or approval.
Section 7.7 No Public Announcement. No party hereto shall, without the
----------------------
approval of the other parties hereto (which may not be unreasonably withheld),
make any press release or other public announcement concerning the transactions
contemplated by this Agreement, except as and to the extent that such party
shall be so obligated by law, in which case the other parties hereto shall be
advised and the parties hereto shall use their reasonable best efforts to cause
a mutually agreeable release or announcement to be issued.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST
The obligations of the Trust under this Agreement to consummate the
transactions contemplated hereby to be consummated at the Closing shall, at the
option of the Trust, be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
Section 8.1 No Misrepresentation or Breach of Covenants and Warranties.
----------------------------------------------------------
There shall have been no material breach by Starwood Mezzanine or SOFI IV in the
performance of the covenants and agreements herein to be performed by each of
them at or prior to the Closing Date; on the Closing Date, each of the
representations and warranties of Starwood Mezzanine and SOFI IV that is
qualified as to materiality shall be true and correct as though made on the
Closing Date; on the Closing Date, each of the representations and warranties of
Starwood Mezzanine and SOFI IV that is not so qualified as to materiality shall
be true and correct in all material respects as though made on the Closing Date;
and there shall have been delivered to the Trust a certificate or certificates
to the foregoing effect, dated the Closing Date, signed on behalf of each of
Starwood Mezzanine and SOFI IV. Notwithstanding anything to the contrary, the
prepayment of any mortgage after the date hereof but prior to the Closing Date
shall not constitute a breach of the representations and warranties of SOFI IV
or Starwood Mezzanine. In the event of a breach of the warranties under Section
-------
6.3(h), the Trust, at its option, may elect not to purchase
- ------
19
<PAGE>
the defaulted Mortgage and to reduce the Purchase Price accordingly pursuant to
Section 1.3 or to purchase the defaulted Mortgage and to negotiate with the
- -----------
Contributors in good faith in order to determine the appropriate reduction in
the Purchase Price, if the Trust reasonably determines that the occurrence of
such default adversely affects the value of such Mortgage Loan.
Section 8.2 No Material Adverse Effect. Between the date hereof and the
--------------------------
Closing Date, there shall have been no Material Adverse Effect on Starwood
Mezzanine, SOFI IV or any of the Interests or the collateral therefore and there
shall have been delivered to the Trust a certificate to that effect, dated the
Closing Date, signed on behalf of Starwood Mezzanine and SOFI IV (with respect
to itself and the Interests owned by it).
Section 8.3 Opinion of Counsel for Starwood. The Trust shall have
-------------------------------
received from Katten Muchin & Zavis, counsel for Starwood Mezzanine and SOFI IV,
an opinion, dated the Closing Date, in form and substance reasonably
satisfactory to the Trust.
Section 8.4 No Injunctions or Restraints. No temporary restraining
----------------------------
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect, it
being agreed by each of the Trust, Starwood Mezzanine and SOFI IV, however, that
it shall use its best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible any injunction or other order
that may be entered.
Section 8.5 Necessary Governmental Approvals. The parties hereto shall
--------------------------------
have received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Closing Date by applicable law or
regulation or are necessary to prevent a Material Adverse Effect on the Trust,
Starwood Mezzanine or SOFI IV.
Section 8.6 Transaction Agreements. Each of the parties (other than the
----------------------
Trust) to each of the Transaction Agreements and any other documents
contemplated hereby and thereby shall have entered into such Transaction
Agreements and any other documents contemplated hereby and thereby substantially
in the forms attached hereto as exhibits or, if not so attached, as agreed to by
the parties.
Section 8.7 Shareholder and Stockholder Action. The Shareholders of the
----------------------------------
Trust shall have approved, by the requisite vote of the holders of Class A and
Class B Shares, the Contribution Proposal (as defined in the Proxy Statement),
and the Advisory Agreement Proposal (as defined in the Proxy Statement).
Section 8.8 Termination of Partnership and Exchange Rights Agreement.
--------------------------------------------------------
The Partnership and the Exchange Rights Agreement shall be terminated effective
as of the Closing Date.
Section 8.9 Fairness Opinion. The Trust shall have received from the
----------------
Financial Advisor a favorable opinion as to the fairness of the transactions
contemplated hereby, from a financial point of view, to the shareholders of the
Trust.
20
<PAGE>
Section 8.10 REIT Qualifications. The Trust shall be eligible to elect to
-------------------
be qualified as a REIT for its taxable year ending December 31, 1998.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF STARWOOD MEZZANINE AND SOFI IV
The obligations of each of Starwood Mezzanine and SOFI IV under this
Agreement to consummate the transactions contemplated hereby to be consummated
at the Closing shall be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
Section 9.1 No Misrepresentation or Breach of Covenants and Warranties.
----------------------------------------------------------
There shall have been no material breach by the Trust in the performance of its
covenants and agreements herein to be performed at or prior to the Closing Date;
on the Closing Date, each of the representations and warranties of the Trust
that is qualified as to materiality shall be true and correct as though made on
the Closing Date, on the Closing Date, each of the representations and
warranties of the Trust that is not so qualified as to materiality shall be true
and correct in all material respects as though made on the Closing Date; and
there shall have been delivered to Starwood Mezzanine and SOFI IV a certificate
or certificates to the foregoing effect, dated the Closing Date, signed on
behalf of the Trust. Without limitation of the foregoing, the Class A Shares
shall continue to be listed and publicly traded on the AMEX.
Section 9.2 No Material Adverse Effect. Between the date hereof and the
--------------------------
Closing Date, there shall have been no Material Adverse Effect on the Trust or
the Partnership; and there shall have been delivered to Starwood Mezzanine and
SOFI IV a certificate to that effect, dated the Closing Date, signed on behalf
of the Trust.
Section 9.3 Opinion of Counsel for the Trust. Starwood Mezzanine and
--------------------------------
SOFI IV shall have received from Mayer, Brown & Platt, counsel for the Trust, an
opinion dated the Closing Date, in form and substance reasonably satisfactory to
Starwood Mezzanine and SOFI IV.
Section 9.4 No Injunctions or Restraints. No temporary restraining
----------------------------
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect, it
being agreed by each of the Trust, Starwood Mezzanine and SOFI IV, however, that
it shall use its best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible any injunction or other order
that may be entered.
Section 9.5 Necessary Governmental Approvals. The parties hereto shall
--------------------------------
have received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Closing Date by applicable law or
regulation or are necessary to prevent a Material Adverse Effect on the Trust,
Starwood Mezzanine or SOFI IV.
Section 9.6 Transaction Agreements; Advisory Agreement. Each of the
------------------------------------------
parties (other than Starwood Mezzanine, SOFI IV and SOFI Holdings) to each of
the Transaction Agreements and any other
21
<PAGE>
documents contemplated hereby and thereby shall have entered into such
Transaction Agreements and any other documents contemplated hereby and thereby
substantially in the forms attached hereto as exhibits or, if not so attached,
as agreed to by the parties. The Advisory Agreement between the Trust and
Starwood Financial Advisors, L.L.C. shall be entered into on the Closing Date
substantially in the form attached hereto as Exhibit C.
---------
Section 9.7 Shareholder and Stockholder Action. The Shareholders of the
----------------------------------
Trust shall have approved, by the requisite vote of the holders of Class A
Shares and Class B Shares, the Trust Shareholder Matters and each of William M.
Matthes and Kneeland C. Youngblood, M.D. shall be elected as Trustees with a
term that expires on the date of the 1999 annual meeting of the Trust's
shareholders and Robin Josephs shall be elected as a Trustee with a term that
expires on the date of the 1998 annual meeting of the Trust's shareholders.
Section 9.8 REIT Qualifications. The Trust shall be eligible to elect to
-------------------
be qualified as a REIT for its taxable year ending December 31, 1998.
ARTICLE X
INDEMNIFICATION; SURVIVAL
Section 10.1 Indemnification. (a) Each of the Trust, Starwood Mezzanine
---------------
and SOFI IV shall indemnify and hold harmless each other and their respective
subsidiaries, affiliates, employees, agents, partners and successors from and
against any and all (x) liabilities, losses or damages ("Loss") and (y)
reasonable out-of-pocket expenses, including without limitation attorneys' fees
and expenses ("Expense") incurred by such party in connection with (i) its
respective breach or failure to perform its obligations under this Agreement or
any other agreement entered into by it in connection therewith (including the
Transaction Agreements) and (ii) any breach of any warranty or the inaccuracy of
any representation, or misrepresentation or material omission, made by it
respectively in this Agreement, any Transaction Agreement or in any certificate
delivered by or on behalf of it respectively pursuant hereto or thereto;
provided however, that the obligation of each Contributor to indemnify and hold
- -------- -------
harmless pursuant to this Section 10.1 shall be limited to the payment by such
------------
Contributor in the aggregate of an amount equal to the value of the Class A
Shares and cash received by such Contributor pursuant to this Agreement.
(b) The Trust shall indemnify and hold harmless each of Starwood
Mezzanine and SOFI IV and their respective subsidiaries, affiliates, employees,
agents, partners and successors from and against any and all Loss and Expenses
incurred by such party in connection with any untrue statement of a material
fact or omission of a material fact required to be stated in the Proxy
Statement, at the time of its mailing or delivery to the shareholders of the
Trust and at the time of the shareholders meeting referenced therein or
necessary to make the statements therein not misleading; provided, however, that
-------- -------
the foregoing shall not apply to the extent that any such untrue statement of a
material fact or omission to state a material fact was made by the Trust in
reliance upon and in conformity with information concerning Starwood Mezzanine,
SOFI IV and their partners or representatives or the Interests for inclusion in
the Proxy Statement.
(c) Each of Starwood Mezzanine and SOFI IV severally agrees that it
shall indemnify and hold harmless the Trust and its subsidiaries, affiliates,
employees, agents, partners and successors
22
<PAGE>
from and against any and all Loss and Expenses incurred by such party in
connection with any untrue statement of a material fact or omission of a
material fact required to be stated in the Proxy Statement, at the time of its
mailing or delivery to the shareholders of the Trust and at the time of the
shareholders meeting referenced therein or necessary to make the statements
therein not misleading; provided, however, that the foregoing shall only apply
-------- -------
to the extent that any such untrue statement of a material fact or omission to
state a material fact was made by the Trust in reliance upon and in conformity
with information concerning the indemnifying party and its partners or
representatives or its Interests supplied by such indemnifying party for
inclusion in the Proxy Statement.
