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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1997, or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- -- Act of 1934 for the period from ____________ to ______________
COMMISSION FILE NUMBER: 1934 ACT FILE NUMBER: 0-25968
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1681657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 CRYSTAL DRIVE
CRYSTAL CITY, ARLINGTON, VA 22202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 920-8500
Securities registered pursuant to Section 12(b) of the Act:
CLASS A UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement of Charles E. Smith Residential Realty,
Inc. for its annual shareholders' meeting to be held in 1998 are incorporated by
reference into Part III.
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FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.
metropolitan area; the registrant's ability to identify and secure additional
properties and sites that meet its criteria for acquisition or development; the
acceptance of the registrant's financing plans by the capital markets, and the
effect of prevailing market interest rates and the pricing of the Company's
stock; and other risks described from time-to-time in the registrant's filings
with the Securities and Exchange Commission. Given these uncertainties, readers
are cautioned not to place undue reliance on such statements. The registrant
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
PART I
ITEM 1. BUSINESS.
Charles E. Smith Residential Realty L.P., a Delaware limited partnership
(the "Operating Partnership"), was formed in 1993 and commenced operations on
June 30, 1994. It is managed by its general partner, Charles E. Smith
Residential Realty, Inc., a Maryland corporation (the " Company"), which is a
self-administered and self-managed equity real estate investment trust ("REIT").
The Company was organized in 1993 and also commenced operations on June 30, 1994
upon completion of its initial public offering (the "Initial Public Offering").
The Operating Partnership and the Company are engaged primarily in the
acquisition, development, management and operation of multifamily properties.
The Operating Partnership, together with the Company and their respective
subsidiaries as described below, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing, leasing and
property management expertise. The Operating Partnership's primary strategy for
growth is to acquire, develop, own and manage high quality multifamily
properties for income generation and long-term value appreciation.
The Company is the sole general partner and holds approximately 56% of the
common and preferred units of limited partnership interest ("Units") in the
Operating Partnership as of March 2, 1998. The other limited partners of the
Operating Partnership (the "Minority Interest") primarily consist of the former
limited and general partners of properties and the former owners of the property
service businesses acquired by the Operating Partnership (see "History of the
Company" below). The Operating Partnership and its subsidiaries own all of the
properties, property interests, and business assets and conduct all operations
on behalf of the Company and the Operating Partnership. The Operating
Partnership owns 100% of the nonvoting common
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stock, which represents 99% of the total economic interest, of three operating
companies (collectively, the "Property Service Businesses") which provide
property services to the properties owned by the Operating Partnership and to
other multifamily, retail, and office properties. The three Property Service
Businesses are: Smith Realty Company, which provides management, leasing,
financing, development and insurance services; Consolidated Engineering
Services, Inc., which provides engineering and technical services; and Smith
Management Construction, Inc., which provides construction and interior
renovation services. As the sole general partner of the Operating Partnership,
the Company has the exclusive power to manage and conduct the business of the
Operating Partnership, subject to the consent of the holders of Units in
connection with the sale of all or substantially all of the assets of the
Operating Partnership. Some references made herein to the Company include the
Operating Partnership and the Property Service Businesses, as the context
requires.
As of March 2, 1998, the Operating Partnership, directly or through its
subsidiaries, owned 46 operating multifamily apartment properties containing a
total of 18,296 units (the "Multifamily Properties"), two retail centers
containing approximately 436,000 square feet of retail space (the "Retail
Properties"), and had three properties under construction containing
approximately 2,000 units ("Development Properties"). All properties,
excluding two in Chicago, Illinois and one in Boston, Massachusetts, are located
in the Washington, D.C. metropolitan area (collectively, the "Properties").
The executive offices of the Operating Partnership and the Company are
located at 2345 Crystal Drive, Crystal City, Arlington, Virginia 22202, and its
telephone number is (703) 920-8500.
HISTORY OF THE COMPANY
The Operating Partnership was formed to succeed to the property assets of
38 partnerships (the "Property Partnerships") and certain asset management and
property service businesses of the Charles E. Smith Companies (the "Smith
Companies"). On June 30, 1994, the Company consummated an initial public
offering (the "Initial Public Offering") of 8,632,800 shares of its common
stock, $.01 par value per share (the "Common Stock"), and a private placement of
416,667 shares of its Common Stock. The Company contributed the net proceeds of
such offerings to the Operating Partnership in return for 9,049,467 Units of
general and limited partnership interest therein. On that same date, (i) the
Operating Partnership acquired, in exchange for 12,131,292 Units, 30 Properties
(reflects the combination of three buildings into one for operational and
statistical purposes), partial interests in two additional properties, all of
the non-voting common stock of the Property Service Businesses (representing 99%
of the economic interest), and notes of the Property Service Businesses in the
aggregate amount of $44.5 million; (ii) the Operating Partnership, through its
partnership subsidiaries, issued $352.4 million of fixed-rate indebtedness
secured by certain of the Properties in private placements to institutional
investors and assumed certain other indebtedness (the "Mortgage Loans"); (iii)
the Operating Partnership applied the proceeds of the Mortgage Loans and the
Company's contribution of offering proceeds to repay approximately $454 million
of mortgage indebtedness,
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$26.2 million in related party indebtedness and $11.1 million in notes payable
to a bank, to pay $13.8 million in prepayment penalties related to the early
extinguishment of debt, to pay $14.7 million in transfer taxes and other costs
associated with the formation of the Company and the Operating Partnership, and
to pay $18.5 million of mortgage recording taxes, origination fees and other
expenses associated with the Mortgage Loans, and to supply $15.4 million of
working capital; and (iv) the Operating Partnership established a $100 million
line of credit to fund development activities and property acquisitions and for
general corporate purposes (collectively, the "Formation Transactions").
Since the Formation Transactions and through March 2, 1998, the Operating
Partnership developed one and acquired 18 operating Multifamily Properties
totaling 6,688 apartment units and sold one property containing 227 units. In
addition, the Operating Partnership had approximately 2,000 units under
construction at three Development Properties as of March 2, 1998 (see "Recent
Developments" below).
BUSINESS STRATEGY
The Operating Partnership seeks growth in funds from operations (a common
measure of equity real estate investment trust performance, defined as net
income [loss] computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales of
property plus depreciation and amortization of assets unique to the real estate
industry) while preserving and enhancing property values by pursuing the
following strategies: (i) maximizing cash flow from operations of the Properties
by seeking to maintain high occupancy levels, obtain rent increases, manage
tenant turnover efficiently, make strategic capital investments, expand the
availability of furnished rental apartments, initiate new tenant fees and
control operating expenses; (ii) acquiring additional multifamily properties for
Common Stock, Units, or cash in situations where, in the judgment of management,
the Operating Partnership's business strengths have the potential to increase
property performance and value; (iii) developing new multifamily properties
consistent with the predecessor Smith Companies' historical policies of
constructing and maintaining high quality properties for long-term income and
value enhancement; and (iv) actively promoting the comprehensive property
services of the Property Service Businesses to unaffiliated property owners. In
addition to its activities in the Washington, D.C. metropolitan area, the
Operating Partnership also seeks to acquire additional properties or portfolios
in Chicago, Boston and other markets with characteristics similar to the
Operating Partnership's current portfolio that offer opportunities for
profitable investment and long-term growth.
FINANCING STRATEGY
To the extent that the Company's board of directors determines to seek
additional capital for acquisitions or otherwise, the Company or the Operating
Partnership may raise such capital through additional equity offerings, debt
financing or retention of cash flow (subject to provisions of the Internal
Revenue Code of 1986, as amended, requiring the distribution by a REIT of a
certain percentage of taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or a combination of these methods.
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EQUITY
During 1997 and through March 2, 1998, the Company and the Operating Partnership
completed several equity transactions.
On February 19, 1997, the Company consummated a second stock offering,
issuing an additional 3,105,000 shares of Common Stock (including exercise of
the underwriter's over-allotment), and the proceeds of such offering were used
to purchase an additional 3,105,000 common units in the Operating Partnership.
On May 15, 1997, the Company entered into an agreement with Security
Capital Preferred Growth, Inc. ("Security Capital") to sell 2,640,325 shares by
May 14, 1998 of Series A Cumulative Convertible Redeemable Preferred Stock
("Series A Preferred Shares"), $0.01 par value. On June 30, 1997 and December
2, 1997, the Company sold 738,553 and 923,191 Series A Preferred Shares,
respectively, under the agreement. The net proceeds were contributed to the
Operating Partnership in exchange for 1,661,744 Series A Cumulative Redeemable
Preferred Units ("Series A Preferred Units").
The Operating Partnership amended the Articles of Incorporation to
designate and establish the rights and privileges of the Series A Preferred
Unitholders which include certain voting, distribution and liquidation
preferences. Distributions are cumulative from the date of original issue and
are payable quarterly at the greater of the rate declared on the common unit or
an annual rate of $2.02 per unit. The Series A Preferred Units are not
redeemable prior to May 15, 2003. On or after May 15, 2003, the Operating
Partnership, at its option, may redeem the Series A Preferred Units for cash at
a price of $27.08 per unit, plus accrued and unpaid distributions. Under certain
circumstances, the Operating Partnership may elect to make such redemption with
Common Unit at the then market price of the Company's Common Stock. On or after
January 31, 1999, Security Capital may convert the Series A Preferred Shares
into Common Stock on a one-for-one basis subject to certain limitations. Prior
to January 31, 1999, the Series A Preferred Shares will not be convertible
unless the Company undergoes a change in control, as defined by the agreement,
or fails to qualify as a REIT for tax purposes.
On October 3, 1997, the Company sold 1,450,000 shares of Common Stock and
1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred Stock
("Series B Preferred Shares"), $0.01 par value, to the Prudential Insurance
Company of America ("Prudential"). The net proceeds were contributed to the
Operating Partnership in exchange for 1,450,000 common units and 1,216,666
Series B Cumulative Redeemable Preferred Units ("Series B Preferred Units").
The Operating Partnership amended the Articles of Incorporation to
designate and establish the rights and privileges of the Series B Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders. The Series B Preferred Units have a
liquidation preference of $28.50 per unit. Distributions are cumulative
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and are payable quarterly at the greater of the rate declared on the common unit
or an annual rate of $2.02 per unit. Prudential may convert the Series B
Preferred Shares into shares of Common Stock on a one-for-one basis, subject to
certain adjustments and limitations related to its ownership of Common Stock of
the Company. The Company, at its option, may redeem Series B Preferred Shares at
any time for Common Stock, plus accrued and unpaid dividends.
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, to
Cobalt Capital, LLC. The Company contributed the net proceeds to the Operating
Partnership in exchange for 500 shares of Series C Cumulative Redeemable
Preferred Units ("Series C Preferred Units").
The Operating Partnership amended the Articles of Incorporation to
designate and establish the rights and privileges of the Series C Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
of $7,910 per unit (7.91% of purchase price). If the securities receive an
investment grade rating, the distribution will decrease to $7,660 per unit.
Distributions are cumulative and are payable quarterly. The Operating
Partnership may redeem Series C Preferred Units after February 1, 2028, at the
liquidation price plus accrued distributions.
The Company currently has on file with the Securities and Exchange
Commission an effective registration statement which allows the sale of up to
$450,000,000 in debt or equity securities, of which approximately $312,000,000
remains available. As long as the Operating Partnership is in existence, the net
proceeds of all equity capital raised by the Company will be contributed to the
Operating Partnership in exchange for limited partnership interests in the
Operating Partnership. The Company and the Operating Partnership also may issue
securities senior to the Common Stock or Units, including additional preferred
stock or debt securities (either of which may be convertible into Common Stock
or Units or may be accompanied by warrants to purchase Common Stock or Units).
DEBT
The Operating Partnership's policy, which is set by the Board of Directors
of the Company, is to incur debt (including debt incurred under its lines of
credit) only if upon such incurrence its ratio of debt to total market
capitalization would be 60% or less. The Operating Partnership may reevaluate or
modify this financing policy from time to time in light of then current economic
conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors. At December
31, 1997, the Operating Partnership's debt to total market capitalization ratio
was 35.0%.
PROPERTY MANAGEMENT
The Operating Partnership and its Property Service Businesses are
experienced in the management and leasing of multifamily and retail properties.
The Operating Partnership believes that the management and leasing of its own
portfolio has resulted in consistent income growth
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and reduced operating expenses. The Property Service Businesses have provided
the Operating Partnership both with a source of cash flow that is relatively
stable and with economies of scale in conjunction with the management and
leasing of its own Properties. These Property Service Businesses also allow the
Operating Partnership and its subsidiaries to establish additional relationships
with tenants that benefit the Properties.
PROPERTY SERVICE BUSINESSES
MULTIFAMILY PROPERTY MANAGEMENT SERVICES. The residential property
management business of Smith Realty Company ("SRC"), an operating subsidiary of
the Operating Partnership, is a long-established, integrated business with
extensive experience in leasing and managing multifamily properties. This
subsidiary has been managing and leasing multifamily housing in the Washington,
D.C. metropolitan area since 1946 and, as of March 2, 1998, manages 58 apartment
properties (including 45 Multifamily Properties and 13 other multifamily
properties with approximately 3,800 apartment units). It also assists in the
development and acquisition of additional multifamily properties and carries out
a periodic inspection program that addresses all aspects of the property and
property management.
RETAIL PROPERTY MANAGEMENT SERVICES. The retail management and leasing
business, also conducted through Smith Realty Company, approaches the management
and leasing of its retail portfolio with an integrated program of regular direct
communication with retail tenants, proactive assistance with marketing,
merchandising and monitoring store operations, and maintenance. A retail
marketing staff works to promote the shopping centers as a whole and to work
with individual tenants to ensure the effectiveness of store design, marketing,
merchandising and sales efforts. The retail management and leasing group, in
addition to providing complete property management and leasing services for the
two Retail Properties totaling approximately 436,000 square feet, also provides
such services for a fee to three retail properties owned by affiliated parties
totaling approximately 293,000 square feet, and one retail property owned by an
unaffiliated third party totaling 660,000 square feet. Smith Realty Company also
provides retail leasing and brokerage services for additional, unaffiliated
third parties on a fee-for-service basis.
FINANCING SERVICES. The finance department negotiates and administers
all debt financing for the Operating Partnership and its subsidiaries, and, for
a fee, other properties owned by third parties (the majority of which are
affiliated with Robert H. Smith and Robert P. Kogod, the Co-Chief Executive
Officers and Co-Chairmen of the Board of the Company and the owners of
approximately 13% of the shares and Units). This responsibility includes
obtaining new sources of funding by actively soliciting prospective lenders,
monitoring, analyzing and negotiating changes in loan status and/or structure,
and satisfying reporting requirements of lenders. Financing services were
performed for approximately $489 million of refinancing in 1997. During the
fourth quarter of 1997, Financing Services personnel transferred to Charles E.
Smith Commercial Realty L.P. ("CESCR"), a commercial office partnership
affiliated with Messrs. Smith and Kogod. The Operating Partnership entered into
agreements through December 31, 1998 to provide Financing Services for certain
properties owned and certain properties to be acquired by CESCR. Services will
be provided utilizing CESCR personnel on
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a negotiated cost basis. The Company will separately negotiate revenue and cost
sharing agreements for Financing Services it may provide, if any, to properties
managed but not owned by CESCR.
ENGINEERING AND TECHNICAL SERVICES. The engineering and technical services
business is conducted through Consolidated Engineering Services, Inc., an
operating subsidiary of the Operating Partnership, which manages, operates,
maintains and repairs the "physical plant" of office, multifamily, and retail
properties. Through its staff of on-site and off-site engineers, supervisors,
technical specialists and maintenance personnel, this subsidiary provides
various services, including on-site building systems operations and maintenance,
engineering and technical consulting, automated environmental monitoring and
controls, preventive maintenance, management of building environmental systems
and repair and replacement of mechanical/electrical systems. This business
serves the Properties and also provides facilities management services for both
affiliated and unaffiliated third parties, including condominium, bank,
university and government buildings. During 1997, services were provided with
respect to approximately 30 million square feet of facilities.
INTERIOR CONSTRUCTION AND RENOVATION SERVICES. The construction services
business, conducted through Smith Management Construction, Inc., an operating
subsidiary of the Operating Partnership, is a construction management and
general contracting company that provides interior construction and renovation
services to the Properties and various other affiliated and unaffiliated third
party clients. This business focuses primarily on capital improvement projects
and office and retail tenant space construction and alteration, and provides the
expertise necessary to take a project from the initial planning and
preconstruction stage through the completion of construction. In 1997, oversight
was provided to approximately $66 million of construction activity.
CORPORATE SERVICES. The corporate services businesses, conducted through
Smith Realty Company, enable a central office to provide supporting services in
the areas of insurance, legal advice, accounting, information systems, human
resources, office administration and marketing to the Operating Partnership
and its subsidiaries, as well as to other affiliated third parties, including
CESCR. Services are provided at cost (including overhead) in accordance with
cost and executive sharing agreements. In management's opinion, the allocation
methods provide reasonable estimates of the costs that would have been incurred
by the Operating Partnership had the services been provided by the Operating
Partnership.
The accounting department is responsible for all accounting, auditing and
controls, procedures and management information systems as they relate to the
Operating Partnership and the Properties, and for certain other partnerships and
corporate entities (including affiliates of Messrs. Smith and Kogod). The legal
department provides real estate and corporate advice to management, performs
legal services and in some cases coordinates representation by outside counsel.
The marketing department develops and implements a variety of marketing programs
for the Operating Partnership and its subsidiaries, and for specific properties.
The human resources department administers all personnel functions. The
insurance subsidiary provides
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property and casualty insurance placement services for both corporate and
individual property requirements.
EMPLOYEES
As of March 2, 1998, the Operating Partnership and its subsidiaries had
approximately 1,400 full-time and part-time employees, the latter primarily
employed in on-site clerical positions. This total includes 540 employees who
provide on-site property services and, in the Property Service Businesses, 550
persons in its engineering and technical services subsidiary, 110 persons in its
interior construction and renovation subsidiary, and 200 persons in its
residential and retail leasing and management, finance, and corporate services
subsidiary.
RECENT DEVELOPMENTS
ACQUISITION PROPERTIES. During 1997, the Company, through the Operating
Partnership, acquired six operating properties containing 3,036 apartment units,
as further described below.
Crystal Plaza. This 540-unit, high-rise, multifamily apartment building
located in the Crystal City submarket of Arlington, Virginia, was acquired in
February 1997 for 307,079 Operating Partnership Units with an approximate value
of $8.7 million (based upon the price of the Company's stock on the date of the
acquisition), and the assumption of an existing mortgage, for an approximate
total cost of $43.0 million. The property was developed and managed by the
Smith Companies, predecessor to the Operating Partnership, and remains subject
to a 5.1% net profits interest in favor of an unaffiliated third party. During
the fourth quarter of 1997, this property had an average economic occupancy of
98.9% and average monthly rental revenue per apartment unit of approximately
$1,228.
Crystal Towers. This 912-unit, high-rise, multifamily apartment building
also located in Crystal City was acquired in February 1997 for 842,544 Operating
Partnership Units with an approximate value of $23.9 million, $0.9 million in
cash, and the assumption of an existing mortgage for an approximate total cost
of $69.8 million. The property was developed and managed by the Smith
Companies. During the fourth quarter of 1997, the property had an average
economic occupancy of 96.2% and average monthly rental revenue per apartment
unit of approximately $1,085.
Kenmore. This 376-unit high-rise multifamily apartment building located in
northeast Washington, D.C., was acquired in March 1997 for 510,674 Operating
Partnership Units with an approximate value of $14.5 million and the assumption
of an existing mortgage, for an approximate total cost of $16.3 million. During
the fourth quarter of 1997, the property had an average economic occupancy of
98.6% and average monthly rental revenue per apartment unit of approximately
$738.
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Lincoln Towers. This 714-unit high-rise property located in Ballston,
Virginia, was acquired in October 1997 for a total cost of approximately $88.9
million in cash. Lincoln Towers was built in 1992 and consists of twin 22-story
towers above a three level parking garage. The acquisition was funded in part
by the sale of 1,450,000 shares of Common Stock and 1,216,666 Series B Preferred
Shares for approximately $76 million. The Company contributed the net proceeds
to the Operating Partnership in exchange for 1,450,000 common units and
1,216,666 Series B Preferred Units. During the fourth quarter of 1997, the
property had an average economic occupancy of 90.1% and average monthly rental
revenue per apartment unit of approximately $1,224.
One East Delaware. This 306-unit high-rise property in downtown Chicago,
Illinois was acquired in October 1997 for approximately $43.1 million in cash.
Built in 1989, the property consists of a 36-story tower over an enclosed
parking garage. The Operating Partnership funded the acquisition with proceeds
from its line of credit. During the fourth quarter of 1997, the property had an
average economic occupancy of 99.4% and average monthly rental revenue per
apartment unit of approximately $1,229.
2000 Commonwealth. This 188-unit high-rise property in Boston,
Massachusetts was acquired in October 1997 for approximately $27.5 million
consisting of 464,667 Operating Partnership units valued at $13.9 million,
assumed debt of $13.3 million, and acquisition related costs of approximately
$0.3 million. Built in 1986, the property is a 16-story, brick structure over
below grade parking. During the fourth quarter of 1997, the property had an
average economic occupancy of 97.2% and average monthly rental revenue per
apartment unit of approximately $1,346.
In addition to the above-described properties, the Operating Partnership,
in the first quarter of 1998, also acquired two operating properties with 287
apartment units, contracted to purchase a third property with 299 units and
sold one property with 227 units, as further described below.
Tunlaw Park. This 120-unit mid-rise property in northwest Washington, D.C.
was acquired in January 1998 for $0.8 million in cash and 123,818 Operating
Partnership units valued at $4.4 million. The property was developed and
managed by the Smith Companies and the Operating Partnership previously owned a
20% minority interest. During the fourth quarter of 1997, the property had an
average economic occupancy of 94.6% and average monthly rental revenue per
apartment unit of approximately $1,047.
Tunlaw Gardens. This 167-unit, garden property in northwest Washington,
D.C. was acquired in January 1998 for $6.9 million consisting of $2.5 million
cash and 130,371 Operating Partnership units valued at $4.4 million. The
property was previously managed by the Operating Partnership. During the fourth
quarter of 1997, the property had an average economic occupancy of 96.1% and
average monthly rental revenue per apartment unit of approximately $716.
Parc Vista. In January 1998, the Operating Partnership contracted to
purchase this 299-unit, 16-story high-rise built in 1990. The property is
located in the Crystal City/Pentagon City
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submarket, adjacent to the Ritz Carlton Hotel, the Pentagon City regional mall,
and a Metrorail station. The property contains extensive contemporary amenities
and will be purchased for approximately $39 million cash during the second
quarter of 1998.
Oxford Manor. In March 1998, the Operating Partnership sold this 227-unit
property located in southeast Washington, D.C. for $4.4 million. The Operating
Partnership recognized a gain on the sale of $3.2 million.
DEVELOPMENT PROPERTIES. During 1997, the Operating Partnership, acquired
interests in three development properties as further described below.
Springfield Station. The Operating Partnership purchased for $9.1 million
in cash approximately 17 acres of land and is nearing completion on the first
phase of construction of an estimated 630-unit mid-rise and garden apartment
property in Springfield, Virginia. The $60 million project is located adjacent
to a new Metrorail and commuter rail station and a regional shopping mall and
offers convenient access to major transportation routes. Initial delivery is
expected in the spring of 1998, with final delivery in the fall of 1999.
Courthouse Place. In October 1997, the Operating Partnership acquired this
564-unit high-rise property under construction in Arlington, Virginia for $17.5
million consisting of $3.6 million cash and approximately 450,000 Operating
Partnership units valued at $13.9 million. Total expected project cost is
approximately $65 million. The balance of construction cost will be funded
through a three-year construction loan. Management expects to initially deliver
apartment units in the fourth quarter of 1998, with final delivery in the fall
of 1999.
One Superior Place. During the fourth quarter of 1997, construction began
on a 52-story, 809-unit high-rise apartment and commercial center in downtown
Chicago. The $112 million project will also include a new Whole Foods
supermarket and other tenants in its 52,000 square feet of commercial space.
Management expects to secure construction loan financing for this project during
the second quarter of 1998. Initial occupancy is expected in late summer of
1999 with final delivery in mid-2000.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a biographical summary of the experience of the executive
officers of the Company:
ROBERT H. SMITH. Mr. Smith is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service Businesses. Since 1962, Mr. Smith has been the President, Chief
Executive Officer and a director of Charles E. Smith Construction, Inc. and its
predecessor companies, where he oversees and directs all phases of development
and construction of the Smith Companies' office, retail and residential real
estate projects. He is also Co-Chairman of the Board and a director of Charles
E. Smith Commercial Realty, Inc. which together with its subsidiaries and
affiliates
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is engaged in the ownership, operation, and management of commercial office
buildings. Mr. Smith joined the Smith Companies in 1950. Mr. Smith is 69 years
old and the brother-in-law of Robert P. Kogod.
ROBERT P. KOGOD. Mr. Kogod is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service Businesses. From 1964 to 1997, Mr. Kogod was the President, Chief
Executive Officer and a director of Charles E. Smith Management, Inc., where he
oversaw and directed all phases of the leasing and management of the Smith
Companies' commercial real estate portfolio. He is now the Co-Chairman of the
Board and a director of Charles E. Smith Commercial Realty, Inc., a successor to
Charles E. Smith Management, Inc., and the owner, operator, and manager of
commercial office buildings. He is also Secretary/Treasurer and a director of
Charles E. Smith Construction, Inc., an affiliated company that specializes in
the development and construction of office, retail and residential projects.
Mr. Kogod joined the Smith Companies in 1959. Mr. Kogod is 66 years old and the
brother-in-law of Robert H. Smith.
ERNEST A. GERARDI, JR. Mr. Gerardi is President, Chief Operating Officer
and a Director of the Company, and is President, Chief Executive Officer, and a
director of each of the Property Service Businesses. From 1985 until 1994, Mr.
Gerardi was a member of the Executive Committee of Charles E. Smith Management,
Inc., where he had overall responsibility for all day-to-day business operations
and long-range planning. From 1985 through 1993, he served as Executive Vice
President and Senior Executive Vice President of Charles E. Smith Management,
Inc. Prior to joining the Smith Companies in 1985, Mr. Gerardi was with Arthur
Andersen and Co., where he served as senior partner in charge of the firm's
accounting and financial practice for over 250 professionals in Washington, D.C.
During his 27 years with Arthur Andersen, he specialized in management
consultation and strategic planning. He is also a member of the American
Institute of Certified Public Accountants and the D.C. Institute of Certified
Public Accountants. Mr. Gerardi is 62 years old.
WESLEY D. MINAMI. Mr. Minami is Senior Vice President and Chief Financial
Officer of the Company and Smith Realty Company, one of the Property Service
Businesses, and is responsible for the Company's debt portfolio, corporate
financial planning, local acquisitions, and its treasury, accounting, controls
and information systems departments. Prior to joining the Company in 1997, Mr.
Minami was the Chief Financial Officer for Ascent Entertainment Company where he
was responsible for an $86 million initial public offering spin-off of Ascent,
which had been a wholly-owned subsidiary of Comsat Corporation. Formerly, he
had served as the Treasurer of Comsat Corporation. From 1985 to 1993, Mr.
Minami held several positions, including Senior Vice President, Chief Financial
Officer at Oxford Realty Services Corporation which developed and managed a
portfolio of over 45,000 apartment units. Mr. Minami is 41 years old.
ROBERT D. ZIMET. Mr. Zimet is Senior Vice President, General Counsel and
Secretary of the Company and Smith Realty Company, one of the Property Service
Businesses. He was the General Counsel and a Senior Vice President of Charles
E. Smith Management, Inc., since joining the Smith Companies in 1983, and
became a Group Senior Vice President in 1991. He
11
<PAGE>
continues in these capacities for Charles E. Smith Commercial Realty, Inc., a
successor to Charles E. Smith Management, Inc., and the owner, operator, and
manager of commercial office buildings. Mr. Zimet is responsible for the legal
affairs of the Company and the Smith Companies, as well as supervision of the
Human Resources and Office Services departments of Smith Realty Company. Mr.
Zimet is 59 years old.
ROGER L. WEEKS. Mr. Weeks is Senior Vice President-Residential of the
Company and Smith Realty Company, one of the Property Service Businesses. Since
1980, Mr. Weeks has been Senior Vice President and Department Head of the
Residential Management Department for which he had overall property management
and leasing responsibility for the entire multifamily residential management
portfolio. Mr. Weeks was also a member of the Executive Committee of Charles E.
Smith Management, Inc. until 1994. He joined the Smith Companies in 1967. Mr.
Weeks is a member of the Building Owners and Managers Association, former
Treasurer of the National Apartment Association and past President of the
Apartment and Office Building Association. Mr. Weeks is 56 years old.
MATTHEW B. MCCORMICK. Mr. McCormick is the Senior Vice President-
Residential Marketing of the Company and Smith Realty Company, one of the
Property Service Businesses. Prior to January 1998, Mr. McCormick was the Senior
Vice President and Department Head of the Retail Group, where he was responsible
for retail property management and leasing, as well as outside retail brokerage
services. Prior to joining the Smith Companies in 1988, Mr. McCormick was a
retail specialist with the Washington, D.C. office of Coldwell Banker. Mr.
McCormick is 37 years old.
ALFRED G. NEELY. Mr. Neely is Senior Vice President-Development of the
Company, responsible for the zoning, planning and development of all multifamily
buildings. Since joining Charles E. Smith Construction, Inc., in 1989 as a
Senior Vice President and now as a Group Senior Vice President, Mr. Neely has
been responsible for zoning, planning and development. Prior to joining the
Smith Companies, Mr. Neely was Executive Vice President and Managing General
Partner of the New Height Group, a real estate and development company in
Denver, Colorado. During his nine years with this company, Mr. Neely has been
responsible for development and management of mixed-use properties. Mr. Neely
is 52 years old.
ITEM 2. PROPERTIES
GENERAL
The 51 Properties as of March 2, 1998 consist of 46 Multifamily Properties,
three Development Properties and two Retail Properties, as described in more
detail below. Twenty-eight of the Multifamily Properties (reflecting the
combination of three buildings into one for operational and statistical
purposes) and both Retail Properties were acquired in connection with the
Formation Transactions, two additional Multifamily Properties were acquired in
1994, five additional Multifamily Properties were acquired and one additional
Multifamily Property was constructed and delivered in 1995, four additional
Multifamily Properties were acquired in 1996
12
<PAGE>
(one of which was later combined with another Property for operational and
statistical purposes), six operating Multifamily Properties were acquired in
1997, and three Development Properties (or interests therein) were acquired and
construction commenced in 1997. In addition, the Operating Partnership held a
minority limited partnership interest in one other multifamily property (after
giving effect to the January 1998 purchase of the remaining partnership interest
in Tunlaw Park) in the Washington metropolitan area, acquired in the Formation
Transactions and increased in a subsequent transaction.
All of the Operating Partnership's properties are located in developed
areas that include other residential and retail properties. The number of
competitive residential properties in a particular area could have a material
effect on the Operating Partnership's ability to lease apartment units and on
the rents charged. In addition, other forms of single and multifamily
residential properties provide housing alternatives to tenants and potential
tenants of the Operating Partnership's residential properties. The Operating
Partnership's retail properties face similar competition with other retail
properties with respect to tenant leases. The Operating Partnership believes
that the properties are well located in their markets and are well constructed
and designed. In the opinion of management, the Operating Partnership's
properties are adequately covered by insurance.
MULTIFAMILY PROPERTIES
The 45 operating Multifamily Properties owned as of December 31, 1997
contain a total of 18,236 garden, mid-rise, and high-rise apartment units,
ranging in size from 115 to 1,065 apartment units. All properties are located
in the Washington D.C. metropolitan area with the exception of one property in
Chicago, Illinois and one property in Boston, Massachusetts. All of the
Multifamily Properties are 100% owned by the Operating Partnership and its
subsidiaries. The Smith Companies developed and built 27 of the Multifamily
Properties owned by the Operating Partnership (not including the Westerly at
Worldgate, which was developed by the Operating Partnership but constructed by
an affiliate of the Smith Companies). In 1997, the average monthly rental
revenue per unit was $901 and the average economic occupancy was 96.4% for the
Core Residential Portfolio (Multifamily Properties owned as of December 31,
1995.)
Each of the Multifamily Properties is established in its local market and
provides residents with numerous amenities and services, which may include 24-
hour desk service, swimming pools, tennis courts, exercise rooms and/or saunas,
day care centers, party or meeting rooms, tenant newsletters, and laundry
facilities. Nearly all units are wired for cable television, and many units also
offer additional features, such as washer/dryer, microwave, fireplace, and
patio/balcony. The Operating Partnership maintains an ongoing program of
regular maintenance and capital improvements and renovations, including roof
replacement and exterior maintenance, kitchen and bath renovations, balcony
repairs, and replacements of various building systems.
The following table sets forth certain additional information relating to
the Multifamily Properties as of December 31, 1997 (in the following table,
occupancy is based upon economic occupancy, which measures occupancy beginning
on the rent commencement date; monthly
13
<PAGE>
revenue per unit is total property revenue divided by the number of apartment
units; and certain data may be omitted for properties not operated by the
Operating Partnership for the entire year):
14
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
Residential Portfolio Statistics for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Year Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Built Units Per Units Per Unit Occupancy
- ---------------------------- --------- --------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Core Residential Portfolio
NW Washington, D.C.
Albemarle High-rise 1959 235 1,097 $1,161 98.8%
Calvert-Woodley High-rise 1954 136 1,001 1,090 99.1%
Cleveland House High-rise 1955 216 894 1,057 98.7%
Connecticut Heights High-rise 1920s/74 519 536 835 96.2%
Corcoran House High-rise 1961 138 464 786 99.3%
Statesman High-rise 1961 281 593 773 98.9%
2501 Porter Street High-rise 1988 202 760 1,390 97.7%
------ ----- ------ ----
1,727 723 978 98.0%
Crystal City
The Bennington High-rise 1982 348 804 1,015 96.0%
Crystal House I High-rise 1964 426 917 974 96.2%
Crystal House II High-rise 1965 402 938 955 96.5%
Crystal Square High-rise 1973/75 378 1,121 1,116 97.9%
Crystal Place High-rise 1987 180 894 1,264 98.0%
Gateway Place High-rise 1987 162 826 1,541 89.1%
Water Park Towers High-rise 1988/89 360 881 1,434 96.6%
------ ----- ------ ----
2,256 923 1,138 96.2%
Other NE & SE Washington,
D.C.
Car Barn Garden 1981/87 196 1,311 832 97.3%
Fort Chaplin Garden 1963/65 549 983 636 97.7%
Marbury Plaza High-rise 1966 672 997 635 96.5%
Oxford Manor Garden 1968 227 1,005 594 95.0%
------ ----- ------ ----
1,644 1,031 653 96.8%
Other Northern Virginia -
Inside Beltway
Berkeley Mid-rise 1960 138 891 719 97.8%
Boulevard of Old Town III Garden 1941 159 603 816 97.5%
Columbia Crossing Garden 1990/91 247 976 1,046 92.3%
Columbian Stratford Mid-rise 1959 227 942 732 96.7%
Concord Village Garden 1968 531 1,025 776 94.2%
Courthouse Plaza High-rise 1988/90 396 772 1,179 97.6%
Executives Mid-rise 1959/61 711 877 755 95.9%
Newport Village Garden 1969/71 937 1,115 880 97.4%
Orleans Village Garden 1965/67 851 1,061 806 95.9%
Patriot Village Garden 1973/77 1,065 1,162 872 96.2%
Skyline Towers High-rise 1970/72 940 1,221 970 96.5%
Windsor Towers Mid-rise 1965 280 1,025 783 97.6%
------ ----- ------ ----
6,482 1,044 870 96.2%
Other Northern Virginia -
Outside Beltway
Bedford Village Garden 1967 752 1,070 869 94.5%
Oakwood Garden 1980 218 968 1,021 97.6%
Potomac View Garden 1978 192 965 738 97.5%
Westerly at Worldgate Garden 1995 320 921 1,057 93.8%
------ ----- ------ ----
1,482 1,009 915 95.1%
Suburban Maryland
The Manor Garden 1969 435 999 746 96.2%
Suburban Tower High-rise 1960 172 677 803 97.4%
------ ----- ------ ----
Subtotal/Average 607 908 762 96.6%
------ ----- ------ ----
Subtotal/Average 14,198 975 901 96.4%
Acquisition Portfolio
Charter Oak (other No.Va.
-outside Beltway) Garden 1970 262 1,097 918 97.7%
Van Ness South (NW
Washington, D.C.) High-rise 1970 625 956 1,032 97.9%
1841 Columbia Road (N.W.
Wash., D.C.) High-rise 1923 115 634 621 97.5%
The Kenmore (NW
Washington, D.C.) High-rise 1950 376 725 N/A N/A
Crystal Plaza (Crystal
City) High-rise 1967 540 1,129 N/A N/A
Crystal Towers (Crystal
City) High-rise 1967 912 1,107 N/A N/A
Lincoln Towers (other
No.Va.-inside Beltway) High-rise 1992 714 879 N/A N/A
2000 Commonwealth
(Boston, MA) High-rise 1986 188 878 N/A N/A
One East Delaware
(Chicago, IL) High-rise 1989 306 704 N/A N/A
------ ----- ------ ----
Sub-Total/Average 4,038 706 955 97.8%
------ ----- ------ ----
All Residential Properties 18,236 915 $ 904 96.5%
====== ===== ====== ====
</TABLE>
15
<PAGE>
The following table sets forth the total number of apartment units in the
Core Residential Portfolio, the economic occupancy, and the average monthly
rental revenue per unit as of the end of 1997 and in each of the previous five
years:
<TABLE>
<CAPTION>
MULTIFAMILY PROPERTIES
Average Monthly
Year Number of Units Percent Occupied* Revenue Per Unit
- ------- --------------- ------------------ ----------------
<S> <C> <C> <C>
1997 14,198 96.4% $901
1996 12,462 97.0% $883
1995 11,834 97.2% $862
1994 11,834 97.8% $845
1993 11,834 97.8% $818
1992 11,587 97.2% $802
</TABLE>
* Based on economic occupancy
RETAIL PROPERTIES
The Operating Partnership's two Retail Properties, Skyline Mall and
Worldgate Centre, are enclosed malls containing a total of approximately 436,000
square feet of retail space. Until December 1997, both Retail Properties
leased health club facilities to entities controlled by Messrs. Smith and Kogod
pursuant to leases expiring on December 31, 2015. In December 1997, the health
clubs were sold by Messrs. Smith and Kogod. In conjunction with that sale, the
Operating Partnership agreed to restructure the two leases, including reduced
base rent on the Worldgate lease, and extend terms on both leases for ten years,
through 2025, in exchange for a $2.3 million cash payment. The Operating
Partnership used the funds to retire 65,000 Operating Partnership units.
WORLDGATE CENTRE. Worldgate Centre is a community retail center located in
Herndon, Virginia, at the intersection of two major Northern Virginia traffic
arteries, the Dulles Airport Access Highway and Centreville Road. Developed by
the Smith Companies in 1991, it is a part of a mixed-use development which
includes the 320-unit Multifamily Property which the Operating Partnership
constructed in 1995. The town of Herndon is located in Fairfax County, one of
the highest median income counties in the country. The Property contains the
108,670 square foot Worldgate Athletic Club, a Loew's Cinema, and a mix of
approximately 40 other food service, fashion and specialty retailers and various
business and general service tenants. Worldgate Centre has 230,926 square feet
of leasable area and had an average occupancy rate of 97.6% during 1997.
Approximately 10.1% of the leases, based on net rentable area, are scheduled to
expire prior to the year 2001.
SKYLINE MALL. Skyline Mall is a two-level, enclosed community retail
center located on Route 7 in Northern Virginia, at the intersection of Fairfax
County, Arlington County, and the City of Alexandria, Virginia. Originally
developed by the Smith Companies in 1977, it is part of a mixed-use community
which also includes over two million square feet of office space and over 3,300
high-
16
<PAGE>
rise condominium and apartment units (including Skyline Towers, a 940-unit
Multifamily Property owned by the Operating Partnership), all within walking
distance. The Property has 204,914 square feet of leasable area and had an
average occupancy rate of 97.2% in 1997. It contains the 79,920 square foot
Skyline Racquet and Health Club, an AMC Cinema, and approximately 40 other
stores, including restaurants, fashion and specialty retailers, and various
business and general services. Approximately 11.8% of the leases, based on net
rentable area, are scheduled to expire prior to the year 2001.
