<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant / X /
Filed by a Party other than the Registrant / /
----
Check the appropriate box:
/ X / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
- ---- Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
- ----
/ / Definitive Additional Materials
- ----
/ / Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
- ----
CORPORATE OFFICE PROPERTIES TRUST
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
- ----
/ X / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Shares, par value $0.01 per share, and Preferred Shares, par value
$0.01 per share, of Corporate Office Properties Trust.
(2) Aggregate number of securities to which transaction applies:
approximately 6,928,000 shares of Common Shares and approximately
969,900 Series A Convertible Preferred Shares convertible into Common
Shares on the basis of 1.8748 Common Shares for each Preferred Share.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $9.09375 per
Common Share and $25.00 per Preferred Share, plus $107,600,000 in cash
and assumption or payment of indebtedness. The Common Share price is
calculated pursuant to Rule 0-11(a)(4) of the Securities Exchange Act
of 1934 as the average of the high and low prices reported in the
consolidated reporting system as of June 23, 1998 which is within five
business days prior to the date of this filing.
(4) Proposed maximum aggregate value of transaction: $194,876,000.
(5) Total fee paid: $38,975.
/ / Fee paid previously with preliminary materials.
- ----
/ / Check box if any part of the fee is offset as provided by Exchange Act
- ---- Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------
(3) Filing Party:
---------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------
<PAGE>
[CORPORATE OFFICE PROPERTIES TRUST LOGO]
, 1998
------------- ----
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Corporate Office Properties Trust (the "Company") to be
held on ____________ __ , 1998, at 10:30 a.m. in Room ___ at The Four Seasons
Hotel, One Logan Square, Philadelphia, Pennsylvania 19103.
At the Special Meeting, you will be asked to consider and vote to approve a
transaction (the "Transaction") pursuant to which certain affiliates of
Constellation Real Estate Group, Inc. (collectively, "Constellation") will
contribute certain real property, interests in entities which own certain real
property and a mortgage, and certain other assets to the Company in exchange for
cash, the assumption of certain debt, and Common Shares of Beneficial Interest
and non-voting Series A Convertible Preferred Shares of Beneficial Interest to
be issued by the Company. The Transaction is more fully described in the
accompanying Proxy Statement.
The scale of the Transaction will significantly expand the Company's
management, property, tenant and capital base. In addition, the Constellation
management team will add property development and third party property
management functions that management believes will enhance the Company's
resources and long term performance. As a result, the Board of Trustees believes
the Transaction will create shareholder value; and therefore it is in the
economic interest of all shareholders to approve the Transaction.
We urge you to review and consider carefully the accompanying Notice of
Special Meeting of Shareholders and Proxy Statement, which contain information
about the Transaction to be voted upon and certain other matters. The Board of
Trustees has unanimously approved, and recommends a vote FOR the Transaction.
The approval of the Transaction requires the affirmative vote of a majority
of the votes cast at the Special Meeting. Your vote is important to the Company.
Please complete, date and sign the enclosed proxy card and return it in the
accompanying postage-paid envelope. You are, of course, welcome to attend the
Special Meeting and vote in person, even if you have previously returned your
proxy card. Regardless of your attendance, you may revoke your proxy at any time
before it is exercised.
Thank you for your consideration of this important matter.
Sincerely, Sincerely,
/s/ JAY H. SHIDLER /s/ CLAY W. HAMLIN, III
- -------------------- ------------------------
JAY H. SHIDLER CLAY W. HAMLIN, III
CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
ONE LOGAN SQUARE, SUITE 1105
PHILADELPHIA, PENNSYLVANIA 19103
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On , 1998
------------ ---
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Corporate Office Properties Trust (the "Company") will be held on
________ __, 1998, at 10:30 a.m. in Room ____ at The Four Seasons Hotel, One
Logan Square, Philadelphia, Pennsylvania 19103, to consider and vote upon the
following matters more fully described in the accompanying Proxy Statement:
1. A proposal to approve a transaction evidenced by various agreements by and
among the Company, Corporate Office Properties, L.P. and certain
partnerships and other entities affiliated with Constellation Real Estate
Group, Inc. (collectively, "Constellation"), pursuant to which
Constellation will contribute interests in entities which own certain real
property and a mortgage, certain real property owned by Constellation, and
certain other assets owned by Constellation to the Company in exchange for
a combination of cash, the assumption of debt by the Company, and Common
Shares and non-voting Series A Convertible Preferred Shares of Beneficial
Interest to be issued by the Company; and
2. Such other business as may properly be brought before the Special Meeting
or any adjournment or postponement thereof.
The Board of Trustees has fixed the close of business on ______ __, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting and any adjournment or postponement thereof. A
list of such shareholders will be available for inspection at the offices of the
Company, at One Logan Square, Suite 1105, Philadelphia, Pennsylvania 19103, at
least ten days prior to the Special Meeting.
By order of the Board of Trustees,
/s/ JOHN D. PARSINEN
--------------------
, 1998 JOHN D. PARSINEN
- ---------- --- SECRETARY
Philadelphia, Pennsylvania
THE BOARD OF TRUSTEES APPRECIATES AND ENCOURAGES YOUR PARTICIPATION IN THE
COMPANY'S SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED. ACCORDINGLY, PLEASE
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE
PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR PROXY, IF YOU
WISH, AND VOTE IN PERSON. YOUR PROXY IS REVOCABLE IN ACCORDANCE WITH THE
PROCEDURES SET FORTH IN THE PROXY STATEMENT.
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1998
---------- ---
PROXY STATEMENT
This Proxy Statement (the "Proxy Statement") is being furnished to holders
of Common Shares of Beneficial Interest, par value $0.01 per share, (the "Common
Shares") of Corporate Office Properties Trust, a Maryland real estate investment
trust (the "Company"), in connection with a special meeting of shareholders of
the Company (the "Special Meeting") and the solicitation of proxies in
connection therewith. At the Special Meeting, shareholders will be asked to
consider and vote upon: (A) a transaction (the "Transaction") in which certain
affiliates of Constellation Real Estate Group, Inc. (collectively,
"Constellation") will contribute to the Company (i) Constellation's interests in
entities which own certain real property and a mortgage, (ii) certain real
property, and (iii) certain other assets owned by Constellation, in exchange for
a combination of cash, assumption of debt, and Common Shares and non-voting
Series A Convertible Preferred Shares of Beneficial Interest to be issued by the
Company; and (B) such other business as may properly come before the Special
Meeting or any adjournment thereof. Constellation is an indirect wholly-owned
subsidiary of Baltimore Gas and Electric Company.
The close of business on _____________ __, 1998 has been fixed by the Board
of Trustees as the record date for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournments or
postponements thereof (the "Record Date"). On the Record Date, the Company had
outstanding ____________ Common Shares. The Common Shares is the Company's only
class of voting securities and each Common Share entitles the holder thereof to
one vote on all matters to come before the meeting. Approval of the Transaction
requires the affirmative vote of a majority of the votes cast at the Special
Meeting, assuming a quorum is present. There is no cumulative voting.
All of the shareholders represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting, and not revoked,
will be voted at the Special Meeting in accordance with the instructions
thereon. If no instructions are indicated, proxies will be voted in favor of the
Transaction. Abstentions will have the effect of a vote against the Transaction.
The Company does not know of any matters, other than as described in the
Notice of Meeting, which are to come before the Special Meeting. If any other
matters are properly presented at the Special Meeting for action, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment.
A proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked (i) by filing with the Board of
Trustees of the Company at or before the Special Meeting a written notice of
revocation bearing a later date than the proxy, (ii) by duly executing a
subsequent proxy relating to the same Common Shares and delivering it to the
Board of Trustees of the Company at or before the Special Meeting or (iii) by
attending the Special Meeting and voting in person (attendance at the Special
Meeting will not in and of itself constitute revocation of a proxy). Any written
notice revoking a proxy should be delivered to the Board of Trustees, Corporate
Office Properties Trust, One Logan Square, Suite 1105, Philadelphia,
Pennsylvania 19103.
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<PAGE>
Votes cast by proxy or in person at the Special Meeting will be tabulated by
the election inspector appointed for the meeting. The election inspector will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter upon which the shareholder has abstained.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn).
The cost of preparing, assembling and mailing the Notice of Special Meeting,
this Proxy Statement and the form of proxy, including the reimbursement of
banks, brokers and other nominees for forwarding proxy materials to beneficial
owners, will be borne by the Company. Proxies may also be solicited personally
or by telephone by Trustees and officers of the Company, who will receive no
additional compensation.
The Company's Common Shares are listed for trading on the New York Stock
Exchange ("NYSE") under the symbol OFC. On ___________ __, 1998, the last sale
price for the Company's Common Shares as reported on the NYSE was $__.__ per
share. The high and low sales price for the Company's Common Shares as reported
on the NYSE on May 14, 1998, the date preceding the public announcement of the
Transaction, was 10-15/16 and 10-1/2, respectively.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with the solicitation of proxies hereby and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company or any other person.
This Proxy Statement is solicited on behalf of the Board of Trustees of the
Company. The date of this Proxy Statement is _________ __ , 1998.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY...........................................................................1
THE SPECIAL MEETING...............................................................8
Record Date; Voting At The Meeting..............................................8
Proxies.........................................................................8
THE TRANSACTION..................................................................10
Reasons For The Transaction And Recommendation of Board of Trustees............10
Terms Of The Transaction.......................................................11
Properties and Assets to be Contributed by Constellation.....................11
Consideration to be Paid by the Company......................................12
Description of Common and Preferred Shares...................................14
Conditions to the Transaction................................................15
Registration Rights..........................................................16
Transaction Costs............................................................16
Changes In Operations And Additions To Management..............................17
Certain Effects Of The Transaction.............................................19
Share Ownership..............................................................19
Major Tenants................................................................19
Financing of Transaction.....................................................20
Other........................................................................20
Accounting Treatment Of The Transaction........................................20
Federal Income Tax Matters.....................................................20
Treatment of the Transaction.................................................21
Taxation of the Company......................................................21
REIT Qualification Requirements..............................................22
THE COMPANY......................................................................27
General........................................................................27
Recent Developments............................................................27
CAPITALIZATION...................................................................28
THE CONSTELLATION PROPERTIES AND CONSTELLATION SERVICE COMPANIES.................30
The Constellation Properties...................................................30
The Constellation Service Companies............................................46
Legal Proceedings Related To Constellation.....................................47
SELECTED FINANCIAL DATA OF CONSTELLATION SERVICE COMPANIES.......................47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSTELLATION SERVICE COMPANIES' FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................49
SELECTED FINANCIAL DATA OF THE COMPANY...........................................52
MANAGEMENT.......................................................................56
Executive Officers And Trustees................................................56
Certain Information Regarding The Board of Trustees and Committees.............58
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS......................................59
INDEPENDENT ACCOUNTANTS..........................................................60
OTHER MATTERS....................................................................60
EXPERTS..........................................................................60
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................60
INDEX TO FINANCIAL STATEMENTS...................................................F-1
</TABLE>
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Proxy Statement
and incorporated by reference. Unless the context otherwise requires, the
"Company" refers to Corporate Office Properties Trust, and its predecessors and,
where applicable, Corporate Office Properties, L.P., a Delaware limited
partnership ("COPLP" or the "Operating Partnership") and its subsidiaries. The
actual amounts of cash to be paid, debt to be assumed or repaid and Common and
Preferred Shares to be issued by the Company cannot be determined until closing,
as they will be a function of certain calculations and adjustments to be made at
that time. Accordingly, such amounts included in this Proxy Statement are
estimates, not expected to vary materially from the actual amounts.
The Company................. The Company is a self-administered real estate
investment trust ("REIT") which focuses principally
on the ownership, acquisition and management of
suburban office properties in strong and growing
suburban submarkets in the United States. The
Company currently owns interests in 24 suburban
office properties in Maryland, Pennsylvania and New
Jersey containing approximately 2.6 million
rentable square feet and seven retail properties
located in the Midwest containing approximately
370,000 rentable square feet. As of June 1, 1998,
the properties owned by the Company were over 97%
leased. In addition, the Company has options to
purchase 44.3 acres of land contiguous to certain
of its properties owned by related parties. See
"The Company."
Constellation................Constellation Real Estate Group, Inc. (together
with its affiliates that will be party to the
Transaction, "Constellation") is a wholly owned
indirect subsidiary of Baltimore Gas and Electric
Company ("BGE"), through which BGE has engaged in
the acquisition, ownership, development,
construction and management of office, industrial
and retail properties since 1981. The Company is
acquiring from Constellation title to, or ownership
of entities that own title to, all the office and
retail operating properties owned by Constellation,
and options to purchase 91 acres of land held by
Constellation for future office and retail
development. The Company is also acquiring
Constellation's 75% interest in Constellation
Realty Management, LLC ("CRM"), a real estate
management services entity, and will employ the
approximately 37 employees of Constellation Real
Estate, Inc. ("CRE") who are engaged in the
development, construction and asset management of
Constellation's operating properties. Constellation
will continue to be actively engaged in the real
estate business, as it is retaining substantially
all its interests in its commercial and residential
land and will continue to employ its personnel
engaged in the development and management of those
properties. See "Constellation."
1
<PAGE>
Date, Place & Time
of Meeting...................The Special Meeting of Shareholders of the Company
is scheduled to be held in Room ______ at The Four
Seasons Hotel, One Logan Square, Philadelphia,
Pennsylvania 19103 on _________ __ , 1998 at 10:30
a.m.
Purpose of Meeting...........To consider and vote upon: (i) a transaction,
pursuant to which Constellation will contribute to
the Company certain real property, its interests in
entities which own certain real property and a
mortgage, and certain other assets owned by
Constellation in exchange for a combination of
cash, assumption of debt by the Company, and Common
Shares and non-voting Series A Convertible
Preferred Shares of Beneficial Interest to be
issued by the Company (the "Transaction"); and (ii)
such other business as may properly come before the
Special Meeting.
Record Date, Quorum
and Vote Required............Approval of the Transaction requires the
affirmative vote of a majority of the votes cast at
the Special Meeting, assuming a quorum is present.
A majority of the Common Shares outstanding,
represented in person or by proxy, will constitute
a quorum for the transaction of business at the
Special Meeting. The Record Date for the Special
Meeting is _____________ __, 1998. See "The Special
Meeting--Record Date; Voting at the Meeting."
Solicitation and Revocation
of Proxies...................All expenses of the solicitation of the
shareholders of the Company in connection with this
Proxy Statement will be borne by the Company. Any
proxy given pursuant to this solicitation may be
revoked at any time prior to its exercise by the
execution of a proxy signed at a later date or by
the giving of written notice of revocation to the
Secretary of the Company at any time before the
taking of the vote at the Special Meeting. A
shareholder may also revoke a proxy by attending
the Special Meeting and voting in person. See "The
Special Meeting--Proxies."
Assets to be Contributed to
the Company by
Constellation................Constellation will contribute to the Company: (i)
title to, or 100% of the ownership interests in,
entities which own a total of 14 office properties
and two retail properties; (ii) controlling
interests in two entities, one of which holds a
mortgage on a retail property, the other of which
owns a retail property under development; (iii) a
75% ownership interest in CRM, a real estate
management company (the 25% minority interest is
owned by an unaffiliated third party), and (iv)
certain equipment, office furniture and other
assets related to CRE. In addition, approximately
37 employees of CRE will become Company
2
<PAGE>
employees. See "The Transaction--Terms of the
Transaction." The real property, mortgage interest
and interests in entities owning real property
being contributed by Constellation are referred to
herein collectively as the "Constellation
Properties," and the 75% interest in CRM and the
furniture and other CRE assets to be contributed to
the Company by Constellation are referred to herein
as the "Constellation Service Companies."
Upon completion of the Transaction, the Company
will own interests in a total of 38 suburban office
properties (as compared to 24 currently),
containing approximately 4.0 million rentable
square feet (as compared to 2.6 million currently),
and 11 retail properties (as compared to seven
currently) containing 783,000 rentable square feet
(as compared to 370,000 square feet currently); the
Company will have approximately 49 full time
employees (as compared to 12 currently).
Constellation is also granting to the Company
options to purchase up to 91 acres of land zoned
for office development, and an option to purchase a
50% interest in a 206,000 square foot office
property.
Consideration to be
Exchanged with Constellation
by the Company...............In exchange for the Constellation Properties and
Constellation Service Companies, the Company will
(i) issue to Constellation an aggregate of
approximately 6,928,000 Common Shares; (ii) issue
to Constellation an aggregate of approximately
969,900 non-voting Series A Convertible Preferred
Shares of Beneficial Interest, $0.01 par value,
with a liquidation preference of $25.00 per share
("Preferred Shares"); and (iii) pay cash to
Constellation and assume or repay indebtedness
outstanding against the Constellation Properties.
Such cash payments and indebtedness are estimated
to total $107.6 million, including $4.2 million of
cash payments to Constellation, $64.8 million of
debt repayment and $13.0 million of assumed
indebtedness. The $25.6 million balance of the
foregoing $107.6 million cash requirement reflects
the purchase price to be paid to Constellation for
two retail properties (the "Development
Properties"). The Company's obligation to close on
each of the Development Properties is contingent on
the occurrence of certain events. For purposes of
the Transaction, the Common Shares are valued at
$10.50 per share and the Preferred Shares are
valued at $25.00 per share, for a total of
approximately $97.0 million. The Preferred Shares
are convertible, beginning two years after the
closing of the Transaction, at the rate of 1.8748
Common Shares for each Preferred Share into an
aggregate of approximately 1,818,300 Common Shares.
See "The Transaction--Terms of the Transaction."
Common Shares and
3
<PAGE>
Preferred Shares are collectively referred to
herein as the "Shares."
Closing of the Transaction... The Transaction will be consummated at several
closings, each comprising a closing with
respect to one or more of the Constellation
Properties and Constellation Service Companies,
as follows. At the initial closing (expected to
occur within 30 days following the date of the
Special Meeting), the Company will acquire the
Constellation Service Companies and 12 of the
Constellation Properties. The total
consideration payable at the initial closing
will be approximately $145.0 million, including
approximately $59.9 million of indebtedness
assumed or repaid and approximately $85.1
million in value of Common and Preferred
Shares. Subsequent closings will be held with
respect to six Constellation Properties
currently under construction or development.
The closing on two of those properties is to
occur within 45 days after the initial closing
(total consideration of approximately $4.2
million in cash); closing on two of those
properties is to occur on the earlier of
December 31, 1998 or the date on which certain
occupancy levels are met (total consideration
of approximately $29.8 million, including
approximately $17.9 million debt repayment and
$11.9 million in Shares), and closing on the
Development Properties is to occur on the
earlier of the date on which certain net
operating income levels are achieved or July 1,
1999 (total purchase price of approximately
$25.6 million in cash). Neither the Company nor
Constellation is obligated to close on the
Development Properties unless certain minimum
net operating income levels have been achieved
by July 1, 1999.
Source of Funds Required
by the Company...............To complete the Transaction, the Company will
require a total of approximately $98.7 million in
cash, of which approximately $64.8 million will be
used to repay indebtedness currently outstanding
with respect to certain Constellation Properties,
approximately $4.2 million will be the purchase
price payable for two of the Constellation
Properties, approximately $25.6 million will be the
purchase price of the two Development Properties
and approximately $4.1 million will be required for
brokerage fees and other out of pocket expenses
related to the Transaction. The cash required to
complete the Transaction, not including the
Development Properties, is available from the
Company's existing acquisition credit facility;
however, the Company and Constellation are
currently seeking to refinance certain of the
Constellation Properties at or prior to the closing
of the Transaction to fund a significant portion of
the cash requirements of the Transaction. The
Company expects to be able to obtain financing
commitments sufficient to enable it to close on
each of the Development Properties prior to the
time
4
<PAGE>
any such closing may occur. See "The
Transaction-Certain Effects of the Transaction."
Changes in Operations,
Management and
Board of Trustees............Upon closing of the Transaction, certain of
Constellation's senior management personnel will be
employed by the Company in senior management
positions, and the Board of Trustees will be
increased by two members, to a total of nine, by
the addition of two Trustees designated by
Constellation. The Company's property management,
development, construction and accounting activities
will be conducted from Constellation's offices in
Columbia (one of the Constellation Properties),
Maryland, and the Company's acquisition, capital
markets and financing activities will continue to
be conducted from the Company's headquarters in
Philadelphia, Pennsylvania. See "The
Transaction--Changes in Operations and Additions to
Management."
Certain Effects of the
Transaction..................As a result of the transaction: (i)
Constellation will have the right, so long as it
maintains certain levels of share ownership in the
Company, to designate up to two members of the
Board of Trustees; (ii) Constellation will own
approximately 41.5% of the Company's Common Shares
outstanding upon closing of the Transaction, and as
such will have the power to prevent certain actions
that require the approval of the holders of two
thirds of the Common Shares; and (iii)
Constellation, as holder of the Preferred Shares,
will be entitled to receive an annual preferred,
cumulative dividend payment of $1.375 per Preferred
Share, equal to a rate of 5.5% based on the $25.00
per share liquidation preference attributable to
the Preferred Shares. Additionally, in order to
fulfill its obligation to close on the Development
Properties, the Company must obtain financing
commitments prior to the date of any such closing
in amounts up to approximately $25.6 million. See
"The Transaction--Certain Effects of the
Transaction."
Conditions to the Closing of
the Transaction..............Closing of the Transaction is
conditioned, among other things, upon (i) approval
of the Transaction by the Company's shareholders,
(ii) the representations and warranties of the
parties contained in the agreements related to the
Transaction (the "Transaction Agreements") being
true and correct in all material respects as of the
closing of the Transaction, (iii) performance by
each of the parties of their respective obligations
required to be performed under the Transaction
Agreements on or prior to the closing of the
Transaction, and (iv) receipt of the requisite
consents, opinions and approvals from certain third
parties. For a discussion of certain important
issues related, inter
5
<PAGE>
alia, to the Company's continued qualification as a
REIT, see "The Transaction--Conditions to the
Transaction."
Federal Income Tax
Consequences.................No gain or loss will be recognized by
the Company or the holders of Common Shares upon
the consummation of the Transaction. Subsequent to
the Transaction, the Company will continue to
operate as a REIT. See "The Transaction--Federal
Income Tax Matters."
Shares Outstanding
after Closing................Upon closing of the Transaction, there will be
approximately 16,699,083 Common Shares outstanding.
The entities comprising Constellation, all of which
are directly or indirectly owned by BGE, will own
an aggregate of approximately 6,928,000 Common
Shares, or approximately 41.5% of the Common Shares
to be outstanding after the Transaction. They will
also own approximately 969,900 Preferred Shares,
convertible on a basis of 1.8748 Common Shares for
each Preferred Share beginning two years following
the closing of the Transaction into a total of
approximately 1,818,300 Common Shares. The
Preferred Shares may not be converted into Common
Shares if at the time of such conversion
Constellation and its affiliates would own 45% or
more of the Company's outstanding Common Shares.
See "The Transaction--Terms of the Transaction."
Ownership of Units
in COPLP.....................As of the date of this Proxy Statement, there are
10,399,310 Partnership Units and 1,913,545
Preferred Units of COPLP outstanding. In addition,
282,508 Partnership Units and 186,455 Preferred
Units are issuable in November 2000. The Company
owns 8,100,000 Partnership Units, or 75.8% of all
Partnership Units outstanding and to be issued as
aforesaid. The ownership of substantially all the
Constellation Properties and Constellation Service
Companies will be contributed by the Company to
COPLP and its subsidiaries, in exchange for which
COPLP will issue to the Company 6,928,000
Partnership Units and 969,900 Preferred Units. Upon
completion of the transaction, the Company will own
85.3% of all Units outstanding and to be issued as
aforesaid. The Preferred Units currently held by
outside parties are convertible to Partnership
Units on a basis of 3.5714 Partnership Units for
each Preferred Unit beginning October 1, 1999. The
969,900 Preferred Units to be issued to the Company
are convertible to 1,818,300 Partnership Units on a
basis of 1.8748 Partnership Units for each
Preferred Unit beginning two years after the
closing of the Transaction. The Company's Preferred
Units will be so converted automatically upon the
conversion of Preferred Shares into Common Shares -
the conversion of each Preferred Share will
automatically trigger
6
<PAGE>
the conversion of a Preferred Unit.
Recommendation of the
Board of Trustees............The Board of Trustees, including the independent
Trustees, has unanimously approved the Transaction
and the terms of the Transaction Agreements, and
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE TRANSACTION. The Board of
Trustees believes that the terms of the Transaction
are fair to, and in the best interests of, the
Company, the Operating Partnership and the
Company's shareholders. For a discussion of factors
considered by the Board of Trustees in reaching its
decision, see "The Transaction--Reasons for the
Transaction and Recommendation of the Board of
Trustees."
This Proxy Statement contains "forward-looking statements" relating to,
without limitation, future economic performance, plans and objectives of
management for future operations and projections of revenue and other financial
items. The Company's actual results may differ significantly from the results
discussed in such "forward-looking statements." Factors that could cause such
differences include, but are not limited to, continued occupancy of certain
major tenants, supply and demand of office properties in the Company's market
area, prevailing economic conditions in the Mid-Atlantic region, significant
expansion of the properties owned and managed by the Company, interest rates,
availability of capital, expansion of the Company's personnel, future capital
expenditure requirements, and distributions available from the Operating
Partnership.
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THE SPECIAL MEETING
At the Special Meeting, the Company's shareholders will be asked to: (i)
consider and vote upon the approval of the Transaction, and (ii) transact such
other business relating thereto as may properly come before the Special Meeting.
The Board of Trustees has determined the Transaction to be fair to, and in
the best interests of, the Company's shareholders, has unanimously approved the
Transaction and the terms of the Transaction Agreements, and unanimously
recommends that the shareholders vote "FOR" approval of the Transaction.
RECORD DATE; VOTING AT THE MEETING
On the Record Date, there were _____________ Common Shares outstanding. Each
holder of record of Common Shares on the Record Date is entitled to cast one
vote per Common Share, exercisable in person or by a properly executed proxy,
upon each matter properly submitted for the vote of the shareholders at the
Special Meeting. A majority of the Common Shares outstanding, represented in
person or by proxy, will constitute a quorum for the transaction of business at
the Special Meeting. Abstentions will be treated as shares that are present and
entitled to vote for the purpose of determining a quorum.
The approval and adoption of the Transaction requires the affirmative vote
of a majority of the votes cast at the Special Meeting, assuming a quorum is
present.
Approval of postponement or adjournment of the Special Meeting requires the
affirmative vote of a majority of the Common Shares voting at the Special
Meeting. For purposes of satisfying this vote requirement, failure to vote or an
abstention from voting will have the effect of votes against postponement or
adjournment. If shareholders approve such an adjournment or postponement, the
Special Meeting could be postponed or adjourned in order to permit further
solicitation of proxies if there are not sufficient votes at the time of the
Special Meeting to approve the Transaction.
PROXIES
Common Shares represented by properly executed proxies received at or prior
to the Special Meeting that have not been revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Common Shares
represented by properly executed proxies for which no instruction is given will
be voted "FOR" approval of the Transaction. The Company's shareholders are
requested to complete, sign, date and promptly return the enclosed proxy card in
the postage prepaid envelope provided for this purpose to ensure that their
shares are voted. A shareholder may revoke a proxy any time before it is voted
by submitting at any time prior to the Special Meeting a later-dated proxy with
respect to the same shares, by delivering a written notice of revocation to the
Secretary of the Company at any time prior to such Special Meeting or by
attending the Special Meeting and voting in person. Mere attendance at the
Special Meeting will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, including
further solicitation of proxies, at any subsequent reconvening of the Special
Meeting all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Special Meeting (except for any
proxies that have theretofore effectively been revoked or withdrawn).
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The Company has retained _____________________ (the "Solicitation Agent") to
solicit proxies. The Solicitation Agent may contact the Company's shareholders.
The Solicitation Agent will receive a fee of approximately $_______ for such
services, plus reimbursement of out-of-pocket expenses. The Trustees and
officers of the Company and their affiliates may also solicit proxies by
telephone, telegram or personal contact, and such persons will receive no
additional compensation for such services. Copies of solicitation materials will
be furnished to fiduciaries, custodians and brokerage houses for forwarding to
beneficial owners of the Company shares held in their name. The Company will
bear the cost of preparing and mailing proxy materials in connection with the
Special Meeting and the solicitation of proxies, and the cost of commission
filing fees and printing costs in connection with this Proxy Statement.
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THE TRANSACTION
REASONS FOR THE TRANSACTION AND RECOMMENDATION OF THE BOARD OF TRUSTEES
In reaching its conclusion, the Board of Trustees considered, without
assigning relative weight to, the following factors:
(i) The Transaction will provide the Company with additional experienced
management personnel and significant property management, development and
construction infrastructure, all of which will expand its business and
development capabilities in the Mid-Atlantic region of the United States.
In addition, the Company will have the option to acquire 91 acres, adjacent
to certain of the properties being acquired, suitable for development of
office properties.
(ii) The Transaction will increase the Company's asset and capital base and
diversify its sources of revenue. While increased profitability does not
necessarily result from increased size, the Board of Trustees believes the
Company's increased size should enhance its access to capital and reduce
its costs of capital.
(iii) The Transaction will give the Company a major presence in the
Baltimore/Washington market, enhancing the geographic diversity of the
Company's ownership interests and operations and the Company's goal of
becoming a significant participant in key markets in the Mid-Atlantic
region of the United States.
(iv) The Transaction is expected to be accretive, and therefore economically
advantageous to the Company's current shareholders.
(v) In addition to adding up to 18 properties to the Company's portfolio, the
Transaction will add more than 130 tenants to the Company's tenant base,
for a combined total of more than 215 tenants. This adds to the diversity
and stability of the Company's portfolio.
(vi) The addition of the CRE employees and CRM will make the Company one of the
largest property managers in its market area, and will increase the square
footage of the office properties managed by the Company to more than 17
million (including approximately four million square feet in properties
owned, or to be owned by the Company).
The terms of the Transaction were negotiated by the respective managements
of the Company and Constellation. The Company did not obtain independent
appraisals of the specific Constellation Properties or Constellation Service
Companies, nor did the Company obtain an independent appraisal, valuation or
fairness opinion with respect to the Transaction as a whole. Constellation did
obtain a fairness opinion from an independent party, solely for the benefit of
Constellation.
The Board of Trustees has unanimously agreed that the Transaction is in the
best interests of the shareholders of the Company, and has unanimously
recommended that the shareholders approve the Transaction.
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THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR APPROVAL
OF THE TRANSACTION.
TERMS OF THE TRANSACTION
The following summary of the material provisions of the Transaction
Agreements is qualified in its entirety by reference to the Transaction
Agreements, copies of which have been filed with the Securities and Exchange
Commission as Exhibits to this Proxy Statement.
Properties and Assets to be Contributed by Constellation
Constellation will contribute to the Company:
(i) Title to one operating office property;
(ii) 100% of the ownership interests in entities which own a total of
ten operating properties (nine office properties and one retail
property);
(iii) 100% of the ownership interests in entities which own two office
properties currently under construction;
(iv) 75% of the ownership interest in one entity which holds a mortgage
on a retail property owned by persons not affiliated with either
the Company or Constellation;
(v) 100% and 60%, respectively, of the ownership interests in two
entities which own two retail properties currently under
development (the "Development Properties");
(vi) Either title to, or 100% of the ownership interests in entities
which own, two office properties on which construction recently
commenced;
(vii) A 75% ownership interest in CRM; and
(viii) Certain equipment, furniture and other assets related to CRE.
Items (i)-(vi) above are referred to herein as the "Constellation Properties,"
and items (vii) and (viii) are referred to herein as the "Constellation Service
Companies." The Constellation Properties comprise, in the aggregate,
approximately 1.4 million rentable square feet of office space and approximately
400,000 rentable square feet of retail space in a total of 14 office properties
and four retail properties. The terms of the mortgage referred to in (iv) above
are such that the mortgagee has virtually the same economic risks and rewards as
if it owned the land and improvements directly.
The Company will acquire from CRE the furniture, equipment, computer
software, etc. used by CRE in connection with the operation of the Constellation
Properties. In addition, those persons employed by CRE engaged in the operation
of the Constellation Properties will become Company employees. Of the 37 CRE
employees expected to join the Company, ten are currently involved in
construction, nine in finance/accounting, four in legal, four in development,
three in information technology, two in asset management, and five in various
corporate and administrative functions. CRM
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is one of the largest property management organizations in the
Baltimore/Washington market. Approximately 47% of its revenues for the year
ended December 31, 1997 were derived from Constellation Properties and other
Constellation affiliates (including BGE). The balance of its revenues for the
year were derived from unaffiliated third parties. CRM employs 66 people, 30 of
whom are building engineers and maintenance personnel, 19 are engaged in
property management and support, five are lease administrators, nine are engaged
in accounting and three are involved in corporate activities.
In addition to the foregoing, Constellation will grant the Company an option
to purchase for cash its 50% interest in a planned suburban office development
project in Annapolis, Maryland, as well as certain options and rights of first
refusal to purchase undeveloped land totaling 91 acres in three locations
adjacent to certain of the Constellation Properties with aggregate office
development potential of approximately 1.7 million square feet.
Following closing of the Transaction, a subsidiary of the Operating
Partnership will perform certain consulting and project management services for
Constellation pursuant to an agreement that calls for Constellation to pay the
Company $250,000 per month for the first three months following the closing,
$150,000 per month for the next three months, $100,000 per month for the four
months thereafter, and $50,000 per month for the eight months thereafter.
For a more complete description of the foregoing, see "The Constellation
Properties and Constellation Service Companies."
Consideration to be Paid by the Company
Pursuant to the Transaction Documents, the Company agreed to acquire the
Constellation Service Companies for Common Shares and Preferred Shares valued at
a total of $2.5 million, and the Constellation Properties for a payment of cash,
the issuance of Common Shares and Preferred Shares and the assumption of debt
valued at a total of approximately $202.1 million. The mix of cash, shares and
debt assumption cannot be determined precisely until closing on all aspects of
the Transaction have occurred. The closing on certain of the retail
Constellation Properties may be deferred until after the first quarter of 1999,
closing on the Development Properties is contingent upon the occurrence of
certain events, and it is possible that certain of the Constellation Properties
may be disposed of to third parties with the consent of both the Company and
Constellation prior to closing of the Transaction. For purposes of the
Transaction, the Company and Constellation agreed to value the Common Shares at
$10.50 per share and the Preferred Shares at $25.00 per share.
At the date of this Proxy Statement, the Company's best estimate is that in
exchange for the Constellation Properties and Constellation Service Companies,
the Company will:
(i) Pay approximately $29.8 million in cash to Constellation.
Approximately $25.6 million of this amount will be payable for the
purchase of the two Development Properties, the closings for which
are not expected to occur prior to the first quarter of 1999, and
approximately $4.2 million will be payable for two properties (134
National Business Parkway and Woodlands Two) on which construction
recently commenced, the closings for which are expected to occur
within 45 days after the initial closing of the Transaction;
(ii) Repay a total of approximately $64.8 million of indebtedness
currently outstanding against certain of the Constellation
Properties;
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(iii) Assume two loans reflecting a total of approximately $13.0
million of indebtedness outstanding against certain of the
Constellation Properties. One such obligation is approximately
$9.6 million of fixed rate debt bearing interest at 7.5% percent
per annum. Annual principal payments for the year ended December
31, 1998 will approximate $165,000. This debt matures in October
2020, unless the lender exercises a termination right in October
2005 and every five years thereafter. The remaining $3.4 million
of debt to be assumed matures in September 2000 and bears
interest, payable monthly, based upon London Interbank Offered
Rate (LIBOR) plus 250 basis points. LIBOR as of June 1, 1998 was
5.69%. Scheduled annual principal payments of $82,440 are
required, with the remaining balance due upon maturity in
September 2000;
(iv) Issue to Constellation approximately 6,928,000 Common Shares; and
(v) Issue to Constellation approximately 969,900 Preferred Shares.
The Company has deposited with an independent Escrowee a non-transferable,
irrevocable standby letter of credit in the amount of $5 million (the "Letter of
Credit") to collateralize its obligations under the Transaction Agreements,
other than the Company's obligation to acquire the Development Properties. In
the event of a final determination that the Company has defaulted under the
terms of such Transaction Agreements, the proceeds of the Letter of Credit are
to be paid to Constellation as liquidated damages. Upon closing of the
Transaction, the Letter of Credit shall be returned to the Company.
The Transaction will be consummated at several closings, each comprising
a closing with respect to one or more of the Constellation Properties and
Constellation Service Companies, as follows. At the initial closing (expected
to occur within 30 days following the date of the Special Meeting), the
Company will acquire the Constellation Service Companies and 12 of the
Constellation Properties. The total consideration payable at the initial
closing will be approximately $145.0 million, including approximately $59.9
million of indebtedness assumed or repaid and approximately $85.1 million in
value of Common and Preferred Shares. Subsequent closings will be held with
respect to six Constellation Properties currently under construction or
development. The closing on two of those properties is to occur within 45
days after the initial closing (total consideration approximately $4.2
million in cash); closing on two of those properties is to occur on the
earlier of December 31, 1998 or the date on which certain occupancy levels
are met (total consideration approximately $29.8 million, including
approximately $17.9 million debt repayment and $11.9 million in Shares), and
closing on the Development Properties is to occur on the earlier of the date
on which certain net operating income levels are achieved or July 1, 1999
(total purchase price approximately $25.6 million in cash). Neither the
Company nor Constellation is obligated to close on the Development Properties
unless certain minimum net operating income levels have been achieved by
July 1, 1999.
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Description of Common and Preferred Shares
General. The Declaration of Trust provides that the Company may issue up to
45,000,000 Common Shares and 5,000,000 Preferred Shares. As of June 1, 1998,
there were 9,771,083 Common Shares and no Preferred Shares issued and
outstanding. As permitted by Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended (the "Maryland REIT Law"),
the Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by the shareholders of the Company, to amend the Declaration
of Trust to increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that the Company has authority to issue. The NYSE requires that the Company
obtain shareholder approval of the Transaction, since it calls for the issuance
of voting securities constituting more than 20% of the Company's outstanding
voting securities. For a discussion of certain limitations on Share ownership,
see "-- Federal Tax Matters" below.
Common Shares. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common Shares
are entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to its shareholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company.
Subject to the provisions of the Declaration of Trust regarding restrictions
on transfer of shares of beneficial interest, each outstanding Common Share
entitles the holder thereof to one vote on all matters submitted to a vote of
shareholders, including the election of Trustees, and, except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of such Common Shares possess the exclusive voting power. There is no
cumulative voting in the election of Trustees, which means that the holders of a
majority of the outstanding Common Shares can elect all of the Trustees then
standing for election and the holders of the remaining shares will not be able
to elect any Trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Common Shares, the Common Shares
have equal dividend, distribution, liquidation and other rights.
Preferred Shares. In connection with the Transaction, the Board of Trustees
has authorized the Series A Convertible Preferred Shares which will constitute
the non-voting convertible preferred shares to be issued to Constellation in the
Transaction, as follows:
Voting Rights. Except as set forth below and as required by applicable law,
the Preferred Shares do not entitle the holder thereof to any vote. If an
amendment to the Company's Declaration of Trust or a reclassification of
Preferred Shares would amend, alter or repeal any of the rights, preferences or
powers of the Preferred Shares, then the affirmative vote of holders of
two-thirds of the outstanding Preferred Shares, voting as a separate class,
would be required for its adoption. As discussed under "The Transaction--Changes
in Operation and Additions to Management," Constellation has the right to
designate up to two members of the Board of Trustees depending on
Constellation's ownership percentage of outstanding Shares. This right is set
forth as a term of the Preferred Shares, such that so long as Constellation
holds any Preferred Shares (and it owns the requisite amount of
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Common Shares), Constellation will have the right to designate up to two
Trustees.
Dividends. Holders of Preferred Shares will be entitled to cumulative
dividends, payable quarterly and in preference to dividends payable on Common
Shares, accruing from the date of issue, when, as and if declared by the Board
of Trustees out of funds legally available therefor, at the annual rate of
$1.375 per share, which is 5.5% of the $25.00 liquidation preference of the
Preferred Shares.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Company's affairs, voluntary or otherwise, holders of Preferred Shares
will be entitled to receive, out of the assets of the Company legally available
for distribution to its shareholders, the sum of $25.00 for each Preferred
Share, plus an amount equal to all dividends accrued and unpaid on each such
Preferred Share up to the date fixed for distribution, before any distribution
may be made to holders of the Company's Common Shares.
Conversion. The Preferred Shares are convertible, beginning two years
after the closing of the Transaction, into Common Shares on the basis of 1.8748
Common Shares for each Preferred Share (subject to adjustment upon certain
events, such as dividends paid in Common Shares). Notwithstanding the foregoing,
Preferred Shares held by Constellation may not be converted into Common Shares
if after such conversion Constellation and its affiliates would own 45% or more
of the Company's outstanding Common Shares.
Conditions to the Transaction
Constellation's obligation to consummate the Transaction is subject to the
fulfillment of certain conditions (in most cases subject to waiver by
Constellation) by the Company including, but not limited to, the following: (i)
the Transaction shall have been approved by the Company shareholders; (ii) the
resolutions contemplated by the Transaction Agreements shall have been approved
and implemented by the Board of Trustees of the Company; (iii) the
representations and warranties of the Company contained in the Transaction
Agreements will be true and correct in all material respects as of the closing
of the Transaction; (iv) the Company will have performed all obligations
required to be performed by it under the Transaction Agreements on or prior to
the closing of the Transaction; (v) the Company shall not have taken any action
or have failed to take any action which would reasonably be expected to result
in the loss of its status as a REIT for federal income tax purposes; and (vi)
the Company shall have delivered, on or before the closing of the Transaction,
certain documents detailed in the Transaction Agreements.
The Company's obligation to consummate the Transaction is subject to the
fulfillment of certain conditions (in most cases subject to waiver by the
Company) by Constellation including, but not limited to, the following: (i) the
representations and warranties of Constellation contained in the Transaction
Agreements will be true and correct in all material respects as of the closing
of the Transaction; (ii) Constellation will have performed all obligations
required to be performed by it under the Transaction Agreements on or prior to
the closing of the Transaction; (iii) certain options to purchase and all rights
of first refusals and rights of first offer with respect to the Constellation
Properties which are held by unaffiliated third parties shall have been waived;
(iv) Constellation and the Company shall have received all requisite consents
and approvals from unaffiliated third parties; and (v) Constellation shall have
delivered, on or before the closing of the Transaction, certain documents
detailed in the Transaction Agreements.
In addition, Constellation has agreed that, among other things, prior to the
consummation of the
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Transaction, it will (i) operate and maintain the Constellation Service
Companies and Constellation Properties in the ordinary course of business and
use reasonable efforts to preserve for the Company its relationships with its
tenants, suppliers and others having on-going business relationships with the
Constellation Service Companies and Constellation Properties; (ii) maintain and
keep in full force the insurance policies it currently maintains on the
Constellation Service Companies and Constellation Properties; (iii) provide to
the Company and its authorized representatives all information concerning, and
reasonable access to, all its books, records, tenant and leasing data and
materials, tax returns, market studies and any other materials of any kind owned
by or in the possession of Constellation which are or may be used in the
operation of the Constellation Service Companies and Constellation Properties at
all reasonable times and upon reasonable notice; (iv) promptly notify the
Company of any notice it may have received from any Governmental Authority
concerning a violation of any environmental laws or a discharge of contaminants;
(v) complete all required construction work at the Constellation Properties;
(vi) take all commercially reasonable action to obtain the requisite consents
and approvals from its partners to consummate the Transaction; (vii) make all
required payments, and comply with all other material conditions under any
mortgage affecting the Constellation Service Companies and Constellation
Properties; (viii) not modify its ownership structure; and (ix) enter into new
leases or modification of leases or new contracts without the consent of the
Company.
Registration Rights
The Company has granted certain registration rights to the entities which
are contributing the Constellation Properties and Constellation Service
Companies to the Company in exchange for Common Shares and Preferred Shares.
Within six months of closing the Transaction, the Company is obligated to file a
shelf registration statement with respect to the Common Shares issued in the
Transaction, as well as those issuable upon conversion of the Preferred Shares
(the "Registrable Securities"). The Company is also required, at the demand of
holders of 10% or more of the Registrable Securities, to register such holders'
Registrable Securities, subject to the right to defer the filing of the
necessary registration statement for a period not to exceed 90 days under
certain limited circumstances. This right to demand registration may be
exercised not more than three times. In addition, the Company has granted to
holders of Registrable Securities certain "piggy-back" rights. The Company has
agreed to indemnify the holders of Registrable Securities against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company will pay all fees associated with these registrations, other than
underwriting discounts and commissions.
Transaction Costs
Each of the Company and Constellation has agreed to pay its own costs and
expenses incidental to the Transaction, including brokerage, legal, accounting
and other fees and expenses payable to third parties. Except as set forth in the
following paragraph, all the Company's out-of-pocket expenses are payable to
unaffiliated third parties, and no current or former officer, director, trustee
or employee of the Company is entitled to receive any payment or other
consideration in connection with the Transaction.
The Company estimates its out-of-pocket expenses in connection with the
Transaction will be approximately $4.1 million, including investigation,
brokerage, legal, accounting, printing and title insurance fees. Among the fees
to be paid by the Company is a fee to Corporate Office Services, Inc. ("OSI"),
an entity of which Antony P. Bernheim is the principal employee, for
acquisition-related services with respect to the Transaction. Mr. Bernheim
resigned his position as Vice President and Chief Investment Officer of the
Company effective April 27, 1998. OSI and other third party service providers
will perform for the Company in the future those services previously performed
by Mr. Bernheim. The fee payable to OSI pursuant to the terms of a Consulting
Services Agreement between the Company and OSI will be approximately $745,000 in
cash, and could be increased by up to approximately $150,000 if the Company does
not dispose of the retail Constellation Properties within one year following
closing of the Transaction. In addition, the Company has agreed to pay an
additional fee to OSI in an amount to be determined based principally upon the
market value of the Company's Common Shares 30 months after the closing of the
Transaction.
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CHANGES IN OPERATIONS AND ADDITIONS TO MANAGEMENT
Upon closing of the Transaction, the Company's Board of Trustees will be
expanded from its present composition of seven, to nine Trustees. The two new
Trustees, designated by Constellation pursuant to its right as the holder of
Preferred Shares, will be Edward A. Crooke, Chairman of Constellation
Enterprises, Inc. and Vice Chairman of BGE and Steven D. Kesler, President of
Constellation Investments, Inc. Mr. Crooke will be a Class III Trustee whose
term expires in 2001, and Mr. Kesler will be a Class II Trustee whose term
expires in 2000. If any member of the Board of Trustees designated by
Constellation shall withdraw for any reason, Constellation shall have the right
to designate such withdrawing Trustee's replacement. Thereafter, Constellation
shall be entitled to designate two Trustees as long as it owns any Preferred
Shares and at least 30% of the Company's outstanding Common Shares, and shall be
entitled to designate one Trustee as long as it owns any Preferred Shares and
less than 30% but more than 15% of the outstanding Common Shares. The foregoing
calculations are to include as outstanding the Common Shares owned by
Constellation as well as the Common Shares issuable upon conversion of Preferred
Shares owned by Constellation.
Upon closing of the Transaction, Jay H. Shidler will remain as Chairman and
Clay W. Hamlin, III will remain as Chief Executive Officer of the Company.
Randall M. Griffin, President of Constellation Real Estate Group, Inc. ("CREG"),
will become President and Chief Operating Officer of the Company. In addition,
Roger A. Waesche, Jr., Senior Vice President of Finance of CRE and John H.
Gurley, Vice President and General Counsel of CRE, as well as certain other
officers of Constellation, are expected to assume positions with the Company
similar to those held by them with Constellation.
Mr. Griffin has served as President of CREG since May 24, 1993. From 1990
through March 1993, Mr. Griffin worked as Vice President-Development for
EuroDisney Development in Paris, France. During the period 1976 to 1990, Mr.
Griffin progressed to Executive Vice President and Chief Operating Officer with
Linclay Corporation, a St. Louis based real estate development, management and
investment company. Mr. Griffin holds a Master of Business Administration from
Harvard Graduate School of Business Administration and a Bachelor of Arts from
Ohio Wesleyan University. Mr. Griffin remains active in several civic
organizations, including serving on the Board of Trustees of The National
Aquarium as its Vice Chairman and Columbia Festival of the Arts. He is a member
of the Maryland Economic Development Commission, and serves on its Executive
Committee. In addition, Mr. Griffin obtained the rank of 1st Lieutenant Infantry
in the United States Army during his service from 1966 through 1969.
Edward A. Crooke is currently Vice Chairman of BGE. Prior to May 1998, he
held the position of President and Chief Operating Officer of BGE from 1992 to
1998. Mr. Crooke presently serves as Chairman of the Board, President and Chief
Executive Officer of Constellation Enterprises, Inc., a wholly owned direct
subsidiary of BGE. Throughout his thirty-year career with BGE, Mr. Crooke
advanced through the utility from Vice-President-Finance & Accounting and
Secretary during the period 1978 through 1987 to President-Utility Operations
from 1988 to 1992. Mr. Crooke is a member of BGE's Board of Directors, a role he
has performed since 1988. Active in various civic and professional
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organizations, Mr. Crooke serves as a director on First Maryland Bancorp, First
National Bank of Maryland, Goucher College and Baltimore Equitable Insurance.
Mr. Crooke possesses a Master of Business Administration in Finance from Loyola
College and a Bachelor's degree in Economics from the University of Maryland.
Prior to his employment with BGE, Mr. Crooke participated in the United States
Army Reserve from 1954 through 1964.
Steven D. Kesler is the Chief Executive Officer and President of
Constellation Investments, Inc., and a Vice President of CREG, both wholly owned
indirect subsidiaries of BGE. In these roles, Mr. Kesler manages a corporate
investment entity, BGE's pension plan, BGE's nuclear decommissioning trust and a
portfolio of real estate assets. Mr. Kesler is currently a Director of publicly
traded insurance company and had previously served on the Board of another
insurance company. During his thirteen years with Constellation, Mr. Kesler had
also served as Treasurer and Assistant Secretary of Constellation Holdings,
Inc., the wholly owned indirect subsidiary of BGE. Prior to employment with
Constellation, Mr. Kesler was Controller of Westinghouse-Hittman Nuclear, Inc.
and Manager of budgets, planning and analysis with Maryland National
Corporation. Mr. Kesler participates in several civic and professional
organizations. He possesses a Master of Business Administration from the Wharton
Graduate School, University of Pennsylvania, a Bachelor of Science from New York
University and is a Certified Public Accountant in Maryland.
Roger A. Waesche, Jr. has been responsible for all financial operations of
CRE including treasury, accounting, budgeting and financial planning. Mr.
Waesche also has had primary responsibility for CRE's asset investment and
disposition activities. Since 1984, Mr. Waesche has managed the financial
relationships of the CRE and has sourced over $500 million of project debt.
Prior to joining CRE, Mr. Waesche was a practicing Certified Public Accountant
with Coopers & Lybrand L.L.P. Mr. Waesche has an undergraduate degree in
Accounting and a Master of Business Administration in Finance from Loyola
College.
John H. Gurley has served as Vice President and General Counsel of CRE with
responsibility for all legal matters. In this role, Mr. Gurley has managed lease
negotiations for more that 2.0 million square feet of office and retail space
and has handled all land purchases and sales, as well as financing and related
matters. Prior to his employment with CRE, Mr. Gurley spent 17 years with The
Rouse Company in which he worked eight years as Assistant General Counsel.
Before that he worked in a private practice for five years with Semmes, Bowen &
Semmes where he provided a broad spectrum of real estate related services to
various clients. He graduated from Georgetown University with honors and earned
his Juris Doctorate from University of Maryland School of Law also with honors.
He was an editor of the Maryland Law Review and clerked for the Chief Judge of
the Maryland Court of Appeals for one year after graduation. He participates in
the American Bar Association, the Maryland Bar Association and the Baltimore
City Bar Association.
Following closing of the Transaction, the Company's headquarters will remain
in Philadelphia, and acquisition, capital markets and financing activities will
be conducted out of the Philadelphia office. The Company will occupy a portion
of the space currently occupied by Constellation in Columbia, Maryland (in a
building which is one of the Constellation Properties), where the CRE personnel
who are to become Company employees will perform the Company's property
management, development, construction and accounting functions.
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CERTAIN EFFECTS OF THE TRANSACTION
Share Ownership
As the holder of approximately 41.5% of the outstanding Common Shares,
Constellation will have significant influence on the Company. Under the Maryland
REIT Law, a Maryland real estate investment trust generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the real estate investment
trust's declaration of trust. The Company's Declaration of Trust provides for
approval by a majority of the votes cast by holders of Common Shares entitled to
vote on the matter in all situations permitting or requiring action by the
shareholders, except with respect to: (i) the election of Trustees (which
requires a plurality of all the votes cast at a meeting of shareholders of the
Company at which a quorum is present), (ii) the removal of Trustees (which
requires the affirmative vote of the holders of two-thirds of the outstanding
shares of beneficial interest of the Company entitled to vote generally in the
election of Trustees, which action can only be taken for cause by vote at a
shareholder meeting), (iii) the merger or sale (or other disposition) of all or
substantially all of the assets of the Company (which requires the affirmative
vote of the holders of two-thirds of the outstanding shares of beneficial
interest entitled to vote on the matter), (iv) the amendment of the Declaration
of Trust by shareholders (which requires the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter) and (v) the termination of the
Company (which requires the affirmative vote of two-thirds of the outstanding
shares of beneficial interest entitled to be cast on the matter). As allowed
under the Maryland REIT Law, the Declaration of Trust permits (a) the Trustees
by a two-thirds vote to amend the Declaration of Trust from time to time to
qualify as a real estate investment trust under the Code or the Maryland REIT
Law without the approval of the shareholders and (b) the Trustees by a majority
vote, without any action by the shareholders of the Company, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that the Company has authority to issue.
Major Tenants
As of June 1, 1998, one major tenant accounted for approximately 23.2% of
the Company's total annualized revenue. Two major tenants accounted for
approximately 42.4% of the total annualized revenue derived from the
Constellation Properties as of June 1, 1998. One of those tenants is the federal
government which leases space for the Department of Defense and the Department
of Treasury in two of the Constellation Properties pursuant to two leases. The
Department of Defense lease, which accounts for approximately 24.4% of the total
annualized revenue of the operating Constellation Properties, is for an entire
240,336 square foot building, and extends through 2007, but may be terminated by
the tenant with one year's notice and payment of a penalty. Following the
acquisition of the Constellation Properties, two major tenants will account for
approximately 32.5% of the Company's total annualized revenue as of June 1, 1998
on a pro forma basis, one of which is the federal government as described above.
In the event one or more of these tenants experience financial difficulties, or
default on their obligation to make rental payments to the Company, or if the
Department of Defense elects to terminate its lease and the space cannot be
re-let on satisfactory terms, the Company's financial performance and ability to
make expected distributions to shareholders would be materially adversely
affected. For a tabular presentation of the Company's pro forma significant
tenants, see "The Constellation Properties and Constellation Service
Companies--The Constellation Properties."
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Financing of Transaction
The Transaction will be consummated at several closings, as detailed
elsewhere in this Proxy Statement. The closings for substantially all the
properties and assets to be acquired other than the Development Properties are
expected to be completed within 30 to 75 days after the Special Meeting. The
closing for each of the Development Properties is contingent upon the
achievement of certain net operating income levels by July 1, 1999, and neither
closing is expected to occur in any event prior to the first quarter of 1999. As
of the date of this Proxy Statement, the Company has borrowed $23.8 million
under its recently obtained $100 million revolving credit facility. To complete
the Transaction, exclusive of the Development Properties, the Company will
require a total of approximately $73.1 million in cash, which, if other
financing is not obtained, is expected to be funded from the revolving credit
facility. The aggregate purchase price for the Development Properties is
approximately $25.6 million. Assuming that closings occur as to both Development
Properties, the Company will require financing commitments in addition to those
currently available. Management is confident it will be able to obtain such
financing, on reasonable terms, as may be necessary to close on the Development
Properties. The Company and Constellation are currently seeking to finance
certain of the Constellation Properties simultaneous with the initial closing of
the Transaction. Although management believes appropriate financing will be
available to the Company to complete the Transaction, there can be no assurance
that such financing will be available on acceptable terms, if at all.
Other
For a discussion of certain issues regarding the qualification of the
Company as a REIT, see "The Company--Federal Income Tax Matters" below.
ACCOUNTING TREATMENT OF THE TRANSACTION
The Transaction will be accounted for as a purchase. See the Company's pro
forma financial statements included elsewhere in this Proxy Statement.
FEDERAL INCOME TAX MATTERS
The Company was organized in 1988 and elected to be taxed as a REIT
commencing with its taxable year ended on December 31, 1992. The Company
believes that it was organized and has operated in a manner that permits it to
satisfy the requirements for taxation as a REIT under the applicable provisions
of the Internal Revenue Code of 1986, as amended (the "Code") and intends to
continue to operate in such a manner. No assurance can be given, however, that
such requirements have been or will continue to be met. The following is a
summary of certain federal income tax considerations that may be relevant to the
Company and its shareholders in connection with the Transaction, including the
continued treatment of the Company as a REIT for federal income tax purposes.
For purposes of this discussion of "FEDERAL INCOME TAX MATTERS" the term
"Company" refers only to Corporate Office Properties Trust and not to any other
affiliated entities.
The following discussion is based on the law existing and in effect on the
date hereof and the Company's qualification and taxation as a REIT will depend
on compliance with such law and with any future amendments or modifications to
such law. The qualification and taxation as a REIT will further depend upon the
ability to meet, on a continuing basis through actual operating results, the
various qualification tests imposed under the Code discussed below. No assurance
can be given that the Company will satisfy such tests on a continuing basis.
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In brief, a corporation that invests primarily in real estate can, if it
meets the REIT provisions of the Code described below, claim a tax deduction for
the dividends it pays to its shareholders. Such a corporation generally is not
taxed on its "REIT taxable income" to the extent such income is currently
distributed to shareholders, thereby substantially eliminating the "double
taxation" (i.e., at both the corporate and shareholder levels) that generally
results from an investment in a corporation. However, as discussed in greater
detail below, such an entity remains subject to tax in certain circumstances
even if it qualifies as a REIT. Further, if the entity were to fail to qualify
as a REIT in any year, it would not be able to deduct any portion of the
dividends it paid to its shareholders and would be subject to full federal
income taxation on its earnings, thereby significantly reducing or eliminating
the cash available for distribution to its shareholders.
Treatment of the Transaction
In general, the Transaction will be treated as a taxable purchase of assets
from Constellation, but will not cause the Company to recognize taxable gain or
loss. The Company will have an initial tax basis in the assets acquired from
Constellation equal to the sum of (i) the fair market value of the Common and
Preferred Shares issued to Constellation, (ii) the amount of any cash paid to
Constellation, and (iii) the principal amount of any indebtedness assumed by the
Company. This aggregate initial tax basis will be allocated among the assets
acquired from Constellation in accordance with their relative fair market
values, as determined by the Company. There can be no assurance that the
Internal Revenue Service (the "Service") will accept the allocation of basis
made by the Company.
The Company will immediately contribute the assets and interests acquired
from Constellation, subject to indebtedness, to the Operating Partnership in
exchange for Partnership Units and Preferred Units equivalent to the Common and
Preferred Shares issued to Constellation. This contribution will be tax-free to
the Company, and the Company's tax basis in the assets will carry over to the
Operating Partnership.
Taxation of the Company
General. In any year in which the Company qualifies as a REIT, in general it
will not be subject to federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. The Company may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gains not distributed. Under recently enacted legislation, shareholders
are required to include their proportionate share of the REIT's undistributed
long-term capital gain in income but receive a credit for their share of any
taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, the Company also may be subject
to taxation in certain other circumstances. If the Company should fail to
satisfy either the 75% or the 95% gross income test (each as discussed below),
and nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which the Company fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect the Company's profitability. The Company will
also be subject to a tax of 100% on net income from any "prohibited transaction"
(as described below), and if the Company has (i) net income from the sale or
other disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such
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year, (ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior years, the Company would be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company also may be subject to the corporate
alternative minimum tax, as well as to tax in certain situations not presently
contemplated. The Company will use the calendar year both for federal income tax
purposes, as is required of a REIT, and for financial reporting purposes.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify as a REIT will not be deductible by the
Company, nor generally will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and subject to
certain limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from re-electing taxation as a
REIT for the four taxable years following the year during which qualification
was lost.
REIT Qualification Requirements
In order to qualify as a REIT, the Company must meet the following
requirements, among others:
Share Ownership Tests. The Company's shares of beneficial interest (which
term, in the case of the Company, currently means the Common Shares) must be
held by a minimum of 100 persons for at least 335 days in each taxable year (or
a proportionate number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of the Company may be owned,
directly or indirectly and taking into account the effects of certain
constructive ownership rules, by five or fewer individuals, which for this
purpose includes certain tax-exempt entities (the "50% Limitation"). However,
for purposes of this test, any shares of beneficial interest held by a qualified
domestic pension or other retirement trust will be treated as held directly by
its beneficiaries in proportion to their actuarial interest in such trust rather
than by such trust. In addition, for purposes of the 50% Limitation, shares of
beneficial interest owned, directly or indirectly, by a corporation will be
considered as being owned proportionately by its shareholders.
In order to attempt to ensure compliance with the foregoing share ownership
tests, the Company's Declaration of Trust places certain restrictions on the
transfer of its shares of beneficial interest to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury Regulations require the Company to maintain records which
disclose the actual ownership of its outstanding shares of beneficial interest.
In fulfilling its obligations to maintain records, the Company must and will
demand written statements each year from the record holders of designated
percentages of its shares of beneficial interest disclosing the actual owners of
such shares of beneficial interest (as prescribed by Treasury Regulations). A
list of those persons failing or refusing to comply with such demand must be
maintained as part of the Company's records. A shareholder failing or refusing
to comply with the Company's written demand must submit with his tax return a
similar statement disclosing the actual ownership of Company shares of
beneficial interest and certain other information.
As a result of the Transaction, BGE will directly or through its wholly
owned subsidiaries own approximately 41.5% of the Common Shares to be
outstanding, and will own approximately 969,900 Preferred Shares
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convertible, two years after closing of the Transaction, into approximately
1,818,300 Common Shares. Under the Company's Declaration of Trust a person is
generally prohibited from owning more than 9.8% of the aggregate outstanding
Common Shares or more than 9.8% in value of the aggregate outstanding shares of
beneficial interest unless such person makes certain representations to the
Board of Trustees and the Board of Trustees ascertains that ownership of a
greater percentage of shares will not cause the Company to violate either the
50% Limitation or the gross income tests described below. The Board of Trustees
has exempted BGE from the 9.8% limitation set forth in the Declaration of Trust
and has determined that BGE may hold up to that number of Common Shares and
Preferred Shares to be issued in the Transaction. The Board of Trustees has
determined, based upon representations made by BGE, that this will not result in
a violation of the 50% Limitation or otherwise adversely affect the Company's
ability to qualify as a REIT for federal income tax purposes.
Asset Tests. At the close of each quarter of the Company's taxable year, the
Company must satisfy two tests relating to the nature of its assets (determined
in accordance with generally accepted accounting principles). First, at least
75% of the value of the Company's total assets must be represented by interests
in real property, interests in mortgages on real property, shares in other
REITs, cash, cash items, government securities and qualified temporary
investments. Second, although the remaining 25% of the Company's assets
generally may be invested without restriction, securities in this class may not
exceed (i) in the case of securities of any one non-government issuer, 5% of the
value of the Company's total assets (the "Value Test") or (ii) 10% of the
outstanding voting securities of any one such issuer (the "Voting Stock Test").
Where the Company invests in a partnership (such as the Operating Partnership),
it will be deemed to own a proportionate share of the partnership's assets, and
the partnership interest will not constitute a security for purposes of these
tests. Accordingly, the Company's investment in real properties through its
interests in the Operating Partnership (which itself holds real properties
through other partnerships) will constitute an investment in qualified assets
for purposes of the 75% asset test.
Certain of the assets to be acquired from Constellation as part of the
Transaction, such as the interest in CRM, will not constitute qualified assets
for purposes of the 75% asset test. The Company intends to transfer the interest
in CRM, as well as other management assets acquired from Constellation, to the
Operating Partnership in exchange for Partnership Units and Preferred Units. The
Operating Partnership will, in turn, transfer the interest in CRM and all or a
portion of the other management assets to a newly formed corporation to be named
Corporate Office Management, Inc. ("COMI") in exchange for indebtedness and 95%
of the capital stock to be issued by COMI. Although the Operating Partnership
will acquire all of the non-voting common stock to be issued by COMI, it will
only acquire 1% of the voting common stock to be issued by COMI. The Company has
determined that the acquisition of management assets from Constellation, the
transfer of such assets to COMI and the acquisition of indebtedness and common
stock in COMI will not cause the Company to violate the Voting Stock Test, the
Value Test or the 75% asset test.
Gross Income Tests. There are two separate percentage tests relating to the
sources of the Company's gross income which must be satisfied for each taxable
year. For purposes of these tests, where the Company invests in a partnership,
the Company will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the partnership.
The two tests are described below.
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes: (i)
rents from real property (except as modified below); (ii) interest on
obligations secured by mortgages on, or interests in, real property; (iii) gains
from the sale or other disposition of interests in real property and real estate
mortgages, other
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than gain from property held primarily for sale to customers in the ordinary
course of the Company's trade or business ("dealer property"); (iv) dividends or
other distributions on shares in other REITs, as well as gain from the sale of
such shares; (v) abatements and refunds of real property taxes; (vi) income from
the operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage secured by such property ("foreclosure property");
and (vii) commitment fees received for agreeing to make loans secured by
mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property for purposes of the 75% and 95%
gross income tests, the Company generally must not operate or manage the
property or furnish or render services to customers, other than through an
"independent contractor" from whom the Company derives no income, except that
the "independent contractor" requirement does not apply to the extent that the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only, and are not otherwise
considered "rendered to the occupant for his convenience." In addition, under
recently enacted legislation, beginning with its taxable year ending December
31, 1998, the Company may directly perform a de minimis amount of non-customary
services.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Trust's gross income for the taxable
year must be derived from the above-described qualifying income or from
dividends, interest, or gains from the sale or other disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test. The Company
intends to monitor closely its non-qualifying income and anticipates that
non-qualifying income from its other activities will not result in the Company
failing to satisfy either the 75% or 95% gross income test.
For purposes of determining whether the Company complies with the 75% and
the 95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, a sale of property will not be a prohibited
transaction if such property is held for at least four years and certain other
requirements (relating to the number of properties sold in a year, their tax
bases and the cost of improvements made thereto) are satisfied.
Even if the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
is due to reasonable cause and not to willful neglect; (ii) the Company reports
the nature and amount of each item of its income included in the tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, the Company will nonetheless be subject to a 100% tax
on the greater of the amount by which it
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fails either the 75% or 95% gross income test, multiplied by a fraction intended
to reflect the Company's profitability.
Compliance with Income Tests. For the year following the closing of the
Transaction, BGE or affiliates in which BGE has a 10% or greater interest are
obligated as tenants to pay rent of approximately $1,020,000 with respect to
properties held by the Company through the Operating Partnership. Rental income
paid by such affiliates will not constitute qualifying rental income for
purposes of the 75% and 95% gross income tests. Constellation has represented to
the Company that the remainder of the rental income payable under the existing
leases on the properties it is transferring to the Company will constitute
qualifying income for purposes of the 75% and 95% gross income tests.
The Company expects, based on current rent levels, as per the Pro Forma
Schedule of Lease Expirations, that its annual gross income following the
Transaction will be at least $52,500,000. Accordingly, the Company estimates
that it can earn up to $2,625,000 of non-qualifying income per year without
violating the 95% gross income test. Aside from the rental income to be paid by
affiliates of BGE, the Company does not expect that it will earn material
amounts of non-qualifying income from either the Constellation Properties or its
existing properties. Based on the foregoing, the Company has determined that it
will continue to satisfy the 75% and 95% gross income tests following the
Transaction. The fact that affiliates of BGE will be paying substantial amounts
of non-qualifying income may, however, restrict the ability of the Company and
the Operating Partnership to acquire additional properties that generate
non-qualifying income.
As described above under "The Transaction--Terms of the Transaction,"
Constellation has agreed to pay fees to the Company (or its affiliates)
aggregating $2,000,000 for certain consulting and project management services to
be rendered over the 18 month period following closing of the Transaction.
Constellation is also selling the Company its 75% interest in CRM, a limited
liability company which earns management fees. To avoid a violation of the 95%
gross income test as a result of the fees paid by BGE or earned through CRM, the
75% interest in CRM and all or a portion of the other management assets to be
acquired from Constellation will be transferred to COMI, a new corporation to be
formed by the Operating Partnership and certain officers of the Company and
COMI. The Operating Partnership will hold indebtedness issued by COMI and 95% of
the aggregate amount of voting and non-voting common stock to be issued by COMI,
but will only hold 1% of the aggregate amount of voting common stock to be
issued by COMI. As discussed above, to satisfy the Voting Stock Test the Company
may not directly or indirectly hold 10% or more of the voting stock of COMI. In
addition to holding the 75% interest in CRM, COMI will, either directly or
through subsidiaries, provide management and development services to BGE, the
Operating Partnership and potentially unrelated parties.
The management fee income earned by COMI as a result of its ownership
interest in CRM, or as a result of management or development services performed
by COMI or its subsidiaries, will not be treated as non-qualifying income earned
by the Company for purposes of the 95% or 75% gross income tests. Any interest
or dividends paid or distributed by COMI to the Operating Partnership will be
considered as qualifying income for purposes of the 95% test, but will not be
considered qualifying income for purposes of the 75% gross income test. To the
extent that COMI earns net taxable income from its activities, it will be
required to pay federal and state income taxes, which will reduce the amount of
dividends it is able to pay to the Operating Partnership and its other
Shareholders.
The Company intends to monitor its operations in the context of these
standards so as to continue to satisfy the 75% and 95% gross income tests. The
Operating Partnership or its affiliate will provide certain services at the
properties in which the Company owns interests and possibly at any newly
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acquired properties. The Company believes that for purposes of the 75% and 95%
gross income tests the services provided at such properties and any other
services and amenities provided by the Operating Partnership or its agents with
respect to such properties will be of the type usually or customarily rendered
in connection with the rental of space for occupancy only and not rendered to
the occupants of such properties. The Company intends that services that cannot
be provided directly by the Operating Partnership or other agents will be
performed by independent contractors.
Annual Distribution Requirements. In order to qualify as a REIT, the Company
is required to distribute dividends to its shareholders each year in an amount
at least equal to (A) the sum of (i) 95% of the Company's REIT taxable income
(computed without regard to the dividends received deduction and the Company's
net capital gain) and (ii) 95% of the net income (after tax), if any, for
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after the declaration. To the extent that the Company does not distribute all of
its net capital gain or distributes at least 95%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gain or ordinary corporate tax rates, as the case may
be.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the
preceding paragraph. In this regard, the Operating Partnership Agreement
authorizes the Company in its capacity as General Partner to take such steps as
may be necessary to cause the Operating Partnership to distribute to its
partners an amount sufficient to permit the Company to meet the distribution
requirements. It is possible that the Company may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement, due to timing
differences between the actual receipt of income and actual payment of expenses
on the one hand, and the inclusion of such income and deduction of such expense
in computing the Company's REIT taxable income on the other hand; or for other
reasons. The Company will monitor closely the relationship between its REIT
taxable income and cash flow and, if necessary, intends to borrow funds (or
cause the Operating Partnership or other affiliates to borrow funds) in order to
satisfy the distribution requirement. However, there can be no assurance that
such borrowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
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THE COMPANY
GENERAL
The Company is a self-administered REIT, headquartered in Philadelphia,
Pennsylvania, which focuses principally on the ownership, acquisition and
management of suburban office properties in high growth submarkets in the United
States. The Company owns interests in 24 suburban office buildings in Maryland,
Pennsylvania and New Jersey containing approximately 2.6 million rentable square
feet and seven retail properties located in the Midwest containing approximately
370,000 rentable square feet. As of June 1, 1998, the Company's properties were
over 97% leased. In addition, the Company has options to purchase 44.27 acres of
land owned by related parties contiguous to certain of the office properties.
The Company was formed in 1988 as Royale Investments, Inc. to own and
acquire net lease retail properties and subsequently became an externally
advised REIT. On October 14, 1997, the Company, as part of a series of
transactions, acquired the Mid-Atlantic suburban office operations of The
Shidler Group, a national real estate firm, relocated its headquarters from
Minneapolis to Philadelphia and became self-administered. At that time, Jay H.
Shidler became the Company's Chairman of the Board and Clay W. Hamlin, III
became the Company's President and Chief Executive Officer.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a Maryland
real estate investment trust and changed its name to Corporate Office Properties
Trust. The Company has operated and will continue to operate as a REIT under
Sections 856 through 860 of the Code. Under such provisions, the Company must
distribute at least 95% of its taxable income to its shareholders and meet
certain other asset and income tests. As a REIT, the Company generally is not
subject to federal income tax.
RECENT DEVELOPMENTS
On April 27, 1998, the Company completed a public offering which generated
$74.4 million of net proceeds from the issuance of 7,500,000 Common Shares (the
"1998 Offering"). The Company contributed all of the net proceeds to the
Operating Partnership in exchange for additional Partnership Units. These
7,500,000 additional Partnership Units increased the Company's interest in the
Operating Partnership to approximately 75.8%.
On April 30, 1998, the Company acquired nine multistory office buildings and
three office/flex buildings known as Airport Square, for approximately $72
million of the proceeds from the 1998 Offering. The properties, totaling
approximately 813,000 square feet, are located in the Baltimore/Washington
corridor in Anne Arundel County, Maryland. Acquisition of the Airport Square
properties was accounted for as a purchase. This purchase was accomplished
through a combination of (i) the purchase of the debt encumbering these
properties from the former mortgage lender, and (ii) the purchase of all the
partnership interests in the partnership that previously owned the Airport
Square properties. The Airport Square properties were 97% leased as of June 1,
1998.
On May 28, 1998, COPLP acquired two properties in Fairfield, New Jersey for
a total purchase price of $28.8 million, including the assumption of
approximately $6.47 million in existing debt collateralized by one of the
properties. The properties consist of two multistory office buildings totaling
approximately 263,000 square feet. The properties were 84% leased as of June 1,
1998.
In May 1998, the Company obtained a $100 million Senior Secured Revolving
Credit Facility
27
<PAGE>
(the "Revolving Credit Facility") from lenders led by Bankers
Trust Company ("BT"). BT is also the lead lender of the Company's $100 million
Senior Secured Term Credit Facility (the "Term Credit Facility") obtained in
October 1997.
The Revolving Credit Facility is a two year facility to be used to refinance
existing indebtedness, to fund acquisitions and new development projects and for
general working capital purposes, including capital expenditures and tenant
improvements. Maximum borrowings under the Revolving Credit Facility are the
lesser of $100 million or 65% of the appraised values of the office properties
in the borrowing base. COPLP is the borrower and the Company is the guarantor of
all advances under the Revolving Credit Facility, and borrowings will be
cross-collateralized with the Term Credit Facility. The Revolving Credit
Facility bears interest at LIBOR plus 175 basis points, payable interest only on
a monthly basis. A 25 basis point fee per annum on the unused portion of the
Revolving Credit Facility is payable quarterly in arrears. As of the date of
this Proxy Statement, borrowings outstanding under the Revolving Credit Facility
were approximately $23.8 million.
The Company is engaged in an active acquisition program, and is presently
identifying, negotiating and seeking to consummate acquisitions of entities,
portfolios and individual properties.
Additional information concerning the Company is included in the documents
incorporated by reference in this Proxy Statement. See "Incorporation of Certain
Documents by Reference."
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis and a pro forma basis assuming the following as of March 31,
1998: (i) the issuance of 7.5 million Common Shares in a public offering
completed on April 27, 1998, including the application of the net proceeds
thereof, (ii) the acquisition of the Airport Square properties in Maryland,
(iii) the acquisition of two properties in Fairfield, New Jersey, (iv) the
consummation of the Company's $100 million Revolving Credit Facility, and (v)
the closing of the Transaction. For further information about each of items
(i)-(v), see "The Company--Recent Developments." The information set forth in
the following table should be read in conjunction with the following: (i) the
consolidated financial statements of the Company and the notes thereto
incorporated by reference in this Proxy Statement, (ii) the consolidated
financial statements and the notes thereto of the Constellation Service
Companies included elsewhere in this Proxy Statement, (iii) the combined
statement of revenue and certain expenses for the year ended December 31,
1997 and the notes thereto for the real property being acquired by the
Company in the Transaction (the "Constellation Properties") included
elsewhere in this Proxy Statement, (iv) the pro forma financial information
of the Company and the notes and management assumptions thereto which appear
elsewhere in this Proxy Statement, and (v) other financial information
included elsewhere in this Proxy Statement.
28
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1998
(In Thousands)
Historical Pro Forma
----------- ------------
<S> <C> <C>
Debt:
Mortgage notes payable........................ $ 114,301 $ 230,649
Minority Interest -
Preferred Units (1)........................... 52,500 52,500
Minority Interest -
Partnership Units (1)......................... 12,111 12,111
Shareholders' equity:
Preferred Shares, $.01 par
value per share, 5,000,000
shares authorized. No shares
issued and outstanding on
an historical basis. 969,900
shares of Series A Convertible
Preferred Shares, $25.00
liquidation preference per
share, 5.5% annual dividend
issued and outstanding as of
March 31, 1998, on a pro
forma basis.................................. -0- 10
Common Shares, $0.01 par
value per share, 45,000,000
shares authorized, 2,271,083
issued and outstanding on an
historical basis as of
March 31, 1998 and
16,699,083 shares issued
and outstanding on a pro
forma basis as of
March 31, 1998 (1)........................... 23 167
Additional paid-in capital................... 16,647 185,656
Accumulated deficit.......................... (5,819) (5,819)
---------- -----------
Total shareholders' equity..................... 10,851 180,014
---------- -----------
---------- -----------
Total capitalization........................... $ 189,763 $ 475,274
---------- -----------
---------- -----------
</TABLE>
- ----------
(1) Does not include the effects of 10,196,758 Common Shares that may be
issued upon conversion or redemption of certain Partnership Units and
certain Preferred Units of COPLP partnership interest or upon exercise
of options under the Company's Option Plan. Such conversion will also
eliminate Minority Interest.
29
<PAGE>
THE CONSTELLATION PROPERTIES AND CONSTELLATION SERVICE COMPANIES
Constellation has been an active participant in the real estate industry
since 1981. Based in Columbia, Maryland, the Constellation entities comprise a
full-service diversified real estate company. In addition to property
management, Constellation specializes in the planning and development of
multi-use business parks and the construction, leasing and sale of office
buildings and retail centers. Through investment, development and
acquisition/disposition, Constellation has assembled a real estate portfolio of
approximately 1.8 million square feet, consisting of high quality suburban
office (77%) and retail (23%) properties located in an area spanning from
Baltimore to Northern Virginia.
THE CONSTELLATION PROPERTIES
The Constellation Properties comprise 18 properties: ten operating office
properties, two operating retail properties, one of which is based on an
interest in a mortgage (Tred Avon), two office properties under construction
which are expected to be completed by the end of 1998 (135 National Business
Parkway and Woodlands One), two office properties on which construction has
recently commenced (134 National Business Parkway and Woodlands Two), and two
retail properties under construction which are expected to be completed early in
1999 (Piney Orchard Marketplace and Springfield Commons), if certain conditions
are met. The total square footage of the Constellation Properties is
approximately 1.8 million square feet.
The operating office properties comprise a total of approximately one
million rentable square feet, ranging from approximately 38,513 to 240,336
rentable square feet. The two operating retail properties contain approximately
241,749 rentable square feet. As of June 1, 1998, the operating Constellation
Properties had a weighted average occupancy rate of approximately 92% and were
leased to 126 tenants. As of June 1, 1998, only one tenant, occupying 100% of
one operating property with approximately 240,336 net rentable square feet,
represented more than 10% of the aggregate contractual annualized base rent of
the operating Constellation Properties. The two office properties which have
been under construction since September 1997 comprise approximately 193,110
rentable square feet. A tenant is committed to occupy 100% of one of the office
properties under construction, with approximately 106,278 net rentable square
feet, and will likely represent more than 10% of the aggregate contractual
annual base rent of the Constellation Properties.
The Constellation Properties are located in Maryland and Northern Virginia,
with a concentration of properties in Anne Arundel County (five operating
properties comprising approximately 524,000 square feet and two properties under
construction consisting of approximately 177,000 square feet and one development
property comprising 53,000 square feet); Prince George's County (three operating
properties comprising approximately 322,000 square feet); and Howard County (one
operating property comprising approximately 54,000 square feet and two
properties under construction comprising approximately 212,000 square feet).
Generally, each property has landscaped sites, common areas, and on-site
parking. The Constellation Properties are managed by CRM.
30
<PAGE>
The Constellation Properties are leased to a variety of U.S. government
entities, service sector employers, high tech firms as well as a large number of
professional firms and national and international firms. Major office tenants
include, among others, the U.S. Department of Defense, e.spire Communications,
U.S. Department of Treasury, Stanford Telecommunications, Lockheed Martin
Technical, TASC, Inc. and JHPIEGO Corporation. Major retail tenants include
Giant Food, Staples, Inc., Acme Markets and Rite-Aid.
Leases for the operating properties are typically structured with terms
ranging from one to five years, with the major exception of one lease
representing 24.4% of the aggregate contractual annualized rent which contains
automatic annual renewal options for the remaining ten years of its fifteen year
term, unless terminated at the option of the tenant, the U.S. Department of
Defense, upon 12 months notice and payment of a penalty. Generally all leases
provide for annual contractual rent escalations over the lease term. A typical
lease requires (i) payment of base rent, (ii) payment of the tenant's
proportionate share of real estate taxes, utilities and common area and other
operating expense escalations over a base year, and (iii) payment of overtime
HVAC and electrical use. Under these leases, the landlord is typically
responsible for certain structural repairs. A few properties are leased to one
or more tenants on a triple net basis. Under these leases, the respective
tenant(s) are responsible for paying all or a proportionate share of all real
estate taxes, utilities and operating expenses; under some leases, the tenant
directly contracts and pays for such costs. Additionally, some of the leases
provide renewal options or provisions of varying durations which extend the
original lease terms, typically at either market rents or negotiated rental
rates set forth in the leases.
The Office Properties
Analysis of the Baltimore Metropolitan Area: Comprised of both the
Washington, D.C. and Baltimore communities, the Baltimore metropolitan region
contained approximately 36.6 million square feet of office property as of
December 1997. The office property market in the Baltimore metropolitan region
realized improvements in 1997 as space began to tighten after a five year lull.
In 1997, suburban office construction activity commenced on or completed 1.2
million square feet of property in the region. As of December 1997, Class A
space comprised 41% and Class B space contained 59% of the 530 office buildings
in the area. The overall region's vacancy rate decreased from 13.9% in 1996 to
12.1% in 1997 with 4.4 million square feet of available space. This vacancy
statistic is a mixture of the 16.9% vacancy rate in the downtown market with the
9.3% vacancy rate in the suburban markets.
The reduction in the overall vacancy rate is attributed to an 8.87% increase
in employment experienced by the region during the period from 1992 to 1997. Job
growth has been forecasted as steady with employment opportunities in financial
services, telecommunications, data processing, engineering and architectural
services as well as research and development companies in the region. Management
believes that the Baltimore metropolitan region will continue to improve as
businesses continue to migrate from the urban to the suburban markets, the
latter of which is experiencing 900,000 square feet of new construction, 78% of
which is located in submarkets with Class A vacancy rates below 5%.
31
<PAGE>
<TABLE>
<CAPTION>
Baltimore Metropolitan Area / January 1, 1997 - December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Office Market Statistical Overview
- ------------------------------------------------------------------------------------------------------------------------------------
Total Total Total Total Vacancy Future Under Completed
Buildings Size Available Absorbed Rate Available* Construction Construction
12/97 12/97 12/97 YTD 1997 12/97 12/97 YTD 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DOWNTOWN
"A" Tier 10 3,602,293 310,229 108,711 8.61% 42,710 0 0
"A-2" Tier 15 3,527,010 489,587 55,740 13.88% 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total "A" Tier 25 7,129,303 799,816 164,451 11.22% 42,710 0 0
"B" Tier 75 6,524,118 1,501,248 (95,184) 23.01% 300,038 177,130 0
Total Downtown 100 13,653,421 2,301,064 69,267 16.85% 342,748 177,130 0
Suburban North
"A" Tier 42 4,449,940 583,322 (143,066) 13.11% 162,642 0 0
"B" Tier 112 5,500,636 532,557 10,060 9.68% 181,564 22,000 89,200
Total Suburban North 154 9,950,576 1,115,879 (133,006) 11.21% 344,206 22,000 89,200
Suburban South
"A" Tier 8 959,077 32,621 22,267 3.40% 0 0 0
"B" Tier 47 2,648,827 316,234 245,701 11.94% 130,800 130,800 0
Total Suburban South 55 3,607,904 348,855 267,968 9.67% 130,800 130,800 0
Howard County
Perimeter
"A" Tier 8 703,893 24,516 0 3.48% 292,749 292,749 0
"B" Tier 90 2,839,736 152,583 36,509 5.37% 0 0 40,000
Total Howard County
Perimeter 98 3,543,629 177,099 36,509 5.00% 292,749 292,749 40,000
Howard County
Town Center
"A" Tier 5 641,254 12,338 (3,570) 1.92% 0 0 0
"B" Tier 23 1,285,138 77,782 22,405 6.05% 0 0 0
Total Howard County Town 28 1,926,392 90,120 18,835 4.68% 0 0 0
Center
Total Howard County 126 5,470,021 267,219 55,344 4.89% 292,749 292,749 40,000
Suburban West
"A" Tier 11 1,190,979 15,737 (2,723) 1.32% 158,100 111,416 300,000
"B" Tier 84 2,765,214 380,354 251,748 13.75% 65,000 180,000 50,000
Total Suburban West 95 3,956,193 396,091 249,025 10.01% 223,100 291,416 350,000
- ------------------------------------------------------------------------------------------------------------------------------------
Market Totals
Downtown 100 13,653,421 2,301,064 69,267 16.85% 342,748 177,130 0
"A" Tier 25 7,129,303 799,816 164,451 11.22% 42,710 0 0
"B" Tier 75 6,524,118 1,501,248 (95,184) 23.01% 300,038 177,130 0
Suburban Markets 430 22,984,694 2,128,044 439,331 9.26% 990,855 736,965 479,200
"A" Tier 74 7,945,143 668,534 (127,092) 8.41% 613,491 404,165 300,000
"B" Tier 356 15,039,551 1,459,510 566,423 9.70% 377,364 332,800 179,200
Metropolitan Area 530 36,638,115 4,429,108 508,598 12.09% 1,333,603 914,095 479,200
"A" Tier 99 15,074,446 1,468,350 37,359 9.74% 656,201 404,165 300,000
"B" Tier 431 21,563,669 2,960,758 471,239 13.73% 677,402 509,930 179,200
</TABLE>
- ----------
* Source: Colliers Pinkard, 1997 Office and Industrial Market Review.
* Future Available includes under Construction square footage and indicates
space not currently vacant, but becoming available after December 31, 1997.
32
<PAGE>
Suburban South Market: As of December 1997, the Suburban South Market
contained approximately 3.6 million square feet of office space. The submarket
stretches from the Baltimore/Washington International Airport ("BWI") to
Maryland Route 32. Absorption of office space in this submarket in the last year
was almost 268,000 square feet of space. Rental rates have increased by 10% to
20% over the last year and a half. Class A renewals are achieving $18.75 per
square foot, full service, with new office space being offered at $21.00 per
square foot. Office space greater than 10,000 square feet is limited.
Speculative office development has commenced in the BWI/Anne Arundel section of
this submarket. Seven of the Constellation Properties are located in this
submarket, six of which are located in Annapolis Junction, Maryland.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Total Buildings ....................................... 55 56 57
Total Square Feet ..................................... 3,607,904 3,595,699 3,802,845
"A" Tier Vacancy Rate ................................. 3.40% 5.72% 11.67%
"B" Tier Vacancy Rate ................................. 11.94% 17.90% 18.61%
Market Vacancy Rate.................................... 9.67% 14.65% 16.86%
Net Absorption ........................................ 267,968 24,894 88,627
Under Construction .................................... 130,800 90,000 277,233
</TABLE>
Source: Colliers Pinkard, 1997 Office and Industrial Market Review, 1996
Office and Industrial Market Review, and 1995 Office and Industrial Market
Review.
The National Business Park: The National Business Park (the "Park"), a
175-acre business park, is located at the crossroads of the Baltimore/Washington
Parkway and Maryland Route 32 at the mid-point of the Baltimore/Washington
corridor. The Park is owned by affiliates of CREG, a Constellation entity, and
contains a mixture of mid-rise office buildings with low-rise tech buildings.
The Park also contains 85 acres of undeveloped land on which the Company will
hold, after closing of the Transaction, purchase options and rights of first
refusal. As of June 1, 1998, approximately 485,196 square feet of office space
has been constructed in the Park:
<TABLE>
<CAPTION>
Number of
Name Square Feet Stories Date of Construction
---- ----------- ------- --------------------
<S> <C> <C> <C>
One National Business Park 240,336 12 1990
131 National Business Parkway 69,230 2 1990
141 National Business Parkway 86,964 2 1990
133 National Business Parkway 88,666 3 1997
135 National Business Parkway 86,832 3 Scheduled for completion by
September 1998
134 National Business Parkway 90,000 4 Commenced Summer 1998
</TABLE>
33
<PAGE>
One National Business Park is 100% leased by the U.S. Department of Defense
through September 30, 2008. The tenant has the right to terminate this lease
with one year's notice and payment of a penalty. 135 National Business Parkway
is 81.75% pre-leased to Credit Management Solutions, Inc. ("CMSI") for 70,982
square feet. Other tenants in the Park include Lockheed Martin Technical,
Electronic Data Systems Corporation, General Dynamics, Intel Corporation, Harris
Data Services Corp., and TASC, Inc.
Brandon I: Brandon I is a 38,513 square foot flex building located in
Brandon Woods Business Park, in Riviera Beach, Maryland. It is multi-tenanted
flex building with an office to warehouse ratio of approximately one to one.
This property is located near I-695 and adjacent to major parts of the Baltimore
metropolitan region.
Howard County Suburban Market: As of December 1997, the Howard County
Suburban Market contained 5,470,000 square feet of office space with the lowest
vacancy rate in the entire Baltimore metropolitan region equal to 4.89%. As the
submarket has tightened, office rental rates have exceeded $20 per square foot
for Class A space, supporting new construction. Three of the Constellation
Properties are located in this submarket.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Total Buildings ....................................... 98 96 90
Total Square Feet ..................................... 3,543,629 3,467,049 3,324,586
"A" Tier Vacancy Rate ................................. 3.48% 3.45% 9.67%
"B" Tier Vacancy Rate ................................. 5.37% 7.29% 9.03%
Market Vacancy Rate.................................... 5.00% 6.51% 9.17%
Net Absorption ........................................ 36,509 207,703 152,754
Under Construction .................................... 292,749 -0- -0-
</TABLE>
Source: Colliers Pinkard, 1997 Office and Industrial Market Review, 1996
Office and Industrial Market Review, and 1995 Office and Industrial Market
Review.
Three Centre Park: Three Centre Park is a four-story office building located
in the Columbia North submarket between Maryland Routes 108 and 100, in
Columbia, Maryland. Three Centre Park contains 53,669 square feet of office
space and is Constellation's headquarters building.
Woodlands One: Woodlands One is a four-story, 106,278 square foot Class A
office building, located Columbia Gateway Corporate Center at the intersection
of Maryland Route 175 and Interstate 95 in Columbia, Maryland. Construction on
Woodlands One began in September 1997 and is expected to be completed and
occupied by August 1998. It has been 100% pre-leased to Green Spring Health
Services, Inc. for its national headquarters.
Woodlands Two: This property, to be located adjacent to Woodlands One, is
planned as a four-story, 106,000 square foot office building. Construction
commenced in June 1998.
34
<PAGE>
Northern Prince George's County Market, Laurel Submarket: As of
December 1997, the Laurel submarket within the Northern Prince George's County
Market, contained 22 buildings and 1,450,000 square feet of office space and
experienced an 11.18% vacancy rate which was lower than the 14.8% overall
Northern Prince George's County Market. Rents are increasing, but at a slower
rate than adjacent market areas, with rental rates ranging from $15 to $22 per
square foot. Two of the Constellation Properties are located in this market.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Total Buildings ....................................... 22 22 21
Total Square Feet ..................................... 1,450,600 1,448,473 1,418,116
"A" Tier Vacancy Rate ................................. .57% .46% 1.90%
"B" Tier Vacancy Rate ................................. 18.46% 22.61% 35.53%
Market Vacancy Rate.................................... 11.18% 13.58% 21.53%
Net Absorption ........................................ 34,539 282,094 (137,445)
Under Construction .................................... -0- -0- -0-
</TABLE>
Source: Colliers Pinkard, 1997 Office and Industrial Market Review, 1996
Office and Industrial Market Review, and 1995 Office and Industrial Market
Review.
Lakeview at the Greens I & II: Lakeview at the Greens I & II are twin,
five-story office buildings, with a total of 141,062 square feet, located
minutes from the Baltimore/Washington Parkway in Laurel, Maryland.
Southern Prince George's County Suburban Market: The Southern Prince
George's County Suburban Market contains approximately 2,530,000 square feet of
office space within 45 buildings. The vacancy rate for the first quarter of 1998
was 15.2%. Options for office space over 10,000 square feet are limited. The
overall market absorption during the first quarter of 1998 was a negative 2,300
square feet. Rental rates have been stable over the last 18 months despite the
availability of space and a lack of net absorption in the market. Rental rates
average $19 per square foot for Class A buildings and $15 per square foot for
Class B buildings. One of the Constellation Properties is located in this
submarket.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Total Buildings ....................................... 45 46 44
Total Square Feet ..................................... 2,531,712 2,728,729 2,418,646
"A" Tier Vacancy Rate ................................. 10.2% 2.7% 1.8%
"B" Tier Vacancy Rate ................................. 8.8% 9.6% 11.0%
Market Vacancy Rate.................................... 15.1% 13.3% 15.3%
Net Absorption ........................................ (48,941) 41,851 8,378
Under Construction .................................... -0- -0- -0-
</TABLE>
Source: Grubb & Ellis Research Services, Suburban Maryland Office Market
Statistics, Fourth Quarter 1997; Fourth Quarter 1996, and Fourth Quarter 1995.
35
<PAGE>
One Constellation Centre: One Constellation Centre is comprised of 178,198
square foot, Class A office building with a two-story atrium lobby and a
three-story covered parking deck and a 3,038 square foot, free standing building
occupied by a bank. The Centre is within view of the Potomac River at Exit 4 off
of the Capital Beltway (Maryland Route 495) in Prince George's County, Maryland.
Fells Point, Baltimore, Maryland: Although statistically part of the
downtown Baltimore market, the Brown's Wharf property is located near the Inner
Harbor in the historic Fells Point section of Baltimore, Maryland which has a
reputation for its entertainment and amenities. The following table presents
information relating to the downtown Baltimore market.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Total Buildings ....................................... 100 98 100
Total Square Feet ..................................... 13,653,421 13,545,785 13,892,017
"A" Tier Vacancy Rate ................................. 11.22% 13.80% 17.49%
"B" Tier Vacancy Rate ................................. 23.01% 27.32% 24.10%
Market Vacancy Rate.................................... 16.85% 20.24% 20.78%
Net Absorption ........................................ 69,267 145,284 (157,337)
Under Construction .................................... 177,130 -0- -0-
</TABLE>
Source: Colliers Pinkard, 1997 Office and Industrial Market Review, 1996
Office and Industrial Market Review, and 1995 Office and Industrial Market
Review.
Brown's Wharf: Brown's Wharf combines 75,998 square feet of office space
with 27,672 square feet of retail space. The lead office tenant is JHPIEGO
Corporation, an affiliate of The Johns Hopkins University. The property had an
occupancy rate of 100% as of June 1, 1998.
The Retail Properties
Westminster, Maryland Retail Market: An upward trend in housing starts and
economic growth has caused the Westminster, Maryland Retail Market to demand
additional retail development while simultaneously keeping overall market
vacancy rates below 5% with steadily increasing rental rates. Estimates of the
county's population will exceed 200,000 by the year 2000. This represents an
annual 12% growth rate. One of the Constellation Properties is located in this
market.
Cranberry Square: Cranberry Square contains 112,609 square feet of retail
space, comprised of a 56,139 square foot Giant Food store, a Staples store, Toy
Works and small shops, and 27,000 square feet of retail space under construction
which will allow for the expansion of the Staples store and the addition of
Factory Card Outlet and Pier One Imports. Regionally located contiguous to
Cranberry Mall at Maryland Routes 27 and 140 in Westminster, Cranberry Square is
100% leased and serves more than 93,000 people located within a ten mile radius
of the square. In 1997, the number of households within a ten mile radius of
this property totaled 33,917 with an average household income of $60,499.
36
<PAGE>
Easton, Maryland Retail Market: Growth in the Easton, Maryland Retail Market
remains stable in all sectors of commercial development. Residential growth
continues to occur at a steady 3% annual rate. Vacancy rates are 3-4% with
gradually increasing rental rates. Easton includes major employers such as Black
and Decker, Cadmus, Journal Services, Allen Family Foods and The Memorial
Hospital, all of which provide basic employment to this market. One of the
Constellation Properties is located in this market.