Section 10.2 Notice of Claims. If a party believes that any of the
----------------
persons entitled to indemnification under this Article X has suffered or
---------
incurred any Loss or incurred any Expense, whether or not the applicable dollar
limitation specified by Section 10.1 has been exceeded, such party shall notify
------------
the indemnifying party promptly in writing describing such Loss or Expense, the
amount thereof, if known, and the method of computation of such Loss or Expense,
all with reasonable particularity and containing a reference to the provisions
of this Agreement, any Transaction Agreement, the Proxy Statement or any
certificate delivered pursuant hereto in respect of which such Loss or Expense
shall have occurred; provided, however, that the omission by such indemnified
-------- -------
party to give notice as provided herein shall not relieve the indemnifying party
of its indemnification obligation under this Article X except to the extent that
---------
such indemnifying party is materially damaged as a result of such failure to
give notice. If any action at Law or suit in equity is instituted against a
third party with respect to which any of the persons entitled to indemnification
under this Article X intends to claim any liability or expense as Loss or
---------
Expense under this Article X, any such person shall promptly notify the
---------
indemnifying party of such action or suit as specified in this Section 10.2 and
------------
10.3. Any party entitled to indemnification hereunder shall use reasonable
- ----
efforts to minimize any Loss or Expense for which indemnification is sought
hereunder.
Section 10.3 Third-Party Claims. In the event of any claim for
------------------
indemnification hereunder resulting from or in connection with any claim or
legal proceeding by a third party, the indemnified persons shall give notice
thereof to the indemnifying party not later than twenty (20) business days prior
to the time any response to the asserted claim is required, if possible, and in
any event within fifteen (15) days following the date such indemnified person
has actual knowledge thereof; provided, however, that the omission by such
-------- -------
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its indemnification obligation under this Article X except
---------
to the extent that such indemnifying party is materially damaged as a result of
such failure to give notice. In the event of any such claim for indemnification
resulting from or in connection with a claim or legal proceeding by a third
party, the indemnifying party may, at its sole cost and expense, assume the
defense thereof; provided, however, that counsel for the indemnifying party, who
-------- -------
shall conduct the defense of such claim or legal proceeding, shall be reasonably
satisfactory to the indemnified party; and provided, further, that if the
-------- -------
defendants in any such actions include both the indemnified persons and the
indemnifying party and the indemnified persons shall have reasonably concluded
based on a written opinion of counsel that there may be legal defenses or rights
available to them which have not been waived and are in actual or potential
conflict with those available to the indemnifying party, the indemnified persons
shall have the right to select one law firm reasonably acceptable to the
indemnifying party to act as separate counsel, on behalf of such indemnified
persons, at the expense of the indemnifying party. Unless the indemnified
persons are represented by separate counsel pursuant to the second proviso of
------ -------
the immediately preceding sentence, if an indemnifying party assumes the defense
of any such claim or legal proceeding, such
23
<PAGE>
indemnifying party shall not consent to entry of any judgment, or enter into any
settlement, that (a) is not subject to indemnification in accordance with the
provisions in this Article X, (b) provides for injunctive or other nonmonetary
---------
relief affecting the indemnified persons or (c) does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
indemnified persons of a release from all liability with respect to such claim
or legal proceeding, without the prior written consent of the indemnified
persons (which consent, in the case of clauses (b) and (c), shall not be
----------- ---
unreasonably withheld); and provided, further, that unless the indemnified
-------- -------
persons are represented by separate counsel pursuant to the second proviso of
--------------
the immediately preceding sentence, the indemnified persons may, at their own
expense, participate in any such proceeding with the counsel of their choice
without any right of control thereof. So long as the indemnifying party is in
good faith defending such claim or proceeding, the indemnified persons shall not
compromise or settle such claim or proceeding without the prior written consent
of the indemnifying party, which consent shall not be unreasonably withheld. If
the indemnifying party does not assume the defense of any such claim or
litigation in accordance with the terms hereof, the indemnified persons may
defend against such claim or litigation in such manner as they may deem
appropriate, including, without limitation, settling such claim or litigation
(after giving prior written notice of the same to the indemnifying party and
obtaining the prior written consent of the indemnifying party, which consent
shall not be unreasonably withheld) on such terms as the indemnified persons may
deem appropriate, and the indemnifying party will promptly indemnify the
indemnified persons in accordance with the provisions of Article X.
---------
Section 10.4 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties contained in this Agreement shall survive until
the first (1st) anniversary of the Closing Date, at which time such
representations and warranties will terminate and be of no force and effect.
Any claim under this Article X for Loss or Expense in respect of any
---------
representations and warranties must be asserted in writing prior to the first
(1st) anniversary of the Closing Date. Notwithstanding the foregoing, if a
claim of a breach of a representation or warranty under this Article X is
---------
asserted in writing prior to the applicable time period set forth above in this
Section 10.4, then such representation or warranty, as it relates to such claim,
- ------------
shall survive until the Loss or Expense in respect thereof, if any, is finally
determined and paid by the indemnifying party.
ARTICLE XI
TERMINATION
Section 11.1 Termination. Anything contained in this Agreement to the
-----------
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Closing Date:
(a) by the mutual consent of the parties;
(b) by the Trust upon any material breach by Starwood Mezzanine or
SOFI IV of any of their respective representations, warranties or covenants
contained in this Agreement that is not qualified as to materiality and upon any
breach by Starwood Mezzanine or SOFI IV of any of their respective
representations, warranties or covenants contained in this Agreement that is
qualified as to materiality; provided that either Starwood Mezzanine or SOFI IV,
--------
as the case may be, shall have been given a reasonable opportunity to cure such
breach;
24
<PAGE>
(c) by Starwood Mezzanine or SOFI IV upon any material breach by the
Trust of any of its representations, warranties or covenants contained in this
Agreement that is not qualified as to materiality and upon any breach by the
Trust of any of its representations, warranties or covenants contained in this
Agreement that is qualified as to its materiality; provided that the Trust shall
--------
have been given a reasonable opportunity to cure such breach;
(d) by the Trust if any of the conditions specified in Article VIII
------------
has not been met or waived at such time as it is no longer possible to satisfy
such condition;
(e) by Starwood Mezzanine and SOFI IV if any of the conditions
specified in Article IX has not been met or waived at such time as it is no
----------
longer possible to satisfy such condition;
(f) by the Trust, Starwood Mezzanine, or SOFI IV if the transactions
contemplated by this Agreement are not consummated on or before March 31, 1998
(the "Outside Date"); except that on or after the Outside Date no party may
terminate this Agreement pursuant to this Section 10.1(f) if such party is then
---------------
in material breach of its representations, warranties or covenants in this
Agreement; or
(g) upon 15 days' written notice by the Trust, Starwood Mezzanine or
SOFI IV if the Trust enters into an agreement with any party other than Starwood
Mezzanine, SOFI IV or any other entity controlled by Starwood Capital Group,
L.P., Starwood Capital Group, L.L.C. or their principals (a "Starwood Controlled
Party") which is not consistent with the obligations of the Trust set forth in
this Agreement or with the consummation of the transactions contemplated by this
Agreement. For the purposes hereof, an agreement with a party other than
Starwood Mezzanine, SOFI IV or a Starwood Controlled Party will be deemed to be
inconsistent with the obligations of the Trust set for this Agreement in the
event that such agreement would impose any exclusivity or non-competition
agreements on the Trust or would require a commitment of the Trust capital in
excess of $1,000,000 in the aggregate.
ARTICLE XII
OTHER PROVISIONS
Section 12.1 Confidential Nature of Information. Each party agrees that
----------------------------------
it will treat in strict confidence all documents, materials and other
information which it obtains regarding the other party during the course of the
negotiations leading to the consummation of the transactions provided for herein
and the preparation of this Agreement; and if for any reason whatsoever the
transactions contemplated by this Agreement shall not be consummated, each party
shall return to the other party all copies of non-public documents and materials
which have been furnished or acquired in connection therewith and shall not use
or disseminate such documents, materials or other information for any purpose
whatsoever.
Section 12.2 Expenses.
--------
(a) Each of the parties hereto shall bear its own costs and expenses
(including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors) incurred
by it in connection with the preparation, negotiation, execution and delivery of
this Agreement, each of the other documents and instruments executed in
connection with or contemplated by this Agreement, including the Proxy
Statement, and the consummation of the
25
<PAGE>
transactions contemplated hereby and thereby (collectively "Acquisition
Expenses"); provided, that, if the transactions contemplated by this Agreement
-------- ----
are not consummated on or before June 30, 1998, the Contributors (pro rata based
on the relative amounts of Class A Shares that would have been issued to each
and the amount of cash paid to each if the transactions had been consummated)
will reimburse the Trust for all amounts the Trust pays to Houlihan, Zokey,
Howard & Zukin Financial Advisors, Inc. other than as a result of the
Independent Trustees of the Trust withdrawing their approval for the proposed
transactions.
(b) In the event of a Qualifying Termination (as defined below), then
within ten (10) business days after receipt by the Trust from Starwood Mezzanine
or SOFI IV, as the case may be, of reasonable documentation therefor, the Trust
shall reimburse Starwood Mezzanine or SOFI IV, as the case may be, for its
reasonable out-of-pocket Acquisition Expenses.
For the purposes of this Section 12.2(b), a "Qualifying Termination" shall
---------------
mean a termination of this Agreement pursuant to Section 11.1(g).
---------------
Section 12.3 Notices. All notices and other communications under this
-------
Agreement shall be in writing and shall be deemed given when delivered by
facsimile, personally or by overnight mail, or four (4) days after being mailed
(by registered mail, return receipt requested) to a party at the following
address (or to such other address as such party may have specified by notice
given to the other parties pursuant to this provision):
If to the Trust to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
26
<PAGE>
If to Starwood Mezzanine to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax No.: (312) 902-1620
If to SOFI IV to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza
Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with copies to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Chicago, Illinois 60661
Attention: Nina Matis
Fax No.: (312) 902-1620
Section 12.4 Definitions. For purposes of this Agreement:
-----------
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person; provided, however, that the
-------- -------
Trust, Starwood Mezzanine and SOFI IV are not affiliates for any purpose under
this Agreement;
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Financial Advisor" means Houlihan, Zokey, Howard & Zukin.