The following table sets forth certain additional information relating to
the Retail Properties as of December 31, 1997:
RETAIL PROPERTIES
<TABLE>
<CAPTION>
Gross Average Average
Leasable Number Average Base Rent Gross Rent
Property Year Area of % Leased Per SF Per SF
Name Location Completed (SF) Stores 1997 Leased Leased
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Skyline Mall Fairfax Co., VA 1977 204,914 40 97.2 % $11.91 $16.16
Worldgate
Centre Herndon, VA 1991 230,926 40 97.6 % $21.66 $28.72
------- ------ ------ ------
435,840 97.4 % $17.07 $22.81
======= ===== ====== ======
</TABLE>
PROPERTY MARKETS
The Operating Partnership believes that the demographic and economic trends
and conditions in the Chicago, Boston and Washington, D.C. metropolitan areas,
the markets where the Properties are located, indicate an excellent potential
for continued high occupancy and rental rate growth in 1998 and beyond. These
three markets are projected to be among the top four U.S. markets in total
employment growth over the period 1993 to 2005, an average increase in each
market of over 50,000 or more jobs per annum, according to 1996 projections
prepared by the U.S. Dept. of Commerce, Bureau of Economic Analysis as indicated
on the following table:
17
<PAGE>
PROJECTED JOB GROWTH FOR MAJOR U.S. CITIES 1993 TO 2005
- -------------------------------------------------------
<TABLE>
<CAPTION>
Metro Area Job Increase Rank Projected Jobs Added
- ---------------------------- ----------------- --------------------
<S> <C> <C>
CHICAGO, IL 1. 763,000
Los Angeles-Long Beach, CA 2. 685,000
WASHINGTON, DC-MD-VA 3. 648,000
BOSTON, MA 4. 600,000
Atlanta, GA 5. 598,000
Orange County, CA 6. 525,000
Houston, TX 7. 515,000
Dallas, TX 8. 486,000
Phoenix-Mesa, AZ 9. 469,000
San Diego, CA 10. 429,000
- -------------------------
</TABLE>
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May 1996
According to the same Department of Commerce projections, the Boston,
Chicago and Washington D.C. metro areas are also projected to be among the top
ten in total population increases of all U.S. cities as shown in the following
table:
PROJECTED POPULATION GROWTH FOR MAJOR U.S. CITIES 1993 TO 2005
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Population Projected Total
Metro Area Increase Rank (1) Population Increase
- ----------------------------- ----------------- -------------------
<S> <C> <C>
Riverside-San Bernadino, CA 1. 928,000
Los Angeles, Long Beach, CA 2. 927,000
WASHINGTON, D.C.-MD-VA 3. 744,000
Atlanta, GA 4. 732,000
CHICAGO, IL 5. 716,000
Houston, TX 6. 673,000
Phoenix-Mesa, AZ 7. 617,000
San Diego, CA 8. 595,000
Orange County, CA 9. 531,000
BOSTON, MA, NH 10. 518,000
- -------------------------
</TABLE>
(1) Reflects rank increase in population by number of people
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May 1996
In the Washington, D.C. metropolitan area, employment and population growth
in recent years, and expected in future years, has been considerably stronger in
the northern Virginia
18
<PAGE>
segment of the metropolitan area, which is the sector where the majority (69%)
of the Multifamily Properties are located. The growth in northern Virginia is
substantially attributable to continuing strong growth in the technology sector,
particularly the information technology and telecommunications segments. The
Operating Partnership believes that this trend will continue due to the
concentration of technology firms in northern Virginia and the growth outlook
for the information technology and telecommunications industries.
Demand for multifamily rental apartments continues to be strong in the
Boston, Chicago and Washington, D.C. metropolitan areas as evidenced by high
occupancy and rent growth rates. Surveys of comparable investment grade
apartment properties are conducted in each of these markets annually by The REIS
Reports, Inc. The results of these surveys are shown in the following tables:
APARTMENT OCCUPANCY AND RENTAL RATE GROWTH FOR SELECTED MARKETS
<TABLE>
<CAPTION>
Rental Growth Rate
-----------------------
Metro Area Market Occupancy 1997 1997 1998 (Projected)
- ---------------------- --------------- ----- ----------------
<S> <C> <C> <C>
Boston 97.6% 6.4% 6.0%
Chicago 97.2% 4.4% 5.5%
Washington, D.C.
- Northern Virginia 95.9% 2.8% 3.3%
- Washington, D.C. 96.9% 3.2% 4.2%
</TABLE>
_______________
Source: The REIS Reports, Inc., February 1998
MORTGAGE FINANCING
As of December 31, 1997, thirty-five of the 50 Properties were subject to
Mortgage Loans aggregating approximately $500,435,000. The Mortgage Loans are
collateralized by nonrecourse first lien mortgages or deeds of trust on
Properties organized into four pools ("Mortgage Pool One," "Mortgage Pool Two,"
"Mortgage Pool Three," and "Mortgage Pool Four", as shown in the chart below)
and seven individual loans (the "Acquisition Mortgages"). The Mortgage Loans
bear interest at a weighted average interest rate of 7.86% at December 31,
1997. The Properties collateralizing each Mortgage Loan, the outstanding
principal balances as of December 31, 1997, the applicable interest rates, and
the maturity dates for each Mortgage Loan are set forth in the chart below.
19
<PAGE>
<TABLE>
<CAPTION>
12/31/97
Mortgage Pool/ Outstanding Interest Maturity
Collateral Location Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
(000's)
<S> <C> <C> <C> <C>
Mortgage Pool One $ 110,140 7.93% June 30, 1999
- -------------------
Columbian Stratford Arlington, Virginia
Corcoran House Washington, D.C.
Crystal House I Arlington, Virginia
Crystal House II Arlington, Virginia
Executive North (1) Arlington, Virginia
Marbury Plaza Washington, D.C.
Oxford Manor Washington, D.C.
Skyline Towers Fairfax County, Virginia
Statesman Washington, D.C.
Water Park Towers Arlington, Virginia
Windsor Towers Arlington, Virginia
Mortgage Pool Two $125,214 8.19% June 30, 2001
- -----------------
Bedford Village Fairfax County, Virginia
Car Barn Washington, D.C.
Concord Village Arlington, Virginia
Crystal Place Arlington, Virginia
Crystal Square Arlington, Virginia
Executive Central (1) Arlington, Virginia
Executive South (1) Arlington, Virginia
Fort Chaplin Washington, D.C.
Newport III (1) Alexandria, Virginia
Orleans Village Fairfax County, Virginia
Mortgage Pool Three $117,000 7.99% June 30, 2009 (2)
- -------------------
Berkeley Arlington, Virginia
Calvert Woodley Washington, D.C.
Cleveland House Washington, D.C.
Columbia Crossing Arlington, Virginia
Courthouse Plaza Arlington, Virginia
Gateway Place Arlington, Virginia
Newport I/II (1) Alexandria, Virginia
Skyline Mall Fairfax County, Virginia
2501 Porter Street Washington, D.C.
Mortgage Pool Four
- ------------------------
Patriot Village Fairfax County, Virginia $ 31,095 8.24% August 1, 2009 (3)
Acquisition Mortgages
- ------------------------
Connecticut Heights Washington, D.C. $ 8,053 Variable(4) February 28, 1998
The Bennington Arlington, Virginia $ 12,666 7.50% October 1, 2020
1841 Columbia Road Washington, D.C. $ 3,211 9.00% August 1, 1999
Crystal Plaza Arlington, Virginia $ 33,971 6.86% November 1, 2009
Crystal Towers Arlington, Virginia $ 44,610 7.158% January 1, 2006
The Kenmore Washington, D.C. $ 1,165 9.25% March 30, 2005
2000 Commonwealth Boston, Massachusetts $ 13,310 Variable(5) December 3, 1998
-------- --------
$500,435 7.86%
======== ========
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
(1) Operated as a single property, but divided for collateralization purposes.
(2) Twenty-five year amortization begins June 30, 1999.
Also, reflects a five-year extension agreed to in January 1996.
(3) Thirty-year amortization begins in August 2004.
(4) Interest rate is based on LIBOR plus 1.70%.
(5) Interest rate is based on LIBOR plus 1.10%
Each of the related loan agreements for Mortgage Pool One and Mortgage Pool
Two requires the payment of interest only and contains cross-collateral and
cross-default provisions among the separate financing partnership borrowers in
each pool. Prepayment of these loans would be subject to a yield maintenance
premium. The loan secured by Mortgage Pool Three is interest only through June
30, 1999, at which time amortization begins using a 25-year amortization
schedule with a balloon payment at maturity. In addition, this loan may not be
prepaid until May 1, 1999, at which time it would be subject to a yield
maintenance premium. The loan is cross-collateralized with the $83 million line
of credit from the same lender, as described below. Certain predecessor
partners executed guarantees for $42 million of the mortgage loans secured by
Mortgage Pool Three. The loan secured by Mortgage Pool Four was refinanced in
September 1996 and was obtained jointly with a ground lessor, with a portion of
the principal allocated to each of them. The ground lessor has been allocated
$9.9 million of the refinanced loan (of the total of $41.0 million outstanding
as of December 31, 1997), for which the Operating Partnership is contingently
liable. The loan requires the payment of interest only through August 2004, at
which time amortization begins using a 30-year amortization schedule with a
balloon payment due in August 2009. The Operating Partnership remits full debt
service to the lender and reduces its ground rent payment by the corresponding
amount of debt service relating to the principal assigned to the ground lessor.
The Acquisition Mortgages relate to the debt assumed on seven acquired
Multifamily Properties. The loans require monthly payments of interest and, in
certain cases, principal (1841 Columbia Road, Crystal Towers and Kenmore).
Lines of Credit
The Operating Partnership had a $100 million revolving line of credit with
PNC Bank, Nations Bank and U.S. Bank (formerly First Bank), of which $75 million
was outstanding at December 31, 1997. Amounts outstanding bear interest at a
selected LIBOR rate plus 97.5 to 125 basis points (6.98% at December 31, 1997)
based on the leverage ratio of the related collateral. The Operating Partnership
paid an annual fee of .125% on the full amount of the line. Borrowings under
this line of credit were collateralized by the Albemarle, Worldgate Centre,
Manor, Potomac View, Suburban Tower, Boulevard of Old Town I and II, and Van
Ness South apartments properties.
In February 1998, the Operating Partnership established a new $250
million, unsecured line of credit with PNC Bank, Nations Bank and U.S. Bank
which matures in March 2001. Draws upon
21
<PAGE>
the line are subject to certain unencumbered asset requirements. The Operating
Partnership repaid the balance outstanding under the existing $100 million line
and recognized an extraordinary loss of $0.3 million related to the
extinguishment of such debt. Borrowings under the new line bear interest at a
selected LIBOR rate plus 75 to 110 basis points based on the leverage ratio of
the Operating Partnership.
The Operating Partnership also has a secured $83 million credit facility
with Northwestern Mutual Life expiring in June, 2004, to be used for property
acquisitions. The line provides for an interest rate that is fixed at the time
of each acquisition at a spread of 1.50% over 10-year Treasury Bills at that
time. Any properties acquired in this fashion will secure the facility, and it
is cross-collateralized with Mortgage Pool Three. The balance of $30 million
outstanding at December 31, 1997 is collateralized by the Oakwood and Charter
Oak properties. The blended interest rate is 7.27%.
Subsequent to the issuance of the Series C Preferred Units in the first
quarter of 1998, the related debt repayment and the newly established $250
million line of credit, the Operating Partnership had approximately $183 million
of unused borrowing capacity available on its lines of credit, subject to
unencumbered asset requirements.
In October 1997, the Operating Partnership obtained a variable rate,
unsecured construction loan of $46.3 million to finance the construction of the
564-unit Courthouse Place property. The loan is recourse to the Operating
Partnership, bears interest at LIBOR plus 130 basis point (6.93% at December 31,
1997), and matures in October 2000. The loan balance at December 31, 1997 was
$5,536,000.
ITEM 3. LEGAL PROCEEDINGS.
The Operating Partnership and/or the Property Service Businesses are
presently subject to legal actions or claims for damages that arise in the
ordinary course of business. In the opinion of management and counsel to the
Operating Partnership, the ultimate outcome of such litigation will not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
There is no established public trading market for the Units of the
Operating Partnership. The Company's shares of Common Stock have been listed on
the New York Stock Exchange ("NYSE") since June 24, 1994, trading under the
symbol "SRW." Prior to that date, the Company's shares of Common Stock were not
publicly traded.
During the fourth quarter of 1997, the Operating Partnership issued Units
(as set forth in the chart below) for the purpose of acquiring all or part of an
ownership interest in a real estate property. The recipients of these Units have
been the partners of partnerships owning such property, who have swapped their
ownership interest for Units, cash, the assumption of debt, or some combination
thereof. These Units are offered on a private placement basis, and the offerings
are completed without an underwriter or the payment of sales commissions or
discounts. The Operating Partnership believes that such offerings and sales were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") by virtue of Section 4(2) of the Securities Act as the
securities were issued to accredited investors or affiliates in transactions not
involving a public offering.
UNREGISTERED UNIT ISSUANCES
<TABLE>
<CAPTION>
#
Issue of Units Implied Unit
Date Issued Consideration Value Redeemable
- ------- -------- -------------------------- -------------- --------------
<S> <C> <C> <C> <C>
10/97 464,667 Interest in 2000 $13,940,000 After one year
Commonwealth ($30.000/Unit)
Apartments
10/97 450,000 Interest in Courthouse $13,950,000 After one year
Place Apartments ($31.000/Unit)
1/98 123,818 Interest in Tunlaw $ 4,086,000 After one year
Park Apartments ($33.000/Unit)
1/98 130,371 Interest in Tunlaw $ 4,343,049 After one year
Gardens Apartments ($33.313/Unit)
</TABLE>
23
<PAGE>
On October 3, 1997, the Company issued 1,450,000 shares of Common Stock
and 1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B Preferred Shares") , $0.01 par value, liquidation preference of
$28.50 per share, for a total of $76 million. The Company contributed the net
proceeds to the Operating Partnership in exchange for 1,450,000 common units and
1,216,666 Series B Preferred Units.
24
<PAGE>
The Operating Partnership amended the First Amended and Restated Limited
Partnership Agreement of the Operating Partnership to designate and establish
the rights and privileges of the Series B Preferred Units which include certain
voting, distribution and liquidation preferences over the common unitholders,
mirroring the rights of the Preferred Shareholders.
Distributions on the Series B Preferred Units are cumulative and are
payable quarterly at the greater of an annual rate of $2.02 per unit or the rate
declared on the common units. No distributions will be declared or paid on any
class of common or other junior units to the extent that distributions on Series
B Preferred Units have not been declared and/or paid. The Operating Partnership,
at its option, may redeem the Series B Preferred Units for Common Unit. The
investor may convert the Series B Preferred Shares into Common Shares on a one-
for-one basis subject to certain adjustments and limitations related to its
ownership of Common Units.
On December 2, 1997, the Company sold an additional 923,191 Series A
Preferred Shares for $24.7 million, net of $0.3 million in offering costs. The
net proceeds were contributed to the Operating Partnership in exchange for
923,191 Series A Preferred Units.
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$48.9 million, net of offering costs of $1.1 million. The net proceeds were
contributed to the Operating Partnership in exchange for 500 Series C
Preferred Units. The Operating Partnership amended the First Amended and
Restated Limited Partnership Agreement of the Operating Partnership to
designate and establish the rights and privileges of the Series C Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders, mirroring the rights of the Preferred
Shareholders. The Series C Preferred Units have a liquidation preference of
$100,000 per unit and an initial annual distribution rate of $7,910 per unit. If
the securities receive an investment grade rating, the distribution will
decrease by $250 per unit. Distributions are cumulative and are payable
quarterly. The Operating Partnership may redeem Series C Preferred Units after
February 1, 2028, at the liquidation price plus accrued distributions.
The Operating Partnership believes that such offering and sale was exempt
from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act as the securities were issued to an affiliate in a transaction
not involving a public offering.
The following table sets forth the distributions made by the Operating
Partnership with respect to each such period:
<TABLE>
<CAPTION>
PERIOD DISTRIBUTION PER UNIT
- ------ ---------------------
<S> <C>
January 1, 1996, to March 31, 1996 $0.490
April 1, 1996, to June 30, 1996 $0.490
July 1, 1996, to September 30, 1996 $0.505
October 1, 1996, to December 31, 1996 $0.505
January 1, 1997, to March 31, 1997 $0.505
April 1, 1997, to June 30, 1997 $0.505
July 1, 1997, to September 30, 1997 $0.520
October 1, 1997, to December 31, 1997 $0.520
</TABLE>
25
<PAGE>
On March 2, 1998, the Operating Partnership had approximately 750 unitholders
of record.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating information
on a historical basis for the Operating Partnership and the Predecessor (as
hereinafter defined in the Notes to Consolidated Financial Statements). The
following information should be read in conjunction with all of the financial
statements and notes thereto included elsewhere in this Form 10-K. The
historical operating data for the years ended December 31, 1997, 1996, 1995,
1994 and 1993 have been derived from the financial statements of the Operating
Partnership and the Predecessor audited by Arthur Andersen LLP, independent
accountants.
Charles E. Smith Residential Realt L.P. and CES Group
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Charles E. Smith Residential Realty L.P. CES Group
------------------------------------------- --------------------------
June 30, January 1,
Year Ended December 31, 1994 to 1994 Year Ended
------------------------------ December 31, to June 29, December 31,
(Dollars in Thousands, Except Per Unit Data) 1997 1996 1995 1994 1994 1993
- --------------------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rental properties
Revenues(1) $200,104 $163,959 $143,464 $ 66,683 $63,496 $124,187
Expenses 104,493 89,156 78,514 36,571 36,039 70,681
Equity in income of Property Service Businesses 7,597 7,846 6,868 3,785 2,798 7,098
Corporate general & administrative expenses 6,563 5,255 4,768 2,089 1,550 3,137
Interest income 1,063 1,029 1,424 825 970 1,940
Interest expense 45,411 43,606 37,421 17,392 24,798 46,815
Income/(loss) before extraordinary items 52,297 34,817 31,053 15,241 (10,700) 12,592
Net income/(loss) of the Operating Partnership 52,210 34,817 31,053 15,241 (25,895) 14,691
------------------------------------------- ----------------------------
Earnings per common unit - basic $1.89 $1.59 $1.44 $0.72
Earnings per common unit - diluted $1.88 $1.59 $1.44 $0.72
OTHER DATA
FUNDS FROM OPERATIONS(2):
Net income $ 52,210 $ 34,817 $ 31,053 $ 15,241
Plus
Depreciation and amortization of rental property 20,666 17,931 16,258 7,738
Extraordinary item - loss on extinguishment of debt 87 - - -
-------------------------------------------
Funds from Operations $ 72,963 $ 52,748 $ 47,311 $ 22,979
===========================================
Net cash flows provided by (used in)
Operating activities $ 75,223 $ 50,958 $ 54,283 $ 19,877
Investing activities (196,924) (72,742) (68,495) (26,666)
Financing activities 117,803 16,204 5,340 25,139
Cash dividends per unit $ 2.035 $ 1.975 $ 1.915 $ 0.480
Average residential occupancy rate(3) 96.4% 97.0% 97.2% 97.8% 97.8%
Number of apartment units - core portfolio(3) 14,198 12,462 11,834 11,834 11,834
Number of apartment units - total portfolio 18,236 15,200 14,198 12,462 11,834
BALANCE SHEET DATA
Rental properties, net(4) $804,323 $470,093 $414,490 $315,213 $295,544
Total assets 865,506 522,211 469,322 391,189 357,861
Loans(5) 610,971 546,544 483,177 404,971 551,550
Other Limited Partners' Interest at redemption
value(6) 502,719 351,873 288,663 310,247 -
Partner's Equity
General Partner's General and Limited
Partnership Interest(6) (264,369) (389,252) (320,286) (347,767) (216,006)
</TABLE>
26
<PAGE>
[FOOTNOTES TO SELECTED FINANCIAL DATA]
1. Includes revenues from the retail properties of $10,645 in 1997, $10,176
in 1996, $10,418 in 1995, $8,990 in 1994 and $8,048 in 1993.
2. Funds from Operations (FFO) is defined by the National Association of Real
Estate Investment Trusts (NAREIT) as net income (loss) (computed in
accordance with generally accepted accounting principles) excluding gains
(or losses) from debt restructuring, and distributions in excess of
earnings allocated to Minority Interest, plus depreciation/amortization of
assets unique to the real estate industry. Depreciation/amortization of
assets not unique to the industry, such as amortization of deferred
financing costs and non-real estate assets, is not added back. FFO does not
represent cash flow from operating activities in accordance with generally
accepted accounting principles (which, unlike Funds from Operations,
generally reflects all cash effects of transactions and other events in the
determination of net income) and should not be considered an alternative to
net income as an indication of the Operating Partnership's performance or
to cash flow as a measure of liquidity or ability to make distributions.
The Operating Partnership considers FFO a meaningful, additional measure of
operating performance because it primarily excludes the assumption that the
value of real estate assets diminishes predictably over time, and because
industry analysts have accepted it as a performance measure. Comparison of
the Operating Partnership's presentation of FFO, using the NAREIT
definition, to similarly titled measures for other REITs may not
necessarily be meaningful due to possible differences in the application of
the NAREIT definition used by such REITs.
3. Average occupancy is defined as gross potential rent for the core portfolio
less vacancy allowance divided by gross potential rent for the period,
expressed as percentage.
4. At the formation of the Operating Partnership, all rental properties were
recorded at predecessor partners' historical cost basis which is
significantly less than current value and, therefore, results in dilution
of partners' book value. Partners' equity as of December 31, 1997, 1996,
1995 and 1994 is net of $(244,208) contribution by Predecessors of assets
at historical cost, net of liabilities.
5. Represents mortgage loans, lines of credit and construction loans.
6. Limited partnership units of the Other Limited Partners may be redeemed
at the unitholder's discretion. Consequently, the Other Limited Partners'
Interest, measured at redemption value, is not included in partner's
equity. Partner's equity has been adjusted to reflect the redemption value
of Other Limited Partners' Interest. (See footnote 15 to the financial
statements.)
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BACKGROUND
The following discussion compares historical results of operations for the
years ended December 31, 1997 and 1996 as well as the years ended December 31,
1996 and 1995. The discussion should be read in conjunction with the "Selected
Financial Data," and the financial statements and notes thereto included
elsewhere in this annual report.
THE OPERATING PARTNERSHIP
The Operating Partnership is engaged primarily in the acquisition,
development, management and operation of multifamily properties. Together with
its subsidiaries, the Operating Partnership is a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
leasing and property management expertise.
On June 30, 1994, Charles E. Smith Residential Realty, Inc. (the "Company")
made a $201.4 million capital contribution to the Operating Partnership for a 1%
general partnership interest and a 41.7% limited partnership interest in the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership.
As of December 31, 1997, the Operating Partnership and its subsidiaries,
owned 45 operating multifamily properties, three multifamily properties under
construction and two retail shopping centers (collectively, the "Properties").
Two of the properties are located in Chicago, Illinois and one is located in
Boston, Massachusetts; all other properties are located in the Washington, D.C.
metropolitan area. The operating multifamily properties consist of the
following:
28
<PAGE>
<TABLE>
<CAPTION>
Number of
-----------------
Type Properties Units
---------------------- ---------- ------
<S> <C> <C>
Core Portfolio
High-Rise/Mid-Rise 22 7,519
Garden 14 6,679
-- ------
36 14,198
-- ------
Acquisitions
High-Rise 8 3,776
Garden 1 262
-- ------
9 4,038
-- ------
45 18,236
== ======
</TABLE>
The Operating Partnership's two free standing retail properties are enclosed
malls containing a total of approximately 436,000 square feet of retail space.
Additionally, the Operating Partnership owned substantially all the equity
in the following entities (collectively, the "Property Service Businesses")
which provide a range of services to the owned Properties, essentially at cost
(including overhead), and for a fee to other properties including commercial
office partnerships which have Messrs. Smith and Kogod as the general partners
("Affiliates"):
. Multifamily and Retail Property Management Services provides property
management and leasing services to multifamily and retail properties.
. Interior Construction and Renovation Services provides construction and
project management services for capital improvement and tenant renovation
projects of office, retail and residential properties.
. Engineering and Technical Services provides on-site building systems
operations and maintenance; engineering and technical consulting;
automated environmental monitoring and controls; repair and replacement
of mechanical/electrical systems; and facilities management services.
. Financing Services provides negotiation, administration and execution of
debt refinancing including sourcing funding alternatives, soliciting
prospective lenders, monitoring, analyzing and negotiating changes in
loan status and/or structure, and requirements of lenders.
29
<PAGE>
RENTAL PROPERTIES
Revenue, expenses and income from the multifamily and retail properties were
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $153,438 $148,202 $133,046
Expenses (65,360) (65,109) (58,809)
------- ------- -------
Income before depreciation $ 88,078 $ 83,093 $ 74,237
======== ======== ========
Multifamily Properties -
Acquisitions & Development
Revenues $ 36,021 $ 5,581 $ -
Expenses (14,834) (2,549) -
-------- -------- --------
Income before depreciation $ 21,187 $ 3,032 $ -
======== ======== ========
Retail Properties
Revenues $ 10,645 $ 10,176 $ 10,418
Expenses (3,633) (3,567) (3,447)
-------- -------- --------
Income before depreciation $ 7,012 $ 6,609 $ 6,971
======== ======== ========
Total Rental Properties
Revenues $200,104 $163,959 $143,464
Expenses (83,827) (71,225) (62,256)
Depreciation (20,666) (17,931) (16,258)
-------- -------- --------
Income from Rental Properties $ 95,611 $ 74,803 $ 64,950
======== ======== ========
/(1)/ "Core" represents properties owned as of December 31, 1995.
</TABLE>
OCCUPANCY RATES
Average occupancy of the Operating Partnership's core multifamily properties
compares favorably with the Washington, D.C. metropolitan area market-wide
average occupancy, based on annual surveys of approximately 80% of comparable
investment grade apartment properties conducted by The REIS Reports, Inc. as
follows:
<TABLE>
<CAPTION>
Occupancy Percent
------------------------------------------
Operating Partnership Washington DC Area
--------------------- ------------------
<S> <C> <C>
1997 96.4% 96.4%
1996 97.0% 96.5%
1995 97.2% 95.9%
</TABLE>
The decreases in occupancy in 1997 and 1996 are consistent with the Operating
Partnership's aggressive efforts to maximize apartment rents including various
revenue initiatives such as non-refundable move-in fees. Also, it is important
to note that market data from The REIS Reports,
30
<PAGE>
Inc. is determined on a physical occupancy basis, whereas the Operating
Partnership's occupancy data is calculated on an economic basis. Physical
occupancy data commonly yields a slightly higher percentage than economic
occupancy because apartment units are considered physically rented when a rental
applicant's deposit is received, a point in time generally prior to the actual
rent commencement date used in computing economic occupancy.
RENTAL REVENUE
Average revenue per apartment unit for the Operating Partnership's core
multifamily properties increased approximately 3.5% in 1997 as compared with
1996, and 3.4% in 1996 (based on properties owned as of December 31, 1994) as
compared with 1995.
A schedule of portfolio statistics follows:
31
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
Residential Portfolio Statistics for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Year Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Built Units Per Unit Per Unit Occupancy
- --------------------------------------- --------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Core Residential Portfolio
NW Washington, D.C.
Albemarle High-rise 1959 235 1,097 $1,161 98.8%
Calvert-Woodley High-rise 1954 136 1,001 1,090 99.1%
Cleveland House High-rise 1955 216 894 1,057 98.7%
Connecticut Heights High-rise 1920s/74 519 536 835 96.2%
Corcoran House High-rise 1961 138 464 786 99.3%
Statesman High-rise 1961 281 593 773 98.9%
2501 Porter Street High-rise 1988 202 760 1,390 97.7%
------ -------- ------ ----
1,727 723 978 98.0%
Crystal City
The Bennington High-rise 1982 348 804 1,015 96.0%
Crystal House I High-rise 1964 426 917 974 96.2%
Crystal House II High-rise 1965 402 938 955 96.5%
Crystal Square High-rise 1973/75 378 1,121 1,116 97.9%
Crystal Place High-rise 1987 180 894 1,264 98.0%
Gateway Place High-rise 1987 162 826 1,541 89.1%
Water Park Towers High-rise 1988/89 360 881 1,434 96.6%
------ -------- ------ ----
2,256 923 1,138 96.2%
Other NE & SE Washington, D.C.
Car Barn Garden 1981/87 196 1,311 832 97.3%
Fort Chaplin Garden 1963/65 549 983 636 97.7%
Marbury Plaza High-rise 1966 672 997 635 96.5%
Oxford Manor Garden 1968 227 1,005 594 95.0%
------ -------- ------ ----
1,644 1,031 653 96.8%
Other Northern Virginia -
Inside Beltway
Berkeley Mid-rise 1960 138 891 719 97.8%
Boulevard of Old Town III Garden 1941 159 603 816 97.5%
Columbia Crossing Garden 1990/91 247 976 1,046 92.3%
Columbian Stratford Mid-rise 1959 227 942 732 96.7%
Concord Village Garden 1968 531 1,025 776 94.2%
Courthouse Plaza High-rise 1988/90 396 772 1,179 97.6%
Executives Mid-rise 1959/61 711 877 755 95.9%
Newport Village Garden 1969/71 937 1,115 880 97.4%
Orleans Village Garden 1965/67 851 1,061 806 95.9%
Patriot Village Garden 1973/77 1,065 1,162 872 96.2%
Skyline Towers High-rise 1970/72 940 1,221 970 96.5%
Windsor Towers Mid-rise 1965 280 1,025 783 97.6%
------ -------- ------ ----
6,482 1,044 870 96.2%
Other Northern Virginia -
Outside Beltway
Bedford Village Garden 1967 752 1,070 869 94.5%
Oakwood Garden 1980 218 968 1,021 97.6%
Potomac View Garden 1978 192 965 738 97.5%
Westerly at Worldgate Garden 1995 320 921 1,057 93.8%
------ -------- ------ ----
1,482 1,009 915 95.1%
Suburban Maryland
The Manor Garden 1969 435 999 746 96.2%
Suburban Tower High-rise 1960 172 677 803 97.4%
------ -------- ------ ----
Subtotal/Average 607 908 762 96.6%
------ -------- ------ ----
Subtotal/Average 14,198 975 901 96.4%
Acquisition Portfolio
Charter Oak (other No.Va.-outside
Beltway) Garden 1970 262 1,097 918 97.7%
Van Ness South (NW
Washington, D.C.) High-rise 1970 625 956 1,032 97.9%
1841 Columbia Road (N.W.
Wash., D.C.) High-rise 1923 115 634 621 97.5%
The Kenmore (NW Washington, D.C.) High-rise 1950 376 725 N/A N/A
Crystal Plaza (Crystal City) High-rise 1967 540 1,129 N/A N/A
Crystal Towers (Crystal City) High-rise 1967 912 1,107 N/A N/A
Lincoln Towers (other No.Va.-inside
Beltway) High-rise 1992 714 879 N/A N/A
2000 Commonwealth
(Boston, MA) High-rise 1986 188 878 N/A N/A
One East Delaware
(Chicago, IL) High-rise 1989 306 704 N/A N/A
------ -------- ------ ----
Sub-Total/Average 4,038 706 955 97.8%
------ -------- ------ ----
All Residential Properties 18,236 915 $ 904 96.5%
====== ======== ====== ====
</TABLE>
32
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service Businesses
were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Multifamily and Retail Property
Management Services
Revenues $ 10,546 $ 11,465 $ 9,672
Expenses (9,756) (9,169) (7,664)
-------- -------- --------
Income before depreciation $ 790 $ 2,296 $ 2,008
======== ======== ========
Interior Construction and
Renovation Services
Net fee revenues $ 6,614 $ 5,650 $ 5,901
Expenses (5,547) (4,670) (4,795)
-------- -------- --------
Income before depreciation $ 1,067 $ 980 $ 1,106
======== ======== ========
Engineering and Technical
Services (including
reimbursed costs) Revenues $ 50,597 $ 42,179 $ 40,186
Expenses (46,759) (38,516) (36,701)
-------- -------- --------
Income before depreciation $ 3,838 $ 3,663 $ 3,485
======== ======== ========
Financing Services
Revenues $ 3,798 $ 2,640 $ 3,018
Expenses (670) (687) (1,439)
-------- -------- --------
Income before
depreciation $ 3,128 $ 1,953 $ 1,579
======== ======== ========
Total Property Service
Businesses
Revenues $ 71,555 $ 61,934 $ 58,777
Expenses (62,732) (53,042) (50,599)
-------- -------- --------
Income before
depreciation 8,823 8,892 8,178
Depreciation (1,226) (1,046) (1,310)
-------- -------- --------
Income from Property
Service Businesses $ 7,597 $ 7,846 $ 6,868
======== ======== ========
</TABLE>
33
<PAGE>
Multifamily and Retail Property Management Services provide management
services to the Operating Partnership at cost plus 5% in accordance with the
management agreement. In addition to 46 owned Properties (Multifamily and
Retail), management services were also provided to 14 third-party owned
multifamily properties of approximately 3,800 apartment units and to three
third-party owned retail properties of approximately 293,000 square feet. Of the
17 third-party management agreements, twelve are with Affiliates and five are
with unaffiliated property owners. Two of the multifamily management agreements
were terminated in January 1998 when the Operating Partnership acquired the
properties. The management agreements with Affiliates are for initial terms of
three years or more while the management agreements with unaffiliated owners
generally have one-year terms. The average term for which the Operating
Partnership and its Predecessors have managed these properties is 20 years.
Interior Construction and Renovation Services provided oversight to
approximately $66 million of gross construction activity in 1997 compared to
approximately $58 million in 1996 and $45 million in 1995. Services are provided
to the Operating Partnership at cost and to Affiliates and third parties at cost
plus a fee.
Engineering and Technical Services provides on-site building systems
operations, maintenance and inspection to the Operating Partnership and
Affiliates at cost and to third parties at cost plus a fee. Services were
provided to approximately 30 million square feet of facilities in 1997 and 28
million square feet in 1996 and 1995.
Financing Services performed $489 million of refinancings in 1997 compared to
$242 million in 1996 and $261 million in 1995.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
COMPARISON TO YEAR ENDED DECEMBER 31, 1996
SUMMARY. Net income of the Operating Partnership increased 50.0%, or $17.4
million, from $34.8 million for the year ended December 31, 1996 to $52.2
million for the year ended December 31, 1997. Funds from Operations ("FFO") of
the Operating Partnership increased $20.2 million, or 38.3% during the same
period. The increase in both net income and FFO is due to increases in income
from the rental properties, primarily the multifamily acquisition and
development properties. These increases were partially offset by higher
interest and other expenses related to acquisitions and development.
RENTAL PROPERTIES. Revenue from rental properties increased $36.1 million, or
22.0%, from $164.0 million for 1996 to $200.1 million for 1997. The nine
multifamily acquisition properties, consisting of 4,038 apartment units,
contributed $30.4 million, or 84.2% of the rental revenue increase. This growth
was primarily due to the fact that six of the nine properties, or 3,036 units,
were acquired during 1997. The core portfolio contributed an increase of $5.2
34
<PAGE>
million, or 3.5%, over 1996 while revenue from the retail properties increased
$0.5 million over 1996.
Average monthly revenue per apartment unit of the core portfolio increased
from $870 in 1996 to $901 per month during 1997. Average economic occupancy
decreased to 96.4% in 1997 from 96.9% in 1996. The decrease in occupancy was
not unexpected given continued efforts by management in 1997 to lead the market
in terms of rent increases as well as further growth of revenue-enhancing
initiatives such as the premium for month-to-month leases and the charging of a
non-refundable move-in fee in lieu of security deposits. The Operating
Partnership also continues to expand and aggressively market its furnished
apartment program. As a result, revenues from this program increased $0.5
million, or 34.9%, over the prior year period.
Retail revenues increased by $0.5 million, or 4.6%, during 1997 compared to
the prior year due primarily to rent increases and improved vacancy at Skyline
Mall. Average occupancy at Skyline Mall increased from 95.1% in 1996 to 97.2%
in 1997. In addition, 1997 reflects a full year of retail revenue related to a
1996 multifamily property acquisition which also contained retail space.
In December 1997, Messrs. Smith and Kogod sold their health club facilities
which lease retail space from the Operating Partnership. In conjunction with
that sale, the Operating Partnership agreed to restructure the leases by
reducing base rent on the Worldgate lease and extending the terms on both leases
by ten years, through 2025, in exchange for a $2.3 million cash payment which
will be amortized over the lives of the revised leases. The Operating
Partnership used the funds to retire 65,000 Operating Partnership units.
Expenses from rental properties (including depreciation) increased $15.3
million, or 17.2%, from $89.2 million in 1996 to $104.5 million in 1997. The
increases resulted primarily from the acquisition of 4,038 apartment units
subsequent to December 31, 1995 which added $12.3 million in property operating
expenses compared to the prior year. The increase of $2.7 million in
depreciation expense for 1997 is primarily due to the impact of 1996 and 1997
acquisitions. The increase of $0.3 million, or 0.4%, in property operating
expenses for the core portfolio was primarily due to expected increases in
payroll and related costs, partially offset by savings from management
restructuring and the outsourcing of janitorial services.
Operating margins of the Operating Partnership's core portfolio of
approximately 57% and 56% for the years ended December 31, 1997 and 1996,
respectively, are generally lower in comparison to industry averages due
primarily to its method of recovering utility costs. The Operating
Partnership's apartment rents, for the most part, include utility services such
as electricity and gas since the Operating Partnership bears utility costs. The
majority of the Operating Partnership's competitors, however, require their
tenants to pay utilities directly. Management estimates that the Operating
Partnership's operating margins would be approximately 60% on a comparable
basis.
35
<PAGE>
PROPERTY SERVICE BUSINESSES. Income from the Property Service Businesses
decreased $0.2 million, or 3.2%, during 1997 compared to 1996.
Income before depreciation for Multifamily and Retail Property Management
Services decreased $1.5 million, or 65.6%, primarily due to a non-recurring fee
of $0.6 million earned in 1996 in connection with the termination of a
management agreement with a hotel owned by a related party. In addition,
revenue decreased by an additional $0.9 million due to the February 1997
acquisition of two properties previously managed by the Operating Partnership's.
Income before depreciation for Interior Construction and Renovation Services
increased $0.1 million, or 8.9%, due to an increase of $1.0 million in net fee
revenue offset by an increase of $0.9 million in related expenses.
Revenue from Engineering and Technical Services increased 20.0%, or $8.4
million, in 1997 with a corresponding increase of $8.2 million in expenses
compared to 1996 due primarily to additional HVAC systems operations and
preventative maintenance contracts obtained throughout 1997. Due to start-up
costs on the new contracts, operating margins during 1997 were lower than 1996.
Consequently, income before depreciation for Engineering and Technical Services
increased a moderate 4.8% to $3.8 million for 1997 compared to $3.7 million in
1996.
Income before depreciation for Financing Services increased $1.2 million, or
60.2%, due primarily to fees earned on an unusually high level of refinancings
performed during the fourth quarter of 1997. Such refinancings were related to
the roll-up of Affiliated commercial properties into a single partnership. In
conjunction with the roll-up, Financing Services personnel transferred to the
new entity, Charles E. Smith Commercial Realty L.P.("CESCR"). The Operating
Partnership entered into agreements through December 31, 1998 to provide
Financing Services for certain properties owned and certain properties to be
acquired by CESCR. Services will be provided utilizing CESCR personnel on a
negotiated cost basis. The Operating Partnership will separately negotiate
revenue and cost sharing agreements for Financing Services it may provide, if
any, to properties managed but not owned by CESCR.
OTHER. Corporate general and administrative expenses increased by $1.3
million, or 24.9%, due primarily to additional personnel added during the year
to expand the Operating Partnership's acquisition and development program
outside of the Washington, D.C. metropolitan area to other U.S. cities with
strong urban multifamily markets. Interest expense increased by $1.8 million,
or 4.1%, primarily due to assumed debt on acquisitions of multifamily
properties.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
COMPARISON TO YEAR ENDED DECEMBER 31, 1995
SUMMARY. Net income of the Operating Partnership increased 12.1%, or $3.8
million, from $31.1 million for the year ended December 31, 1995 to $34.8
million for the year ended
36
<PAGE>
December 31, 1996. Funds from Operations of the Operating Partnership increased
$5.4 million, or 11.5%, during the same period. The increase in both net income
and FFO is due to increases in income from the rental properties, primarily the
multifamily acquisition and development properties, as well as increased income
from the Property Service Businesses. These increases were partially offset by
an increase in interest expense related to multifamily acquisitions and
development.
RENTAL PROPERTIES. Revenue from rental properties increased $20.5 million, or
14.3%, from $143.5 million for 1995 to $164.0 million for 1996. The three
multifamily acquisition properties, consisting of 1,002 apartment units (note
that five properties purchased and one property constructed in 1995 totaling
1,736 apartment units were transferred into the core portfolio on January 1,
1997), contributed $5.6 million of the rental revenue increase. The core
portfolio contributed an increase of $15.2 million over 1995 (which includes
$10.8 million impact of transferring the six properties to core on January 1,
1997), offset by a $0.2 million decrease in revenue from the retail properties.
Average monthly revenue per apartment unit of the core portfolio (based on
properties owned as of December 31, 1994) increased 3.4% from $854 in 1995 to
$883 per month during 1996. Average economic occupancy decreased slightly to
97.0% in 1996 from 97.2% in 1995. The decrease in occupancy was not unexpected
given the aggressive efforts initiated by management to increase rents as well
as the implementation during the third quarter of 1996 of several revenue-
enhancing initiatives, including a premium for month-to-month leases and the
charging of a non-refundable move-in fee in lieu of security deposits.
Retail revenues decreased by $0.2 million, or 2.3%, during the year ended
December 31, 1996 compared to the prior year due to lower base and percentage
rents as well as higher vacancy at Skyline Mall. Average occupancy at Skyline
Mall declined from 97.3% in 1995 to 95.1% in 1996 due to several stores
remaining vacant during the last six months of 1996. In addition, repairs and
maintenance expenses were higher in 1996 than in 1995.
Expenses from rental properties (including depreciation) increased $10.7
million, or 13.6%, from $78.5 million in 1995 to $89.2 million in 1996. The
increases resulted primarily from the acquisition/development of 2,738 apartment
units subsequent to December 31, 1994 which added $9.0 million in property
operating expenses compared to the prior year. The increase of $6.3 million in
operating expenses for the core portfolio (which includes $3.6 million impact of
transferring the six properties to core on January 1, 1997) was primarily due to
expected increases in payroll and related costs, increased repairs and
maintenance costs and increased snow removal costs caused by the record snowfall
in the first quarter of 1996. In addition, real estate taxes were significantly
higher in 1996 primarily in the Virginia submarkets which constitute the
majority of the portfolio. Assessments averaged 5.5% higher in 1996 than in 1995
for the Virginia properties while local property tax rates for Arlington and
Fairfax counties increased by 2.1% and 5.9%, respectively. The substantial
increase in utility costs during the first quarter of 1996 was mostly offset in
the third quarter by an unseasonably cool summer.
37
<PAGE>
PROPERTY SERVICE BUSINESSES. Income from the Property Service Businesses
increased $1.0 million, or 14.2%, during 1996 compared to 1995.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.3 million, or 14.3%, resulting primarily from the impact
of a non-recurring fee of $0.6 million related to the termination of a
management agreement with a hotel owned by a related party. The hotel was sold
during the first quarter of 1996. In addition, retail leasing income increased
by approximately $0.2 million due primarily to retail leases for a third party
development project. These increases were offset by approximately $0.5 million
of increased marketing expenditures for furnished corporate apartments, Smith
Advantage, and other tenant services. Also, although income from residential
management services increased approximately $0.2 million due to the growth in
the size of the portfolio, the increase was offset by the cost of severance and
other benefits related to a late 1996 management reorganization in this group.