Tred Avon: Tred Avon is a 129,140 square foot shopping center, located at
the heart of the Central Shopping District at Maryland Route 322 and Marlboro
Road in Easton, Maryland. This shopping center contains four anchor stores,
consisting of Acme Markets, Peebles, Rite-Aid and JoAnn Fabrics, and 19 other
tenants. An extensive refurbishment of the exterior has recently been completed
to update the design of the shopping center. In addition, Acme Markets is
planning a 21,000 square foot expansion. Constellation holds an interest in the
mortgage on this property. In 1996, the number of households within a ten mile
radius of this property totaled 15,324 with an average household income of
$55,838.
The Development Properties
The Company has agreed to acquire the Development Properties for cash, as to
each such property upon the earlier of the achievement of certain net operating
income levels or July 1, 1999. Notwithstanding the foregoing, if certain minimum
net operating income levels are not achieved by July 1, 1999, either the Company
or Constellation has the right to terminate the agreement to purchase such
property.
Piney Orchard Marketplace: Located within the 2,000-acre planned unit
development of Piney Orchard in Odenton, Maryland, Piney Orchard Marketplace
will be a 52,781 square foot retail center. Construction on this property
commenced in April 1998 and is expected to be completed by November 1998. Piney
Orchard Marketplace will contain a mixture of convenience retail stores,
anchored by Food Lion, Inc. service retail, and restaurants on 8.77 acres. As of
June 1, 1998, 42,781 square feet, or approximately 81%, was pre-leased, the
primary amount of which has been pre-leased to Food Lion, Inc. In 1996, the
number of households within a five mile radius of this property totaled 22,387
with an average household income of $60,385.
Springfield Commons: Springfield Commons will be a 119,099 square foot
regional shopping center located at Fairfax County Parkway and Frontier Drive in
Springfield, Virginia. Construction commenced on this retail center in April
1998 and is anticipated to be completed before the end of 1998. Springfield
Commons was 66.85% pre-leased as of June 1, 1998 to Borders, Inc., Staples,
Inc., Pier One Imports and other tenants. Constellation holds a 60% interest in
this property with the remaining 40% held by Fried Companies, Inc., an
unaffiliated entity. In 1997, the number of households within a five mile radius
of this property totaled 122,308 with an average household income of $83,969.
37
<PAGE>
THE CONSTELLATION PROPERTIES
The following tables set forth certain historical information relating
to each of the Constellation Properties as of June 1, 1998.
<TABLE>
<CAPTION>
Percentage
Leased or Pre-
Year Built Rentable Leased as of Total Rental
Property Locations Renovated Sq. Ft. June 1, 1998(1) Revenue (2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
1. One National Business 1990 240,336 100.00% $4,523,256
Park (5)
2. 131 National Business 1990 69,230 99.52% 1,178,776
Parkway
3. 133 National Business 1996 88,666 90.60% 1,683,725
Parkway
4. 141 National Business 1990 86,964 98.42% 1,434,318
Parkway
5. One Constellation Centre 1988/1989 181,236 69.27% 2,420,901
6. Lakeview at the Greens I 1986 69,192 73.40% 841,261
7. Lakeview at the Greens II 1988 71,870 95.94% 1,128,521
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Total Rental
Revenue of Total Rental
Occupied Revenue per Major Tenants
PROPERTY LOCATIONS Space (3) Occupied Sq. Ft. (4) (10% or more Rental Sq. Ft.)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OFFICE PROPERTIES
1. One National Business 24.40% $18.82 U.S. Department of Defense (100%)
Park (5)
2. 131 National Business 6.36% 17.11 e.spire Communications (35%)
Parkway TASC, Inc. (28%)
Lockheed Martin Technical (23%)
Intel Corporation (13%)
3. 133 National Business 9.08% 20.96 e.spire Communications (67%)
Parkway Applied Signal Technology (24%)
4. 141 National Business 7.74% 16.76 Stanford Telecommunications (35%)
Parkway J.G. Van Dyke & Associates (20%)
Harris Data Services Corp. (14%)(6)
E.D.S. (10%)
5. One Constellation Centre 13.05% 19.28 U.S. Department of Treasury (47%)
NRL Federal Credit Union (10%)
6. Lakeview at the Greens I 4.54% 16.56 Great West Life & Annuity (17%)
Laurel Consulting Group (15%)
Moore USA, Inc. (11%)
7. Lakeview at the Greens II 6.09% 16.37 Sky Alland Research, Inc. (22%)
Greeman-Pedersen, Inc. (15%)
Metcalf & Eddy (11%)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Percentage
Leased or Pre-
Year Built Rentable Leased as of Total Rental
Property Locations Renovated Sq. Ft. June 1, 1998(1) Revenue (2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8. Three Centre Park 1987 53,669 95.65% $ 899,873
9. Brandon I 1982 38,513 94.49% 208,297
10. Brown's Wharf (7) 1989 103,670 100.00% 1,603,168
--------- ------ -----------
TOTAL OFFICE PROPERTIES 1,003,346 90.89% $15,922,096
--------- ------ -----------
--------- ------ -----------
RETAIL PROPERTIES
11. Cranberry Square 1991 112,609 100.00% $ 1,871,836
12. Tred Avon 1977/1997 129,140 92.09% 747,325
--------- ------ -----------
TOTAL RETAIL PROPERTIES 241,749 95.77% $ 2,619,161
--------- ------ -----------
--------- ------ -----------
TOTAL/OPERATING AVERAGE
PORTFOLIO PROPERTIES (8) 1,245,095 91.83% $18,541,257
--------- ------ -----------
--------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Total Rental
Revenue of Total Rental
Occupied Revenue per Major Tenants
Property Locations Space (3) Occupied Sq. Ft. (4) (10% or more Rental Sq. Ft.)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8. Three Centre Park 4.85% $17.53 CRE/CRM (34%)
N.A.C.M. (20%)
Reap/REMAX, Inc. 16%)
H.C. Copeland Associates, Inc. (11%)
9. Brandon I 1.12% 5.72 Rapid Response (50%)
BGE Environmental (19%)
10. Brown's Wharf (7) 8.65% 15.46 JHIEPGO Corporation (27%)
Lista's (10%)
----- ------
TOTAL OFFICE PROPERTIES 85.88% $17.46
----- ------
----- ------
RETAIL PROPERTIES
11. Cranberry Square 10.10% $16.62 Giant Food (50%)
Staples, Inc. (15%)
Toy Works (11%)
12. Tred Avon 4.02% 6.28 Peebles (27%)
Acme Markets (22%)
----- ------
TOTAL RETAIL PROPERTIES 14.12% $11.31
----- ------
----- ------
TOTAL/OPERATING AVERAGE
PORTFOLIO PROPERTIES (8) 100.00% $16.22
----- ------
----- ------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Percentage
Leased or Pre-
Year Built Rentable Leased as of Total Rental
Property Locations Renovated Sq. Ft. June 1, 1998(1) Revenue (2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROPERTIES UNDER CONSTRUCTION
13. 135 National Business 1998 86,832 81.75% $ 1,277,676
Parkway
14. Woodlands One 1998 106,278 100.00% 2,168,071
15. 134 National Business N/A 90,000 0% 0
Parkway (10)
16. Woodlands Two (10) N/A 106,000 0% 0
DEVELOPMENT PROPERTIES
17. Piney Orchard N/A 52,781 81.05% 265,000(12)
Marketplace (11)
18. Springfield Commons (11) N/A 119,099 66.85% 1,750,363(12)
--------- ------ ------------
TOTAL OF 18 PROPERTIES 1,806,085 78.61% $ 24,002,367
--------- ------ ------------
--------- ------ ------------
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Total Rental
Revenue of Total Rental
Occupied Revenue per Major Tenants
Property Locations Space (3) Occupied Sq. Ft. (4) (10% or more Rental Sq. Ft.)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTIES UNDER CONSTRUCTION
13. 135 National Business N/A $ 18.00 CMSI (81.75%) (9)
Parkway
14. Woodlands One N/A 20.40 Green Spring Health Services, Inc.
(100%) (9)
15. 134 National Business N/A N/A N/A
Parkway (10)
16. Woodlands Two (10) N/A N/A N/A
DEVELOPMENT PROPERTIES
N/A 6.19 Food Lion, Inc. (72%)
17. Piney Orchard
Marketplace (11)
18. Springfield Commons (11) N/A 21.99 Borders, Inc. (23%) and Staples, Inc.
(20%)
---- ------
TOTAL OF 18 PROPERTIES -- $16.91
---- ------
---- ------
</TABLE>
- ----------
(1) The percentage is based upon all leases signed as of June 1, 1998.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
(3) The percentage is based on the property's rental revenue to Constellation
Properties' Total Rental Revenue excluding properties numbered 13-18 listed
on the table above.
(4) This represents the property's annualized base rent
divided by the respective property's leased square feet as of June 1, 1998.
(5) This property is triple net leased. The tenant reimburses Constellation for
$1,090,452 of annualized operating expenses included in rental revenue
noted.
(6) Harris Data Services Corp. is a subtenant for GTE Government Systems.
(7) This property contains 75,998 square feet of office space and 27,672 feet
of retail space.
(8) Total Rental Revenue per rentable square foot excludes the Development
Properties' square feet and the four properties under construction.
(9) CMSI has pre-leased 70,982 square feet for $18.00 per square foot (net of
electric cost) upon occupancy. Green Springs Health Services, Inc. has
pre-leased 106,278 square feet for $20.40
40
<PAGE>
- ----------
per square foot upon occupancy.
(10) The Company exercised its options for these two properties on May 28, 1998.
These properties commenced in Summer 1998 and no pre-leasing activity has
occurred. The Rentable Square Foot figures are estimates as of June 1, 1998
as a result of their development stages.
(11) The purchase commitment by the Company is the earlier of achievement of
certain operating results or July 1, 1999. The Rentable Square Foot figures
are estimates as of June 1, 1998 as a result of their development stages.
(12) Total Rental Revenue does not include pro rata operating expenses since
these expense reimbursements have not yet been determined.
N/A Not applicable as property not operational as of June 1, 1998.
41
<PAGE>
CONSTELLATION'S SIGNIFICANT TENANTS
The following table sets forth a schedule of Constellation's ten largest
tenants, for the twelve operating properties, as of June 1, 1998, based upon
annualized contractual base rents for the month of June 1998 plus annualized
operating expense reimbursements. This schedule excludes $350,695 of rental
revenue for 21,502 square feet in two different buildings which were occupied by
CRE/CRM as of June 1, 1998.
<TABLE>
<CAPTION>
Remaining
Number Lease Term Total Rent
Name Exp. Date Of Leases (months) Revenue (1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFFICE TENANTS:
U.S. Department of Defense (2) September 2008 1 124 $ 4,523,256
e.spire Communications (3) - 2 - 1,763,769
U.S. Department of Treasury April 2003 1 58 1,564,362
Stanford Telecommunications August 2003 1 63 640,690
JHPIEGO Corporation October 2008 1 125 385,574
NRL Federal Credit Union December 2003 1 67 343,305
Applied Signal Technology May 2004 1 71 332,054
TASC, Inc. April 2001 1 35 327,188
Lockheed Martin Technical July 2008 1 2 286,532
RETAIL TENANTS:
Giant Food April 2016 1 215 768,573
---- --- -----------
TOTALS: 11 -- $10,935,302
---- --- -----------
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Percentage of Aggregate Aggregate
Name Total Revenue Leased Sq. Ft. Leased Sq. Ft.
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OFFICE TENANTS:
U.S. Department of Defense (2) 24.40% 240,336 21.02%
e.spire Communications (3) 9.51% 83,800 7.33%
U.S. Department of Treasury 8.44% 85,253 7.46%
Stanford Telecommunications 3.46% 39,880 3.49%
JHPIEGO Corporation 2.08% 27,541 2.41%
NRL Federal Credit Union 1.85% 17,901 1.57%
Applied Signal Technology 1.79% 20,783 1.82%
TASC, Inc. 1.76% 19,550 1.71%
Lockheed Martin Technical 1.55% 15,807 1.38%
RETAIL TENANTS:
Giant Food 4.15% 56,139 4.91%
------ ------- ------
TOTALS: 58.98% 606,990 53.09%
------ ------- ------
</TABLE>
(1) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
(2) Property occupied under a triple net lease agreement, pursuant to which the
tenant reimburses Constellation for all building operating expenses. Lease
provides tenant with annual automatic renewal options which commenced in
October 1994.
(3) e.spire Communications occupies space in two different buildings with
59,545 square feet expiring in March 2003 and 24,255 square feet expiring
in January 2005.
Constellation has pre-leased properties under construction to the
following significant tenants. Green Spring Health Services, Inc. has
pre-leased 106,278 square feet of Woodlands One for a five year term, which
will generate $2,168,071 of annual rental revenue upon occupancy. In 135
National Business Parkway, CMSI has leased 70,982 square feet under a seven
year lease which will generate $1,277,676 of annual rental revenue upon
occupancy. Food Lion, Inc. has leased 37,981 square feet for a twenty year
term, which will generate $184,000 of annual rental revenue upon occupancy
for the Piney Orchard Marketplace property. Springfield Commons has been
pre-leased to Borders, Inc. for 27,608 square feet for a twenty-year term and
Staples, Inc. for 24,000 square feet for a fifteen-year term, which will
generate $604,891 and $432,000 of annual rental revenue on occupancy,
respectively.
42
<PAGE>
CONSTELLATION PROPERTIES
SCHEDULE OF LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
operating Constellation Properties beginning June 1, 1998 and annually
thereafter, assuming that none of the tenants exercises renewal options:
<TABLE>
<CAPTION>
Total Rental
Number Square Total Rental Revenue of Percentage of
of Footage of Percentage of Revenue of Expiring Leases Total Rental
Year of Leases Leases Total Leased Expiring Per Rentable Revenue
Expiration Expiring Expiring (1) Square Feet Leases (2) Square Feet (2) Expiring (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1998-
December 31, 1998 15 58,021 5.07% $ 778,393 $ 13.42 4.20%
1999 29 75,222 6.58% 1,107,648 14.73 5.97%
2000 21 99,453 8.70% 1,418,525 14.26 7.65%
2001 19 152,959 13.38% 2,262,091 14.79 12.20%
2002 9 65,466 5.73% 684,858 10.46 3.70%
2003 20 267,031 23.35% 4,899,731 18.35 26.43%
2004 6 59,447 5.20% 928,196 15.61 5.01%
2005 1 24,255 2.12% 412,097 16.99 2.22%
2006 1 12,330 1.08% 150,601 12.21 .81%
2007 0 0 0.00% 0 0.00 0.00%
2008 2 267,877 (1) 23.43% 4,908,830 18.32 26.48%
2009 and 3 61,311 5.36% 990,287 16.15 5.33%
thereafter
------------------------------------------------------------------------------------------------
TOTALS: 126 1,143,372 100.00% $18,541,257 $ 16.22 100.00%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
(1) One tenant occupying 240,336 square feet and remitting $4,523,256 of
annualized June 1, 1998 total rental revenue leases space under a one year
lease with 14 consecutive automatic one year renewals. The lease has been
reflected as expiring in the year 2008 in the above table.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
43
<PAGE>
PRO FORMA SIGNIFICANT TENANTS
The following table sets forth a pro forma schedule of the Company's ten
largest tenants, including the 12 operating Constellation Properties and the
Company (including the Airport Square properties and the properties in
Fairfield, New Jersey) based upon annualized contractual rents as of June 1,
1998 plus annualized operating expense reimbursements.
<TABLE>
<CAPTION>
Remaining
Number Lease Term Total Rent Percentage of
Name Exp. Date Of Leases (months) Revenue (1) Total Revenue
- -------------------------------------- --------------------- ------------ -------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
OFFICE TENANTS:
Unisys(2) July 2009 4 133 $ 8,943,060 17.03%
U.S. Department of Defense(3) September 2008 7 6,580,059 12.53%
IBM(4) March 2002 1 46 3,255,778 6.20%
Teleport Communications(5) 2 2,603,324 4.96%
Ciena Corporation(6) 3 1,987,569 3.78%
e.spire Communications(7) 2 1,763,769 3.35%
U.S. Department of Treasury April 2003 1 58 1,564,362 2.98%
First Annapolis Consulting August 2005 1 74 766,413 1.46%
RETAIL TENANTS:
Giant Food April 2016 1 215 768,573 1.46%
Fleming Companies, Inc.(8) 3 729,621 1.39%
------------------------------------------------------------
TOTALS: 24 $28,962,528 55.14%
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Aggregate Aggregate
Name Leased Sq. Ft. Leased Sq. Ft.
- -----------------------------------------------------------------------
<S> <C> <C>
OFFICE TENANTS: 954,937 23.86%
Unisys(2) 450,041 11.24%
U.S. Department of Defense(3) 170,000 4.25%
IBM(4) 172,385 4.30%
Teleport Communications(5) 182,183 4.55%
Ciena Corporation(6) 83,800 2.09%
e.spire Communications(7) 85,253 2.13%
U.S. Department of Treasury 49,446 1.23%
First Annapolis Consulting
RETAIL TENANTS: 56,139 1.40%
Giant Food 128,320 3.21%
Fleming Companies, Inc.(8)
---------------------------------
TOTALS: 2,332,504 58.26%
---------------------------------
---------------------------------
</TABLE>
- ----------
(1) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
(2) Merck subleases 109,109 square feet and has exercised its option to lease
an additional 109,109 square feet commencing January 1, 1999.
(3) U.S. Department of Defense occupies space in seven different buildings with
240,336 square feet expiring September 2008; 96,636 square feet expiring
September 1998; 73,572 square feet expiring May 1999; 12,333 square feet
expiring June 2005; 15,776 square feet expiring June 1999; 10,308 square
feet expiring September 1998; and 1,080 square feet expiring October 1998.
(4) Teleport Communications recently signed a ten year lease with the Company
for 143,072 square feet to be phased in over the next nine months. Teleport
Communications will sublease this space through March 31, 2002.
(5) Teleport Communications leases 142,385 square feet which expires June 2008
and 30,000 square feet which expires December 2006. The 30,000 square feet
space is subleased from IBM through March 2002.
(6) Ciena Corporation leases 57,140 square feet which expires August 2002;
67,903 square feet which expires February 2008; and 57,140 square feet
which expires June 2002.
(7) e.spire Communications leases 59,545 square feet which expires March 2003
and 24,255 square feet which expires January 2005.
(8) Fleming Companies, Inc. has three leases consisting of 36,248 square feet
expiring October 2010; 39,272 square feet expiring May 2014; and 52,800
square feet expiring November 2014.
44
<PAGE>
PRO FORMA SCHEDULE OF LEASE EXPIRATIONS
The following table sets forth a pro forma schedule of the lease expirations
for the 12 operating Constellation Properties and the Company (including the
Airport Square properties and the properties in Fairfield, New Jersey) as of
June 1, 1998:
<TABLE>
<CAPTION>
Total Rental
Number Square Total Rental Revenue of Percentage of
of Footage of Percentage of Revenue of Expiring Leases Total Rental
Year of Leases Leases Total Leased Expiring Per Rentable Revenue
Expiration Expiring Expiring (1) Square Feet Leases (2) Square Feet (2) Expiring(2)
- ----------------------- ------------ --------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1998 -
December 31, 1998 23 183,456 4.58% $2,029,497 $11.06 3.86%
1999 39 307,219 7.68% 4,280,784 13.93 8.15%
2000 32 156,000 3.90% 2,310,740 14.81 4.40%
2001 35 384,304 9.60% 5,972,535 15.54 11.37%
2002 27 496,461 12.40% 6,770,929 13.64 12.89%
2003 24 284,368 7.10% 5,213,900 18.34 9.93%
2004 8 86,481 2.16% 1,407,075 16.27 2.68%
2005 3 86,034 2.15% 1,379,369 16.03 2.63%
2006 3 109,840 2.74% 1,256,281 11.44 2.39%
2007 3 53,812 1.34% 984,083 18.29 1.87%
2008 12 838,241(1) 20.94% 10,980,417 13.10 20.91%
2009 and 7 1,016,248 25.41% 9,933,334 9.77 18.92%
thereafter
---------- ------------ --------- ------------ ------- ---------
TOTALS: 216 4,002,464 100% $52,518,944 $13.12 100%
---------- ------------ --------- ------------ ------- ---------
---------- ------------ --------- ------------ ------- ---------
</TABLE>
- --------
(1) One tenant occupying 240,336 square feet and remitting $4,523,256 of
annualized June 1, 1998 total rental revenue leases space under a one year
lease with 14 consecutive automatic one year renewals. The lease has been
reflected as expiring in the year 2008 in the above table.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
45
<PAGE>
THE CONSTELLATION SERVICE COMPANIES
The Constellation Service Companies consist of certain assets and personnel
of CRE and a 75 percent interest in CRM.
Constellation Real Estate, Inc.
CRE provides comprehensive design/build, construction, development and asset
management service to entities affiliated with Constellation. Most of
Constellation's activities in the real estate business have been conducted on
its behalf by CRE and its employees. CRE's strategy in the office property
business has been to develop or acquire high quality office properties in
suburban markets where it is, or can become, a prominent market force, or in
markets where it identifies specific real estate investment opportunities
CRE management includes: Randall M. Griffin, President; Roger A. Waesche,
Jr., Senior Vice President of Finance; John H. Gurley, Vice President and
General Counsel; Stanley A. Link, Senior Vice President of Construction; and
Dwight S. Taylor, Senior Vice President of Marketing and Leasing. These
individuals manage the operations including development, construction, leasing,
asset management, acquisition and disposition of the company owned, and
affiliated entities' properties. Each of them is expected to join the Company in
a senior management position following closing of the Transaction.
Constellation Realty Management, LLC
CRM is engaged in management of income producing real estate and corporate
facilities management. Approximately 47% of CRM's revenues for the year ended
December 31,1997 were derived from Constellation Properties and other affiliates
of Constellation, and the balance of its income was derived from unaffiliated
third parties. As of June 1, 1998, CRM managed approximately 14.8 million square
feet of real estate, comprising more than 146 properties. Of these totals,
approximately 1.8 million square feet in 16 properties were owned by entities
affiliated with Constellation, including BGE. The balance, 13.0 million square
feet in over 130 properties, were owned by unaffiliated clients of CRM.
CRM is active in all facets of commercial real estate, including commercial,
office, industrial, retail and corporate facilities projects. CRM's list of
clients includes pension fund managers, Fortune 500 companies, financial
institutions and partnerships and individuals. Its clients include:
- - LaSalle Advisors - ERE Yarmouth
- - Westmark Realty Advisers - AMB Institutional Realty Advisers
- - GE Capital Investment Advisers
CRM maintains its headquarters at Three Centre Park in Columbia, Maryland,
with offices in Towson, Maryland, Woodlawn, Maryland, Annapolis Junction,
Maryland, Calverton, Maryland, Columbia, Maryland, Linthicum, Maryland, and
Wilmington, Delaware. CRE owns 75% of the outstanding membership interests of
CRM, which was formed on April 1, 1996. The remaining 25% interest is held by
KLNB, Inc., an unaffiliated entity. CRM is operated under the direction of
Michael D. Kaiser, President and Steven J. Willats, Vice President. CRM employs
66 people, 30 of whom are building engineers, 19 are property managers, five are
lease administrators, nine are engaged in accounting and three are involved in
corporate activities.
The 75% interest in CRM and other management assets to be acquired by the
Company from
46
<PAGE>
Constellation will be transferred by the Company to the Operating Partnership,
which will, in turn, transfer such assets to COMI. In exchange for such assets,
the Operating Partnership will receive (i) indebtedness issued by COMI in the
principal amount of $2,005,000, (ii) cash of approximately $24,750, (iii) 18,800
shares of non-voting common stock, representing all of the non-voting common
stock to be issued by COMI and (iv) 10 shares of voting common stock,
representing 1% of the voting common stock to be issued by COMI. Individual
shareholders, including Jay H. Shidler, Clay W. Hamlin, III, executive officers
of COMI and perhaps others, will purchase 990 shares of voting common stock
(representing 99% of the outstanding voting stock and 5% of the aggregate
outstanding stock) in exchange for a cash capital contribution of $24,750. Due
to federal income tax requirements, the REIT may not directly or indirectly own
10% or more of the outstanding voting securities of COMI.
LEGAL PROCEEDINGS RELATED TO CONSTELLATION
To the Company's knowledge, there are no material legal proceedings pending
or threatened against Constellation, any of the Constellation Properties or the
Constellation Service Companies, other than routine litigation arising out of
the ordinary course of business, and which are covered by liability insurance.
SELECTED FINANCIAL DATA OF
CONSTELLATION SERVICE COMPANIES
The following selected financial data of the Constellation Service Companies
as of and for the three months ended March 31, 1998 and 1997; and as of December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993, have
been derived from the Constellation Service Company's unaudited financial
statements, which in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the unaudited periods. The selected financial data of
Constellation Service Companies as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995 has been derived from and should be
read in conjunction with the Constellation Service Companies' audited financial
statements and notes thereto for those periods included elsewhere in this Proxy
Statement. This information should also be read in conjunction with
"Management's Discussion and Analysis of Constellation Service Companies'
Financial Condition and Results of Operations" included elsewhere in this Proxy
Statement.
47
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA OF CONSTELLATION SERVICE COMPANIES
(Dollars in Thousands)
Three Months Ended
March 31, Year Ended December 31,
Year Ended December 31,
------------------------------- --------------------------------------
1998 1997 1997 1996
-------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Operating Data:
Total revenue............................... $ 3,717 $ 3,314 $ 11,226 $ 15,412
Total expenses.............................. 3,755 3,043 10,485 14,708
Minority interest........................... 26 47 117 96
Income tax expense (benefit)................ (23) 91 256 251
---------- ------------ ------------ ------------
Net Income (loss)....................... $ (41) $ 133 $ 368 $ 357
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Balance Sheet Data:
Cash and cash equivalents................... $ 5,944 $ 5,733 $ 4,732 $ 5,191
Due from affiliates......................... - - - -
Other assets................................ 4,151 5,886 3,378 5,341
---------- ------------ ------------ ------------
Total assets............................ $ 10,095 $ 11,619 $ 8,110 $ 10,532
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Due to affiliates........................... $ 6,051 $ 7,529 $ 4,423 $ 4,925
Other liabilities........................... 1,193 1,433 821 3,130
---------- ------------ ------------ ------------
Total liabilities....................... $ 7,244 $ 8,962 5,244 $ 8,055
Minority interest........................... $ 162 $ 162 $ 136 $ 115
Stockholder's equity........................ 2,689 2,495 2,730 2,362
---------- ------------ ------------ ------------
Total liabilities and stockholder's equity.. $ 10,095 $ 11,619 $ 8,110 $ 10,532
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Square Feet under Management................ 13,576,000 11,278,000 14,203,000 10,863,000
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1995 1994 1993
----------------- ----------------- ----------------
<S> <C> <C> <C>
Operating Data:
Total revenue............................... $ 7,096 $ 3,467 $ 3,308
Total expenses.............................. 7,088 3,401 3,769
Minority interest........................... -- --
Income tax expense (benefit)................ 14 26 (189)
----------- ----------- -----------
Net Income (loss)....................... $ (6) $ 40 $ (272)
----------- ----------- -----------
----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents................... $ (554) $ (423) $ (1,113)
Due from affiliates......................... 1,484 1,448 2,637
Other assets................................ 3,284 1,395 992
----------- ----------- -----------
Total assets............................ $ 4,214 $ 2,420 $ 2,516
----------- ----------- -----------
----------- ----------- -----------
Due to affiliates........................... $ -- $ -- $ --
Other liabilities........................... 2,209 409 545
----------- ----------- -----------
Total liabilities....................... $ 2,209 $ 409 $ 545
Minority interest........................... -- -- --
Stockholder's equity........................ 2,005 2,011 1,971
----------- ----------- -----------
Total liabilities and stockholder's equity.. $ 4,214 $ 2,420 $ 2,516
----------- ----------- -----------
----------- ----------- -----------
Square Feet under Management................ 2,245,000 1,594,000 1,372,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSTELLATION SERVICE
COMPANIES' FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated
financial statements of Constellation Service Companies and the notes thereto,
appearing elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
Net Income: Net income decreased by $174,000 from $133,000 to a $41,000
loss for the three month period ended March 31, 1998 as compared to the same
period in 1997. This change resulted from reduction in CRM's profit by 44.7%
from $188,000 in 1997 to $104,000 in 1998 as expenses increased 12.5% from
$827,000 to $930,000 but the property management fees only increased 1.9% from
$1,015,000 in 1997 to $1,034,000 in 1998 for the three month period ended March
31, 1998 compared to the same period in 1997. The remaining decrease of $120,000
resulted from the reduction in profit recognized on the construction contract
services due to the increase in related party transactions for which no profit
was realized.
Revenues: Total revenues increased by 12.3% or $.4 million from $3.3
million to $3.7 million for the three months ended March 31, 1998 compared to
the same period in 1997. This increase resulted principally from commencement of
certain construction contract services during the first quarter of 1998 which
represented new services, causing a 12.9% or $.2 million increase from $1.7
million to $1.9 million for the first quarter of 1998 compared to 1997. The
remaining $.2 million increase in revenues was generated from increased
construction, development, marketing, asset management and finance fees.
Operating Expenses: Total operating expenses increased by $.7 million
or 23.4% from $3.0 million to $3.7 million for the three months ended March 31,
1998 and 1997, respectively. Construction contract costs increased by $.3
million or 22.2% from $1.5 million to $1.8 million from 1997 to 1998 as a result
of the commencement of new construction contract services. Another $.3 million
or 27.0% increase from $1.0 million to $1.3 million in salaries and related
expenses was caused by the hiring of new employees to service the growth in the
property management business coupled with normal wage increases to the existing
employees.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Income: Net income was relatively unchanged level for the year
ended December 31, 1997 compared to the same period in 1996 due to the
offsetting effects of decreases in revenues and decreases in operating expenses.
Revenues: Total revenues decreased by 27.6% or $4.2 million from $15.3
to $11.1 million for the years ended December 31, 1996 and 1997, respectively.
This decrease resulted principally from reduced levels of certain construction
contract services from 1996 to 1997, causing a $5.4 million decrease. Property
management fees increased $.7 million and 21.0% due to higher volume of square
feet managed. Construction, development, marketing, asset management fees and
finance fees increased by 21.8% or $.5 million from $2.6 million in 1996 to $3.1
million in 1997, primarily due to increased marketing fees associated with new
projects of $.4 million.
Operating Expenses: Total operating expenses decreased by $4.2 million
or 15.2% from $14.7 to $10.5 million for the year ended December 31, 1997
compared to the same period in 1996. This decrease, similar to the decline in
revenues, principally resulted from completion of certain construction
49
<PAGE>
contract services during 1996 which represented non-recurring services in 1997
or a $5.4 million decrease. An increase of $.7 million and 17.7% in salaries and
related expenses resulted from the hiring of ten new employees due to CRM's
growth coupled with wage increases for existing employees. Other expenses
increased by 52.8% or $.5 million and 52.8% over the prior year and consist
primarily of $.3 million in consulting advisory services and $.1 million of
additional rental expense due to the overall growth in the business.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Income: Net income increased by $.4 million from a breakeven in
1995 to a $.4 million profit in 1996 due to the $.3 million pre-tax improvement
in construction contract profit. The growth of $1.3 million in property
management fees due to additional square feet under management coupled with the
$1.1 increase in construction, development, marketing, asset management and
finance fees offset the additional $1.5 million in salaried expenses required to
service this growth.
Revenues: Total revenues increased by $8.3 million or 119.3% from $7.0
million to $15.3 million for the year ended December 31, 1996 compared to the
same period in 1995. This increase resulted principally from growth in certain
construction contract services during 1996 which did not exist in 1995, causing
a $5.9 million increase. Property management fees increased by 72.3% or $1.3
million from $1.8 million to $3.1 million as a result of the purchase of a 75%
member interest in CRM by CRE, effective in April 1996. Construction,
development, marketing, asset management fees and finance fees increased by
70.4% or $1.1 million from $1.5 million to $2.6 million in 1995 and 1996,
respectively, due to the increased leasing commissions and increased fees
associated with the growth in the construction contract services.
Operating Expenses: Total operating expenses increased by 107.0% or
$7.6 million from $7.1 million to $14.7 million for the year ended December 31,
1996 compared to the same period in 1995. This increase, similar to the
increased operating revenues, principally resulted from growth in certain
construction contract services during 1996 which did not exist in 1995, causing
a $5.6 million increase. An increase of 67.3% or $1.5 million in salaries and
related expenses primarily resulted from the purchase of the 75% member interest
in CRM in which approximately 19 new employees were hired. Overhead costs of
related party increased 41.5% or $255,000 over the prior year because the total
allocable costs from related party comprised a larger portion of the related
party's business as compared to other lines of business in 1996. Other expenses
increased 32.6% or $.2 million from $.7 million in 1995 to $.9 million in 1996
as rent and depreciation expense increased from new CRM satellite offices.
Minority Interest: Minority interest expense increased by $96,000 as a
result of the formation of CRM in April 1996. KLNB, Inc., the minority interest
holder, shares in 25% of the earnings from CRM.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash provided from operations represents the primary source
of liquidity to fund operating expenses. To the extent necessary, borrowings
from affiliates and lending institutions provide other sources of liquidity. The
Constellation Service Companies have generated cash from operations to fund
distributions to the minority interest holder, as required, and from all sources
to satisfy its debt service obligations.
The Constellation Service Companies use a centralized cash management
system for Constellation affiliates owned by CREG. As a result, if historical
cash flows from operating activities
50
<PAGE>
were insufficient to fund operating expenses and costs, the Constellation
Service Companies received advances from its affiliates. These advances are then
repaid from available cash flow.
Working capital as of March 31, 1998 was $406,000 as compared to
$1,460,000 as of March 31, 1997. This decrease of $1,054,000 was principally
caused by a $2,954,000 reduction in accounts receivable offset by a $1,478,000
reduction in due to affiliates. Cash flows from operating activities increased
by $1,591,000 from $650,000 for the three-month period March 31, 1997 to
$2,241,000 for the three-month period March 31, 1998 principally as a result of
a $2,208,000 increase in accounts payable and accrued expenses offset by the
$976,000 reduction in borrowings from affiliates. Cash flows from investing
activities decreased by $950,000 due to the $1,000,000 escrowed deposit related
to a contract to acquire loans collaterialized by the Airport Square properties.
Cash flows from (used in) financing activities increased by $29,000 from a
$1,000 deficit for the three-month period March 31, 1998 to $28,000 for the
three-month period March 31, 1997.
Working capital as of December 31, 1997 was $1,400,000 as compared to
$1,300,000 as of December 31, 1996. The $100,000 increase was principally caused
by the $2,464,000 reduction in the outstanding accounts receivable balances
partially offset by the $2,164,000 reduction in accounts payable.
Cash flows from (used in) operating activities for the years ended
December 31, 1997, 1996 and 1995 were $124,000, $6,290,000, and $(91,000),
respectively. Although net income realized for the year ended December 31, 1997
remained level compared to 1996, cash flows from operating activities decreased
by $745,000 from $6,290,000 in 1996 to $124,000 in 1997 principally as a result
of the operating advances from affiliates. In 1997, the Constellation Service
Companies repaid $502,000 of advances from affiliates as compared to the
$6,409,000 borrowed from affiliates in 1996. In 1996, although net income
improved by $363,000 as compared to 1995, cash flows from (used in) operating
activities increased by $6,381,000 from $(91,000) in 1995 to $6,290,000 in 1996
principally as a result of $6,409,000 advanced from affiliates. This advance
provided cash to fund operations as liquidity was strained by the $1,982,000
increase in accounts receivable from 1995 to 1996 coupled with a $2,182,000
increase in accounts payable from 1995 to 1996. Net cash used in operating
activities for the year ended December 31, 1995 was $(91,000) caused primarily
by the $(6,000) net loss combined with a net decrease of $200,000 in current
assets and liabilities from 1994 to 1995.
Cash flows used in investing activities, which primarily relate to
investment in fixed assets, for the years ended December 31, 1997, 1996 and 1995
were $(445,000), $(731,000), and $(59,000), respectively. In 1996, cash flows
from investing activities included the $414,000 acquisition of the 75% member
interest in CRM.
Cash flows from (used in) financing activities, which include the
annual principal repayments to KLNB, Inc. on the outstanding note payable and
any distribution or contributions to CRM's minority interest holder, for the
years ended December 31, 1997, 1996 and 1995 were $(138,000), $186,000, and
$19,000, Annual scheduled principal payments of $40,000 were paid to KLNB from
the $200,000 promissory note assumed in 1996 upon the acquisition of the 75%
member interest in CRM in 1996. A $96,000 distribution was provided to the
minority interest holder in 1997. In 1996, the minority interest holder
contributed $19,000.
51
<PAGE>
INFLATION
Inflation has generally not significantly impacted the periods
presented for the Constellation Service Companies due to the relatively low
inflation rates in their market. In addition, average salaries and related
expenses historically have not exceeded 10% annually in the same market.
SELECTED FINANCIAL DATA OF THE COMPANY
The following tables set forth certain financial data on a consolidated
historical and pro forma basis for the Company. The financial data should be
read in conjunction with the Company's financial statements and the notes
thereto incorporated by reference in this Proxy Statement, Constellation
Properties' combined statement of revenue and certain expenses for the year
ended December 31, 1997 and the notes thereto, and the Constellation Service
Companies' consolidated financial statements and the notes thereto included
elsewhere in this Proxy Statement. The consolidated historical financial data of
the Company as of and for the fiscal years ended December 31, 1993 through 1997
have been derived from and should be read in conjunction with the audited
financial statements for those years. The financial data of the Company as of
and for the three months ended March 31, 1998 and 1997 have been derived from
unaudited financial statements, which, in the opinion of management, include all
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company incorporated by reference in this Proxy Statement.
The unaudited pro forma financial and operating data for the three
months ended March 31, 1998 and for the year ended December 31, 1997, is
presented as if the completion of the Transaction, the Airport Square property
acquisition, the acquisition of properties in Fairfield, New Jersey, and the
1998 Offering, all occurred as of January 1, 1998 for the March 31, 1998 pro
forma data and as of January 1, 1997 for the December 31, 1997 pro forma data.
The acquisition of the Shidler Group's Mid-Atlantic operations is reflected in
the Company's historical consolidated balance sheet at December 31, 1997 and
March 31, 1997 and is included in the pro forma condensed consolidating
statements of operations as if it occurred on January 1, 1997. The unaudited pro
forma balance sheet as of March 31, 1998 is presented as if the foregoing,
except for the Shidler transaction, occurred as of March 31, 1998.
The pro forma information is based upon certain assumptions that are
included in the notes to the pro forma financial statements included elsewhere
in this Proxy Statement. The pro forma information is unaudited and is not
necessarily indicative of what the financial position and results of operations
of the Company would have been as of and for the periods indicated, nor does it
purport to represent the future financial position and results of operations for
future periods.
52
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA OF THE COMPANY
(Dollars in thousands, except per share amounts)
Three Months Ended March 31, Year Ended December 31,
--------------------------------------------- ---------------------------------------------------
Pro Forma Historical Pro Forma
------------- ----------------------------- ------------- ---------------------------------
1998 1998 1997 1997 1997 1996
------------- ------------- ----------- ------------- ------------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue:
Rental Income.......... $12,109 $4,919 $626 $44,007 $6,122 $2,477
Tenant recoveries and
other income........ 1,260 606 7 5,619 496 32
---------- --------- -------- ---------- ---------- ----------
Total revenue.......... 13,369 5,525 633 49,626 6,618 2,509
---------- --------- -------- ---------- ---------- ----------
Expenses:
Interest............... 4,281 2,159 308 17,226 2,855 1,246
Depreciation and
amortization........ 2,484 1,041 142 9,907 1,331 567
Property expenses...... 3,460 899 79 14,743 728 31
General and
administrative...... 465 299 13 1,358 533 372
Reformation costs (1).. -- 637 --
Termination of Advisory
Agreement (2).......... -- -- -- -- 1,353 --
---------- --------- -------- ---------- ---------- -----------
Total expenses......... 10,690 5,035 542 43,234 6,800 2,216
---------- --------- -------- ---------- ---------- -----------
Equity in income of
management
company................ (159) -- -- 55 -- --
----------- --------- -------- ---------- ---------- ----------
Income (loss) before
minority interests..... 2,520 490 91 6,447 (182) 293
Income allocated to
minority interests..... (1,033) (989) -- (3,608) (785) --
Preferred Share
distributions.......... (333) -- -- (1,334) -- --
----------- --------- -------- ----------- ---------- ----------
Net income (loss)......... $1,154 $(499) $91 $1,505 $(967) $293
----------- --------- -------- ----------- ---------- ----------
----------- --------- -------- ----------- ---------- ----------
Net income (loss) per
common share........... $0.07 $(0.22) $0.06 $0.09 $(0.60) $0.21
----------- --------- -------- ----------- ---------- ----------
----------- --------- -------- ----------- ---------- ----------
Cash dividends/
distributions declared. $1,276 $177 $816 $710
--------- -------- ---------- ----------
Cash dividends/
distributions per share $.15 $.12 $0.50 $0.50
--------- -------- ---------- ----------
--------- -------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
Historical
-----------------------------------------------
1995 1994 1993
------------- ------------ -----------
<S> <C> <C> <C>
Operating Data:
Revenue:
Rental Income.......... $2,436 $2,038 1,073
Tenant recoveries and
other income........ 48 217 70
----------- --------- ---------
Total revenue.......... 2,484 2,255 1,143
----------- --------- ---------
Expenses:
Interest............... 1,267 1,098 461
Depreciation and
amortization........ 567 476 256
Property expenses...... 42 43 63
General and
administrative...... 336 337 183
Reformation costs (1)..
Termination of Advisory
Agreement (2).......... -- -- --
----------- --------- ---------
Total expenses......... 2,212 1,954 963
----------- --------- ---------
Equity in income of
management
company................ -- -- --
----------- --------- ---------
Income (loss) before
minority interests..... 272 301 180
Income allocated to
minority interests..... -- -- --
Preferred Share
distributions.......... -- --
----------- ---------
Net income (loss)......... $272 $301 $180
----------- --------- ---------
----------- --------- ---------
Net income (loss) per
common share........... $0.19 $0.21 $0.17
----------- --------- ---------
----------- --------- ---------
Cash dividends/
distributions declared. $710 $1,207 $923
----------- --------- ---------
Cash dividends/
distributions per share $0.50 $0.85 $0.88
----------- --------- ---------
----------- --------- ---------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
--------------------------------------------- ---------------------------------------------------
Pro Forma Historical Pro Forma
------------- ----------------------------- ------------- ---------------------------------
1998 1998 1997 1997 1997 1996
------------- ------------- ----------- ------------- ------------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
(as of period end):
Real estate investments,
net of accumulated
depreciation........... 469,850 $187,730 $22,931 $188,625 $23,070
Total assets.............. 478,167 192,656 24,044 193,534 24,197
Mortgages payable......... 230,649 114,301 14,579 114,375 14,658
Total liabilities......... 233,542 117,194 14,959 117,008 15,026
Minority interests........ 64,611 64,611 -- 64,862
Shareholders' equity...... 180,014 10,851 9,085 11,664 9,171
Other Data:
Cash flows provided
(used in):.............
Operating activities... (3) $956 $223 (3) $3,216 $840
Investing activities... (3) (682) 0 (3) 973 127
Financing activities... (3) (1,323) (256) (3) (1,052) (967)
Funds from
operations (4)......... 1,246 232 1,718 847
Weighted average shares
outstanding (in
thousands)............. 16,699 2,268 1,420 16,699 1,601 1,420
Property Data (as of
period end):
Number of properties
owned.................. 49 17 7 49 17 7
Total rentable square feet
owned (in thousands)... 4,734 1,852 370 4,734 1,852 370
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
Historical
----------------------------------------------
1995 1994 1993
------------- ------------ -----------
<S> <C> <C> <C>
Balance Sheet Data
(as of period end):
Real estate investments,
net of accumulated
depreciation........... $23,624 $24,179 $15,110
Total assets.............. 24,779 25,647 18,882
Mortgages payable......... 14,916 15,153 7,450
Total liabilities......... 15,191 15,620 7,950
Minority interests........
Shareholders' equity...... 9,588 10,026 10,932
Other Data:
Cash flows provided
(used in):.............
Operating activities... $678 $690 $358
Investing activities... (551) (9,511) (5,461)
Financing activities... (1,001) 6,357 7,829
Funds from
operations (4)......... 827 768 437
Weighted average shares
outstanding (in
thousands)............. 1,420 1,420 1,065
Property Data (as of
period end):
Number of properties
owned.................. 7 7 4
Total rentable square feet
owned (in thousands)... 370 370 215
</TABLE>
- -------------------------------------------
(1) Reflects a nonrecurring expense of $637 associated with the
reformation of the Company on March 16, 1998.
(2) Reflects a nonrecurring expense of $1,353 associated with the
termination of the Advisory Agreement on October
14, 1997, which was paid in the form of Common Stock.
(3) Pro forma information relating to cash flows from operating, investing
and financing activities has not been included because management
believes that the information would not be meaningful due to the number
of assumptions required in order to calculate this information.
(4) The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes
54
<PAGE>
that FFO is helpful to investors as a measure of the financial
performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to
incur and service debt, to make capital expenditures and to fund other
cash needs. The Company computes FFO in accordance with standards
established by NAREIT which may not be comparable to FFO reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently than the Company. FFO does not represent cash generated
from operating activities determined in accordance with GAAP and should
not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is
it indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND TRUSTEES
Set forth below is certain information as of the date of this Proxy
Statement for (i) the Trustees of the Company, (ii) the executive officers of
the Company and (iii) the Trustees and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
Name Age Office Class
----- ---- ------ -----
<S> <C> <C> <C>
Jay H. Shidler 52 Chairman of the Board of Trustees III
Clay W. Hamlin, III 53 Chief Executive Officer and Trustee III
Vernon R. Beck 56 Vice President and Vice Chairman of the I
Board of Trustees
Kenneth D. Wethe 56 Trustee II
Allen C. Gehrke 63 Trustee I
William H. Walton 45 Trustee II
Kenneth S. Sweet, Jr. 65 Trustee III
Thomas D. Cassel 39 Vice President, Finance and Treasurer
John D. Parsinen 55 Secretary
</TABLE>
- ---------------------------------
*Upon closing of the Transaction, Mr. Griffin will become President of the
Company and Messrs. Crooke and Kesler will become Trustees of the Company. In
addition, Messrs. Waesche and Gurley will become executive officers of the
Company. For biographies of each of the five aforementioned persons, see the
"The Transaction--Changes in Operations and Additions to Management."
Jay H. Shidler has been Chairman of the Board of Trustees since October
1997. Mr. Shidler is the Founder and Managing Partner of The Shidler Group. A
nationally acknowledged expert in the field of real estate investment and
finance, Mr. Shidler has over 25 years of experience in real estate investment
and has been directly involved in the acquisition and management of over 1,000
properties in 40 states and Canada totaling over $4 billion in aggregate value.
Mr. Shidler is a founder and current Chairman of the Board of Trustees of First
Industrial Realty Trust, Inc. and is a founder and former director and
Co-Chairman of TriNet Corporate Realty Trust, Inc. Mr. Shidler is also founder
and Chairman of the Board of Trustees of CGA Group, Ltd., a holding company
whose subsidiary is a AAA-rated financial guarantor based in Bermuda. Mr.
Shidler serves on the boards of directors of several companies and is active as
a Trustee of several charitable organizations, including The Shidler Family
Foundation. Mr. Shidler holds a bachelor's degree in Business Administration
from the University of Hawaii.
Clay W. Hamlin, III has been a Trustee and President and Chief
Executive Officer of the Company since October 1997. Upon consummation of the
Transaction, Mr. Hamlin will relinquish the role of President to Randall M.
Griffin. See "The Transaction -- Changes in Operations and Additions to
Management." Mr. Hamlin joined The Shidler Group in May 1989, as Managing
Partner of The Shidler Group's Mid-Atlantic regional office and acquired,
managed and leased over four million square feet of commercial property with a
value in excess of $300 million. A resident of Philadelphia for over 30 years,
Mr. Hamlin has been active in the real estate business for 25 years. Mr. Hamlin
is an attorney, a CPA and holds an MBA from The Wharton School of Business and
an undergraduate degree from the University of Pennsylvania. Mr. Hamlin served
as a Lieutenant J.G. in the U.S. Navy, and is active in many professional and
charitable organizations. Mr. Hamlin is a founding shareholder of both TriNet
56
<PAGE>
Corporate Realty Trust, Inc. and First Industrial Realty Trust, Inc. His
professional affiliations include the Urban Land Institute, NAREIT, the American
Institute of CPAs and the American Bar Association.
Vernon R. Beck is Vice Chairman of the Board of Trustees and a Vice
President of the Company. Mr. Beck was elected a Trustee of the Company in
January 1990. From 1988 to 1997, Mr. Beck served as President of the Company and
as President of Crown Advisors, Inc., the Company's former external advisors.
Since 1976, Mr. Beck has also been President of Vernon Beck & Associates, Inc.,
a commercial mortgage banking and real estate development firm, which has
developed and financed numerous commercial real estate projects. Mr. Beck is a
former commercial loan officer with IDS Mortgage Corporation and senior analyst
with Northwestern National Life Insurance Company.
Kenneth D. Wethe has been a Trustee of the Company since January 1990.
Since 1990, Mr. Wethe has been the owner and principal officer of Wethe &
Associates, a Dallas-based firm providing independent risk management, insurance
and employee benefit services to school districts and governmental agencies. Mr.
Wethe's background includes over 26 years experience in the group insurance and
employee benefits area. He is a certified public accountant and holds an MBA
from Pepperdine University.
Allen C. Gehrke has been a Trustee of the Company since 1995. Prior to
becoming a private investor in 1995, Mr. Gehrke served for 35 years in various
key positions at Fleming Companies, Inc. As Senior Vice President of Corporate
Development, Mr. Gehrke's responsibilities included management of company
physical assets, market research, lease negotiations and real estate financing.
Prior to his employment with Fleming Companies, Inc., Mr. Gehrke spent seven
years with Midwest Contractors and L.A. Construction Co. of Milwaukee. Mr.
Gehrke is a former director of United Cerebral Palsy and several other community
organizations.
William H. Walton has been a Trustee of the Company since October 1997.
Mr. Walton is a Managing Principal of Westbrook Partners, LLC ("Westbrook")
which he co-founded in April of 1994. With offices in Dallas, New York, San
Francisco and Florida, Westbrook is a fully integrated real estate investment
management company. Westbrook is the sponsor of Westbrook Real Estate Fund and
Westbrook Real Estate Fund II, which together control approximately $4 billion
of real estate assets including investments in: real estate companies and
securities; offices, retail and industrial properties; apartments; hotels; and
residential developments. Prior to co-founding Westbrook, Mr. Walton was a
Managing Director of Morgan Stanley Realty. Mr. Walton holds an AB from
Princeton University and an MBA from Harvard Business School.
Kenneth S. Sweet, Jr. has been a Trustee of the Company since October
1997. Mr. Sweet is the Managing Director of Gordon Stuart Associates, Inc.,
which he founded in 1991. In 1971, Mr. Sweet founded K.S. Sweet Associates which
specialized in real estate and venture capital investments. From 1957 to 1971,
he served in increasingly responsible positions at The Fidelity Mutual Life
Insurance Company. Currently the Managing General Partner of fifteen venture
capital and real estate partnerships with assets of over $300 million, Mr. Sweet
has over 37 years of experience in real estate investments, management,
development and venture capital transactions. Mr. Sweet is active in community
affairs and serves as a director, chairman of the real estate committee and a
member of the finance committee of the Main Line Health and the Philadelphia
Chapter of the Nature Conservancy and is on the Advisory Committee of the Arthur
Ashe Youth Tennis Center. Mr. Sweet holds a BA degree from the Lafayette College
and attended The Wharton School of Business.
Thomas D. Cassel has been Vice President, Finance and Treasurer of the
Company since
57
<PAGE>
October 1997. Mr. Cassel is a Certified Public Accountant with over 18 years
experience in real estate accounting, finance, acquisitions and management. From
1995 until he joined the Company, Mr. Cassel was Vice President and Chief
Financial Officer of Delancey Investment Group, Inc., a Philadelphia based real
estate investment and management company of commercial and residential
properties. Prior to Delancey, he was a real estate consulting manager for
Arthur Andersen, LLP for four years and Kenneth Leventhal & Co. for two years.
As a consultant, he performed strategic planning, capital markets, valuation and
acquisition analyses for a variety of real estate companies, including real
estate investment trusts. Mr. Cassel received his bachelor's degree in Finance
with a major in Accounting from the Wharton School at the University of
Pennsylvania. He is active in several professional and charitable organizations.
John Parsinen has been Secretary of the Company since January 1990. Mr.
Parsinen has over 31 years of experience in commercial real estate. Mr. Parsinen
has developed and owns various real estate projects. Mr. Parsinen has been a
senior attorney at Parsinen Kaplan Levy Rosberg & Gotlieb, P.A., Minneapolis,
Minnesota, since it was formed in 1982. Mr. Parsinen owns 50% of Guaranty Title,
Inc., a Minneapolis-based real estate title insurance company. Mr. Parsinen was
a general partner of Earle Brown Commons Limited Partnership II, which owned and
operated an elderly housing facility in Brooklyn Center, Minnesota. In 1994, the
limited partnership initiated a Chapter 11 bankruptcy reorganization proceeding
to restructure certain tax and debt obligations. The bankruptcy was dismissed in
1995 and the project was sold.
CERTAIN INFORMATION REGARDING THE BOARD OF TRUSTEES AND COMMITTEES
The Board of Trustees. The business and affairs of the Company are
managed under the direction of the Board of Trustees. Pursuant to the terms of
the Declaration of Trust, the Trustees are divided into three classes. Class I
will hold office for a term expiring at the annual meeting of shareholders to be
held in 1999, Class II will hold office for a term expiring at the annual
meeting of shareholders to be held in 2000, and Class III will hold office for a
term expiring at the annual meeting of shareholders to be held in 2001. At each
annual meeting of shareholders of the Company, the successors to the class of
Trustees whose terms expire at the meeting will be elected to hold office for a
term continuing until the annual meeting of shareholders held in the third year
following the year of their election and the election and qualification of their
successors. Upon closing of the Transaction, the Board of Trustees will be
expanded from seven to nine members, as discussed under "The
Transaction--Changes in Operation and Additions to Management."
Committees. The Board of Trustees has Audit, Compensation and
Investment Committees. The Audit Committee, which currently consists of Messrs.
Wethe, Gehrke and Beck, reviews, recommends and reports to the Board of Trustees
on (1) the engagement of independent auditors and range of audit fees, (2) the
quality and effectiveness of internal controls, (3) engagement or discharge of
the independent auditors, (4) professional services provided by the independent
auditors and (5) the review and approval of major changes in the Company's
accounting principles and practices. The Compensation Committee, which currently
consists of Messrs. Sweet and Walton, determines all executive compensation,
administers stock option plans and other incentive plans and approves employment
contracts. The Investment Committee, which consists of Messrs. Shidler, Sweet
and Wethe, must approve all investments and acquisitions. Investments of less
than $25 million may be made with Investment Committee approval only, and
investments in excess of that amount must also be approved by the Board of
Trustees. The Board of Trustees presently acts as its own Nominating Committee.
Compensation of Trustees. Independent Trustees (Messrs. Gehrke, Sweet,
Walton and Wethe)
58
<PAGE>
each receive an annual fee of $15,000. Trustees incurring travel expenses in
connection with their duties as Trustees of the Company are reimbursed in full.
Each Trustee is eligible to participate in the Incentive Plan. The Compensation
Committee intends to grant to each Trustee who is not an employee of the
Company, upon initial election or appointment, an option to purchase 5,000
Common Shares, at the then fair market value of the Common Shares.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table contains certain information as of June 1, 1998
regarding the beneficial ownership of Common Shares by (i) each person known by
the Company to own beneficially more than 5% of the Common Shares, (ii) each
current Trustee and executive officer of the Company, and (iii) the current
Trustees and executive officers as a group. Any shares which are subject to an
option or a warrant exercisable within 60 days are reflected in the following
table and are deemed to be outstanding for the purpose of computing the
percentage of Common Shares owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Shares owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
Number of
Common Percent of
Shares All
Beneficially Common
Owned(1) Shares
------------ -----------
<S> <C> <C>
Jay H. Shidler ...................... 300,000 3.1%
Clay W. Hamlin, III ................. 300,000 3.1
Vernon R. Beck ...................... 151,793(2) 1.6
John Parsinen ....................... 151,965(3) 1.6
Allen C. Gehrke ..................... 7,750(4) *
Kenneth S. Sweet, Jr ................ 10,000 *
William H. Walton ................... 0 0
Kenneth D. Wethe .................... 12,724(2) *
Thomas D. Cassel .................... 660 *
All Trustees and Executive
Officers as a Group
(9 persons) ......................... 934,892(5) 9.4%
</TABLE>
* Represents less than one percent.
(1) Shares Beneficially Owned by a person are determined in accordance with
the definition of "beneficial ownership," as set forth in the
regulations of the Commission and, accordingly, may include securities
owned by or for, among others, the spouse, children or certain other
relatives of such person, as well as other shares as to which the
person has or shares voting or investment power or has the option or
right to acquire Common Shares within 60 days.
(2) Includes 12,500 Common Shares issuable upon exercise of presently
exercisable options.
(3) Includes 10,000 Common Shares issuable upon exercise of presently
exercisable options. Includes 3,000 shares owned by
Mr. Parsinen's wife.
(4) Includes 7,500 Common Shares issuable upon exercise of presently
exercisable options.
(5) Includes 42,500 Common Shares issuable upon exercise of presently
exercisable options.
59
<PAGE>
INDEPENDENT ACCOUNTANTS
Representatives of Coopers & Lybrand L.L.P. are expected to be present
at the Special Meeting to respond to questions from shareholders and to make a
statement if they so desire.
OTHER MATTERS
As of the date of this Proxy Statement, neither the Board of Trustees
nor management knows of other matters which will be presented for consideration
at the Special Meeting. However, if any other business should properly come
before the Special Meeting, the persons named in the enclosed proxy (or their
substitutes) will have discretionary authority to take such action as shall be
in accordance with their best judgment.
EXPERTS
The consolidated financial statements of the Constellation Services
Companies as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 and the combined statement of revenues
and certain expenses of the Constellation Properties for the year ended December
31, 1997 have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, incorporated by reference in this Proxy Statement, have been
incorporated by reference herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission
pursuant to Section 13 of the Securities Exchange Act of 1934 (the "Exchange
Act") (File No.1-13274), are incorporated herein by reference: (i) the Annual
Report on Form 10-K for the year ended December 31, 1997, (ii) the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, (iii) the Current
Reports on Form 8-K filed May 14, 1998, May 29, 1998 and June 10, 1998, (iv) the
Proxy Statement/Prospectus dated February 11, 1998, and (v) the Prospectus dated
April 22, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference herein from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
60
<PAGE>
Also incorporated by reference herein are the Transaction Agreements,
copies of which have been filed with the Securities and Exchange Commission as
Exhibits to this Proxy Statement.
TO THE EXTENT THAT THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS,
EXCEPT THE EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS), ARE AVAILABLE ON REQUEST. REQUESTS
FOR SUCH COPIES SHOULD BE DIRECTED TO DENISE LISZEWSKI, ONE LOGAN SQUARE, SUITE
1105, PHILADELPHIA, PA 19103 OR BY TELEPHONE AT (215) 567-1800. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
_______________.
By order of the Board of Trustees,
/s/ JOHN D. PARSINEN
----------------------------------
JOHN D. PARSINEN
SECRETARY
Date: , 1998
-------- --
Philadelphia, Pennsylvania
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL STATEMENTS OF THE COMPANY
Pro forma Condensed Consolidating Balance Sheet as of March 31, 1998.............................F-4
Pro forma Condensed Consolidating Statement of Operations for the Three Months
Ended March 31, 1998 and for the Year Ended December 31, 1997................................F-5
Notes and Management's Assumptions to
Unaudited Pro Forma Condensed Consolidating Financial Information............................F-7
II. CONSTELLATION PROPERTIES
Report of Independent Accountants.................................................................F-15
Combined Historical Statement of Revenue and Certain Expenses for the Three
Months Ended March 31, 1998 (unaudited) and for the Year Ended
December 31, 1997.............................................................................F-16
Notes to Combined Historical Statement of Revenue and Certain Expenses............................F-17
III. CONSTELLATION SERVICE COMPANIES
Report of Independent Accountants.................................................................F-21
Consolidated Balance Sheets as of March 31, 1998 and 1997 (unaudited) and
December 31, 1997 and 1996....................................................................F-22
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996, and 1995.............................................................F-23
Consolidated Statements of Equity for the Three Months
Ended March 31, 1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996, and 1995.............................................................F-24
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (unaudited) and for Years Ended
December 31, 1997 and 1996, and 1995..........................................................F-25
Notes to Consolidated Financial Statements........................................................F-26
</TABLE>
F-1
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following sets forth the unaudited pro forma condensed consolidating balance
sheet of Corporate Office Properties Trust and its consolidated affiliates,
including Corporate Office Properties, L.P. (the "Operating Partnership") as of
March 31, 1998, and the unaudited pro forma condensed consolidating statements
of operations for the year ended December 31, 1997 and the three-month period
ended March 31, 1998 of the Company (as defined below). Corporate Office
Properties Trust and its consolidated affiliates, including the Operating
Partnership, are collectively referred to herein as the "Company."
In October 1997, the Operating Partnership acquired partnership interests in a
portfolio of ten properties (the "Initial Office Properties"), representing the
Mid-Atlantic suburban office operations of The Shidler Group, subject to $100
million of indebtedness (the "Term Credit Facility"). At that time, the Company
became the sole general partner of the Operating Partnership, which was formed
to acquire and hold the Initial Office Properties. In connection with the
acquisition of the Initial Office Properties, the Company issued 600,000 of its
common shares of beneficial interest ("Common Shares") and the Operating
Partnership issued (or committed to issue) 3,181,818 common partnership units
("Partnership Units") and 2.1 million preferred partnership units ("Preferred
Units").
The acquisition of the Initial Office Properties is reflected in the Company's
historical consolidated balance sheet as of December 31, 1997, and is included
in the pro forma condensed consolidating statements of operations as if it
occurred on January 1, 1997.
The pro forma condensed consolidating financial information is presented as if
the following transactions had been consummated on March 31, 1998 for balance
sheet purposes, and at the beginning of the period presented for purposes of the
statements of operations:
o The completion of a public offering (the "Offering") in which the Company
issued 7,500,000 Common Shares at $10.50 per share and contributed all of
the net proceeds to the Operating Partnership in exchange for 7,500,000
Partnership Units.
o The acquisition of nine multistory office buildings and three office/flex
buildings (the "Airport Square Properties").
o The acquisition of two office properties (the "Fairfield Properties").
o The closing of a $100 million, two-year-senior revolving credit facility
(the "Revolving Credit Facility") and the borrowing of $23,750,000 under
the Revolving Credit Facility to pay a portion of the consideration for the
Fairfield Properties.
o The acquisition by the Company from various parties (collectively,
"Constellation") of interests in (i) 14 office and 2 retail properties (the
"Constellation Properties"); (ii) a 75% ownership interest in a real estate
management services entity; and (iii) certain equipment, furniture and
other assets related to management operations ((ii) and (iii) collectively,
the "Constellation Service Companies") in exchange for: (a) issuance by the
Company of 969,900 non-voting Series A Convertible Preferred Shares of
Beneficial Interest, $0.01 par value, $25.00 liquidation preference
("Preferred Shares") and
F-2
<PAGE>
6,928,000 Common Shares; (b) the assumption of debt aggregating
$12,990,000; and (c) the payment of $69,038,000 in cash. The foregoing is
referred to herein as the "Transaction."
o The borrowing of $73,143,000 under the Revolving Credit Facility to pay for
certain of the cash requirements of the Transaction.
o The contribution by the Company of all the assets acquired in the
Transaction to the Operating Partnership in exchange for Partnership Units
and Preferred Units.
The accompanying pro forma condensed consolidating financial information does
not include the effects of the acquisition of two retail properties (the
"Development Properties"), as the Company's obligation to complete such
acquisitions is contingent on the occurrence of certain events.
This pro forma condensed consolidating financial information should be read in
conjunction with the historical financial statements of the Company and those of
the Initial Office Properties, the Airport Square Properties, the Fairfield
Properties, the Constellation Properties and the Constellation Service
Companies, which are incorporated by reference or included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
transactions to be consummated have been made. This pro forma condensed
consolidating financial information is unaudited and is not necessarily
indicative of what the actual financial position would have been at March 31,
1998, nor does it purport to represent the future financial position and the
results of operations of the Company.
F-3
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Balance Sheet
As of March 31, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Offering,
Company Airport Square
Historical and Fairfield Pro Forma Pro Forma
(A) Properties (B) Adjustments (C) Consolidated
--------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Assets
Net investments in real estate $ 187,730 $ 102,073 $ 180,047 (D) $ 469,850
Cash and cash equivalents 2,346 386 -- 2,732
Deferred costs, net 793 505 -- 1,298
Investment in management company -- -- 2,500 (D) 2,500
Other assets 1,787 -- -- 1,787
--------- --------- --------- ---------
Total assets $ 192,656 $ 102,964 $ 182,547 $ 478,167
--------- --------- --------- ---------
--------- --------- --------- ---------
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ 114,301 $ 30,215 $ 86,133 (E) $ 230,649
Other liabilities 2,893 -- -- 2,893
--------- --------- --------- ---------
Total liabilities 117,194 30,215 86,133 233,542
--------- --------- --------- ---------
Minority interests
Preferred Units 52,500 -- -- 52,500
Partnership Units 12,111 -- -- 12,111
--------- --------- --------- ---------
Total minority interests 64,611 -- -- 64,611
--------- --------- --------- ---------
Shareholders' equity
Preferred shares of beneficial interest -- -- 10 (F) 10
Common shares of beneficial interest 23 75 69 (G) 167
Additional paid in capital 16,647 72,674 96,335 (H) 185,656
Accumulated deficit (5,819) -- -- (5,819)
--------- --------- --------- ---------
Total shareholders' equity 10,851 72,749 96,414 180,014
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 192,656 $ 102,964 $ 182,547 $ 478,167
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-4
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Offering,
Initial Office,
Company Airport Square
Historical and Fairfield Pro Forma Pro Forma
(A) Properties (B) Adjustments (C) Consolidated
---------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 6,122 $ 23,129 $ 14,756 (D) $ 44,007
Tenant reimbursements 434 2,795 2,095 (D) 5,324
Other 62 20 213 (D) 295
----------- ----------- ------------- -----------
Total revenues 6,618 25,944 17,064 49,626
----------- ----------- ------------- -----------
Expenses:
Property operating 728 8,029 5,986 (D) 14,743
General and administrative 533 299 526 (D) 1,358
Interest expense 2,855 8,194 6,177 (D) 17,226
Depreciation and amortization 1,331 5,059 3,517 (D) 9,907
Termination of Advisory Agreement 1,353 -- (1,353)(E) --
----------- ----------- ------------- -----------
Total expenses 6,800 21,581 14,853 43,234
----------- ----------- ------------- -----------
Equity in income of management company -- -- 55 (D) 55
----------- ----------- ------------- -----------
Income (loss) before minority interests (182) 4,363 2,266 6,447
Minority interests
Preferred Units (720) -- (2,692)(F) (3,412)
Partnership Units (65) -- (131)(F) (196)
----------- ----------- ------------- -----------
Net income (loss) (967) 4,363 (557) 2,839
Preferred share distributions -- -- (1,334)(F) (1,334)
----------- ----------- ------------- -----------
Net income (loss) available to Common Shareholders $ (967) $ 4,363 $ (1,891) $ 1,505
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Net income (loss) per share: Basic and diluted $ (0.60) $ 0.09
----------- -----------
----------- -----------
Weighted average number of shares 1,600,807 16,699,083
----------- -----------
----------- -----------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-5
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Statement of Operations
For the Three Month Period Ended March 31, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Offering,
Historical Airport Square
Consolidated and Fairfield Pro Forma Pro Forma
(A) Properties (B) Adjustments (C) Consolidated
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 4,919 $ 3,496 $ 3,694(D) $ 12,109
Tenant reimbursements 553 142 426(D) 1,121
Other 53 4 82(D) 139
----------- ----------- ----------- -----------
Total revenues 5,525 3,642 4,202 13,369
----------- ----------- ----------- -----------
Expenses:
Property operating 899 1,088 1,473(D) 3,460
General and administrative 299 29 137(D) 465
Interest expense 2,159 579 1,543(D) 4,281
Depreciation and amortization 1,041 564 879(D) 2,484
Reformation costs 637 -- (637)(E) --
----------- ----------- ----------- -----------
Total expenses 5,035 2,260 3,395 10,690
----------- ----------- ----------- -----------
Equity in income of management company -- -- (159)(D) (159)
----------- ----------- ----------- -----------
Income (loss) before minority interests 490 1,382 648 2,520
Minority interests
Preferred Units (853) -- -- (F) (853)
Partnership Units (136) -- (44)(F) (180)
----------- ----------- ----------- -----------
Net income (loss) (499) 1,382 604 1,487
Preferred share distributions -- -- (333)(F) (333)
----------- ----------- ----------- -----------
Net income (loss) available to Common Shareholders $ (499) $ 1,382 $ 271 $ 1,154
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share: Basic and diluted $ (0.22) $ 0.07
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares 2,268,333 16,699,083
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-6
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation:
Corporate Office Properties Trust (the "Company") is a self-administered
Maryland real estate investment trust. As of March 31, 1998, the Company's
portfolio included 17 commercial real estate properties leased for office and
retail purposes.
These pro forma condensed consolidating financial statements should be read in
conjunction with the historical financial statements and notes thereto of the
Company, the Initial Office Properties, the Airport Square Properties, the
Fairfield Properties, the Constellation Properties and the Constellation Service
Companies, incorporated by reference or included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
Offering and the acquisitions of the Initial Office Properties, the Airport
Square Properties, the Fairfield Properties, the Constellation Properties and
the Constellation Service Companies by the Company have been made.
2. Adjustments to Pro Forma Condensed Consolidating Balance Sheet:
(A) Reflects the historical consolidated balance sheet of the Company as of
March 31, 1998.
(B) Reflects the effects of the Offering and the acquisitions of the
Airport Square Properties and the Fairfield Properties.
<TABLE>
<CAPTION>
Airport Square Fairfield
Offering(i) Properties (ii) Properties(iii) Combined
----------- --------------- --------------- --------
<S> <C> <C> <C> <C>
Assets
Net investments in real estate $ -- $ 72,668 $ 29,405 $102,073
Cash and cash equivalents 72,749 (72,668) 305 386
Deferred costs, net -- -- 505 505
-------- -------- -------- --------
Total assets $ 72,749 $ -- $ 30,215 $102,964
-------- -------- -------- --------
-------- -------- -------- --------
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ -- $ -- $ 30,215 $ 30,215
-------- -------- -------- --------
Total liabilities -- -- 30,215 30,215
-------- -------- -------- --------
Shareholders' equity
Common shares of beneficial interest 75 -- -- 75
Additional paid in capital 72,674 -- -- 72,674
-------- -------- -------- --------
Total shareholders' equity 72,749 -- -- 72,749
-------- -------- -------- --------
Total liabilities and
shareholders' equity $ 72,749 $ -- $ 30,215 $102,964
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-7
<PAGE>
(i) Reflects the proceeds of the Offering of $78,750 based upon an
offering of 7,500,000 Common Shares at an offering price of
$10.50 per share, net of underwriting discounts and offering
expenses of approximately $6,001.
(ii) Reflects the Company's acquisition of the Airport Square
Properties based upon the purchase price of $71,479 plus
closing costs of $1,189 paid in cash.
(iii) Reflects the Company's acquisition of the Fairfield Properties
based upon the purchase price of $28,800 plus closing costs of
$605 paid through the Company's assumption of debt of $6,465
and initial funding proceeds of $23,750 from the Revolving
Credit Facility, net of loan fees totaling $505 in connection
with the Revolving Credit Facility and the debt assumed.
(C) The accompanying pro forma condensed consolidating financial
information does not include the effects of the acquisition of the
Development Properties (estimated purchase price of $25,594), as the
Company's obligation to complete such acquisitions is contingent on
the occurrence of certain events.
(D) Reflects the contribution of the Constellation Properties and
Constellation Service Companies in exchange for: (i) issuance of
969,900 Preferred Shares at a value equal to a liquidation preference
of $25.00 per share ($24,248); (ii) issuance of 6,928,000 Common
Shares at a value of $10.50 per share ($72,744); (iii) assumption of
debt aggregating $12,990; and (iv) utilization of loan proceeds from
the Revolving Credit Facility of $72,565, including payment of $3,527
of costs associated with the acquisition. The total contribution is
recorded as follows:
<TABLE>
<S> <C>
o Net investments in real estate $ 180,047
o Investment in management company 2,500
-------------
Total investments from Transaction $ 182,547
-------------
-------------
</TABLE>
The Company will be acquiring from Constellation an interest in the
Constellation Service Companies for $2,500 which the Company will
contribute to a newly formed company in exchange for indebtedness and
stock. As this investment will be accounted for under the equity
method of accounting, the pro forma adjustments reflect the income
(loss) from this investment as equity in income of management company.
(E) Reflects the net increase in mortgage loans payable as follows:
<TABLE>
<S> <C>
o Net proceeds from the Revolving Credit Facility
in connection with the Transaction $ 73,143
o Assumption of mortgages in connection with the
Transaction 12,990
-------------
Net increase in mortgage loans payable $ 86,133
-------------
-------------
</TABLE>
(F) Reflects the issuance of 969,900 Preferred Shares,
<TABLE>
<S> <C>
$0.01 par value $ 10
-------------
-------------
</TABLE>
F-8
<PAGE>
(G) Reflects the issuance of 6,928,000 Common Shares,
<TABLE>
<S> <C>
$0.01 par value $ 69
-------------
-------------
</TABLE>
(H) Reflects increase in additional paid in capital as follows:
<TABLE>
<S> <C>
o Issuance of 969,900 Preferred Shares, excess of $ 24,238
$25.00 over par
o Issuance of 6,928,000 Common Shares, excess of
$10.50 over par 72,675
o Less: costs in connection with the Transaction (578)
--------
Net increase in additional paid in capital $ 96,335
--------
--------
</TABLE>
3. Adjustments to Pro Forma Condensed Consolidating Statements of Operations:
(A) Reflects the historical consolidated operations of the Company.
(B) Reflects the effects of the combined adjusted historical operations of
the Initial Office Properties, the Airport Square Properties and the
Fairfield Properties which were acquired on October 14, 1997, April 30,
1998 and May 28, 1998, respectively.
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Initial Office Fairfield
Properties Airport Square Properties
through Properties through Pro Forma
10/13/97 through 12/31/97 12/31/97 Adjustments Combined
-------------- ---------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Base rents $12,216 $ 8,524 $ 2,389 $ -- $23,129
Tenant reimbursements 1,282 275 1,238 -- 2,795
Other -- 20 -- -- 20
------- ------- ------- ------- -------
Total revenues 13,498 8,819 3,627 -- 25,944
------- ------- ------- ------- -------
Expenses
Property operating 2,731 3,367 1,931 -- 8,029
General and administrative 174 41 84 -- 299
Interest expense 7,388 -- -- 806(i) 8,194
Depreciation and amortization 2,580 -- -- 2,479(ii) 5,059
------- ------- ------- ------- -------
Total expenses 12,873 3,408 2,015 3,285 21,581
------- ------- ------- ------- -------
Income (loss) before minority interests $ 625 $ 5,411 $ 1,612 $(3,285) $ 4,363
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
F-9
<PAGE>
For the Three-Month Period Ended March 31, 1998
<TABLE>
<CAPTION>
Fairfield
Airport Square Properties
Initial Office Properties Historical
Properties Historical through Pro Forma
Historical through 3/31/98 3/31/98 Adjustments Combined
-------------- --------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Base rents $ -- $ 2,528 $ 968 $ -- $ 3,496
Tenant reimbursements -- 64 78 -- 142
Other -- 4 -- -- 4
------------ ------- ------- ------- -------
Total revenues -- 2,596 1,046 -- 3,642
------------ ------- ------- ------- -------
Expenses
Property operating -- 805 283 -- 1,088
General and administrative -- 6 23 -- 29
Interest expense -- -- -- 579(i) 579
Depreciation and amortization -- -- -- 564(ii) 564
------------ ------- ------- ------- -------
Total expenses -- 811 306 1,143 2,260
------------ ------- ------- ------- -------
Income (loss) before minority interests $ -- $ 1,785 $ 740 $(1,143) $ 1,382
------------ ------- ------- ------- -------
------------ ------- ------- ------- -------
</TABLE>
(i) Reflects the net increase in interest expense resulting from:
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
o The Term Credit Facility, for the period January 1, 1997
through October 13, 1997, the date on which the loan
originated, which debt bears interest at 7.5% per
annum, net of historical interest expense
of the Initial Office Properties $(1,511) $ --
o The debt assumed in connection with the
acquisition of the Fairfield Properties
which debt bears interest at 8.29% per 536 134
annum
o The borrowing on the Revolving Credit Facility of $23,750
in connection with the acquisition of the Fairfield
Properties (which debt bears interest at
LIBOR plus 175 basis points) assuming a
LIBOR rate of 5.75% 1,781 445
------- -------
$ 806 $ 579
------- -------
------- -------
</TABLE>
(ii) Reflects the net increase in depreciation and amortization expense
resulting from:
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
o Depreciation of buildings acquired over
a 40-year useful life $ 2,588 $ 511
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
o Reduction in amortization of deferred
financing fees related to loans held by
previous owners of the Initial Office
Properties ($515), net of amortization of
deferred financing debt related to Term
Credit Facility held by the Company on
Initial Office Properties ($192) (323) -
o Amortization of deferred financing fees
related to debt assumed in connection
with the Fairfield Properties 10 2
o Amortization of deferred financing fees
related to the Revolving Credit Facility 204 51
----------------- -------------
$ 2,479 $ 564
----------------- -------------
----------------- -------------
</TABLE>
(C) Consistent with the pro forma condensed consolidating balance sheet,
the pro forma statements of operations do not reflect the operations of
the Development Properties.
(D) Reflects the effects of the combined adjusted historical operations of
the Constellation Properties and Constellation Service Companies.
For the Year ended December 31, 1997
<TABLE>
<CAPTION>
Constellation Constellation Pro Forma
Properties Service Companies Constellation
Historical Historical Adjustments Combined
------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C>
Revenues
Base rents $ 14,756 $ -- $ -- $ 14,756
Tenant reimbursements 2,095 -- -- 2,095
Other 213 11,226 (11,226)(i) 213
-------- -------- -------- --------
Total revenues 17,064 11,226 (11,226) 17,064
-------- -------- -------- --------
Expenses
Property operating 5,986 -- -- 5,986
General and administrative 526 10,242 (10,242)(ii) 526
Interest expense -- 18 6,159(iii) 6,177
Depreciation and amortization -- 225 3,292(iv) 3,517
-------- -------- -------- --------
Total expenses 6,512 10,485 (791) 16,206
-------- -------- -------- --------
Equity in income of management company -- -- 55(v) 55
-------- -------- -------- --------
Income before income taxes
and minority interests $ 10,552 $ 741 $(10,380) $ 913
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-11
<PAGE>
For the Three-Month Period Ended March 31, 1998
<TABLE>
<CAPTION>
Constellation Constellation Pro Forma
Properties Service Companies Constellation
Historical Historical Adjustments Combined
------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C>
Revenues
Base rents $ 3,694 $ -- $ -- $ 3,694
Tenant reimbursements 426 -- -- 426
Other 82 3,717 (3,717)(i) 82
------- ------- ------- -------
Total revenues 4,202 3,717 (3,717) 4,202
------- ------- ------- -------
Expenses
Property operating 1,473 -- -- 1,473
General and administrative 137 3,685 (3,685)(ii) 137
Interest expense -- 3 1,540(iii) 1,543
Depreciation and amortization -- 67 812(iv) 879
------- ------- ------- -------
Total expenses 1,610 3,755 (1,333) 4,032
------- ------- ------- -------
Equity in income of management company -- -- (159)(v) (159)
------- ------- ------- -------
Income (loss) before income taxes and
minority interests $ 2,592 $ (38) $(2,543) $ 11
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
<S> <C> <C>
(i) Reflects the reclassification of Constellation
Service Companies' historical revenue to equity in
income of management company. $(11,226) $(3,717)
-------- -------
-------- -------
(ii) Reflects the reclassification of Constellation Service
Companies' historical operating expenses to
equity in income of management company. $(10,242) $(3,685)
-------- -------
-------- -------
(iii) Reflects the net changes in interest expense as follows:
o The borrowing on the Revolving Credit Facility of
$73,143 in connection with the Transaction (which debt
bears interest at LIBOR plus 175 basis points) assuming
a LIBOR rate of 5.75%, net of interest on $4,217 in
debt associated with properties under
construction $ 5,168 $ 1,291
o The fee of 25 basis points per annum on the
unused portion of the Revolving Credit
Facility of $3,107 8 2
o The debt of $9,581 assumed in connection with
the acquisition of the Constellation
Properties which debt bears interest at a
fixed rate of 7.5% per annum 720 180
o The debt of $3,409 assumed in connection with
the acquisition of the Constellation
Properties which debt bears interest at a
fixed rate of 8.25% per annum 281 70
o Reclassification of Constellation Service Companies'
historical interest expense to equity in income
of management company (18) (3)
-------- -------
$6,159 $1,540
-------- -------
-------- -------
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
(iv) Reflects the net change in depreciation and amortization
expense as follows:
o Depreciation of buildings acquired from
Constellation over a 40-year useful life $ 3,517 $ 879
o Reclassification of Constellation Service
Companies' historical depreciation and
amortization to equity in income of management
company (225) (67)
------------- ------------
$ 3,292 $ 812
------------- ------------
------------- ------------
(v) Reflects the net change in equity in income of management
company as follows:
o Reclassification of Constellation Service
Companies' historical income and expenses $ 741 ($ 38)
o Elimination of construction contract revenue
earned by Constellation Service Companies in
connection with operations that are not
expected to have a continuing impact on the
Company (4,122) (1,889)
o Elimination of construction contract costs
incurred by Constellation Service Companies in
connection with operations that are not
expected to have a continuing impact on the
Company 3,768 1,852
o Addition of net overhead costs not included
in historical costs and expected to have a
continuing impact on the Company (122) (177)
o Depreciation expense on personal property of
$405 over a 5-year useful life (81) (20)
o Adjustment to Constellation Service
Companies' historical depreciation and
amortization 122 42
o To reflect income tax (expense) benefit at an
assumed rate of 40% (42) 111
o To reflect minority interest in management
company (124) (19)
o To reflect adjustment for purchase price of
management company to pro forma net income
over 20 years (85) (21)
------------- ------------
$ 55 $ (159)
------------- ------------
------------- ------------
</TABLE>
(E) Costs relating to termination of the advisory agreement and the
reformation of the Company aggregating $1,353 and $637 for the year
ended December 31, 1997 and the three-month period ended March 31,
1998, respectively, have been excluded since such costs are not
expected to have a continuing impact on the Company.
(F) Reflects the effects of contribution of the net assets received from
the Offering and the Transaction to the Operating Partnership in
exchange for 7,500,000 Partnership Units as a result of the Offering
and for 969,900 Preferred Units and 6,928,000 Partnership Units as a
result of the Transaction.
F-13
<PAGE>
The following table presents the calculation of the post closing
percentage ownership of Partnership Units in the Operating Partnership
(i.e. not including Preferred Units):
<TABLE>
<CAPTION>
Company Others Total
--------------------- ------------------- -----------------
<S> <C> <C> <C>
Partnership Units - pre closing 600,000 2,581,818 3,181,818
Offering 7,500,000 - 7,500,000
Transaction 6,928,000 - 6,928,000
--------------- ---------------- ---------------
Partnership Units - post closing 15,028,000 2,581,818 17,609,818
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Percentage ownership 85.3% 14.7% 100.0%
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
Minority interest in income (loss) has been reflected, on a pro forma
basis, in accordance with the Operating Partnership Agreement. The
holders of Preferred Units are allocated income up to 6.5% or 5.5% of
their investment on a pari passu basis with remaining income, if any,
or loss allocated between the Company (85.3%) and the remaining
partners (14.7%). The adjustments to record the income (loss) effect of
the minority interest share of income (loss) in the pro forma
statements of operations were computed as follows:
<TABLE>
<CAPTION>
For the Three
For the Year Month Period
Ended Ended
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
Income before minority interests $ 6,447 $ 2,520
Less: income from the retail properties directly
owned by the Company
(368) (104)
-------------- ---------------
Income before minority interest
- Operating Partnership 6,079 2,416
Preferred Unitholders
- $52,500 @ 6.5% 3,412 853
Preferred Unitholders/Shareholders
- $24,248 @ 5.5% 1,334 333
------------- --------------
Remaining Operating Partnership allocation 1,333 1,230
------------- --------------
------------- --------------
Pro forma minority share
- Partnership Units (14.7%) 196 180
------------- --------------
------------- --------------
Remaining Operating Partnership allocation (85.3%) 1,137 1,050
Add back: income from retail properties directly
owned by the Company 368 104
------------- --------------
Net income allocated to Common Shareholders $ 1,505 $ 1,154
------------- --------------
------------- --------------
</TABLE>
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors of
Constellation Real Estate Group, Inc.
We have audited the accompanying combined historical statement of
revenues and certain expenses of the Constellation Properties as described in
Note 1 for the year ended December 31, 1997. This financial statement is the
responsibility of the Constellation Properties' management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined historical statement of revenues and certain
expenses as discussed in Note 1 was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission for
inclusion in the proxy of Corporate Office Properties Trust and is not intended
to be a complete presentation of the Constellation Properties' revenue and
expenses.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the revenues and certain expenses of the
Constellation Properties for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 8, 1998
F-15
<PAGE>
CONSTELLATION PROPERTIES
COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Year Ended
Ended March 31, 1998 December 31, 1997
-------------------- ------------------
Unaudited
---------
<S> <C> <C>
REVENUES
Base Rents $ 3,694 $14,756
Recoveries from Tenants 426 2,095
Other Income 82 213
-- ---
4,202 17,064
----- ------
CERTAIN EXPENSES
Operating 1,229 5,071
Real Estate Taxes 244 915
General and Administrative 137 526
--- ---
1,610 6,512
----- -----
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 2,592 $10,552
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
Constellation Properties
Notes to Combined Historical Statement of Revenue and Certain Expenses
(dollars in thousands)
1. Organization and Basis of Presentation
Organization
The combined historical statement of revenue and certain expenses combines the
results of operations of the following 12 properties (the "Properties") to be
acquired from Constellation Properties, Inc. (CPI) by Corporate Office
Properties Trust (COPT).
Browns Wharf L.P.
-----------------
1600 Block of Thames Street, Baltimore, MD
Cranberry-140 L.P.
------------------
405 North Center Street, Westminster, MD
Laurel Tower Associates L.P.
----------------------------
14502 Greenview Drive, Laurel, MD
14504 Greenview Drive, Laurel, MD
NBP-I L.P.
----------
2730 Hercules Road, Annapolis Junction, MD
NBP II L.P.
-----------
131 National Business Parkway, Annapolis Junction, MD
133 National Business Parkway, Annapolis Junction, MD
141 National Business Parkway, Annapolis Junction, MD
St. Barnabus L.P.
-----------------
6009 and 6011 Oxon Hill Road, Oxon Hill, MD
Three Centre Park Associates L.P.
---------------------------------
8815 Centre Park Drive, Columbia, MD
Constellation Properties, Inc.
------------------------------
7609 Energy Parkway, Baltimore, MD
Project T/A Tred Avon Square
----------------------------
210 Marlboro Avenue, Easton, MD
The Properties consist of 9 office properties, 2 retail properties and 1 flex
office/warehouse property.
Tred Avon Square (TA) is a shopping center which has a participating mortgage
payable to Tred Lightly, LLC (TL), an entity in which CPI has a controlling
interest which is being acquired by COPT. Under the terms of the mortgage with
TA, TL has virtually the same risks and rewards as those of an owner.
Accordingly, TL is presented as if TL owns TA.
F-17
<PAGE>
Constellation Properties
Notes to Combined Historical Statement of Revenue and Certain Expenses
(dollars in thousands)
Basis of Presentation
The statement has been prepared on the accrual basis of accounting.
The statement is not representative of the actual operations for the periods
presented, as certain expenses, which are not comparable to the expenses to be
incurred in the future operations of the Properties, have been excluded.
Expenses excluded include interest, depreciation, amortization of intangible
costs, income taxes, and other costs not directly related to the future
operations of the Properties. Management is not aware of any material factors
relating to these properties which would cause the reported financial
information not to be necessarily indicative of future operating results.
The combined historical statement of revenues and certain expenses and related
notes for the three months ended March 31, 1998 are unaudited and reflect, in
the opinion of management, all adjustments necessary for a fair presentation of
the interim statement.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of revenues and expenses reported during the period. Actual
results could differ from those estimates.
Revenue Recognition
The Properties recognize rental revenue from tenants on a straight-line basis
under which contractual rent changes are recognized evenly over the lease term.
Tenant recovery income includes payments from tenants for taxes, insurance and
other property operating expenses and is recognized as revenues in the same
period as the related expenses are incurred by the Properties.
Geographic Diversity
The Properties are geographically concentrated in the Baltimore/Washington
metropolitan area.
Major Tenants
The United States Government is the sole tenant of an office property. Rental
income from this lease represents approximately 23% and 24% of base rent and 46%
and 55% of recoveries from tenants in the three months ended March 31, 1998 and
the year ended December 31, 1997, respectively.
Minority Interest
CPI owns a 75% member interest in Tred Lightly, LLC (TL). Under the terms of
TL's operating agreement, the interest owned by CPI is entitled to full
allocation of TL's income up until that point in time when CPI recovers its
investment in TL plus a 10% compounding preferred return. Since CPI had not
recovered its investment and preferred return at March 31, 1998 and December 31,
1997, no income was allocated to minority interest.
F-18
<PAGE>
Constellation Properties
Notes to Combined Historical Statement of Revenue and Certain Expenses
(dollars in thousands)
3. Leasing Activity
The Properties are leased to tenants under operating leases with expiration
dates ranging from 1998 to 2015. Future contractual minimum rentals under
noncancelable tenant leases in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 14,618
1999 13,970
2000 13,125
2001 11,584
2002 9,870
Thereafter 29,166
------
Total $ 92,333
--------
--------
</TABLE>
The United States Government is the sole tenant of an office property. The
tenant's lease is structured as a 1 year lease commencing in 1993, with 14
consecutive automatic 1 year renewals. The lease also carries a penalty should
the tenant not renew for all 14 years. Base rent from this lease is included in
future minimum rentals disclosed above.
4. Related Party Revenue and Expenses
The Properties are owned by CPI, which is a wholly owned subsidiary of
Constellation Real Estate Group, Inc. (CREG). CREG is a wholly owned subsidiary
of Constellation Holdings, Inc., which is wholly owned by Baltimore Gas and
Electric Company (BGE). Constellation Real Estate, Inc., Constellation Realty
Management, LLC, Constellation Health Services, Inc., and Constellation Senior
Services, Inc. are other affiliates of CREG. The Properties had transactions
with these related parties as follows:
Rental Income
The Properties earned base rent and tenant recoveries on leases to the following
related parties:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Constellation Real Estate, Inc. $ 85 $315
Baltimore Gas and Electric Co. 9 242
Constellation Senior Services, Inc. 34 59
Constellation Health Services, Inc. -- 6
-
Total $128 $622
---- ----
---- ----
</TABLE>
F-19
<PAGE>
Constellation Properties
Notes to Combined Historical Statement of Revenue and Certain Expenses
(dollars in thousands)
Property Management
The Properties incurred property management fees under contracts with
Constellation Realty Management, LLC (CRM) totaling $126 and $518 in the three
months ended March 31, 1998 and the year ended December 31, 1997, respectively.
General and Administrative
Constellation Real Estate, Inc. charged the Properties for finance, legal and
corporate overhead costs totaling $137 and $526 in the three months ended March
31, 1998 and the year ended December 31, 1997, respectively.
Operating Expenses
The Properties incurred costs with BGE during the three months ended March 31,
1998 and the year ended December 31, 1997 totaling $181 and $638, respectively.
These costs were primarily for utility services provided to the Properties.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------
To the Board of Directors of
Constellation Real Estate Group, Inc.
We have audited the accompanying consolidated balance sheets of
Constellation Service Companies (as described in Note 1 to the accompanying
financial statements) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows and equity for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Constellation Service Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit include 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
Constellation Service Companies as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 8, 1998
F-21
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1996
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,944 $ 4,732 $ 5,191
Accounts receivable 1,186 1,158 3,622
Costs and estimated profit in excess
of billings on uncompleted contracts 265 449 215
Deferred tax asset 45 86 17
Other 95 126 176
---------- ---------- ----------
Total current assets 7,535 6,551 9,221
---------- ---------- ----------
Property and equipment
Furniture, fixtures and equipment 1,935 1,878 1,514
Leasehold improvements 81 81 --
Accumulated depreciation (1,310) (1,257) (1,089)
---------- ---------- ----------
Total property and equipment 706 702 425
Goodwill, net of accumulated amortization 777 791 848
Deferred tax asset 77 66 38
Restricted cash 1,000 -- --
---------- ---------- ----------
Total assets $ 10,095 $ 8,110 $ 10,532
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND EQUITY
Current liabilities
Current portion of note payable $ 40 $ 40 $ 40
Accounts payable and accrued expenses 502 241 2,508
Billings in excess of costs and estimated
profit on uncompleted contracts 192 140 238
Accrued vacation costs 328 296 193
Due to affiliates 6,051 4,423 4,925
Other 16 17 22
-- -- --
Total current liabilities 7,129 5,157 7,926
Note payable, net of current portion 80 80 120
Other 35 7 9
---------- ---------- ----------
Total liabilities 7,244 5,244 8,055
---------- ---------- ----------
Minority interest 162 136 115
---------- ---------- ----------
Commitments and contingencies
Equity
Divisional equity 2,689 2,730 2,362
---------- ---------- ----------
Total liabilities and equity $ 10,095 $ 8,110 $ 10,532
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, For the Year Ended December 31,
1998 1997 1997 1996 1995
---------- ---------- --------- -------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Construction, development, marketing, asset
management and finance fees - related parties $735 $ 598 $ 2,880 $ 2,531 $ 1,517
Construction, development, marketing, asset
management and finance fees - other 33 -- 273 58 2
Property management fees - related parties 442 571 1,845 1,789 1,728
Property management fees - other 592 444 1,952 1,348 93
Construction contract revenues - related parties 1,848 139 426 943 294
Construction contract revenues - other 41 1,534 3,696 8,617 3,335
---------- ---------- --------- -------- ---------
Total revenues 3,691 3,286 11,072 15,286 6,969
---------- ---------- --------- -------- ---------
Operating expenses
Construction contract costs 1,852 1,516 3,768 9,159 3,545
Salaries and related expenses 1,243 979 4,412 3,750 2,242
Overhead costs - related party 271 225 901 870 615
Other 386 320 1,386 907 684
---------- ---------- --------- -------- ---------
Total operating expenses 3,752 3,040 10,467 14,686 7,086
---------- ---------- --------- -------- ---------
Income from operations (61) 246 605 600 (117)
Interest income 18 21 101 84 66
Other income 8 7 53 42 61
Interest expense (3) (3) (18) (22) (2)
---------- ---------- --------- -------- ---------
Income before income taxes (38) 271 741 704 8
Income tax expense (benefit) (23) 91 256 251 14
---------- ---------- --------- -------- ---------
Income before minority interest (15) 180 485 453 (6)
Minority interest 26 47 117 96 --
---------- ---------- --------- -------- ---------
Net income (loss) ($41) $ 133 $ 368 $ 357 ($ 6)
---------- ---------- --------- -------- ---------
---------- ---------- --------- -------- ---------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Contributed Accumulated
Equity Earnings Total
----------- ----------- -----
<S> <C> <C> <C>
Balance, January 1, 1995 $ 1,590 $ 421 $ 2,011
Net Loss -- (6) (6)
----------- ----------- -----
Balance, December 31, 1995 1,590 415 2,005
Net Income -- 357 357
----------- ----------- -----
Balance, December 31, 1996 1,590 772 2,362
Net Income -- 368 368
----------- ----------- -----
Balance, December 31, 1997 1,590 1,140 2,730
Net Loss -- (41) (41)
----------- ----------- -----
Balance, March 31, 1998 (Unaudited) $ 1,590 $ 1,099 $ 2,689
----------- ----------- -----
----------- ----------- -----
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended,
March 31, For the Years Ended December 31,
1998 1997 1997 1996 1995
------- --------- ------ -------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($41) $ 133 $ 368 $ 357 ($6)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 67 55 225 164 98
Minority interest expense 26 47 117 96 --
Provision for deferred income taxes 30 11 (97) (62) 18
Changes in operating assets and liabilities:
Accounts receivable (28) (518) 2,464 (1,982) (1,056)
Accounts payable and accrued expenses 293 (1,915) (2,164) 2,182 99
Due to affiliates 1,628 2,604 (502) 6,409 (36)
Uncompleted contract asset 184 (84) (234) 697 (849)
Uncompleted contract liability 52 220 (98) (1,426) 1,664
Other current assets and liabilities 30 97 45 (145) (23)
------- --------- ------ -------- ---------
Net cash provided by (used in) operating activities 2,241 650 124 6,290 (91)
------- --------- ------ -------- ---------
Cash flows from investing activities:
Increase in restricted cash (1,000) -- -- -- --
Purchases of property and equipment (57) (107) (453) (317) (59)
Acquisition of business, net of cash acquired -- -- -- (414) --
Other -- -- 8 -- --
------- --------- ------ -------- ---------
Net cash used in investing activities (1,057) (107) (445) (731) (59)
------- --------- ------ -------- ---------
Cash flows from financing activities:
Proceeds from note payable -- -- -- 200 --
Note repayments -- -- (40) (40) --
Minority interest (distribution) contribution -- -- (96) 19 --
Other 28 (1) (2) 7 19
------- --------- ------ -------- ---------
Net cash provided by (used in) financing activities 28 (1) (138) 186 19
------- --------- ------ -------- ---------
Net increase (decrease) in cash and cash equivalents 1,212 542 (459) 5,745 (131)
Cash and cash equivalents, beginning of period 4,732 5,191 5,191 (554) (423)
------- --------- ------ -------- ---------
Cash and cash equivalents, end of period $ 5,944 $ 5,733 $ 4,732 $ 5,191 ($ 554)
------- --------- ------ -------- ---------
------- --------- ------ -------- ---------
Supplemental data:
Cash paid during the period for:
Interest $ 3 $ 3 $ 18 $ 22 $ 2
Income Taxes $ 16 -- $ 88 $ 1 $ 25
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Organization and Basis of Presentation
Constellation Service Companies (not a legal entity) (the "Company") is a real
estate company engaged in property and asset management and building
construction and development services. The Company represents a carve-out of the
aforementioned operations of the legal entity, Constellation Real Estate, Inc.