(d) "Incentive Plans" means the Angeles Participating Mortgage Trust
1996 Share Incentive Plan and the Angeles Participating Mortgage Trust 1996
Trustee Share Incentive Plan.
27
<PAGE>
(e) "Ground Lease" means the lease agreement between Red Lion Hotels,
Inc. and RLH Partnership, L.P.
(f) "Material Adverse Effect" means any change or effect (or any
development that, insofar as can reasonably be foreseen, would result in any
change or effect) that is materially adverse to (i) in the case of the Trust and
Starwood Mezzanine, the business, properties, assets, condition (financial or
otherwise) or results of operations of the applicable person or persons, taken
as a whole and (ii) in the case of SOFI IV, the SOFI IV Interests, the Letters
of Intent and the First Mortgage Portfolio.
(g) "Mortgage" shall mean the original mortgage, deed of trust or
other instrument, as amended, restated, supplemented or otherwise modified from
time to time prior to the date hereof, securing a Mortgage Note relating to a
Mortgage Loan.
(h) "Mortgage Files" means all related notes, deeds of trust,
mortgages, security agreements, guaranties, indemnities, financing statements,
assignments, endorsements, correspondence, bonds, letters of credit, accounts,
insurance contracts and policies, credit reports, tax returns, appraisals,
environmental reports, escrow documents, participation agreements (if
applicable), loan files, servicing files and all other documents evidencing,
securing or pertaining to the Mortgage Loans.
(i) "Mortgage Loan" or "Mortgage Loans" shall mean the loan or loans
identified on Schedule 1.1(a) or (b), as the same may be amended from time to
time pursuant to the provisions of this Agreement, together with all Servicing
Rights related thereto.
(j) "Mortgage Note" means a note or other evidence of indebtedness
evidencing the indebtedness of a Mortgagor under a Mortgage Loan.
(k) "Mortgaged Property" means the property encumbered by a Mortgage.
(l) "Mortgagor" means a Person that has executed and delivered a
Mortgage encumbering Mortgaged Property owned and/or leased by such Person.
(m) "Person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
entity.
(n) "Servicing Files" means the documents, files and other items
pertaining to the Mortgage Loans, including without limitation the computer
files, data disks, books, records, data tapes, notes, and all additional
documents generated as a result of or utilized in originating or servicing the
Mortgage Loans.
(o) "Servicing Rights" means, with respect to each Mortgage Loan, any
and all of the following: (a) all rights to service such Mortgage Loan; (b) any
payments or monies payable or received for servicing such Mortgage Loan; (c) any
late fees, assumption fees, penalties or similar payments with respect to such
Mortgage Loan; (d) all agreements or documents creating, defining or evidencing
any such Servicing Rights and all rights of the Contributor thereunder,
including without limitation any clean-up calls and termination options; (e) all
accounts and other rights to payment related to any of the property described in
this paragraph; (f) possession and use of any and all Servicing Files pertaining
to
28
<PAGE>
such Mortgage Loan or pertaining to the past, present or prospective servicing
of such Mortgage Loan; and (g) all rights, powers and privileges incident to any
of the foregoing.
Section 12.5 Partial Invalidity. In case any one or more of the
------------------
provisions contained herein shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein unless the deletion of
such provision or provisions would result in such a material change as to cause
completion of the transactions contemplated hereby to be unreasonable.
Section 12.6 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
permitted successors or assigns.
Section 12.7 Execution in Counterparts. This Agreement may be executed
-------------------------
in one or more counterparts, each of which shall be considered an original
counterpart, and shall become a binding agreement when each of the parties shall
have each executed one counterpart.
Section 12.8 Titles and Headings. Titles and headings to Articles and
-------------------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
Section 12.9 Schedules and Exhibits. The schedules and exhibits referred
----------------------
to in this Agreement shall be construed with and as an integral part of this
Agreement to the same extent as if the same had been set forth verbatim herein.
Section 12.10 Entire Agreement; Amendments and Waivers; Assignment. This
----------------------------------------------------
Agreement (together with the Transaction Agreements and other documents referred
to herein) contains the entire understanding of the parties hereto with regard
to the subject matter contained herein. The parties hereto, only by mutual
agreement in writing, may amend, modify and supplement this Agreement. The
failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
such party thereafter to enforce each and every such provision. No waiver of
any breach of this Agreement shall be held to constitute a waiver of any other
or subsequent breach. Except as expressly provided herein, the rights and
obligations of the parties under this Agreement may not be assigned or
transferred by any party hereto without the prior written consent of the other
parties hereto, provided, however, that the Trust shall be permitted to assign
this agreement in connection with any merger, reorganization, consolidation,
sale of all or substantially all of its assets in which the Trust is the
surviving entity or the primary purpose of which is to change the domicile of
the Trust or to change the form of the Trust to a corporation.
Section 12.11 Governing Law. This Agreement and the application or
-------------
interpretation thereof, shall be exclusively governed by its terms and by the
internal laws of the State of New York, without regard to principles of
conflicts of laws as applied in the State of New York or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of New York.
29
<PAGE>
Section 12.12 No Third-Party Beneficiaries. Except as specified in
----------------------------
Article X, nothing in this Agreement, expressed or implied, is intended or
- ------- -
shall be construed to confer upon any person other than the parties hereto and
successors and assigns permitted by Section 12.6 any right, remedy or claim
------------
under or by reason of this Agreement.
Section 12.13 The Trust; Starwood General Partners. Each of the parties
------------------------------------
hereto acknowledges and agrees that (a) the name "Angeles Participating Mortgage
Trust" is a designation of the Trust and its Trustees (as Trustees but not
personally) under a Declaration of Trust, originally made and entered into as of
April 15, 1988, as restated as of July 18, 1988, and all persons dealing with
the Trust shall look solely to Trust's assets for the enforcement of any claims
against the Trust, and the Trustees, officers, agents and security holders of
the Trust assume no personal liability for obligations entered into on behalf of
the Trust, and their respective individual assets shall not be subject to the
claims of any person relating to such obligations; (b) all persons dealing with
Starwood Mezzanine shall look solely to the assets of Starwood Mezzanine for the
enforcement of any claims against Starwood Mezzanine and the general partners of
Starwood Mezzanine, and the officers, agents and security holders of such
general partner assume no personal liability for obligations entered into on
behalf of Starwood Mezzanine, and their respective individual assets shall not
be subject to the claims of any person relating to such obligations; and (c) all
persons dealing with SOFI IV shall look solely to the assets SOFI IV for the
enforcement of any claims against SOFI IV and the general partners of SOFI IV,
and the officers, agents and security holders of such general partner assume no
personal liability for obligations entered into on behalf of SOFI IV, and their
respective individual assets shall not be subject to the claims of any person
relating to such obligations.
Section 12.14 Determinations and Interpretations by the Trust. All
-----------------------------------------------
determinations of the Trust (or the Board of Trustees of the Trust) provided for
in or pursuant to this Agreement shall be made by the Independent Trustees (as
defined in the Shareholders Agreement). All interpretations of the terms of
this Agreement shall be resolved on behalf of the Trust by the Independent
Trustees (as defined in the Shareholders Agreement).
Section 12.15 Submission to Jurisdiction. Each of the parties hereto
--------------------------
irrevocably submits and consents to the jurisdiction of the United States
District Court for the Southern District of New York in connection with any
action or proceeding arising out of or relating to this Agreement or any
Transaction Document and the transactions contemplated hereby and thereby, and
irrevocably waives any immunity from jurisdiction thereof and any claim of
improper venue, forum non conveniens or any similar basis to which it might
----- --- ----------
otherwise be entitled in any such action or proceeding.
Section 12.16 Approvals and Consents. Unless otherwise expressly set
----------------------
forth herein, any agreement, approval or consent required a party hereto shall
not be unreasonably withheld or delayed.
30
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto or by their duly authorized officers, all as of the date
first above written.
ANGELES PARTICIPATING MORTGAGE TRUST, a California
business trust
By: /s/ Barry S. Sternlicht
--------------------------------------
Name: Barry S. Sternlicht
Title:
STARWOOD MEZZANINE INVESTORS, L.P.
By: Starwood Capital Group, L.P.
its general partner
By: BSS Capital Partners, L.P.
its general partner
By: Sternlicht Holdings II, Inc.
its general partner
By: /s/ Jay Sugarman
----------------------
Name: Jay Sugarman
Title: President
STARWOOD OPPORTUNITY FUND IV, L.P.
By: SOFI IV Management, L.L.C.
Its: General Partner
By: Starwood Capital Group, L.L.C.
Its General Manager
By: /s/ Jay Sugarman
----------------------
Name: Jay Sugarman
Title: President
31
<PAGE>
SCHEDULE 1.1(a)
Starwood Mezzanine Interests
<TABLE>
<CAPTION>
Outstanding Principal
Original Principal Amount to
Loan Interest Principal Balance at Anticipated Contribution Senior
Borrower Collateral Rate Maturity Balance ---- Draws Participation Value Subordination Investmen
- -------- ---------- -------- -------- --------- ----------- ----------- ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
32
<PAGE>
SCHEDULE 1.1(b)
SOFI IV Interests
<TABLE>
<CAPTION>
Outstanding Principal
Original Principal Amount to
Loan Interest Principal Balance at Contribution Senior
Lender Collateral Rate Maturity Balance ---- Participation Value Subordination Investment
------ ---------- -------- -------- --------- ----------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
33
<PAGE>
EXHIBIT 10.4
SECOND AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
SECOND AMENDED AND RESTATED SHAREHOLDERS AGREEMENT dated as of March 18,
1998 (the "Contribution Date"), by and among B Holdings, L.L.C., a Connecticut
limited liability company ("BLLC"), SAHI Partners, a Delaware general
partnership ("SAHI Partners"), Starwood Mezzanine Investors, L.P., a Delaware
limited partnership ("Starwood Mezzanine"), SOFI-IV SMT Holdings, L.L.C. ("SOFI
IV" and, together with BLLC, SAHI Partners and Starwood Mezzanine, "SAHI") and
Starwood Financial Trust, a California business trust formerly known as Angeles
Participating Mortgage Trust (the "Company").