Income before depreciation for Interior Construction and Renovation Services
decreased $0.1 million, or 11.4%, due primarily to a 4.3% decrease in net fee
revenue caused by a shift to lower margin, third-party construction management
services compared to higher margin general contracting services provided to
Affiliates. The decrease in revenues was partially offset by a 2.6% decrease in
operating expenses resulting primarily from worker's compensation insurance
savings due to favorable claims experience.
Revenue from Engineering and Technical Services increased 5.0%, or $2.0
million, in 1996 to $42.2 million compared to 1995 due primarily to additional
HVAC systems operations and preventative maintenance contracts obtained in late
1995 and throughout 1996. As a result of the growth in revenue, expenses
increased by $1.8 million, or 4.9%, due primarily to additional payroll and
related benefit costs associated with performing the additional work as well as
increased information technology costs. Consequently, income before depreciation
for Engineering and Technical Services increased 5.1% to $3.7 million for 1996
compared to $3.5 million in 1995.
Income before depreciation for Financing Services increased $0.4 million, or
23.7%,due primarily to savings in payroll and related expenses during the latter
half of 1996. These savings were partially offset by reduced revenue associated
with the $19 million decrease in refinancings performed in 1996 compared to
1995.
OTHER. Corporate general and administrative expenses increased by $0.5
million, or 10.2%, due primarily to costs incurred in connection with the
Operating Partnership's acquisition and development efforts including write-offs
of capitalized costs for terminated acquisition efforts. Interest expense
increased by $6.2 million, or 16.5%, due to the assumption of debt and
additional borrowings under the lines of credit related to the acquisition and
development of multifamily properties.
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
Net cash flow provided by operating activities was $75.2 million for 1997
compared to $51.0 million for 1996. The increase of $24.2 million was primarily
due to higher cash flow contributed by the acquisition portfolio as well as core
revenue growth. Although the acquisition portfolio also increased accounts
payable, the cash flows were offset by related increases in receivables.
Net cash flow used by the Operating Partnership for investing activities
increased $124.2 million in 1997, from $72.7 million in 1996 to $196.9 million
in 1997 due to the substantial increase in acquisition volume during the year as
well as increased capital expenditures.
Net cash flow provided by financing activities was $117.8 million in 1997
compared to $16.2 million in 1996. The Operating Partnership significantly
deleveraged in 1997 through issuance of equity in order to finance increased
acquisition and development activities. Approximately $203 million was raised in
1997 through sales of common and preferred equity with net repayments of debt of
approximately $29 million. In 1997, the Operating Partnership paid distributions
of $53.5 million, or $2.035 per unit representing three quarters of
distributions at $.505 per unit and one quarter at $.52, a 3.0% increase.
EQUITY ACTIVITY
During the first quarter of 1997, the Company issued 3.1 million shares of
common stock in an equity offering at $28.375 per share resulting in proceeds of
$82.9 million, net of underwriting discounts and other expenses totaling $5.2
million. The Company used the net proceeds from the offering to purchase 3.1
million limited partnership units of the Operating Partnership. The Operating
Partnership used the resulting proceeds to repay $72.1 million on the line of
credit and $9.0 million of mortgage debt and to fund three property
acquisitions.
In May 1997, the Company entered into an agreement with a private investor to
sell 2.6 million shares of Series A Cumulative Convertible Redeemable Preferred
Stock ("Series A Preferred Shares") for $71.5 million no later than May 14,
1998. On June 30, 1997, the Company issued 0.7 million shares of Series A
Preferred Shares at $27.08 per share resulting in proceeds of $19.8 million, net
of underwriting discounts and other expenses totaling $0.2 million. In December
1997, the Company issued 0.9 million shares of Series A Preferred Shares at
$27.08 per share resulting in proceeds of $24.7 million, net of expenses of $0.3
million. The net proceeds of both issuances were contributed to the Operating
Partnership in exchange for 1.6 million Series A Preferred Units. The Operating
Partnership used the proceeds to repay a portion of the line of credit.
39
<PAGE>
In October 1997, the Company sold 1.45 million shares of common stock and 1.22
million shares of Series B Cumulative Convertible Redeemable Preferred Stock
("Series B Preferred Shares") to a private investor for $76 million. The net
proceeds were contributed to the Operating Partnership in exchange for 1.45
million common units and 1.22 million Series B Preferred Units. The Operating
Partnership used the proceeds to fund an acquisition.
During 1997, the Operating Partnership issued approximately 2.1 million
Operating Partnership units valued at $61.1 million in connection with property
acquisitions.
In January 1998, the Company sold 500 shares of Series C Cumulative Redeemable
Preferred Stock ("Series C Preferred Shares") for $48.9 million, net of offering
costs of $1.1 million. The Company contributed the net proceeds to the
Operating Partnership in exchange for 500 shares of Series C Preferred Units.
The Series C Preferred Units have a liquidation preference of $100,000 per unit
and an initial annual distribution rate of $7,910 per unit. If the securities
receive an investment grade rating, the distribution rate will decrease by $250
per unit. The Operating Partnership used the proceeds to repay outstanding
amounts under its lines of credit.
FUNDS FROM OPERATIONS
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring, and
distributions in excess of earnings allocated to Minority Interest, plus
depreciation/amortization of assets unique to the real estate industry.
Depreciation/amortization of assets not unique to the industry, such as
amortization of deferred financing costs and non-real estate assets, is not
added back. FFO does not represent cash flow from operating activities in
accordance with generally accepted accounting principles (which, unlike FFO,
generally reflects all cash effects of transactions and other events in the
determination of net income) and should not be considered an alternative to net
income as an indication of the Operating Partnership's performance or to cash
flow as a measure of liquidity or ability to make distributions. The Operating
Partnership considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of real
estate assets diminishes predictably over time, and because industry analysts
have accepted it as a performance measure. Comparison of the Operating
Partnership's presentation of FFO, using the NAREIT definition, to similarly
titled measures for other REITs may not necessarily be meaningful due to
possible differences in the application of the NAREIT definition used by such
REITs.
The Operating Partnership's FFO for the years ended December 31, 1997, 1996
and 1995 was as follows (in thousands):
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Income $52,210 $34,817 $31,053
Depreciation of Real Property 20,666 17,931 16,258
Extraordinary item - Loss on
Debt Extinguishment 87 - -
------- ------- -------
Funds from Operations $72,963 $52,748 $47,311
======= ======= =======
</TABLE>
ACQUISITIONS
The Operating Partnership acquired the following operating properties during
1997 and 1996:
<TABLE>
<CAPTION>
Total Cost (Dollars in Thousands)
-----------------------------------
1997 1996
-------- --------
<S> <C> <C>
Acquisitions
262-unit garden apartment $ - $14,200
47-unit garden apartment - 2,800
625-unit high-rise apartment - 41,800
115-unit high-rise apartment - 5,300
376-unit high-rise apartment 16,300 -
540-unit high-rise apartment 43,000 -
912-unit high-rise apartment 69,800 -
714-unit high-rise apartment 88,900 -
306-unit high-rise apartment 43,100 -
188-unit high-rise apartment 27,500 -
-------- -------
$288,600 $64,100
======== =======
</TABLE>
In January 1998, the Operating Partnership completed the acquisition of two
multifamily properties in northwest Washington, D.C. totaling 287 apartment
units. The total cost of approximately $12.1 million was comprised of $3.3
million cash and 254,000 Operating Partnership units valued at approximately
$8.8 million. The Operating Partnership previously owned a 20% interest in one
of the properties, and both properties were previously managed by the Operating
Partnership. The Operating Partnership also finalized a contract to purchase in
the second quarter of 1998 a 299-unit multifamily property located in the
Crystal City submarket of Arlington, Virginia. The purchase price of $39
million is expected to be funded from the line of credit.
41
<PAGE>
DEVELOPMENT
Springfield Station. The Operating Partnership purchased for $9.1 million
approximately 17 acres of land and is nearing completion on the first phase of
construction of an estimated 630-unit mid-rise and garden apartment property in
Springfield, Virginia. The site is located adjacent to a new Metrorail and
commuter rail station and a regional shopping mall and offers convenient access
to major transportation routes. Total cost is expected to be approximately $60
million with final delivery in mid-1999.
Courthouse Place. On October 8, 1997, the Operating Partnership acquired a
564-unit, luxury high rise property under construction in Arlington, Virginia
for $17.5 million consisting of $3.6 million cash and approximately 450,000
Operating Partnership units valued at $13.9 million. Total expected project
cost is approximately $65 million. The balance of construction cost will be
funded through a construction loan secured in October 1997 at LIBOR plus 130
basis points which matures in October 2000. The balance outstanding at December
31, 1997 is $5.5 million. Management expects to initially deliver apartment
units in October 1998, with completion in the fall of 1999.
One Superior Place. During the fourth quarter of 1997, the Operating
Partnership began construction of a 52-story, 809-unit luxury high rise
apartment and commercial center in downtown Chicago. The $112 million project,
which is expected to be funded through a construction loan, will also include a
new Whole Foods supermarket and other tenants in its 52,000 square feet of
commercial space. Management expects to initially deliver units in September
1999 with completion in mid-2000.
Numerous other acquisition and development projects are being pursued by the
Operating Partnership. The Operating Partnership anticipates meeting the
related funding requirements through draws on its lines of credit, long-term
borrowings and public or private issuances of equity, including Operating
Partnership unit exchanges.
DEBT
As of December 31, 1997, the Operating Partnership had the following mortgage
indebtedness and other borrowings carrying a weighted average interest rate of
7.71% and collateralized by 44 of the 50 Properties:
42
<PAGE>
<TABLE>
<CAPTION>
Dollars in
Thousands Percent of Total
---------- ----------------
<S> <C> <C>
Fixed rate debt:
Mortgages $479,072 78.4%
$83M Acquisition Line of Credit 30,000 4.9%
Variable rate debt:
Mortgages 21,363 3.5%
$100M Acquisition Line of Credit 75,000 12.3%
Construction loan 5,536 0.9%
-------- -----
$610,971 100.0%
======== =====
</TABLE>
As of December 31, 1997, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 35.0% (based on 29.1 million common units and 2.9
million preferred units outstanding at the Company's stock price of $35.50)
versus 45.9% at December 31, 1996. The decreases are attributable to the 1997
common and preferred equity sales, acquisitions funded via Operating Partnership
unit exchanges, and an increasing stock price of the Company. The Operating
Partnership's Interest Coverage Ratios for the years ended December 31, 1997 and
1996 were 2.78:1 and 2.38:1, respectively.
Principal payments on outstanding debt are due in the following years (in
millions):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 21.4
1999 113.4
2000 80.5
2001 125.2
2002 -
Thereafter 270.5
------
$611.0
======
</TABLE>
At December 31, 1997, the Operating Partnership had $78 million of unused
borrowing capacity available on lines of credit and $26.5 million available
under its convertible preferred stock agreement. Amounts outstanding under
lines of credit averaged $80.1 million and $86.6 million for the years ended
December 31, 1997 and 1996, respectively.
The Operating Partnership anticipates meeting principal repayment
requirements through long-term borrowings, public or private issuances of debt
securities or public or private equity offerings.
In February 1998, the Operating Partnership terminated its existing $100
million line of credit and entered into a new $250 million, unsecured line of
credit with PNC Bank, Nations Bank, and U.S. Bank which matures in March 2001.
Draws upon the new line are subject to
43
<PAGE>
certain unencumbered asset requirements and bear interest at a selected LIBOR
rate plus 75 to 110 basis points based on the leverage ratio of the Operating
Partnership. If the Operating Partnership receives an investment grade rating,
the interest rate will decrease to 60 to 90 basis points over LIBOR based on the
rating. The Operating Partnership repaid the balance outstanding under the $100
million line and recognized an extraordinary loss of $0.3 million related to the
extinguishment of such debt.
OTHER
CAPITAL IMPROVEMENTS. In 1997, total capital improvements were $12.8
million, of which $10.3 million, or $727 per apartment unit, was for the core
portfolio. Approximately 36% of the capital expenditures on the core portfolio
are considered by management to be revenue generating or economic improvements,
as shown below, which management believes directly affect the Operating
Partnership's ability to increase rents. The remaining capital expenditures on
the core portfolio indirectly influence the Operating Partnership's ability to
increase rents and are considered non-revenue generating. A summary of core
capital expenditures during 1997 follows:
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Unit Improved Core Unit
- ----------------------------- -------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Installations/Replacements:
Appliances $ 831 1,291 $ 644 $ 59
Carpet 703 653 1,077 50
Security Gating 322 711 453 23
Other 136 159 855 9
Renovations:
Kitchen 805 179 4,498 57
Bath 436 319 1,368 31
Exercise Room 495 34
------- ----
Total Revenue-Generating
Improvements 3,728 263
Non-Revenue Generating
Improvements 6,593 464
------- ----
Total Capital Expenditures
- Core Portfolio $10,321 $ 727
======= ======
</TABLE>
INCOME TAXES. The Property Service Businesses are taxable corporations, and
thus, pay Federal and state income taxes on their net income. Such taxes
amounted to $ 0.4 million, $0.4 million and $0.6 million for 1997, 1996 and
1995.
EFFECT OF INFLATION. Substantially all of the leases at the Multifamily
Properties are for a term of one year or less, which enables the Operating
Partnership to seek increased rents upon
44
<PAGE>
renewal or reletting of apartments. Retail tenant leases provide for pass-
through of common area maintenance, real estate taxes and other operating costs
to tenants, which reduces the impact of inflation.
YEAR 2000. The Operating Partnership has conducted a comprehensive review
of its internal computer systems and related software to identify issues related
to year 2000 compliance. Accordingly, the Operating Partnership has determined
that it has no material risks related to the ability of its hardware and
software to recognize the year 2000 and beyond as valid dates. The Operating
Partnership's primary financial and operational software programs are purchased
from outside vendors who have generally resolved or are in the process of
resolving year 2000 issues. The Operating Partnership is in the process of
replacing one computer system, however, which is not currently year 2000
compliant at an estimated cost of approximately $1 million. The new system will
be operational in early 1999 and the related cost will be depreciated over its
estimated useful life. During 1998, the Operating Partnership will continue to
monitor year 2000 issues (primarily using internal staff) including analysis of
its secondary applications software and suppliers and review of its service
providers for year 2000 compliance. The Operating Partnership does not expect
any material adverse impact to its business operations from service providers'
inability, if any, to become year 2000 compliant. Costs associated with the
Operating Partnership's ongoing year 2000 compliance review and any necessary
system or software modifications are expensed as incurred.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements on Page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors is hereby
incorporated by reference to the material appearing under the caption "Election
of Directors" in the Company's definitive proxy statement for the annual meeting
of shareholders to be held in 1998 (the "Proxy Statement"). Information required
by this item with respect to executive officers is provided in Item 1 of this
report. See "Executive Officers of the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission and the NYSE. To the best of the Company's knowledge, all
required reports were timely filed during and with respect to the fiscal year
ended December 31, 1997, except for the following reports which were filed late:
Wesley Denn Minami (Form 3); Steven E. Gulley (Form 3); Ernest Gerardi, Jr. (two
transactions, one report); Charles B. Gill (one transaction, one report); Robert
P. Kogod (two transactions, one report); Alfred G. Neely (five transactions, two
reports); Mandell J. Ourisman (one transaction, one report); Robert H. Smith
(three transactions, one report); and Roger L. Weeks (one transaction, one
report).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K.
14(A)(1) FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements and Schedule
on Page F-1 of this Form 10-K.
14(A)(2) FINANCIAL STATEMENT SCHEDULES
Reference is made to the Index to Financial Statements and Schedule
on Page F-1 of this Form 10-K.
All other schedules have been omitted because the required
information of such other schedules is not present in amounts
sufficient to require submission of the schedule or because the
required information is included in the consolidated financial
statements.
14(A)(3) EXHIBITS
**2.1 Third Party Management and Leasing, Hotel Asset Management and
Corporate Services Business Transfer Agreement by and between
Charles E. Smith Residential Realty, Inc. and Smith Property
Management, Inc.
**2.2 REIT Properties Management and Leasing Business Transfer
Agreement by and between Charles E. Smith Management, Inc. and
Charles E. Smith Residential Realty L.P.
**2.3 Assignment by Robert H. Smith, Clarice R. Smith, Robert P. Kogod
and Arlene R. Kogod to Charles E. Smith Management, Inc. of 99%
of all Partnership Interests of Residential Associates Limited
Partnership
**2.4 Assignment and Assumption Agreement by Residential Associates
Limited Partnership and Charles E. Smith Residential Realty L.P.
**2.5 Debt Assumption Agreement and Accord and Satisfaction of Debt by
Charles E. Smith Management, Inc. and Charles E. Smith
Residential Realty L.P.
**2.6 Debt Contribution Agreement between Charles E. Smith Management,
Inc. and Charles E. Smith Residential Realty L.P. (the "Operating
Partnership")
**3.1 First Amended and Restated Agreement of Limited Partnership of
the Operating Partnership, as amended
**3.2 Certificate of Limited Partnership of the Operating Partnership
47
<PAGE>
3.3 Articles Supplementary to Amended and Restated Articles of
Incorporation of the Company (Incorporated by reference to
Exhibit No. 3.1 of the Operating Partnership's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 1997)
3.4 Articles Supplementary of the Company for Classifying and
Designating Series B Cumulative Convertible Redeemable Preferred
Stock (Incorporated by reference to Exhibit No. 4.1 of the
Operating Partnership's Report on Form 8-K dated October 3, 1997
and filed October 20, 1997)
3.5 Certificate of Correction relating to Articles Supplementary for
Series B Cumulative Convertible Redeemable Preferred Stock
(Incorporated by reference to Exhibit No. 4.2 of the Operating
Partnership's Report on Form 8-K dated October 3, 1997 and filed
October 20, 1997)
3.6 Articles Supplementary for Series C Cumulative Redeemable
Preferred Stock (Incorporated by reference to Exhibit No. 3.5 in
the Company's Registration Statement on Form S-3, File No. 333-
17053)
*4.1 Amended and Restated Articles of Incorporation of Charles E.
Smith Residential Realty, Inc. (the "Company")
4.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to the same titled and numbered exhibit in the
Company's Registration Statement on Form S-3 (File No. 33-93986)
4.3 Ninth Amendment to Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (Incorporated by
reference to Exhibit No. 4.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997)
4.4 Tenth Amendment to Amended and Restated Agreement of Limited
Partnership of the Operating Partnership
**10.1 Noncompetition Agreement by and among the Company, the Operating
Partnership and Robert P. Kogod and Robert H. Smith
**10.2 Registration Rights and Lock-up Agreement
**10.3 Pledge Agreement
**10.4 First Amended and Restated 1994 Employee Stock and Unit Option
Plan
**10.5 First Amended and Restated 1994 Employee Restricted Stock and
Restricted Unit Plan
**10.6 Non-Employee Directors Stock Option Plan
**10.7 Subscription Agreement
**10.8 Voting Stock Partnership Agreement for Smith Property
Management Partnership
**10.9 Voting Stock Partnership Agreement for Smith Management
Construction Partnership
**10.10 Voting Stock Partnership Agreement for Consolidated
Engineering Services Partnership
48
<PAGE>
**10.11 Amended and Restated Articles of Incorporation of Smith
Realty Company
*10.12 By-Laws of Smith Property Management, Inc.
*10.13 Articles of Incorporation of Smith Management Construction,
Inc.
*10.14 By-Laws of Smith Management Construction, Inc.
*10.15 Articles of Incorporation of Consolidated Engineering
Services, Inc.
*10.16 By-Laws of Consolidated Engineering Services, Inc.
*10.17 Certificate of Incorporation of Smith One, Inc.
*10.18 By-Laws of Smith One, Inc.
**10.19 Agreement of Limited Partnership of Smith Property Holdings
One L.P.
**10.20 Agreement of Limited Partnership of Smith Property Holdings
One (D.C.) L.P.
*10.21 Certificate of Incorporation of Smith Two, Inc.
*10.22 By-Laws of Smith Two, Inc.
**10.23 Agreement of Limited Partnership of Smith Property Holdings
Two L.P.
**10.24 Agreement of Limited Partnership of Smith Property Holdings
Two (D.C.) L.P.
*10.25 Certificate of Incorporation of Smith Three, Inc.
*10.26 By-Laws of Smith Three, Inc.
**10.27 Agreement of Limited Partnership of Smith Property Holdings
Three L.P.
**10.28 Agreement of Limited Partnership of Smith Property Holdings
Three (D.C.) L.P.
*10.29 Certificate of Incorporation of Smith Four, Inc.
*10.30 By-Laws of Smith Four, Inc.
**10.31 Agreement of Limited Partnership of Smith Property Holdings
Four L.P.
**10.32 Amended and Restated Certificate of Incorporation of Smith
Five, Inc.
*10.33 By-Laws of Smith Five, Inc.
**10.34 Agreement of Limited Partnership of Smith Property Holdings
Five (D.C.) L.P.
**10.35 License Agreement between Charles E. Smith Management, Inc.
and the Company
**10.36 License Agreement between Charles E. Smith Management, Inc.
and the Operating Partnership
10.37 Agreement of Limited Partnership of Smith Property Holdings Five
L.P. (Incorporated by reference to Exhibit No. 10.1 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1994)
**10.38 Certificate of Limited Partnership of Smith Property Holdings
Five L.P.
**10.39 Amended and Restated Credit Agreement by and between the
Operating Partnership and PNC Bank, National Association, et al.
10.40 Deed of Trust and Security Agreement between Smith Property
Holdings Three L.P. ("Smith Three") and The Northwestern Mutual
Life Insurance Company ("Northwestern") (Incorporated by
reference to Exhibit No. 10.2
49
<PAGE>
of the Operating Partnership's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1994)
10.41 Guarantee of Recourse Obligations by Smith Three and the
Operating Partnership (Incorporated by reference to Exhibit No.
10.3 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.42 Absolute Assignment of Leases and Rents between Smith Three and
Northwestern (Incorporated by reference to Exhibit No. 10.4 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.43 Promissory Note of Smith Three to Northwestern (Incorporated by
reference to Exhibit No. 10.5 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.44 Purchase Money Deed of Trust and Security Agreement between
Smith Property Holdings Three (D.C.) L.P. ("Smith Three D.C.")
and Northwestern (Incorporated by reference to Exhibit No. 10.6
of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.45 Guarantee of Recourse Obligations by Smith Three D.C. and
the Operating Partnership (Incorporated by reference to Exhibit
No. 10.7 of the Operating Partnership's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1994)
10.46 Absolute Assignment of Leases and Rents between Smith Three
D.C. and Northwestern (Incorporated by reference to Exhibit No.
10.8 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.47 Purchase Money Promissory Note of Smith Three D.C. to
Northwestern (Incorporated by reference to Exhibit No. 10.9 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.48 Supplemental Loan Agreement by and among Smith Property Holdings
Two L.P. ("Smith Two"), Smith Property Holdings Two (D.C.) L.P.
("Smith Two D.C.") and GMAC Mortgage Corporation of PA ("GMAC")
(Incorporated by reference to Exhibit No. 10.10 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.49 Multifamily Note of Smith Two to GMAC (Incorporated by reference
to Exhibit No. 10.11 of the Operating Partnership's Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1994)
10.50 Multifamily Note of Smith Two D.C. to GMAC (Incorporated by
reference to Exhibit No. 10.12 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.51 Supplemental Loan Agreement by and among Smith Property Holdings
One L.P. ("Smith One"), Smith Property Holdings One (D.C.) L.P.
("Smith One D.C.") and GMAC (Incorporated by reference to
Exhibit No. 10.13 of the
50
<PAGE>
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
10.52 Multifamily Note of Smith One to GMAC (Incorporated by reference
to Exhibit No. 10.14 of the Operating Partnership's Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1994)
10.53 Multifamily Note of Smith One D.C. to GMAC (Incorporated by
reference to Exhibit No. 10.15 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.54 Absolute Assignment of Leases and Rents by Smith One D.C. to
GMAC (Incorporated by reference to Exhibit No. 10.16 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
10.55 Property Management Agreement by and between Smith One and the
Operating Partnership (Incorporated by reference to Exhibit No.
10.17 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1994)
10.56 Multifamily Deed of Trust, Assignment of Rents and Security
Agreement between Smith One D.C. and GMAC (Incorporated by
reference to Exhibit No. 10.18 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.57 Commercial Leasing and Property Management Agreement between
Smith Three and the Operating Partnership (Incorporated by
reference to Exhibit No. 10.19 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
**10.58 Agreement of Limited Partnership of Smith Employment Services
L.P.
**10.59 Certificate of Limited Partnership of Smith Employment
Services L.P.
10.60 Second Restated and Amended Agreement of Limited Partnership of
First Herndon Associates Limited Partnership (Incorporated by
reference to Exhibit 10.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1995)
10.61 Second Amendment to the Certificate of Limited Partnership of
First Herndon Associates Limited Partnership (Incorporated by
reference to Exhibit 10.2 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1995)
10.62 Certificate of Incorporation of Smith Six, Inc. (Incorporated by
reference to Exhibit No. 10.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1995)
10.63 By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit
No. 10.2 of the Operating Partnership's Quarterly Report on Form
10-Q for the Quarter Ended March 31, 1995)
10.64 Agreement of Limited Partnership of Smith Property Holdings Six
L.P. (Incorporated by reference to Exhibit No. 10.3 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1995)
51
<PAGE>
10.65 Agreement of Limited Partnership of Smith Property Holdings Six
(D.C.) L.P. (Incorporated by reference to Exhibit No. 10.4 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1995)
**10.66 Certificate of Incorporation of Smith Seven, Inc.
**10.67 By-Laws of Smith Seven, Inc.
**10.68 Agreement of Limited Partnership of Smith Property Holdings
Seven L.P.
**10.69 Commitment for Mortgage Loan to the Operating Partnership
from Northwestern Mutual Life Insurance Company
10.70 Second Amended and Restated Credit Agreement by and between the
Operating Partnership and PNC Bank, National Association, et.
al. (Incorporated by reference to Exhibit No. 10.1 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997)
10.71 Third Amended and Restated Credit Agreement by and between the
Operating Partnership and PNC Bank, National Association, et.
al.
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
___________________________________
*Incorporated by reference to the same titled and numbered exhibit in
the Company's Registration Statement on Form S-11, No. 33-75288.
**Incorporated by reference to the same titled and numbered exhibit in
the Operating Partnership's previously filed Forms 10-K.
14(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on February 7, 1997 (and subsequently
amended on Form 8-K/A filed August 22, 1997) providing information on
three Properties acquired by the Operating Partnership during the
first quarter of 1997, including certain unaudited proforma balance
sheets and statements of operations of the Operating Partnership
reflecting the acquisitions and statements of revenue and certain
expenses for the Crystal Plaza, Crystal Towers and Kenmore Properties
for the year ended December, 1996, and applicable subsequent periods.
A report on Form 8-K was filed on November 10, 1997 (and subsequently
amended on Forms 8-K/A filed November 26, 1997 and January 30, 1998)
providing information on three Properties acquired by the Operating
Partnership during 1997, including certain unaudited proforma balance
sheets and statements of operations of the
52
<PAGE>
Operating Partnership reflecting the acquisitions and statements of
revenue and certain expenses for the One East Delaware, 2000
Commonwealth, and Lincoln Towers Properties for the year ended
December, 1996, and applicable subsequent periods.
14(c) EXHIBITS
The list of Exhibits filed with this report is set forth in response
to Item 14(a)(3). The required exhibit index has been filed with the
exhibits.
14(d) FINANCIAL STATEMENTS
See Index to Financial Statements and Schedules on Page F-1 of this
Form 10-K.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
25th day of March, 1998.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
BY: CHARLES E. SMITH RESIDENTIAL REALTY,
INC., ITS GENERAL PARTNER
By /s/Ernest A. Gerardi, Jr.
----------------------------------------------
Ernest A. Gerardi, Jr.
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 25th day of March, 1998.
SIGNATURE TITLE (WITH THE GENERAL PARTNER)
--------- --------------------------------
/s/Robert H. Smith
- ---------------------------------- Co-Chairman of the Board, Co-Chief
Robert H. Smith Executive Officer, and Director
/s/Robert P. Kogod
- ---------------------------------- Co-Chairman of the Board, Co-Chief
Robert P. Kogod Executive Officer, and Director
/s/Ernest A. Gerardi, Jr.
- ---------------------------------- President, Chief Operating Officer, and
Ernest A. Gerardi, Jr. Director
54
<PAGE>
/s/Wesley D. Minami
- ---------------------------------- Senior Vice President,
Wesley D. Minami Chief Financial Officer, and Treasurer
/s/ Steven E. Gulley
- ---------------------------------- Vice President, Controller, and Chief
Steven E. Gulley Accounting Officer
/s/Fred J. Brinkman
- ---------------------------------- Director
Fred J. Brinkman
/s/Charles B. Gill
- ---------------------------------- Director
Charles B. Gill
/s/Mandell J. Ourisman
- ----------------------------------- Director
Mandell J. Ourisman
/s/Mallory Walker
- ----------------------------------- Director
Mallory Walker
55
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Partner's Equity and Other F-5
Limited Partners' Interest
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-28
</TABLE>
SCHEDULES FILED AS PART OF THIS REPORT
Schedule III - Real Estate and Accumulated Depreciation S-1 to S-2
All other Schedules have been omitted because the required information of
such other Schedules is not present in amounts sufficient to require
submission of the schedule or because the required information is included
in the consolidated financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Unitholders of Charles E. Smith Residential Realty L.P.:
We have audited the accompanying consolidated balance sheets of Charles E. Smith
Residential Realty L.P. (a Delaware limited partnership) and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, partner's equity and other limited partners' interest, and cash
flows for the years ended December 31, 1997, 1996 and 1995. These consolidated
financial statements and the schedule referred to below are the responsibility
of the management of Charles E. Smith Residential Realty L.P. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Charles E. Smith
Residential Realty L.P. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 9, 1998
F-2
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
ASSETS
<S> <C> <C>
Rental property, at predecessor cost, net $ 261,609 $ 267,658
Rental property, acquired and developed, net 489,621 202,435
Rental property under development 53,093 -
Cash and cash equivalents - 3,898
Tenants' security deposits 2,453 3,521
Escrow funds 7,606 6,087
Investment in and advances to Property Service Businesses
and other 15,905 10,756
Deferred charges, net 16,047 17,646
Other assets 19,172 10,210
----------------- -----------------
$ 865,506 $ 522,211
================= =================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 500,435 $ 416,808
Lines of credit 105,000 112,050
Construction loans 5,536 17,686
Accounts payable and accrued expenses 13,732 9,525
Tenants' security deposits 2,453 3,521
----------------- -----------------
Total liabilities 627,156 559,590
----------------- -----------------
Commitments and contingencies
Other Limited Partners' Interest
14,161,102 and 12,029,857 common units issued and outstanding
at December 31, 1997 and December 31, 1996, respectively, at
redemption value 502,719 351,873
----------------- -----------------
Partner's Equity
General Partner's General and Limited Partnership Interest
Preferred units - Series A Cumulative Convertible
Redeemable Preferred Units, 1,661,744 units issued
and outstanding 45,000 -
Preferred units - Series B Cumulative Convertible
Redeemable Preferred Units, 1,216,666 units issued
and outstanding 34,675 -
Common units - 14,942,429 and 9,969,607 units issued and
outstanding at December 31, 1997 and December 31, 1996,
respectively (344,044) (389,252)
----------------- -----------------
Total partner's equity (264,369) (389,252)
----------------- -----------------
$ 865,506 $ 522,211
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Rental Properties:
Revenues $ 200,104 $ 163,959 $ 143,464
Expenses
Operating costs (71,425) (60,796) (53,636)
Real estate taxes (12,402) (10,429) (8,620)
Depreciation and amortization (20,666) (17,931) (16,258)
------------ ------------ ------------
Total expenses (104,493) (89,156) (78,514)
Property Service Businesses:
Equity in income of Property Service 7,597 7,846 6,868
Businesses
Corporate general and administrative expenses (6,563) (5,255) (4,768)
Interest income 1,063 1,029 1,424
Interest expense (45,411) (43,606) (37,421)
------------ ------------ ------------
Income before extraordinary item 52,297 34,817 31,053
Extraordinary item - loss on extinguishment of debt (87) - -
------------ ------------ ------------
Net income 52,210 34,817 31,053
Less: Income attributable to preferred units (1,881) - -
Net income attributable to common units $ 50,329 $ 34,817 $ 31,053
============ ============ ============
Earnings per common unit - basic $ 1.89 $ 1.59 $ 1.44
============ ============ ============
Earnings per common unit - diluted $ 1.88 $ 1.59 $ 1.44
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
Other
General Partner's General and Limited Partners'
Limited Interest Interest
----------------------------------------------------------- -------------------
Series A Preferred Series B Preferred
Units Units Common Units Common Units
-------------------- -------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $ - $ (347,767) $ 310,247
Units exchanged for - - - 15,491
acquisitions
Adjustment for unit grants - - - 570
Net income - - 13,405 17,648
Distributions ($1.915 per
unit) - - (17,693) (23,524)
Adjustment to reflect Other
Limited Partners' interest
at redemption value - - 31,769 (31,769)
-------------------- -------------------- -------------- -------------------
Balance, December 31, 1995 - - (320,286) 288,663
Units exchanged for
acquisitions - - - 2,403
Adjustment for unit grants - - - 333
Net income - - 15,755 19,062
Distributions ($1.975 per
unit) - - (19,469) (23,840)
Adjustment to reflect Other
Limited Partners' interest at
redemption value - - (65,252) 65,252
-------------------- -------------------- -------------- -------------------
Balance, December 31, 1996 - - (389,252) 351,873
Units exchanged for
acquisitions - - - 75,019
Adjustment for unit grants - - - 579
Net income - - 26,593 25,617
Contribution by Charles E.
Smith Residential Realty, Inc. 45,000 34,675 124,180 -
Offering costs - - (562) -
Repurchase and cancellation of
Operating Partnership units - - - (2,206)
Distributions ($2.035 per unit) - - (27,151) (26,369)
Other - - 244 110
Adjustment to reflect Other
Limited Partners' interest
at redemption value - - (78,096) 78,096
-------------------- -------------------- -------------- -------------------
Balance, December 31, 1997 $ 45,000 $ 34,675 $ (344,044) $ 502,719
==================== ==================== ============== ===================
Units issued and outstanding at
December 31, 1997 1,661,743 1,216,666 14,942,429 14,161,102
==================== ==================== ============== ===================
Units issued and outstanding at
December 31, 1996 - - 9,969,607 12,029,857
==================== ==================== ============== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,210 $ 34,817 $ 31,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,543 21,039 19,547
(Increase) decrease in escrow funds (1,519) (716) 2,107
Increase in other assets (3,218) (1,014) (1,296)
(Decrease) increase in accounts payable and
accrued expenses 4,207 (3,168) 2,872
------------ ---------- ----------
Net cash provided by operating activities 75,223 50,958 54,283
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (173,205) (60,173) (55,152)
Additions to rental property (12,811) (7,425) (5,257)
(Decrease) increase in related party payables:
Property Service Businesses - (635) (8,535)
Affiliates - (469) (703)
Predecessor - (337) 33
(Increase) decrease in investment in and advances
to Property Service Businesses and other (5,111) (2,408) 1,939
Acquisition deposits and other (5,797) (1,295) (820)
------------ ---------- ----------
Net cash used by investing activities (196,924) (72,742) (68,495)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to deferred charges (1,033) (402) (1,032)
Capital contributions by Charles E. Smith Residential Realty, Inc.:
Common units 124,180 - -
Preferred units 79,113 - -
Mortgages:
Proceeds 34,000 31,095 -
Repayments (43,847) (31,520) (466)
Lines of credit:
Proceeds 92,350 75,500 31,400
Repayments (99,400) (16,000) -
Constuction loans:
Proceeds 5,536 1,032 16,654
Repayments (17,686) - -
Repurchase of units (2,206) - -
Distributions (53,520) (43,309) (41,216)
Other, net 316 (192) -
------------ ---------- ----------
Net cash provided by financing activities 117,803 16,204 5,340
------------ ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,898) (5,580) (8,872)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,898 9,478 18,350
------------ ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 3,898 $ 9,478
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF COMPANY
Charles E. Smith Residential Realty L.P. (The "Operating Partnership") was
organized in Delaware in 1993. The Operating Partnership had no operations
prior to the completion of the business combination (discussed below) which
occurred on June 30, 1994. Charles E. Smith Residential Realty, Inc. (the
"Company"), formed in June 1993, is a self-administered and self-managed equity
real estate investment trust ("REIT"). On June 30, 1994, the Company raised
equity through an initial public offering and a private placement (the
"Offerings"), and issued debt in a series of concurrent private financing
transactions. The proceeds from the Offerings were used to acquire the 1.0% sole
general partnership and a 41.7% limited partnership interest in the Operating
Partnership.
Simultaneous with the Offerings, the entities that owned the properties
and the related service businesses included in the CES Group contributed the
properties (the "Predecessor Properties") and the management, development,
leasing, interior construction, engineering, and financing services business
segments of the Predecessor to the Operating Partnership (or corporations in
which the Operating Partnership owns substantially all of the equity) and
received in exchange, directly or indirectly, units of limited partnership in
the Operating Partnership. (The contributing entities and their owners, which
include Robert H. Smith and Robert P. Kogod and their families, and other former
owners of indirect interests in contributed properties, are referred to
collectively as the "Other Limited Partners"). The contributed assets and
liabilities were recorded at historical net book value which transferred a net
carry-over deficit of $244.2 million to the Operating Partnership.
The Operating Partnership and its subsidiaries are engaged in the
ownership, operation, management, leasing, acquisition, and development of real
estate properties, primarily residential multifamily properties. As of December
31, 1997, the Operating Partnership owned 45 operating multifamily properties
containing 18,236 apartment units (the "Properties"), had approximately 2,000
units under construction at three additional sites and owned two free-standing
community retail shopping centers aggregating 436,000 square feet. The
properties are located in the following metropolitan areas:
F-7
<PAGE>
<TABLE>
<CAPTION>
Washington, D.C. Chicago, Boston,
Area Illinois Mass. Total
---------------- -------- ------- -----
<S> <C> <C> <C> <C>
Multi-Family
- ------------
Operating 43 1 1 45
Under Construction 2 1 - 3
Retail Centers 2 - - 2
- -------------- -- - - --
47 2 1 50
== = = ==
</TABLE>
Additionally, the Operating Partnership owned substantially all of the
equity in entities which provide multifamily and retail property management and
leasing, interior construction and renovation, building engineering and
technical services, and financial advisory services (collectively, the "Property
Service Businesses").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include all of the
accounts of the Operating Partnership and its subsidiaries and affiliates. The
Operating Partnership uses the equity method of accounting for its 99% non-
voting interest in the Property Service Businesses.
All significant intercompany balances and transactions have been
eliminated.
RENTAL PROPERTY
The Operating Partnership recorded the contributed Predecessor Properties at
the Predecessor's historical cost. Rental property subsequently acquired or
developed is recorded at the Operating Partnership's actual cost, including
interest and real estate taxes incurred during development. Ordinary repairs
and maintenance, such as minor replacements and painting, are expensed as
incurred; major improvements, such as new HVAC equipment and kitchen/bath
renovations, are capitalized when they extend the useful life, increase capacity
or improve the efficiency of the asset. Depreciation on buildings and
improvements is computed using the straight-line method over estimated useful
asset lives as follows:
Base building 40 years
Land improvements 20 years
Building improvements 7 to 20 years
Tenant improvements Shorter of remaining lease term or useful life
Furniture, fixtures
and equipment 5 to 10 years
F-8
<PAGE>
DEFERRED CHARGES
Deferred charges consist primarily of permanent loan fees, which are
amortized to interest expense over the terms of the notes using the effective
interest rate method, and retail lease acquisition costs, which are amortized
over the terms of the related leases.
REVENUE RECOGNITION
Rental income attributable to residential leases is recognized when due
from tenants. The Operating Partnership requires residential tenants to
initially execute a one-year lease. At the expiration of the lease term, if not
renewed, the lease converts to a month-to-month basis.
Minimum rental income attributable to retail leases is recognized on a
straight-line basis over the term of the lease regardless of when payments are
due. Minimum rental income recognized in excess of payments due was $5.0 million
and $6.8 million at December 31, 1997 and 1996, respectively, and is included in
other assets. The lease agreements contain provisions that provide for
additional rentals based on the tenants' sales volume and reimbursement from the
tenants for their share of real estate taxes and certain common area maintenance
costs. Additional rentals are recognized on the accrual basis.
The future minimum lease payments to be received by the Operating
Partnership under noncancelable retail leases as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ending
December 31,
------------
1998 $ 7,571
1999 7,219
2000 7,171
2001 6,841
2002 6,743
Thereafter 93,492
--------
$129,037
========
</TABLE>
INCOME TAXES
These financial statements contain no provision for Federal income taxes
since the entity is a partnership and, therefore, all Federal income tax
liabilities and/or tax benefits are passed through to the individual partners in
accordance with the partnership agreement and the Internal Revenue Code.
F-9
<PAGE>
The Operating Partnership's income tax basis in its assets and liabilities
was $702 million and $635 million, respectively, at December 31, 1997 and $470
million and $558 million, respectively, at December 31, 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions related to the net realizable value of rental property, the
collectibility of accounts and notes receivable, and the outcome of asserted and
unasserted claims 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 periods. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
Management assesses for impairment any property whenever events or
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the sum of the estimated undiscounted future
cash flows before interest charges is less than its carrying value. The loss is
measured as the difference between the carrying value and the fair value of the
property.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation programs under Accounting
Principles Board Opinion No. 25 whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock at the grant date over
the exercise price.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" which specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. The standard is effective for interim and annual
periods ending after December 15, 1997 and requires restatement of comparative
prior-period data. The Operating Partnership has adopted SFAS No. 128 and all
prior period amounts have been restated to conform with this standard.
F-10
<PAGE>
During 1997, the FASB also issued several additional standards including
SFAS No. 129, "Disclosure of Information About Capital Structure", SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 129 is effective for
reporting periods ending after December 15, 1997 and had no impact on the
Operating Partnership's financial statements. SFAS No. 130 and SFAS No. 131
are effective beginning in 1998 and are not expected to have any significant
impact on the Operating Partnership's financial statements.
