FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission File No. 0-12708
FRANKLIN SELECT REALTY TRUST
(Exact Name of Company as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
California 94-3095938
- ------------------------------------------------------ -------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification number)
or incorporation or organization)
P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-2000
- ------------------------------------------------------ -------------------------------------------------
(Address of principal and executive Office) Company's telephone number, including Area Code
Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which registered
Common Stock Series A American Stock Exchange
- ------------------------------------------------------ -------------------------------------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At March 3, 1997, 10,529,765 shares of the Company's Series A common stock were
held by non-affiliates of the Company. The aggregate market value of the voting
stock held by non-affiliates of the Company, based upon the closing price of
$5.50 as of March 3, 1997, is $57,913,706.
Indicate the number of shares outstanding of each of the Company's classes of
common stock at December 31, 1996: 12,250,384 shares of Series A common stock
and 745,584 shares of Series B common stock.
PART I
Item 1. BUSINESS
DESCRIPTION OF BUSINESS
Franklin Select Realty Trust, formerly Franklin Select Real Estate Income Fund,
(the "Company") is a California corporation formed on January 5, 1989, for the
purpose of acquiring, managing and holding for investment income-producing real
estate assets. The Company is a real estate investment trust ("REIT"). At
December 31, 1996, the Company's property portfolio consisted of ownership
interests in the following eight properties: (i) two industrial research and
development properties containing approximately 356,000 rentable square feet of
space; (ii) three suburban office properties containing approximately 403,000
rentable square feet of space; and (iii) three neighborhood shopping centers
containing approximately 204,000 rentable square feet of space. The Company's
properties are concentrated in the greater San Francisco and Los Angeles areas
from which the Company derived 45% and 43% of its 1996 rental revenue
respectively. The Company also owns one property in San Diego and one property
in Reno, Nevada.
The Company's day-to-day operations are managed by Franklin Properties, Inc.
(the "Advisor") under the terms of an advisory agreement which is renewable
annually. The Company does not have any employees. Seven of the Company's
properties are managed by Continental Property Management Co. ("CPMC"), an
affiliate of the Advisor, and the remaining property is managed by an
unaffiliated company, Cupertino Capital. Both management companies perform the
leasing, re-leasing and management-related services for their respective
properties. The Advisor is a wholly-owned subsidiary of Franklin Resources,
Inc., ("Franklin") whose primary business is the $186 billion Franklin Templeton
Group of Funds.
In 1995, the Boards of Directors of the Company and of two other real estate
investment trusts that the Advisor advised, Franklin Real Estate Income Fund
("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), agreed
to the merger of the three real estate investment trusts. At a Special Meeting
of Stockholders held on May 7, 1996, the proposed merger of Advantage and FREIF
into the Company was approved (the "Merger") by a majority of the outstanding
shares of each of the three companies, and the surviving entity was renamed
Franklin Select Realty Trust. Shares of the Company were issued in exchange for
the shares of Advantage and FREIF on the basis described in a Joint Proxy
Statement/Prospectus filed with the Securities and Exchange Commission. The
financial and operating results of periods prior to the Merger have been
restated to give effect to the Merger.
In 1996, the Company formed a limited partnership, FSRT L.P.("FSRT"), in order
to acquire two industrial R & D buildings located in Fremont, California (the
"Lam Research Buildings"). FSRT assumed the existing financing on the Lam
Research Buildings and issued 1,625,000 limited partnership units to the owner
of the property in exchange for its equity interest in the property. The limited
partnership units are convertible into Series A shares of the Company's common
stock on a one-for-one basis commencing October 31, 1997. The Company
contributed its fee title interest in the Data General Building to FSRT and
approximately $1.4 million in cash to cover transaction and closing costs. The
Company is the sole general partner of FSRT and for its contribution, the
Company received an approximate 70% ownership interest in FSRT. The Company may
contribute all of its remaining properties to FSRT at some later date. The
Company is subject to certain restrictions regarding the sale or refinance of
properties owned by FSRT.
All references to the Company in this report refer to Franklin Select Realty
Trust and its majority owned, consolidated limited partnership, FSRT. Unless
otherwise specified, information about the Company and the properties includes
the operations of FSRT, and refers to the Company after the completion of the
Merger, and the combined operations of the Company, FREIF, and Advantage prior
to the completion of the Merger.
INVESTMENT AND OPERATING STRATEGY
The Company acquires income-producing real estate investments located in
California with cash flow growth potential, although it has the flexibility to
purchase properties elsewhere. The Company's investment focus is on the five
major metropolitan areas in California: the Los Angeles metropolitan area,
Orange County, San Diego County, the Sacramento metropolitan area and the San
Francisco metropolitan area. In addition, the Company may consider strategic
acquisitions in other states.
The Company's investment program includes providing stockholders with a
professionally managed diversified portfolio of income-producing equity real
estate investments in strategic markets which represent the potential for
current cash flow and for capital appreciation. The Company's business strategy
is to expand the size and scope and increase the profitability of its current
operations. Traditionally, the Company has identified individual properties
suitable for acquisition and acquired them for cash. The Company now also
acquires property portfolios in exchange for equity. In particular, the Company
seeks to establish strategic relationships with, and acquire property portfolios
from, selected real estate operating companies that appear to have competitive
advantages within their local market areas. This strategy potentially will allow
the Company to increase its asset size, significantly diversify its portfolio
and increase its revenues and profitability while reducing its exposure to any
single property type or market area. In October 1995, the Company retained
Prudential Securities Incorporated as its exclusive financial advisor in
connection with the implementation of its portfolio acquisition strategy.
The Company anticipates that a portion of its future acquisitions may be
achieved through the issuance of common stock or partnership interests. The
Company will carefully limit its use of debt financing as discussed under
"Financing Policy and Related Matters". It is anticipated that the Company will
issue additional limited partnership units of FSRT, or of similarly structured
partnerships, to make certain acquisitions. The issuance or exchange of such
partnership units can provide important tax benefits to a real estate seller
that can enhance the price and other terms of the acquisition, or induce a
seller to sell its property when other forms of consideration may not be as
attractive. The Company may decide to contribute all of its remaining properties
to FSRT at some later date. It is expected that the Company will serve as the
general partner and hold a majority ownership interest in any new acquisition
partnership vehicles.
After properties are acquired, the Company places a strong emphasis on leasing
and tenant retention in combination with a program of regular maintenance,
periodic renovation and capital improvement. Sophisticated management and
accounting systems linked together through a computer network provide detailed
and timely reports on property operations to the Advisor's asset management
staff. The Company views aggressive and involved property management as crucial
to maintaining and improving both cash flow from, and the market value of, its
properties.
Properties are acquired with a view to holding them as long-term investments.
When appropriate, however, the Company seeks to realize the value of its
properties through financings, refinancings, sales or exchanges.
While the Company currently follows the investment policies described above,
they are guidelines only and may be changed by the Board of Directors without a
vote of the Company's stockholders.
FINANCING POLICY AND RELATED MATTERS
The Company's present policy is to maintain a debt to total assets ratio not to
exceed 50%. At December 31, 1996, the Company's debt to total assets ratio was
17%. The Company may from time to time modify its debt policy in light of then
current economic conditions, relative costs of debt and equity financings,
fluctuations in the fair market price of the Company's common stock, growth and
acquisition opportunities and other factors. Accordingly, the Company may
increase its debt to total assets ratio beyond the limit described above.
However, the Company's organizational documents prohibit the aggregate amount of
the Company's indebtedness to exceed 300% of its net assets, and prohibit
unsecured borrowings which result in asset coverage of less than 300%.
The Company expects to fund the cost of acquisitions, capital expenditures,
costs associated with lease renewals and reletting of space, repayment of
indebtedness, and development of properties from (i) cash flow from operations,
(ii) borrowings under its credit facility and, if available, other indebtedness
(which may include indebtedness assumed in acquisitions), (iii) the sale of real
estate investments, (iv) the sale of the Company's equity securities, and (v)
the issuance of partnership interests in connection with acquisitions.
The Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, that the Company will not be able
to refinance existing indebtedness on the encumbered properties or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness.
Debt Financing: Balloon Payments. The Company's mortgage indebtedness has the
following balloon payments: 1999-$4.0 million; and 2006-$13.4 million. In
addition, the Company's $25 million credit facility, which had no outstanding
balance at December 31, 1996, matures in 1998. The Company does not anticipate
that its cash flow from operations will be sufficient to make all of the balloon
payments of principal when due under its mortgage indebtedness and its credit
facility. The Company intends to make such payments by refinancing or extending
the indebtedness or by raising funds through the sale of equity securities or
properties. If the Company is unable to extend, refinance, or payoff its
indebtedness when due, the mortgaged properties could be foreclosed upon by or
otherwise transferred to the mortgagee with a subsequent loss of income and
asset value to the Company.
Debt Financing: Variable Interest Rates. As of December 31, 1996, the Company
had approximately $4.2 million of variable rate mortgage indebtedness
outstanding which bears interest at a floating rate tied to the Union Bank
Reference Rate. In addition, the Company has access to a revolving line of
credit in the amount of $25 million which bears interest at a floating rate tied
to either (i) the London Interbank Offered Rates ("LIBOR"), or (ii) the Bank of
America Reference Rate at the Company's option. Although there were no amounts
outstanding under the line of credit at December 31, 1996, the Company intends
to use the line of credit to provide short term financing for future
acquisitions. An increase in interest rates will have an adverse effect on the
Company's net income and Funds from Operations.
CASH DISTRIBUTION POLICY
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to evaluate the current
distribution rate, at least annually, in light of anticipated tenant turnover
over the next two or three years, the estimated level of associated improvements
and leasing commissions, planned capital expenditures, any debt service
requirements and the Company's other working capital requirements. After
balancing these considerations, and considering the Company's earnings and cash
flow, the level of its liquid reserves and other relevant factors, the Company
seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable despite short term
fluctuations in property cash flows;
ii) maximizes the amount of cash flow paid out as distributions consistent
with the above listed objective; and
iii) complies with the Internal Revenue Code requirement that a REIT
annually pay out as distributions not less than 95% of its taxable
income.
MATTERS THAT MAY AFFECT THE COMPANY'S RESULTS
The Company is subject to the risks generally associated with the ownership of
real property, including the possibility that operating expenses, debt service
payments and fixed costs may exceed property revenues; economic conditions may
adversely change in the California, Nevada and the national markets; the real
estate investment climate may change; local market conditions may change
adversely due to general or local economic conditions and neighborhood
characteristics; interest rates may fluctuate and the availability, costs and
terms of mortgage financing may change; unanticipated maintenance and
renovations may arise; changes in real estate tax rates and other operating
expenses may arise; governmental rules and fiscal policies may change; natural
disasters, including earthquakes, floods or tornadoes may result in losses
beyond the coverage of the Company's insurance policies; the financial condition
of the tenants of properties may deteriorate; and other factors which are beyond
the control of the Company may occur.
All of the Company's properties are located in areas that are subject to
earthquake activity. The Company currently carries earthquake insurance coverage
for its properties and intends to continue to carry earthquake coverage to the
extent that it is available at economically reasonable rates. However, the
Company's earthquake insurance coverage may, from time to time, be subject to
substantial deductibles.
The real estate business is competitive, and the Company is in competition with
many other entities engaged in real estate investment activities, many of which
have greater assets than the Company. The Company's real estate investments in
rental properties are subject to the risk of the Company's inability to attract
or retain tenants and a consequent decline in rental income. Furthermore, real
estate investments tend to be long-term, and under the REIT provisions of the
Internal Revenue Code, might be subject to minimum holding periods to avoid
adverse tax consequences; consequently, the Company will have only minimal
ability to vary its property portfolio in response to changing economic,
financial and investment conditions. To the extent that the Company's rental
income is based on a percentage of the gross receipts of retail tenants, its
cash flow is dependent on the retail success achieved by such tenants.
In connection with any lease renewal or new lease, the Company typically incurs
costs for tenant improvements and leasing commissions which will be funded first
from operating cash flow and, if necessary, from cash reserves or the line of
credit. In addition, while the Company has historically been successful in
renewing and releasing space, it will be subject to the risk that leases
expiring in the future may be renewed or released at terms that are less
favorable than current lease terms.
The opportunities for sale, and the profitability of any sale, of any particular
property by the Company will be subject to the risk of adverse changes in real
estate market conditions, which may vary depending upon the size, location and
type of each property.
GOVERNMENT REGULATION
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances, the
presence of such substances, or the failure to properly remediate such
substances, when released. As part of the investigation of properties prior to
acquisition, the Company typically has obtained inspection reports concerning
the condition of the property, including specialized environmental inspection
reports concerning the presence of hazardous substances on the property. The
Company intends to continue this practice. None of these inspection reports has
revealed any environmental conditions requiring material expenditures for
remediation.
Such inspection reports, however, do not necessarily reveal all hazardous
substances or sources thereof, and substances not considered hazardous when a
property is acquired may subsequently be classified as such by amendments to
local, state, and federal laws, ordinances, and regulations. If it is ever
determined that hazardous substances on or in a Company property must be removed
or the release of such substances remediated, the Company could be required to
pay all costs of any necessary cleanup work, although under certain
circumstances, claims against other responsible parties could be made by the
Company. The Company could also experience lost revenues during any such
cleanup, or lower lease rates, decreased occupancy or difficulty selling or
borrowing against the affected property either prior to or following any such
cleanup. The Company believes that it is in compliance in all material respects
with all federal, state and local laws regarding hazardous or toxic substances,
and the Company has not been notified by any governmental authority of any
non-compliance or other claim in connection with any of its present or former
properties. The Company does not anticipate that compliance with federal, state
and local environmental protection regulations will have any material adverse
impact on the financial position, results of operations or liquidity of the
Company.
The Company is aware of the existence of certain hazardous substances at the
Data General Building site. The Data General Building is located on property
that was formerly part of a site used for storage of crude oil and various
refined petroleum products. As a result, methane gas is present in the soil and
the groundwater is contaminated throughout the area where the property is
located. According to environmental reports prepared at the time the Data
General Building was acquired, a vapor ventilation system on the property, which
was installed and is maintained and monitored by a prior owner of the property,
Chevron Land Development Company, has mitigated any material risk associated
with the presence of the methane gas. The Company has not incurred any costs for
monitoring and remediating the presence of methane gas or the groundwater
contamination at the Data General Building and does not anticipate incurring any
cost with regard to such activities in the future. The contamination in the
groundwater generally presents a risk only if the groundwater is used as
drinking water, which it is not.
The Company has not received any reports from federal or state agencies
relieving it of future clean-up responsibilities, but federal and state agencies
have investigated these matters and have not, to date, required any clean-up.
The Company has no reason to believe at this time that it will be required to
take remediation steps in the future, particularly given the geographic scope of
the contaminated area. It is therefore difficult to predict what, if any, costs
might be incurred by the Company should the position of the federal or state
agencies change. In any event, if the Company is required to cure the
contamination on the Data General Building site, it would seek full indemnity
from the oil companies which were the source of the contamination.
The Data General Building's transite exterior panels and roof coverings contain
asbestos. Transite is "non-friable," which means that the asbestos fibers are
not released into the air, unless the transite is broken, cut or otherwise
damaged. The Company believes that absent such breakage or damage, the existence
of asbestos in the transite presents no measurable risk of asbestos-related
injuries. However, the presence of asbestos in the transite panels means that
protective measures may need to be taken if the transite panels are repaired or
if they are damaged by the elements.
The Americans with Disabilities Act ("ADA"), which generally requires that
buildings be made accessible to people with disabilities, has separate
compliance requirements for "public accommodations" and "commercial facilities".
If certain uses by tenants of a building constitute a "public accommodation",
the ADA imposes liability for non-compliance on both the tenant and the
owner/operator of the building. The Company has conducted inspections of its
properties to determine whether the exterior and common area of such properties
are in compliance with the ADA and it believes that its properties are in
compliance. If, however, it were ever determined that one or more of the
Company's properties were not in compliance, the Company may be subjected to
unanticipated expenditures incurred to remove access barriers, or to pay fines
or damages related to such non-compliance.
The Company's due diligence review of prospective acquisitions of office,
industrial and retail property includes an examination of such property's
compliance with the ADA, and the cost of remedial work, if any, believed to be
required to meet such requirements.
Item 2. PROPERTIES
PORTFOLIO SUMMARY
At December 31, 1996, the Company's property portfolio consisted of eight
properties located in the greater San Francisco, Los Angeles and San Diego
metropolitan areas of California and in Reno, Nevada. At year-end, the Company's
properties were 98% leased compared to 97% leased at the end of 1995. The
Company's real estate investments (net of accumulated depreciation) were
diversified by property type as follows:
Number of Investment
Properties -------------- -------------------
Amounts % of Total
Industrial R&D Properties 2 $36,834,000 30%
Office Properties 3 64,380,000 52%
Retail Properties 3 22,828,000 18%
Total 8 $124,042,000 100%
==============================
The following table describes the Company's properties:
<TABLE>
<CAPTION>
Total Average
Rentable Year cupancy 1996
Property Name/ Location Square Acquired During Rental
Footage 1996 Revenue
<S> <C> <C> <C> <C>
Industrial R&D Properties:
The Northport Buildings
Fremont, California 144,568 1991 96% $1,627,000
The Lam Research Buildings
Fremont, California 211,680 1996 100% 407,000
Office Properties:
The Shores
Redwood City, California 138,546 1989 100% 3,286,000
The Data General Building
Manhattan Beach, California 118,443 1989 100% 2,657,000
The Fairway Center
Brea, California 146,131 1992 100% 3,286,000
Retail Centers
Mira Loma Shopping Center
Reno, Nevada 94,026 1988 83% 973,000
Glen Cove Center
Vallejo, California 66,000 1994 97% 901,000
Carmel Mountain Gateway Plaza
San Diego, California 44,230 1994 77% 789,000
Total 963,624 95% $13,926,000
==================================
</TABLE>
The Company or FSRT owns a fee interest in each property. For information
related to the encumbrances of the individual properties, see the Notes to
Consolidated Financial Statements on pages 39 and 41.
At December 31, 1996, the Company's property portfolio contained a total of 70
leases. The Company's portfolio represents in the aggregate, 963,624 rentable
square feet. The following table sets forth for all of the Company's properties
the lease expiration dates and the related annual base rental income at December
31, 1996.
No. of
Leases Total Current Annual % of Current
Year Expiring Sq. Ft. Base Rent1 Annual Rent
1997 11 161,892 $3,104,000 22%
1998 13 32,093 632,000 4%
1999 10 92,925 1,884,000 13%
2000 8 38,789 874,000 6%
2001 6 86,163 1,480,000 10%
2002 4 31,380 616,000 4%
2003 4 63,157 579,000 4%
2004 3 63,555 621,000 4%
2005 3 40,525 392,000 3%
2006 1 12,078 193,000 1%
2008 1 22,400 311,000 2%
2009 1 16,648 372,000 3%
2010 1 50,360 552,000 4%
2012 2 6,000 271,000 2%
2013 1 15,025 109,000 1%
2014 1 211,680 2,386,000 17%
Total 70 944,670 $14,376,000 100%
- ----------
===============================================================================
1 Annualized Base Rent means the product of (i) the monthly base
rent in effect with respect to each property at December 31,
1996 or, if such monthly base rent has been reduced by a
temporary rent concession, the monthly base rent that would
have been in effect at such date in the absence of such
concession, multiplied by (ii) 12. Annualized Base Rent does
not reflect any increases or decreases in monthly rental rates
or lease expirations which are scheduled to occur or which may
occur after the date of calculation or the cost of any leasing
commissions or tenant improvements.
SIGNIFICANT TENANTS
Two of the Company's tenants provide 10% or more of the Company's annual base
rental income at December 31, 1996.
<TABLE>
<CAPTION>
Annualized Total % of
Tenant Name/Property Square Base Rent Base Lease Renewal
Feet at 12/31/96 Rent Expiration Options
- ---------------------------------------------------------------------------------------------------------------
Lam Research
Corporation
<S> <C> <C> <C> <C> <C>
Lam Research Buildings 211,680 $2,386,000 17% 12/31/2014 2-5 yr.
Northport Buildings 58,130 506,000 4% 7/31/2003 1-5 yr.
Continental Casualty Company
The Fairway Center 74,515 $1,699,000 12% 10/31/97 1-5 yr.
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a discussion of the estimated
financial effects of renewing the Continental Casualty Company lease or
re-leasing the space.
Item 3. LEGAL PROCEEDINGS
On December 2, 1996, two stockholders, for themselves and purportedly on behalf
of certain other minority stockholders of Advantage, filed a purported class
action complaint in the California Superior Court for San Mateo County against
Advantage, its directors, the Advisor, Franklin Resources, Inc. and the
Massachusetts State Teachers' and Employees' Retirement Systems Trust
("MASTERS"). The complaint alleges that defendants breached fiduciary duties to
plaintiffs and other minority stockholders in connection with the purchase by
Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage
and in connection with the Merger of Advantage into the Company in May 1996,
which was approved by a majority of the outstanding shares of each of the three
companies. Plaintiffs also allege that defendants misstated certain material
facts or omitted to state material facts in connection with these transactions.
The complaint includes a variety of additional claims, including claims relating
to the investment of Advantage assets, the suspension of the dividend
reinvestment program, the allocation of merger-related expenses, revisions to
the investment policies of Advantage, and the restructuring of the contractual
relationship with the Advisor. Plaintiffs seek damages in an unspecified amount
and certain equitable relief. The defendants deny any wrongdoing in these
matters and intend to vigorously defend the action. Management does not believe
that the outcome of this litigation will have a material adverse affect on the
Company's financial condition or results of operations.
The properties are subject to certain routine litigation and administrative
proceedings arising in the ordinary course of business, which, taken together,
are not expected to have a material adverse impact on the Company's financial
condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the last
quarter covered by this report.
PART II
Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company has one class of common stock in two series, designated Series A and
Series B (the "Common Stock"). At December 31, 1996, the Company had 12,250,384
Series A common shares outstanding and 745,584 Series B common shares
outstanding, and there were approximately 3,750 Series A stockholders of record.
The Common Stock votes together as one class with each share being entitled to
one vote. The Series B shares are owned by Franklin Properties, the Advisor.
There are no restrictions on sales or purchases of the Company's Series A common
stock other than those that may be imposed by any applicable federal or state
securities laws or by the Company's Articles of Incorporation or Bylaws with
respect to maintaining the Company's status as a qualified real estate
investment trust under applicable tax rules and regulations.
On January 14, 1994, the Company registered its Series A common stock on the
American Stock Exchange (AMEX) where it is currently traded under the symbol
"FSN". Prior to January 14, 1994, there was no established public trading market
for the common stock. Set forth below are the quarterly high and low share
reported sales prices for the past two years and the distributions per share
declared each quarter. For periods prior to the Merger on May 7, 1996, the
amounts shown do not reflect those of FREIF and Advantage.
DISTRIBUTIONS
QUARTER ENDED HIGH LOW DECLARED
- -------------------------------------------------------------------------------
December 31, 1996 $ 5 7/8 $ 4 11/16 .11
September 30, 1996 5 4 1/2 .11
June 30, 1996 5 1/4 4 1/2 .11
March 31, 1996 5 1/8 3 15/16 .11
December 31, 1995 4 5/8 3 15/16 .11
September 30, 1995 4 11/16 3 7/8 .11
June 30, 1995 4 5/8 3 3/4 .11
March 31, 1995 4 3/8 3 3/4 .11
The Company has a policy, subject to the discretion of the Board of Directors,
of making quarterly cash distributions to stockholders aggregating on an annual
basis at least 95% of its taxable income. For the years ended December 31, 1996,
and 1995, the Company declared distributions of approximately $5,860,000 ($.44
per share) and $6,206,000 ($.44 per share). Cash distributions to stockholders
are currently paid on approximately the 15th day of January, April, July and
October. Stockholders may elect to direct their distributions into any or one of
the eligible funds in the Franklin Templeton Group of Funds, which are managed
by an affiliate of the Advisor, or participate in the Company's Dividend
Reinvestment Plan.
DIVIDEND REINVESTMENT PLAN
The Company has established a Dividend Reinvestment Plan (the "Plan") which is
designed to enable Company Series A stockholders to choose to have distributions
automatically invested in additional shares of Company common stock at market
value, without the payment of any brokerage commission, service charge or other
expense. Under the Plan, the Company's Dividend Reinvestment Agent makes open
market purchases of the Company's Series A common stock, administers the Plan
and performs other duties related to the Plan. No new shares have been issued in
connection with the Plan. In order to participate in the Plan, investors must
designate that they would like their distributions reinvested. Company Series A
stockholders may elect to participate in the Plan at any time. The Plan does not
accept cash contributions from Company stockholders to purchase additional
shares of existing Company common stock. Only distributions on existing Company
common stock may be reinvested. For information on how to participate in the
Dividend Reinvestment Plan, please contact the Company's transfer agent at (800)
851-4217.