WHEREAS, SAHI Partners, SAHI, Inc., Starwood Mezzanine and the Company are
a party to the Restated Shareholders Agreement, dated as of March 15, 1994 and
restated as of April 27, 1994, as amended by Amendment No. 1 to the Restated
Shareholders Agreement, dated as of March 15, 1996 (the Restated Shareholder
Agreement, as amended by Amendment No. 1 thereto, the "Original Agreement");
WHEREAS, SAHI, Inc. is no longer a shareholder of the Company;
WHEREAS, SAHI Partners, Starwood Mezzanine and the Company hereby deem it
to be in their respective best interest to add BLLC and SOFI IV as parties to
the Original Agreement and to amend and restate the Original Agreement as set
forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Interested Transactions. (a) SAHI Partners agrees that until
-----------------------
the date that a majority of members of the Board of Trustees are Independent
Trustees (the "Restricted Period"), neither it nor its Affiliates shall take any
action, directly or indirectly, which would result in the Company entering into
any Interested Transactions (as defined below) unless any such Interested
Transaction has been approved by a majority of the Independent Trustees (as
defined below) of the Company. In addition, as to all contracts or other
transactions between the Trust and any Trustee or any Affiliate of a Trustee,
such interested Trustee shall recuse himself from any vote by the Board of
Trustees on such agreement or transaction; provided that the presence of such
-------- ----
interested Trustee shall count for the determination of the presence of a quorum
at any meeting.
(b) SOFI IV agrees that it will not contribute any assets to the Trust
after the date hereof without the consent of Starwood Mezzanine and SOFI IV.
<PAGE>
Section 2.Options and Other Incentive Awards. (a) The Company agrees that at
----------------------------------
all times prior to the date on which Class A Shares with a Fair Market Value of
at least $250,000,000 are outstanding that were issued as part of one or more
primary or secondary public offerings (with not less than $200,000,000
constituting issuances of Class A Shares which are not resales of Class A Shares
outstanding at 11:59 pm on the Contribution Date) (an "IPO Event"):
(i) Only Options, and not any other Awards, shall be granted under
the Starwood Financial Trust 1996 Long-Term Incentive Plan (the "Incentive
Plan") to any person who has an interest, directly or indirectly, in SOFI
IV or Starwood Mezzanine (a "Starwood Insider");
(ii) The initial Award to Starwood Financial Advisors, L.L.C. shall
be in the form of Options;
(iii) No Options shall be granted to Barry S. Sternlicht;
(iv) The Class A Shares underlying total Awards granted shall not
exceed 4.5%, in the aggregate, of the fully-diluted Class A Shares
outstanding from time to time and the Class A Shares underlying Awards
granted to Starwood Insiders shall not exceed 2.5% of the fully diluted
Class A Shares outstanding from time to time; and
(v) Vesting of Options granted to Starwood Insiders shall, in
addition to any service criteria imposed by the Board of Trustees, occur on
a pari passu percentage basis with the percentage of the total number of
Class A Shares held on the Contribution Date by SOFI IV and Starwood
Mezzanine as have been sold or distributed from time to time by SOFI IV or
Starwood Mezzanine; provided, however, that in no event shall such Options
vest at a rate that is faster than 33.33% per annum and provided further,
however, that, subject to the continued satisfaction of any service
criteria imposed by the Board of Trustees, any theretofore unvested options
held by Starwood Insiders shall vest in full on the earlier to occur of a
Change of Control (as defined in the Incentive Plan) or on the fifth
anniversary of the date of grant.
(b) The Company further agrees that Options will be issued at Fair Market
Value, except that on the Contribution Date, Options (or restricted stock with
equivalent value) not exceeding 4.5%, in the aggregate, of the fully-diluted
Class A Shares outstanding after giving effect to the transactions occurring on
the Contribution Date may be issued with an exercise price which is less than
the Fair Market Value of the Class A Shares but is not less than $2.50 per Class
A Share (subject to adjustment for stock splits, capitalizations and similar
events) and after the Contribution Date but prior to the date which is the
earlier of (x) six (6) months after the Contribution Date and (y) the date on
which the outstanding publicly traded Class A Shares held by Outside Parties
shall have a Fair Market Value of more than $100 million, Options (or restricted
stock with equivalent value) may be issued based on the fair market value of the
assets of the Trust (subject to the aforesaid 4.5% limitation). Without the
prior written consent of the
-2-
<PAGE>
Advisor, the Company shall not grant Awards directly to officers, key employees,
members or principals of the Advisor in such respective capacities.
(c) The Company agrees that it will not amend the basic terms of the
Incentive Plan without the consent of Starwood Mezzanine and SOFI IV
respectively, as long as such entity owns Class A Shares.
Section 3.Election of Trustees. During any period in which (x) the Class B
--------------------
Shares remain controlled by Starwood Capital Group, L.L.C. ("SCG") or by any
entity under common control with SCG, and (y) the Advisory Agreement has not
been terminated by the Advisor or terminated for cause by the Company, the
Company shall use its best efforts to cause five nominees designated by SCG or
by the parties who control SCG to be elected to the Board of Trustees and to
cause such persons to be included as the management slate of nominees to the
Board of Trustees. Further, during such period, the Company shall use its best
efforts to cause such nominees or Trustees to be replaced from time to time,
with or without cause, with new persons designated by SCG or the parties who
control SCG at the request of SCG or persons who control SCG. SAHI agrees to
renominate and to vote the Class A and Class B Shares held by it for the
election of Robin Josephs as a Trustee at the 1998 annual meeting of the Trust's
shareholders.
Section 4.Voting. From and after the tenth anniversary of the Contribution
------
Date, BLLC agrees to vote any Class B Shares in respect of any matters related
to the Advisory Agreement (including, but without limitation, to vote in respect
of any proposed termination of the Advisory Agreement) in the same proportion as
the Class A Shares voted on such matter during any period (a "Suspension
Period") in which all of the following conditions shall be satisfied:
(a) The daily average closing price of Class A Shares on the American
Stock Exchange or the national securities exchange or electronic trading
system that provides the primary market on which the Class A Shares are
then traded for the 180-consecutive-calendar-day period preceding each day
occurring during the Suspension Period shall be less than the product of
(a) the Trust's book equity value attributable to the Class A Shares and
(b) the percentage equivalent of a fraction, the numerator of which is one,
and the denominator of which is the total outstanding Class A Shares; and
(b) The partners of SOFI IV shall have received aggregate
distributions from SOFI IV that are less than the sum of (i) the total
accrued "Preferred Return" (as defined in the SOFI IV Partnership
Agreement) on the contributed and unreturned capital contributions of SOFI
IV's partners to SOFI IV plus (ii) the total capital contributed by the
partners of SOFI IV to SOFI IV; provided, however, that solely for purposes
of this subparagraph (b) (and not for purposes of determining distributions
from SOFI IV), in the event partners are distributed Class A Shares and
such Class A Shares are sold to unaffiliated third parties of such partners
within 180 days subsequent to such distribution, then the prices received
by such partners with respect to such shares so sold shall be
-3-
<PAGE>
deemed to have been the amounts distributed to such partners by SOFI IV for
purposes of this subparagraph (b).
Section 5.Independent Trustees. During the Restricted Period each of BLLC,
--------------------
the Company, SAHI Partners, Starwood Mezzanine and SOFI IV, severally and not
jointly, shall take all actions within their powers, to cause the nomination and
election of at least three Independent Trustees to serve on the Company's Board
of Trustees; provided that in no event shall BLLC, SAHI Partners, Starwood
Mezzanine or SOFI IV be obligated to take any action which would prevent them
from electing a majority of the entire Trustees on the Company's Board of
Trustees.
Section 6.Transfers. During the term of this Agreement, BLLC, SAHI Partners,
---------
Starwood Mezzanine and SOFI IV, severally and not jointly, shall not transfer or
undertake a series of transfers of Class A Shares or Class B Shares which in the
aggregate represent over 9% of the voting power of the Company unless the
transferees thereof agree to be bound by the terms hereof pursuant to a written
agreement in form and substance reasonably acceptable to the Company; provided
--------
that, Starwood Mezzanine and SOFI IV shall be permitted to distribute Class A
- ----
Shares to their limited partners without compliance with the terms of this
Section and transfers that are registered under the Securities Act of 1933, as
amended shall be exempted from the terms of this Section. The limited partners
of Starwood Mezzanine and SOFI IV may transfer Class A Shares without regard to
this Section 6.
---------
Section 7.Definitions. The following terms have the meanings set forth
-----------
below:
"Advisor" means Starwood Financial Advisors, L.L.C. and its successors
-------
and assigns.
"Advisory Agreement" means the Advisory Agreement between the Company
------------------
and the Advisor dated as of the Contribution Date as amended from time to
time.
"Affiliate" of any entity means a person which directly or indirectly
---------
through one or more intermediaries controls, or is controlled by, or is
under common control with, such entity.
"Award" has the meaning given in the Incentive Plan.
-----
"Class A Shares" means the Company's Class A Shares, $1.00 par value
--------------
per share.
"Class B Shares" means the Company's Class B Shares, $.01 par value
--------------
per share.
"Fair Market Value" has the meaning given in the Incentive Plan.
-----------------
-4-
<PAGE>
"Independent Trustees" shall mean a Trustee who qualifies as a "Non-
--------------------
Employee Director" of the Company within the meaning of Rule 16b-3(b)(3) of
the Securities Exchange Act of 1934, as amended and who is not (i) a Person
directly or indirectly owning, controlling or holding 3% or more of the
outstanding economic or voting interest of the Advisor or SCG, (ii) a
Person directly or indirectly owning, controlling or holding 10% or more of
the economic interest of any borrower under any loan made by the Company
with an outstanding principal balance in excess of $3 million (a
"Borrower") or any Person that provides mortgage servicing, or real estate
or financial advisory or consulting services to the Company and that
received fees from the Company for such services in excess of $100,000 for
the prior fiscal year or is expected to receive in excess of $100,000 per
annum during the current fiscal year (a "Service Provider") or an Affiliate
of such Borrower or Service Provider, (iii) an officer, director, employee,
member or partner of the Advisor or SCG, (iv) a spouse, sibling, lineal
descendent, parent, grandparent, sibling of parents or first cousin,
including adoptive relationships and with respect to siblings and parents,
in-laws (a "Relative") of any Person described in clause (i), or (v) a
Relative of a Borrower or any Person described in clause (iii) residing in
the same household as such Person.