RECLASSIFICATIONS
The Operating Partnership changed the classification of certain senior
management payroll costs from property operating expenses to corporate general
and administrative expense. Management believes this reclassification more
accurately reflects property operations and is consistent with industry
practice. Approximately $2.2 million and $1.9 million, respectively, for the
years ended December 31, 1996 and 1995 have been reclassified to conform to the
current year's presentation.
Certain other reclassifications of the prior years' information have been
made to conform to the current year's presentation.
3. RENTAL PROPERTY
Rental property consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
At Predecessor cost
- ----------------------------------------
Land $ 25,452 $ 25,452
Buildings and improvements 427,333 427,333
At Company cost
- ----------------------------------------
Land 103,761 55,891
Buildings and improvements 404,870 151,324
Property under development 53,093 -
---------- ---------
1,014,509 660,000
Less: Accumulated depreciation (210,186) (189,907)
---------- ---------
$ 804,323 $ 470,093
========== =========
</TABLE>
Depreciation expense of the Operating Partnership was $20.3 million, $17.7
millon and $15.9 million for the years ended Decemer 31, 1997, 1996 and 1995,
respectively. Repairs and
F-11
<PAGE>
maintenance expense of the Operating Partnership was $13.0 millon, $11.8
million and $10.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
ACQUISITIONS
During 1997, the Operating Partnership acquired six properties for $288.6
million, adding 3,036 apartment units. In four of the transactions, the
Operating Partnership issued a total of approximately 2.1 million Operating
Partnership units valued at $61.1 million. The conversion of these Operating
Partnership units into Company common stock is restricted for up to two years.
In four of the transactions, the Operating Partnership assumed a total of $93.5
million in mortgage loans.
During 1996, the Operating Partnership acquired four properties for $64.1
million, adding 1,049 apartment units. In two of the transactions, the Operating
Partnership issued a total of approximately 0.1 million Operating Partnership
units valued at approximately $2.4 million. The conversion of these Operating
Partnership units into Company common stock is restricted for up to one year.
In one of the transactions, the Operating Partnership assumed a $3.3 million
mortgage loan.
During 1995, the Operating Partnership acquired five properties for $82.3
million adding 1,369 apartment units. In two of the transactions, the Operating
Partnership issued a total of approximately 0.6 million Operating Partnership
units valued at $13.7 million. In two of the transactions, the Operating
Partnership assumed a total of $30.6 million in mortgage loans.
DEVELOPMENT
During 1997, the Operating Partnership acquired interests in three
development sites for $35.1 million consisting of $21.2 million cash and 450,000
Operating Partnership units valued at $13.9 million.
During 1995, the Operating Partnership completed construction on a 320-unit
property for a total cost of approximately $23.9 million.
4. INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES AND OTHER
The Operating Partnership uses the equity method of accounting for its 99%
non-voting interest in the Property Service Businesses, which include Smith
Realty Company ("SRC"), Consolidated Engineering Services, Inc. ("CES") and
Smith Management Construction, Inc. ("SMC"). These companies provide services
which include property management, leasing, engineering and technical, financing
and property construction and renovation. Under the equity
F-12
<PAGE>
method, the Operating Partnership's investment is adjusted for its proportionate
share of earnings or losses of the Property Service Businesses and by dividends
received. The Operating Partnership recognized its 99% interest in the earnings
of each of the Property Service Businesses which aggregated $7.6 million, $7.8
million and $6.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Operating Partnership received distributions aggregating $8.9
million, $8.9 million and $8.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
The Property Service Businesses provide services to the Operating
Partnership under one-year agreements which are automatically renewable. Such
services are generally provided at cost (including a proportionate share of
total overhead) except property management and leasing services which are
provided at cost plus five percent. The Property Service Businesses also provide
services to certain partnerships which own multifamily and commercial office
properties and have Messrs. Smith and Kogod as the general partners
("Affiliates"). Such services are generally provided at cost (including
overhead) plus a fee, except for certain engineering and technical services
which are provided at cost and overhead.
In November 1997, certain Affiliates combined into a single partnership,
Charles E. Smith Commercial Realty L.P. ("CESCR"). In conjunction with the
combination, CES and SMC each entered into eight-year agreements with CESCR to
continue providing services under the same terms and conditions in place prior
to the business combination. In addition, certain Financing Services personnel
of SRC transferred to CESCR. SRC entered into agreements through December 31,
1998 to provide Financing Services for certain properties owned and certain
properties to be acquired by CESCR. Services will be provided utilizing CESCR
personnel on a negotiated cost basis. SRC will separately negotiate revenue and
cost sharing agreements for Financing Services it may provide, if any, to
properties managed but not owned by CESCR.
In addition to the above, SRC provided administrative services such as
accounting, systems and human resources services to the Operating Partnership
and Affiliates at cost and overhead in accordance with cost and executive
sharing agreements. In management's opinion, the allocation methods provide
reasonable estimates of the costs that would have been incurred had the services
been provided by the Operating Partnership.
Total fees and administrative services charged by the Property Service
Businesses to the Operating Partnership and Affiliates follows (in thousands):
F-13
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fees Charged by Property Services Businesses to:
- -----------------------------------------------
Operating Partnership $ 8,762 $ 7,969 $ 7,950
Affiliates 29,841 31,321 28,964
Costs of Administrative Services Charged by SRC to:
- --------------------------------------------------
Operating Partnership 9,629 7,459 8,090
Affiliates 5,632 5,630 5,248
</TABLE>
The Operating Partnership had net working capital advances to the Property
Service Businesses of $10.6 million and $3.9 million at December 31, 1997 and
1996, respectively, which are reflected in the investment balance.
Combined summarized balance sheet information for the Property Service
Businesses
follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Assets/(1)/
Accounts receivable $27,827 $20,699
Property, net 5,475 4,140
Other, net 3,091 2,951
------- -------
$36,393 $27,790
======= =======
Liabilities/(1)/
Accounts payable $17,422 $13,143
Deferred revenue 5,120 3,758
Due to related parties 11,529 7,130
Other 1,552 1,774
Equity 770 1,985
------- -------
$36,393 $27,790
======= =======
</TABLE>
/(1)/ Balance sheets exclude $44.5 million of notes due to the Operating
Partnership which, under the equity method, are eliminated for purposes of
carry-over basis accounting.
Combined summarized income statement information for the Property Service
Businesses
follows (in thousands):
F-14
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 72,277 $ 62,559 $ 58,777
Operating expenses (62,976) (53,245) (49,925)
Depreciation/amortization (1,238) (1,056) (1,325)
Other expense, net (447) (391) (647)
-------- -------- --------
Net income/(1)/ $ 7,616 $ 7,867 $ 6,880
======== ======== ========
</TABLE>
/(1)/ Represents 100% of the Property Service Businesses' net income, of which
the Operating Partnership's share was $7.6 million, $7.8 million and $6.9
million, respectively, for the years ended December 31, 1997, 1996 and 1995.
5. DEFERRED CHARGES
Deferred charges consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Permanent loan fees $ 20,513 $19,917
Retail lease acquisition costs 4,170 3,693
Acquisition/development costs
and other 1,742 1,729
-------- -------
26,425 25,339
Less: Accumulated amortization (10,378) (7,693)
-------- -------
$ 16,047 $17,646
======== =======
</TABLE>
Amortization of permanent loan fees (which is charged to interest expense)
was $2.3 million, $2.7 million and $2.7 million for the years ended December 31,
1997, 1996 and 1995, respectively. Other amortization expense was $0.4 million,
$0.2 million and $0.4 million for the years ended December 31, 1997, 1996 and
1995, respectively.
6. MORTGAGE LOANS
The Operating Partnership, through its subsidiary financing partnerships,
has mortgage loans consisting of the following as of December 31 (in
thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage Pool One $110,140 $110,140
Mortgage Pool Two 125,214 125,214
Mortgage Pool Three 117,000 117,000
Mortgage Pool Four 31,095 31,095
Acquisition Mortgages 116,986 33,359
-------- --------
$500,435 $416,808
======== ========
</TABLE>
These loans require monthly interest and, where applicable, principal
payments and are collateralized by non-recourse first lien mortgages or deeds of
trust on 35 of the 50 Properties, bear interest at a weighted-average interest
rate of 7.86% and 8.01% as of December 31, 1997 and 1996, respectively, and have
a weighted-average maturity of 6.8 years as of December 31, 1997.
MORTGAGE POOLS
The loan for Mortgage Pool One bears interest at a fixed rate of 7.93% and
is due June 30, 1999. The loan for Mortgage Pool Two bears interest at a fixed
rate of 8.19% and is due June 30, 2001. Both loans are interest only and require
the Operating Partnership to establish escrows to fund capital improvements and
repairs, and to maintain minimum cash balances for interest and ground rent
payments. The loans for Mortgage Pools One and Two contain cross collateral and
cross default provisions among the separate financing partnership borrowers
within each pool.
The loan for Mortgage Pool Three is interest only, at a fixed rate of 7.99%
paid monthly, through June 30, 1999, at which time principal amortization begins
using a 25-year amortization schedule with a balloon payment due June 30, 2009.
The loan requires a capital and repair escrow. Certain Predecessor partners
guarantee $42 million of the mortgage loan secured by Mortgage Pool Three.
In September 1996, the outstanding loan balance of $40.6 million for
Mortgage Pool Four was refinanced for a new loan amount of $41 million. The
ground lessor (see Note 9) has been allocated $9.9 million of the refinanced
loan for which the Operating Partnership is contingently liable. The remaining
$31.1 million of debt is allocated to the Operating Partnership. The loan bears
interest at a fixed rate of 8.24%, paid monthly through August, 2004, at which
time principal amortization begins, using a 30-year amortization schedule with a
final payment due August 1, 2009.
ACQUISITION MORTGAGES
In 1995, the Operating Partnership assumed $30.6 million in mortgage loans
in connection with acquisitions. A $17.5 million mortgage loan was assumed with
an interest rate of 170 basis
F-16
<PAGE>
points over the London Interbank Offer Rate (LIBOR) (7.665% as of December 31,
1997), due February 28, 1998. Approximately $9 million of principal was repaid
in 1997. The Operating Partnership plans to refinance the remaining balance in
1998. The Operating Partnership also assumed a $13.1 million mortgage loan with
a fixed interest rate of 7.5% with principal amortized over 25 years and a final
payment due October 31, 2020.
In 1996, the Operating Partnership assumed a $3.3 million mortgage loan in
connection with an acquisition The loan has a fixed interest rate of 9.0% with
principal amortized using a 29-year amortization schedule and a final payment
due August 1, 1999.
In 1997, the Operating Partnership assumed four mortgage loans totaling
$93.5 million in connection with acquisitions of operating properties. An
assumed $33 million mortgage loan with a fixed interest rate of 9.9% was
refinanced in November 1997 for $34 million. The interest rate is fixed at 6.86%
with principal amortization using a 30-year amortization schedule, due November
1, 2009. A $46.0 million mortgage loan was assumed with a fixed interest rate of
7.158% with principal amortization using a 30-year amortization schedule, due
January 1, 2006. An assumed $1.2 million mortgage loan with a fixed interest
rate of 9.25% and fixed monthly principal payments, due March 30, 2005, was
repaid in February 1998. Finally, the Operating Partnership assumed a $13.3
million interest-only mortgage loan at LIBOR plus 110 basis points (7.08% as of
December 31, 1997), due December 3, 1998. The Operating Partnership plans to
refinance this loan in 1998.
The scheduled principal payments for all of the mortgage loans are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
--------------
<S> <C>
1998 $ 22,399
1999 115,403
2000 2,785
2001 128,227
2002 3,258
Thereafter 228,363
--------
$500,435
========
</TABLE>
7. LINES OF CREDIT AND CONSTRUCTION LOANS
The Operating Partnership, has the following amounts due under lines of
credit and construction loans as of December 31 (in thousands):
F-17
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
$100 million Line of Credit $ 75,000 $ 82,050
$83 million Line of Credit 30,000 30,000
Construction Loans 5,536 17,686
-------- --------
$110,536 $129,736
======== ========
</TABLE>
The Operating Partnership has a $100 million revolving line of credit on
which borrowings bear interest at a selected LIBOR rate plus 97.5 to 125 basis
points based on the leverage ratio of the related collateral (6.979% at
December 31, 1997). The line of credit matures on April 30, 2000. The Operating
Partnership pays a fee of .125% on the full amount available under the line of
credit. Borrowings under the line of credit are collateralized by 7 of the 50
Properties. The line of credit agreement contains certain restrictive covenants,
including maintenance of minimum net worth, debt to equity ratios and cash flow
coverage requirements. The maximum amounts outstanding during 1997 and 1996
were $127.0 million and $112.1 million, respectively.
The Operating Partnership also has an $83 million acquisition credit
facility which matures June 2004. The line of credit provides for an interest
rate that is fixed at the time of each borrowing at 150 basis points over 10-
year Treasury Bills and is cross-collateralized with Mortgage Pool Three (Note
6). Borrowings outstanding at December 31, 1997 bear interest at a weighted-
average fixed rate of 7.27% and are collateralized by two Properties. The
agreement contains certain restrictive covenants including a limit on debt to
asset value and maintenance of debt service coverage ratios.
In October 1997, the Operating Partnership obtained a variable rate,
unsecured construction loan of $46.3 million to finance the construction of an
acquired development property. The loan is recourse to the Operating
Partnership, bears interest at LIBOR plus 130 basis point (6.93% at December 31,
1997), and matures in October 2000. The loan balance at December 31, 1997 was
$5.5 million.
8. PARTNER'S EQUITY
During the first quarter of 1997, the Company completed a follow-on equity
offering and issued 3.1 million shares of common stock at $28.375 per share
totaling $82.9 million, net of underwriting discount and other expenses totaling
$5.2 million. The net proceeds from the offering was contributed to the
Operating Partnership in exchange for 3.1 million common units. The Operating
Partnership used the proceeds to repay $72.1 million of notes payable and $9
million of mortgage debt and to fund property acquisitions.
On May 15, 1997, the Company entered into an agreement with Security
Capital Preferred Growth Inc. ("Security Capital") to sell 2.6 million shares of
Series A Cumulative Convertible
F-18
<PAGE>
Redeemable Preferred Stock ("Series A Preferred Shares"), $0.01 par value
(liquidation preference of $27.08 per share), at $27.08 per share for a total of
$71.5 million. On June 30, 1997, the Company sold 0.7 million Series A Preferred
Shares for proceeds of $19.8 million, net of $0.2 million in offering costs. On
December 2, 1997, the Company sold 0.9 million of Series A Preferred Shares for
proceeds of $24.7 million net of $0.3 million in offering costs. The remainder
of the Series A Preferred Shares will be issued and sold in amounts determined
by the Company on or before May 14, 1998. The Company contributed the net
proceeds to the Operating Partnership in exchange for 1.6 million Series A
Preferred Units.
The Operating Partnership amended the Articles of Incorporation to
designate and establish the rights of the Series A Preferred Units which include
certain voting, distribution and liquidation preferences over the common
unitholders.
Distributions on the Series A Preferred Units are cumulative from the date
of original issue and are payable quarterly at the greater of the rate declared
on the common units or the annual rate of $2.02 per unit. The Series A
Preferred Units are not redeemable prior to May 15, 2003. On or after May 15,
2003, the Operating Partnership, at its option, may redeem the Series A
Preferred Units for cash at a redemption price of $27.08 per unit, plus accrued
and unpaid distributions. Under certain circumstances, the Operating
Partnership may elect to make such redemption with common units at the then
market price of the Company's common stock. On or after January 31, 1999,
Security Capital may convert the Series A Preferred Shares into shares of common
stock on a one-for-one basis subject to certain limitations. Prior to January
31, 1999, the Series A Preferred Shares will not be convertible unless the
Company undergoes a change in control, as defined by the agreement, or fails to
qualify as a REIT for tax purposes.
On October 3,1997, the Company sold 1.45 million shares of common stock and
1.22 million shares of Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B Preferred Shares"), $0.01 par value, to the Prudential
Insurance Company of America ("Prudential") for approximately $76 million in
connection with a property acquisition. The net proceeds were contributed to
the Operating Partnership in exchange for 1.45 million common units and 1.22
million Series B Preferred Units.
The Operating Partnership amended the Articles Of Incorporation to
designate and establish the rights and privileges of the Series B Preferred
Units which include certain voting, distribution and liquidation preferences
over the common unitholders. The Series B Preferred Units have a liquidation
preference of $28.50 per unit. Distributions are cumulative and are payable
quarterly at the greater of the rate declared on the common units or the annual
rate of $2.02 per unit. Prudential may convert the Series B Preferred Shares
into shares of common stock on a one-for-one basis, subject to certain
adjustments and limitations related to its ownership of common stock of the
Company. The Operating Partnership may redeem Series B Preferred Units at any
time for common units, plus accrued and unpaid distributions.
F-19
<PAGE>
As of December 31, 1997, approximately 18.7 million shares of the Company's
authorized common stock had been reserved for redemption of Operating
Partnership units and 1.0 million shares were reserved under the Company's
Dividend and Distribution Investment and Share Purchase Plan, respectively.
9. COMMITMENTS AND CONTINGENCIES
LAND LEASES
Nine of the Properties have ground leases expiring at various dates between
December 2032 and July, 2064. Generally, each ground lease provides for a
nominal annual rental and an additional rental calculated from the results of
Property operations after capital expenditures.
The base rental expense to the Operating Partnership under the ground
leases was $0.5 million for each of the years ended December 31, 1997, 1996 and
1995. The additional rental expense to the Operating Partnership under the
ground leases was $3.2 million, $2.6 million and $1.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively. At the expiration of the
ground leases, the land and all of the improvements thereon will revert to the
land owner. In most cases, the leases are subordinated to the mortgage debt on
the related rental property.
The future nominal base annual rentals as of December 31, 1997 for the
ground leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
- --------------
<S> <C>
1998 $ 491
1999 491
2000 491
2001 491
2002 491
Thereafter 21,799
-------
$24,254
=======
</TABLE>
NET PROFITS INTEREST
An unaffiliated third party has a 5.1% interest in the net profits of one of
the Properties acquired in 1997. Net profit is calculated based on the results
of Property operations less capital expenditures.
F-20
<PAGE>
LITIGATION
The Operating Partnership and/or the Property Service Businesses are
presently subject to legal actions or claims for damages that arise in the
ordinary course of business. In the opinion of management and counsel to the
Operating Partnership, the ultimate outcome of such litigation will not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or cash flows.
BUILDING EMPLOYEES RETIREMENT PLAN
Substantially all of the personnel employed at the Properties are eligible
and participate in the Charles E. Smith Building Employees Retirement Plan, a
defined contribution plan (the "Plan"). These personnel are employed by Smith
Employment Services, L.P. ("Employment Services"), a limited partnership owned
by the Operating Partnership, which is the primary employer in the Plan.
Employment Services is required to contribute 4% of employee-qualified earnings.
The total contributions were $ 0.4 million in 1997, and $ 0.3 million in 1996
and 1995. Employees of the Property Service Businesses are covered by a separate
defined contribution tax-qualified retirement savings plan.
10. RELATED-PARTY TRANSACTIONS
The Operating Partnership conducts business with entities in which Messrs.
Smith and Kogod exercise control. In each case, the Company's Board of
Directors reviews the transaction and obtains, as required, independent
assurance as to the arms-length nature of the terms. The following is a
description of these transactions.
In connection with the development of the Westerly at Worldgate apartments,
the Operating Partnership purchased the land in 1994 for $4.7 million from
an affiliate controlled by Messrs. Smith and Kogod. Also, a contract was
executed with an entity controlled by Messrs. Smith and Kogod to manage the
construction of the apartments at a fee of 4% of hard construction costs.
Construction management fees were $0.5 million for the year ended December
31, 1995 and $0.2 million for the period from June 30, 1994 to December 31,
1994. The project was completed in December 1995.
For the years ended December 31, 1997, 1996 and 1995, the Operating
Partnership paid approximately $0.7 million, $0.7 million and $0.3 million,
respectively, in payroll reimbursements to an entity controlled by Messrs.
Smith and Kogod for efforts on development properties and potential
development sites.
F-21
<PAGE>
In February 1997, the Operating Partnership purchased two multifamily
properties (Crystal Plaza and Crystal Towers) totaling $112.8 million from
partnerships in which Messrs. Smith and Kogod had ownership interests.
In connection with the development of Springfield Station, a contract was
executed with an entity controlled by Messrs. Smith and Kogod to manage the
construction of the apartments at a fee of 4% of hard construction costs.
Construction management fees were $0.4 million for the year ended December
31, 1997.
Prior to December 1997, the two retail properties leased health club
facilities to entities controlled by Messrs. Smith and Kogod. Rental income
earned under these leases approximated $5.0 million, $5.0 million and $4.8
million for the years ended December 31, 1997, 1996 and 1995. In December
1997, the health clubs were sold. In conjunction with that sale, the
Operating Partnership agreed to restructure the leases by reducing base
rent on the Worldgate lease and extending the terms of both leases for ten
years, through 2025, in exchange for a $2.3 million cash payment which will
be amortized over the lives of the revised leases. The Operating
Partnership used the funds to retire 65,000 Operating Partnership units.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. Based on the borrowing rates
currently available to the Operating Partnership for mortgages with similar
terms and remaining maturities, the fair value of mortgages payable was
approximately $527 million and $427 million at December 31, 1997 and 1996,
respectively. The fair values of lines of credit and construction loans
approximate the carrying values.
12. EARNINGS PER UNIT
For the year ended December 31, 1997, basic and diluted earnings per common
unit is computed based on 26.7 million weighted average units outstanding during
the year and 26.8 million weighted average units outstanding during the year
adjusted for the assumed conversion of dilutive securities, respectively. For
the years ended December 31, 1996 and 1995, weighted average units outstanding
were 21.9 million and 21.6 million, respectively, for both basic and diluted
earnings per common unit. The per-unit impact in 1997 of the extraordinary
item was immaterial.
F-22
<PAGE>
A reconciliation of income (before extraordinary item) and units used to
calculate basic and diluted earnings per common unit for 1997 follows (dilutive
securities had no effect on earnings in 1996 and 1995):
<TABLE>
<CAPTION>
Weighted Per-Unit
Income Average Units Amount
--------- -------------- --------
(000's) (000's)
<S> <C> <C> <C>
Income before extraordinary item $52,297
Less: Preferred Unit distributions (1,881)
-------
Earnings per unit - Basic
Income attributable to common
unitholders before extraordinary item $50,416 26,670 $1.89
Effect of Dilutive Securities
Options - 161 (.01)
------- ------------- ------
Earnings per unit - Diluted $50,416 26,831 $1.88
======= ============= ======
</TABLE>
Options to purchase 798,500 shares of the Company's common stock at $35
per share were not included in the computation of diluted earnings per unit
because the options' exercise price was higher than the average price of the
Company's common shares. All convertible preferred units were also excluded
from the calculation of diluted earnings since the preferred dividends paid per
unit exceeded basic earnings per unit.
13. INCENTIVE PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based on the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Operating Partnership's net income
would have been reduced by approximately $65,000 (less than $0.01 per basic and
diluted common unit) for the year ended December 31, 1997 and $8,000 for the
year ended December 31, 1996. The fair value of options granted during 1997 and
1996 is estimated at approximately $2,111,000 and $23,000, respectively, based
on the date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for 1997 and 1996, respectively: dividend yield
of 6.8% and 8.3%, volatility of 14% and 9%, risk-free interest rate of 5.7% and
6.3% and an expected life of 3 years and 7 years.
F-23
<PAGE>
OPTION PLANS
The Company with the Operating Partnership maintains an employee stock
and unit option plan designed for executive officers and other key employees of
the Company, the Operating Partnership and the Property Service Businesses.
Messrs. Smith and Kogod are not eligible to participate under this plan. The
Company also maintains a Director's stock option plan which provides for
automatic grants of vested options, exercisable for 5,000 shares of common
stock, to newly appointed non-employee directors. The plans authorize the
issuance of up to 1,750,000 shares of common stock and/or units pursuant to
options granted under these plans. Options outstanding under both plans are as
follows:
<TABLE>
<CAPTION>
Weighted Average Options
Number Exercise Price Exercisable/(1)/
--------- --------------- ----------------
<S> <C> <C> <C>
Shares/units under option,
December 31, 1994 895,000 $ 24 20,000
Options granted - -
Options canceled - -
---------
Shares/units under option,
December 31, 1995 895,000 24 199,000
Options granted 40,000 24
Options canceled (100,000) 24
---------
Shares/units under option,
December 31, 1996 835,000 24 351,000
Options granted 918,000 34
Options canceled (12,000) 24
Options exercised (25,000) 24
---------
Shares/units under option,
December 31, 1997 1,716,000 $ 29/(2)/ 677,000
=========
</TABLE>
/(1)/Weighted average exercise price is $24
/(2)/Range of exercise prices is $24-$35
The exercise price of options granted under the plans may not be less than
the fair market value of the common stock on the date of grant. Payment for
shares and/or units granted under the plans may be made either in cash, or, if
permitted by the option agreement, by exchanging shares of common stock of the
Company having a fair market value equal to the option exercise price. The
weighted average remaining contractual life of options outstanding as of
December 31, 1997 was 8.4 years.
F-24
<PAGE>
Options granted under the employee plan have a maximum term of ten years
and vest generally in three to five equal annual installments beginning on the
first anniversary of the date of grant. Generally, options terminate three
months after the optionee's termination of employment with the Company. The
Executive Compensation Committee of the Board of Directors may provide, however,
that an option may be exercised over a longer period following termination of
employment, but in no event beyond the expiration date of the option.
RESTRICTED STOCK AND UNIT PLAN
The Company, with the Operating Partnership, maintains a restricted stock
and unit plan for executive officers and other key employees of the Company, the
Operating Partnership and the Property Service Businesses. Messrs. Smith and
Kogod are not eligible to participate under the plan. A maximum of 300,000
shares of common stock and/or units may be issued under the plan. Restricted
shares and/or units that have not vested at the time of an employee's
termination of employment with the Company will be forfeited, except where such
termination occurs by reason of death or disability. Any restricted shares
and/or units forfeited pursuant to the vesting provisions of the plan will again
be available for award under the plan. In July 1994, 95,000 restricted units
were awarded to certain executive officers and key employees. These grants vest
in four equal annual installments beginning on the first anniversary of the date
of grant, subject to acceleration of vesting upon a change of control of the
Company. During 1997, 24,000 grants were awarded and 20,700 units vested.
During 1996, 7,500 grants were canceled and 23,750 units vested. No grants were
canceled and 23,750 units vested in 1995. For the years ended December 31, 1997,
1996 and 1995, compensation expense relating to the plan was $0.6 million, $0.5
million and $0.6 million, respectively, based on the market value of the
Company's stock at the date of grant.
14. SUPPLEMENTAL CASH FLOW DATA
Information on non-cash investing and financing activities and cash
interest paid is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash paid during the period
for interest $44,420 $41,078 $35,376
Capitalized interest 1,306 60 675
Purchase of properties
for Operating Partnership units 75,019 2,403 15,491
Assumption of debt on acquisitions 93,474 3,260 30,618
</TABLE>
F-25
<PAGE>
15. OTHER LIMITED PARTNERS' INTEREST
Limited partnership units of the Other Limited Partners may be redeemed at
the unitholders' discretion. At the option of the Company, such redemption may
be made for cash, at the then fair value of the Company's stock, or for shares
of common stock of the Company on a one-for-one basis. As of December 31, 1997,
approximately 18.7 million shares of the Company's authorized common stock had
been reserved for possible issuance upon redemption of limited partnership
units.
In accordance with generally accepted accounting principles, the Other
Limited Partners' redemption rights are not included in partner's equity.
Consequently, the accompanying consolidated balance sheets and statements of
partner's equity reflect the Other Limited Partners' Interest in the Operating
Partnership, measured at redemption value. Such interest is deducted from
partner's equity.
16. SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, the Operating Partnership completed the acquisition of two
multifamily properties in northwest Washington, D.C. totaling 287 apartment
units. The total cost of approximately $12.1 million was comprised of $3.3
million cash and 254,000 Operating Partnership units valued at approximately
$8.8 million. One of the properties was an Affiliate in which the Operating
Partnership previously owned a 20% interest. Both properties were previously
managed by the Operating Partnership.
In January 1998, the Operating Partnership finalized a contract to purchase
a 299-unit multifamily property located in the Crystal City submarket of
Arlington, Virginia. The acquisition is expected to close during the second
quarter of 1998. The purchase price of $39 million is expected to be funded from
the line of credit.
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$48.9 million, net of offering costs of $1.1 million. The net proceeds were
contributed to the Operating Partnership in exchange for 500 shares of Series C
Preferred Units. The Operating Partnership amended the Articles of Incorporation
to designate and establish the rights and privileges of the Series C Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
rate of $7,910 per unit. If the securities receive an investment grade rating,
the distribution rate will decrease by $250 per unit. Distributions are
cumulative and are payable quarterly. The Operating Partnership may redeem
Series C Preferred Units after February 1, 2028, at the liquidation price plus
accrued distributions.
F-26
<PAGE>
In February 1998, the Operating Partnership terminated its existing $100
million line of credit and entered into a new $250 million, unsecured line of
credit with PNC Bank, Nations Bank, and U.S. Bank which matures in March 2001.
Draws upon the new line are subject to certain unencumbered asset requirements
and bear interest at a selected LIBOR rate plus 75 to 110 basis points based on
the leverage ratio of the Operating Partnership. If the Operating Partnership
receives an investment grade rating, the interest rate will decrease to 60 to 90
basis points over LIBOR based on the rating. The Operating Partnership repaid
the balance outstanding under the $100 million line and recognized an
extraordinary loss of $0.3 million related to the extinguishment of such debt.
In March 1998, the Operating Partnership sold a 227-unit multifamily
property located in southeast Washington, D.C. for $4.4 million. The Operating
Partnership recognized a gain on the sale of $3.2 million.
F-27
<PAGE>
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1997 and 1996 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
---------- --------- --------------- -------------
1997 1997 1997 1997
---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 45,007 $ 49,784 $ 51,065 $ 55,311
Operating expenses
(including depreciation) (24,202) (25,708) (26,688) (27,895)
Equity in income of Property
Service Businesses 809 896 1,931 3,961
Interest expense (11,427) (11,256) (10,981) (11,747)
Corporate general and
administrative expenses (1,391) (1,648) (1,544) (1,980)
-------- -------- ------------- ------------
Income before extraordinary
item 8,796 12,068 13,783 17,650
Extraordinary item -
Loss on extinguishment of debt - - - (87)
-------- -------- ------------- ------------
Net income 8,796 12,068 13,783 17,563
Less income attributable to:
Series A Preferred units - - (384) (864)
Series B Preferred units - - - (633)
-------- -------- ------------- ------------
Net income attributable to
common units $ 8,796 $ 12,068 $ 13,399 $ 16,066
======== ======== ============= ============
Earnings per common unit-basic $ 0.37 $ 0.45 $ 0.50 $ 0.55
======== ======== ============= ============
Earnings per common
unit-diluted $ 0.36 $ 0.45 $ 0.50 $ 0.55
======== ======== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
---------- --------- --------------- -------------
1996 1996 1996 1996
---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 39,106 $ 40,334 $ 42,349 $ 43,199
Operating expenses
(including depreciation) (22,260) (21,508) (22,912) (22,476)
Equity in income of Property
Service Businesses 1,548 1,444 1,797 3,057
Interest expense (10,411) (10,631) (11,206) (11,358)
Corporate general and
administrative
expenses (1,287) (1,343) (1,237) (1,388)
-------- -------- -------- --------
Net income $ 6,696 $ 8,296 $ 8,791 $ 11,034
======== ========= ======== ========
Earnings per common unit-basic $ 0.31 $ 0.38 $ 0.40 $ 0.50
-------- -------- -------- --------
Earnings per common
unit-diluted $ 0.31 $ 0.38 $ 0.40 $ 0.50
======== ========= ======== ========
</TABLE>
F-28
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Capitalized
Costs Before Accumulated
Depreciation at
Initial Cost Costs December 31, 1997
Encumbrances/ ---------------------- Capitalized ------------------------
Collateral Building and Subsequent To Building and
Properties Pools (1) Land Improvements Acquisition Land Improvements Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Properties:
Albemarle LOC $ 418 - $ 4,803 $ 418 $ 4,803 $ 5,221
Bedford Village Two 1,062 - 13,475 1,062 13,475 14,537
Bennington $12,666 6,922 22,645 318 6,922 22,963 29,885
Berkeley Three 108 - 2,012 108 2,012 2,120
Boulevard of Old Town LOC 2,653 4,269 3,238 2,653 7,507 10,160
Calvert-Woodley Three 172 - 2,574 172 2,574 2,746
Car Barn Two 3,576 - 13,723 3,576 13,723 17,299
Charter Oaks LOC 4,387 10,280 466 4,387 10,746 15,133
Cleveland House Three 325 - 4,554 325 4,554 4,879
Columbia Crossing Three 4,701 - 18,421 4,701 18,421 23,122
Columbian-Stratford One 242 - 4,564 242 4,564 4,806
2000 Commonwealth (2) $13,310 3,827 23,692 2 3,827 23,694 27,521
Concord Village Two - - 8,926 - 8,926 8,926
Connecticut Heights $ 8,053 6,956 18,695 994 6,956 19,689 26,645
Corcoran House One 230 - 2,167 230 2,167 2,397
Courthouse Plaza Three - - 44,200 - 44,200 44,200
Crystal House I One - - 10,979 - 10,979 10,979
Crystal House II One - - 9,376 - 9,376 9,376
Crystal Place Two 1,245 - 18,709 1,245 18,709 19,954
Crystal Plaza (2) $33,971 7,710 35,355 338 7,710 35,693 43,403
Crystal Square Two - - 14,725 - 14,725 14,725
Crystal Towers (2) $44,610 12,607 57,189 973 12,607 58,162 70,769
1841 Columbia Road $ 3,211 3,611 1,873 350 3,611 2,223 5,834
Executive Central Two 262 - 13,136 262 13,136 13,398
Executive North One 245 - 235 245 235 480
Executive South Two 303 - 547 303 547 850
Fort Chaplin Two 97 - 7,948 97 7,948 8,045
Gateway Place Three 1,660 - 17,673 1,660 17,673 19,333
Kenmore (2) $ 1,165 4,456 11,833 84 4,456 11,917 16,373
Lincoln Towers (2) - 12,471 76,442 13 12,471 76,455 88,926
Manor LOC 5,809 14,807 924 5,809 15,731 21,540
Marbury Plaza One - - 10,256 - 10,256 10,256
Newport Village Two/Three 281 - 16,303 281 16,303 16,584
Oakwood LOC 3,819 12,551 282 3,819 12,833 16,652
One East Delaware (2) - 6,800 36,271 12 6,800 36,283 43,083
Orleans Village Two 700 - 13,870 700 13,870 14,570
Oxford Manor One 290 - 3,208 290 3,208 3,498
Patriot Village $31,095 - - 28,677 - 28,677 28,677
Potomac View LOC 2,520 6,393 625 2,520 7,018 9,538
Skyline Mall Three 482 - 14,568 482 14,568 15,050
Skyline Towers One 360 - 25,939 360 25,939 26,299
Statesman One 600 - 4,323 600 4,323 4,923
Suburban Tower LOC 1,815 5,239 (211) 1,815 5,028 6,843
2501 Porter Street Three 1,126 - 18,345 1,126 18,345 19,471
Van Ness LOC 12,699 29,973 280 12,699 30,253 42,952
Water Park Towers One 2,500 - 41,789 2,500 41,789 44,289
Westerly - 4,700 19,244 267 4,700 19,511 24,211
Windsor Towers One 362 - 5,725 362 5,725 6,087
Worldgate Centre LOC 4,105 - 40,746 4,105 40,746 44,851
Development Properties:
Courthouse Place $ 5,536 7,130 16,343 - 7,130 16,343 23,473
One Superior Place - 8,471 2,337 - 8,471 2,337 10,808
Springfield Station - 9,100 9,712 - 9,100 9,712 18,812
----------------------------------------------------------------------------
$153,915 $415,143 $445,451 $153,915 $860,594 $1,014,509
============================================================================
<CAPTION>
Accumulated Net Date of Depreciable
Properties Depreciation Property Construction Acquired Lives
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Properties:
Albemarle ($3,484) $ 1,737 1966 - 5 - 40 years
Bedford Village (8,583) 5,954 1967 - 5 - 40 years
Bennington (1,289) 28,596 - 1995 5 - 40 years
Berkeley (1,550) 570 1961 - 5 - 40 years
Boulevard of Old Town (397) 9,763 - 1995 5 - 40 years
Calvert-Woodley (1,858) 888 1962 - 5 - 40 years
Car Barn (5,165) 12,134 1982/1986 - 5 - 40 years
Charter Oaks (516) 14,617 1970 1996 5 - 40 years
Cleveland House (3,000) 1,879 1962 - 5 - 40 years
Columbia Crossing (4,279) 18,843 1990/1991 - 5 - 40 years
Columbian-Stratford (3,331) 1,475 1959 - 5 - 40 years
2000 Commonwealth (2) (123) 27,398 - 1997 5 - 40 years
Concord Village (5,749) 3,177 1967 - 5 - 40 years
Connecticut Heights (1,235) 25,410 - 1995 5 - 40 years
Corcoran House (1,616) 781 1961 - 5 - 40 years
Courthouse Plaza (11,126) 33,074 1988/1990 - 5 - 40 years
Crystal House I (6,284) 4,695 1969 - 5 - 40 years
Crystal House II (6,188) 3,188 1964 - 5 - 40 years
Crystal Place (6,508) 13,446 1986 - 5 - 40 years
Crystal Plaza (2) (777) 42,626 - 1997 5 - 40 years
Crystal Square (8,237) 6,488 1975 - 5 - 40 years
Crystal Towers (2) (1,259) 69,510 - 1997 5 - 40 years
1841 Columbia Road (68) 5,766 1923 1996 5 - 40 years
Executive Central (10,308) 3,090 1960 - 5 - 40 years
Executive North (302) 178 1960 - 5 - 40 years
Executive South (359) 491 1960 - 5 - 40 years
Fort Chaplin (6,086) 1,959 1963 - 5 - 40 years
Gateway Place (5,176) 14,157 1987 - 5 - 40 years
Kenmore (2) (236) 16,137 - 1997 5 - 40 years
Lincoln Towers (2) (399) 88,527 - 1997 5 - 40 years
Manor (1,389) 20,151 - 1994 5 - 40 years
Marbury Plaza (7,499) 2,757 1966 - 5 - 40 years
Newport Village (9,325) 7,259 1971 - 5 - 40 years
Oakwood (656) 15,996 - 1995 5 - 40 years
One East Delaware (2) (186) 42,897 - 1997 5 - 40 years
Orleans Village (9,259) 5,311 1965/1966 - 5 - 40 years
Oxford Manor (2,278) 1,220 1967 - 5 - 40 years
Patriot Village (15,019) 13,658 1973/1975/1977 - 5 - 40 years
Potomac View (617) 8,921 - 1994 5 - 40 years
Skyline Mall (7,848) 7,202 1977 - 5 - 40 years
Skyline Towers (15,795) 10,504 1972 - 5 - 40 years
Statesman (3,527) 1,396 1961 - 5 - 40 years
Suburban Tower (380) 6,463 - 1995 5 - 40 years
2501 Porter Street (4,982) 14,489 1987/1988 - 5 - 40 years
Van Ness (320) 42,632 1970 1996 5 - 40 years
Water Park Towers (10,299) 33,990 1989 - 5 - 40 years
Westerly (1,113) 23,098 1995 - 5 - 40 years
Windsor Towers (4,059) 2,028 1965 - 5 - 40 years
Worldgate Centre (10,147) 34,704 1990 - 5 - 40 years
Development Properties:
Courthouse Place - 23,473 Under construction - N/A
One Superior Place - 10,808 Under construction - N/A
Springfield Station - 18,812 Under construction - N/A
-------------------------
$(210,186) $804,323
=========================
</TABLE>
(1) Encumbrances include $352.4 million of mortgage loans collateralized by
three separate pools, and approximately $105 million drawn on the Operating
Partnership's lines of credit ("LOC") collateralized by the properties
noted. As of December 31, 1997, the mortgage loan balances relating to
Mortgage Pool One ("One"), Mortgage Pool Two ("Two"), and Mortgage Pool
Three ("Three") are $110,140, $125,214, and $117,000 respectively.
(2) 2000 Commonwealth was acquired in exchange for Operating Partnership units
valued at $13,940 and the assumption of an existing mortgage of
approximately $13,310. Crystal Plaza was acquired in exchange for Operating
Partnership units valued at $8,725 and the assumption of an existing
mortgage of approximately $33,000. Crystal Towers was acquired in exchange
for Operating Partnership units valued at $23,939 and the assumption of an
existing mortgage of approximately $46,002. The Kenmore Apartments was
acquired in exchange for Operating Partnership units valued at $14,465 and
the assumption of an existing mortgage of approximately $1,172. Lincoln
Towers was acquired by sale of stock of approximately $76,000 and a draw on
the LOC of approximately $10,897. One East Delaware was acquired with a
draw on the LOC of approximately $42,500.
S-1
<PAGE>
The aggregate cost for Federal income tax purposes of the Operating
Partnership's investment in real estate was approximately $895.6 million and
$652.4 million at December 31, 1997 and 1996, respectively. The changes in total
real estate and accumulated depreciation for the three years ended December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
Total Real Estate Assets
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE, beginning of year $ 660,000 $587,114 $471,920
Acquisitions 288,605 65,836 110,487
Development 53,093 - -
Improvements 12,811 7,425 4,709
Retirements and write-offs - (375) (2)
---------- -------- --------
BALANCE, end of year $1,014,509 $660,000 $587,114
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Depreciation
----------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
BALANCE, beginning of year $ 189,907 $172,624 $156,707
Depreciation expense 20,279 17,658 15,917
Retirements and write-offs - (375) -
---------- -------- --------
BALANCE, end of year $ 210,186 $189,907 $172,624
========== ======== ========
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<S> <C> <C>
**2.1 Third Party Management and Leasing, Hotel Asset Management -
and Corporate Services Business Transfer Agreement by and
between Charles E. Smith Residential Realty, Inc. and Smith
Property Management, Inc.