RETURN OF CAPITAL
Because depreciation is a non-cash expense, cash flow will typically be greater
than earnings from operations and net income. Therefore, quarterly distributions
will generally be higher than quarterly earnings which causes a portion of the
distributions to be considered a return of capital. The portion of distributions
that represented a return of capital for financial statement purposes on a
consolidated basis, for the years ended December 31, 1996, and 1995, were
$2,053,000 and $1,744,000, respectively.
REIT QUALIFICATION MATTERS
The Company is a REIT and elected REIT status commencing with the 1989 tax year
pursuant to the provisions of the Internal Revenue Code (the "Code") and
applicable state income tax law. Under those provisions, the Company will not be
subject to income tax on that portion of its taxable income which is distributed
annually to stockholders if at least 95% of its taxable income (which term
excludes capital gains) is distributed and if certain other conditions are met.
During such time as the Company qualifies as a REIT, the Company intends to make
quarterly cash distributions to the stockholders aggregating on an annual basis
at least 95% of its taxable income.
Among other requirements, the Company must, in order to continue its status as a
REIT under the Code, not have more than 50% in value of its outstanding shares
owned by five or fewer individuals during the last half of a taxable year (the
"5/50 Provision"). In order to meet these requirements, the Company has the
power to redeem a sufficient number of shares in order to maintain or to bring
the ownership of the shares into conformity with these requirements, and to
prohibit the transfer of shares to persons whose acquisition would result in a
violation of these requirements. The price to be paid in the event of the
redemption of shares will be the last reported sale price of the Series A common
stock on the last business day prior to the redemption date on the principal
national securities exchange on which the Series A common stock is listed or
admitted to trading or otherwise, as determined in good faith by the Board of
Directors of the Company.
In order to assure compliance with the 5/50 Provision of the Code, described
above, the Company's Bylaws permit the Directors of the Company to impose a
lower percentage limit on the remaining stockholders, in the event certain
stockholders (including Franklin and its affiliates) acquire in excess of 9.9%
of the outstanding shares of Common Stock during the offering period. The
Directors of the Company have exercised this authority under the Bylaws to lower
the percentage limitation such that stockholders may not acquire additional
shares if such shareholder then holds, or would then hold, in excess of 7% of
the total outstanding voting shares of the Company. Any shares acquired in
excess of the foregoing limitation will be deemed to be held in trust for the
Company, and will not be entitled to receive distributions or to vote.
The Directors of the Company may impose, or seek judicial or other imposition of
additional restrictions if deemed necessary or advisable, including but not
limited to further reductions in the foregoing percentage limitation with or
without notice, or redemption of shares, in order to protect the Company's
status as a qualified REIT.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in 000's except
per share amounts) Restated1 Restated1 Restated1 Restated1
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total revenue $14,568 $14,111 $12,990 $12,877 $12,422
Net income $3,807 $4,462 $4,273 $4,438 $4,328
Per Series A common share1:
Net income $0.28 $0.32 $0.30 $0.31 $0.30
Distributions declared $.44 $0.44 $0.44 $0.43 $0.47
Weighted average number
- -------------------------------------------
of shares of Series A 13,830 14,145 14,145 14,145 14,223
common stock outstanding
Balance Sheet Data:
Total assets $131,298 $116,457 $117,873 $114,820 $117,057
Notes and bonds payable $22,745 $7,145 $7,279 $3,015 $3,075
Stockholders' equity $96,653 $106,986 $108,316 $111,000 $113,204
Other Data:
Funds from operations2 $7,235 $7,795 $7,396 $7,337 $6,079
Cash flow provided by (used in)
Operating activities $7,831 $8,359 $8,771 $5,282 $6,039
Investing activities $4,140 $31 ($5,904) $3,940 ($11,986)
Financing activities ($15,599) ($6,404) ($3,184) ($6,173) ($6,868)
Total rentable square footage
of properties at end of period 963,624 751,944 751,944 641,714 641,714
Number of properties at end of
period 8 7 7 5 5
</TABLE>
1 Amounts reported for 1992 through 1995 have been restated to give
effect to the Merger.
2 Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, means net income (loss) from operations,
excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustment for
unconsolidated joint ventures. The Company considers funds from
operations to be a useful measure of the operating performance of an
equity REIT because, together with net income and cash flows, funds
from operations provides investors with an additional basis to evaluate
the ability of a REIT to support general operating expense and interest
expense before the impact of certain activities, such as gains and
losses from property sales and changes in the accounts receivable and
accounts payable. Funds from operations does not represent net income
or cash flows from operations as defined by GAAP and does not
necessarily indicate that the cash flows will be sufficient to fund
cash needs. It should not be considered as an alternative to net income
as an indicator of the Company's operating performance or as an
alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. Funds from operations does not
measure whether income is sufficient to fund all of the Company's cash
needs including principal amortization, capital improvements and
distributions to stockholders. The Company reports funds from
operations in accordance with the revised NAREIT definition. The change
in the NAREIT definition in 1995 had no material effect on the amounts
previously reported by the Company as funds from operations. Funds from
operations disclosed by other REITs may not be comparable to the
Company's calculation of funds from operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
On May 7, 1996, the Company merged with two other real estate investment trusts
that Franklin Properties, Inc. advised, Franklin Real Estate Income Fund
("FREIF"), and Franklin Advantage Real Estate Income Fund ("Advantage"). The
consolidated financial information of the Company has been presented as a
reorganization of entities under common control; therefore, the historical
amounts reported for prior periods have been restated so as to report them on a
combined basis.
The following discussion is based primarily on the consolidated financial
statements of the Company for the year ended December 31, 1996 and the restated,
combined financial statements of the Company, FREIF and Advantage for the prior
periods presented. The information should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
When used in the following discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected, including, but not
limited to, those set forth in the section entitled "Potential Factors Affecting
Future Operating Results," below. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
GENERAL BACKGROUND
The Company's rental revenue is generated by investments in the following eight
properties: (i) two industrial R&D properties comprising 356,000 rentable square
feet of space, (ii) three office properties comprising 403,000 rentable square
feet of space, and (iii) three neighborhood shopping centers, comprising 204,000
rentable square feet of space. Six of the properties are concentrated in the
greater San Francisco and Los Angeles areas from which the Company derived 45%
and 43% of its 1996 rental revenue, respectively. The remaining two properties
are located in San Diego, California and Reno, Nevada.
The Company's day-to-day operations are managed by Franklin Properties, Inc.
(the "Advisor", or "Management") under the terms of an advisory agreement which
is renewable annually. The Company does not have any employees. Property
management for seven of the Company's eight properties is provided by
Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, and
the remaining property is managed by an unaffiliated company, Cupertino Capital.
Both management companies perform the leasing, re-leasing and management related
services for their respective properties. The Advisor is a wholly owned
subsidiary of Franklin Resources, Inc. whose primary business is the $186
billion Franklin Templeton Group of Funds.
1996 SUMMARY
The Company's property operations were stable with the prior year, both with
respect to rental rates and average occupancy. The transactions that had the
greatest influence on the Company's reported results in 1996 were:
(i) the Merger of the Company with two other real estate investment trusts in
May 1996,
(ii) the sale of a large portion of the Company's investments in mortgage-backed
securities in October 1996, which provided cash used to repurchase
approximately 13.4% of the Series A common stock held by stockholders who
dissented from the Merger; and,
(iii)the acquisition of two industrial research and development buildings in
October 1996 (the "Lam Research Buildings"). To acquire the buildings, the
Company and the buildings' owner formed a limited partnership, FSRT, which
issued convertible limited partnership units to the owner in return for the
owner's equity interest in the property. FSRT also assumed the existing
indebtedness on the buildings which was subsequently refinanced with fixed
rate debt carrying a lower interest rate. The Company holds a 70% interest
in FSRT, and it is the sole general partner of the partnership.
The Company also arranged for a $25 million line of credit in December 1996,
which was unused at year end, but which is expected to provide capital for
future acquisitions and for other liquidity needs.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total revenue increased approximately 3% compared to 1995 primarily due to
rental revenue provided by the Lam Research Buildings which were acquired on
October 31, 1996. Rental revenue for the seven properties that the Company owned
for the entire year improved 1% in 1996, reflecting stable rental rates and
occupancy rates for both periods. Interest income declined $75,000 compared to
1995 due to the sale of mortgage-backed securities in October 1996.
Total expenses increased approximately $1,112,000, or 12%, compared to 1995
primarily due to an increase in expenses related to the Merger, and due to
interest expense, depreciation expense and minority interest expense related to
the Lam Research Buildings which were acquired in 1996.
During 1996, the Company incurred non-recurring expenses related to the Merger,
totaling approximately $919,000 compared to $456,000 in 1995. The expenses were
comprised of: (i) consolidation expense of $695,000 and $394,000, respectively,
(ii) general and administrative expenses of $73,000 and $62,000, respectively,
and (iii) a loss on the sale of mortgage-backed securities of $151,000 in 1996,
which was recorded when the Company sold securities to provide cash for the
repurchase of shares dissenting from the Merger.
Property operating expenses, which generally include maintenance and repairs,
property taxes, utilities, and on-site administrative expense, declined slightly
compared to 1995 due to non-recurring expenses recorded in 1995 related to
discontinuing operations of a self service car wash at the Mira Loma Center.
Excluding those expenses, operating expenses increased approximately 1% compared
to 1995. In 1996, minor increases in several expense categories were offset by a
decline in electricity expense caused by milder summertime temperatures in
Southern California. The acquisition of the Lam Research Buildings did not cause
property operating expenses to increase in 1996 since the tenant pays the
expenses directly.
Related party expense increased $175,000, or 17% in 1996 reflecting an increase
in advisory fees of $201,000, and an increase in property management fees of
$12,000, which were partially offset by a decline of $38,000 in reimbursements
to the Advisor for accounting and data processing costs. The increase in
advisory fees was caused by the acquisition of the Lam Research Buildings, and
the adoption of the Company's advisory agreement by the two REITs that merged
with the Company in May 1996. Prior to the Merger, the REITs operated under
advisory agreements containing different methods of compensation to the Advisor.
General and administrative expense increased approximately $136,000 in 1996
primarily due to legal and consulting fees related to locating potential
property acquisitions, expenses of transferring ownership of the Data General
Building to FSRT, and a temporary increase in stock exchange fees that was
attributable to the Merger. Partly offsetting these increases were declines in
the cost of directors' and officers' insurance coverage and transfer agent
expense, reflecting economies of scale after the Merger.
Net income declined approximately $655,000, or 15% in 1996 largely due to an
increase in Merger related expenses, an increase in advisory fees subsequent to
the Merger, and a decline in interest income caused by the sale of
mortgage-backed securities. Net income per share also declined, but by a lesser
percentage, due to a decline in the number of shares outstanding after the
Company purchased the dissenting shares.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Net income for 1995 increased $189,000, or 4%, compared to 1994 primarily as a
result of an increase in rental revenues exceeding increases in interest
expense, depreciation and amortization, operating expense, related party and
consolidation expense, as more fully described below.
Total revenue increased $1,121,000, or 9%, in 1995 primarily due to a full
year's operations from two properties which were acquired in 1994. The increase
in rental revenue was also attributable to increased rental income from Shores
Office Complex due to improved occupancy and rental rates at that property.
Total expenses increased $932,000, or 11%, in 1995. Increases in interest
expense, depreciation and amortization, operating expense, and related party
expense were primarily a result of a full year's operations from properties
acquired in 1994. Other items affecting the change from year to year included
$394,000 of consolidation expense incurred in 1995 and a loss on the sale of
mortgage-backed securities of $318,000 recorded in 1994.
General and administrative expense decreased $155,000 in 1995 primarily due to
non-recurring costs incurred in 1994 associated with listing the Company's,
FREIF's and Advantage's stock on the American Stock Exchange.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's cash and cash equivalents aggregated
$2,558,000 which the Company believes is adequate to meet its short term
operating cash requirements. The Company also has access to a revolving line of
credit in the amount of $25 million and holds $578,000 of mortgage-backed
securities. At year end, there were no amounts outstanding under the Company's
credit facility.
During 1996, the Company's cash balance declined to $2,558,000 compared to
$6,186,000 at December 31, 1995. This decline in cash reflects cash provided by
operating activities of $7,831,000, plus cash provided by investing activities
of $4,140,000, and reduced by cash used by financing activities of $15,599,000.
The $4,140,000 of net cash provided by investing activities reflects $6,534,000
of proceeds from the sale of mortgage-backed securities, which was partially
offset by $1,428,000 used to acquire the Lam Research Buildings, $627,000 used
for improvements to rental properties, and $339,000 used for leasing
commissions. The mortgage-backed securities were sold in order to provide funds
to purchase the dissenting shares as described below, and to pay for transaction
and closing costs related to the property acquisition. The $15,599,000 of net
cash used in financing activities primarily reflects $8,408,000 of funds used to
purchase the dissenting shares, and $6,033,000 of cash distributions.
The Company's investment in mortgage-backed securities at December 31, 1996, is
represented by a FNMA adjustable rate pass-through certificate with a market
value of approximately $578,000. Although payments of principal and interest are
guaranteed by FNMA, changes in market interest rates may cause the security's
market value to fluctuate, which could result in a gain or loss if the security
is sold before maturity.
In 1996, the Company formed a limited partnership, FSRT, in order to acquire two
industrial R & D buildings located in Fremont, California (the "Lam Research
Buildings"). FSRT assumed the existing financing on the Lam Research Buildings,
which was subsequently refinanced, and issued 1,625,000 limited partnership
units to the prior owner in exchange for its equity interest in the buildings.
The limited partnership units are convertible into Series A shares of the
Company's common stock on a one-for-one basis after November 1, 1997. The
Company contributed its fee title interest in the Data General Building to FSRT
and approximately $1.4 million in cash to cover transaction and closing costs.
The Company is the sole general partner of FSRT and for its contribution, the
Company received an approximate 70% ownership interest in the partnership. The
Company may contribute all of its remaining properties to FSRT at some later
date. The Company is subject to certain restrictions regarding the sale or
refinance of properties owned by FSRT.
In connection with the Merger, stockholders representing approximately 635,638
shares of FREIF Series A common stock and 1,077,677 shares of Company Series A
common stock elected to exercise dissenter's rights pursuant to Chapter 13 of
the California General Corporation Law. No Advantage stockholders elected to
exercise dissenter's rights. On November 1, 1996, the Company purchased all of
the remaining dissenting shares of Series A common stock arising from the Merger
for an aggregate price of $8.4 million. After giving effect to the transaction,
the total number of shares of Series A common stock of the Company outstanding
is 12,250,384. Cash for the purchase price was provided by the sale of a portion
of the Company's mortgage-backed securities.
On December 10, 1996, the Company entered into an agreement with the Bank of
America for a $25 million secured revolving line of credit to provide funding
for future acquisitions and general business purposes. Borrowings under the line
of credit bear interest at the London Interbank Offered Rate ("LIBOR") plus
1.90%, or at the bank's Reference rate at the Company's option. The credit
facility is secured by mortgages on three of the Company's properties (which
collectively accounted for 52% of the Company's annualized base rent as of
December 31, 1996), together with the rental proceeds from such properties. At
December 31, 1996, these properties comprised approximately 45% of the Company's
gross real estate assets. The credit agreement contains customary
representations, restrictive covenants, and events of default, including a
covenant limiting quarterly distributions to 98% of funds from operations. The
Company does not anticipate that this covenant will adversely affect the ability
of the Company to declare distributions under the Company's current distribution
policy. At December 31, 1996, the Company had no borrowings outstanding under
the line of credit.
In connection with any lease renewal or new leasing, the Company would incur
costs for tenant improvements and leasing commissions which would be funded
first from operating cash flow and, if necessary, from cash reserves or the line
of credit.
IMPACT OF INFLATION
The Company's policy of negotiating leases which incorporate operating expense
"pass-through" provisions is intended to protect the Company against increased
operating costs resulting from inflation. Inflation, however, would increase the
Company's borrowing costs.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES
In prior years, net income has been positively affected by interest income that
the Company earned on its investments in mortgage-backed securities. In
addition, the Company periodically incurred losses upon the sale of certain of
the securities. Late in 1996, the Company liquidated substantially all of its
mortgage-backed securities in order to provide funds to repurchase a portion of
its outstanding common stock. Therefore, the Company does not anticipate
generating significant amounts of interest income, or losses on the sale of
mortgage-backed securities, in future years. The repurchase of the Company's
common stock was not detrimental to the Company's operating results in 1996
calculated on a per share basis, due to the related decline in the number of
shares outstanding.
LEASING TURNOVER
In connection with any lease renewal or new lease, the Company typically incurs
costs for tenant improvements and leasing commissions which will be funded first
from operating cash flow and, if necessary, from cash reserves or the line of
credit. In addition, while the company has historically been successful in
renewing and releasing space, the Company will be subject to the risk that
leases expiring in the future may be renewed or released at terms that are less
favorable than current lease terms.
LEASING TURNOVER - CONTINENTAL CASUALTY COMPANY
An important event in the near term is the expiration of the Continental
Casualty Company ("CNA") lease in November, 1997. The lease covers 74,515 square
feet of space and represents approximately 12% of the Company's current base
rental income. The Company has commenced renewal negotiations with CNA; however,
it is currently unknown whether an agreement will be consummated. Currently, the
base annual rental rate of this lease is $22.80 per square foot, and the Company
has offered to extend the tenant's lease for five years at a lower rental rate.
The Company has also offered to provide the tenant with tenant improvements and
to pay leasing commissions, which total approximately $870,000. Although it is
impossible to predict the final outcome of negotiations with CNA, if the tenant
were to accept the Company's proposal, the Company's annual rental income and
expense reimbursements would decline by approximately $420,000, or 2.9% of the
Company's total revenue in 1996. Alternatively, if CNA were to vacate its space
and a single replacement tenant could not be located, the Company may have to
reconfigure the space for multiple tenants at a cost which could exceed $2
million. The most likely sources for such funds are the Company's cash reserves,
debt financing, or the sale of an undeveloped parcel of land at the Fairway
Center. No assurance can be given that CNA will renew under the terms set forth
above or whether the space currently occupied by CNA can be rented without
detrimental impact to the Company's current annual rental income and expense
reimbursements.
LEASING TURNOVER - DATA GENERAL BUILDING
The Data General Building is located in an area of Los Angeles County that is
dominated by aerospace and defense related companies. Because many of the
defense programs that these companies are engaged in have been curtailed, their
office space requirements were substantially reduced, causing greater vacancies
and lower market rental rates. Based on reports from CB Commercial Real Estate
Group, at December 31, 1996, the Manhattan Beach/El Segundo sub-market, had a
total vacancy factor of 31% and an average asking full service rental rate of
$19.32 per square foot. New leases and renewals that the Company executes while
these soft market conditions persist may be at lower rental rates and require
greater tenant improvements than current leases at the property. However,
according to the CB Commercial reports, the severe job losses experienced by the
aerospace and defense industries appear to have bottomed out in February of
1996, and occupancy rates in the El Segundo market are expected to increase in
1997. No assurance can be given, however, that this will occur.
Over the next two years, the Company's leasing exposure at the Data General
Building consists of two leases each covering 48,000 square feet, which expire
in November, 1997 and January 1999. The Company believes that the effective
rental rate that is provided by the lease expiring in 1997 is substantially at
the current market rate. However, the lease expiring in 1999 carries a triple
net rental rate that is equivalent to approximately $28.00 per square foot on a
full service basis. Compared to the current market asking rate of $19.32 per
square foot, this lease provides overmarket rent of approximately $417,000
annually, or 2.9% of the Company's total revenue in 1996. It is impossible to
predict the market rental rate in 1999; however, the Company expects that when
this lease expires, the rental income related to this space will be less than
$28.00 per square foot regardless of whether the lease is renewed or new leases
are signed. The Company will also incur costs for tenant improvements and
leasing commissions related to both spaces upon the renewal or re-leasing of the
spaces, however, the amounts are unknown at this time.
Management believes that the Company's sources of capital as described under
Liquidity and Capital Resources are adequate to meet its liquidity needs in the
foreseeable future.
FUNDS FROM OPERATIONS
The Company considers funds from operations to be a useful measure of the
operating performance of an equity REIT because, together with net income and
cash flows, Funds from Operations provides investors with an additional basis to
evaluate the ability of a REIT to support general operating expense and interest
expense before the impact of certain activities, such as gains and losses from
property sales and changes in the accounts receivable and accounts payable.
However, it does not measure whether income is sufficient to fund all of the
Company's cash needs including principal amortization, capital improvements and
distributions to stockholders. Funds from operations should not be considered an
alternative to net income or any other GAAP measurement of performance, as an
indicator of the Company's operating performance or as an alternative to cash
flows from operating, investing or financing activities as a measure of
liquidity. As defined by the National Association of Real Estate Investment
Trusts, funds from operations is net income (computed in accordance with GAAP),
excluding gains or losses from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustment for unconsolidated joint
ventures. The Company reports funds from operations in accordance with the
revised NAREIT definition. The change in the NAREIT definition in 1995 had no
material effect on the amounts reported by the Company as funds from operations
in prior periods. The measure of funds from operations as reported by the
Company may not be comparable to similarly titled measures of other companies
that follow different definitions.
FUNDS FROM OPERATIONS
(dollars in thousands)
Year ended December 31,
1996 1995 1994
Net income $3,807 $4,462 $4,273
Add: Depreciation and
Amortization 3,428 3,333 3,123
Funds from Operations $7,235 $7,795 $7,396
===============================================================================
The primary difference between the periods reflects the changes in Merger
related expenses and losses on the sale of mortgage-backed securities as
discussed under "Results of Operations".