(CRE), and its 75% owned subsidiary, Constellation Realty Management, LLC.
(CRM).
CRE is a real estate company engaged in property and asset management, building
construction and development and land development. CRE is a wholly owned
subsidiary of Constellation Real Estate Group, Inc. ("CREG"), which is a wholly
owned subsidiary of Constellation Holdings, Inc. (CHI), which is wholly owned by
Baltimore Gas and Electric Company (BGE). In April 1996, CRE purchased a 75%
member interest in CRM, an entity engaged in real estate property management. In
May 1998, Corporate Office Properties Trust (COPT) entered into a contract to
acquire the assets and employees of CRE associated with property and asset
management and building construction and development services, as well as CRE's
75% member interest in CRM.
A significant amount of the Company's activity represents services provided to
entities owned by CREG. The majority of these services are concentrated in the
Baltimore/Washington metropolitan area.
Unaudited Financial Statements
The consolidated financial statements including the note disclosures included
herein as of March 31, 1998 and 1997 and for the three months ended March 31,
1998 and 1997 are unaudited; however, in the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
statements for this interim period have been included. The results of the
interim period are not necessarily indicative of the results to be obtained for
the full fiscal year.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CRM and the CRE
lines of business being acquired by COPT. All material intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
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.
F-26
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
Revenue Recognition
Construction, development, marketing and financing fees predominantly represent
fees charged to real estate projects owned by CREG. Most of these fees are
recognized as revenue as labor time is incurred. Certain of these fees, however,
are recognized upon the occurrence of an event at a real estate project, such as
the signing of a tenant lease or the closing of a loan. Property management
fees, property management recovery items and asset management fees are
recognized as earned.
The Company recognizes construction, development, marketing and financing fees
charged to real estate projects owned by CREG at cost.
The Company recognizes construction contract revenues from third parties using
the percentage-of-completion method based on contract costs incurred to date
compared with total estimated contract costs. Because of inherent uncertainties
in estimating costs, it is at least reasonably possible that estimates used will
change within the near term. Changes to total estimated contract costs and
losses, if any, are recognized in the period they become known. Amounts billed
in advance of satisfying revenue recognition criteria are recorded in current
liabilities as billings in excess of costs and estimated profit on uncompleted
contracts. Costs and estimated profit in excess of amounts billed are recorded
in current assets as costs and estimated profit in excess of billings on
uncompleted contracts.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when it is probable that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
initial maturity of three months or less. The carrying amount approximates fair
value due to the short maturity of these investments. The Company maintains its
cash in bank deposit accounts which may exceed federally insured limits at
times. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
F-27
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
Property
Property is stated at original cost less accumulated depreciation. Furniture,
fixtures and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, which is generally 3 to 5 years. Leasehold
improvements are depreciated over the shorter of the lives of the respective
leases or the useful lives of the assets. Depreciation expense totaled $53, $40,
$168, $120 and $83 for the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, respectively.
Goodwill
Goodwill consists of $590 relating to the 1988 acquisition of certain assets and
employees and $414 relating to the 1996 acquisition of CRM. The 1988 goodwill is
being amortized over 40 years and the 1996 goodwill is being amortized over 10
years. Goodwill is reflected net of accumulated amortization, which totaled
$227, $213 and $156 at March 31, 1998 and December 31, 1997 and 1996,
respectively.
Minority Interest
Minority interest represents the minority partner's proportionate share of the
equity in CRM. Income is allocated to minority interest based on the minority
partner's percentage ownership.
3. Note Payable
The Company obtained a $200 unsecured note payable to KLNB, Inc. on April 16,
1996. The note matures on December 31, 2000 and bears interest at 8%. The
outstanding balance of the note totaled $120, $120 and $160 at March 31, 1998
and December 31, 1997 and 1996, respectively.
Interest expense incurred on the note totaled $2, $3, $13 and $11 during the
three months ended March 31, 1998 and 1997 and the years ended December 31, 1997
and 1996, respectively. Debt maturities of the note outstanding at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 40
1999 40
2000 40
----
$120
----
----
</TABLE>
4. Leases
The Company had several operating leases in place during the reporting periods,
most of which are for office space. Rent expense totaled $79, $69, $451, $308
and $219 during the three months ended March 31, 1998 and 1997 and the years
ended December 31, 1997, 1996 and 1995, respectively.
F-28
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
Future minimum lease payments for non-cancelable operating leases at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 429
1999 382
2000 372
2001 267
---
Total $1,450
------
------
</TABLE>
5. Related Party Transactions
The Company provided construction, development, marketing, asset management and
finance services to entities owned by CREG. Fees earned from these services
totaled $714, $598, $2,686, $2,531 and $1,517 during the three months ended
March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. The Company also earned marketing fees from a CREG affiliate
totaling $21 and $194 during the three months ended March 31, 1998 and the year
ended December 31, 1997, respectively.
The Company provided property management services to entities owned by CREG.
Fees earned from these services were computed predominantly based on a fixed
percentage of property income collections ranging from 3.5% to 5% and totaled
$315, $284, $1,272, $1,197 and $1,157 during the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. The Company also earned property management fees from BGE totaling
$127, $287, $573, $592 and $571 during the three months ended March 31, 1998 and
1997 and the years ended December 31, 1997, 1996 and 1995, respectively. Fees
were computed on the BGE management contracts based on a rate per square foot,
subject to increases and decreases for the Company's performance in managing
operating cost levels for individual projects.
The Company performed work under construction contracts with BGE, CHI and
certain entities owned by CREG. Construction contract revenue recognized on
contracts with BGE totaled $132, $200, $932 and $294 during the three months
ended March 31, 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Construction contract revenue recognized on contracts with CHI
totaled $1,842 and $178 during the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively. Construction contract revenue
recognized on contracts with entities owned by CREG totaled $6, $7, $48 and $11
during the three months ended March 31, 1998 and 1997 and the years ended
December 31, 1997 and 1996, respectively.
F-29
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
CREG allocates certain overhead costs to all of its subsidiaries. Overhead costs
allocated from CREG to the Company totaled $271, $225, $901, $870 and $615
during the three months ended March 31, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company provides administrative, financial and legal support services to
certain entities owned by CREG. During the three months ended March 31, 1998 and
1997 and the years ended December 31, 1997 and 1996, the Company received
expense reimbursements for these services totaling $89, $55, $318 and $64,
respectively.
The Company leased office space from entities owned by CREG. Expenses incurred
under these leases totaled $78, $62, $301, $240 and $219 during the three months
ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and
1995, respectively.
The Company also incurred other costs for various services provided by BGE and
CHI, including electrical service, payroll processing, and computer training.
The Company had amounts due to affiliates at March 31, 1998 and December 31,
1997 and 1996 of $6,051, $4,423 and $4,925, respectively. These payables
represent primarily advances to the Company resulting from its participation in
a centralized cash account used by entities owned by CREG. The Company's
payables to affiliates are noninterest bearing and due on demand.
6. Pension and Other Post-Employment Benefits
Certain employees of the Company participate in the BGE noncontributory defined
benefit pension plan (the "Plan"). BGE's policy is to fund annually the cost of
the Plan as determined under the projected unit credit cost method. BGE charged
the Company $20, $16, $64 and $80 during the three months ended March 31, 1998
and 1997 and the years ended December 31, 1997 and 1996, respectively. Certain
key executives also are participants in BGE's supplemental pension plans, which
provide enhanced retirement, disability and survivor benefits. Benefits under
all of these plans are generally based on age, years of service and compensation
levels. Prior service cost associated with retroactive plan amendments is
amortized on a straight-line basis over the average remaining service period of
active employees. Plan assets at December 31, 1997 consisted primarily of
marketable equity and fixed income securities and group annuity contracts.
F-30
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
Pension plan valuations are only available for CHI. The following table sets
forth CHI's combined funded status of the plans and the composition of total
pension cost:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Vested benefit obligation $5,104 $4,296
Nonvested benefit obligation 291 111
------ ------
Accumulated benefit obligation 5,395 4,407
Projected benefits related to increase
in future compensation levels 2,096 769
------ ------
Projected benefit obligation 7,491 5,176
Plan assets at fair value (5,871) (3,535)
------ ------
Projected benefit obligation less
plan assets 1,620 1,641
Unrecognized prior service cost (446) (290)
Unrecognized net gain 1,091 934
Unamortized net liability from adoption
of FASB Statement No. 87 (168) (443)
------ ------
Accrued Pension Liability $2,097 $1,842
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Components of net pension cost
Service cost-benefits earned
during the period $ 296 $ 321 $ 188
Interest cost on projected benefit
obligation 1,149 1,179 509
Actual return on plan assets (468) (207) (542)
Net amortization and deferral (315) (481) 552
------- ------ -------
Total net pension cost $ 662 $ 812 $ 707
------- ------ -------
------- ------ -------
</TABLE>
Other Postemployment Benefits
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. The Company also
provides certain pay continuation payments to employees who are determined to be
disabled under the Company's Long-Term Disability Plan. The Company did not
recognize any liability at March 31, 1998 and 1997 and December 31, 1997 and
1996 since there were no employees determined to be disabled.
F-31
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
7. Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal
Current ($ 44) $ 67 $ 290 $ 258 ($ 3)
Deferred 25 8 (80) (51) 15
---- ---- ---- ---- ----
(19) 75 210 207 12
---- ---- ---- ---- ----
State
Current (9) 14 63 55 (1)
Deferred 5 2 (17) (11) 3
---- ---- ---- ---- ----
(4) 16 46 44 2
---- ---- ---- ---- ----
($ 23) $ 91 $ 256 $ 251 $ 14
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The following is a reconciliation, stated as a percentage of pre-tax income, of
the U.S. statutory federal income tax rate to the Company's effective tax rate
on income from operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ -----------------------
1998 1997 1997 1996 1995
----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Federal Statutory Rate (35.0%) 35.0% 35.0% 35.0% 35.0%
Permanent Differences,
Including Goodwill and
Meals and Entertainment 3.6 1.1 1.6 1.7 135.5
State Taxes, Net of
Federal Benefit (4.5) 4.5 4.5 4.5 4.5
----- ---- ---- ---- -----
Effective Tax Rate (35.9%) 40.6% 41.1% 41.2% 175.0%
----- ---- ---- ---- -----
----- ---- ---- ---- -----
</TABLE>
F-32
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ -----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Bonus and Deferred
Compensation $ 146 $ 174 $ 63
Depreciation (24) (22) (8)
----- ----- -----
Net Deferred Asset $ 122 $ 152 $ 55
----- ----- -----
----- ----- -----
</TABLE>
8. Commitments and Contingencies
Contract to Acquire Loans
In March 1998, the Company entered into a contract to acquire loans
collateralized by 12 commercial real estate properties from Aetna Life Insurance
Company for $65,300. In connection with the contract, the Company had $1,000 in
escrow as a deposit on the contract at March 31, 1998. In April 1998, the
Company assigned its rights under the contract to COPT in exchange for a fee.
Legal
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Management believes that the final outcome of such
matters will not have a material effect on the financial position, results of
operations or liquidity of the Company.
F-33
<PAGE>
APPENDIX
PROXY PROXY
CORPORATE OFFICE PROPERTIES TRUST
SPECIAL MEETING OF SHAREHOLDERS
_________ __, 1998
THIS PROXY IS SOLICITED ON BEHALF OF
THE COMPANY'S BOARD OF TRUSTEES
The undersigned hereby (i) acknowledges receipt of the Notice of Special
Meeting of Shareholders (the "Special Meeting") of Corporate Office Properties
Trust (the "Company") and the accompanying Proxy Statement dated _______,
1998 (the "Proxy Statement"), and (ii) appoints _________________ and
_________________, and each of them individually, lawful attorneys-in-fact
and proxies of the undersigned, with full power of substitution for and in
the name, place, and stead of the undersigned, to vote upon and act with
respect to all of the Common Shares of Beneficial Interest of the Company
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Special Meeting and at any
adjournments or postponements thereof.
The Company's Board of Trustees recommends a vote "for" item 1 set forth on
the reverse side of this proxy card. The shares represented by this proxy will
be voted as specified on the reverse side. IF NO DIRECTION IS GIVEN IN THE
SPACE PROVIDED ON THE REVERSE SIDE, THIS PROXY WILL BE VOTED "FOR" ITEM 1.
<PAGE>
[REVERSE SIDE OF CARD]
The undersigned directs that this proxy be voted as follows:
1. To consider and vote upon a proposal for the Company to enter into and
perform the transaction with certain partnerships and other entities
affiliated with Constellation Real Estate Group, Inc. (collectively,
"Constellation"), pursuant to which the Company will acquire from
Constellation interests in entities, an interest in a mortgage, title to
certain real property (the foregoing collectively representing up to 18
properties) and certain other assets in exchange for a combination of cash,
the assumption of debt by the Company, and Common Shares and non-voting
Series A Convertible Preferred Shares Of Beneficial Interest to be issued
by the Company, all as more particularly described in the Proxy Statement.
FOR // // AGAINST // // ABSTAIN // //
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting or any adjournment
thereof and matters incident to the conduct of the meeting.
The undersigned hereby revokes any proxy heretofore given to vote or actwith
respect to the Common Stock and hereby ratifies and confirms all that the
proxies, their substitutes, or any of them may lawfully do by virtue hereof.
Please sign exactly as the name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer and affix
corporate seal. If a partnership, please sign in partnership name by general
partner.
Date:
------------------------------------------------
- ------------------------------------------------
Signature
- ------------------------------------------------
Signature
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Proxy Statement of our reports dated May
8, 1998 on our audits of: (1) the consolidated financial statements of the
Constellation Service Companies and (2) the combined statement of revenues
and certain expenses of the Constellation Properties. We also consent to the
reference to our firm under the caption "EXPERTS."
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, MD
June 24, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Proxy Statement of our
reports dated February 24, 1998 on our audits of the consolidated financial
statements and financial statement schedules of Corporate Office Properties
Trust. We also consent to the reference to our firm under the caption
"EXPERTS."
/s/ COOPERS & LYBRAND L.L.P.
Philadelphia, PA
June 24, 1998
<PAGE>
CONTRIBUTION AGREEMENT
Between
CORPORATE OFFICE PROPERTIES TRUST AND
CORPORATE OFFICE PROPERTIES, L.P.,
COLLECTIVELY, BUYER
and
THE SELLERS LISTED ON THE
SIGNATURE PAGE TO THIS AGREEMENT
(Constellation Real Estate Portfolio/
Completed Properties)
Dated as of May 14, 1998
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THE SECURITIES REFERENCED HEREIN HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEFINITIONS.............................................................3
2. ASSIGNMENT AND TRANSFER OF INTERESTS...................................10
3. CONSIDERATION..........................................................10
4. SHARES; INVESTOR MATERIALS; PROXY STATEMENT............................13
5. REIT BOARD OF TRUSTEES; CERTAIN REIT OPERATIONS; RELATED
TRANSACTIONS..........................................................14
6. CLOSING................................................................16
7. SELLER'S DELIVERIES....................................................19
8. INSPECTION PERIOD......................................................19
9. TITLE AND SURVEY MATTERS...............................................21
10. REPRESENTATIONS AND WARRANTIES AS TO PROJECTS.........................22
11. REPRESENTATIONS AS TO INTERESTS/SECURITIES AND RELATED MATTERS........27
12. COVENANTS OF SELLER...................................................31
13. ENVIRONMENTAL WARRANTIES AND AGREEMENTS...............................35
14. ADDITIONAL CONDITIONS PRECEDENT TO CLOSING............................38
15. LEASES-CONDITIONS PRECEDENT AND WARRANTIES WITH RESPECT THERETO.......40
16. CLOSING DELIVERIES....................................................42
17. PRORATIONS AND ADJUSTMENTS............................................47
18. CLOSING EXPENSES......................................................50
19. DESTRUCTION, LOSS OR DIMINUTION OF PROJECTS...........................50
20. DEFAULT...............................................................52
21. SUCCESSORS AND ASSIGNS................................................54
22. LITIGATION............................................................55
23. NOTICES...............................................................55
24. BENEFIT...............................................................56
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
25. LIMITATION OF LIABILITY...............................................56
26. BROKERAGE.............................................................57
27. REASONABLE EFFORTS....................................................57
28. MISCELLANEOUS.........................................................57
</TABLE>
<PAGE>
THIS CONTRIBUTION AGREEMENT is made and entered into as of this 14th day of
May, 1998 (the "Contract Date"), by and between the entities listed on the
signature page to this Agreement as Sellers and also identified on Exhibit
"Sellers" attached hereto (collectively, the "Sellers" and each individually, a
"Seller"), Corporate Office Properties, L.P., a Delaware limited partnership
("COPLP"). and Corporate Office Properties Trust, a Maryland real estate
investment trust ("REIT") (COPLP and the REIT, hereinafter collectively the
"Buyer").
Background
The Sellers, except for CPI (as defined below) only as to Tred Avon (as
defined below), own one hundred percent (100%) of the Interests (the
"Interests") of the entities and limited liability companies identified on
Exhibit "Entities" (the "Entities"). Each Entity (except Tred Avon) is the
record and beneficial owner of its respective Project or Projects (as defined
below) identified on Exhibit "Projects", and CPI is the record and beneficial
owner of fee simple title to the Project known as Brandon (defined below). Tred
Avon is the record and beneficial owner of the Tred Avon Loan Documents (defined
below). The Interest of each Seller (which is such Seller's full capital,
profits, voting and other interest in the subject Entity) in each Entity is set
forth on Exhibit "Sellers".
The Projects include the Land and those certain buildings (the "Buildings"),
each containing that number of net rentable square feet, as specified on Exhibit
"Projects" attached hereto. The Buildings are leased by the Entities (except
Tred Avon) and CPI as to Brandon, to Tenants (as defined below) for office and
retail purposes. Each of the Buildings is commonly known by the respective
street address in the cities, counties and states described on Exhibit
"Projects" attached hereto. For purposes of this Agreement the term, "Projects,"
shall be deemed to mean, on a collective basis with respect to each Entity or
Seller, as applicable: (i) all of the parcels of land identified on Exhibit
"Projects" attached hereto (collectively, the "Land"), together with all rights,
easements and interests appurtenant thereto, including, but not limited to, any
streets or other public ways adjacent to such Land and any water or mineral
rights owned by, or leased to, such Entity or CPI as to Brandon; (ii) all
improvements located on the Land, including, but not limited to, the Buildings,
and all other structures, systems, and utilities associated with, and utilized
by, such Entity, or CPI as to Brandon in the ownership and operation of the
Buildings (all such improvements being collectively referred to herein as the
"Improvements"), but excluding improvements, if any, owned by Tenants of such
applicable Buildings; (iii) all personal property owned by such Seller or
Entity, or CPI as to Brandon and either (A) located on or in the Land or
Improvements, or (B) used in connection with the operation and maintenance of
the Project (collectively, the "Personal Property"); (iv) all building
materials, supplies, hardware, carpeting and other inventory owned by such
Entity or Seller, or CPI as to Brandon and maintained in connection with such
Entity's or CPI's ownership and operation of the Land and/or Improvements
(collectively, the "Inventory"); (v) all trademarks, tradenames, development
rights and entitlements and other intangible property used or useful in
connection with the foregoing (collectively, the "Intangible Personal
Property"), except the right to use the name Constellation; and (vi) such
Entity's interest, and CPI's interest as to Brandon, in all leases and
2
<PAGE>
other agreements to occupy all or any portion of the Land and/or Improvements in
effect on the Contract Date or into which such Entity or CPI enters prior to the
Closing (as defined below), but pursuant to the express terms of this Agreement
(collectively, the "Leases").
The Sellers and Buyer desire to enter this Agreement relating to the sale by
the Sellers to Buyer of Interests, and the sale by CPI to Buyer of Brandon, in
exchange for cash, debt assumption, and Shares (as defined below) pursuant to
the terms of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound, the parties agree as follows:
1. DEFINITIONS.
All terms which are not otherwise defined in this Contribution Agreement
shall have the meaning set forth in this Section 1.
1.1. "Accredited Investor" shall have the meaning set forth in
Regulation D promulgated under the Securities Act of 1933, as amended.
1.2. "Additional Rent" shall have the meaning set forth in Section
15.1.5.
1.3. "Affiliate(s)" shall have the meaning set forth in Section 21.
1.4. "Assumed Indebtedness" shall mean (a) the outstanding principal
balance of the indebtedness as of the Closing Date of those two (2) Entities
identified on Exhibit "Assumed Indebtedness" with respect to those two (2)
Projects identified on Exhibit "Assumed Indebtedness" as such indebtedness is
described (including a statement of the outstanding principal balance as of the
date of this Agreement) on Exhibit "Assumed Indebtedness" and (b) the
outstanding principal balance as of the Closing Date of such portion of the
Satisfied Indebtedness that Buyer, in its sole discretion, elects to assume. The
Assumed Indebtedness identified in clause (a) of the preceding sentence is
evidenced and secured by the Assumed Loan Documents described on Exhibit
"Assumed Loan Documents". Buyer's right to assume the Assumed Indebtedness is
subject to the provisions of Section 3.2.7.
1.5. "Assumed Loan Documents" shall mean the documents evidencing or
securing the Assumed Indebtedness, as described on Exhibit "Assumed Loan
Documents".
1.6. "Base Rent" shall have the meaning set forth in Section 15.1.5.
1.7. "Brandon" shall mean the Project located at 7609 Energy Parkway,
Anne Arundel County, Maryland and identified as Brandon on Exhibit "Projects".
3
<PAGE>
1.8. "Buildings" shall have the meaning set forth in the recitals to
this Agreement.
1.9. "Buyer" shall mean collectively the REIT (as defined below) and
Corporate Office Properties, L.P., a Delaware limited partnership the sole
general partner of which is the REIT.
1.10. "Buyer Indemnified Parties" shall have the meaning set forth in
Section 13.3.
1.11. "Buyer's Closing Notice" shall have the meaning set forth in
Section 6.1.
1.12. "Buyer's Request" shall have the meaning set forth in Section
6.3.
1.13. "Buyer's Conditions Precedent" shall mean all conditions
precedent to Buyer's obligations to close as set forth in this Agreement.
1.14. "Buyer's Reasonable Costs" shall mean all out-of-pocket costs and
expenses incurred by Buyer in connection with this Agreement and the Projects,
including, but not limited to, legal fees, title company charges, engineering
fees, environmental consultant's fees, architects' and surveyors' fees and other
similar charges.
1.15. "CPI" shall mean Constellation Properties, Inc., a Maryland
corporation.
1.16. "CPI Affiliates" shall mean entities controlled by CPI.
1.17. "Cash Component" shall have the meaning set forth in Section 3.
1.18. "Certification of Default" shall have the meaning set forth in
Section 6.3.
1.19. "Closing" shall mean (a) the occurrence of the events described
in Section 6.1 as to all Sellers, other than the NBP 135 Sellers and Woodlands
Sellers, and defined in Section 6.1 as the First Closing, (b) the occurrence of
the events described in Section 6.2.1 as to the NBP 135 Sellers and defined in
Section 6.2.1 as the NBP 135 Closing, and (c) the occurrence of the events
described in Section 6.2.2 as to Woodlands, and defined in Section 6.2.2 as the
Woodlands Closing.
1.20. "Closing Date" shall mean (a) the date set forth in Section 6.1
as to all Sellers, other than the NBP 135 Sellers and the Woodlands Sellers, and
defined in Section 6.1 as the First Closing Date, (b) the date set forth in
Section 6.2.1 as to the NBP 135 Sellers and defined in Section 6.2.1 as the NBP
135 Closing Date, and (c) the date set forth in Section 6.2.2 as to the
Woodlands Sellers and defined in Section 6.2.2 as the Woodlands Closing Date.
1.21. "Closing Statement" shall have the meaning set forth in Section
16.1.11.
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1.22. "Common Share Amount" shall have the meaning set forth in Section
3.2.3 below.
1.23. "Common Shares" means common shares of the REIT.
1.24. "Consideration" shall have the meaning set forth in Section 3.
1.25. "Constellation Lease" shall have the meaning set forth in Section
5.6.
1.26. "Contract Date" shall mean the date set forth in the first
paragraph of this Agreement.
1.27. "Convertible Preferred Shares" shall mean convertible cumulative
preferred shares of the REIT to be classified and issued by the REIT in
accordance with the Amended and Restated Declaration of Trust of the REIT as
amended. Each Convertible Preferred Share has a liquidation preference of $25.00
and pays a cumulative dividend of 5.5% per year. The dividend shall have a
preference over dividends payable on the Common Shares. Each Convertible
Preferred Share is convertible into Common Shares at an initial conversion price
of $13.335 per Common Share (subject to anti-dilution adjustments) and otherwise
subject to the terms of the Amended and Restated Declaration of Trust of the
REIT, as may be further amended. Convertible Preferred Shares delivered to
Sellers at Closing under this Agreement shall not be converted before two (2)
years after the Closing Date and shall not be converted if such conversion would
result in the Sellers owning, in the aggregate, more than forty-five percent
(45%) in the aggregate of the outstanding Common Shares of the REIT.
Notwithstanding the foregoing, if there is a change in control of the REIT, the
two year prohibition against conversion shall be deemed to have terminated and
the Convertible Preferred Shares may thereafter be converted into Common Shares
(subject, however, to the 45% limitation and to the terms of the Amended and
Restated Declaration of Trust of the REIT, as amended prior to such change in
control).
1.28. "CREG" shall mean Constellation Real Estate Group, Inc., which is
the one hundred percent (100%) direct owner of CPI and a guarantor under certain
indebtedness of the Sellers.
1.29. "Damage" shall have the meaning set forth in Section 19.
1.30. "Delinquent Rents" shall have the meaning set forth in Section
17.9.
1.31. "Development Management Agreement" shall have the meaning set
forth in Section 5.7.
1.32. "Development Projects Acquisition Agreements" shall have the
meaning set forth in Section 5.4.
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1.33. "Disapproved Exception" shall have the meaning set forth in
Section 9.2.
1.34. "Eminent Domain" shall have the meaning set forth in Section 19.
1.35. "Entities" shall mean the Entities identified on Exhibit
"Entities".
1.36. "Environmental Law(s)" shall have the meaning set forth in
Section 13.1.1.
1.37. "Environmental Permits" shall have the meaning set forth in
Section 13.1.2.
1.38. "Escrowee" shall mean the Title Company.
1.39. "Estoppel Certificate" shall have the meaning set forth in
Section 15.2 of this Agreement.
1.40. "Existing Loan Documents" shall mean the Assumed Loan Documents
and the Satisfied Loan Documents.
1.41. "First Closing" shall have the meaning set forth in Section 6.1.
1.42. "First Closing Date" shall have the meaning set forth in Section
6.1.
1.43. "Governmental Authority/Authorities" shall mean any agency,
commission, department or body of any municipal, township, county, local, state
or Federal governmental or quasi-governmental regulatory unit, entity or
authority having jurisdiction or authority over all or any portion of the
Projects or the management, operation, use or improvement thereof.
1.44. "Hazardous Conditions" shall have the meaning set forth in
Section 13.1.3.
1.45. "Hazardous Material(s)" shall have the meaning set forth in
Section 13.1.4.
1.46. "Improvements" shall have the meaning set forth in the recitals
to this Agreement.
1.47. "Informational Materials" shall have the meaning set forth in
Section 11.1.8 below.
1.48. "Intangible Personal Property" shall have the meaning set forth
in the recitals to this Agreement.
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1.49. "Interests" shall have the meaning set forth in the recitals to
this Agreement.
1.50. "Inventory" shall have the meaning set forth in the recitals to
this Agreement.
1.51. "Investor Materials" shall have the meaning set forth in Section
4.1.3.
1.52. "Land" shall have the meaning set forth in the recitals to this
Agreement.
1.53. "Leases" shall have the meaning set forth in the recitals to this
Agreement.
1.54. "Lenders' Approvals" shall have the meaning set forth in Section
14.1.5.
1.55. "Letter of Credit" shall have the meaning set forth in Section
6.3.
1.56. "Losses" shall have the meaning set forth in Section 13.3.
1.57. "NBP 135" shall mean the Entity identified as NBP 135 on Exhibit
"Entities" which owns the Project identified as 135 National Business Park on
Exhibit "Projects".
1.58. "NBP 135 Gross Value" shall have the meaning set forth in Section
3.1.
1.59. "NBP 135 Sellers" shall mean those Sellers who are selling all of
the Interests in NBP 135.
1.60. "NBP 135 Lease Achievement Date" shall have the meaning set forth
in Section 6.2.1 of this Agreement.
1.61. "NBP 135/Woodlands Closing" shall have the meaning set forth in
Section 6.2.
1.62. "NBP 135/Woodlands Closing Date" shall have the meaning set forth
in Section 6.2.
1.63. "Net Asset Value" shall have the meaning set forth in Section
3.1.
1.64. "Net Value Percentage Allocation" shall mean the percentage
assigned to each Project on Exhibit "Net Value Percentage Allocation", the total
percentage of which is one hundred percent (100%). Shares shall be allocated
among the Projects by multiplying the Net Asset Value by the Net Value
Percentage Allocation of each Project.
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1.65. "NOI" shall have the meaning set forth in Section 3.2.
1.66. "Notice of Dispute" shall have the meaning set forth in Section
6.3.
1.67. "Notice of Objection" shall have the meaning set forth at Section
6.3.
1.68. "Option Projects" shall have the meaning set forth in Section
5.5.
1.69. "Option/ROFR Agreements" shall have the meaning set forth in
Section 5.5.
1.70. "Permitted Exceptions" shall have the meaning set forth in
Section 9.2.
1.71. "Personal Property" shall have the meaning set forth in the
recitals to this Agreement.
1.72. "Post-Closing Seller" shall have the meaning set forth in Section
13.3.
1.73. "Preferred Share Amount" shall have the meaning set forth in
Section 3.2.2.
1.74. "Projects" shall have the meaning set forth in the recitals to
this Agreement.
1.75. "Proxy Statement" shall have the meaning set forth in Section
4.5.
1.76. "Records" shall mean all books, records, tax returns,
correspondence, financial data, leases, and all other documents and matters,
public or private, maintained by the Entities, the Sellers or its or their
agents, relating to receipts and expenditures pertaining to all of the Projects
for the three most recent full calendar years and the current calendar year and
all contracts, rental agreements and all other documents and matters, public or
private, maintained by the Entities, the Sellers or its or their agents,
relating to operations of the Projects.
1.77. "Registration Rights Agreement" shall mean the Registration
Rights Agreement in favor of the Sellers to be entered into by the REIT at
Closing in the form attached hereto as Exhibit "Registration Rights Agreement".
1.78. "Regulatory Violation Notice" shall have the meaning set forth in
Section 4.1.3.
1.79. "REIT" means Corporate Office Properties Trust, a Maryland real
estate investment trust, which is the sole general partner of Corporate Office
Properties, L.P.
1.80. "Release" shall have the meaning set forth in Section 13.1.5.
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1.81. "Remedial Action" shall have the meaning set forth in Section
13.1.6.
1.82. "Remedial Costs" shall have the meaning set forth in Section
13.1.7.
1.83. "Satisfied Indebtedness" shall mean the outstanding principal
balance as of the Closing Date of the indebtedness of those Entities identified
on Exhibit "Satisfied Indebtedness" with respect to those Projects identified on
Exhibit "Satisfied Indebtedness" as such indebtedness is described (including a
statement of the outstanding principal balance as of the date of this Agreement)
on Exhibit "Satisfied Indebtedness". The Satisfied Indebtedness is evidenced and
secured by the Satisfied Loan Documents described on Exhibit "Satisfied Loan
Documents". Buyer, in Buyer's sole discretion, shall have the right to assume
any portion of the Satisfied Indebtedness, provided, however, that as to any
such assumed portion, the Entities, Sellers and CREG, as applicable, obligated
under such assumed portion are released from all obligations under such assumed
portion. If Buyer, in Buyer's sole discretion, elects to assume any portion of
the Satisfied Indebtedness, such portion shall become part of the Assumed
Indebtedness, and the amount of Satisfied Indebtedness shall be reduced by an
amount equal to the amount of the outstanding principal of such assumed portion
as of the Closing Date.
1.84. "Satisfied Loan Documents" shall mean the documents evidencing or
securing the Satisfied Indebtedness.
1.85. "SEC" shall mean the Securities and Exchange Commission.
1.86. "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.87. "Sellers" shall mean those persons and entities listed as Sellers
on the signature page to this Agreement and listed on Exhibit "Sellers" .
1.88. "Sellers' Condition Precedent" shall mean all conditions
precedent to Seller's obligations to close as set forth in this Agreement.
1.89. "Seller Indemnified Parties" shall have the meaning set forth in
Section 20.4 of this Agreement.
1.90. "Service Company Agreement" shall have the meaning set forth at
Section 5.3.
1.91. "Shares" shall mean collectively Common Shares and Convertible
Preferred Shares.
1.92. "Tank(s)" shall have the meaning set forth in Section 13.1.9.
1.93. "Taxes" shall have the meaning set forth in Section 11.1.4(b).
1.94. "Tax Returns" shall have the meaning set forth in Section
11.1.4(b).
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1.95. "Tenants" shall have the meaning set forth in Section 15.1.
1.96. "TIF Agreement" shall have the meaning set forth in Section 5.8.
1.97. "Title Company" shall mean Commonwealth Land Title Insurance
Company.
1.98. "Title Reports" shall have the meaning set forth in Section 9.2.
1.99. "Tred Avon" shall mean Tred Lightly Limited Liability Company, a
Maryland limited liability company, which is the holder of the Tred Avon Loan
Documents.
1.100. "Tred Avon Loan Documents" shall mean the notes, deeds of trust
encumbering the Project identified as Tred Avon on Exhibit "Projects", and other
loan documents described on Exhibit "Tred Avon Loan Documents" evidencing and
securing first and second deed of trust loans in the aggregate original
principal amount of $10,000,000.00 from TA Associates Limited Partnership, a
Maryland limited partnership, the owner of Tred Avon, to Tred Avon.
1.101. "Woodlands" shall mean the Entity identified as Woodlands on
Exhibit "Entities" which owns the Project identified as Woodlands I on Exhibit
"Projects".
1.102. "Woodlands Gross Value" shall have the meaning set forth in
Section 3.1.
1.103. "Woodlands Lease Achievement Date" should have the meaning set
forth in Section 6.2.2.
1.104. "Woodlands Sellers" shall mean those Sellers who are selling all
of the Interests in Woodlands.
2. ASSIGNMENT AND TRANSFER OF INTERESTS.
2.1. At Closing, each Seller agrees to assign and transfer to Buyer,
and Buyer agrees to accept and take from each Seller, on the terms and
conditions set forth in this Agreement, all of such Seller's right, title and
interest in the Interests, and CPI agrees to convey to Buyer and Buyer agrees to
accept, CPI's fee simple title interest in Brandon.
3. CONSIDERATION.
Calculations under this Section 3 shall be computed separately for the First
Closing with all Sellers, other than the NBP 135 Sellers and the Woodlands
Sellers under Section 6.1, and for the NBP 135/Woodlands Closing with the
Woodlands Sellers and NBP 135 Sellers under
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Section 6.2 and, with respect to each such Closing, shall relate only to those
Sellers, Interests, and Projects which are the subject of such Closing.
In consideration of the assignment of the Interests to Buyer and conveyance
of Brandon to Buyer, and subject to the terms of this Agreement, at Closing, the
Buyer shall (a) pay to Sellers an amount equal to the Satisfied Indebtedness
(the "Cash Component"), (b) acquire the Interests and Brandon under and subject
to the Assumed Indebtedness and (c) deliver to the Sellers, Shares (consisting
of Seventy-Five percent (75%) Common Shares and Twenty-Five percent (25%)
Convertible Preferred Shares, as more particularly described in Section 3.2
below) having an aggregate value equal to the Net Asset Value (defined below) of
the Projects. Such consideration shall be referred to in this Agreement as the
"Consideration." The Shares issued to the Sellers at Closing shall be issued to
the respective Sellers in the same proportion as the respective Sellers assign
and convey Brandon and the Interests (subject to appropriate rounding to
eliminate fractional Shares), as more particularly described on Exhibit "Share
Schedule", as such allocation may be adjusted on the updated Exhibit Share
Schedule to be prepared by Buyer and to be mutually and reasonably approved by
Sellers and the Buyer at the Closing (the "Updated Exhibit Share Schedule" or
the "Share Schedule").
3.1. The "Net Asset Value" of the Projects (excluding NBP 135 and
Woodlands) equals $142,550,000.00 [and as to NBP 135, $12,150,000.00 (the "NBP
135 Gross Value"), and as to Woodlands, $17,600,000.00 (the "Woodlands Gross
Value"), both subject to adjustment as set forth in Section 3.2.5] less the Cash
Component, less the Assumed Indebtedness with respect to all Projects (as such
amount is reflected in the Exhibit "Assumed Indebtedness" on the Closing Date).
The Net Asset Value shall be further adjusted by the positive or negative
adjustments and prorations described in Section 17 below, all of which shall be
adjusted as of the Closing Date. The Net Asset Value is allocated among the
Projects in accordance with Exhibit "Net Value Percentage Allocation".
3.2. The Consideration shall be determined, allocated and paid by the
Buyer to the Sellers at Closing as follows:
3.2.1. The Cash Component shall be allocated among, and paid to
the Sellers, in accordance with Exhibit "Cash Component Allocation".
3.2.2. Buyer shall acquire the Interests and Brandon subject to
the Assumed Indebtedness at the time of the Closing. Sellers acknowledge and
agree that the Sellers shall be solely responsible for any and all assumption
fees, transfer fees and other costs associated with the Buyer's acquisition of
the Interests subject to the Assumed Indebtedness and, in the event that the
holder of any existing financing on the Projects is unwilling to consent to the
transfer of the Interests, and Buyer elects to proceed to Closing, Sellers shall
be solely responsible for any prepayment penalties in connection the payment of
any such indebtedness.
3.2.3. Buyer shall deliver to Sellers Convertible Preferred Shares
($25 par value per unit) having an aggregate value equal to Twenty-Five percent
(25%) of the Net Asset Value of the Projects. This value expressed in dollars
shall be referred to as the
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"Preferred Share Amount." Divide the Preferred Share Amount by $25 (the par
value of the Convertible Preferred Shares) to determine the number of
Convertible Preferred Shares to be delivered. If this calculation would result
in a fractional number of Convertible Preferred Shares to be delivered to
Sellers, the Buyer shall round that fraction up or down, as the case may be, to
the nearest whole number of Convertible Preferred Shares. The Share Schedule
shall establish the allocation of Convertible Preferred Shares to each Seller.
3.2.4. Buyer shall deliver Common Shares having an aggregate value
equal to Seventy-Five percent (75%) of the Net Asset Value of the Projects. This
value expressed in dollars shall be referred to as the "Common Share Amount".
Divide the Common Share Amount by $10.50 to arrive at the number of Common
Shares to be delivered. If this calculation would result in a fractional number
of Common Shares to be delivered to Seller, the Buyer shall round that fraction
up or down, as the case may be, to the nearest whole number of Common Shares.
The Share Schedule shall establish the allocation of Common Shares to each
Seller.
3.2.5. The NBP 135 Gross Value shall be decreased if the NOI
(defined below) of NBP 135 at the time of the NBP 135/Woodlands Closing is less
than $1,071,807. The Woodlands Gross Value shall be decreased if the NOI for
Woodlands at the time of the NBP 135/Woodlands Closing is less than $1,364,531.
If the NOI of NBP 135 is less than $1,071,807 at the time of the NBP
135/Woodlands Closing, the NBP 135 Gross Value shall equal the NOI of NBP 135 at
the time of the NBP 135/Woodlands Closing divided by a capitalization rate of
8.82%. If the NOI of Woodlands is less than $1,364,531 at the time of the NBP
135/Woodlands Closing, the Woodlands Gross Value shall equal the NOI of
Woodlands at the time of the NBP 135/Woodlands Closing divided by the
capitalization rate of 7.75%. "NOI" means the net operating income for a Project
determined as customarily calculated in the commercial real estate industry for
Projects similar to the Project for which the determination is being made, based
on the annualized operating revenues to be received from the Project from Leases
in effect (with Tenants paying rent) ten (10) days before the NBP 135/Woodlands
Closing Date less the estimated annual operating expenses, including, without
limitation, a management fee of three and one-half percent (3.5%) of revenues, a
structural reserve equal to $.20 per square foot of the Project, and a vacancy
reserve of five percent (5%) of the number of square feet of the Project times
the anticipated average rent per square foot for the Project.
3.2.6. The number of Common Shares at any time held by the
Sellers, in the aggregate, shall not exceed forty-five percent (45%) of the
outstanding Common Shares of the REIT.
3.2.7. Buyer's right to assume the Assumed Indebtedness is subject
to the condition that the Sellers and CREG, as applicable, are released from
their obligations under the Assumed Indebtedness. If, despite Buyer's
commercially reasonable efforts to have the Sellers and CREG released from their
obligations under the Assumed Indebtedness, Buyer is unable to obtain such
release as to Assumed Indebtedness relating to a specific Project, Buyer shall
indemnify the Sellers and CREG, as applicable, obligated on the subject Assumed
Indebtedness
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with respect to the deleted Project, and Sellers and CREG, as applicable, shall
accept such indemnification by Buyer in lieu of a release.
4. SHARES; INVESTOR MATERIALS; PROXY STATEMENT.
4.1.1. Investor Materials. Each Seller, on or before ten (10) days
after the date of this Agreement, shall complete a questionnaire (in
substantially the form set forth in Exhibit "Investor Materials" attached
hereto, the "Investor Materials") providing, among other things, information
concerning each Seller's status as an Accredited Investor, and shall provide or
cause to be provided to Buyer, or to any other party designated by Buyer, such
other information and documentation as may reasonably be requested by Buyer in
furtherance of the issuance of the Shares as contemplated hereby.
Notwithstanding anything contained in this Agreement to the contrary, in the
event that, in the reasonable opinion of Buyer, based on advice of its
securities counsel, (x) any such person or entity providing Investor Materials
is not considered an Accredited Investor, (y) the proposed delivery of Shares
hereunder might not qualify for the exemption from the registration requirements
of Section 5 of the Securities Act, or (z) the proposed delivery of Shares
hereunder would violate any applicable federal or state securities laws, rules
or regulations, or agreements to which the REIT or the Buyer is a party, or any
tax related or other legal rules, agreements or constraints applicable to Buyer
or the REIT, Buyer shall so advise Seller, in writing (the "Regulatory Violation
Notice") within five (5) business days after such determination is made. In the
event a Regulatory Violation Notice is delivered, this Agreement shall terminate
and no party shall have any further liability hereunder except (i) as otherwise
expressly set forth in this Agreement and (ii) to the extent a breach of this
Agreement gives rise to, or becomes the basis for, the Regulatory Violation
Notice.
4.2. Certain Informational Materials. Sellers have been furnished with
the informational materials listed on Exhibit "Informational Materials").
Sellers have read, reviewed and understand the Informational Materials, and have
been afforded the opportunity to ask questions of those persons it considers
appropriate and to obtain any additional information it desires in respect of
the Shares and the business, operations, conditions (financial and otherwise)
and current prospects of the COPLP and the REIT. Sellers consulted their own
financial, legal and tax advisors with respect to the economic, legal and tax
consequences of delivery of the Shares and have not relied on the Informational
Materials, COPLP, the REIT or any of their officers, directors, affiliates or
professional advisors for such advice as to such consequences. Notwithstanding
anything to the contrary contained in this Section 4.2, the effect of any
representations or warranties expressly made by COPLP and the REIT in this
Agreement shall not be diminished, abrogated or compromised by this Section 4.2.
4.3. Transfer Requirements. Sellers may only sell, transfer, assign,
pledge or encumber, or otherwise convey any or all of the Shares, in strict
compliance with the charter documents of the REIT, the registration and other
provisions of the Securities Act (and the rules promulgated thereunder), any
state securities laws, and the Registration Rights Agreement, in each case as
may be applicable. The provisions of this Section 4.3 shall survive the Closing.
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4.4. Registration Rights. At the Closing, the REIT shall execute and
deliver the Registration Rights Agreement to the Sellers.
4.5. Proxy Statement. As promptly as practicable after the execution of
this Agreement, the REIT shall prepare and file with the SEC a Proxy Statement
(the "Proxy Statement") which shall solicit the votes of the REIT's shareholders
with respect to the transactions contemplated hereby. The Proxy Statement shall
include the recommendation of the REIT's Board of Trustees in favor of this
Agreement and the transactions contemplated hereby; provided, however, that the
Board of Trustees may modify or withdraw such recommendation if it believes in
good faith after consultation with legal counsel that the modification or
withdrawal of such recommendation is necessary for the Board to comply with its
fiduciary obligations under applicable law.
5. REIT BOARD OF TRUSTEES; CERTAIN REIT OPERATIONS; RELATED TRANSACTIONS.
5.1. Composition of REIT Board of Trustees. The REIT hereby agrees that
the Proxy Statement will include, as a part of the transaction recommended to,
and to be voted upon by the REIT's shareholders, an arrangement reasonably
satisfactory to Sellers and the REIT whereby immediately following Closing,
Sellers shall have the right to have two representatives of the Sellers (each, a
"Seller Representative") serve as members of the Board of Trustees of the REIT
(the "Board") for as long as Sellers are the owners, in the aggregate, of more
than thirty percent (30%) of the REIT's outstanding Common Shares, and to have
one Seller Representative serve as a member of the Board for as long as Sellers
are the owners, in the aggregate, of less than thirty percent (30%) but more
than fifteen percent (15%) of the REIT's outstanding Common Shares. The initial
Seller Representatives shall be designated by Sellers to the REIT prior to the
filing of the Proxy Statement. The principal terms of the arrangement shall be
as follows. At Closing, the number of members of the Board shall be increased by
two pursuant to Article III, Section 2 of the Bylaws of the REIT, and the two
initial Seller Representatives shall be appointed to the Board pursuant to
Article III, Section 10 of the Bylaws of the REIT. One Seller Representative
shall be appointed for a three-year term, and the other Seller Representative
shall be appointed for a two-year term. Such Seller Representatives shall serve
the foregoing terms without regard to the percentage of Common Shares owned by
Sellers, notwithstanding the first sentence of Section 5.1. One Seller
Representative shall be appointed to the Investment Committee of the Board and
each Seller Representative shall be eligible for appointment to other committees
of the Board. Appropriate provision shall be made to assure that Sellers shall
have the right to designate a replacement for a Seller Representative in the
event of the death, resignation or removal of such person, and for a change in
the number of Board members or otherwise to assure continued representation on
the Board by the Seller Representative(s) in the event a Seller Representative
who has been nominated for election is not re-elected at a time when the Sellers
are entitled to have the Board representation described herein. For purposes of
calculating the percentages of Common Shares outstanding and owned by the
Sellers, it shall be assumed that any Convertible Preferred Shares then owned by
the Sellers have been converted into Common Shares and that such Common Shares
are outstanding and owned by the Sellers.
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5.2. REIT Offices. From and after Closing, the REIT shall maintain
offices in Columbia, Maryland and in the Philadelphia, Pennsylvania vicinity at
such locations as the officers of the REIT shall elect. Initially, general real
estate operations shall be headquartered in the Columbia, Maryland office of the
REIT, and capital markets and acquisitions activities of the REIT shall be
headquartered in the Philadelphia, Pennsylvania office of the REIT.
5.3. Service Company Agreement. Concurrently with the execution of this
Agreement, Buyer and Constellation Real Estate, Inc. ("CREI"), an affiliate of
the Sellers, are entering into an agreement for the acquisition by Buyer, or its
Affiliate, of certain of the assets of CREI, including, without limitation,
tangible and intangible assets, and the Seventy-Five percent (75%) interest of
CREI in Constellation Realty Management LLC (the "Service Company Agreement")
for a purchase price of $2,500,000 payable in Shares. Closing under the Service
Company Agreement is to occur immediately after and on the same day as Closing
under this Agreement. The obligations of Sellers and Buyer to complete Closing
under this Agreement are subject to the completion of closing under the Service
Company Agreement.
5.4. Development Projects. Promptly following the execution of this
Agreement, Buyer and affiliates of the Sellers and other entities shall
negotiate in good faith to enter into two (2) acquisition agreements (the
"Development Projects Acquisition Agreements") for the acquisition by Buyer of
Interests in entities owning development projects in Maryland and Virginia as
will be more particularly described in the Development Projects Acquisition
Agreements. The Development Projects Acquisition Agreements will provide, among
other things, that they shall become effective among the parties thereto upon
the completion of Closing under Section 6.1 of this Agreement.
5.5. Option Projects. Concurrently with the execution of this
Agreement, Buyer and affiliates of the Sellers are entering into two (2) option
agreements with respect to the properties known as Lot 11 of the National
Business Park and Woodlands Two. At Closing, Buyer and the entities owning one
hundred percent (100%) of the interests (except as to the Option Project
identified as "Annapolis Exchange" on Exhibit "Option Projects") in the owners
of the Projects listed on Exhibit "Option Projects" (the "Option Projects"), as
the case may be, are entering into option agreements or option and right of
first refusal agreements (the "Option/ROFR Agreements"), granting to Buyer the
option to acquire one hundred percent (100%) of the interests in the entities
owing such Option Projects and fifty percent (50%) of the interests in Annapolis
Exchange.
5.6. Constellation Lease. At Closing, St. Barnabas Limited Partnership,
a Maryland limited partnership, the Entity owing the Project identified as One
Constellation Centre on Exhibit "Projects" and CPI shall enter into a lease for
CPI's leasing of approximately 48,863 square feet in One Constellation Centre at
a rent of $18.50 per square foot for two (2) years in accordance with the terms
of Exhibit "Constellation Lease" ("Constellation Lease").
5.7. Development Management Agreement. At Closing, Buyer or an
Affiliate of Buyer, as Buyer shall elect, and CPI shall enter into a management
services
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agreement pursuant to which Buyer, or Buyer's Affiliate, shall provide
management services to CPI with respect to CPI's post-Closing real estate
portfolio for an eighteen (18) month period after Closing and shall receive the
following compensation: (a) from the Closing Date through the last day of the
third month after the Closing Date, $250,000.00 per month; (b) from the first
day of the fourth month after the Closing Date through the last day of the sixth
month after the Closing Date, $150,000.00 per month; (c) from the first day of
the seventh month after the Closing Date through the last day of the tenth month
following the Closing Date, $100,000.00 per month, and; (d) from the first day
of the eleventh month following the Closing Date through the last day of the
eighteenth month following the Closing Date, $50,000.00 per month (the
"Development Management Agreement"). The Development Management Agreement shall
be substantially in form of Exhibit "Development Management Agreement".
5.8. TIF Indemnification Agreement. Buyer and CPI shall enter into an
indemnification agreement substantially in the form of the Indemnification
Agreement attached hereto as Exhibit "TIF Indemnification Agreement" (the "TIF
Agreement") for CPI's indemnification of Buyer for certain tax increases
relating to the special tax district and the tax incremental financing affecting
the Projects located in the National Business Park, Anne Arundel County,
Maryland.
6. CLOSING.
6.1. First Closing. The assignment and transfer of the Interests, the
conveyance of Brandon, and the other transactions contemplated herein with
respect to all Sellers except the NBP 135 Sellers and the Woodlands Sellers (the
"First Closing") shall be consummated on the date (the "First Closing Date"),
after the shareholders of the REIT have approved all of the transactions
contemplated by this Agreement, specified by Buyer on not less than seven (7)
days notice to Sellers (the "Buyer's Closing Notice"), provided that the First
Closing Date shall not be sooner than July 1, 1998 or later than thirty (30)
days after the shareholders of the REIT have approved all of the transactions
contemplated by this Agreement. Sellers shall have the right to postpone the
First Closing to a date that is up to five (5) days after the First Closing Date
specified in Buyer's Closing Notice by giving Buyer notice of such postponement.
If the shareholders of the REIT have not approved the transactions contemplated
by this Agreement by October 30, 1998, this Agreement shall terminate and become
null and void, the Letter of Credit shall be returned to the Buyer, and the
parties shall be released from all liability or obligation to the other. The
Closing shall take place at the offices of Saul, Ewing, Remick & Saul LLP,
Centre Square West, 1500 Market Street, 38th Floor, Philadelphia, Pennsylvania
19102, or at such other place as may mutually agreed upon by the parties.
6.2. NBP 135/Woodlands Closing.
6.2.1. The assignment and transfer of the Interests in NBP 135 and
the other transactions contemplated herein with respect to the NBP 135 Sellers
(the "NBP 135 Closing"), shall occur after the First Closing under Section 6.1
of this Agreement, on the date (the "NBP 135 Closing Date") within thirty (30)
days after the "NBP 135 Lease Achievement Date" (defined below) specified by
Buyer on not less than seven (7) days notice to Sellers, but
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not later than December 31, 1998. As used in this Section 6.2.1, "NBP 135 Lease
Achievement Date", shall mean the date on which at least ninety-five percent
(95%) of the rentable area of NBP 135 has been leased to Tenants who or which
have entered into Leases in accordance with Section 12.1 of this Agreement and
have commenced paying rent under such Leases.
6.2.2. The assignment and transfer of the Interests in Woodlands
and the other transactions contemplated herein with respect to Woodlands (the
"Woodlands Closing", which shall occur after the First Closing under Section 6.1
of this Agreement on the date (the "Woodlands Closing Date") within thirty (30)
days after the "Woodlands Lease Achievement Date" (defined below) specified by
Buyer on not less than seven (7) days notice to Sellers, but not later than
December 31, 1998. As used in this Section 6.2.2, "Woodlands Lease Achievement
Date" shall mean the date on which at least ninety-five percent (95%) of the
rental area of Woodlands has been leased to Tenants who or which have entered
into Leases in accordance with Section 12.1 of this Agreement and have commenced
paying rent under such Leases.
6.2.3. Sellers shall provide Buyer with detailed written updates
of leasing activity, lease status, and occupancy and rent payment levels at NBP
135 and Woodlands at least monthly until the NBP 135/Woodlands Closing, shall
permit Buyer to review and copy leasing information for NBP 135 and Woodlands,
and shall give Buyer prompt notice of the date Sellers believe is the Lease
Achievement Date.
6.3. Letter of Credit. On or before thirty (30) days after the date of
this Agreement, Buyer shall deliver to the Title Company, as escrowee (the
"Escrowee"), a non-transferrable, irrevocable standby letter of credit in the
amount of Five Million Dollars ($5,000,000.00) (the "Letter of Credit") issued
by a bank selected by Buyer, naming the Escrowee as the Beneficiary, and having
an expiration date no sooner December 10, 1998. The Letter of Credit shall
provide that the Escrowee may present it for payment only after Escrowee
receives a Certification of Default. The Letter of Credit shall be returned to
Buyer (a) upon Closing, or, (b) within fifteen (15) days after Buyer's request
by simultaneous notice to Escrowee and Sellers ("Buyer's Request"), upon
termination of this Agreement by Buyer under any Section of this Agreement
giving Buyer the right to so terminate (provided that Buyer is not in default
hereunder), or if for any reason other than the default of Buyer, Closing is not
completed under this Agreement, unless Sellers dispute the return of the Letter
of Credit to Buyer by notice of dispute to Escrowee and Buyer (the "Notice of
Dispute") given within ten (10) days after Buyer's Request. If the Escrowee
receives a Notice of Dispute, then the Escrowee shall continue to hold the
Letter of Credit until (a) the Escrowee receives a written notice signed by
Randall M. Griffin or John Harris Gurley, Esquire or Charles E. Garman or Dan R.
Skowronski and Buyer, directing the delivery of the Letter of Credit, or (b) a
final order of court of competent jurisdiction is entered in a proceeding in
which all Sellers and the Buyer are named as parties, directing the delivery of
the Letter of Credit in either of which events described in clause (a) or clause
(b), the Escrowee shall deliver the Letter of Credit in accordance with such
direction.
6.3.1. Upon delivery by Sellers to Escrowee of a notarized default
certificate signed by Randall M. Griffin or John Harris Gurley, Esquire or
Charles E. Garman or
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Dan R. Skowronski certifying that Buyer has defaulted in the performance of
Buyer's obligations under this Agreement and specifying the alleged default in
the form of Exhibit "Certification of Default" (the "Certification of Default"),
Escrowee shall promptly submit a draft on the Letter of Credit to the issuing
bank. Escrowee shall then hold the proceeds from negotiation of the Letter of
Credit (the "Proceeds") in escrow and shall deposit the Proceeds in a separate,
interest-bearing money market account in a Federally insured bank.
6.3.2. Promptly following receipt of the Certification of Default,
Escrowee shall send a copy thereof to Buyer. If the Escrowee does not receive
from the Buyer written notice of objection (the "Notice of Objection") to the
Certification of Default within fifteen (15) days after the date of Buyer's
receipt of Certification of Default, Escrowee, after the expiration of such
fifteen (15) day period, shall pay the Proceeds, together with all interest
accrued thereon, to the Sellers, which shall be retained by the Sellers as
liquidated damages for any default or breach by Buyer under this Agreement and
Sellers' sole and exclusive remedy against Buyer for any default or breach under
this Agreement. Upon receipt of a Notice of Objection from Buyer, the Escrowee
shall promptly send a copy thereof to Sellers.
6.3.3. If the Escrowee receives a Notice of Objection from Buyer
within such fifteen (15) day period, then the Escrowee shall continue to hold
the Proceeds until (i) the Escrowee receives a written notice signed by Randall
M. Griffin or John Harris Gurley, Esquire or Charles E. Garman or Dan R.
Skowronski and Buyer, directing the disbursement of the Proceeds, or (ii) a
final order of court of competent jurisdiction is entered in a proceeding in
which all Sellers and the Buyer are named as parties, directing the disbursement
of the Proceeds, in either of which events described in clause (i) or clause
(ii), the Escrowee shall disburse the Proceeds in accordance with such
direction. If the Proceeds are paid to the Sellers pursuant to such direction,
the Proceeds shall be retained by Sellers as liquidated damages for any breach
or default by Buyer under this Agreement and as Sellers' sole and exclusive
remedy against Buyer for any breach or default under this Agreement. If the
Escrowee receives a Notice of Objection within the fifteen (15) day period set
forth above, the Escrowee shall have no liability by reason of its failure to
deliver the Proceeds to Sellers until the Escrowee has received the direction of
the nature described in clause (i) or clause (ii) above.
6.3.4. Sellers and Buyer agree that the Proceeds shall constitute
liquidated damages for any breach or default by Buyer of any Buyer's obligations
under this Agreement prior to the Closing Date or due to Buyer's failure to
complete Closing in accordance with the terms of the Agreement, and that
Sellers' receipt of such Proceeds shall be Sellers' sole and exclusive remedy
against Buyer for any such breach or default by Buyer under this Agreement. This
Section 6.3.4 shall not, however, be deemed to alter or impair any rights or
remedies that Sellers may have under this Agreement after Closing has been
completed.
6.3.5. The Escrowee may act upon any instrument or other writing
believed by Escrowee in good faith to be genuine and to be signed and presented
by the proper person, and shall not be liable in connection with the performance
of any duties imposed upon the Escrowee by the provisions of this Agreement,
except for the Escrowee's own willful default or gross negligence. The Escrowee
shall have no duties or responsibilities except those set forth
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in this Agreement, unless the same is in writing and signed by Buyer and Randall
M. Griffin or John Harris Gurley, Esquire or Charles E. Garman or Dan R.
Skowronski on behalf of Sellers. Buyer and Sellers shall jointly and severally
indemnify and hold Escrowee harmless from and against all costs, claims, and
expenses, including reasonable attorneys' fees, relating to the performance of
Escrowee of Escrowee's obligations under this Agreement, except with respect to
Escrowee's willful default or gross negligence. The Escrowee shall have the
right to continue to hold the Letter of Credit if there is any dispute between
the parties regarding delivery of the Letter of Credit. The Escrowee shall have
the right to pay the Proceeds into court of competent jurisdiction if there is
any dispute between the parties regarding the payment of the Proceeds.
7. SELLER'S DELIVERIES.
To the extent in any Seller's possession or control, each Seller shall
continue to make available to Buyer, from and after the Contract Date, at
reasonable times and upon reasonable notice, all documents, contracts,
information, Records and exhibits pertinent to the transaction that is the
subject of this Agreement, including, but not limited to, the documents listed
as "Seller's Deliveries" on Exhibit "Seller's Deliveries" attached hereto.
8. INSPECTION PERIOD.
8.1. Project Inspection. At all times prior to the Closing, including
times following the Inspection Period, Buyer, its agents and representatives
shall be entitled to conduct an inspection of the Projects, which will include
the rights to: (i) enter upon the Land and Improvements, on reasonable notice to
Seller, to perform inspections and tests of any and all of the Projects,
including, but not limited to, inspection, evaluation and testing of the
heating, ventilation and air-conditioning systems and all components thereof,
all structural and mechanical systems within the Improvements, including, but
not limited to, sprinkler systems, power lines and panels, air lines and
compressors, automatic doors, tanks, pumps, plumbing and all equipment,
vehicles, and Personal Property; (ii) examine and copy any and all Records;
(iii) make investigations with regard to zoning, environmental (including, but
not limited to, an environmental assessment as specified in Section 8.2, which
includes, but is not limited to, an analysis of the presence of any asbestos,
chlordane, formaldehyde or other Hazardous Material in, under or upon the
Projects, or any underground storage tanks on, or under, the Land), building,
code, regulatory and other legal or governmental requirements; (iv) make or
obtain market studies and real estate tax analyses; and (v) interview Tenants
with respect to their current and prospective occupancies. Without limitation of
the foregoing, Buyer or its designated independent or other accountants may
audit the Operating Statements (as defined in Exhibit "Seller's Deliveries"
attached hereto), and Sellers shall supply such documentation as Buyer or its
accountants may reasonably request in order to complete such audit.
Notwithstanding anything to the contrary contained in this Agreement, the effect
of any representations, warranties or undertakings made by Sellers in this
Agreement shall not be diminished, abrogated, or compromised by the foregoing
inspections, environmental assessments or other tests or investigations made by
Buyer.
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8.2. Environmental Assessment. Buyer or Buyer's agent(s) shall have the
right to employ one or more environmental consultants or other professional(s)
to perform or complete such environmental inspections and assessments of the
Projects as Buyer deems necessary or desirable. Buyer and its consultants shall
also have the right to undertake or complete a technical review of all
documentation, reports, plans, studies and information in possession or control
of Sellers, or its past or present environmental consultants, concerning or in
any way related to the environmental condition of the Projects. In order to
facilitate the assessments and technical review, each Seller shall extend its
full cooperation (but without third party expense to such Seller) to Buyer and
its environmental consultants, including, without limitation, providing access
to all files and fully and completely answering all questions.
8.3. Buyer's Undertaking. Buyer hereby covenants and agrees that it
shall cause all studies, investigations and inspections performed at the
Projects pursuant to this Section 8 to be performed in a manner that does not
materially or unreasonably disturb or disrupt the tenancies or business
operations of any of the Projects' Tenants. In the event that, as a result of
Buyer's exercise of its rights under Sections 8.1 and 8.2, physical damage
occurs to any or all of the Projects, then Buyer shall promptly repair such
damage, at Buyer's sole cost and expense, so as to return the Projects to
substantially the same condition as exists on the Contract Date. Buyer hereby
indemnifies, protects, defends and holds each Seller harmless from and against
any and all losses, damages, claims, causes of action, judgments, damages, costs
and expenses that such Seller actually suffers or incurs as a direct result of
any physical damage caused to, in, or at the Projects during the course of, or
as a result of, any or all of the studies, investigations and inspections that
Buyer elects to perform (or causes to be performed) pursuant to this Section 8.
8.4. Confidentiality. Each party agrees to maintain in confidence, and
not to disclose to Tenants or Tenants' employees, the information contained in
this Agreement or pertaining to the transaction contemplated hereby and the
information and data furnished or made available by Sellers to Buyer, its agents
and representatives in connection with Buyer's investigation of the Projects and
the transactions contemplated by this Agreement; provided, however, that each
party, its agents and representatives may disclose such information and data (i)
to such party's accountants, attorneys, existing or prospective lenders,
investment bankers, accountants, underwriters, ratings agencies, partners,
consultants and other advisors in connection with the transactions contemplated
by this Agreement to the extent that such representatives reasonably need to
know (in the disclosing party's reasonable discretion) such information and data
in order to assist, and perform services on behalf of, the disclosing party;
(ii) to the extent required by any applicable statute, law, regulation or
Governmental Authority (including, but not limited to, Form 8-K and other
reports and filings required by the SEC and other regulatory entities, as
described in Exhibit "Securities Reporting Requirements" attached hereto) or by
the New York Stock Exchange in connection with the listing of the Conversion
Shares; (iii) in connection with any litigation that may arise between the
parties in connection with the transactions contemplated by this Agreement or
otherwise relating to the Projects or any of them; (iv) to the extent such
disclosure is required or appropriate in connection with any securities offering
or other capital markets or financing transaction undertaken by the REIT; (v) to
the extent such information and data become generally available to the public
other than as a result of disclosure by such party or its agents or
representatives; and (vi) to the extent
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such information and data become available to such party or its agents or
representatives from a third party who, insofar as is known to such party, is
not subject to a confidentiality obligation to the other party hereunder; and
(vii) to the extent necessary in order to comply with each party's respective
covenants, agreements and obligations under this Agreement. In the event the
transactions contemplated by this Agreement shall not be consummated, such
confidentiality shall be maintained indefinitely. Furthermore, Sellers and Buyer
acknowledge that, notwithstanding any contrary term of this Section 8.4, Buyer
shall have the right to conduct Tenant interviews during the Inspection Period,
and the disclosure of the existence of this Agreement to the Tenants shall not
constitute a breach of the above restriction. Buyer shall also have the right to
issue a press release mutually acceptable to Buyer and Sellers upon the
execution of this Agreement and consummation of the transactions described in
this Agreement.
9. TITLE AND SURVEY MATTERS.
9.1. Title. At the Closing, Sellers agree that each Entity (except Tred
Avon) and Brandon shall have good and marketable fee simple title to its
Project(s), free and clear of all liens, claims and encumbrances except for the
Permitted Exceptions. From and after the date of this Agreement, Sellers shall
not take any action, or fail to take any action, that would cause title to the
Projects to be subject to any title exceptions or objections, other than the
Permitted Exceptions.
9.2. Title Commitments/Surveys. On or before thirty (30) days after the
Contract Date, Buyer shall furnish Sellers with a preliminary title reports
issued by the Title Company covering the Projects (the "Title Reports") and a
written notice specifying those title exceptions which are not acceptable to
Buyer in Buyer's commercially reasonable judgment, which objection may include
matters shown on any updated or re-certified survey which Buyer may obtain (the
"Disapproved Exceptions"). Buyer's failure to designate as one of the
Disapproved Exceptions a title exception shown on the Title Report shall
constitute Buyer's approval of such title exception (all title exceptions not
designated by Buyer as Disapproved Exceptions are in this Agreement called
"Permitted Exceptions"). The applicable Seller(s) shall use their best efforts
to cause the removal of all Disapproved Exceptions on or before ten (10) days
after Buyer's notice to Seller of such Disapproved Exceptions, except that liens
of an ascertainable amount and other items which can be removed by the payment
of money shall be paid and discharged by Sellers at or before Closing. Within
such ten (10) day period, Seller(s) shall notify Buyer of all Disapproved
Exceptions that Seller(s), after using their best efforts, are unable to remove.
Seller(s)' failure to give Buyer notice of Seller(s)' inability to remove any
Disapproved Exceptions shall constitute such Seller(s)' covenant that such
Disapproved Exceptions shall be removed at or prior to the Closing. Buyer shall
have the rights set forth in Section 9.4 if any Disapproved Exceptions cannot be
removed by the applicable Seller(s) at or prior to the Closing.
9.3. It shall be an Buyer's Condition Precedent that the marked-up
Title Reports delivered on the Closing Date shall be in the form described in
this Section 9.3 and have all standard and general printed exceptions deleted so
as to afford full "extended form coverage," and shall further include an owner's
comprehensive endorsement, an endorsement
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certifying that the bills for the real estate taxes pertaining to the Land and
Improvements do not include taxes pertaining to any other real estate; an access
endorsement; a contiguity endorsement, if applicable; a subdivision or plat act
endorsement; a survey endorsement; a non-imputation endorsement; a Fairway
endorsement; and a creditors' rights endorsement (if available).
9.4. If Sellers are unable to correct or remove any Disapproved
Exceptions in accordance with the requirements of this Section 9, Buyer shall
have the sole option of either (i) completing the Closing subject to such
Disapproved Exceptions without any abatement of the Consideration, except that
liens of an ascertainable amount and other items which can be removed by payment
of money shall be paid and discharged by Sellers or (ii) having the Letter of
Credit returned to Buyer and being immediately paid Buyer's Reasonable Costs
and, in the latter event, the parties shall be released from all liability or
obligation to the other and this Agreement shall then and thereafter be null and
void.
9.5. Tred Avon Loan Documents. At Closing, the Tred Avon Loan Documents
shall be free and clear of all liens, claims, encumbrances and security
interests of any nature, except the portion of the Assumed Indebtedness held by
Provident Bank of Maryland for which the Tred Avon Loan Documents are security,
and shall evidence and secure first and second deeds of trust as described on
Exhibit "Tred Avon Loan Documents" encumbering the Project identified as Tred
Avon on Exhibit "Projects".
10. REPRESENTATIONS AND WARRANTIES AS TO PROJECTS.
10.1. Sellers. The Sellers represent and warrant to Buyer, for
themselves and the Entities, that the following matters are true as of the
Contract Date and shall be true as of the Closing Date and covenant as follows:
10.1.1. Title. The Entities and CPI as to Brandon are the legal
fee simple titleholder of the Projects as more particularly described on Exhibit
"Projects", and, other than with respect to the Permitted Exceptions, have,
good, marketable and insurable title to the Projects, free and clear of all
mortgages and security interests (other than the Assumed Indebtedness and
Satisfied Indebtedness), leases, agreements and tenancies (other than the
Leases), licenses, claims, options, options to purchase, liens, covenants,
conditions, restrictions, rights-of-way, easements, judgments and other matters
affecting title to the Projects. The Projects are the only tangible assets owned
by the Entities. The sole business of each Entity is its ownership and operation
of the Project owned by it.
10.1.2. Seller's Deliveries. All of Seller's Deliveries listed on
Exhibit "Seller's Deliveries" attached hereto and all other items delivered by
Sellers pursuant to this Agreement are true, accurate, correct and complete in
all material respects, and fairly present the information set forth in a manner
that is not misleading. The copies of all documents and other agreements
delivered or furnished and made available by Sellers to Buyer pursuant to this
Agreement constitute all of and the only Leases and other agreements relating to
or affecting the ownership and operation of the Projects, there being no
material "side" or other agreements,
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written or oral, in force or effect, to which any Seller or Entity is a party or
to which the Project(s) is/are subject.
10.1.3. Defaults. Neither the Entities nor any Seller is in
default under any of the documents, recorded or unrecorded, referred to in the
title commitments. To the knowledge of Sellers, there are no defaults under any
of the Major Repair Contracts, Contracts or Governmental Approvals (as such
terms are defined in Exhibit "Seller's Deliveries" attached hereto).
10.1.4. Contracts. There are no contracts of any kind relating to
the management, leasing, operation, maintenance or repair of any Project, except
the Contract listed on Exhibit "Service Contracts" attached hereto. Each Seller
and each Entity has performed all material obligations required to be performed
by it, and is not in default, under any of such Contracts. The Contract may, by
the express terms thereof be assigned to Buyer by notice to such effect to the
appropriate contract party, without penalty or other payment by Sellers, the
Entities or Buyer.
10.1.5. Improvements. The Improvements were completed and
installed in accordance with the Plans (as defined in Exhibit "Seller's
Deliveries" attached hereto), which were approved by all Governmental
Authorities having jurisdiction thereover, and there are not outstanding any
notices of any material violation of any governmental laws, ordinances, rules or
regulations with respect to such Improvements.
10.1.6. Employees. The Entities do not have any employees.
10.1.7. Compliance with Laws and Codes. The Projects, and the
use and operation of any or all of them are (or the use and operation of any
component, portion or area of any Project is) in material compliance with
applicable municipal and other governmental laws, ordinances, regulations,
codes, licenses, permits and authorizations, and there are presently and
validly in effect all licenses, permits and other authorizations necessary
(including, without limitation, certificates of occupancy) for the use,
occupancy and operation of the Projects as they are presently being operated,
whether required of any Entity or any Tenant. Without limiting the foregoing,
the Projects comply in all material respects with all applicable requirements
of the Americans With Disabilities Act of 1990 (42 U.S.C.A. Section 12101 et
seq.). The Projects are zoned by the municipality in which they are located
so as to permit office and retail uses and structures thereon, in a manner
that accommodates and is fully compatible with the Buildings and Improvements
as they presently exist. No zoning, subdivision, environmental, Hazardous
Material, building code, health, fire, safety or other law, order or
regulation is, or, on the Closing Date will be, violated by the continued
maintenance, operation or use of any Improvements or parking areas in the
Projects, and no notice of any such violation issued by any Governmental
Authority having jurisdiction over the Projects is outstanding. All existing
streets and other improvements, including water lines, sewer lines,
sidewalks, curbing and streets at each Project have been paid for and either
enter such Project through adjoining public streets, or, if they enter
through private lands, do so in accordance with valid, irrevocable easements
running with the ownership of such Project.
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10.1.8. Litigation. There are no pending (or to the best of each
Seller's knowledge, threatened) judicial, municipal or administrative
proceedings affecting any Entity or any Project, or in which any Seller is or
will be a party by reason of such Entity's ownership or operation of any Project
or any portion thereof, including, without limitation, proceedings for or
involving collections, condemnation, eminent domain, alleged building code or
environmental or zoning violations, or personal injuries or property damage
alleged to have occurred on any Project or by reason of the condition, use of,
or operations on, such Project, except certain litigation to which CPI is a
party, but which is not material to the transfer of any Interests or Brandon by
CPI and is not related to any Project. No attachments, execution proceedings,
assignments for the benefit of creditors, insolvency, bankruptcy, reorganization
or other proceedings are pending against any Entity, any Seller, or to the best
of Seller's knowledge, threatened against any Entity or any Seller, nor are any
of such proceedings contemplated by any Entity or any Seller. In the event any
proceeding of the character described in this Section 10.1.8 is initiated or
threatened against any Entity or Seller prior to the Closing, Sellers shall
promptly advise Buyer thereof in writing, Sellers shall remain responsible
therefor, and Sellers shall indemnify, defend and hold Buyer from any claims,
losses, liabilities and expenses (excluding, without limitation, reasonable
counsel fees) relating to any such occurrence.
10.1.9. Insurance. Each Entity or Seller now has in force
customary and commercially reasonable amounts of property, liability and
business interruption insurance relating to the Projects from established and
reputable insurers. No Entity or Seller has received any notice from any
insurance carrier, nor is any Entity or Seller aware of, any defects or
inadequacies in the Projects that, if not corrected, would result in termination
of insurance coverage or increase in the normal and customary cost thereof.
10.1.10. Financial Information. All Operating Statements (as
defined in Exhibit "Seller's Deliveries" attached hereto) delivered by Sellers,
and all of Sellers' and/or the Entities' Records, are complete, accurate, true
and correct, in all material respects; have been compiled in accordance with
generally accepted accounting principles; and accurately set forth the results
of the operation of the Projects and Entities for the periods covered. There has
been no material adverse change in the financial condition or operation of the
Projects and Entities since the period covered by the Operating Statements.
10.1.11. Re-Zoning. There is not now pending, and neither any
Entity nor any Seller has knowledge of, any threatened proceeding for the
rezoning of any Project or any portion thereof, or the taking of any other
action by governmental authorities that would have any material adverse impact
on the value of any Project or use thereof.
10.1.12. Real Estate Taxes. True and complete copies of the most
recent real estate "Tax Bill(s)" for (and the only real estate tax bills
applicable to) the Projects have been delivered to Buyer. Except as set forth on
Exhibit "Real Estate Tax Matters" attached hereto, no Entity nor Seller has
received notice of and does not have any actual knowledge of any proposed
increase in the assessed valuation or rate of taxation of any or all of the
Projects from that reflected in the most recent Tax Bills. Except as described
on Exhibit "Real Estate Tax
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Matters" attached hereto, there is not now pending, and no Entity will, without
the prior written consent of Buyer, institute prior to the Closing Date, any
proceeding or application for a reduction in the real estate tax assessment of
any of the Projects or any other relief for any tax year. There are no
outstanding agreements with attorneys or consultants with respect to the Tax
Bills that will be binding on Buyer or any of the Projects after the Closing,
except for Constellation Centre as noted on Exhibit "Real Estate Tax Matters".
Other than the amounts disclosed by the Tax Bills, no other real estate taxes
have been, or will be, assessed against the Projects, or any portion thereof, in
respect of the year 1998 or any prior year, and no special assessments of any
kind (special, bond or otherwise) are or have been levied against the Projects,
or any portion thereof, that are outstanding or unpaid, and, to the best of each
Seller's knowledge, none will be levied prior to the Closing. Each Entity has
paid all real estate taxes presently due and owing with respect to the Projects.
10.1.13. Easements and Other Agreements. To the knowledge of
Sellers, no Entity or Seller is in default in complying with the terms and
provisions of any of the covenants, conditions, restrictions, rights-of-way or
easements constituting one or more of the Permitted Exceptions.
10.1.14. Lease Controversies. Except as described in Exhibit
"Lease Controversies" attached hereto, no material controversy, complaint,
negotiation or renegotiation, proceeding, suit or litigation relating to all or
any of the Leases, is pending or, to the knowledge of Sellers, threatened,
whether in any tribunal or informally. Sellers are and shall remain responsible
after the Closing Date for defending (or continuing) any such suit, proceeding
or other matter relating to periods prior to the Closing Date, and all damages,
loss, expenses and costs related thereto.
10.1.15. Existing Loan Documents. Exhibits "Assumed Loan
Documents" and "Satisfied Loan Documents" set forth true, correct and complete
schedules of all of the notes, deeds of trust, and other loan documents
evidencing or securing the Assumed Indebtedness and Satisfied Indebtedness,
respectively. Sellers have delivered true, correct and complete copies of the
Existing Loan Documents to Buyer prior to the date hereof as part of the
Seller's Deliveries. Each Entity and Seller has complied with (and, prior to the
Closing, shall continue to comply with) the terms of, and all notices or
correspondence received from the holders of, the Existing Loan Documents. Each
Entity and/or Seller has paid (and, at all times prior to the Closing, shall
pay) all sums due under the Existing Loan Documents. No Entity or Seller shall
make any prepayment of any amount due under the Loan Documents. The Existing
Loan Documents are in full force and effect, and, to the best knowledge of each
Seller and each Entity, no Entity nor any Seller is in default thereunder, and
there has not occurred any event which, with the giving of notice and/or the
passage of time, or both, would constitute a default by any Entity or Seller
thereunder or under any of the Existing Loan Documents. The outstanding
principal balance under the Assumed Indebtedness as of the Contract Date is
$13,062,178 ($9,625,148.00 as to the Project known as Cranberry Square and
$3,457,030.00 secured by a security interest in the deed of trust encumbering
the Project known as Tred Avon.)
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10.1.16. Tred Avon Loan Documents. Exhibit "Tred Avon Loan
Documents" attached hereto sets forth a true, correct and complete schedule of
all of the notes, deeds of trust and the other loan documents evidencing or
securing the Tred Avon Indebtedness. Sellers have delivered true, correct and
complete copies of the Tred Avon Loan Documents to Buyer prior to the date
hereof as part of the Seller's Deliveries. TA Associates Limited Partnership has
complied with the terms of, and all notices or correspondence received from the
holder of, the Tred Avon Loan Documents. TA Associates Limited Partnership has
paid all sums due under the Tred Avon Loan Documents. The Tred Avon Loan
Documents are in full force and effect, and to the best knowledge of each Seller
and each Entity, TA Associates Limited Partnership is not in default thereunder,
and there has not occurred any event which, with the giving of notice and/or the
passage of time, or both, would constitute a default by TA Associates Limited
Partnership thereunder or under any of the Tred Avon Loan Documents. The
outstanding principal balance under the Tred Avon Loan Documents on the Contract
Date is $9,659,512.00.
10.1.17. Condemnation. Sellers and the Entities have no knowledge
of any pending or contemplated condemnation or other governmental taking
proceedings affecting all or any part of any or all of the Projects.
10.1.18. Disclosure. No representation or warranty made by any
Seller in this Agreement, no exhibit attached hereto with respect to the
Projects, and no schedule contained in this Agreement contains any untrue
statement of a material fact, or omits to state a material fact necessary in
order to make the statements contained therein not misleading. Except as
otherwise expressly set forth in this Agreement, Seller makes no representation
or warranty, express or implied, as to the physical condition of the Projects,
and Buyer is purchasing the Interests and Brandon with the Projects "AS-IS,
WHERE-IS" as to physical condition.
The representations and warranties in this Section 10 shall be deemed remade
by each Seller as of the Closing Date with the same force and effect as if in
fact specifically remade at that time. The representations and warranties made
in this Section 10 shall survive the Closing for a period of eighteen (18)
months. Notwithstanding anything to the contrary herein, the effect of the
representations and warranties made in this Agreement by Sellers shall not be
diminished, abrogated or deemed to be waived by the inspections, assessments, or
any other investigations made by Buyer.
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11. REPRESENTATIONS AS TO INTERESTS/SECURITIES AND RELATED MATTERS.
11.1. Sellers. The Sellers represent and warrant to Buyer that the
following matters are true as of the Contract Date and shall be true as of the
Closing Date and covenant as follows:
11.1.1. Authority. Each Seller is duly formed, validly existing,
and in good standing under the laws of Maryland, and has the power and authority
to own the Interests owned by it. The execution and delivery of this Agreement
by Sellers, and the performance of this Agreement by Sellers, have been duly
authorized by Sellers, respectively, and this Agreement is binding on Sellers
and enforceable against them in accordance with its terms. No consent of any
creditor, investor, partner, shareholder, tenant-in-common, judicial or
administrative body, Governmental Authority, or other governmental body or
agency, or other party to such execution, delivery and performance by Sellers is
required. Neither the execution of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in a breach of, default under,
or acceleration of, any agreement to which Sellers are a party or by which
Sellers, or the Projects are bound; or (ii) violate any restriction, court
order, agreement or other legal obligation to which Sellers, and/or any of the
Projects are subject.
11.1.2. Entities. Each Entity is duly formed, validly existing,
and in good standing under the laws of Maryland, and has the power and authority
to own its Project (or, as to Tred Avon, the Tred Avon Loan Documents). Sellers
have delivered to Buyer, as part of Sellers' Deliveries, all of the documents
relating to the formation or governance of the Entities. Each Entity is a single
purpose entity, organized for the sole purpose of owning its Project (or as to
Tred Avon, the Tred Avon Loan Documents).
11.1.3. Interest. The direct and indirect ownership of each Seller
including percentage interests of ownership, is as reflected on Exhibit
"Sellers". The Interests constitute one hundred percent (100%) of the Interests
in the Entities, except Tred Avon in which CPI owns a seventy-five percent (75%)
Interest. Each Seller owns the Interests owned by such Seller, as set forth on
Exhibit "Sellers" hereto, free and clear of all liens, charges, encumbrances,
restrictive agreements and assessments, other than restrictions on transfers and
other similar provisions as set forth in the relevant Partnership Agreement,
which such Seller warrants and represents shall not be violated by the
assignment of Interests contemplated by this Agreement. Upon the assignment of
such Seller's Interest to the Buyer (or its designee(s)), the Buyer will receive
good and absolute title thereto, free from all liens, charges, encumbrances,
restrictive agreements and assessments whatsoever, other than restrictions on
transfers and other similar provisions as set forth in the relevant Partnership
Agreement. Each Seller hereby waives, with respect to the assignment
contemplated by this Agreement, any "right of refusal" or other restriction on
transfer set forth in the Partnership Agreement of any Entity of which such
Seller is a partner. There are no outstanding options, contracts, calls,
commitments or demands of any nature relating to the Interests of any Seller.
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11.1.4. No Transfers of Interests. There will be no changes in the
composition of any Entity between the date of this Agreement and Closing, except
for transfers by and between entities controlled by CPI ("CPI Affiliates").
Transfers of any Interests to CPI Affiliates shall be subject to this Agreement,
the transferor/assignor Sellers shall not be relieved of their obligations under
this Agreement, and the CPI Affiliates which are transferees/assignees of
Interests shall become Sellers under this Agreement. Sellers shall give Buyer
written notice of such transfers to CPI Affiliates and shall provide Buyer with
copies of all executed documents effecting such transfers.
11.1.5. Tax-Related Issues.
(a) Each Entity is, and at all times has been, properly
treated as a partnership for federal income tax purposes and not as an
"association" or "publicly traded partnership" taxable as a corporation.
(b) Each Entity has filed or caused to be filed in a timely
manner (within any applicable extension periods) all tax, information or other
returns required to be filed by the Code or by applicable state, or local tax
laws (collectively, "Tax Returns"). Such Tax Returns are true, correct and
complete in all respects; and all federal, state or local income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, unemployment, disability, personal property, sales, use, transfer,
registration, estimated, or other tax of any kind whatsoever, including any
interest, penalty or other addition thereto, whether disputed or not,
(collectively, "Taxes") due, and Taxes due in respect of any person for which
the applicable Entity had an obligation to withhold and/or otherwise pay over
Taxes, have been timely paid in full or will be timely paid in full by the due
date thereof (and whether or not shown on a Tax Return). With respect to any
taxable year for which a statute of limitations (or similar provision) has not
yet run, none of the Tax Returns of the applicable Entity has been audited by a
government or taxing authority, nor is any such audit or other proceeding in
process, pending, threatened (either in writing or verbally, formally or
informally) or expected to be asserted with respect to Taxes (or the collection
of Taxes) of the applicable Entity, and no Entity has received notice (either in
writing or verbally, formally or informally) or expects to receive notice that
it has not filed a Tax Return or not paid Taxes required to be filed, withheld,
or paid by it. Each Entity has disclosed on its federal income tax returns all
positions taken therein that could give rise to a substantial understatement
penalty within the meaning of Code Section 6662. No claim has ever been made by
an authority in a jurisdiction where such Entity does not file Tax Returns that
it is or may be subject to taxation by that jurisdiction.
11.1.6. United States Person. Each Entity and each Seller is a "United
States Person" within the meaning of Section 1445(f)(3) of the Code, as amended,
and shall execute and deliver an "Entity Transferor" certification at Closing.
11.1.7. Entity Liabilities. Except for (i) the Assumed Indebtedness,
and (ii) any accrued liabilities and obligations of the Entities that are being
adjusted at the Closing pursuant to Section 17 of this Agreement, the Entities
shall not have any liabilities or obligations, either accrued, absolute,
contingent, or otherwise, which will not be paid or
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discharged on or before the Closing Date. In addition, except for the claims and
liabilities described in the preceding sentence, neither the Sellers nor the
Entities have received notice of any claim against (or liability of) the
Entities arising from business done, transactions entered into or other events
occurring prior to the Closing Date (and to the best knowledge of the Sellers
and the Entities, no basis for any such claim or liability exists).
11.1.8. Investment Representation. Each Seller has such knowledge
and experience in financial and business matters so as to be fully capable of
evaluating the merits and risks of an investment in the Shares. No Shares will
be issued, delivered or distributed to any person or entity who either (i) is a
resident of the State of California or New York or (ii) is other than an
Accredited Investor with respect to whom there has been delivered to Buyer
satisfactory Investor Materials confirming the status of such person or entity
as an Accredited Investor. Each Seller has been furnished with the informational
materials described in Section 4.2 above (collectively, the "Informational
Materials"), and has read and reviewed the Informational Materials and
understands the contents thereof. The Sellers have been afforded the opportunity
to ask questions of those persons they consider appropriate and to obtain any
additional information they desire in respect of the Shares and the business,
operations, conditions (financial and otherwise) and current prospects of the
Buyer and the REIT. The Sellers have consulted their own financial, legal and
tax advisors with respect to the economic, legal and tax consequences of
delivery of the Shares and have not relied on the Informational Materials,
Buyer, the Buyer, the REIT or any of their officers, directors, affiliates or
professional advisors for such advice as to such consequences. All of the
holders of interests in each Seller are Accredited Investors. No Seller requires
the consent of any interest holder in order to consummate the transactions
contemplated by this Agreement, including, without limitation, to amend any
partnership agreement, operating agreement, charter or other governing document
of such Seller. All of the Sellers are formed under the law of the State of
Maryland, or as to natural individuals, are domiciled in the State of Maryland.
11.1.9. The representations and warranties in this Section 11.1
shall be deemed remade by each Seller, as of the Closing Date with the same
force and effect as if specifically remade at that time. The representations and
warranties made in this Section 11.1 shall survive the Closing without
limitation.
11.2. COPLP and the REIT. COPLP and the REIT represent and warrant to
Sellers that the following matters are true as of the Contract Date and shall be
true as of the Closing Date:
11.2.1. COPLP is a limited partnership validly existing under
the laws of the State of Delaware and has all requisite power to carry on its
business as now conducted. The REIT is the sole general partner of COPLP and
is a duly formed and validly existing Maryland real estate investment trust.
Each of COPLP and the REIT has full power and authority and possesses all
material authorizations and approvals necessary to enable it to execute and
deliver this Agreement and the other documents to be executed by it pursuant
to this Agreement, and perform its obligations hereunder and thereunder. This
Agreement and the other documents to be executed by COPLP and the REIT
pursuant to this Agreement when executed and delivered
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by COPLP and the REIT will, subject to approval by the shareholders of the
REIT prior to Closing, constitute valid and legally binding obligations of
each of COPLP and the REIT, enforceable against them in accordance with their
respective terms, subject to bankruptcy and insolvency laws, and to equitable
principles which may be imposed by courts.
11.2.2. Subject to approval by the shareholders of the REIT, the
execution, delivery and performance of this Agreement and the other documents to
be executed, delivered and performed pursuant to this Agreement do not and will
not (with or without the passage of time or the giving of notice): (i) violate
or conflict with COPLP's Partnership Agreement or the REIT's Amended and
Restated Declaration of Trust, or any law binding upon COPLP or the REIT; (ii)
violate or conflict with, result in a breach of, or constitute a default or
otherwise cause any loss of benefit under, any agreement or other obligation to
which COPLP or the REIT is a party or by which either of them (or the assets of
either of them) is bound, or give to any other party any rights (including,
without limitation, rights of termination, foreclosure, cancellation or
acceleration) in, or with respect to COPLP or the REIT; or (iii) result in,
require, or permit the creation or imposition of, any restriction, mortgage,
deed of trust, pledge, lien, security interest or other charge, claim or
encumbrance upon, or with respect to, COPLP or the REIT or the assets of either
of them.
11.2.3. There are no actions, suits, claims, proceedings,
investigations or inspections, pending or (to the REIT's knowledge) threatened,
against or affecting COPLP or its Affiliates which could have a material adverse
affect on COPLP and its Affiliates considered as a whole, and to the REIT's
knowledge there are no matters of litigation or governmental proceedings
expected to be brought against it or its Affiliates which could have a material
adverse affect on the financial condition of the REIT and its Affiliates
considered as a whole.
11.2.4. No consent, order, approval or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or agency, domestic or foreign, is
required by or with respect to the COPLP or the REIT in connection with the
execution, delivery and performance of this Agreement and the other documents to
the executed, delivered and performed pursuant to this Agreement.
11.2.5. The Informational Materials did not, as of their
respective dates of filing, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading. There has not been any material adverse change in the
business of COPLP or the REIT since March 31, 1998. Except as may otherwise be
set forth therein, the financial statements (including the notes thereto) of the
REIT set forth in the Informational Materials present fairly the consolidated
financial position of the REIT as at the dates set forth therein and its results
of operations, changes in consolidated stockholder equity and cash flows for
periods covered thereby, all in conformity with United States generally accepted
accounting principles applied on a consistent basis for such periods.
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11.2.6. The Shares to be issued at Closing will, when issued and
delivered, be duly authorized, validly issued, fully paid, non-assessable shares
of the REIT free from all claims of preemptive rights.
11.2.7. COPLP has been at all times, and presently intends to
continue to be, classified as a partnership for federal income tax purposes and
not an association taxable as a corporation or a publicly traded partnership
taxable as a corporation. The REIT is now, and presently intends to continue to
be classified, as a real estate investment trust under Section 856 of the
Internal Revenue Code of 1986, as amended.
11.2.8. All documents and other papers delivered by or on behalf
of COPLP or the REIT in connection with the transactions contemplated by this
Agreement are accurate and complete in all material respects and are authentic.
No representation or warranty of COPLP or the REIT contained in this Agreement
contains any untrue statement of a material fact or omits to state a fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. Except as described in
this Agreement or in the Informational Materials there is no fact known to COPLP
or the REIT or (other than proposed or enacted legislation, proposed or enacted
regulation, or general economic or real estate industry conditions and changes)
that materially adversely affects or, so far as COPLP and the REIT can
reasonably foresee, materially threatens, the assets, activities, prospects,
financial condition or results of COPLP or the REIT.
11.2.9. The representations and warranties in this Section 11.2
shall be deemed remade by COPLP and REIT as of the Closing Date with the same
force and effect as if remade at Closing. The representations and warranties
made in this Section 11.2 shall survive Closing without limitation.
12. COVENANTS OF SELLER.
Sellers (for themselves and for the Entities) hereby covenant with Buyer as
follows:
12.1. New Leases. Neither the Entities nor CPI as to Brandon shall
amend any Lease or execute any new lease, license, or other agreement affecting
the ownership or operation of all or any portion of the Projects or for personal
property, equipment, or vehicles, without Buyer's prior written approval. The
Tred Avon Loan Documents shall not be amended without the prior written consent
of Buyer. The Existing Loan Documents shall not be amended without the prior
written consent of Buyer. Buyer shall be deemed to have consented to any
document or action under Sections 12.1 or 12.2 for which Sellers have requested
approval by written request (specifying in such request that Buyer must object,
if at all, within five (5) days after receipt) to Buyer if Buyer does not object
to such document or action within five (5) days after receiving such request
from Sellers. No prepayment shall be made under any of loans evidenced or
secured by the Existing Loan Documents.
12.2. New Contracts. Neither the Entities nor CPI shall enter into any
contract with respect to the ownership and operation of all or any portion of
any or all of the Projects that
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will survive the Closing, or that would otherwise affect the use, operation or
enjoyment of any or all of the Projects, without Buyer's prior written approval,
except for service contracts entered into in the ordinary course of business
that are terminable, without penalty, on not more than 30 days' notice, for
which no consent shall be required.
12.3. Insurance. The insurance policies described in Section 10.1.11
above shall remain continuously in force through and including the Closing Date.
12.4. Operation of Projects. The Entities and CPI as to Brandon shall
operate and manage the Projects in a manner consistent with the manner in which
they are being operated on the Contract Date, maintaining the current level of
services, shall maintain the Projects in good repair and working order; shall
keep on hand sufficient materials, supplies, equipment and other Personal
Property for the efficient operation and management of the Projects in a first
class manner; and shall perform, when due, all of the Entities' obligations
under the Existing Loan Documents, Leases, Contracts, Governmental Approvals and
other agreements relating to the Projects and otherwise in accordance with
applicable laws, ordinances, rules and regulations affecting the Projects.
Except as otherwise specifically provided herein, the Entities and CPI as to
Brandon shall deliver the Projects at Closing in substantially the same
condition as each of them is in on the Contract Date, reasonable wear and tear
excepted. Sellers shall cause Tred Avon to the collect the indebtedness under,
and shall hold the Tred Avon Loan Documents in the manner in which they are
currently being collected and held. Sellers shall cause the Entities to pay when
due all amounts due under Existing Loan Documents and to perform all obligations
of such Entities under the Loan Documents.
12.5. Pre-Closing Expenses. Sellers have paid or will pay or cause to
be paid in full, prior to the Closing, all bills and invoices for labor, goods,
material and services of any kind relating to the Projects and utility charges,
relating to the period prior to the Closing. Except as the parties may otherwise
agree at or prior to Closing, any alterations, installations, decorations and
other work required to be performed under any and all agreements affecting the
Projects have been or will, by the Closing, be completed and paid for in full.
12.6. Good Faith. All actions required pursuant to this Agreement that
are necessary to effectuate the transaction contemplated herein will be taken
promptly and in good faith by Sellers or the Entities, as applicable, and each
Seller shall furnish Buyer with such documents or further assurances as Buyer
may reasonably require.