"Interested Transactions" means to:
-----------------------
(a) merge, consolidate with, or otherwise acquire all or any
portion of the business, assets or securities of any Affiliate of SAHI
or SCG or sell, transfer or assign any portion of the Company's
business, assets or securities to any Affiliate of SAHI or SCG;
(b) make any loans or other advances of money to, or guarantee
with or for the benefit of, any Affiliate of SAHI or SCG or any
officer, director, partner, trustee or shareholder (both direct and
indirect) of any Affiliate of SAHI or SCG;
(c) sell, lease, transfer or otherwise dispose of any property
or assets from, entertain or maintain any contract, agreement or
understanding with, or otherwise enter into, or be a party to, any
transaction with, any Affiliate of SAHI or SCG or any officer,
director, partner, trustee or shareholder (both direct and indirect)
of any Affiliate of SAHI or SCG;
(d) take any actions which would result in one or more publicly-
traded classes of the Company's equity securities no longer having the
attributes of public ownership; or
(e) take any actions beneficial to any Affiliate of SAHI or SCG
which would be detrimental to a material number of public shareholders
of the Company;
-5-
<PAGE>
provided, however, the actions described in (a), (b) and (c) above, shall
not constitute an Interested Transaction if (i) the action taken has been
determined by the Independent Trustees to be pursuant to the reasonable
requirements of the Company's business and upon fair and reasonable terms
which are no less favorable to the Company than would be obtained in a
comparable arm's-length transaction with an independent third-party and
(ii) the transaction involves less than $500,000.
"Options" has the meaning given in the Incentive Plan.
-------
"Outside Parties" means persons other than Starwood Mezzanine or any
---------------
of its limited partners, SOFI IV or any of its limited partners, SCG or any
entity controlled, directly or indirectly by SCG or Barry S. Sternlicht.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
Section 8.Amendment and Waiver. Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement will be
effective against the Company, BLLC, SAHI Partners, Starwood Mezzanine or SOFI
IV unless such modification, amendment or waiver is approved in writing by the
Company, BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV.
Section 9.Successors and Assigns. This Agreement will bind and inure to
----------------------
the benefit of and be enforceable by (a) the Company and its successors and
assigns and (b) BLLC, SAHI Partners, Starwood Mezzanine and SOFI IV and their
respective successors and assigns; provided that no partner of Starwood
-------- ----
Mezzanine or SOFI IV shall have any obligations under this Agreement unless it
specifically consents in writing to be bound by the terms hereof.
Section 10.Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which will be an original and all of which taken together
will constitute one and the same agreement.
Section 11.Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
in this Agreement 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. The use of the word "including" in this Agreement shall be by way of
example rather than by limitation.
Section 12.Construction. This Agreement shall be governed by and construed
------------
in accordance with the laws of the State of New York, without regard to
conflicts of law principles.
Section 13.Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and will be deemed to have been duly given when delivered
personally to the recipient, sent to the recipient
-6-
<PAGE>
by reputable express courier (charges prepaid) or mailed by certified or
registered mail, return receipt requested and postage prepaid. Such notices,
demands and other communications will be sent to the addresses indicated on
Schedule I or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party.
Section 14. Preamble; Preliminary Recitals. The Preliminary Recitals set
------------------------------
forth in the Preamble hereto are hereby incorporated and made part of this
Agreement.
Section 15. Entire Agreement. Subject to the Amended and Restated
----------------
Declaration of Trust of the Trust, this Agreement sets forth the entire
understanding of the parties, and supersedes and preempts all prior oral or
written understandings and agreements with respect to the subject matter hereof,
including the Original Agreement; provided that this Agreement shall not
-------- ----
supersede or preempt any understanding or agreement between each of SAHI
Partners, Starwood Mezzanine and SOFI IV and their respective partners.
Section 16. Third Party Beneficiaries. It is specifically contemplated that
-------------------------
the public shareholders of the Company be third party beneficiaries of this
Agreement.
Section 17. Termination. This Agreement will terminate automatically and be
-----------
of no further force and effect on the date that neither Starwood Mezzanine nor
SOFI IV no longer own Class A Shares.
Section 18. The Trust. Each of the parties hereto acknowledges and agrees
---------
that the name "Starwood Financial Trust" is a designation of the Trust and its
Trustees (as Trustees but not personally) under a Declaration of Trust,
originally made and entered into as of April 15, 1988, as restated as of July
18, 1988, September 26, 1996 and March 13, 1998, and all persons dealing with
the Trust shall look solely to the Trust's assets for the enforcement of any
claims against the Trust, and the Trustees, officers, agents and security
holders of the Trust assume no personal liability for obligations entered into
on behalf of the Trust, and their respective individual assets shall not be
subject to the claims of any person relating to such obligations.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Shareholders
Agreement as of the date set forth above.
STARWOOD FINANCIAL TRUST
By: /s/ Jay Sugarman
---------------------------------
Name: Jay Sugarman
Title: CEO
B HOLDINGS, L.L.C.
By: /s/ Jerome C. Silvey
-----------------------------
Name: Jerome C. Silvey
Title: Senior Vice President
SAHI PARTNERS
By: SAHI, Inc., a general partner
By: /s/ Jerome C. Silvey
-----------------------------
Name: Jerome C. Silvey
Title: Senior Vice President
STARWOOD MEZZANINE INVESTORS, L.P.
By: STARWOOD CAPITAL GROUP I, L.P.,
General Partner
By: BSS CAPITAL PARTNERS, L.P.,
General Partner
-8-
<PAGE>
By: STERNLICHT HOLDINGS II, INC.,
General Partner
By: /s/ Jerome C. Silvey
-----------------------------
Name: Jerome C. Silvey
Title: Vice President
STARWOOD OPPORTUNITY FUND IV, L.P.
By: SOFI IV Management, L.L.C.,
General Partner
By: Starwood Capital Group, L.L.C.,
General Partner
By: /s/ Jerome C. Silvey
-----------------------------
Name: Jerome C. Silvey
Title: Senior Vice President
-9-
<PAGE>
SCHEDULE I
ADDRESSES FOR NOTICE
If to the Trust, to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Jay Sugarman
Fax No.: (203) 861-2101
with copies to:
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Attention: James B. Carlson
Fax No.: (212) 262-1910
and
Rinaldi & Associates
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Ellis Rinaldi
Fax No.: (203) 861-2122
If to SAHI Partners, BLLC, Starwood Mezzanine or SOFI IV, to:
c/o Starwood Capital Group, L.P.
Three Pickwick Plaza, Suite 250
Greenwich, Connecticut 06830
Attention: Madison F. Grose, Esq.
Fax No.: (203) 861-2101
with a copy to:
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Attention: Nina Matis
Fax. No.: (312) 902-1061
-10-
<PAGE>
Exhibit 10.5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated this 18th day of March, 1998, but effective as of the date
stated in section 10 below, by and between Starwood Financial Trust, a
California business trust (the "Company"), and Starwood Financial Advisors,
L.L.C., a Connecticut limited liability company ("STARWOOD ADVISORS" or the
"INVESTMENT ADVISOR").
1. PURPOSE OF THE COMPANY.
The Company is a business trust organized under the laws of the State of
California to conduct business and to qualify under the Internal Revenue Code of
1986, as amended ("CODE"), as a real estate investment trust ("REIT"). The
principal purpose of the Company is to acquire, hold, own, develop, redevelop,
construct, improve, maintain, operate, manage, sell, lease, rent, transfer,
encumber, mortgage, convey, exchange and otherwise dispose of or deal with a
diversified portfolio (the "Diversified Portfolio") of debt or debtlike
interests in real estate or real estate-related assets, including (i) mortgage
loans, as well as direct and indirect and controlling and noncontrolling equity
investments in real estate and real estate-related assets including through any
entity or direct ownership; (ii) direct or indirect interests in short term,
medium and long-term real estate-related debt securities and mortgage interests,
which may include warrants, equity participations or similar rights incidental
to a debt investment; (iii) purchase money loans with respect to assets sold by
the Company; and (iv) non-performing and sub-performing debt for the purpose of
restructuring the same to performing debt or if such efforts are unsuccessful,
of shortly thereafter obtaining primary management rights over or equity
interests in the underlying assets securing such debt, in each case, subject to
the limitations set forth in the Company's Declaration of Trust, as the same may
be amended from time to time (the "DECLARATION"). The Diversified Portfolio may
include controlling or non-controlling equity ownership positions in any general
category of real estate assets, including without limitation, office,
industrial, mini-storage and residential improvements to land, excluding any
positions prohibited by such Declaration.
2. THE INVESTMENT ADVISOR.
Starwood Advisors and its principals have experience in the investment
management of assets of the type owned and expected to be owned by the Company.
The Company hereby engages the services of Starwood Advisors as the Company's
investment manager.
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3. OBLIGATIONS OF THE INVESTMENT ADVISOR.