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Accountants 29
Consolidated Balance Sheets as of December 31, 1996 and 1995 30
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 32
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 35
Notes to Financial Statements 36
Schedule III - Real Estate and Accumulated Depreciation 49
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Franklin Select Realty Trust
We have audited the accompanying consolidated balance sheets of Franklin Select
Realty Trust as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, and the financial statement
schedule of Real Estate and Accumulated Depreciation. These financial statements
and financial statement schedule are the responsibility of Franklin Select
Realty Trust's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Franklin Select
Realty Trust as of December 31, 1996, and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 7, 1997
C O N S O L I D A T E D B A L A N C E S H E E T S
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
Restated
- ------------------------------------------------------------------ ----------------- -------------------
as of December 31, 1996 and 1995
(Amounts in 000's except per share amounts) 1996 1995
- ------------------------------------------------------------------ ----------------- -------------------
ASSETS
Rental property:
<S> <C> <C>
Land $38,286 $30,949
Buildings and improvements 103,339 83,121
----------------- -------------------
141,625 114,070
Less: accumulated depreciation 17,583 14,416
----------------- -------------------
124,042 99,654
Cash and cash equivalents 2,558 6,186
Mortgage-backed securities,
available for sale 578 7,135
Deferred rent receivable 1,916 1,970
Deferred costs and other assets 2,204 1,512
================= ===================
Total assets $131,298 $116,457
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $22,745 $7,145
Tenant deposits, accounts payable
and accrued expenses 1,197 741
Advance rents 26 64
Distributions payable 1,348 1,521
----------------- ------------------
Total liabilities 25,316 9,471
----------------- ------------------
Minority interest 9,329 -
----------------- ------------------
Commitments and contingencies
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per share; 110,000
shares authorized; 12,250 and 14,145 shares
issued and outstanding, respectively 103,161 111,569
Common stock, Series B, without par value;
stated value $10 per share; 2,500
shares authorized;
746 shares issued and outstanding 6,294 6,294
Unrealized loss on mortgage-backed
securities (36) (164)
Accumulated distributions in excess
of net income (12,766) (10,713)
----------------- ------------------
Total stockholders' equity 96,653 106,986
----------------- ------------------
Total liabilities and stockholders'
equity $131,298 $116,457
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C ON S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
Restated Restated
- ------------------------------------------------------------- -------------- ---------------- --------------
for the years ended December 31,
1996, 1995 and 1994
(Amounts in 000's except per share
amounts) 1996 1995 1994
- ------------------------------------------------------------- -------------- ---------------- --------------
REVENUE:
<S> <C> <C> <C>
Rent $13,926 $13,383 $12,099
Interest, dividends, and other 642 728 891
-------------- ---------------- --------------
Total revenue 14,568 14,111 12,990
-------------- ---------------- --------------
EXPENSES:
Interest 886 679 466
Depreciation and amortization 3,440 3,335 3,124
Property operating 3,635 3,705 3,246
Related party 1,205 1,030 897
Consolidation expense 695 394 5
General and administrative 642 506 661
Loss on sale of mortgage-backed
securities 151 - 318
Minority interest 107 - -
-------------- ---------------- --------------
Total expenses 10,761 9,649 8,717
-------------- ---------------- --------------
NET INCOME $3,807 $4,462 $4,273
============== ================ ==============
Net income per share, based on the weighted
average shares outstanding of Series
A common stock of 13,830, 14,145 and 14,145
for the years ended December 31,
1996, 1995 and 1994, respectively $ .28 $ .32 $ .30
============== ================ ==============
Distributions per share, based on the weighted
average shares outstanding of
Series A common stock of 13,343, 14,145
and 14,145 for the years ended December
31, 1996, 1995 and 1994, respectively $ .44 $ .44 $ .44
============== ================ ==============
- ------------------------------------------------------------- -------------- ---------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S'
E Q U I T Y
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
for the years ended December 31, 1996, 1995, and 1994 (Amounts in 000's)
Unrealized Accumulated
COMMON STOCK (loss)/gain on distributions
Series A Series B mortgate- in excess
Shares Amount Shares Amount securities of net income Total
--------------------------------------------------- ----------------- -------------------- ------------
Balance,
December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1993, Restated 14,146 $111,574 746 $6,294 - $(7,076) $110,792
Redemption of
Series A
common stock (1) (2) - - - - (2)
Unrealized loss
on mortgage-
backed
securities - - - - $(581) - (581)
Net income - - - - - 4,273 4,273
Distributions
declared - - - - - (6,166) (6,166)
Balance,
December 31,
1994, Restated 14,145 111,572 746 6,294 (581) (8,969) 108,316
Redemption of
Series A
common stock - (3) - - - - (3)
Unrealized gain
on mortgage-
backed
securities - - - - 417 - 417
Net income - - - - - 4,462 4,462
Distributions declared - - - - - (6,206) (6,206)
Balance,
December 31,
1995, restated 14,145 111,569 746 6,294 (164) (10,713) 106,986
Dissenting
stockholders'
interest (1,895) (8,408) - - - - (8,408)
Unrealized gain
on mortgage-
backed
securities - - - - 128 - 128
Net income - - - - - 3,807 3,807
Distributions
declared - - - - - (5,860) (5,860)
Balance,
December 31,
1996 12,250 $103,161 746 $6,294 $(36) $(12,766) $96,653
=========================== ============= ============== ========== ======================= ======================== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
Restated Restated
- ---------------------------------------------------------- ------------- -------------- --------------
for the years ended December 31,
1996,1995 and 1994 (Dollars in 000's) 1996 1995 1994
- ---------------------------------------------------------- ------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET INCOME $3,807 $4,462 $4,273
------------- -------------- --------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,440 3,335 3,124
Loss on sale of mortgage-backed
securities 151 - 318
Minority interest 107 - -
Loss on disposition of rental property - 100 -
Decrease in deferred rent receivable 54 44 -
(Increase) decrease in other assets (27) 309 873
Increase in tenant deposits, accounts
payable, and accrued expenses 337 148 125
(Decrease) increase in advance rents (38) (39) 58
------------- -------------- --------------
4,024 3,897 4,498
------------- -------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,831 8,359 8,771
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental property (1,428) - (12,910)
Improvements to rental property (627) (390) (1,120)
Leasing commissions paid (339) (371) (467)
Investment in mortgage-back securities - - (3,235)
Disposition of mortgage-back securities 6,534 792 11,828
------------- -------------- --------------
-------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 4,140 31 (5,904)
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable 16,222 - 2,000
Repayment of notes payable (16,781) (134) (86)
Payment of loan costs (599) - (12)
Repurchase of dissenting stockholders'
interest (8,408) - -
Redemption of Series A common stock - (3) (2)
Distributions paid (6,033) (6,267) (5,084)
-------------- --------------
-------------
NET CASH USED IN FINANCING ACTIVITIES (15,599) (6,404) (3,184)
------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (3,628) 1,986 (317)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,186 4,200 4,517
============= ============== ==============
CASH AND CASH EQUIVALENTS,
END OF YEAR $2,558 $6,186 $4,200
============= ============== ==============
</TABLE>
Supplemental cash flow information and non-cash investing and financing
activities - Notes 2 and 4.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Franklin Select Realty Trust (the "Company") (formerly Franklin Select Real
Estate Income Fund) is a California corporation formed on January 5, 1989 for
the purpose of investing in income-producing real property. The Company is a
real estate investment trust ("REIT") having elected to qualify as a REIT under
the applicable provisions of the Internal Revenue Code since 1989. Under the
Internal Revenue Code and applicable state income tax law, a qualified REIT is
not subject to income tax if at least 95% of its taxable income is currently
distributed to its stockholders and other REIT tests are met. The Company has
distributed at least 95% of its taxable income and intends to distribute
substantially all of its taxable income in the future. Accordingly, no provision
is made for income taxes in these financial statements.
On May 7, 1996 Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage
Real Estate Income Fund ("Advantage") merged into the Company. In connection
with the Merger of the three companies (the "Merger"), the Company issued
approximately 7,945,000 shares of Series A common stock and 559,718 shares of
Series B common stock in exchange for 3,363,877 and 3,013,713 shares of Series A
common stock and 319,308 and 124,240 shares of Series B common stock of FREIF
and Advantage, respectively, in each case excluding dissenting shares.
Stockholders representing approximately 635,638 shares of FREIF Series A common
stock and 1,077,667 shares of Company Series A common stock elected to exercise
dissenter's rights pursuant to Chapter 13 of the California General Corporation
Law. On November 1, 1996, the Company paid the dissenting stockholders
approximately $8.4 million for their shares. The dissenting shares were
repurchased by the Company as more fully described under Note 6 Repurchase of
Dissenting Shares.
At December 31, 1996, the Company's real estate portfolio consisted of fee
interests in the Shores Office Complex, a three-building office complex located
in Redwood City, California; the Data General Building located in Manhattan
Beach, California; the Mira Loma Shopping Center, a shopping center located in
Reno, Nevada; three separate research and development buildings in the Northport
Business Park, located in Fremont, California; the Glen Cove Shopping Center
located in Vallejo, California; the Fairway Center, a two story office building
located in Brea, California; the Carmel Mountain Gateway Plaza, a retail center
located in San Diego, California; and the LAM Research Buildings, two separate
research and development buildings also located in the Northport Business Park,
located in Fremont, California.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include all
accounts of the Company and its majority owned partnership, FSRT L.P. All
significant intercompany amounts and transactions have been eliminated. Certain
1995 and 1994 amounts have been reclassified to conform to the 1996
presentation. Such reclassifications had no effect on previously reported
results.
The accompanying consolidated financial statements have been presented as a
reorganization of entities under common control due to the common management of
the Company, FREIF and Advantage by the Advisor and are reflected in the
financial statements at their historical bases. Prior periods have been restated
to give effect to the Merger.
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.
RENTAL PROPERTY
Rental property is stated at cost and depreciated using the straight-line method
over an estimated useful life of 35 years for buildings and improvements. Tenant
improvements are generally amortized over the lesser of the improvements' useful
life or the lease term. Significant improvements and betterments are
capitalized. Maintenance, repairs and minor renewals are charged to expense when
incurred.
Pursuant to the Company's investment objectives, property purchased is generally
held for extended periods. During the holding period, management periodically,
but at least annually, evaluates whether rental property has suffered an
impairment in value. Management's analyses include consideration of estimated
undiscounted future cash flows during the expected holding period in comparison
with carrying values, prevailing market conditions and other economic matters.
If the current carrying value of an individual property exceeds estimated future
undiscounted cash flows, the Company would reduce the carrying value of the
asset to fair value; however, to date, such adjustments have not been required.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with banks, debt
instruments with original maturities of three months or less, and money market
funds, which are readily convertible into cash. Due to their relatively
short-term nature, the carrying value of these instruments approximates fair
value.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held by the Company are classified as available for
sale and are carried at fair value. The resulting unrealized gains and losses
are reported as a separate component of stockholders' equity until realized.
Realized gains and losses are recognized on the specific identification method
and are included in earnings.
DEFERRED COSTS
Lease commissions are deferred and amortized using the straight-line method over
the term of the related lease. Loan fees and loan costs are deferred and
amortized using the straight-line method, which approximates the effective
interest method, over the term of the related loan.
RENTAL REVENUES
Rental revenues are recorded on the straight-line method to reflect scheduled
rent increases and free rent over the related lease term. As a result, a
deferred rent receivable is created when rental receivables are less than the
amount earned using the straight-line method or when rental income is recognized
during free rent periods of a lease.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of mortgage-backed securities and operating
leases with tenants.
The Company places excess cash in short-term deposits with Franklin Money Fund,
an investment company managed by an affiliate of the Advisor, and in money
market securities of companies with strong credit ratings and, by policy, limits
credit exposure to any one issuer. The Company performs ongoing credit
evaluations of its tenants and generally does not require collateral for
commercial tenants. The Company reserves for potential credit losses, as
appropriate.
NOTE 2 - RENTAL PROPERTY ACQUISITION
In October, 1996, the Company formed FSRT, L.P. ("FSRT"), a limited partnership
in which the Company is the sole general partner. Upon formation, an
unaffiliated party contributed the Lam Research Buildings in exchange for
1,625,000 limited partnership units (the "FSRT Units"), representing an
approximate 30% interest in FSRT. In addition, FSRT assumed approximately $16.6
million of existing non-recourse debt which was subsequently refinanced with new
debt at a reduced interest rate. The limited partner contribution was recorded
based on the fair value of the LAM Research Buildings of approximately $25.5
million. The Company contributed its interest in the Data General Building and
$1.4 million in cash to FSRT to cover transaction and closing costs in
connection with the Lam Research Building. The FSRT Units, which are convertible
into a like number of the Company's Series A common shares after one year, are
entitled to receive quarterly distributions of $.11 per unit, subject to
periodic annual increases commencing in June, 1998, as specified in the
partnership agreement. Residual cash flow after distributions to the FSRT Units
is distributable to the Company. In the future, the Company may contribute its
remaining assets to FSRT at which time the distribution rate on the FSRT Units
may be modified at the Company's discretion in accordance with the partnership
agreement. The Company is subject to certain restrictions regarding the sale or
refinance of the properties owned by FSRT.
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1996, had a
coupon rate of 7.18% and a maturity date of July 17, 2001. Amortized cost was
$614,000 and the fair value was $578,000 resulting in a gross unrealized loss of
$36,000 at December 31, 1996. Mortgage-backed securities at December 31, 1995
had an aggregate market value of $7,135,000 and an amortized cost of $7,298,000
resulting in a gross unrealized loss of $164,000.
NOTE 4 - NOTES AND BONDS PAYABLE
Notes and bonds payable at December 31, 1996, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
Restated
In thousands 1996 1995
----------------- ----------------
<S> <C> <C>
FAIRWAY CENTER
Note payable, collateralized by a deed
of trust, payable interest only until
maturity in March, 1996. Interest is
paid monthly at a rate of 9% annually. - $480
Bonds payable, net of prepaid reserve of $300,000,
collateralized by a lien, including serial bonds maturing
through October 1, 2000, at interest rates ranging from
5.75% to 7.60%, and term bonds maturing October 1, 2006, and
October 1, 2013, at interest rates of 8% and 8.125%,
respectively. The payments on the bonds are calculated in an
amount sufficient to fully amortize the indebtedness. $2,335 2,405
GLEN COVE
Note payable, collateralized by a deed of trust. The note
bears interest, payable monthly, at the Union Bank Reference
Rate plus 1.5%, together with monthly principal payments of
$3,700 until maturity in 1999. 1,893 1,937
CARMEL MOUNTAIN
Note payable, collateralized by a deed of trust. The note
bears interest, payable monthly, at the Union Bank Reference
Rate plus 1.5%, together with variable monthly principal
payments until maturity in 1999. 2,295 2,323
LAM RESEARCH BUILDINGS
Notes payable, collateralized by deeds of trust. The two
notes bear interest at a fixed rate of 8.44%. The combined
principal and interest payment of $129,969 is payable
monthly until maturity in 2006. 16,222 -
================= ================
$22,745 $7,145
================= ================
</TABLE>
Aggregate principal payments required in future years are as follows:
In thousands
1997 $347
1998 378
1999 4,360
2000 350
2001 383
Thereafter 16,927
===================
$22,745
===================
For the years ended December 31, 1996, 1995 and 1994, interest paid was
$773,000, $687,000 and $444,000, respectively.
Subsequent to December 31, 1996, the bonds payable were refinanced lowering the
interest rate and extending the maturity date of the bonds to October 1, 2026.
Management estimates that the carrying amount of aggregate notes and bonds
payable approximate fair value.
In December 1996, the Company entered into a $25 million secured line of credit
agreement with a bank to provide funding for future acquisitions and working
capital. Borrowings under the line of credit bear interest at the applicable
London Interbank Offered Rate plus 1.9%, or at the bank's reference rate, and
is secured by three of the Company's rental properties. Among other covenants,
the agreement restricts payment of quarterly dividends to an amount not to
exceed 98% of funds from operations, as defined. In addition, the Company pays
an annualized fee of .25% of the unused portion of the line of credit, payable
quarterly. At December 31, 1996, no borrowings were outstanding under the line
of credit.
NOTE 5 - COMMON STOCK AND INCOME PER SHARE
In 1994, the Company issued to the Advisor an exchange right to exchange the
Series B common stock held by the Advisor (Note 8) for Series A common stock. In
connection with the Merger, the Company issued an additional exchange right to
the Advisor with respect to the shares of Series B common stock held by Advisor
in FREIF and Advantage which were exchanged in the Merger for Series B shares of
the Company, The exchange rights are exercisable only when the Series A common
stock achieves certain trading prices for 20 consecutive trading days. The
number of shares of Series B common stock that will exchange for Series A common
stock, and the related trading prices are as follows: 149,088 Series B shares
will be exchanged for 149,088 Series A shares at $8.42, 185,866 Series B shares
will be exchanged for 185,866 Series A shares at $10.35, and 410,630 Series B
shares will be exchanged for 287,441 Series A share at $11.33. The rates of
exchange and trading prices will be subject to change under certain
circumstances as provided in the Exchange Rights Agreement.
No distribution may be paid on the Series B shares prior to exercise of the
exchange rights. After exercise of the exchange rights, the Advisor will receive
distributions on its Series A shares.
Series A and Series B common stock have the same voting rights. Distributions on
Series A common stock are declared at the discretion of the Board of Directors.
For the purpose of calculating net income per share for the year ended December
31, 1996, the weighted average number of shares outstanding of Series A common
stock has been calculated assuming the shares attributable to dissenting
stockholders (equivalent to approximately 1.9 million shares of the Company's
common stock) were converted into the Company's common stock and were
outstanding for the period May 7, 1996 to the repurchase date of November 1,
1996. For the period May 7, 1996, to November 1, 1996, the Company was not
obligated to, and did not, pay dividends related to 635,638 Series A shares of
FREIF that dissented from the Merger.
NOTE 6 - REPURCHASE OF DISSENTING SHARES
On November 1, 1996 the Company purchased all the remaining "dissenting shares"
of Class A common stock arising from the Merger for an aggregate price of $8.4
million. After giving effect to the transaction, the total number of shares of
Series A common stock of the Company outstanding is approximately 12.25 million.
Cash for the purchase price was provided by the sale of a portion of the
Company's mortgage-backed securities. The Company incurred a loss on the sale of
the securities of approximately $151,000.
NOTE 7 - RENTAL INCOME
The Company's rental income from commercial property is received principally
from tenants under non-cancelable operating leases. The tenant leases typically
provide for guaranteed minimum rent plus contingent rents. Minimum future
rentals on non-cancelable tenant operating leases at December 31, 1996 are as
follows:
In thousands
1997 13,723
1998 11,167
1999 9,780
2000 8,540
2001 7,204
Thereafter 52,348
-------------------
102,762
===================
Minimum future rentals do not include contingent rents which represent
reimbursements of property operating expenses. Contingent rents amounted to
$1,725,000, $1,567,000 and $1,452,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
During the years ended December 31, 1996, 1995 and 1994, one of the Company's
tenants, the Continental Casualty Company, provided 13.8%, 14.3% and 15.8% of
the Company's base rental income under a lease which expires in October 1997.
Late in 1996, the Company acquired two industrial buildings that are occupied by
Lam Research Corporation under leases that expire in 2014. In addition, Lam
Research Corporation leases other space from the Company at the Northport
Buildings under a lease that expires in 2003. Subsequent to the acquisition of
the Lam Research Buildings, the percentage of the Company's base rental income
that is received from Lam Research Corporation increased to a total of
approximately 20%, based upon leases in effect at December 31, 1996.
Leases covering 162,000 square feet, and representing approximately 22%, of the
Company's base rental income at December 31, 1996, are scheduled to expire
during 1997. The Company may incur significant costs related to the releasing or
renewing of the leases. In addition, the Company anticipates releasing 75,000
square feet of this space at a rental rate substantially below the existing
lease rate.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company has an agreement with Franklin Properties, Inc. (the "Advisor") to
administer the day-to-day operations of the Company. Under the terms of the
agreement, which is renewable annually, the Advisor will receive an annualized
fee equal to .5% of the Company's gross real estate assets, defined generally as
the book value of the assets before depreciation, payable quarterly. The fee
will be reduced to .4% for gross real estate assets exceeding $200 million.
Prior to October 1, 1994, the Advisor received an annualized fee equal to 1% of
invested assets and .4% of mortgage investments, paid quarterly. One half of the
fee was subordinate to declaring distributions to Series A common stockholders
totaling at least 7% per annum on their adjusted price per share, as defined.
Prior to the Merger, fees paid to the Advisor by FREIF and Advantage were
calculated in a manner similar to that used by the Company prior to October 1,
1994, except that for FREIF, the entire fee was subordinated to declaring
distributions to the Series A common stockholders totaling 8% of the adjusted
price per share. If the advisory fees for FREIF and Advantage had been
calculated under terms of the Company's current advisory agreement, the
aggregate advisory fees for the Company, FREIF and Advantage would have been
$606,000, $570,000 and $528,000 for the years ended December 31, 1996, 1995 and
1994, respectively. In addition, FREIF and Advantage paid the Advisor
acquisition fees equal to 6% of the asset purchase price which are not payable
under the terms of the Company's current advisory agreement.
Seven of the Company's properties are managed by Continental Property Management
Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed
by an unaffiliated company, Cupertino Capital. The Company pays a property
management fee, leasing commission and construction supervision fee to CPMC
based on actual services performed. The fees paid to CPMC do not include any
fees or expenses paid to on-site property managers or leasing commissions paid
to third parties, both of which are borne by the Company.
The agreements between the Company and the Advisor, or affiliates of the
Advisor, provide for certain types of compensation and payments including, but
not limited to, the following for the years ended December 31, 1996, 1995 and
1994:
Restated Restated
In thousands 1996 1995 1994
------- ----------------- ----------------
Advisory fee, charged to
related party expense $551 $350 $264
Reimbursement for data
processing, accounting
and certain other expenses,
charged to related party expense 63 101 109
Property management fee, charged
to related party expense 591 579 524
Property acquisition fee,
capitalized and amortized
over the life of the related
investment - - 730
Leasing commissions, capitalized
and amortized over the term of
the related lease 97 187 99
Construction supervision fee,
capitalized and amortized over the
life of the related investment or
the term of the related lease,
as applicable 33 30 47
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
At December 31, 1996 and 1995, cash equivalents included $1,764,000 and
$1,014,000, respectively, which was invested in Franklin Money Fund, an
investment company managed by an affiliate of the Advisor. Distributions earned
from Franklin Money Fund totaled $60,000, $23,000 and $21,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, accrued expenses included $177,000 and $103,000,
respectively, payable to the Advisor or affiliates.
NOTE 9 - DISTRIBUTIONS
The allocation of cash distributions per share for individual stockholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for
the years ended December 31, 1996, 1995 and 1994 was as follows:
Ordinary Return of Total
Year Paid Income Capital Paid
- ------------------------ ------------------ -------------------- --------------
Franklin Select Realty Trust
1996 $.42 $.02 $.44
1995 $.35 $.09 $.44
1994 $.34 $.07 $.41
Franklin Real Estate Income Fund
1996(to May 7, 1996) $.18 $.03 $.21
1995 $.49 $.01 $.50
1994 $.41 $.09 $.50
Franklin Advantage Real Estate Income Fund
1996 (to May 7, 1996) $.19 $.03 $.22
1995 $.60 $.01 $.61
1994 $.51 $.14 $.65
In December 1994, the Company implemented a Dividend Reinvestment and Share
Purchase Plan (the "Plan"), under which a stockholder's cash distributions may
be reinvested in shares of Series A common stock of the Company, subject to the
terms and conditions of the Plan. Under the Plan, the Company's Dividend
Reinvestment Agent makes open market purchases of the Company's Series A common
stock, administers the Plan and performs other duties related to the Plan. No
new shares have been issued in connection with the Plan.
NOTE 10 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts, as restated to give effect to the
merger.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------- ------------------ ------------------------- ---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
-------------------- ------------------ ------------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue $3,474 $3,613 $3,597 $3,884
Net income $753 $1,078 $1,187 $789
Net income
per share $ .05 $ .08 $ .08 $ .06
THREE MONTHS ENDED
-------------------- ------------------ ------------------------- ---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
-------------------- ------------------ ------------------------- ---------------------
Revenue $3,452 $3,569 $3,597 $3,493
Net income $1,279 $1,318 $893 $972
Net income per
share $ .09 $ .09 $ .06 $ .07
</TABLE>
NOTE 11 - PRO FORMA FINANCIAL INFORMATION
The pro forma financial information set forth below is presented as if: (i) the
Merger and the related repurchase of dissenting shares and (ii) the formation of
FSRT and the limited partners' contribution of the LAM Research Buildings had
occurred on January 1, 1995. The pro forma financial information is not
necessarily an indication of what actual results of operations of the Company
would have been assuming the transaction had occurred on January 1, 1995, nor
does it purport to present the results of operations for future periods.
December 31
Dollars in thousands 1996 1995
(Unaudited)
- ------------------------------------
Rent $15,867 $15,731
Net income $3,023 $3,479
Net income per share $ .25 $ .28
Weighted average Series A
common stock outstanding 12,250 12,250
NOTE 12 - LITIGATION
On December 2, 1996, two stockholders, for themselves and purportedly on behalf
of certain other minority stockholders of Advantage, filed a purported class
action complaint in the California Superior Court for San Mateo County against
Advantage, its directors, the Advisor, Franklin Resources, Inc. and the
Massachusetts State Teachers' and Employees' Retirement Systems Trust
("MASTERS"). The complaint alleges that defendants breached fiduciary duties to
plaintiffs and other minority stockholders in connection with the purchase by
Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage
and in connection with the Merger of Advantage into the Company in May 1996,
which was approved by a majority of the outstanding shares of each of the three
companies. Plaintiffs also allege that defendants misstated certain material
facts or omitted to state material facts in connection with these transactions.
The complaint includes a variety of additional claims, including claims relating
to the investment of Advantage assets, the suspension of the dividend
reinvestment program, the allocation of merger-related expenses, revisions to
the investment policies of Advantage, and the restructuring of the contractual
relationship with the Advisor. Plaintiffs seek damages in an unspecified amount
and certain equitable relief. The defendants deny any wrongdoing in these
matters and intend to vigorously defend the action. Management does not believe
that the outcome of this litigation will have a material adverse affect on the
Company's financial condition or results of operations.
The properties are subject to certain routine litigation and administrative
proceedings arising in the ordinary course of business, which, taken together,
are not expected to have a material adverse impact on the Company's financial
condition or results of operations.
- --------------------------------------------------------------------------------
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
as of, and for the years ended December 31, 1996, 1995 and 1994
Dollars in thousands
Cost Capitalized
Initial Subsequent To Gross Amount at Which
Cost to Carried at
Fund Acquisition Close of
Period
Life on
Which
Deprec-
iation
in
Latest
Build- Date Operat-
ings Accumu- of ions
Carry- and lated con- Date State-
Encum- Build- Improve- ing Improve- Depreci- struc- Acqu- ment is
Description brances Land ings ments Costs Land ments Total ation tion ired Computed
----------------------------------------------------------------------------------------------------------------------------------
The Shores
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Redwood City, CA - (4) $7,033 $20,499 $2,108 - $7,033 $22,607 $29,640 $5,488 82-87 09/89 35
Data General
Building
Manhattan Beach, CA - 5,372 16,994 2,707 - 5,372 19,701 25,073 4,985 82 12/89 35
Mira Loma 11/88
Shopping Center &
Reno, Nevada - 2,233 7,006 801 - 2,233 7,807 10,040 1,926 85-88 09/92 35
Northport Buildings
Fremont, CA - (4) 2,874 8,708 534 - 2,874 9,242 12,116 2,116 85 01/91 35
Glen Cove
Shopping Center
Vallejo, CA $1,893 2,500 4,200 104 - 2,500 4,304 6,804 361 89 01/94 35
Fairway Center
Brea, CA 2,335 (4) 7,430 14,273 729 - 7,430 15,002 22,432 2,292 87 01/92 35
Carmel Mountain
Gateway Plaza
San Diego, CA 2,295 3,507 5,053 32 - 3,507 5,085 8,592 321 94 11/94 35
Lam Research
Buildings
Fremont, CA 16,222 7,337 19,591 - - 7,337 19,591 26,928 94 96 10/96 35
- ------------------------------------------------------------------------------------------------------------------------------------
$22,745 $38,286 $96,324 $7,015 - $38,286 $103,339 $141,625 $17,583
(1) (2) (3)
</TABLE>
================================================================================
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
================================================================================
NOTES:
(1) The aggregate cost for federal income tax purposes is $123,528.