12.7. No Assignment. After the Contract Date and prior to the Closing,
no Seller shall assign, alienate, lien, encumber or otherwise transfer all or
any part of any or all of the Interests, the Projects or any interest in any or
all of them, except for transfers of Interests to CPI Affiliates. Sellers shall
give Buyer notice of the transfers of any Interests to CPI Affiliates, together
with copies of the signed documents effecting such transfers.
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12.8. Availability of Records, Audit Representation Letter.
12.8.1. Upon Buyer's request, for a period of two years after the
Closing, Sellers shall (i) make the Records available to Buyer for inspection,
copying and audit by Buyer's designated accountants; and (ii) cooperate with
Buyer (without any third party expense to Sellers) in obtaining any and all
permits, licenses, authorizations, and other Governmental Approvals necessary
for the operation of any or all of the Projects. Without limitation of the
foregoing in this Section 12.8, Sellers agree to abide by the terms of Exhibit
"Securities Reporting Requirements" attached hereto. At any time before or
within two years after the Closing, Sellers further agree to provide to the
Buyer's designated independent auditor, upon request of Buyer or such auditor:
(x) access (to the same extent to which Buyer would be entitled to such access)
to the books and records of the Projects and all related information (including
the information listed on Exhibit "Securities Reporting Requirements") regarding
the period for which Buyer is required to have the Project audited under the
regulations of the Securities and Exchange Commission, and (y) a representation
letter delivered by each managing agent of the Projects regarding the books and
records of the Projects, in substantially the form as attached hereto as Exhibit
"Audit Representation Letter".
12.8.2. In addition, Sellers shall provide, and cooperate, in all
respects, in providing, Buyer with copies of, or access to, such factual
information as may be reasonably requested by Buyer, and in the possession or
control of Sellers, to enable the REIT to issue one or more mutually agreed upon
press releases concerning the transaction that is the subject of this Agreement,
to file a Current Report on Form 8-K (as specified on Exhibit "Securities
Reporting Requirements" attached hereto), if, as and when such filing may be
required by the SEC and to make any other filings that may be required by any
Governmental Authority. The obligation of Sellers to cooperate in providing
Buyer with such information for Buyer to file its Current Report on Form 8-K
shall survive the Closing.
12.9. Change in Conditions. Sellers shall promptly notify Buyer of any
change in any condition with respect to any or all of the Entities, the Projects
or of the occurrence of any event or circumstance that makes any representation
or warranty of Sellers to Buyer under this Agreement untrue or misleading, or
any covenant of Buyer under this Agreement incapable or less likely of being
performed, it being understood that Sellers' obligation to provide notice to
Buyer under this Section 12.9 shall in no way relieve Sellers of any liability
for a breach by Sellers of any of its representations, warranties or covenants
under this Agreement.
12.10. Entity Structure. Except for transfers of Interests to CPI
Affiliates, from the Contract Date through and including the Closing Date, the
Entities and Sellers shall maintain the same composition of its partners,
shareholders and members as the case may be, as exists on the Contract Date,
unless otherwise expressly or consented to by Buyer in writing.
12.11. Cure of Violations. On or before the Closing Date, Sellers shall
cure (or escrow sufficient funds at the Closing with the Title Company to cure)
(i) all violation(s) of law, code, ordinance or regulation that are the subject
of any written notice issued by a Governmental
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Authority with respect to any Project, and (ii) legal deficiencies discovered at
or in any Project before the Closing.
12.12. Tenant Purchase Rights. Exhibit "Tenant Purchase Rights" sets
forth the purchase rights of three (3) Tenants as more particularly described in
Exhibit "Tenant Purchase Rights", a right of first option held by Giant of
Maryland, Inc. ("Giant") with respect to the Cranberry Square Project (the
"Giant Purchase Right"), an option to purchase held by the United States of
America with respect to the One National Business Park Project (the "USA
Purchase Right"), and a right of first refusal held by Green Spring Health
Services, Inc. with respect to the Woodlands I Project (the "Green Spring
Purchase Right").
12.12.1. Buyer agrees to accept the One National Business Park
Project subject to the USA Purchase Right.
12.12.2. Promptly after the Contract Date, Sellers shall notify
Giant of this transaction and the sale of the Interests of the Entity owning the
Cranberry Square Project. The obligation of Buyer to purchase the Interests of
Entity owning Cranberry Square is contingent upon Giant's entering into an
agreement of sale to purchase the Cranberry Square Project on or before the
Closing Date. If, prior to Closing, Giant enters into an agreement to purchase
the Cranberry Square Project or the Interests of the Entity owing the Cranberry
Square Project, the Cranberry Square Project shall be deleted from this
Agreement, this Agreement shall be deemed to have been automatically amended so
as to delete the Project from this Agreement, and Buyer and Sellers shall
proceed to close on the remaining Projects subject to a reduction in the
Consideration by the amount of the Consideration allocated to the Cranberry
Square Project.
12.12.3. Promptly after the Contract Date, Sellers shall notify
Green Spring Health Services, Inc. ("Green Spring") of this transaction and the
sale of the Interests of the Entity owning the Woodlands I Project. Buyer's
obligation to purchase the Interests of the Entity owning the Woodlands I
Project is contingent upon (a) the exercise by Green Spring of the Green Spring
Purchase Right or (b) the waiver by Green Spring on or before the Closing Date
(either in writing or due to the passage of time) of its right, if any, to
purchase the Woodlands I Project pursuant to the terms contemplated by this
Agreement. If Green Spring exercises the Green Spring Purchase Right or does not
waive such right (either in writing or due to the passage of time) on or before
the Closing Date, the Green Spring Purchase Right with respect to the Woodlands
I Project as it relates to the transaction contemplated by this Agreement, the
Woodlands I Project shall be deleted from this Agreement, this Agreement shall
be deemed to have been automatically amended so as to delete the Woodlands I
Project from this Agreement, and Buyer and Sellers shall proceed to close on the
remaining Projects, subject to a reduction in the Consideration by the amount of
the Consideration allocated to the Woodlands I Project.
All covenants made in this Agreement by Sellers shall survive the Closing for a
period of eighteen (18) months.
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13. ENVIRONMENTAL WARRANTIES AND AGREEMENTS.
13.1. Definitions. Unless the context otherwise requires:
13.1.1. "Environmental Law" or "Environmental Laws" shall mean
all applicable past, present or future federal, state and local statutes,
regulations, directives, ordinances, rules, court orders, decrees,
arbitration awards and the common law, which pertain to environmental
matters, contamination of any type whatsoever or health and safety matters,
as such have been amended, modified or supplemented from time to time
(including all present and future amendments thereto and re-authorizations
thereof). Environmental Laws include, without limitation, those relating to:
(i) the manufacture, processing, use, distribution, treatment, storage,
disposal, generation or transportation of Hazardous Materials; (ii) air,
soil, surface, subsurface, groundwater or noise pollution; (iii) Releases;
(iv) protection of wildlife, endangered species, wetlands or natural
resources; (v) Tanks; (vi) health and safety of employees and other persons;
and (vii) notification requirements relating to the foregoing. Without
limiting the above, Environmental Law also includes the following: (i) the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. Section 9601 et seq.), as amended ("CERCLA"); (ii) the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act (42
U.S.C. Section 6901 et seq.), as amended ("RCRA"); (iii) the Emergency
Planning and Community Right to Know Act of 1986 (42 U.S.C. Section 11001 et
seq.), as amended; (iv) the Clean Air Act (42 U.S.C. Section 7401 et seq.),
as amended; (v) the Clean Water Act (33 U.S.C. Section 1251 et seq.), as
amended; (vi) the Toxic Substances Control Act (15 U.S.C. Section 2601 et
seq.), as amended; (vii) the Hazardous Materials Transportation Act (49
U.S.C. Section 1801 et seq.), as amended; (viii) the Federal Insecticide,
Fungicide and Rodenticide Act (7 U.S.C. Section 136 et seq.), as amended;
(ix) the Federal Safe Drinking Water Act (42 U.S.C. Section 300f et seq.), as
amended; (x) the Federal Radon and Indoor Air Quality Research Act (42 U.S.C.
Section 7401 note, et seq.); (xi) the Occupational Safety and Health Act (29
U.S.C. Section 651 et seq.), as amended; (xii) any state, county, municipal
or local statutes, laws or ordinances similar or analogous to (including
counterparts of) any of the statutes listed above; and (xiii) any rules,
regulations, directives, orders or the like adopted pursuant to or
implementing any of the above.
13.1.2. "Environmental Permit" or "Environmental Permits" shall
mean licenses, certificates, permits, directives, requirements, registrations,
government approvals, agreements, authorizations, and consents which are
required under or are issued pursuant to an Environmental Law or are otherwise
required by Governmental Authorities.
13.1.3. "Hazardous Conditions" refers to the existence or presence
of any Hazardous Materials on, in, under, or at, the Projects (including air,
soil and groundwater) or any portion of any of them.
13.1.4. "Hazardous Material" or "Hazardous Materials" shall mean:
(a) any chemical, pollutant, contaminant, pesticide,
petroleum or petroleum product or by product, radioactive substance, solid waste
(hazardous or extremely hazardous), special, dangerous or toxic waste,
substance, chemical or material regulated, listed,
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limited or prohibited under any Environmental Law, including without limitation:
(i) friable or damaged asbestos, asbestos-containing material, presumed
asbestos-containing material, polychlorinated biphenyls ("PCBs"), solvents and
waste oil; (ii) any "hazardous substance" as defined under CERCLA; and (iii) any
"hazardous waste" as defined under RCRA; and
(b) even if not prohibited, listed, limited or regulated by
an Environmental Law, all pollutants, contaminants, hazardous, dangerous or
toxic chemical materials, wastes or any other substances, including without
limitation, any industrial process or pollution control waste (whether or not
hazardous within the meaning of RCRA) which could pose a hazard to the
environment, or the health and safety of any person or impair the use or value
of any portion of the Projects.
13.1.5. "Release" means any spill, discharge, leak, migration,
emission, escape, injection, dumping or other release or threatened release of
any Hazardous Material into the environment, whether or not notification or
reporting to any Governmental Authority was or is required. Release includes,
without limitation, historical releases and the meaning of Release as defined
under CERCLA.
13.1.6. "Remedial Action" shall mean any and all corrective or
remedial action, preventative measures, response, removal, transport, disposal,
clean-up, abatement, treatment and monitoring of Hazardous Materials or
Hazardous Conditions, whether voluntary or mandatory, and includes all studies,
assessments, reports or investigations performed in connection therewith to
determine if such actions are necessary or appropriate (including investigations
performed to determine the progress or status of any such actions), all
occurring on or after the Contract Date.
13.1.7. "Remedial Costs" shall include all costs, liabilities
expenses and fees incurred on or after the date of this Agreement in connection
with Remedial Action, including but not limited to: (i) the fees of
environmental consultants and contractors; (ii) reasonable attorneys' fees
(including compensation for in-house and corporate counsel provided such
compensation does not exceed customary rates for comparable services); (iii) the
costs associated with the preparation of reports, and laboratory analysis
(including charges for expedited results if reasonably necessary); (iv)
regulatory, permitting and review fees; (v) costs of soil and/or water treatment
(including groundwater monitoring) and/or transport and disposal; and (vi) the
cost of supplies, equipment, material and utilities used in connection with
Remedial Action.
13.1.8. "Tank" or "Tanks" means above-ground and underground
storage tanks, vessels and related equipment, including appurtenant pipes, lines
and fixtures containing or previously containing any Hazardous Material or
fraction thereof.
13.2. Warranties. Sellers, for themselves and for the Entities, hereby
represent and warrant as follows with respect to each Project:
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13.2.1. Sellers and the Entities have made available or delivered
to Buyer originals (or true, complete and accurate copies) of all of the
documents in their possession, custody or control, which documents include
and/or relate to:
(a) All approvals, plans, specifications, test borings,
percolation tests, engineering studies, surveys or other environmental data
concerning the Projects;
(b) All permits (including Environmental Permits), approvals,
registrations, Tank registration and/or closure documentation, certificates,
applications, notices, orders, directives, legal pleadings, correspondence or
other documents of any nature that any Entity or Seller, any tenant of Entity,
any of Entity's predecessors-in-title or any tenant of Entity's
predecessors-in-title have submitted to, or received from, any Governmental
Authority regarding the Projects and their use, compliance or non-compliance
with Environmental Laws; and
(c) The results of any investigation of any of the Projects
including, but not limited to, Phase I or Phase II site assessments, asbestos
inspection and/or removal reports, tests or investigations of soil or other
substrate air, groundwater, surface water, or the building interior, and any
testing or investigation results relating to the removal or abandonment of any
Tanks from the Projects.
13.2.2. To the knowledge of Sellers, each Project is owned and
operated in material compliance with all Environmental Laws and Environmental
Permits.
13.2.3. There are no pending or, to the Sellers' and Entities'
knowledge, threatened: (i) claims, complaints, notices, correspondence or
requests for information received by Sellers or the Entities with respect to any
violation or alleged violation of any Environmental Law or Environmental Permit
or with respect to any corrective or remedial action for or cleanup of the
Project or any portion thereof; and (ii) written correspondence, claims,
complaints, notices, or requests for information from or to Sellers or Entities
regarding any actual, potential or alleged liability or obligation under or
violation of any Environmental Law or Environmental Permit with respect to the
Project or any portion thereof.
13.2.4. To Seller's knowledge, there have been no Releases and
there has not been a threatened Release of a Hazardous Material on, in, under or
at the Project or any portion thereof.
13.2.5. No Project is listed, proposed or nominated for listing on
the National Priorities List pursuant to CERCLA (the "NPL"), the Comprehensive
Environmental Response and Liability Information System ("CERCLIS") or on any
other similar list of sites under analogous state laws.
13.2.6. Except as listed and described on Exhibit "USTs", there
are no Tanks at, on or under the Project. Neither the Sellers nor the Entities
have removed, closed or
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abandoned any Tanks at the Projects, and neither the Sellers nor the Entities
have any knowledge of the existence, abandonment, closure or removal of Tanks at
the Projects.
13.2.7. To the knowledge of Sellers, there are no PCBs or friable
or damaged asbestos at the Projects.
13.2.8. To the knowledge of Sellers, there has been no storage,
treatment, disposal, generation, transportation or Release of any Hazardous
Materials by any Entity or Seller or by any other person or entity for which any
Seller or Entity is or may be held responsible, at, on, under, or about any
Project (or any portion thereof) in violation of Environmental Laws.
13.3. Indemnity. Notwithstanding anything to the contrary in this
Agreement, with respect to each Project, each of the Sellers, and each of
Sellers' shareholders, partners and members, (collectively, jointly and
severally, "Post Closing Seller") agree to and do hereby indemnify, defend and
hold harmless Buyer, the REIT and each of their respective partners,
shareholders, agents, contractors, employees, officers, directors, trustees,
shareholders, and each of their successors and assigns (collectively, the "Buyer
Indemnified Parties"), from and against any and all liabilities, claims,
demands, suits, administrative proceedings, causes of action, costs, damages,
personal injuries and property damages, losses and expenses, both known and
unknown, present and future, at law or in equity (collectively, "Losses"),
arising out of, by virtue of or related in any way to a breach by Sellers of any
of their representations and warranties under Sections 13.2 through and
including 13.2.8.
Without limiting any of Post-Closing Seller's above indemnification
obligations, Post-Closing Seller further acknowledges and agrees that its
obligation to indemnify the Buyer Indemnified Parties with respect to any breach
by Sellers of their representations and warranties under Sections 13.2 through
and including 13.2.8, includes, without limitation: (i) any and all Remedial
Costs associated with any Tank, Hazardous Material, Hazardous Condition or any
Release; (ii) to the maximum extent allowed by law, all fines and/or penalties
that may be imposed in connection with any Tank or the existence of any
Hazardous Material on, at, under, near, in or about the Projects; (iii) the
defense of any claim made by any individual or entity (including any government,
governmental agency or entity) concerning any of the foregoing, which defense
shall be conducted by counsel and with the assistance of environmental advisors
and consultants, in all cases subject to the prior written approval of Buyer;
and (iv) reasonable attorneys' fees and costs and environmental advisors' and
consultants' fees incurred by any of the Buyer Indemnified Parties with respect
to enforcing its rights under this indemnification provision. This Section 13
shall survive the Closing for a period of thirty (30) months. Indemnification
claims by Buyer under this Section 13.3 are subject to Section 20.3.
14. ADDITIONAL CONDITIONS PRECEDENT TO CLOSING.
14.1. Buyer's Conditions Precedent. In addition to the other conditions
enumerated in this Agreement, the following shall be additional Buyer's
Conditions Precedent:
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14.1.1. Physical Condition. The physical condition of each Project
shall be substantially the same on the Closing Date as on the Contract Date,
reasonable wear and tear excepted, unless the alteration of said physical
condition is the result of Damage.
14.1.2. Pending Actions. At the Closing, there shall be no
administrative agency, litigation or governmental proceeding of any kind
whatsoever, pending or threatened, that, after the Closing, would, in Buyer's
sole and absolute discretion, materially and adversely affect any Entity or the
value or marketability of any Project or the Projects as a whole, or the ability
of Buyer to operate any or all of the Projects in the manner it is (they are)
being operated on the Contract Date.
14.1.3. Zoning. On the Closing Date, no proceedings shall be
pending or threatened that could or would involve the change, redesignation,
redefinition or other modification of the zoning classifications of (or any
building, environmental, or code requirements applicable to) any or all of the
Projects, or any portion thereof, or any property adjacent to any Project, in a
manner which, in Buyer's sole and absolute discretion, would materially and
adversely affect the value or marketability of any Project.
14.1.4. Flood Insurance. As of the Closing Date, if any Project is
located in a flood plain, Buyer shall have obtained flood plain insurance in
form and substance acceptable to Buyer.
14.1.5. Assumed Indebtedness. Sellers shall provide to Buyer
letters from each of the holders of the Assumed Indebtedness dated no earlier
than 30 days prior to the Closing Date, approving the transfer of the Interests
to the Buyer, setting forth the amount of principal and interest outstanding as
of the Closing Date, and stating that there has not been, and there does not
currently exist, any default under any of the Assumed Indebtedness. Such letters
shall be referred to collectively as the "Lenders' Approvals."
14.1.6. Satisfied Indebtedness. Sellers shall provide to Buyers
payoff letters good through the Closing Date from all holders of the Satisfied
Indebtedness stating the amount required to pay off the Satisfied Indebtedness.
14.1.7. Owners. The composition of partners, shareholders and
members of each Entity and each Seller on the Closing Date shall be the same as
on the Contract Date, except for transfers to CPI Affiliates.
14.1.8. Bankruptcy. As of the Closing Date, no Seller, no Entity
and no Project is the subject of any bankruptcy proceeding for which approval of
this transaction has not been given and issued by the applicable bankruptcy
court.
14.1.9. Representations and Warranties True. The representations
and warranties of Sellers contained in this Agreement shall be true and correct
as of the Closing Date in all material respects, as though such representations
and warranties were made on such date.
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14.1.10. Covenants Performed. All covenants and obligations of
Sellers required to be performed on or prior to the Closing Date shall have been
performed, in all material respects.
14.1.11. Approval by Buyer's Shareholders. REIT's Board of
Trustees and shareholders shall have approved this Agreement and the
consummation of the transactions contemplated by this Agreement.
14.2. Seller's Additional Conditions Precedent. The following shall be
additional Seller's Conditions Precedent:
14.2.1. Representations and Warranties. The representations and
warranties of Buyer contained in this Agreement shall be true and correct as of
the Closing Date, in all respects, as though such representations and warranties
were made on such date.
14.2.2. Covenants. All covenants of Buyer required to be performed
on or prior to the Closing Date shall have been performed, in all material
respects.
15. LEASES-CONDITIONS PRECEDENT AND WARRANTIES WITH RESPECT THERETO.
15.1. Warranties as to Leases. With respect to each of the tenants
listed on the Rent Roll (as defined in Exhibit "Seller's Deliveries") provided
to Buyer by Sellers and any other tenants leasing space in any or all of the
Projects as of the Closing Date (collectively, the "Tenants"), Sellers, for
themselves and for the Entities, represent and warrant to Buyer as of the
Contract Date and as of the Closing Date as follows:
15.1.1. Each of the Leases is in full force and effect strictly
according to the terms set forth therein and in the Rent Roll, and has not been
modified, amended, or altered, in writing or otherwise. Each Tenant is legally
required to pay all sums and perform all obligations set forth in the Leases,
without concessions, abatements, offsets or other bases for relief or
adjustment;
15.1.2. All obligations of the lessor under the Leases that accrue
to the date of the Closing have been performed, including, but not limited to,
all required tenant improvements, cash or other inducements, rent abatements or
moratoria, installations and construction (for which payment in full has been
made in all cases), and each Tenant has unconditionally accepted lessor's
performance of such obligations. No Tenant has asserted any offsets, defenses or
claims available against rent payable by it or other performance or obligations
otherwise due from it under any Lease;
15.1.3. Other than as shown on the Rent Roll, no Tenant is in
default under or is in arrears in the payment of any sums or in the performance
of any obligations required of it under its Lease. No Tenant has prepaid any
rent or other charges;
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15.1.4. Each Entity and CPI as to Brandon have no reason to
believe that any Tenant is, or may become, unable or unwilling to perform any or
all of its obligations under its Lease, whether for financial or legal reasons
or otherwise;
15.1.5. Neither base rent ("Base Rent"), nor regularly payable
estimated Tenant contributions or operating expenses, insurance premiums, real
estate taxes, common area charges, and similar or other "pass-through" or
non-base rent items including, without limitation, cost-of-living or so-called
"C.P.I." or other such adjustments (collectively, "Additional Rent"), nor any
other item payable by any Tenant under any Lease has been heretofore prepaid for
more than one month nor shall it be prepaid between the Contract Date and the
Closing Date for more than one month;
15.1.6. No guarantor(s) of any Lease has been released or
discharged, partially or fully, voluntarily or involuntarily, or by operation of
law, from any obligation under or in connection with any Lease or any
transaction related thereto;
15.1.7. Except as specifically disclosed on Exhibit "Commissions,"
there are no brokers' commissions, finders' fees, or other charges payable or to
become payable to any third party on behalf of any Entity as a result of or in
connection with any Lease or any transaction related thereto, including, but not
limited to, any exercised or unexercised option(s) to expand or renew;
15.1.8. Each security deposit provided for under each Lease shall
be fully assigned to Buyer at the Closing. No Tenant or any other party has
asserted any claim (other than for customary refund at the expiration of a
Lease) to all or any part of any security deposit;
15.1.9. Sellers shall pay, and retain sole and exclusive
responsibility for, all expenses due on or before the Closing Date connected
with or arising out of the negotiation, execution and delivery of the Leases,
including, without limitation, brokers' commissions (subject to Section 17.7),
leasing fees and recording fees (as well as the cost of all tenant improvements,
subject to Section 17.7, not paid for by Tenants), and Sellers shall be deemed
to have certified and warranted payment thereof to Buyer at the Closing;
15.1.10. Except as set forth on Exhibit "Tenant Purchase Rights",
no Tenant has, by virtue of its Lease or any other agreement or understanding,
any purchase option with respect to any Project, or any portion thereof, or any
right of first refusal to purchase any Project, or a portion thereof, whether
triggered by the transactions contemplated by this Agreement or by a subsequent
sale of such Project or a portion thereof. Except as set forth on the Rent Roll,
no Tenant has, by virtue of its Lease, or any other agreement or understanding
any of the following: (a) the right or option to expand its tenancy into space
at any Project other than the space that such Tenant is currently occupying; (b)
the right or option to terminate its Lease; and (c) the right or option to
contract the space at any Project that such Tenant is currently occupying;
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15.1.11. (a) Except as specifically disclosed on the Rent Roll
delivered to Buyer, no Tenant has sublet its leased premises; and (b) there are
no outstanding requests from any Tenants to Seller, requesting any consent to an
assignment of the Tenant's Lease or to a sublease of all or some portion of a
Tenant's leased premises.
Each Seller hereby indemnifies, defends and holds Buyer harmless from and
against all loss, damage, liability, cost, expense (including, but not limited
to, reasonable fees of attorneys of Buyer's choice) and charges which Buyer may
incur, or to which Buyer may become subject, as a consequence of any breach of
the warranties contained in this Section 15. The foregoing indemnity shall
survive the Closing for a period of eighteen (18) months.
15.2. Estoppel Certificates from Tenants. Sellers shall use Sellers'
commercially reasonable efforts to obtain, on or prior to the Closing Date, a
tenant's estoppel certificate from Tenants occupying at least eighty percent
(80%) of each Project (except Tred Avon) or such larger percentage as Buyer's
lender or lenders may require (provided, that Buyer advises Sellers of lender
requirements at least thirty (30) days before Closing) (the "Estoppel
Certificate"), dated no earlier than thirty (30) days prior to the Closing Date,
from each of the Tenants. The Estoppel Certificate shall be certified to Buyer,
the Entity owning the Project in which the applicable Tenant is located, and any
other party designated by Buyer. If Sellers (despite Sellers' required best
efforts) are unable to obtain an Estoppel Certificate from the required
percentage of Tenants Buyer's sole remedy shall be to proceed to close and
accept Seller's own Estoppel Certificate with respect to the Lease and tenancy
for which Sellers fail to procure an Estoppel Certificate from the relevant
Tenant (and any Estoppel Certificate so executed by a Seller shall also be
tailored, in a manner mutually and reasonably acceptable to Buyer and such
Seller, to reflect its issuance by the landlord, rather than the Tenant in
question). Each such Estoppel Certificate shall be substantially in the form
attached hereto as Exhibit "Tenant Estoppel Certificate" or in such other form
as Buyer's lender or lenders may require. At Buyer's request, when Sellers
request the Tenant Estoppels, Sellers shall simultaneously request, and
thereafter Sellers shall use Sellers' commercially reasonable efforts to obtain,
on or before the Closing Date, from each Tenant a subordination, non-disturbance
and attornment agreement in such form and content as Buyer or Buyer's lender may
require.
16. CLOSING DELIVERIES.
16.1. Sellers' Deliveries. At the Closing (or such other times as may
be specified below), Sellers shall deliver or cause to be delivered to Buyer the
following, in form and substance reasonably acceptable to Buyer and Sellers:
16.1.1. Assignment of Interests. As to each Entity, an Assignment
and Assumption Agreement, an Amendment to the Entity Agreement, and an Amendment
to the filed Entity Certificate setting forth the assignment by each of the
Sellers of such Seller's Interests and his, her or its withdrawal from the
Entity and the admission of the Buyer and/or its designee(s) as partners of the
Entity, which amendment shall be executed and acknowledged by all Sellers and
the Buyer.
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16.1.2. Release. A release from each Seller releasing each Entity
and the Buyer (and its designee(s)) as partners of the Entities from any
obligations and liabilities with respect to the original formation of the
Entities, and any other matter arising from business done, transactions entered
into or events occurring prior to the Closing Date.
16.1.3. Opinion. The opinion, in form and substance reasonably
acceptable to Buyer and Buyer's counsel, of Dan R. Skowronski, Esquire, General
Counsel of Constellation Holdings, Inc., to the effect that, providing, or with
respect to:
(a) Each Entity is a duly organized and validly existing
entity in good standing under the laws of the State of Maryland;
(b) (i) the legal existence and good standing of each Entity
and each Seller in Maryland; (ii) the due authorization, execution and delivery
of this Agreement, and the other documents required (under the terms of this
Agreement) to be delivered by each Seller; (iii) that this Agreement and the
other documents required (under the terms of this Agreement) to be delivered by
each Seller, constitute the legal, valid and binding obligations of such Seller,
enforceable against it in accordance with their respective terms, except to the
extent that enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws of
general applicability relating to or affecting the enforcement of creditors'
rights and by the effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding of equity or at law;
(c) The execution and delivery of this Agreement and all
other agreements delivered in connection herewith or at the Closing, the
consummation of the transactions herein contemplated, and compliance with the
terms of this Agreement and all other agreements delivered in connection
herewith or at the Closing will not conflict with, or result in a breach of, any
of the terms, conditions or provisions of, or constitute a default under, any
note, indenture, mortgage, deed of trust, contract or other agreement or
instrument to which any Entity is a party or by which any Entity is bound, or
any law or order, rule, regulation, writ, injunction or decree of any
government, governmental instrumentality or court, domestic or foreign; and
(d) There is no litigation or investigation pending or, to
the best of such counsel's knowledge, threatened against any Entity, any
Project, or any part thereof.
16.1.4. Lenders' Approvals and Payoff Letters. The Lenders'
Approvals from all holders of the Assumed Indebtedness in conformity with
Section 14.1.5 and the payoff letters required by Section 14.1.6.
16.1.5. Estoppel Certificates. The Estoppel Certificates of all
Tenants in conformity with Section 15.2;
16.1.6. Keys. Keys to all locks located at each Project;
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16.1.7. Affidavit of Title and ALTA Statement. As to each Project,
an Affidavit of Title (or comparable document) as reasonably required by the
Title Company in the Commonwealth of Pennsylvania as a condition to the deletion
of the general exceptions of Schedule B, Section 2 of each Title Policy,
executed by the applicable Entity or Seller, as applicable, and in form and
substance acceptable to the Title Company and to Buyer;
16.1.8. Letters to Tenants. If requested by Buyer, letters
executed by the applicable Entities and, if applicable, its management agent,
addressed to all Tenants, in form provided by Buyer, notifying all Tenants of
the transfer of control of the Projects and directing payment of all rents
accruing after the Closing Date to be made to Buyer or at its direction;
16.1.9. Title Policies. The title policies (or "marked-up" Title
Reports) issued by the Title Company, dated as of the Closing Date in the amount
of the Consideration allocated to each Project, in accordance with the
requirements of Section 9 (it being understood that CPI as to Brandon will
provide any certificates or undertakings required in order to induce the Title
Company to insure over any "gap" period resulting from any delay in recording of
documents or later-dating the title insurance file);
16.1.10. Original Documents. To the extent not previously
delivered to Buyer, originals of the Leases, Assigned Contracts and Governmental
Approvals;
16.1.11. Closing Statement. A closing statement conforming to the
proration and other relevant provisions of this Agreement (the "Closing
Statement") duly executed by Sellers;
16.1.12. Plans and Specifications. All plans and specifications
relating to the Projects in any Entity's or Seller's possession and control or
otherwise available to any Entity or Seller;
16.1.13. Tax Bills. Copies of the most currently available Tax
Bills to the extent not previously delivered to Buyer;
16.1.14. Entity Transfer Certificate. Entity transfer
certifications confirming that each Seller is a "United States Person" within
the meaning of Section 1445 of the Internal Revenue Code of 1986, as amended;
16.1.15. Rent Roll. A Rent Roll, prepared as of the Closing Date,
certified by the applicable Sellers to be true, complete and correct through the
Closing Date;
16.1.16. Registration Rights Agreement. The Registration Rights
Agreement, dated as of the Closing Date and duly executed by the Sellers;
16.1.17. Share Schedule. The Share Schedule, duly executed by
Sellers;
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16.1.18. Certificates of Occupancy. Currently valid certificates
of occupancy (or comparable permits or licenses), to the extent in Sellers'
possession or control, with respect to the entirety of each Project;
16.1.19. Closing Certificate. A certificate, signed by Sellers,
certifying to the Buyer that the representations and warranties of Sellers
contained in this Agreement are true and correct on all material respects as of
the Closing Date and that all covenants required to be performed by Sellers
prior to the Closing Date have been performed in all material respects;
16.1.20. Resolutions, Consents, Approvals. Certified Resolutions,
consents, and approvals of each Sellers evidencing such Seller's authority to
execute this Agreement and consummate the transactions contemplated by this
Agreement.
16.1.21. Good Standing Certificate. Currently dated good standing
certificates for the Sellers and the Entities.
16.1.22. Deed. Special Warranty Deed, Executed by CPI, in
recordable form conveying Brandon to Buyer free and clear of all liens, claims
and encumbrances except for the Permitted Exceptions.
16.1.23. Bill of Sale. General Warranty Assignment and Bill of
Sale, executed by CPI, assigning, conveying and warranting to Buyer title to the
Personal Property and Inventory as to Brandon, free and clear of all
encumbrances, other than the Permitted Exceptions.
16.1.24. General Assignment. An assignment, executed by CPI to
Buyer, of all right, title and interest of Contributor and its agents in and to
the Intangible Personal Property as to Brandon.
16.1.25. Assignment of Contracts. An assignment, executed by CPI
and Buyer, to Buyer of CPI's right, title and interest in and to those of the
Contracts that will remain in effect after Closing. CPI shall also assign to
Buyer all guarantees and warranties given to CPI in connection with the
operation, construction, improvement, alteration or repair of any or all of
Brandon.
16.1.26. Assignment of Leases and Estoppel Certificates. An
assignment of CPI's right, title and interest in and to the Leases as to Brandon
(including all security deposits and/or other deposits thereunder), with
customary reciprocal indemnity provisions.
16.1.27. Option/ROFR. The signed Option/ROFR Agreements.
16.1.28. Constellation Lease. The signed Constellation Lease.
16.1.29. Development Management Agreement. The signed Development
Management Agreement.
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16.1.30. TIF Agreement. The signed TIF Agreement.
16.1.31. License Agreements. Signed License Agreements in form and
content reasonably acceptable to Sellers and Buyer giving Buyer, and Buyer's
successors and assigns, the right to use the names "National Business Park".
"Constellation Centre", and "Piney Orchard" in connection with the ownership and
operation of those Projects.
16.1.32. Articles of Transfer. Signed articles of transfer to the
extent required by the State Department of Assessments and Taxation of Maryland.
16.1.33. Other. Such other documents and instruments as may
reasonably be required by Buyer (including, without limitation, those of the
Seller's Deliveries in Seller's possession or control that have not previously
been delivered to Buyer), its (or its underwriters' or lenders') counsel or the
Title Company and that may be necessary to consummate the transactions that are
the subject of this Agreement and to otherwise give effect to the agreements of
the parties hereto.
16.2. Buyer's. As a condition precedent to Seller's obligation to close
("Seller's Condition Precedent"), Buyer shall cause to be delivered to Sellers
the following, each in form and substance reasonably acceptable to Sellers and
Buyer and their respective counsel:
16.2.1. The Consideration. The Consideration required to be
delivered by Buyer to Sellers under this Agreement.
16.2.2. Organizational Documents. (i) A copy certified by the
Secretary of State of the State of Maryland of the Declaration of Trust of the
REIT and a good standing certificate for the REIT; (ii) a copy certified by the
Secretary of State of the State of Delaware of the certificate of limited
partnership of the Buyer and a good standing certificate for the Buyer; and
(iii) a copy, certified by the secretary or an assistant secretary of the REIT,
of the resolution of the REIT's board of directors, authorizing the transactions
described herein;
16.2.3. Closing Statement. A Closing Statement, duly executed by
the Buyer;
16.2.4. Registration Rights Agreement. The Registration Rights
Agreement, duly executed by the REIT;
16.2.5. Share Schedule. Share Schedule, duly executed by the
Buyer;
16.2.6. Tenant Letters. If Buyer has requested such letters, the
Tenant Letters, duly executed by the Buyer;
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16.2.7. Opinion. An opinion of counsel for COPLP and the REIT, in
form and substance reasonably satisfactory to Seller and Seller's counsel,
providing or with respect to: (i) the legal existence and good standing of COPLP
and the REIT; (ii) the due authorization, execution and delivery of this
Agreement, and the other documents required (under the terms of this Agreement)
to be delivered by COPLP and the REIT, as applicable; (iii) that the Shares
issued and delivered to Sellers as part of the Consideration have been duly
authorized and validly issued by the REIT and constitute fully paid,
non-assessable shares of the REIT, free from all pre-emptive rights; (iv) that
this Agreement and the other documents required (under the terms of this
Agreement) to be delivered by each of COPLP and the REIT, as applicable,
constitute the legal, valid and binding obligations of COPLP and the REIT,
enforceable against them in accordance with their respective terms, except to
the extent that enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws of
general applicability relating to or affecting the enforcement of creditors'
rights and by the effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding of equity or at law;
16.2.8. ROFR. The signed ROFR Agreements.
16.2.9. Constellation Lease. The signed Constellation Lease;
16.2.10. Development Management Agreement. The signed Development
Management Agreement;
16.2.11. TIF Agreement. The signed TIF Agreement.
16.2.12. Licenses. The licenses referred to in Section 16.1.31.
16.2.13. Articles of Transfer. The articles of transfer referred
to in Section 16.1.32.
16.2.14. Other. Such other documents and instruments as may
reasonably be required by Sellers or its or their respective counsel or the
Title Company and that are necessary to consummate the transaction which is the
subject of this Agreement and to otherwise effect the agreements of the parties
hereto.
17. PRORATIONS AND ADJUSTMENTS.
The following shall be prorated and adjusted between Sellers and Buyer as of
the Closing Date, except as otherwise specified:
17.1. The amount of all security and other Tenant deposits, and
interest due thereon, if any, shall be credited to Buyer;
17.2. Buyer and Sellers shall divide the cost, if any, of any closing
escrows hereunder equally between them;
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17.3. Water, electricity, sewer, gas, telephone and other utility
charges based, to the extent practicable, on final meter readings and final
invoices, or, in the event final readings and invoices are not available, based
on the most currently available billing information, and reprorated upon
issuance of final utility bills;
17.4. Amounts paid or payable under any Assigned Contracts shall be
prorated based, to the extent practicable, on final invoices, or, in the event
final invoices are not available, based on the most currently available billing
information, and reprorated upon issuance of final invoices;
17.5. All real estate, personal property and ad valorem taxes
applicable to the Projects and levied with respect to current tax year shall be
prorated as of the Closing Date, utilizing the actual final Tax Bills for those
Projects. Prior to or at the Closing, Sellers shall pay or have paid all Tax
Bills that are due and payable prior to or on the Closing Date and shall furnish
evidence of such payment to Buyer and the Title Company. Each party's respective
obligations to reprorate real estate taxes shall survive the Closing.
17.6. All assessments, general or special, shall be prorated as of the
Closing Date on a "due date" basis such that the applicable Entity or Seller
shall be responsible for any installments of assessments which are first due or
payable prior to the Closing Date and Buyer shall be responsible for any
installments of assessments which are first due or payable on or after the
Closing Date;
17.7. Commissions of leasing and rental agents for any Lease entered
into as of or prior to the Contract Date, whether with respect to base lease
term or future expansions, shall be paid in full at or prior to the Closing by
Seller, without contribution or proration from Buyer, except for renewal
commissions as disclosed to Buyer in Exhibit "Commissions". As to Leases entered
into between the Contract Date and the Closing Date in accordance with Section
12.1, commissions shall be prorated as of the Closing Date based upon the
portion of the term of the Lease before Closing and the portion of the term of
this Lease after Closing. At Closing, COPT shall reimburse CPI the amount of
leasing commissions payable to unaffiliated third-parties and tenant
improvements costs payable to unaffiliated third-parties incurred by CPI with
respect to Leases entered into, subject to Section 12.1 of this Agreement, after
March 9, 1998 at the Project known as "One Constellation Centre", the amount
claimed for reimbursement evidenced by invoices or paid receipts from such third
parties or other evidence of expense reasonably required by Buyer..
17.8. Current interest under Assumed Indebtedness shall be prorated as
of the Closing Date.
17.9. All Base Rents and other charges, including, without limitation,
all Additional Rent, shall be prorated as of the Closing Date. At the time(s) of
final calculation and collection from Tenants of Additional Rent for 1998, there
shall be a re-proration between Sellers and Buyer as to Additional Rent
adjustments, with such re-prorations being payable to the
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appropriate recipient in cash. Such re-proration shall be paid upon Buyer's
presentation of its final accounting to Seller, certified as to accuracy by
Buyer. At the Closing, no "Delinquent Rents" (rents or other charges that are
due as of the Closing) shall be prorated in favor of Seller. The parties'
respective obligations to reprorate Additional Rent shall survive the Closing.
Notwithstanding the foregoing, Buyer shall use reasonable efforts after the
Closing Date to collect any Delinquent Rents due to Sellers from Tenants, but
Buyer shall not be required to sue any Tenants. All rents and other charges
received by (or for the benefit of) Buyer from any Tenant after the Closing
shall be first applied against current and past due obligations owed to, or for
the benefit of, Buyer (with respect to those obligations accruing subsequent to
the Closing Date), and any excess shall be delivered to Seller, but only to the
extent of amounts in default and owed to, and for the benefit of, Sellers for
the period prior to the Closing Date. In no event, however, shall any sums be
paid to Sellers to the extent Sellers have been previously reimbursed for such
default out of any security deposit and security deposits have been
appropriately prorated hereunder; and
17.10. Such other items that are customarily prorated in transactions
of this nature shall be ratably prorated.
17.11. With respect to the Project known as "Cranberry Square", at
Closing, Buyer shall reimburse CPI amounts expended by CPI from and after March
9, 1998 until the Closing Date on the expansion of the Cranberry Square Project,
subject, however, to the limitation, that the amount payable to CPI under this
Section 17.11 shall not exceed the amount determined by subtracting the costs to
complete the expansion of the Cranberry Square Project after the Closing Date as
reasonably determined by Buyer and Sellers from Two Million Two Hundred Thousand
Dollars ($2,200,000.00). Amounts claimed for reimbursement shall be evidenced by
invoices or paid receipts from third-parties not affiliated with CPI, or other
evidence of expense reasonably required by Buyer.
For purposes of calculating prorations, Buyer shall be deemed, through
control of the Entities, to be in title to the Projects, and therefore entitled
to the income therefrom and responsible for the expenses thereof, for the entire
Closing Date. All such prorations shall be made on the basis of the actual
number of days of the year and month that shall have elapsed as of the Closing
Date. Bills received after the Closing that relate to expenses incurred,
services performed or other amounts allocable to the period prior to the Closing
Date shall be paid, in cash, by Seller, to the extent due and owing. Bills
received by Sellers after the Closing Date that relate to expenses incurred,
services performed or other amounts allocable to the period on or after the
Closing Date, shall be paid, in cash, by the Buyer, to the extent due and owing.
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18. CLOSING EXPENSES.
18.1. Sellers will pay the entire cost of all assumption charges,
release fees, prepayment fees and any other fees or costs in connection with the
assumption, payoff, release and satisfaction of the Assumed Mortgages and the
Satisfied Mortgages, and all fees imposed by its accountants and attorneys and
consultants in connection with this Agreement and the transaction contemplated
hereunder. Buyer will pay the entire cost of the title policies, the Surveys
(inclusive of any updates thereof), and all fees imposed by its accountants,
attorneys, and environmental and engineering consultants.
18.2. Although Seller and Buyer believe that no real estate transfer or
recording fees or taxes will be due in connection with the assignment of the
Interests, if it is finally determined that such taxes are due and payable in
connection herewith, then the Buyer and the Sellers which held Interests the
transfer of which is deemed subject to real estate transfer tax shall divide
equally the costs of contesting such taxes and shall divide equally the full
amount of such taxes if they are finally determined to be payable. This Section
18.2 shall survive Closing.
18.3. Sellers and Buyer shall divide equally all recordation taxes and
fees, and all realty transfer taxes applicable to the conveyance of Brandon.
19. DESTRUCTION, LOSS OR DIMINUTION OF PROJECTS.
If, prior to the Closing, all or any portion of any Project is damaged by
fire or other natural casualty (collectively, "Damage"), or is taken or made
subject to condemnation, eminent domain or other governmental acquisition
proceedings (collectively, "Eminent Domain"), then the following procedures
shall apply:
19.1. If the aggregate cost of repair or replacement in connection with
any Damage at any Project or the value of the Eminent Domain involving any
single Project (collectively, "repair and/or replacement") is $200,000.00 or
less (on a per Project basis), in the mutual and reasonable opinions of Buyer
and Seller, Buyer shall close and take the Project(s) in question as diminished
by the Damage or Eminent Domain, as the case may be, subject to a reduction in
the Contribution Consideration otherwise due at the Closing, in the full amount
of the cost of repair and/or replacement. Any casualty insurance or condemnation
proceeds shall be the sole property of Seller.
19.2. If the aggregate cost of repair and/or replacement at any single
Project is greater than $200,000.00, in the mutual and reasonable opinions of
Buyer and Seller, then Buyer, in its sole and absolute discretion, may elect any
of the following options: (i) Buyer may delete and eliminate from this Agreement
any Project that is in need of repair and/or replacement in excess of
$200,000.00 by giving written notice to Seller, in which event (A) this
Agreement shall be deemed to have been automatically amended so as to eliminate
the deleted Projects herefrom, and (B) Buyer and Sellers shall proceed to close
on the remaining Projects (i.e., the non-deleted Projects) subject to an
appropriate and commensurate reduction in the Consideration (which reduction
shall include, without limitation, an amount equal to the full cost of repair
and/or
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replacement of any portion of any non-deleted Project that Buyer proceeds to
purchase); or (iii) Buyer may proceed to close on all of the Projects, subject
to (1) a reduction in the Consideration equal to $200,000.00, on a per Project
basis, otherwise due at the Closing and (2) an assignment of the proceeds of
Seller's casualty insurance proceeds for all Damage (or condemnation awards for
any Eminent Domain) in excess of $200,000.00, on a per Project basis, together
with payment to Buyer by Sellers of any uninsured or deductible amount not
covered by such proceeds. In such event, Sellers shall fully cooperate with
Buyer in the adjustment and settlement of the insurance claim or governmental
acquisition proceeding and if, as of the Closing, the insurance proceeds (or
condemnation award) assignable to Buyer shall not have been collected from the
insurer or Governmental Authority, then a cash credit in the amount thereof
shall be given to Buyer, to be repaid to Sellers out of and upon Buyer's actual
receipt of insurance proceeds. The proceeds and benefits under any rent loss or
business interruption policies attributable to the period following the Closing
shall likewise be transferred and paid over (and, if applicable, likewise
credited on an interim basis) to Buyer.
19.3. In the event of a dispute between Sellers and Buyer with respect
to the cost of repair and/or replacement with respect to the matters set forth
in this Section 19, an engineer designated by Sellers and an engineer designated
by Buyer shall select an independent engineer licensed to practice in the
jurisdiction where the Project in question is located who shall resolve such
dispute. All fees, costs and expenses of such third engineer so selected shall
be shared equally by Buyer and Seller.
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20. DEFAULT.
20.1. Default by Seller. If any of Sellers' representations and
warranties contained herein shall not be true and correct on the Contract Date
and continuing thereafter through and including the Closing Date, or if any
Seller fails to perform any of the covenants and agreements contained herein to
be performed by such Seller within the time for performance as specified herein
(including Seller's obligation to close), or if any of the Buyer's Conditions
Precedent shall not have been satisfied, Buyer may elect either to (i) terminate
Buyer's obligations under this Agreement by written notice to Sellers, in which
event Buyer shall retain all rights and remedies available to it; or (ii) close,
in which event Buyer may file an action for either or both of specific
performance and damages to compel Sellers to cure all or any of such default(s),
in whole or in part, whereupon Buyer shall be entitled to deduct from the
Consideration, the cost of such action and cure, and all reasonable expenses
incurred by Buyer in connection therewith, including, but not limited to,
attorneys' fees of Buyer's counsel. Notwithstanding anything to the contrary
herein and in addition to any other remedies of Buyer, Buyer shall be entitled
to recover actual (but not consequential) damages suffered by Buyer by reason of
Seller's defaults hereunder and/or any delay occasioned thereby, including,
without limitation, Buyer's Reasonable Costs. The remedies of Buyer set forth in
this Section 20.1 shall be in addition to remedies otherwise applicable or
provided in this Agreement or otherwise available to Buyer at law or in equity,
including, without limitation, specific performance, it being understood that
Buyer's rights and remedies under this Agreement shall always be non-exclusive
and cumulative and that the exercise of one remedy or form of relief available
to Buyer hereunder shall not be exclusive or constitute a waiver of any other.
Buyer's remedies under this Section 20.1 shall not be limited by Section 20.3.
20.2. Default by Buyer. In the event Buyer defaults in its obligations
to acquire the Interests and Brandon, then Sellers' sole and exclusive remedy
shall be to cause the Escrowee to deliver the Proceeds, together with all
interest earned thereon, to Seller, the amount thereof being fixed and
liquidated damages, it being understood that Sellers' actual damages in the
event of such default are difficult to ascertain and that such proceeds
represent the parties' best current estimate of such damages. Sellers shall have
no other remedy for any default by Buyer prior to Closing.
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20.3. Indemnification of Buyer.
20.3.1. Indemnification. Each of Seller and each of Seller's
shareholders, members and partners, jointly and severally, as the case may be,
shall and does hereby indemnify, protect, defend and hold the Buyer Indemnified
Parties harmless from and against any claims, losses, demands, liabilities,
suits, costs and damages suffered by the Buyer Indemnified Parties, including
consequential as well as actual damages and attorneys' fees of counsel selected
by the Buyer Indemnified Parties and other costs of defense, incurred, arising
against, or suffered by, the Buyer Indemnified Parties or its assigns as a
direct or indirect consequence of (i) any breach of any representation, warranty
or covenant made in this Agreement by Seller, or any other default by Seller,
whether discovered before or after the Closing or (ii) any default claim, action
or omission arising or alleging to arise under the Existing Loan Documents and
relating to the period prior to the Closing, whether asserted before or after
the Closing. This indemnification obligation shall expire eighteen (18) months
from the Closing Date, except as to claims under Section 13 of this Agreement
which may be made until thirty (30) months after the date of this Agreement, and
except as to claims under Section 11.1 which may be made until the expiration of
the time period under the statute of limitation applicable to such claims..
20.3.2. Limitation of Claims. No claims for indemnification under
this Agreement may be asserted by Buyer Indemnified Parties against the Sellers
until the aggregate amount of such indemnification claims exceeds $125,000.00,
whereupon all such amounts may be claimed.
20.4. Indemnification of Sellers.
20.4.1. Indemnification. Buyer shall indemnify, protect, defend
and hold Sellers' and each of Sellers' shareholders, members and partners (the
"Seller Indemnified Parties") harmless from and against any claims, losses,
demands, liabilities, suits, costs and damages suffered by the Seller
Indemnified Parties, including consequential as well as actual damages and
attorneys' fees of counsel selected by the Seller Indemnified Parties and other
costs of defense, incurred, arising against, or suffered by, the Seller
Indemnified Parties or its assigns as a direct or indirect consequence of any
breach of any representation, warranty or covenant made in this Agreement by
Buyer, or any other default by Buyer, whether discovered before or after the
Closing. This indemnification obligation shall survive Closing.
20.5. Buyer Notice and Right to Cure. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default hereunder by Buyer shall not be a default unless Sellers
shall have given Buyer notice of such default, and Buyer shall have failed to
cure the same within thirty (30) days after such notice. No notice of default
shall be required in the case of Buyer's default in failing to complete Closing
on the required Closing Date.
20.6. Sellers' Notice and Right to Cure. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default
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hereunder by Sellers shall not be a default unless Buyer shall have given
Sellers notice of such default, and Sellers shall have failed to cure the same
within thirty (30) days after such notice. No notice of default shall be
required in the case of Sellers' default in failing to complete Closing on the
required Closing Date.
21. SUCCESSORS AND ASSIGNS.
The terms, conditions and covenants of this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective nominees,
successors, beneficiaries and assigns; provided, however, no direct or indirect
conveyance, assignment or transfer of any interest whatsoever of, in or to any
or all of the Projects or of this Agreement shall be made by Sellers during the
term of this Agreement except to CPI Affiliates, as permitted in Section 11.1.4.
Buyer may assign all or any of its right, title and interest under this
Agreement to the Buyer, the REIT or to any corporate or partnership entity
affiliated with, or related to, the Buyer or the REIT ("Affiliate"). For
purposes of this Agreement, an Affiliate shall, without limitation, include any
entity having common ownership or management with Buyer or the REIT. No such
assignee shall accrue any obligations or liabilities hereunder until the
effective date of such assignment. In addition to its right of assignment, Buyer
shall also have the right, exercisable at or prior to the Closing, to designate
any Affiliate, as the contract party under any contract to be entered into at
Closing pursuant to the terms of this Agreement by Buyer, or as the grantee or
transferee of any or all of the conveyances, transfers and assignments to be
made by Sellers at the Closing hereunder, independent of, or in addition to, any
assignment of this Agreement. In the event of an assignment of this Agreement by
Buyer (but not in the event of the designation of any Affiliate), its assignee
shall be deemed to be the Buyer hereunder for all purposes hereof, and shall
have all rights of Buyer hereunder (including, but not limited to, the right of
further assignment). In the event that an Affiliate shall be designated as a
transferee hereunder, that transferee shall have the benefit of all of the
representations and rights which, by the terms of this Agreement, are
incorporated in or relate to the conveyance in question.
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22. LITIGATION.
Sellers and Buyer waive all rights to a jury trial with respect to any
disputes relating to this Agreement, whether arising before or after Closing. In
the event of litigation between the parties with respect to any Project, this
Agreement, the performance of their respective obligations hereunder or the
effect of a termination under this Agreement, the losing party shall pay all
costs and expenses incurred by the prevailing party in connection with such
litigation, including, but not limited to, reasonable attorneys' fees of counsel
selected by the prevailing party. The parties hereby further acknowledge and
agree that in the event of litigation between them, as contemplated above, and
the resolution of that litigation through compromise, settlement, or partial
judgment, the court before which such litigation is initially brought shall have
the right to allocate responsibility, between Sellers and Buyer, for all costs
and expenses (including, but not limited to, attorneys' reasonable fees)
incurred by both Sellers and Buyer in the pursuit of that litigation resolved
through compromise, settlement or partial judgment. Notwithstanding any
provision of this Agreement to the contrary, the obligations of the parties
under this Section 22 shall survive termination of this Agreement and the
Closing, if applicable.
23. NOTICES.
Any notice, demand or request which may be permitted, required or desired to
be given in connection therewith shall be given in writing and directed to
Sellers and Buyer as follows:
Sellers:
Constellation Real Estate, Inc.
8815 Centre Park Drive - Suite 400
Columbia, MD 21045
Attention: General Counsel
and
Constellation Holdings, Inc.
250 West Pratt Street
Baltimore, MD 21201-2423
Attention: Dan R. Skowronski, Esquire
With a copy to its attorneys:
Stephen L. Owen, Esquire
Piper & Marbury LLP
36 South Charles Street
Baltimore, MD 21201-3018
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Buyer:
Corporate Office Properties Trust
One Logan Square, Suite 1105
Philadelphia, PA 19103
Attention: Clay W. Hamlin, III
President and Chief Executive Officer
With a copy to its attorneys:
F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street - 38th Floor
Philadelphia, PA 19102
Notices shall be deemed properly delivered and received when and if either (i)
personally delivered, including via facsimile; or (ii) on the first business day
after deposit with a commercial overnight courier for delivery on the next
business day. Any party may change its address for delivery of notices by
properly notifying the others pursuant to this Section 23.
24. BENEFIT.
This Agreement is for the benefit only of the parties hereto and their
nominees, successors, beneficiaries and assignees as permitted in Section 21
above and no other person or entity shall be entitled to rely hereon, receive
any benefit herefrom or enforce against any party hereto any provision hereof.
25. LIMITATION OF LIABILITY.
25.1. Upon the Closing, neither the REIT nor the Buyer shall assume or
undertake to pay, satisfy or discharge any liabilities, obligations or
commitments of Sellers other than those specifically agreed to between the
parties and set forth in this Agreement. Except as otherwise specifically
provided in this Agreement, neither the REIT nor the Buyer shall assume or
discharge any debts, obligations, liabilities or commitments of Seller, whether
accrued now or hereafter, fixed or contingent, known or unknown. Neither the
holders of Shares nor the trustees, officers, employees or agents of the REIT
shall be liable under this Agreement and all parties hereto shall look solely to
the REIT assets for the payment of any claim or for the performance of any
obligation of the REIT as a party to this Agreement, both in its own capacity
and in its capacity as a general partner of the Buyer.
25.2. None of the shareholders, directors, officers, employees or
agents of the Sellers shall be liable under this Agreement and all parties
hereto shall look solely to the Sellers' assets for the payment of any claim or
for the performance of any obligation of the Sellers as a party to this
Agreement.
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26. BROKERAGE.
Each party hereto represents and warrants to the other that it has dealt
with no brokers or finders in connection with this transaction and that no
broker, finder or other party is entitled to a commission, finder's fee or other
similar compensation as a result hereof, except Legg Mason Real Estate Services,
Inc. under separate agreement with Buyer. Buyer shall pay to Legg Mason Real
Estate Services, Inc. the compensation payable to it with respect to this
transaction. Sellers hereby indemnify, protect and defend and hold Buyer
harmless from and against all losses, claims, costs, expenses, damages
(including, but not limited to, attorneys' fees of counsel selected by Buyer)
resulting or arising from the claims of any broker, finder or other such party,
claiming by, through or under the acts or agreements of any Seller. Buyer hereby
indemnifies, defends and holds each Seller harmless from and against all losses,
claims, costs, expenses, damages (including, but not limited to, attorneys' fees
of counsel selected by such Seller) resulting or arising from the claims of any
broker, finder or other such party claiming by, through or under acts or
agreements of Buyer. This Section 26 shall survive any termination of this
Agreement and the Closing, if applicable.
27. REASONABLE EFFORTS.
Sellers and Buyer shall use their reasonable, diligent and good faith
efforts, and shall cooperate with and assist each other in their efforts, to
obtain any and all consents and approvals of third parties (including, but not
limited to, governmental authorities) to the transaction contemplated hereby,
and to otherwise perform as may be necessary or otherwise reasonably requested
by the other party to effectuate and carry out the purposes of, this Agreement.
28. MISCELLANEOUS.
28.1. Entire Agreement. This Agreement, the Services Company Agreement,
and the two option agreements described above constitute the entire
understanding between the parties with respect to the transaction contemplated
herein, and all prior or contemporaneous oral agreements, understandings,
representations and statements, and all prior written agreements,
understandings, letters of intent and proposals are merged into this Agreement.
Neither this Agreement nor any provisions hereof may be waived, modified,
amended, discharged or terminated except by an instrument in writing signed by
the party against which the enforcement of such waiver, modification, amendment,
discharge or termination is sought, and then only to the extent set forth in
such instrument.
28.2. Time of the Essence. Time is of the essence of this Agreement. If
any date herein set forth for the performance of any obligations by Sellers or
Buyer or for the delivery of any instrument or notice as herein provided should
be on a Saturday, Sunday or legal holiday, the compliance with such obligations
or delivery shall be deemed acceptable on the next business day following such
Saturday, Sunday or legal holiday. As used herein, the term "legal holiday"
means any state or federal holiday for which financial institutions or post
offices are generally closed in the State of Maryland for observance thereof.
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28.3. Conditions Precedent. 28.3.1. The obligations of Buyer to make
the payments and deliver the Shares as described in Section 3 above and to close
the transaction contemplated herein are subject to the express Buyer's
Conditions Precedent set forth in this Agreement, each of which is for the sole
benefit of Buyer and may be waived at any time by written notice thereof from
Buyer to Seller. The waiver of any particular Buyer's Condition Precedent shall
not constitute the waiver of any other.
28.3.2. The obligations of Sellers to close the transaction
contemplated herein are subject to the express Sellers' Condition Precedent set
forth in this Agreement, each of which is for the sole benefit of Sellers and
may be waived at any time by written notice thereof from Sellers to Buyer. The
waiver of any particular Sellers' Condition Precedent shall not constitute the
waiver of any other.
28.4. Construction. This Agreement shall not be construed more strictly
against one party than against the other merely by virtue of the fact that it
may have been prepared by counsel for one of the parties, it being recognized
that both Sellers and Buyer have contributed substantially and materially to the
preparation of this Agreement. The headings of various Sections in this
Agreement are for convenience only, and are not to be utilized in construing the
content or meaning of the substantive provisions hereof.
28.5. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland.
28.6. Partial Invalidity. The provisions hereof shall be deemed
independent and severable, and the invalidity or partial invalidity or
enforceability of any one provision shall not affect the validity of
enforceability of any other provision hereof.
28.7. Expenses. Except and to the extent as otherwise expressly
provided to the contrary herein, Buyer and Sellers shall each bear its own
respective costs and expenses relating to the transactions contemplated hereby,
including, without limitation, fees and expenses of legal counsel or other
representatives for the services used, hired or connected with the proposed
transactions mentioned above.
28.8. Control of Defense Counsel. Each indemnified party shall give
reasonably prompt notice to each indemnifying party of any action or proceeding
commenced against the indemnified party in respect of which indemnity may be
sought hereunder, but failure so to notify an indemnifying party (i) shall not
relieve it from any liability which it may have under any indemnity provided
herein unless and to the extent it did not otherwise learn of such action and
the lack of notice by the indemnified party results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) shall not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party hereunder other than its indemnification obligation if the indemnifying
party so elects within a reasonable time after receipt of such notice, the
indemnifying party may assume the defense of such action or proceeding at such
indemnifying party's own expense with counsel chosen by the indemnifying
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party; provided, however, that, if such indemnified party or parties reasonably
determine that a conflict of interest exists where it is advisable for such
indemnified party or parties to be represented by separate counsel or that, upon
advice of counsel, there may be legal defenses available to them which are
different from or in addition to those available to the indemnifying party, then
the indemnifying party shall not be entitled to one separate counsel at the
indemnifying party's expense. If an indemnifying party is not so entitled to
assume the defense of such action or does not assume such defense, after having
received the notice referred to in the first sentence of this Section 28.8 , the
indemnifying party or parties will pay the reasonable fees and expenses of
counsel for the indemnified party or parties. In such event however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party. If an indemnifying party is entitled
to assume, and assumes, the defense of such action or proceeding in accordance
with this Section, such indemnifying party shall not be liable for any fees and
expenses of counsel for the indemnified parties incurred thereafter in
connection with such action or proceeding.
28.9. Waiver of Conditions Precedent. Buyer and Sellers shall each have
the right, in its sole and absolute discretion, to waive any Condition Precedent
for its benefit contained in this Agreement.
28.10. Certain Securities Matters. No sale of Shares is intended by the
parties by virtue of their execution of this Agreement.
28.11. Counterparts. This Agreement may be executed in any number of
identical counterparts, any of which may contain the signatures of less than all
parties, and all of which together shall constitute a single agreement.
28.12. Calculation of Time Periods. Notwithstanding anything to the
contrary contained in this Agreement, any period of time provided for in this
Agreement that is intended to expire on or prior to the Closing Date, but that
would extend beyond the Closing Date if permitted to run its full term, shall be
deemed to expire upon the Closing.
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IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Acquisition Agreement on the date first above written.
Buyer:
CORPORATE OFFICE PROPERTIES,
L.P.
By: Corporate Office Properties Trust,
its sole general partner
BY: /s/ Clay W. Hamlin, III
-------------------------------------
Clay W. Hamlin, III, President and
Chief Executive Officer
[SIGNATURES CONTINUED ON NEXT PAGE]
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SELLERS:
CONSTELLATION PROPERTIES, INC.
a Maryland corporation
BY: /s/ Randall M. Griffin
--------------------------------------
Printed Name: Randall M. Griffin
Title: President
NBP-I LIMITED PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
NBP-II LIMITED PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
NBP-IV, LLC
a Maryland limited liability company
BY: CPI National Business Park IV, Inc.,
a Maryland corporation, Member
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
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ST. BARNABAS LIMITED PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
BY: CPO Constellation Centre, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
LAUREL TOWER ASSOCIATES LIMITED
PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
BY: CPO Laurel Tower, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
62
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THREE CENTRE PARK ASSOCIATES LIMITED
PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
BY: CPO Three Centre Park, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
63
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BROWN'S WHARF LIMITED PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
BY: CPI Brown's Wharf, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
CRANBERRY-140 LIMITED PARTNERSHIP
a Maryland limited partnership
BY: Constellation Properties, Inc.,
a Maryland corporation, General Partner
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
TRED LIGHTLY LIMITED LIABILITY COMPANY
a Maryland limited liability company
BY: CPI Tred Avon, Inc.
a Maryland corporation, Member
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
CONSTELLATION GATESPRING, LLC
a Maryland limited partnership
BY: CPI Gatespring, Inc.,
a Maryland corporation, Member
BY: /s/ Randall M. Griffin
-------------------------------------
Printed Name: Randall M. Griffin
Title: President
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SERVICE COMPANY ASSET
CONTRIBUTION AGREEMENT
SERVICE COMPANY ASSET CONTRIBUTION AGREEMENT, entered into as of the 14 day
of May, 1998, by and among Constellation Real Estate, Inc., a Maryland
corporation ("Seller"), KMS Oldco, Inc. a Maryland corporation ("KMS") and
Constellation Real Estate Group, Inc. a Maryland corporation ("CREG"), (KMS and
CREG are collectively referred to herein as the "Shareholders"), and Corporate
Office Properties, L.P., a Delaware limited partnership ("COP") and Corporate
Office Properties Trust, a Maryland real estate investment trust ("COPT"). COP
and COPT are collectively referred to herein as "Buyer."
W I T N E S S E T H:
Seller is engaged directly, and indirectly through its controlling ownership
interest in Constellation Realty Management, LLC, a Maryland limited liability
company ("CRM") in the business of managing real property. Shareholders are the
owners of all the issued and outstanding capital stock of Seller.
COPT is the sole General Partner of COP. COP and COPT have this day entered
into a certain Contribution Agreement and certain Development Agreements which
provide, inter alia, for the transfer to Buyer of certain ownership interests in
entities which are Affiliates of Seller and the Shareholders and which own real
property, some of which real property has been managed by Seller or CRM.
Seller wishes to sell and Buyer wishes to buy certain assets owned by
Seller, including all of Seller's interest as a member in CRM, and Buyer wishes
to assume certain of Seller's liabilities.
In consideration of the mutual agreements, covenants, representations and
warranties contained herein, and each intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE 1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" as to a Person shall mean a Person that controls, is controlled by
or under common control with such Person.
"Accredited Investor" shall have the meaning set forth in Regulation D
promulgated under the Securities Act of 1933, as amended.
<PAGE>
"Agreement" means this Service Company Asset Contribution Agreement.
"Assets" has the meaning set forth in Section 2.1 (a) of the Agreement.
"Assumed Liabilities" has the meaning set forth in Section 2.5 (b) of the
Agreement.
"Authorizations" has the meaning set forth in Section 8.3 of the Agreement.
"Balance Sheet Date" means April 30, 1998.
"Business" means the operations and activities of Seller insofar as they relate
to the real properties which are owned by the entities whose interests are
being transferred to Buyer pursuant to the terms of the Contribution
Agreement and the Development Agreements.
"Buyer" means COP and COPT together.
"Closing" means the closing of the purchase and sale of the Assets and the CRM
Interest pursuant to the terms of this Agreement.
"Closing Date" means the date on which the Closing shall occur.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contracts" has the meaning set forth in Section 2.1 (a) (iii) of the Agreement.
"Contribution Agreement" means that Contribution Agreement dated as of May __,
1998 by and between Buyer and the Persons identified therein as "Sellers".
"COP" means Corporate Office Properties, L.P.
"COPT" means Corporate Office Properties Trust.
"CREG" means Constellation Real Estate Group, Inc.
"CRM" means Constellation Realty Management, LLC.
"CRM Balance Sheet" means the balance sheet of CRM as of April 30, 1998 included
on Schedule 4.8 to the Agreement.
"CRM Financial Statement" has the meaning set forth in Section 4.8 of the
Agreement.
"CRM Interest" means the seventy five percent (75%) ownership interest in CRM,
comprising all the issued and outstanding Class A Units of CRM, owned by
Seller as a member of CRM.
"CRM Operating Agreement" means that Operating Agreement dated April 17,1996
between Seller and KLNB, LLC, attached hereto as Exhibit "A".
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<PAGE>
"Deficiencies" has the meaning set forth in Section 9.2 of the Agreement.
"Development Agreements" means those two Development Properties Acquisition
Agreements each dated as of May __, 1998 by and between Buyer and the
Persons identified therein as "Sellers".
"Employee Benefit Plan" means employee benefit plans as defined in Section 3(3)
of ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Excluded Assets" has the meaning set forth in Section 2.1 (c) of the Agreement.
"GAAP" means generally accepted accounting principles, consistently applied.
"Informational Materials" shall have the meaning set forth in Section 4.30 of
the Agreement.
"KMS" means KMS Oldco, Inc.
"Law" means any law, including, without limitation, any (i) principle of common
law, (ii) federal, state or local statute, ordinance, rule or regulation,
(iv) federal, state or local permit, license or certificate, or (iv)
judgment, order, decree, award or other decision or requirement of any
arbitrator, court, government or governmental agency or instrumentality
(domestic or foreign).
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, organization, trust or other entity.
"Purchase Price" has the meaning set forth in Section 2.2 of the Agreement.
"SEC Reports" means the following documents filed to date by COPT with the
Securities and Exchange Commission pursuant to either the Securities
Exchange Act of1934, as amended or the Securities Act of 1933, as amended:
Annual report on Form 10- K for the year ended December 31, 1997; Proxy
Statement dated February 11, 1998; Prospectus dated April 22, 1998 included
in registration statement number 333-47465 filed pursuant to Rule 424(b);
and, Quarterly Report on Form 10_Q for the three months ended March 31,
1998.
"Seller" means Constellation Real Estate, Inc.
"Shares" has the meaning set forth in Section 2.2 of the Agreement.
"Shareholders" means, collectively, KMS and CREG, and "Shareholder" means any
one of the Shareholders.
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"Taxes" means all Federal, state, local and foreign income, property, sales,
excise and other taxes or governmental charges of any nature whatsoever.
"Transaction Documents" has the meaning set forth in Section 4.2 of the
Agreement.
ARTICLE 2. TERMS OF ASSET PURCHASE; CLOSING.
2.1 Sale and Purchase of Assets and CRM Interest.
(a) In reliance on the representations, warranties, covenants and
agreements herein, and subject to the terms and conditions hereof, Seller shall
sell, convey, transfer and assign to Buyer, and Buyer shall purchase from
Seller, all of Seller's right, title and interest in and to substantially all of
the tangible and certain intangible assets owned or used by Seller in the
Business as of the Closing Date (the "Assets"). It is understood and agreed that
all or a portion of the Assets may be contributed to, and owned by, single
member limited liability companies in which Seller is the sole member, in which
case Seller shall sell and Buyer shall purchase (or cause to be purchased) all
of the interests of such entities. The Assets include, without limitation, the
following:
(i) all trade fixtures, fixed and movable equipment, and office
equipment (including, without limitation, all repair and replacement parts),
furniture, all useable inventory of office supplies, and all other items of
tangible personal property used or employed in the conduct and operation of its
business as of the date of Closing;
(ii) all files and other documents and records and all books,
ledgers, files and business records related to the Business;
(iii) all rights existing under management service agreements,
equipment leases, contracts, real property leases, supply agreements, purchase
orders, and all other agreements, commitments and understandings, to the extent
the same relate to the Business and are assignable (collectively, the
"Contracts");
(iv) all telephone numbers of Seller related to the Business;
(v) all permits, licenses, registrations, filings, authorizations
and approvals (and pending applications for any thereof) to the extent the same
relate to the Business and are assignable by Seller to Buyer;
(vi) all prepaid items, utility and other deposits related to the
Business and to which Seller is entitled, supplier lists related to the
Business, and to the extent assignable, all present and future causes of action
and claims against third parties related to the Business;
(vii) all rights to operate as a going concern, to hire any past
or present employees, and to do business with all present customers and
suppliers, and all right and title to and interest in all goodwill of its
business;
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<PAGE>
(viii) all computer equipment, databases, software and software
licenses related to the Business (it being understood and agreed that all such
equipment and information, both hard copy and computer-based, which is not
related to the Business shall not be part of the Assets); and
(ix) an amount of cash which shall be no less than the aggregate
amount of all accrued but unpaid payroll, incentive pay, vacation and associated
payroll taxes and benefit payments which Seller is required to pay for the
current payroll period in which the Closing occurs (and any other unpaid amounts
from prior periods) but only to the extent such amounts relate to the employees
of Seller that will be employed by Buyer or an Affiliate of Buyer immediately
after Closing.
(b) In reliance on the representations, warranties, covenants and
agreements herein, and subject to the terms and conditions hereof, Seller shall
sell, convey, transfer and assign to Buyer, and Buyer shall purchase from
Seller, all of Seller's right, title and interest in and to the CRM Interest.
(c) The following are not included in the Assets (the "Excluded
Assets"):
(i) all right, title and interest in and to Seller's name and the
service marks, trade names, trademarks and copyrights, including all
registrations and variances thereof, logos used in connection therewith, the
right to sue for past infringements thereof, and all goodwill associated with
such marks and rights;
(ii) intercompany and other accounts receivable of Seller;
(iii) trade fixtures, fixed and movable equipment, and office
equipment (including, without limitation, a reasonable amount of repair and
replacement parts), furniture, a reasonable amount of useable inventory of
office supplies, and all other items of tangible personal property used or
employed in the conduct and operation of its business as of the date of Closing
by those employees who will not be employed by Buyer or an Affiliate of Buyer
immediately after Closing; and,
(iv) other items of personal property set forth on Schedule
2.1(c).
2.2 Purchase Price and Payment. As consideration for the Assets and the CRM
Interest, COPT shall deliver to Seller the aggregate number of shares of COPT
Common Shares and COPT Convertible Preferred Shares (collectively, the "Shares")
set forth on Schedule 2.2. (the "Purchase Price"). It is agreed that the value
of the Purchase Price is Two Million Five Hundred Thousand Dollars ($2,500,000).
The Purchase Price shall be allocated among the Assets and the CRM Interest in
the manner required by Section 1060 of the Code, and as set forth on Schedule
2.2 hereto. Seller and Buyer hereby agree to timely file Internal Revenue
Service Form 8594 and any other required Federal or State tax form with respect
to such allocation. No party hereto shall take, for income tax purposes, any
position inconsistent with such allocation.
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<PAGE>
2.3 Expenses. Seller, the Shareholders, COP and COPT will each bear their
respective legal, accounting and other expenses incurred in connection with the
investigation, negotiation, preparation, review, execution, performance and
enforcement of this Agreement, and in connection with the transactions
contemplated hereby.
2.4 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall be held immediately following, and at the same place as
the closing of the transactions contemplated by the Contribution Agreement, or
at such other time and place as may be mutually agreed upon by Buyer and Seller.
2.5 Assumption of Liabilities.
(a) Buyer assumes no liabilities of, or related to, CRM. Except as
expressly set forth in Section 2.5(b), neither the execution of this Agreement
nor the consummation of the transactions contemplated herein shall obligate
Buyer to pay any fixed or contingent, known or unknown, secured or unsecured
obligation, debt or liability of Seller or any Shareholder, whether arising
before or after the Closing, it being the express intention of the parties that
Seller and the Shareholders shall be responsible for the payment of all their
respective obligations, debts and liabilities, including, but not limited to,
indebtedness to banks and other financial institutions, indebtedness to current
and former employees, officers, directors or shareholders of Seller, and,
liability for payment of any and all accrued and unpaid salaries and wages, sick
pay, vacation pay, time off or pay in lieu thereof, and any employee benefit due
any employee.
(b) Notwithstanding the foregoing, Buyer agrees to assume the following
obligations of Seller, and no others (the "Assumed Liabilities"):
(i) obligations of Seller under the Contracts set forth on
Schedule 2.5(b) hereto, but only to the extent that performance of such
obligations is to occur after Closing, or payment of sums due thereunder are in
consideration for products or services rendered to Buyer after the Closing Date;
(ii) accounts payable then current and as agreed to in writing by
Buyer and Seller at or prior to Closing; and
(iii) accrued payroll for the employees of Seller that will be
employed by Buyer or an Affiliate of Buyer immediately after the Closing, and
associated payroll taxes for the Seller's current payroll period in which the
Closing Date occurs, as agreed to in writing by Buyer and Seller at or prior to
Closing.
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<PAGE>
ARTICLE 3. COVENANTS OF SELLER AND THE SHAREHOLDERS.
Seller and the Shareholders jointly and severally covenant and agree to and
with Buyer as follows:
3.1 Activities Pending Closing. Except as expressly provided herein, between
the date hereof and Closing, unless Seller shall have received the prior written
consent of Buyer to the contrary, Seller shall, and Seller and the Shareholders
shall cause each of Seller and CRM to use their commercially reasonable best
efforts to:
(i) maintain its existence, pay and discharge all debts,
liabilities and obligations as they become due, and operate solely in the
ordinary course of business in a manner consistent with past practice and the
provisions of this Agreement and in compliance in all material respects with all
applicable Law and all contracts and agreements to which Seller or CRM is a
party or by which its assets are bound;
(ii) maintain its facilities and assets in the same state of
repair, order and condition as they were on the date hereof, reasonable wear and
tear excepted;
(iii) maintain its books and records in accordance with past
practice, and use maintain in full force and effect all insurance policies and
binders;
(iv) preserve intact its present organization and maintain its
relations and goodwill with suppliers, customers, employees and others having
relationships with it;
(v) promptly advise Buyer in writing of the threat or commencement
against Seller or CRM of any dispute, claim, action, suit, proceeding,
arbitration or investigation that could materially adversely affect Seller or
CRM, or the assets of any Shareholder, or that challenges, or may affect the
validity of, this Agreement or any other Transaction Document or any action
taken or to be taken in connection with this Agreement or any other Transaction
Document or the ability of any party hereto to consummate the transactions
contemplated herein or therein; and
(vi) promptly advise Buyer in writing of any event or the
existence of any fact which makes untrue, or will make untrue as of the Closing,
any representation or warranty of Seller or the Shareholders set forth in this
Agreement or in any Transaction Document.
3.2 Negative Covenants. Except as expressly provided herein, between the
date hereof and the Closing, without the prior written consent of Buyer, Seller
shall not, and Seller and the Shareholders shall cause each of Seller and CRM
not to:
(i) take any action (regardless of whether such action might
otherwise be permitted hereunder), or (through inaction) permit to occur any
event, that would, or could reasonably be expected to, result in any
representation of Seller or a Shareholder contained in this Agreement being
untrue in any material respect or the breach or nonfulfillment of any warranty,
covenant or other obligation of Seller or a Shareholder in this Agreement;
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<PAGE>
(ii) amend its Articles of Incorporation or Bylaws (in the case of
Seller) or the CRM Operating Agreement (in the case of CRM) or any other
instrument regulating its conduct, including but not limited to agreements among
its owners;
(iii) fail to pay or discharge when due any liability or
obligation of Seller related to the Business or CRM;
(iv) enter into or renew, extend, amend or terminate any
agreement, commitment or transaction, which entry, renewal, extension, amendment
or termination is not in the ordinary course of business and consistent with
past practice, or which is material to Seller's operations or financial
condition or CRM's operations or financial condition;
(v) settle or compromise any material pending or threatened
litigation or proceeding related to the Business or to CRM;
(vi) other than transactions in the ordinary course of business
consistent with prior practice, sell, lease, license, encumber or otherwise
dispose of, or agree to sell, lease, license, encumber or otherwise dispose of,
any assets that are material, individually or in the aggregate, to it;
(vii) except in the ordinary course of business, incur or guaranty
any indebtedness or make any loan;
(viii) acquire any other business or interest therein;
(ix) create, enter into, adopt, amend (except as may be required
by Law) or terminate any employee benefit plan or any compensatory or benefit
agreement, arrangement, plan or policy with respect to any employee or, except
for normal increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense, increase in any manner the compensation or
fringe benefits of any employee or consultant or pay any benefit not required by
any plan and arrangement as in effect as of the date hereof or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing; or
(x) agree to do any of the foregoing.
3.3 Access to Information. Prior to the Closing, Seller shall, during
ordinary business hours and at mutually convenient times, give Buyer and its
authorized representatives reasonable access to all of its and CRM's personnel,
books, records, offices and other facilities and properties, and permit Buyer to
make such inspections thereof as Buyer may reasonably request, and cause its and
CRM's officers and advisors to furnish Buyer with such financial, operating and
other information regarding the Business and CRM as Buyer may reasonably
request.
3.4 Confidentiality. Seller and the Shareholders will keep confidential and
use their best efforts to cause their affiliates and instruct its and their
respective officers, managers, directors, employees and advisors to keep
confidential all nonpublic information
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relating to the transactions contemplated hereby, except as required by law or
administrative process and except for information which becomes public other
than as a result of a breach of this Section 3.4.
3.5 Other Transactions. Prior to the Closing neither Seller nor any of the
Shareholders shall, nor shall they permit any of their Affiliates, officers,
directors, advisors or other representatives to, directly or indirectly,
encourage, solicit, initiate or participate in discussions or negotiations with,
or provide any information or assistance to, any Person other than Buyer and its
representatives concerning any merger, sale of securities, sale of assets or
similar transactions involving the Seller or CRM In the event Seller or any of
the Shareholders receive an inquiry or proposal relating to any such
transaction, it or he will promptly notify Buyer thereof.
3.6 Supplemental Disclosure. Seller and the Shareholders shall promptly
supplement or amend each Schedule hereto with respect to any material matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in such
Schedule; provided, however, that any such supplemental or amended disclosures
shall not be deemed to have been disclosed as of the date of this Agreement
unless so agreed to in writing by Buyer.
3.7 Employees and Contractors. Seller and the Shareholders shall use their
best efforts to assist Buyer in retaining the services of those employees of
Seller and independent contractors with Seller that are identified by Buyer for
such purpose.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS.
Seller and each of the Shareholders jointly and severally represent and
warrant to Buyer as follows:
4.1 Status. Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland, and has all requisite
corporate power and authority to conduct its business as it has been and is now
conducted, to own and lease the assets it owns and leases and to perform its
obligations pursuant to each agreement and instrument by which it is bound. CRM
is a limited liability company duly organized, validly existing and in good
standing under the laws of the State of Maryland, and has all requisite power
and authority to conduct its business as it has been and is now conducted, to
own and lease the assets it owns and leases and to perform its obligations
pursuant to each agreement and instrument by which it is bound. Neither Seller
nor CRM is required to be qualified to do business as a foreign corporation or
company in any jurisdiction except as follows: CRM is qualified to do business
in Virginia, Delaware, New Jersey, West Virginia, North Carolina, the District
of Columbia and Pennsylvania; and, Seller is qualified to do business in
Maryland and District of Columbia.
4.2 Power and Authority. Seller and each Shareholder has full legal right,
power and authority to enter into and perform its and his obligations under this
Agreement and under the other agreements and documents required to be delivered
by it hereunder prior to or at the Closing, if any (the "Transaction
Documents"). The execution, delivery and
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performance by Seller of this Agreement and the other Transaction Documents have
been duly authorized by all necessary corporate action. This Agreement has been
duly and validly executed and delivered by the Seller and by each Shareholder
and constitutes the legal, valid and binding obligation of each of them,
enforceable against each of them in accordance with its terms. When executed and
delivered as contemplated herein, each of the Transaction Documents shall
constitute the legal, valid and binding obligation of Seller and each
Shareholder, as the case may be, enforceable against each of them in accordance
with its terms, subject to bankruptcy and insolvency laws, and to equitable
principles which may be imposed by courts.
4.3 No Conflicts. The execution, delivery and performance of this Agreement
and the other Transaction Documents do not and will not (with or without the
passage of time or the giving of notice): (i) violate or conflict with Seller's
Articles of Incorporation or Bylaws, the CRM Operating Agreement or any Law
binding upon Seller or CRM; (ii) violate or conflict with, result in a breach
of, or constitute a default or otherwise cause any loss of benefit under, any
agreement or other obligation to which CRM, Seller or any Shareholder is a party
or by which any of them (or the assets of any of them) is bound, or give to any
other party any rights (including, without limitation, rights of termination,
foreclosure, cancellation or acceleration) in, or with respect to, Seller, the
CRM Interest or any of the Assets; or (iii) result in, require, or permit the
creation or imposition of, any restriction, mortgage, deed of trust, pledge,
lien, security interest or other charge, claim or encumbrance upon, or with
respect to, Seller, the CRM Interest or any of the Assets.
4.4 Shareholders. The Shareholders are the registered and beneficial owners
of one hundred percent (100%) of the issued and outstanding capital stock of the
Seller free and clear of any claims, liens, encumbrances, security interests,
options, charges or restrictions whatever. No shares of the capital stock of the
Seller are subject to any voting trust agreement or other contract, agreement,
arrangement, commitment or understanding, including any such agreement,
arrangement, commitment or understanding restricting or otherwise relating to
the voting, dividend rights or disposition of the capital stock. There are no
outstanding options, warrants, rights, puts, calls, commitments, or other
contracts, arrangements (including "phantom" stock arrangements), or
understandings with respect to its capital stock issued by or binding upon the
Seller. There are no obligations or agreements, written or otherwise, requiring
or otherwise providing for the Seller to (x) make any dividend or other
distribution, direct or indirect, on or account of any shares of any class of
stock, now and hereafter outstanding, of the Seller or pursuant to any "phantom"
stock arrangement; or (y) make any redemption, purchase or other acquisition,
direct or indirect, of any shares of any class of stock of the Seller now or
hereafter outstanding or of any warrants or rights to purchase any such stock
(including, without limitation, the repurchase of any such stock or warrant or
any refund of the purchase price thereof in connection with the exercise by the
holder thereof of any right of rescission or similar remedies with respect
thereto).
4.5 Investments, Subsidiaries and Controlled Entities. Except as set forth
on Schedule 4.5, neither Seller nor CRM directly or indirectly owns, controls or
has any investment or membership or other interest in any other Person.
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4.6 Compliance with Law and Other Requirements. Each of Seller and CRM is,
and at all times since its inception has been, in compliance in all material
respects with all applicable Law, and has not received any notice, order or
other communication from any governmental agency or instrumentality of any
alleged, actual, or potential violation of, or failure to comply with, any Law.
All federal, foreign, state, local and other governmental consents, licenses,
permits, franchises, grants, approvals and authorizations required for the
activities of Seller and CRM as currently conducted are in full force and effect
without any default or violation thereunder by Seller or CRM or by any other
party thereto, except where such default or violation would not have a material
adverse effect on the activities, financial condition or results of operations
of Seller or CRM.
4.7 Employee and Labor Relations. Schedule 4.7 hereto includes a complete
and correct list of each of Seller's and CRM's employees, job titles, dates of
employment with Seller. Seller has previously furnished Buyer with a complete
and correct list of the current rates and terms of compensation of all such
persons.. All employees are employed by Seller and CRM "at will". Except as set
forth in Schedule 4.7 hereto:
(i) Each of Seller and CRM is in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and is not
engaged in any unfair labor practice;
(ii) no charges with respect to or relating to Seller or CRM are
pending before the Equal Employment Opportunity Commission or any state or local
agency responsible for the prevention of unlawful employment practices, and
neither Seller nor CRM has received notice of the intent of any Federal, state
or local agency responsible for the enforcement of labor or employment laws to
conduct an investigation with respect to or relating to the Seller or CRM and no
such investigation is in progress;
(iii) none of Seller, CRM, the Shareholders or their respective
Affiliates has been the subject of an order, judgment or decree of any court,
government agency or regulatory body that has enjoined, barred or suspended the
Seller, CRM or any Shareholder, or any Affiliate of Seller, CRM or any
Shareholder from engaging in any type of practice or activity; and
(iv) all services performed by Seller and CRM have been provided
in accordance with all applicable Laws in all material respects.
4.8 Financial Information. Attached hereto as Schedule 4.8 are the CRM
Balance Sheet and the income statement of CRM as at and for the four months
ended April 30, 1998 (collectively, including the notes thereto, the "CRM
Financial Statement") and the balance sheets as of December 31, 1996 and 1997
and related statements of income, shareholders equity and cash flows for the
eight and twelve month periods then ended, respectively, including the notes
thereto. The books and records of CRM accurately and fairly reflect its
activities and results of CRM, and the financial statements and notes specified
above accurately and fairly present the financial condition, cash flows and
results of CRM, as at the respective dates thereof and for the periods referred
to therein, all in accordance with GAAP. The CRM Balance Sheet reflects all
liabilities of CRM as of the Balance Sheet Date, whether absolute, accrued or
contingent, of the type required to be
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reflected or disclosed in a balance sheet (or the notes thereto) prepared in
accordance with GAAP. CRM has no liabilities or obligations of any nature that
are not reflected on the CRM Balance Sheet, other than current liabilities
(within the meaning of GAAP) incurred since the Balance Sheet Date in the
ordinary course of business consistent in nature and amount with past practice,
and that are neither material in amount nor inconsistent with any of the
representations and warranties contained herein.
4.9 Accounts Receivable. All accounts receivable of CRM reflected on its
books and records represent valid obligations for services rendered or sales
made in the ordinary course of business and are, to the best knowledge of
Seller, collectible in the ordinary course of business.
4.10 Absence of Changes. Since the Balance Sheet Date, except as otherwise
set forth in Schedule 4.10, each of Seller and CRM has not:
(i) undergone or experienced any material adverse change in its
business or financial condition, properties, assets, liabilities, business or
other aspect of operations;
(ii) suffered any damages, destruction or loss (insured or
uninsured) materially and adversely affecting its ability to conduct business;
(iii) sold, transferred, encumbered or granted any security
interest in any of its business, properties or assets (or agreed to do so),
except in the ordinary course of its business;
(iv) merged or consolidated with or been acquired by any Person
(or agreed to do so);
(v) suffered or permitted any material change in the manner of
conducting business;
(vi) agreed to any waiver or settlement of any material lawsuit or
dispute;
(vii) made or authorized any loan or advance to any Person except
for normal travel and other reasonable expense advances to employees ;
(viii) other than in the ordinary course of business, granted or
authorized any salary increases, bonuses or other benefits payable to employees
or consultants;
(ix) incurred (or agreed to) any actual, contingent or otherwise,
indebtedness or liability, except current liabilities in the ordinary and usual
course of business;
(x) made (or agreed to) any purchase or lease of capital assets;
(xi) paid, declared or authorized any redemption, distribution or
dividend with respect to any member or otherwise with respect to any ownership
interest; and
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(xii) lost, or suffered cancellation, termination or cessation of,
any customer(s) or client relationship(s) which accounted for seven and one-half
percent (7.5%) or more of gross revenues, in the aggregate, from its business
(in the case of CRM) or the Business (in the case of the Seller) for the twelve
month period ended on the Balance Sheet Date.
4.11 Undisclosed Liabilities. CRM has no material liabilities or material
obligations of any nature (whether accrued, absolute, contingent, unasserted or
otherwise) other than as set forth on the CRM Balance Sheet and except as
incurred in the ordinary course of business consistent with past practice since
the Balance Sheet Date.
4.12 Taxes. Each of Seller and CRM has filed all tax returns required to be
filed by it and has paid or has established an adequate reserve for the payment
of, all Taxes required to be paid in respect of the periods covered by such
returns. Neither Seller nor CRM is delinquent in the payment of any tax,
assessment or governmental charge. No deficiencies for any Taxes have been
proposed, asserted or assessed against the Seller or CRM and no requests for
waivers of the time to assess any Taxes are pending. There are no liens for
Taxes upon any of the Assets. None of the Seller, CRM or the Shareholders is a
Person other than a United States Person within the meaning of the Code.
4.13 Litigation. Except as set forth on Schedule 4.13 attached hereto, there
is no suit, action or proceeding pending against or (to Seller's knowledge)
threatened against or affecting Seller or CRM that could reasonably be expected
to have a material adverse effect on Seller or CRM. Neither Seller nor any
Shareholder is aware of any basis for any such suit, action or proceeding, nor
is there any judgment, decree, injunction, rule or order of any governmental
entity or arbitrator outstanding against any Seller or CRM having, or which in
the future would have, any such effect. Neither Seller nor CRM, or any Person
employed by Seller or CRM, has reported a claim or potential claim to Seller's,
CRM's or such Person's professional liability insurance carrier.
4.14 Contracts. Neither Seller nor CRM is in default under any document,
contract, agreement or other commitment to which it is a party or by which it or
any of its assets is bound where such default would have a material adverse
effect on the activities, financial condition or results of operations of Seller
or CRM. Each contract or agreement to which the Seller or CRM is a party is in
full force and effect in accordance with its terms and there is no outstanding
notice of cancellation or termination in connection therewith.
4.15 Effect of Transaction. No creditor, employee, client or other customer
or other Person having a material business relationship with Seller or CRM has
informed Seller, CRM or any Shareholder that such Person intends to change the
relationship because of the transactions contemplated by this Agreement.
4.16 Intangible Assets. Schedule 4.16 hereto includes a true and complete
list of all fictitious names, trademarks, service marks, trade names, copyrights
and patents owned by CRM on the date hereof, or for which application is
pending. All such fictitious names, trademarks, service marks, trade names,
copyrights and patents are free and clear of all assignments, restrictions,
encumbrances, charges or claims of infringement by third parties.
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4.17 Consents. No consent, order, approval or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or agency, domestic or foreign, is
required by or with respect to the Seller, CRM or a Shareholder in connection
with the execution, delivery and performance of this Agreement and the other
Transaction Documents. Set forth on Schedule 4.17 hereto are names of each
Person whose consent is required in order to permit the transfer of an Asset to
Buyer, the assumption by Buyer of Seller's rights pursuant to a Contract, and
the transfer to Buyer of the CRM Interest.
4.18 Further Assurances. From and after the date of this Agreement (and from
and after the date of Closing for a period of two years to the extent that
Seller shall thereafter retain any of the following), Seller shall give to Buyer
and to Buyer's representatives, auditors and counsel full access during normal
hours to all of the properties, books, files, records, contracts, licenses and
all other documents maintained by Seller and related to the Business and shall
furnish to Buyer all information with respect to the Business prior to the
Closing Date as Buyer may from time to time reasonably request. Seller and the
Shareholders shall use their commercially reasonable best efforts to obtain all
consents necessary to consummate the sale, assignment, conveyance and delivery
of the Assets and the CRM Interest contemplated by this Agreement and to
otherwise consummate the transactions contemplated hereby, and to enable Buyer
to continue to conduct the businesses conducted by Seller and CRM in a manner
similar to the manner in which they have previously been conducted. From time to
time after the Closing, at Buyer's request and without additional consideration,
Seller and each of the Shareholders agree to execute and deliver such other
instruments of assignment and transfer and take such other action as Buyer
reasonably may require to more effectively assign, transfer to, and vest in
Buyer absolutely, and to put Buyer in possession of, any property to be sold,
assigned, transferred and delivered hereunder.
4.19 [intentionally left blank]
4.20 Leases and Subleases. Each lease or sublease pursuant to which the
Seller or CRM leases or subleases any real or personal property, either as
lessor or lessee, is valid and binding in accordance with its terms, and there
is not under such lease or sublease any existing default or breach of covenant
by the Seller or CRM or by the other party thereto, or any condition, event, or
act that with notice or lapse of time or both would constitute default. Schedule
2.5(b) hereto contains a true, correct and complete list of each lease of real
property and personal property to which the Seller or CRM is a party and in
which capacity.
4.21 Title to Assets. Except as set forth on Schedule 4.21 hereto, Buyer
will receive at Closing good and marketable title to the Assets, free and clear
of all liens, claims, encumbrances and security interests of any kind or nature.
None of the Assets is the subject of any pending or threatened litigation.
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4.22 Title to CRM Interest. Buyer will receive at Closing good and
marketable title to the CRM Interest, free and clear of all liens, claims,
encumbrances and security interests of any kind or nature. Buyer acknowledges
that as the owner of the CRM Interest, it will be subject to the terms of the
CRM Operating Agreement.
4.23 Employee Benefits. Schedule 4.23 contains a complete and correct list
of all benefit plans, arrangements, commitments and payroll practices of CRM
(whether or not Employee Benefit Plans under ERISA), including, without
limitation, sick leave, vacation pay, severance pay, salary continuation or
disability, consulting or other compensation arrangements, retirement, deferred
compensation, bonus, incentive compensation, stock purchase, stock option,
health including hospitalization, medical, dental and pharmacy, life insurance
and scholarship programs maintained for the benefit of any present or former
employees of CRM. Each Employee Benefit Plan of CRM has been administered in
compliance with its terms, and is in compliance in all material respects with
the applicable provisions of ERISA, the Code and all other applicable Law
(including, without limitation, funding, filing, termination, reporting and
disclosure and continuation coverage obligations pursuant to Title V of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended).
4.24 No Investigation. None of Seller, CRM, any Shareholder or their
respective Affiliates nor (to the best of Seller's knowledge) any Person
employed by Seller or CRM is currently under investigation or prosecution for,
nor has Seller, CRM, any Shareholder or their respective Affiliates nor any such
Person been convicted of a criminal offense related to fraud, theft,
embezzlement or other financial or unlawful manufacture, distribution,
prescription or dispensing of a controlled substance.
4.25 Copies of Documents. Seller has furnished Buyer with true, complete and
correct copies of: Seller's Articles of Incorporation and Bylaws; all contracts,
agreements and understandings to which Seller is a party and related to the
Business; the CRM Operating Agreement; all contracts, agreements and
understandings to which CRM is a party (other than routine maintenance and
similar agreements which are not individually or in the aggregate material in
amount or substance to CRM or its operations); and, all contracts agreements and
understandings to which Seller is a party in its capacity as a member of CRM.
4.26 Proper Licensing. Seller and CRM and each Person employed or retained
as an independent contractor by Seller and CRM are qualified and licensed to
engage in providing the service provided by such Person without restriction or
limitation in the State of Maryland and in each other jurisdiction in which such
Person engages in such services.
4.27 Insurance Coverages. Each of Seller and CRM has maintained in full
force and effect insurance policies which are adequate in coverage amounts and
types of risks covered for the conduct of its business, and all premiums
necessary to maintain such insurance policies have been paid or accrued in full
and are reflected on the Seller Balance Sheet and the CRM Balance Sheet.
4.28 Prohibited Payments. None of Seller, CRM or the Stockholders, nor any
of the officers, directors, employees, agents or affiliates of Seller or CRM has
offered, paid or
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agreed to pay to any person or entity, including any governmental official, or
solicited, received or agreed to receive from any such person or entity,
directly or indirectly, any money or anything of value for the purpose or with
the intent of obtaining or maintaining business or otherwise affecting the
operations, prospects, properties or condition (financial or otherwise) of the
Seller or CRM and which is or was in violation of any law, rule or regulation,
or is not properly and correctly recorded or disclosed on the books and records
of the Seller or CRM.