**2.2 REIT Properties Management and Leasing Business Transfer -
Agreement by and between Charles E. Smith Management, Inc.
and Charles E. Smith Residential Realty L.P.
**2.3 Assignment by Robert H. Smith, Clarice R. Smith, Robert P. -
Kogod and Arlene R. Kogod to Charles E. Smith Management,
Inc. of 99% of all Partnership Interests of Residential Associates
Limited Partnership
**2.4 Assignment and Assumption Agreement by Residential -
Associates Limited Partnership and Charles E. Smith Residential
Realty L.P.
**2.5 Debt Assumption Agreement and Accord and Satisfaction of -
Debt by Charles E. Smith Management, Inc. and Charles E.
Smith Residential Realty L.P.
**2.6 Debt Contribution Agreement between Charles E. Smith -
Management, Inc. and Charles E. Smith Residential Realty L.P.
(the "Operating Partnership")
**3.1 First Amended and Restated Agreement of Limited Partnership -
of the Operating Partnership, as amended
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<C> <S> <C>
**3.2 Certificate of Limited Partnership of the Operating Partnership -
3.3 Articles Supplementary to Amended and Restated Articles of
Incorporation of the Company (Incorporated by reference to
Exhibit No. 3.1 of Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1997) -
3.4 Articles Supplementary of the Company for Classifying and
Designating Series B Cumulative Convertible Redeemable
Preferred Stock (Incorporated by reference to Exhibit No. 4.1 of
the Operating Partnership's Report on Form 8-K dated October 3, -
1997 and filed October 20, 1997)
3.5 Certificate of Correction relating to Articles Supplementary for
Series B Cumulative Convertible Redeemable Preferred Stock
(Incorporated by reference to Exhibit No. 4.2 of the Operating
Partnership's Report on Form 8-K dated October 3, 1997 and -
filed October 20, 1997)
3.6 Articles Supplementary for Series C Cumulative Redeemable
Preferred Stock (Incorporated by reference to Exhibit No. 3.5 in
the Company's Registration Statement on Form S-3, File No.
333-17053) -
*4.1 Amended and Restated Articles of Incorporation of Charles E. -
Smith Residential Realty, Inc. (the "Company")
4.2 Amended and Restated Bylaws of the Company (Incorporated by -
reference to the same titled and numbered exhibit in the
Company's Registration Statement on Form S-3 (File No. 33- -
93986)
4.3 Ninth Amendment to Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (Incorporated
by reference to Exhibit No. 4.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997)
4.4 Tenth Amendment to Amended and Restated Agreement of E-1
Limited Partnership of the Operating Partnership
**10.1 Noncompetition Agreement by and among the Company, the -
Operating Partnership and Robert P. Kogod and Robert H. Smith
**10.2 Registration Rights and Lock-up Agreement -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<C> <S> <C>
**10.3 Pledge Agreement -
**10.4 First Amended and Restated 1994 Employee Stock and Unit -
Option Plan
**10.5 First Amended and Restated 1994 Employee Restricted Stock -
and Restricted Unit Plan
**10.6 Non-Employee Directors Stock Option Plan -
**10.7 Subscription Agreement -
**10.8 Voting Stock Partnership Agreement for Smith Property -
Management Partnership
**10.9 Voting Stock Partnership Agreement for Smith Management -
Construction Partnership
**10.10 Voting Stock Partnership Agreement for Consolidated -
Engineering Services Partnership
**10.11 Amended and Restated Articles of Incorporation of Smith Realty -
Company
*10.12 By-Laws of Smith Property Management, Inc. -
*10.13 Articles of Incorporation of Smith Management Construction, -
Inc.
*10.14 By-Laws of Smith Management Construction, Inc. -
*10.15 Articles of Incorporation of Consolidated Engineering Services, -
Inc.
*10.16 By-Laws of Consolidated Engineering Services, Inc. -
*10.17 Certificate of Incorporation of Smith One, Inc. -
*10.18 By-Laws of Smith One, Inc. -
**10.19 Agreement of Limited Partnership of Smith Property Holdings -
One L.P.
**10.20 Agreement of Limited Partnership of Smith Property Holdings -
One (D.C.) L.P.
*10.21 Certificate of Incorporation of Smith Two, Inc. -
*10.22 By-Laws of Smith Two, Inc. -
**10.23 Agreement of Limited Partnership of Smith Property Holdings -
Two L.P.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<C> <S> <C>
**10.24 Agreement of Limited Partnership of Smith Property Holdings -
Two (D.C.) L.P.
*10.25 Certificate of Incorporation of Smith Three, Inc. -
*10.26 By-Laws of Smith Three, Inc. -
**10.27 Agreement of limited Partnership of Smith Property Holdings -
Three L.P.
**10.28 Agreement of Limited Partnership of Smith Property Holdings -
Three (D.C.) L.P.
*10.29 Certificate of Incorporation of Smith Four, Inc. -
*10.30 By-Laws of Smith Four, Inc. -
**10.31 Agreement of Limited Partnership of Smith Property Holding -
Four L.P.
**10.32 Amended and Restated Certificate of Incorporation of Smith -
Five, Inc.
*10.33 By-Laws of Smith Five, Inc. -
**10.34 Agreement of Limited Partnership of Smith Property Holdings -
Five (D.C.) L.P.
**10.35 License Agreement between Charles E. Smith Management, Inc. -
and the Company
**10.36 License Agreement between Charles E. Smith Management, Inc. -
and the Operating Partnership
10.37 Agreement of Limited Partnership of Smith Property Holdings -
Five L.P. (Incorporated by reference to Exhibit No. 10.1 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1994)
**10.38 Certificate of Limited Partnership of Smith Property Holdings -
Five L.P.
**10.39 Amended and Restated Credit Agreement by and between the -
Operating Partnership and PNC Bank, National Association, et
al.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<C> <S> <C>
10.40 Deed of Trust and Security Agreement between Smith Property -
Holdings Three L.P. ("Smith Three") and The Northwestern
Mutual Life Insurance Company ("Northwestern") (Incorporated
by reference to Exhibit No. 10.2 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.41 Guarantee of Recourse Obligations by Smith Three and the -
Operating Partnership (Incorporated by reference to Exhibit No.
10.3 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.42 Absolute Assignment of Leases and Rents between Smith Three -
and Northwestern (Incorporated by reference to Exhibit No. 10.4
of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.43 Promissory Note of Smith Three to Northwestern (Incorporated -
by reference to Exhibit No. 10.5 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.44 Purchase Money Deed of Trust and Security Agreement between -
Smith Property Holdings Three (D.C.) L.P. ("Smith Three D.C.")
and Northwestern (Incorporated by reference to Exhibit No. 10.6
of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.45 Guarantee of Recourse Obligations by Smith Three D.C. and the -
Operating Partnership (Incorporated by reference to Exhibit No.
10.7 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.46 Absolute Assignment of Leases and Rents between Smith Three -
D.C. and Northwestern (Incorporated by reference to Exhibit No.
10.8 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.47 Purchase Money Promissory Note of Smith Three D.C. to -
Northwestern (Incorporated by reference to Exhibit No. 10.9 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM DOCUMENT PAGE
-------- -------- ----
<C> <S> <C>
10.48 Supplemental Loan Agreement by and among Smith Property -
Holdings Two L.P. ("Smith two"), Smith Property Holdings Two
(D.C.) L.P. ("Smith Two D.C.") and GMAC Mortgage
Corporation of PA ("GMAC") (Incorporated by reference to
Exhibit No. 10.10 of the Operating Partnership's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 1994)
10.49 Multifamily Note of Smith Two to GMAC (Incorporated by -
reference to Exhibit No. 10.11 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.50 Multifamily Note of Smith Two D.C. to GMAC (Incorporated by -
reference to Exhibit No. 10.12 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.51 Supplemental Loan Agreement by and among Smith Property -
Holdings One L.P. ("Smith One D.C."), Smith Property Holdings
One (D.C.) L.P. ("Smith One D.C.") and GMAC (Incorporated
by reference to Exhibit No. 10.13 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.52 Multifamily Note of Smith One to GMAC (Incorporated by -
reference to Exhibit No. 10.14 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.53 Multifamily Note of Smith One D.C. to GMAC (Incorporated by -
reference to Exhibit No. 10.15 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.54 Absolute Assignment of Leases and Rents by Smith One D.C. to -
GMAC (Incorporated by reference to Exhibit No. 10.16 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
10.55 Property Management Agreement by and between Smith One and -
the Operating Partnership (Incorporated by reference to Exhibit
No. 10.17 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1994)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<C> <S> <C>
10.56 Multifamily Deed of Trust, Assignment of Rents and Security -
Agreement between Smith One D.C. and GMAC (Incorporated
by reference to Exhibit No. 10.18 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.57 Commercial Leasing and Property Management Agreement -
between Smith Three and the Operating Partnership
(Incorporated by reference to Exhibit No. 10.19 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
**10.58 Agreement of Limited Partnership of Smith Employment -
Services L.P.
**10.59 Certificate of Limited Partnership of Smith Employment Services -
L.P.
10.60 Second Restated and Amended Agreement of Limited -
Partnership of First Herndon Associated Limited Partnership
(Incorporated by reference to Exhibit No. 10.1 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1995)
10.61 Second Amendment to the Certificate of Limited Partnership of -
First Herndon Associates Limited Partnership (Incorporated by
reference to Exhibit No. 10.2 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1995)
10.62 Certificate of Incorporation of Smith Six, Inc. (Incorporated by -
reference to Exhibit No. 10.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1995)
10.63 By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit -
No. 10.2 of the Operating Partnership's Quarterly Report on Form
10-Q for the Quarter Ended March 31, 1995)
10.64 Agreement of Limited Partnership of Smith Property Holdings -
Six L.P. (Incorporated by reference to Exhibit No. 10.3 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1995)
10.65 Agreement of Limited Partnership of Smith Property Holdings -
Six (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.4 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1995)
</TABLE>
<PAGE>
<TABLE>
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<C> <S> <C>
**10.66 Certificate of Incorporation of Smith Seven, Inc. -
**10.67 By-Laws of Smith Seven, Inc. -
**10.68 Agreement of Limited Partnership of Smith Property Holdings -
Seven L.P.
**10.69 Commitment for Mortgage Loan to the Operating Partnership -
from Northwestern Mutual Life Insurance Company
10.70 Second Amended and Restated Credit Agreement by and -
between the Operating Partnership and PNC Bank, National
Association, et. al. (Incorporated by reference to Exhibit No.
10.1 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1997)
10.71 Third Amended and Restated Credit Agreement by and between E-2
the Operating Partnership and PNC Bank, National Association,
et. al.
21 Subsidiaries of the Registrant E-3
23.1 Consent of Arthur Andersen LLP E-4
27 Financial Data Schedule E-5
</TABLE>
- ---------------------
*INCORPORATED BY REFERENCE TO THE SAME TITLED AND NUMBERED EXHIBIT IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-11, NO. 33-75288.
**INCORPORATED BY REFERENCE TO THE SAME TITLED AND NUMBERED EXHIBIT IN THE
OPERATING PARTNERSHIP'S PREVIOUSLY FILED FORMS 10-K FOR THE YEARS ENDED
DECEMBER 31, 1994, 1995 AND 1996.
<PAGE>
TENTH AMENDMENT TO
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
THIS TENTH AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF CHARLES E. SMITH RESIDENTIAL REALTY L.P. (this "TENTH
AMENDMENT"), dated as of October 3, 1997, is entered into by Charles E. Smith
Residential Realty, Inc., a Maryland corporation, as general partner (the
"GENERAL PARTNER") of Charles E. Smith Residential Realty L.P. (the
"PARTNERSHIP"), for itself and on behalf of the limited partners of the
Partnership.
WHEREAS, Section 4.2.B of the First Amended and Restated Agreement of
Limited Partnership of the Partnership (as heretofore amended, the "PARTNERSHIP
AGREEMENT") provides that the General Partner shall not issue additional
convertible securities containing the right to subscribe for or purchase shares
of Common Stock of the General Partner ("REIT SHARES" and collectively, the "NEW
SECURITIES"), other than to all holders of REIT Shares, unless the General
Partner causes the Partnership to issue to the General Partner Partnership
Interests having designations, preferences and other rights, all such that the
economic interests are substantially the same as those of the New Securities;
WHEREAS, the General Partner has entered into a Purchase Agreement dated
as of September 17, 1997, pursuant to which the General Partner has agreed to
issue shares of Common Stock and a newly created series of capital stock,
designated Series B Cumulative Convertible Redeemable Preferred Stock (the
"SERIES B PREFERRED STOCK");
WHEREAS, pursuant to the authority granted to the General Partner
pursuant to Section 4.2 of the Partnership Agreement, the General Partner
desires to amend the Partnership Agreement (i) to establish a new class of
Units, to be entitled Series B Cumulative Convertible Redeemable Preferred Units
(the "SERIES B PREFERRED UNITS"), and to set forth the designations, rights,
powers, preferences and duties of such Series B Preferred Units, which are
substantially the same as those of the Series B Preferred Stock, and (ii) to
make certain other changes to the Partnership Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement, as
follows:
1. Section 4.2 of the Partnership Agreement is hereby amended by adding
after Section 4.2.D the following section:
E. Series B Preferred Units. Under the authority granted to
------------------------
it by Section 4.2.A hereof, the General Partner hereby establishes an
additional class of Partnership Units entitled "Series B Cumulative
Convertible Redeemable Preferred Units" (the "SERIES B PREFERRED UNITS").
Series B Preferred Units shall have the designations, preferences,
rights, powers and duties as set forth in Exhibit G hereto.
---------
E-1
<PAGE>
2. Exhibits to Partnership Agreement.
---------------------------------
A. The General Partner shall maintain the information set forth in
Exhibit A to the Partnership Agreement, as such information shall change from
time to time, in such form as the General Partner deems appropriate for the
conduct of the Partnership's affairs, and Exhibit A shall be deemed amended from
time to time to reflect the information so maintained by the General Partner,
whether or not a formal amendment to the Partnership Agreement has been executed
amending such Exhibit A. In addition to the designation of Series B Preferred
Units pursuant to this Tenth Amendment, such information shall reflect (and
Exhibit A shall be deemed amended from time to time to reflect) the issuance of
any additional Partnership Units to the General Partner or any other Person, the
transfer of Partnership Units and the redemption of any Partnership Units, all
as contemplated herein.
B. The Partnership Agreement is hereby amended by attaching thereto
as Exhibit G the Exhibit G attached hereto.
3. Certain Capitalized Terms. All capitalized terms used in this Tenth
-------------------------
Amendment and not otherwise defined shall have the meanings assigned in the
Partnership Agreement. Except as modified herein, all terms and conditions of
the Partnership Agreement shall remain in full force and effect, which terms and
conditions the General Partner hereby ratifies and affirms.
IN WITNESS WHEREOF, the undersigned has executed this Tenth Amendment as
of the date first set forth above.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
as General Partner of
Charles E. Smith Residential Realty L.P.
and on behalf of existing Limited Partners
By:
Name:
Title:
2
<PAGE>
EXHIBIT G
DESIGNATION OF THE PREFERENCES, CONVERSION
AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO SERIES B
PREFERRED UNITS
The Series B Preferred Units shall have the following designations,
preferences, rights, powers and duties:
(1) Certain Defined Terms. The following capitalized terms used in
---------------------
this Exhibit G shall have the respective meanings set forth below:
"DISTRIBUTION DATE" means (i) for any Distribution Period with respect
to which the Partnership pays a distribution on the Class A Units, the date
on which such distribution is paid, or (ii) for any Distribution Period
with respect to which the Partnership does not pay a distribution on the
Class A Units, the date set by the General Partner for payment of dividends
on the Series B Preferred Stock.
"DISTRIBUTION PERIOD" means quarterly periods commencing on January 1,
April 1, July 1 and October 1 of each year and ending on and including the
day preceding the first day of the next succeeding Distribution Period,
except that: (i) the initial Distribution Period shall commence on July 1,
1997 and end on and include September 30, 1997, and (ii) the Distribution
Period during which any Series B Preferred Units shall be redeemed pursuant
to Section 4 shall end on and include the date of such redemption.
"FULLY JUNIOR UNITS" shall mean the Common Units and any other class
or series of Partnership Units now or hereafter issued and outstanding over
which the Series B Preferred Units have a preference or priority in both
(i) the payment of dividends and (ii) the distribution of assets on any
liquidation, dissolution or winding up of the Partnership.
"JUNIOR UNITS" shall mean the Common Units and any other class or
series of Partnership Units now or hereafter issued and outstanding over
which the Series B Preferred Units have a preference or priority in either
(i) the payment of dividends or (ii) the distribution of assets on any
liquidation, dissolution or winding up of the Partnership.
"PARITY UNITS" has the meaning ascribed thereto in Section 6(B).
(2) Distributions.
-------------
(A) The General Partner, in its capacity as the holder of the then
outstanding Series B Preferred Units, shall be entitled to receive out of
funds legally available therefor, when, as and if declared by the General
Partner, distributions payable in cash at the rate per Series B Preferred
Unit equal to the greater of (a) $2.02 per annum, prorated as described in
Section 2(B), or (b)
G-1
<PAGE>
the ordinary cash distributions (determined on each Distribution Date) paid
on the number of Class A Units, or portion thereof, into which a Series B
Preferred Unit is convertible. The distributions referred to in clause (b)
of the preceding sentence shall equal the number of Class A Units, or
portion thereof, into which a Series B Preferred Unit is convertible,
multiplied by the most recent quarterly distribution on a Class A Unit on
or before the applicable Distribution Date. If the Partnership pays an
ordinary cash distribution on the Class A Units with respect to a
Distribution Period after the date on which the Distribution Date is
declared pursuant to clause (ii) of the definition of Distribution Date and
the distribution calculated with respect to clause (b) of the first
sentence of this Section 2(A) is greater than the distribution previously
declared on the Series B Preferred Units with respect to such Distribution
Period, the Partnership shall pay an additional distribution in respect of
the Series B Preferred Units on the date on which the distribution on the
Class A Units is paid, in an amount equal to the difference between (y) the
distribution calculated pursuant to clause (b) of the first sentence of
this Section 2(A) and (z) the amount of distributions previously declared
on the Series B Preferred Units with respect to such Distribution Period.
Distributions shall begin to accrue and shall be fully cumulative from
September 30, 1997, whether or not in any Distribution Period or Periods
there shall be funds of the Partnership legally available for the payment
of such distributions, and shall be payable quarterly, when, as and if
declared by the General Partner, in arrears on each Distribution Date.
Accrued and unpaid distributions for any past Distribution Periods may be
declared and paid at any time and for such interim periods, without
reference to any regular Distribution Date, to the General Partner, on such
date as may be fixed by the General Partner for payment of the
corresponding dividend on the Series B Preferred Stock. Any distribution
made on the Series B Preferred Units shall first be credited against the
earliest accrued but unpaid distribution due with respect to Series B
Preferred Units which remains payable.
(B) The amount of distributions referred to in clause (a) of the first
sentence of Section 2(A) shall be equal to $0.505. The distribution
payable with respect to the initial Distribution Period will include a full
distribution for such Distribution Period notwithstanding the fact that the
Series B Preferred Units were issued after September 30, 1997 (i.e., the
greater of $0.505 per Series B Preferred Unit or the ordinary cash
distribution paid on the Class A Units with respect to the quarterly period
ending on or about September 30, 1997). The amount of distribution for any
period on the Series B Preferred Units that represents less than a full
quarter of a year shall be computed on the basis of a 360-day year of
twelve 30-day months and the actual number of days in such Distribution
Period. No interest, or sum of money in lieu of interest, shall be payable
in respect of any distribution payment or payments on the Series B
Preferred Units that may be in arrears.
(C) So long as any Series B Preferred Units are outstanding, no
distributions, except as described in the immediately following sentence,
shall be declared or paid or set apart for payment on any class or series
of Parity Units for any period unless full cumulative distributions have
been or
G-2
<PAGE>
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series B
Preferred Units for all Distribution Periods terminating on or prior to the
distribution payment date for such class or series of Parity Units. When
distributions are not paid full or a sum sufficient for such payment is not
set apart, as aforesaid, all distributions declared upon Series B Preferred
Units and all distributions declared upon any other class or series of
Parity Units shall be declared ratably in proportion to the respective
amounts of distributions accumulated and unpaid on the Series B Preferred
Units and accumulated and unpaid on such Parity Units.
(D) So long as any Series B Preferred Units are outstanding, no
distributions (other than distributions paid solely in Fully Junior Units
or options, warrants or rights to subscribe for or purchase Fully Junior
Units) shall be declared or paid or set apart for payment or other
distribution shall be declared or made or set apart for payment upon Junior
Units, nor shall any Junior Units be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of Class A
Units made for purposes of an employee incentive or benefit plan of the
General Partner or any subsidiary) for any consideration (or any moneys be
paid to or made available for a sinking fund for the redemption of any such
Junior Units) by the Partnership, directly or indirectly (except by
conversion into or exchange for Fully Junior Units), unless in each case
(i) the full cumulative distributions on all outstanding Series B Preferred
Units and any other Parity Units of the Partnership shall have been paid or
declared and set apart for payment for all past Distribution Periods with
respect to the Series B Preferred Units and all past distribution periods
with respect to such Parity Units and (ii) sufficient funds shall have been
paid or set apart for the payment of the distribution for the current
Distribution Period with respect to the Series B Preferred Units and the
current distribution period with respect to such Parity Units.
(E) No distributions on the Series B Preferred Units shall be declared
by the General Partner or paid or set apart for payment by the Partnership
at such time as the terms and provisions of any agreement of the General
Partner or the Partnership, including any agreement relating to
indebtedness of either of them, prohibits such declaration, payment, or
setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment shall be restricted or
prohibited by law.
(3) Liquidation Preference.
----------------------
(A) In the event of any liquidation, dissolution or winding up of the
Partnership, whether voluntary or involuntary, before any payment or
distribution of the assets of the Partnership shall be made to or set apart
for the holders of Junior Units, the General Partner, in its capacity as
holder of the Series B Preferred Units, shall be entitled to receive Twenty
Eight Dollars and Fifty Cents ($28.50) (the "Series B Liquidation
PreferencE") per Series B
G-3
<PAGE>
Preferred Unit plus an amount equal to all distributions (whether or not
earned or declared) accumulated, accrued and unpaid thereon to the date of
final distribution to the General Partner, in its capacity as such holder;
but the General Partner, in its capacity as the holder of Series B
Preferred Units shall not be entitled to any further payment; provided that
the distribution payable with respect to the Distribution Period containing
the date of final distribution shall be equal to the greater of (i) the
distribution provided in clause (a) of the first sentence of Section 2(A)
or (ii) the distribution determined pursuant to clause (b) of the first
sentence of Section 2(A) for the preceding Distribution Period. Until the
holders of Series B Preferred Units have been paid, the Series B
Liquidation Preference in full, no payment will be made to any holder of
Junior Units upon the liquidation, dissolution, or winding up of the
General Partner. If, upon any such liquidation, dissolution or winding up
of the Partnership, the assets of the Partnership, or proceeds thereof,
distributable to the General Partner, in its capacity as the holder of
Series B Preferred Units, shall be insufficient to pay in full the
preferential amount aforesaid and liquidating payments on any other class
or series of Parity Units, then such assets, or the proceeds thereof, shall
be distributed among the General Partner, in its capacity as the holder of
such Series B Preferred Units, and the holders of such other Parity Units
ratably in accordance with the respective amounts that would be payable on
such Series B Preferred Units and such other Parity Units if all amounts
payable thereon were paid in full. For the purposes of this Section 3, (x)
a consolidation or merger of the Partnership with one or more partnerships,
limited liability companies, corporations, real estate investment trusts or
other entities and (y) a sale, lease or conveyance of all or substantially
all of the Partnership's property or business shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Partnership.
(B) Subject to the rights of the holders of Partnership Units of any
Parity Units upon any liquidation, dissolution or winding up of the
Partnership, after payment shall have been made in full to the General
Partner, in its capacity as the holder of the Series B Preferred Units, as
provided in this Section 3, any other series or class or classes of Junior
Units shall, subject to any respective terms and provisions applying
thereto, be entitled to receive any and all assets remaining to be paid or
distributed, and the General Partner, in its capacity as the holder of the
Series B Preferred Units, shall not be entitled to share therein.
4. Redemption Right.
----------------
(A) Except as provided in Section 4(B), the Series B Preferred Units
shall be redeemable by the General Partner, at its option, in whole or in
part, for Class A Units, subject to the following conditions:
(i) The Series B Preferred Units shall be redeemed only if the
General Partner shall concurrently therewith redeem an equivalent
number of shares of Series B Preferred Stock for REIT
G-4
<PAGE>
Shares. Such redemption of Series B Preferred Units shall occur
substantially concurrently with the redemption by the General
Partner of such Series B Preferred Shares (such date of
redemption the "REDEMPTION DATE").
(ii) In the event that the General Partner redeems shares of Series B
Preferred Stock in exchange for REIT Shares, an equivalent number
of Series B Preferred Units shall be converted into a number of
Class A Units equal to (x) the number of REIT Shares issued by
the General Partner in redemption of such shares of Series B
Preferred Stock divided by (y) the Conversion Factor.
(iii) Upon any redemption of Series B Preferred Units, the
Partnership shall pay in cash to the holder of such Units an
amount equal to all accumulated, accrued and unpaid distributions
with respect to the Series B Preferred Units being redeemed for
any Distribution Period ending on or prior to the Redemption Date
whether or not earned or declared. Immediately prior to
authorizing any redemption of the Series B Preferred Units, and
as a condition precedent for such redemption, the General
Partner, by resolution of its Board of Directors, shall declare a
mandatory distribution on the Series B Preferred Units, payable
in cash on the Redemption Date in an amount equal to all
accumulated, accrued, and unpaid distributions as of the
Redemption Date on the Series B Preferred Units to be redeemed,
which amount shall be added to the redemption price, except to
the extent such distributions are to be paid pursuant to the
immediately following sentence. If the Redemption Date falls
after a Partnership Record Date and prior to the corresponding
Distribution Date, then the General Partner, in its capacity as
the holder of the Series B Preferred Units being redeemed, shall
be entitled to distributions payable on the corresponding
Distribution Date notwithstanding the redemption of such Series B
Preferred Units prior to such Distribution Date. Except as
provided above, the Partnership shall make no payment or
allowance for accumulated or accrued distributions on Series B
Preferred Units called for redemption or on the Class A Units
issued upon such redemption.
(iv) Any Class A Unit issued upon redemption of the Series B Preferred
Units shall be validly issued, fully paid and non-assessable.
(B) In the event that the General Partner is required to redeem any
shares of Series B Preferred Stock pursuant to the terms thereof, the
Partnership shall redeem an equivalent number of Series B Preferred Units
for consideration equal to the consideration payable by the General Partner
upon redemption of such shares of Series B Preferred Stock.
G-5
<PAGE>
5. Conversion to Class A Units.
---------------------------
(A) In the event that a holder of Series B Preferred Stock exercises
its right to convert such Series B Preferred Stock into REIT Shares, then,
concurrently therewith, an equivalent number of Series B Preferred Units
shall be automatically converted into a number of Class A Units equal to
(x) the number of REIT Shares issued upon conversion of such Series B
Preferred Shares divided by (y) the Conversion Factor. Any such conversion
will be effective at the same time as the conversion of Series B Preferred
Stock into REIT Shares is effective.
(B) The General Partner, in its capacity as the holder of Series B
Preferred Units that are converted pursuant to this Section 4 effective
during the period after a Partnership Record Date with respect to the
Series B Preferred Shares and prior to the opening of business on the
distribution payment record date with respect to the Class A Units for the
corresponding Distribution Date, shall not be entitled to receive the
distribution payable on such Series B Preferred Units on such Distribution
Date notwithstanding such conversion thereof following the corresponding
Partnership Record Date and prior to such Distribution Date.
6. Ranking. Any class or series of Partnership Units shall be
-------
deemed to rank:
(A) prior to the Series B Preferred Units, as to the payment of
distributions and as to distribution of assets upon liquidation,
dissolution or winding up of the Partnership, if the holders of such class
or series of Partnership Units shall be entitled to the receipt of
distributions or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to the holders of
Series B Preferred Units;
(B) on a parity with the Series B Preferred Units as to the payment of
distributions and as to the distribution of assets upon liquidation,
dissolution or winding up of the Partnership, whether or not the
distribution rates, distribution payment dates or redemption or liquidation
prices per Partnership Unit be different from those of the Series B
Preferred Units, if the holders of such class or series of Partnership
Units and the Series B Preferred Units shall be entitled to the receipt of
distributions and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
distributions per Partnership Unit or liquidation preferences, without
preference or priority one over the other ("PARITY UNITS"); the outstanding
Series A Cumulative Convertible Redeemable Preferred Units of the General
Partner are Parity Units;
(C) junior to the Series B Preferred Units, as to the payment of
distributions or as to the distribution of assets upon liquidation,
dissolution
G-6
<PAGE>
or winding up of the Partnership, if such class or series of
Partnership Units shall be Junior Units; and
(D) junior to the Series B Preferred Units, as to the payment of
distributions and as to the distribution of assets upon liquidation,
dissolution or winding up of the Partnership, if such class or series of
Partnership Units shall be Fully Junior Units;
7. Voting. Except as required by law, the General Partner, in its
------
capacity as the holder of the Series B Preferred Units, shall not be
entitled to vote at any meeting of the Partners or for any other purpose or
otherwise to participate in any action taken by the Partnership or the
Partners, or to receive notice of any meeting of the Partners.
8. Restriction on Ownership. The Series B Preferred Units shall be
------------------------
owned and held solely by the General Partner.
9. General. The rights of the General Partner, in its capacity as
-------
the holder of the Series B Preferred Units, are in addition to and not in
limitation on any other rights or authority of the General Partner, in any
other capacity, under the Agreement. In addition, nothing contained in
this Exhibit G shall be deemed to limit or otherwise restrict any rights or
---------
authority of the General Partner under the Agreement, other than in its
capacity as the holder of the Series B Preferred Units.
G-7
<PAGE>
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
dated as of February 26, 1998
among
CHARLES E. SMITH RESIDENTIAL REALTY L.P., A DELAWARE
LIMITED PARTNERSHIP, AS BORROWER
and
PNC BANK, NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT,
NATIONSBANK, N.A.,
AS SYNDICATION AGENT,
U.S. BANK NATIONAL ASSOCIATION,
AS DOCUMENTATION AGENT,
and
SUCH OTHER BANKS AS SHALL BECOME PARTIES HERETO
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I................................................................. 2
SECTION 1.1. Definitions............................................ 2
SECTION 1.2. Accounting Terms and Determinations.................... 29
SECTION 1.3. Types of Borrowings.................................... 30
ARTICLE II................................................................ 30
SECTION 2.1. Commitments to Lend.................................... 30
SECTION 2.2. Notice of Borrowing.................................... 31
SECTION 2.3. Money Market Borrowings................................ 32
SECTION 2.4. Notice to Banks; Funding of Loans...................... 37
SECTION 2.5. Notes.................................................. 38
SECTION 2.6. Method of Electing Interest Rates...................... 39
SECTION 2.7. Interest Rates......................................... 41
SECTION 2.8. Fees................................................... 42
SECTION 2.9. Maturity Date; Extension of Maturity Date.............. 44
SECTION 2.10. [Intentionally Deleted]................................ 46
SECTION 2.11. Optional Prepayments................................... 46
SECTION 2.12. General Provisions as to Payments...................... 48
SECTION 2.13. Funding Losses......................................... 48
SECTION 2.14. Computation of Interest and Fees....................... 49
SECTION 2.15. Use of Proceeds........................................ 49
SECTION 2.16. Letters of Credit...................................... 49
SECTION 2.17. Letter of Credit Usage................................. 52
ARTICLE III............................................................... 53
SECTION 3.1. Closing................................................ 53
SECTION 3.2. Borrowings............................................. 55
ARTICLE IV................................................................ 56
SECTION 4.1. Existence and Power.................................... 57
SECTION 4.2. Power and Authority.................................... 57
SECTION 4.3. No Violation........................................... 57
SECTION 4.4. Financial Information.................................. 58
SECTION 4.5. Litigation............................................. 58
SECTION 4.6. Compliance with ERISA.................................. 59
SECTION 4.7. Environmental Matters.................................. 59
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 4.8. Taxes................................................................. 59
SECTION 4.9. [Intentionally Deleted]............................................... 60
SECTION 4.10. Solvency.............................................................. 60
SECTION 4.11. Use of Proceeds; Margin Regulations................................... 60
SECTION 4.12. Governmental Approvals................................................ 60
SECTION 4.13. Investment Company Act; Public Utility Holding Company Act............ 60
SECTION 4.14. Principal Offices..................................................... 60
SECTION 4.15. REIT Status........................................................... 61
SECTION 4.16. Patents, Trademarks, etc.............................................. 61
SECTION 4.17. Ownership of Property................................................. 61
SECTION 4.18. No Default............................................................ 61
SECTION 4.19. Licenses, etc......................................................... 61
SECTION 4.20. Compliance With Law................................................... 61
SECTION 4.21. No Burdensome Restrictions............................................ 62
SECTION 4.22. Brokers' Fees......................................................... 62
SECTION 4.23. Labor Matters......................................................... 62
SECTION 4.24. Insurance............................................................. 62
SECTION 4.25. Organizational Documents.............................................. 62
SECTION 4.26. Qualifying Unencumbered Properties.................................... 63
SECTION 4.27. Ownership of Borrower and Consolidated Subsidiaries................... 63
SECTION 4.28. Disclosure............................................................ 63
SECTION 4.29. CESRRI's Ownership Interests.......................................... 63
ARTICLE V................................................................................ 64
SECTION 5.1. Information........................................................... 64
SECTION 5.2. Payment of Obligations................................................ 64
SECTION 5.3. Maintenance of Property; Insurance; Leases............................ 64
SECTION 5.4. Conduct of Business and Maintenance of Existence...................... 64
SECTION 5.5. Compliance with Laws.................................................. 65
SECTION 5.6. Inspection of Property, Books and Records............................. 65
SECTION 5.7. Existence............................................................. 65
SECTION 5.8. Financial Covenants................................................... 65
SECTION 5.9. Restriction on Fundamental Changes.................................... 69
SECTION 5.10. Changes in Business................................................... 69
SECTION 5.11. Margin Stock.......................................................... 70
SECTION 5.12. Hedging Requirements.................................................. 70
SECTION 5.13. CESRRI Status......................................................... 70
SECTION 5.14. Acceptance of Qualifying Unencumbered Properties...................... 71
SECTION 5.15. Payment of Taxes and Claims........................................... 73
SECTION 5.16. Maintenance of Permits, Etc........................................... 73
SECTION 5.17. Disposal of Consolidated Subsidiary Interests......................... 73
SECTION 5.18. Environmental Liabilities............................................. 74
ARTICLE VI............................................................................... 74
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 6.1. Events of Default..................................................... 74
SECTION 6.2. Rights and Remedies................................................... 77
SECTION 6.3. Notice of Default..................................................... 77
SECTION 6.4. Actions in Respect of Letters of Credit............................... 78
SECTION 6.5. Distribution of Proceeds after Default................................ 80
ARTICLE VII.............................................................................. 80
SECTION 7.1. Appointment and Authorization......................................... 80
SECTION 7.2. Agency and Affiliates................................................. 80
SECTION 7.3. Action by Administrative Agent........................................ 80
SECTION 7.4. Consultation with Experts............................................. 81
SECTION 7.5. Liability of Administrative Agent..................................... 81
SECTION 7.6. Indemnification....................................................... 82
SECTION 7.7. Credit Decision....................................................... 82
SECTION 7.8. Successor Administrative Agent........................................ 82
SECTION 7.9. Consents and Approvals................................................ 83
SECTION 7.10. Delivery of Documents................................................. 84
SECTION 7.11. Inspection of Books and Records....................................... 84
SECTION 7.12. Administrative Agent's Commitment..................................... 85
ARTICLE VIII............................................................................. 85
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair.............. 85
SECTION 8.2. Illegality............................................................ 85
SECTION 8.3. Increased Cost and Reduced Return..................................... 86
SECTION 8.4. Taxes................................................................. 88
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar Loans............ 90
ARTICLE IX............................................................................... 90
SECTION 9.1. Notices............................................................... 90
SECTION 9.2. No Waivers............................................................ 91
SECTION 9.3. Expenses; Indemnification............................................. 91
SECTION 9.4. Sharing of Set-Offs................................................... 92
SECTION 9.5. Amendments and Waivers................................................ 93
SECTION 9.6. Successors and Assigns................................................ 93
SECTION 9.7. Collateral............................................................ 96
SECTION 9.8. Governing Law; Submission to Jurisdiction............................. 96
SECTION 9.9. Counterparts; Integration; Effectiveness.............................. 97
SECTION 9.10. WAIVER OF JURY TRIAL.................................................. 97
SECTION 9.11. Survival.............................................................. 98
SECTION 9.12. Domicile of Loans..................................................... 98
SECTION 9.13. Limitation of Liability............................................... 98
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 9.14. Recourse Obligation................................................... 98
SECTION 9.15. Confidentiality....................................................... 99
SECTION 9.16. Bank's Failure to Fund................................................ 99
SECTION 9.17. No Bankruptcy Proceedings............................................. 105
</TABLE>
iv
<PAGE>
EXHIBITS
--------
A1 - BID RATE NOTES
A2 - NOTE
B - MONEY MARKET QUOTE REQUEST
C - INVITATION FOR MONEY MARKET QUOTE
D - MONEY MARKET QUOTE
E - ASSIGNMENT AND ASSUMPTION AGREEMENT
F - LIST OF QUALIFIED UNENCUMBERED PROPERTIES
G - DESIGNATION AGREEMENT
H - ADMINISTRATIVE QUESTIONNAIRE
I - NOTICE OF BORROWING
J - EXTENSION REQUEST
K - CERTIFICATION AS TO QUALIFIED UNENCUMBERED PROPERTIES
L - COMPLIANCE CERTIFICATE
M - UNCONDITIONAL GUARANTY OF PAYMENT
N - QUALIFYING GROUND LEASES
O - CLOSING REQUIREMENTS
P - APPROVED CONSOLIDATED METROPOLITAN STATISTICAL AREAS
v
<PAGE>
SCHEDULES
---------
SCHEDULE I - COMMITMENTS OF BANKS
SCHEDULE II - NAMES, ADDRESSES, TELEPHONE AND TELECOPIER NUMBERS OF
PARTIES
SCHEDULE 2.16 LETTERS OF CREDIT ISSUED UNDER EXISTING CREDIT AGREEMENT
SCHEDULE 4.5 LITIGATION
SCHEDULE 4.6 COMPLIANCE WITH ERISA
SCHEDULE 4.7 ENVIRONMENTAL MATTERS
SCHEDULE 4.17 OWNERSHIP OF PROPERTIES
SCHEDULE 4.27 OWNERSHIP OF BORROWER AND CONSOLIDATED
SUBSIDIARIES
SCHEDULE 5.1 FINANCIAL REPORTING REQUIREMENTS
SCHEDULE 5.13(C)(1) CESRRI INVESTMENTS
SCHEDULE 5.13(C)(2) CESRRI PROPERTY INTERESTS
vi
<PAGE>
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement")
dated as of February 26, 1998, among CHARLES E. SMITH RESIDENTIAL REALTY L.P., a
Delaware limited partnership (the "Borrower"), PNC BANK, NATIONAL ASSOCIATION,
as Administrative Agent and as a Bank, NATIONSBANK, N.A., as Syndication Agent
and as a Bank, and, U.S. BANK NATIONAL ASSOCIATION, as Documentation Agent and
as a Bank and the other BANKS listed on the signature pages hereof.
W I T N E S S E T H
-------------------
WHEREAS, the Borrower, PNC Bank, National Association ("PNC"), as Co-
Agent and a Bank, and First Bank National Association, now known as U.S. Bank
National Association ("U.S. Bank") and NationsBank, N.A. ("NationsBank"), as
Banks, and certain other Banks are parties to that certain Credit Agreement
dated as of June 30, 1994 (the "Original Agreement"), as amended by that certain
First Amendment to Credit Agreement dated as of October 25, 1994 (the "First
Amendment") and as amended and restated by that certain Amended and Restated
Credit Agreement effective as of January 22, 1996 (the "First Restatement");
WHEREAS, pursuant to those certain three (3) Assignment and Assumption
Agreements (the "Assignments") dated January 22, 1996, to each of PNC, U.S. Bank
and NationsBank, all of the right, title and interest of the other Banks under
the Loan Documents were assigned to PNC, U.S. Bank and NationsBank so that,
after giving effect to such Assignments, each of PNC, First Bank and NationsBank
has a Commitment of $33,333,333;
WHEREAS, pursuant to the First Restatement, the parties agreed that,
among other things, PNC should become the Administrative Agent;
WHEREAS, effective as of May 1, 1997, the Borrower, PNC, U.S. Bank and
NationsBank entered into the Second Amended and Restated Credit Agreement (the
"Second Restatement") wherein certain modifications were made to the Credit
Agreement (the Original Agreement, as amended by the First Amendment, the First
Restatement and the Second Restatement being hereinafter called the "Existing
Credit Agreement"); and
WHEREAS, the parties hereto desire to further amend and restate the
Existing Credit Agreement as more fully set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. The Existing Credit Agreement is hereby modified so that all of
the terms and conditions of the Existing Credit Agreement shall be restated in
their entirety as set forth herein, and the Borrower, the Banks and the
Administrative Agent agree to comply with and be subject to all
<PAGE>
of the terms, covenants and conditions of this Agreement.
II. This Agreement shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and assigns, and shall be
deemed to be effective as provided in Section 9.9 hereof.
III. Any reference in the Notes, any other Loan Document or any other
document executed in connection with this Agreement to the Original Agreement or
the Existing Credit Agreement shall be deemed to refer to this Agreement.
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions.
-----------
The following terms, as used herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes setting
---------------------
forth Money Market Absolute Rates pursuant to Section 2.3.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
--------------------------------------
Section 2.7(b) .
"Administrative Agent" shall mean PNC Bank, National Association in its
--------------------
capacity as Administrative Agent hereunder, and its permitted successors in such
capacity in accordance with the terms of this Agreement.