(2) RECONCILIATION OF REAL ESTATE
<TABLE>
<CAPTION>
Restated Restated
1996 1995 1994
-------------- ---------------- -------------------
<S> <C> <C> <C>
Balance at beginning of period $114,070 $113,833 $97,453
Dispositions - (153) -
Additions during period:
Acquisitions 26,928 - 15,260
Improvements 627 390 1,120
-------------- -------------- -----------------
Balance at end of period $141,625 $114,070 $113,833
============== =============== =================
(3) RECONCILIATION OF ACCUMULATED DEPRECIATION
Restated Restated
1996 1995 1994
------------- ---------------- -------------------
<S> <C> <C> <C>
Balance at beginning of period $14,416 $11,383 $8,488
Dispositions - (53) -
Depreciation expense
for the period 3,167 3,086 2,895
------------- ------------- -----------------
Balance at end of period $17,583 $14,416 $11,383
============= ============= =================
</TABLE>
(4) These assets are pledged as collateral under the Company's $25 million line
of credit. At December 31, 1996, no borrowings were outstanding under the line
of credit.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 12 of Part III is incorporated
herein by reference from the Company's Proxy Statement which will be mailed to
stockholders in connection with the Registrant's annual meeting of stockholders
scheduled to be held on June 5, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is managed by the Advisor under the terms of an Advisory Agreement,
which is renewable annually and is subject to the overall approval of the Board
of Directors, a majority of whom are independent of the Advisor. The Company
pays the Advisor, as an asset management fee, an annualized fee of .5% of the
book value of its real estate assets before depreciation. This fee is reduced to
.4% of the book value before depreciation of real estate assets exceeding $200
million. The fee is calculated and paid at the end of each fiscal quarter of the
Company, based on the real estate assets at the end of such quarter. The Company
changed its advisory fee structure after its conversion to an infinite life REIT
in 1994. The properties formerly owned by FREIF and Advantage became subject to
the Company's advisory fee structure upon the Merger of FREIF and Advantage into
and with the Company in May 1996. The Advisory fee paid to the Advisor during
the year ended December 31, 1996, is stated in the table below.
The Company pays all expenses of its operations except for the following, which
are borne by the Advisor (i) employment expenses of the Company's Chairman,
President, Senior Vice President, Chief Financial Officer, Secretary and of the
Company's directors who are also officers of the Advisor, (ii) office expenses
of the Advisor, and (iii) overhead expenses of the Advisor not properly
attributable to the performance of its duties and obligations under the Advisory
Agreement.
Seven of the Company's properties are managed by Continental Property Management
Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed
by an unaffiliated company, Cupertino Capital. The Company pays a property
management fee, leasing commission and construction supervision fee to CPMC
based on actual services performed. The fees paid to CPMC do not include any
fees or expenses paid to on-site property managers or leasing commissions paid
to third parties, both of which are borne by the Company. The fees paid to CPMC
for the year ended December 31, 1996, are listed in the table below.
During the year ended December 31, 1996, the Company paid or accrued the
following amounts for the reimbursements and services noted above:
Advisory fee, charged to related party expense $551,000
Reimbursement for data processing, accounting
and certain other expenses charged to related
party expense 63,000
Property management fee, charged to related
party expense 591,000
Leasing commission, capitalized and amortized
over the term of the related lease 97,000
Construction supervision fee, capitalized
and amortized over the life of the related
investment or the term of the related lease 33,000
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
David P. Goss, Mark A. TenBoer and Richard S. Barone, who are officers of the
Company, are also officers of the Advisor.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Company included in Item 8 of
this report are listed on the index on page 28.
2. The supplemental financial statement schedule of the Company
included in Item 8 of this report is listed on the index on page
28.
3. Exhibits:
Exhibit
NO. LIST OF EXHIBITS FOOTNOTE
3.1 Articles of Incorporation (1)
3.2 First Amendment to Articles of Incorporation (2)
3.2a Second Amended and Restated Bylaws of
Franklin Select Realty Trust (2)
10.1* Amended and Restated Advisory Agreement
10.2 Property Management Agreement (3)
10.3 Agreement of Limited Partnership of
FSRT, L.P. between the Company and (4)
Northport Associates No. 18, a California
limited liability company, dated as of October 30, 1996.
10.4 Contribution Agreement, dated as of October 30, 1996,
between FSRT, L.P., (4)
the Company, Northport Associates No. 18,
a California limited liability company,
and the members of Northport Associates No. 18.
10.5 Exchange Rights Agreement, dated as of
October 30, 1996, among the Company, (4)
FSRT, L.P., and Northport Associates No. 18,
a California limited liability company.
10.6 Registration Rights Agreement, dated as of
October 30, 1996, among the (4)
Company and Northport Associates No. 18,
a California limited liability company.
10.7* Secured line of credit loan agreement, dated December 10, 1996,
by and between the Company and Bank of America.
21.1* Subsidiaries of the Company.
* Filed herewith.
FOOTNOTES
(1) Documents were filed in the Company's Form S-11 Registration Statement,
dated March 30, 1989 (Registration No. 033-26562) and are incorporated
herein by reference.
(2) Documents were filed in the Company's Form S-4 Registration Statement,
dated November 13, 1995, (Registration No. 033-64131), and are incorporated
herein by reference.
(3) Documents were filed in the Company's Form 10-K for the year ended December
31, 1994, and are incorporated herein by reference.
(4) Documents were filed in the Company's Form 8-K, dated October 31, 1996, and
are incorporated herein by reference.
(b) Reports filed on Form 8-K.
During the quarter ended December 31, 1996, the Company filed a
report dated October 31, 1996, (date of earliest event reported)
on Form 8-K, with respect to the acquisition of the Lam Research
Buildings and the repurchase of dissenting shares.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
(Company)
Date: 03/27/97 By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
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 Company, and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer, and
Director
s/David P. Goss 3/27/97
- ----------------------------- -------------------
David P. Goss
s/Barry C. L. Fernald Director1 3/27/97
- ----------------------------- -------------------
Barry C. L. Fernald
s/Lloyd D. Hanford, Jr. Director1 3/27/97
- ----------------------------- -------------------
Lloyd D. Hanford, Jr.
s/Egon H. Kraus Director1 3/27/97
- ----------------------------- -------------------
Egon H. Kraus
s/Frank W. T. LaHaye Director1 3/27/97
- ----------------------------- -------------------
Frank W. T. LaHaye
s/Larry D. Russel Director1 3/27/97
- ----------------------------- -------------------
Larry D. Russel
s/E. Samuel Wheeler Director1 3/27/97
- ----------------------------- -------------------
E. Samuel Wheeler
1 Independent Director
Exhibit 21.1
Subsidiaries of Franklin Select Realty Trust
State of Name under which
SUBSIDIARY NAME ORGANIZATION SUBSIDIARYIS DOING BUSINESS
FSRT, L.P. Delaware FSRT, L.P.
AMENDED AND RESTATED
ADVISORY AGREEMENT
between
FRANKLIN SELECT REALTY TRUST
and
FRANKLIN PROPERTIES, INC.
THIS AMENDED AND RESTATED ADVISORY AGREEMENT ("Agreement") is dated as of
January 1, 1997, between FRANKLIN SELECT REALTY TRUST, a California corporation
(the "Company"), and FRANKLIN PROPERTIES, INC., a California corporation (the
"Advisor").
WHEREAS, the Company and the Advisor entered into a certain agreement (the
"Old Agreement") captioned "Advisory Agreement between Franklin Select Real
Estate Income Fund and Franklin Properties, Inc.," dated as of March 1, 1989.
WHEREAS, the Company and the Advisor entered into a certain agreement
captioned "First Amendment to Advisory Agreement between Franklin Select Real
Estate Income Fund and Franklin Properties Inc.," dated as of October 1, 1994,
pursuant to which the Agreement was amended to reflect certain changes in the
compensation paid to the Advisor as approved by the shareholders.
WHEREAS, the Company and the Advisor desire to amend and restate the Old
Agreement so that all of the terms between the Company and the Advisor are set
forth in one agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants in the Old Agreement and this Agreement, the parties agree as follows:
1. DUTIES OF ADVISOR. The Advisor agrees to use its best efforts to
present to the Company (a) a continuing and suitable investment program
consistent with the investment policies and objectives of the Company and
(b) investment opportunities of a character consistent with the investment
program as the Directors may adopt from time to time. In performance of
this undertaking, subject to the supervision of the Directors and upon
their direction, and consistent with the provisions of the Articles of
Incorporation and Bylaws of the Company, the Advisor shall:
(a) furnish or obtain and supervise the day-to-day operations of
the Company;
(b) serve as the Company's investment and financial advisor and
provide research, economic and statistical data in connection with the
Company's investments and investment and financial policies;
(c) on behalf of the Company, investigate, select and conduct
relationships with consultants, investment banks, lenders, mortgagors,
brokers, investors, shareholders, transfer agents, builders,
developers and others;
(d) consult with the Directors and furnish the Directors with
advice and recommendations with respect to making, acquiring (by
purchase, investment, exchange or otherwise), holding and disposing
(through sale, exchange or otherwise) of investments consistent with
the policies and provisions of the Company;
(e) on behalf of the Company, investigate, select and commit to
purchase (subject to board approval) investments consistent with the
policies and provisions of the Company and in accordance with the
policies and guidelines established by the Directors, provided that
actual investments shall be made only with the prior approval of a
majority of a quorum of the Directors or by written consent of all
Directors;
(f) obtain for the Directors such services as may be required in
acquiring and disposing of investments, disbursing and collecting the
funds of the Company, paying the debts and fulfilling the obligations
of the Company and handling, prosecuting and settling any claims of
the Company;
(g) obtain for the Company such services as may be required for
property management, including property management services rendered
by an affiliate of the Advisor, and other activities relating to the
investment portfolio of the Company;
(h) advise in connection with and conduct negotiations by or on
behalf of the Company with investment banking firms, securities
brokers or dealers and other institutions or investors for public or
private sales of Shares or other securities of the Company, or obtain
loans for the Company, but in no event in such a way that the Advisor
could be deemed to be acting as a broker-dealer or underwriter;
(i) provide, at the Company's expense, office space, office
furnishings, personnel and other overhead items necessary and
incidental to the Company's business and operations;
(j) from time to time or at any time requested by the Directors,
make reports to the Directors of its performance of services under
this Agreement;
(k) obtain appraisal reports, where appropriate, on investments
or contemplated investments of the Company;
(l) provide, at the Company's expense and at the direction of the
Board of Directors, accounting and related services necessary to the
preparation of the Company's financial statements, regulatory filings,
and tax returns; and
(m) do all things necessary to assure its ability to render the
services described in this Agreement.
2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Advisor are
not partners or joint venturers with each other and nothing in this
Agreement shall be construed to make the parties partners or joint
venturers or impose any liability as a partner or joint venturer on either
of them.
3. RECORDS. At all times, the Advisor shall keep proper books of
account and records relating to services performed under this Agreement,
which shall be accessible for inspection by the Company at any time during
ordinary business hours.
4. REIT QUALIFICATIONS. Notwithstanding anything else in this
Agreement, the Advisor shall refrain from any action (including, without
limitation, performing services for tenants of property or managing or
operating real property) which, in its sole judgment made in good faith or
in the judgment of the Directors of which the Advisor has written notice,
would adversely affect the status of the Company as a real estate
investment trust as defined and limited in the Code, which would violate
any law, rule, regulation or statement of policy of any governmental body
or agency having jurisdiction over the Company or over its securities, or
which would otherwise not be permitted by the Company's Bylaws.
5. BANK ACCOUNTS. The Advisor, at the expense of the Company, may
establish and maintain one or more bank accounts in its own name, and may
collect and deposit into any one or more accounts, and disburse from any
account or accounts, any money on behalf of the Company, on the terms and
conditions as the Directors may approve, provided that no funds shall be
commingled with funds of the Advisor; and the Advisor shall from time to
time give an appropriate accounting of collections and payments to the
Directors and to the auditors of the Company.
6. BOND. The Advisor, if and to the extent that the Directors require,
shall maintain a fidelity bond with a responsible surety company in such
amount as the Directors may require from time to time, covering all
directors, officers, employees and agents of the Advisor handling funds of
the Company and any investment documents or records pertaining to
investments of the Company. The bond shall inure to the benefit of the
Company in respect of losses of any property from acts of the directors,
officers, employees and agents of the Advisor through theft, embezzlement,
fraud, negligence, error or omission or otherwise. The premium for the bond
shall be an expense of the Company.
7. INFORMATION FURNISHED ADVISOR. The Directors shall at all times
keep the Advisor fully informed with regard to the investment policy of the
Company, the capitalization policy of the Company and, generally, their
current intentions as to the future of the Company. In particular, the
Directors shall notify the Advisor promptly of their intention to sell or
otherwise dispose of any of the Company's investments or to make any new
investment. The Company shall furnish the Advisor with a certified copy of
all financial statements, a signed copy of each report prepared by
independent certified public accountants and all other information with
regard to the Company's affairs as the Advisor may reasonably request.
8. CONSULTATION AND ADVICE. In addition to the services described
elsewhere in this Agreement, the Advisor shall consult with the Directors,
and shall, at the request of the Directors or the officers of the Company,
give advice and recommendations with respect to other aspects of the
business and affairs of the Company. In general, the Advisor shall inform
the Directors of any factors, which come to its attention which the Advisor
believes would influence the policies of the Company, except to the extent
that giving that information would involve a breach of fiduciary duty.
9. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings indicated:
(a) "Affiliate" means as to any Person (i) any other Person
directly or indirectly controlling, controlled by or under common
control with such Person, (ii) any other person owning or controlling
10% or more of the outstanding voting securities or beneficial
interest of such Person, (iii) any officer, director, trustee or
general partner of such Person and (iv) if such other Person is an
officer, director, trustee or partner of another entity, then the
entity for which that Person acts in any such capacity.
(b) "Average Invested Assets" means for any period the average of
the aggregate book value of the assets of the Company invested,
directly or indirectly, in equity interests in and loans secured by
real estate, before reserves for depreciation or bad debts or other
similar non-cash reserves computed by taking the average of such
values at the end of each month during such period.
(c) "Fiscal Year" means any period for which an income tax return
is submitted to the Internal Revenue Service and which is treated by
the Internal Revenue Service as a reporting period for the Company.
(d) "Mortgage Investment" means the assets of the Company
invested in any mortgage loans, mortgage-backed securities, notes,
bonds or other evidences of indebtedness or obligations which are
secured or collateralized by interests in real estate.
(e) "Net Income" means the total revenues of the Company for any
period, computed on the basis of its results of operations for that
period, after deduction of all expenses, excluding, however, any
additions to reserves for depreciation or bad debts or other similar
non-cash reserves.
(f) "Person" means an individual, corporation, partnership, joint
venture, association, company, trust, bank or other entity, or
government and any agency and political subdivision of a government.
(g) "Real Estate Assets" means for any calendar quarter, the
aggregate book value of the assets of the Company on the last day of
the quarter, invested directly or indirectly in interests in real
estate, before reserves for depreciation, bad debts, or other similar
non-cash reserves, as set forth in the Company's financial statements
(which may be unaudited except as elsewhere provided in this
Agreement), prepared quarterly on an accrual basis in accordance with
generally accepted accounting principles. Real Estate Assets do not
include Mortgage Investments.
10. ADVISOR COMPENSATION. At the end of each calendar quarter or such
other interval as the parties shall agree, the Company shall pay to the
Advisor as compensation for the advisory services rendered to the Company
hereunder an annualized fee equal to the sum of (a) one-half of one percent
(.5%) of the Real Estate Assets up to and including $200,000,000 and (b)
four-tenths of one percent (.4%) of the Real Estate Assets, if any, in
excess of $200,000,000.
11. STATEMENTS. The Advisor shall furnish to the Company at least
quarterly, beginning with the second calendar quarter of the term of this
Agreement, a statement showing the computation of the fee payable in
respect of the preceding calendar quarter under Section 10, even after the
termination of this Agreement. The final settlement of any fees for each
Fiscal Year shall be subject to adjustment in accordance with, and upon
completion of, the annual audit of the Company's financial statement; any
payment by the Company or repayment by the Advisor indicated as a result of
the audit shall be made promptly after the completion of the audit and
shall be reflected in the audited statements to be published by the
Company.
12. COMPENSATION FOR ADDITIONAL SERVICES.
(a) Where appropriate in the sole judgment of the Directors or
the Advisor, an Affiliate of the Advisor may be retained to perform
property management services for the Company.
(b) If and to the extent that the Company shall request the
Advisor, or any director, officer, partner or employee of the Advisor,
to perform services for the Company other than those required under
this Agreement, the additional services, if performed, will be
compensated separately on terms to be agreed between that party and
the Company.
13. EXPENSES OF THE ADVISOR. Without regard to the amount of
compensation received under this Agreement by the Advisor, the Advisor
shall bear the following expenses:
(a) employment expenses of the officers and directors of the
Advisor;
(b) telephone, utilities, office furniture and furnishings and
other office expenses of the Advisor; and
(c) miscellaneous administrative and other expenses of the
Advisor not relating to the performance by the Advisor of its
functions hereunder.
14. EXPENSES OF THE COMPANY. Except as expressly otherwise provided in
this Agreement, the Company shall pay all its expenses not expressly
assumed by the Advisor, and without limiting the generality of the
foregoing it is specifically agreed that the following expenses of the
Company shall be paid by the Company and shall not be paid by the Advisor:
(a) the cost of money borrowed by the Company;
(b) taxes on income and taxes and assessments on real property
and all other taxes applicable to the Company;
(c) real estate brokerage and sales commissions with respect to
the purchase or sale of real estate assets of the Company payable to
real estate brokers who cooperate with the Advisor in such
transactions, and brokerage and sales commissions with respect to the
purchase or sale of Mortgage Investments payable to mortgage brokers
who cooperate with the Advisor in such transactions;
(d) legal, accounting, underwriting commissions and fees and any
other fees and costs, including due diligence, qualification of
securities for sale in various states, listing of securities on a
securities exchange, printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution, transfer,
registration, marketing and listing of the Company's securities,
including compensation of employees of the Advisor and direct expenses
of officers and employees of the Advisor and affiliates while directly
engaged in such activities on behalf of the Company;
(e) fees, salaries and other employment costs, taxes and expenses
paid to Directors, officers and employees of the Company, including
persons who may be employees of the Advisor, other than officers of
the Advisor, or of any company which controls, is controlled by or is
under common control with the Advisor, incurred with respect to and
allocable to the prudent operation and business of the Company, other
than as provided under Section 13(a) above.
(f) fees and expenses paid to independent contractors,
appraisers, consultants, managers and other agents retained by or on
behalf of the Company and expenses (including expenses for Persons who
may also be officers or employees of the Advisor) connected with the
acquisition, financing, refinancing, disposition and ownership of real
estate interests or other property, including insurance premiums,
legal services, brokerage and sales commissions, maintenance, repair
and improvement of property;
(g) expenses of maintaining and managing real estate interests;
(h) insurance as required by the Directors (including Directors'
liability insurance);
(i) the expenses of organizing, revising, amending, converting,
modifying or terminating the Company;
(j) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by
the Directors to holders of securities of the Company;
(k) all expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities,
including the cost of printing and mailing certificates for
securities, proxy solicitation materials and reports to holders of the
Company's securities;
(1) the cost of any accounting, statistical or bookkeeping
equipment necessary for the maintenance of the books and records of
the Company;
(m) transfer agent's, registrar's, dividend disbursing agent's,
dividend reinvestment plan agent's and indenture trustee's fees and
charges;
(n) legal, accounting and auditing fees and expenses not included
in (d) and (f) of this Section 14; and
(o) other ordinary and necessary expenses of the business and
affairs of the Company, other than those allocable to the Advisor
under Section 13 above.
The Company shall reimburse the Advisor or its affiliates for the cost
of rent, goods or materials furnished or advanced by them for the benefit
of the Company, and for services rendered for the benefit of the Company.
The Company's costs for services and goods provided by the Advisor to the
Company shall be based upon the cost to the Advisor and an allocable
portion of the actual compensation (including employment taxes and
benefits) of Persons involved plus an appropriate share of overhead
allocable to each Person who rendered services for the benefit of and on
the business affairs of the Company. The amounts charged to the Company by
the Advisor and its Affiliates shall not exceed those which the Company
would be required to pay to independent parties for comparable rent,
materials, goods or services.
15. REFUND BY ADVISOR. In addition to the provisions of Section 10
hereof, within 60 days after the end of any calendar year which begins
following the date the Company first commences operations after reaching
its minimum capital subscription amount, the Advisor will refund to the
Company the amount, if any, by which the Operating Expenses (as defined in
this Section 15) of the Company during such Calendar Year exceeded the
greater of (a) 2% of the Average Invested Assets or (b) 25% of Net Income
unless the Independent Directors of the Company shall have affirmatively
determined that due to unusual and non-recurring factors, such higher level
of Operating Expenses is justified for such year. For the purposes of this
Section 15, "Operating Expenses" during the Calendar Year means the
aggregate annual expenses of every character regarded as Operating Expenses
in accordance with generally accepted accounting principles, as determined
by independent accountants selected by the Directors, including regular
compensation payable to the Advisor, excluding, however, the following: (i)
the cost of money borrowed by the Company; (ii) taxes on income and taxes
and assessments on real property and all other taxes applicable to the
Company; (iii) expenses of acquiring, financing, refinancing, disposing of,
maintaining, managing and owning real estate equity interests or other
property (including the costs of legal services, brokerage and sales
commissions, maintenance, repair and improvement of property); (iv)
insurance as required by the Directors (including any Directors' liability
insurance); (v) expenses of organizing, revising, amending, converting, or
terminating the Company; (vi) expenses connected with payments of dividends
or interest or distributions in cash or any other form made or caused to be
made by the Directors to holders of securities of the Company; (vii) all
expenses connected with communications to holders of securities of the
Company and the other bookkeeping and clerical work necessary in
maintaining relations with holders of securities of the Company, including
the cost of printing and mailing certificates for securities and proxy
solicitation materials and reports to holders of securities of the Company;
(viii) transfer agent's, registrar's, dividend disbursing agent's, warrant
agent's, dividend reinvestment plan agent's and indenture trustee's fees
and charges, (ix) other legal, accounting and auditing fees and expenses;
and (x) non-cash expenditures (including depreciation, amortization and bad
debt reserve).
16. OTHER ACTIVITIES. Nothing in this Agreement shall prevent the
Advisor or any of its officers, directors or employees or any of its
affiliates from engaging in other business activities related to real
estate investments, from making investments permitted to the Company by the
Company's Bylaws or from acting as advisor to any other person or entity
even though having investment policies similar to the Company (including
another real estate investment trust). The Advisor and its officers,
directors or employees and any of its Affiliates shall be free from any
obligation to present to the Company any particular investment opportunity
which comes to the Advisor or such persons, regardless of whether such
opportunity is within the Company's investment policies, provided, that the
Advisor will give due consideration to the investment objectives and
financial capabilities of the Company in determining whether to present an
investment opportunity to the Company or to another entity for which the
Advisor provides similar services.
17. TERM: TERMINATION OF AGREEMENT. This Agreement shall continue in
force through December 31, 1997, and thereafter it may be renewed annually,
subject to the approval thereof by a majority of the Independent Directors.
Notice of renewal shall be given in writing by the Directors to the Advisor
not less than 60 days before the expiration of this Agreement or of any
extension of this Agreement. Notwithstanding any other provision to the
contrary, this Agreement may be terminated for any reason upon 60 days'
written notice by the Company to the Advisor or 120 days' written notice by
the Advisor to the Company, in the former case by the action of the
Directors, the Independent Directors or a majority of the shareholders of
the Company.
18. AMENDMENTS. This Agreement shall not be changed, modified,
terminated or discharged in whole or in part except by an instrument in
writing signed by both parties, or their respective successors or assigns,
or otherwise as provided in this Agreement.
19. ASSIGNMENT. This Agreement shall not be assignable by the Advisor
without the consent of the Company, except an assignment to an Affiliate of
the Advisor, or to a corporation, association, trust or other successor
organization which may take over the property and carry on the affairs of
the Advisor. A proper assignment or any other assignment of this Agreement
by the Advisor shall bind the assignee under this Agreement and by the
terms of the assignment in the same manner as the Advisor is bound. This
Agreement shall not be assignable by the Company without the consent of the
Advisor, except in the case of assignment by the Company to a corporation,
association, trust or other organization which is a successor to the
Company. The successor shall be bound under this Agreement and by the terms
of said assignment in the same manner as the Company is bound.
20. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Directors,
this Agreement shall be and become terminated immediately upon written
notice of termination from the Directors to the Advisor if any of the
following events shall occur:
(a) If the Advisor shall violate any provision of this Agreement,
and after notice of the violation shall not have cured the default
within thirty (30) days or begun action within thirty (30) days to
cure the default which shall be completed with reasonable diligence;
or
(b) If the Advisor shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court
of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Advisor or of all or substantially all of
its property by reason of the foregoing, or approving any petition
filed against the Advisor for its reorganization, and the adjudication
or order shall remain in force or unstayed for a period of thirty (30)
days; or
(c) If the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver for itself
or for all or substantially all its property, or shall make a general
assignment for the benefit of its creditors, or shall admit in writing
its inability to pay its debts generally as they become due.
The Advisor agrees that if any of the events specified in
subsections (b) and (c) of this Section 20 shall occur, it will give
written notice of the event to the Directors within seven (7) days
after the occurrence of the event.
21. ACTION UPON TERMINATION. From and after the effective date of
termination of this Agreement, pursuant to Sections 17, 19 or 20 herein,
the Advisor shall not be entitled to compensation for further services
performed after the date of termination, but shall be paid all compensation
accruing to the date of termination, including compensation which may have
been earned but deferred.
The Advisor shall promptly upon termination:
(a) pay over to the Company all moneys collected and held for the
account of the Company pursuant to this Agreement, after deducting any
accrued compensation and reimbursement for its expenses to which it is
then entitled;
(b) deliver to the Directors a full accounting, including a
statement showing all payments collected by it and a statement of all
moneys held by it, covering the period following the date of the last
accounting furnished to the Directors;
(c) deliver to the Directors all property and documents of the
Company then in the custody of the Advisor except for copies of
documents, which the Advisor may keep; and
(d) cooperate with the Directors to provide an orderly management
transition.
22. CHANGE OF NAME. Upon termination of this Agreement by either
party, the Directors shall forthwith cause the name of the Company to be
changed to a name not containing the name "Franklin" or any approximations
or abbreviations of that name and sufficiently dissimilar to that name as
to be unlikely to cause confusion with that name.
23. INDEMNIFICATION. The Advisor, its officers, directors,
shareholders, employees, agents, subsidiaries and assigns shall be
indemnified by the Company against any liability to the Company or its
shareholders resulting from errors in judgment or other acts or omissions,
whether or not disclosed, unless a court of competent jurisdiction
determines that the liabilities or losses resulted from fraud, negligence,
misconduct or other breach of fiduciary duty by that Person.
24. MISCELLANEOUS. The Advisor assumes no responsibility under this
Agreement other than to perform the services called for in good faith, and
shall not be responsible for any action of the Directors in following or
declining to follow any advice or recommendations of the Advisor. Neither
the Advisor nor its shareholders, directors, officers or employees shall be
liable to the Company, the Directors, the holders of securities of the
Company or to any successor or assigns of the Company except by reason of
acts constituting the negligent performance of their duties.
25. NOTICES. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing unless some other
method of giving such notice, report or other communication is accepted by
the party to whom it is given, and shall be given by being delivered at the
following addresses:
The Directors and/or the Company:
Franklin Select Realty Trust
777 Mariners Island Boulevard
San Mateo, California 94403-7777
The Advisor:
Franklin Properties, Inc.
777 Mariners Island Boulevard
San Mateo, California 94403-7777
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings have been inserted for convenience
of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
27. GOVERNING LAW. The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the State of California as
they apply to agreements solely among California residents to be executed
and performed entirely in California.
28. EXECUTION. This instrument is executed and made on behalf of the
Company by an officer who is a Director of the Company, not individually
but solely as an officer pursuant to the Company's Bylaws and the
obligations under this Agreement are not binding upon, nor shall resort be
had to the private property of, any of the Directors, shareholders,
officers, employees or agents of the Company personally, but bind only the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
FRANKLIN SELECT REALTY TRUST
By __________________________
President
ADVISOR:
FRANKLIN PROPERTIES, INC.
By __________________________
President
SECURED LINE OF CREDIT LOAN AGREEMENT
By and Between
FRANKLIN SELECT REALTY TRUST,
as Borrower
and
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Lender
Dated as of December 10, 1996
LINE OF CREDIT LOAN AGREEMENT
(Secured)
This Line of Credit Loan Agreement (the "Agreement") dated as of
December 10, 1996, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION (the "Bank") and FRANKLIN SELECT REALTY TRUST, a California
corporation (the "Borrower").
WHEREAS, Bank has agreed to provide a line of credit to Borrower
on the terms and conditions set forth herein. Subject to the terms and
conditions of this Agreement, the line of credit is to be revolving and is to
be secured by collateral.
NOW, THEREFORE, in consideration for the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. DEFINITIONS
1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined; other terms are defined
elsewhere in this Agreement):
"ACCOUNTANTS" means Coopers & Lybrand LLP, or any other "big six"
accounting firm or other firm of certified public accountants of national
standing selected by Borrower and acceptable to the Bank.
"AFFILIATE" means, as to any Person, (a) any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person; or (b) any Person five percent (5%) or
more of the equity interest of which is held beneficially or of record by
such Person. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of the other Person, whether through the ownership of voting
securities, partnership or membership interests, by contract, by family
relationship or otherwise.
"APPRAISAL" means a written appraisal of the market value of a Real
Property in its condition existing as of the date of such appraisal
prepared by an independent MAI appraiser acceptable to the Bank in its sole
discretion (which may be the Bank's in-house appraisal department), subject
to the Bank's customary independent appraisal requirements and prepared in
compliance with all Requirements of Law applicable to the Bank, including
FIRREA.
"APPRAISED VALUE" means, as to any Real Property, the market value of
such Real Property as reflected in the then most recent Appraisal of such
Real Property, as the same may have been adjusted by the Bank based upon
its internal review of such Appraisal.
"BANKING DAY" has the meaning given to such term in the Note.
"CLOSING DATE" means the date on which all conditions precedent to the
Bank's obligations set forth in Section 6 shall have been satisfied as
determined by the Bank in its sole distinction.
"CODE" means the Internal Revenue Code of 1986, as amended from time
to time.
"COLLATERAL" means, collectively, the Real Property, the Personal
Property and any other real or personal property in or upon which a Lien is
granted in favor of the Bank, or as to which an assignment for security
purposes is made in favor of the Bank, under this Agreement, the Deeds of
Trust or any other Loan Document.
"COMMITMENT" means the Bank's agreement to make advances to the
Borrower under the Loan in accordance with the terms and conditions of this
Agreement in an aggregate outstanding amount not to exceed the Commitment
Amount.
"COMMITMENT AMOUNT" means Twenty-Five Million Dollars ($25,000,000).
"COMPLIANCE CERTIFICATE" means a certificate in the form of EXHIBIT C
to this Agreement duly completed and executed by a Responsible Officer in
accordance with this Agreement.
"CONTRACTUAL OBLIGATION," as applied to any Person, means any
provision of any securities issued by that Person or any indenture,
mortgage, deed of trust, lease, contract, undertaking, document or
instrument to which that Person is a party or by which it or any of its
properties is bound, or to which it or any of its properties is subject.
"DEBT SERVICE" means, for any period, Interest Expense for such period
PLUS all regularly scheduled principal payments due and payable during such
period on all of the Borrower's Indebtedness.
"DEEDS OF TRUST" means, collectively, the Deeds of Trust with
Assignments of Rents, Security Agreements and Fixture Filings executed,
acknowledged and delivered by the Borrower in favor of the Bank pursuant to
this Agreement and encumbering the Real Property.
"EBITDA" means, for any period, (a) the sum of (i) net income, (ii)
depreciation and amortization expense as shown on the Borrower's financial
statements, (iii) Interest Expense, (iv) taxes imposed by any jurisdiction
upon the Borrower's net income, (v) losses on sales of assets and other
non-recurring expenses, LESS (b) (i) interest income, (ii) dividend income,
and (iii) gains on sales of assets and other non-recurring income, all as
determined on a consolidated basis for the Borrower in accordance with
GAAP.
"EVENT OF DEFAULT" means those events so designated in Section 11 of
this Agreement.
"EXCESS BORROWING CONDITION" has the meaning given to such term in
Section 2.5 of this Agreement.
"EXTENSION OPTION" means the Borrower's right to extend the Maturity
Date in accordance with the provisions of Section 8.1 of this Agreement.
"FAIRWAY CENTER PROPERTY" means that certain improved real property
owned by the Borrower, commonly known as 1800 East Imperial Highway, Brea,
California, and more particularly described in EXHIBIT A to this Agreement.
"FIRREA" means the Financial Institutions Recovery, Reform and
Enforcement Act of 1989, as amended from time to time.
"FUNDS FROM OPERATIONS" means, for any period, the Borrower's net
income (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, PLUS depreciation and
amortization expense, and after adjustments for unconsolidated partnerships
and joint ventures, if any. (Adjustments for unconsolidated partnerships
and joint ventures shall be calculated to reflect funds from operations on
the same basis.)
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board, or in such
other statements by such other entity as may be in general use by
significant segments of the accounting profession, which are applicable to
the circumstances as of the date of determination.
"GOVERNMENTAL AUTHORITY" means any federal, state or local
governmental or quasi-governmental agency, authority, board, bureau,
commission, department, instrumentality or public body, court,
administrative tribunal or public utility.
"GUARANTEED OBLIGATIONS" means, as applied to any Person, any
Indebtedness or other Contractual Obligation or liability, contingent or
otherwise, of another Person in respect of which that Person is liable,
including, without limitation, any such indebtedness, obligation or
liability directly or indirectly guaranteed, endorsed (otherwise than for
collection or deposit in the ordinary course of business), co-made,
discounted or sold with recourse by that Person, or in respect of which
that Person is otherwise directly or indirectly liable, including in
respect of any partnership in which that Person is a general partner,
Contractual Obligations (contingent or otherwise) arising through any
agreement to purchase, repurchase or otherwise acquire such indebtedness,
obligation or liability or any security therefor, or to provide funds for
the payment or discharge thereof (whether in the form of loans, advances,
stock purchases, capital contributions or otherwise), or to maintain
solvency, assets, level of income, or other financial condition, or to make
payment other than for value received.
"HAZARDOUS MATERIALS" means (a) any chemical, material or substance
defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous waste",
"restricted hazardous waste" or "toxic substances" or words of similar
import under any applicable local, state or federal law or under the
regulations adopted or publications promulgated pursuant thereto,
including, without limitation, Hazardous Materials Laws; (b) any oil,
petroleum, petroleum derived substance or petroleum products; any flammable
substances or explosives; any radioactive materials; any hazardous wastes
or substances; any toxic wastes or substances or any other similar
materials or pollutants; (c) asbestos, urea formaldehyde or polychlorinated
biphenyls; and (d) any other chemical, material or substance, exposure to
which is prohibited, limited or regulated by any Governmental Authority or
which poses a hazard to the health and safety of the owners, occupants or
any other Persons occupying affected property or any property abutting any
affected property.
"HAZARDOUS MATERIALS LAWS" means all federal, state and local
statutes, ordinances, rules and regulations relating to environmental
matters, including, without limitation, those relating to fines, orders,
injunctions, penalties, damages, contribution, cost recovery, compensation,
losses or injuries resulting from the release of Hazardous Materials and to
the generation, use, storage, transportation or disposal of Hazardous
Materials, in any manner applicable to Borrowers or any of the Properties,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (49 U.S.C. ss. 9601 ET SEQ.), the Hazardous
Material Transportation Act (49 U.S.C. ss. 1801 ET SEQ.), the Resource
Conservation and Recovery Act (42 U.S.C. ss. 6901 ET SEQ.), the Federal
Water Pollution Control Act (33 U.S.C. ss. 1251 ET SEQ.), the Clean Air Act
(42 U.S.C. ss. 7401 ET SEQ.), the Toxic Substances Control Act (15 U.S.C.
ss. 2601 ET SEQ.), the Occupational Safety and Health Act (29 U.S.C. ss.
651 ET SEQ.), and the Emergency Planning and Community Right-to-Know Act
(42 U.S.C. ss. 11001 ET SEQ.), each as amended or supplemented, and any
analogous future or present local, state and federal statutes, ordinances,
rules and regulations promulgated pursuant thereto, each as in effect as of
the date of determination.
"IMPUTED LOAN MAXIMUM AMOUNT" means the principal amount of the loan
for which the ratio of the Net Operating Income from all Real Property for
the twelve (12) month period immediately preceding the Closing Date or any
other date for which the Bank shall make such determination to Annual Debt
Service would be equal to 1.35:1, where (a) the per annum interest rate on
such loan were equal to the greater of (i) nine percent (9%) per annum, or
(ii) two and fifty one-hundredths percent (2.50%) per annum, plus the
interest rate as of or about the Closing Date or any other date for which
the Bank shall make such determination on U.S. Treasury securities having a
maturity of ten (10) years, as determined by the Bank in its sole
discretion; (b) such loan provided for monthly principal and interest
payments based upon an amortization of the principal amount thereof over a
twenty-five (25) year period, with interest thereon at the interest rate
specified in the foregoing clause (a); and (c) "Annual Debt Service" means
the principal and interest payments required under such loan for a twelve
(12) month period. The determination of the Imputed Loan Maximum Amount
shall be made by the Bank in its sole discretion as of the Closing Date, as
of each of the dates provided for in Section 9.4(f) below and upon the
occurrence of a Reappraisal Event (as defined below).
"INDEBTEDNESS", as applied to any Person means (a) all indebtedness,
obligations or other liabilities for borrowed money, (b) all indebtedness,
obligations or other liabilities evidenced by notes, bonds, debentures or
other similar instruments, (c) all reimbursement obligations and other
liabilities with respect to letters of credit, banker's acceptances, surety
bonds or similar instruments issued for such Person's account, (d) all
obligations to pay the deferred purchase price of property or services, (e)
all obligations in respect of capital leases, (f) all Guaranteed
Obligations, and (g) all indebtedness, obligations or other liabilities of
such Person or others secured by a Lien on any asset of such Person,
whether or not such indebtedness, obligations or liabilities are assumed
by, or are a personal liability of, such Person (including, without
limitation, the principal amount of any assessment or similar indebtedness
encumbering any asset).
"INTEREST EXPENSE" means, for any period, total interest expense of
the Borrower calculated in accordance with GAAP.
"LEASE" means any lease, rental agreement, occupancy agreement or
other agreement pursuant to which any Person is provided with a right to
occupy or possess all or any portion of a Real Property.
"LEVERAGE" means, at any time, the ratio of (a) Total Liabilities as
of such date, to (b) Total Capital as of such date.
"LIBOR SPREAD" means, with respect to any amount outstanding under the
Loan which bears interest at a rate based upon LIBOR, (a) if the ratio of
the Commitment Amount to the aggregate Appraised Value of the Real Property
as of the Closing Date shall exceed fifty percent (50%), 1.90%, and (b) if
the ratio of the Commitment Amount to the aggregate Appraised Value of the
Real Property as of the Closing Date shall be equal to or less than fifty
percent (50%), 1.75%.
"LIEN" means any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, security interest, encumbrance,
preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever, including without limitation
any conditional sale or other title retention agreement, the interest of a
lessor under a capital lease, any financing lease having substantially the
same economic effect as any of the foregoing, and the filing of any
financing statement or document having similar effect (other than a
financing statement filed by a "true" lessor pursuant to Section 9408 of
the Uniform Commercial Code) naming the owner of the asset to which such
Lien relates as debtor, under the Uniform Commercial Code or other
comparable law of any jurisdiction.
"LOAN" means the secured revolving credit facility and, if the
Borrower exercises the Term Out Option in accordance with this Agreement,
term loan in the Commitment Amount which the Bank has agreed to provide to
the Borrower pursuant to this Agreement.
"LOAN AVAILABILITY" means, at any time, (a) the lowest of (i) the
Commitment Amount, (ii) the Real Property Collateral Value, and (iii) the
Imputed Loan Maximum Amount, less (b) the sum of any Termed Loan Amounts.
"MAJOR LEASE" means any Lease covering twenty-five percent (25%) or
more of the net rentable area of the improvements included in any Real
Property.
"MATERIAL ADVERSE EFFECT" means, with respect to a Person, a material
adverse effect upon the condition (financial or otherwise), operations,
performance or properties of such Person. The phrase "has a Material
Adverse Effect" or "will result in a Material Adverse Effect" or words
substantially similar thereto shall in all cases be intended to mean "has
resulted, or will or could reasonably be anticipated to result, in a
Material Adverse Effect", and the phrase "has no (or does not have a)
Material Adverse Effect" or "will not result in a Material Adverse Effect"
or words substantially similar thereto shall in all cases be intended to
mean "does not or will not or could not reasonably be anticipated to result
in a Material Adverse Effect".
"MATURITY DATE" means December 1, 1998, as the same may be extended in
accordance with this Agreement.
"MINORITY INTEREST" means the interests held by other Persons and
shown as minority interest on the Borrower's financial statements prepared
in accordance with GAAP.
"NDA AGREEMENTS" means the Non-Disturbance and Attornment Agreements
to be executed by the tenants under the Required Leases as a condition to
the Bank's obligations, as provided in this Agreement.
"NET OPERATING INCOME" means, for any Real Property at any time, the
actual cash-basis net operating income of such Real Property for the period
in question, determined on a basis consistent with the operating statements
provided by the Borrower to the Bank prior to the Closing Date, LESS an
amount equal to three percent (3%) of gross rental revenue for such period
for capital expense.
"NORTHPORT PROPERTY" means the improved real property owned by the
Borrower, commonly known as 4545 Cushing Road, 45635 Northport Loop East
and 45865 Northport Loop East, Fremont, California, and more particularly
described in EXHIBIT A attached hereto.
"NOTE" means the Promissory Note (Secured by Deeds of Trust) executed
and delivered by the Borrower to the Bank pursuant to this Agreement.
"PERSON" means any natural person, corporation, limited partnership,
general partnership, joint stock company, limited liability company, joint
venture, association, company, trust, bank, trust company, land trust,
business trust or other organization, whether or not a legal entity, or any
Governmental Authority.
"PERSONAL PROPERTY" means any tangible and intangible personal
property of the Borrower in which the Bank shall be granted a Lien pursuant
to the Deeds of Trust or any of the other Loan Documents.
"POTENTIAL DEFAULT" means an event or condition which, with the giving
of notice or the lapse of time, or both, would constitute an Event of
Default if that event or condition were not cured within any applicable
cure period.
"REAL PROPERTY" means, collectively, the Fairway Center Property, the
Northport Property and the Shores Property, all of which, if accepted by
the Bank in its sole discretion, shall be subject to the Lien of a Deed of
Trust granted by Borrower in favor of the Bank pursuant to this Agreement.
"REAL PROPERTY COLLATERAL VALUE" means an amount equal to sixty
percent (60%) multiplied by the aggregate Appraised Value of all Real
Property as of the Closing Date or any other date for which the Bank shall
make such determination.
"REQUIRED LEASES" means each Lease for which the Bank shall require
the tenant thereunder to execute an NDA Agreement as a condition to the
Bank's obligations as provided in this Agreement, which Leases are listed
on EXHIBIT D hereto.
"REQUIREMENTS OF LAW" mean, as any Person, all statutes, ordinances,
rules and regulations of any Governmental Authority applicable to such
Person or its property; any development agreement, subdivision agreement,
improvement agreement, loan agreement, indenture or other agreement or
undertaking with a Governmental Authority to which such Person is a party
or otherwise binding upon such Person; and the provisions of any license,
permit or approval issued by a Governmental Authority and applicable to
such Person or its properties.
"RESPONSIBLE OFFICER" means (a) the chief executive officer or the
president of the Borrower; (b) with respect to compliance with financial
covenants, the chief financial officer of the Borrower; or (c) any other
officer of the Borrower approved as a "Responsible Officer" by the Bank.
"SHORES PROPERTY" means the improved real property owned by the
Borrower, commonly known as 1 and 3 Twin Dolphin Drive and 100 Marine World
Parkway, Redwood City, California, and more particularly described in
EXHIBIT A attached hereto.
"TANGIBLE NET WORTH" means, at any time, shareholders' equity, as
shown on the Borrower's financial statements prepared in accordance with
GAAP, MINUS intangible assets.
"TERM OUT OPTION" means the Borrower's right to convert all or a
portion or portions of the line of credit into a term loan in accordance
with the provisions of Section 8.2 of this Agreement.
"TERMED LOAN AMOUNT" means each portion of the Loan for which the
Borrower shall exercise the Term Out Option in accordance with the
provisions of Section 8.2 of this Agreement.
"TOTAL ASSETS" means, at any time, the book value (net of any
applicable reserves) of all tangible assets of the Borrower as shown on its
most recent quarterly financial statements prepared in accordance with
GAAP.
"TOTAL CAPITAL" means, at any time, an amount equal to the sum of (a)
Total Liabilities as of such date, PLUS (b) Tangible Net Worth as of such
date, PLUS (c) Minority Interest as of such date.
"TOTAL LIABILITIES" means (a) all liabilities of the Borrower shown on
the balance sheet of the Borrower prepared in accordance with GAAP, PLUS
(b) all Guaranteed Obligations and all contingent liabilities of the
Borrower that would be disclosed in accordance with GAAP.
"UNSECURED INDEMNITY AGREEMENT" means the Indemnity Agreement
(Borrower) to be executed by the Borrower in favor of the Bank pursuant to
this Agreement.
"UPREIT" means any limited partnership formed by the Borrower as
general partner and other Persons to own and operate the Real Property, and
to which the Borrower shall have the right to transfer title to the Real
Property in accordance with the provisions of Section 8.3 of this
Agreement.
1.2 COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of
periods of time from a specified date to a later specified date, the word "from"
means "from and including" and the words "to" and "until" shall mean "to and not
including." Periods of days referred to in this Agreement shall be counted in
calendar days unless Banking Days are expressly prescribed.
1.3 ACCOUNTING TERMS. Any accounting terms used in this Agreement which are
not specifically defined herein shall have the meanings customarily given to
such terms in accordance with GAAP.
2. LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) Subject to the terms and conditions contained in this
Agreement, the Bank hereby agrees to make advances under the Loan to the
Borrower from time to time during the Availability Period (as defined below)
in an aggregate principal amount not to exceed at any time the Loan
Availability.
(b) Except as otherwise provided in this Agreement, the Loan is
a revolving line of credit. During the Availability Period, subject to the
provisions of this Agreement and the other Loan Documents (as defined below),
the Borrower may from time to time repay principal amounts and reborrow such
principal amounts.
(c) Each advance must be for at least One Million Dollars
($1,000,000), or for the amount of the remaining available under the line of
credit, if less.
2.2 AVAILABILITY PERIOD.
The line of credit is available (the "Availability Period")
between the Closing Date and the Maturity Date. The Bank shall have no
obligation to make advances under the line of credit following the occurrence
and during the continuance of an Event of Default or Potential Default.
2.3 INTEREST RATE.
Borrower is executing the Note in the Commitment Amount
evidencing the Loan and payable to the Bank. The Note sets forth the
interest rates, the payment terms and certain other terms and conditions
applicable to the Loan.
2.4 LOAN DOCUMENTS.
The "Loan Documents" are the documents indicated below, each
dated as of the date of this Agreement unless indicated otherwise. A
capitalized term used in this Agreement but not defined herein has the
meaning given in the other Loan Documents.
(a) This Agreement;
(b) The Note;
(c) The Deeds of Trust;
(d) State of California Uniform Commercial Code Financing
Statement Form UCC-1, executed by Borrower as debtor;
(e) Unsecured Indemnity Agreement;
(f) NDA Agreements executed by the tenants under the Required
Leases; and
(g) Corporate Resolution to borrow certified by the Corporate
Secretary of the Borrower. The Corporate Resolution shall also contain a
Certificate of Incumbency for the authorized signing officers, containing
their specimen signatures and certified by the Corporate Secretary.
2.5 EXCESS BORROWING CONDITION.
The Borrower agrees not to permit the outstanding principal
balance of the Loan to exceed the lowest of (i) the Commitment Amount, (ii)
the Real Property Collateral Value or (iii) the Imputed Loan Maximum Amount.
If at any time and for any reason the outstanding principal balance of the
Loan shall exceed such amount ("Excess Borrowing Condition"), the Borrower
shall cause such Excess Borrowing Condition to be eliminated not later than
three (3) days following the date of written notice thereof from the Bank to
the Borrower, by repaying to the Bank an amount on account of the Loan
sufficient to eliminate such Excess Borrowing Condition. The failure by the
Borrower to do so shall constitute an Event of Default without further notice
or opportunity to cure hereunder. No further advances under the line of
credit shall be permitted so long as such Excess Borrowing Condition shall
continue to exist. Nothing contained in this section shall excuse the
Borrower's compliance with all terms, conditions, covenants and other
obligations imposed upon the Borrower under this Agreement or the other Loan
Documents during the period of any Excess Borrowing Condition, nor in any
manner condition or impair the Bank's rights with respect to any such breach
thereof by the Borrower.
3. FEES, EXPENSES
3.1 FEES.
(a) COMMITMENT FEE. The Borrower agrees to pay to the Bank a
fee equal to 0.5% of the Commitment Amount, payable in advance. This fee is
due on the Closing Date and shall be nonrefundable.