4.29 CRM Operating Agreement. The CRM Operating Agreement in the form
attached hereto as Exhibit "A" is in full force and effect, and there is no
current breach or violation of its terms by any party thereto, or the existence
of any condition which would, if continued, result in a breach or violation
thereof by any party thereto. Seller has complied with all the terms and
conditions of the CRM Operating Agreement, including but not limited to all
obligations with respect to capital contributions set forth in Article III. No
consent of any person is required for the transfer of the CRM Interest to Buyer.
4.30 Investment Representation. Seller and each Shareholder has such
knowledge and experience in financial and business matters so as to be fully
capable of evaluating the merits and risks of an investment in the Shares. No
Shares will be issued, delivered or distributed to any person or entity who
either (i) is a resident of the State of California or New York or (ii) is other
than an Accredited Investor with respect to whom there has been delivered to
Buyer satisfactory information confirming the status of such person or entity as
an Accredited Investor. Seller and each Shareholder has been furnished with the
informational materials described in Section 4.2 of the Contribution Agreement
(collectively, the "Informational Materials"), and has read and reviewed the
Informational Materials and understands the contents thereof. Seller and the
Shareholders have been afforded the opportunity to ask questions of those
persons they consider appropriate and to obtain any additional information they
desire in respect of the Shares and the business, operations, conditions
(financial and otherwise) and current prospects of the Buyer. Seller and the
Shareholders have consulted their own financial, legal and tax advisors with
respect to the economic, legal and tax consequences of delivery of the Shares
and have not relied on COP, COPT, or any of their officers, directors,
affiliates or professional advisors for such advice as to such consequences.
Seller and each of the Shareholders is an Accredited Investor. Seller and each
of the Shareholders is formed under the law of the State of Maryland.
4.31 United States Person. Each Entity and each Seller is a "United States
Person" within the meaning of Section 1445(f)(3) of the Code, as amended, and
shall execute and deliver an "Entity Transferor" certification (as defined in
the Contribution Agreement) at Closing.
4.32 Full Disclosure. All documents and other papers delivered by or on
behalf of Seller and each Shareholder in connection with the transactions
contemplated by this Agreement are accurate and complete in all material
respects and are authentic. No representation or warranty of Seller or a
Shareholder contained in this Agreement or any other Transaction Document
contains any untrue statement of a material fact or omits to state a fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. Except as described in
this
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Agreement, there is no fact known to Seller or any of the Shareholders or (other
than proposed or enacted legislation, proposed or enacted regulation, or general
economic or real estate industry conditions and changes) that materially
adversely affects or, so far as Seller and the Shareholders can reasonably
foresee, materially threatens, the assets, activities, prospects, financial
condition or results of Seller or CRM.
ARTICLE 5. COVENANTS OF BUYER.
Buyer covenants and agrees to and with Seller as follows:
5.1 Confidentiality. Buyer acknowledges that the information being provided
by the Seller and Shareholders is for the sole purpose of the transactions
contemplated hereby and that Buyer will keep confidential and instruct Buyer's
Affiliates, officers, directors, employees and advisors to keep confidential all
nonpublic information relating to the Seller, except as required by Law and
except for information which becomes public other than as a result of a breach
of this Section 5.1.
5.2 Financial Information. Buyer agrees to (x) retain all of the books and
records of the Seller acquired by Buyer hereunder and not to destroy or dispose
of any thereof for a period of three (3) years from the Closing Date or such
longer time as may be required by Law, and (y) provide to the Shareholders
financial information in its possession or control with respect to the Seller
requested by Seller or the Shareholders in order to comply with tax, financial
reporting and accounting requirements.
5.3 Proxy Statement. As promptly as practicable after the execution of this
Agreement, COPT shall prepare and file with the Securities Exchange Commission a
Proxy Statement (the "Proxy Statement") which shall solicit the votes of COPT's
shareholders with respect to the transactions contemplated hereby and by the
Contribution Agreement. The Proxy Statement shall include the recommendation of
COPT's Board of Trustees in favor of this Agreement and the transactions
contemplated hereby; provided, however, that the Board of Trustees may modify or
withdraw such recommendation if it believes in good faith after consultation
with legal counsel that the modification or withdrawal of such recommendation is
necessary for the Board of Trustees to comply with its fiduciary obligations
under applicable law.
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF BUYER.
COP and COPT, jointly and severally, represent and warrant to Seller as
follows:
6.1 Status, Power and Authority.
COP is a limited partnership validly existing under the laws of the State of
Delaware and has all requisite power to carry on its business as now conducted.
COPT is the sole general partner of COP and is a duly formed and validly
existing Maryland real estate
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investment trust. Each of COP and COPT has full power and authority and
possesses all material authorizations and approvals necessary to enable it to
execute and deliver this Agreement and the other Transaction Documents to be
executed by it, and perform its obligations hereunder and thereunder. This
Agreement and the other Transaction Documents when executed and delivered by COP
and COPT will, subject to approval by the shareholders of COPT prior to Closing,
constitute valid and legally binding obligations of each of COP and COPT,
enforceable against them in accordance with their respective terms, subject to
bankruptcy and insolvency laws, and to equitable principles which may be imposed
by courts.
6.2 No Conflicts. Subject to approval by the shareholders of COPT, the
execution, delivery and performance of this Agreement and the other Transaction
Documents do not and will not (with or without the passage of time or the giving
of notice): (i) violate or conflict with COP's Partnership Agreement or COPT's
Amended and Restated Declaration of Trust, or any Law binding upon COP or COPT;
(ii) violate or conflict with, result in a breach of, or constitute a default or
otherwise cause any loss of benefit under, any agreement or other obligation to
which COP or COPT is a party or by which either of them (or the assets of either
of them) is bound, or give to any other party any rights (including, without
limitation, rights of termination, foreclosure, cancellation or acceleration)
in, or with respect to COP or COPT; or (iii) result in, require, or permit the
creation or imposition of, any restriction, mortgage, deed of trust, pledge,
lien, security interest or other charge, claim or encumbrance upon, or with
respect to, COP or COPT or the assets of either of them.
6.3 Litigation. There are no actions, suits, claims, proceedings,
investigations or inspections, pending or (to COPT's knowledge) threatened,
against or affecting COPT or its Affiliates which could have a material adverse
affect on COPT and its Afiliates considered as a whole, and to COPT's knowledge
there are no matters of litigation or governmental proceedings expected to be
brought against it or its Affiliates which could have a material adverse affect
on the financial condition of COPT and its Affiliates considered as a whole.
6.3 Consents. No consent, order, approval or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or agency, domestic or foreign, is
required by or with respect to the COP or COPT in connection with the execution,
delivery and performance of this Agreement and the other Transaction Documents.
6.4 SEC Reports and Financial Statements. The SEC Reports did not, as of
their respective dates of filing, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading. There has not been any material adverse
change in the business of COPT since March 31, 1998. Except as may otherwise be
set forth therein, the financial statements (including the notes thereto) of
COPT set forth in the SEC Reports present fairly the consolidated financial
position of COPT as at the dates set forth therein and its results of
operations, changes in consolidated stockholder equity and cash flows for
periods covered
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thereby, all in conformity with United States generally accepted accounting
principles applied on a consistent basis for such periods.
6.5. The Shares. The Shares to be issued at Closing will, when issued and
delivered, be duly authorized, validly issued, fully paid, non-assessable shares
of COPT free from all claims of preemptive rights.
6.6 Tax Status. COP has been at all times, and presently intends to continue
to be, classified as a partnership for federal income tax purposes and not an
association taxable as a corporation or a publicly traded partnership taxable as
a corporation. COPT is now, and presently intends to continue to be classified,
as a real estate investment trust under Section 856 of the Internal Revenue Code
of 1986, as amended.
6.7 Full Disclosure. All documents and other papers delivered by or on
behalf of COP or COPT in connection with the transactions contemplated by this
Agreement are accurate and complete in all material respects and are authentic.
No representation or warranty of COP or COPT contained in this Agreement or any
other Transaction Document contains any untrue statement of a material fact or
omits to state a fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading. Except as described in this Agreement or in the SEC Reports there is
no fact known to COP or COPT or (other than proposed or enacted legislation,
proposed or enacted regulation, or general economic or real estate industry
conditions and changes) that materially adversely affects or, so far as COP and
COPT can reasonably foresee, materially threatens, the assets, activities,
prospects, financial condition or results of COP or COPT.
6.8 Condition of Tangible Assets. COP and COPT acknowledge that the tangible
assets comprising a portion of the Assets are being transferred "as-is,
where-is", and that Seller makes no representation or warranty, express or
implied, about the condition or fitness for any particular purpose, of any of
the tangible assets included as a part of the Assets.
ARTICLE 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.
Seller's obligation to complete the Closing shall be conditioned on the
following, any of which may be waived by Seller.
7.1 Representations and Warranties. The representations and warranties made
by Buyer in this Agreement and all other Transaction Documents, or in any
exhibit, schedule, statement, list or certificate furnished pursuant thereto,
shall be true and correct when made and shall be true and correct in all
material respects at and as of the time of the Closing.
7.2 Performance by Buyer. Buyer shall have performed and complied in all
material respects with all agreements and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing.
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7.3 Other Matters. The transactions contemplated hereby shall be approved by
all necessary action on the part of Buyer.
7.4 Deliveries at Closing. All instruments, documents, certificates and
other items required to be delivered to Seller pursuant to Section 10.2 of the
Agreement shall have been delivered to Buyer at or prior to the Closing Date.
7.5 Shareholder Approval and Other Closings. The Shareholders of COPT shall
have approved the transactions contemplated hereby and by the Contribution
Agreement and the Development Agreements. Immediately preceding Closing
hereunder, there shall be a closing pursuant to the Contribution Agreement.
ARTICLE 8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS.
Buyer's obligation to complete the Closing shall be conditioned on the
following, any of which may be waived by Buyer.
8.1 Representations and Warranties. The representations and warranties made
by Seller and the Shareholders in this Agreement and all other Transaction
Documents, or in any exhibit, schedule, statement, list or certificate furnished
pursuant thereto, shall be true and correct when made and shall be true and
correct in all material respects at and as of the time of the Closing.
8.2 Performance by Seller and the Shareholders. Seller and the Shareholders
shall have performed and complied in all material respects with all agreements
and conditions required by this Agreement to be performed or complied with by
them prior to or at the Closing.
8.3 Federal and State Licenses, Permits and Authorizations. Buyer shall have
received or have been granted any and all necessary licenses, permits and
authorizations by the appropriate local, state and federal government agencies
in order for Buyer to purchase the Assets and the CRM Interest (the
"Authorizations"). Seller and the Shareholders shall cooperate and employ their
best efforts to assist Buyer in receiving the Authorizations.
8.4 Other Matters. The transactions contemplated hereby shall be approved by
all necessary corporate action on the part of the Seller, and there shall have
been no material change in any Law or regulation affecting Seller or CRM.
8.5 Deliveries at Closing. All instruments, documents, certificates and
other items required to be delivered to Buyer pursuant to Section 10.1 of the
Agreement shall have been delivered to Buyer at or prior to the Closing Date.
8.6 Buyer's Rights With Respect to CRM Interest. Buyer shall have the right
not to purchase the CRM Interest at Closing, if Buyer is not satisfied for any
reason whatsoever with the documents, agreements and instruments relating to
such transfer. Buyer may exercise this right, in its sole discretion, by
notifying Seller in writing of its intention not to purchase the CRM Interest at
any time up to completion of the closing of
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the Contribution Agreement. If Buyer elects not to purchase the CRM Interest:
(i) the Purchase Price shall be reduced to Shares representing an aggregate
value of Seven Hundred Fifty Thousand Dollars ($750,000.00); (ii) the amount set
forth in Section 9.7 below shall be changed to Twenty Thousand Dollars
($20,000.00); and (iii) this Agreement shall otherwise continue in full force
and effect.
8.7 Shareholder Approval and Other Closings. The Shareholders of COPT shall
have approved the transactions contemplated hereby and by the Contribution
Agreement and the Development Agreement. Immediately preceding Closing
hereunder, there shall be a closing pursuant to the Contribution Agreement.
ARTICLE 9. INDEMNIFICATION.
9.1 Basic Provision. The Sellers and the Shareholders hereby jointly and
severally agree to indemnify, defend and hold harmless Buyer, its Affiliates and
their respective partners, directors, officers, shareholders, employees and
agents and the successors and assigns of each of the foregoing (individually, an
"Indemnitee" and collectively, the "Indemnitees"), from, against and in respect
of the amount of any and all Deficiencies.
9.2 Definitions of "Deficiencies. As used herein, "Deficiencies" means:
(i) any and all losses, damages, costs and expenses resulting from
any misrepresentation, breach of warranty or representation, or any
non-fulfillment of any warranty, representation, covenant or agreement on the
part of Seller or any Shareholder contained herein;
(ii) any and all losses, damages, costs and expenses resulting
from any misrepresentation contained in any statement, report, certificate or
other document or instrument delivered to Buyer pursuant to this Agreement or
contained in any Schedule or Exhibit hereto;
(iii) any and all losses, damages, costs and expenses resulting to
Indemnitee by reason of any claim, debt, liability or obligation or any alleged
claim, debt, liability or obligation of CRM, Seller or any Shareholder
(including but not limited to any claim for malpractice or professional
liability), whether known or unknown, accrued or contingent, except for the
Assumed Liabilities;
(iv) any and all losses, damages, costs and expenses resulting
from all actions and conduct occurring on or prior to the Closing Date by or on
behalf of CRM, Seller or the Shareholders, including but not limited to actions
and conduct of Seller and its employees, customers or agents; and
(v) any and all actions, suits, proceedings, demands, assessments,
judgments, reasonable attorneys' fees, costs and expenses incident to any of the
foregoing.
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9.3 Procedures for Third Party Claims. In the event that any claim shall be
asserted by any individual or entity against Buyer which, if sustained, would
result in a Deficiency, Buyer, within a reasonable time after learning of such
claim, shall notify Seller and the Shareholders of such claim, and shall extend
to Seller and the Shareholders a reasonable opportunity to defend against such
claim, at the Sellers' and the Shareholders' sole expense and through legal
counsel acceptable to Buyer, provided that Seller and the Shareholders proceed
in good faith, expeditiously and diligently to defend such claim. Buyer shall,
at its option and expense, have the right to participate in any defense
undertaken by Seller and the Shareholders with legal counsel of its own
selection. No settlement or compromise of any claim which may result in a
Deficiency may be made by Seller or any Shareholder without the prior written
consent of Buyer unless prior to such settlement or compromise (i) Seller and
the Shareholders acknowledge in writing their obligation to pay in full the
amount of the settlement and all associated expenses, (ii) Buyer is furnished
with security reasonably satisfactory to Buyer that Seller and the Shareholders
will in fact pay such amount and expenses and (iii) Seller and the Shareholders
obtain a written release from the claimant, in a form reasonably satisfactory to
Buyer, of the Buyer from all liability, past, present and future, arising from
or in connection with the claim.
9.4 Payment of Deficiencies. In the event that Buyer discovers any
Deficiency, Buyer shall give written notice to Seller and the Shareholders of
the nature and amount of the Deficiency. Seller and the Shareholders hereby
agree to pay the amount of such Deficiency to Buyer in cash within thirty (30)
days after written notice from Buyer which reasonably details the nature and
amount of the Deficiency. Any amounts required to be paid which are not paid by
Seller and the Shareholders when due under this Article 9 shall bear interest
from the due date thereof until the date paid at a rate of interest per annum
that is equal to the Prime Rate. At Buyer's option, Buyer may off-set any unpaid
Deficiency or portion thereof against any obligation Buyer may have to any party
hereto.
9.5 Provisions Not Exclusive. The indemnification obligations of Seller, the
Shareholders and Buyer contained herein, including any rights of set off as
described herein, are not intended to waive or preclude any other claims, rights
or remedies which may exist at law (whether statutory or otherwise) or in equity
with respect to the matters covered by the indemnifications described herein.
9.6 Time Limit on Certain Claims. No claim for indemnification may be
asserted pursuant to a Deficiency described in Section 9.2, unless notice of
such claim shall have been given within eighteen months after the Closing Date
to the person from whom such indemnification may be sought (except that the cost
of items described in Section 9.2(v) which are based on claims for which notice
has been given in such eighteen month period shall be payable regardless of when
incurred); provided, however, that if the Deficiency is based on a
misrepresentation or breach contained in Sections 4.12, 4.21, 4.22 or 4.30, the
claim for indemnification with respect thereto shall have been given within the
later of three years after the Closing Date or the statute of limitations
applicable to such underlying claim.
9.7 Limit on Amounts. No claim for indemnification may be asserted pursuant
to this Article 9 against Seller and the Shareholders until the aggregate amount
of
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Deficiencies for claims which then may be asserted hereunder exceeds Fifty
thousand Dollars ($50,000.00), whereupon all such Deficiencies may be claimed.
9.8 Indemnification by COP and COPT. COP and COPT shall jointly and
severally indemnify, protect, defend and hold Seller and each of the
Shareholders (the "Seller Indemnified Parties") harmless from and against any
claims, losses, demands, liabilities, suits, costs and damages suffered by the
Seller Indemnified Parties incurred, arising against, or suffered by, the Seller
Indemnified Parties as a consequence of (i) any breach of any representation,
warranty or covenant made in this Agreement by COP or COPT, or (ii) the failure
of COP or COPT to satisfy any of the Assumed Liabilities.
ARTICLE 10. DELIVERIES AT CLOSING.
10.1 Deliveries by Seller and the Shareholders at Closing. If not previously
delivered, at Closing Seller and the Shareholders shall deliver or cause to be
delivered to Buyer each of the following:
(a) all contractual assignments, third-party consents, permits, waivers
and governmental approvals, as well as evidence of the completion of all other
transactions necessary or appropriate for consummation by Buyer of the
transactions contemplated by this Agreement and the other Transaction Documents,
in form and substance reasonably satisfactory to Buyer;
(b) resolutions of Seller's Board of Directors and the Shareholders
authorizing the execution, delivery and performance of this Agreement and the
other Transaction Documents to be executed and performed by Seller;
(c) duly executed bills of sale, articles of transfer, assignments and
other documents evidencing the transfer of the Assets and the CRM Interest to
Buyer, in form reasonably satisfactory to Buyer;
(d) an opinion of Daniel R. Skowronski, counsel for the Seller,
addressed to Buyer and dated the date of the Closing, in the same form as
provided for in Section 16.1.3. of the Contribution Agreement except that no
opinion will be rendered with respect to the transfer of the interest in CRM
without obtaining the consent of KLNB, Inc.;
(e) a certificate executed by the chief executive officer of Seller and
by each Shareholder to the effect that all conditions precedent to the
obligation of the Seller to close hereunder have been satisfied or waived, and
that the representations and warranties of the Seller in the Agreement are true
and correct as of the Closing Date;
(f) Good Standing Certificates reflecting each of Seller's and CRM's
good standing issued by the State of Maryland as of a date immediately prior to
the Closing; and
(g) such other certificates, instruments, documents, agreements, etc.
as may be reasonably necessary or appropriate to effect the transactions
contemplated hereby.
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10.2 Deliveries by Buyer at Closing. If not previously delivered, at Closing
Buyer shall deliver or cause to be delivered to Seller each of the following:
(a) the Shares;
(b) a resolution of COPT's Trustees, for COPT and as sole general
partner of COP, authorizing the execution, delivery and performance of this
Agreement and the other Transaction Documents to be executed and performed by
COPT and COP;
(c) a certificate executed by COPT, for COPT and as sole general
partner of COP, to the effect that all conditions precedent to the obligation of
the COP to close hereunder have been satisfied or waived, and that the
representations and warranties of COP and COPT in the Agreement are true and
correct as of the Closing Date;
(d) an opinion of counsel for COP and COPT addressed to Seller and
dated the date of the Closing, as to the matters described in Sections 6.1, 6.2,
6.3 and 6.5 hereof in form and substance reasonably satisfactory to Seller; and
(e) such other certificates, instruments, documents, agreements, etc.
as may be reasonably necessary or appropriate to effect the transactions
contemplated hereby.
ARTICLE 11. TERMINATION; REMEDIES.
11.1 Termination by Buyer. This Agreement may be terminated and canceled at
any time prior to the Closing by the Buyer, upon written notice to the Seller,
if any of the following circumstances or events continues for more than ten (10)
business days after Buyer has provided written notice thereof to Seller of its
intention to terminate this Agreement:
(a) any of the representations or warranties of the Seller or the
Shareholders contained herein or in any other Transaction Document shall be
inaccurate or untrue in any material respect;
(b) any material obligation, term or condition to be performed, kept or
observed by Seller or any Shareholder hereunder has not been performed, kept or
observed in any material respect at or prior to the time specified in this
Agreement; or
(c) any one of the conditions precedent to Buyer's obligations to
complete Closing hereunder as set forth in Article 7 has not been satisfied, or
waived by Buyer in writing, at or before the Closing unless the failure of
condition is the result of a material breach of this Agreement by Buyer.
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11.2 Termination by Seller. This Agreement may be terminated and canceled at
any time prior to the Closing by the Seller, upon written notice to the Buyer,
if any of the following circumstances or events continues after Seller has
provided ten (10) business days' written notice thereof to Buyer of its
intention to terminate this Agreement:
(a) any of the representations or warranties of the Buyer contained
herein or in any Transaction Document shall be inaccurate or untrue in any
material respect;
(b) any material obligation, term or condition to be performed, kept or
observed by Buyer hereunder has not been performed, kept or observed in any
material respect at or prior to the time specified in this Agreement; or
(c) any one of the conditions precedent to Seller's obligations to
complete Closing hereunder as set forth in Article 6 has not been satisfied, or
waived by Seller in writing, at or before the Closing unless the failure of
condition is the result of a material breach of this Agreement by Seller or a
Shareholder.
11.3 Termination by Agreement. This Agreement may be terminated at any time
by mutual written agreement of Buyer and Seller, and shall be automatically
terminated upon termination of the Contribution Agreement.
11.4 Effect of Termination. All obligations of the Parties hereunder shall
cease upon any termination pursuant to Sections 11.1, 11.2 or 11.3, provided,
however, that (x) the provisions of this Article 11, Section 2.3, Section 3.4
and Section 5.1 hereof shall survive any termination of this Agreement; and (y)
nothing herein shall relieve any party from any liability (at law or in equity)
for a material error or omission in any of its representations or warranties
contained herein or a material failure to comply with any of its covenants,
conditions or agreements contained herein, if such error, omission or failure
was willful or deliberate, but if such error, omission or failure was not
willful or deliberate, the liability of the responsible party shall be limited
to out-of-pocket expenses incurred by the other party(ies) in connection with
negotiating, preparing and entering into this Agreement and carrying out the
transactions contemplated hereby.
ARTICLE 12. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Seller and the Shareholders and Buyer as follows:
Seller and the Shareholders:
Constellation Real Estate, Inc.
8815 Centre Park Drive - Suite 400
Columbia, MD 21045
Attention: General Counsel
Telecopy: 410-740-1174
and
Constellation Holdings, Inc.
250 West Pratt Street
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Baltimore, MD 21201-2423
Attention: Dan R. Skowronski, Esquire
Telecopy: 410-783-3632
With a copy to its attorneys:
Stephen L. Owen, Esquire
Piper & Marbury LLP
36 South Charles Street
Baltimore, MD 21201-3018
Telecopy: 410-539-0489
Buyer:
Corporate Office Properties Trust
One Logan Square, Suite 1105
Philadelphia, PA 19103
Attention: Clay W. Hamlin, III
President and Chief Executive Officer
Telecopy: 215-567-1907
With a copy to its attorneys:
F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street - 38th Floor
Philadelphia, PA 19102
215-972-7139
Notices shall be deemed properly delivered and received when and if either (i)
personally delivered, including via facsimile; or (ii) on the first business day
after deposit with a commercial overnight courier for delivery on the next
business day. Any party may change its address for delivery of notices by
properly notifying the others pursuant to this Article 12.
ARTICLE 13. MISCELLANEOUS PROVISIONS.
13.1 Entire Agreement; Counterparts. This Agreement is the entire agreement
between the parties hereto with respect to the sale of the Assets and the CRM
Interest and supersedes all prior and contemporaneous communications,
representations, agreements, discussions and understandings, whether oral or
written, between the parties hereto, including, without limitation, any
financial or other projections, valuations or predictions regarding the Seller,
the Assets or the CRM Interest. There are no oral or written agreements,
understandings, representations or warranties between the parties hereto with
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respect to the subject matter hereof other than those set forth or contemplated
in this Agreement. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13.2 Headings. The headings contained in this Agreement and the Schedules
and Exhibits are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. Reference to Sections, Schedules or Exhibits
are to portions of this Agreement unless the context requires otherwise.
13.3 Assignment and Amendment of Agreement. This Agreement shall be binding
on and inure to the benefit of the parties hereto, their heirs, executors,
administrators, successors and assigns; provided, however, that this Agreement
shall not be assignable or transferable by Seller or a Shareholder without the
prior written consent of Buyer, or by Buyer without the written consent of
Seller, except that Buyer may assign some or all of Buyer's rights and
obligations under this Agreement without such prior written consent to any
Affiliate of Buyer. Neither this Agreement nor any provisions hereof may be
waived, modified, amended, discharged or terminated except by an instrument in
writing signed by the party against which the enforcement of such waiver,
modification, amendment, discharge or termination is sought, and then only to
the extent set forth in such instrument.
13.4 Commercially Reasonable Best Efforts. Subject to the terms and
conditions of this Agreement each party will use its commercially reasonable
best efforts to cause the Closing to occur. Seller and Buyer shall use their
commercially reasonable, diligent and good faith efforts, and shall cooperate
with and assist each other in their efforts, to obtain any and all consents and
approvals of third parties (including, but not limited to, governmental
authorities) to the transaction contemplated hereby, and to otherwise perform as
may be necessary or otherwise reasonably requested by the other party to
effectuate and carry out the purposes of, this Agreement.
13.5 Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of Maryland without regard to principles of conflicts of
law.
13.6 No Third Party Rights. This Agreement is not intended and shall not be
construed to create any rights in any persons other than Seller, the
Shareholders and Buyer and their permitted assignees, and no Person shall assert
any rights as third party beneficiary hereunder.
13.7 Incorporation of Schedules and Exhibits. The Schedules and Exhibits
attached hereto are incorporated into this Agreement and shall be deemed a part
hereof as if set forth herein in full. Reference herein to "this Agreement" and
the words "herein," "hereof' and words of similar import refer to this Agreement
including its Schedules and Exhibits as an entirety. In the event of any
conflict between provisions of this Agreement and any such Schedule or Exhibit,
the provisions of this Agreement shall control.
13.8 Survival. The covenants, rights, obligations, representations and
warranties of each of the parties hereunder shall survive the Closing subject to
the limitations set forth in this Agreement.
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13.9 Waiver. The failure of any party at any time or times to enforce its
rights under such provisions, strictly in accordance with the same, shall not be
construed as having created a custom in any way or manner contrary to the
specific provisions of this Agreement or as having in any way or manner modified
or waived the same.
13.10 Enforcement. Each of the Parties hereto shall have the right at all
times to enforce the provisions of this Agreement in strict accordance with its
terms and to pursue remedies for breach by any legal and equitable means,
including by an action for specific performance, notwithstanding any conduct or
custom on its part in refraining from doing so at any time or times.
13.11 Litigation. Seller, the Shareholders and Buyer waive all rights to a
jury trial with respect to any disputes relating to this Agreement, whether
arising before or after Closing. In the event of litigation between the parties
with respect to this Agreement, the performance of their respective obligations
hereunder or the effect of a termination under this Agreement, the losing party
shall pay all costs and expenses incurred by the prevailing party in connection
with such litigation, including, but not limited to, reasonable attorneys' fees
of counsel selected by the prevailing party. The parties hereby further
acknowledge and agree that in the event of litigation between them, as
contemplated above, and the resolution of that litigation through compromise,
settlement, or partial judgment, the court before which such litigation is
initially brought shall have the right to allocate responsibility, between
Seller and the Shareholders on the one hand, and Buyer on the other, for all
costs and expenses (including, but not limited to, attorneys' reasonable fees)
incurred by all parties in the pursuit of that litigation resolved through
compromise, settlement or partial judgment. Notwithstanding any provision of
this Agreement to the contrary, the obligations of the parties under this shall
survive termination of this Agreement and the Closing, if applicable.
13.12 Publicity. Seller, the Shareholders and Buyer agree that no public
release or announcement concerning the transactions contemplated hereby shall be
issued by either party without the prior written consent of both Buyer and
Seller, but in no event shall financial terms be disclosed, except as such
release or announcement may be required by law or court order, in which case the
party required to make the release or announcement shall allow the other party
reasonable time to comment on such release or announcement in advance of such
issuance.
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13.13 Brokerage. Seller and the Shareholders represent and warrant to Buyer
that none of them, and Buyer represents and warrants to Seller and the
Shareholders that neither of them, has dealt with any brokers or finders in
connection with this transaction and that no broker, finder or other party is
entitled to a commission, finder's fee or other similar compensation as a result
hereof, except Legg Mason Real Estate Services, Inc. under separate agreement
with Buyer. Buyer shall pay to Legg Mason Real Estate Services, Inc. the
compensation payable to it with respect to this transaction pursuant to such
agreement. Seller and the Shareholders hereby indemnify, protect and defend and
hold Buyer harmless from and against all losses, claims, costs, expenses,
damages (including, but not limited to, attorneys' fees of one counsel selected
by Buyer) resulting or arising from the claims of any broker, finder or other
such party, claiming by, through or under the acts or agreements of Seller or a
Shareholder. Buyer hereby indemnifies, defends and holds Seller and the
Shareholders harmless from and against all losses, claims, costs, expenses,
damages (including, but not limited to, attorneys' fees of one counsel selected
by the Seller and Shareholders) resulting or arising from the claims of any
broker, finder or other such party claiming by, through or under acts or
agreements of Buyer. This Section 13.13 shall survive any termination of this
Agreement and the Closing, if applicable.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed under seal as of the date first written above.
CORPORATE OFFICE PROPERTIES TRUST
By: /s/ Clay W. Hamlin, III
-------------------------------------
Clay W. Hamlin, III, President and Chief
Executive Officer:
CORPORATE OFFICE PROPERTIES, L.P.
By: Corporate Office Properties Trust, its sole
general partner
By: /s/ Clay W. Hamlin, III
-------------------------------------
Clay W. Hamlin, III, President and Chief
Executive Officer:
CONSTELLATION REAL ESTATE, INC.
By: /s/ Randall M. Griffin
-----------------------------------
Title: Randall M. Griffin
President
SHAREHOLDERS:
KMS OLDCO, INC.
By: /s/ Randall M. Griffin
-----------------------------------
Title: Randall M. Griffin
President
CONSTELLATION REAL ESTATE GROUP, INC.
By: /s/ Randall M. Griffin
-----------------------------------
Title: Randall M. Griffin
President
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OPTION AGREEMENT
THIS OPTION AGREEMENT ("Agreement") is made and executed this 14th day
of May, 1998, by and between NBP-III, LLC ("Seller") and CORPORATE OFFICE
PROPERTIES L.P. its successors and assigns ("Buyer").
RECITALS
Seller is the owner of that parcel of land knows as Lot 11 within the
National Business Park (the "Property"), said parcel being more particularly
described in Exhibit A attached hereto and by this reference made a part hereof.
Seller is currently in the process of developing and constructing onto Lot 11 an
office building containing approximately 110,000 gross square feet to be known
as 134 National Business Park. Seller is willing to grant to Buyer an option to
purchase the Property on the terms and conditions as set forth herein. Buyer is
willing to accept said option on those terms and conditions and for the
considerations provided and described herein.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the adequacy of which is hereby acknowledged, Seller
hereby grants to Buyer the exclusive right and option (irrevocable except upon
the express terms and conditions of this Agreement) during the term hereof to
purchase from Seller, the Property upon the terms and subject to the conditions
hereinafter set forth.
1. Determination of Purchase Price. The Purchase Price for the Property
shall be determined as of the date of "Settlement" (hereinafter defined) and
shall be that sum which is equal to the "Seller's Book Value" (hereinafter
defined) of the Property. For purposes of this Agreement "Seller's Book Value"
shall mean that sum which is the net dollar amount shown as the value of the
Property as same appears as an asset on the balance sheet of the Seller, which
sum shall include all costs expended on the development and construction of
buildings on the Property through the date of Settlement. Seller will provide to
Buyer such access to Seller's books and accounting records as shall be
reasonably required for such a determination to be
<PAGE>
made. The Purchase Price as so determined shall be paid as provided in Paragraph
4 herein. Seller has dedicated Two Million One Hundred Eight Thousand Dollars
($2,108,000.00) towards the development of the Property through August, 1998 and
Seller represents that as of the date hereof, Seller's Book Value is One Million
Nine Hundred Ninety-Three Thousand Seven Hundred Twenty-Six Dollars
($1,993,726.00). Seller shall maintain its books in accordance with generally
accepted accounting principles, consistently applied.
2. Term of Option; Exercise of Option; Settlement.
(a) The term of the Option as herein granted by Seller shall
commence as of the date hereof and without need of written notice automatically
terminate and expire on that date which is fifteen (15) days thereafter ("Option
Period").
(b) If Buyer at any time during the Option Period desires to
exercise the Option then Buyer shall give to Seller written notice to that
effect together with the date on which Settlement is to occur, subject to the
provisions of Section 2(c) below.
(c) Notwithstanding anything herein to the contrary, if Buyer
exercises its Option hereunder, Settlement shall be on or before that date which
is forty-five (45) days after the Closing under that certain Contribution
Agreement of even date herewith by and between Corporate Office Properties Trust
and Corporate Office Properties, L.P., as Buyer and various entities which are
subsidiaries and affiliates of Constellation Properties, Inc. (the "Contribution
Agreement").
3. Payment of Purchase Price; Deposit.
(a) It is hereby irrevocably acknowledged, confirmed and
agreed by Seller that the mutual obligations and covenants of the parties
hereunder and the entry by affiliates of Seller and Buyer into other agreements
as of even date herewith, constitute adequate consideration for the Option
herein granted.
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(b) The balance of the Purchase Price shall be paid as
provided in Paragraph 5 following.
4. Right to Inspect.
From and after execution of this Agreement by both Buyer and
Seller, Buyer and Buyer's consultants shall have the right to enter upon the
Property and conduct, at Buyer's sole expense, any engineering tests,
development and land use studies, environmental analysis, soil tests,
topographical and other surveys, wetlands and flood plain delineations, and
other surveys, tests and studies (collectively, "Site Investigations") as Buyer
deems necessary. All lands, trees, shrubs, grass and field areas shall be
restored as closely as possible to their pre-test conditions. Buyer and its
consultants shall enter and test the Property at their own risk; and Buyer
and/or its consultants shall carry adequate commercial general liability
insurance of not less than $1,000,000 combined single limit naming Seller as an
additional insured. Buyer and/or its consultants shall provide Seller with a
certificate evidencing such insurance promptly upon request. Further, Buyer
shall indemnify and save Seller harmless from any and all suits, claims of
injuries and judgements, and reasonable attorney's fees, in any way arising out
or such entry and testing of the Property, which indemnification and obligation
to hold the Seller harmless shall survive any termination of this Agreement.
5. Settlement.
(a) Settlement and transfer of title to the Property
("Settlement") shall be held in the Baltimore-Metropolitan area, at a location
selected by the Buyer, and shall occur on that date which shall be noted on
Buyer's notice of exercise of the Option.
(b) At Settlement, the Buyer shall pay Seller, in cash or by
certified, cashier's, treasurer or title company check, or by wire transfer, the
Purchase Price determined for the Property.
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(c) At Settlement, title to the Property shall be good and
merchantable, free of all liens, encumbrances, encroachments and easements other
than the Permitted Encumbrances (as hereinafter defined), and of the Property
shall be given to Buyer free of all tenancies or other rights of use or
occupancy. A deed containing covenants of special warranty and further
assurances shall be executed by Seller, at Buyer's expense, which shall convey
fee simple title to the Property together with all improvements, rights, alleys,
ways, waters, privileges, easements, appurtenances and advantage benefitting the
Property, and shall be delivered to Buyer at Settlement.
(d) As soon as possible after exercise of the Option the
Buyer, at Buyer's expense, shall have the title to the Property examined by a
reputable title insurance company and have such title insurance company issue a
title insurance commitment (the "Title Commitment") to assure Buyer that, as of
the examination date, title to the Property is good and merchantable and
insurable at ordinary prevailing title insurance rates and that any exceptions
to title contained in the Title Commitment are acceptable to Buyer. By the
thirtieth (30th) day after receipt by Seller of notice of any exercise of the
Option, Buyer shall provide to Seller a copy of the Title Commitment and either
advise Seller in writing that all exceptions to title contained in the Title
Commitment are acceptable to Buyer or advise Seller in writing of those
exceptions to title contained in the Title Commitment that are unacceptable to
Buyer; provided, however, that Buyer shall be required to accept (i) all matters
shown on that Subdivision Plat depicting the Property and any amendments
thereto. Failure of Buyer to examine title or to advise Seller of the
acceptability of title within the time periods required hereunder shall be
deemed an acceptance of all title matters. Within fifteen (15) days after
receipt of a notice from Buyer advising Seller that certain title exceptions are
unacceptable to Buyer, Seller shall notify Buyer whether Seller will cure any of
the unacceptable title exceptions. Failure of Seller to provide notice within
such time period shall be deemed an election by Seller not to cure the
unacceptable title exceptions. If Buyer has timely notified Seller of
unacceptable title matters then, unless Seller has timely elected to cure such
title exceptions as provided hereunder, Buyer, by written notice to Seller, may,
within fifteen (15) days after expiration of the time period for Seller to elect
to cure, either waive such unacceptable title exceptions (in which case such
exceptions shall be deemed acceptable to Buyer) or terminate the Option. Failure
of Buyer to notify Seller in such fifteen
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(15) days period shall be deemed an election by Buyer to waive the unacceptable
title exceptions. If Seller notifies Buyer that Seller will cure any
unacceptable title exception, then Seller shall be obligated to promptly and, in
all events, prior to Settlement, proceed to cure such title exception in such
manner that the defect or objection to the title will not appear in the Buyer's
title insurance policy. All exceptions to title accepted by Buyer or deemed to
be accepted by Buyer under the provisions of this paragraph (other than
mortgages, deeds of trust and other liens [excluding liens for taxes and
assessments to be adjusted under subparagraph (e)], all of which shall be
discharged by Seller at or prior to Settlement) shall constitute "Permitted
Encumbrances." Notwithstanding the foregoing, from and after the date hereof and
continuing until the expiration of the Option Period, Seller shall not change or
permit to be changed title to the Property or any portion thereof in a manner
which would materially prevent or interfere with the development of the
Property.
(e) All costs, including taxes, insurance and any and all
costs relating to the ownership of the Property shall be borne by Seller until
the time of any Settlement hereunder. All taxes, general or special, and all
other public, governmental or other assessments against the Property payable on
an annual basis are to be adjusted and apportioned as of the date of Settlement
and are to be assumed and paid after Settlement by Buyer. The costs, if any, of
all recordation taxes and transfer taxes shall be split and paid equally by
Buyer and Seller. All agricultural transfer tax or taxes, if any, shall be paid
by Seller. All other closing costs, including, without limitation, recording
charges, document preparation charges, notary fees and title insurance premiums
shall be paid by Buyer. Seller and Buyer shall each pay their respective legal
costs.
(f) At Settlement hereunder, the Seller shall, execute and
deliver to the Buyer an affidavit, in form sufficient to satisfy all Internal
Revenue Service requirements, stating that Seller is not a "foreign person" (as
defined by the Foreign Investment in Real Property Tax Act and the regulations
promulgated thereunder) so that Buyer is not legally required to withhold any
portion of the Purchase Price then being paid at Settlement hereunder.
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6. Potential Contribution of Member Interests in Lieu of Fee Simple
Transfer.
If Buyer exercises its option to purchase all of the lots owned by
Seller hereunder, Buyer shall have the right, exercisable by written notice to
Seller given at least ten (10) days prior to Settlement, to structure the
transfer as a purchase of 100% of the member interests of the Seller, rather
than as a transfer of the underlying Property. In such event, at the time of
Settlement, Seller(s) shall execute and deliver to Buyer:
(a) an Assignment and Assumption Agreement, an Amendment to the
Operating Agreement, and Amendment of the Articles of Organization setting forth
the assignment by each of the members of such member's membership interest and
his, her or its withdrawal from the Seller and the admission of the Buyer and/or
its designee(s) as members of the Seller, which amendment shall be executed and
acknowledged by all withdrawing members and the Buyer;
(b) a release from each withdrawing member releasing the Buyer (and its
designee(s)) as members of the limited liability company from any obligations
and liabilities with respect to the formation of such limited liability company,
and any other matter arising from business done, transactions entered into or
events occurring prior to the Settlement;
(c) customary representations and warranties as to the member
interests, consistent with those set forth in Section 11.1 of the Contribution
Agreement; and
(d) such other documents and items as may be reasonably required to be
delivered by Seller to Buyer under the terms of this Agreement or relating to
the Property and the membership interest to reasonably effect the purposes of
this Agreement.
All of such documentation shall be in substantially the same form as
the documentation being delivered under the terms of the Contribution Agreement.
7. Risk of Loss. The Property and is to be held at the risk
of the Seller until legal title has passed.
6
<PAGE>
8. Seller's Warranties and Representations. Seller warrants, represents
and covenants to Buyer that the following items are true in all material
respects and shall be deemed to have been restated at the time of Settlement
hereunder:
(a) As of the date hereof and as of Settlement, Seller will be
the owner of 100 percent fee simple interest in the Property and will not have
entered into any contract of sale, option agreement, right of first refusal or
other agreement for the sale of the Property.
(b) The Seller has full power and authority to execute,
deliver and perform this Agreement in accordance with its terms.
(c) As of the date of this Agreement, the Property is zoned to
permit its use for office and warehouse purposes and Seller, shall not join in
or consent to any change in the zoning of the Property which would prohibit its
use for office and warehouse purposes.
(d) To the best of Seller's knowledge, there are no
underground storage tanks on the Property.
(e) Seller has not used, generated, stored or disposed, and
from and after the date of this Agreement will not use, generate, store or
dispose, on, under or about the Property any hazardous waste, toxic substance or
related materials or any friable asbestos or substance containing asbestos.
The foregoing warranties shall terminate twelve (12) months after
Settlement hereunder.
9. Construction Costs and Obligations.If at the time of exercise of the
Option Seller is in the process of construction of buildings on the Property it
is agreed that:
(a) Seller will tender and transfer (as necessary) to Buyer
all plans, specifications, contracts, permits and other materials related to
such construction;
7
<PAGE>
(b) Seller will open its accounting records to Buyer and
cooperate with Buyer's takeover of the responsibility of such construction; and
(c) Seller will if necessary give to Buyer appropriate bills
of sale for personal property items then in the possession of Seller and related
to such construction.
10. Miscellaneous.
(a) Seller and Buyer warrant that, in connection with this
transaction, they have dealt with no broker, agent or other party who may be
entitled to a commission or finder's fee, and each party agrees to indemnify the
other from any claims or damages, including reasonable attorneys' fees, that the
other may incur as a result of the violation of this warranty, which warranty
and indemnification shall survive settlement and any termination of this
Agreement.
(b) Any written notices required under the terms of this
Agreement shall be sent by certified mail, return receipt requested and
addressed as follows:
TO BUYER: Corporate Office Properties L.P.
One Logan Square, Suite 1105
Philadelphia, PA 19103
Att.: Clay W. Hamlin, III
with copies to: F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
1500 Market Street
38th Floor
Philadelphia, Pennsylvania 19102-2186
TO SELLER: NBP-III, LLC
c/o Constellation Properties, Inc.
250 West Pratt Street
Baltimore, Maryland 21201
Att.: Dan R. Skowronski, Esquire
8
<PAGE>
Any party hereto may change its notice address by giving notice of such change
in accordance with this paragraph.
(c) Time shall be the essence of this Agreement.
(d) If the last day of the Option Period or the date on which
Settlement is to occur, or the last day of any time period specified herein,
falls on a Saturday, Sunday or holiday, the period for the required action shall
be extended until 5:00 PM on the next business day.
(e) This Agreement contains the final and entire agreement
between the parties thereto, and neither party shall be bound by any terms,
condition, statement or representation not herein contained. The Agreement may
not be modified or changed orally, but only by agreement in writing, signed by
the party against whom enforcement of any such change is sought.
(f) The Agreement shall be governed by the laws of the State
of Maryland. The titles of the paragraphs are inserted as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this Agreement or the intent of any provision hereof.
(g) Upon any expiration or termination of this Agreement, the
option to purchase the Property shall be deemed to expire and be null and void
and Buyer shall enter into such documentation in recordable form as may be
reasonably required to confirm such expiration as requested by Seller.
(h) Either party shall have the right to record a memorandum
of this Agreement in the Land Records of Anne Arundel County, Maryland, with the
prior written approval of the other party. The parties shall each pay one-half
(1/2) of the recordation taxes and transfer taxes and fees associated with the
recording of the memorandum.
10. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. Buyer shall have the
9
<PAGE>
right to freely assign this Agreement in whole or in part without the consent of
Seller, provided that no such assignment or collateral assignment shall be
effective unless and until Seller is given written notice thereof by Buyer.
IN WITNESS WHEREOF, each of the parties hereto has executed or caused
this Agreement to be executed by its duly authorized representative on the day
and year first above written.
WITNESS: NBP-III, LLC, a Maryland limited liability company
By: CPI National Business Park-III, Inc.
a Maryland corporation, Member
/s/ By: /s/ Roger A. Waesche, Jr.
- ------------------------ -----------------------------------
Name: Roger A. Waesche, Jr.
Title: Vice President
WITNESS: CORPORATE OFFICE PROPERTIES L.P.
by its sole general partner:
Corporate Office Properties Trust
/s/ By: /s/ Clay W. Hamlin, III
- --------------------------- -----------------------------
Clay W. Hamlin, III
President & Chief Executive Officer
Assented And Agreed To By
CONSTELLATION PROPERTIES, INC.
By: /s/ Roger A. Waesche, Jr.
-------------------------
Vice President
10
<PAGE>
STATE OF MARYLAND COUNTY OF ANNE ARUNDEL, TO WIT:
I HEREBY CERTIFY, that on this 14th day of May, 1998, before me,
undersigned Notary Public of said State, personally appeared ROGER A. WAESCHE,
JR., who acknowledged himself to be the Vice President of CPI National Business
Park-III, Inc., a Maryland corporation, and Member of NBP-III, LLC, a Maryland
limited liability company, known to me or satisfactorily proven to be the person
whose name is subscribed to the within instrument, and acknowledged that he
executed the same for the purposes therein contained as the duly authorized Vice
President of said corporation by signing the name of the corporation himself as
Vice President.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal, the day and
year first above written.
/s/
--------------------------
Notary Public
My commission expires: 5/1/02
STATE OF MARYLAND COUNTY OF ANNE ARUNDEL, TO WIT:
I HEREBY CERTIFY, that on this 14th day of May, 1998, before me,
undersigned Notary Public of said State, personally appeared CLAY W. HAMLIN,
III, known to me or satisfactorily proven to be the person whose name is
subscribed to the within instrument, who acknowledged himself to be the
President and Chief Executive Officer of Corporate Office Properties Trust, the
sole general partner of Corporate Office Properties L.P., a limited partnership
and acknowledged that he executed the same for the purposes therein contained as
the duly authorized President and Chief Executive Officer of said trust company
by signing the name of the trust company himself as President and Chief
Executive Officer.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal, the day and
year first above written.
/s/
--------------------------
Notary Public
My commission expires: 05/01/02
11
<PAGE>
STATE OF MARYLAND COUNTY OF ANNE ARUNDEL, TO WIT:
I HEREBY CERTIFY, that on this 14th day of May, 1998, before me,
undersigned Notary Public of said State, personally appeared ROGER A. WAESCHE,
JR., known to me or satisfactorily proven to be the person whose name is
subscribed to the within instrument, who acknowledged himself to be the Vice
President of Constellation Properties, Inc., a Maryland corporation and
acknowledged that he executed the same for the purposes therein contained as the
duly authorized Vice President of said corporation by signing the name of the
corporation himself as Vice President.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal, the day and
year first above written.
/s/
--------------------------
Notary Public
My commission expires: 05/01/98
ATTORNEY CERTIFICATION
THE UNDERSIGNED, an attorney admitted to practice before the Court of
Appeals of Maryland, hereby certifies that the above instrument was prepared by
me or under my supervision.
/s/ John Harris Gurley
---------------------------------
John Harris Gurley, Attorney-at-Law
12
<PAGE>
EXHIBIT A
Description of the Property
Lot No. 11, as shown on those subdivision plats entitled, "Phase Three, An
Industrial Resubdivision of Lots 3, 4 and Reserved Parcel `D', NATIONAL BUSINESS
PARK," dated October, 1991, Sheets 1 thru 10 of 10, which subdivision plats are
recorded among the Land Records of Anne Arundel County, Maryland at Plat Book
143, Pages 28 thru 37, inclusive, Plat Nos. 7751 thru 7760, inclusive.
13
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT ("Agreement") is made and executed this 14th day
of May, 1998, by and between CONSTELLATION GATESPRING II, LLC ("Seller") and
CORPORATE OFFICE PROPERTIES L.P., its successors and assigns ("Buyer").
RECITALS
Seller is the contract purchaser of that parcel of land knows as Lot
8-20 within the Coplumbia Gateway Business Park (the "Property"), said parcel
being more particularly described in Exhibit A attached hereto and by this
reference made a part hereof. Seller intends to develop and construct on Lot
S-20 an office building containing approximately 106,000 gross square feet to be
known as Woodlands Two. Seller will acquire fee simple title to the Property and
is willing to grant to Buyer an option to purchase the Property on the terms and
conditions as set forth herein. Buyer is willing to accept said option on those
terms and conditions and for the considerations provided and described herein.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the adequacy of which is hereby acknowledged, Seller
hereby grants to Buyer the exclusive right and option (irrevocable except upon
the express terms and conditions of this Agreement) during the term hereof to
purchase from Seller, the Property upon the terms and subject to the conditions
hereinafter set forth.
1. Determination of Purchase Price. The Purchase Price for the Property
shall be determined as of the date of "Settlement" (hereinafter defined) and
shall be that sum which is equal to the "Seller's Book Value" (hereinafter
defined) of the Property. For purposes of this Agreement "Seller's Book Value"
shall mean that sum which is the net dollar amount shown as the value of the
Property as same appears as an asset on the balance sheet of the Seller, which
sum shall include all costs expended on the development and construction of
buildings on the Property through the date of Settlement. Seller will provide to
Buyer such access to Seller's books and accounting records as shall be
reasonably required for such a determination to be
<PAGE>
made. The Purchase Price as so determined shall be paid as provided in Paragraph
4 herein. Seller represents that as of the date of this Agreement, Seller has
dedicated Two Million One Hundred Nine Thousand Dollars ($2,109,000.00) to the
development of the Property through August, 1998. Seller shall maintain its
books in accordance with generally accepted accounting principles, consistently
applied.
2. Term of Option; Exercise of Option; Settlement.
(a) The term of the Option as herein granted by Seller shall
commence as of the date hereof and without need of written notice automatically
terminate and expire on that date which is fifteen (15) days thereafter ("Option
Period").
(b) If Buyer at any time during the Option Period desires to
exercise the Option then Buyer shall give to Seller written notice to that
effect together with the date on which Settlement is to occur, subject to the
provisions of Section 2(c) below.
(c) Notwithstanding anything herein to the contrary, if Buyer
exercises its Option hereunder, Settlement shall be on or before that date which
is forty-five (45) days after the Closing under that certain Contribution
Agreement of even date herewith by and between Corporate Office Properties Trust
and Corporate Office Properties, L.P., as Buyer and various entities which are
subsidiaries and affiliates of Constellation Properties, Inc. (the "Contribution
Agreement").
3. Payment of Purchase Price; Deposit.
(a) It is hereby irrevocably acknowledged, confirmed and
agreed by Seller that the mutual obligations and covenants of the parties
hereunder and the entry by affiliates of Seller and Buyer into other agreements
as of even date herewith, constitute adequate consideration for the Option
herein granted.
2
<PAGE>
(b) The balance of the Purchase Price shall be paid as
provided in Paragraph 5 following.
4. Right to Inspect.
From and after execution of this Agreement by both Buyer and
Seller, Buyer and Buyer's consultants shall have the right to enter upon the
Property and conduct, at Buyer's sole expense, any engineering tests,
development and land use studies, environmental analysis, soil tests,
topographical and other surveys, wetlands and flood plain delineations, and
other surveys, tests and studies (collectively, "Site Investigations") as Buyer
deems necessary. All lands, trees, shrubs, grass and field areas shall be
restored as closely as possible to their pre-test conditions. Buyer and its
consultants shall enter and test the Property at their own risk; and Buyer
and/or its consultants shall carry adequate commercial general liability
insurance of not less than $1,000,000 combined single limit naming Seller as an
additional insured. Buyer and/or its consultants shall provide Seller with a
certificate evidencing such insurance promptly upon request. Further, Buyer
shall indemnify and save Seller harmless from any and all suits, claims of
injuries and judgements, and reasonable attorney's fees, in any way arising out
or such entry and testing of the Property, which indemnification and obligation
to hold the Seller harmless shall survive any termination of this Agreement.
5. Settlement.
(a) Settlement and transfer of title to the Property
("Settlement") shall be held in the Baltimore-Metropolitan area, at a location
selected by the Buyer, and shall occur on that date which shall be noted on
Buyer's notice of exercise of the Option.
(b) At Settlement, the Buyer shall pay Seller, in cash or by
certified, cashier's, treasurer or title company check, or by wire transfer, the
Purchase Price determined for the Property.
3
<PAGE>
(c) At Settlement, title to the Property shall be good and
merchantable, free of all liens, encumbrances, encroachments and easements other
than the Permitted Encumbrances (as hereinafter defined), and of the Property
shall be given to Buyer free of all tenancies or other rights of use or
occupancy. A deed containing covenants of special warranty and further
assurances shall be executed by Seller, at Buyer's expense, which shall convey
fee simple title to the Property together with all improvements, rights, alleys,
ways, waters, privileges, easements, appurtenances and advantage benefitting the
Property, and shall be delivered to Buyer at Settlement.
(d) As soon as possible after exercise of the Option the
Buyer, at Buyer's expense, shall have the title to the Property examined by a
reputable title insurance company and have such title insurance company issue a
title insurance commitment (the "Title Commitment") to assure Buyer that, as of
the examination date, title to the Property is good and merchantable and
insurable at ordinary prevailing title insurance rates and that any exceptions
to title contained in the Title Commitment are acceptable to Buyer. By the
thirtieth (30th) day after receipt by Seller of notice of any exercise of the
Option, Buyer shall provide to Seller a copy of the Title Commitment and either
advise Seller in writing that all exceptions to title contained in the Title
Commitment are acceptable to Buyer or advise Seller in writing of those
exceptions to title contained in the Title Commitment that are unacceptable to
Buyer; provided, however, that Buyer shall be required to accept (i) all matters
shown on that Subdivision Plat depicting the Property and any amendments
thereto. Failure of Buyer to examine title or to advise Seller of the
acceptability of title within the time periods required hereunder shall be
deemed an acceptance of all title matters. Within fifteen (15) days after
receipt of a notice from Buyer advising Seller that certain title exceptions are
unacceptable to Buyer, Seller shall notify Buyer whether Seller will cure any of
the unacceptable title exceptions. Failure of Seller to provide notice within
such time period shall be deemed an election by Seller not to cure the
unacceptable title exceptions. If Buyer has timely notified Seller of
unacceptable title matters then, unless Seller has timely elected to cure such
title exceptions as provided hereunder, Buyer, by written notice to Seller, may,
within fifteen (15) days after expiration of the time period for Seller to elect
to cure, either waive such unacceptable title exceptions (in which case such
exceptions shall be deemed acceptable to Buyer) or terminate the Option. Failure
of Buyer to notify Seller in such fifteen
4
<PAGE>
(15) days period shall be deemed an election by Buyer to waive the unacceptable
title exceptions. If Seller notifies Buyer that Seller will cure any
unacceptable title exception, then Seller shall be obligated to promptly and, in
all events, prior to Settlement, proceed to cure such title exception in such
manner that the defect or objection to the title will not appear in the Buyer's
title insurance policy. All exceptions to title accepted by Buyer or deemed to
be accepted by Buyer under the provisions of this paragraph (other than
mortgages, deeds of trust and other liens [excluding liens for taxes and
assessments to be adjusted under subparagraph (e)], all of which shall be
discharged by Seller at or prior to Settlement) shall constitute "Permitted
Encumbrances." Notwithstanding the foregoing, from and after the date hereof and
continuing until the expiration of the Option Period, Seller shall not change or
permit to be changed title to the Property or any portion thereof in a manner
which would materially prevent or interfere with the development of the
Property.
(e) All costs, including taxes, insurance and any and all
costs relating to the ownership of the Property shall be borne by Seller until
the time of any Settlement hereunder. All taxes, general or special, and all
other public, governmental or other assessments against the Property payable on
an annual basis are to be adjusted and apportioned as of the date of Settlement
and are to be assumed and paid after Settlement by Buyer. The costs, if any, of
all recordation taxes and transfer taxes shall be split and paid equally by
Buyer and Seller. All agricultural transfer tax or taxes, if any, shall be paid
by Seller. All other closing costs, including, without limitation, recording
charges, document preparation charges, notary fees and title insurance premiums
shall be paid by Buyer. Seller and Buyer shall each pay their respective legal
costs.
(f) At Settlement hereunder, the Seller shall, execute and
deliver to the Buyer an affidavit, in form sufficient to satisfy all Internal
Revenue Service requirements, stating that Seller is not a "foreign person" (as
defined by the Foreign Investment in Real Property Tax Act and the regulations
promulgated thereunder) so that Buyer is not legally required to withhold any
portion of the Purchase Price then being paid at Settlement hereunder.
5
<PAGE>
6. Potential Contribution of Member Interests in Lieu of Fee Simple
Transfer. If Buyer exercises its option to purchase all of the lots owned by
Seller hereunder, Buyer shall have the right, exercisable by written notice to
Seller given at least ten (10) days prior to Settlement, to structure the
transfer as a purchase of 100% of the member interests of the Seller, rather
than as a transfer of the underlying Property. In such event, at the time of
Settlement, Seller(s) shall execute and deliver to Buyer:
(a) an Assignment and Assumption Agreement, an Amendment to
the Operating Agreement, and Amendment of the Articles of Organization setting
forth the assignment by each of the members of such member's membership interest
and his, her or its withdrawal from the Seller and the admission of the Buyer
and/or its designee(s) as members of the Seller, which amendment shall be
executed and acknowledged by all withdrawing members and the Buyer;
(b) a release from each withdrawing member releasing the Buyer
(and its designee(s)) as members of the limited liability company from any
obligations and liabilities with respect to the formation of such limited
liability company, and any other matter arising from business done, transactions
entered into or events occurring prior to the Settlement;
(c) customary representations and warranties as to the member
interests, consistent with those set forth in Section 11.1 of the Contribution
Agreement; and
(d) such other documents and items as may be reasonably
required to be delivered by Seller to Buyer under the terms of this Agreement or
relating to the Property and the membership interest to reasonably effect the
purposes of this Agreement.
All of such documentation shall be in substantially the same form as
the documentation being delivered under the terms of the Contribution Agreement.
7. Risk of Loss. The Property and is to be held at the risk of the
Seller until legal title has passed.
6
<PAGE>
8. Seller's Warranties and Representations. Seller warrants, represents
and covenants to Buyer that the following items are true in all material
respects and shall be deemed to have been restated at the time of Settlement
hereunder:
(a) As of the date hereof and as of Settlement, Seller will be
the owner of 100 percent fee simple interest in the Property and will not have
entered into any contract of sale, option agreement, right of first refusal or
other agreement for the sale of the Property.
(b) The Seller has full power and authority to execute,
deliver and perform this Agreement in accordance with its terms.
(c) As of the date of this Agreement, the Property is zoned to
permit its use for office and warehouse purposes and Seller, shall not join in
or consent to any change in the zoning of the Property which would prohibit its
use for office and warehouse purposes.
(d) To the best of Seller's knowledge, there are no
underground storage tanks on the Property.
(e) Seller has not used, generated, stored or disposed, and
from and after the date of this Agreement will not use, generate, store or
dispose, on, under or about the Property any hazardous waste, toxic substance or
related materials or any friable asbestos or substance containing asbestos.
The foregoing warranties shall terminate twelve (12) months after
Settlement hereunder.
9. Construction Costs and Obligations. If at the time of exercise of
the Option Seller is in the process of construction of buildings on the
Property it is agreed that:
(a) Seller will tender and transfer (as necessary) to Buyer
all plans, specifications, contracts, permits and other materials related to
such construction;
7
<PAGE>
(b) Seller will open its accounting records to Buyer and
cooperate with Buyer's takeover of the responsibility of such construction; and
(c) Seller will if necessary give to Buyer appropriate bills
of sale for personal property items then in the possession of Seller and related
to such construction.
10. Miscellaneous.
(a) Seller and Buyer warrant that, in connection with this
transaction, they have dealt with no broker, agent or other party who may be
entitled to a commission or finder's fee, and each party agrees to indemnify the
other from any claims or damages, including reasonable attorneys' fees, that the
other may incur as a result of the violation of this warranty, which warranty
and indemnification shall survive settlement and any termination of this
Agreement.
(b) Any written notices required under the terms of this
Agreement shall be sent by certified mail, return receipt requested and
addressed as follows:
TO BUYER: Corporate Office Properties L.P.
One Logan Square, Suite 1105
Philadelphia, PA 19103
Att.: Clay W. Hamlin, III
with copies to: F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
1500 Market Street
38th Floor
Philadelphia, Pennsylvania 19102-2186
TO SELLER: Constellation Gatespring II, LLC
c/o Constellation Properties, Inc.
250 West Pratt Street
Baltimore, Maryland 21201
Att.: Dan R. Skowronski, Esquire
8
<PAGE>
Any party hereto may change its notice address by giving notice of such change
in accordance with this paragraph.
(c) Time shall be the essence of this Agreement.
(d) If the last day of the Option Period or the date on which
Settlement is to occur, or the last day of any time period specified herein,
falls on a Saturday, Sunday or holiday, the period for the required action shall
be extended until 5:00 PM on the next business day.
(e) This Agreement contains the final and entire agreement
between the parties thereto, and neither party shall be bound by any terms,
condition, statement or representation not herein contained. The Agreement may
not be modified or changed orally, but only by agreement in writing, signed by
the party against whom enforcement of any such change is sought.
(f) The Agreement shall be governed by the laws of the State
of Maryland. The titles of the paragraphs are inserted as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this Agreement or the intent of any provision hereof.
(g) Upon any expiration or termination of this Agreement, the
option to purchase the Property shall be deemed to expire and be null and void
and Buyer shall enter into such documentation in recordable form as may be
reasonably required to confirm such expiration as requested by Seller.
(h) Either party shall have the right to record a memorandum
of this Agreement in the Land Records of Anne Arundel County, Maryland, with the
prior written approval of the other party. The parties shall each pay one-half
(1/2) of the recordation taxes and transfer taxes and fees associated with the
recording of the memorandum.
9
<PAGE>
10. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. Buyer shall have the right to freely assign this Agreement in whole or
in part without the consent of Seller, provided that no such assignment or
collateral assignment shall be effective unless and until Seller is given
written notice thereof by Buyer.
IN WITNESS WHEREOF, each of the parties hereto has executed or caused
this Agreement to be executed by its duly authorized representative on the day
and year first above written.
IN WITNESS WHEREOF, each of the parties hereto has executed or caused
this Agreement to be executed by its duly authorized representative on the day
and year first above written.
WITNESS: CORPORATE OFFICE PROPERTIES L.P.
by its sole general partner:
Corporate Office Properties Trust
/s/ By: /s/ Clay W. Hamlin, III
- ---------------------------- ----------------------------------
Clay W. Hamlin, III
President & Chief Executive Officer
WITNESS: CONSTELLATION GATESPRING II, LLC
By: CPI Gatespring, II, Inc., its sole member
/s/ By: /s/ Roger A. Waesche, Jr.
- ---------------------------- ----------------------------------
Roger A. Waesche, Jr.
Vice President
Assented and Agreed To By
CONSTELLATION PROPERTIES, INC.
By: /s/ Roger A. Waesche, Jr.
------------------------
Vice President
10
<PAGE>
STATE OF MARYLAND COUNTY OF ANNE ARUNDEL, TO WIT:
I HEREBY CERTIFY, that on this 14th day of May, 1998, before me,
undersigned Notary Public of said State, personally appeared CLAY W. HAMLIN,
III, known to me or satisfactorily proven to be the person whose name is
subscribed to the within instrument, who acknowledged himself to be the
President and Chief Executive Officer of Corporate Office Properties Trust, the
sole general partner of Corporate Office Properties L.P., a limited partnership
and acknowledged that he executed the same for the purposes therein contained as
the duly authorized President and Chief Executive Officer of said trust company
by signing the name of the trust company himself as President and Chief
Executive Officer.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal, the day and
year first above written.
/s/
--------------------------
Notary Public
My commission expires: 5/1/02
STATE OF MARYLAND COUNTY OF ANNE ARUNDEL, TO WIT:
I HEREBY CERTIFY, that on this 14th day of May, 1998, before me,
undersigned Notary Public of said State, personally appeared ROGER A. WAESCHE,
JR., who acknowledged himself to be the Vice President of CPI Gatespring II,
Inc., a Maryland corporation, the sole member of Constellation Gatespring II,
LLC, a Maryland limited liability company, known to me or satisfactorily proven
to be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same for the purposes therein contained as the
duly authorized Vice President of said corporation by signing the name of the
corporation himself as Vice President.
IN WITNESS WHEREOF, I have set my hand and Notarial Seal, the day and
year first above written.
/s/
--------------------------
Notary Public
My commission expires: 05/01/02
11
<PAGE>
ATTORNEY CERTIFICATION
THE UNDERSIGNED, an attorney admitted to practice before the Court of
Appeals of Maryland, hereby certifies that the above instrument was prepared by
me or under my supervision.
/s/ John Harris Gurley
---------------------------------
John Harris Gurley, Attorney-at-Law
12
<PAGE>
EXHIBIT A
Description of the Property
Parcel S-20 which contains 8.637 acres, more or less, and being shown on that
certain Subdivision Plat entitled, "Columiba Gateway, Parcels `S-19' thru
`S-21', a Resubdivision of Columbia Gateway, Parcels S-4, S-5 & S-7 as shown on
Plat No. 8803, Sheet 1 of 1," which Plat is recorded among the Land Records of
Howard County aslat Number 12882.
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<PAGE>
FIRST AMENDMENT TO OPTION AGREEMENT
THIS FIRST AMENDMENT TO OPTION AGREEMENT ("Amendment") is made and executed
as of this 22nd day of June, 1998 by and between NBP-III, LLC ("Seller") and
CORPORATE OFFICE PROPERTIES, L.P., its successors and assigns ("Buyer").
A. Seller and Buyer entered into an Option Agreement dated May 14, 1988
pursuant to which Seller granted to Buyer the option to purchase the Property
known as Lot 11 of the National Business Park on which Seller intends to develop
and construct an office building containing approximately 110,000 gross square
feet (now planned for 90,000 gross square feet) to be known as 134 National
Business Park (the "Option Agreement"). Capitalized terms used, but not
defined, in this Amendment shall have the meanings set forth in the Option
Agreement.
B. By notice dated May 28, 1998, Buyer exercised its option to purchase
the Property.
C. Seller and Buyer desire to amend the Option Agreement as set forth in
this Amendment.
NOW, THEREFORE, in consideration of the agreements contained herein and
intending to be legally bound hereby, Seller and Buyer agree as follows:
1. The first sentence of Section 1 of the Option Agreement is hereby
deleted, and the following sentence is substituted in its place: "The Purchase
Price for the Property shall be determined as of the date of "Settlement"
(hereinafter defined) and shall be that sum which is equal to the "Seller's Book
Value" (hereinafter defined) of the Property, not to exceed $12,287,130.00 as
set forth on the attached Exhibit "Construction Budget" attached hereto assuming
that the building of 90,000 gross square feet to be constructed on the Property
is fully completed."
2. The following sentence is hereby added at the end of Section 1 of
the Option Agreement: "The Construction Budget shown in Exhibit "Construction
Budget" shall not be increased by more than $50,000.00 without Buyer's prior
written consent.
<PAGE>
3. The following Section 9(d) is added to the Option Agreement:
"(d) Seller shall have paid all costs of any nature relating to
the ownership, development and construction of the buildings
and improvements on the Property through the date of
Settlement and shall deliver evidence of such payment to
Buyer. Seller shall execute and deliver, and shall cause
all contractors to execute and deliver, all documents
reasonably required to effectuate Buyer's takeover of the
responsibility for such construction, free and clear of any
pre-Settlement obligations or claims, which documents shall
be reasonably acceptable to Seller and Buyer."
4. Exhibit "Construction Budget" attached hereto and made a part
hereof is hereby attached to and made part of the Option Agreement.
5. As amended by this Amendment, the Option Agreement shall remain
in full force and effect.
[SIGNATURES FOLLOW ON NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have executed this Amendment on the
day and year first above written.
WITNESS: CORPORATE OFFICE PROPERTIES, L.P., by its
sole general partner, Corporate Office
Properties Trust
/s/ By: /s/ CLAY W. HAMLIN, III
- --------------------------- -----------------------
Clay W. Hamlin, III
President and Chief Executive Officer
WITNESS: NBP-III, LLC, a Maryland limited liability
company, by CPI National Business Park-III,
Inc., a Maryland corporation, authorized
Member
/s/ By: /s/ ROGER A. WAESCHE, JR.
- --------------------------- -------------------------
Roger A. Waesche, Jr.
Vice President
ASSENTED AND AGREED TO BY
CONSTELLATION PROPERTIES, INC.
By: /s/
----------------------
Vice President
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<PAGE>
FIRST AMENDMENT TO OPTION AGREEMENT
THIS FIRST AMENDMENT TO OPTION AGREEMENT ("Amendment") is made and executed
as of this 22nd day of June, 1998 by and between
CONSTELLATION GATESPRING II, LLC ("Seller") and CORPORATE OFFICE
PROPERTIES, L.P., its successors and assigns ("Buyer").
A. Seller and Buyer entered into an Option Agreement dated May 14, 1988
pursuant to which Seller granted to Buyer the option to purchase the Property
known as Lot S-20 of the Columbia Gateway Business Park on which Seller intends
to develop and construct an office building containing approximately 100,000
gross square feet to be known as Woodlands Two (the "Option Agreement").
Capitalized terms used, but not defined, in this Amendment shall have the
meanings set forth in the Option Agreement.
B. By notice dated May 28, 1998, Buyer exercised its option to purchase
the Property.
C. Seller and Buyer desire to amend the Option Agreement as set forth in
this Amendment.
NOW, THEREFORE, in consideration of the agreements contained herein and
intending to be legally bound hereby, Seller and Buyer agree as follows:
1. The first sentence of Section 1 of the Option Agreement is hereby
deleted, and the following sentence is substituted in its place: "The Purchase
Price for the Property shall be determined as of the date of "Settlement"
(hereinafter defined) and shall be that sum which is equal to the "Seller's Book
Value" (hereinafter defined) of the Property, not to exceed $14,442,403.00 as
set forth on the attached Exhibit "Construction Budget" attached hereto assuming
that the building of 106,000 gross square feet to be constructed on the Property
is fully completed."
2. The following sentence is hereby added at the end of Section 1 of
the Option Agreement: "The Construction Budget shown in Exhibit "Construction
Budget" shall not be increased by more than $50,000.00 without Buyer's prior
written consent.
<PAGE>
3. The following Section 9(d) is added to the Option Agreement:
"(d) Seller shall have paid all costs of any
nature relating to the ownership, development
and construction of the buildings and
improvements on the Property through the date
of Settlement and shall deliver evidence of
such payment to Buyer. Seller shall execute
and deliver, and shall cause all contractors
to execute and deliver, all documents
reasonably required to effectuate Buyer's
takeover of the responsibility for such
construction, free and clear of any
pre-Settlement obligations or claims, which
documents shall be reasonably acceptable to
Seller and Buyer."
4. Exhibit "Construction Budget" attached hereto and made a part
hereof is hereby attached to and made part of the Option Agreement.
5. As amended by this Amendment, the Option Agreement shall remain
in full force and effect.
[SIGNATURES FOLLOW ON NEXT PAGE]
-2-
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have executed this Amendment on the
day and year first above written.
WITNESS: CORPORATE OFFICE PROPERTIES, L.P., by its sole
general partner, Corporate Office Properties Trust
/s/ By: /s/ CLAY W. HAMLIN, III
- --------------------------- --------------------------------------
Clay W. Hamlin, III
President and Chief Executive Officer
WITNESS: CONSTELLATION GATESPRING II, LLC, by
CPI Gatespring II, Inc., its sole member
/s/ By: /s/ ROGER A. WAESCHE, JR.
- --------------------------- ------------------------------------
Roger A. Waesche, Jr.
Vice President
ASSENTED AND AGREED TO BY
CONSTELLATION PROPERTIES, INC.
By: /s/
---------------------------
Vice President
-3-
<PAGE>
DEVELOPMENT PROPERTY ACQUISITION AGREEMENT
THIS AGREEMENT, made as of the 22nd day of June, 1998 (the "Contract
Date"), by and between CONSTELLATION PROPERTIES, INC., a Maryland corporation
("Seller"), and CORPORATE OFFICE PROPERTIES, L.P., a Delaware limited
partnership, and its assigns ("Buyer").
B A C K G R O U N D
Seller is the sole shareholder of CPI Springfield, Inc., a Maryland
corporation ("CPI Springfield"). CPI Springfield is the sole member of
Constellation-Springfield, LLC, a Maryland limited liability company
("Constellation-Springfield"). Constellation-Springfield is the holder of a
sixty percent (60%) member interest (the "Member Interest") in Fran-Spring TSA,
LLC, a Virginia limited liability company (the "Company").
Constellation-Springfield's Member Interest is a sixty percent (60%) capital,
profits, voting and other interest in the Company. The Seller,
Constellation-Springfield and CPI Springfield shall be referred to herein
collectively from time to time as the "Constellation Parties" and individually
as a "Constellation Party."
The Company is the record and beneficial owner of approximately 14.93 acres
of land identified as Tax Map 90-2(l) Parcel 61 on the Tax Maps of
Fairfax County, Virginia, as more particularly described on Exhibit "A" hereto,
together with the buildings and other improvements now or hereafter situate
thereon, and together with the appurtenances thereto (including, without
limitation, all easements, rights-of-way, ancillary and/or adjacent lands and
other real property rights and benefits belonging to or running with the owner
of the property (collectively, the "Property"). The Company is in the process
of completing construction of a retail shopping center consisting or
approximately 119,099 rentable square feet of retail space and related
improvements on the Property (the "Improvements") in accordance with the Plans
(as defined on Exhibit "C").
Seller desires to sell and convey and the Buyer desires to purchase and
accept, 100% of the issued and outstanding shares of stock in CPI Springfield
(the "Shares") according to the terms and conditions of this Agreement.
Capitalized terms used in this Agreement shall have the meanings set forth
herein, including the definitions set forth on Exhibit "C."
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and intending to be legally bound hereby, the parties agree as
follows:
1. SALE AND PURCHASE. Seller hereby agrees to sell and convey to Buyer,
which hereby agrees, subject to the conditions set forth herein, to purchase
from Seller, the Shares.
<PAGE>
2. PURCHASE PRICE.
(a) Provided that the Property is generating NOI (as defined below)
equal to at least $2,372,000.00 at the time of Closing (as defined below), the
purchase price for the Shares shall be equal to forty-eight percent (48%) of the
difference between (i) Twenty Five Million Five Hundred Fifty Thousand Dollars
($25,550,000.00) MINUS (ii) the principal balance plus accrued interest
outstanding with respect to the Assumed Indebtedness (as defined in
Section 8(o)), as certified by the holder of the Assumed Indebtedness (the
"Purchase Price"). The Purchase Price shall be paid by the Buyer by delivery of
immediately available wire transfer funds to Seller to such account as shall be
designated by Seller.
(b) If NOI is less than $2,372,000.00 at the time of Closing, the
Purchase Price shall be reduced and shall be equal to the NOI at the time of
Closing divided by a capitalization rate of 9.3%, provided, however that in no
event shall Seller or Buyer be obligated to complete Closing hereunder unless
and until NOI has reached $2,000,000.00. Notwithstanding anything to the
contrary contained in this Agreement, if NOI has not reached $2,000,000.00 by
July 1, 1999 for any reason whatsoever, Buyer and Seller shall each have the
right, by written notice to the other, to terminate this Agreement, in which
event neither party shall have any further liability or obligation hereunder.
(c) The term "NOI" means the net operating income for the Property
determined as customarily calculated in the commercial real estate industry
for retail shopping center properties similar to the Property, based on the
annualized operating revenues to be received from the Property from Leases in
effect on the Closing Date (as those terms are defined below) less the
estimated annual operating expenses, including, without limitation, a
management fee of three and one-half percent (3 1/2%) of revenues, and a
vacancy reserve of two and one-half percent (2 1/2%) of the number of square
feet of the Property times the anticipated average rent per square foot for
the Property. In computing NOI, credit shall be given for rental income from
Leases in effect at Closing, but under which rent payment has not commenced
as of the Closing Date (the "Open Leases"). The portion of the Purchase
Price based upon such Open Leases (the "Open Lease Holdback") shall be placed
in escrow at Closing with Commonwealth Land Title Insurance Company under an
escrow agreement reasonably acceptable to Seller and Buyer. The Open Lease
Holdback shall be paid to Seller only to the extent of the portion of the
Open Lease Holdback based upon Open Leases under which rent payment commences
within one hundred twenty (120) days after the Closing Date. If rent payment
does not commence under any one (1) or more of the Open Leases within one
hundred twenty (120) days after the Closing Date, the portion of the Open
Lease Holdback based upon such Open Leases shall be paid to Buyer. The term
"Leases" shall mean all leases and other agreements to occupy all or any
portion of the Property executed and in effect on the Contract Date or into
which the Company enters prior to the Closing (as defined below), but
pursuant to the express terms of this Agreement.
2
<PAGE>
3. CLOSING.
(a) CLOSING DATE. The sale and transfer of the Shares, the payment
of the Purchase Price and the completion of all other transactions contemplated
by this Agreement ("Closing") shall take place at the offices of Seller set
forth in Section 17 of this Agreement, or at such other place as may mutually
agreed upon by the parties. The Closing shall commence at 10:00 a.m. on the
date (the "Closing Date"), within fifteen (15) days after the Leasing
Requirements Satisfaction Date (defined at Section 5(b)), specified by Buyer
upon not less than five (5) days written notice to the Seller, and, in any
event, subject to Section 2(b) above, the Closing Date shall be not later than
July 1, 1999.
(b) SELLER DELIVERIES. At Closing, Seller shall deliver or cause to
be delivered to Buyer the following in respect of the Shares, in form and
substance reasonably acceptable to Buyer and Seller and their respective
counsel:
(1) ASSIGNMENT DOCUMENTATION. An assignment and certificates
representing all of the Shares sold hereunder, endorsed in blank or to Buyer or
its nominee as Buyer may elect;
(2) ORGANIZATIONAL DOCUMENTS. The minute book, stock
certificates book, corporate seal, articles of incorporation, bylaws, all books
of account, all agreements, documents and other books, records, papers and
instruments of or pertaining to the business and affairs of CPI Springfield (to
the extent not previously delivered as part of Seller's Deliveries, as
hereinafter defined);
(3) RESIGNATIONS AND APPOINTMENT. Written resignations of all
directors and officers of CPI Springfield, and the written resignations of
Constellation Springfield's two (2) members of the Company's Management
Committee, and appointment to such Management Committee of two (2) members
designated by Buyer;
(4) RELEASE. A release from Seller, releasing the Buyer (and
its designee(s)) as the sole shareholder of CPI Springfield from any obligations
and liabilities with respect to the formation of CPI Springfield and
Constellation-Springfield, and any other matter arising from business done,
transactions entered into or event occurring prior to the Closing;
(5) OPINIONS. (A) An opinion of Daniel R. Skowronski, Esquire,
General Counsel of Constellation Holdings, Inc., the parent of Seller, in form
and substance reasonably satisfactory to Buyer and Buyer's counsel, providing or
with respect to: (i) the legal existence and good standing of each of the
Constellation Parties and the Company in its state of formation; (ii) the due
authorization, execution and delivery of this Agreement, and the other documents
required (under the terms of this Agreement) to be delivered by Seller;
(iii) that this Agreement and the other documents required (under the terms of
this Agreement) to be delivered by Seller, constitute the legal, valid and
binding obligations of Seller, enforceable against it in accordance with their
respective terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws of
3
<PAGE>
general applicability relating to or affecting the enforcement of creditors'
rights and by the effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding of equity or at law; (iv) the
execution and delivery of this Agreement and all other agreements delivered in
connection herewith or at the Closing, the consummation of the transactions
herein contemplated, and compliance with the terms of this Agreement and all
other agreements delivered in connection herewith or at the Closing will not
conflict with, or result in a breach of, any of the terms, conditions or
provisions of, or constitute a default under, any note, indenture, mortgage,
deed of trust, contract or other agreement or instrument to which either the
Constellation Parties or the Company is a party or by which the Constellation
Parties or the Company is bound, or any law or order, rule, regulation, writ,
injunction or decree of any government, governmental instrumentality or court,
domestic or foreign; and (v) there is no litigation or investigation pending or,
to the best of such counsel's knowledge, threatened against any of the
Constellation Parties, the Company, the Property, or any part thereof, and
(B) an opinion of Miles and Stockbridge, Baltimore, Maryland, in form and
substance reasonably satisfactory to Buyer and Buyer's counsel, providing that
(i) the Operating Agreement is in full force and effect and has not been
amended; (ii) the transfer of Shares does not trigger the Right of First Refusal
(as defined in Section 10(d) below); and (iii) the transfer of Shares does not
require the consent of Fried (as defined in Section 10(d) below), does not
constitute an impermissible transfer of the Member Interest, and does not
otherwise constitute a breach of or default under the Operating Agreement (as
defined in Section 10(d) below).
(6) ESTOPPEL CERTIFICATES. Using Seller's commercially
reasonable efforts, Tenant estoppel certificate from Tenants occupying at least
eighty percent (80%) of the Improvements or such larger percentage as Buyer's
lender or lenders may require (provided, that Buyer advises Seller of lender
requirements at least thirty (30) days before Closing) (the "Estoppel
Certificate"), dated no earlier than 30 days prior to the Closing Date, from
each of the Tenants. The Estoppel Certificate shall be certified to Buyer and
any other party designated by Buyer. If the Constellation Parties (despite
their required commercially reasonable efforts) are unable to obtain an Estoppel
Certificate from the required percentage of Tenants, Buyer and Seller shall
proceed to close and Buyer shall accept Seller's own Estoppel Certificate with
respect to the Lease and tenancy for which the Constellation Parties failed to
procure an Estoppel Certificate from the relevant Tenant (and any Estoppel
Certificate so executed by a Seller shall also be tailored, in a manner mutually
and reasonably acceptable to Buyer and Seller, to reflect its issuance by the
landlord, rather than the Tenant in question). Each such Estoppel Certificate
shall be substantially in the form attached hereto as Exhibit "B" or in such
other form as Buyer's lender or lenders may require.
(7) LENDER'S APPROVAL. The Lender's Approval from the holder of
the Assumed Indebtedness in conformity with Section 13(a)(4) below.
(8) CLOSING STATEMENT. A closing statement conforming to the
proration and other relevant provisions of this Agreement (the "Closing
Statement") duly executed by Seller;
4
<PAGE>
(9) PLANS AND SPECIFICATIONS. All plans and specifications
relating to the Property (including the Plans) in the possession and control of
the Company or any of the Constellation Parties, or otherwise available to such
entities;
(10) TAX BILLS. Copies of the most currently available Tax Bills
to the extent not previously delivered to Buyer;
(11) RENT ROLL AND OPERATING STATEMENTS. An updated Rent Roll
and Operating Statements (as defined on Exhibit "C") for the Property, prepared
as of the Closing Date, certified by the Seller to be true, complete and correct
through the Closing Date;
(12) CERTIFICATES OF OCCUPANCY. Subject to Section 5 below,
currently valid certificates of occupancy (or comparable permits or licenses)
with respect to the entirety of the Property;
(13) ARCHITECT'S CERTIFICATE. A certificate from the architect
for the Improvements (the "Architect") certifying that the Improvements have
been completed in conformity with the Plans;
(14) CLOSING CERTIFICATE. A certificate, signed by Seller, on
behalf of itself and each of the other Constellation Parties, certifying to the
Buyer that the representations and warranties of Seller (for itself and for each
of the other Constellation Parties) contained in this Agreement are true and
correct in all material respects as of the Closing Date and that all covenants
required to be performed by any of the Constellation Parties prior to the
Closing Date have been performed in all material respects;
(15) RESOLUTIONS, CONSENTS, APPROVALS. Certified Resolutions,
consents, and approvals of the Seller evidencing its authority to execute this
Agreement and consummate the transactions contemplated by this Agreement.
(16) GOOD STANDING CERTIFICATES. Currently dated good standing
certificates for the Company and each of the Constellation Parties.
(17) MISCELLANEOUS. Such other documents and items as reasonably
may be required to be delivered by Seller or the other Constellation Parties to
Buyer under the terms of this Agreement or relating to the Shares or the
Property to reasonably effect the purposes of this Agreement, including without
limitation, affidavits of title in favor of the Buyer and the Company's title
insurance company on the form used by such title company to enable such company
to issue Fairway and Non-Imputation Endorsements to the Company's Owner's Policy
of Title Insurance at the time of Closing.
(c) BUYER DELIVERIES. Buyer shall cause to be delivered to Seller
the following, each in form and substance reasonably acceptable to Seller and
Buyer and their respective counsel:
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<PAGE>
(1) A copy certified by the Secretary of State of the State of
Delaware of the Certificate of Limited Partnership of the Buyer and a good
standing certificate for the Buyer;
(2) The Closing Statement, executed by Buyer;
(3) An opinion of counsel for Buyer, in form and substance
reasonably satisfactory to Seller and Seller's counsel, providing or with
respect to: (i) the legal existence and good standing of Buyer; (ii) the due
authorization, execution and delivery of this Agreement, and the other documents
required (under the terms of this Agreement) to be delivered by Buyer;
(iii) that this Agreement and the other documents required (under the terms of
this Agreement) to be delivered by Buyer, constitute the legal, valid and
binding obligations of Buyer, enforceable against it in accordance with their
respective terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws of general applicability relating to or affecting the
enforcement of creditors' rights and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding of
equity or at law; and
(4) Such other documents and instruments as may reasonably be
required by Seller or its counsel and that are necessary to consummate the
transaction which is the subject of this Agreement and to otherwise effect the
agreements of the parties hereto.
(d) CONSTELLATION RELEASE. At Closing, Buyer shall cause the
Constellation Release (hereinafter defined) to occur. As used in this
Agreement, the term "Constellation Release" shall mean the release of
Constellation Real Estate Group, Inc. (of which the Seller is a wholly-owned
subsidiary) from its obligations under the Unconditional Guaranty of payment and
performance dated as of April 27, 1998 guaranteeing the Company's payment and
performance under the Existing Loan Documents (hereinafter defined). If Buyer
elects to cause the Constellation Release to occur by replacing the Assumed
Indebtedness with New Indebtedness satisfactory to Buyer (the "New
Indebtedness"), Seller shall cooperate with Buyer, and shall use commercially
reasonable efforts to cause Fried (hereinafter defined) to cooperate with Buyer
to obtain such New Indebtedness, to cause the Company to incur the New
Indebtedness, and to encumber the Property with such New Indebtedness.
(e) PRORATIONS AND ADJUSTMENTS. Operating Net Cash Flow (as defined
below) allocable to Seller's Member Interests shall be apportioned between
Seller and Buyer as of the Closing Date. If Seller receives, on or before the
Closing Date, any Operating Net Cash Flow allocable to Constellation-Springfield
for the period after the Closing Date, Buyer shall receive a credit in the
amount of such Operating Net Cash Flow received by Seller on or before the
Closing Date. If, after the Closing Date, Buyer receives any Operating Net Cash
Flow for the fiscal year in which the Closing Date occurred and which is
allocable to Constellation-Springfield for the period during which the Seller
owned the Shares, Buyer shall pay to Seller the portion of Operating Net Cash
Flow allocable to Seller. Buyer shall provide Seller with copies of the
Company's financial statements for the fiscal year in which the Closing Date
occurs within thirty (30) days after Buyer receives such financial statements.
As used in
6
<PAGE>
this Section 3(d), the term "Operating Net Cash Flow" shall mean Net Cash Flow
as defined in the Operating Agreement (defined below), expressly excluding,
however, all proceeds from the financing or re-financing of any indebtedness of
the Company, all proceeds from the sale or other transfer of all or any portion
of the Property, and all proceeds from Capital Contributions (as defined in the
Operating Agreement).
(f) EXPENSES. Seller will pay the entire cost of all fees imposed by
its accountants and attorneys and consultants in connection with this Agreement
and the transaction contemplated hereunder. Subject to the condition precedent
that the Constellation Release shall have occurred, Seller shall pay any and all
assumption fees, transfer fees, and other costs associated with Buyer's
acquisition of the Shares with the Property subject to the Assumed Indebtedness.
Seller shall pay any prepayment fees, charges, or penalties in connection with
the payoff of the Assumed Indebtedness. Although Seller and Buyer do not
believe that any realty transfer taxes shall be due in connection with the
transfer of the Shares, if it is finally determined that transfer taxes are due
and payable, such transfer taxes shall be divided equally by Seller and Buyer.
Seller and Buyer shall divide equally the cost of contesting such transfer
taxes. Buyer shall pay all ordinary filing charges and all title insurance
endorsement fees in connection with the transfer of the Shares and issuance of
appropriate title endorsements, and all fees imposed by Buyer's accountants,
attorneys, and environmental and engineering consultants.
7
<PAGE>
4. INSPECTION.
(a) At all times prior to the Closing, including times following the
Inspection Period, Buyer, its agents and representatives shall be entitled to
conduct an inspection of the Property, which will include the rights
to: (i) enter upon the Property and improvements, on reasonable notice to
Seller, to perform inspections and tests of the Property, including, but not
limited to, inspection, evaluation and testing of the heating, ventilation and
air-conditioning systems and all components thereof, all structural and
mechanical systems within the improvements, including, but not limited to,
sprinkler systems, power lines and panels, air lines and compressors, automatic
doors, tanks, pumps, plumbing and all equipment, vehicles, and personal
property; (ii) examine and copy any and all books, records, tax returns,
correspondence, financial data, leases, and all other documents and matters,
public or private, maintained by the Company, the Seller or its or their agents,
relating to receipts and expenditures pertaining to the Property for the three
most recent full calendar years and the current calendar year and all contracts,
rental agreements and all other documents and matters, public or private,
maintained by the Company, the Seller or its or their agents, relating to the
construction and operation of the Property; (iii) make investigations with
regard to zoning, environmental (including, but not limited to, an environmental
assessment as specified in Section 4(b), which includes, but is not limited to,
an analysis of the presence of any asbestos, chlordane, formaldehyde or other
Hazardous Material in, under or upon the Property, or any underground storage
tanks on, or under, the Property), building, code, regulatory and other legal or
governmental requirements; (iv) make or obtain market studies and real estate
tax analyses; and (v) interview Tenants with respect to their current and
prospective occupancies. In connection with such investigations, Seller shall
deliver to Buyer, or cause delivery to Buyer of, no later than 30 days after the
date of this Agreement, copies of all documents listed on Exhibit "C" (the
"Seller's Deliveries"). Without limitation of the foregoing, Buyer or its
designated independent or other accountants may audit the Operating Statements
(as defined in Exhibit "C" attached hereto), and Seller shall supply such
documentation as Buyer or its accountants may reasonably request in order to
complete such audit. Notwithstanding anything to the contrary contained in this
Agreement, the effect of any representations, warranties or undertakings made by
Seller in this Agreement shall not be diminished, abrogated, or compromised by
the foregoing inspections, environmental assessments or other tests or
investigations made by Buyer.
(b) ENVIRONMENTAL ASSESSMENT. Buyer or Buyer's agent(s) shall have
the right to employ one or more environmental consultants or other
professional(s) to perform or complete such environmental inspections and
assessments of the Property as Buyer deems necessary or desirable. Buyer and
its consultants shall also have the right to undertake or complete a technical
review of all documentation, reports, plans, studies and information in
possession or control of the Company or Seller, or its past or present
environmental consultants, concerning or in any way related to the environmental
condition of the Property. In order to facilitate the assessments and technical
review, Seller shall extend its full cooperation (but without third party
expense to Seller) to Buyer and its environmental consultants, including,
without limitation, providing access to all files and fully and completely
answering all questions.
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(c) BUYER'S UNDERTAKING. Buyer hereby covenants and agrees that it
shall cause all studies, investigations and inspections performed at the
Property pursuant to this Section 3 to be performed in a manner that does not
materially or unreasonably disturb or disrupt the development of the Property or
the tenancies or business operations of any of the tenants of the Property. In
the event that, as a result of Buyer's exercise of its rights under Section 4(a)
or Section 4(b), physical damage occurs to the Property, then Buyer shall
promptly repair such damage, at Buyer's sole cost and expense, so as to return
the Property to substantially the same condition as existed prior to such
damage. Buyer hereby indemnifies, protects, defends and holds Seller harmless
from and against any and all losses, damages, claims, causes of action,
judgments, damages, costs and expenses that Seller actually suffers or incurs as
a direct result of any physical damage caused to, in, or at the Property during
the course of, or as a result of, any or all of the studies, investigations and
inspections that Buyer elects to perform (or causes to be performed) pursuant to
this Section 4.
(d) CONFIDENTIALITY. Each party agrees to maintain in confidence,
and not to disclose to tenants or tenants' employees, the information contained
in this Agreement or pertaining to the transaction contemplated hereby and the
information and data furnished or made available by Seller to Buyer, its agents
and representatives in connection with Buyer's investigation of the Property and
the transactions contemplated by this Agreement; provided, however, that each
party, its agents and representatives may disclose such information and data
(i) to such party's accountants, attorneys, existing or prospective lenders,
investment bankers, accountants, underwriters, ratings agencies, partners,
consultants and other advisors in connection with the transactions contemplated
by this Agreement to the extent that such representatives reasonably need to
know (in the disclosing party's reasonable discretion) such information and data
in order to assist, and perform services on behalf of, the disclosing party;
(ii) to the extent required by any applicable statute, law, regulation or any
Governmental Authority (as defined below) (including, but not limited to,
Form 8-K and other reports and filings required by the SEC and other regulatory
entities, as described in Exhibit "D" attached hereto); (iii) in connection with
any litigation that may arise between the parties in connection with the
transactions contemplated by this Agreement or otherwise relating to the
Property; (iv) to the extent such disclosure is required or appropriate in
connection with any securities offering or other capital markets or financing
transaction undertaken by the Corporate Office Properties Trust (the "REIT");
(v) to the extent such information and data become generally available to the
public other than as a result of disclosure by such party or its agents or
representatives; and (vi) to the extent such information and data become
available to such party or its agents or representatives from a third party who,
insofar as is known to such party, is not subject to a confidentiality
obligation to the other party hereunder; and (vii) to the extent necessary in
order to comply with each party's respective covenants, agreements and
obligations under this Agreement. In the event the transactions contemplated by
this Agreement shall not be consummated, such confidentiality shall be
maintained indefinitely. Furthermore, Seller and Buyer acknowledge that,
notwithstanding any contrary term of this Section 4(d), Buyer shall have the
right to conduct tenant interviews during the Inspection Period, and the
disclosure of the existence of this Agreement to the tenants shall not
constitute a breach of the above restriction. Buyer shall also have the right
to issue a press release mutually acceptable to Buyer and Seller upon the
consummation of the transactions described in this Agreement. The term
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"Governmental Authority" shall mean any agency, commission, department or body
of any municipal, township, county, local, state or Federal governmental or
quasi-governmental regulatory unit, entity or authority having jurisdiction or
authority over the Property or the management, operation, use or improvement
thereof.
5. CONDITIONS/INSPECTION PERIOD. Each of the following shall be a
condition precedent to Buyer's obligation to complete Closing under this
Agreement (any of which may be waived in whole or in part by Buyer at or prior
to Closing) (together with any other Buyer's conditions precedent under this
Agreement, collectively, the "Conditions" or "Conditions Precedent" and each,
individually, a "Condition" or "Condition Precedent"):
(a) All of the representations and warranties by Seller set forth in
this Agreement shall be true and correct at and as of Closing in all material
respects as though such representations and warranties were made at and as of
Closing. Seller shall have performed, observed and complied with all covenants,
agreements and conditions required by this Agreement to be performed on its part
prior to or as of Closing.
(b) Buyer shall have the Inspection Period (as hereinafter defined)
to conduct, at Buyer's sole cost and expense, due diligence investigations and
analysis of the Company, the Constellation Parties, the Property and all
information pertaining to such entities and the Property, including without
limitation, reviewing environmental conditions, surveys, title reports, leases
and the physical conditions of the Property. If Buyer, in its sole discretion,
determines that either the Property, the Company, CPI Springfield, or
Constellation-Springfield does not meet Buyer's (or its underwriters',
investment bankers', lenders', rating agencies' or investors) criteria for the
purchase of the Member Interest or for the purchase, financing or operation of
the Property in the manner contemplated by the Buyer, and notifies Seller by
5:00 p.m. on the last day of the Inspection Period of Buyer's election to
terminate this Agreement, this Agreement thereupon shall become void and there
shall be no further obligation or liability on any of the parties. The
"Inspection Period" shall mean the period commencing on the date of this
Agreement and expiring sixty (60) days after the Contract Date.