"Administrative Questionnaire" means, with respect to each Bank, an
----------------------------
administrative questionnaire in the form attached hereto as Exhibit H, and
submitted to the Administrative Agent (with a copy to the Borrower) duly
completed by such Bank.
"Aggregate Purchase Price" shall mean with respect to the purchase of any
------------------------
Property, without duplication, (i) Cash and Cash Equivalents paid as
consideration for such purchase, plus (ii) the principal amount of any note
----
delivered or other deferred payment to be made in connection with such purchase,
plus (iii) the value of any other consideration delivered in connection with
- ----
such purchase (including, without limitation, shares of CESRRI and OP Units),
as determined in good faith by the Borrower in accordance with GAAP, provided
that shares of CESRRI and OP Units shall be valued based on the value attributed
thereto pursuant to the applicable purchase agreement.
"Agreement" shall mean this Third Amended and Restated Credit Agreement as
---------
the same may from time to time hereafter be modified, supplemented or amended.
"Applicable Interest Rate" means (i) with respect to any Fixed Rate
------------------------
Indebtedness, the fixed interest rate applicable to such Fixed Rate Indebtedness
at the time in question, and (ii) with respect to any Floating Rate
Indebtedness, either (x) the rate at which the interest rate applicable to such
2
<PAGE>
Floating Rate Indebtedness is actually capped (or fixed pursuant to an interest
rate hedging device), at the time of calculation, if Borrower has entered into
an interest rate cap agreement or other interest rate hedging device with
respect thereto or (y) if Borrower has not entered into an interest rate cap
agreement or other interest rate hedging device with respect to such Floating
Rate Indebtedness, the greater of (A) the rate at which the interest rate
applicable to such Floating Rate Indebtedness could be fixed for the remaining
term of such Floating Rate Indebtedness, at the time of calculation, by
Borrower's entering into any unsecured interest rate hedging device either not
requiring an upfront payment or if requiring an upfront payment, which upfront
payment shall be amortized over the term of such device and included in the
calculation of the interest rate (or, if such rate is incapable of being fixed
by entering into an unsecured interest rate hedging device at the time of
calculation, a fixed rate equivalent thereto as reasonably determined by
Administrative Agent) or (B) the floating rate applicable to such Floating Rate
Indebtedness at the time in question.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
-------------------------
case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of
its Euro-Dollar Loans, its Euro-Dollar Lending Office, and (iii) in the case of
its Money Market Loans, its Money Market Lending Office.
"Applicable Margin" means, with respect to each Loan during any period when
-----------------
neither CESRRI nor Borrower maintains the Investment Grade Ratings, the
respective percentages per annum determined, based on the range into which
Borrower's Leverage Ratio then falls, in accordance with the table set forth
below. Any change in Borrower's Leverage Ratio causing it to move to a
different range on the table shall effect a change in the Applicable Margin,
effective on the earlier of (i) the date of the Compliance Certificate
reflecting such change in the Leverage Ratio, or (ii) the end of the calendar
quarter to which such Compliance Certificate is related, if applicable.
<TABLE>
<CAPTION>
Applicable
Margin for Applicable
Range of Base Rate Margin for Euro-
Borrower's Loans Dollar Loans
Leverage Ratio (% per annum) (% per annum)
- -------------- ------------- -------------
<S> <C> <C>
less than 25% 0.0 0.75
Greater than or equal to 25% less than 35% 0.0 0.85
Greater than or equal to 35% less than 45% 0.0 0.95
Greater than or equal to 45% less than or equals to 55% 0.0 1.10
</TABLE>
During any period when either CESRRI or Borrower shall maintain the
Investment Grade Ratings, "Applicable Margin" shall mean, with respect to each
Loan, the respective percentages per annum, determined, at any time, based on
the Credit Ratings then applicable, in accordance with the table set forth
below.
<TABLE>
<CAPTION>
Applicable
Margin for Applicable
Credit Rating Base Rate Margin for Euro-
(S&P/Moody's Loans Dollar Loans
Ratings) (% per annum) (% per annum)
- ------------- ------------- ----------------
<S> <C> <C>
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
A-/A3 or higher 0.0 0.60
BBB+/Baa1 0.0 0.70
BBB/Baa2 0.0 0.80
BBB-/Baa3 0.0 0.90
</TABLE>
If Borrower or CESRRI, as applicable, shall maintain two (2) Credit Ratings, and
such ratings are not equivalent, Applicable Margin shall be based upon the lower
of the two ratings. In the event that Borrower or CESRRI, as applicable,
receives more than two (2) Credit Ratings, and such ratings are not equivalent,
the Applicable Margin shall be determined by the lower of the two (2) highest
ratings, provided that at least one (1) of such highest ratings shall be a
Credit Rating from S&P or Moody's. In the event that at least one (1) of the two
(2) highest ratings shall not be a Credit Rating from S&P or Moody's, then the
Applicable Margin shall be determined by the lowest of the ratings. In the
event that only one of the Rating Agencies shall have set Borrower's or CESRRI's
Credit Rating, or Borrower or CESRRI, as applicable, shall not maintain the
Investment Grade Ratings, then the Applicable Margin shall be based on
Borrower's Leverage Ratio as set forth above. Notwithstanding anything
contained to the contrary, the Borrower shall always have the right to elect
that the Applicable Margin be determined based upon its Leverage Ratio by
written notice to the Administrative Agent with such election to become
effective upon the next Domestic Business Day following receipt of such notice
by Administrative Agent. Any change in the Applicable Margin resulting from a
change in a Credit Rating shall become effective on the effective date of the
change in the applicable Credit Rating.
"Approved Bank" shall mean banks which have (i)(a) a minimum net worth of
-------------
$500,000,000 and (b) total assets of $10,000,000,000, and (ii) a minimum long
term debt rating of (a) BBB+ or higher by S&P, and (b) Baal or higher by
Moody's.
"Approved CMSA" means the CMSA's listed on Exhibit P attached hereto.
-------------
"Assignee" has the meaning set forth in Section 9.6(c).
--------
"Assignment and Assumption Agreement" means an Assignment and Assumption
-----------------------------------
Agreement in the form attached hereto as Exhibit E.
"Assumed Unsecured Debt Service" means an amount equal to the principal and
------------------------------
interest payments due on a loan in the amount of the Unsecured Debt in
connection with the level mortgage-style amortization thereof based on a twenty-
five (25) year term at an interest rate of 1.5% above the Treasury Rate.
"Bank" means each bank listed on the signature pages hereof, each other
----
bank, finance company or other financial institution which becomes a party to
this Agreement pursuant to Section 9.6 (c) , and their respective successors,
and, except when used in reference to a Base Rate Loan, a Euro-Dollar Loan, a
Note in the form of Exhibit A-2, any Letter of Credit, the Commitment of any
4
<PAGE>
Bank or a related term, each Designated Lender.
"Bank Reply Period" has the meaning set forth in Section 7.9.
-----------------
"Bankruptcy Code" shall mean Title 11 of the United States Code, entitled
---------------
"Bankruptcy", as amended from time to time, and any successor statute or
statutes.
"Base Rate" means, for any day, a rate per annum. equal to the higher of
---------
(i) the Prime Rate for such day and (ii) the sum of 0.5% plus the Federal Funds
Rate for such day.
"Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate
--------------
Loan in accordance with the applicable Notice of Borrowing or pursuant to
Article VIII.
"Benefit Arrangement" means at any time an employee benefit plan within the
-------------------
meaning of Section 3(3) of ERISA which is not a Plan or a Multi-employer Plan
and which is maintained or otherwise contributed to by any member of the ERISA
Group.
"Bid Rate Notes" means promissory notes of the Borrower, substantially in
--------------
the form of Exhibit A-1 hereto, evidencing the obligation of the Borrower to
repay Money Market Loans made by the Banks, and "Bid Rate Note" means any one of
such promissory notes.
"Borrower" means Charles E. Smith Residential Realty L.P., a Delaware
--------
limited partnership.
"Borrower Debt" means all Indebtedness of Borrower, on a consolidated
-------------
basis, and Borrower's Share of the Indebtedness of any Investment Affiliate
(without offset or reduction in respect of prepaid interest, restructuring fees
or similar items).
"Borrower Implied Market Equity" means, as of any date of determination,
------------------------------
the sum of, without redundancy, (i) the product of the number of issued and
outstanding shares of common stock of CESRRI and the market price per share,
plus, (ii) the product of the number of issued and outstanding units in the
Borrower and the market price per share of CESRRI's common stock, plus (iii) the
aggregate liquidation preference of all classes of preferred partnership
interests in Borrower.
"Borrower's Share" means a percentage equal to Borrower's percentage
----------------
ownership interest in the applicable Investment Affiliate .
"Borrowing" has the meaning set forth in Section 1.3.
---------
"Budgeted Project Costs" means with respect to Properties under
----------------------
Development, the budgeted cost of completion of such Properties under
Development, provided that the budgeted costs shall include projected operating
deficits through completion and the projected date of occupancy of seventy-five
percent (75%) of the dwelling units and provided further that, for Properties
under Development by Investment Affiliates, the Budgeted Project Costs shall be
the Borrower's share of the budgeted costs of completion (based on the greater
of (x) the Borrower's percentage equity interest in the Investment Affiliates or
(y) the Borrower's obligation to provide funds to the
5
<PAGE>
Investment Affiliates).
"Capital Expenditures" means any expenditures for any item that would be
--------------------
treated or defined as a capital expenditure under GAAP.
"Capital Leases" as applied to any Person, means any lease of any property
--------------
(whether real, personal or mixed) by that Person as lessee which, in conformity
with GAAP, is or should be accounted for as a capital lease on the balance sheet
of that Person.
"Capital Reserve" shall mean, for any period, $62.50 for each residential
---------------
unit for each Fiscal Quarter to occur during such period (in connection with any
annualized calculation, the Capital Reserve used in such calculation shall also
be annualized).
"Cash and Cash Equivalents" shall mean (i) cash, (ii) direct obligations of
-------------------------
the United States Government, including without limitation, treasury bills,
notes and bonds, (iii) interest bearing or discounted obligations of Federal
agencies and Federal government-sponsored entities or pools of such instruments
offered by Approved Banks and dealers, including without limitation, Federal
Home Loan Mortgage Corporation participation sale certificates, Government
National Mortgage Association modified pass through certificates, Federal
National Mortgage Association bonds and notes, and Federal Farm Credit System
securities, (iv) time deposits, Domestic and Euro-Dollar certificates of
deposit, bankers acceptances, commercial paper rated at least A-1 by S&P and P-1
by Moody's and/or guaranteed by a Person maintaining an Aa2 rating by Moody's,
an AA rating by S&P or better rated credit, floating rate notes, other money
market instruments and letters of credit each issued by Approved Banks (provided
that the same shall cease to be a "Cash or Cash Equivalent" if at any time any
such bank shall cease to be an Approved Bank), (v) obligations of domestic
corporations, including, without limitation, commercial paper, bonds, debentures
and loan participations, each of which is rated at least AA by S&P and/or Aa2 by
Moody's and/or guaranteed by a Person maintaining an Aa2 rating by Moody' s, an
AA rating by S&P or better rated credit, (vi) obligations issued by state and
local governments or their agencies, rated at least MIG-1 by Moody's and/or SP-1
by S&P and/or guaranteed by an irrevocable letter of credit of an Approved Bank
(provided that the same shall cease to be a "Cash or Cash Equivalent" if at any
time any such bank shall cease to be an Approved Bank), (vii) repurchase
agreements with Approved Banks and primary government security dealers fully
secured by the U.S. Government or agency collateral equal to or exceeding the
principal amount on a daily basis and held in safekeeping, and (viii) real
estate loan pool participations, guaranteed by a Person maintaining an AA rating
given by S&P or Aa2 rating given by Moody's or better rated credit.
"Cash Available for Distribution" means, for any period, Funds from
-------------------------------
Operations less Capital Expenditures.
"CESRRI" means Charles E. Smith Residential Realty, Inc.
------
"CESRRI Debt Proceeds" means all cash proceeds received by CESRRI as a
--------------------
result of the issuance of any Indebtedness, less customary costs of issuance
paid by CESRRI.
6
<PAGE>
"Closing Date" means the date on or after the Effective Date on which the
------------
conditions set forth in Section 3.1 shall have been satisfied or waived to the
satisfaction of the Administrative Agent and the Borrower.
"CMSA" means a consolidated metropolitan statistical area as defined by the
----
Office of Management and Budget.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and as it
----
may be further amended from time to time, any successor statutes thereto, and
applicable U.S. Department of Treasury regulations issued pursuant thereto in
temporary or final form.
"Committed Borrowing" has the meaning set forth in Section 1.3.
-------------------
"Committed Loan" means a Loan made by a Bank pursuant to Section 2.1 as
--------------
well as Loans required to be made by a Bank pursuant to Section 2.16 to
reimburse a Fronting Bank for a Letter of Credit that has been drawn down;
provided that, if any such Loan or Loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term "Committed
Loan" shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision as the case may be.
"Commitment" means, with respect to each Bank, the amount set forth
----------
opposite the name of such Bank on Schedule I hereto (and, for each Bank which is
an Assignee, the amount set forth in the Assignment and Assumption Agreement
entered into pursuant to Section 9.6(c) as the Assignee's commitment), as such
amount may be reduced or increased from time to time pursuant to the provisions
hereof, which Commitments, on the Effective Date, aggregate the sum of Two
Hundred Fifty Million Dollars ($250,000,000).
"Compliance Certificate" means a certificate in the form of Exhibit L
----------------------
hereto to be delivered by the Borrower to the Administrative Agent in accordance
with Subsection (c) on Schedule 5.1.
"Consolidated Subsidiary" means at any date any Subsidiary or other entity,
-----------------------
which is consolidated with Borrower in accordance with GAAP.
"Contingent Obligation" as to any Person means, without duplication, (i)
---------------------
any contingent obligation of such Person required to be shown on such Person's
balance sheet in accordance with GAAP, and (ii) any obligation required to be
disclosed in the footnotes to such Person's financial statements, guaranteeing
partially or in whole any Non-Recourse Indebtedness, lease, dividend or other
obligation, exclusive of (A) contractual indemnities (including, without
limitation, any indemnity or price-adjustment provision relating to the purchase
or sale of securities or other assets), (B) obligations under a contract to
purchase Property prior to the acquisition of title thereto, and (C) guarantees
of non-monetary obligations (other than guarantees of completion) which have not
yet been called on or quantified, of such Person or of any other Person. The
amount of any Contingent Obligation described in clause (ii) shall be deemed to
be (a) with respect to a guaranty of interest or interest and principal, or
operating income guaranty, the Net Present Value of the sum of all payments
required to be made thereunder (which in the case of an operating income
guaranty shall
7
<PAGE>
be deemed to be equal to the debt service for the note secured thereby),
calculated at the Applicable Interest Rate, through (i) in the case of an
interest or interest and principal guaranty, the stated date of maturity of the
obligation (and commencing on the date interest could first be payable
thereunder), or (ii) in the case of an operating income guaranty, the date
through which such guaranty will remain in effect, and (b) with respect to all
guarantees not covered by the preceding clause (a), an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
guaranty is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder) as recorded on the balance sheet and on the footnotes to the
most recent financial statements of Borrower required to be delivered pursuant
to Schedule 5.1 hereof. Notwithstanding anything contained herein to the
contrary, guarantees of completion shall not be deemed to be Contingent
Obligations unless and until a claim for payment or performance has been made
thereunder, at which time any such guaranty of completion shall be deemed to be
a Contingent Obligation in an amount equal to any such claim. Subject to the
preceding sentence, (i) in the case of a joint and several guaranty given by
such Person and another Person (but only to the extent such guaranty is
recourse, directly or indirectly to Borrower), the amount of the guaranty shall
be deemed to be 100% thereof unless and only to the extent that such other
Person has delivered Cash or Cash Equivalents to secure all or any part of such
Person's guaranteed obligations and (ii) in the case of a guaranty (whether or
not joint and several) of an obligation otherwise constituting Indebtedness of
such Person, the amount of such guaranty shall be deemed to be only that amount
in excess of the amount of the obligation constituting Indebtedness of such
Person. Notwithstanding anything contained herein to the contrary, "Contingent
Obligations" shall be deemed not to include guarantees of Unused Commitments or
of construction loans to the extent the same have not been drawn. All matters
constituting "Contingent Obligations" shall be calculated without duplication.
"Contractual Obligation," as applied to any Person, means any provision of
----------------------
any Securities issued by that Person or any indenture, mortgage, deed of trust,
lease, contract, undertaking, document or instrument to which that Person is a
party or by which it or any of its properties is bound, or to which it or any of
its properties is subject (including without limitation any restrictive covenant
affecting such Person or any of its properties).
"Credit Rating" means a rating assigned by the Rating Agencies to CESRRI's
-------------
or Borrower's, as applicable, senior unsecured long term indebtedness, provided
that, if no such rating is assigned, a comparable rating, as determined by the
Administrative Agent in its reasonable discretion, assigned by a Rating Agency
to CESRRI's preferred stock, will be deemed to constitute a Credit Rating.
"Debt Restructuring" means a restatement of, or material change in, the
------------------
amortization or other financial terms of any Indebtedness of the Borrower, any
Consolidated Subsidiary, or any Investment Affiliate.
"Debt Service" means, for any period, and without duplication, Interest
------------
Expense for such period plus scheduled principal amortization (excluding any
----
individual scheduled principal payment due at maturity) for such period on all
Indebtedness of the Borrower, on a consolidated basis, plus Borrower's Share of
----
scheduled principal amortization for such period on all Indebtedness of
Investment Affiliates.
8
<PAGE>
"Default" means any condition or event which with the giving of notice or
-------
lapse of time or both would, unless cured or waived, become an Event of Default.
"Default Rate" has the meaning set forth in Section 2. 6(d).
------------
"Designated Lender" means a special purpose corporation that (i) shall have
-----------------
become a party to this Agreement pursuant to Section 9.6(d), and (ii) is not
otherwise a Bank.
"Designating Lender" shall have the meaning set forth in Section 9.6(d)
------------------
hereof.
"Designation Agreement" means a designation agreement in substantially the
---------------------
form of Exhibit G attached hereto, entered into by a Bank and a Designated
Lender and accepted by the Administrative Agent.
"Distribution Limitation" has the meaning set forth in Section 5.8(f)(i).
-----------------------
"Domestic Business Day" means any day except a Saturday, Sunday or other
---------------------
day on which commercial banks in Pittsburgh, Pennsylvania are authorized by law
to close.
"Domestic Lending Office" means, as to each Bank, its office located at its
-----------------------
address in the United States set forth in its Administrative Questionnaire (or
identified in its Administrative Questionnaire as its Domestic Lending Office)
or such other office as such Bank may hereafter designate as its Domestic
Lending Office by notice to the Borrower and the Administrative Agent.
"EBITDA" means, for any period (i) Net Income of the Borrower for such
------
period, plus (ii) depreciation and amortization expense and other non-cash items
----
deducted in the calculation of Net Income for such period, plus (iii) Interest
----
Expense deducted in the calculation of Net Income for such period, plus, (iv)
----
Taxes deducted in the calculation of Net Income for such period, plus (v) to
----
the extent not included above, Borrower's Share of Investment Affiliate EBITDA
for each Investment Affiliate, minus (vi) the gains (and plus the losses) from
----- ----
extraordinary items or asset sales or write-ups or forgiveness of indebtedness
included in the calculation of Net Income, for such period, all of the foregoing
without duplication.
"Effective Date" means the date this Agreement becomes effective in
--------------
accordance with Section 9.9.
"Environmental Affiliate" means any partnership, joint venture, trust or
-----------------------
corporation in which an equity interest is owned by the Borrower, either
directly or indirectly. and, as a result of the ownership of such equity
interest, the Borrower may have recourse liability for Environmental Claims
against such partnership, joint venture or corporation (or the property
thereof).
"Environmental Approvals" means any permit, license, approval, ruling,
-----------------------
variance, exemption or other authorization required under applicable
Environmental Laws.
"Environmental Claim" means, with respect to any Person, any notice, claim,
-------------------
demand or
9
<PAGE>
similar communication (written or oral) by any other Person alleging potential
liability of such Person for investigatory costs, cleanup costs, governmental
response costs, natural resources damage, property damages, personal injuries,
fines or penalties arising out of, based on or resulting from (i) the presence,
or release into the environment, of any Materials of Environmental Concern at
any location, whether or not owned by such Person or (ii) circumstances forming
the basis of any violation, or alleged violation, of any Environmental Law, in
each case (with respect to both (i) and (ii) above) as to which there is a
reasonable possibility of an adverse determination with respect thereto and
which, if adversely determined, would have a Material Adverse Effect on such
Person.
"Environmental Laws" means any and all federal, state, and local statutes,
------------------
laws, judicial decisions, regulations, ordinances, rules, judgments, orders,
decrees, plans, injunctions, permits, concessions, grants, licenses, agreements
and other governmental restrictions relating to the environment, the effect of
the environment on human health or to emissions, discharges or releases of
Materials of Environmental Concern into the environment including, without
limitation, ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental Concern or the
clean up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
-----------
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Code.
"Euro-Dollar Borrowing" has the meaning set forth in Section 1.3.
---------------------
"Euro-Dollar Business Day"' means any Domestic Business Day on which
------------------------
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
--------------------------
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Euro-Dollar Lending
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower
and the Administrative Agent.
"Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-
----------------
Dollar Loan in accordance with the applicable Notice of Borrowing.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
------------------------------
2.7(b).
"Event of Default" has the meaning set forth in Section 6.1.
----------------
"Existing Credit Agreement" has the meaning set forth in the recitals to
-------------------------
this Agreement.
10
<PAGE>
"Extension Fee" has the meaning set forth in Section 2.8(f).
-------------
"Extension Request" has the meaning set forth in Section 2.9(b).
-----------------
"Facility Fee" has the meaning set forth in Section 2.8(a).
------------
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to the Administrative Agent on such day on
such transactions as determined by the Administrative Agent.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
---------------------
System as constituted from time to time.
"Fee Letter" means the letter agreement, dated as of the date hereof,
----------
between the Borrower and PNC, as the same may be amended, supplemented or
otherwise modified from time to time.
"Fiscal Quarter" means a fiscal quarter of a Fiscal Year.
--------------
"Fiscal Year" means the fiscal year of Borrower and CESRRI which shall be
-----------
the twelve (12) month period ending on the last day of December in each year.
"Fixed Charges" for any period means the sum, without duplication and on a
-------------
consolidated basis, of (i) Debt Service for such period, (ii) the product of the
average number of apartment units owned by Borrower or any Consolidated
Subsidiary during such period times the Capital Reserve for such period, (iii)
the product of the average number of square feet of retail improvements owned by
Borrower or any Consolidated Subsidiary during such period times the Retail
Capital Reserve Reduction Amount for such period, (iv) Borrower's Share of the
aggregate sum of the product of the average number of apartment units owned
(directly or indirectly) by each Investment Affiliate during such period and
the Capital Reserve for such period, (v) Borrower's Share of the aggregate sum
of the product of the number of square feet of retail improvements owned
(directly or indirectly) by each Investment Affiliate during such period and
the Retail Capital Reserve Reduction Amount for such period, and (vi) dividends
on preferred units payable by Borrower for such period.
"Fixed Rate Borrowing" has the meaning set forth in Section 1.3.
--------------------
"Fixed Rate Indebtedness" means all Indebtedness for borrowed money which
-----------------------
accrues interest at a fixed rate.
11
<PAGE>
"Floating Rate Indebtedness" means all Indebtedness for borrowed money
--------------------------
which is not Fixed Rate Indebtedness and which is not a Contingent Obligation or
an Unused Commitment.
"FNMA Mortgage Pool #1" means that certain pool financing in the
---------------------
approximate amount of $110,100,000 which matures on June 30, 1999. The
financing is secured by eleven (11) multi-family residential properties located
in Washington, D.C. and Northern Virginia.
"Fronting Bank" shall mean PNC Bank, National Association or such other
-------------
Bank acceptable to the Administrative Agent which is designated by Borrower in
its Notice of Borrowing as the Bank which shall issue a Letter of Credit with
respect to such Notice of Borrowing.
"Fronting Bank Fee" has the meaning set forth in Section 2.8(c).
-----------------
"Funds from Operations" means Net Income of the Borrower excluding gains
---------------------
(or losses) from Debt Restructuring and sales of property, plus depreciation and
amortization with respect to real estate properties, and after adjustments for
unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles recognized as such in
----
the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Acts" has the meaning set forth in Section 2.16(g).
-----------------
"Governmental Authority" means any national, state or local government
----------------------
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, bureau or entity (including, without limitation, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency or the
Federal Reserve Board, any central bank or any comparable authority) or any
arbitrator with authority to bind a party at law.
"Group of Loans" means, at any time, a group of Loans consisting of (i) all
--------------
Committed Loans which are Base Rate Loans at such time, or (ii) all Euro-Dollar
Loans having the same Interest Period at such time; provided that, if a
Committed Loan of any particular Bank is converted to or made as a Base Rate
Loan pursuant to Section 8.2 or 8.5, such Loan shall be included in the same
Group or Groups of Loans from time to time as it would have been if it had not
been so converted or made.
"Guaranties" means the Unconditional Guaranties of Payment to be furnished
----------
by each Consolidated Subsidiary which owns a Qualifying Unencumbered Property or
as otherwise required under the definition of Permitted Liens, with the form of
the Guaranties to be provided by the Consolidated Subsidiaries being attached
hereto as Exhibit M.
"Hedge Rate" means a rate of interest per annum (including any reserve or
----------
cost adjustments)
12
<PAGE>
equal to nine percent (9%).
"Indebtedness" of any Person means, without duplication, (A) as shown on
------------
such Person's consolidated balance sheet (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property, (ii) all
indebtedness of such Person evidenced by a note, bond, debenture or similar
instrument (whether or not disbursed in full in the case of a construction
loan), and (iii) all obligations in respect of Capital Leases (including ground
leases) of such Person, (B) the face amount of all letters of credit issued for
the account of such Person and, without duplication, all unreimbursed amounts
drawn thereunder, (C) all Contingent Obligations of such Person, and (D) all
payment obligations of such Person under any interest rate protection agreement
(including, without limitation, any interest rate swaps, caps, floors, collars
and similar agreements) and currency swaps and similar agreements which were not
entered into specifically in connection with the Indebtedness set forth in
clauses (A), (B) or (C) hereof. For purposes of this Agreement, Indebtedness
(other than Contingent Obligations) of the Borrower shall be deemed to include
the Borrower's Share of the Indebtedness of any Investment Affiliate, provided
that such Indebtedness is nonrecourse, both directly and indirectly, to the
Borrower or a Consolidated Subsidiary, and provided further, that if such
Indebtedness is recourse to the Borrower, or a Consolidated Subsidiary, it shall
be treated as Indebtedness to the extent of such recourse for the purposes of
this definition.
"Indemnitee" has the meaning set forth in Section 9.3(b).
----------
"Interest Expense" means, for any period and without duplication, total
----------------
interest expense, whether paid, accrued or capitalized of Borrower, on a
consolidated basis, determined in accordance with GAAP, plus Borrower's Share of
----
accrued, paid or capitalized interest with respect to any Indebtedness of
Investment Affiliates (in each case, including, without limitation, the
interest component of Capital Leases but excluding interest expense covered by
an interest reserve established under a loan facility such as capitalized
construction interest provided for in a construction loan).
"Interest Period" means: (a) with respect to each Euro-Dollar Borrowing,
---------------
the period commencing on the date of such Borrowing specified in the Notice of
Borrowing or on the date specified in the applicable Notice of Interest Rate
Election and ending one (1), two (2), three (3) or six (6) months thereafter,
and, if acceptable to all of the Banks, ending twelve (12) months thereafter, as
the Borrower may elect in the applicable Notice of Borrowing or Notice of
Interest Rate Election; provided that:
--------
(i) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-
Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding Euro-Dollar Business Day;
(ii) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Euro-Dollar Business Day of a calendar month;
13
<PAGE>
(iii) until the end of the Syndication Period, each Interest
Period shall be limited to one (1) month; and
(iv) any Interest Period which would otherwise end after the Maturity
Date shall end on the Maturity Date.
(b) with respect to each Money Market LIBOR Loan, the period commencing on
the date of Borrowing specified in the applicable Money Market Quote Request and
ending such number of days thereafter (but not less than fourteen (14) days or
more than one hundred eighty (180) days) as the Borrower may elect in accordance
with Section 2.3; provided, that:
--------
(i) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-
Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding Euro-Dollar Business Day;
(ii) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (iii) below, end on the last Euro-Dollar Business Day
of a calendar month; and
(iii) any Interest Period which would otherwise end after the Maturity
Date shall end on the Maturity Date.
(c) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of Borrowing specified in the applicable Money Market
Quote Request and ending such number of days thereafter (but not less than
fourteen (14) days or more than one hundred eighty (180) days) as the Borrower
may elect in accordance with Section 2.3; provided that:
--------
(i) any Interest Period which would otherwise end on a day which is
not a Domestic Business Day shall be extended to the next succeeding Domestic
Business Day; and
(ii) any Interest Period which would otherwise end after the Maturity
Date shall end on the Maturity Date.
"Interest Rate Contracts" means, collectively, interest rate swap, collar,
-----------------------
cap or similar agreements providing interest rate protection.
"Interest Rate Hedges" has the meaning set forth in Section 5.12.
--------------------
"Investment Affiliate" means any Person in whom CESRRI or Borrower holds
--------------------
more than a twenty percent (20%) equity interest, directly or indirectly, whose
financial results are not consolidated under GAAP with the financial results of
CESRRI or Borrower on the consolidated financial statements of CESRRI or
Borrower.
14
<PAGE>
"Investment Affiliate EBITDA" means, for any period, (i) the Net Income of
---------------------------
an Investment Affiliate for such period, plus (ii) depreciation and amortization
expense and other non-cash items of such Investment Affiliate deducted in the
calculation of Net Income for such period, plus (iii) total interest expense,
whether paid, accrued or capitalized, of such Investment Affiliate deducted in
the calculation of Net Income for such period, plus (iv) Taxes of such
Investment Affiliate deducted in the calculation of Net Income for such period,
minus (v) the gains (and plus the losses) from extraordinary items or asset
sales or write-ups or forgiveness of indebtedness included in the calculation of
Net Income, for such period, all of the foregoing without duplication.
"Investment Grade Ratings" means at least two (2) ratings for Borrower's
-------------------------
or CESRRI's senior long-term unsecured debt, one of which must be a rating of
BBB- or higher by S&P or a rating of Baa3 or higher by Moody's, and the other of
which must be an equivalent rating of BBB- or Baa3 or higher, provided that, in
the absence of such ratings of Borrower's or CESRRI's, as applicable, senior
long-term unsecured debt, two (2) comparable ratings, as determined by the
Administrative Agent, assigned by the Rating Agencies to CESRRI's preferred
stock (at least one of which must be a comparable rating from Moody's or S&P)
will be deemed to constitute the Investment Grade Ratings.
"Investment Mortgages" means mortgages securing Indebtedness directly or
--------------------
indirectly owed to Borrower or any of its Subsidiaries, including certificates
of interest in real estate mortgage investment conduits.
"Invitation for Money Market Quotes" has the meaning set forth in Section
----------------------------------
2.3(c).
"Land" means unimproved real estate, including future phases of a partially
----
completed project, owned or leased by Borrower for the purpose of future
development of improvements. For purposes of the foregoing definition,
"unimproved" shall mean Land on which the construction of building improvements
has not commenced or has been discontinued for a continuous period longer than
sixty (60) days prior to completion.
"Lease-Up Property" means any Property owned by the Borrower or a
-----------------
Consolidated Subsidiary which has been substantially completed within the
preceding two (2) year period and which has not been occupied by tenants under
bona fide leases totalling at least seventy-five percent (75%) of the
residential units in such Property for at least two (2) consecutive Fiscal
Quarters.
"Letter(s) of Credit" has the meaning provided in Section 2.2 (b).
-------------------
"Letter of Credit Collateral" has the meaning provided in Section 6.4(b).
---------------------------
"Letter of Credit Collateral Account" has the meaning provided in Section
-----------------------------------
6.4(a).
"Letter of Credit Documents" has the meaning provided in Section 2.17(a).
--------------------------
"Letter of Credit Fee" has the meaning provided in Section 2.8(b).
--------------------
15
<PAGE>
"Letter of Credit Usage" means at any time the sum of (i) the aggregate
----------------------
maximum amount available to be drawn under the Letters of Credit then
outstanding, assuming compliance with all requirements for drawing referred to
therein, and (ii) the aggregate amount of the Borrower's unpaid Obligations
under this Agreement in respect of the Letters of Credit.
"Leverage Ratio" means the percentage determined by dividing Borrower Debt
--------------
by Market Value and multiplying the quotient by one hundred percent (100%).
"LIBOR Auction" means a solicitation of Money Market Quotes setting forth
-------------
Money Market Margins based on the London Interbank Offered Rate pursuant to
Section 2.3.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement, in each case that has the effect of creating a
security interest in respect of such asset. For the purposes of this Agreement,
the Borrower or any Consolidated Subsidiary shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Lincoln Towers Property" means the 714-unit luxury high rise apartment
-----------------------
project located in Arlington, Virginia.
"Loan" means a Base Rate Loan, a Euro-Dollar Loan or a Money Market Loan
----
and "Loans" means Base Rate Loans, Euro-Dollar Loans or Money Market Loans or
-----
any combination of the foregoing.
"Loan Availability" means the maximum amount available to be borrowed
-----------------
hereunder in compliance with the covenants contained in Section 5.8(e) and (i),
but in no event to exceed the aggregate Commitments.
"Loan Documents" means this Agreement, the Notes, the Guaranties, the
--------------
Letter(s) of Credit, the Letter of Credit Documents, and the Security Documents.
"London Interbank Offered Rate" has the meaning set forth in Section
-----------------------------
2.7(b).
"Margin Stock" shall have the meaning provided such term in Regulation U
------------
and Regulation G of the Federal Reserve Board.
"Market Value" means the sum of (i) the book value of all Unrestricted
------------
Tangible Assets, plus (ii) for all income-producing residential rental
Properties, other than Lease-Up Properties, owned and operated by the Borrower
or a Consolidated Subsidiary for at least two (2) consecutive Fiscal Quarters
but less than four (4) consecutive Fiscal Quarters, the estimated market value
thereof, as determined by dividing the annualized aggregate Net Operating Income
for such Properties for the number of Fiscal Quarters actually owned, less the
Capital Reserve for such Properties, by a nine percent (9%) capitalization rate,
plus (iii) for all income-producing residential rental Properties, other than
Lease-Up Properties, owned and ope-rated by the Borrower or a Consolidated
Subsidiary for
16
<PAGE>
four (4) Fiscal Quarters or more, the estimated Market Value thereof, as
determined by dividing the aggregate Net Operating Income for such Properties
for the immediately preceding four (4) Fiscal Quarters, less the Capital Reserve
for such Properties, by a nine percent (9%) capitalization rate, plus (iv) for
all income-producing retail Properties owned and operated by the Borrower or a
Consolidated Subsidiary for at least two (2) consecutive Fiscal Quarters but
less than four (4) consecutive Fiscal Quarters, the estimated market value
thereof, as determined by dividing the annualized aggregate Net Operating Income
for such Properties for the number of Fiscal Quarters actually owned, less the
Retail Capital Reserve Reduction Amount for such Properties, by a ten percent
(10%) capitalization rate, plus (v) for all income-producing retail Properties
owned and operated by the Borrower or a Consolidated Subsidiary for four (4)
Fiscal Quarters or more, the estimated market value thereof, as determined by
dividing the aggregate Net Operating Income for such Properties for the
immediately preceding four (4) Fiscal Quarters, less the Retail Capital Reserve
Reduction Amount for such Properties, by a ten percent (10%) capitalization
rate, plus (vi) for any Properties owned and operated by the Borrower or a
Consolidated Subsidiary for a period of less than two (2) consecutive Fiscal
Quarters, the Aggregate Purchase Price for such Properties, plus (vii) for the
Property Service Businesses, the estimated market value thereof, determined by
dividing the Property Service Business EBITDA for each of the Property Service
Businesses for the immediately preceding four (4) Fiscal Quarters by a fourteen
percent (14%) capitalization rate, plus (viii) the estimated market value of
each Lease-Up Property and of all Properties which are not revenue generating,
such as Land and Properties under Development, based upon the value thereof as
determined in accordance with GAAP, plus (ix) Borrower's Share of the estimated
market value of any Property owned by any Investment Affiliate determined based
upon the status of such Property in accordance with the applicable preceding
subparagraphs (ii) through (viii).
"Material Adverse Effect" means an effect resulting from any circumstance
-----------------------
or event or series of circumstances or events, of whatever nature (but excluding
general economic conditions), which does or could reasonably be expected to,
materially and adversely (i) effect the business, operations, properties, assets
or financial condition of Borrower and its Consolidated Subsidiaries taken as a
whole, (ii) impair the ability of Borrower and its Consolidated Subsidiaries,
taken as a whole, to perform their respective obligations under the Loan
Documents, or (iii) cause a Default under Sections 5.8, 5.9 or 5.13.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded
-------------
Liabilities in excess of $5,000,000.
"Materials of Environmental Concern" means and includes pollutants,
----------------------------------
contaminants, hazardous wastes, toxic and hazardous substances, asbestos, lead,
petroleum and petroleum by-products.
"Maturity Date" shall mean the date when all of the Obligations hereunder
-------------
shall be due and payable, which date shall be three (3) years from the Closing
Date, or, if properly extended in accordance with Section 2.9, five (5) years
from the Closing Date, unless accelerated pursuant to the terms hereof.
"Money Market Absolute Rate" has the meaning set forth in Section 2.3(d)
--------------------------
(ii)(D).
17
<PAGE>
"Money Market Absolute Rate Loan" means a Loan to be made by a Bank
-------------------------------
pursuant to an Absolute Rate Auction.
"Money Market Borrowing" has the meaning set forth in Section 1.3.
----------------------
"Money Market Lending Office" means, as to each Bank, its Domestic Lending
---------------------------
Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Administrative Agent; provided that any Bank may from time to time by
--------
notice to the Borrower and the Administrative Agent designate separate Money
Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and
its Money Market Absolute Rate Loans, on the other hand, in which case all
references herein to the Money Market Lending Office of such Bank shall be
deemed to refer to either or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a Loan to be made by a Bank pursuant to a
-----------------------
LIBOR Auction (including such a Loan bearing interest at the Base Rate pursuant
to Article VIII).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
-----------------
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section 2.3 (d) (ii)(C)
-------------------
.
"Money Market Quote" means an offer by a Bank to make a Money Market Loan
------------------
in accordance with Section 2.3.
"Money Market Quote Request" has the meaning set forth in Section 2.3(b).
--------------------------
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
-------
"Mortgage Constant Debt Service" means the principal and interest payments
------------------------------
due based upon a nine percent (9%) mortgage constant multiplied by the amount
of the Unsecured Debt.
"Multiemplover Plan" means at any time an employee pension benefit plan
------------------
within the meaning of Section 4001 (a) (3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"NAREIT" means National Association of Real Estate Investment Trusts.
------
"Net Income" means, for any period, the net earnings (or loss) after Taxes
----------
of the applicable Person, on a consolidated basis, for such period, calculated
in conformity with GAAP.
"Net Offering Proceeds" means, without duplication, (a) all cash proceeds
---------------------
received by CESRRI as a result of the sale of common, preferred or other classes
of stock in CESRRI (if and
18
<PAGE>
only to the extent reflected in stockholders' equity on the consolidated balance
sheet of CESRRI prepared in accordance with GAAP) less customary costs and
----
discounts of issuance paid by CESRRI, all of which proceeds shall have been
concurrently contributed by CESRRI to Borrower as additional capital, plus (b)
----
all cash and the fair market value of the net equity of all properties
contributed to Borrower by one or more Persons in exchange for limited
partnership interests in Borrower or shares of CESRRI, less customary costs and
discounts of issuance and reasonable and customary transaction expenses paid by
Borrower.
"Net Operating Income" means, for any period with respect to any Property
--------------------
owned by Borrower, any Consolidated Subsidiary or any Investment Affiliate, the
net operating income of such Property for such period (i) determined in
accordance with GAAP, (ii) determined in accordance with the past practices of
Borrower, (iii) inclusive of an allocation of reasonable management fees and
administrative costs to each Property, (iv) inclusive of all ground lease
payments, (v) exclusive of any deduction for depreciation, amortization, or
Interest Expense and (vi) exclusive of any material items of a non-recurring
nature which must be excluded in accordance with GAAP.
"Net Present Value" shall mean, as to a specified or ascertainable dollar
-----------------
amount, the present value, as of the date of calculation of any such amount
using a discount rate equal to the Base Rate in effect as of the date of such
calculation.
"Non-Apartment Properties" means Properties that are direct or indirect
------------------------
interests in income-producing real estate which are not operated as primarily
multifamily residential properties.
"Non-Excluded Taxes" has the meaning set forth in Section 8.4(a).
------------------
"Non-Recourse Indebtedness" means Indebtedness with respect to which
-------------------------
recourse to the Borrower or its Consolidated Subsidiaries for payment is limited
to specific assets of such entities related to a particular Property or group of
Properties encumbered by a Lien securing such Indebtedness provided, however,
that personal recourse of Borrower for any such Indebtedness for fraud,
misrepresentation, misapplication of cash, waste, environmental claims and
liabilities and other circumstances customarily excluded by institutional
lenders from exculpation provisions and/or included in separate indemnification
agreements in non-recourse financing of real estate shall not, by itself,
prevent such Indebtedness from being characterized as Non-Recourse Indebtedness.
"Notes" means promissory notes of the Borrower, substantially in the forms
-----
of Exhibit
A-1 and Exhibit A-2 hereto, evidencing the obligation of the Borrower to repay
the Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Borrowing (as defined in Section
-------------------
2.4(a)).
"Notice of Interest Rate Election" has the meaning set forth in Section
--------------------------------
2.6.
"Notice of Money Market Borrowing" has the meaning set forth in Section
--------------------------------
2.3(f).
"Obligations" means all obligations, liabilities, indemnity obligations and
-----------
Indebtedness of
19
<PAGE>
every nature of the Borrower, from time to time owing to Administrative Agent or
any Bank under or in connection with this Agreement or any other Loan Document.
"Other Taxes" has the meaning set forth in Section 8.4(b).