(b) UNUSED COMMITMENT FEE. The Borrower agrees to pay to the
Bank a fee on any difference between the Commitment Amount and the amount of
credit it actually uses, determined by the weighted average Loan balance
maintained during the specified period. The fee will be calculated at 0.25%
per year. This fee is due quarterly in arrears and on the date of the
expiration of the Availability Period.
3.2 EXPENSES AND COSTS.
(a) Borrower shall pay all reasonable costs and expenses
incurred by Bank in connection with the making, disbursement and
administration of the Loan, and in the exercise of any of Bank's rights or
remedies under the Loan Documents. Such costs and expenses include title
insurance, recording and escrow charges, fees for Appraisals, environmental
services, legal fees and expenses of Bank's counsel and any other reasonable
fees and costs for services, regardless of whether such services are
furnished by Bank's employees or by independent contractors. Borrower
acknowledges that the fees payable to Bank as provided above do not include
amounts payable by Borrower under this Section 3.2.
(b) The Borrower agrees to indemnify the Bank from and hold it
harmless against any transfer taxes, documentary and mortgage taxes,
assessments or charges imposed by any governmental authority by reason of the
execution, delivery and performance of the Loan Documents, the Loan and
security therefor. Borrower's obligations under this Section 3.2 shall
survive payment of the Loan and assignment of any rights hereunder.
4. REAL PROPERTY VALUE
4.1 ACCEPTANCE, DETERMINATIONS.
(a) The decision of whether or not the Bank will accept any
Real Property as Collateral shall be made by the Bank in its sole
discretion. The Borrower shall have the right from time to time to propose
additional real property as collateral for the Loan. The decision of whether
to accept such additional real property, and, if the Bank decides to accept
such additional real property, the terms and conditions of the Bank's
acceptance, shall be made by the Bank in its sole discretion.
(b) All other determinations to be made with respect to the
Real Property, including, without limitation, the determinations of the Real
Property Collateral Value, the Imputed Loan Maximum Amount, the Appraised
Values and the LIBOR Spread, shall be made by the Bank in its sole
discretion. Without limiting the foregoing, the Real Property Collateral
Value as of the Closing Date or any other date shall be established on the
basis of the Appraised Value of the Real Property as of such date, as
determined by the Bank in its sole discretion.
4.2 ADDITIONAL VALUE DETERMINATIONS.
(a) In addition to the Bank's determination of the Appraised
Value of the Real Property as of the Closing Date as provided above, the Bank
shall have the right to redetermine the Appraised Value of the Real Property
on the basis of new Appraisals of the Real Property or any portion thereof
obtained by the Bank under each of the following circumstances: (i) upon any
exercise by Borrower of the Term Out Option, if the value date used in any of
the most recent Appraisals of the Real Property is more than twelve (12)
months prior to such date; (ii) upon the Borrower's exercise of the Extension
Option, if the value date used in any of the most recent Appraisals of the
Real Property is more than twelve (12) months prior to such date; (iii) if
necessary in order to enable the Bank to comply with any Requirements of Law
applicable to the Bank, including, without limitation, FIRREA; or (iv) upon
the occurrence of a Reappraisal Event (as defined below), provided that in
such event, the Bank shall have the right to obtain new Appraisals only on
(A) the Real Property subject to the Reappraisal Event, and (B) any other
Real Property if the value date used in the most recent Appraisal of such
Real Property is more than twelve (12) months prior to the date the Bank
receives written notice of the Reappraisal Event.
(b) Subject to subparagraph (c) below, upon the Bank's
redetermination of the Appraised Value of the Real Property under
subparagraph (a) above, the Loan Availability shall be adjusted, if
necessary, on the basis of the resulting Real Property Collateral Value. If
any change in the Real Property Collateral Value shall cause the occurrence
of an Excess Borrowing Condition, the Borrower shall cause such excess
Borrowing Condition to be eliminated as provided in Section 2.5 above.
(c) Upon the occurrence of a Reappraisal Event with respect to
any Real Property, if the Bank shall require that the Appraised Value of such
Real Property and/or any other Real Property be redetermined under
subparagraph (a) above, and if the Bank shall be prevented from causing such
Appraised Value to be redetermined within forty-five (45) days following the
Bank's notice thereof to the Borrower through no fault of the Bank, then
effective as of the expiration of such 45-day period and until the date on
which such Appraised Value shall have been redetermined by the Bank in its
sole discretion, (i) for purposes of the Real Property Collateral Value, the
Real Property subject to the Reappraisal Event shall have an Appraised Value
of zero, and (ii) for purposes of the Imputed Loan Maximum Amount, the Net
Operating Income from the Real Property subject to the Reappraisal Event
shall not be included. The Bank shall redetermine the Real Property
Collateral Value and the Imputed Loan Maximum Amount as of the date of such
notice by the Bank to the Borrower, and the Loan Availability shall be
adjusted, if necessary, to account for any change in the Real Property
Collateral Value and/or the Imputed Loan Maximum Amount. The Borrower shall
continue to have the right to request advances under the Loan following a
Reappraisal Event, subject to the adjusted Loan Availability. If any change
in the Real Property Collateral Value and/or Imputed Loan Maximum Amount
shall cause the occurrence of an Excess Borrowing Condition, the Borrower
shall cause such Excess Borrowing Condition to be eliminated as provided in
Section 2.5 above. Upon the Bank's redetermination of the Appraised Value of
the Real Property subject to the Reappraisal Event and, if applicable, other
Real Property under subparagraph (a) above, the Bank shall also redetermine
the Real Property Collateral Value by using the new Appraised Value, and the
Imputed Loan Maximum Amount by including the Net Operating Income from the
Real Property subject to the Reappraisal Event. The Loan Availability shall
then be adjusted again, if necessary, and the Borrower shall be entitled to
request advances under the Loan, subject to the adjusted Loan Availability.
(d) Upon the occurrence of a Reappraisal Event, the Borrower
may propose to provide the Bank with other real property or other collateral
("Replacement Collateral") for the Loan in replacement of the Real Property
subject to such Reappraisal Event. Any such Replacement Collateral shall be
acceptable to the Bank in its sole discretion, and the Bank's acceptance
thereof shall be subject to a satisfactory Appraisal and such other
conditions as the Bank may require, including, without limitation, that the
Bank receive a first priority Lien on such Replacement Collateral as security
for the Loan.
(e) For the purposes of this Agreement, "Reappraisal Event"
shall mean the occurrence of any one of the following events or circumstances
with respect to any Real Property: (i) a major casualty or a taking in
condemnation or under threat of condemnation; (ii) a tenant under a Major
Lease shall become insolvent or shall otherwise default under its Lease; or
(iii) the discovery of Hazardous Materials in, on, under or about the Real
Property or the soils or groundwaters thereof, and the Bank's determination,
in its sole discretion, that the costs of investigation, characterization,
remediation and/or monitoring of such Hazardous Materials in compliance with
Hazardous Materials Laws would equal or exceed twenty-five percent (25%) of
the then-current Appraised Value of such Real Property.
5. DISBURSEMENTS, PAYMENTS, COSTS
5.1 REQUESTS FOR CREDIT.
(a) BORROWING NOTICE. Each request by the Borrower for an
advance under the line of credit shall be made by irrevocable written notice
of Borrower (including notice via facsimile confirmed by a mailed copy)
pursuant to a Borrowing Notice in the form attached hereto as EXHIBIT B as
follows:
(i) Each Borrowing Notice shall contain a certification
from a Responsible Officer or an authorized representative of the
Borrower that (A) no Event of Default or Potential Default, after
giving effect to the requested borrowing, will exist, (B) the aggregate
outstanding balance of the line of credit after giving effect to the
requested borrowing will not exceed the Loan Availability, and (C) the
proceeds from the requested borrowing will be used only for purposes
permitted under the Agreement. The truth and accuracy of the
certification made in the Borrowing Notice shall be a condition
precedent to Bank's obligation to make to the Borrower the advance
requested thereunder.
(ii) Each Borrowing Notice shall be submitted to and
received by Bank prior to 9:00 a.m. (California time) on the Banking
Day specified as the borrowing date.
(iii) The Borrower hereby authorizes the Responsible
Officers whose names and specimen signatures are set forth below to
execute and deliver to the Bank Borrowing Notices in accordance with
this Agreement:
Responsible Officers
AUTHORIZED REPRESENTATIVES SPECIMEN SIGNATURES
David P. Goss _____________________________
Mark A. TenBoer _____________________________
(b) ADDITIONAL CONDITIONS TO DISBURSEMENT. Each advance by the
Bank under the line of credit, including the first one, shall be conditioned
upon the Bank's receipt of such additional documents and information as the
Bank may require, in form and content satisfactory to Bank.
5.2 DISBURSEMENT AND PAYMENT RECORDS.
Each disbursement by the Bank and each payment by the Borrower
will be evidenced by records kept by the Bank.
5.3 AUTHORIZATION.
(a) The Bank may honor telefax or mailed instructions for
advances or repayments (or for the designation of any optional interest rates
that may be permitted by the Note) given by any one of the individuals
authorized to sign Loan Documents on behalf of the Borrower, or any other
individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be
withdrawn from the Borrower's account number 14220-01705 ("Account"), or such
other of the Borrower's accounts with the Bank as designated in writing by
the Borrower.
(c) The Borrower indemnifies and releases the Bank (including
its officers, employees, and agents) from all liability, loss, costs, claims
and damages in connection with any act resulting from any instructions Bank
reasonably believes are made by any individual authorized by the Borrower to
give such instructions. This indemnity and release shall survive this
Agreement's termination.
5.4 DIRECT DEBIT TO LINE OF CREDIT.
(a) The Borrower agrees that the Bank may create advances under
the line of credit to pay interest and any fees that are due under the Loan
Documents.
(b) The Bank will create such advances on the dates the
payments become due. If a due date does not fall on a Banking Day, the Bank
will create the advance on the first Banking Day following the due date.
(c) If the creation of an advance under the line of credit
causes an Excess Borrowing Condition, the Borrower shall immediately cause
the Excess Borrowing Condition to be eliminated.
5.5 PAYMENTS.
Borrower hereby authorizes and requests Bank to use Loan funds to
pay Loan fees owing to Bank, interest on the Loan, legal fees and expenses of
Bank's attorneys which are payable by Borrower, and such other sums as may be
owing from time to time by notice to or authorization by Borrower. Bank at
its option may make any such payment on Borrower's behalf by debiting the
Loan itself. Alternatively, Bank may disburse all or part of the payment
amount into the Account, and then may either debit the Account or invoice
Borrower in the amount of the payment. In the event such disbursement under
the line of credit causes an Excess Borrowing Condition, the Borrower shall
immediately cause the Excess Borrowing Condition to be eliminated.
5.6 BANKING DAYS.
All payments and disbursements which would be due on a day which
is not a Banking Day will be due on the next Banking Day. All payments
received on a day which is not a Banking Day will be applied to the Loan on
the next Banking Day.
6. CONDITIONS
The Bank's obligations under this Agreement are subject to the
Bank's receipt, on or before December 15, 1996, of the following items, in
form and content acceptable to the Bank in its sole discretion, and the
satisfaction as of such date, of the following additional conditions
precedent:
6.1 AUTHORIZATIONS.
The Bank shall have received evidence that the execution,
delivery and performance by the Borrower of the Loan Documents have been duly
authorized.
6.2 GOVERNING DOCUMENTS; GOOD STANDING CERTIFICATES.ERTIFICATES
The Bank shall have received a copy of the Borrower's articles of
incorporation, together with a certificate of good standing for the Borrower
from the state where formed and from any other state in which the Borrower is
required to qualify to conduct its business.
6.3 LOAN DOCUMENTS.
The Bank shall have received duly executed Loan Documents.
6.4 EVIDENCE OF PRIORITY; TITLE INSURANCE.
(a) The Bank shall have received evidence that the Liens in
favor of the Bank under the Loan Documents are valid, enforceable, and prior
to all others' rights and interests, except those the Bank consents to in
writing, including those shown in the Title Policies (as defined below).
(b) The Bank shall have received 1970 ALTA extended coverage
lender's title insurance policies in form and issued by a title company
satisfactory to Bank in the Commitment Amount ("Title Policies"), showing
Borrower as the owner of the fee estate in and to the Real Property, and
insuring the Bank that the Deeds of Trust constitute first priority Liens on
the Real Property, subject to no exceptions except as otherwise approved by
Bank in writing, with such endorsements as may be required by Bank; and
(c) The Bank shall have received an ALTA survey of the Real
Property meeting Bank's customary requirements.
6.5 INSURANCE.
The Bank shall have received evidence of insurance coverage
required by the Loan Documents.
6.6 ENVIRONMENTAL QUESTIONNAIRE.
The Bank shall have received a completed Bank form Environmental
Questionnaire and Disclosure Statement, together with an environmental site
assessment of the Real Property, acceptable to Bank, concerning any potential
toxic or hazardous conditions.
6.7 APPRAISAL.
The Bank shall have completed Appraisals of the Real Property,
which Appraisals shall be satisfactory in all respects to Bank.
6.8 PAYMENT OF FEES.
The Bank shall have received payment of all accrued and unpaid
fees and expenses payable to the Bank as provided for by the Loan Documents.
6.9 ENGINEERING.
The Bank shall have received structural reports on all Real
Property.
6.10 CREDIT.
The Bank shall have satisfactorily completed its credit approval
process on the Borrower.
6.11 OTHER ITEMS.
The Bank shall have received any other documents and other items
Bank may reasonably require as conditions precedent to this Agreement.
6.12 NO DEFAULT.
No Event of Default or Potential Default shall exist.
6.13 MATERIAL ADVERSE CHANGES.
No change in the Borrower or any Real Property shall have
occurred which has a Material Adverse Effect, as determined by the Bank.
6.14 REPRESENTATIONS AND WARRANTIES.
All representations and warranties of the Borrower contained in
this Agreement or the other Loan Documents shall be true and correct.
6.15 LEASES.
The Bank shall have reviewed and approved all Leases.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until all indebtedness and
obligations of the Borrower under the Loan Documents shall be fully
satisfied, the Borrower makes the following representations and warranties to
the Bank. Each request by the Borrower for an advance under the line of
credit constitutes a renewed representation and warranty.
7.1 ORGANIZATION OF BORROWER; GOOD STANDING.
The Borrower is a corporation duly formed and validly existing
under the laws of the State of California. In each state in which the
Borrower does business, it is properly licensed, in good standing, and, where
required, in compliance with any fictitious name statute.
7.2 AUTHORIZATION; ENFORCEABLE AGREEMENT.
This Agreement and the other Loan Documents are within the
Borrower's powers, have been duly authorized, and do not conflict with any of
its organizational documents. The Loan Documents do not conflict with any
law, agreement, or obligation by which the Borrower is bound. This Agreement
is a legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms, and any instrument or document
required hereunder, when executed and delivered, will be similarly legal,
valid, binding and enforceable, subject in each case to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other loans of
general applicability relating to or affecting creditor's rights and to
general principles of equity.
7.3 FINANCIAL INFORMATION.
(a) The Form 10-Q Quarterly Report filed by the Borrower with
the Securities and Exchange Commission for the period ending September 30,
1996, and the Form 8-K Current Report filed by the Borrower with the
Securities and Exchange Commission for the period ending October 31, 1996,
copies of which have been delivered by the Borrower to the Bank, and all
other financial statements and data submitted in writing by the Borrower to
the Bank in connection with the Borrower's request for the Loan, are true,
correct and complete, and all such financial information presents fairly the
financial condition of the Borrower as of the date thereof and the results of
the operations of the Borrower for the period covered thereby, and has been
prepared in accordance with GAAP on a basis consistently applied. The
Borrower has no knowledge of any material liabilities, contingent or
otherwise, at said date not reflected in said financial information and the
Borrower has not entered into any material commitments or material contracts
which are not reflected in said financial information which may have a
Material Adverse Effect on the Borrower. Since said date there have been no
material changes in the assets or liabilities or financial condition of the
Borrower other than changes in the ordinary course of business, and no such
changes have been materially adverse changes.
(b) All financial and other information that has been or will
be supplied to the Bank, including the financial statements of the Borrower:
(i) is sufficiently complete to give the Bank accurate
knowledge of the subject's financial condition;
(ii) is in form and content as required by the Bank;
(iii) is in compliance with any government regulations that
apply; and
(iv) does not fail to state any material facts necessary
to make the information contained therein not misleading.
All such information was and will be prepared in accordance with GAAP, unless
otherwise noted.
7.4 LAWSUITS.
There is no lawsuit, arbitration, claim or other dispute pending
or threatened against the Borrower which, if lost, would materially impair
the Borrower's financial condition or ability to repay the Loan, except as
has been previously disclosed in writing to the Bank.
7.5 TITLE TO ASSETS.
The Borrower has good and clear title to its assets, and the same
are not subject to any Liens other than those permitted by Bank in writing,
including those shown in the Title Policies.
7.6 COLLATERAL.
All Collateral required by this Agreement is owned by the grantor
of the security interest free of any title defects or any Liens or interests
of others, except as may have been permitted by the Bank in writing.
7.7 PERMITS, FRANCHISES.
The Borrower possesses all permits, franchises, contracts and
licenses required and all trademark rights, trade name rights, and fictitious
name rights necessary to enable it to conduct the business in which it is now
engaged, the failure by the Borrower to possess which would have a Material
Adverse Effect upon the Borrower or its business.
7.8 INCOME TAX RETURNS.
The Borrower has filed all tax returns and reports required to be
filed and has paid all applicable federal, state and local franchise, income
and property taxes which are due and payable. The Borrower has no knowledge
of any pending assessments or adjustments of its income taxes or property
taxes for any year, except as have been disclosed in writing to the Bank.
Borrower is not a "foreign person" within the meaning of Section 1445(f)(3)
of the Code.
7.9 ERISA PLANS.
(a) As used herein, (i) "ERISA" means the Employee Retirement
Income Act of 1974, as amended; (ii) "PBGC" means the Pension Benefit
Guaranty Corporation established pursuant to ERISA; and (iii) "Plan" means
any employee pension benefit plan maintained or contributed to by the
Borrower and insured by the PBGC.
(b) The Borrower has fulfilled its obligations, if any, under
the minimum funding standards of ERISA and the Code with respect to each Plan
and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
(c) No reportable event has occurred under Section 4043(b) of
ERISA for which the PBGC requires 30 day notice. No action by the Borrower
to terminate or withdraw from any Plan has been taken and no notice of intent
to terminate a Plan has been filed under Section 4041 of ERISA. No
proceeding has been commenced with respect to a Plan under Section 4042 of
ERISA, and no event has occurred or condition exists which might constitute
grounds for the commencement of such a proceeding.
7.10 OTHER OBLIGATIONS.
The Borrower is not in default on any material Indebtedness or
Contractual Obligation of the Borrower.
7.11 NO EVENT OF DEFAULT.
There is no Event of Default or Potential Default under the Loan
Documents.
7.12 LOCATION OF BORROWER.
The Borrower's place of business (or, if the Borrower has more
than one place of business, its chief executive office) is located at the
address listed under the Borrower's signature on this Agreement.
7.13 STATUS AS A REIT.
The Borrower (i) is a real estate investment trust as defined in
Section 856 of the Code (or any successor provision thereto), (ii) has not
revoked its election to be a real estate investment trust, (iii) has not
engaged in any "prohibited transactions" as defined in Section 856(b)(6)(iii)
of the Code (or any successor provision thereto), and (iv) for its current
"tax year" (as defined in the Code) is and for all prior tax years subsequent
to its election to be a real estate investment trust has been entitled to a
dividends paid deduction which meets the requirements of Section 857 of the
Code.
8. BORROWER OPTIONS
8.1 EXTENSION OPTION.
Provided that no Event of Default or Potential Default shall have
occurred at any time prior to the Borrower's attempted exercise of such
right, the Borrower shall have the right to extend ("Extension Option") the
term of the Loan and the Availability Period from the Maturity Date to the
date twelve (12) months following the Maturity Date ("Extended Maturity
Date"), provided that each of the following conditions shall have been
satisfied:
(a) The Borrower shall provide the Bank with written notice of
the Borrower's request to exercise the Extension Option not more than ninety
(90) days or less than thirty (30) days prior to the Maturity Date;
(b) On or before the Maturity Date, the Borrower shall pay to
the Bank an extension fee in immediately available funds in the amount of
.25% of the Commitment Amount;
(c) No Event of Default or Potential Default shall exist as of
the Maturity Date;
(d) The Borrower shall execute all documents reasonably
required by the Bank in order to exercise the Extension Option, and shall
deliver to the Bank, such title insurance endorsements as the Bank shall
require;
(e) There shall have occurred no change since the Closing Date,
as determined by the Bank in its sole discretion, which could have a Material
Adverse Effect on the Borrower or any Real Property; and
(f) If the Bank, in its sole discretion, shall require, the
Bank shall have obtained new Appraisals of the Real Property in accordance
with Section 4.2(a)(ii) above, the Loan Availability shall be adjusted by
reason thereof, and the outstanding principal balance of the line of credit
as of the Maturity Date shall not exceed the adjusted Loan Availability.
8.2 TERM OUT OPTION.
(a) Provided that no Event of Default or Potential Default
shall have occurred on more than one occasion at any time prior to the
Borrower's attempted exercise of such right, and at any time during the
initial term of the Loan, the Borrower shall have the right, exercisable on
not more than three (3) occasions ("Term Out Option"), to borrow all or a
portion of the amount remaining available for disbursement under the line of
credit at such time as, and/or to convert all or a portion of the amount
outstanding under the line of credit at such time into, a term loan on the
terms and conditions hereinafter provided for. Each amount so borrowed
and/or converted by the Borrower is referred to herein as a "Termed Loan
Amount."
(b) If the Borrower shall desire to exercise the Term Out
Option, the Borrower shall give written notice thereof to the Bank. The
Borrower shall not be entitled to exercise the Term Out Option as to a
principal amount of less than Five Million Dollars ($5,000,000). The term of
any Termed Loan Amount shall expire on the Banking Day selected by the
Borrower in its notice of exercise of the Term Out Option, which shall be a
day on or before five (5) years following the date of such notice. If the
Borrower shall validly exercise the Term Out Option, and subject to the
satisfaction of the conditions provided for in subparagraph (d) below, the
Borrower's borrowing as, and/or conversion of, all or a portion of the Loan
into a Termed Loan Amount shall become effective on the Banking Day as of
which such conditions shall have been satisfied, as confirmed by the Bank to
the Borrower in writing.
(c) Each Termed Loan Amount shall bear interest at the per
annum interest rates applicable to the Loan as provided in the Note. The
Borrower shall pay to the Bank the principal amount of a Termed Loan Amount,
and all accrued interest thereon in monthly installments of principal and
interest. The principal portion of such monthly installments shall be based
upon an amortization of the Termed Loan Amount over a twenty-five (25) year
period, with interest thereon at a per annum rate of nine percent (9%); and
the interest portion of such monthly installments shall be equal to all
accrued and unpaid interest on the outstanding principal balance of the
Termed Loan Amount (and not the interest portion of each installment set
forth in the foregoing amortization schedule). Such monthly installments
shall be payable at the times and in the manner provided for in the Note for
monthly interest payments under the line of credit. Subject to the Bank's
rights to accelerate the Loan as provided in the Loan Documents, each Termed
Loan Amount shall mature on the date for such Termed Loan Amount provided for
in subparagraph (b) above, notwithstanding the fact that the Maturity Date
may occur on an earlier date. The Loan Availability, and the portion of the
Loan made available to the Borrower on a revolving credit basis, shall be
reduced by an amount equal to each Termed Loan Amount. If at any time, the
sum of the outstanding principal amounts of the Termed Loan Amounts and the
amount outstanding under the line of credit shall exceed the lowest of
(i) the Commitment Amount, (ii) the Real Property Collateral value, and (iii)
the Imputed Loan Maximum Amount, such occurrence shall be an Excess Borrowing
Condition, and the Borrower shall cause such Excess Borrowing Condition to be
eliminated as provided in Section 2.5 above.
(d) The Borrower's right to exercise the Term Out Option shall
be subject to the satisfaction of the following conditions: (i) concurrently
with the Borrower's delivery of each notice of exercise of the Term Out
Option, the Borrower shall pay to the Bank a fee in immediately available
funds in the amount of .50% of such Termed Loan Amount; (ii) no Event of
Default or Potential Default shall exist as of the effective date of the
borrowing and/or conversion of such Termed Loan Amount as provided in
subparagraph (b); (iii) the Borrower shall execute all documents reasonably
required by the Bank in order to exercise the Term Out Option, and shall
deliver to the Bank, at the Borrower's sole cost and expense, such title
insurance endorsements as the Bank shall require; (iv) there shall have
occurred no change since the Closing Date, as determined by the Bank in its
sole discretion, which could have a Material Adverse Effect on the Borrower
or any Real Property; and (v) if the Bank, in its sole discretion, shall
require, the Bank shall have obtained new Appraisals of the Real Property in
accordance with Section 4.2(a)(i) above, the Loan Availability shall be
adjusted by reason thereof and the outstanding principal balance of the Loan
shall not exceed the lowest of (a) the Commitment Amount; (b) the Real
Property Collateral Value; or (c) the Imported Loan Maximum Amount (taking
into account such Termed Loan Amount).