(c) Company shall have satisfied the following requirements (the
"Leasing Requirements"):
(1) Company shall have completed construction of the
Improvements and certificates of occupancy (or comparable permits and licenses)
for the Improvements shall have been issued by appropriate Governmental
Authorities.
(2) Company or Seller shall have delivered true and correct
copies of all of the Leases in effect as of the date the NOI reaches
$2,372,000.00, together with a Rent Roll as of such date, including a complete
list of Tenants which have commenced paying rent, and a calculation of the NOI
in accordance with Section 2(a); and
(3) The NOI shall have reached $2,372,000.00.
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The date that Seller satisfies the Leasing Requirements to the satisfaction of
Buyer shall be referred to in this Agreement as the "Leasing Requirements
Satisfaction Date". The parties shall confirm the Leasing Requirements
Satisfaction Date in writing.
(d) So long as the Buyer, or any entity related to Buyer, is the
named Buyer under this Agreement, Closing shall have been completed under that
certain Contribution Agreement dated May 14, 1998, among the Sellers identified
therein, Buyer and REIT.
6. ENVIRONMENTAL WARRANTIES AND AGREEMENTS.
(a) DEFINITIONS. Unless the context otherwise requires:
(1) "Environmental Law" or "Environmental Laws" shall mean all
applicable past, present or future federal, state and local statutes,
regulations, directives, ordinances, rules, court orders, decrees, arbitration
awards and the common law, which pertain to environmental matters, contamination
of any type whatsoever or health and safety matters, as such have been amended,
modified or supplemented from time to time (including all present and future
amendments thereto and re-authorizations thereof). Environmental Laws include,
without limitation, those relating to: (i) the manufacture, processing, use,
distribution, treatment, storage, disposal, generation or transportation of
Hazardous Materials; (ii) air, soil, surface, subsurface, groundwater or noise
pollution; (iii) Releases; (iv) protection of wildlife, endangered species,
wetlands or natural resources; (v) Tanks; (vi) health and safety of employees
and other persons; and (vii) notification requirements relating to the
foregoing. Without limiting the above, Environmental Law also includes the
following: (i) the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Sections 9601 ET SEQ.), as amended ("CERCLA");
(ii) the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act (42 U.S.C. Sections 6901 ET SEQ.), as amended ("RCRA"); (iii) the
Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C. Sections
11001 ET SEQ.), as amended; (iv) the Clean Air Act (42 U.S.C. Sections 7401
ET SEQ.), as amended; (v) the Clean Water Act (33 U.S.C. Section 1251 ET SEQ.),
as amended; (vi) the Toxic Substances Control Act (15 U.S.C. Section 2601
ET SEQ.), as amended; (vii) the Hazardous Materials Transportation Act
(49 U.S.C. Sections 1801 ET SEQ.), as amended; (viii) the Federal Insecticide,
Fungicide and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.), as amended;
(ix) the Federal Safe Drinking Water Act (42 U.S.C. Section 300f ET SEQ.), as
amended; (x) the Federal Radon and Indoor Air Quality Research Act
(42 U.S.C. Section 7401 note, ET SEQ.); (xi) the Occupational Safety and Health
Act (29 U.S.C. Section 651 ET SEQ.), as amended; (xii) any state, county,
municipal or local statutes, laws or ordinances similar or analogous to
(including counterparts of) any of the statutes listed above; and (xiii) any
rules, regulations, directives, orders or the like adopted pursuant to or
implementing any of the above.
(2) "Environmental Permit" or "Environmental Permits" shall mean
licenses, certificates, permits, directives, requirements, registrations,
government approvals, agreements, authorizations, and consents which are
required under or are issued pursuant to an Environmental Law or are otherwise
required by Governmental Authorities.
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(3) "Hazardous Conditions" refers to the existence or presence
of any Hazardous Materials on, in, under, or at, the Property (including air,
soil and groundwater) or any portion of the Property.
(4) "Hazardous Material" or "Hazardous Materials" shall mean:
(A) any chemical, pollutant, contaminant, pesticide,
petroleum or petroleum product or by product, radioactive substance, solid waste
(hazardous or extremely hazardous), special, dangerous or toxic waste,
substance, chemical or material regulated, listed, limited or prohibited under
any Environmental Law, including without limitation: (i) friable or damaged
asbestos, asbestos-containing material, presumed asbestos-containing material,
polychlorinated biphenyls ("PCBs"), solvents and waste oil; (ii) any "hazardous
substance" as defined under CERCLA; and (iii) any "hazardous waste" as defined
under RCRA; and
(B) even if not prohibited, listed, limited or regulated by
an Environmental Law, all pollutants, contaminants, hazardous, dangerous or
toxic chemical materials, wastes or any other substances, including without
limitation, any industrial process or pollution control waste (whether or not
hazardous within the meaning of RCRA) which could pose a hazard to the
environment, or the health and safety of any person or impair the use or value
of any portion of the Property.
(5) "Release" means any spill, discharge, leak, migration,
emission, escape, injection, dumping or other release or threatened release of
any Hazardous Material into the environment, whether or not notification or
reporting to any Governmental Authority was or is required. Release includes,
without limitation, historical releases and the meaning of Release as defined
under CERCLA.
(6) "Remedial Action" shall mean any and all corrective or
remedial action, preventative measures, response, removal, transport, disposal,
clean-up, abatement, treatment and monitoring of Hazardous Materials or
Hazardous Conditions, whether voluntary or mandatory, and includes all studies,
assessments, reports or investigations performed in connection therewith to
determine if such actions are necessary or appropriate (including investigations
performed to determine the progress or status of any such actions), all
occurring on or after the Contract Date.
(7) "Remedial Costs" shall include all costs, liabilities
expenses and fees incurred on or after the date of this Agreement in connection
with Remedial Action, including but not limited to: (i) the fees of
environmental consultants and contractors; (ii) reasonable attorneys' fees
(including compensation for in-house and corporate counsel provided such
compensation does not exceed customary rates for comparable services); (iii) the
costs associated with the preparation of reports, and laboratory analysis
(including charges for expedited results if reasonably necessary);
(iv) regulatory, permitting and review fees; (v) costs of soil and/or water
treatment (including groundwater monitoring) and/or transport and disposal; and
(iv) the cost of supplies, equipment, material and utilities used in connection
with Remedial Action.
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(8) "Tank" or "Tanks" means above-ground and underground storage
tanks, vessels and related equipment, including appurtenant pipes, lines and
fixtures containing or previously containing any Hazardous Material or fraction
thereof.
(b) WARRANTIES. Seller, for itself, for the Constellation Parties
and for the Company, hereby represents and warrants as follows with respect to
the Property:
(1) The Constellation Parties and the Company has made available
or delivered to Buyer originals (or true, complete and accurate copies) of all
of the documents in their possession, custody or control, which documents
include and/or relate to:
(A) All approvals, plans, specifications, test borings,
percolation tests, engineering studies, surveys or other environmental data
concerning the Property;
(B) All permits (including Environmental Permits),
approvals, registrations, Tank registration and/or closure documentation,
certificates, applications, notices, orders, directives, legal pleadings,
correspondence or other documents of any nature that the Company or any of the
Constellation Parties, any tenant of Company, any of Company's
predecessors-in-title or any tenant of Company's predecessors-in-title have
submitted to, or received from, any Governmental Authority regarding the
Property and its use, compliance or non-compliance with Environmental Laws; and
(C) The results of any investigation of the Property
including, but not limited to, Phase I or Phase II site assessments, asbestos
inspection and/or removal reports, tests or investigations of soil or other
substrate air, groundwater, surface water, or the building interior, and any
testing or investigation results relating to the removal or abandonment of any
Tanks from the Property.
(2) To the knowledge of each of the Constellation Parties, the
Property has been and continues to be owned and operated in full compliance with
all Environmental Laws and Environmental Permits.
(3) There are no pending or, to the knowledge of each of the
Constellation Parties or the Company, threatened: (i) claims, complaints,
notices, correspondence or requests for information received by the
Constellation Parties or the Company with respect to any violation or alleged
violation of any Environmental Law or Environmental Permit or with respect to
any corrective or remedial action for or cleanup of the Property or any portion
thereof; and (ii) written correspondence, claims, complaints, notices, or
requests for information from or to the Constellation Parties or Company
regarding any actual, potential or alleged liability or obligation under or
violation of any Environmental Law or Environmental Permit with respect to the
Property or any portion thereof.
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(4) To the knowledge of each of the Constellation Parties, there
have been no Releases and there has not been a threatened Release of a Hazardous
Material on, in, under or at the Property or any portion thereof.
(5) The Property is not listed, proposed or nominated for
listing on the National Priorities List pursuant to CERCLA (the "NPL"), the
Comprehensive Environmental Response and Liability Information System
("CERCLIS") or on any other similar list of sites under analogous state laws.
(6) There are no Tanks at, on or under the Property. None of
the Constellation Parties nor the Company has removed, closed or abandoned any
Tanks at the Property, and none of the Constellation Parties nor the Company has
any knowledge of the existence, abandonment, closure or removal of Tanks at the
Property.
(7) To the knowledge of each of the Constellation Parties, there
are no PCBs or friable or damaged asbestos at the Property.
(8) There has been no storage, treatment, disposal, generation,
transportation or Release of any Hazardous Materials by the Company or any of
the Constellation Parties or by any other person or entity for which the
Constellation Parties or Company is or may be held responsible, at, on, under,
or about the Property (or any portion thereof) in violation of, or which could
give rise to any claim, obligation or liability under, Environmental Laws.
(c) INDEMNITY. Notwithstanding anything to the contrary in this
Agreement, with respect to the Property, each of the Constellation Parties and
each of Sellers' shareholders (collectively, jointly and severally,
"Post Closing Seller") agree to and do hereby indemnify, defend and hold
harmless Buyer, the REIT and each of their respective partners, shareholders,
agents, contractors, employees, officers, directors, trustees, shareholders, and
each of their successors and assigns (collectively, the "Buyer Indemnified
Parties"), from and against any and all liabilities, claims, demands, suits,
administrative proceedings, causes of action, costs, damages, personal injuries
and property damages, losses and expenses, both known and unknown, present and
future, at law or in equity (collectively, "Losses"), arising out of, by virtue
of or related in any way to an breach by Seller of any of its representations
and warranties under Section 6(b).
Without limiting any of Post-Closing Seller's above indemnification
obligations, Post-Closing Seller further acknowledges and agrees that its
obligation to indemnify the Buyer Indemnified Parties includes, without
limitation with respect to any breach by any of the Constellation Parties of its
representations and warranties under Section 6(b): (i) any and all Remedial
Costs associated with any Tank, Hazardous Material, Hazardous Condition or any
Release; (ii) to the maximum extent allowed by law, all fines and/or penalties
that may be imposed in connection with any Tank or the existence of any
Hazardous Material on, at, under, near, in or about the Property; (iii) the
defense of any claim made by any individual or entity (including any government,
governmental agency or entity) concerning any of the foregoing,
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which defense shall be conducted by counsel and with the assistance of
environmental advisors and consultants, in all cases subject to the prior
written approval of Buyer; and (iv) reasonable attorneys' fees and costs and
environmental advisors' and consultants' fees incurred by any of the Buyer
Indemnified Parties with respect to enforcing its rights under this
indemnification provision. This Section 6 shall survive the Closing for a
period of thirty (30) months.
7. TITLE. At the Closing, Seller agrees that the Company shall have good
and marketable fee simple title to the Property, free and clear of all liens,
claims and encumbrances except for the Permitted Exceptions. From and after the
date of this Agreement, Company shall not take any action, or fail to take any
action, that would cause title to the Property to be subject to any title
exceptions or objections, other than the Permitted Exceptions.
(a) On or before forty-five (45) days after the Contract Date, Buyer
shall furnish Seller with a preliminary title report covering the Property (the
"Title Report") and a written notice specifying those title exceptions which are
not acceptable to Buyer, which objection may include matters shown on any
updated or re-certified survey which Buyer may obtain (the "Disapproved
Exceptions"). Buyer's failure to designate as one of the Disapproved Exceptions
a title exception shown on the Title Report shall constitute Buyer's approval of
such title exception (all title exceptions not designated by Buyer as
Disapproved Exceptions are in this Agreement called "Permitted Exceptions" and,
if Buyer has elected to purchase the Shares with the Property subject to the
Assumed Indebtedness, the Assumed Indebtedness shall be a Permitted Exception).
The Seller shall cause the Company to use its best efforts to cause the removal
of all Disapproved Exceptions on or before ten (10) days after Buyer's notice to
Seller of such Disapproved Exceptions, except that liens of an ascertainable
amount and other items which can be removed by the payment of money shall be
paid and discharged by Seller or the Company at or before Closing. Within such
ten (10) day period, Seller shall notify Buyer of all Disapproved Exceptions
that Seller, after using its best efforts, is unable to remove. Seller's
failure to give Buyer notice of Seller's inability to remove any Disapproved
Exceptions shall constitute Seller's covenant that such Disapproved Exceptions
shall be removed at or prior to the Closing. Buyer shall have the rights set
forth in 7(c) if any Disapproved Exceptions cannot be removed by Seller(s) at or
prior to the Closing.
(b) It shall be a Condition under this Agreement that the marked-up
Title Reports delivered on the Closing Date shall be in the form described in
this Section 6 and have all standard and general printed exceptions deleted so
as to afford full "extended form coverage," and shall further include an owner's
comprehensive endorsement, an endorsement certifying that the bills for the real
estate taxes pertaining to the Property do not include taxes pertaining to any
other real estate; an access endorsement; a contiguity endorsement, if
applicable; a subdivision or plat act endorsement; a survey endorsement; a
non-imputation endorsement; a Fairway endorsement; and a creditors' rights
endorsement.
(c) If Seller or the Company is unable to correct or remove any
Disapproved Exceptions in accordance with the requirements of this Section 7,
Buyer shall have the sole option of either (i) completing the Closing subject to
such Disapproved Exceptions without any abatement of the Purchaser Price, except
that liens of an ascertainable amount and other items
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which can be removed by payment of money shall be paid and discharged by Seller
or Company prior to Closing or (ii) being immediately paid Buyer's Reasonable
Costs (as defined below) and, in the latter event, the parties shall be released
from all liability or obligation to the other and this Agreement shall then and
thereafter be null and void. "Buyer's Reasonable Costs" shall mean all
out-of-pocket costs and expenses incurred by Buyer in connection with this
Agreement and the Property, including, but not limited to, legal fees, title
company charges, engineering fees, environmental consultant's fees, architects'
and surveyors' fees and other similar charges.
8. REPRESENTATIONS AND WARRANTIES AS TO THE PROPERTY. Seller represents
and warrants to Buyer, for itself, the other Constellation Parties and the
Company, that the following matters are true as of the Contract Date and shall
be true as of the Closing Date and covenants as follows:
(a) TITLE. The Company is the legal fee simple titleholder of the
Property, and, other than with respect to the Permitted Exceptions (including,
as of the date of this Agreement, the Assumed Indebtedness), has, good,
marketable and insurable title to the Property, free and clear of all mortgages
and security interests (other than the Assumed Indebtedness), leases, agreements
and tenancies (other than the Leases), licenses, claims, options, options to
purchase, liens, covenants, conditions, restrictions, rights-of-way, easements,
judgments and other matters affecting title to the Property. The Property is
the only tangible assets owned by the Company. The sole business of the Company
is its ownership and operation of the Property.
(b) SALES CONTRACT. The Company and Lynch Properties Limited
Partnership ("Lynch") have performed all of their obligations under the Contract
of Sale between them, a copy of which is attached hereto as Exhibit "G" (the
"Lynch Sale Contract"). There are no defaults by the Company or Lynch under the
Lynch Sale Contract. The only remaining obligations of the Company under the
Lynch Sale Contract are the obligations under Section 2.04 and Section 2.05.
(c) SELLER'S DELIVERIES. All of Seller's Deliveries listed on
Exhibit "C" attached hereto and all other items delivered by Seller pursuant to
this Agreement are true, accurate, correct and complete in all material
respects, and fairly present the information set forth in a manner that is not
misleading. The copies of all documents and other agreements delivered or
furnished and made available by Seller to Buyer pursuant to this Agreement
constitute all of and the only Leases and other agreements relating to or
affecting the ownership and operation of the Property, there being no material
"side" or other agreements, written or oral, in force or effect, to which any of
the Constellation Parties or the Company is a party or to which the Property is
subject.
(d) DEFAULTS. None of the Constellation Parties nor the Company is
in default under any of the documents, recorded or unrecorded, referred to in
the title commitments. To the knowledge of each of the Constellation Parties,
there are no defaults under any of the Major Construction Contracts, Contracts
or Governmental Approvals (as such terms are defined in Exhibit "C" attached
hereto).
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(e) CONTRACTS. There are no contracts of any kind relating to the
management, leasing, operation, maintenance or repair of the Property, except
the Contracts listed on Exhibit "E" attached hereto. The Company and each of
the Constellation Parties, as applicable, has performed all material obligations
required to be performed by it, and is not in default, under any of such
Contracts.
(f) IMPROVEMENTS. The Improvements shall be completed and installed
in accordance with the Plans (as defined in Exhibit "C"), which were approved by
all Governmental Authorities having jurisdiction thereover, and there are not
outstanding any notices of any material violation of any governmental laws,
ordinances, rules or regulations with respect to such Improvements.
(g) EMPLOYEES. Neither CPI Springfield, Constellation-Springfield
nor the Company has any employees.
(g)
(h) COMPLIANCE WITH LAWS AND CODES. At Closing, the Property and its
use and operation shall be in material compliance with applicable municipal and
other governmental laws, ordinances, regulations, codes, licenses, permits and
authorizations, and there shall then be presently and validly in effect all
licenses, permits and other authorizations necessary (including, without
limitation, certificates of occupancy) for the use, occupancy and operation of
the Property for a retail shopping center, whether required of the Company or
any Tenant. Without limiting the foregoing, at the time of Closing, the
Property shall comply in all material respects with all applicable requirements
of the Americans With Disabilities Act of 1990 (42 U.S.C.A. Section 12101
ET SEQ.). The Property is zoned by the municipality in which they are located
so as to permit retail uses and structures thereon, in a manner that
accommodates and is fully compatible with the Improvements. No zoning,
subdivision, environmental, Hazardous Material, building code, health, fire,
safety or other law, order or regulation is, or, on the Closing Date will be,
violated by the continued maintenance, operation or use of any Improvements or
parking areas in the Property, and no notice of any such violation issued by any
Governmental Authority having jurisdiction over the Property is outstanding.
At the time of Closing, all existing streets and other improvements, including
water lines, sewer lines, sidewalks, curbing and streets at each Property shall
have been paid for and either enter the Property through adjoining public
streets, or, if they enter through private lands, do so in accordance with
valid, irrevocable easements running with the ownership of such Property.
(i) LITIGATION. No attachments, execution proceedings, assignments
for the benefit of creditors, insolvency, bankruptcy, reorganization or other
proceedings are pending against the Property, the Company, any of the
Constellation Parties, or to the best of Seller's knowledge, threatened against
the Property, the Company or any of the Constellation Parties, nor are any of
such proceedings contemplated by such entities. In the event any proceeding of
the character described in this Section is initiated or threatened against the
Property, the Company or any of the Constellation Parties prior to the Closing,
Seller shall promptly advise Buyer thereof in writing, the Constellation Parties
shall remain jointly and severally responsible therefor, and the Constellation
Parties shall indemnify, defend and hold Buyer from any claims, losses,
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liabilities and expenses (excluding, without limitation, reasonable counsel
fees) relating to any such occurrence.
(j) INSURANCE. The Company now has in force customary and
commercially reasonable amounts of property, liability and business interruption
insurance relating to the Property from established and reputable insurers.
Neither the Company nor any of the Constellation Parties has received any notice
from any insurance carrier, nor are any of such entities aware of, any defects
or inadequacies in the Property that, if not corrected, would result in
termination of insurance coverage or increase in the normal and customary cost
thereof.
(k) FINANCIAL INFORMATION. All Operating Statements (as defined in
Exhibit "C") delivered to Buyer, and all of the Records (as defined in
Exhibit "C") of the Company, CPI Springfield and Constellation-Springfield, are
complete, accurate, true and correct, in all material respects; have been
compiled in accordance with generally accepted accounting principles; and
accurately set forth the results of the operation of the Property and the
Company, CPI Springfield and Constellation-Springfield for the periods covered.
There has been no material adverse change in the financial condition or
operation of the Property and such entities since the period covered by the
Operating Statements.
(l) RE-ZONING. There is not now pending, and neither Company nor any
of the Constellation Parties has knowledge of, any threatened proceeding for the
rezoning of the Property or any portion thereof, or the taking of any other
action by governmental authorities that would have an adverse impact on the
value of the Property or use thereof.
(m) REAL ESTATE TAXES. True and complete copies of the most recent
real estate "Tax Bill(s)" for (and the only real estate tax bills applicable to)
the Property have been delivered to Buyer. Neither the Company nor any of the
Constellation Parties has received notice of and does not have any actual
knowledge of any proposed increase in the assessed valuation or rate of taxation
of the Property from that reflected in the most recent Tax Bills. There is not
now pending, and Company will not, without the prior written consent of Buyer,
institute prior to the Closing Date, any proceeding or application for a
reduction in the real estate tax assessment of the Property or any other relief
for any tax year. There are no outstanding agreements with attorneys or
consultants with respect to the Tax Bills that will be binding on Buyer or the
Property after the Closing. Other than the amounts disclosed by the Tax Bills,
no other real estate taxes have been, or will be, assessed against the Property,
or any portion thereof, in respect of the year 1998 or any prior year, and no
special assessments of any kind (special, bond or otherwise) are or have been
levied against the Property, or any portion thereof, that are outstanding or
unpaid, and, to the best knowledge of any of the Constellation Parties, none
will be levied prior to the Closing. The Company has paid all real estate taxes
presently due and owing with respect to the Property.
(n) EASEMENTS AND OTHER AGREEMENTS. To the knowledge of each of the
Constellation Parties, neither the Company nor any of the Constellation Parties
is in default in complying with the terms and provisions of any of the
covenants, conditions, restrictions, rights-of-way or easements constituting one
or more of the Permitted Exceptions.
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(o) ASSUMED INDEBTEDNESS/EXISTING LOAN DOCUMENTS.
(1) The Property is presently encumbered by a mortgage loan in
the maximum principal amount of Nineteen Million Dollars ($19,000,000.00) made
by First Union National Bank to the Company (the "Assumed Indebtedness").
Subject to the condition precedent that the Constellation Release shall have
occurred, Buyer may acquire the Shares subject to the Assumed Indebtedness at
the time of the Closing. Seller and each of the other Constellation Parties
acknowledge and agree that they are solely responsible for any and all
assumption fees, transfer fees and other costs associated with the Buyer's
acquisition of the Shares subject to the Assumed Indebtedness.
(2) Exhibit "G" sets forth true, correct and complete schedule
of all of the notes, deeds of trust, and other loan documents evidencing or
securing the Assumed Indebtedness (collectively, the "Existing Loan Documents").
Seller has delivered true, correct and complete copies of the Existing Loan
Documents to Buyer prior to the date hereof as part of the Seller's Deliveries.
The Company and each Constellation Party has complied with (and, prior to the
Closing, shall continue to comply with) the terms of, and all notices or
correspondence received from the holder of, the Existing Loan Documents. The
Company and each Constellation Party has paid (and, at all times prior to the
Closing, shall pay) all sums due under the Existing Loan Documents. Neither
Company nor any of the Constellation Entities shall make any prepayment of any
amount due under the Loan Documents or amend the Existing Loan Documents,
without the prior written consent of Buyer. The Existing Loan Documents are in
full force and effect, and, to the best knowledge of each of the Constellation
Entities, neither the Company nor any Constellation Entity is in default
thereunder, and there has not occurred any event which, with the giving of
notice and/or the passage of time, or both, would constitute a default by
Company or any Constellation Party thereunder or under any of the Existing Loan
Documents.
(p) LEASE CONTROVERSIES. No material controversy, complaint,
negotiation or renegotiation, proceeding, suit or litigation relating to all or
any of the Leases, is pending or, to the knowledge of any of the Constellation
Parties, threatened, whether in any tribunal or informally. Each of the
Constellation Parties is and shall remain jointly and severally responsible
after the Closing Date for defending (or continuing) any such suit, proceeding
or other matter relating to periods prior to the Closing Date, and all damages,
loss, expenses and costs related thereto.
(q) CONDEMNATION. None of the Constellation Parties nor the Company
has knowledge of any pending or contemplated condemnation or other governmental
taking proceedings affecting all or any part of the Property.
(r) DISCLOSURE. No representation or warranty made by Seller
(whether for itself, the Company or any of the other Constellation Parties) in
this Agreement, no exhibit attached hereto with respect to the Property, and no
schedule contained in this Agreement contains any untrue statement of a material
fact, or omits to state a material fact necessary in
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order to make the statements contained therein not misleading, or necessary in
order to provide a prospective Buyer of the Property with adequate information
as to the Property and its management, operation, maintenance and repair. There
is no fact known to Seller or the other Constellation Parties which has, or
which could reasonably have been foreseen by Seller or any of the other
Constellation Parties as likely to have, an adverse effect on the management,
operation, maintenance and repair of the Property which has not been disclosed
herein, in any schedule attached hereto, or in any written document furnished by
any of the Constellation Parties to Buyer under this Agreement or in connection
with the transactions contemplated hereby.
The representations and warranties in this Section 8 shall be deemed remade
by Seller (for itself, the Company and the other Constellation Parties) as of
the Closing Date with the same force and effect as if in fact specifically
remade at that time. The representations and warranties made in this Section 8
shall survive the Closing for a period of eighteen (18) months. Notwithstanding
anything to the contrary herein, the effect of the representations and
warranties made in this Agreement by Seller shall not be diminished, abrogated
or deemed to be waived by the inspections, assessments, or any other
investigations made by Buyer.
9. LEASES--CONDITIONS PRECEDENT AND WARRANTIES WITH RESPECT THERETO.
(a) WARRANTIES AS TO LEASES. With respect to each of the tenants
listed on the Rent Roll (as defined in Exhibit "C") provided to Buyer by any of
the Constellation Parties and any other tenants leasing space in any or all of
the Property as of the Closing Date (collectively, the "Tenants"), Seller, for
itself, for the other Constellation Parties and for the Company, represents and
warrants to Buyer as of the Contract Date and as of the Closing Date as follows:
(1) Each of the Leases is in full force and effect strictly
according to the terms set forth therein and in the Rent Roll, and has not been
modified, amended, or altered, in writing or otherwise. Each Tenant is legally
required to pay all sums and perform all obligations set forth in the Leases,
without concessions, abatements, offsets or other bases for relief or
adjustment;
(2) All obligations of the lessor under the Leases that accrue
to the date of the Closing have been or will be performed by the Closing Date,
including, but not limited to, all required tenant improvements, cash or other
inducements, rent abatements or moratoria, installations and construction (for
which payment in full has been made in all cases), and each Tenant has
unconditionally accepted lessor's performance of such obligations. No Tenant
has asserted any offsets, defenses or claims available against rent payable by
it or other performance or obligations otherwise due from it under any Lease;
(3) No Tenant is in default under or is in arrears in the
payment of any sums or in the performance of any obligations required of it
under its Lease. No Tenant has prepaid any rent or other charges;
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(4) The Company has no reason to believe that any Tenant is, or
may become, unable or unwilling to perform any or all of its obligations under
its Lease, whether for financial or legal reasons or otherwise;
(5) Neither base rent ("Base Rent"), nor regularly payable
estimated Tenant contributions or operating expenses, insurance premiums, real
estate taxes, common area charges, and similar or other "pass through" or
non-base rent items including, without limitation, cost-of-living or so-called
"C.P.I." or other such adjustments (collectively, "Additional Rent"), nor any
other item payable by any Tenant under any Lease has been heretofore prepaid for
more than one month nor shall it be prepaid between the Contract Date and the
Closing Date for more than one month;
(6) No guarantor(s) of any Lease has been released or
discharged, partially or fully, voluntarily or involuntarily, or by operation of
law, from any obligation under or in connection with any Lease or any
transaction related thereto;
(7) Except as specifically disclosed in detail on the Rent Roll
delivered to Buyer, there are no brokers' commissions, finders' fees, or other
charges payable or to become payable to any third party on behalf of the Company
as a result of or in connection with any Lease or any transaction related
thereto, including, but not limited to, any exercised or unexercised option(s)
to expand or renew;
(8) No Tenant or any other party has asserted any claim (other
than for customary refund at the expiration of a Lease) to all or any part of
any security deposit;
(9) Seller shall have caused Company to pay, and retain sole and
exclusive responsibility for, all expenses due on or before the Closing Date
connected with or arising out of the negotiation, execution and delivery of the
Leases, including, without limitation, brokers' commissions (including those
applicable, if any, to future expansions or renewals by Tenants), leasing fees
and recording fees (as well as the cost of all tenant improvements not paid for
by Tenants); and Seller shall be deemed to have certified and warranted payment
thereof to Buyer at Closing;
(10) No Tenant has, by virtue of its Lease or any other agreement
or understanding, any purchase option with respect to the Property, or any
portion thereof, or any right of first refusal to purchase any Property, or a
portion thereof, whether triggered by the transactions contemplated by this
Agreement or by a subsequent sale of the Property or a portion thereof. No
Tenant has, by virtue of its Lease or any other agreement or understanding any
of the following (a) the right or option to expand its tenancy into space at the
Property other than the space that such Tenant is currently occupying; (b) the
right or option to terminate its Lease; and (c) the right or option to contract
the space at the Property that such Tenant is currently occupying; and
(11) (a) Except as specifically disclosed on the Rent Roll
delivered to Buyer, no Tenant has sublet its leased premises; and (b) there are
no outstanding requests from
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any Tenants to the Company or any of the Constellation Parties, requesting any
consent to an assignment of the Tenant's Lease or to a sublease of all or some
portion of a Tenant's leased premises.
Each of the Constellation Parties hereby indemnifies, defends and holds
Buyer harmless from and against all loss, damage, liability, cost, expense
(including, but not limited to, reasonable fees of attorneys of Buyer's choice)
and charges which Buyer may incur, or to which Buyer may become subject, as a
consequence of any breach of the warranties contained in this Section. The
foregoing indemnity shall survive the Closing for a period of eighteen (18)
months.
10. WARRANTIES AND REPRESENTATIONS OF SELLER AS TO SHARES/MEMBER
INTEREST/SECURITIES AND RELATED MATTERS. The Seller, for itself and for each of
the other Constellation Parties, represent and warrant to Buyer that the
following matters are true as of the Contract Date and shall be true as of the
Closing Date and covenant as follows:
(a) AUTHORITY. Seller is duly formed, validly existing, and in good
standing under the laws of Maryland, and has the power and authority to own the
Shares. CPI Springfield is a single purpose entity formed for the sole purpose
of being the sole member of Constellation-Springfield.
Constellation-Springfield is duly formed, validly existing, and in good standing
under the laws of Maryland, and has the power and authority to own the Member
Interest. Constellation-Springfield is a single purpose entity, formed for the
sole purpose of owning the Member Interest. The execution and delivery of this
Agreement by Seller, and the performance of this Agreement by Seller, have been
duly authorized by Seller, and this Agreement is binding on Seller and
enforceable against it in accordance with its terms. No consent of any
creditor, investor, partner, shareholder, tenant-in-common, judicial or
administrative body, Governmental Authority, or other governmental body or
agency, or other party to such execution, delivery and performance by Seller is
required. Neither the execution of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in a breach of, default under,
or acceleration of, any agreement to which any of the Constellation Parties is a
party or by which any of the Constellation Parties or the Property is bound; or
(ii) violate any restriction, court order, agreement or other legal obligation
to which any of the Constellation Parties and/or the Property is subject.
(b) COMPANY. The Company is duly formed, validly existing, and in
good standing under the laws of the Commonwealth of Virginia, and has the power
and authority to own the Property. Seller has delivered to Buyer, as part of
Seller's Deliveries, all of the documents relating to the formation or
governance of the Company. The Company is a single purpose entity, organized
for the sole purpose of owning the Property.
(c) SHARES. Seller owns one hundred percent (100%) of the Shares of
CPI Springfield. Seller owns the Shares free and clear of all liens, charges,
encumbrances, restrictive agreements and assessments. Upon the assignment of
the Shares to Buyer (or its designee(s)), the Buyer will receive good and
absolute title thereto, free from all liens, charges, encumbrances, restrictive
agreements and assessments whatsoever. There are no outstanding
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rights of first refusal, options, contracts, calls, commitments or demands of
any nature relating to the Shares.
(d) OPERATING AGREEMENT. Without limiting the generality of any of
the representations or warranties set forth in this Section 10, each of the
Constellation Parties warrants and represents to Buyer that: (i) the transfer of
the Shares does not trigger the right of first refusal (the "Right of First
Refusal") in favor of Fried Springfield Commons, LLC ("Fried") set forth in the
Company's Operating Agreement dated as of April 17, 1998 (the "Operating
Agreement"); (ii) the transfer of the Shares to the Buyer does not require the
consent of Fried, does not constitute an impermissible transfer of the
Membership Interest, and does not otherwise constitute a default under the
Operating Agreement; (iii) Fried has been paid any and all sums due to Fried
under the Operating Agreement (including, without limitation, the zoning fee and
development fee described in Section 7.5 and Section 7.6 of the Operating
Agreement); and (iv) both Fried and Constellation-Springfield have performed all
of their obligations, monetary and non-monetary, set forth in the Operating
Agreement, and no default exists thereunder. The Operating Agreement is in full
force and effect, and the Operating Statements include, among other things, an
accurate statement of Capital Accounts and Capital Contributions of
Constellation-Springfield and Fried under the Operating Agreement and an
accurate statement of the Company's financial condition.
(e) MEMBER INTEREST. Constellation-Springfield owns a sixty percent
(60%) Member Interest in the Company. Constellation-Springfield owns the Member
Interest free and clear of all liens, charges, encumbrances, restrictive
agreements and assessments, other than restrictions on transfers and other
similar provisions as set forth in the Operating Agreement, which each of the
Constellation Parties warrants and represents shall not be violated by the
transfer of Shares contemplated by this Agreement. There are no outstanding
rights of first refusal, options, contracts, calls, commitments or demands of
any nature relating to the Member Interest.
(f) NO TRANSFERS OF INTERESTS. There will be no changes in the
composition of the Company or any of the Constellation Parties between the date
of this Agreement and Closing.
(g) TAX-RELATED ISSUES.
(1) The Company and Constellation-Springfield are, and at all
times have been, properly treated as limited liability companies for federal
income tax purposes and not as an "association" or "publicly traded partnership"
taxable as a corporation.
(2) The Company and each of the Constellation Parties has filed
or caused to be filed in a timely manner (within any applicable extension
periods) all tax, information or other returns required to be filed by the
Internal Revue Code of 1986, as amended (the "Code") or by applicable state, or
local tax laws (collectively, "Tax Returns"). Such Tax Returns are true,
correct and complete in all respects; and all federal, state or local income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium,
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unemployment, disability, personal property, sales, use, transfer, registration,
estimated, or other tax of any kind whatsoever, including any interest, penalty
or other addition thereto, whether disputed or not, (collectively, "Taxes") due,
and Taxes due in respect of any person for the Company had an obligation to
withhold and/or otherwise pay over Taxes, have been timely paid in full or will
be timely paid in full by the due date thereof (and whether or not shown on a
Tax Return). With respect to any taxable year for which a statute of
limitations (or similar provision) has not yet run, none of the Tax Returns of
the Company or any of the Constellation Parties has been audited by a government
or taxing authority, nor is any such audit or other proceeding in process,
pending, threatened (either in writing or verbally, formally or informally) or
expected to be asserted with respect to Taxes (or the collection of Taxes) of
the Company or any of the Constellation Parties, and neither the Company nor any
of the Constellation Parties has received notice (either in writing or verbally,
formally or informally) or expects to receive notice that it has not filed a Tax
Return or not paid Taxes required to be filed, withheld, or paid by it. The
Company and each of the Constellation Parties has disclosed on its federal
income tax returns all positions taken therein that could give rise to a
substantial understatement penalty within the meaning of Code Section 6662. No
claim has ever been made by an authority in a jurisdiction where the Company or
any of the Constellation Parties does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction.
(h) UNITED STATES PERSON. Each of the Constellation Parties and the
Seller are each a "United States Person" within the meaning of
Section 1445(f)(3) of the Code, as amended, and shall execute and deliver an
"Entity Transferor" certification at Closing.
(i) LIABILITIES. Except for any normal and customary accrued
liabilities and obligations of the Company in the ordinary course of the
business of Company as set forth on the updated Operating Statements of Company
to be delivered at Closing, neither the Company, CPI Springfield nor
Constellation-Springfield shall have any liabilities or obligations, either
accrued, absolute, contingent, or otherwise, which will not be paid or
discharged on or before the Closing Date. In addition, except for the claims
and liabilities described in the preceding sentence, neither the Company,
CPI Springfield nor Constellation-Springfield has received notice of any claim
against (or liability of) the Company, CPI Springfield or
Constellation-Springfield arising from business done, transactions entered into
or other events occurring prior to the Closing Date (and to the best knowledge
of each of the Constellation Parties and the Company, no basis for any such
claim or liability exists).
(j) The representations and warranties in this Section 10 shall be
deemed remade by Seller (for itself, for the other Constellation Parties and for
the Company), as of the Closing Date with the same force and effect as if in
fact specifically remade at that time. The representations and warranties made
in this Section 10 shall survive the Closing without time limitation.
11. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants to, and covenants with Seller, as follows, which representations,
warranties, and covenants are true, correct and complete on the date of this
Agreement, shall be true, correct, and complete at Closing:
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(a) Neither its entering into this Agreement or its consummation of
the transactions contemplated hereby does nor will violate any indenture,
agreement or order by which Buyer is bound, or any rule, order, or law
applicable to it.
(b) The execution and delivery of this Agreement has been approved by
the directors or officers, as applicable, of Buyer and no further corporate
action is required on the part of Buyer to consummate the transaction
contemplated hereby. There are no proceedings pending or threatened by or
against Buyer in bankruptcy, insolvency or reorganization in any state or
federal court which adversely affect the ability of Buyer to enter into and
perform its obligations under this Agreement
12. COVENANTS OF SELLER. Seller (for itself, for the other Constellation
Parties and for the Company) hereby covenant with Buyer as follows:
(a) NEW LEASES. The Company shall not amend any Lease or execute any
new lease, license, or other agreement affecting the ownership or operation of
all or any portion of the Property or for personal property, equipment, or
vehicles, without Buyer's prior written approval.
(b) NEW CONTRACTS. The Company shall not enter into any contract
with respect to the ownership and operation of all or any portion of any or all
of the Property that will survive the Closing, or that would otherwise affect
the use, operation or enjoyment of the Property, without Buyer's prior written
approval, except for service contracts entered into in the ordinary course of
business that are terminable, without penalty, on not more than 30 days' notice,
for which no consent shall be required. Neither Constellation-Springfield nor
CPI Springfield shall enter into, or amend, any contract or agreement without
the Buyer's written approval.
(c) OPERATING AGREEMENT. The Operating Agreement shall not be
amended without Buyer's prior written approval. From and after the Leasing
Requirements Satisfaction Date, there shall be no distributions of Net Cash Flow
to members of the Company under the Operating Agreement.
(d) SALES CONTRACT. The Company shall not amend the Sales Contract
or execute any new agreement pertaining thereto without Buyer's prior written
approval.
(e) INSURANCE. The insurance policies described in Section 8 above
shall remain continuously in force through and including the Closing Date.
(f) OPERATION OF THE PROPERTY. The Company shall construct, operate
and manage the Property in a manner consistent with similar class "A" shopping
centers in Fairfax County, Virginia, in good repair and working order; shall
keep on hand sufficient materials, supplies, equipment and other personal
property for the efficient operation and management of the Property in such
manner; and shall perform, when due, all of the Company's
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obligations under the Leases, Contracts, Governmental Approvals and other
agreements relating to the Property and otherwise in accordance with applicable
laws, ordinances, rules and regulations affecting the Property. Without the
prior written consent of Buyer, the Company shall not incur any indebtedness,
other that normal and customary current indebtedness for current payables
necessary for the day-to-day operation of the Property.
(g) PRE-CLOSING EXPENSES. Seller has paid or will pay or cause to be
paid in full, prior to the Closing, all bills and invoices for labor, goods,
material and services of any kind relating to the Property and utility charges,
relating to the period prior to the Closing. Except as the parties may
otherwise agree at or prior to Closing, any alterations, installations,
decorations and other work required to be performed under any and all agreements
affecting the Property have been or will, by the Closing, be completed and paid
for in full.
(h) GOOD FAITH. All actions required pursuant to this Agreement that
are necessary to effectuate the transaction contemplated herein will be taken
promptly and in good faith by the Constellation Parties or the Company, as
applicable, and Seller shall furnish Buyer with such documents or further
assurances as Buyer may reasonably require.
(i) NO ASSIGNMENT. After the Contract Date and prior to the Closing,
none of the Constellation Parties shall assign, alienate, lien, encumber or
otherwise transfer all or any part of any or all of the Shares, Member Interest,
the Property or any interest in any or all of them.
(j) AVAILABILITY OF RECORDS, AUDIT REPRESENTATION LETTER.
(1) Upon Buyer's request, for a period of two years after the
Closing, Seller shall (i) make the Records available to Buyer for inspection,
copying and audit by Buyer's designated accountants; and (ii) cooperate with
Buyer (without any third party expense to Seller) in obtaining any and all
permits, licenses, authorizations, and other Governmental Approvals necessary
for the operation of any or all of the Property. Without limitation of the
foregoing in this Section, Seller agree to abide by the terms of Exhibit "D"
attached hereto. At any time before or within two years after the Closing,
Seller further agrees to provide to the Buyer's designated independent auditor,
upon request of Buyer or such auditor: (x) access (to the same extent to which
Buyer would be entitled to such access) to the books and records of the Property
and all related information (including the information listed on Exhibit "D")
regarding the period for which Buyer is required to have the Property audited
under the regulations of the Securities and Exchange Commission, and (y) a
representation letter delivered by each managing agent of the Property regarding
the books and records of the Property, in substantially the form as attached
hereto as Exhibit "E."
(2) In addition, Seller shall provide, and cooperate, in all
respects, in providing, Buyer with copies of, or access to, such factual
information as may be reasonably requested by Buyer, and in the possession or
control of Seller, to enable the Buyer or the REIT to issue one or more mutually
agreed upon press releases concerning the transaction that is the subject of
this Agreement, to file a Current Report on Form 8-K (as specified on
Exhibit "D"), if,
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as and when such filing may be required by the SEC and to make any other filings
that may be required by any Governmental Authority. The obligation of Seller to
cooperate in providing Buyer with such information for Buyer to file its Current
Report on Form 8-K shall survive the Closing.
(k) CHANGE IN CONDITIONS. Seller shall promptly notify Buyer of any
change in any condition with respect to the Company, the other Constellation
Parties, the Property or of the occurrence of any event or circumstance that
makes any representation or warranty of Seller to Buyer under this Agreement
untrue or misleading, or any covenant of Buyer under this Agreement incapable or
less likely of being performed, it being understood that Seller's obligation to
provide notice to Buyer under this Section shall in no way relieve Seller of any
liability for a breach by Seller of any of its representations, warranties or
covenants under this Agreement.
(l) ENTITY STRUCTURE. From the Contract Date through and including
the Closing Date, the Company and each of the Constellation Parties shall
maintain the same composition of its members as exists on the Contract Date,
unless otherwise expressly or consented to by Buyer in writing.
(m) CURE OF VIOLATIONS. On or before the Closing Date, Seller shall
cure (or escrow sufficient funds at the Closing with the Buyer's Title Company
to cure) (i) all violation(s) of law, code, ordinance or regulation that are the
subject of any written notice issued by a Governmental Authority with respect to
the Property, and (ii) legal deficiencies discovered at or in any Property
before the Closing.
All covenants made in this Agreement by Seller shall survive the Closing
for a period of eighteen (18) months.
13. ADDITIONAL CONDITIONS PRECEDENT TO CLOSING.
(a) BUYER'S CONDITIONS PRECEDENT. In addition to any other
Conditions Precedent of Buyer enumerated in this Agreement, the following shall
be additional Buyer's Conditions Precedent (any of which may be waived by Buyer
prior to Closing:
(1) PENDING ACTIONS. At the Closing, there shall be no
administrative agency, litigation or governmental proceeding of any kind
whatsoever, pending or threatened, that, after the Closing, would, in Buyer's
sole and absolute discretion, materially and adversely affect the Company,
Constellation-Springfield, CPI Springfield, the Shares or the Member Interest,
the transfer of the Shares, or the value or marketability of the Property, or
the ability of the Company to operate the Property in the manner intended.
(2) ZONING. On the Closing Date, no proceedings shall be
pending or threatened that could or would involve the change, redesignation,
redefinition or other modification of the zoning classifications of (or any
building, environmental, or code requirements applicable to) the Property, or
any portion thereof, or any property adjacent to the
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Property, in a manner which, in Buyer's sole and absolute discretion, would
materially and adversely affect the value or marketability of the Property.
(3) FLOOD INSURANCE. As of the Closing Date, if the Property is
located in a flood plain, Company shall have obtained flood plain insurance in
form and substance acceptable to Buyer.
(4) ASSUMED INDEBTEDNESS. Subject to agreement of the holder of
the Assumed Indebtedness to deliver the Constellation Release at Closing, Seller
shall provide to Buyer a letter from First Union National Bank (or the then
holder of the Assumed Indebtedness) dated no earlier than 30 days prior to the
Closing Date, approving the transfer of the Shares to the Buyer, setting forth
the amount of principal and interest outstanding as of the Closing Date, and
stating that there has not been, and there does not currently exist, any default
under any of the Assumed Indebtedness. Such letter shall be referred to as the
"Lender's Approval."
(5) OWNERS. The composition of members of the Company and each
of the Constellation Parties on the Closing Date shall be the same as on the
Contract Date.
(6) BANKRUPTCY. As of the Closing Date, neither Seller, nor any
of the Constellation Parties nor the Property shall be the subject of any
bankruptcy proceeding for which approval of this transaction has not been given
and issued by the applicable bankruptcy court.
(7) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties of Seller (whether for itself, for the Company or for any of the
other Constellation Parties) contained in this Agreement shall be true and
correct as of the Closing Date in all material respects, as though such
representations and warranties were made on such date.
(8) COVENANTS PERFORMED. All covenants and obligations of the
Constellation Parties and Company required to be performed on or prior to the
Closing Date shall have been performed, in all material respects.
(9) APPROVAL BY BUYER'S SHAREHOLDERS. REIT's Board of Trustees
and shareholders shall have approved this Agreement and the consummation of the
transactions contemplated by this Agreement.
(b) SELLER'S CONDITIONS PRECEDENT. The following shall be conditions
precedent to the Seller's obligation to complete Closing under this Agreement
(any of which may be waived by Seller at or prior to Closing):
(1) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer contained in this Agreement shall be true and correct as of
the Closing Date, in all material respects, as though such representations and
warranties were made on such date.
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(2) COVENANTS. All covenants of Buyer required to be performed
on or prior to the Closing Date shall have been performed, in all material
respects.
14. RISK OF LOSS OR DAMAGE.
(a) If, prior to the Closing, all or any portion of the Property is
damaged by fire or other natural casualty (collectively, "Damage"), or is taken
or made subject to condemnation, eminent domain or other governmental
acquisition proceedings (collectively, "Eminent Domain"), then the following
procedures shall apply:
(1) If the aggregate cost of repair or replacement in connection
with any Damage or the value of the Eminent Domain (collectively, "repair and/or
replacement") is $200,000.00 or less, in the mutual and reasonable opinions of
Buyer and Seller, Buyer shall close and take the Property in question as
diminished by the Damage or Eminent Domain, as the case may be. Any casualty
insurance or condemnation proceeds shall be the sole property of the Company.
(2) If the aggregate cost of repair and/or replacement at the
Property is greater than $200,000.00, in the mutual and reasonable opinions of
Buyer and Seller, then Buyer, in its sole and absolute discretion, may elect any
of the following options: (i) Buyer may proceed to close on the Shares without
diminution of the Purchase Price, or (ii) Buyer may elect to terminate this
Agreement by written notice to Seller. Any casualty insurance or condemnation
proceeds shall be the sole property of the Company.
(b) In the event of a dispute between Seller and Buyer with respect
to the cost of repair and/or replacement with respect to the matters set forth
in this Section 14, an engineer designated by Seller and an engineer designated
by Buyer shall select an independent engineer licensed to practice in the
Commonwealth of Virginia who shall resolve such dispute. All fees, costs and
expenses of such third engineer so selected shall be shared equally by Buyer and
Seller.
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15. DEFAULT.
(a) DEFAULT BY SELLER. If any of Seller's representations and
warranties (whether for itself, for the Company or for any of the other
Constellation Parties) contained herein shall not be true and correct on the
Contract Date and continuing thereafter through and including the Closing Date,
or if any of the Constellation Parties fails to perform any of the covenants and
agreements contained herein to be performed by such party within the time for
performance as specified herein (including Seller's obligation to close), or if
any of the Buyer's Conditions Precedent shall not have been satisfied, Buyer may
elect either to (i) terminate Buyer's obligations under this Agreement by
written notice to Seller, in which event Buyer shall retain all rights and
remedies available to it; or (ii) close, in which event Buyer may file an action
for either or both of specific performance and damages to compel Seller to cure
all or any of such default(s), in whole or in part, whereupon Buyer shall be
entitled to deduct from the Purchase Price, the cost of such action and cure,
and all reasonable expenses incurred by Buyer in connection therewith,
including, but not limited to, attorneys' fees of Buyer's counsel.
Notwithstanding anything to the contrary herein and in addition to any other
remedies of Buyer, Buyer shall be entitled to recover actual (but not
consequential) damages suffered by Buyer by reason of Seller's defaults
hereunder and/or any delay occasioned thereby, including, without limitation,
Buyer's Reasonable Costs. The remedies of Buyer set forth in this Section 15(a)
shall be in addition to remedies otherwise applicable or provided in this
Agreement or otherwise available to Buyer at law or in equity, including,
without limitation, specific performance, it being understood that Buyer's
rights and remedies under this Agreement shall always be non-exclusive and
cumulative and that the exercise of one remedy or form of relief available to
Buyer hereunder shall not be exclusive or constitute a waiver of any other.
(b) DEFAULT BY BUYER. In the event Buyer defaults in its obligations
to acquire the Shares, then Seller may (i) pursue and action for specific
performance, or (ii) terminate this Agreement and recover actual (but not
consequential) damages suffered by Seller by reason of Buyer's defaults
hereunder and/or any delay occasioned thereby, including, without limitation,
the reasonable out-of-pocket costs and expenses incurred by Seller in connection
with this Agreement.
(c) INDEMNIFICATION OF BUYER. Each of the Constellation Parties and
Seller's shareholders, jointly and severally, as the case may be, shall and does
hereby indemnify, protect, defend and hold the Buyer Indemnified Parties
harmless from and against any claims, losses, demands, liabilities, suits, costs
and damages suffered by the Buyer Indemnified Parties, including consequential
as well as actual damages and attorneys' fees of counsel selected by the Buyer
Indemnified Parties and other costs of defense, incurred, arising against, or
suffered by, the Buyer Indemnified Parties or its assigns as a direct or
indirect consequence of (i) any breach of any representation, warranty or
covenant made in this Agreement by Seller (whether for itself, for the Company
or for any of the other Constellation Parties), or any other default by Seller,
whether discovered before or after the Closing or (ii) any default claim, action
or omission arising or alleging to arise under the Existing Loan Documents and
relating to the period prior to the Closing, whether asserted before or after
the Closing. This indemnification obligation shall expire eighteen (18) months
from the Closing Date, except as to claims under Section 6 of this
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Agreement which may be made until thirty (30) months after the date of this
Agreement, and except as to claims under Section 10 which may be made until the
expiration of the time period under statute of limitation applicable to such
claims.
(d) INDEMNIFICATION OF SELLER. Buyer shall indemnify, protect,
defend and hold Seller and each of Seller's shareholders (the "Indemnified
Parties") harmless from and against any claims, losses, demands, liabilities,
suits, costs and damages suffered by the Seller Indemnified Parties, including
consequential as well as actual damages and attorneys' fees of counsel selected
by the Seller Indemnified Parties and other costs of defense, incurred, arising
against, or suffered by, the Seller Indemnified Parties or its assigns as a
direct or indirect consequence of any breach of any misrepresentation, warranty
or covenant made in this Agreement by Buyer, or any other default by Buyer,
whether discovered before or after the Closing. This indemnification obligation
shall expire eighteen (18) months from the Closing Date, except as to claims
under Section 11 which may be made until the expiration of the time period under
the statute of limitation applicable to such claims.
(e) BUYER NOTICE AND RIGHT TO CURE. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default hereunder by Buyer shall not be a default unless Seller
shall have given Buyer notice of such default, and Buyer shall have failed to
cure the same within thirty (30) days after such notice. No notice of default
shall be required in the case of Buyer's default in failing to complete Closing
on the required Closing Date.
(f) SELLER'S NOTICE AND RIGHT TO CURE. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default hereunder by Seller shall not be a default unless Buyer
shall have given Seller notice of such default, and Seller shall have failed to
cure the same within thirty (30) days after such notice. No notice of default
shall be required in the case of Seller's default in failing to complete Closing
on the required Closing Date.
16. ENTIRE AGREEMENT.
This Agreement contains the entire agreement among Seller and Buyer
pertaining to the Property, and there are no other terms, obligations,
covenants, representations, statements or conditions, oral or otherwise, of any
kind whatsoever concerning this sale. Any changes or additions to this
Agreement must be made in writing and executed by the parties hereto. All
Exhibits attached to this Agreement are made a part of this Agreement. This
Agreement may be executed in counterparts, each of which is an original, but all
of which are a single instrument.
17. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Seller and Buyer as follows:
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SELLER:
Constellation Properties, Inc.
c/o Constellation Real Estate, Inc.
8815 Centre Park Drive - Suite 400
Columbia, MD 21045
Attention: General Counsel
BUYER:
Corporate Office Properties, L.P.
c/o Corporate Office Properties Trust
One Logan Square, Suite 1105
Philadelphia, PA 19103
Attention: Clay W. Hamlin, III
President and Chief Executive Officer
WITH A COPY TO ITS ATTORNEYS:
F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street - 38th Floor
Philadelphia, PA 19102
Notices shall be deemed properly delivered and received when and if either
(i) personally delivered, including via facsimile; or (ii) on the first business
day after deposit with a commercial overnight courier for delivery on the next
business day. Any party may change its address for delivery of notices by
properly notifying the others pursuant to this Section.
18. NO RECORDING. This Agreement shall not be recorded in any Clerk's
Office, Recorder's Office or in any office or place of public record. If Buyer
records this Agreement or causes or permits this Agreement to be recorded,
Seller may elect to treat such act as a breach of this Agreement and may declare
this Agreement terminated, null and void by recording notice of such termination
in the same records in which this Agreement has been recorded.
19. COMMISSIONS. Seller and Buyer each represents that it has not dealt
with any brokers in connection with this transaction. Buyer and Seller will
indemnify and defend the other from any and all claims, actual or threatened,
for compensation by any third party by reason of breach of its or their
representation or warranty contained in this Section. The provisions of this
Section 19 shall survive Closing.
20. BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns.
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21. LITIGATION. Seller and Buyer waive all rights to a jury trial with
respect to any disputes relating to this Agreement, whether arising before or
after Closing. In the event of litigation between the parties with respect to
the Property, this Agreement, the performance of their respective obligations
hereunder or the effect of a termination under this Agreement, the losing party
shall pay all costs and expenses incurred by the prevailing party in connection
with such litigation, including, but not limited to, reasonable attorneys' fees
of counsel selected by the prevailing party. The parties hereby further
acknowledge and agree that in the event of litigation between them, as
contemplated above, and the resolution of that litigation through compromise,
settlement, or partial judgment, the court before which such litigation is
initially brought shall have the right to allocate responsibility, between
Seller and Buyer, for all costs and expenses (including, but not limited to,
attorneys' reasonable fees) incurred by both Seller and Buyer in the pursuit of
that litigation resolved through compromise, settlement or partial judgment.
Notwithstanding any provision of this Agreement to the contrary, the obligations
of the parties under this Section shall survive termination of this Agreement
and the Closing, if applicable.
22. BENEFIT. This Agreement is for the benefit only of the parties hereto
and their nominees, successors, beneficiaries and assignees as permitted in
Section 27(a) below, above and no other person or entity shall be entitled to
rely hereon, receive any benefit herefrom or enforce against any party hereto
any provision hereof.
23. LIMITATION OF LIABILITY. Upon the Closing, neither the REIT nor the
Buyer shall assume or undertake to pay, satisfy or discharge any liabilities,
obligations or commitments of Seller other than those specifically agreed to
between the parties and set forth in this Agreement. Except as otherwise
specifically provided in this Agreement, neither the REIT nor the Buyer shall
assume or discharge any debts, obligations, liabilities or commitments of
Seller, whether accrued now or hereafter, fixed or contingent, known or unknown.
Neither the holders of shares in the REIT, nor the trustees, officers, employees
or agents of the REIT shall be liable under this Agreement and all parties
hereto shall look solely to the REIT assets for the payment of any claim or for
the performance of any obligation of the REIT as a party to this Agreement, both
in its own capacity and in its capacity as a general partner of the Buyer.
24. MISCELLANEOUS.
(a) BUYER'S RIGHT TO ASSIGN. Buyer shall have the right to assign
this Agreement, in whole or in part, without the prior consent of Seller, and
upon notice from Buyer, Seller agrees to convey the Shares directly to Buyer's
assignee, provided that Buyer and/or such assignee have fulfilled Buyer's
obligations under this Agreement. Any such assignment shall not relieve the
named Buyer of its obligations through the completion of Closing under this
Agreement.
(b) ENTIRE AGREEMENT. This Agreement and the other agreements
described in this Agreement constitutes the entire understanding between the
parties with respect to the transaction contemplated herein, and all prior or
contemporaneous oral agreements, understandings, representations and statements,
and all prior written agreements, understandings,
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letters of intent and proposals are merged into this Agreement. Neither this
Agreement nor any provisions hereof may be waived, modified, amended, discharged
or terminated except by an instrument in writing signed by the party against
which the enforcement of such waiver, modification, amendment, discharge or
termination is sought, and then only to the extent set forth in such instrument.
(c) TIME OF THE ESSENCE. Time is of the essence of this Agreement.
If any date herein set forth for the performance of any obligations by Seller or
Buyer or for the delivery of any instrument or notice as herein provided should
be on a Saturday, Sunday or legal holiday, the compliance with such obligations
or delivery shall be deemed acceptable on the next business day following such
Saturday, Sunday or legal holiday. As used herein, the term "legal holiday"
means any state or federal holiday for which financial institutions or post
offices are generally closed in the Commonwealth of Pennsylvania for observance
thereof.
(d) CONDITIONS PRECEDENT. The obligations of Buyer to pay the
Purchase Price and to close the transaction contemplated herein are subject to
the express Buyer's Conditions Precedent set forth in this Agreement, each of
which is for the sole benefit of Buyer and may be waived at any time by written
notice thereof from Buyer to Seller. The waiver of any particular Buyer's
Condition Precedent shall not constitute the waiver of any other.
(e) CONSTRUCTION. This Agreement shall not be construed more
strictly against one party than against the other merely by virtue of the fact
that it may have been prepared by counsel for one of the parties, it being
recognized that both Seller and Buyer have contributed substantially and
materially to the preparation of this Agreement. The headings of various
Sections in this Agreement are for convenience only, and are not to be utilized
in construing the content or meaning of the substantive provisions hereof.
(f) GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Maryland (without giving
effect to the conflict of law rules of that state).
(g) PARTIAL INVALIDITY. The provisions hereof shall be deemed
independent and severable, and the invalidity or partial invalidity or
enforceability of any one provision shall not affect the validity of
enforceability of any other provision hereof.
(h) EXPENSES. Except and to the extent as otherwise expressly
provided to the contrary herein, Buyer and Seller shall each bear its own
respective costs and expenses relating to the transactions contemplated hereby,
including, without limitation, fees and expenses of legal counsel or other
representatives for the services used, hired or connected with the proposed
transactions mentioned above.
(i) CONTROL OF DEFENSE COUNSEL. Each indemnified party shall give
reasonably prompt notice to each indemnifying party of any action or proceeding
commenced against the indemnified party in respect of which indemnity may be
sought hereunder, but failure so to notify an indemnifying party (i) shall not
relieve it from any liability which it may have
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under any indemnity provided herein unless and to the extent it did not
otherwise learn of such action and the lack of notice by the indemnified party
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) shall not, in any event, relieve the indemnifying party from
any obligations to any indemnified party hereunder other than its
indemnification obligation if the indemnifying party so elects within a
reasonable time after receipt of such notice, the indemnifying party may assume
the defense of such action or proceeding at such indemnifying party's own
expense with counsel chosen by the indemnifying party; provided, however, that,
if such indemnified party or parties reasonably determine that a conflict of
interest exists where it is advisable for such indemnified party or parties to
be represented by separate counsel or that, upon advice of counsel, there may be
legal defenses available to them which are different from or in addition to
those available to the indemnifying party, then the indemnifying party shall not
be entitled to one separate counsel at the indemnifying party's expense. If an
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this Section, the indemnifying party or parties will pay
the reasonable fees and expenses of counsel for the indemnified party or
parties. In such event however, no indemnifying party will be liable for any
settlement effected without the written consent of such indemnifying party. If
an indemnifying party is entitled to assume, and assumes, the defense of such
action or proceeding in accordance with this Section, such indemnifying party
shall not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action or proceeding.
(j) WAIVER OF CONDITIONS PRECEDENT. Buyer and Seller shall each have
the right, in its sole and absolute discretion, to waive any Condition Precedent
for its benefit contained in this Agreement.
(k) COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, any of which may contain the signatures of less than all
parties, and all of which together shall constitute a single agreement.
25. CALCULATION OF TIME PERIODS. Notwithstanding anything to the contrary
contained in this Agreement, any period of time provided for in this Agreement
that is intended to expire on or prior to the Closing Date, but that would
extend beyond the Closing Date if permitted to run its full term, shall be
deemed to expire upon the Closing.
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IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement,
intending to be legally bound hereby, as of the date and year first above
written.
BUYER:
CORPORATE OFFICE PROPERTIES, L.P., a Delaware
limited partnership, by its sole general
partner, Corporate Office Properties Trust, a
Maryland real estate investment trust
By: /s/ CLAY W. HAMLIN, III
-------------------------------------
Clay W. Hamlin, III, President
SELLER:
CONSTELLATION PROPERTIES, INC., a Maryland
corporation
By: /s/
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
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DEVELOPMENT PROPERTY ACQUISITION AGREEMENT
THIS AGREEMENT, made as of the 22nd day of June, 1998 (the "Contract Date")
, by and between CPI PINEY ORCHARD VILLAGE CENTER, INC., a Maryland corporation
("Seller"), and CORPORATE OFFICE PROPERTIES, L.P., a Delaware limited
partnership, and its assigns ("Buyer").
B A C K G R O U N D
Seller is the holder of a one hundred percent (100%) member interest (the
"Member Interest") in Piney Orchard Village Center, LLC, a Maryland limited
liability company (the "Company").
The Company is the record and beneficial owner of approximately 8.646 acres
of land located in Anne Arundel County, Maryland, as more particularly described
on Exhibit "A" hereto, together with the buildings and other improvements now or
hereafter situate thereon, and together with the appurtenances thereto
(including, without limitation, all easements, rights-of-way, ancillary and/or
adjacent lands and other real property rights and benefits belonging to or
running with the owner of the property (collectively, the "Property"). The
Company is in the process of completing construction of a retail shopping center
consisting or approximately 52,781 rentable square feet of retail space and
related improvements on the Property (the "Improvements") in accordance with the
Plans (as defined on Exhibit "C").
Seller desires to sell and convey and the Buyer desires to purchase and
accept, the Member Interest according to the terms and conditions of this
Agreement.
Capitalized terms used in this Agreement shall have the meanings set forth
herein, including the definitions set forth on Exhibit "C."
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and intending to be legally bound hereby, the parties agree as
follows:
1. SALE AND PURCHASE. Seller hereby agrees to sell and convey to Buyer,
which hereby agrees, subject to the conditions set forth herein, to purchase
from Seller, the Member Interest.
<PAGE>
2. PURCHASE PRICE.
(a) Provided that the Property is generating NOI (as defined below)
equal to at least $351,634.00 at the time of Closing (as defined below), the
purchase price for the Member Interest shall be equal to Three Million Four
Hundred Fifty Thousand Dollars ($3,450,000.00) (the "Purchase Price"). The
Purchase Price shall be paid by the Buyer by delivery of immediately available
wire transfer funds to Seller to such account as shall be designated by Seller.
(b) If NOI is less than $351,634.00 at the time of Closing, the
Purchase Price shall be reduced and shall be equal to the NOI at the time of
Closing divided by a capitalization rate of 10.19%, provided, however that in no
event shall Buyer or Seller be obligated to complete Closing hereunder unless
and until NOI has reached $300,000.00. Notwithstanding anything to the contrary
contained in this Agreement, if NOI has not reached $300,000.00 by July 1, 1999
for any reason whatsoever, Buyer and Seller shall each have the right, by
written notice to the other party, to terminate this Agreement, in which event
neither party shall have any further liability or obligation hereunder.
(c) The term "NOI" means the net operating income for the Property
determined as customarily calculated in the commercial real estate industry for
retail shopping center properties similar to the Property, based on the
annualized operating revenues to be received from the Property from Leases in
effect on the Closing Date (as those terms are defined below) less the estimated
annual operating expenses, including, without limitation, a management fee of
three and one-half percent (31/2%) of revenues, and a vacancy reserve of five
percent (5%) (excluding, for this purpose only, the space occupied by Food Lion)
of the number of square feet of the Property times the anticipated average rent
per square foot for the Property. In computing NOI, credit shall be given for
rental income from Leases in effect at Closing, but under which rent payment has
not commenced as of the Closing Date (the "Open Leases"). The portion of the
Purchase Price based upon such Open Leases (the "Open Lease Holdback") shall be
placed in escrow at Closing with Commonwealth Land Title Insurance Company under
an escrow agreement reasonably acceptable to Seller and Buyer. The Open Lease
Holdback shall be paid to Seller only to the extent of the portion of the Open
Lease Holdback based upon Open Leases under which rent payment commences within
one hundred twenty (120) days after the Closing Date. If rent payment does not
commence under any one (1) or more of the Open Leases within one hundred
twenty (120) days after the Closing Date, the portion of the Open Lease Holdback
based upon such Open Leases shall be paid to Buyer. The term "Leases" shall
mean all leases and other agreements to occupy all or any portion of the
Property executed and in effect on the Contract Date or into which the Company
enters prior to the Closing (as defined below), but pursuant to the express
terms of this Agreement.
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3. CLOSING.
(a) The sale and transfer of the Member Interest, the payment of the
Purchase Price and the completion of all other transactions contemplated by this
Agreement ("Closing") shall take place at the offices of Seller set forth in
Section 17 of this Agreement, or at such other place as may mutually agreed upon
by the parties. The Closing shall commence at 10:00 a.m. on the date (the
"Closing Date"), within fifteen (15) days after the Leasing Requirements
Satisfaction Date, specified by Buyer upon not less than five (5) days written
notice to the Seller, and, in any event, subject to Section 2(b) above, the
Closing Date shall be not later than July 1, 1999.
(b) At Closing, Seller shall deliver or cause to be delivered to
Buyer the following in respect of the Member Interest, in form and substance
reasonably acceptable to Buyer and Seller and their respective counsel:
(1) ASSIGNMENT DOCUMENTATION. An assignment and assumption
agreement, an amendment to operating agreement and an amendment to the articles
of organization of the Company, setting forth the assignment by the Seller of
the Member Interest, its withdrawal from the Company, and the admission of the
Buyer and/or its designee(s) as a member of the Company;
(2) ORGANIZATIONAL DOCUMENTS. The operating agreement, all
books of account, all agreements, documents and other books, records, papers and
instruments of or pertaining to the business and affairs of the Company (to the
extent not previously delivered as part of Seller's Deliveries, as hereinafter
defined);
(3) RELEASE. A release from Seller, releasing the Buyer (and
its designee(s)) from any obligations and liabilities with respect to the
formation of the Company, and any other matter arising from business done,
transactions entered into or event occurring prior to the Closing;
(4) OPINIONS. An opinion of Daniel R. Skowronski, Esquire,
General Counsel of Constellation Holdings, Inc., the parent of Seller, in form
and substance reasonably satisfactory to Buyer and Buyer's counsel, providing or
with respect to: (i) the legal existence and good standing of the Company in
its state of formation; (ii) the due authorization, execution and delivery of
this Agreement, and the other documents required (under the terms of this
Agreement) to be delivered by Seller; (iii) that this Agreement and the other
documents required (under the terms of this Agreement) to be delivered by
Seller, constitute the legal, valid and binding obligations of Seller,
enforceable against it in accordance with their respective terms, except to the
extent that enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws of
general applicability relating to or affecting the enforcement of creditors'
rights and by the effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding of equity or at law; (iv) the
execution and delivery of this Agreement and all other agreements delivered in
connection herewith or at the Closing, the consummation of the transactions
herein contemplated, and
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compliance with the terms of this Agreement and all other agreements delivered
in connection herewith or at the Closing will not conflict with, or result in a
breach of, any of the terms, conditions or provisions of, or constitute a
default under, any note, indenture, mortgage, deed of trust, contract or other
agreement or instrument to which the Seller or the Company is a party or by
which the Seller or the Company is bound, or any law or order, rule, regulation,
writ, injunction or decree of any government, governmental instrumentality or
court, domestic or foreign; and (v) there is no litigation or investigation
pending or, to the best of such counsel's knowledge, threatened against the
Seller, the Company, the Property, or any part thereof.
(5) ESTOPPEL CERTIFICATES. Using Seller's commercially
reasonable efforts, Tenant estoppel certificate from Tenants occupying at least
eighty percent (80%) of the Improvements or such larger percentage as Buyer's
lender or lenders may require (provided, that Buyer advises Seller of lender
requirements at least thirty (30) days before Closing) (the "Estoppel
Certificate"), dated no earlier than 30 days prior to the Closing Date, from
each of the Tenants. The Estoppel Certificate shall be certified to Buyer and
any other party designated by Buyer. If the Seller (despite its required
commercially reasonable efforts) is unable to obtain an Estoppel Certificate
from the required percentage of Tenants, Buyer and Seller shall proceed to close
and Buyer shall accept Seller's own Estoppel Certificate with respect to the
Lease and tenancy for which the Seller failed to procure an Estoppel Certificate
from the relevant Tenant (and any Estoppel Certificate so executed by a Seller
shall also be tailored, in a manner mutually and reasonably acceptable to Buyer
and Seller, to reflect its issuance by the landlord, rather than the Tenant in
question). Each such Estoppel Certificate shall be substantially in the form
attached hereto as Exhibit "B" or in such other form as Buyer's lender or
lenders may require.
(6) CLOSING STATEMENT. A closing statement conforming to the
proration and other relevant provisions of this Agreement (the "Closing
Statement") duly executed by Seller;
(7) PLANS AND SPECIFICATIONS. All plans and specifications
relating to the Property (including the Plans) in the possession and control of
the Company or the Seller, or otherwise available to such entities;
(8) TAX BILLS. Copies of the most currently available Tax Bills
to the extent not previously delivered to Buyer;
(9) RENT ROLL AND OPERATING STATEMENTS. An updated Rent Roll
and Operating Statements (as defined on Exhibit "C") for the Property, prepared
as of the Closing Date, certified by the Seller to be true, complete and correct
through the Closing Date;
(10) CERTIFICATES OF OCCUPANCY. Subject to Section 5 below,
currently valid certificates of occupancy (or comparable permits or licenses)
with respect to the entirety of the Property;
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(11) ARCHITECT'S CERTIFICATE. A certificate from the architect
for the Improvements (the "Architect") certifying that the Improvements have
been completed in conformity with the Plans;
(12) CLOSING CERTIFICATE. A certificate, signed by Seller, on
behalf of itself and the Company, certifying to the Buyer that the
representations and warranties of Seller (for itself and for the Company)
contained in this Agreement are true and correct in all material respects as of
the Closing Date and that all covenants required to be performed by the Seller
or the Company prior to the Closing Date have been performed in all material
respects;
(13) RESOLUTIONS, CONSENTS, APPROVALS. Certified Resolutions,
consents, and approvals of the Seller evidencing its authority to execute this
Agreement and consummate the transactions contemplated by this Agreement.
(14) GOOD STANDING CERTIFICATES. Currently dated good standing
certificates for the Company and the Seller.
(15) MISCELLANEOUS. Such other documents and items as reasonably
may be required to be delivered by Seller or the Company to Buyer under the
terms of this Agreement or relating to the Member Interest or the Property to
reasonably effect the purposes of this Agreement, including without limitation,
affidavits of title in favor of the Buyer and the Company's title insurance
company on the form used by such title company to enable such company to issue
Fairway and Non-Imputation Endorsements to the Company's Owner's Policy of Title
Insurance at the time of Closing.
(c) Buyer shall cause to be delivered to Seller the following, each
in form and substance reasonably acceptable to Seller and Buyer and their
respective counsel:
(1) A copy certified by the Secretary of State of the State of
Delaware of the Certificate of Limited Partnership of the Buyer and a good
standing certificate for the Buyer;
(2) The Closing Statement, executed by Buyer;
(3) An opinion of counsel for Buyer, in form and substance
reasonably satisfactory to Seller and Seller's counsel, providing or with
respect to: (i) the legal existence and good standing of Buyer; (ii) the due
authorization, execution and delivery of this Agreement, and the other documents
required (under the terms of this Agreement) to be delivered by Buyer;
(iii) that this Agreement and the other documents required (under the terms of
this Agreement) to be delivered by Buyer, constitute the legal, valid and
binding obligations of Buyer, enforceable against it in accordance with their
respective terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws of general applicability relating to or affecting the
enforcement of creditors' rights and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding of
equity or at law; and
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(4) Such other documents and instruments as may reasonably be
required by Seller or its counsel and that are necessary to consummate the
transaction which is the subject of this Agreement and to otherwise effect the
agreements of the parties hereto.
(d) PRORATIONS AND ADJUSTMENTS/EXPENSES. To the extent paid for by
the Company (rather than by Tenants under Leases), the following shall be
prorated and adjusted between Seller and Buyer as of the Closing Date:
(1) Water, electricity, sewer, gas, telephone and other utility
charges based, to the extent practicable, on final meter readings and final
invoices, or, in the event final readings and invoices are not available, based
on the most currently available billing information, and reprorated upon
issuance of final utility bills;
(2) Amounts paid or payable under any Contracts shall be
prorated based, to the extent practicable, on final invoices, or, in the event
final invoices are not available, based on the most currently available billing
information, and reprorated upon issuance of final invoices;
(3) All real estate, personal property and ad valorem taxes
applicable to the Property and levied with respect to current tax year shall be
prorated as of the Closing Date, utilizing the actual final Tax Bills. Prior to
or at the Closing, Seller shall pay or have paid all Tax Bills that are due and
payable prior to or on the Closing Date and shall furnish evidence of such
payment to Buyer and its title company. Each party's respective obligations to
reprorate real estate taxes shall survive the Closing.
(4) All assessments, general or special, shall be prorated as of
the Closing Date on a "due date" basis such that the Seller shall be responsible
for its share of any installments of assessments which are first due or payable
prior to the Closing Date and Buyer shall be responsible for its share of any
installments of assessments which are first due or payable on or after the
Closing Date;
(5) Commissions of leasing and rental agents for any Lease
entered into as of or prior to the Contract Date, whether with respect to base
lease term or future expansions, shall be paid in full at or prior to the
Closing by Company, without contribution or proration from Buyer except for
renewal commissions as disclosed to Buyer in the Rent Roll. As to Leases
entered into between the Contract Date and the Closing Date in accordance with
this Agreement, commissions shall be prorated as of the Closing Date based upon
the portion of the term of the Lease before Closing and the portion of the term
of this Lease after Closing.
(6) All Base Rents and other charges, including, without
limitation, all Additional Rent, shall be prorated as of the Closing Date. At
the time(s) of final calculation and collection from Tenants of Additional Rent
for the calendar year in which Closing is completed, there shall be a
re-proration between Seller and Buyer as to Additional Rent adjustments, with
such re-prorations being payable to the appropriate recipient in cash. Such
re-proration shall be
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paid upon Buyer's presentation of its final accounting to Seller, certified as
to accuracy by Buyer. At the Closing, no "Delinquent Rents" (rents or other
charges that are due as of the Closing) shall be prorated in favor of Seller.
The parties' respective obligations to reprorate Additional Rent shall survive
the Closing. Notwithstanding the foregoing, the Company shall use reasonable
efforts after the Closing Date to collect any Delinquent Rents due from Tenants,
but Company shall not be required to sue any Tenants. All rents and other
charges received by (or for the benefit of) Company from any Tenant after the
Closing shall be first applied against current and past due obligations owed to,
or for the benefit of, Company (with respect to those obligations accruing
subsequent to the Closing Date), and Seller's share of any excess shall be
delivered to Seller, but only to the extent of amounts in default and owed to,
and for the benefit of, Seller for the period prior to the Closing Date. In no
event, however, shall any sums be paid to Seller to the extent Seller has been
previously reimbursed for such default out of any security deposit and security
deposits have been appropriately prorated hereunder; and
(7) Such other items that are customarily prorated in
transactions of this nature shall be ratably prorated.
For purposes of calculating prorations, Buyer shall be deemed, through
control of the Company, to be in title to the Property, and therefore entitled
to the income therefrom and responsible for the expenses thereof, for the entire
Closing Date. All such prorations shall be made on the basis of the actual
number of days of the year and month that shall have elapsed as of the Closing
Date. Bills received after the Closing that relate to expenses incurred,
services performed or other amounts allocable to the period prior to the Closing
Date shall be paid, in cash, by the Company, to the extent due and owing. Bills
received by the Company or Seller after the Closing Date that relate to expenses
incurred, services performed or other amounts allocable to the period on or
after the Closing Date, shall be paid, in cash, by the Company, to the extent
due and owing.
(e) Seller will pay the entire cost of all fees imposed by its
accountants and attorneys and consultants in connection with this Agreement and
the transaction contemplated hereunder. Although Seller and Buyer do not
believe that any realty transfer taxes shall be due in connection with the
transfer of the Member Interest, if it is finally determined that transfer taxes
are due and payable, such transfer taxes shall be divided equally by Seller and
Buyer. Seller and Buyer shall divide equally the cost of contesting such
transfer taxes. Buyer shall pay all ordinary filing charges and all title
insurance endorsement fees in connection with the transfer of the Member
Interest and issuance of appropriate title endorsements, and all fees imposed by
Buyer's accountants, attorneys, and environmental and engineering consultants.
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INSPECTION.
(a) At all times prior to the Closing, including times following the
Inspection Period, Buyer, its agents and representatives shall be entitled to
conduct an inspection of the Property, which will include the rights
to: (i) enter upon the Property and improvements, on reasonable notice to
Seller, to perform inspections and tests of the Property, including, but not
limited to, inspection, evaluation and testing of the heating, ventilation and
air-conditioning systems and all components thereof, all structural and
mechanical systems within the improvements, including, but not limited to,
sprinkler systems, power lines and panels, air lines and compressors, automatic
doors, tanks, pumps, plumbing and all equipment, vehicles, and personal
property; (ii) examine and copy any and all books, records, tax returns,
correspondence, financial data, leases, and all other documents and matters,
public or private, maintained by the Company, the Seller or its or their agents,
relating to receipts and expenditures pertaining to the Property for the three
most recent full calendar years and the current calendar year and all contracts,
rental agreements and all other documents and matters, public or private,
maintained by the Company, the Seller or its or their agents, relating to the
construction and operation of the Property; (iii) make investigations with
regard to zoning, environmental (including, but not limited to, an environmental
assessment as specified in Section 4(b), which includes, but is not limited to,
an analysis of the presence of any asbestos, chlordane, formaldehyde or other
Hazardous Material in, under or upon the Property, or any underground storage
tanks on, or under, the Property), building, code, regulatory and other legal or
governmental requirements; (iv) make or obtain market studies and real estate
tax analyses; and (v) interview Tenants with respect to their current and
prospective occupancies. In connection with such investigations, Seller shall
deliver to Buyer, or cause delivery to Buyer of, no later than 30 days after the
date of this Agreement, copies of all documents listed on Exhibit "C" (the
"Seller's Deliveries"). Without limitation of the foregoing, Buyer or its
designated independent or other accountants may audit the Operating Statements
(as defined in Exhibit "C" attached hereto), and Seller shall supply such
documentation as Buyer or its accountants may reasonably request in order to
complete such audit. Notwithstanding anything to the contrary contained in this
Agreement, the effect of any representations, warranties or undertakings made by
Seller in this Agreement shall not be diminished, abrogated, or compromised by
the foregoing inspections, environmental assessments or other tests or
investigations made by Buyer.
(b) ENVIRONMENTAL ASSESSMENT. Buyer or Buyer's agent(s) shall have
the right to employ one or more environmental consultants or other
professional(s) to perform or complete such environmental inspections and
assessments of the Property as Buyer deems necessary or desirable. Buyer and
its consultants shall also have the right to undertake or complete a technical
review of all documentation, reports, plans, studies and information in
possession or control of the Company or Seller, or its past or present
environmental consultants, concerning or in any way related to the environmental
condition of the Property. In order to facilitate the assessments and technical
review, Seller shall extend its full cooperation (but without third party
expense to Seller) to Buyer and its environmental consultants, including,
without limitation, providing access to all files and fully and completely
answering all questions.
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(c) BUYER'S UNDERTAKING. Buyer hereby covenants and agrees that it
shall cause all studies, investigations and inspections performed at the
Property pursuant to this Section 3 to be performed in a manner that does not
materially or unreasonably disturb or disrupt the development of the Property or
the tenancies or business operations of any of the tenants of the Property. In
the event that, as a result of Buyer's exercise of its rights under Section 4(a)
or Section 4(b), physical damage occurs to the Property, then Buyer shall
promptly repair such damage, at Buyer's sole cost and expense, so as to return
the Property to substantially the same condition as existed prior to such
damage. Buyer hereby indemnifies, protects, defends and holds Seller harmless
from and against any and all losses, damages, claims, causes of action,
judgments, damages, costs and expenses that Seller actually suffers or incurs as
a direct result of any physical damage caused to, in, or at the Property during
the course of, or as a result of, any or all of the studies, investigations and
inspections that Buyer elects to perform (or causes to be performed) pursuant to
this Section 4.
(d) CONFIDENTIALITY. Each party agrees to maintain in confidence,
and not to disclose to tenants or tenants' employees, the information contained
in this Agreement or pertaining to the transaction contemplated hereby and the
information and data furnished or made available by Seller to Buyer, its agents
and representatives in connection with Buyer's investigation of the Property and
the transactions contemplated by this Agreement; provided, however, that each
party, its agents and representatives may disclose such information and data
(i) to such party's accountants, attorneys, existing or prospective lenders,
investment bankers, accountants, underwriters, ratings agencies, partners,
consultants and other advisors in connection with the transactions contemplated
by this Agreement to the extent that such representatives reasonably need to
know (in the disclosing party's reasonable discretion) such information and data
in order to assist, and perform services on behalf of, the disclosing party;
(ii) to the extent required by any applicable statute, law, regulation or any
Governmental Authority (as defined below) (including, but not limited to,
Form 8-K and other reports and filings required by the SEC and other regulatory
entities, as described in Exhibit "D" attached hereto); (iii) in connection with
any litigation that may arise between the parties in connection with the
transactions contemplated by this Agreement or otherwise relating to the
Property; (iv) to the extent such disclosure is required or appropriate in
connection with any securities offering or other capital markets or financing
transaction undertaken by the Corporate Office Properties Trust (the "REIT");
(v) to the extent such information and data become generally available to the
public other than as a result of disclosure by such party or its agents or
representatives; and (vi) to the extent such information and data become
available to such party or its agents or representatives from a third party who,
insofar as is known to such party, is not subject to a confidentiality
obligation to the other party hereunder; and (vii) to the extent necessary in
order to comply with each party's respective covenants, agreements and
obligations under this Agreement. In the event the transactions contemplated by
this Agreement shall not be consummated, such confidentiality shall be
maintained indefinitely. Furthermore, Seller and Buyer acknowledge that,
notwithstanding any contrary term of this Section 4(d), Buyer shall have the
right to conduct tenant interviews during the Inspection Period, and the
disclosure of the existence of this Agreement to the tenants shall not
constitute a breach of the above restriction. Buyer shall also have the right
to issue a press release mutually acceptable to Buyer and Seller upon the
consummation of the transactions described in this Agreement. The term
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"Governmental Authority" shall mean any agency, commission, department or body
of any municipal, township, county, local, state or Federal governmental or
quasi-governmental regulatory unit, entity or authority having jurisdiction or
authority over the Property or the management, operation, use or improvement
thereof.
(5) CONDITIONS/INSPECTION PERIOD. Each of the following shall be a
condition precedent to Buyer's obligation to complete Closing under this
Agreement (any of which may be waived in whole or in part by Buyer at or prior
to Closing) (together with any other Buyer's conditions precedent under this
Agreement, collectively, the "Conditions" or "Conditions Precedent" and each,
individually, a "Condition" or "Condition Precedent"):
(a) All of the representations and warranties by Seller set forth in
this Agreement shall be true and correct at and as of Closing in all material
respects as though such representations and warranties were made at and as of
Closing. Seller shall have performed, observed and complied with all covenants,
agreements and conditions required by this Agreement to be performed on its part
prior to or as of Closing.
(b) Buyer shall have the Inspection Period (as hereinafter defined)
to conduct, at Buyer's sole cost and expense, due diligence investigations and
analysis of the Company, the Property and all information pertaining to the
Company and the Property, including without limitation, reviewing environmental
conditions, surveys, title reports, leases and the physical conditions of the
Property. If Buyer, in its sole discretion, determines that either the
Property, or the Company does not meet Buyer's (or its underwriters', investment
bankers', lenders', rating agencies' or investors) criteria for the purchase of
the Member Interest or for the purchase, financing or operation of the Property
in the manner contemplated by the Buyer, and notifies Seller by 5:00 p.m. on the
last day of the Inspection Period of Buyer's election to terminate this
Agreement, this Agreement thereupon shall become void and there shall be no
further obligation or liability on any of the parties. The "Inspection Period"
shall mean the period commencing on the date of this Agreement and expiring
sixty (60) days after the Contract Date.
(c) Company shall have satisfied the following requirements (the
"Leasing Requirements"):
(1) Company shall have completed, or caused completion of, the
construction of the Improvements and certificates of occupancy (or comparable
permits and licenses) for the Improvements shall have been issued by appropriate
Governmental Authorities.
(2) Company or Seller shall have delivered true and correct
copies of all of the Leases in effect as of the date the NOI reaches
$351,634.00, together with a Rent Roll as of such date, including a complete
list of Tenants which have commenced paying rent, and a calculation of the NOI
in accordance with Section 2(a); and
(3) The NOI shall have reached $351,634.00.
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The date that Seller satisfies the Leasing Requirements to the satisfaction of
Buyer shall be referred to in this Agreement as the "Leasing Requirements
Satisfaction Date". The parties shall confirm the Leasing Requirements
Satisfaction Date in writing.
(d) So long as the Buyer, or any entity related to Buyer, is the
named Buyer under this Agreement, Closing shall have been completed under that
certain Contribution Agreement dated May 14, 1998, among the sellers identified
therein, Buyer and REIT.
6. ENVIRONMENTAL WARRANTIES AND AGREEMENTS.
(a) DEFINITIONS. Unless the context otherwise requires:
(1) "Environmental Law" or "Environmental Laws" shall mean all
applicable past, present or future federal, state and local statutes,
regulations, directives, ordinances, rules, court orders, decrees, arbitration
awards and the common law, which pertain to environmental matters, contamination
of any type whatsoever or health and safety matters, as such have been amended,
modified or supplemented from time to time (including all present and future
amendments thereto and re-authorizations thereof). Environmental Laws include,
without limitation, those relating to: (i) the manufacture, processing, use,
distribution, treatment, storage, disposal, generation or transportation of
Hazardous Materials; (ii) air, soil, surface, subsurface, groundwater or noise
pollution; (iii) Releases; (iv) protection of wildlife, endangered species,
wetlands or natural resources; (v) Tanks; (vi) health and safety of employees
and other persons; and (vii) notification requirements relating to the
foregoing. Without limiting the above, Environmental Law also includes the
following: (i) the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Sections 9601 ET SEQ.), as amended ("CERCLA");
(ii) the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act (42 U.S.C. Sections 6901 ET SEQ.), as amended ("RCRA"); (iii) the
Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C. Sections
11001 ET SEQ.), as amended; (iv) the Clean Air Act (42 U.S.C. Sections 7401
ET SEQ.), as amended; (v) the Clean Water Act (33 U.S.C. Section 1251 ET SEQ.),
as amended; (vi) the Toxic Substances Control Act (15 U.S.C. Section 2601
ET SEQ.), as amended; (vii) the Hazardous Materials Transportation Act
(49 U.S.C. Sections 1801 ET SEQ.), as amended; (viii) the Federal Insecticide,
Fungicide and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.), as amended;
(ix) the Federal Safe Drinking Water Act (42 U.S.C. Section 300f ET SEQ.), as
amended; (x) the Federal Radon and Indoor Air Quality Research Act
(42 U.S.C. Section 7401 note, ET SEQ.); (xi) the Occupational Safety and Health
Act (29 U.S.C. Section 651 ET SEQ.), as amended; (xii) any state, county,
municipal or local statutes, laws or ordinances similar or analogous to
(including counterparts of) any of the statutes listed above; and (xiii) any
rules, regulations, directives, orders or the like adopted pursuant to or
implementing any of the above.
(2) "Environmental Permit" or "Environmental Permits" shall mean
licenses, certificates, permits, directives, requirements, registrations,
government approvals, agreements, authorizations, and consents which are
required under or are issued pursuant to an Environmental Law or are otherwise
required by Governmental Authorities.
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(3) "Hazardous Conditions" refers to the existence or presence
of any Hazardous Materials on, in, under, or at, the Property (including air,
soil and groundwater) or any portion of the Property.
(4) "Hazardous Material" or "Hazardous Materials" shall mean:
(A) any chemical, pollutant, contaminant, pesticide,
petroleum or petroleum product or by product, radioactive substance, solid waste
(hazardous or extremely hazardous), special, dangerous or toxic waste,
substance, chemical or material regulated, listed, limited or prohibited under
any Environmental Law, including without limitation: (i) friable or damaged
asbestos, asbestos-containing material, presumed asbestos-containing material,
polychlorinated biphenyls ("PCBs"), solvents and waste oil; (ii) any "hazardous
substance" as defined under CERCLA; and (iii) any "hazardous waste" as defined
under RCRA; and
(B) even if not prohibited, listed, limited or regulated by
an Environmental Law, all pollutants, contaminants, hazardous, dangerous or
toxic chemical materials, wastes or any other substances, including without
limitation, any industrial process or pollution control waste (whether or not
hazardous within the meaning of RCRA) which could pose a hazard to the
environment, or the health and safety of any person or impair the use or value
of any portion of the Property.
(5) "Release" means any spill, discharge, leak, migration,
emission, escape, injection, dumping or other release or threatened release of
any Hazardous Material into the environment, whether or not notification or
reporting to any Governmental Authority was or is required. Release includes,
without limitation, historical releases and the meaning of Release as defined
under CERCLA.
(6) "Remedial Action" shall mean any and all corrective or
remedial action, preventative measures, response, removal, transport, disposal,
clean-up, abatement, treatment and monitoring of Hazardous Materials or
Hazardous Conditions, whether voluntary or mandatory, and includes all studies,
assessments, reports or investigations performed in connection therewith to
determine if such actions are necessary or appropriate (including investigations
performed to determine the progress or status of any such actions), all
occurring on or after the Contract Date.
(7) "Remedial Costs" shall include all costs, liabilities
expenses and fees incurred on or after the date of this Agreement in connection
with Remedial Action, including but not limited to: (i) the fees of
environmental consultants and contractors; (ii) reasonable attorneys' fees
(including compensation for in-house and corporate counsel provided such
compensation does not exceed customary rates for comparable services); (iii) the
costs associated with the preparation of reports, and laboratory analysis
(including charges for expedited results if reasonably necessary);
(iv) regulatory, permitting and review fees; (v) costs of soil and/or water
treatment (including groundwater monitoring) and/or transport and disposal; and
(iv) the cost of supplies, equipment, material and utilities used in connection
with Remedial Action.
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(8) "Tank" or "Tanks" means above-ground and underground storage
tanks, vessels and related equipment, including appurtenant pipes, lines and
fixtures containing or previously containing any Hazardous Material or fraction
thereof.
(b) WARRANTIES. Seller, for itself and for the Company, hereby
represents and warrants as follows with respect to the Property:
(1) The Seller and the Company have made available or delivered
to Buyer originals (or true, complete and accurate copies) of all of the
documents in their possession, custody or control, which documents include
and/or relate to:
(A) All approvals, plans, specifications, test borings,
percolation tests, engineering studies, surveys or other environmental data
concerning the Property;
(B) All permits (including Environmental Permits),
approvals, registrations, Tank registration and/or closure documentation,
certificates, applications, notices, orders, directives, legal pleadings,
correspondence or other documents of any nature that the Company or the Seller,
any tenant of Company, any of Company's predecessors-in-title or any tenant of
Company's predecessors-in-title have submitted to, or received from, any
Governmental Authority regarding the Property and its use, compliance or
non-compliance with Environmental Laws; and
(C) The results of any investigation of the Property
including, but not limited to, Phase I or Phase II site assessments, asbestos
inspection and/or removal reports, tests or investigations of soil or other
substrate air, groundwater, surface water, or the building interior, and any
testing or investigation results relating to the removal or abandonment of any
Tanks from the Property.
(2) To the knowledge of the Seller and the Company, the Property
has been and continues to be owned and operated in full compliance with all
Environmental Laws and Environmental Permits.
(3) There are no pending or, to the knowledge of the Seller or
the Company, threatened: (i) claims, complaints, notices, correspondence or
requests for information received by the Seller or the Company with respect to
any violation or alleged violation of any Environmental Law or Environmental
Permit or with respect to any corrective or remedial action for or cleanup of
the Property or any portion thereof; and (ii) written correspondence, claims,
complaints, notices, or requests for information from or to the Seller or
Company regarding any actual, potential or alleged liability or obligation under
or violation of any Environmental Law or Environmental Permit with respect to
the Property or any portion thereof.
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(4) To the knowledge of the Seller and the Company, there have
been no Releases and there has not been a threatened Release of a Hazardous
Material on, in, under or at the Property or any portion thereof.
(5) The Property is not listed, proposed or nominated for
listing on the National Priorities List pursuant to CERCLA (the "NPL"), the
Comprehensive Environmental Response and Liability Information System
("CERCLIS") or on any other similar list of sites under analogous state laws.
(6) There are no Tanks at, on or under the Property. Neither
the Seller nor the Company has removed, closed or abandoned any Tanks at the
Property, and neither the Seller nor the Company has any knowledge of the
existence, abandonment, closure or removal of Tanks at the Property.
(7) To the knowledge of the Seller and the Company, there are no
PCBs or friable or damaged asbestos at the Property.
(8) There has been no storage, treatment, disposal, generation,
transportation or Release of any Hazardous Materials by the Company or the
Seller or by any other person or entity for which the Seller or Company is or
may be held responsible, at, on, under, or about the Property (or any portion
thereof) in violation of, or which could give rise to any claim, obligation or
liability under, Environmental Laws.
(c) INDEMNITY. Notwithstanding anything to the contrary in this
Agreement, with respect to the Property, the Seller and each of Seller's
shareholders (collectively, jointly and severally, "Post Closing Seller") agree
to and do hereby indemnify, defend and hold harmless Buyer, the REIT and each of
their respective partners, shareholders, agents, contractors, employees,
officers, directors, trustees, shareholders, and each of their successors and
assigns (collectively, the "Buyer Indemnified Parties"), from and against any
and all liabilities, claims, demands, suits, administrative proceedings, causes
of action, costs, damages, personal injuries and property damages, losses and
expenses, both known and unknown, present and future, at law or in equity
(collectively, "Losses"), arising out of, by virtue of or related in any way to
an breach by Seller of any of its representations and warranties under
Section 6(b).
Without limiting any of Post-Closing Seller's above indemnification
obligations, Post-Closing Seller further acknowledges and agrees that its
obligation to indemnify the Buyer Indemnified Parties includes, without
limitation with respect to any breach by the Company or the Seller of its
representations and warranties under Section 6(b): (i) any and all Remedial
Costs associated with any Tank, Hazardous Material, Hazardous Condition or any
Release; (ii) to the maximum extent allowed by law, all fines and/or penalties
that may be imposed in connection with any Tank or the existence of any
Hazardous Material on, at, under, near, in or about the Property; (iii) the
defense of any claim made by any individual or entity (including any government,
governmental agency or entity) concerning any of the foregoing, which defense
shall be conducted by counsel and with the assistance of environmental advisors
and consultants, in all cases subject to the prior written approval of Buyer;
and (iv) reasonable attorneys' fees and
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costs and environmental advisors' and consultants' fees incurred by any of the
Buyer Indemnified Parties with respect to enforcing its rights under this
indemnification provision. This Section 6 shall survive the Closing for a
period of thirty (30) months.