As the Investment Advisor, Starwood Advisors will:
a. identify investment opportunities for and advise the Company as to
the acquisition and disposition of investments, all in accordance with the
Company's investment policies;
b. comply, in carrying out its obligations hereunder and its
activities on behalf of the Company, with all directives of the Company's
Board of Trustees or any duly constituted committee or officer of the
Company acting pursuant to authority of the Company's Board of Trustees;
C. report to the Company's Board of Trustees, or to any committee or
officer of the Company acting pursuant to the authority of the Board, at
such times and in such detail as the Board deems appropriate in order to
enable the Company to determine that the investment policies of the Company
are being observed and implemented;
d. subject to the Company's investment policies and any specific
directives concerning such policies from the Company's Board of Trustees,
and subject further to the approval of the Company's Board of Trustees with
respect to each investment or disposition of an investment with an
acquisition cost or disposition value in excess of $10 million (other than
temporary investments of cash in short term investments permitted by the
Company's investment policies or disposition of such short term
investments), effect acquisitions and dispositions for the Company's
account in the Investment Advisor's discretion and to arrange for the
documents representing investments acquired to be delivered to the
Company's custodian or other designee. Any investment or disposition of an
investment with an acquisition cost or disposition value that is $10
million or less (other than such temporary investments) shall be permitted
provided that it is in accordance with the Company's investment policies;
e. on a continuing basis and subject to the overall super-vision of
the Board of Trustees, monitor, manage and, for loans which are originated
by the Investment Advisor, service the Company's Diversified Portfolio,
including, upon approval of the Board of Trustees, the enforcement of
remedies upon default. In the event the Company purchases loans subject to
existing servicing agreements or purchases multi-loan portfolios originated
by third parties which cannot reasonably be serviced by the Investment
Advisor subject to this Agreement, the Investment Advisor shall designate a
third-party servicer for such loans purchased by the Company to be engaged
by the Company and arrange for the monitoring and administering of such
servicer, including negotiating servicing agreements, collecting
information and submitting reports pertaining to such loans;
f. arrange debt financing for the Company, subject to policies
adopted by the Company's Board of Trustees and subject further to the
approval of the Company's Board of Trustees with respect to each financing
in excess of $100 million or, in the case of financings that are recourse
to the Company, each financing in excess of $25 million;
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g. upon request by and in accordance with the directions of the Board
of Trustees, invest or reinvest any cash of the Company; and
h. engage in hedging activities on behalf of the Company consistent
with the Company's qualification as a REIT and in accordance with its
investment policies.
In carrying out its obligations under this Agreement, (i) the Investment
Advisor will comply with the investment policies of the Company as from time to
time established by the Board of Trustees and furnished to the Investment
Advisor, (ii) the Investment Advisor will not act in a manner which is
inconsistent with an express direction of the Board of Trustees, provided that
such direction is not expressly contrary to the specific terms and provisions of
this Agreement, which shall be controlling, and (iii) the Investment Advisor
will not subcontract out primary responsibility for the performance of its
overall responsibilities under this Agreement.
Notwithstanding the foregoing, the Investment Advisor shall not be
responsible for the administration of the Company or for compliance by the
Company with reporting and other regulatory requirements applicable to them.
4. BANK ACCOUNTS; RELEASE OF MONEY OR OTHER PROPERTY HELD IN CUSTODY.
a. At the direction of the Company's Board of Trustees, the
Investment Advisor shall establish and maintain one or more bank accounts
in the name of the Company or any subsidiary of the Company, and shall
collect and deposit into any such account or accounts, and disburse funds
from any such account or accounts, under such terms and conditions as the
Board of Trustees may approve; and the Investment Advisor shall from time
to time render appropriate accountings of such collections and payments to
the Board of Trustees and, upon request by the Company, to the auditors of
the Company. In no event shall the funds in any such Company account be
commingled with the funds of the Investment Advisor or any other person.
b. The Investment Advisor agrees that any money or other property of
the Company or any subsidiary held by the Investment Advisor under this
Agreement shall be held by the Investment Advisor as custodian for the
Company or subsidiary, and the Investment Advisor's records shall be
appropriately marked clearly to reflect the ownership of such money or
other property then held by the Investment Advisor for the account of the
Company or such subsidiary. Upon the receipt by the Investment Advisor of a
written request signed by a duly authorized representative of the Company
requesting the Investment Advisor to release to the Company or any
subsidiary any money or other property then held by the Investment Advisor
for the account of the Company or any subsidiary under this Agreement, the
Investment Advisor shall promptly release such money or other property to
the Company or any subsidiary. The Investment Advisor shall not be liable
to the Company, any subsidiary, the Independent Trustees (as defined
below), or the Company's or a subsidiary's stockholders or partners for any
acts performed or omissions to act by the Company or any subsidiary in
connection with the money or other property released to the Company or any
subsidiary in accordance with this section 4(b). The Company and any
subsidiary shall indemnify the Investment Advisor, its members, managers,
officers, stockholders
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and employees against any and all expenses, losses, damages, liabilities,
demands, charges and claims of any nature whatsoever, which arise in
connection with the Investment Advisor's release of such money or other
property to the Company or any subsidiary in accordance with the terms of
this section 4(b). Indemnification pursuant to this provision shall be in
addition to any right of the Investment Advisor to indemnification under
section 9 of this Agreement. The provisions of this section regarding
indemnification shall survive termination of this Agreement.
5. EXPENSES TO BE PAID BY THE INVESTMENT ADVISOR.
The Investment Advisor will pay the salaries, wages, bonuses and other
employee benefits of the persons in its organization whom the Investment Advisor
may engage to render such services (other than fees paid and reimbursement of
expenses made to independent managers, independent contractors, professionals,
mortgage servicers, consultants, managers, local property managers or agents
employed by or on behalf of the Company including (subject to Section 6 hereof)
such persons or entities which may be affiliates of the Investment Advisor when
acting in any such capacity other than as mortgage servicers, all of which shall
be the responsibility of the Company), including without limitation persons who
may from time to time act as the Company's officers, as well as all occupancy
and equipment costs (office rent, utilities, telephone, and office overhead)
incident to such services. Notwithstanding the foregoing, the Board of Trustees
of the Company may, in its sole discretion, award to such officers or to other
principals or employees or members of the Investment Advisor directly or
indirectly (through awards made to the Investment Advisor) options to acquire
Shares of the Company and other awards, as provided in Section 26 of this
Agreement, none of which awards shall be considered part of their salaries or
other employee benefits for the purpose of this paragraph, provided, however,
that without the prior written approval of the Investment Advisor, no awards
shall be made by the Company directly to officers, principals, employees or
members of the Investment Advisor in such respective capacities.
6. EXPENSES TO BE PAID BY THE COMPANY.
Subject to the annual percentage limitations on Advisory Fees set forth in
Section 4.5 of the Company's Declaration and the corresponding power of the
Independent Trustees to waive such limitations in appropriate circumstances, and
to the following provisions, the Company will pay any expenses incurred by the
Company and shall reimburse the Investment Advisor promptly, against the
Investment Advisor's voucher, for any such expenses paid by the Investment
Advisor for the Company's account. Without limitation, such expenses shall
include all expenses of the Company's organization or any reorganization, and of
any offering and sale by the Company of its shares; expenses of the Company's
operations, except as otherwise provided in paragraph 5 above, such operational
expenses to include enforcement costs and administrative costs of the Company;
the fees and disbursements of the Company's counsel, accountants, consultants,
custodian, transfer agent and registrar; fees of third party servicers retained
pursuant to Section 3.e. hereof-, fees and expenses incurred in producing and
effecting filings with federal and state securities administrators or other
compliance and reporting costs (to the extent the Investment Advisor voluntarily
undertakes to assist the Company with respect thereto); costs of the Company's
periodic reports to and other communications with its shareholders (to the
extent the Investment Advisor voluntarily
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undertakes to assist the Company with respect thereto); fees and expenses of
members of the Company's Board of Trustees (excluding the fees of trustees who
are employees of the Investment Advisor or the Company or their affiliates);
premiums for any insurance or fidelity bond maintained by the Company; and all
transaction costs incident to the pursuit, acquisition, management, financing
and disposition of investment assets by the Company, including, as applicable
and without limitation, due diligence costs, legal, accounting, engineering,
travel and reasonable entertainment, and environmental assessment fees and
expenses. In addition, if the Company for its corporate purposes, uses the
services of attorneys or paraprofessionals on the staff of the Investment
Advisor or its affiliates in lieu of outside counsel, the Company will not be
required to reimburse the Investment Advisor for such services but shall pay for
incidental disbursements to third parties or for travel.
7. RECEIPT OF FEES.
All fees that may be paid to the Investment Advisor by any person in
connection with the making, holding or disposition of any investment in which
the Company participates or proposes to participate shall be paid over or
credited to the Company pro rata to the extent of its participation in such
transaction. The Investment Advisor may, on the other hand, retain for its own
account any fees paid to it by any person for any services rendered to such
person which is not related to the making, holding or disposition of any such
investment, and nothing herein shall be construed to prevent members of the
Investment Advisor and their affiliates from continuing to be entitled to any
fee, equity participations or other benefits from any shareholder of the Company
(nor shall any such member or affiliate have any obligation to rebate any fee,
equity participations or other benefits, as applicable) in connection with
services rendered to such person, to the extent agreed to from time to time by
the Investment Advisor (or such members or affiliates) and such other person. In
addition, any fees paid by third parties for services rendered by attorneys on
the staff of the Investment Advisor in connection with any such investment
transaction shall be treated as transaction costs and shall not be deemed to be
fees paid to the Investment Advisor in connection with any investment
transaction, provided, however, that the Investment Advisor shall not negotiate
for reimbursement of such legal fees in lieu of payment of fees that would have
otherwise been payable to the Company. The Investment Advisor will report to the
Company's Board of Trustees not less often than quarterly all fees received by
the Investment Advisor from any source whatever and whether, in its opinion, any
such fee is one that the Investment Advisor is entitled to retain under the
provisions of this paragraph. In the event that any member of the Board of
Trustees should disagree, the matter shall be conclusively resolved by a
majority of the trustees who are Independent Trustees (as such term shall be
defined in the Declaration (THE "INDEPENDENT TRUSTEES"); provided that for as
long as Starwood Mezzanine Investors, L.P. and Starwood Opportunity Fund IV,
L.P. hold Class "A" Shares of the Company, such term shall be as defined in the
Second Amended and Restated Shareholders Agreement, dated as of March 13, 1998
by and among B Holdings, L.L.C., SAHI Partners, Starwood Mezzanine Investors,
L.P., SOFIIV SMT Holdings, L.L.C., and Starwood Financial Trust.