8.3 UPREIT TRANSFER.IT TRANSFER
Notwithstanding anything to the contrary contained in the Loan
Documents, including the Deeds of Trust, the Borrower shall have the right to
transfer title to the Real Property to the UPREIT ("UPREIT Transfer"), and
the Bank shall not accelerate the Maturity Date or other date for payment in
full of the Loan by reason thereof, provided that each of the following
conditions shall have been satisfied:
(a) The Borrower shall provide the Bank with written notice of
the Borrower's intent to make the UPREIT Transfer not less than forty-five
(45) days prior to the intended effective date thereof;
(b) The Bank shall have reviewed and approved the
organizational documents for the UPREIT, and shall have received such
certificates, authorizations and legal opinions with respect to the UPREIT as
the Bank shall require;
(c) The Borrower and the UPREIT shall execute all documents
reasonably required by the Bank in connection with the UPREIT Transfer,
including, without limitation, assumption agreements and guarantees, and
shall deliver to the Bank, at the Borrower's sole cost and expense, such
title endorsements as the Bank shall require; and
(d) There shall have occurred no change since the Closing Date,
as determined by the Bank in its sole discretion, which could have a Material
Adverse Effect on the Borrower or any Real Property.
9. COVENANTS
The Borrower agrees that, until all indebtedness and obligations of
Borrower under the Loan Documents shall be fully satisfied:
9.1 USE OF PROCEEDS.
The Borrower shall use the proceeds of the advances made by the
Bank under the Loan primarily for the acquisition of and investment in
commercial real properties, and for general working capital purposes.
9.2 FINANCIAL INFORMATION.
The Borrower shall provide to the Bank the following financial
information and statements and such additional information as requested by
the Bank from time to time:
(a) As soon as available but not later than 90 days after the
Borrower's fiscal year end, the Borrower's annual financial statements
including balance sheet, income statement, statement of stockholders' equity
and source and use of funds statement. These financial statements must be
audited (with an unqualified opinion) by the Accountants. The statements
shall be prepared on a consolidated basis in accordance with GAAP.
(b) As soon as available but not later than 60 days after the
period's end, the Borrower's quarterly financial statements, including
balance sheet, income statement, statement of stockholders' equity and source
and use of funds statement. These financial statements may be Borrower
prepared and must be certified by a Responsible Officer. The statements
shall be prepared on a consolidated basis in accordance with GAAP.
(c) As soon as available but not later than 90 days after the
Borrower's fiscal year end, cash flow statement projections for Borrower for
the succeeding fiscal year, detailing expected sources and uses of cash for
such fiscal year;
(d) As soon as available but not later than 60 days after the
end of each fiscal quarter, operating statements which detail operating
results on a month-by-month basis for the Real Property for the twelve (12)
month period ending as of the end of such quarter; rent rolls; and lease
status reports for each Real Property, prepared in the Borrower's customary
forms or another form required by the Bank.
(e) Copies of the Borrower's Form 10-K Annual Report, Form 10-Q
Quarterly Report, Form 8-K Current Report and all other filings by the
Borrower with the Securities and Exchange Commission, within 15 days after
the date of filing.
(f) At the time of the delivery of the financial statements
provided for in Sections 9.2(a) and (b), a Compliance Certificate executed by
a Responsible Officer of the Borrower certifying (i) compliance with all of
Borrower's financial covenants contained herein, including appropriate
supporting schedules, (ii) that no Event of Default or Potential Default has
occurred and is continuing, if any Event of Default or Potential Default has
occurred and is continuing, specifying the nature and extent thereof, (iii)
that the Borrower is not in default with respect to any other Indebtedness,
or if the Borrower is so in default, specifying the nature and extent
thereof, (iv) as to the amount and nature of any contingent liabilities to
which the Borrower has become subject since the date of the last Compliance
Certificate, and (v) that the outstanding principal amount of the Loan as of
the date thereof does not exceed Loan Availability. Notwithstanding anything
to the contrary contained herein and without limiting the Bank's other rights
and remedies, if any Compliance Certificate required under this Section 9.2
is not provided on or before the due date therefor, the Borrower shall be
prohibited from any further borrowing under the line of credit until such
Compliance Certificate is provided.
(g) Such other financial and/or operating reports and
other information on the Borrower or any Real Property as the Bank shall
reasonably request from time to time.
9.3 OTHER INFORMATION.
The Borrower shall also provide to the Bank:
(a) Promptly (and in any event within 48 hours) after the
Borrower first has knowledge of (i) its failing to continue to qualify as a
real estate investment trust as defined in Section 856 of the Code (or any
successor provision thereof), (ii) any act by the Borrower causing its
election to be taxed as a real estate investment trust to be terminated,
(iii) any act causing the Borrower to be subject to the taxes imposed by
Section 857(b)(6) of the Code (or any successor provision thereto), or (iv)
the Borrower failing to be entitled to a dividends paid deduction which meets
the requirements of Section 857 of the Code, a written notice of any such
occurrence or circumstance.
(b) Such additional information as the Bank may reasonably
request from time to time.
(c) Such information as the Bank may request regarding the
Collateral as provided in Article 10 herein.
9.4 FINANCIAL COVENANTS.
(a) TANGIBLE NET WORTH. The Borrower shall at all times
maintain a Tangible Net Worth equal to at least Ninety Million Dollars
($90,000,000).
(b) EBITDA TO DEBT SERVICE. The Borrower shall at all times
maintain a ratio of EBITDA to Debt Service of at least 2:1. This ratio shall
be calculated in each of Borrower's fiscal years throughout the term of the
Loan as follows: at the end of the first fiscal quarter, using the results
of that fiscal quarter; at the end of the second fiscal quarter, using the
results of the first two fiscal quarters; at the end of the third fiscal
quarter, using the results of the first three fiscal quarters; and at each
fiscal year end, using the results of such fiscal year.
(c) LEVERAGE. The Borrower shall at all times maintain
Leverage of not greater than .50:1.0.
(d) DISTRIBUTIONS.
(i) Subject to subparagraph (ii) below, aggregate
distributions to shareholders of the Borrower as of the end of each
fiscal quarter and as of the end of each fiscal year shall not exceed
ninety-eight percent (98%) of Funds From Operations for each such
period. For purposes of this Section 9.4(d), the term "distributions"
shall mean and include all dividends and other distributions to, and
the repurchase of shares from, the holder of any equity interests in
the Borrower.
(ii) No distributions shall be made during the continuance
of any Event of Default arising out of the Borrower's failure to pay
any monetary obligation when due under any Loan Document (a "Monetary
Default"). In the event of any other Event of Default, Borrower shall
be entitled to make the regularly scheduled distributions for the
fiscal quarter in which such Event of Default shall occur, not to
exceed the amount permitted under subparagraph (i) above. For the
following fiscal quarter and each fiscal quarter thereafter until any
such other Event of Default shall have been cured, the distributions
shall not exceed the minimum amount that the Borrower must distribute
to its shareholders in order to maintain compliance with Section 9.16
below; provided, however, that if any such other Event of Default shall
remain uncured or shall not be waived by the Bank for more than 100
days, as of such date and continuing thereafter, the Borrower shall not
be entitled to make any further distributions.
(e) DEVELOPMENT. Unless the Borrower shall have obtained the
Bank's prior written approval therefor, at no time shall Development Costs
(as defined below) exceed an amount equal to ten percent (10%) of the
Borrower's cost basis in the Real Property and any other real estate assets
owed by the Borrower (meaning the value at which Borrower carries the Real
Property and other real estate assets of Borrower on its books in accordance
with GAAP, without the effect of any accumulated depreciation). For the
purposes of this Agreement, "Development Costs" shall mean the aggregate of
all costs and expenses incurred and/or reasonably projected by the Borrower
to be incurred by the Borrower in the acquisition of unimproved real property
or the development of unimproved or improved real property. For the purposes
of this section, "unimproved real property" shall mean any real property
other than real property improved with commercial improvements for which a
certificate of occupancy or its equivalent has been issued by the applicable
Governmental Authority. Without limiting the foregoing, the Borrower shall
not acquire or invest in any real property, and shall not commence the
construction or development of any improvements on any real property, if the
Development Costs relating thereto would cause the limitation established by
this section to be exceeded.
(f) DEBT COVERAGE RATIO OF PROPERTY. The Imputed Loan Maximum
Amount shall be redetermined by the Bank as of the end of each fiscal quarter
on the basis of the Net Operating Income from all of the Real Property for
the twelve (12) month period ending as of the end of such fiscal quarter, and
the Annual Debt Service shall be calculated as of the end of each such fiscal
quarter in the manner provided in the definition of "Imputed Loan Maximums
Amount" provided in Section 1.1 above. Upon the Bank's redetermination of
the Imputed Loan Maximum Amount as of the end of each fiscal quarter, the
Loan Availability shall be adjusted, if necessary, on the basis thereof. If
any such adjustment shall cause the occurrence of an Excess Borrowing
Condition, the Borrower shall cause such Excess Borrowing Condition to be
eliminated as provided in Section 2.5 above.
(g) CALCULATION. Each of the foregoing ratios and financial
requirements shall be calculated as of the last day of each fiscal quarter,
but shall be satisfied by the Borrower at all times.
9.5 TAXES AND OTHER LIABILITIES.
The Borrower shall pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by
appropriate proceedings in such manner as not to cause any Material Adverse
Effect on Borrower or any Real Property or the loss of any right of
redemption from any sale thereunder; and
(b) Borrower shall have set aside on its books reserves
(segregated to the extent required by GAAP) adequate with respect thereto.
9.6 OTHER LIENS.
The Borrower shall not create, assume, or allow any Lien
(including judicial Liens) on the Real Property, except:
(a) Deeds of trust and security agreements in favor of the Bank;
(b) Liens for property taxes not yet due; or
(c) Liens outstanding on the date of this Agreement and
previously disclosed in writing to and permitted by the Bank, including those
shown in the Title Polices.
If at any time any Lien other than those referred to above shall be imposed
upon or otherwise affect any Real Property without the Bank's prior written
consent, the Borrower shall immediately cause such Lien to be removed, either
by satisfying the same or causing an appropriate lien release bond to be
recorded with respect to such Lien. If the Borrower shall fail to cause such
Lien to be removed within forty-five (45) days following the date of its
recordation, such failure shall constitute an Event of Default without
further notice or opportunity to cure hereunder; and the Bank, in addition to
its other rights and remedies by reason thereof under the Loan Documents,
shall have the right to advance its own funds in payment of such Lien, and
the amount of such advance, together with interest thereon at the Default
Rate provided for in the Note shall be immediately due and payable and shall
be secured by the Liens granted in favor of Bank under the Loan Documents.
9.7 NOTICES TO BANK.
The Borrower shall promptly notify the Bank in writing of:
(a) any Event of Default hereunder or any event which would
become an Event of Default hereunder upon the giving of notice, the lapse of
time, or both;
(b) any lawsuit or arbitration over Two Hundred Fifty Thousand
Dollars ($250,000) against the Borrower;
(c) any significant dispute between the Borrower and any
Governmental Authority which may have a Material Adverse Effect upon the
Borrower;
(d) any event, circumstance or condition which may have a
Material Adverse Effect on the Borrower; and
(e) any change in the Borrower's name or trade name, legal
structure, or place of business, (or chief executive office if the Borrower
has more than one place of business).
9.8 AUDITS; BOOKS AND RECORDS.
The Borrower shall maintain adequate books and records and to
allow the Bank and its agents to inspect the Borrower's properties and
examine, audit and make copies of books and records at any reasonable time.
If any of the Borrower's properties, books or records are in the possession
of a third party, the Borrower hereby authorizes that third party to permit
the Bank or its agents to have access to perform inspections or audits and to
respond to the Bank's requests for information concerning such properties,
books and records.
9.9 COMPLIANCE WITH LAWS.
The Borrower shall comply with all Requirements of Law (including
any fictitious name statute), applicable to the Borrower's business.
9.10 PRESERVATION OF RIGHTS.
The Borrower shall maintain and preserve in all material respects
all rights, privileges, and franchises the Borrower now has.
9.11 MAINTENANCE OF PROPERTIES.
The Borrower shall make repairs, renewals, or replacements to
keep the Borrower's properties in good working condition.
9.12 INSURANCE.
The Borrower shall maintain the following insurance:
(a) LIABILITY INSURANCE. Commercial general liability coverage
in a limit of not less than $5,000,000 for a single occurrence. This policy
shall name Bank as an additional insured. Coverage shall be written on an
occurrence basis, not claims made.
(b) PROPERTY DAMAGE INSURANCE. All risk property damage
insurance in nonreporting form on the Real Property, with a policy limit in
an amount not less than the full insurable value of the Real Property on a
replacement cost basis, including tenant improvements, if any. The policy
shall include a business interruption (or rent loss, if more appropriate)
endorsement in the amount of twelve months' principal and interest payments,
taxes and insurance premiums, a lender's loss payable endorsement (438 BFU or
its equivalent) in favor of Bank, and any other endorsements reasonably
required by Bank.
(c) OTHER INSURANCE. Such additional insurance that Bank in
its reasonable judgment may from time to time require, against insurable
hazards which at the time are commonly insured against in the case of
property similarly situated. Such additional insurance may include flood
insurance as required by federal law, but shall not include earthquake
insurance. At Bank's request, Borrower shall supply Bank with an original or
underlyer of any policy.
(d) INSURANCE COMPANIES. All policies of insurance required
under the Loan Documents shall be issued by companies having a minimum A.M.
Best's rating of A:IX. The limits, coverage, forms, deductibles, inception
and expiration dates and cancellation provisions of all such policies shall
be acceptable to Bank. In addition, each required property insurance policy
shall provide that all proceeds be payable to Bank to the extent of its
interest. An approval by Bank is not, and shall not be deemed to be, a
representation of the solvency of any insurer or the sufficiency of any
amount of insurance.
(e) REQUIREMENTS. Each policy of insurance required under the
Loan Documents shall provide that it may not be modified or canceled without
at least thirty (30) days' prior written notice to Bank. When any required
insurance policy expires, Borrower shall furnish Bank with proof acceptable
to Bank that the policy has been reinstated or a new policy issued,
continuing in force the insurance covered by the policy which expired.
Borrower shall also furnish Bank with evidence satisfactory to Bank that all
premiums for such policy have been paid at the time of renewal or issuance.
If Bank fails to receive such proof and evidence, Bank shall have the right,
but not the obligation, to obtain current coverage and advance funds to pay
the premiums for it. Borrower shall repay Bank immediately on demand for any
advance for such premiums, which shall be considered to be an additional loan
to Borrower bearing interest at the Reference-Based Rate, as defined in the
Note, and secured by the Deed of Trust and any other Collateral held by Bank
in connection with the Loan.
Upon the request of the Bank, Borrower shall deliver to the Bank
a copy of each insurance policy, or, if permitted by the Bank, a certificate
of insurance listing all insurance in force.
9.13 ERISA PLANS.
The Borrower shall give prompt written notice to the Bank of the
occurrence of any reportable event under Section 4043(b) of ERISA for which
the PBGC requires 30 day notice; any action by the Borrower to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate under
Section 4041 of ERISA; any notice of noncompliance made with respect to a
Plan under Section 4041(b) of ERISA; or the commencement of any proceeding
with respect to a Plan under Section 4042 of ERISA.
9.14 ADDITIONAL NEGATIVE COVENANTS.
The Borrower shall not, without the Bank's written consent:
(a) liquidate or dissolve the Borrower's business;
(b) enter into any consolidation, merger, pool, syndicate, or
other combination where the Borrower is not the surviving Person;
(c) (i) master lease all or a substantial part of the
Borrower's business or assets, or (ii) dispose of all or a substantial part
of the Borrower's business or assets, if any such master lease or disposition
would have a Material Adverse Effect on Borrower;
(d) acquire or purchase a business or its assets other business
or assets of the kind permitted under Section 9.17 of this Agreement;
(e) sell or otherwise dispose of any assets for less than fair
market value, or enter into any sale and leaseback agreement covering any of
its fixed or capital assets;
(f) suspend its business activity for more than two days;
(g) use any proceeds of the Loan, directly or indirectly, to
purchase or carry, or reduce or retire any loan incurred to purchase or carry
any "Margin Stock" (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System) or to extend credit to others for
the purpose of purchasing or carrying any Margin Stock; or
(h) amend its articles of incorporation, by-laws or other
organizational documents.
9.15 PERFECTION OF LIENS; COOPERATION.
The Borrower shall assist the Bank in perfecting and protecting
its Liens in the Real Property and other Collateral, and shall reimburse it
for reasonable costs it incurs to protect such Liens; and shall take any
action reasonably requested by the Bank to carry out the intent of the Loan
Documents.
9.16 CONTINUED STATUS AS A REIT; PROHIBITED TRANSACTIONS.
The Borrower (i) shall continue to be a real estate investment
trust as defined in Section 856 of the Code (or any successor provision
thereto), (ii) shall not revoke its election to be a real estate investment
trust, (iii) shall not engage in any "prohibited transactions" as defined in
Section 856(b)(6)(iii) of the Code (or any successor provision thereto), and
(iv) shall continue to be entitled to a dividend paid deduction meeting the
requirements of Section 857 of the Code.
9.17 CONDUCT OF BUSINESS.
The Borrower shall engage primarily in the business of the
acquisition of or investment in commercial real properties, and other
business activities of the Borrower reasonably incidental to business
activities otherwise permitted under this section.
9.18 MANAGEMENT OF BORROWER.
The Borrower's business affairs and activities are managed by
Franklin Properties, Inc. pursuant to an Advisory Agreement dated March 1,
1989 as amended October 1, 1994. The Borrower shall not amend, modify,
terminate or surrender such Advisory Agreement, release Franklin Properties,
Inc. from any of its obligations thereunder or enter into any other agreement
with any other Person for the management of the Borrower's business affairs
or activities, without the Bank's prior written consent.
10. COLLATERAL
10.1 REAL PROPERTY.
(a) Without notice to or the consent of Borrower, Bank may
disclose to any title insurance company which insures any interest of Bank
under a Deed of Trust (whether as primary insurer, coinsurer or reinsurer)
any information, data or material in Bank's possession relating to Borrower,
the Loan, or the Real Property.
(b) The Bank may require Appraisals or inspections of the Real
Property, as required elsewhere in this Agreement or as separately
communicated to the Borrower. The Bank assumes no liability for the accuracy
of any Appraisal or inspection and makes no warranty of any kind about the
condition or value of the Real Property.
(c) Borrower agrees that it shall not make any Accelerating
Transfer (as defined in the Deed of Trust) except as otherwise permitted in
this Agreement, unless the transfer is preceded by Bank's express written
consent to the particular transaction and transferee. Bank may withhold such
consent in its sole discretion. If any Accelerating Transfer occurs, Bank in
its sole discretion may declare all of the obligations under the Loan
Documents to be immediately due and payable, and Bank may invoke any rights
and remedies provided by the Deed of Trust, this Agreement and the other Loan
Documents.
10.2 PERSONAL PROPERTY.
(a) The Borrower's obligations to the Bank under the Loan
Documents will be secured by personal property the Borrower now owns or will
own in the future, as may be included in a Deed of Trust or other instrument
securing the Loan. This Collateral is further defined in security
agreement(s) executed by the Borrower either as separate documents or in a
deed of trust or mortgage. All personal property collateral securing any
other present or future obligations of the Borrower to the Bank shall also
secure this Loan.
(b) Borrower shall not sell, convey, or otherwise transfer or
dispose of its interest in any Personal Property, or agree to do any of the
foregoing, other than in the ordinary course of Borrower's business, without
the prior written consent of Bank in each instance.
10.3 REAL PROPERTY COVENANTS.
(a) MAINTENANCE AND REPAIR. Borrower shall not (i) demolish,
alter, remove or add to any improvements located on any Real Property
("Improvements"), or (ii) erect any new buildings, structures or building
additions on the Real Property, without the prior written consent of Bank
except as may be expressly permitted by this Agreement. Borrower shall pay
when due all claims for labor performed and materials furnished therefor in
connection with any Improvements or construction activities. Notwithstanding
the foregoing, the Borrower shall have the right to make the following
Improvements: (A) the repair and restoration of Improvements following
damage thereto as required by any Deed of Trust, (B) the construction or
installation of non-structural alterations or improvements, provided the same
are in all respects consistent with the character and utility of the existing
Improvements, and (C) the installation or construction of tenant improvements
and related demolition in connection with any Leases entered into by the
Borrower in accordance with this Agreement.
(b) PRESERVATION OF RIGHTS. Borrower shall obtain, preserve
and maintain in good standing, as applicable, all rights, privileges and
franchises necessary or desirable for the conduct of Borrower's business and
all permits, licenses and approvals (including any subdivision map, if
applicable) which are required to be obtained from Governmental Authorities
in order to construct, occupy, operate, market and sell real estate. Upon
request, Borrower shall promptly deliver copies of all such permits, licenses
and approvals to Bank.
(c) TAX RECEIPTS; IMPROVEMENT DISTRICT; CC&RS.
(i) Throughout the term of the Loan, at Borrower's sole
expense, Bank shall be furnished with a tax services contract issued by
a tax reporting agency satisfactory to Bank.
(ii) Borrower shall not consent to, vote in favor of, or
directly or indirectly advocate or assist in the incorporation of any
part of the Real Property into any improvement or community facilities
district, special assessment district or other district without Bank's
prior written consent in each instance. Borrower shall not, without
Bank's prior written consent in each instance, execute, amend or modify
any covenants, conditions and restrictions affecting any part of the
Real Property.
(d) SITE VISITS; BOOKS AND RECORDS. In addition to the rights
provided Bank and subject to the terms and conditions in the Deed of Trust,
Borrower grants Bank, its agents and representatives the right to enter and
visit the Real Property at any reasonable time for the purposes of inspecting
the Real Property. Borrower shall also allow Bank to examine, copy and audit
its books and records. Bank owes no duty of care to protect Borrower or any
other party against, or to inform Borrower or any other party of, any adverse
condition affecting the Real Property, including any defects in the design or
construction of any Improvements on the Real Property or the presence of any
Hazardous Materials on the Real Property. Prior to entering the Real
Property, Bank shall give Borrower reasonable notice of its intent to enter.
Bank shall exercise reasonable efforts to avoid interfering with Borrower's
use of the Real Property in connection with the activities permitted under
this section.
(e) MANAGEMENT AGREEMENTS. Without Bank's prior written
consent, Borrower shall not enter into any agreement providing for the
management, leasing or operation of any portion of any Real Property with any
third party other than Continental Property Management Co., or amend, modify,
terminate or surrender any such agreement currently in place.
(f) CONDITIONAL SALES CONTRACTS; REMOVAL OF FIXTURES AND
EQUIPMENT. Without Bank's prior written consent, Borrower shall not (i)
purchase any materials, equipment, furnishings or fixtures to be installed on
the Real Property under any agreement where the seller reserves a Lien or
title thereto or the right of removal or repossession after such items are
installed on the Real Property, or (ii) remove or permit to be removed from
the Real Property or the Improvements any equipment, machinery or fixtures
used in connection with the management, maintenance, operation or enjoyment
thereof unless replaced by articles of equal suitability and value owned by
Borrower free and clear of any Lien.
(g) USE AND LEASING OF THE PROPERTY.
(i) INCOME FROM PROPERTY. Borrower shall first apply all
income derived from the Real Property, including all income from
Leases, to pay costs and expenses associated with the ownership,
maintenance, operation, leasing and financing of the Real Property,
including all amounts then required to be paid under the Loan
Documents, before using or applying such income for any other purpose.
(ii) LEASING.
(A) Except as otherwise approved by Bank in
writing, all Leases shall be entered into with bona fide third party
tenants financially capable of performing their obligations under their
Leases, and shall reflect arms-length transactions at the then current
market rate for comparable space. Borrower shall perform all
obligations required to be performed by it as landlord under any
Lease. Borrower shall not accept payment of more than one month's rent
in advance from any tenant. Except as may be permitted under this
paragraph, without the prior written consent of Bank, Borrower shall
not enter into, modify, amend, surrender or terminate any Lease.
Notwithstanding the foregoing:
(1) Borrower may terminate a Lease without the
prior written consent of Bank for non-payment of rent if Borrower
would in good faith do so on such default in the ordinary course
of its business;
(2) The prior approval of Bank shall not be
required to any Lease if (a) the proposed use to be made of the
premises subject to the Lease does not involve the use, storage,
processing, manufacture, generation, disposal or release of any
Hazardous Materials as a principal business operation or as a
necessary and principal component of a business operation to be
conducted at said premises; (b) the Lease is not a Major Lease;
and (c) the Lease does not contain one or more of the following
types of lease provisions: (i) granting an option, right of
first offer or refusal or other peremptory right to purchase all
or any portion of the Property, (ii) granting the tenant any
right to receive any portion of any insurance or condemnation
proceeds, (iii) allowing for rental offsets, or (iv) providing
for environmental or Hazardous Materials indemnification by the
landlord.