7. TITLE. At the Closing, Seller agrees that the Company shall have good
and marketable fee simple title to the Property, free and clear of all liens,
claims and encumbrances except for the Permitted Exceptions. From and after the
date of this Agreement, Company shall not take any action, or fail to take any
action, that would cause title to the Property to be subject to any title
exceptions or objections, other than the Permitted Exceptions.
(a) On or before forty-five (45) days after the Contract Date, Buyer
shall furnish Seller with a preliminary title report covering the Property (the
"Title Report") and a written notice specifying those title exceptions which are
not acceptable to Buyer, which objection may include matters shown on any
updated or re-certified survey which Buyer may obtain (the "Disapproved
Exceptions"). Buyer's failure to designate as one of the Disapproved Exceptions
a title exception shown on the Title Report shall constitute Buyer's approval of
such title exception (all title exceptions not designated by Buyer as
Disapproved Exceptions are in this Agreement called "Permitted Exceptions). The
Seller shall cause the Company to use its best efforts to cause the removal of
all Disapproved Exceptions on or before ten (10) days after Buyer's notice to
Seller of such Disapproved Exceptions, except that liens of an ascertainable
amount and other items which can be removed by the payment of money shall be
paid and discharged by Seller or the Company at or before Closing. Within such
ten (10) day period, Seller shall notify Buyer of all Disapproved Exceptions
that Seller, after using its best efforts, is unable to remove. Seller's
failure to give Buyer notice of Seller's inability to remove any Disapproved
Exceptions shall constitute Seller's covenant that such Disapproved Exceptions
shall be removed at or prior to the Closing. Buyer shall have the rights set
forth in 7(c) if any Disapproved Exceptions cannot be removed by Seller(s) at or
prior to the Closing.
(b) It shall be a Condition under this Agreement that the marked-up
Title Reports delivered on the Closing Date shall be in the form described in
this Section 6 and have all standard and general printed exceptions deleted so
as to afford full "extended form coverage," and shall further include an owner's
comprehensive endorsement, an endorsement certifying that the bills for the real
estate taxes pertaining to the Property do not include taxes pertaining to any
other real estate; an access endorsement; a contiguity endorsement, if
applicable; a subdivision or plat act endorsement; a survey endorsement; a
non-imputation endorsement; a Fairway endorsement; and a creditors' rights
endorsement.
(c) If Seller or the Company is unable to correct or remove any
Disapproved Exceptions in accordance with the requirements of this Section 7,
Buyer shall have the sole option of either (i) completing the Closing subject to
such Disapproved Exceptions without any abatement of the Purchaser Price, except
that liens of an ascertainable amount and other items which can be removed by
payment of money shall be paid and discharged by Seller or Company prior to
Closing or (ii) being immediately paid Buyer's Reasonable Costs (as defined
below) and, in the latter event, the parties shall be released from all
liability or obligation to the other and this Agreement shall then and
thereafter be null and void. "Buyer's Reasonable Costs" shall mean all
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out-of-pocket costs and expenses incurred by Buyer in connection with this
Agreement and the Property, including, but not limited to, legal fees, title
company charges, engineering fees, environmental consultant's fees, architects'
and surveyors' fees and other similar charges.
8. REPRESENTATIONS AND WARRANTIES AS TO THE PROPERTY. Seller represents
and warrants to Buyer, for itself and the Company, that the following matters
are true as of the Contract Date and shall be true as of the Closing Date and
covenants as follows:
(a) TITLE. The Company is the legal fee simple titleholder of the
Property, and, other than with respect to the Permitted Exceptions, has, good,
marketable and insurable title to the Property, free and clear of all mortgages
and security interests, leases, agreements and tenancies (other than the
Leases), licenses, claims, options, options to purchase, liens, covenants,
conditions, restrictions, rights-of-way, easements, judgments and other matters
affecting title to the Property. The Property is the only tangible asset owned
by the Company. The sole business of the Company is its ownership and operation
of the Property.
(b) SELLER'S DELIVERIES. All of Seller's Deliveries listed on
Exhibit "C" attached hereto and all other items delivered by Seller pursuant to
this Agreement are true, accurate, correct and complete in all material
respects, and fairly present the information set forth in a manner that is not
misleading. The copies of all documents and other agreements delivered or
furnished and made available by Seller to Buyer pursuant to this Agreement
constitute all of and the only Leases and other agreements relating to or
affecting the ownership and operation of the Property, there being no material
"side" or other agreements, written or oral, in force or effect, to which the
Seller or the Company is a party or to which the Property is subject.
(c) DEFAULTS. Neither the Seller nor the Company is in default under
any of the documents, recorded or unrecorded, referred to in the title
commitments. To the knowledge of the Seller and the Company, there are no
defaults under any of the Major Construction Contracts, Contracts or
Governmental Approvals (as such terms are defined in Exhibit "C" attached
hereto).
(d) CONTRACTS. There are no contracts of any kind relating to the
management, leasing, operation, maintenance or repair of the Property, except
the Contracts listed on Exhibit "E" attached hereto. The Company and the
Seller, as applicable, has performed all material obligations required to be
performed by it, and is not in default, under any of such Contracts.
(e) IMPROVEMENTS. The Improvements shall be completed and installed
in accordance with the Plans (as defined in Exhibit "C"), which were approved by
all Governmental Authorities having jurisdiction thereover, and there are not
outstanding any notices of any material violation of any governmental laws,
ordinances, rules or regulations with respect to such Improvements.
(f) EMPLOYEES. The Company does not have any employees.
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(g) COMPLIANCE WITH LAWS AND CODES. At Closing, the Property and its
use and operation shall be in material compliance with applicable municipal and
other governmental laws, ordinances, regulations, codes, licenses, permits and
authorizations, and there shall then be presently and validly in effect all
licenses, permits and other authorizations necessary (including, without
limitation, certificates of occupancy) for the use, occupancy and operation of
the Property for a retail shopping center, whether required of the Company or
any Tenant. Without limiting the foregoing, at the time of Closing, the
Property shall comply in all material respects with all applicable requirements
of the Americans With Disabilities Act of 1990 (42 U.S.C.A. Section 12101
ET SEQ.). The Property is zoned by the municipality in which they are located
so as to permit retail uses and structures thereon, in a manner that
accommodates and is fully compatible with the Improvements. No zoning,
subdivision, environmental, Hazardous Material, building code, health, fire,
safety or other law, order or regulation is, or, on the Closing Date will be,
violated by the continued maintenance, operation or use of any Improvements or
parking areas in the Property, and no notice of any such violation issued by any
Governmental Authority having jurisdiction over the Property is outstanding.
At the time of Closing, all existing streets and other improvements, including
water lines, sewer lines, sidewalks, curbing and streets at each Property shall
have been paid for and either enter the Property through adjoining public
streets, or, if they enter through private lands, do so in accordance with
valid, irrevocable easements running with the ownership of such Property.
(h) LITIGATION. No attachments, execution proceedings, assignments
for the benefit of creditors, insolvency, bankruptcy, reorganization or other
proceedings are pending against the Property, the Company, the Seller, or to the
best of Seller's knowledge, threatened against the Property, the Company or the
Seller, nor are any of such proceedings contemplated by such entities. In the
event any proceeding of the character described in this Section is initiated or
threatened against the Property, the Company or the Seller prior to the Closing,
Seller shall promptly advise Buyer thereof in writing, the Seller shall remain
responsible therefor, and the Seller shall indemnify, defend and hold Buyer from
any claims, losses, liabilities and expenses (excluding, without limitation,
reasonable counsel fees) relating to any such occurrence.
(i) INSURANCE. The Company now has in force customary and
commercially reasonable amounts of property, liability and business interruption
insurance relating to the Property from established and reputable insurers.
Neither the Company nor the Seller has received any notice from any insurance
carrier, nor are any of such entities aware of, any defects or inadequacies in
the Property that, if not corrected, would result in termination of insurance
coverage or increase in the normal and customary cost thereof.
(j) FINANCIAL INFORMATION. All Operating Statements (as defined in
Exhibit "C") delivered to Buyer, and all of the Records (as defined in
Exhibit "C") of the Company are complete, accurate, true and correct, in all
material respects; have been compiled in accordance with generally accepted
accounting principles; and accurately set forth the results of the operation of
the Property and the Company for the periods covered. There has been no
material adverse change in the financial condition or operation of the Property
and such entities since the period covered by the Operating Statements.
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(k) RE-ZONING. There is not now pending, and neither Company nor the
Seller has knowledge of, any threatened proceeding for the rezoning of the
Property or any portion thereof, or the taking of any other action by
governmental authorities that would have an adverse impact on the value of the
Property or use thereof.
(l) REAL ESTATE TAXES. True and complete copies of the most recent
real estate "Tax Bill(s)" for (and the only real estate tax bills applicable to)
the Property have been delivered to Buyer. Neither the Company nor the Seller
has received notice of and does not have any actual knowledge of any proposed
increase in the assessed valuation or rate of taxation of the Property from that
reflected in the most recent Tax Bills. There is not now pending, and Company
will not, without the prior written consent of Buyer, institute prior to the
Closing Date, any proceeding or application for a reduction in the real estate
tax assessment of the Property or any other relief for any tax year. There are
no outstanding agreements with attorneys or consultants with respect to the Tax
Bills that will be binding on Buyer or the Property after the Closing. Other
than the amounts disclosed by the Tax Bills, no other real estate taxes have
been, or will be, assessed against the Property, or any portion thereof, in
respect of the year 1998 or any prior year, and no special assessments of any
kind (special, bond or otherwise) are or have been levied against the Property,
or any portion thereof, that are outstanding or unpaid, and, to the best
knowledge of the Seller, none will be levied prior to the Closing. The Company
has paid all real estate taxes presently due and owing with respect to the
Property.
(m) EASEMENTS AND OTHER AGREEMENTS. To the knowledge of the Seller,
neither the Company nor the Seller is in default in complying with the terms and
provisions of any of the covenants, conditions, restrictions, rights-of-way or
easements constituting one or more of the Permitted Exceptions.
(n) LEASE CONTROVERSIES. No material controversy, complaint,
negotiation or renegotiation, proceeding, suit or litigation relating to all or
any of the Leases, is pending or, to the knowledge of the Seller or the Company,
threatened, whether in any tribunal or informally. The Seller is and shall
remain responsible after the Closing Date for defending (or continuing) any such
suit, proceeding or other matter relating to periods prior to the Closing Date,
and all damages, loss, expenses and costs related thereto.
(o) CONDEMNATION. Neither the Seller nor the Company has knowledge
of any pending or contemplated condemnation or other governmental taking
proceedings affecting all or any part of the Property.
(p) DISCLOSURE. No representation or warranty made by Seller
(whether for itself or the Company) in this Agreement, no exhibit attached
hereto with respect to the Property, and no schedule contained in this Agreement
contains any untrue statement of a material fact, or omits to state a material
fact necessary in order to make the statements contained therein not misleading,
or necessary in order to provide a prospective Buyer of the Property with
adequate information as to the Property and its management, operation,
maintenance and repair. There is no fact known to Seller or the Company which
has, or which could reasonably have been foreseen by Seller or the Company as
likely to have, an adverse effect on the management,
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operation, maintenance and repair of the Property which has not been disclosed
herein, in any schedule attached hereto, or in any written document furnished by
the Seller or the Company to Buyer under this Agreement or in connection with
the transactions contemplated hereby.
The representations and warranties in this Section 8 shall be deemed remade
by Seller (for itself and the Company) as of the Closing Date with the same
force and effect as if in fact specifically remade at that time. The
representations and warranties made in this Section 8 shall survive the Closing
for a period of eighteen (18) months. Notwithstanding anything to the contrary
herein, the effect of the representations and warranties made in this Agreement
by Seller shall not be diminished, abrogated or deemed to be waived by the
inspections, assessments, or any other investigations made by Buyer.
9. LEASES--CONDITIONS PRECEDENT AND WARRANTIES WITH RESPECT THERETO.
(a) WARRANTIES AS TO LEASES. With respect to each of the tenants
listed on the Rent Roll (as defined in Exhibit "C") provided to Buyer by the
Company or the Seller and any other tenants leasing space in any or all of the
Property as of the Closing Date (collectively, the "Tenants"), Seller, for
itself and for the Company, represents and warrants to Buyer as of the Contract
Date and as of the Closing Date as follows:
(1) Each of the Leases is in full force and effect strictly
according to the terms set forth therein and in the Rent Roll, and has not been
modified, amended, or altered, in writing or otherwise. Each Tenant is legally
required to pay all sums and perform all obligations set forth in the Leases,
without concessions, abatements, offsets or other bases for relief or
adjustment;
(2) All obligations of the lessor under the Leases that accrue
to the date of the Closing have been or will be performed by the Closing Date,
including, but not limited to, all required tenant improvements, cash or other
inducements, rent abatements or moratoria, installations and construction (for
which payment in full has been made in all cases), and each Tenant has
unconditionally accepted lessor's performance of such obligations. No Tenant
has asserted any offsets, defenses or claims available against rent payable by
it or other performance or obligations otherwise due from it under any Lease;
(3) No Tenant is in default under or is in arrears in the
payment of any sums or in the performance of any obligations required of it
under its Lease. No Tenant has prepaid any rent or other charges;
(4) The Company has no reason to believe that any Tenant is, or
may become, unable or unwilling to perform any or all of its obligations under
its Lease, whether for financial or legal reasons or otherwise;
(5) Neither base rent ("Base Rent"), nor regularly payable
estimated Tenant contributions or operating expenses, insurance premiums, real
estate taxes, common area charges, and similar or other "pass through" or
non-base rent items including, without limitation,
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cost-of-living or so-called "C.P.I." or other such adjustments (collectively,
"Additional Rent"), nor any other item payable by any Tenant under any Lease has
been heretofore prepaid for more than one month nor shall it be prepaid between
the Contract Date and the Closing Date for more than one month;
(6) No guarantor(s) of any Lease has been released or
discharged, partially or fully, voluntarily or involuntarily, or by operation of
law, from any obligation under or in connection with any Lease or any
transaction related thereto;
(7) Except as specifically disclosed in detail on the Rent Roll
delivered to Buyer, there are no brokers' commissions, finders' fees, or other
charges payable or to become payable to any third party on behalf of the Company
as a result of or in connection with any Lease or any transaction related
thereto, including, but not limited to, any exercised or unexercised option(s)
to expand or renew;
(8) No Tenant or any other party has asserted any claim (other
than for customary refund at the expiration of a Lease) to all or any part of
any security deposit;
(9) Seller shall cause the Company to pay, and retain sole and
exclusive responsibility for, all expenses due on or before the Closing Date
connected with or arising out of the negotiation, execution and delivery of the
Leases, including, without limitation, brokers' commissions (including those
applicable, if any, to future expansions or renewals by Tenant), leasing fees
and recording fees (as well as the cost of all tenant improvements not paid for
by Tenants), and the Seller shall be deemed to have certified and warranted
payment thereof to Buyer at the Closing;
(10) No Tenant has, by virtue of its Lease or any other agreement
or understanding, any purchase option with respect to the Property, or any
portion thereof, or any right of first refusal to purchase any Property, or a
portion thereof, whether triggered by the transactions contemplated by this
Agreement or by a subsequent sale of the Property or a portion thereof. No
Tenant has, by virtue of its Lease or any other agreement or understanding any
of the following (a) the right or option to expand its tenancy into space at the
Property other than the space that such Tenant is currently occupying; (b) the
right or option to terminate its Lease; and (c) the right or option to contract
the space at the Property that such Tenant is currently occupying; and
(11) (a) Except as specifically disclosed on the Rent Roll
delivered to Buyer, no Tenant has sublet its leased premises; and (b) there are
no outstanding requests from any Tenants to the Company or the Seller,
requesting any consent to an assignment of the Tenant's Lease or to a sublease
of all or some portion of a Tenant's leased premises.
The Seller hereby indemnifies, defends and holds Buyer harmless from and
against all loss, damage, liability, cost, expense (including, but not limited
to, reasonable fees of attorneys of Buyer's choice) and charges which Buyer may
incur, or to which Buyer may become subject,
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as a consequence of any breach of the warranties contained in this Section. The
foregoing indemnity shall survive the Closing for a period of eighteen (18)
months.
10. WARRANTIES AND REPRESENTATIONS OF SELLER AS TO MEMBER
INTEREST/SECURITIES AND RELATED MATTERS. The Seller, for itself and for the
Company, represents and warrants to Buyer that the following matters are true as
of the Contract Date and shall be true as of the Closing Date and covenant as
follows:
(a) AUTHORITY. Seller is duly formed, validly existing, and in good
standing under the laws of Maryland, and has the power and authority to own the
Member Interest. Seller is a single purpose entity formed for the sole purpose
of being the sole member of the Company. The execution and delivery of this
Agreement by Seller, and the performance of this Agreement by Seller, have been
duly authorized by Seller, and this Agreement is binding on Seller and
enforceable against it in accordance with its terms. No consent of any
creditor, investor, partner, shareholder, tenant-in-common, judicial or
administrative body, Governmental Authority, or other governmental body or
agency, or other party to such execution, delivery and performance by Seller is
required. Neither the execution of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in a breach of, default under,
or acceleration of, any agreement to which the Seller or the Company is a party
or by which the Seller, the Company or the Property is bound; or (ii) violate
any restriction, court order, agreement or other legal obligation to which the
Seller, the Company and/or the Property is subject.
(b) COMPANY. The Company is duly formed, validly existing, and in
good standing under the laws of the State of Maryland, and has the power and
authority to own the Property. Seller has delivered to Buyer, as part of
Seller's Deliveries, all of the documents relating to the formation or
governance of the Company. The Company is a single purpose entity, organized
for the sole purpose of owning the Property.
(c) MEMBER INTEREST. Seller owns one hundred percent (100%) of the
Member Interest of the Company. Seller owns the Member Interest free and clear
of all liens, charges, encumbrances, restrictive agreements and assessments.
Upon the assignment of the Member Interest to Buyer (or its designee(s)), the
Buyer will receive good and absolute title thereto, free from all liens,
charges, encumbrances, restrictive agreements and assessments whatsoever. There
are no outstanding rights of first refusal, options, contracts, calls,
commitments or demands of any nature relating to the Member Interest.
(d) OPERATING AGREEMENT. The Operating Agreement of the Company is
in full force and effect, and the Operating Statements include, among other
things, an accurate statement of the Company's financial condition.
(e) NO TRANSFERS OF INTERESTS. There will be no changes in the
composition of the Company or the Seller between the date of this Agreement and
Closing.
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(f) TAX-RELATED ISSUES.
(1) The Company is, and at all times has been, properly treated
as a partnership for federal income tax purposes and not as an "association" or
"publicly traded partnership" taxable as a corporation.
(2) The Company and the Seller has filed or caused to be filed
in a timely manner (within any applicable extension periods) all tax,
information or other returns required to be filed by the Internal Revue Code of
1986, as amended (the "Code") or by applicable state, or local tax laws
(collectively, "Tax Returns"). Such Tax Returns are true, correct and complete
in all respects; and all federal, state or local income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
unemployment, disability, personal property, sales, use, transfer, registration,
estimated, or other tax of any kind whatsoever, including any interest, penalty
or other addition thereto, whether disputed or not, (collectively, "Taxes") due,
and Taxes due in respect of any person for the Company had an obligation to
withhold and/or otherwise pay over Taxes, have been timely paid in full or will
be timely paid in full by the due date thereof (and whether or not shown on a
Tax Return). With respect to any taxable year for which a statute of
limitations (or similar provision) has not yet run, none of the Tax Returns of
the Company or the Seller has been audited by a government or taxing authority,
nor is any such audit or other proceeding in process, pending, threatened
(either in writing or verbally, formally or informally) or expected to be
asserted with respect to Taxes (or the collection of Taxes) of the Company or
the Seller, and neither the Company nor the Seller has received notice (either
in writing or verbally, formally or informally) or expects to receive notice
that it has not filed a Tax Return or not paid Taxes required to be filed,
withheld, or paid by it. The Company and the Seller has disclosed on its
federal income tax returns all positions taken therein that could give rise to a
substantial understatement penalty within the meaning of Code Section 6662. No
claim has ever been made by an authority in a jurisdiction where the Company or
the Seller does not file Tax Returns that it is or may be subject to taxation by
that jurisdiction.
(g) UNITED STATES PERSON. The Company and the Seller are each a
"United States Person" within the meaning of Section 1445(f)(3) of the Code, as
amended, and shall execute and deliver an "Entity Transferor" certification at
Closing.
(h) LIABILITIES. Except for any normal and customary accrued
liabilities and obligations of the Company that are being adjusted at Closing
pursuant to Section 3(d), the Company shall not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, which will not
be paid or discharged on or before the Closing Date. In addition, except for
the claims and liabilities described in the preceding sentence, neither the
Company nor the Seller has received notice of any claim against (or liability
of) the Company or Seller arising from business done, transactions entered into
or other events occurring prior to the Closing Date (and to the best knowledge
of the Seller and the Company, no basis for any such claim or liability exists).
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(i) The representations and warranties in this Section 10 shall be
deemed remade by Seller (for itself and for the Company), as of the Closing Date
with the same force and effect as if in fact specifically remade at that time.
The representations and warranties made in this Section 10 shall survive the
Closing without time limitation.
11. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants to, and covenants with Seller, as follows, which representations,
warranties, and covenants are true, correct and complete on the date of this
Agreement, shall be true, correct, and complete at Closing:
(a) Neither its entering into this Agreement or its consummation of
the transactions contemplated hereby does nor will violate any indenture,
agreement or order by which Buyer is bound, or any rule, order, or law
applicable to it.
(b) The execution and delivery of this Agreement has been approved by
the directors or officers, as applicable, of Buyer and no further corporate
action is required on the part of Buyer to consummate the transaction
contemplated hereby. There are no proceedings pending or threatened by or
against Buyer in bankruptcy, insolvency or reorganization in any state or
federal court which adversely affect the ability of Buyer to enter into and
perform its obligations under this Agreement
12. COVENANTS OF SELLER. Seller (for itself and for the Company) hereby
covenant with Buyer as follows:
(a) NEW LEASES. The Company shall not amend any Lease or execute any
new lease, license, or other agreement affecting the ownership or operation of
all or any portion of the Property or for personal property, equipment, or
vehicles, without Buyer's prior written approval.
(b) NEW CONTRACTS. The Company shall not enter into any contract
with respect to the ownership and operation of all or any portion of any or all
of the Property that will survive the Closing, or that would otherwise affect
the use, operation or enjoyment of the Property, without Buyer's prior written
approval, except for service contracts entered into in the ordinary course of
business that are terminable, without penalty, on not more than 30 days' notice,
for which no consent shall be required. Neither the Company nor the Seller
shall enter into, or amend, any contract or agreement without the Buyer's
written approval.
(c) OPERATING AGREEMENT. The Operating Agreement of the Company
shall not be amended without Buyer's prior written approval.
(d) INSURANCE. The insurance policies described in Section 8 above
shall remain continuously in force through and including the Closing Date.
(e) OPERATION OF THE PROPERTY. The Company shall construct, operate
and manage the Property in a manner consistent with similar class "A" shopping
centers in
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Anne Arundel County, Maryland, in good repair and working order; shall keep on
hand sufficient materials, supplies, equipment and other personal property for
the efficient operation and management of the Property in such manner; and shall
perform, when due, all of the Company's obligations under the Leases, Contracts,
Governmental Approvals and other agreements relating to the Property and
otherwise in accordance with applicable laws, ordinances, rules and regulations
affecting the Property. Without the prior written consent of Buyer, the Company
shall not incur any indebtedness, other that normal and customary current
indebtedness for current payable necessary for the day-to-day operation of the
Property.
(f) PRE-CLOSING EXPENSES. Seller has paid or will pay or cause to be
paid in full, prior to the Closing, all bills and invoices for labor, goods,
material and services of any kind relating to the Property and utility charges,
relating to the period prior to the Closing. Except as the parties may
otherwise agree at or prior to Closing, any alterations, installations,
decorations and other work required to be performed under any and all agreements
affecting the Property have been or will, by the Closing, be completed and paid
for in full.
(g) GOOD FAITH. All actions required pursuant to this Agreement that
are necessary to effectuate the transaction contemplated herein will be taken
promptly and in good faith by the Seller or the Company, as applicable, and
Seller shall furnish Buyer with such documents or further assurances as Buyer
may reasonably require.
(h) NO ASSIGNMENT. After the Contract Date and prior to the Closing,
neither the Company nor the Seller shall assign, alienate, lien, encumber or
otherwise transfer all or any part of any or all of the Member Interest, the
Property or any interest therein.
(i) AVAILABILITY OF RECORDS, AUDIT REPRESENTATION LETTER.
(1) Upon Buyer's request, for a period of two years after the
Closing, Seller shall (i) make the Records available to Buyer for inspection,
copying and audit by Buyer's designated accountants; and (ii) cooperate with
Buyer (without any third party expense to Seller) in obtaining any and all
permits, licenses, authorizations, and other Governmental Approvals necessary
for the operation of any or all of the Property. Without limitation of the
foregoing in this Section, Seller agree to abide by the terms of Exhibit "D"
attached hereto. At any time before or within two years after the Closing,
Seller further agrees to provide to the Buyer's designated independent auditor,
upon request of Buyer or such auditor: (x) access (to the same extent to which
Buyer would be entitled to such access) to the books and records of the Property
and all related information (including the information listed on Exhibit "D")
regarding the period for which Buyer is required to have the Property audited
under the regulations of the Securities and Exchange Commission, and (y) a
representation letter delivered by each managing agent of the Property regarding
the books and records of the Property, in substantially the form as attached
hereto as Exhibit "E."
(2) In addition, Seller shall provide, and cooperate, in all
respects, in providing, Buyer with copies of, or access to, such factual
information as may be reasonably requested by Buyer, and in the possession or
control of Seller, to enable the Buyer or the REIT to
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issue one or more mutually agreed upon press releases concerning the transaction
that is the subject of this Agreement, to file a Current Report on Form 8-K (as
specified on Exhibit "D"), if, as and when such filing may be required by the
SEC and to make any other filings that may be required by any Governmental
Authority. The obligation of Seller to cooperate in providing Buyer with such
information for Buyer to file its Current Report on Form 8-K shall survive the
Closing.
(j) CHANGE IN CONDITIONS. Seller shall promptly notify Buyer of any
change in any condition with respect to the Company, the Seller, the Property or
of the occurrence of any event or circumstance that makes any representation or
warranty of Seller to Buyer under this Agreement untrue or misleading, or any
covenant of Buyer under this Agreement incapable or less likely of being
performed, it being understood that Seller's obligation to provide notice to
Buyer under this Section shall in no way relieve Seller of any liability for a
breach by Seller of any of its representations, warranties or covenants under
this Agreement.
(k) ENTITY STRUCTURE. From the Contract Date through and including
the Closing Date, the Company and the Seller shall maintain the same composition
of its members as exists on the Contract Date, unless otherwise expressly or
consented to by Buyer in writing.
(l) CURE OF VIOLATIONS. On or before the Closing Date, Seller shall
cure (or escrow sufficient funds at the Closing with the Buyer's Title Company
to cure) (i) all violation(s) of law, code, ordinance or regulation that are the
subject of any written notice issued by a Governmental Authority with respect to
the Property, and (ii) legal deficiencies discovered at or in any Property
before the Closing.
All covenants made in this Agreement by Seller shall survive the Closing
for a period of eighteen (18) months.
13. ADDITIONAL CONDITIONS PRECEDENT TO CLOSING.
(a) BUYER'S CONDITIONS PRECEDENT. In addition to any other
Conditions Precedent of Buyer enumerated in this Agreement, the following shall
be additional Buyer's Conditions Precedent (any of which may be waived by Buyer
at or prior to Closing):
(1) PENDING ACTIONS. At the Closing, there shall be no
administrative agency, litigation or governmental proceeding of any kind
whatsoever, pending or threatened, that, after the Closing, would, in Buyer's
sole and absolute discretion, materially and adversely affect the Company, the
Member Interest, the transfer of the Member Interest, or the value or
marketability of the Property, or the ability of the Company to operate the
Property in the manner intended.
(2) ZONING. On the Closing Date, no proceedings shall be
pending or threatened that could or would involve the change, redesignation,
redefinition or other modification of the zoning classifications of (or any
building, environmental, or code requirements applicable to) the Property, or
any portion thereof, or any property adjacent to the
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Property, in a manner which, in Buyer's sole and absolute discretion, would
materially and adversely affect the value or marketability of the Property.
(3) FLOOD INSURANCE. As of the Closing Date, if the Property is
located in a flood plain, Company shall have obtained flood plain insurance in
form and substance acceptable to Buyer.
(4) OWNERS. The composition of members of the Company and the
Seller on the Closing Date shall be the same as on the Contract Date.
(5) BANKRUPTCY. As of the Closing Date, neither Seller nor the
Company nor the Property shall be the subject of any bankruptcy proceeding for
which approval of this transaction has not been given and issued by the
applicable bankruptcy court.
(6) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties of Seller (whether for itself or for the Company) contained in
this Agreement shall be true and correct as of the Closing Date in all material
respects, as though such representations and warranties were made on such date.
(7) COVENANTS PERFORMED. All covenants and obligations of the
Seller and Company required to be performed on or prior to the Closing Date
shall have been performed, in all material respects.
(8) APPROVAL BY BUYER'S SHAREHOLDERS. REIT's Board of Trustees
and shareholders shall have approved this Agreement and the consummation of the
transactions contemplated by this Agreement.
(b) SELLER'S ADDITIONAL CONDITIONS PRECEDENT. The following shall be
conditions precedent to the Seller's obligations to complete Closing under this
Agreement (any of which may be waived by Seller at or prior to Closing):
(1) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer contained in this Agreement shall be true and correct as of
the Closing Date, in all material respects, as though such representations and
warranties were made on such date.
(2) COVENANTS. All covenants of Buyer required to be performed
on or prior to the Closing Date shall have been performed, in all material
respects.
14 RISK OF LOSS OR DAMAGE.
(a) If, prior to the Closing, all or any portion of the Property is
damaged by fire or other natural casualty (collectively, "Damage"), or is taken
or made subject to condemnation, eminent domain or other governmental
acquisition proceedings (collectively, "Eminent Domain"), then the following
procedures shall apply:
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(1) If the aggregate cost of repair or replacement in connection
with any Damage or the value of the Eminent Domain (collectively, "repair and/or
replacement") is $200,000.00 or less, in the mutual and reasonable opinions of
Buyer and Seller, Buyer shall close and take the Property in question as
diminished by the Damage or Eminent Domain, as the case may be. Any casualty
insurance or condemnation proceeds shall be the sole property of the Company.
(2) If the aggregate cost of repair and/or replacement at the
Property is greater than $200,000.00, in the mutual and reasonable opinions of
Buyer and Seller, then Buyer, in its sole and absolute discretion, may elect any
of the following options: (i) Buyer may proceed to close on the Member Interest
without diminution of the Purchase Price, or (ii) Buyer may elect to terminate
this Agreement by written notice to Seller. Any casualty insurance or
condemnation proceeds shall be the sole property of the Company.
(b) In the event of a dispute between Seller and Buyer with respect
to the cost of repair and/or replacement with respect to the matters set forth
in this Section 14, an engineer designated by Seller and an engineer designated
by Buyer shall select an independent engineer licensed to practice in the State
of Maryland who shall resolve such dispute. All fees, costs and expenses of
such third engineer so selected shall be shared equally by Buyer and Seller.
15. DEFAULT.
(a) DEFAULT BY SELLER. If any of Seller's representations and
warranties (whether for itself or for the Company) contained herein shall not be
true and correct on the Contract Date and continuing thereafter through and
including the Closing Date, or if the Seller or the Company fails to perform any
of the covenants and agreements contained herein to be performed by such party
within the time for performance as specified herein (including Seller's
obligation to close), or if any of the Buyer's Conditions Precedent shall not
have been satisfied, Buyer may elect either to (i) terminate Buyer's obligations
under this Agreement by written notice to Seller, in which event Buyer shall
retain all rights and remedies available to it; or (ii) close, in which event
Buyer may file an action for either or both of specific performance and damages
to compel Seller to cure all or any of such default(s), in whole or in part,
whereupon Buyer shall be entitled to deduct from the Purchase Price, the cost of
such action and cure, and all reasonable expenses incurred by Buyer in
connection therewith, including, but not limited to, attorneys' fees of Buyer's
counsel. Notwithstanding anything to the contrary herein and in addition to any
other remedies of Buyer, Buyer shall be entitled to recover actual (but not
consequential) damages suffered by Buyer by reason of Seller's defaults
hereunder and/or any delay occasioned thereby, including, without limitation,
Buyer's Reasonable Costs. The remedies of Buyer set forth in this Section 15(a)
shall be in addition to remedies otherwise applicable or provided in this
Agreement or otherwise available to Buyer at law or in equity, including,
without limitation, specific performance, it being understood that Buyer's
rights and remedies under this Agreement shall always be non-exclusive and
cumulative and that the exercise of one remedy or form of relief available to
Buyer hereunder shall not be exclusive or constitute a waiver of any other.
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<PAGE>
(b) DEFAULT BY BUYER. In the event Buyer defaults in its obligations
to acquire the Member Interest, then Seller may (i) pursue and action for
specific performance, or (ii) terminate this Agreement and recover actual (but
not consequential) damages suffered by Seller by reason of Buyer's defaults
hereunder and/or any delay occasioned thereby, including, without limitation,
the reasonable out-of-pocket costs and expenses incurred by Seller in connection
with this Agreement.
(c) INDEMNIFICATION OF BUYER. The Seller and Seller's shareholders,
jointly and severally, as the case may be, shall and does hereby indemnify,
protect, defend and hold the Buyer Indemnified Parties harmless from and against
any claims, losses, demands, liabilities, suits, costs and damages suffered by
the Buyer Indemnified Parties, including consequential as well as actual damages
and attorneys' fees of counsel selected by the Buyer Indemnified Parties and
other costs of defense, incurred, arising against, or suffered by, the Buyer
Indemnified Parties or its assigns as a direct or indirect consequence of
(i) any breach of any representation, warranty or covenant made in this
Agreement by Seller (whether for itself or for the Company), or any other
default by Seller, whether discovered before or after the Closing or (ii) any
default claim, action or omission arising or alleging to arise under the
Existing Loan Documents and relating to the period prior to the Closing, whether
asserted before or after the Closing. This indemnification obligation shall
expire eighteen (18) months from the Closing Date, except as to claims under
Section 6 of this Agreement which may be made until thirty (30) months after the
date of this Agreement, and except as to claims under Section 10 which may be
made until the expiration of the time period under statute of limitation
applicable to such claims.
(d) INDEMNIFICATION OF SELLER. Buyer shall indemnify, protect,
defend and hold Seller and each of Seller's shareholders (the "Indemnified
Parties") harmless from and against any claims, losses, demands, liabilities,
suits, costs and damages suffered by the Seller Indemnified Parties, including
consequential as well as actual damages and attorneys' fees of counsel selected
by the Seller Indemnified Parties and other costs of defense, incurred, arising
against, or suffered by, the Seller Indemnified Parties or its assigns as a
direct or indirect consequence of any breach of any misrepresentation, warranty
or covenant made in this Agreement by Buyer, or any other default by Buyer,
whether discovered before or after the Closing. This indemnification obligation
shall expire eighteen (18) months from the Closing Date, except as to claims
under Section 11 which may be made until the expiration of the time period under
the statute of limitation applicable to such claims.
(e) BUYER NOTICE AND RIGHT TO CURE. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default hereunder by Buyer shall not be a default unless Seller
shall have given Buyer notice of such default, and Buyer shall have failed to
cure the same within thirty (30) days after such notice. No notice of default
shall be required in the case of Buyer's default in failing to complete Closing
on the required Closing Date.
(f) SELLER'S NOTICE AND RIGHT TO CURE. Anything contained in this
Agreement to the contrary notwithstanding, any thing or act which would
otherwise be a default hereunder by Seller shall not be a default unless Buyer
shall have given Seller notice of such
28
<PAGE>
default, and Seller shall have failed to cure the same within thirty (30) days
after such notice. No notice of default shall be required in the case of
Seller's default in failing to complete Closing on the required Closing Date.
16. ENTIRE AGREEMENT.
This Agreement contains the entire agreement among Seller and Buyer
pertaining to the Property, and there are no other terms, obligations,
covenants, representations, statements or conditions, oral or otherwise, of any
kind whatsoever concerning this sale. Any changes or additions to this
Agreement must be made in writing and executed by the parties hereto. All
Exhibits attached to this Agreement are made a part of this Agreement. This
Agreement may be executed in counterparts, each of which is an original, but all
of which are a single instrument.
17. NOTICES. Any notice, demand or request which may be permitted,
required or desired to be given in connection therewith shall be given in
writing and directed to Seller and Buyer as follows:
SELLER:
CPI Piney Orchard Village Center, Inc.
c/o Constellation Real Estate, Inc.
8815 Centre Park Drive - Suite 400
Columbia, MD 21045
Attention: General Counsel
BUYER:
Corporate Office Properties, L.P.
c/o Corporate Office Properties Trust
One Logan Square, Suite 1105
Philadelphia, PA 19103
Attention: Clay W. Hamlin, III
President and Chief Executive Officer
WITH A COPY TO ITS ATTORNEYS:
F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street - 38th Floor
Philadelphia, PA 19102
Notices shall be deemed properly delivered and received when and if either
(i) personally delivered, including via facsimile; or (ii) on the first business
day after deposit with a commercial
29
<PAGE>
overnight courier for delivery on the next business day. Any party may change
its address for delivery of notices by properly notifying the others pursuant to
this Section.
18. NO RECORDING. This Agreement shall not be recorded in any Clerk's
Office, Recorder's Office or in any office or place of public record. If Buyer
records this Agreement or causes or permits this Agreement to be recorded,
Seller may elect to treat such act as a breach of this Agreement and may declare
this Agreement terminated, null and void by recording notice of such termination
in the same records in which this Agreement has been recorded.
19. COMMISSIONS. Seller and Buyer each represents that it has not dealt
with any brokers in connection with this transaction. Buyer and Seller will
indemnify and defend the other from any and all claims, actual or threatened,
for compensation by any third party by reason of breach of its or their
representation or warranty contained in this Section. The provisions of this
Section 19 shall survive Closing.
20. BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns.
21. LITIGATION. Seller and Buyer waive all rights to a jury trial with
respect to any disputes relating to this Agreement, whether arising before or
after Closing. In the event of litigation between the parties with respect to
the Property, this Agreement, the performance of their respective obligations
hereunder or the effect of a termination under this Agreement, the losing party
shall pay all costs and expenses incurred by the prevailing party in connection
with such litigation, including, but not limited to, reasonable attorneys' fees
of counsel selected by the prevailing party. The parties hereby further
acknowledge and agree that in the event of litigation between them, as
contemplated above, and the resolution of that litigation through compromise,
settlement, or partial judgment, the court before which such litigation is
initially brought shall have the right to allocate responsibility, between
Seller and Buyer, for all costs and expenses (including, but not limited to,
attorneys' reasonable fees) incurred by both Seller and Buyer in the pursuit of
that litigation resolved through compromise, settlement or partial judgment.
Notwithstanding any provision of this Agreement to the contrary, the obligations
of the parties under this Section shall survive termination of this Agreement
and the Closing, if applicable.
22. BENEFIT. This Agreement is for the benefit only of the parties hereto
and their nominees, successors, beneficiaries and assignees as permitted in
Section 24(a) below, above and no other person or entity shall be entitled to
rely hereon, receive any benefit herefrom or enforce against any party hereto
any provision hereof.
23. LIMITATION OF LIABILITY. Upon the Closing, neither the REIT nor
the Buyer shall assume or undertake to pay, satisfy or discharge any
liabilities, obligations or commitments of Seller other than those
specifically agreed to between the parties and set forth in this Agreement.
Except as otherwise specifically provided in this Agreement, neither the REIT
nor the Buyer shall assume or discharge any debts, obligations, liabilities
or commitments of Seller, whether accrued now or hereafter, fixed or
contingent, known or unknown. Neither the holders of shares
30
<PAGE>
in the REIT, nor the trustees, officers, employees or agents of the REIT shall
be liable under this Agreement and all parties hereto shall look solely to the
REIT assets for the payment of any claim or for the performance of any
obligation of the REIT as a party to this Agreement, both in its own capacity
and in its capacity as a general partner of the Buyer.
24. MISCELLANEOUS.
(a) BUYER'S RIGHT TO ASSIGN. Buyer shall have the right to assign
this Agreement, in whole or in part, without the prior consent of Seller, and
upon notice from Buyer, Seller agrees to convey the Member Interest directly to
Buyer's assignee, provided that Buyer and/or such assignee have fulfilled
Buyer's obligations under this Agreement. Any such assignment shall not relieve
the named Buyer of its obligations under this Agreement through the completion
of Closing under this Agreement.
(b) ENTIRE AGREEMENT. This Agreement and the other agreements
described in this Agreement constitutes the entire understanding between the
parties with respect to the transaction contemplated herein, and all prior or
contemporaneous oral agreements, understandings, representations and statements,
and all prior written agreements, understandings, letters of intent and
proposals are merged into this Agreement. Neither this Agreement nor any
provisions hereof may be waived, modified, amended, discharged or terminated
except by an instrument in writing signed by the party against which the
enforcement of such waiver, modification, amendment, discharge or termination is
sought, and then only to the extent set forth in such instrument.
(c) TIME OF THE ESSENCE. Time is of the essence of this Agreement.
If any date herein set forth for the performance of any obligations by Seller or
Buyer or for the delivery of any instrument or notice as herein provided should
be on a Saturday, Sunday or legal holiday, the compliance with such obligations
or delivery shall be deemed acceptable on the next business day following such
Saturday, Sunday or legal holiday. As used herein, the term "legal holiday"
means any state or federal holiday for which financial institutions or post
offices are generally closed in the Commonwealth of Pennsylvania for observance
thereof.
(d) CONDITIONS PRECEDENT. The obligations of Buyer to pay the
Purchase Price and to close the transaction contemplated herein are subject to
the express Buyer's Conditions Precedent set forth in this Agreement, each of
which is for the sole benefit of Buyer and may be waived at any time by written
notice thereof from Buyer to Seller. The waiver of any particular Buyer's
Condition Precedent shall not constitute the waiver of any other.
(e) CONSTRUCTION. This Agreement shall not be construed more
strictly against one party than against the other merely by virtue of the fact
that it may have been prepared by counsel for one of the parties, it being
recognized that both Seller and Buyer have contributed substantially and
materially to the preparation of this Agreement. The headings of various
Sections in this Agreement are for convenience only, and are not to be utilized
in construing the content or meaning of the substantive provisions hereof.
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<PAGE>
(f) GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Maryland (without giving
effect to the conflict of law rules of that state).
(g) PARTIAL INVALIDITY. The provisions hereof shall be deemed
independent and severable, and the invalidity or partial invalidity or
enforceability of any one provision shall not affect the validity of
enforceability of any other provision hereof.
(h) EXPENSES. Except and to the extent as otherwise expressly
provided to the contrary herein, Buyer and Seller shall each bear its own
respective costs and expenses relating to the transactions contemplated hereby,
including, without limitation, fees and expenses of legal counsel or other
representatives for the services used, hired or connected with the proposed
transactions mentioned above.
(i) CONTROL OF DEFENSE COUNSEL. Each indemnified party shall give
reasonably prompt notice to each indemnifying party of any action or proceeding
commenced against the indemnified party in respect of which indemnity may be
sought hereunder, but failure so to notify an indemnifying party (i) shall not
relieve it from any liability which it may have under any indemnity provided
herein unless and to the extent it did not otherwise learn of such action and
the lack of notice by the indemnified party results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) shall not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party hereunder other than its indemnification obligation if the indemnifying
party so elects within a reasonable time after receipt of such notice, the
indemnifying party may assume the defense of such action or proceeding at such
indemnifying party's own expense with counsel chosen by the indemnifying party;
provided, however, that, if such indemnified party or parties reasonably
determine that a conflict of interest exists where it is advisable for such
indemnified party or parties to be represented by separate counsel or that, upon
advice of counsel, there may be legal defenses available to them which are
different from or in addition to those available to the indemnifying party, then
the indemnifying party shall not be entitled to one separate counsel at the
indemnifying party's expense. If an indemnifying party is not so entitled to
assume the defense of such action or does not assume such defense, after having
received the notice referred to in the first sentence of this Section, the
indemnifying party or parties will pay the reasonable fees and expenses of
counsel for the indemnified party or parties. In such event however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party. If an indemnifying party is
entitled to assume, and assumes, the defense of such action or proceeding in
accordance with this Section, such indemnifying party shall not be liable for
any fees and expenses of counsel for the indemnified parties incurred thereafter
in connection with such action or proceeding.
(j) WAIVER OF CONDITIONS PRECEDENT. Buyer and Seller shall each have
the right, in its sole and absolute discretion, to waive any Condition Precedent
for its benefit contained in this Agreement.
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<PAGE>
(k) COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, any of which may contain the signatures of less than all
parties, and all of which together shall constitute a single agreement.
25. CALCULATION OF TIME PERIODS. Notwithstanding anything to the contrary
contained in this Agreement, any period of time provided for in this Agreement
that is intended to expire on or prior to the Closing Date, but that would
extend beyond the Closing Date if permitted to run its full term, shall be
deemed to expire upon the Closing.
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement,
intending to be legally bound hereby, as of the date and year first above
written.
BUYER:
CORPORATE OFFICE PROPERTIES, L.P., a Delaware
limited partnership, by its sole general partner,
Corporate Office Properties Trust, a Maryland real
estate investment trust
By: /s/ CLAY W. HAMLIN, III
--------------------------------
Clay W. Hamlin, III, President
SELLER:
CPI PINEY ORCHARD VILLAGE CENTER,
INC., a Maryland corporation
By: /s/
-----------------------------
Name:
----------------------------
Title:
--------------------------
33
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-20047
CORPORATE OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 23-2947217
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Logan Square, Suite 1105, Philadelphia, PA 19103
(Address of principal executive offices) (Zip Code)
(215) 567-1800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common shares of beneficial interest, .01 par value
Indicate by check mark whether the (1)registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $18,340,000.00 based on the last trade on March 18,
1998 on NASDAQ.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
At March 20, 1998, 2,271,083 shares of the Registrant's Common Shares of
Beneficial Interest, .01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b)
or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e. g., annual report to
security holders for fiscal year ended December 24, 1980).
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 10
Item 3. Legal Proceedings..................................... 16
Item 4. Submissions of Matters to a Vote of Security Holders.. 16
PART II
Item 5. Market Registrant's Common Equity and Related
Stockholder Matters................................. 17
Item 6. Selected Financial Data............................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 20
Item 8. Financial Statements and Supplementary Data........... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 25
PART III
Item 10. Trustees and Executive Officers of the Company........ 26
Item 11. Executive Compensation................................ 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 34
Item 13. Certain Relationships and Related Transactions........ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8K............................................. 37
</TABLE>
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of complying with these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company on a consolidated
basis include, but are not limited to, changes in: economic conditions generally
and the real estate market specifically, legislative/regulatory changes
(including changes to laws governing the taxation of REITs), availability of
capital, interest rates, competition, supply and demand for office properties in
the Company's current and proposed market areas and general accounting
principles, policies and guidelines applicable to REITs. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included herein and in the
Company's other filings with the Securities and Exchange Commission.
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
The Company is a self-administered REIT, headquartered in Philadelphia,
Pennsylvania, which focuses principally on the ownership, acquisition and
management of suburban office properties in high growth submarkets in the United
States. The Company currently owns interests in ten suburban office buildings in
Pennsylvania and New Jersey containing approximately 1.5 million rentable square
feet (the "Office Properties") and seven retail properties located in the
Midwest containing approximately 370,000 rentable square feet (the "Retail
Properties" and, together with the Office Properties, the "Properties"). As of
December 31, 1997, the Properties were over 99% leased. In addition, the Company
has options to purchase 44.27 acres of land contiguous to certain of the Office
Properties owned by related parties.
The Company was formed in 1988 as Royale Investments, Inc. to own and
acquire retail properties and subsequently became an externally advised REIT. On
October 14, 1997, the Company, as part of a series of transactions, acquired the
Mid-Atlantic suburban office operations of The Shidler Group, a national real
estate firm (the "Transactions"). As a result of the Transactions, the Company
relocated its headquarters from Minneapolis to Philadelphia and became
self-administered. At that time, Jay Shidler became the Company's Chairman of
the Board, and Clay Hamlin became the Company's President and Chief Executive
Officer.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a
Maryland real estate investment trust (the "Reformation") and changed its name
to Corporate Office Properties Trust. In connection with the Reformation, each
share of common stock of Corporate Office Properties Trust, Inc. ("Common
Stock") was exchanged for one share of beneficial interest ("Common Share") in
Corporate Office Properties Trust. On March 6, 1998, the Company filed a
preliminary Registration Statement on Form S-11 for the issuance of 7,500,000
Common Shares (the "Offering").
The Company has operated and will continue to operate as a REIT under
Sections 856 through 860 of the Internal Revenue Code. Under such provisions,
the Company must distribute at least 95% of its taxable income to its
shareholders and meet certain other asset and income tests. As a REIT, the
Company generally is not subject to federal income tax.
The Company directly owns the Retail Properties. The Company's interests in
the Office Properties are held through its subsidiary partnership, Corporate
Office Properties, L.P. (formerly FCO, L.P.) (the "Operating Partnership") and
its wholly owned subsidiary Corporate Office Properties Holdings, Inc. (formerly
FCO Holdings, Inc.) ("Holdings"), and four subsidiary partnerships in which
Holdings is the general partner and the Operating Partnership is the majority
limited partnership (the "Properties Partnerships") as described below.
On October 14, 1997, the Company completed the Transactions. For the
purposes of the Transactions, the Properties Partnerships (including the
Retained Interests as defined below) were treated as having a value of $170
million (which includes the $100 million of indebtedness collateralized by the
Properties) (the "Property Financing"). The aggregate consideration issued in
the Transactions by the Company and the Operating Partnership to the former
general and limited partners of the Properties Partnerships consisted of (x)
600,000 shares of Common Stock (issued at a price of
3
<PAGE>
$5.50 per share), (y) an aggregate of 2,899,310 partnership units that,
subject to certain conditions and beginning on September 1, 1998, are
convertible into Common Shares at a rate of one common share for every one
unit ("Partnership Units") (including 600,000 issued to the Company in
consideration for limited partner interests in the Properties Partnerships
acquired by it for 600,000 shares of Common Stock and subsequently
contributed by it to the Operating Partnership) and (z) 1,913,545 preferred
units that, subject to certain conditions and beginning on October 1, 1999,
are convertible into Partnership Units at a rate of 3.5714 Partnership Units
for every one preferred unit ("Preferred Units"). Partnership Interests
representing 11% of three of the Properties Partnerships ("the Retained
Interests") are required to be contributed to the Operating Partnership in
November 2000 in consideration for the issuance of an aggregate of 282,508
Partnership Units and 186,455 Preferred Units. Concurrently with the closing
of the Transactions, the then existing advisory agreement (the "Advisory
Agreement") between Crown Advisors, Inc. ("Crown") and the Company was
terminated, and the Company entered into a management agreement (the
"Management Agreement") with Glacier Realty LLC, a Minnesota limited
liability company ("Glacier") owned by Messrs. Beck and Parsinen, officers of
the Company. A non-recurring termination expense of $1.4 million, paid in the
form of shares of Common Stock (net of certain shares retired), was incurred
as a result of the termination of the Advisory Agreement. As a result of the
Transactions, the Company became self-administered.
BUSINESS OBJECTIVES AND GROWTH STRATEGIES
The Company has filed a registration statement on Form S-11 which, if
completed, will result in the issuance of a significant
amount of Common Shares. In addition, the Company is likely to issue
directly, or through the issuance of Partnership Units and Preferred Units
(together "Units") by the Operating Partnership, a substantial number of
Common Shares or Units redeemable or exchangeable for Common Shares, in
connection with acquisitions. The Company is presently exploring a number of
potential acquisitions, some of which could be material and a number of which
could be effected in the near term in the event the Company's explorations
are successful.
INDUSTRY SEGMENTS
The Company operates in only one industry segment.
EMPLOYEES
As of December 31, 1997, the Company employed nine persons.
COMPETITION
Numerous commercial properties compete with the Company's properties in
attracting tenants to lease space, and additional properties can be expected to
be built in the markets in which the Company's properties are located. The
number and quality of competitive commercial properties in a particular area
will have a material effect on the rents charged and on the Company's ability to
lease space at its current properties or at newly acquired properties. Some of
these competing properties may be newer or better located than the Company's
properties. In addition, the commercial real estate market is highly
competitive, particularly within the Mid-Atlantic region in which the Company
presently operates. There are a significant number of buyers of commercial
property, including other
4
<PAGE>
publicly traded commercial REITs, many of which have significant financial
resources. This has resulted in increased competition in acquiring attractive
commercial properties. Accordingly, it is possible that the Company may not
be able to meet its targeted level of property acquisitions and developments
due to such competition or other factors which may have an adverse effect on
the Company's expected growth in operations.
MAJOR TENANTS
During 1997, four major tenants comprised 64% of total rental income, each
individually represented 10% or more of the Company's Total Rental Revenue.
See "Properties -- Major Properties." In the event that one or more of these
tenants experience financial difficulties, or default on their obligation to
make rental payments to the Company, the Company's financial performance and
ability to make expected distributions to shareholders would be materially
adversely affected.
All of the Office Properties are located in the greater Philadelphia and
Harrisburg, Pennsylvania regions and the Princeton, New Jersey region. See
"Properties -- The Office Properties." As a result, the Company does not have
the benefits of portfolio geographic diversity and is subject to any issues
selectively affecting these regions. Therefore, in the long term, based upon the
properties currently owned directly or indirectly by the Company, the Company's
financial performance and ability to make expected distributions to shareholders
is dependent upon the Philadelphia, Harrisburg and Princeton markets. There can
be no assurance as to the stability or growth conditions of the Philadelphia,
Harrisburg and Princeton markets.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to borrow using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of hazardous substances at the disposal or treatment facility,
whether or not such facility is or ever was owned or operated by such person.
Certain environmental laws and common law principles could be used to impose
liability for release of and exposure to hazardous substances, including
ACMs, into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage
associated with exposure to release hazardous substances, including ACMs. As
the owner of real properties, the Company may be potentially liable for any
such costs.
Phase I ESAs have been obtained for each of the Properties. The purpose of
Phase I ESAs is to identify potential sources of contamination for which a
company may be responsible and to assess the status of environmental regulatory
compliance. Where recommended in the Phase I ESA, invasive procedures, such as
soil sampling and testing or the installation and monitoring of groundwater
wells, were subsequently performed. The Phase I ESAs including subsequent
procedures where applicable, have not revealed any environmental liability that,
after giving effect to indemnification available to the Company, the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of any such material
environmental liability.
5
<PAGE>
Nevertheless, it is possible that the indemnification would be unavailable at
the time the Company sought to make a claim thereunder, the Phase I ESAs
relating to any one of its properties have not revealed all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. Moreover, there can be no assurance that (i) future laws,
ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Company's
properties will not be affected by tenants, by the condition of land or
operations in the vicinity of such properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The Company owns
the net Retail Properties directly but intends to conduct all of its other
investment activities through the Operating Partnership and its subsidiaries
and other affiliates and joint ventures in which the Operating Partnership or
a subsidiary may be a partner. The Company's investment objectives are to
provide quarterly cash distributions and achieve long-term capital
appreciation through increases in the value of the Company's portfolio of
properties and its operations. For a discussion of the Properties, see
"Properties." The Company's policies are to (i) purchase income-producing
suburban office properties primarily for long-term capital appreciation and
rental growth and (ii) expand and improve its current properties or other
properties purchased or sell such properties, in whole or in part, when
circumstances warrant. To a lesser extent, the Company intends to grow through
the selective development, redevelopment and construction of commercial
properties. The Company does not intend to expand its existing investments in
net leased retail properties and, to the extent appropriate opportunities
arise, it may contribute some or all of these properties to the Operating
Partnership in exchange for additional Units or sell or exchange some or all
of these properties and reinvest any net cash proceeds in suburban office
properties.
Equity investments may be subject to existing mortgage financing and other
indebtedness or to such financing or indebtedness as may be incurred in
connection with acquiring or refinancing such equity investments. Debt service
with respect to such financing or indebtedness will have a priority over any
distributions with respect to the Common Shares and Units. Investments are also
subject to the Company's policy not to be treated as an investment company under
the Investment Company Act of 1940.
The Company intends to concentrate on acquiring, owning and operating
suburban office properties, and future investment or development activities will
not be limited to any geographic area or product type or to a specified
percentage of the Company's assets. While the Company intends to seek diversity
in its investments in terms of property locations, size and market, the Company
does not have any limit on the amount or percentage of its assets that may be
invested in any one property or any one geographic area. The Company intends to
engage in such future investment and development activities in a manner which is
consistent with the maintenance of its status as a REIT for federal income tax
purposes.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company's current
portfolio consists of, and the Company's business objectives emphasize,
equity investments in suburban office properties, the Company may, at the
discretion of the Board of Trustees, invest in mortgages and deeds of trust,
consistent with the Company's continued qualification as a REIT for federal
income tax purposes, including participating or convertible mortgages if the
Company concludes that it may benefit from the cash flow or any appreciation
in value of the property secured by such mortgages. Investments in real estate
6
<PAGE>
mortgages run the risk that one or more borrowers may default under such
mortgages and that the collateral securing such mortgages may not be
sufficient to enable the Company to recoup its full investment.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUES. Subject to the limitations on ownership of certain
types of assets and the gross income tests imposed by the Code, the Company also
may invest in the securities of other REITs, other entities engaged in real
estate activities or other issuers, including for the purpose of exercising
control over such entities. The Company may enter into joint ventures or
partnerships for the purpose of obtaining an equity interest in a particular
property in accordance with the Company's investment policies. Such investments
may permit the Company to own interests in larger assets without unduly
restricting diversification and, therefore, add flexibility in structuring its
portfolio. The Company has no plans to enter into a joint venture or partnership
to make an investment that would not otherwise meet its investment policies.
FINANCING POLICIES
In conjunction with its growth strategies, the Company has developed a
two-phase capitalization strategy. The Company intends during the first phase of
this strategy, a period of rapid growth of the Company, to emphasize the
issuance of Units as tax-deferred consideration to sellers in entity and
portfolio acquisitions. To accelerate growth in FFO per share during this
period, the Company will utilize a minimum cash flow to debt service coverage
ratio of approximately 1.6 to 1.0, which is anticipated to equate to a ratio of
debt to total market capitalization of between 40% and 60%. The Company believes
a 1.6 times cash flow coverage ratio is conservative for a seasoned pool of
suburban office buildings and is a more appropriate measure of entity leverage
than the conventional REIT measure of total debt outstanding to total market
capitalization. During the second phase of this strategy, the Company plans to
gradually reduce its debt as a percentage of total market capitalization while
continuing to grow FFO per share. The Company's plan to reduce its debt in the
future is designed to achieve an investment grade rating and provide the Company
access to the corporate unsecured debt market. The Declaration of Trust and the
Bylaws, however, do not limit the amount or percentage of indebtedness that the
Company may incur, and the Company may from time to time modify its debt policy
in light of current economic conditions, relative costs of debt and equity
capital, the market values of its properties, general conditions in the market
for debt and equity securities, fluctuations in the market price of its Common
Shares, growth and acquisition opportunities and other factors. Any increase in
the Company's level of indebtedness results in an increased risk of default on
its obligations and a related increase in debt service requirements that could
adversely affect the financial condition and results of operations of the
Company and the Company's ability to make distributions to shareholders. The
Company will consider a number of factors in making decisions regarding the
incurrence of debt, such as the purchase price of properties to be acquired with
debt financing, the estimated market value of properties upon refinancing and
the ability of particular properties and the Company as a whole to generate
sufficient cash flow to cover expected debt service.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole.
To the extent that the Board of Trustees decides to obtain additional
capital, the Company may raise such capital through additional equity offerings
(including offerings of senior securities), debt financings or retention of cash
available for distribution (subject to provisions in the Code concerning
taxability of undistributed REIT income), or a combination of these methods. As
long as the Operating
7
<PAGE>
Partnership is in existence, the net proceeds of the sale of Common Shares by
the Company will be transferred to the Operating Partnership in exchange for
that number of Partnership Units in the Operating Partnership equal to the
number of Common Shares sold by the Company. The Company presently
anticipates that any additional borrowings would be made through the
Operating Partnership, although the Company may incur indebtedness directly
and loan the proceeds to the Operating Partnership. Borrowings may be
unsecured or may be secured by any or all of the assets of the Company, the
Operating Partnership or any existing or new property owning partnership and
may have full or limited recourse to all or any portion of the assets of the
Company, the Operating Partnership or any existing or new property owning
partnership. Indebtedness incurred by the Company may be in the form of bank
borrowings, purchase money obligations to sellers of properties, publicly or
privately placed debt instruments or financing from institutional investors
or other lenders. The proceeds from any borrowings by the Company may be used
for working capital, to refinance existing indebtedness or to finance
acquisitions, expansions or the development of new properties, and for the
payment of distributions.
MORTGAGE DEBT
The following table sets forth the Company's mortgage indebtedness
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
FACE PRINCIPAL ANNUAL
AMOUNT BALANCE INTEREST DEBT PRE-
OF AS OF ACCUMULATED RATE AT SERVICE MATURITY PAYMENT
PROPERTY/LOCATION MORTGAGE 12/31/97 AMORTIZATION 12/31/97 (1) DATE PREMIUMS
- --------------------------- -------------- -------------- ------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Plymouth, MN and
Indianapolis, IN......... $ 4,800,000 $ 4,660,648 $139,352 9.500% $ 490,684 06/01/02(2) Yld. Maint.
Peru, IL................... 2,650,000 2,429,348 220,652 8.000% 257,868 11/01/13 Yld. Maint.
Minot, ND.................. 2,850,000 2,628,356 221,644 8.000% 277,331 02/01/14 Yld. Maint.
Glendale, WI............... 1,200,000 1,055,731 144,269 7.750% 127,224 04/01/11 (3)
Oconomowac, WI............. 1,800,000 1,737,046 62,954 7.625% 153,000 06/10/14 Yld. Maint.
Delafield, WI.............. 2,000,000 1,864,231 135,769 8.125%(4) 202,617 12/10/04(5) Yld. Maint.
Office Properties.......... 100,000,000 100,000,000 0 7.500% 7,500,000 10/13/00(6) None
------------ ------------ -------- ----------
Total Mortgage
Indebtedness............. $115,300,000 $114,375,360 $924,640 $9,008,724
------------ ------------ -------- ----------
------------ ------------ -------- ----------
</TABLE>
- ------------------------
(1) "Annual Debt Service" is calculated for the twelve-month period ending
December 31, 1997. For loans that bear interest at a variable rate, the
rates in effect at December 31, 1997 have been assumed to remain constant
for the balance of 1997. The debt service has been annualized for the
Property Financing.
(2) A balloon payment of $4,434,000 is due on June 1, 2002.
(3) Until May 1, 1999, there is a prepayment premium of 5.0%. As of May 1, for
each year thereafter, the prepayment premium decreases by 0.5%.
(4) Until November 30, 1999, the interest rate is 8.125%. Thereafter, the
interest rate is the greater of the current 5 year U.S. Treasury Yield plus
1.80% or 8.125%.
(5) A balloon payment of $1,401,000 is due on December 10, 2004.
(6) A balloon payment of any amount then outstanding under the Property
Financing is due on October 13, 2000.
Immediately prior to the Acquisition, each of the Properties Partnerships
jointly and severally entered into the $100 million Property Financing with
Bankers Trust Company. Approximately $96.1 million of the proceeds of the
Property Financing was used by entities other than the Company and the Operating
Partnership to refinance indebtedness of or secured by the assets of the
Properties Partnerships and to pay various costs in connection with the
Transactions. Approximately $3.9 million of the proceeds of the Property
Financing was contributed to the Operating Partnership in connection with the
Transactions. The Operating Partnership used approximately $2.9 million of these
funds to pay
8
<PAGE>
various costs associated with the Transactions and retained approximately
$1.0 million for working capital needs.
The Operating Partnership is a joint and several obligor in respect of the
Property Financing. The Company and Holdings are not obligors with respect to
the Property Financing, but have pledged certain assets described in the
following sentence to secure repayment of the Property Financing. Substantially
all of the assets of the Properties Partnerships and the Operating Partnership's
and Holdings' interests in the Properties Partnerships and the Company's
interests in Holdings and the Operating Partnership have been pledged or
mortgaged to secure the Properties Partnerships' and the Operating Partnership's
joint and several obligations in respect of the Property Financing.
The initial term of the Property Financing is three years with the right
given to the obligors to extend it, subject to the satisfaction of certain
conditions precedent thereto, for two successive one-year extensions. Borrowings
under the Property Financing bear interest at the rate of 7.5% per annum. In the
event that the Property Financing is extended after the third anniversary or
following an event of default during the first three years, the borrowings under
the Property Financing will bear interest at a floating rate based on LIBOR plus
2.5%.
The Property Financing contains, among other things, covenants restricting
the ability of the Operating Partnership to make distributions. The Property
Financing also contains covenants restricting the ability of each Properties
Partnership to incur indebtedness, create liens, make certain investments, enter
into transactions with affiliates and otherwise restrict activities. The
Property Financing also contains the following financial covenants binding upon
the Company and its subsidiaries: maintenance of consolidated net worth, a
minimum consolidated interest coverage ratio, a maximum consolidated unhedged
floating rate debt ratio and a maximum consolidated total indebtedness ratio.
Each Properties Partnership must also maintain a minimum property interest
coverage ratio and a minimum property hedged interest coverage ratio.
Events of default under the Property Financing include, among other things,
default in the payment of principal or interest on borrowings outstanding under
the Property Financing, any payment default in respect of material amounts of
indebtedness of the Company or its subsidiaries, any non-payment default on such
indebtedness, any material breach of the covenants or representations and
warranties included in the Property Financing and related documents, the
institution of any bankruptcy proceedings and the failure of any security
agreement related to the Property Financing or lien granted thereunder to be
valid and enforceable. Upon the occurrence and continuance of an event of
default under the Property Financing, the lender may declare the then
outstanding loans due and payable.
In March 1998, the Company entered into a conditional agreement with
Bankers Trust Company regarding the Property Financing to repay up to $70
million from the proceeds of the Offering pursuant to which the Company has been
granted the right to reborrow, in minimum amounts of $20 million (or the
remaining undrawn amount, if less), the entire $70 million repaid with the net
proceeds of the Offering for the purpose of acquiring commercial office building
real property and paying related fees and expenses. This right must be exercised
within nine months of the date of the Offering. Prior to the end of the nine-
month period, the Company may reborrow the remaining amount of the prepayment
not previously reborrowed and use the proceeds to purchase marketable securities
in which Bankers Trust Company will have a security interest. The Company may
not reborrow the $70 million unless there are no defaults or events of default
under the Property Financing, the Company provides Bankers Trust Company with
satisfactory assurances that Bankers Trust Company has a first priority lien on
the existing Office Properties for the entire amount of the loan outstanding
under the
9
<PAGE>
Property Financing and the Company pays certain draw down fees. The Company
will pay an unused facility fee for the period between prepayment and
reborrowing.
ITEM 2. PROPERTIES
THE OFFICE PROPERTIES
Set forth below is certain information with respect to the Office Properties
for the year ended December 31, 1997.
<TABLE>
<CAPTION>
TOTAL TOTAL
BASE RENT BASE RENT
PERCENTAGE FOR THE PER
YEAR RENTABLE LEASED 12 MONTHS PERCENTAGE RENTABLE MAJOR TENANTS
BUILT/ SQUARE (AS OF ENDED OF TOTAL SQUARE (10% OR MORE OF
PROPERTY LOCATION RENOVATED FEET 12/31/97) 12/31/97 (1) BASE RENT FOOT (1) RENTABLE SQUARE FEET)
- ----------------- --------- --------------- ------------- ------------- ------------ ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Philadelphia Region
Unisys World Hdqtrs
751 Jolly Rd...... 1966/1991 112,958 100.0% $ 1,597,964 8.5% $14.15(2) Unisys(100%)
753 Jolly Rd...... 1960/1992-94 424,380 100.0% 3,287,716 47.5% 7.75 Unisys(100%)
------- ----------- -----
Combined Total.. 537,338 4,885,680 26.0% 9.09
760 Jolly Rd. 1974/1994 199,380 100.0% 2,821,560 15.1% 14.15(2) Unisys(100%)
------- ----------- -----
Combined Total.. 736,718 7,707,240 41.1% 10.46
Merck Building
785 Jolly Rd. 1970/1996 218,219 100.0% 2,318,232 12.3% 10.62 Unisys with 100%
sublease to Merck.
------- ----------- -----
Region Total......... 954,937 10,025,472 53.4% $10.50
Harrisburg Region
Gateway Corporate Ctr.
6385 Flank Dr..... 1995 32,800 100.0% 340,949 1.8% $10.39 Cowles Magazine(35%)
Orion Capital(26%)
Commerce Court
2601 Market Pl.... 1989 67,377 98.2% 985,369 5.2% 14.62 Penn State
Geisinger(38%)
Ernst & Young(26%)
Texas-Eastern Gas
Pipeline Co.(26%)
2605 Interstate Dr. 1990 84,268 100.0% 1,168,119 6.2% 13.86 PA Emergency Mgmt.
Agency(56%)
------- ----------- -----
USF&G(24%)
Health Central(15%)
Region Total......... 184,445 2,494,437 13.2% $13.52
Princeton Region
Teleport National
Hdqtrs.
429 Ridge Rd...... 1966/1996 142,385 100.0% 1,950,810 10.4% $13.70 TCG(100%)(3)
437 Ridge Rd...... 1962/1996 30,000 100.0% 349,500 1.9% 11.65 IBM with 100%
sublease to TCG
IBM Building
431 Ridge Rd. 1958/1967 170,000 100.0% 1,445,000 7.7% 8.50 IBM(100%)
------- ----------- -----
Region Total......... 342,385 3,745,310 20.0% $10.94
------- ----------- -----
Total/Weighted Average 1,481,767 99.9% $16,265,219 86.6% $10.98
------- ----------- -----
------- ----------- -----
</TABLE>
- ------------------------
(1) "Total Base Rent" for the twelve months ended December 31, 1997 represents
base rents received during the period, excluding tenant reimbursements,
calculated in accordance with generally accepted accounting principals
determined on a straight-line basis. Tenant reimbursements generally include
payment of real estate taxes, operating expenses, and escalations and common
area maintenance and utility charges. These amounts reflect the annualized
revenue of the Office Properties acquired by the Company on October 14,
1997.
(2) Property is triple net leased.
(3) On January 8, 1998, TCG announced its intention to merge with a subsidiary
of AT&T Corporation.
10
<PAGE>
THE RETAIL PROPERTIES
Set forth below is certain information with respect to the Company's retail
properties for the year ended December 31, 1997. All of the Retail Properties
are leased on a triple net basis.
<TABLE>
<CAPTION>
TOTAL
BASE RENT
PERCENTAGE PERCENTAGE PER
YEAR RENTABLE LEASED TOTAL OF TOTAL RENTABLE
BUILT/ SQUARE (AS OF BASE BASE SQUARE
PROPERTY LOCATION RENOVATED FEET 12/31/97) RENT (1) RENT (1) FOOT(1)
- ----------------------------- ------------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SuperValu Stores, Inc.
Indianapolis, IN
5835 West 10th St. 1991 67,541 100.0% $ 548,196 2.90% $ 8.12
Plymouth, MN
3550 Vicksburg Ln. 1991 67,510 100.0% 522,813 2.80% 7.74
Nash-Finch Stores
Minot, ND
2100 S. Broadway 1993 46,134 100.0% 317,040 1.70% 6.87
Peru, IL
1351 38th St. North 1993 60,232 100.0% 347,208 1.80% 5.76
Fleming Companies Stores
Delafield, WI
3265 Golf Rd. 1994 52,800 100.0% 330,564 1.80% 6.26
Glendale, WI
7601 N. Port Washington
Rd. 1992 36,248 100.0% 177,984 1.00% 4.91
Oconomowac, WI
630 E. Wisconsin Ave. 1994 39,272 100.0% 264,799 1.40% 6.74
----------- ----- --------- ----- ---
Total/Weighted Average 369,737 100.0% $2,508,604 13.40% $ 6.78
----------- ----- --------- ----- ---
<CAPTION>
PROPERTY LOCATION TENANTS
- ----------------------------- ----------------------
<S> <C>
SuperValu Stores, Inc.
Indianapolis, IN
5835 West 10th St. SV Ventures
Plymouth, MN
3550 Vicksburg Ln. Innsbruck Investments
Nash-Finch Stores
Minot, ND
2100 S. Broadway Nash-Finch Company
Peru, IL
1351 38th St. North Nash-Finch Company
Fleming Companies Stores
Delafield, WI
3265 Golf Rd. Fleming Companies,
Inc.
Glendale, WI
7601 N. Port Washington Fleming Companies,
Rd. Inc.
Oconomowac, WI
Fleming Companies,
630 E. Wisconsin Ave. Inc.
Total/Weighted Average
</TABLE>
- ------------------------
(1) "Total Base Rent" for the twelve months ended December 31, 1997 represents
base rents received during the period, excluding tenant reimbursements,
calculated in accordance with generally accepted accounting principals
determined on a straight-line basis. Tenant reimbursements generally include
payment of real estate taxes, operating expenses, and escalations and common
area maintenance and utility charges.
11
<PAGE>
Lease Expiration -- Portfolio Total
The following table sets forth a summary schedule of the lease expirations
for the Company's Properties for leases in place as of December 31, 1997,
assuming that none of the tenants exercise renewal options.
<TABLE>
<CAPTION>
TOTAL
TOTAL BASE RENT
SQUARE BASE RENT OF EXPIRING
YEAR OF NUMBER OF FOOTAGE OF PERCENTAGE OF OF EXPIRING LEASES
LEASE LEASES EXPIRING TOTAL LEASED LEASES PER RENTABLE
EXPIRATION EXPIRING LEASES SQUARE FEET ($000) (1) SQUARE FOOT (1)
- ---------------------------------------- --------------- ----------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
1998.................................... 0 0 0.0% $ 0 $ 0.00
1999.................................... 2 4,420 0.2% 56 12.65
2000.................................... 3 33,766 1.8% 503 14.90
2001.................................... 4 71,263 3.9% 972 13.63
2002.................................... 6 208,632 11.3% 1,940 9.30
2003.................................... 0 0 0.0% 0 0
2004.................................... 0 0 0.0% 0 0
2005.................................... 0 0 0.0% 0 0
2006.................................... 2 97,510 5.3% 1,068 10.96
2007.................................... 2 35,164 1.9% 650 18.50
2008 and beyond......................... 10 1,399,549 75.6% 14,710 10.51
--
----------- ----- ----------- ------
Total................................... 29 1,850,304 100.0% $ 19,900 $ 10.76
--
--
----------- ----- ----------- ------
----------- ----- ----------- ------
<CAPTION>
PERCENTAGE OF
YEAR OF TOTAL
LEASE BASE RENT
EXPIRATION EXPIRING (1)
- ---------------------------------------- ---------------
<S> <C>
1998.................................... 0.0%
1999.................................... 0.3%
2000.................................... 0.4%
2001.................................... 0.4%
2002.................................... 16.5%
2003.................................... 0.0%
2004.................................... 0.0%
2005.................................... 0.0%
2006.................................... 2.9%
2007.................................... 2.9%
2008 and beyond......................... 69.9%
-----
Total................................... 100.0%
-----
-----
</TABLE>
- ------------------------
(1) "Total Base Rent" represents base rents for expiring leases, excluding
tenant reimbursements, calculated in accordance with generally accepted
accounting principals determined on a straight-line basis. Tenant
reimbursements generally include payment of real estate taxes, operating
expenses, and escalations and common area maintenance and utility charges.
MAJOR PROPERTIES
PHILADELPHIA REGION
The Company owns four properties in the Blue Bell/Plymouth Meeting/Fort
Washington submarket.
The Merck Building: The Merck Building is a 218,219 square foot office
building located on 28 acres at 785 Jolly Road in Blue Bell, Montgomery County,
Pennsylvania. The building has a one-story lobby with a structural steel frame
and brick exterior.
The building is currently 50% occupied by Unisys and 50% occupied by Merck &
Co. Inc. ("Merck"), which has exercised its option to occupy 100% of the
building commencing on January 1, 1999. The building is leased in its entirety
to Unisys on a triple net basis through June 30, 2009 with the tenant
responsible for the payment of all operating and capital improvement expenses of
the property. The lease provides for 2% annual increases in the base rent. Merck
has subleased one-half of the building from Unisys through June 30, 2009, the
remainder of the Unisys lease term. The Merck sublease contains a call
option under which Merck can take the remainder of the space in the building and
a put option under which Unisys can cause Merck to take the remaining space.
Merck has exercised its option to become the sole occupant of the building
commencing on January 1, 1999. Under
12
<PAGE>
the sublease, Merck has a direct obligation to pay the landlord if Unisys
were to default on its obligations. The two-story brick building was
constructed in 1970 as the Remington Rand Headquarters and was renovated by
Merck in 1996.
The aggregate undepreciated tax basis of depreciable real property for
785 Jolly Road for Federal income tax purposes was $9,987,000 as of December
31, 1997. Depreciation is computed on the straight-line method over 40 years.
The current real estate tax for 785 Jolly Road is $31.622 per $100 of
assessed value. The total annual tax for 785 Jolly Road at this rate for the
1997-1998 tax year is $289,942 (at an assessed value of $916,900). The entire
county was revalued in 1998 and as a result, the real estate assessment
increased to $16,114,020. As a result of the revaluation, the taxing
authorities will adjust downward the real estate tax rates.
Unisys World Headquarters: The Unisys World Headquarters, located on 84
acres in Blue Bell, Montgomery County, Pennsylvania, consists of 736,718
square feet contained in three office buildings in a suburban office campus
setting.
All of the buildings are leased to Unisys under separate leases which
expire June 30, 2009. The buildings are leased on a triple net basis though
June 30, 2009 with the tenant responsible for the payment of all operating
and capital improvement expenses of the property. The leases provide for 2%
annual increases in the base rent.
- 751 Jolly Road: The first building comprising the Unisys World
Headquarters consists of 112,958 square feet in a two-story steel frame
facility. Exterior walls of glass and concrete panels enclose the
executive offices, boardroom, and worldwide telecommunications facilities
of this international corporation. The building was substantially
renovated by Unisys in 1991.
- 753 Jolly Road: The second building comprising the Unisys World
Headquarters is a single story office/flex building with structural steel
frame and brick, block and glass exterior containing 424,380 square feet.
The building possesses the heavy power capabilities, fiber optics,
upgraded HVAC and telecommunications and electronic systems necessary to
support this Fortune 500 technology company. The building contains the
primary software engineering and development divisions for Unisys, as well
as general offices. Renovation of this building has been ongoing since
1993, during which time Unisys has expended over $6 million in capital
improvements on the building.
Both 751 Jolly Road and 753 Jolly Road are leased under a single lease
with Unisys, which has posted a cash security deposit in the amount of
$12.75 million under the lease.
The aggregate undepreciated tax basis of depreciable real property for
751 Jolly Road and 753 Jolly Road for Federal income tax purposes was
$24,592,000 as of December 31, 1997. Depreciation is computed on the
straight-line method over 40 years.
The 1997 real estate tax for 751 Jolly Road and 753 Jolly Road is
$31.622 per $100 of assessed value. The total annual tax for 751 Jolly
Road and 753 Jolly Road at this rate for the 1997-98 tax year is
$389,614 (at an assessed value of $1,232,100). The entire county was
revalued in 1998 and as a result, the real estate assessment increased
to
13
<PAGE>
$29,050,890. As a result of the revaluation, the taxing authorities
will adjust downward the real estate tax rates.
- 760 Jolly Road: The third building comprising the Unisys World
Headquarters is a 199,380 square foot office building situated on 29.67
acres. This building serves as the headquarters for Unisys' worldwide
marketing operations. The three-story building consists of structural
steel framing with brick and concrete panel exterior walls. This
technologically advanced building contains the latest telecommunications
and electronic systems, a high tech display center and a cafeteria.
The aggregate undepreciated tax basis of depreciable real property for
760 Jolly Road for Federal income tax purposes was $9,125,000 as of
December 31, 1997. Depreciation is computed on the straight-line method
over 40 years.
The current real estate tax for 760 Jolly Road is $31.622 per $100 of
assessed value. The total annual tax for 760 Jolly Road at this rate
for the 1997-1998 tax year is $235,078 (at an assessed value of
$743,400). The entire county was revalued in 1998 and as a result, the
real estate assessment increased to $15,703,760). As a result of the
revaluation, the taxing authorities will adjust downward the real
estate tax rates.
The following table sets forth information for 785 Jolly Road, 751 Jolly
Road, 753 Jolly Road and 760 Jolly Road, collectively:
<TABLE>
<CAPTION>
ANNUALIZED ANNUAL NET
RENT PER EFFECTIVE RENT
PERCENT LEASED PER LEASED
YEAR-END LEASED SQUARE FOOT SQUARE FOOT
----------- ----------- ------------- ---------------
<S> <C> <C> <C>
1997 100% $ 9.27 $ 9.27
1996 100% 9.09 9.09
1995 100% 8.91 8.91
1994 100% 8.74 8.74
1993 100% 8.57 8.57
</TABLE>
PRINCETON REGION
The Company owns three properties in the Exit 8A--Cranbury submarket.
Princeton Technology Center: The Princeton Technology Center, a corporate
business park located on 18.8 acres in Dayton, New Jersey, consists of three
parcels and 342,385 rentable square feet contained in three separate buildings
- -- two office buildings and an office/flex building.
- 429 Ridge Road: The first of two buildings leased to TCG is a 142,385
square feet three-story building on 14 acres. TCG is a leading fiber
optic based telecommunications company. In January 1998, AT&T announced
its agreement to acquire TCG. This three-story building has a
structural steel frame with brick, metal panel and glass exterior. TCG
operates a National Monitoring Center and its national training
headquarters at this location and has made a multi-million dollar
investment in the building. The initial term of TCG's lease ends in
2008. The building was totally renovated in 1996 and 1997 and provides
the latest in technologically advanced telecommunications and
electronics capabilities.
14
<PAGE>
The following table sets forth certain information for 429 Ridge Road:
<TABLE>
<CAPTION>
ANNUALIZED ANNUAL NET
RENT PER EFFECTIVE RENT
PERCENT LEASED PER LEASED
YEAR-END LEASED SQUARE FOOT SQUARE FOOT
----------- ----------- ------------- ---------------
<S> <C> <C> <C>
1997 100% $ 17.62 $ 12.62
1996 61% 17.62 12.62
1995 0% 0.00 0.00
</TABLE>
The aggregate undepreciated tax basis of depreciable real property for
429 Ridge Road for Federal income tax purposes was $7,770,000 as of
December 31, 1997. Depreciation is computed on the straight-line method
over 40 years.
The current real estate tax for 429 Ridge Road is $2.48 per $100 of
assessed value. The total annual tax for 429 Ridge Road at this rate
for the 1997-1998 tax year is $119,640 (at an assessed value of
$4,824,200).
- 437 Ridge Road: The second of the buildings leased to TCG consists of a
30,000 square feet single-story building. The building has a glass
exterior along with a glass enclosed landscaped courtyard. TCG occupies
the building under a sublease with IBM through April 2002, and a direct
lease extending its occupancy through December 2006. The Chief
Executive Officer and other executive officers work out of this
facility. TCG totally renovated this building at a cost exceeding $2
million for TCG's initial occupancy beginning November 1, 1996.
- 431 Ridge Road: 431 Ridge Road is a 170,000 square feet single-story
office and research building which is leased in its entirety to IBM
through March 31, 2002. The building has a structural steel frame with
glass, metal panel and block exterior. The large floorplate, ample
parking and ceiling height make the building highly adaptable for
either office or research uses.
The following table sets forth certain information for 431 Ridge Road:
<TABLE>
<CAPTION>
ANNUALIZED ANNUAL NET
RENT PER EFFECTIVE RENT
PERCENT LEASED PER LEASED
YEAR-END LEASED SQUARE FOOT SQUARE FOOT
----------- ----------- ------------- ---------------
<S> <C> <C> <C>
1997 100% $ 16.28 $ 8.50
1996 100% 16.35 8.50
1995 100% 16.68 8.50
</TABLE>
The aggregate undepreciated tax basis of depreciable real property for
431 Ridge Road for Federal income tax purposes was $7,082,000 as of
December 31, 1997. Depreciation is computed on the straight-line method
over 40 years.
The current real estate tax for 431 and 437 Ridge Road is $2.48 per
$100 of assessed value. The total annual tax for 431 and 437 Ridge Road
at this rate for the 1997-1998 tax year is $190,305 (at an assessed
value of $7,673,600).
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened
against the Company (other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance).
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matter was submitted to a vote of security holders during
the Company's fourth quarter:
<TABLE>
<S> <C>
(a) Meeting type and date Special Meeting held on December 22, 1997
(b) Directors elected at meeting Not applicable
(c) Description of each matter
voted on at meeting
</TABLE>
<TABLE>
<S> <C> <C>
Resolution to change the Results of votes
name of the Company from For 1,339,185.241
Royale Investments, Inc. to Against or withheld 17,390.559
Corporate Office Properties Trust, Inc. Abstentions and broker non-votes 15,609.826
</TABLE>
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Shares are listed for trading on NASDAQ under the symbol "COPT."
Prior to January 1, 1998, the Common Stock was listed on NASDAQ under the symbol
"RLIN." The following table sets forth the range of the high and low last
reported sale prices as reported on NASDAQ, as well as the quarterly
distributions per share of Common Stock declared and paid, prior to the Company
Reformation, and per Common Share thereafter. The quotations shown represent
interdealer prices without adjustment for retail markups, markdowns or
commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
LOW HIGH DISTRIBUTION
--------- --------- -----------
<S> <C> <C> <C>
1996
First Quarter................................................................. $ 4.750 $ 5.375 $ 0.125
Second Quarter................................................................ 4.875 5.750 0.125
Third Quarter................................................................. 4.875 5.750 0.125
Fourth Quarter................................................................ 4.750 5.500 0.125
1997
First Quarter................................................................. 4.500 6.000 0.125
Second Quarter................................................................ 4.500 5.625 0.125
Third Quarter................................................................. 5.000 7.875 0.125
Fourth Quarter................................................................ 6.813 11.750 0.125
1998
First Quarter................................................................. 9.750 14.000 0.150
(through March 20, 1998)
</TABLE>
On September 5, 1997, the last trading day before the announcement of the
Transactions, the last sale price for the Common Stock, as reported on NASDAQ,
was $5-9/16. On September 8, 1997, the date on which the Transactions were first
announced, the last sale price for the Common Stock, as reported on NASDAQ, was
$7-7/8 per share. On October 13, 1997, the day before the Transactions were
consummated, the last sale price for the Common Stock, as reported on NASDAQ,
was $7-5/8 per share. On March 20, 1998, the last sale price for the Common
Stock, as reported on NASDAQ, was 13-7/8 share. The approximate number of
holders of record of the shares of Common Stock was approximately 228 as of
March 20, 1998.
During 1997, the Company made regular quarterly cash distributions to its
shareholders based upon a quarterly distribution of $0.125 per Common Share or
$0.50 per Common Share annualized. On March 16, 1998, the Board of Directors
increased its quarterly dividend to $0.15 per Common Share or $0.60 per Common
Share annualized (or an annual distribution rate of approximately 4.3% based on
the last trade price of the Common Shares on NASDAQ on March 20, 1998).
Future distributions by the Company, however, will be at the discretion of
the Board of Trustees. The Company's ability to pay cash distributions in the
future will be dependent upon (i) amounts distributed by the Operating
Partnership from properties or interests held by it, (ii) income from the
17
<PAGE>
properties held directly by the Company, (iii) cash generated by financing
transactions and (iv) the annual distribution requirements under the REIT
provisions of the Code described above and such other factors as the Board of
Trustees deems relevant. The ability of the Company to make cash distributions
will also be limited by the terms of the Operating Partnership Agreement and the
Property Financing as well as limitations imposed by state law and the
agreements governing any future indebtedness of the Company or the Operating
Partnership.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Corporate Office Properties Trust, Inc.
The following selected financial data as of and for each of the years
ended December 31, 1993 through 1997 has been derived from and should be read
in conjunction with the Company's audited financial statements for those
years. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
the consolidated financial statements and the notes thereto of the Company
included eslewhere in this form 10-K.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue:
Rental income..................................... $ 6,122 $ 2,477 $ 2,436 $ 2,038 $ 1,073
Tenant recoveries and other income................ 496 32 48 217 70
---------- --------- --------- --------- ---------
Total revenue.................................. 6,618 2,509 2,484 2,255 1,143
Expenses:
Interest.......................................... 2,855 1,246 1,267 1,098 461
Depreciation and amortization..................... 1,331 567 567 476 256
Property expenses................................. 728 31 42 43 63
General and administrative........................ 533 372 336 337 183
Termination of Advisory Agreement(1).............. 1,353
---------- --------- --------- --------- ---------
Total expenses...... .......................... 6,800 2,216 2,212 1,954 963
Income (loss) before minority interests.............. (182) 293 272 301 180
Income allocated to minority interests............... (785) 0 0 0 0
Net income (loss) (1)................................ $ (967) $ 293 $ 272 $ 301 $ 180
---------- --------- --------- --------- ---------
Net income (loss) per common share (1)............... $ (0.60) $ 0.21 $ 0.19 $ 0.21 $ 0.17
---------- --------- --------- --------- ---------
Cash dividends/distributions declared................ $ 816 $ 710 $ 710 $ 1,207 $ 923
---------- --------- --------- --------- ---------
Cash dividends/distributions per share............... $ 0.50 $ 0.50 $ 0.50 $ 0.85 $ 0.88
---------- --------- --------- --------- ---------
Balance Sheet Data (as of period end):
Real estate investments, net of accumulated
depreciation...................................... $ 188,625 $ 23,070 $ 23,624 $ 24,179 $ 15,110
Total assets......................................... 193,534 24,197 24,779 25,647 18,882
Mortgages payable.................................... 114,375 14,658 14,916 15,153 7,450
Total liabilities.................................... 117,008 15,026 15,191 15,620 7,950
Minority interests................................... 64,862
Stockholders' equity................................. 11,664 9,171 9,588 10,026 10,932
Other Data:
Cash flows provided by (used in):
Operating activities.............................. $ 3,216 $ 840 $ 678 $ 690 $ 358
Investing activities.............................. 973 127 (551) (9,511) (5,461)
Financing activities.............................. (1,052) (967) (1,001) 6,357 7,829
Funds from operations (2)............................ 1,718 847 827 768 437
Weighted average shares outstanding (in thousands)... 1,601 1,420 1,420 1,420 1,065
Property Data (as of period end):
Number of properties owned........................... 17 7 7 7 4
Total rentable square feet owned (in thousands)...... 1,852 370 370 370 215
</TABLE>
- ------------------------
(1) Reflects a non-recurring termination expense of $1,353 for the year ending
December 31, 1997 associated with the termination of the Advisory Agreement,
which was paid in the form of Common Stock. See "Part I. Item 1. Business."
19
<PAGE>
(2) The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that FFO is helpful
to investors as a measure of the financial performance of an equity REIT
because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an
indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company
computes FFO in accordance with standards established by NAREIT which may
not be comparable to FFO reported by other REITs that do not define the
term in accordance with the current NAREIT definition or that interpret
the current NAREIT definition differently than the Company. FFO does not
represent cash generated from operating activities determined in
accordance with GAAP and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with Selected
Financial Data and the Consolidated Financial Statements and the Notes
thereto of the Company.
The Company was formed in 1988 to own and acquire net lease retail
properties. The Company did not commence operations until February 1990 and
filed its initial public offering of Common Stock on December 31, 1991. On
June 25, 1992, the Company acquired two net leased retail properties. On June
30, 1993, the Company sold additional shares of Common Stock in a public
offering. During 1993 and 1994, the Company purchased five additional net
leased retail properties.
On October 14, 1997, the Company completed the Transactions. For the
purposes of the Transactions, the Properties Partnerships (including the
Retained Interests) were treated as having a value of $170 million (which
includes the $100 million of indebtedness represented by the Property
Financing). The aggregate consideration issued in the Transactions by the
Company and the Operating Partnership to the former general and limited
partners of the Properties Partnerships consisted of (x) 600,000 shares of
Common Stock (issued at a price of $5.50 per share), (y) an aggregate of
2,899,310 Partnership Units (including 600,000 issued to the Company in
consideration for limited partner interests in the Properties Partnerships
acquired by it for 600,000 shares of Common Stock and subsequently
contributed by it to the Operating Partnership) and (z) 1,913,545 Preferred
Units. Concurrently with the closing of the Transactions, the Advisory
Agreement between Crown Advisors and the Company was terminated, and the
Company entered into the Management Agreement with Glacier. A non-recurring
termination expense of $1.4 million, paid in the form of shares of Common
Stock (net of certain shares retired), was incurred as a result of the
termination of the Advisory Agreement. As a result of the Transactions, the
Company became self-administered.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a
Maryland real estate investment trust and changed its name to Corporate
Office Properties Trust. In connection with the Reformation, each share of
Common Stock was exchanged for one Common Share in Corporate Office
Properties Trust. On March 6, 1998, the Company filed a preliminary
Registration Statement on Form S-11 for the issuance of 7,500,000 Common
Shares.
20
<PAGE>
The Company accounted for the acquisition of the Office Properties under
purchase accounting requirements; therefore, the operating results of the
Company for the year ended December 31, 1997 are not directly comparable to
1996.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1997 and 1996: Total revenues
increased from $2.5 million for the year ended December 31, 1996 to $6.6
million for the year ended December 31, 1997, an increase of $4.1 million or
164%. Of this increase, $3.6 million results from an increase in base rents,
substantially all of which is attributable to the acquisition of the Office
Properties. Tenant recoveries totaled $.4 million in 1997 as compared to none
in 1996 due to tenant recoveries attributable to leases on the Office
Properties.
Total expenses increased from $2.2 million for the year ended December
31, 1996 to $6.8 million for the year ended December 31, 1997, an increase of
207%, of which $1.4 million of the change represented a non-recurring charge
related to the termination of the Advisory Agreement. The remaining $3.2
million increase was attributable to increased interest expense ($1.6
million), increased depreciation and amortization ($.7 million), increased
property expenses ($.7 million), and increased general and administrative
expenses ($.2 million), primarily as a result of the acquisition of the
Office Properties.
Depreciation and amortization increased from $567,000 in 1996 to $1.3
million in 1997, an increase of 129%, as a result of the Transactions.
Interest expense increased from $1.2 million in 1996 to $2.9 million in 1997,
an increase of 129%, primarily as a result of borrowings under the Property
Financing, offset slightly by decreased interest expense on the retail
properties' mortgages.
General and administrative expenses increased from $372,000 in 1996 to
$533,000 in 1997 resulting from the conversion of the Company from an
externally-advised REIT to a self-administered REIT. During 1997, the REIT
commenced administrative operations and incurred payroll expenses of $102,000
and office overhead expenses of $34,000 not incurred previously. General and
administrative expenses also increased due to higher professional fees as a
result of the change in corporate structure, partially offset by a reduction
in the advisory fees resulting from the termination of the Advisory Agreement.
As a result of the above factors, net income before minority interests
decreased from income of $293,000 for the year ended December 31, 1996 to a
loss of $182,000 for the year ended December 31, 1997. Net income decreased
from income of $293,000 for 1996 to a loss of $1.0 million for 1997
attributable primarily to the existence of minority interests resulting from
the new structure of the Company following the Transactions, as well as the
factors described above.
Comparison of the Years Ended December 31, 1996 and 1995: Total revenues
were approximately $2.5 million for both the year ended December 31, 1995 and
the year ended December 31, 1996. The increase of $41,000 in total rental
revenue in 1996 resulted from contractual rent increases in two of the Retail
Properties based on increases in the Consumer Price Index partially offset by
a decrease in interest income due to a reduction in cash and marketable
securities.
Total expenses were approximately $2.2 million for both the year ended
December 31, 1995 and the year ended December 31, 1996. Because all of the
properties owned by the Company in 1995 and 1996 were triple net leased, all
operating expenses relating to the Company's properties, such as utilities,
property taxes, repairs and maintenance and insurance, are the responsibility
of the Com-
21
<PAGE>
pany's tenants. The increase of $4,000 in total expense in 1996 consists of
an increase in general and administrative expenses, consisting primarily of
professional fees, travel expense and state income taxes, offset by a
decrease in mortgage interest expense, due to a reduction in mortgage
principal of approximately $257,000 during the year. Operation and management
expenses consisting mainly of fees paid to Crown pursuant to the Advisory
Agreement, and depreciation expense, remained relatively unchanged between
1995 and 1996.
As a result of the above described factors and a charge to operations in
1996 for an unsuccessful attempt to raise capital and acquire additional
properties, net income increased from $272,000 for the year ended December
31, 1995 to $293,000 for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, cash provided from operations represented the primary
source of liquidity to fund distributions, pay debt service and fund working
capital requirements. The Company expects to continue to meet its short-term
capital needs from property cash flow, including all property expenses,
general and administrative expenses, dividend and distribution requirements
and recurring capital improvements and leasing commissions. The Company does
not anticipate borrowing to meet these requirements.