8. COMPENSATION OF THE INVESTMENT ADVISOR.
As the Investment Advisor's sole and exclusive compensation for its
services to be rendered pursuant to the terms hereof (other than any options or
other awards granted to individual officers, principals, members or employees of
the Investment Advisor pursuant
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to Section 5 above), the Company will, during the term of this Agreement, pay to
the Investment Advisor the following fees, beginning as of the date that is 90
days from the Contribution Date (as hereinafter defined), subject, however, to
the annual percentage limitation on Advisory Fees set forth in Section 4.5 of
the Company's Declaration and the corresponding power of the Independent
Trustees to waive such limitations in appropriate circumstances:
a. Base Management Fee. A quarterly base management fee ("BASE FEE")
---------------------
in an amount equal to 0.3125% (1.25% per annum), of the Book Equity Value
(as defined below) of the Company determined as of the last day of each
quarter, but estimated and paid in advance subject to recomputation as
indicated below. For these purposes, "BOOK EQUITY VALUE" shall mean the
excess of the book value of the assets of the Company over all liabilities
of the Company determined in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), except that real estate-related
depreciation and amortization (other than amortization of financing costs
and other prepaid expenses to the extent such costs and prepaid expenses
have previously been booked as an asset of the Company) shall not operate
to reduce the book value of the Company's assets for purposes of
determining Book Equity Value.
For purposes of determining the "Book Equity Value", debt
obligations of the Company, such as convertible debt, which are exchangeable
or convertible into equity securities shall not be considered liabilities of
the Company for any applicable period in which the same are so convertible
or exchangeable and the value of the equity securities into which such debt
obligation is convertible or for which it may be exchanged equals or
exceeds, as of the last day of such period, the outstanding balance
(including accrued interest) of such debt obligation (with the value of any
such equity securities for such applicable period as are traded on an
exchange to be deemed to be the average daily closing price of such equity
securities on such exchange over such applicable period for purposes of
making the value determination contemplated by this sentence). Debt
obligations that are excluded as liabilities of the Company under the
preceding sentence in determining "Book Equity Value" shall be referred to
herein as "DEEMED EQUITY OBLIGATIONS".
In addition to the foregoing, in the event and to the extent non-
cash assets are acquired by the Company or any of its subsidiaries or
affiliates in exchange for equity securities of the Company, then under
those circumstances where "purchase accounting" principles are not
applicable for purposes of determining the Company's "Book Equity Value"
following such contributions, the book value of the assets so contributed
shall be deemed to be increased by the excess, if any, of the fair market
value of the equity securities issued in consideration of such contributions
determined at the time of such acquisitions over the GAAP book equity value
allocable to such assets by the Company immediately following such
contributions. For purposes of the foregoing determination with respect to
the contribution of assets made on the date hereof by "Starwood Mezzanine"
and "SOFI IV" (as such terms are hereinafter defined), the price per share
of the Company shall be deemed to be $2.50.
b. Incentive Fee. A quarterly incentive FEE ("INCENTIVE FEE"), in an
---------------
amount equal to five percent (5%) of the Company's "Adjusted Net Income"
(as
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defined below) during such quarter, but such fee shall be payable only during
those quarters where Adjusted Net Income for such quarter, restated (and
annualized) as an annualized rate of return on the Company's average Book Equity
Value for such quarter, equals or exceeds the Benchmark BB Rate (as defined
below). For these purposes, "ADJUSTED NET INCOME" means the Company's gross
income for the applicable quarter (determined in accordance with GAAP, provided
that any interest payment which is more than 30 days in default shall not be
included until collected) less the Company's expenses for the applicable quarter
(determined in accordance with GAAP and including the Base Fee for such quarter
but not the Incentive Fee for such quarter). In addition, real estate-related
depreciation and amortization (other than amortization of financing costs and
other prepaid expenses to the extent such costs and prepaid expenses have
previously been booked as an asset of the Company) shall not be deducted in
determining Adjusted Net Income. For purposes of determining "Adjusted Net
Income", any interest expenses for an applicable period on Deemed Equity
Obligations shall not be included as an expense and, thus, shall not operate to
reduce the Company's gross income for such applicable period. "BENCHMARK BB
RATE" for a given quarter means the arithmetic average of the various weekly
average annualized rates of return to maturity on current pay "BB" rated
commercial mortgage-backed securities during such quarter by domestic U.S.
issuers. The weekly average annualized rates of return on current pay "BB" rated
commercial mortgage backed securities shall mean the sum of the rate of return
on the 10 year Treasury on the applicable date and the BB spread as reported in
the Morgan Stanley Dean Witter Weekly Mortgage Research Report. During any
quarter where such rate is not published, the Company and the Investment Advisor
shall meet in good faith to agree upon another published report or similar
source.
C. Timing of Fee Payments. The Investment Advisor shall estimate the
------------------------
compensation payable under Section 8(a) of this Agreement at the beginning of
each fiscal quarter on or before the tenth day of such quarter. The amount of
any such estimated fees payable for the upcoming quarter shall be offset,
however, against any excess of the prior quarter's estimate over fees actually
earned during the previous quarter (recomputed based on information available as
of the last day of the quarter). If the amount of such excess for the prior
quarter exceeds the amount of estimated fees for the upcoming quarter that can
be offset, such remaining excess shall promptly be returned by the Investment
Advisor to the Company (as any such remaining excess shall be considered an
advance). A copy of the itemized computations made by the Investment Advisor to
calculate its estimated and actual compensation under Section 8(a) shall
promptly be delivered to the Company's Board of Trustees and, upon such
delivery, payment of the balance shown therein shall be due and payable within
15 days after such transmittal to the Board. The Investment Advisor shall
calculate the compensation payable under Section 8(b) of this Agreement within
45 days after the end of each fiscal quarter. A copy of the itemized
computations shall promptly be delivered to the Board of Trustees and, upon such
delivery, payment of the compensation earned under Section 8(b) shall be due and
payable within 15 days after such transmittal to the Board. At the Investment
Advisor's option, the fee computation schedule under sections 8(a) and 8(b) can
also be combined. Payments of the applicable portion of the fees referenced
above shall be pro rated based on the number of days elapsed during any partial
month.
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d. Investment Advisor Loans. If loans are made to the Company or its
--------------------------
affiliates by the Investment Advisor or an affiliate of the Investment
Advisor, the maximum amount of interest that may be charged by such
affiliate shall be the prime rate publicly announced by The Chase Manhattan
Bank from time to time plus 1 % per year. Interest will be computed on the
basis of a 3 60 day year consisting of 12 months of 30 days each.
9. STANDARD OF CARE; INDEMNIFICATION.
To the maximum extent permitted by law, the Investment Advisor 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 Trustees in following or declining to follow any advice or recommendations of
the Investment Advisor, including as set forth in Section 3(d) of this
Agreement. Neither the Investment Advisor, nor any of its members, managers,
officers, stockholders or employees shall be liable to the Company, any
subsidiary, the Independent Trustees of the Company or the Company's or any
subsidiary's stockholders or partners for any acts or omissions by such party
under or in connection with this Agreement, except for each such party by reason
of its own acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of its duties. To the extent permitted by law, the Company
shall reimburse, indemnify and hold harmless the Investment Advisor, its
members, managers, officers, stockholders 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 Investment Advisor, its members, managers, officers,
stockholders and employees, made in good faith in the performance of the
Investment Advisor's duties under this Agreement and not constituting bad faith,
willful misconduct, gross negligence or reckless disregard of its duties. The
provisions of this section shall survive termination of the Agreement, and in
the event of any conflict between the provisions of this Section 9 and the
provisions of Section 5.1 of the Declaration, the provisions of this Section 9
shall control.
10. TERM OF THE AGREEMENT.
a. The initial term of this Agreement shall commence on the first
date that either of Starwood Mezzanine Investors, L.P. ("STARWOOD
MEZZANINE") or Starwood Opportunity Fund IV, L.P. ("SOFI IV") contributes,
either directly or indirectly, mortgage interests (other than the Warwick
Notes) to the Company (the "CONTRIBUTION DATE"), and shall end on the third
anniversary of the Contribution Date. This Agreement shall automatically
renew for an additional one year term upon the expiration of the initial
term and each additional successive one year term unless (i) a Termination
Event (as defined below) has occurred and is continuing on the expiration
of the then current term or (ii) all of the Company's assets have been
distributed upon liquidation of the Company; provided, however, that if
assets of the Company are transferred to any subsidiary or subsidiaries of
the Company other than in connection with a liquidation of the Company, the
terms of this Agreement shall continue to apply with respect to such
assets. The foregoing notwithstanding, this Agreement may be terminated at
any time, without the payment of a penalty, on 60 days' notice to the
Investment Advisor, if the decision to terminate is based on the occurrence
of a Termination Event (as defined below) or has been made by two-thirds of
the votes that may be cast by all holders of shares entitled to vote,
including in the calculation for this purpose, all
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the Company's voting shares of any class and regardless of any affiliation the
holders thereof may have with the Investment Advisor. This Agreement will
terminate automatically in the event of any assignment by the Investment Advisor
that is not in accordance with section 15 below. The Investment Advisor may also
terminate this Agreement on 60 days' notice to the Company.
b. Termination Events. At the option of the Company, this Agreement shall
-----------------------
be and become terminated upon 60 days' written notice of termination from the
Company's Board of Trustees to the Investment Advisor, without payment of any
termination fee, if any of the FOLLOWING EVENTS ("TERMINATION EVENTS") shall
occur:
(1) if the Investment Advisor shall violate any provision of this
Agreement and after notice of such violation, shall not cure such violation
within 90 days;
(2) there is entered an order for relief or similar decree or order
with respect to the Investment Advisor by a court having competent
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 Investment Advisor (i)
ceases, or 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; (ii) 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 Investment Advisor 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
Investment Advisor and continue undismissed for 90 days; (iii) 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 Investment Advisor without such
authorization, application or consent and are approved as properly
instituted and remain undismissed for 90 days or result in adjudication of
bankruptcy or insolvency; or (iv) 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 90 days; or
(3) unless cured by the Investment Advisor within the period set forth
in subsection I 0(b)(1) above, a material expense, loss, damage or liability
is incurred by the Company resulting primarily from an act or omission of
the Investment Advisor that constituted bad faith, willful misconduct, gross
negligence or reckless disregard of its duties.
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If any of the events specified in this Section I 0(b) of this Agreement
shall occur, the Investment Advisor shall give prompt written notice
thereof to the Board of Trustees upon the happening of such event.
11. PROTECTION OF INVESTMENTS
The Investment Advisor shall use its efforts, in cooperation with the legal
counsel to the Company, as deemed appropriate in the Investment Advisor's
reasonable discretion, (a) to verify title to or procure title insurance in
respect of any property in which the Company makes or proposes to make any
investment; (b) to verify that any mortgage securing any investment of the
Company shall be a valid lien upon the mortgaged property according to its
terms; and (c) to carry on the policies from time to time specified by the Board
of Trustees with regard to the protection of the Company's investments.