(3) The prior approval of Bank shall not be
required to any amendment or modification of a Lease other than a
Required Lease or Major Lease if the amendment or modification
contains no provision which, if originally included in the Lease,
would not have required the prior approval of Bank.
(B) Borrower shall disclose to Bank any and all
Leases which affect the Property. Borrower shall promptly deliver to
Bank such rent rolls, leasing schedules and reports, operating
statements or other leasing information as Bank from time to time may
request, and shall promptly notify Bank of any material tenant dispute
or material adverse change in leasing activity on the Real Property.
Borrower shall promptly obtain and deliver to Bank such estoppel
certificates and subordination, non-disturbance and attornment
agreements or non-disturbance and attornment agreements from tenants as
Bank from time to time may require. In no event shall any approval by
Bank of a Lease be a representation of any kind with regard to the
Lease or its enforceability, or the financial capacity of any tenant or
Lease guarantor.
(C) If Bank's prior written approval is required
for any Lease, Borrower shall pay to Bank as a condition to such
consent Bank's costs and expenses (including reasonable outside counsel
fees and the allocated cost of in-house counsel) incurred in connection
therewith. Such costs and expenses shall be due and payable whether or
not such consent is given.
11. DEFAULT
If any of the following events occurs (an "Event of Default"), the Bank
may declare the Borrower in default, stop making any additional advances to
the Borrower under the line of credit, and require the Borrower to repay its
entire debt immediately and without prior notice. However, if a bankruptcy
petition is filed with respect to the Borrower, the entire debt outstanding
under this Agreement shall automatically be due immediately.
11.1 FAILURE TO PAY.
The Borrower fails to make a payment due under the Loan Documents
within 15 days after the date when due.
11.2 LIEN PRIORITY.
The Bank fails to have an enforceable first Lien on any Real
Property or Personal Property (except for any prior Liens to which the Bank
has consented in writing).
11.3 FALSE INFORMATION.
The Borrower has given the Bank false or misleading information
or representations.
11.4 BANKRUPTCY.
The Borrower files a bankruptcy petition or makes a general
assignment for the benefit of creditors, or a bankruptcy petition is filed
against the Borrower. The default will be deemed cured if any bankruptcy
petition filed against the Borrower is dismissed within a period of 45 days
after the filing; provided, however, that the Bank will not be obligated to
extend any additional credit to the Borrower during that period.
11.5 RECEIVERS.
A receiver or similar official is appointed for the Borrower's
business, or the business is terminated.
11.6 LAWSUITS.
Any lawsuit or lawsuits are filed against the Borrower in an
aggregate amount of Ten Million Dollars ($10,000,000) or more as any one time
in excess of any insurance coverage.
11.7 JUDGMENTS.
Any judgment or arbitration award is entered against the
Borrower, or the Borrower enters into any settlement agreement with respect
to any litigation, claim or arbitration, in an aggregate amount of Five
Million Dollars ($5,000,000) or more in excess of any insurance coverage.
11.8 ERISA PLANS.
The occurrence of any of the following events with respect to the
Borrower, provided such event could reasonably be expected, in the judgment
of the Bank, to subject the Borrower to any tax, penalty or liability (or any
combination of the foregoing) which in the aggregate could have a Material
Adverse Effect on the Borrower with respect to a Plan:
(a) A reportable event occurs with respect to a Plan which in
the reasonable judgment of the Bank may result in the termination of such
Plan for purposes of ERISA.
(b) Any Plan termination (or commencement of proceedings to
terminate a Plan) or the Borrower's full or partial withdrawal from a Plan.
11.9 GOVERNMENT ACTION.
Any Governmental Authority takes action that the Bank believes
has a Material Adverse Effect on the Borrower.
11.10 MATERIAL ADVERSE CHANGE.
Any event, circumstance or condition shall occur which the Bank
believes has a Material Adverse Effect on the Borrower.
11.11 OTHER DEFAULT.
The occurrence of any other event, circumstance or condition
which, under this Agreement or the other Loan Documents, constitutes an Event
of Default. Except if this Agreement provides that no cure period shall
apply to any such event, circumstance or condition, and if in the Bank's
opinion, such event, circumstance or condition is capable of being remedied,
it will not be considered an Event of Default for a period of thirty (30)
days after the date on which the Bank gives written notice of such event,
circumstance or condition to the Borrower; provided, however, that the Bank
will not be obligated to extend any additional credit to the Borrower during
that period.
11.12 OTHER BREACH UNDER THIS AGREEMENT.S AGREEMENT
The Borrower fails to meet the conditions of or fails to perform
any obligation under any term of this Agreement not specifically referred to
in this Article, including, without limitation, compliance with any of the
financial covenants set forth in Section 9.4 above. If, in the Bank's
opinion, the breach is capable of being remedied, the breach will not be
considered an Event of Default under this Agreement for a period of thirty
(30) days after the date on which the Bank gives written notice of the breach
to the Borrower; provided, however, that the Bank will not be obligated to
extend any additional credit to the Borrower during that period.
11.13 CROSS-DEFAULT.
Any default occurs under any agreement in connection with any
credit the Borrower or any of the Borrower's related entities or Affiliates
has obtained from the Bank or any other creditor or which the Borrower or any
of the Borrower's related entities or affiliates has guaranteed, and such
default shall continue beyond any cure period applicable thereto, if the
default consists of a failure to make a payment when due or gives the
creditor the right to accelerate the obligation.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 REMEDIES.
If an Event of Default occurs under the Loan Documents:
(a) Bank may exercise any right or remedy which it has under
any of the Loan Documents or which is otherwise available at law or in
equity. All of Bank's rights and remedies shall be cumulative. At Bank's
option, exercisable in its sole discretion, all of Borrower's obligations
under the Loan Documents will become immediately due and payable without
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor, or other notices or demands of any kind.
(b) Bank shall have the right in its sole discretion to enter
the Real Property and take possession of it, whether in person, by agent or
by court-appointed receiver, collect rents and otherwise protect the
Collateral and its rights under the Loan Documents. If Bank exercises any of
the rights or remedies provided in this subparagraph, that exercise shall not
make Bank a partner or joint venturer of Borrower. All sums which are
expended by Bank in preserving the Collateral shall be considered an
additional advance to Borrower under this line of credit.
12.2 CALIFORNIA LAW.
This Agreement is governed by California law but without regard
to the choice of law rules of California.
12.3 ARBITRATION AND REFERENCE.
(a) MANDATORY ARBITRATION. Except as provided below, any
controversy or claim between or among the parties, including those arising
out of or relating to this Agreement or the other Loan Documents and any
claim based on or arising from an alleged tort, shall at the request of any
party be determined by arbitration. The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Agreement, and under the
Commercial Rules of the American Arbitration Association ("AAA"). The
arbitrator(s) shall give effect to statutes of limitation in determining any
claim. Any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator(s). Judgment upon the arbitration award may be
entered into any court having jurisdiction. The institution and maintenance
of an action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration if any other
party contests such action for judicial relief.
(b) REAL PROPERTY COLLATERAL. Notwithstanding subparagraph (a)
above, no controversy or claim shall be submitted to arbitration without the
consent of all parties if, at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation to Bank which is
secured in whole or in part by real property in California. If all parties
do not consent to submission of such a controversy or claim to arbitration,
the controversy or claim shall be determined as provided in subparagraph (c)
below.
(c) JUDICIAL REFERENCE. Subject to subparagraph (a) and (b)
above, in any judicial action between or among the parties, including but not
limited to any action or cause of action arising out of or relating to this
Agreement or the other Loan Documents or based on or arising from an alleged
tort, all decisions of fact and law shall at the request of any party be
referred to a referee in accordance with California Code of Civil Procedure
Sections 638 ET SEQ. The parties shall designate to the court a referee or
referees selected under the auspices of the AAA in the same manner as
arbitrators are selected in AAA-sponsored proceedings. The presiding referee
of the panel, or the referee if there is a single referee, shall be an active
attorney or retired judge. Judgment upon the award rendered by such
referee(s) shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure Sections 644
and 645.
(d) PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision of this Agreement shall limit the right of any party to this
Agreement to exercise self-help remedies such as setoff, foreclosure against
or sale of any real or personal property collateral or security, or obtaining
provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either
party to resort to arbitration or reference. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by exercise of
power of sale under the deed of trust or mortgage or by judicial foreclosure.
12.4 PRESENTMENT, DEMANDS AND NOTICE.
The Bank shall be under no duty or obligation (a) to make or give
any presentment, demands for performances, notices of nonperformance,
protests, notices of protest or notices of dishonor in connection with any
obligation or indebtedness under the Loan Documents or in connection with any
obligations or evidences of indebtedness held by the Bank as Collateral or
(b) to give the Borrower notice of rights or privileges relating to or
affecting any Collateral held by the Bank.
12.5 INDEMNIFICATION.
Borrower shall indemnify, save, and hold harmless the Bank and
its directors, officers, agents and employees (collectively the
"Indemnitees") from and against:
(a) Any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, charges, expenses or
disbursements (including attorneys' fees) of any kind with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement and the other Loan Documents, and the transactions contemplated
hereby, and with respect to any investigation, litigation or proceeding
related to this Agreement, the other Loan Documents, the Loan or the use of
the proceeds thereof, whether or not any Indemnitee is a party thereto (all
the foregoing, collectively, the "Indemnified Liabilities"); provided, that
Borrower shall have no obligation hereunder to any Indemnitee with respect to
Indemnified Liabilities arising from the gross negligence or willful
misconduct of such Indemnitee.
(b) Any and all writs, subpoenas, claims, demands, actions, or
causes of action that are served on or asserted against any Indemnitee (if
directly or indirectly related to a writ, subpoena, claim, demand, action, or
cause of action against Borrower or any affiliate of Borrower); and any and
all liabilities, losses, costs, or expenses (including attorneys' fees) that
any Indemnitee suffers or incurs as a result of any of said matters.
The obligations of the Borrower under this section shall survive
payment of the Loan and assignment of any rights hereunder.
12.6 ATTORNEYS' FEES.
In the event of a lawsuit or arbitration proceeding, including
any tort proceeding, between or among the parties hereto, the prevailing
party is entitled to recover costs and reasonable attorneys' fees (including
any allocated costs of in-house counsel) incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator.
12.7 NOTICES.
All notices required under this Agreement shall be personally
delivered or sent by registered or certified mail, postage prepaid, or
facsimile transmission to the addresses on the signature page of this
Agreement, or to such other addresses as the Bank and the Borrower may
specify from time to time in writing. Notices shall be effective upon
receipt or when proper delivery is refused.
12.8 SUCCESSORS AND ASSIGNS.
This Agreement is binding on the Borrower's and the Bank's
successors and assignees. The Borrower agrees that it may not assign this
Agreement or the other Loan Documents without the Bank's prior consent. The
Bank may sell participations in or assign this Loan, and may provide
financial information about the Borrower to actual or potential participants
or assignees, without notice to or consent of Borrower.
12.9 NO THIRD PARTIES BENEFITED.
This Agreement is made and entered into for the sole protection
and benefit of Bank and Borrower and their successors and assigns. No trust
fund is created by this Agreement and no other persons or entities shall have
any right of action under this Agreement or any right to the Loan funds.
12.10 INTEGRATION; RELATION TO ANY LOAN COMMITMENT; HEADINGS.
The Loan Documents (a) integrate all the terms and conditions in
or incidental to this Agreement, (b) supersede all oral negotiations and
prior writings with respect to their subject matter, including any loan
commitment to Borrower, and (c) are intended by the parties as the final
expression of the agreement with respect to the terms and conditions set
forth in those documents and as the complete and exclusive statement of the
terms agreed to by the parties. No representation, understanding, promise or
condition shall be enforceable against any party unless it is contained in
the Loan Documents. If there is any conflict between the terms, conditions
and provisions of this Agreement and those of any other agreement or
instrument, including any other Loan Document, the terms, conditions and
provisions of this Agreement shall prevail. Headings and captions are for
reference only and shall not affect the interpretation or meaning of any
provisions of this Agreement. The exhibits to this Agreement are hereby
incorporated in this Agreement.
12.11 INTERPRETATION.
(a) Time is of the essence in the performance of this Agreement
by Borrower; and (b) the word "include(s)" means "include(s), without
limitation," and the word "including" means "including but not limited to."
No listing of specific instances, items or matters in any way limits the
scope or generality of any language of this Agreement.
12.12 SEVERABILITY; WAIVERS; AMENDMENTS.
This Agreement may not be modified or amended except by a written
agreement signed by the parties. Any consent or waiver under this Agreement
must be in writing. If any part of this Agreement is not enforceable, the
rest of the Agreement may be enforced. If the Bank waives a default, it may
enforce a later default. No waiver shall be construed as a continuing
waiver. No waiver shall be implied from Bank's delay in exercising or
failure to exercise any right or remedy against Borrower or any security.
Consent by Bank to any act or omission by Borrower shall not be construed as
a consent to any other or subsequent act or omission or as a waiver of the
requirement for Bank's consent to be obtained in any future or other
instance. The Bank retains all of its rights and remedies, even if it makes
an advance after a default.
12.13 COUNTERPARTS.
This Agreement may be executed in counterparts each of which,
when executed, shall be deemed an original, and all such counterparts shall
constitute one and the same agreement.
This Agreement is executed as of the date stated at the top of the first page.
BANK: BORROWER:
BANK OF AMERICA NATIONAL FRANKLIN SELECT REALTY TRUST,
TRUST AND SAVINGS ASSOCIATION a California corporation
By ______________ By _________________________
Title ______________ Title _________________________
By ______________ By _________________________
Title ______________ Title _________________________
Address where notices to Address where notices to
the Bank are to be sent: the Borrower are to be sent:
Bank of America NT&SA Franklin Select Realty Trust
Commercial Real Estate Services/ 1800 Gateway Drive, 3rd Floor
National Accounts 9105 San Mateo, CA 94403
50 California Street, 11th Floor Attn: Mark TenBoer
San Francisco, CA 94111 Tel: (415) 312-5862
Attn: Laurence C. Hughes Fax: (415) 312-5830
Tel: (415) 445-4404
Fax: (415) 445-4154
EXHIBIT A
REAL PROPERTY COLLATERAL
EXHIBIT B
BORROWING NOTICE
___________________, 199__
Bank of America National Trust
and Savings Association
Commercial Real Estate Services
Division 9105
50 California Street, 11th Floor
San Francisco, CA 94111
Attention: Jane Duelks
Re: Secured Line of Credit Loan Agreement dated as of December 10, 1996
(the "Agreement") between BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("Bank") and FRANKLIN SELECT REALTY TRUST ("Borrower")
Dear ________________:
Reference is made to the Agreement. Capitalized terms used in this
Borrowing Notice without definition have the meanings specified in the
Agreement.
Pursuant to the Agreement, notice is hereby given that the Borrower
desires that the Bank make the advance described in attached SCHEDULE 1 (the
"Advance"). The Borrower and the undersigned Responsible Officer or other
authorized representative of the Borrower hereby certify that:
(1) LOAN AVAILABILITY. The outstanding amount of the Line of
Credit shall not, after giving effect to the making of the Advance, exceed
the Loan Availability;
(2) REPRESENTATIONS AND WARRANTIES. All representations and
warranties of the Borrower contained in the Agreement and the other Loan
Documents are true and correct in all material respects as of the date hereof
and shall be true and correct in all material respects on the date of the
Advance, both before and after giving effect to the Advance; provided,
however, that the representations and warranties of the Borrower set forth in
the Agreement regarding financial statements shall be deemed to be made with
respect to the financial statements most recently delivered to the Bank
pursuant to the Agreement;
(3) NO EVENT OF DEFAULT. No Event of Default or Potential Default
exists as of the date hereof or will result from the making of the Advance;
(4) USE OF PROCEEDS. The proceeds of the Advance will be used
only as permitted by the Agreement;
(5) NO MATERIAL ADVERSE EFFECT. No act, omission, change or event
which would have a Material Adverse Effect on the Borrower or the Collateral
has occurred since the date of the Agreement; and
(6) OTHER CONDITIONS. Enclosed are the documents and information
requested by Bank as a condition to this Advance.
FRANKLIN SELECT REALTY TRUST,
a California corporation
By: __________________________
Its: _________________________
SCHEDULE 1
to Borrowing Notice
REQUESTED LOAN
1. AMOUNT OF REQUESTED ADVANCE: $_______________
(Must be a minimum of $1,000,000)
2. PURPOSE OF ADVANCE:
EXHIBIT C
COMPLIANCE CERTIFICATE
This Compliance Certificate is delivered pursuant to the Secured
Line of Credit Loan Agreement dated as of December 10, 1996, between Franklin
Select Realty Trust ("Borrower") and Bank of America National Trust and
Savings Association ("Bank") (as from time to time amended, supplemented or
restated, the "Loan Agreement"). Capitalized terms used in this Certificate
without definition have the same meanings as in the Loan Agreement.
1. The undersigned hereby certifies that the undersigned is a
Responsible Officer and has reviewed the terms of the Loan Agreement and has
made a review of the transactions and financial condition of Borrower during
_________, the accounting period covered by the financial statements and
operating statements being delivered to Bank along with this Compliance
Certificate and:
(a) Borrower was in compliance with all of Borrower's financial
covenants contained in the Loan Agreement, including Section 9.4 of the Loan
Agreement, throughout such accounting period;
(b) No Event of Default or Potential Default occurred during such
accounting period, except as set forth in subparagraph (d) below;
(c) Borrower was not in default with respect to any other
Indebtedness of Borrower during such accounting period, except as set forth
in subparagraph (d) below;
(d) The nature and extent of the event or condition that
constituted [an Event of Default/Potential Default/a default with respect to
other Indebtedness of Borrower] is as follows:
(e) Borrower [has taken/is taking/is planning to take] the
following action with respect to the event or condition described in
subparagraph [(c)/(d)] above;
(f) During such accounting period, Borrower did not become subject
to any contingent liabilities not disclosed in a previous Compliance
Certificate, except as set forth as Schedule 1 hereto.
2. The outstanding principal amount of the Loan as of the date hereof
does not exceed Loan Availability.
3. The calculations required to establish compliance with Borrower's
financial covenants contained in the Loan Agreement, including Section 9.4 of
the Loan Agreement, and to establish that the outstanding principal amount of
the Loan does not exceed Loan Availability, are attached hereto as Schedule 1.
Date: ______________ __________________________________
[Responsible Officer]
SCHEDULE 1
to Compliance Certificate
1. [Calculations establishing compliance with Financial Covenants]
2. [Calculations establishing that Loan amount does not exceed Loan
Availability]
3. [Contingent liabilities]
EXHIBIT D
SCHEDULE OF REQUIRED LEASES
SHORES PROPERTY
American Management System (Suite 100)
American Management System (Suite 150)
American Management System (Suite 170)
American Management System (Suite 190)
American Management System (XL/Data) (Suite 225)
American Management System (Suite 200, 300)
Am. Telecorp (Suite 100)
Oracle Corp
Am. Telecorp (Suite 400, 465, 475)
Am Teleco (Media)
RSA Data Sec
RSA (Must)
RSA Data Sec
NORTHPORT PROPERTY
Hereaus Amersil
Advanced EPI
Lam Research
Lam Research
FAIRWAY CENTER PROPERTY
20th Cen Indust
CA Fed. Bank
CNA
TABLE OF CONTENTS
PAGE
1. DEFINITIONS........................................................... 1
1.1 Certain Defined Terms.......................................... 1
1.2 Computation of Time Periods.................................... 6
1.3 Accounting Terms............................................... 7
2. LINE OF CREDIT AMOUNT AND TERMS....................................... 7
2.1 Line of Credit Amount.......................................... 7
2.2 Availability Period............................................ 7
2.3 Interest Rate.................................................. 7
2.4 Loan Documents................................................. 7
2.5 Excess Borrowing Condition..................................... 8
3. FEES, EXPENSES........................................................ 8
3.1 Fees........................................................... 8
3.2 Expenses and Costs............................................. 8
4. REAL PROPERTY VALUE................................................... 8
4.1 Acceptance, Determinations..................................... 8
4.2 Additional Value Determinations................................ 9
5. DISBURSEMENTS, PAYMENTS, COSTS........................................ 10
5.1 Requests for Credit............................................ 10
5.2 Disbursement and Payment Records............................... 11
5.3 Authorization.................................................. 11
5.4 Direct Debit To Line of Credit................................. 11
5.5 Payments....................................................... 11
5.6 Banking Days................................................... 11
6. CONDITIONS............................................................ 11
6.1 Authorizations................................................. 12
6.2 Governing Documents; Good Standing Certificates................ 12
6.3 Loan Documents................................................. 12
6.4 Evidence of Priority; Title Insurance.......................... 12
6.5 Insurance...................................................... 12
6.6 Environmental Questionnaire.................................... 12
6.7 Appraisal...................................................... 12
6.8 Payment of Fees................................................ 12
6.9 Engineering.................................................... 12
6.10 Credit......................................................... 12
6.11 Other Items.................................................... 13
6.12 No Default..................................................... 13
6.13 Material Adverse Changes....................................... 13
6.14 Representations and Warranties................................. 13
6.15 Leases......................................................... 13
7. REPRESENTATIONS AND WARRANTIES........................................ 13
7.1 Organization of Borrower; Good Standing........................ 13
7.2 Authorization; Enforceable Agreement........................... 13
7.3 Financial Information.......................................... 13
7.4 Lawsuits....................................................... 14
7.5 Title to Assets................................................ 14
7.6 Collateral..................................................... 14
7.7 Permits, Franchises............................................ 14
7.8 Income Tax Returns............................................. 14
7.9 ERISA Plans.................................................... 15
7.10 Other Obligations.............................................. 15
7.11 No Event of Default............................................ 15
7.12 Location of Borrower........................................... 15
7.13 Status as a REIT............................................... 15
8. BORROWER OPTIONS...................................................... 15
8.1 Extension Option............................................... 15
8.2 Term Out Option................................................ 16
8.3 UPREIT Transfer................................................ 17
9. COVENANTS............................................................. 17
9.1 Use of Proceeds................................................ 17
9.2 Financial Information.......................................... 18
9.3 Other Information.............................................. 18
9.4 Financial Covenants............................................ 19
9.5 Taxes and Other Liabilities.................................... 20
9.6 Other Liens.................................................... 20
9.7 Notices to Bank................................................ 21
9.8 Audits; Books and Records...................................... 21
9.9 Compliance with Laws........................................... 21
9.10 Preservation of Rights......................................... 21
9.11 Maintenance of Properties...................................... 21
9.12 Insurance...................................................... 21
9.13 ERISA Plans.................................................... 22
9.14 Additional Negative Covenants.................................. 22
9.15 Perfection of Liens; Cooperation............................... 23
9.16 Continued Status as a REIT; Prohibited Transactions............ 23
9.17 Conduct of Business............................................ 23
9.18 Management of Borrower......................................... 23
10. COLLATERAL............................................................ 23
10.1 Real Property.................................................. 23
10.2 Personal Property.............................................. 24
10.3 Real Property Covenants........................................ 24
11. DEFAULT............................................................... 26
11.1 Failure to Pay................................................. 26
11.2 Lien Priority.................................................. 26
11.3 False Information.............................................. 26
11.4 Bankruptcy..................................................... 27
11.5 Receivers...................................................... 27
11.6 Lawsuits....................................................... 27
11.7 Judgments...................................................... 27
11.8 ERISA Plans.................................................... 27
11.9 Government Action.............................................. 27
11.10 Material Adverse Change........................................ 27
11.11 Other Default.................................................. 27
11.12 Other Breach Under This Agreement.............................. 28
11.13 Cross-default.................................................. 28
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS............................... 28
12.1 Remedies....................................................... 28
12.2 California Law................................................. 28
12.3 Arbitration and Reference...................................... 28
12.4 Presentment, Demands and Notice................................ 29
12.5 Indemnification................................................ 29
12.6 Attorneys' Fees................................................ 30
12.7 Notices........................................................ 30
12.8 Successors and Assigns......................................... 30
12.9 No Third Parties Benefited..................................... 30
12.10 Integration; Relation to Any Loan Commitment; Headings......... 30
12.11 Interpretation................................................. 30
12.12 Severability; Waivers; Amendments.............................. 31
12.13 Counterparts................................................... 31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,558
<SECURITIES> 578
<RECEIVABLES> 1,916
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 141,625
<DEPRECIATION> 17,583
<TOTAL-ASSETS> 131,298
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 109,455
<OTHER-SE> (12,802)
<TOTAL-LIABILITY-AND-EQUITY> 131,298
<SALES> 0
<TOTAL-REVENUES> 14,568
<CGS> 0
<TOTAL-COSTS> 9,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 886
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,807
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