On October 14, 1997, the Company completed the Transactions including the
assumption of $100 million of the Property Financing and the issuance of $70
million of equity consisting of (i) $3.3 million in shares of Common Stock,
(ii) $14.2 million in Partnership Units and (iii) $52.5 million in Preferred
Units, including the Retained Interests. The aggregate purchase price for the
Office Properties was $169 million and $1 million of cash was provided for
working capital to the Operating Partnership.
To meet long-term capital needs, the Company has historically relied
primarily on fixed-rate secured financing for the acquisition, redevelopment
and improvement of the Properties. The Property Financing consists of a $100
million facility bearing interest at an annual rate of 7.5%, and is
prepayable at any time. The loan requires payments of interest only through
its term and matures on October 13, 2000 unless extended for one or two
one-year extensions.
On March 5, 1998, the Company filed a Registration Statement on Form S-11
outlining the Offering for the issuance of 7,500,000 Common Shares. The
Company intends to use the proceeds to acquire 7,500,000 Partnership Units
and increase its percentage interest in the Operating Partnership to
approximately 71.8%. The Operating Partnership intends to use $70 million of
such net proceeds to repay indebtedness outstanding under the Property
Financing, the lender of which is an affiliate of BT Alex. Brown
Incorporated, one of the Underwriters in the Offering. Any remaining net
proceeds will be used by the Operating Partnership for acquisitions and
general business purposes.
In March 1998, the Company has entered into a conditional agreement with
Bankers Trust Company pursuant to which the Company has been granted the
right to reborrow, in minimum amounts of $20 million (or the remaining
undrawn amount, if less), the entire $70 million repaid with the net proceeds
of the Offering for the purpose of acquiring commercial office building real
property and paying related fees and expenses. This right must be exercised
within nine months of the date of the Offering. Prior to the end of the
nine-month period, the Company may reborrow the remaining amount of the
prepayment not previously reborrowed and use the proceeds to purchase
marketable securities in which Bankers Trust Company will have a security
interest. The Company may not re-
22
<PAGE>
borrow the $70 million unless there are no defaults or events of default
under the Property Financing, the Company provides Bankers Trust Company with
satisfactory assurances that Bankers Trust Company has a first priority lien
on the existing Office Properties for the entire amount of the loan
outstanding under the Property Financing and the Company pays certain draw
down fees. The Company will pay an unused facility fee for the period between
prepayment and reborrowing. There is no assurance that the Company will
consummate the Offering, or repay or reborrow the $70 million of Property
Financing.
To further meet long-term capital needs, the Company is presently
negotiating with Bankers Trust Company, an affiliate of BT Alex. Brown
Incorporated, one of the Underwriters in the Offering, regarding a separate
credit facility which is intended to be utilized to facilitate acquisitions,
renovations, tenant improvements and leasing commissions. Acquisitions may
also be financed through net cash provided from operations or equity
issuances. There is no assurance that the Company will be able to obtain such
credit facility or that such credit facility will be adequate to fund its
acquisition and capital program.
The Company has no contractual obligations for property acquisition or
material capital costs, other than tenant improvements in the ordinary course
of business. The Company expects to meet its long-term capital needs through
a combination of cash from operations, additional borrowings, additional
equity issuances of Common Shares, Partnership Units and/or Preferred Units.
STATEMENT OF CASH FLOWS
During the year ended December 31, 1997, the Company generated $3.2
million in cash flow from operating activities which, together with $1.0
million of proceeds from the Transactions, initial cash balances of $0.3
million and marketable securities net proceeds of $0.5 million, were used in
part for (i) property costs in the Transactions of $0.5 million, (ii) costs
relating to Common Stock issued in the Transactions of $0.1 million, (iii)
dividends paid of $0.7 million and (iv) repayments of mortgage loans of $0.3
million. As a result, the cash balances increased to $3.4 million at December
31, 1997 from $0.3 million at December 31, 1996.
23
<PAGE>
FUNDS FROM OPERATIONS
The Company considers FFO to be helpful to investors as a measure of the
financial performance of an equity REIT. In accordance with NAREIT's
definition, FFO is defined as net income (loss) computed in accordance with
GAAP, excluding gains (or losses) from debt restructuring and sales of
property, plus real estate-related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. FFO does not
represent cash generated from operating activities determined in accordance
with GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions. Other REITs may not define FFO in
accordance with the current NAREIT definition or may interpret the current
NAREIT definition differently from the Company. FFO for the years ended
December 31, 1997 and 1996, as calculated in accordance with the NAREIT
definition published in March 1995, are summarized in the following table (in
thousands).
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- ---------
<S> <C> <C>
(Loss) income before minority interests......... $(182) $ 293
Add: Nonrecurring charge--
Advisory Agreement termination cost........ 1,353 --
Real estate related depreciation and
Add: amortization............................... 1,267 554
Less: Preferred Unit distributions.............. (720) --
----- -----
Funds from operations........................... $1,718 $ 847
----- -----
----- -----
Weighted average Common Shares/Units
outstanding (1)............................... 2,153 1,420
----- -----
----- -----
</TABLE>
- ------------------------
(1) Assumes redemption of all Partnership Units, calculated on a weighted
average basis for Common Shares. Excludes the weighted average effect of
the conversion of 1,913,545 Preferred Units into 6,834,035 Partnership
Units which are, in turn, redeemable for 6,834,035 Common Shares.
Includes 282,508 Common Shares issuable upon redemption of Partnership
Units issuable upon the transfer of the Retained Interests.
INFLATION
Inflation has not generally had a significant impact during the periods
presented on the Company or the Office Properties because of the relatively
low inflation rates in the markets in which they operate. Most of the
Company's or the Office Properties' tenants are contractually obligated to
pay their share of operating expenses, thereby reducing exposure to increases
in such costs resulting from inflation.
24
<PAGE>
PROSPECTIVE ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) Nos. 130, "Reporting
Comprehensive Income," and 131, "Disclosures About Segments of an Enterprise
and Related Information." Both statements are effective for the Company
beginning January 1, 1998. The statements, both of which are
disclosure-related only, are not expected to materially impact the Company's
financial reporting disclosures.
At its March 1998 meeting the Emerging Issues Task Force ("EITF") of the
FASB reached a consensus (EITF 97-11) that internal pre-acquisition of
operating properties should be expensed as incurred. The Company cannot
determine the impact of adopting EITF 97-11 on its future operating results.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer systems that have date-sensitive software or microprocessors may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar business activities.
The Company has evaluated its systems and determined that the software
currently in use is substantially year 2000 compliant. The software vendor has
agreed to make minor modifications in the software to make it fully year 2000
compliant by December 31, 1998 at no additional cost to the Company. The Company
presently believes that with these modifications, the Year 2000 issue will not
have a material adverse impact on the operations and financial condition of the
Company. However, even if such modifications are not timely completed, the Year
2000 issue is not expected to have a material adverse impact on the operations,
financial condition and cash flows of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by this Item can be found beginning on page
F-2 of this Form 10-K and are deemed incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
After the acquisition of the Office Properties, the Company changed its
certifying accountant from Lurie, Besikof, Lapidus & Co., LLP ("Lurie") to
Coopers & Lybrand L.L.P. ("C&L"). On October 31, 1997, C&L was appointed by the
Board of Directors as the Company's independent public accountant for the year
ending December 31, 1997.
The Company is not aware of any disagreements with Lurie during the
Company's two most recent fiscal years and through October 31, 1997 on any
matters of accounting principles or practices, financial statement disclosures,
or auditing scope and procedures.
25
<PAGE>
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE COMPANY
The persons who serve as executive officers and Trustees of the Company
are identified below. Except as noted below, each of the executive officers
will be a full time employee of the Company or the Operating Partnership.
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS
- ------------------------------------------------- --- ------------------------------------------------- -----
<S> <C> <C> <C>
Jay H. Shidler................................... 51 Chairman of the Board of Trustees III
Clay W. Hamlin, III.............................. 53 President, Chief Executive Officer and Trustee III
Vice President and Vice Chairman of the Board of
Vernon R. Beck................................... 56 Trustees I
Kenneth D. Wethe................................. 56 Trustee II
Allen C. Gehrke.................................. 63 Trustee I
William H. Walton................................ 45 Trustee II
Kenneth S. Sweet, Jr............................. 65 Trustee III
Antony P. Bernheim............................... 38 Vice President, Chief Investment Officer
Thomas D. Cassel................................. 39 Vice President, Finance and Treasurer
David P. Hartsfield.............................. 46 Vice President, Operations and Development
John Parsinen.................................... 55 Secretary
James K. Davis, Jr............................... 37 Vice President, Acquisitions
Denise J. Liszewski.............................. 41 Vice President, Administration
Stephen S. Fera.................................. 31 Controller
</TABLE>
Jay H. Shidler is Chairman of the Board of Trustees. Mr. Shidler was
appointed Chairman of the Board of Directors upon the closing of the
Transactions. Mr. Shidler is the Founder and Managing Partner of The Shidler
Group. A nationally acknowledged expert in the field of real estate investment
and finance, Mr. Shidler has over 25 years of experience in real estate
investment and has been directly involved in the acquisition and management of
over 1,000 properties in 40 states and Canada totaling over $4 billion in
aggregate value. Mr. Shidler is a founder and current Chairman of the Board of
Directors of First Industrial Realty Trust, Inc. (NYSE: FR) and is a founder and
former director and Co-Chairman of TriNet Corporate Realty Trust, Inc. (NYSE:
TRI). Mr. Shidler is also founder and Chairman of the Board of Directors of CGA
Group, Ltd., a holding company whose subsidiary is a AAA rated financial
guarantor based in Bermuda.
Mr. Shidler serves on the boards of directors of several companies and is
active as a trustee of several charitable organizations, including The Shidler
Family Foundation. Mr. Shidler holds a bachelor's degree in Business
Administration from the University of Hawaii.
Clay W. Hamlin, III is a Trustee and President and Chief Executive Officer
of the Company. Mr. Hamlin was appointed director and President and Chief
Executive Officer of the Company upon the closing of the Transactions. Mr.
Hamlin joined The Shidler Group in May 1989, as Managing Partner of The Shidler
Group's Mid-Atlantic regional office and acquired, managed and leased over four
million square feet of commercial property with a value in excess of $300
million. A resident of Philadelphia for over 30 years, Mr. Hamlin has been
active in the real estate business for 25 years. Mr. Hamlin is an attorney, a
CPA and holds an MBA from The Wharton School of Business and an undergraduate
degree from the University of Pennsylvania. Mr. Hamlin served as a Lieutenant
J.G. in the U.S. Navy, and is active in many professional and charitable
organizations. Mr. Hamlin is a founding shareholder of both TriNet Corporate
Realty Trust, Inc. and First Industrial Realty Trust, Inc. His professional
26
<PAGE>
affiliations include the Urban Land Institute, NAREIT, the American Institute
of CPAs and the American Bar Association.
Vernon R. Beck is Vice Chairman of the Board of Trustees and is a Vice
President of the Company. Mr. Beck was elected a director of the Company in
January 1990. From 1988 to 1997, Mr. Beck served as President of the Company and
as President of Crown Advisors, Inc., the Company's former external advisors.
Since 1976, Mr. Beck has also been President of Vernon Beck & Associates, Inc.,
a commercial mortgage banking and real estate development firm, which has
developed and financed numerous commercial real estate projects. Mr. Beck is a
former commercial loan officer with IDS Mortgage Corporation and senior analyst
with Northwestern National Life Insurance Company. Mr. Beck, together with John
Parsinen, owns substantially all of the interests in Glacier Realty LLC.
Kenneth D. Wethe is a Trustee of the Company. Mr. Wethe was elected a
director of the Company in January 1990. Since 1990, Mr. Wethe has been the
owner and principal officer of Wethe & Associates, a Dallas-based firm providing
independent risk management, insurance and employee benefit services to school
districts and governmental agencies. Mr. Wethe's background includes over 26
years experience in the group insurance and employee benefits area. He is a
certified public accountant and holds an MBA from Pepperdine University.
Allen C. Gehrke is a Trustee of the Company. Mr. Gehrke was elected a
director of the Company in May 1995. Prior to becoming a private investor in
1995, Mr. Gehrke served for 35 years in various key positions at Fleming
Companies, Inc. As Senior Vice President of Corporate Development, Mr. Gehrke's
responsibilities included management of company physical assets, market
research, lease negotiations and real estate financing. Prior to his employment
with Fleming Companies, Mr. Gehrke spent seven years with Midwest Contractors
and L.A. Construction Co. of Milwaukee. Mr. Gehrke is a former director of
United Cerebral Palsy and several other community organizations.
William H. Walton is a Trustee of the Company. Mr. Walton was appointed a
director of the Company upon the closing of the Transactions. Mr. Walton is a
Managing Principal of Westbrook Partners, L.L.C. ("Westbrook") which he
co-founded in April of 1994. With offices in Dallas, New York, San Francisco and
Florida, Westbrook is a fully integrated real estate investment management
company. Westbrook is the sponsor of Westbrook Real Estate Fund and Westbrook
Real Estate Fund II, which together control approximately $4 billion of real
estate assets including investments in: real estate companies and securities;
offices, retail and industrial properties; apartments; hotels; and residential
developments. Prior to co-founding Westbrook, Mr. Walton was a Managing Director
of Morgan Stanley Realty. Mr. Walton holds an AB from Princeton University and
an MBA from Harvard Business School.
Kenneth S. Sweet, Jr. is a Trustee of the Company. Mr. Sweet was appointed a
director of the Company upon the closing of the Transactions. Mr. Sweet is the
Managing Director of Gordon Stuart Associates, Inc., which he founded in 1991.
In 1971, Mr. Sweet founded K.S. Sweet Associates which specialized in real
estate and venture capital investments. From 1957 to 1971, he served in
increasingly responsible positions at The Fidelity Mutual Life Insurance
Company. Currently the Managing General Partner of fifteen venture capital and
real estate partnership with assets of over $300 million, Mr. Sweet has over 37
years of experience in real estate investment, management, development and
venture capital transactions.
27
<PAGE>
Mr. Sweet is active in community affairs and serves as a director, chairman
of the real estate committee and a member of the finance committee of the Main
Line Health and the Philadelphia Chapter of the Nature Conservancy and is on the
Advisory Committee of the Arthur Ashe Youth Tennis Center. Mr. Sweet holds a BA
degree from the Lafayette College and attended The Wharton School of Business.
Antony P. Bernheim became Vice President, Chief Investment Officer, of
the Company in November 1997. Prior to joining the Company, Mr. Bernheim
served as Director of Acquisitions for Cali Realty Corp. from September 1994
to May 1997. As Cali's Director of Acquisitions, Mr. Bernheim oversaw the
acquisition program which transformed Cali from a $300 million company with
12 buildings to a 130 building, $2.5 billion company. Prior to his employment
with Cali, Mr. Bernheim had 13 years experience in the real estate industry,
including three years with Oppenheimer & Company from February 1991 to
September 1994. Mr. Bernheim studied international finance at the University
of Southern California.
Thomas D. Cassel has been Vice President, Finance and Treasurer of the
Company since October 1997. Mr. Cassel has over 18 years experience in real
estate accounting, finance, acquisitions and management. From 1995 until he
joined the Company, Mr. Cassel was Vice President and Chief Financial Officer of
Delancey Investment Group, Inc., a Philadelphia-based real estate investment and
management company of commercial and residential properties. Prior to Delancey,
he was a real estate consulting manager for Arthur Andersen, LLP for four years
and Kenneth Leventhal & Co. for two years. As a consultant, he performed
strategic planning, capital markets, valuation and acquisition analyses for a
variety of real estate companies, including REITs. Mr. Cassel is a CPA and
received his bachelor's degree in Finance with a major in Accounting from the
Wharton School at the University of Pennsylvania. He is active in several
professional and charitable organizations.
David P. Hartsfield has been Vice President, Operations and Development of
the Company since October 1997. He joined The Shidler Group in November 1994, as
Vice President with responsibility for management, leasing and development for
The Shidler Group's Mid-Atlantic region. Prior to joining The Shidler Group, he
served as Vice President, Development for the Kevin F. Donohoe Companies, where
he was responsible for the development and management of office, hotel and
retail properties, including the 1.1 million square foot Curtis Center in
Philadelphia. Mr. Hartsfield has over 20 years of experience with commercial
real estate management, leasing and development. He has a degree in architecture
and an MBA from The University of Virginia and is a member of BOMA and other
professional organizations.
John D. Parsinen has been Secretary of the Company since January 1990. Mr.
Parsinen has over 31 years of experience in commercial real estate. Mr. Parsinen
has developed and owns various real estate projects. Mr. Parsinen has been a
senior attorney at Parsinen Kaplan Levy Rosberg & Gotlieb, P.A. (Minneapolis,
Minnesota) since it was formed in 1982. Mr. Parsinen owns 50% of Guaranty Title,
Inc. a Minneapolis-based real estate title insurance company. Mr. Parsinen was a
general partner of Earle Brown Commons Limited Partnership II, which owned and
operated an elderly housing facility in Brooklyn Center, MN. In 1994, the
limited partnership initiated a Chapter 11 bankruptcy reorganization proceeding
to restructure certain tax and debt obligations. The bankruptcy was dismissed in
1995 and the project was sold. Mr. Parsinen, together with Vernon Beck, owns
substantially all of the interests in Glacier Realty LLC.
28
<PAGE>
James K. Davis, Jr. has been Vice President, Acquisitions of the Company
since October 1997. He joined The Shidler Group in July 1994, as Vice President
with responsibility for acquisitions, financing, and leasing for The Shidler
Group's Mid-Atlantic region. Prior to joining The Shidler Group, Mr. Davis, was
Vice President, Acquisitions for Sandler Securities, Inc. He has 13 years of
real estate experience in acquisitions, financing, development and leasing. Mr.
Davis has an MBA from The Wharton School with a major in finance and an
undergraduate degree from The University of North Carolina. He is active in
several professional and charitable organizations.
Denise J. Liszewski has been Vice President, Administration of the Company
and Assistant Secretary since October l997. She joined The Shidler Group in May
1989 serving in a number of capacities, where she was in charge of personnel,
administration and information systems. Ms. Liszewski has over 20 years of
business experience and has an undergraduate degree from Drexel University.
Stephen S. Fera has been Controller of the Company since December 1997.
Prior to joining the Company, he spent seven years at Pennsylvania Real Estate
Investment Trust ("PREIT"), where he was promoted to the position of Controller.
At PREIT, he was responsible for managing the day-to-day accounting operations
of the REIT including all wholly-owned and joint venture properties. Prior to
PREIT, Mr. Fera was Assistant Controller at Calvanese Corporation, where he was
responsible for all corporate and construction accounting.
CERTAIN INFORMATION REGARDING THE BOARD OF TRUSTEES AND COMMITTEES
THE BOARD OF TRUSTEES. The business and affairs of the Company are
managed under the direction of the Board of Trustees. Pursuant to the terms
of the Declaration of Trust, the Trustees are divided into three classes.
Class I will hold office for a term expiring at the annual meeting of
shareholders to be held in 1999, Class II will hold office for a term
expiring at the annual meeting of shareholders to be held in 2000, and Class
III will hold office for a term expiring at the annual meeting of
shareholders to be held in 2001. At each annual meeting of the shareholders
of the Company, the successors to the class of Trustees whose terms expire at
the meeting will be elected to hold office for a term continuing until the
annual meeting of shareholders held in the third year following the year of
their election and the election and qualification of their successors.
COMMITTEES. The Company has a standing Audit Committee, which currently
consists of Mr. Wethe (Chairman), Mr. Gehrke and Mr. Shidler, and a Compensation
Committee, which currently consists of Mr. Sweet and Mr. Walton. The Audit
Committee reviews, recommends and reports to the Board of Trustees on (1) the
engagement of independent auditors and range of audit fees, (2) the quality and
effectiveness of internal controls, (3) engagement or discharge of the
independent auditors, (4) professional services provided by the independent
auditors and (5) the review and approval of major changes in the Trust's
accounting principles and practices. The Compensation Committee determines all
executive compensation, administers stock option plans and other incentive plans
and approves employment contracts.
The Board of Trustees presently acts as its own Nominating Committee.
29
<PAGE>
COMPENSATION OF TRUSTEES. Independent Trustees (Messrs. Gehrke, Sweet,
Walton and Wethe) will receive an annual fee of $15,000. Trustees incurring
travel expenses in connection with their duties as trustees of the Company are
reimbursed in full. Each Trustee is eligible to participate in the Incentive
Plan. The Compensation Committee intends to grant to each Trustee who is not an
employee of the Trust, upon initial election or appointment, an option to
purchase 5,000 Common Shares, at the then fair market value of the Common Shares
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, Trustees and persons who own more than 10% of the Stock
to file reports of ownership and changes in ownership with the Securities
Exchange Commission and the NASDAQ Small CAP. Officers, Trustees and greater
than 10% stockholders are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company,
or written representation that no Annual Statements of Beneficial Ownership of
Securities on Form 5 were required, the Company believes that during the fiscal
year ended December 31, 1997, all Section 16(a) filing requirements applicable
to its officers, Trustees and greater than 10% Stockholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Upon completion of the Transactions on October 14, 1997, the Company
converted from an externally advised to a self-administered REIT. Prior to
October 14, 1997, no individual officer of the Company was paid any cash or
other compensation. The following table sets forth the compensation paid from
October 14, 1997 to December 31, 1997 and current base annual compensation
for each of the five most highly compensated officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------
<S> <C> <C> <C>
1997 BASE
ACTUAL ACTUAL
NAME PRINCIPAL POSITION SALARY SALARY
- ----------------------------------------- ----------------------------------------- ------------ ------------
Clay W. Hamlin, III...................... President, Chief Executive Officer $ 18,000 $ 90,000
Antony Bernheim.......................... Vice President, Chief Investment Officer -- 125,000
Thomas D. Cassel......................... Vice President, Finance and Treasurer 22,038 90,000
Vice President, Operations and
David P. Hartsfield...................... Development 16,000 80,000
James K. Davis, Jr....................... Vice President, Acquisitions 13,000 65,000
</TABLE>
30
<PAGE>
Options Grants in Fiscal Year 1997
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
COMMON OF ASSUMED ANNUAL RATE
SHARES PERCENT OF EXERCISE OF COMMON PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS PRICE PER FOR OPTION TERM (2)
OPTIONS GRANTED IN COMMON EXPIRATION ----------------------------
NAME GRANTED (1) FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------ ------------- --------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Clay W. Hamlin, III................. 2,500 14.3% $ 7.59 10/14/2007 $ 11,933 $ 30,241
- ------------------------
</TABLE>
(1) All options are granted at the fair market value of the Common Shares at the
date of grant. Options granted are for a term of ten years from the date of
grant and vest one year after the date of grant.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), these amounts are the hypothetical gains or "option spreads"
that would exist for the options based on assumed rates of annual compound
share price appreciation of 5% and 10% from the date the options are granted
over the full option term. No gain to the optionee is possible without an
increase in the market price of the Common Shares, which would benefit all
shareholders.
Other than as set forth above, none of the other officers received options
in connection with their service to the Company during the year ended December
31, 1997. In addition, none of these officers contributed to any 401(k) plan.
In addition to cash compensation in the form of base annual salary, the
Company anticipates that it will have a cash bonus incentive plan pursuant to
which cash bonuses may be awarded to executive officers and other key employees
based on attainment of specified personal and corporate objectives. It is
anticipated that the amounts of such bonuses will be determined by the Board of
Trustees based upon a recommendation of the Compensation Committee.
EMPLOYMENT AGREEMENTS
Mr. Hamlin has entered into an employment agreement with the Company. The
agreement is for a continuous and self-renewing term of two years unless
terminated by either party. The agreement provides for base annual compensation
in the amount set forth above and incentive compensation to be determined by the
Board of Trustees, upon a recommendation of the Compensation Committee. The base
annual compensation may be increased in subsequent years by action of the
Compensation Committee. The employment agreement provides for certain severance
payments in the event of disability or termination by the Company without cause
or by Mr. Hamlin based upon constructive termination. The agreement also
provides for certain payments to be made to Mr. Hamlin in the event of a Change
in Control (as defined in the agreement). Mr. Hamlin is required under the terms
of his employment agreement to devote his full business time to the affairs of
the Company. The agreement also prohibits Mr. Hamlin from engaging, directly or
indirectly, during the term of his employment and for a period thereafter, in
activities that compete with those of the Company.
Mr. Cassel has entered into an employment agreement with the Company. The
agreement is for a term of three years unless terminated by either party. The
agreement provides for base annual compensation in the amount set forth above
and incentive compensation to be determined by the Board of Trustees, upon a
recommendation of the Compensation Committee. The base annual compensation may
be increased in subsequent years by action of the Compensation Committee. The
employment agreement provides for certain severance payments in the event of
disability or termination by the Company without cause or by Mr. Cassel based
upon constructive termination. The agreement
31
<PAGE>
also provides for certain payments to be made to Mr. Cassel in the event of a
Change in Control (as defined in the agreement). Mr. Cassel is required under
the terms of his employment agreement to devote his full business time to the
affairs of the Company. The agreement also prohibits Mr. Cassel from
engaging, directly or indirectly, during the term of his employment and for a
period thereafter, in activities that compete with those of the Company.
THE PLANS
THE OPTION PLAN. Since 1993, the Company has maintained the Option Plan.
A total of 75,000 shares of Common Stock were reserved for issuance under the
Option Plan. Each director of the Company was eligible to participate in the
Option Plan. The Option Plan provided that each director received, upon
initial election or appointment, an option to purchase 2,500 shares of Common
Stock at the then fair market value of the Common Stock. The Option Plan also
provided for the grant of an option to purchase an additional 2,500 shares of
the Common Stock upon each director's re-election to the Board of Directors
of the Company. The options become exercisable in full one year after date of
grant and expire ten years from the date of grant. Options representing
75,000 shares of Common Stock have been granted under the Option Plan, with
options representing 70,000 Common Shares remaining unexercised as of March
20, 1998. The Company does not intend to issue any more options under the
Option Plan.
THE INCENTIVE PLAN. In connection with the Company Reformation, the Board
of Trustees adopted, and the shareholders of the Company approved, the 1998 Long
Term Incentive Plan for the purpose of attracting, retaining and motivating
employees and trustees of the Company. The Incentive Plan authorizes the
issuance of up to ten percent of the Common Shares outstanding from time to
time, subject to adjustment on the event of certain recapitalization or
reorganization transactions. The Incentive Plan is administered by the
Compensation Committee of the Board of Trustees or, with respect to certain
matters, its delegate. As used in this summary, the term "Administrator" means
the Compensation Committee or its delegate, as appropriate. Trustees, and
employees of the Company, the Operating Partnership and other subsidiaries of
the Company, and designated affiliates of the Company will be eligible for
selection by the Administrator to participate in the Incentive Plan. The maximum
number of Common Shares with respect to which options may be granted during a
calendar year to any participant under the Incentive Plan will be 200,000 Common
Shares, subject to adjustment for certain recapitalization or reorganization
transactions. No awards may be granted under the Incentive Plan after March
2008.
The Incentive Plan provides for the grant of (i) share options intended to
qualify as incentive stock options under Section 422 of the Code, (ii) share
options not intended to qualify as incentive stock options under Section 422 of
the Code ("nonqualified stock options") and (iii) Dividend Equivalents (as
defined in the Incentive Plan) which may be granted alone or in conjunction with
share options (each an "Award"). The Administrator determines the type and
number of Awards granted, the terms and conditions of any Award and may adopt,
amend, waive and rescind the rules and regulations necessary to administer the
Incentive Plan, among other things. In connection with the grant of options
under the Incentive Plan, the Administrator will determine the option exercise
price, the term of the option and the time and method of exercising.
An option granted under the Incentive Plan may be exercised for any number
of whole Common Shares less than the full number of Common Shares for which the
option could be exercised. Unless otherwise agreed by the Administrator, Awards
will not be transferable except by will or the laws of descent and distribution.
A holder of an option will have no rights as a shareholder with
32
<PAGE>
respect to Common Shares subject to his or her option until the option is
exercised. Any Common Shares subject to options which are forfeited (or
expire without exercise) pursuant to the vesting requirement or other terms
established at the time of grant will again be available for grant under the
Incentive Plan. Payment of the exercise price of an option granted under the
Incentive Plan may be made in cash, or, if permitted by the Administrator, by
exchanging Common Shares having a fair market value equal to the option
exercise price. Unless otherwise provided by the Administrator, all
outstanding Awards will become fully exercisable upon a Change of Control.
Options to purchase an aggregate of 20,000 Common Shares were granted to the
independent Trustees on March 12, 1998 at a purchase price of $12.25 (options to
purchase 5,000 Common Shares granted to each of Messrs. Gehrke, Sweet, Walton
and Wethe) which vest one year after the date of grant. Options to purchase
25,000 Common Shares were granted to Mr. Cassel on March 12, 1998 at a purchase
price of $12.25 which vest proratably over three years following the date of
grant. These options expire ten years after their date of grant.
33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of March 20, 1998,
regarding the beneficial ownership of the Common Stock by (i) each person known
by the Company to own beneficially more than 5% of the Common Stock, (ii) each
current director and executive officer of the Company and (iii) the current
directors and executive officers as a group, and as to the percentage of the
outstanding shares held by them on such date. Any shares which are subject to an
option or a warrant exercisable within 60 days are reflected in the following
table and are deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Stock owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
OWNED (1) OF CLASS
----------- -----------
<S> <C> <C>
Clay W. Hamlin, III............................... 300,000 13.21%
Jay H. Shidler.................................... 300,000 13.21%
Vernon R. Beck.................................... 151,793(2) 6.65%
John Parsinen..................................... 151,965(1)(3) 6.66%
Allen C. Gehrke................................... 7,750(4) *
Kenneth S. Sweet, Jr.............................. 10,000(1) *
William H Walton.................................. -- 0.00%
Kenneth D. Wethe.................................. 12,724(2) *
Antony P. Bernheim................................ 7,500 *
Thomas D. Cassel.................................. 660(1) *
All Directors and Executive Officers.............. 942,392(5) 40.73%
as a Group (10 persons)
</TABLE>
- ------------------------
* Represents less than one percent.
(1) Shares Beneficially Owned by a person are determined in accordance with the
definition of "beneficial ownership" as set forth in the regulations of the
Commission and, accordingly, may include securities owned by or for, among
others, the spouse, children or certain other relatives of such person, as
well as other shares as to which the person has or shares voting or
investment power or has the option or right to acquire Common Stock within
60 days.
(2) Includes 12,500 shares of Common Stock issuable upon exercise of presently
exercisable options.
(3) Includes 10,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(4) Includes 7,500 shares of Common Stock issuable upon exercise of presently
exercisable options.
(5) Includes 42,500 shares of Common Stock issuable upon exercise of presently
exercisable options.
34
<PAGE>
THE OPERATING PARTNERSHIP
The following table sets forth certain information as of December 31, 1997
regarding the ownership of Partnership Units and Preferred Units (before giving
effect to any contribution of Retained Interests):
<TABLE>
<CAPTION>
COMMON PERCENTAGE PREFERRED
UNITS INTEREST UNITS
---------- ----------- ----------
<S> <C> <C> <C>
General Partner
- ---------------
The Company............................................................... 600,000 20.6946%
Limited Partners and Preferred Limited Partners
- -----------------------------------------------
Mr. Shidler............................................................... 2,600 0.0897% 126,079
Shidler Equities, L.P. (1)................................................ 582,103 20.0773% 457,826
Mr. Hamlin................................................................ 5,235 0.1805% 115,334
LBCW Limited Partnership (2).............................................. 875,284 30.1894% 663,808
CHLB Partnership (2)...................................................... 63,243 2.1813% 41,741
Robert L. Denton.......................................................... 129,549 4.4683% 85,502
James K. Davis............................................................ 15,368 0.5300% 10,142
John E. de B. Blockey, Trustee of the John E. de B.
Blockey Living Trust dated 9/12/88...................................... 89,549 3.0886% 59,102
Henry D. Bullock.......................................................... 34,718 1.1975% 22,914
Frederick K. Ito.......................................................... 17,359 0.5987% 11,457
LGR Investment Fund, Ltd.................................................. 80,030 2.7603% 52,820
Tiger South Brunswick, L.L.C.............................................. 2,875 0.0992% 1,898
Westbrook Real Estate Fund L.L.P.......................................... 336,121 11.5931% 221,840
Westbrook Real Estate Co. Investment Partnership L.L.P.................... 33,299 1.1485% 21,977
Denise J. Liszewski....................................................... 10,227 0.3527% 6,750
Samuel Tang............................................................... 6,818 0.2352% 4,500
David P. Hartsfield....................................................... 9,091 0.3136% 6,000
Lawrence J. Taff.......................................................... 4,091 0.1411% 2,700
Kimberly F. Aquino........................................................ 1,750 0.0604% 1,155
---------- ----------- ----------
2,899,310 100.0000% 1,913,545
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
- ------------------------
(1) A limited partnership controlled by Jay H. Shidler and his wife, Wallette
Shidler.
(2) A family partnership controlled by Mr. Hamlin and his wife, Lynn B. Hamlin,
as the sole general partners.
REGISTRATION RIGHTS
The Company has granted to the holders of the Partnership Units and the
Preferred Units certain registration rights. No later than August 1, 1998, the
Company is obligated to file a shelf registration statement with respect to the
shares of Common Stock issuable upon conversion or redemption of the Units (the
"Registerable Securities"). The Company is also required, at the demand of
holders of 6% or more of the Registerable Securities, to register such holders'
Registerable Securities, subject to the right to defer the filing of the
necessary registration statement for a period not to exceed 90 days under
certain limited circumstances. This right to demand registration may be
exercised not more than three times. In addition, the Company has granted to
holders of Registerable Securities certain "piggy-back" rights. The Company has
agreed to indemnify the holders of Registerable Securities against certain
liabilities, including liabilities under the Securities Act. The Company will
pay all fees associated with these registrations, other than underwriting
discounts and commissions. In connection
35
<PAGE>
with the Reformation, the Trust will assume these obligations with respect to
registering Common Shares issuable upon conversion or redemption of the Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Options to purchase an aggregate of 17,500 shares of Common Stock were
granted to the Trustees in the year ended December 31, 1997 under the Option
Plan at a purchase price of $7.59 (options to purchase 2,500 Common Shares
granted to each of Messrs. Hamlin, Shidler, Sweet and Walton in October 1997)
and $5.25 (options to purchase 2,500 Common Shares granted to each of Messrs.
Beck, Gehrke and Wethe in May 1997). These options expire ten years after their
issue date.
Subject to the supervision of the Company's Board of Directors, prior to
October 14, 1997 the business of the Company was managed by Crown, which
provided investment advisory and administrative services to the Company pursuant
to the Advisory Agreement. Crown was owned by John Parsinen and Vernon R. Beck,
then officers and directors of the Company and currently Secretary and Vice
President and Vice Chairman of the Board of Trustees, respectively. Under the
Advisory Agreement, the Company paid Crown certain attorney fees, expenses and
performance fees, as defined in the Advisory Agreement, and a 3% fee for each
real estate acquisition or disposition.
Concurrently with the closing of the Transactions and pursuant to the
Formation Agreement, the Advisory Agreement was terminated and the Company
entered into the Management Agreement with Glacier. Substantially all of the
interests in Glacier are owned by Vernon R. Beck and John Parsinen. Under the
Management Agreement, Glacier is responsible for the management of the Retail
Properties of the Company, subject to the approval and direction of the Board of
Trustees. The Management Agreement provides that Glacier will receive an annual
fee of $250,000 plus a percentage of Average Invested Assets (as defined in the
Management Agreement) and will pay third party expenses associated with owning
the Retail Properties. In addition, Glacier will receive a fee of 1% of the
purchase price or the sale price upon the acquisition or disposition by the
Company or any of its affiliates of any net-leased real estate assets. Under the
Management Agreement, this percentage is increased to 3% in the event that all
or substantially all of the net-leased real estate properties are disposed of.
The Management Agreement has a term of five years and is terminable thereafter
on 180 days prior written notice. In the event the Management Agreement is
terminated, including for non-renewal, a fee equal to 3% of the Invested Real
Estate Assets (defined in the Management Agreement to exclude the Company's
current net-leased real estate assets) would be due to Glacier. Crown and
Glacier received combined fees of $250,288 pursuant to the Advisory Agreement
and the Management Agreement in the year ended December 31, 1997.
Parsinen Kaplan Levy Rosberg & Gotlieb, P.A. performed legal services for
the Company. The Company incurred legal fees to them of approximately $69,000 in
the year ended December 31, 1997. John Parsinen, Secretary of the Company, is an
officer, director and shareholder of Parsinen Kaplan Levy Rosberg & Gotlieb,
P.A.
An officer and director of the Company is the director of a company that
received management fees of approximately $22,000 in the year ended December 31,
1997. This fee was paid for property services. The Company believes that this
fee represented a payment for services not in excess of their fair market value.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
The following documents are filed as part of this Form 10-K:
(a)
1. Financial Statements. Audited balance sheets as of December 31, 1997
and 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997 are filed as part of this Form
10-K. See Index to Financial Statements on Page F-1.
(b) The Company filed the following Current Reports on Form 8-K in the
last quarter of the year ended December 31,1997.
1. Acquisition of the Shidler Acquisition Properties dated October 29,
1997 and amended December 24, 1997
2. Change of Auditors from Lurie, Besikof, Lapidus & Co., to Coopers &
Lybrand, L.L.P. dated November 6, 1997
(c) Exhibits. Refer to the Exhibit Index that follows.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 31, 1998, among the Registrant, the Maryland Company
and the Company (filed with the Trust's Registration Statement on Form S-4 (Commission File No.
333-45649) and incorporated herein by reference).
2.2 Formation/Contribution Agreement dated September 7, 1997, as amended, by and among the Company and
certain subsidiary corporations and partnerships regarding the Transactions (filed with the Company's
Current Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization between the Company and Crown Advisors, Inc. (filed with the
Company's Current Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
2.4 Limited Partnership Agreement of the Operating Partnership dated October 14, 1997 (filed with the
Company's Current Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
2.5 Amended and Restated Partnership Agreement of Blue Bell Investment Company, L.P. (filed with the
Company's Current Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
37
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
2.6 Amended and Restated Partnership Agreement of South Brunswick Investors, L.P. (filed with the Company's
Current Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
2.7 Amended and Restated Partnership Agreement of ComCourt Investors, L.P. (filed with the Company's Current
Report on Form 8-K on October 29, 1997 and incorporated herein by reference).
2.8 Amended and Restated Partnership Agreement of 6385 Flank, L.P. (filed with the Company's Current Report
on Form 8-K on October 29, 1997 and incorporated herein by reference).
3.1 Amended and Restated Declaration of Trust of Registrant (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference).
3.2 Bylaws of Registrant (filed with the Registrant's Registration Statement on Form S-4 (Commission File No.
333-45649) and incorporated herein by reference).
4.1 Form of certificate for the Registrant's Common Shares of Beneficial Interest, $0.01 par value per share
(filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
10.1 Clay W. Hamlin, III Employment Agreement dated October 14, 1997 with the Operating Partnership (filed with
the Company's Current Report on Form 8-K on October 29, 1997, and incorporated herein by reference).
10.2 Registration Rights Agreement dated October 14, 1997, as amended, for the benefit of certain
shareholders of the Registrant (filed with the Company's Current Report on Form 8-K on October 29, 1997,
and incorporated herein by reference).
10.3 Management Agreement between Registrant and Glacier Realty, LLC (filed with the Company's Current Report
on Form 8-K on October 29, 1997, and incorporated herein by reference).
10.4 Senior Secured Credit Agreement dated October 13, 1997 (filed with the Company's Current Report on Form
8-K on October 29, 1997, and incorporated herein by reference).
10.5 Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference).
10.6 Stock Option Plan for Directors (filed with Royale Investments, Inc.'s Form 10-KSB for the year ended
December 31, 1993 (Commission File No. 0-20047) and incorporated herein by reference).
38
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
10.7 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation dated March 12, 1997
with respect to lot A (filed with the Registrant's Registration Statement on Form S-4 (Commission File
No. 333-45649) and incorporated herein by reference).
10.8 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation dated March 12, 1997
with respect to lot B (filed with the Registrant's Registration Statement on Form S-4 (Commission File
No. 333-45649) and incorporated herein by reference).
10.9 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation dated March 12, 1997
with respect to lot C (filed with the Registrant's Registration Statement on Form S-4 (Commission File
No. 333-45649) and incorporated herein by reference).
10.11 Amended and Restated Lease between South Brunswick Investors L.P. and International Business Machines
Corporation dated August 11, 1995, as amended (filed with the Registrant's Registration Statement on Form
S-4 (Commission File No. 333-45649) and incorporated herein by reference).
10.12 Agreement of Lease between South Brunswick Investors L.P. and Teleport Communications Group, Inc. dated
February 20, 1996, as amended (filed with the Registrant's Registration Statement on Form S-4 (Commission
File No. 333-45649) and incorporated herein by reference).
10.13 Agreement of Lease between South Brunswick Investors L.P. and Teleport Communications Group, Inc. dated
August 19, 1996 (filed with the Registrant's Registration Statement on Form S-4 (Commission File No.
333-45649) and incorporated herein by reference).
10.14 Thomas D. Cassel Employment Agreement dated as of October 20, 1997 with the Operating Partnership.
16.1 Letter to the Commission from Lurie, Besikof, Lapidus & Co., LLP dated November 4, 1997 (filed with
Company's Current Report on Form 8-K on November 6, 1997, and incorporated herein by reference).
21.1 Subsidiaries of Registrant.
24.1 Powers of attorney (included on signature page to the Registration Statement).
39
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
26.1 Published report regarding name change of Registrant filed as proxy materials on Form 14A on
December 4, 1997.
27.1 Financial Data Schedule
</TABLE>
40
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
HISTORICAL
Report of Independent Accountants......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................ F-4
Consolidated Statements of Stockholders Equity for the years ended December 31, 1995, 1996 and 1997....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
SCHEDULE III
Report of Independent Accountants......................................................................... F-17
Real Estate and Accumulated Depreciation as of December 31, 1997.......................................... F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
Corporate Office Properties Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Corporate
Office Properties Trust, Inc. (the "Company") as of December 31, 1996 and 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows of the Company for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Corporate
Office Properties Trust, Inc. as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1998
F-2
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
ASSETS
Assets
Land...................................................................................... $ 5,428 $ 38,764
Buildings and improvements................................................................ 19,599 152,945
Furniture, fixtures and equipment......................................................... -- 140
Less accumulated depreciation............................................................. (1,957) (3,224)
---------- ----------
Net investment in real estate.......................................................... 23,070 188,625
Cash and cash equivalents................................................................. 258 3,395
Marketable securities..................................................................... 479 --
Tenant accounts receivable................................................................ 16 78
Deferred rent receivable.................................................................. 184 479
Deferred financing costs, net............................................................. 185 857
Prepaid and other assets, net............................................................. 5 100
---------- ----------
Total assets........................................................................... $ 24,197 $ 193,534
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans payable.................................................................... $ 14,658 $ 114,375
Accounts payable and accrued expenses..................................................... 190 932
Rents received in advance and security deposits........................................... -- 425
Dividends/distributions payable........................................................... 178 1,276
---------- ----------
Total liabilities...................................................................... 15,026 117,008
---------- ----------
Minority interests:
Preferred Units........................................................................... -- 52,500
Partnership Units......................................................................... -- 12,362
---------- ----------
Total minority interests............................................................... -- 64,862
---------- ----------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock ($.01 par value; 50,000,000 authorized, 1,420,000 and
2,266,083 shares, issued and outstanding at December 31, 1996 and 1997,
respectively)............................................................................ 14 23
Additional paid-in capital................................................................. 12,353 16,620
Accumulated deficit........................................................................ (3,196) (4,979)
---------- ----------
Total stockholders' equity............................................................... 9,171 11,664
---------- ----------
Total liabilities and stockholders' equity............................................... $ 24,197 $ 193,534
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Rental income...................................................................... $ 2,436 $ 2,477 $ 6,122
Tenant recoveries and other income................................................. 48 32 496
--------- --------- ---------
Total revenues................................................................. 2,484 2,509 6,618
--------- --------- ---------
Expenses
Property operating................................................................. 42 31 728
General and administrative......................................................... 336 372 533
Interest expense................................................................... 1,267 1,246 2,855
Amortization of deferred financing costs........................................... 13 13 64
Depreciation....................................................................... 554 554 1,267
Termination of Advisory Agreement.................................................. -- -- 1,353
--------- --------- ---------
Total expenses................................................................. 2,212 2,216 6,800
--------- --------- ---------
Income (loss) before minority interests.............................................. 272 293 (182)
Minority interests
Preferred Units.................................................................... -- -- (720)
Partnership Units.................................................................. -- -- (65)
--------- --------- ---------
Net income (loss).................................................................... $ 272 $ 293 $ (967)
--------- --------- ---------
Basic and diluted earnings (loss) per share.......................................... $ 0.19 $ 0.21 $ (0.60)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994...................................... $ 14 $ 12,353 $ (2,341) $ 10,026
Net income...................................................... -- -- 272 272
Dividends....................................................... -- -- (710) (710)
----------- ----------- ------------ ---------
Balance at December 31, 1995...................................... 14 12,353 (2,779) 9,588
Net income...................................................... -- -- 293 293
Dividends....................................................... -- -- (710) (710)
----------- ----------- ------------ ---------
Balance at December 31, 1996...................................... 14 12,353 (3,196) 9,171
Issuance of common stock
for property acquisition and
advisory agreement termination................................ 9 4,267 4,276
Net loss........................................................ -- -- (967) (967)
Dividends....................................................... (816) (816)
----------- ----------- ------------ ---------
Balance at December 31, 1997...................................... $ 23 $ 16,620 $ (4,979) $ 11,664
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CORPORATE OFFICE PROPERTIES TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................... $ 272 $ 293 $ (967)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Minority interests................................................................ -- -- 785
Depreciation...................................................................... 554 554 1,267
Amortization of deferred financing costs.......................................... 13 13 64
Advisory contract termination cost................................................ -- -- 1,353
Other amortization................................................................ (29) (26) --
Increase in deferred rent receivable.............................................. (67) (67) (295)
Decrease (increase) in other assets............................................... 2 (19) (158)
(Decrease) increase in accounts payable, accrued expenses,
rents received in advance and security deposits.................................. (67) 92 1,167
--------- --------- ---------
Net cash provided by operating activities........................................ 678 840 3,216
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of marketable securities...................................... 130 1,126 1,854
Purchase of marketable securities.................................................... (681) (999) (1,375)
Purchase of land and buildings....................................................... -- -- (506)
Cash proceeds received from acquisition of properties................................ -- -- 1,000
--------- --------- ---------
Net cash (used in) provided by investing activities.............................. (551) 127 973
--------- --------- ---------
Cash flows from financing activities:
Costs attributable to Common Stock issued............................................ -- -- (59)
Dividends paid....................................................................... (834) (710) (710)
Repayments of mortgage loans payable................................................. (237) (257) (283)
Refund of mortgage costs............................................................. 71 -- --
--------- --------- ---------
Net cash used in financing activities............................................ (1,000) (967) (1,052)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents................................... (873) -- 3,137
Cash and cash equivalents
Beginning of year.................................................................... 1,131 258 258
--------- --------- ---------
End of year.......................................................................... $ 258 $ 258 $ 3,395
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. ORGANIZATION AND FORMATION OF COMPANY
Corporate Office Properties Trust, Inc. (formerly Royale Investments, Inc.)
(the "Company") is a self-administered REIT which focuses on the ownership,
acquisition and management of suburban office buildings. The Company was formed
in 1988 as a Minnesota corporation. The Company has qualified as a real estate
investment trust ("REIT") as defined in the Internal Revenue Code (the "Code").
During the three years ended December 31, 1997, the Company directly owned seven
net leased retail properties.
On October 14, 1997, the Company acquired (Note 4) a portfolio of 10
properties, representing the Mid-Atlantic suburban office operations of The
Shidler Group, a national real estate investment firm (the "Office Properties").
As result of the acquisition, the Company became the sole general partner of and
obtained a 20.6946% interest in the Common Units ("Partnership Units") of
Corporate Office Properties, L.P. (formerly FCO, L.P.) (the "Operating
Partnership"), a partnership formed to acquire and hold partnership interests in
partnerships which own the Office Properties (the "Properties Partnerships").
The General Partner of the Properties Partnerships is Corporate Office
Properties Holdings, Inc. (formerly FCO Holdings, Inc.) ("COP Holdings"), a
wholly owned subsidiary of the Company. In addition, the Company became
self-administered by terminating its external advisory contract with Crown
Advisors, Inc. ("Crown"), and currently entering into a new management contract
with Glacier Realty LLC ("Glacier") for the existing retail properties. Purchase
accounting was applied to the acquisition of the Office Properties.
As of December 31, 1997, the Company's portfolio included 17 commercial real
estate properties leased for office and retail purposes. The Company changed its
name from Royale Investments, Inc. to Corporate Office Properties Trust, Inc. on
January 1, 1998.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company at December 31, 1996
and 1997 and for the years ended December 31, 1995, 1996 and 1997 include the
accounts of the Company, the Operating Partnership, and COP Holdings. All
intercompany transactions and balances have been eliminated in consolidation.
Certain amounts from prior periods have been reclassified to conform to current
year presentation. The reclassifications had no affect on net operations or
stockholders' equity.
The Company, as general partner, controls the Operating Partnership;
therefore consolidated financial reporting and accounting have been applied.
Minority interests (Note 5) represents the 81.14% of the Partnership Units of
the Operating Partnership and 100% of the Preferred Units of the Operating
Partnership not owned by the Company, each of which include certain interests in
the Properties Partnerships retained by the Chairman and the President of the
Company ("Retained Interests").
F-7
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
REVENUE RECOGNITION
The Company recognizes rental revenue from tenants on a straight-line basis
under which contractual rent changes are recognized evenly over the lease term.
In the accompanying balance sheets, revenues earned in advance of contractual
rental payments are recorded as deferred rent receivables while rental payments
received in advance of revenue recognition are recorded as rents received in
advance. Tenant recovery income includes payments from tenants for taxes,
insurance and other property operating expenses and is recognized as revenues in
the same period as the related expenses are incurred by the Company.
MAJOR TENANTS
During 1995 and 1996, all of the Company's rental revenue was derived from
four major tenants, each of which contributed 20% or more of the total rental
revenues. During 1997, four major tenants comprised 64% of total rental income,
each individually represented 10% or more of the Company's total rental revenue.
GEOGRAPHICAL DIVERSITY
During 1995 and 1996, all of the Company's rental revenue was derived from
properties located in the mid-west United States. During 1997, 59% of total
rental revenue was derived from the office properties in the Philadelphia,
Princeton and Harrisburg markets and 41% was derived from properties located in
the mid-west United States.
INVESTMENT IN REAL ESTATE AND DEPRECIATION
Real estate investments are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives. The estimated useful
lives are as follows:
<TABLE>
<S> <C>
Building and building improvements..................... 40 years
Land improvements...................................... 20 years
Equipment and personal property........................ 5 years
</TABLE>
Construction expenditures for tenant improvements and leasing commissions
are capitalized and amortized over the terms of each specific lease. Maintenance
and repairs are charged to expense when incurred. Expenditures for building and
other improvements are capitalized.
F-8
<PAGE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." This statement requires the Company to review its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Adoption
of this statement had no effect on the Company's financial position or results
of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and liquid investments with an
initial maturity of three months or less. The carrying amount approximates fair
value due to the short maturity of these investments. The Company maintains its
cash in bank deposit accounts which may exceed federally insured limits at
times. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
DEFERRED FINANCING COSTS
The Company has capitalized as deferred costs certain expenditures related
to its long-term financings. These costs are being amortized, over the terms of
the related loans. Accumulated amortization totaled $34 and $98 as of December
31, 1996 and 1997, respectively.
INCOME TAXES
The Company intends to maintain its election to be treated as a REIT under
Sections 856 through 860 of the Code. As a result, the Company generally is not
subject to federal income taxation at the corporate level to the extent it
distributes annually at least 95% of its REIT taxable income and meets the other
conditions for qualification as a REIT under the Code, as defined in the Code,
to its stockholders and satisfies certain other requirements. Accordingly, no
provision has been made for federal income taxes in the accompanying financial
statements.
For federal income tax purposes, the cash distributions paid to
stockholders may be characterized as ordinary income, return of capital
(generally non-taxable) or capital gains. Distributions declared for the year
ended December 31, 1995 totaling $710 or $0.50 per share are characterized
30.0% ($0.15 per share) as ordinary income and 70.0% ($0.35 per share) as
return of capital. Distributions declared for the year ended December 31,
1996 totaling $710 or $0.50 per share are characterized 40.0% ($0.20 per
share) as ordinary income and 60.0% ($0.30 per share) as return of capital.
Distributions declared for the year ended December 31, 1997 totaling $816 or
$0.50 per share are characterized 45.0% ($0.225 per share) as ordinary income
and 55.0% ($0.275 per share) as return of capital.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from net income reported for financial reporting
purposes due to the differences in the cost basis for federal tax purposes,
differences in the useful lives used to compute depreciation, and differences
between the allocation of the Company's net income and loss for financial
reporting purposes and for tax reporting purposes.
The Company is subject to certain state and local income and franchise
taxes. The provision for such state and local taxes has been reflected in
general and administrative expense in the consolidated statements of income and
has not been separately stated due to its insignificance. The Operating
Partnership, a limited partnership, is essentially a pass-through entity;
therefore, taxes, if any, are the obligations of the owners.
F-9
<PAGE>
EARNINGS PER SHARE ("EPS")
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). Pursuant to SFAS No. 128, the Company has
computed basic and diluted EPS for the years ended December 31, 1995, 1996 and
1997. Adoption of SFAS No. 128 did not impact the amounts of EPS previously
reported.
The numerator utilized to calculate basic EPS and diluted EPS is the same.
The weighted average common shares outstanding for purposes of basic and diluted
EPS calculations are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares--basic.................. 1,420,000 1,420,000 1,600,807
Assumed conversion of stock options.................... 249 -- --
---------- ---------- ----------
Weighted average common shares diluted................. 1,420,249 1,420,000 1,600,807
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Convertible Preferred Units and convertible Partnership Units could
potentially dilute EPS in the future.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include short-term investments,
marketable securities, tenant accounts receivable, accounts payable, accrued
expenses and mortgage loans payable. The fair values of these financial
instruments were not materially different from their carrying or contract
values.
4. ACQUISITION OF THE OFFICE PROPERTIES
On October 14, 1997, the Company closed on the acquisition of the Office
Properties. As a result of the acquisition, the Company became the sole general
partner of and obtained a 20.6946% interest in the Operating Partnership, an
operating partnership formed to acquire and hold the Office Properties.
In connection with the acquisition, the Company issued 600,000 shares of
Common Stock (valued at $5.50 per share, or an aggregate of $3,300) and the
Operating Partnership issued approximately 3.2 million Partnership Units (valued
at $5.50 per unit, or an aggregate of $17,500) and 2.1 million preferred
partnership units ("Preferred Units") (valued at $25.00 per unit, or an
aggregate of $52,500). The Office Properties were also subject to $100,000 of
7.5% mortgage financing, payable in 2000. In connection with the acquisition,
acquired assets and liabilities were recorded at fair value pursuant to the
purchase accounting method.
Concurrently with the acquisition, the Company issued 273,729 shares of
Common Stock (valued at $5.50 per share, or an aggregate of $1,506) in exchange
for the assets of Crown, an affiliate of the Company, previously acting as
investment advisor to the Company and assisting in the management operations.
The contract between Crown and the Company was terminated and the Company
entered into a property management agreement with Glacier whose stock is owned
by two current officers of the Company, one of whom is also a current director.
Further, the Company retired 27,646 shares of Common Stock previously held by
Crown at the time it was acquired. The cost of the termination of the contract
was $1,353, which was charged to expense in the accompanying statement of
operations.
F-10
<PAGE>
5. MINORITY INTEREST
As of December 31, 1997, the Operating Partnership, which is 20.6946% owned
by the Company, has outstanding 3.2 million of Partnership Units (of which
600,000 are owned by the Company) and 2.1 million of Preferred Units (none which
are owned by the Company).
The Partnership Units are substantially similar economically (and are
convertible into) shares of common stock of the Company. The Partnership Units
are convertible into shares of Company common stock subject to certain
conditions beginning on September 1, 1998. As of December 31, 1997, the Company
has accrued $272 of distributions related to holders of Partnership Units.
The Preferred Units, for which each holder thereof is entitled to a 6.5%
priority annual return, may be converted on or after October 1, 1999 into
Partnership Units on the basis of 3.5714 Partnership Units for each Preferred
Unit plus any accrued return. Income of the Operating Partnership allocated to
holders of Preferred Units is also based on the aforementioned 6.5% priority
annual return. As of December 31, 1997, the Company has accrued $720 of
distributions related to holders of Preferred Units.
6. MORTGAGE NOTES PAYABLE
At December 31, 1996 and 1997, the Company's mortgage loans totaled $14,658
and $114,375, respectively.
The Office Properties were acquired subject to mortgage indebtedness of
$100,000. The loan is a non-recourse mortgage loan collateralized by the real
estate assets of the Office Properties. The loan provides for monthly payments
of interest only, at a fixed rate of 7.5% per annum. The loan matures on October
13, 2000 and provides for two one-year extension options, subject to certain
conditions. Certain restrictive financial covenants must be complied with, the
most restrictive of which are adjusted consolidated net worth, minimum property
interest coverage, minimum property hedged interest coverage, minimum
consolidated interest coverage, maximum consolidated unhedged floating rate debt
and maximum consolidated total indebtedness.
The Retail Properties collateralize and, in certain cases, cross
collateralize, mortgage loans with maturities ranging from 2004 to 2014
aggregating $14,658 and $14,375 as of December 31, 1996 and 1997, respectively.
The mortgage loans accrue interest at rates ranging from 7.6% to 9.5%. The
weighted average interest rate on these loans is 8.4%.
Aggregate maturities of the mortgage loans outstanding at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $ 307
1999 355
2000 100,391
2001 425
2002 4,816
Thereafter 8,081
---------
Total $ 114,375
---------
---------
</TABLE>
As of December 31, 1997, substantially all of the Company's Properties were
mortgaged or subject to liens, aggregating $188,485 of net book value.
F-11
<PAGE>
The Company has a revolving credit agreement with a bank whereby the
Company can borrow up to $100 at an annual interest rate equal to prime.
Interest is payable monthly with the principal due April 10, 1998. At
December 31, 1997, no amounts were borrowed against the note.
7. STOCK OPTIONS AND COMMON STOCK WARRANTS
In April 1993, the Company adopted a stock option plan ("Plan") for
directors which provides for the grant of an option to purchase 2,500 shares
of common stock to a director upon appointment or election, and upon each
re-election. The purchase price of the stock will be the fair market value at
the time the option is granted. The options are exercisable beginning on the
first anniversary of their grant and expire ten years after the date of
grant. The Company has reserved 75,000 shares of common stock for issuance
pursuant to the Plan.
The following summarizes transactions in the Plan:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- --------------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1994.............................. 27,500 $ 9.50--$10.38 $ 9.75
Granted--1995................................................. 15,000 $ 5.38 $ 5.38
---------
Outstanding at December 31, 1995.............................. 42,500 $ 5.38--$10.38 $ 8.21
Granted--1996................................................. 15,000 $ 5.63 $ 5.63
---------
Outstanding at December 31, 1996.............................. 57,500 $ 5.38--$10.38 $ 7.53
Granted--1997................................................. 25,000 $ 5.25--$ 7.59
Forfeited--1997............................................... (7,500) $ 5.25 $ 5.25
---------
Outstanding at December 31, 1997.............................. 75,000 $ 5.25--$10.38 $ 7.31
---------
---------
Exercisable at December 31, 1997.............................. 57,500 $ 5.38--$10.38 $ 7.53
---------
Available for future grant at December 31, 1997............... --
---------
---------
</TABLE>
The weighted average grant-date fair value of options granted in 1995, 1996
and 1997 was $0.76, $0.63 and $1.25, respectively. The weighted average
remaining contractual life of the options at December 31, 1997 was approximately
8 years.
The weighted average assumptions used to price the grant-date fair value of
options were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate.................. 6.75% 6.25% 6.32%
Expected life -- years................... 8 8 8
Expected volatility...................... 35% 31% 34%
Expected dividend rate................... 9.20% 9.70% 6.70%
</TABLE>
F-12
<PAGE>
If the Company elected to account for its stock options based on Statement
of Financial Accounting Standards No. 123, net income and earnings per average
common share would have been as follows for the years ended December 31, 1995,
1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net (loss) income, as reported.......................... $ 272 $ 293 $ (967)
Net (loss) income, pro forma............................ 261 284 (998)
(Loss) earnings per share, as reported.................. 0.19 0.21 (0.60)
(Loss) earnings per share, pro forma.................... 0.18 0.19 (0.61)
</TABLE>
Warrants for an aggregate of 30,000 and 34,000 shares of common stock were
issued to officers and directors of the Company and to the underwriter in
December 1991 at exercise prices of $10 and $13 per share, respectively. All of
the warrants expired on December 22, 1996, and none were exercised.
8. RELATED PARTY TRANSACTIONS
Pursuant to the advisory agreement which was terminated on October 14, 1997
(see Note 4), Crown, an affiliate of the Company, acted as investment advisor to
the Company and assisted in the management of the day-to-day operations for a
base annual fee of $250 plus incentives based upon performance. Advisory fees
paid to Crown were $250, $250 and $198 for the years ended December 31, 1995,
1996 and 1997 respectively. No performance fee was paid or earned under this
agreement.
On October 14, 1997, the Company entered into a new management agreement
(the "Management Agreement") with Glacier. Substantially all of the interests in
Glacier are owned by Vernon R. Beck, a Vice President and director of the
Company, and John Parsinen, the Secretary of the Company. Under the Management
Agreement, Glacier is responsible for the management of the Retail Properties of
the Company. The Management Agreement provides that Glacier will receive an
annual fee of $250 plus a percentage of Average Invested Assets (as defined in
the Management Agreement) and will pay third party expenses associated with
owning the Retail Properties. In addition, Glacier will receive a fee of 1% of
the purchase price or the sale price upon the acquisition or disposition by the
Company or any of its affiliates of any net-leased real estate assets. Under the
Management Agreement, this percentage is increased to 3% in the event that all
or substantially all of the net-leased real estate properties are disposed of.
The Management Agreement has a term of five years and is terminable thereafter
on 180 days prior written notice. In the event that the Management Agreement is
terminated, including for non-renewal, a fee equal to 3% of the Invested Real
Estate Assets (defined in the Management Agreement to exclude the Company's
current net-leased real estate assets) would be due to Glacier. Management fees
paid to Glacier were $52 for the year ended December 31, 1997.
An officer and director of the Company is a partner in a law firm which
received fees from the Company relating to legal services totaling $9 and $69
for the years ended December 31, 1996 and 1997, respectively.
The Company has employee advances on the balance sheet in the amount of $14
as of December 31, 1997.
An officer and director of the Company is the director of a company that
received management fees of $22 in 1997.
F-13
<PAGE>
9. OPERATING LEASES
The Company leases its properties to tenants under operating leases with
various expiration dates extending to the year 2014. Gross minimum future
rentals and accrued rental income on noncancelable leases at December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998 ......................... $ 18,387
1999 ......................... 18,273
2000 ......................... 18,114
2001 ......................... 17,942
2002 ......................... 16,452
Thereafter ................... 101,514
----------
Total ...................... $ 190,682
----------
----------
</TABLE>
10. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- -----------
Interest paid.................................................................... $ 1,266 $ 1,210 $ 2,220
--------- --------- -----------
Supplemental schedule of non-cash investing and financing activities:
Distribution payable on common stock/units..................................... $ 178 $ 178 $ 556
Distribution payable on preferred units........................................ -- -- 720
--------- --------- -----------
$ 178 $ 178 $ 1,276
--------- --------- -----------
--------- --------- -----------
Advisory contract termination fee for common stock:
Advisory contract termination fee.............................................. $ -- $ -- $ (1,353)
Common stock................................................................... -- -- 2
Additional paid in capital..................................................... -- -- 1,351
--------- --------- -----------
$ - $ -- $ --
--------- --------- -----------
--------- --------- -----------
In conjunction with the property acquisition, the following assets and
liabilities were assumed:
Purchase of real estate....................................................... $ -- $ -- $ (166,316)
Mortgage loans................................................................ -- -- 100,000
Deferred financing costs...................................................... -- -- (735)
Common stock.................................................................. -- -- 6
Additional paid in capital.................................................... -- -- 2,975
Partnership Units............................................................. -- -- 12,570
Preferred Units............................................................... -- -- 52,500
--------- --------- -----------
Proceeds from acquisition of properties....................................... $ -- $ -- $ 1,000
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-14
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
In the normal course of business the Company is involved in legal actions
arising from its ownership and administration of its properties. In managementis
opinion, any liabilities which may result, are not expected to have a material
adverse effect on the Companyis financial position, operations or liquidity. The
Company is subject to various federal, state and local environmental regulations
related to its property ownership and operation. The Company has performed
environment assessments of its properties, the results of which have not
revealed any environmental liability that the Company believes would have a
material adverse effect on the Companyis financial position, operations or
liquidity.
The Company has a property management agreement with Glacier, a related
party, which provides for Glacier to manage the seven net leased retail
properties of the Company for a five year term with a minimum fee of $250 per
annum.
12. Quarterly data (Unaudited)
<TABLE>
<CAPTION>
YEAR END DECEMBER 31, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
Revenues...................................................... $ 633 $ 633 $ 633 $ 4,719
---------- ---------- ---------- ----------
Income (loss) before minority interest........................ 91 87 85 (445)
Minority interest............................................. -- -- -- (785)
---------- ---------- ---------- ----------
Net (loss) income............................................. $ 91 $ 87 $ 85 $ (1,230)
---------- ---------- ---------- ----------
Basic and diluted earnings (loss) per share................... $ 0.06 $ 0.06 $ 0.06 $ (0.58)
---------- ---------- ---------- ----------
Weighted average common shares -- basic....................... 1,420,000 1,420,000 1,420,000 2,137,331
---------- ---------- ---------- ----------
Weighted average common shares -- diluted..................... 1,420,000 1,420,000 1,426,558 2,137,331
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR END DECEMBER 31, 1996
----------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
Revenues...................................................... $ 620 $ 625 $ 624 $ 640
---------- ---------- ---------- ----------
Net income.................................................... $ 61 $ 64 $ 89 $ 79
---------- ---------- ---------- ----------
Earnings per share............................................ $ 0.04 $ 0.05 $ 0.06 $ 0.06
---------- ---------- ---------- ----------
Weighted average common shares-basic.......................... 1,420,000 1,420,000 1,420,000 1,420,000
---------- ---------- ---------- ----------
Weighted average common shares-diluted........................ 1,420,000 1,420,056 1,420,000 1,420,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-15
<PAGE>
13. Pro Forma Financial Information (Unaudited)
The acquisition of the Office Properties on October 14, 1997 was
accounted for by the purchase method. The accompanying financial statements
include the effects of the acquisition from the date of purchase through
December 31, 1997.
The following pro forma condensed financial information for the years
ended December 31, 1996 and 1997 are presented as if the purchase of Office
Properties had occurred at January 1, 1996 and 1997, and therefore include
pro forma adjustments as deemed necessary by management. The pro forma
financial information is unaudited and is not necessarily indicative of the
results which actually would have occurred if the acquisitions had occurred
on January 1, 1996 and 1997, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
Total revenues.............................................................. $ 16,202 $ 20,116
----------- -----------
Property expenses........................................................... 2,819 3,459
General and administrative expense.......................................... 278 707
Interest expense............................................................ 8,850 8,724
Depreciation and amortization............................................... 4,143 4,280
----------- -----------
Total expenses.............................................................. 16,090 17,170
----------- -----------
Income (loss) before minority interest...................................... 112 2,946
Income allocated to minority interest:
Preferred Units........................................................... -- (2,578)
Partnership Units......................................................... 147 --
----------- -----------
Net income (loss) available to Common Shareholders.......................... $ 259 $ 368
----------- -----------
Basic and diluted earnings per share........................................ $ 0.11 $ 0.16
----------- -----------
Weighted average number of shares outstanding--basic and diluted........... 2,266,083 2,266,083
----------- -----------
----------- -----------
</TABLE>
14. SUBSEQUENT EVENTS
On February 5, 1998, the Company filed a registration statement with the
Securities and Exchange Commission for the conversion of outstanding shares of
common stock, par value $.01 per share, of the Company into common shares of
beneficial interest, par value $.01 per share, of Corporate Office Properties
Trust ("MD REIT"). This registration has been made to facilitate the Company's
proposed reformation into a Maryland real estate investment trust through a
two-step merger. The first proposed merger will merge the company into a newly
formed Maryland corporation. The newly formed Maryland corporation will then be
merged into the MD REIT in the second proposed merger. The Company intends to
account for the reformation as if it were a pooling of interests with no
adjustment to the carrying value of the underlying assets and liabilities. The
transaction is subject to shareholder approval.
F-16
<PAGE>
The Company intends to file a registration statement with the Securities and
Exchange Commission for the issuance of 7,500,000 common shares of beneficial
interest, par value of $.01 per share, of MD REIT ( the "Offering"). The Company
intends to use the proceeds from the Offering to acquire additional units in the
Operating Partnership which will, in turn, use the proceeds to reduce
outstanding mortgage indebtedness and acquire properties. There is no assurance
the Company will consummate the Offering.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Corporate Office Properties Trust, Inc.:
In connection with our audits of the consolidated financial statements of
Corporate Office Properties Trust, Inc. as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997, which
financial statements are included in this Form 10-K, we have also audited the
accompanying financial statement schedule.
In our opinion, the financial statement schedule, 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.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1998
F-18
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
IMPROVE- TOTAL
BUILDING MENTS & BUILDING
BUILDING & LAND CARRYING & LAND ACCUMULATED
PROPERTY NAME LOCATION TYPE ENCUMBRANCES IMPROVEMENTS COSTS IMPROVEMENTS DEPRECIATION
- -------------- ------------ -------- -------------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
429 South Brunswick Dayton, NJ Office $ 8,793,966 $ 11,718,548 $2,000 $ 11,720,548 $ 62,606
431 South Brunswick Dayton, NJ Office 8,351,026 11,128,301 -- 11,128,301 59,453
437 South Brunswick Dayton, NJ Office 2,151,023 2,866,382 -- 2,866,382 15,314
Blue Bell 751/753/760/785
Jolly Rd. Blue Bell, PA Office 66,231,669 88,320,735 -- 88,320,735 471,851
2601 Market Place Harrisburg, PA Office 5,801,595 7,712,693 -- 7,712,693 41,205
2605 Interstate Harrisburg, PA Office 6,241,536 8,355,177 -- 8,355,177 44,637
6385 Flank Drive Harrisburg, PA Office 2,429,185 3,242,272 -- 3,242,272 17,322
Peru Peru, II Retail 2,429,348 3,226,279 -- 3,226,279 353,976
Indianapolis, Indianapolis, IN Retail -- 4,003,155 -- 4,003,155 667,251
Plymouth Plymouth, MN Retail 4,660,648 4,019,547 -- 4,019,547 663,579
Minot Minot, ND Retail 2,628,356 2,503,328 -- 2,503,328 265,394
Delafield Delafield, WI Retail 1,864,231 2,540,375 -- 2,540,375 217,545
Glendale Glendale, WI Retail 1,055,731 1,156,543 -- 1,156,543 135,705
Oconowomac Oconowomac, WI Retail 1,737,046 2,150,000 -- 2,150,000 208,417
$114,375,360 152,943,335 $2,000 $152,945,335 $ 3,224,255
------------ --------------- ---------- ------------- -------------
<CAPTION>
YEAR BUILT/ DATE DEPRECIATION
PROPERTY NAME RENOVATED ACQUIRED LIFE
- --------------- ----------- --------- -----------
<S> <C> <C> <C>
1966/1996 10/14/97 40 Years
1958/1967 10/14/97 40 Years
1962/1996 10/14/97 40 Years
1960-74/92-96 10/14/97 40 Years
1989 10/14/97 40 Years
1990 10/14/97 40 Years
1995 10/14/97 40 Years
1993 11/30/93 40 Years
1991 11/30/93 40 Years
1991 06/01/92 40 Years
1993 02/01/94 40 Years
1994 11/02/94 40 Years
1992 09/29/93 40 Years
1994 05/17/94 40 Years
---------- --------- -----------
</TABLE>
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORPORATE OFFICE PROPERTIES TRUST
Date March 25, 1998 By: /s/ Clay W. Hamlin, III
--------------------------------
Clay W. Hamlin, III
President and Chief Executive Officer
(Principal Executive Officer)
Date March 25, 1998 By: /s/ Thomas D. Cassel
--------------------------------
Thomas D. Cassel
Vice President--Finance and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
- ------------------------------ --------------------------- ------------------
/s/ JAY H. SHIDLER Chairman of the Board and March 27, 1998
- ------------------------------ Trustee
(Jay H. Shidler)
/s/ CLAY W. HAMLIN, III President and Chief March 27, 1998
- ------------------------------ Executive Officer,
(Clay W. Hamlin, III) Trustee (Principal
Executive Officer)
/s/ THOMAS D. CASSEL Vice President, Finance March 27, 1998
- ------------------------------ (Principal Accounting and
(Thomas D. Cassel) Financial Officer)
/s/ VERNON R. BECK Vice Chairman of the Board March 27, 1998
- ------------------------------ and Trustee
(Vernon R. Beck)
/s/ KENNETH D. WETHE Trustee March 27, 1998
- ------------------------------
(Kenneth D. Wethe)
/s/ ALLEN C. GEHRKE Trustee March 27, 1998
- ------------------------------
(Allen C. Gehrke)
/s/ WILLIAM H. WALTON Trustee March 27, 1998
- ------------------------------
(William H. Walton)
/s/ KENNETH S. SWEET, JR. Trustee March 27, 1998
- ------------------------------
(Kenneth S. Sweet, Jr.)
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
------------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 0-20047
Corporate Office Properties Trust
(Exact name of registrant as specified in its charter)
Maryland 23-2947217
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Logan Square, Suite 1105, Philadelphia, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 567-1800
----------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common shares of beneficial interest, .01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
At May 7, 1998, 9,771,083 shares of the Company's Common Shares of Beneficial
Interest, $.01 par value, were outstanding.
<PAGE>
Table of Contents
Form 10-Q
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and March 31,
1998 (unaudited) 3
Consolidated Statements of Operations for the
three months ended March 31, 1997 and 4
1998 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 5
1998 (unaudited)
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults Upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURES 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust
Consolidated Balance Sheet
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------------- ---------------------
Assets (unaudited)
<S> <C> <C>
Assets:
Land $ 38,764 $ 38,764
Buildings and improvements 152,945 152,945
Furniture, fixtures and equipment 140 222
Less accumulated depreciation (3,224) (4,201)
- ---------------------------------------------------------------------- -------------------- ---------------------
Net investments in real estate 188,625 187,730
Cash and cash equivalents 3,395 2,346
Tenant accounts receivable 78 41
Deferred rent receivable 479 837
Deferred financing costs, net 857 793
Deposit on acquisitions - 600
Prepaid and other assets, net 100 309
- ---------------------------------------------------------------------- -------------------- ---------------------
Total assets $ 193,534 $ 192,656
- ---------------------------------------------------------------------- -------------------- ---------------------
Liabilities and shareholders' equity
Liabilities:
Mortgage loans payable $ 114,375 $ 114,301
Accounts payable and accrued expenses 932 1,018
Rents received in advance and security deposits 425 294
Dividends/distributions payable 1,276 1,581
- ---------------------------------------------------------------------- -------------------- ---------------------
Total liabilities 117,008 117,194
- ---------------------------------------------------------------------- -------------------- ---------------------
Minority interests:
Preferred Units 52,500 52,500
Partnership Units 12,362 12,111
- ---------------------------------------------------------------------- -------------------- ---------------------
Total minority interests 64,862 64,611
- ---------------------------------------------------------------------- -------------------- ---------------------
Commitments and contingencies - -
Shareholders' equity:
Common Shares of beneficial interest ($.01 par value;
45,000,000 authorized 2,266,083 and 2,271,083 shares,
issued and outstanding at December 31, 1997 and
March 31, 1998, respectively) 23 23
Additional paid-in capital 16,620 16,647
Accumulated deficit (4,979) (5,819)
- ---------------------------------------------------------------------- -------------------- ---------------------
Total shareholders' equity 11,664 10,851
- ---------------------------------------------------------------------- -------------------- ---------------------
Total liabilities and shareholders' equity $ 193,534 $ 192,656
- ---------------------------------------------------------------------- -------------------- ---------------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
Corporate Office Properties Trust
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
Revenues
Rental income $ 626 $ 4,919
Tenant recoveries and other income 7 606
- ----------------------------------------------------------------- ----------------- ----------------
Total revenues 633 5,525
- ----------------------------------------------------------------- ----------------- ----------------
Expenses
Property operating 6 899
General and administrative 86 299
Interest expense 308 2,159
Amortization of deferred financing costs 3 64
Depreciation 139 977
Reformation costs - 637
- ----------------------------------------------------------------- ----------------- ----------------
Total expenses 542 5,035
- ----------------------------------------------------------------- ----------------- ----------------
Income before minority interests 91 490
Minority interests
Preferred Units - (853)
Partnership Units - (136)
- ----------------------------------------------------------------- ----------------- ----------------
Net income (loss) $ 91 $ (499)
- ----------------------------------------------------------------- ----------------- ----------------
Earnings (loss) per Share
Basic and Diluted $ .06 $ (.22)
- ----------------------------------------------------------------- ----------------- ----------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Corporate Office Properties Trust
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 91 $ (499)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interests - 989
Depreciation 139 977
Amortization of deferred financing costs 3 64
Other amortization (6) -
Increase in deferred rent receivable (17) (358)
Decrease (increase) in other assets 1 (172)
(Decrease) increase in accounts payable, accrued expenses, rents
received in advance and security deposits 12 (45)
- ---------------------------------------------------------------------- ------------- --------------
Net cash provided by operating activities 223 956
- ---------------------------------------------------------------------- ------------- --------------
Cash flows from investing activities:
Increase in deposit on acquisitions - (600)
Purchase of furniture and equipment - (82)
- ---------------------------------------------------------------------- ------------- --------------
Net cash used in investing activities - (682)
- ---------------------------------------------------------------------- ------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options - 27
Dividends/distributions paid (177) (1,276)
Repayments of mortgage loans payable (79) (74)
- ---------------------------------------------------------------------- ------------- --------------
Net cash used in financing activities (256) (1,323)
- ---------------------------------------------------------------------- ------------- --------------
Net decrease in cash and cash equivalents (33) (1,049)
Cash and cash equivalents
Beginning of period 258 3,395
- ---------------------------------------------------------------------- ------------- --------------
End of period $ 225 $ 2,346
- ---------------------------------------------------------------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Corporate Office Properties Trust
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(unaudited)
1. Organization and Formation of Company
Corporate Office Properties Trust (formerly Royale Investments, Inc.)
(the "Company") is a self-administered REIT which focuses on the ownership,
acquisition and management of suburban office buildings. The Company was formed
in 1988 as a Minnesota corporation. The Company has qualified as a real estate
investment trust ("REIT") as defined in the Internal Revenue Code (the "Code").
As of March 31, 1998, the Company's portfolio included 17 commercial real estate
properties leased for office and retail purposes.
On October 14, 1997, the Company acquired a portfolio of 10
properties, representing the Mid-Atlantic suburban office operations of The
Shidler Group, a national real estate investment firm (the "Office
Properties"). As result of the acquisition, the Company became the sole
general partner of and obtained a 20.6946% interest in the Common Units
("Partnership Units") of Corporate Office Properties, L.P. (formerly FCO,
L.P.) (the "Operating Partnership"), a partnership formed to acquire and hold
partnership interests in partnerships which own the Office Properties (the
"Properties Partnerships"). The general partner of the Properties
Partnerships is Corporate Office Properties Holdings, Inc. (formerly FCO
Holdings, Inc.) ("COP Holdings"), a wholly owned subsidiary of the Company.
In addition, the Company became self-administered by terminating its external
advisory contract with Crown Advisors, Inc. ("Crown"), and entering into a
new management contract with Glacier Realty LLC ("Glacier") for the existing
retail properties. The Company accounted for the acquisition of the Office
Properties under purchase accounting requirements; therefore, the operating
results of the Company for the three months ended March 31, 1998 are not
directly comparable to the three months ended March 31, 1997.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a Maryland
real estate investment trust and changed its name to Corporate Office Properties
Trust (the "Reformation"). In connection with the Reformation, 45,000,000 common
shares and 5,000,000 preferred shares were authorized and each share of common
stock was exchanged for one common share of beneficial interest, par $.01
("Common Share") in Corporate Office Properties Trust. All common stock
references in the financial statements have been restated as Common Shares. This
restatement had no effect on net operations or the amounts presented as
shareholders' equity.
On April 23, 1998, the Company completed the sale of 7,500,000 Common
Shares to the public at a price of $10.50 per share ("the Offering").
On April 30, 1998, the Company acquired 12 office properties
aggregating approximately 815,000 net rentable square feet, using the proceeds
from the Offering.
2. Summary of Significant Accounting Policies
The financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. In order to conform with
generally accepted accounting principles, management, in preparation of the
Company's financial statements, is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of December 31, 1997 and March 31, 1998,
and the reported amounts of revenues
6
<PAGE>
and expenses for the three months ended March 31, 1997 and 1998. Actual results
could differ from those estimates.
In the opinion of the Company, all adjustments (consisting solely of
normal recurring matters, except for $637 of costs associated with the
Reformation) necessary to fairly present the financial position of the Company
as of March 31, 1998 and the results of its operations and its cash flows for
the three months ended March 31, 1997 and 1998 have been included. The results
of operations for such interim periods are not necessarily indicative of the
results for a full year. For further information, refer to the Company's
financial statements and footnotes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1997.
Basis of Presentation
The consolidated financial statements of the Company at December 31,
1997 and March 31, 1998 include the accounts of the Company, the Operating
Partnership, and COP Holdings. All intercompany transactions and balances have
been eliminated in consolidation. Certain amounts from prior periods have been
reclassified to conform to current year presentation. The reclassifications had
no effect on net operations or shareholders' equity.
The Company, as general partner, controls the Operating Partnership;
therefore consolidated financial reporting and accounting have been applied. As
of December 31, 1997 and March 31, 1998, minority interests represent the 81.14%
of the Partnership Units of the Operating Partnership and 100% of the Preferred
Units of the Operating Partnership not owned by the Company, each of which
include certain interests in the Properties Partnerships retained by the
Chairman and the President of the Company ("Retained Interests").
Summary of Significant Accounting Policies
Earnings Per Share ("EPS")
Pursuant to SFAS No. 128, the Company has computed basic and diluted
EPS for the three months ended March 31, 1997 and 1998.
The numerator utilized to calculate basic and diluted EPS is the same. The
weighted average common shares outstanding for purposes of basic and diluted EPS
calculations are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
<S> <C> <C>
Weighted average common shares-basic 1,420 2,268
Assumed conversion of stock options - 26
--
Weighted average common shares-diluted 1,420 2,294
===== =====
</TABLE>
Convertible Preferred Units and convertible Partnership Units could
potentially dilute EPS in the future.
3. Issuance of Shares and Options
On March 12, 1998, options to purchase an aggregate of 45,000 shares
were granted to an officer and four independent Trustees at a grant price of
$12.25 per share. Options relating to 20,000 Common Shares vest one year
after the date of grant and options relating to 25,000 Common Shares vest
ratably over 3 years following the date of grant. The options expire ten
years after the date of grant.
7
<PAGE>
4. Related Party Transactions
The Company had employee advances on the balance sheet in the amount of
$14 as of December 31, 1997. All advances were repaid in the quarter ended March
31, 1998.
An officer and director of the Company is the director of a company
that received management fees of $20 in the quarter ended March 31, 1998.
The Company has a property management agreement with Glacier, a related
party, which provides for Glacier to manage the seven net leased retail
properties of the Company for a five year term, which term began in 1997, with a
minimum fee of $250 per annum. Through March 31, 1998 the Company has paid $63
in connection with this agreement.
5. Distributions
On March 16, 1998 the Company declared a distribution of $.15 per
Common Share which was paid on April 15, 1998 to shareholders of record as of
March 31, 1998.
6. Subsequent Events
On April 23, 1998 the Company completed the sale of 7,500,000
Common Shares to the public at a price of $10.50 per share ("the Offering"). The
Company used the proceeds to acquire 7,500,000 Partnership Units and increase
its percentage interest in the Operating Partnership to approximately 75.8%. As
discussed below, the majority of the net proceeds of the Offering were used by
the Company for investment purposes. Although not exercised as of May 7, 1998,
the underwriters have the right to exercise their over-allotment options, which
(if exercised) would result in the Company issuing up to an additional 1,125,000
Common Shares at a price of $10.50 per share.
On April 30, 1998, the Company acquired 12 office properties for an
aggregate cash purchase price of approximately $72 million. The properties
aggregate approximately 815,000 net rentable square feet.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993 and Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: real estate investment
considerations, such as the effect of economic and other conditions in the
market area on cash flows and values; the need to renew leases or release space
upon the expiration of current leases, and the ability of a property to generate
revenues sufficient to meet debt service payments and other operating expenses;
and risks associated with borrowings, such as the possibility that the Company
will not have sufficient funds available to make principal payments on
outstanding debt or outstanding debt may be refinanced at higher interest rates
or otherwise on terms less favorable to the Company.
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the accompanying
financial statements and notes thereto.
Results of Operations
Comparison of the Three Months Ended March 31, 1998 and 1997: Total
revenues increased from $.6 million for the quarter ended March 31, 1997 to $5.5
million for the quarter ended March 31, 1998, an increase of $4.9 million or
773%. Of this increase, $4.3 million results from an increase in base rents,
substantially all of which is attributable to the acquisition of the Office
Properties. Tenant recoveries totaled $.6 million in the first quarter of 1998
as compared to none in the first quarter of 1997 due wholly to tenant recoveries
attributable to leases on the Office Properties.
Total expenses increased from $.54 million for the quarter ended March
31, 1997 to $5.0 million for the quarter ended March 31, 1998, an increase of
829%. Of the total increase of $4.5 million, approximately $3.9 million is
attributable to increased interest expense ($1.9 million), increased
depreciation and amortization ($.9 million), increased property expenses ($.9
million), and increased general and administrative expenses ($.2 million),
primarily as a result of the acquisition of the Office Properties. Further, $.6
million represents costs associated with the Reformation on March 16, 1998.
Depreciation and amortization increased from $142 for the quarter ended
March 31, 1997 to $1.0 million for the quarter ended March 31, 1998, an increase
of 633%, as a result of the acquisition of the Office Properties. Interest
expense increased from $.3 million in 1997 to $2.2 million in 1998, an increase
of 601%, primarily as a result of borrowings associated with the acquisition of
the Office Properties, offset slightly by decreased interest expense on the
retail properties' mortgages.
General and administrative expenses increased from $86 for the quarter
ended March 31, 1997 to $299 for the quarter ended March 31, 1998 resulting from
the conversion of the Company from an externally-advised REIT to a
self-administered REIT. During the first quarter of 1998, the Company incurred
$637 of costs associated with the Reformation on March 16, 1998. During the
fourth quarter of 1997, the Company commenced administrative operations. The
Company incurred administrative payroll expenses of $172 and office overhead
expenses of $31 during the quarter ended March 31, 1998 not incurred prior to
the fourth quarter of 1997.
As a result of the above factors, income before minority interests
increased from $91, for the quarter ended March 31, 1997 to $490 for the quarter
ended March 31, 1998. Net income decreased from $91 for the quarter ended March
31, 1997 to a net loss of $499 for the quarter ended March 31, 1998,
attributable primarily to the existence of minority interests resulting from the
new structure of the Company following the acquisition of the Office Properties
and the costs associated with Reformation.
9
<PAGE>
Liquidity and Capital Resources
Historically, cash provided from operations represented the primary
source of liquidity to fund distributions, pay debt service and fund working
capital requirements. The Company expects to continue to meet its short-term
capital needs from property cash flow, including all property expenses, general
and administrative expenses, dividend and distribution requirements and
recurring capital improvements and leasing commissions. The Company does not
anticipate borrowing to meet these requirements.
For the three months ended March 31, 1998, the Company declared
distributions totaling $.15 per Common Share amounting to approximately $341. In
addition, during this same period the Company's distributions declared to
minority interests holding Partnership Units and Preferred Units amounted to
$388 and $853, respectively.
On April 23, 1998, the Company completed the sale of 7,500,000 Common
Shares to the Public at a price of $10.50 per share. The Company used the
proceeds to acquire 7,500,000 Partnership Units and increase its percentage
interest in the Operating Partnership to approximately 75.8%. As discussed
below, the majority of the net proceeds of the Offering were used by the Company
for investment purposes. Although not exercised as of May 7, 1998, the
underwriters have the right to exercise their over-allotment options, which (if
exercised), would result in the Company issuing up to an additional 1,125,000
Common Shares at a price of $10.50 per share. Simultaneously with the
Offering, the Company became listed on the New York Stock Exchange and began
trading under the symbol "OFC".
On April 30, 1998, the Company acquired 12 office properties for an
aggregate cash purchase price of approximately $72 million. The properties
aggregate approximately 815,000 net rentable square feet.
To further meet long-term capital needs, the Company is presently
negotiating with Bankers Trust Company, an affiliate of BT Alex. Brown
Incorporated, one of the Underwriters in the Offering, regarding a $100 million
collateralized credit facility, which the Company intends to utilize for
acquisitions, renovations, tenant improvements and leasing commissions ("Credit
Facility"). Acquisitions may also be financed through net cash provided from
operations or equity issuances. There is no assurance that the Company will be
able to obtain such Credit Facility or that such Credit Facility will be
adequate to fund the Company's acquisition and capital program.
The Company expects to meet its long term liquidity requirements, such
as property acquisitions, scheduled debt maturities, major renovations,
expansions, and other non-recurring capital improvements through long-term
collateralized indebtedness and the issuance of additional equity securities.
The Company intends to finance the acquisition of additional properties through
borrowings under the proposed Credit Facility.
As of March 31, 1998, the Company posted a nonrefundable deposit with
an unrelated party totaling $600 in connection with a future acquisition.
Statement of Cash Flows
During the three months ended March 31, 1998, the Company generated
$956 in cash flow from operating activities (net of nonrecurring Reformation
costs of $637), which together with initial cash balances of $3.4 million were
used, in part, for (i) deposits on potential acquisitions of $600, (ii)
furniture and equipment costs of $82, (iii) distributions to holders of Common
Shares, Partnership Units and Preferred Units totaling $1.3 million and (iv)
repayments of mortgage loans of $74. As a result, the cash balances decreased by
$1.0 million to $2.3 million.
Funds From Operations
The Company considers Funds From Operation ("FFO") to be helpful to
investors as a measure of the financial performance of an equity REIT. In
accordance with NAREIT's definition, FFO is defined as net in-
10
<PAGE>
come (loss) computed in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property, plus real estate-related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures and extraordinary and nonrecurring items. FFO
does not represent cash generated from operating activities determined in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions. Other REITs may not define FFO in
accordance with the current NAREIT definition or may interpret the current
NAREIT definition differently from the Company. FFO for the three months
ended March 31, 1997 and 1998, as calculated in accordance with the NAREIT
definition published in March 1995, are summarized in the following table (in
thousands).
<TABLE>
<CAPTION>
Historical
Three Months Ended March 31,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Income before minority interests............ $ 91 $ 490
Add: Nonrecurring charge - 637
Reformation costs...........................
Add: Real estate related depreciation and
amortization................................ 138 972
Less: Preferred Unit distributions......... - (853)
-------------- --------------
Funds from operations....................... $ 229 $ 1,246
Add: Preferred Unit distributions.......... - 853
-------------- --------------
Funds from operations assuming conversion
of Preferred Units.......................... 229 $ 2,099
-------------- --------------
Weighted average Common Shares/Units
outstanding(1).............................. 1,420 4,850
-------------- --------------
-------------- --------------
Weighted average Common Shares/Units
outstanding diluted(2)...................... 1,420 12,376
-------------- --------------
-------------- --------------
</TABLE>
- ----------------
(1) Assumes redemption of all Partnership Units, calculated on a weighted
average basis for Common Shares. Includes 282,508 Common Shares
issuable upon redemption of Partnership Units issuable upon the
conversion of the Retained Interests. Excludes the weighted average
effect of the conversion of 186,455 Retained Interests into 186,455
Preferred Units and 1,913,545 Preferred Units, both convertible into an
aggregate of 7,499,940 Partnership Units which are, in turn, redeemable
for 7,499,940 Common Shares.
(2) Assumes redemption of all Partnership Units, calculated on a weighted
average basis for Common Shares. Includes 282,508 Common Shares
issuable upon redemption of Partnership Units issuable upon the
conversion of the Retained Interests. Includes the weighted average
effect of the conversion of 186,455 Retained Interests into 186,455
Preferred Units and 1,913,545 Preferred Units, both convertible into an
aggregate of 7,499,940 Partnership Units which are, in turn, redeemable
for 7,499,940 Common Shares, and 25,913 shares for the assumed
conversion of stock options (using the Treasury stock method).
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not currently involved in any material litigation nor,
to the Company's knowledge, is any material litigation currently threatened
against the Company (other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance).
ITEM 2. Changes In Securities
Reformation
On March 16, 1998 the Company was reformed as a Maryland real estate
investment trust and changed its name to Corporate Office Properties Trust. In
connection with the Reformation, each share of common stock was exchanged for
one Common Share in Corporate Office Properties Trust. The Reformation was
accomplished by merging Corporate Office Properties Trust, Inc. into a newly
formed Maryland subsidiary corporation (the "Maryland Company") which was the
surviving corporation of the merger and immediately thereafter merged the
Maryland Company into the Company, a newly formed Maryland subsidiary trust, in
each case, pursuant to the merger agreement. The Maryland Company was
incorporated in Maryland on January 21, 1998 and the Company was formed in
Maryland on January 21, 1998, specifically for purposes of the Reformation, and
each had conducted no business and had no material assets or liabilities. The
Reformation had been accomplished through the Company merger followed by the
Trust merger because Minnesota law did not permit the direct merger of a
Minnesota corporation into a Maryland real estate investment trust. The Maryland
Company's and the Company's principal executive offices are each located at One
Logan Square, Suite 1105, Philadelphia, Pennsylvania. The Reformation did not
result in any change in the Company's business, assets or liabilities and did
not result in any relocation of management or other employees.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
The following matters were submitted to a vote of security holders
during the Company's first quarter.
<TABLE>
<S> <C> <C>
(a) Meeting type and date Special Meeting of Shareholders held on
March 12, 1998
(b) Directors elected at meeting Not applicable
(c) Description of each matter voted
on at meeting
Resolution to approve the Reformation, Results of votes
in which the Company was reformed as a For 1,492,272.912
Maryland real estate investment trust, Against or withheld 7,699.115
which will be named Corporate Office Abstentions and broker non-votes 9,185.000
Properties Trust.
Resolution to adopt the 1998 long-term Results of votes
incentive plan. For 1,422,037.547
Against or withheld 66,037.480
Abstentions and broker non-votes 21,089.000
</TABLE>
12
<PAGE>
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
99.1 Audited balance sheets of the Company as of December 31,
1996 and 1995, and the related statements of income,
changes in stockholders' equity and cash flow for each
of the years in the three-year period ended December 31,
1996 (filed with the Company's Current Report on Form
8-K on January 20, 1998 and incorporated herein by
reference).
99.2 Press release dated March 6, 1998 (filed with the
Company's Current Report on Form 8-K on March 6, 1998
and incorporated herein by reference).
2.1 Agreement and Plan of merger, dated January 31, 1998,
among Corporate Office Properties, Inc, COPT, Inc. and
the Company (filed with the Company's Registration
statement on Form S-4 (Commission File No. 333-45649)
and incorporated herein by reference).
3(i).1 Articles of Amendment to Articles of Incorporation dated
December 23, 1997 (filed with the Company's Current
Report on Form 8-K on January 5, 1998 and incorporated
herein by reference).
4.1 Form of certificate for the Company's Common Shares of
Beneficial Interest, $0.01 par value per share (filed
with the Company's Registration Statement on Form S-4
(Commission File No. 333-45649) and incorporated herein
by references).
16.1 Letter to the Commission from Lurie, Besikof, Lapidus &
Co., LLP dated November 4, 1997 (filed with Company's
Current Report on Form 8-K on November 6, 1997, and
incorporated herein by reference).
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
During the three months ended March 31, 1998 and through May 7, 1998 the Company
filed the following:
i. a Current Report of Form 8-K dated January 5, 1998 (Reporting under Items
5 and 7) regarding the Shareholders' approval of the Company's name to
Corporate Office Properties Trust Inc.
ii.a Current Report of Form 8-K dated January 20, 1998 (Reporting under
Items 5 and 7) regarding the re-audit of the Company's historical
financial statements as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994 by Coopers and Lybrand, L.L.P. The
report of Coopers
13
<PAGE>
and Lybrand , L.L.P. was not qualified or modified as
to any matter and, except for disclosures of certain subsequent events,
there were no changes to the Company's filed report under Part II Item 7
in the 1996 Form 10-KSB.
iii. a Current Report of Form 8-K dated January 20, 1998 (Reporting under
Items 5 and 7) regarding the Company's earnings for the year ended
December 31, 1997 and certain other financial information.
iv.a Current Report of Form 8-K dated January 20, 1998 (Reporting under
Items 5 and 7) regarding the Reformation of the Company effective March
16, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORPORATE OFFICE PROPERTIES TRUST
Date May 7, 1998 By: /s/ Clay W. Hamlin, III
-----------------------
Clay W. Hamlin, III
President and Chief Executive Officer
(Principal Executive Officer)
Date May 7, 1998 By: /s/ Thomas D. Cassel
--------------------
Thomas D. Cassel
Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
15