-----------
"Other Indebtedness" means all Indebtedness other than the Obligations.
------------------
"OP Units" means partnership interests of any kind in the Borrower.
--------
"PNC" means PNC Bank, National Association.
---
"Parent" means, with respect to any Bank, any Person controlling such Bank.
------
"Participant" has the meaning set forth in Section 9.6(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permit" means any permit, approval, authorization, license, variance or
------
permission required from a Governmental Authority under an applicable
Requirement of Law.
"Permitted Investments" shall have the meaning ascribed thereto in Section
---------------------
5.8(g).
"Permitted Liens" means:
---------------
a. Liens for Taxes, assessments or other governmental charges not
yet due and payable or which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted in accordance with the
terms hereof;
b. statutory Liens of carriers, warehousemen, mechanics, materialmen
and other similar Liens imposed by law, which are incurred in the ordinary
course of business for sums not more than sixty (60) days delinquent or which
are being contested in good faith in accordance with the terms hereof;
c. deposits made in the ordinary course of business to secure
liabilities to insurance carriers;
d. Liens for purchase money obligations for equipment in the
ordinary course of business; provided that (i) the Indebtedness secured by any
--------
such Lien does not exceed the purchase price of such equipment, (ii) any such
Lien encumbers only the asset so purchased and the proceeds upon sale,
disposition, loss or destruction thereof, and (iii) such Lien, after giving
effect to the Indebtedness secured thereby, does not give rise to an Event of
Default;
e. easements, rights-of-way, zoning restrictions, other similar
charges or encumbrances and all other items listed on Schedule B to Borrower's
or a Consolidated Subsidiary's
20
<PAGE>
owner's title insurance policies, except in connection with any Indebtedness,
for any of Borrower's or a Consolidated Subsidiary's Real Property Assets, so
long as the foregoing do not interfere in any material respect with the use or
ordinary conduct of the business of Borrower or the applicable Consolidated
Subsidiary, and do not diminish in any material respect the value of the
Property to which it is attached or for which it is listed;
f. Liens and judgments which have been or will be bonded or released
of record within thirty (30) days after the date such Lien or judgment is
entered or filed against CESRRI, Borrower, or any Subsidiary;
g. Liens on Property of the Borrower or its Subsidiaries (other than
any Qualifying Unencumbered Property) securing Indebtedness which may be
incurred or remain outstanding without resulting in an Event of Default
hereunder; and
h. Liens in favor of the Borrower or any Consolidated Subsidiary
against any Property of any other Consolidated Subsidiary of the Borrower,
provided that (i) the Property is located in the District of Columbia, (ii) the
amount secured by all such Liens does not exceed ten percent (10%) of the
Unencumbered Asset Value, (iii) if the secured indebtedness is held by a
Consolidated Subsidiary, such Consolidated Subsidiary shall execute and deliver
a Guaranty to the Administrative Agent, (iv) the Administrative Agent on behalf
of the Banks shall be granted a first-lien security interest in the Lien and the
documents evidencing the indebtedness secured thereby upon terms and conditions
reasonably acceptable to the Administrative Agent, and (v) the Borrower shall
deliver to the Administrative Agent such due diligence materials and opinion
letters concerning the execution of such security documents as the
Administrative Agent reasonably shall request.
"Permitted Recourse Debt" means Secured Debt which is also Recourse Debt,
-----------------------
provided that Permitted Recourse Debt shall at no time exceed fifteen percent
(15%) of Market Value.
"Person" means an individual, a corporation, a partnership, an association,
------
a trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
----
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code and either (i) is
maintained, or contributed to, by any member of the ERISA Group for employees of
any member of the ERISA Group or (ii) has at any time within the preceding five
years been maintained, or contributed to, by any Person which was at such time a
member of the ERISA Group for employees of any Person which was at such time a
member of the ERISA Group.
"Prime Rate" means the rate of interest publicly announced by the
----------
Administrative Agent in Pittsburgh, Pennsylvania, from time to time as its Prime
Rate.
"Properties Under Development" means Properties the primary purpose of
----------------------------
which is to be residential rental owned by the Borrower
21
<PAGE>
or a Consolidated Subsidiary and on which the Borrower or a Consolidated
Subsidiary has commenced and continues to pursue construction of a building or
other improvements; provided that any such Property will no longer be considered
a Property under Development when seventy-five percent (75%) of the rental units
contained therein are occupied by tenants under leases.
"Property" means, with respect to any Person, any real or personal
--------
property, building, facility, structure, equipment or unit, or other tangible
asset owned by such Person.
"Property Purchase Contract Obligations" means the Aggregate Purchase Price
--------------------------------------
to be paid under purchase agreements for Properties to be developed by any
Person other than Borrower or any Consolidated Subsidiary and to be acquired by
Borrower or any Consolidated Subsidiary following completion of construction of
the improvements, provided that a Property Purchase Contract Obligation shall
not be deemed to exist until the later of (a) the construction of the
improvements to be acquired shall have been substantially completed in
accordance with the applicable purchase agreement, or (b) if applicable, the
satisfaction of any leasing or marketing condition to the Borrower's or the
Consolidated Subsidiary's obligations under such purchase agreement, the
existence of which condition having been certified in writing by the Borrower
to the Administrative Agent promptly following the execution of such purchase
agreement. The Property Purchase Contract Obligation shall be deemed to have
terminated upon final closing of the applicable purchase transaction and when
seventy-five percent (75%) of the rental units contained therein are occupied by
tenants under leases.
"Property Service Businesses" means any Person primarily engaged in
---------------------------
providing services related to real estate properties, including Smith Realty
Company, Consolidated Engineering Services, Inc., and Smith Management
Construction, Inc., so long as the Borrower shall own fifty-one percent (51%) or
more of the economic interests therein.
"Property Service Business EBITDA" means, for any period (i) Net Income for
--------------------------------
such Property Service Business for such period, plus (ii) depreciation and
amortization expense and other non-cash items deducted in the calculation of Net
Income for such period, plus (iii) Interest Expense deducted in the calculation
of Net Income for such period, plus (iv) Taxes deducted in the calculation of
Net Income for such period, minus (v) the gains (and plus the losses) from
extraordinary items or asset sales or write-ups or forgiveness of indebtedness
included in the calculation of Net Income, for such period, all of the foregoing
without duplication.
"Qualifying Ground Lease" means (i) the leases described on Exhibit N and
-----------------------
(ii) any lease (a) which is a direct ground lease (or indirect ground lease, so
long as each ground lease in the chain of title meets the following criteria)
granted by the fee owner of real property, (b) which may be transferred and/or
assigned without the consent of the lessor, (c) which has a remaining term
(including any renewal terms exercisable at the sole option of the lessee) of at
least thirty (30) years, (d) under which no material default has occurred and is
continuing, (e) with respect to which a security interest may be granted
without the consent of the lessor, and (f) which contains reasonably customary
lender protection provisions, including, without limitation, provisions to the
effect that (A) the lessor shall notify a first-lien holder of a security
interest in such lease of the occurrence of any default by the lessee under such
lease and shall afford such holder the right to cure such default;
22
<PAGE>
and (B) in the event that such lease is terminated, such first-lien holder shall
have the option to enter into a new lease having terms substantially identical
to those contained in the terminated lease. Upon submission to Administrative
Agent of a ground lease pursuant to Section 5.14, the Administrative Agent shall
notify Borrower within five (5) Domestic Business Days if it determines that the
ground lease does not constitute a Qualifying Ground Lease and, if it does not,
whether it is willing to waive such non-compliance.
"Qualifying Unencumbered Property" means any Property from time to time
--------------------------------
which (i) is an operating and primarily multifamily residential Property wholly-
owned in fee simple absolute by Borrower, or a Consolidated Subsidiary, provided
that the ownership interest in any such Property may be held pursuant to a
Qualifying Ground Lease and provided further that the Worldgate Retail Property
may qualify as a Qualifying Unencumbered Property even though it is not a multi-
family residential Property as long as it satisfies the other requirements
hereof, (ii) is not subject (nor are any equity interests in such Property
subject) to a Lien which secures Indebtedness of any Person other than Permitted
Liens, or to any agreement which, with the passage of time or the occurrence of
any condition, would result in a Lien which secures Indebtedness of any Person
other than Permitted Liens, (iii) is not subject (nor are any equity interests
in such Property subject) to any covenant, condition, or other restriction which
prohibits or limits the sale of, or the creation or assumption of any Lien upon
such Property, except for any Restricted Asset as long as the Restricted Asset
Penalties do not exceed the limitations set forth in (x) below, and also
provided that a general limitation on the amount of Secured Debt which may be
incurred or certain ratios relating to Secured Debt shall not be construed to
constitute a covenant, condition or other restriction which prohibits or limits
the creation or assumption of any Lien on such Property, (iv) shall be an
institutional-class Property, (v) shall have been substantially completed, shall
be free from all material structural and title defects and shall not be subject
to any material renovation project, as certified in writing by the Borrower to
the Administrative Agent, (vi) shall be free from any Materials of Environmental
Concern, as certified in writing by the Borrower to the Administrative Agent and
as verified by an environmental assessment report, (vii) is occupied by tenants
under bona fide leases occupying at least eighty-five percent (85%) of the
residential units, provided that Properties which are less than eighty-five
percent (85%) occupied may be included as Qualifying Unencumbered Properties, as
long as such Properties do not exceed thirty percent (30%) of Unencumbered Asset
Value, (viii) does not, in the case of any single Property, represent more than
twenty percent (20%) of the Unencumbered Asset Value, except for the Lincoln
Towers Property and any other Property approved by the Required Banks, (ix) is
located in an Approved CMSA, provided that Properties located in Approved CMSA's
other than the Washington/Baltimore CMSA shall not exceed fifty-percent (50%) of
Unencumbered Asset Value, and (x) may constitute a Restricted Asset, provided,
however, a Property shall not constitute a Qualifying Unencumbered Property to
the extent that the addition of such Property to the Qualifying Encumbered
Properties would cause the Restricted Asset Penalties to exceed seven and one-
half percent (7.5%) of the Unencumbered Asset Value. Notwithstanding the
foregoing limitations, any other Property shall constitute a Qualifying
Unencumbered Property if it has been so approved by the Required Banks in their
sole and absolute discretion.
"Rating Agencies" means, collectively, S&P, Moody's, Fitch Investors
---------------
Services, L.P. and Duff & Phelps Credit Rating Co.
23
<PAGE>
"Real Property Assets" means as of any time, the real property assets
--------------------
(including interests in participating mortgages in which the Borrower's interest
therein is characterized as equity according to GAAP) owned directly or
indirectly by the Borrower and the Consolidated Subsidiaries at such time.
"Recourse Debt" shall mean Indebtedness that is not Non-Recourse
-------------
Indebtedness.
"Regulation U" means Regulation U of the Board of Governors of the Federal
------------
Reserve System, as in effect from time to time.
"Rejecting Lender" has the meaning set forth in Section 2.9(b).
----------------
"Required Banks" means at any time (a) Banks having in excess of sixty-one
--------------
percent (61%) of the aggregate amount of the Commitments or, (b) if Banks
having the three (3) largest Commitments hold equal to or less than fifty
percent (50%) of the aggregate Commitments, then Banks having in excess of
fifty-one percent (51%) of the Commitments.
"Requirements of Law" means as to any Person, the charter and by-laws,
-------------------
partnership agreement or other organizational or governing documents of such
Person, and any law, rule or regulation, permit, or determination of an
arbitrator or a court or other Governmental Authority, in each case binding upon
such Person or any of its property or to which such Person or any of its
property is subject, including, without limitation, the Securities Act of 1933,
the Securities Exchange Act of 1934, Regulations G, T, U and X of the Federal
Reserve Board, FIRREA and any certificate of occupancy, zoning ordinance,
building, environmental or land use requirement or Permit or occupational safety
or health law, rule or regulation.
"Restricted Asset" means a Real Property Asset with respect to which
----------------
Borrower or any Consolidated Subsidiary has agreed that it would, upon a sale or
other transfer of such Real Property Asset, be obligated to pay a Restricted
Asset Penalty.
"Restricted Asset Penalty" means the estimated amount of any contractual
------------------------
liability of Borrower or a Consolidated Subsidiary which would be owed to the
prior owner, or the principals of the prior owner, of the applicable Real
Property Asset in the event of a sale or other transfer of such Qualifying
Unencumbered Property as reasonably determined by Borrower. In the event that
the Restricted Asset Penalty is to be determined based upon the tax liability of
the prior owner, or the principals of the prior owner, resulting from any such
sale or other transfer, the Restricted Asset Penalty shall equal the maximum
total taxable gain which could be recognized as a result of any such sale or
other transfer times a tax rate of forty percent (40%) as calculated by Borrower
and certified as true and correct to the Administrative Agent. The Restricted
Asset Penalty shall be calculated at the time that a Restricted Asset becomes a
Qualifying Unencumbered Property and thereafter once annually by March 31 of
each calendar year, and the aggregate Restricted Asset Penalties shall be
recalculated in each quarterly Compliance Certificate as Restricted Assets are
added or removed.
"Retail Capital Reserve" means for any period, $.0425 per square foot of
----------------------
retail improvements for each Fiscal Quarter to occur during such period (in
connection with any annualized calculation,
24
<PAGE>
the Retail Capital Reserve shall also be annualized).
"Retail Capital Reserve Reduction Amount" means the greater of (i) the
---------------------------------------
Retail Capital Reserve for the applicable period, or (ii) the actual Capital
Expenditures incurred for the applicable period (in connection with any
annualized calculation, the Retail Capital Reserve Reduction Amount used in such
calculation shall also be annualized).
"Revolving Credit Notes" means promissory notes of the Borrower,
----------------------
substantially in the form of Exhibit A-2 hereto, evidencing the obligation of
the Borrower to repay Base Rate Loans and Euro-Dollar Loans made by the Banks,
and "Revolving Credit Note" means any one of such promissory notes.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
---
Hill Companies, Inc., or any successor thereto.
"Secured Debt" means Indebtedness, the payment of which is secured by a
------------
Lien on any Property directly owned or leased by Borrower, or any Consolidated
Subsidiary, or any Investment Affiliate, provided that Secured Debt shall not be
deemed to include any Indebtedness of any Consolidated Subsidiary which is
secured by a Lien in favor of the Borrower or any other Consolidated Subsidiary
against a Property located in the District of Columbia.
"Securities" means any stock, shares, voting trust certificates, general
----------
and limited partnership interests, limited liability company interests, bonds,
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or in general any instruments commonly
known as "securities," or any certificates of interest, shares, or participation
in temporary or interim certificates for the purchase or acquisition of, or any
right to subscribe to, purchase or acquire any of the foregoing, but shall not
include any evidence of the Obligations, provided that Securities shall not
--------
include Cash and Cash Equivalents, Investment Mortgages or interests in
Consolidated Subsidiaries.
"Security Documents" means the security agreement, deed of trust
------------------
assignment, and financing statements to be executed and delivered by any
Consolidated Subsidiary with respect to any Permitted Lien described in
subparagraph h of the definition of the term "Permitted Liens".
"Skyline Retail Property" means that approximately 205,000 square foot
-----------------------
enclosed community retail center located on Route No. 7 in Northern Virginia at
the intersection of the boundaries of Fairfax County, Arlington County and the
City of Alexandria.
"Solvent" means, with respect to any Person, that the fair saleable value
--------
of such Person's assets exceeds the Indebtedness of such Person.
"Subsidiary" means any corporation or other entity of which securities or
----------
other ownership interests having (a) ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions or
having (b) management control of any such entity, are at the time directly or
indirectly owned by the Borrower.
25
<PAGE>
"Syndication Period" means the period beginning on the Effective Date and
------------------
ending on the earlier of (i) the date which is one-hundred twenty days following
the Effective Date or (ii) the date on which PNC shall have reduced its
Commitment to a maximum of $50,000,000.
"Taxes" means all federal, state, local and foreign income and gross
-----
receipts taxes.
"Term" has the meaning set forth in Section 2.9(a).
----
"Termination Event" shall mean (i) a "reportable event", as such term is
-----------------
described in Section 4043 of ERISA (other than a "reportable event" not subject
to the provision for 30-day notice to the PBGC), or an event described in
Section 4062(e) of ERISA, (ii) the withdrawal by any member of the ERISA Group
from a Multi-employer Plan during a plan year in which it is a "substantial
employer" (as defined in Section 4001 (a) (2) of ERISA) or the incurrence of
liability by any member of the ERISA Group under Section 4064 of ERISA upon the
termination of a Multi-employer Plan, (iii) the filing of a notice of intent to
terminate any Plan under Section 4041 of ERISA, other than in a standard
termination within the meaning of Section 4041 of ERISA, or the treatment of a
Plan amendment as distress termination under Section 4041 of ERISA, (iv) the
institution by the PBGC of proceedings to terminate, impose liability (other
than for premiums under Section 4007 of ERISA) in respect of, or cause a trustee
to be appointed to administer, any Plan or (v) any other event or condition that
might reasonably constitute grounds for the termination of, or the appointment
of a trustee to administer, any Plan or the imposition of any liability or
encumbrance or Lien on the Real Property Assets or any member of the ERISA Group
under ERISA.
"Treasury Rate" means, as of any date, a rate equal to the annual yield to
-------------
maturity on the U.S. Treasury Constant Maturity Series with a ten year maturity,
as such yield is reported in Federal Reserve Statistical Release H.15 --
Selected Interest Rates, published most recently prior to the date the
applicable Treasury Rate is being determined. Such yield shall be determined by
straight line linear interpolation between the yields reported in Release H.15,
if necessary. In the event Release H.15 is no longer published, the
Administrative Agent shall select, in its reasonable discretion, an alternate
basis for the determination of Treasury yield for U.S. Treasury Constant
Maturity Series with ten year maturities.
"Unencumbered Asset Value" means the sum, without duplication, of (i) the
------------------------
estimated market value of all primarily residential rental Qualifying
Unencumbered Properties owned and operated by the Borrower or a Consolidated
Subsidiary for at least two (2) consecutive Fiscal Quarters, but less than four
(4) consecutive Fiscal Quarters (except for such Qualifying Unencumbered
Properties described in (v) below), as determined by taking the annualized
aggregate Net Operating Income of such Properties for the number of Fiscal
Quarters actually owned, less the Capital Reserve, divided by a nine percent
(9%) capitalization rate, (ii) the estimated market value of all residential
rental Qualifying Unencumbered Properties owned and operated by the Borrower or
a Consolidated Subsidiary for four (4) or more consecutive Fiscal Quarters, as
determined by taking the aggregate Net Operating Income of such Properties for
the previous four (4) Fiscal Quarters, less the Capital Reserve, divided by a
nine percent (9%) capitalization rate, (iii) the estimated market value of all
retail Qualifying Unencumbered Properties owned and operated by the Borrower or
a Consolidated Subsidiary for at least two (2) consecutive Fiscal Quarters, but
less than
26
<PAGE>
four (4) consecutive Fiscal Quarters (except for such Qualifying Unencumbered
Properties described in (v) below), as determined by taking the annualized
aggregate Net Operating Income of such Properties for the number of Fiscal
Quarters actually owned, less the Retail Capital Reserve Reduction Amount,
divided by a ten percent (10%) capitalization rate, (iv) the estimated market
value of all retail Qualifying Unencumbered Properties owned and operated by the
Borrower or a Consolidated Subsidiary for four (4) or more consecutive Fiscal
Quarters, as determined by taking the aggregate Net Operating Income of such
Properties for the previous four (4) Fiscal Quarters, less the Retail Capital
Reserve Reduction Amount, divided by a ten percent (10%) capitalization rate,
(v) the cost of construction of Qualifying Unencumbered Properties which have
been substantially completed within the previous four (4) Fiscal Quarters, and
(vi) for all residential rental and retail Qualifying Unencumbered Properties
which have been owned by Borrower or a Consolidated Subsidiary for a period of
less than two (2) Fiscal Quarters, the Aggregate Purchase Price thereof.
"Unencumbered NOI" means for any period, Net Operating Income from all of
----------------
the Qualifying Unencumbered Properties.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
--------------------
amount (if any) by which (a) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for the purposes of Section 4044 of ERISA, exceeds (b) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the ERISA Group to the PBGC or
any other Person under Title IV of ERISA.
"Unimproved Assets" means Real Property Assets upon which no material
-----------------
improvements have been completed which completion is evidenced by a certificate
of occupancy or its equivalent.
"United States" means the United States of America, including the fifty
-------------
states and the District of Columbia.
"Unrestricted Tangible Assets" means (a) the tangible assets of the
----------------------------
Borrower and its Consolidated Subsidiaries as determined in accordance with GAAP
and (b) other assets of the Borrower approved by the Administrative Agent, other
than real estate assets, security deposits, escrow accounts and other reserve
accounts.
"Unsecured Debt" means Indebtedness of Borrower or any Consolidated
--------------
Subsidiary, which is not Secured Debt.
"Unsecured Debt Service" means, based on the amount of Unsecured Debt
----------------------
outstanding as of the end of the applicable Fiscal Quarter, or other date of
determination, and determined on an annualized basis, the higher of (i) the
actual Interest Expense on Unsecured Debt plus actual principal amortization
(excluding balloon payments due at maturity), (ii) the Assumed Unsecured Debt
Service, or (iii) the Mortgage Constant Debt Service.
"Unsecured Interest Expense" means Interest Expense other than Interest
--------------------------
Expense payable
27
<PAGE>
in respect of Secured Debt.
"Unused Commitment" means an amount equal to all unadvanced funds (other
-----------------
than unadvanced funds in connection with any construction loan) which any third
party is obligated to advance to Borrower or another Person or otherwise
pursuant to any loan document, written instrument or otherwise.
"Washington/Baltimore CMSA" means the CMSA consisting of the Washington,
-------------------------
D.C., and Baltimore, Maryland areas.
"Working Capital Sublimit" shall have the meaning ascribed thereto in
------------------------
Section 2.15.
"Worldgate Retail Property" means that approximately 231,000 square foot
-------------------------
community retail center located at the intersection of the Dulles Airport Access
Highway and Centreville Road in Herndon, Virginia.
SECTION 1.2. Accounting Terms and Determinations.
-----------------------------------
Unless otherwise specified herein, all accounting terms used herein shall
be interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP applied on a basis consistent (except for changes concurred
in by the Borrower's independent public accountants) with the most recent
audited consolidated financial statements of CESRRI, Borrower and its
Consolidated Subsidiaries delivered to the Administrative Agent; provided that,
if the Borrower notifies the Administrative Agent the Borrower wishes to amend
any covenant in Article V to eliminate the effect of any change in GAAP on the
operation of such covenant (or if the Administrative Agent notifies the
Borrower that the Required Banks wish to amend Article V for such purpose), then
the Borrower's compliance with such covenant shall be determined on the basis of
GAAP in effect immediately before the relevant change in GAAP became effective,
until either such notice is withdrawn or such covenant is amended in a manner
reasonably satisfactory to the Borrower and the Required Banks. The financial
results of any Person in whom CESRRI or Borrower holds, directly or indirectly,
an equity interest of twenty percent (20%) or less shall be disregarded for all
purposes.
SECTION 1.3. Types of Borrowings.
-------------------
The term "Borrowing" denotes the aggregation of Loans of one or more Banks
to be made to the Borrower pursuant to Article II on the same date, all of which
Loans are of the same type (subject to Article VIII) and, except in the case of
Base Rate Loans, have the same initial Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "Fixed Rate Borrowing" is a Euro-
Dollar Borrowing or a Money Market Borrowing (excluding any such Borrowing
consisting of Money Market Loans bearing interest at the Base Rate pursuant to
Article VIII), and a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-
Dollar Loans) or by reference to the provisions of Article II under which
participation therein is determined (i.e., a "Committed Borrowing" is a
Borrowing under Section 2.1 in which all Banks participate in proportion to
their Commitments, while a "Money
28
<PAGE>
Market Borrowing" is a Borrowing under Section 2.3 in which a Bank's share is
determined on the basis of its bid in accordance therewith).
ARTICLE II
THE CREDITS
SECTION 2.1. Commitments to Lend.
-------------------
(a) Each Bank severally agrees, on the terms and conditions set forth in
this Agreement, to make Loans to the Borrower and participate in Letters of
Credit issued by the Fronting Bank on behalf of the Banks pursuant to this
Article II from time to time during the term hereof in amounts such that the
aggregate principal amount of Committed Loans by such Bank at any one time
outstanding together with such Bank's pro rata share of the Letter of Credit
Usage shall not exceed the amount of its Commitment, provided that in no event
shall the aggregate amount of the Loans then outstanding and Letter of Credit
Usage, exceed the Loan Availability. Each Borrowing under this Section 2.1
shall be in an aggregate principal amount of $1,000,000 or an integral multiple
of $100,000 in excess thereof (except that any such Borrowing may be in the
aggregate amount available in accordance with Section 3.2(b) or in any amount
required to reimburse the Fronting Bank for any drawing under any Letter of
Credit) and, other than with respect to Money Market Loans, shall be made from
the several Banks ratably in proportion to their respective Commitments.
Subject to the limitations set forth herein, any amounts repaid may be
reborrowed.
(b) If at any time the outstanding principal balance of the Loans and the
Letter of Credit Usage exceeds the Loan Availability, Borrower shall submit to
the Administrative Agent, not later than fifteen (15) days following written
notice from the Administrative Agent to Borrower (a copy of which shall be sent
promptly by the Administrative Agent to each Bank) of the existence of such
excess borrowing condition, a written plan pursuant to which Borrower shall
cause such excess borrowing condition to be eliminated not later than thirty
(30) days following such notice from the Administrative Agent to the Borrower,
through one or both of the following means: Borrower shall (A) pay to the
Administrative Agent such amounts and/or (B) designate to the Administrative
Agent such additional Qualifying Unencumbered Properties as may be acceptable
under Section 5.14 as are necessary so that the outstanding principal balance of
the Loans and the Letter of Credit Usage does not exceed the Loan Availability.
Failure by Borrower to have complied with the foregoing in a timely manner shall
constitute an Event of Default without further notice or grace period hereunder.
No further Borrowings shall be permitted, and the Borrower shall not cause or
allow any existing Qualifying Unencumbered Property to no longer be a Qualifying
Unencumbered Property, so long as such excess borrowing condition shall continue
to exist. Nothing in this Section 2.1(b) shall excuse Borrower's compliance
with all terms, conditions, covenants and other obligations imposed upon it
under the Loan Documents during the period of such excess borrowing, nor in any
manner condition or impair the Banks' rights thereunder in respect of any such
breach thereof by Borrower.
SECTION 2.2. Notice of Borrowing.
-------------------
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(a) The Borrower shall give Administrative Agent notice not later
than 10:00 a.m. Pittsburgh time (x) one (1) Domestic Business Day before each
Base Rate Borrowing, or (y) three (3) Euro-Dollar Business Days before each
Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day
in the case of a Euro-Dollar Borrowing or a combination thereof,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing are to be
Base Rate Loans or Euro-Dollar Loans,
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period,
(v) to which account of Borrower the funds are to be directed,
and
(vi) the proposed use of the Borrowing.
(b) Borrower shall give the Administrative Agent, and the designated
Fronting Bank, written notice in the event that it desires to have Letters of
Credit (each, a "Letter of Credit") issued hereunder no later than 10:00 a.m.,
Pittsburgh time, at least four (4) Domestic Business Days prior to the date of
such issuance. Each such notice shall specify (i) the designated Fronting Bank,
(ii) the aggregate amount of the requested Letters of Credit, (iii) the
individual amount of each requested Letter of Credit and the number of Letters
of Credit to be issued, (iv) the date of such issuance (which shall be a
Domestic Business Day), (v) the name and address of the beneficiary, (vi) the
expiration date, including all available extension options, of the Letter of
Credit (which in no event shall be later than twelve (12) months after the
issuance of such Letter of Credit or the Maturity Date, whichever is earlier),
(vii) the purpose and circumstances for which such Letter of Credit is being
issued and (viii) the terms upon which each such Letter of Credit may be drawn
down (which terms shall not leave any discretion to Fronting Bank), including,
if available, a proposed form of the Letter of Credit. Each such notice may be
revoked telephonically by the Borrower to the applicable Fronting Bank and the
Administrative Agent any time prior to the date of issuance of the Letter of
Credit by the applicable Fronting Bank, provided such revocation is confirmed in
writing by the Borrower to the Fronting Bank and the Administrative Agent within
one (1) Domestic Business Day by facsimile. No later than 10:00 a.m.,
Pittsburgh time, on the date that is four (4) Domestic Business Days prior to
the date of issuance, the Borrower shall specify a precise description of the
documents and the verbatim text of any certificate to be presented by the
beneficiary of such Letter of Credit, which if presented by such beneficiary
prior to the expiration date of the Letter of Credit would require the Fronting
Bank to make a payment under the Letter of Credit; provided, that Fronting Bank
may, in its reasonable judgment, require changes in any such documents and
certificates only in conformity with customary and commercially reasonable
practice or law and, provided further, that no Letter of Credit shall require
payment against a conforming draft to be made thereunder before the third
Domestic Business Day following the date that such
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<PAGE>
draft is presented if such presentation is made later than 10:00 A.M. Pittsburgh
time. The Borrower shall further deliver to the Fronting Bank such additional
instruments and documents as the Fronting Bank may reasonably require in
conformity with the commercially reasonable practices of its letter of credit
department, in connection with the issuance of such Letter of Credit. At the
time that each Letter of Credit is issued, Borrower shall pay to the
Administrative Agent for the benefit of Fronting Bank an issuance fee, to be
retained by the Fronting Bank with no obligation to share with any other Bank,
with respect to each Letter of Credit issued in an amount equal to Five Hundred
Dollars ($500). In determining whether to pay on such Letter of Credit, the
Fronting Bank shall be responsible only to determine that the documents and
certificates required to be delivered under the Letter of Credit have been
delivered and that they substantially comply on their face with the requirements
of that Letter of Credit.
SECTION 2.3. Money Market Borrowings.
-----------------------
(a) The Money Market Option. From time to time during the Term
-----------------------
following the end of the Syndication Period, and provided that at such time
either Borrower or CESRRI maintains the Investment Grade Ratings, the Borrower
may, as set forth in this Section 2.3, request the Banks during the Term to make
offers to make Money Market Loans to the Borrower, provided that the aggregate
amount of Money Market Loans shall not exceed, at any time, the lesser of (i)
$125,000,000 in the aggregate outstanding, and (ii) (A) the lesser of (I) the
aggregate Commitments or (II) Loan Availability, minus (B) all other Loans then
outstanding and Letter of Credit Usage, and (iii) fifty percent (50%) of the
lesser of (A) the aggregate Commitments or (B) Loan Availability. Subject to the
provisions of this Agreement, the Borrower may repay any outstanding Money
Market Loan only on the last day of the Interest Period applicable thereto and
any amounts so repaid may be reborrowed, up to the amount available under this
Section 2.3 or under Section 2.1, as applicable, at the time of such Borrowing,
until the Domestic Business Day next preceding the Maturity Date. The Banks may,
but shall have no obligation to, make such offers and the Borrower may, but
shall have no obligation to, accept any such offers in the manner set forth in
this Section 2.3.
(b) Money Market Quote Request. When the Borrower wishes to request
--------------------------
offers to make Money Market Loans under this Section 2.3, it shall transmit to
the Administrative Agent by telex or facsimile transmission a Money Market Quote
Request (each, a "Money Market Quote Request") substantially in the form of
Exhibit B hereto so as to be received not later than 10:30 A.M. Pittsburgh time
on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing
proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business
Day next preceding the date of Borrowing proposed therein, in the case of an
Absolute Rate Auction specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in the
case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be $3,000,000
or a larger multiple of $100,000,
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(iii) the duration of the Interest Period applicable thereto
(which shall not be less than 14 days or more than 180 days), subject to the
provisions of the definition of Interest Period,
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate,
(v) to which account of Borrower the funds are to be directed, and
(vi) the proposed use of the Borrowing.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five (5) Euro-Dollar Business Days (or such other
number of days as the Borrower and the Administrative Agent may agree) of any
other Money Market Quote Request, and no more than two (2) Money Market Quote
Requests may be submitted within any calendar month. There shall be no more
than five (5) Money Market Loans outstanding at any one time. To the extent
that any such Borrowing would result in the outstanding Loans exceeding Loan
Availability, as based upon the most recent Compliance Certificate but also
taking into account additional Unsecured Debt which has been incurred subsequent
to the most recent Compliance Certificate, a Compliance Certificate in
accordance with Section 5.8(l) shall be delivered with the applicable Money
Market Loan Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
----------------------------------
Money Market Quote Request, the Administrative Agent shall send to the Banks by
telex or facsimile transmission an Invitation for Money Market Quotes
substantially in the form of Exhibit C hereto or such replacement form as may be
delivered by the Administrative Agent, which shall constitute an invitation by
the Borrower to each Bank to submit Money Market Quotes offering to make the
Money Market Loans to which such Money Market Quote Request relates in
accordance with this Section 2.3.
(d) Submission and Contents of Money Market Quotes.
--------------------------------------- ------
(i) Each Bank may submit a Money Market Quote containing an offer or
offers to make Money Market Loans in response to any Invitation for Money Market
Quotes. Each Money Market Quote must comply with the requirements of this
Section 2.3(d) and must be submitted to the Administrative Agent by telex or
facsimile transmission at its offices specified in or pursuant to Section 9.1
not later than (x) 2:00 P.M. Pittsburgh time on the fourth Euro-Dollar Business
Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or
(y) 9:30 A.M. Pittsburgh time on the proposed date of Borrowing, in the case of
an Absolute Rate Auction; provided that Money Market Quotes submitted by the
Administrative Agent (or any affiliate of the Administrative Agent) in the
capacity of a Bank may be submitted, and may only be submitted, if the
Administrative Agent or such affiliate notifies the Borrower of the terms of the
offer or offers contained therein not later than (x) one hour prior to the
deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes
prior to the deadline for the other Banks, in the case of an Absolute Rate
Auction. Subject to Articles III and VI, any Money Market Quote so made shall be
irrevocable except with
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the written consent of the Administrative Agent given on the instructions of the
Borrower. Such Money Market Loans may be funded by such Bank's Designated Lender
(if any) as provided in Section 9.6(d), however such Bank shall not be required
to specify in its Money Market Quote whether such Money Market Loans will be
funded by such Designated Lender.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be greater than or
less than the Commitment of the quoting Bank, (x) must be $3,000,000 or a larger
multiple of $100,000, (y) may not exceed the principal amount of Money Market
Loans for which offers were requested and (z) may be subject to an aggregate
limitation as to the principal amount of Money Market Loans for which offers
being made by such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market Margin") offered
for each such Money Market Loan, expressed as a percentage (specified to the
nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the fixed rate of
interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money
Market Absolute Rate") offered for each such Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five (5) separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded by the
Administrative Agent if it:
(A) is not substantially in conformity with Exhibit D hereto or
does not specify all of the information required by Section 2.3(d)(ii) above;
(B) contains qualifying, conditional or similar language (except
for an aggregate limitation as provided in Section 2.3(d)(ii)(B) above);
(C) proposes terms other than or in addition to those set forth
in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in Section 2.3(d)(i).
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<PAGE>
(e) Notice to Borrower. The Administrative Agent shall promptly
------------------
(and in any event within one (1) Domestic Business Day) notify the Borrower in
writing of the terms (x) of any Money Market Quote submitted by a Bank that is
in accordance with Section 2.3(d) and (y) of any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Administrative
Agent unless such subsequent Money Market Quote is submitted solely to correct a
manifest error in such former Money Market Quote or modifies the terms of such
previous Money Market Quote to provide terms more favorable to Borrower. The
Administrative Agent's notice to the Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received for
each Interest Period specified in the related Money Market Quote Request, (B)
the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M.
---------------------------------
Pittsburgh time on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction, the Borrower shall notify
the Administrative Agent of its acceptance or non-acceptance of the offers
communicated to it pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market Borrowing") shall specify the aggregate
principal amount of offers for each Interest Period that are accepted. The
Borrower may accept any Money Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market Borrowing
may not exceed the applicable amount set forth in the related Money Market Quote
Request;
(ii) the principal amount of each Money Market Borrowing must be
$3,000,000 or a larger multiple of $100,000 ;
(iii) acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be; and
(iv) the Borrower may not accept any offer that is described in
Section 2.3(d)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
(g) Allocation by Administrative Agent. If offers are made by two
----------------------------------
or more Banks with the same Money Market Margins or Money Market Absolute Rates,
as the case may be, for a greater aggregate principal amount than the amount in
respect of which such offers are accepted for the related Interest Period, the
principal amount of Money Market Loans in respect of which such offers are
accepted shall be allocated by the Administrative Agent among such Banks as
nearly as possible (in multiples of $100,000, as the Administrative Agent may
deem appropriate) in proportion to the aggregate principal amounts of such
offers. The Administrative Agent shall promptly notify the Borrower and each
such Bank in writing of any such allocation of Money Market Loans.
Determinations by the Administrative Agent of the allocation of Money Market
Loans shall be
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<PAGE>
conclusive in the absence of manifest error.
(h) Notification by Administrative Agent. Upon receipt of the
------------------------------------
Borrower's Notice of Money Market Borrowing in accordance with Section 2.3(f)
hereof, the Administrative Agent shall promptly notify each Bank of the
principal amount of the Money Market Borrowing accepted by the Borrower and of
such Bank's share (if any) of such Money Market Borrowing and such Notice of
Money Market Borrowing shall not thereafter be revocable by the Borrower. A
Bank who is notified that it has been selected to make a Money Market Loan may
designate its Designated Lender (if any) to fund such Money Market Loan on its
behalf, as described in Section 9.6(d). Any Designated Lender which funds a
Money Market Loan shall on and after the time of such funding become the obligee
under such Money Market Loan and be entitled to receive payment when due. No
Bank shall be relieved of its obligation to fund a Money Market Loan, and no
Designated Lender shall assume such obligation, prior to the time the applicable
Money Market Loan is funded.
(i) Funding of Pro Rata Shares. Notwithstanding anything to the
--------------------------
contrary contained herein, each Bank shall be required to fund its pro rata
share of Committed Loans in accordance with Section 2.1 hereof despite the fact
that such Bank's Commitment may have been or may be exceeded as a result of such
Bank's making of Money Market Loans.
SECTION 2.4. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a notice from Borrower in accordance with Section
2.2 hereof (each such notice being a "Notice of Borrowing") in the form of
Exhibit I attached hereto, and, if the amount of the Borrowing would result in
the outstanding Loans exceeding Loan Availability, based upon the most recent
Compliance Certificate but also taking into account any additional Unsecured
Debt which has been incurred subsequent to the most recent Compliance
Certificate, an updated Compliance Certificate in accordance with Section 5.8(l)
shall be delivered simultaneously therewith, the Administrative Agent shall, on
the date such Notice of Borrowing is received by the Administrative Agent, send
each Bank a copy of the Notice of Borrowing and, if applicable, the Compliance
Certificate, and notify each Bank of such Bank's share of such Borrowing, of the
interest rate determined pursuant thereto and the Interest Period(s) and such
Notice of Borrowing shall not thereafter be revocable by the Borrower, unless
Borrower shall pay any applicable expenses pursuant to Section 2.13.
(b) Not later than 1:00 p.m. Pittsburgh time on the date of each
Borrowing as indicated in the Notice of Borrowing, each Bank shall make
available its share of such Borrowing in Federal funds immediately available in
Pittsburgh, Pennsylvania, to the Administrative Agent at its address referred to
in Section 9.1. If the Borrower has requested the issuance of a Letter of
Credit, no later than 12:00 Noon Pittsburgh time on the date of such issuance
as indicated in the notice delivered pursuant to Section 2.2(b), the Fronting
Bank shall issue such Letter of Credit in the amount so requested and deliver
the same to or as directed by the Borrower with a copy thereof to the
Administrative Agent. Promptly following receipt of a copy of each Letter of
Credit, Administrative Agent shall deliver a copy thereof to each Bank.
Immediately upon the issuance of each Letter of Credit by the Fronting Bank,
such Fronting Bank shall be deemed to have sold and transferred to each other
Bank, and each such other Bank shall be deemed, and hereby agrees, to
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<PAGE>
have irrevocably and unconditionally purchased and received from the Fronting
Bank, without recourse or warranty, an undivided interest and a participation in
such Letter of Credit, any drawing thereunder, and the obligations of the
Borrower hereunder with respect thereto, and any security therefor or guaranty
pertaining thereto, in an amount equal to such Bank's ratable share thereof
(based upon the ratio its Commitment bears to the aggregate of all Commitments).
Upon any change in any of the Commitments in accordance herewith, there shall be
an automatic adjustment to such participations to reflect such changed shares.
The Fronting Bank shall have the primary obligation to fund any and all draws
made with respect to such Letter of Credit notwithstanding any failure of a
participating Bank to fund its ratable share of any such draw. The
Administrative Agent will instruct the Fronting Bank to make such Letter of
Credit available to or as directed by the Borrower and the Fronting Bank shall
make such Letter of Credit available to or as directed by the Borrower at the
Borrower's aforesaid address or at such address in the United States as Borrower
shall request on the date of the Borrowing.
(c) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any Borrowing that such Bank will not make available
to the Administrative Agent such Bank's share of such Borrowing, the
Administrative Agent may assume that such Bank has made such share available to
the Administrative Agent on the date of such Borrowing in accordance with
Section 2.4(b), and the Administrative Agent may, in reliance upon such
assumption, but shall not be obligated to, make available to the Borrower on
such date a corresponding amount on behalf of such Bank. If and to the extent
that such Bank shall not have so made such share available to the Administrative
Agent, such Bank and the Borrower severally agree to repay to the Administrative
Agent forthwith on demand, and in the case of the Borrower one (1) Domestic
Business Day after demand, such corresponding amount together with interest
thereon, for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Administrative Agent, at
(i) in the case of the Borrower, a rate per annum equal to the interest rate
applicable thereto pursuant to Section 2.7 and (ii) in the case of such Bank,
the Federal Funds Rate. If such Bank shall repay to the Administrative Agent
such corresponding amount, such amount so repaid shall constitute such Bank's
Loan included in such Borrowing for the purposes of this Agreement.
(d) The failure of any Bank to make available to the Administrative
Agent its share of any Borrowing shall not relieve any other Bank of its
obligation to fund its share of such Borrowing.