12. REIT QUALIFICATION
Anything else in this Agreement to the contrary notwithstanding, the
Investment Advisor shall not take any action (including, without limitation,
furnishing or rendering services to tenants of property or managing real
property), which action, in its judgment made in good faith, or in the judgment
of the Board of Trustees of the Company as transmitted to the Investment Advisor
in writing, would (a) cause personal liability to attach to the holders of the
Shares (as hereinafter defined) by reason of the ownership thereof, or (b)
adversely affect the status of the Company as a real estate investment trust as
defined in the Code or which would make the Company subject to the Investment
Company Act of 1940, as amended, if not in the best interests of the Company's
shareholders as determined by the Board of Trustees, or (c) violate any law,
rule, regulation or statement of policy of any government body or agency having
jurisdiction over the Company or over its securities, or (d) otherwise not be
permitted by the Declaration of the Company, except if such action shall be
ordered by the Board of Trustees of the Company, in which event the Investment
Advisor shall promptly notify the Board of Trustees of the Investment Advisor's
judgment that such action would adversely affect such status or violate any such
law, rule, regulation or statement or the Declaration, as amended, and shall
refrain from taking such action pending further clarification of such
instructions from the Board of Trustees. In addition, the Investment Advisor
shall take such affirmative steps which, in its good faith judgment, or in the
judgment of the Board of Trustees as transmitted to the Investment Advisor in
writing, would prevent or cure any action described in (a), (b), (c) or (d)
above.
13. ADDITIONAL ACTIVITIES OF THE INVESTMENT ADVISOR
a. During the term of this Agreement, the principal business purpose
of the Investment Advisor shall be to arrange for the investment by the
Company in accordance with the Company's investment policies in high-
yielding, real estate-related debt investments and to perform the other
duties and obligations of the Investment Advisor on behalf of the Company
set forth in this Agreement.
b. Members, managers, officers, employees and agents of the
Investment Advisor or affiliates of the Investment Advisor may serve as
trustees, directors, officers, employees, agents, nominees or signatories
for the Company or
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any subsidiary, to the extent permitted by their respective governing
instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Trustees pursuant to the Company's Declaration. When
executing documents or otherwise acting in such capacities for the Company
or a related entity, such persons shall use their respective titles in the
Company or a related entity. Notwithstanding the foregoing, no person
serving in a dual role for the Investment Advisor and the Company may
execute consents or authorizations on behalf of the Company to or in favor
of the Investment Advisor.
C. Except as provided in the next succeeding paragraph, nothing
herein shall be construed as imposing any restrictions on the investment or
other business activities of the Investment Advisor or of any parties who
may hold direct or indirect ownership interests in the Investment Advisor
from time to time, including, but without limitation, Starwood, and, without
limitation, Starwood and such other parties may invest in any type of real
estate or other investments for their own account or for the account of
others without any obligation to present such opportunities to the
Investment Advisor or the Company. In addition, except as provided in the
next succeeding paragraph, nothing herein shall restrict any members,
managers, officers, employees or agents of the Investment Advisor from
serving as directors, trustees, officers, employees, agents, nominees or
signatories for any person.
During the "Exclusivity Period" (as hereinafter defined), neither the
Investment Advisor nor any person who is controlled by, who controls or who
is under common control with the Investment Advisor shall form, manage or
advise a new blind pool investment fund, the primary purpose of which is to
invest in debt (a) that is secured by real estate in the United States, (b)
that has current coupon rates in excess of comparable maturity Treasury
spreads plus 400 basis points, and (c) that has maturities longer than four
years, and which debt otherwise has predominantly debt investment
characteristics. As used herein, "Exclusivity Period" means the period
commencing on the date hereof and ending on the earlier of (i) February 27,
2000, or (ii) the date which is six (6) months after the date on which
aggregate proceeds of not less than $400,000,000 have been raised through
one or more public offerings of Shares (as hereinafter defined) after the
Contribution Date (with not less than $320,000,000 of such raised proceeds
constituting issuances of Shares which are not resales of Shares
outstanding at 11: 5 9 p.m. on the Contribution Date).
14. CERTAIN CONFLICTS OF INTEREST; ENFORCEMENT OF THE AGREEMENT.
a. The Company hereby acknowledges that various affiliates of the
Investment Advisor have general partner interests in and other direct or
indirect ownership of, and contractual obligations to, Starwood Mezzanine,
and SOFI IV, each of which will be a shareholder in the Company after the
Contribution Date, and to their respective investors, and that such
affiliates of the Investment Advisor have fiduciary responsibilities to
such investors.
b. Subject to the voting rights set forth in Section 10(a) hereof,
the Independent Trustees of the Company shall make all determinations on
behalf of the Company in respect of the computation of the Advisor's fees.
11
<PAGE>
15. ASSIGNMENT.
This Agreement shall not be assignable by either party without the consent
of the other; provided, however, that the Investment Advisor shall have the
right to assign its rights and/or obligations in their entirety to an entity
that following such assignment is controlled by, controls or is under common
control with Starwood (or its approved successors), provided that such assignee
assumes all of the duties and responsibilities of the Investment Advisor in
connection therewith.
16. BINDING NATURE OF AGREEMENT; SUCCESSORS AND ASSIGNS.
Subject to section 15 hereof, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns (to the extent permitted) as provided
herein.
17. 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, understanding, 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 approved by the Company (including a majority of the
Independent Trustees acting on behalf of the Company) and by the Investment
Advisor.
18. 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 New York, notwithstanding
any New York or other conflict of law provisions to the contrary.
19. 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.
20. 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.
12
<PAGE>
21. 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.
22. USE OF THE ANGELES AND STARWOOD NAMES.
The parties hereto agree that no right or license to use the name of either
party or any affiliate is granted hereby. In the event the parties or one or
more of their affiliates agree to allow the Company to use the "Starwood" name
(or any variant thereof) by separate agreement, in connection with the
activities of the Company, such use will cease immediately upon any termination
of the Investment Advisor under this Agreement and the Company shall take all
actions necessary, including the filing of name change forms in all appropriate
jurisdictions, to effect such result.
23. 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.
24. 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.
25. NO JOINT VENTURE.
The Company and the Investment Advisor 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.
26. INVESTMENT ADVISOR OPTION GRANTS.
Under the Company's 1996 long-term Incentive Plan, as amended and restated
on March 13, 1998 (LTIP"), the Company has granted the Investment Advisor
options to purchase 14,963,057 Class "A" Shares (par value $0.01 per share)
of the Company ("Shares"), and may from time to time grant additional
options to purchase Shares to the Investment Advisor (all such options thus
granted by the Company to the Investment Advisor being hereinafter referred
to as "REIT OPTIONS") and Restricted Shares (as defined in the LTIP). The
Company agrees that the initial grant of awards to the Investment Advisor
under the terms of the LTIP shall be only in the form of REIT Options.
Further, only the initial grant of REIT Options shall vest immediately and
not be subject to any vesting periods otherwise contemplated by the LTIP.
The Investment Advisor agrees that over time it will grant options for the
same total number of Shares as are covered by REIT Options or award all
Restricted Shares received by it, as applicable,
13
<PAGE>
to its officers, key employees and consultants on such terms and at such times
as it deems appropriate (all such options thus granted by the Investment Advisor
being hereinafter referred to as "ADVISOR OPTIONS" and the Advisor Options and
Restricted Shares awarded by the Investment Advisor being herein called the
"ADVISOR AWARDS"). Advisor Options will generally have a three (3) year vesting
period (1/3 per year) from the date of issue with an exercise horizon
coterminous with that of the REIT Options and will provide for accelerated
vesting in the event of a change in control of the Company and will have the
same option exercise price (or prices) as the related REIT Options. If any
Advisor Option is partially or wholly forfeited, a replacement Advisor Option or
Options shall be granted (for the forfeited Shares).
Additionally, the following shall be applicable:
At all times prior to the date on which Shares with a Fair Market
Value (as such term is defined in the LTIP) of at least $250,000,000 are
outstanding that were issued as part of one or more primary or secondary
public offerings (with not less than $200,000,000 constituting issuances of
Shares which are not resales of Shares outstanding at 11:59 p.m. on the
Contribution Date) (an "IPO EVENT"):
a. No options (including, without limitation, Advisor Options)
shall be granted to Barry S. Sternlicht;
b. Total Awards (including, without limitation, Advisor Awards)
granted under the LTIP to any person who has an interest, directly or
indirectly, in Starwood Mezzanine or SOFI IV (a "Starwood Insider") by
the Investment Advisor and the Company shall not exceed 2.5%, in the
aggregate, of the fully diluted Shares outstanding from time to time;
and
c. Vesting of Advisor Options granted to Starwood Insiders
shall, in addition to any service criteria imposed by the Board of
Trustees of the Company, occur on a PARI PASSU percentage basis with
the percentage of the total number of Shares held on the Contribution
Date by SOP IV and Starwood Mezzanine as have been sold or distributed
from time to time by SOFI IV or Starwood Mezzanine; provided, however,
that in no event shall such Advisor Options vest at a rate that is
faster than 33.33% per annum and provided further, however, that,
subject to the continued satisfaction of any service criteria imposed
by the Board of Trustees of the Company, any theretofore unvested
Advisor Options held by Starwood Insiders shall vest in full on the
earlier to occur of a change of control of the Company (as provided in
the LTIP) or on the fifth anniversary of the date of grant.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on and as of
the date first above written
STARWOOD FINANCIAL ADVISORS, L.L.C.
By: Starwood Capital Group, L.L.C.
Its: Manager
By: /s/ Jerome C. Silvey
------------------------
Its: Senior Vice President
Name: Jerome C. Silvey
STARWOOD FINANCIAL TRUST,
a California Business Trust
By: /s/ Jay Sugarman
--------------------------
Name: Jay Sugarman
Its: CEO & President
15
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 296,000
<SECURITIES> 11,175,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,970,000
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0
0
<COMMON> 1,558,000
<OTHER-SE> (1,015,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,441,000
<SALES> 0
<TOTAL-REVENUES> 1,887,000
<CGS> 0
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