SECTION 2.5. Notes.
-----
(a) The Base Rate Loans and the Euro-Dollar Loans of each Bank shall
be evidenced by a single Revolving Credit Note in the amount of its Commitment
payable to the order of such Bank for the account of its Applicable Lending
Office. The Money Market Loans of each Bank, including each Designated Lender,
shall be evidenced by a single Bid Rate Note in the amount of $125,000,000,
payable to the order of such Bank for the account of its Applicable Lending
Office.
(b) Each Bank may, by notice to the Borrower and the Administrative
Agent, request that its Loans of a particular type (including Money Market
Loans) be evidenced by a separate Note in an amount equal to the aggregate
unpaid principal amount of such Loans. Any
36
<PAGE>
additional costs incurred by the Administrative Agent, the Borrower or the Banks
in connection with preparing such a Note shall be at the sole cost and expense
of the Bank requesting such Note. In the event any Loans evidenced by such a
Note are paid in full prior to the Maturity Date, any such Bank shall return
such Note to Borrower. Each such Note shall be in substantially the form of
Exhibit A-2 hereto (or in the case of a Money Market Loan, in substantially the
form of Exhibit A-1 hereto) with appropriate modifications to reflect the fact
that it evidences solely Loans of the relevant type. Upon the execution and
delivery of any such Note, any existing Note payable to such Bank shall be
replaced or modified accordingly. Each reference in this Agreement to the "Note"
of such Bank shall be deemed to refer to and include any or all of such Notes,
as the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the
Administrative Agent shall forward such Note to such Bank. Each Bank shall
record the date, amount, type and maturity of each Loan made by it and the date
and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Note, endorse on the appropriate schedule appropriate
notations to evidence the foregoing information with respect to each such Loan
then outstanding; provided that the failure of any Bank to make any such
recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the
Borrower to so endorse its Note and to attach to and make a part of its Note a
continuation of any such schedule as and when required.
(d) The Committed Loans shall mature, and the principal amount thereof
shall be due and payable, on the Maturity Date.
(e) Each Money Market Loan included in any Money Market Borrowing
shall mature, and the principal amount thereof shall be due and payable,
together with accrued interest thereon, on the earlier to occur of (i) the last
day of the Interest Period applicable to such Money Market Borrowing or (ii) the
Maturity Date.
(f) There shall be no more than ten (10) Euro-Dollar Groups of Loans
outstanding at any one time.
SECTION 2.6. Method of Electing Interest Rates.
---------------------------------
(a) The Loans included in each Committed Borrowing shall bear
interest initially at the type of rate specified by the Borrower in the
applicable Notice of Borrowing. Thereafter, the Borrower may from time to time
elect to change or continue the type of interest rate borne by each Group of
Loans (subject in each case to the provisions of Article VIII), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert all or any portion of such Loans to Euro-Dollar Loans as of
any Euro-Dollar Business Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect
to convert all or any portion of such Loans to Base Rate Loans and/or
elect to continue
37
<PAGE>
all or any portion of such Loans as Euro-Dollar Loans for an
additional Interest Period or additional Interest Periods, in each
case effective on the last day of the then current Interest Period
applicable to such Loans, or on such other date designated by Borrower
in the Notice of Interest Rate Election provided Borrower shall pay
any losses pursuant to Section 2.13.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Administrative Agent on or before 11:00 a.m. Pittsburgh
time at least three (3) Euro-Dollar Business Days before the conversion or
continuation selected in such notice is to be effective. A Notice of Interest
Rate Election may, if it so specifies, apply to only a portion of the aggregate
principal amount of the relevant Group of Loans; provided that (i) such portion
is allocated ratably among the Loans comprising such Group, (ii) the portion to
which such Notice of Interest Rate Election applies, and the remaining portion
to which it does not apply, are each $1,000,000 or any larger multiple of
$100,000, (iii) there shall be no more than ten (10) Euro-Dollar Groups of Loans
outstanding at any time, (iv) no Committed Loan may be continued as, or
converted into, a Euro-Dollar Loan when any Default or Event of Default has
occurred and is continuing, and (v) no Interest Period shall extend beyond the
Maturity Date.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the
applicable clause of subsection (a) above;
(iii) if the Loans comprising such Group are to be converted,
the new type of Loans and, if such new Loans are Euro-Dollar Loans,
the duration of the initial Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for
an additional Interest Period, the duration of such additional
Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Administrative Agent shall notify
each Bank the same day as it receives such Notice of Interest Rate Election of
the contents thereof, and the Interest Periods (if different from those
requested by the Borrower) and such notice shall not thereafter be revocable by
the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate
Election to the Administrative Agent for any Euro-Dollar Group of Loans, such
Euro-Dollar Group of Loans shall be converted into Base Rate Loans on the last
day of the then current Interest Period applicable thereto.
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<PAGE>
(d) If the Borrower shall fail to pay any principal of or interest on
any Money Market Loan when due, such Money Market Loan shall bear interest,
payable on demand, for each day until paid at a rate per annum equal to the Base
Rate until such failure shall become an Event of Default and thereafter at a
rate per annum equal to the sum of 4% plus the Base Rate for such day (the
"Default Rate").
SECTION 2.7. Interest Rates.
--------------
(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Loan is made until the
date it is repaid or converted into a Euro-Dollar Loan pursuant to Section 2.6
or at the Maturity Date, at a rate per annum equal to the Base Rate plus the
Applicable Margin for Base Rate Loans for such day. Such interest shall be
payable on the first day of each calendar month.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin for Euro-
Dollar Loans for such day plus the Adjusted London Interbank Offered Rate
applicable to such Interest Period. Such interest shall be payable for each
Interest Period on the first day of each calendar month.
The "Adjusted London Interbank Offered Rate" applicable to any Interest
--------------------------------------
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100th of 1%) by dividing (i) the London
Interbank Offered Rate applicable during such Interest Period by (ii) 1.00 minus
the Euro-Dollar Reserve Percentage.
The "London Interbank Offered Rate" applicable to any Interest Period means
------------------------------
the rate per annum (rounded upward, if necessary, to the next higher 1/100th of
1%) determined by the Administrative Agent in accordance with its usual
procedures (which determination shall be conclusive absent manifest error) to be
the average of the London interbank offered rates for U.S. Dollars quoted by the
British Bankers' Association as set forth on Dow Jones Markets Service (formerly
known as Telerate) display page 3750 (or appropriate successor or, if British
Bankers' Association or its successor ceases to provide such quotes, a
comparable replacement determined by the Administrative Agent) two (2) Euro-
Dollar Business Days before the first day of such Interest Period in an amount
approximately equal to the principal amount of the Euro-Dollar Borrowing or
Group of Loans or portion thereof to be converted into or continued as Euro-
Dollar Loans to which such Interest Period is to apply and for a period of time
comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
------------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) under
Regulation D, as Regulation D may be amended, modified or supplemented, for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Euro-Currency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank
39
<PAGE>
to United States residents). The Adjusted London Interbank Offered Rate shall be
adjusted automatically on and as of the effective date of any change in the
Euro-Dollar Reserve Percentage.
(c) Subject to Section 8.1, each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London Interbank
Offered Rate for such Interest Period (determined in accordance with Section
2.7(b) as if the related Money Market LIBOR Borrowing were a Euro-Dollar
Borrowing) plus, or minus, the Money Market Margin quoted by the Bank making
such Loan in accordance with Section 2.3. Each Money Market Absolute Rate Loan
shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a rate per annum equal to the Money
Market Absolute Rate quoted by the Bank making such Loan in accordance with
Section 2.3. Such interest shall be payable for each Interest Period on the last
day thereof, except as may be otherwise agreed among Borrower, Administrative
Agent and the applicable Bank, but in no event shall interest be payable at any
interval shorter than one month. Any overdue principal of or interest on any
Money Market Loan shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the Base Rate until such failure shall become
an Event of Default and thereafter during the continuance of such Event of
Default at a rate per annum equal to the Default Rate.
(d) In the event that, and for so long as, any Event of Default shall
have occurred and be continuing, the outstanding principal amount of the Loans,
and, to the extent permitted by applicable law, overdue interest in respect of
all Loans, shall bear interest at the Default Rate.
(e) The Administrative Agent shall determine each interest rate
applicable to the Loans hereunder. The Administrative Agent shall give prompt
notice to the Borrower and the Banks of each rate of interest so determined, and
its determination thereof shall be conclusive in the absence of demonstrable
error.
SECTION 2.8. Fees.
----
(a) Facility Fee. At any time while the Investment Grade Ratings are
------------
not maintained, the Borrower shall pay to the Administrative Agent for the
account of the Banks ratably in proportion to their respective Commitments a
facility fee (the "Facility Fee") on the aggregate Commitments at the respective
percentages per annum based upon the range into which the Borrower's Leverage
Ratio then falls, in accordance with the following table. Any change in
Borrower's Leverage Ratio causing it to move to a different range on the table
shall effect an immediate change in the Facility Fee, effective on the earlier
of (i) the date of the Compliance Certificate reflecting such change in the
Leverage Ratio, or (ii) the end of the calendar quarter to which such Compliance
Certificate is related, if applicable.
<TABLE>
<CAPTION>
Facility Fee
Leverage Ratio (% per annum)
-------------- -------------
<S> <C>
Less than 25% 0.15
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
greater than or equal to 25% less than 35% 0.15
greater than or equal to 35% less than 45% 0.20
greater than or equal to 45% less than
or equal to 55% 0.20
</TABLE>
During any time when either CESRRI or Borrower shall maintain the
Investment Grade Ratings, "Facility Fee" shall mean a facility fee on the
aggregate Commitments at the respective percentages per annum based upon the
Credit Ratings then applicable in accordance with the following table.
<TABLE>
<CAPTION>
Credit Rating Facility Fee
(S&P/Moody's Ratings) (% per annum)
--------------------- -------------
<S> <C>
A-/A3 or higher 0.125
BBB+/Baa1 0.15
BBB/Baa2 0.15
BBB-/Baa3 0.20
</TABLE>
Any change in Credit Rating causing it to move into a different range on the
table shall effect an immediate change in the applicable percentage per annum.
If CESRRI or Borrower shall maintain two (2) Credit Ratings, and such ratings
are not equivalent, the Facility Fee shall be based upon the lower of such
Credit Ratings. In the event that CESRRI or Borrower receives more than two (2)
Credit Ratings, and such ratings are not equivalent, the Facility Fee shall be
determined by the lower of the two (2) highest ratings, provided that at least
one of such highest Credit Ratings shall be from S&P or Moody's. In the event
that at least one of the two (2) highest ratings shall not be a Credit Rating
from S&P or Moody's, then the applicable percentage per annum shall be
determined by the lowest of the ratings. In the event that only one (1) Rating
Agency has set the Borrower's or CESRRI's Credit Rating, or CESRRI or Borrower
does not maintain the Investment Grade Ratings, then the Facility Fee shall be
based on Borrower's Leverage Ratio as set forth above. Notwithstanding anything
herein contained to the contrary, the Borrower shall always have the right to
elect that the Facility Fee be determined based upon its Leverage Ratio by
written notice to Administrative Agent, with such election to become effective
upon the next Domestic Business Day following receipt of such notice by the
Administrative Agent. Any change in the Facility Fee resulting from a change in
a Credit Rating shall become effective on the effective date of the change in
the applicable Credit Rating. The Facility Fee shall be payable quarterly in
arrears on each January 1, April 1, July 1 and October 1 during the Term. The
Facility Fee for any partial calendar quarter shall be prorated as provided in
Section 2.14.
(b) Letter of Credit Fee. During the Term, the Borrower shall pay to
--------------------
the
41
<PAGE>
Administrative Agent, for the account of the Banks in proportion to their
interests in respective undrawn issued Letters of Credit, a fee (the "Letter of
Credit Fee") in an amount, provided that no Event of Default shall have occurred
and be continuing, equal to a rate per annum of one percent (1%) on the daily
average of the undrawn amount of such Letters of Credit, which fee shall be
payable quarterly, in arrears, on each January 1, April 1, July 1 and October 1
during the Term. From the occurrence, and during the continuance, of an Event of
Default, such fee shall be increased to be equal to four percent (4%) per annum
on the daily average of the undrawn amount of such Letters of Credit. The Letter
of Credit Fee for any partial calendar quarter shall be prorated.
(c) Fronting Bank Fee. The Borrower shall pay the Administrative
-----------------
Agent, for the Fronting Bank's account, a fee (the "Fronting Bank Fee") at a
rate per annum equal to one-eighth of one percent (0.125%) of the undrawn amount
of such Letter of Credit (less the Fronting Bank's pro rata share thereof based
upon the amount of the Fronting Bank's pro rata share of the Commitments), which
fee shall be in addition to and not in lieu of, the Letter of Credit Fee. The
Fronting Bank Fee shall be payable in arrears on each January 1, April 1, July 1
and October 1 during the Term. The Fronting Bank Fee for any partial calendar
quarter shall be prorated.
(d) Closing Fee. The Borrower shall pay to the Administrative Agent
-----------
certain closing and amendment fees pursuant to the Fee Letter. The
Administrative Agent shall pay to the Banks shares of the closing and amendment
fees in accordance with their separate agreements.
(e) Administrative Agent's Fee. The Borrower shall also pay to the
--------------------------
Administrative Agent, for the Administrative Agent's own account, an
Administrative Agent's fee pursuant to the Fee Letter.
(f) Extension Fee. As provided in Section 2.9(b) and (c), the
-------------
Borrower shall pay to the Administrative Agent, for the account of the Banks in
proportion to the Commitments, an extension fee (the "Extension Fee") in the
amount of one-tenth of one percent (.10%) of the Commitments of Banks which
shall be participating in an extension of the Maturity Date, when due in
accordance with Section 2.9(b) or (c), as applicable.
(g) Money Market Loan Fees. The Borrower agrees to pay the
----------------------
Administrative Agent together with each Money Market Loan Request an
administrative fee in the amount of $1,000, or as otherwise may be agreed to in
writing from time to time.
(h) Fees Non-Refundable. All fees set forth in this Section 2.8
-------------------
shall be deemed to have been earned on the date payment is due in accordance
with the provisions hereof and shall be non-refundable. The obligation of the
Borrower to pay such fees in accordance with the provisions hereof shall be
binding upon the Borrower and shall inure to the benefit of the Administrative
Agent and the Banks regardless of whether any Loans are actually made.
SECTION 2.9. Maturity Date; Extension of Maturity Date.
-----------------------------------------
(a) The term (the "Term") of the Commitments (and each Bank's obligations
to make Loans and to participate in Letters of Credit hereunder) shall terminate
and expire and the Borrower
42
<PAGE>
shall return or cause there to be returned all Letters of Credit to the Fronting
Bank on the Maturity Date, unless the Term shall be extended as hereinafter set
forth. Upon the date of the termination of the Term, any Loans then outstanding
(together with accrued interest thereon and all other obligations) shall be due
and payable on such date.
(b) Provided that no Default or Event of Default then exists, the Borrower
may request that the Administrative Agent and the Banks extend the initial
Maturity Date for an additional two (2) year period by executing and delivering
to the Administrative Agent at least ninety (90) days but no more than one
hundred twenty (120) days prior to the initial Maturity Date, a written request
in the form of Exhibit J (an "Extension Request"), with the joinder in the
Extension Request of each Consolidated Subsidiary which has provided a Guaranty
pursuant hereto. The Administrative Agent shall forward to each Bank a copy of
the Extension Request delivered to the Administrative Agent promptly after
receipt thereof. The Borrower understands that this Section has been included
in this Agreement for the Borrower's convenience in requesting an extension of
the Maturity Date and the Borrower acknowledges that none of the Banks nor the
Administrative Agent has promised (either expressly or impliedly), nor has any
obligation or commitment whatsoever, to extend the Maturity Date. If all of the
Banks shall have notified the Administrative Agent in writing on or prior to the
date which is sixty (60) days prior to the initial Maturity Date that they
accept such Extension Request, then the Maturity Date shall be extended to the
date two (2) years following the initial Maturity Date. If any Bank shall not
have notified the Administrative Agent on or prior to the date which is sixty
(60) days prior to the initial Maturity Date that it accepts such Extension
Request, then the Maturity Date shall not be extended. The Administrative Agent
shall promptly notify the Borrower whether the Extension Request has been
accepted or rejected, and if rejected, the Administrative Agent shall also give
the Borrower notice of which Banks rejected such Extension Request (each such
Bank a "Rejecting Lender'). If accepted, within five (5) Domestic Business Days
after Borrower's receipt of notification thereof, Borrower shall pay the
Extension Fee to the Administrative Agent.
(c) Notwithstanding the preceding subsection (b), after notification from
the Administrative Agent to the Borrower that an Extension Request has been
rejected, the Maturity Date shall be extended as requested in such Extension
Request if (i) the Required Banks consented to such Extension Request, (ii) no
later than thirty (30) days prior to the initial Maturity Date, the Borrower
shall have given written notice to the Administrative Agent and each Bank that
the Borrower desires the Maturity Date to be so extended notwithstanding such
rejection, (iii) the Borrower shall have, no later than ten (10) days prior to
the initial Maturity Date (x) caused each Rejecting Lender to have assigned its
respective Commitment to a Bank subject to and in accordance with the
provisions of Section 9.6(c) for a purchase price equal to the aggregate
principal balance of Loans then owing to such Rejecting Lender plus any accrued
but unpaid interest thereon and accrued but unpaid fees owing to such Rejecting
Lender, and (y) to the extent the Commitment of any Rejecting Lender is not so
assigned by such date, paid to such Rejecting Lender the aggregate principal
balance of Loans then owing to such Rejecting Lender plus any accrued but unpaid
interest thereon and accrued but unpaid fees owing to such Rejecting Lender,
whereupon such Rejecting Lender's Commitment shall terminate, and such Rejecting
Lender shall no longer be a party hereto or have any rights or obligations
hereunder or under any of the other Loan Documents, and (iv) on or before the
initial Maturity Date, the Borrower shall pay the Extension Fee to the
Administrative
43
<PAGE>
Agent for the ratable benefit of the Banks participating in the extension to the
extent of their Commitments. In addition, in connection with any such assignment
by a Rejecting Lender or any such payment to a Rejecting Lender, the Borrower
shall pay the amounts, if any, due such Rejecting Lender under Section 2.13. If
the Borrower desires to cause any Rejecting Lender to assign its Commitment to
an existing or new Bank pursuant to this subsection, the Borrower shall so
notify such Rejecting Lender, the Administrative Agent and the other Banks in
writing no later than the date thirty (30) days prior to the initial Maturity
Date. A Rejecting Lender shall be obligated to assign its Commitment pursuant to
this subsection if requested to do so by the Borrower subject to Borrower's
compliance with the provisions of this subsection. Each Bank that is not a
Rejecting Lender shall have the right (but not the obligation) to acquire such
Rejecting Lender's Commitment and shall exercise such right by giving written
notice thereof to the Administrative Agent no later than five (5) Domestic
Business Days following receipt of the Borrower's notice. Any Bank who has
failed to so notify the Administrative Agent and the Borrower within such five
(5) Domestic Business Day period shall be deemed to have declined to exercise
such right. If more than one Bank exercises its right to acquire a Rejecting
Lender's Commitment, each such Bank shall acquire an amount of such Rejecting
Lender's Commitment in proportion to the Commitments of the Banks exercising
such right. After the expiration of such five (5) Domestic Business Day period,
the Borrower shall have the right to attempt to cause one or more new or
existing Banks to accept an assignment of a Rejecting Lender's Commitment in
accordance with, and subject to, the provisions of Section 9.6(c) hereof.
Neither the Administrative Agent nor any Bank shall have any obligation to
assist the Borrower in finding any such Bank. If the Required Banks do not
consent to the Extension Request or if the Borrower fails to comply with any
provision of this subsection, the Maturity Date shall not be extended.
SECTION 2.10. [Intentionally Deleted].
SECTION 2.11. Optional Prepayments.
--------------------
(a) The Borrower may, upon notice to the Administrative Agent
delivered by 11:00 a.m., Pittsburgh time on the preceding Domestic Business Day,
prepay any Base Rate Group of Loans (or any Euro-Dollar Borrowing bearing
interest at the Base Rate pursuant to Section 8.1), in whole at any time, or
from time to time in part in amounts aggregating One Million Dollars
($1,000,000) or any larger multiple of One Hundred Thousand Dollars ($100,000),
by paying to the Administrative Agent the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment. Each such
optional prepayment shall be applied by the Administrative Agent to prepay
ratably the Loans of the several Banks included in such Group of Loans or
Borrowing.
(b) The Borrower may, upon notice to the Administrative Agent
delivered by 11:00 a.m., Pittsburgh time on the preceding Euro-Dollar Business
Day, prepay any Euro-Dollar Loan as of the last day of the Interest Period
applicable thereto. The Borrower may not prepay all or any portion of the
principal amount of any Euro-Dollar Loan prior to the end of the Interest Period
applicable thereto unless the Borrower shall also pay any applicable expenses
pursuant to Section 2.13. Any such prepayment prior to the end of the Interest
Period applicable thereto shall be upon at least three (3) Euro-Dollar Business
Days notice to the Administrative Agent. Each such optional
44
<PAGE>
prepayment shall be in the amounts set forth in Section 2.11(a) above and shall
be applied to prepay ratably the Loans of the Banks included in any Euro-Dollar
Group of Loans, except that any Euro-Dollar Loan which has been converted to a
Base Rate Loan pursuant to Section 8.2, 8.3 or 8.4 hereof may be prepaid without
ratable payment of the other Loans in such Group of Loans which have not been so
converted.
(c) The Borrower may, upon at least one (1) Domestic Business Day's
notice to the Administrative Agent (by 11:00 a.m Pittsburgh time on such
Domestic Business Day), reimburse the Administrative Agent for the benefit of
the Fronting Bank for the amount of any drawing under a Letter of Credit in
whole or in part in any amount.
(d) The Borrower may at any time return any undrawn Letter of Credit
to the Fronting Bank in whole, but not in part, and the Fronting Bank within one
(1) Domestic Business Day shall give the Administrative Agent and each of the
Banks notice of such return.
(e) The Borrower may at any time and from time to time cancel all or
any part of the Commitments by the delivery to the Administrative Agent of a
notice of cancellation within the applicable time periods for prepayments set
forth in Sections 2.11(a) and (b) if there are Loans then outstanding or, if
there are no Loans outstanding at such time as to which the Commitments with
respect thereto are being canceled, upon at least one (1) Domestic Business
Day's notice to the Administrative Agent, whereupon, in either event, all or
such portion of the Commitments, as applicable, shall terminate as to the Banks,
pro rata on the date set forth in such notice of cancellation, and, if there are
any Loans then outstanding, Borrower shall prepay, as applicable, all or such
portion of Loans outstanding on such date in accordance with the requirements of
Section 2.11(a) and (b). In no event shall the Borrower be permitted to cancel
Commitments for which a Letter of Credit has been issued and is outstanding
unless the Borrower returns (or causes to be returned) such Letter of Credit to
the Fronting Bank. Borrower shall be permitted to designate in its notice of
cancellation which Loans, if any, are to be prepaid.
(f) Any amounts so prepaid pursuant to Section 2.11 (a) or (b) may be
reborrowed. In the event Borrower elects to cancel all or any portion of the
Commitments pursuant to Section 2.11(c) hereof, such amounts may not be
reborrowed.
(g) Notwithstanding anything herein contained to the contrary, the
Borrower may not prepay all or any portion of the principal amount of any Money
Market Loan prior to the end of the Interest Period applicable thereto.
SECTION 2.12. General Provisions as to Payments.
---------------------------------
(a) The Borrower shall make each payment of the principal and
interest on the Loans and of fees hereunder, not later than 12:00 Noon
Pittsburgh time on the date when due, in Federal or other funds immediately
available in Pittsburgh, to the Administrative Agent at its address referred to
in Section 9.1. If any such payment is received by the Administrative Agent
later than 12:00 Noon Pittsburgh time, such payment shall be treated as having
been made on the next Domestic Business Day or Euro-Dollar Business Day, as
applicable. The Administrative Agent will
45
<PAGE>
promptly distribute to each Bank its ratable share (or applicable share with
respect to Money Market Loans) of each such payment received by the
Administrative Agent for the account of the Banks. If and to the extent that the
Administrative Agent shall receive any such payment for the account of the Banks
on or before 12:00 Noon Pittsburgh time on any Domestic Business Day, and
Administrative Agent shall not have distributed to any Bank its applicable share
of such payment on such Domestic Business Day, Administrative Agent shall
distribute such amount to such Bank together with interest thereon, for each day
from the date such amount should have been distributed to such Bank until the
date Administrative Agent distributes such amount to such Bank, at the Federal
Funds Rate. Whenever any payment of principal of, or interest on the Base Rate
Loans or of fees shall be due on a day which is not a Domestic Business Day, the
date for payment thereof shall be extended to the next succeeding Domestic
Business Day. Whenever any payment of principal of, or interest on, the Euro-
Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the
date for payment thereof shall be extended to the next succeeding Euro-Dollar
Business Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case the date for payment thereof shall be the next preceding
Euro-Dollar Business Day. Whenever any payment of principal of, or interest on,
the Money Market Loans shall be due on a day which is not a Euro-Dollar Business
Day, the date for payment thereof shall be extended to the next succeeding Euro-
Dollar Business Day. If the date for any payment of principal is extended by
operation of law or otherwise, interest thereon shall be payable for such
extended time. Unless the Borrower shall otherwise instruct the Administrative
Agent, each payment of principal made by Borrower hereunder shall be first
applied to reduce amounts allocated to the Working Capital Sublimit to the
extent that advances have been so allocated.
(b) Unless the Administrative Agent shall have received notice from
the Borrower prior to the date on which any payment is due to the Banks
hereunder that the Borrower will not make such payment in full, the
Administrative Agent may assume that the Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank shall repay to the
Administrative Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Administrative Agent, at the Federal Funds Rate.
SECTION 2.13. Funding Losses.
--------------
If the Borrower makes any payment of principal with respect to any Euro-
Dollar Loan (pursuant to Article II, VI or VIII or otherwise) on any day other
than the last day of the Interest Period applicable thereto, or if the Borrower
fails to borrow any Euro-Dollar Loans after notice has been given by the
Administrative Agent to any Bank in accordance with Section 2.4(a), or if
Borrower shall deliver a Notice of Interest Rate Election specifying that a
Euro-Dollar Loan shall be converted on a date other than the last day of' the
then current Interest Period applicable thereto, the Borrower shall reimburse
each Bank within fifteen (15) days after Borrower receives certification of such
Bank of such loss or expense (which shall be delivered by each such Bank to
Administrative Agent for delivery to Borrower) for any resulting loss or expense
incurred by it (or by an existing
46
<PAGE>
Participant in the related Loan), including (without limitation) any loss
incurred in obtaining, liquidating or employing deposits from third parties, but
excluding loss of margin for the period after any such payment or failure to
borrow, provided that such Bank shall have delivered to Administrative Agent and
Administrative Agent shall have delivered to the Borrower a certification as to
the amount of such loss or expense, which certification shall set forth in
reasonable detail the basis for and calculation of such loss or expense and
shall be conclusive in the absence of demonstrable error. Calculation of all
amounts payable to a Bank under this Section 2.13 shall be made as though such
Bank had actually funded Euro-Dollar Loans through the purchase of deposits in
the relevant market bearing interest at the rate applicable to such Euro-Dollar
Loans in an amount equal to the amount of the Euro-Dollar Loans and having a
maturity comparable to the relevant Interest Period, provided, however, that
each Bank may fund each of its Euro-Dollar Loans in any manner it sees fit and
the foregoing assumption shall be used only for calculation of amounts payable
under this Section 2.13.
SECTION 2.14. Computation of Interest and Fees.
--------------------------------
All interest and fees (other than the closing fee and amendment fee
pursuant to Section 2.8(d) and the Extension Fee) shall be computed on the basis
of a year of 360 days and paid for the actual number of days elapsed (including
the first day but excluding the last day), provided that the Facility Fee shall
be computed on a quarterly basis, with any partial quarter being prorated on a
per diem basis using the total number of days in the applicable calendar
quarter.
SECTION 2.15. Use of Proceeds.
---------------
Borrower shall use the proceeds of the Loans only for pre-development
costs, development costs, construction costs, acquisitions, working capital,
equity investments and repayment of Indebtedness . Use of proceeds for working
capital purposes shall not exceed Fifty Million Dollars ($50,000,000.00) at any
one time (the "Working Capital Sublimit").
SECTION 2.16. Letters of Credit.
-----------------
(a) Subject to the terms contained in this Agreement and the other
Loan Documents, upon the receipt of a notice in accordance with Section 2.2(b)
requesting the issuance of a Letter of Credit, the Fronting Bank shall issue a
Letter of Credit or Letters of Credit in such form as is reasonably acceptable
to the Borrower subject to the provisions of Section 2.2(b) in an amount or
amounts equal to the amount or amounts requested by the Borrower.
(b) Each Letter of Credit shall be issued in the minimum amount of
One Hundred Thousand Dollars ($100,000).
(c) The Letter of Credit Usage shall be no more than Twenty-Five
Million Dollars ($25,000,000) at any one time.
(d) There shall be no more than ten (10) Letters of Credit
outstanding at any one time.
47
<PAGE>
(e) In the event of any request for a drawing under any Letter of
Credit by the beneficiary thereunder, the Fronting Bank shall notify the
Borrower and the Administrative Agent (and the Administrative Agent shall notify
each Bank thereof) on or before the date on which the Fronting Bank intends to
honor such drawing, and, except as provided in this subsection (e), the Borrower
shall reimburse the Fronting Bank, in immediately available funds, on the same
day on which such drawing is honored in an amount equal to the amount of such
drawing. Notwithstanding anything contained herein to the contrary, however,
unless the Borrower shall have notified the Administrative Agent, and the
Fronting Bank prior to 11:00 a.m. Pittsburgh time on the Domestic Business Day
immediately prior to the date of such drawing that the Borrower intends to
reimburse the Fronting Bank for the amount of such drawing with funds other than
the proceeds of the Loans, the Borrower shall be deemed to have timely given a
Notice of Borrowing pursuant to Section 2.2 to the Administrative Agent,
requesting a Borrowing of Base Rate Loans on the date on which such drawing is
honored and in an amount equal to the amount of such drawing. Each Bank (other
than the Fronting Bank) shall, in accordance with Section 2.4 (b), make
available its pro rata share of such Borrowing to the Administrative Agent, the
proceeds of which shall be applied directly by the Administrative Agent to
reimburse the Fronting Bank for the amount of such draw. In the event that any
such Bank fails to make available to the Fronting Bank the amount of such Bank's
pro rata share on the date of a drawing, the Fronting Bank shall be entitled to
recover such amount on demand from such Bank together with interest at the
Federal Funds Rate commencing on the date such drawing is honored, and the
provisions of Section 9.16 shall otherwise apply to such failure.
(f) If after the date hereof, any change in any law or regulation or
in the interpretation thereof by any court or administrative or governmental
authority charged with the administration thereof shall either (i) impose,
modify or deem applicable any reserve, special deposit or similar requirement
against letters of credit issued by, or assets held by, or deposits in or for
the account of, or participations in any letter of credit, upon any Bank
(including the Fronting Bank) or (ii) impose on any Bank any other condition
regarding this Agreement or such Bank (including the Fronting Bank) as it
pertains to the Letters of Credit or any participation therein and the result of
any event referred to in the preceding clause (i) or (ii) shall be to increase
by an amount deemed by the Fronting Bank or such Bank to be material, the cost
to the Fronting Bank or any Bank of issuing or maintaining any Letter of Credit
or participating therein, then the Borrower shall pay to the Fronting Bank or
such Bank, within fifteen (15) days after written demand by such Bank (with a
copy to the Administrative Agent) , which demand shall be accompanied by a
certificate showing, in reasonable detail, the calculation of such amount or
amounts, such additional amounts as shall be required to compensate the Fronting
Bank or such Bank for such increased costs or reduction in amounts received or
receivable hereunder. Each Bank will promptly notify the Borrower and the
Administrative Agent of any event of which it has knowledge, occurring after the
date hereof, which will entitle such Bank to compensation pursuant to this
Section 2.16 and will designate a different Applicable Lending Office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the reasonable judgment of such Bank, be otherwise
disadvantageous to such Bank. A certificate of any Bank claiming compensation
under this Section 2.16 and setting forth a reasonably detailed calculation of
the additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of demonstrable error. In determining such amount, such Bank may
use any reasonable averaging and attribution methods.
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(g) The Borrower hereby agrees to protect, indemnify, pay and save
the Fronting Bank harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
attorneys' fees and disbursements) which the Fronting Bank may incur or be
subject to as a result of (i) the issuance of the Letters of Credit, other than
to the extent of the bad faith, gross negligence or wilful misconduct of the
Fronting Bank or (ii) the failure of the Fronting Bank to honor a drawing under
any Letter of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
Governmental Authority (collectively, "Governmental Acts"), other than to the
extent of the bad faith, gross negligence or wilful misconduct of the Fronting
Bank. As between the Borrower and the Fronting Bank, the Borrower assumes all
risks of the acts and omissions of any beneficiary with respect to its use, or
misuse of, the Letters of Credit issued by the Fronting Bank. In furtherance
and not in limitation of the foregoing, the Fronting Bank shall not be
responsible (i) for the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection with the
application for and issuance of such Letters of Credit, even if it should in
fact prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (ii) for the validity or insufficiency of any instrument
transferring or assigning or purporting to transfer or assign any such Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; (iii) for
failure of the beneficiary of any such Letter of Credit to comply fully with
conditions required in order to draw upon such Letter of Credit, other than as a
result of the bad faith, gross negligence or wilful misconduct of the Fronting
Bank; (iv) for errors, omissions, interruptions or delays in transmission or
delivery of any message, by mail, cable, telegraph, telex, facsimile
transmission, or otherwise, unless the result of the bad faith, gross negligence
or wilful misconduct of the Fronting Bank; (v) for errors in interpretation of
any technical terms, unless the result of the bad faith, gross negligence or
wilful misconduct of the Fronting Bank; (vi) for any loss or delay in the
transmission or otherwise of any documents required in order to make a drawing
under any such Letter of Credit or of the proceeds thereof; (vii) for the
misapplication by the beneficiary of any such Letter of Credit of the proceeds
of such Letter of Credit; and (viii) for any consequence arising from causes
beyond the control of the Fronting Bank, including any Government Acts, in each
case other than to the extent of the bad faith, gross negligence or willful
misconduct of the Fronting Bank. None of the above shall affect, impair or
prevent the vesting of the Fronting Bank's rights and powers hereunder. In
furtherance and not in limitation of the specific provisions hereinabove set
forth, any action taken or omitted by the Fronting Bank under or in connection
with the Letters of Credit issued by it or the related certificates, if taken or
omitted in good faith, shall not put the Fronting Bank under any resulting
liability to the Borrower; provided that, notwithstanding anything in the
foregoing to the contrary, the Fronting Bank will be liable to the Borrower for
any damages suffered by the Borrower or its Subsidiaries as a result of the
Fronting Bank's grossly negligent or wilful failure to pay under any Letter of
Credit after the presentation to it of a sight draft and certificates strictly
in compliance with the terms and conditions of the Letter of Credit.
(h) If the Fronting Bank or the Administrative Agent is required at
any time, pursuant to any bankruptcy, insolvency, liquidation or reorganization
law or otherwise, to return to the Borrower any reimbursement by the Borrower of
any drawing under any Letter of Credit, each Bank shall pay to the Fronting Bank
or the Administrative Agent, as the case may be, its pro rata share of such
payment, but without interest thereon unless the Fronting Bank or the
Administrative
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Agent is required to pay interest on such amounts to the person recovering such
payment, in which case with interest thereon, computed at the same rate, and on
the same basis, as the interest that the Fronting Bank or the Administrative
Agent is required to pay.
(i) The Letters of Credit issued under the Existing Credit Agreement
described on Schedule 2.16 shall be deemed to be Letters of Credit issued under
this Agreement.
SECTION 2.17. Letter of Credit Usage.
----------------------
The obligations of the Borrower under this Agreement in respect of any
Letter of Credit shall be unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement (as the same may be
amended from time to time) and any Letter of Credit Documents (as hereinafter
defined) under all circumstances, including, without limitation, to the extent
permitted by law, the following circumstances:
(a) any lack of validity or enforceability of any Letter of Credit or
any other agreement or instrument relating thereto (collectively, the "Letter of
Credit Documents") or any Loan Document;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the obligations of the Borrower in respect of the
Letters of Credit or any other amendment or waiver of or any consent by the
Borrower to departure from all or any of the Letter of Credit Documents or any
Loan Document; provided, that the Fronting Bank shall not consent to any such
change or amendment unless previously consented to in writing by the Borrower;
(c) any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any guaranty, for
all or any of the obligations of the Borrower in respect of the Letters of
Credit;
(d) the existence of any claim, set-off, defense or other right that
the Borrower may have at any time against any beneficiary or any transferee of a
Letter of Credit (or any Persons for whom any such beneficiary or any such
transferee may be acting), the Administrative Agent, the Fronting Bank or any
Bank (other than a defense based on the bad faith, gross negligence or wilful
misconduct of the Administrative Agent, the Fronting Bank or such Bank) or any
other Person, whether in connection with the Loan Documents, the transactions
contemplated hereby or by the Letters of Credit Documents or any unrelated
transaction;
(e) any draft or any other document presented under or in connection
with any Letter of Credit or other Loan Document proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect; provided, that payment by the
Fronting Bank under such Letter of Credit against presentation of such draft or
document shall not have been the result of the bad faith, gross negligence or
wilful misconduct of the Fronting Bank;
(f) payment by the Fronting Bank against presentation of a draft or
certificate that
50
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does not strictly comply with the terms of the Letter of Credit; provided, that
such payment shall not have been the result of the bad faith, gross negligence
or wilful misconduct of the Fronting Bank; and
(g) any other circumstance or happening whatsoever other than the
payment in full of all obligations hereunder in respect of any Letter of Credit
or any agreement or instrument relating to any Letter of Credit, whether or not
similar to any of the foregoing, that might otherwise constitute a defense
available to, or a discharge of, the Borrower; provided, that such other
circumstance or happening shall not have been the result of bad faith, gross
negligence or wilful misconduct of the Fronting Bank.
ARTICLE III
CONDITIONS
SECTION 3.1. Closing.
-------
The closing hereunder shall occur on the date when each of the following
conditions is satisfied (or waived by the Administrative Agent and the Banks),
each document to be dated the Closing Date unless otherwise indicated:
(a) the Borrower shall have executed and delivered to the
Administrative Agent a Revolving Credit Note and a Bid Rate Note for the account
of each Bank dated on or before the Closing Date complying with the provisions
of Section 2.5;
(b) the Borrower, the Administrative Agent and each of the Banks
shall have executed and delivered to the Borrower and the Administrative Agent a
duly executed original of this Agreement;
(c) each Consolidated Subsidiary owning a Qualifying Unencumbered
Property shall have executed and delivered to the Administrative Agent a duly
executed original of its Guaranty;
(d) each Consolidated Subsidiary which owns a Lien permitted under
subsection h of the definition of Permitted Liens shall have executed and
delivered to the Administrative Agent its original Guaranty and the original
Security Documents as well as the other materials required under such subsection
h;
(e) the Administrative Agent shall have received an opinion of Hogan
& Hartson L.L.P., counsel for the Borrower, acceptable to the Administrative
Agent, the Banks and their counsel;
(f) the Administrative Agent shall have received all documents the
Administrative Agent may reasonably request relating to the existence of the
Borrower, CESRRI and each Consolidated Subsidiary furnishing a Guaranty, the
authority for and the validity of this
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Agreement and the other Loan Documents, and any other matters relevant hereto,
all in form and substance reasonably satisfactory to the Administrative Agent.
Such documentation shall include, without limitation, the agreement of limited
partnership of the Borrower, as well as the certificate of limited partnership
of the Borrower, both as amended, modified or supplemented to the Closing Date,
certified to be true, correct and complete by a senior officer of the Borrower
as of a date not more than ten (10) days prior to the Closing Date, together
with a certificate of existence as to the Borrower from the Secretary of State
(or the equivalent thereof) of Delaware, to be dated not more than thirty (30)
days prior to the Closing Date, as well as the declaration of trust or articles
of incorporation of CESRRI, as amended, modified or supplemented to the Closing
Date, certified to be true, correct and complete by a senior officer of CESRRI
as of a date not more than ten (10) days prior to the Closing Date, together
with a good standing certificate as to CESRRI from the Secretary of State (or
the equivalent thereof) of Maryland, to be dated not more than thirty (30) days
prior to the Closing Date;
(g) the formation documents, good standing certificates and evidence
of due authorization for each Consolidated Subsidiary which is furnishing a
Guaranty;
(h) the Administrative Agent shall have received all certificates,
agreements and other documents and papers referred to in this Section 3.1 and
the Notice of Borrowing referred to in Section 2.2, if applicable, unless
otherwise specified, in sufficient counterparts, reasonably satisfactory in form
and substance to the Administrative Agent in its sole discretion;
(i) the Borrower shall have taken all actions required to authorize
the execution and delivery of this Agreement and the other Loan Documents and
the performance thereof by the Borrower;
(j) the Administrative Agent shall be reasonably satisfied that
neither the Borrower, CESRRI nor any Consolidated Subsidiary is subject to any
present or contingent environmental liability which could have a Material
Adverse Effect;
(k) the Administrative Agent shall have received, for its and any
other Bank's account, all fees due and payable pursuant to Section 2.8 hereof on
or before the Closing Date, and the fees and expenses accrued through the
Closing Date of Marcus & Shapira, LLP;
(l) the Administrative Agent shall have received copies of all
consents, licenses and approvals, if any, required in connection with the
execution, delivery and performance by the Borrower, CESRRI and the applicable
Consolidated Subsidiaries, and the validity and enforceability, of the Loan
Documents, or in connection with any of the transactions contemplated thereby,
and such consents, licenses and approvals shall be in full force and effect;
(m) the Administrative Agent shall have received the audited
financial statements of the Borrower and its Consolidated Subsidiaries and of
CESRRI for the fiscal year ending December 31, 1996 and the interim financial
statements of the Borrower and its Consolidated Subsidiaries and of CESRRI for
the period ending September 30, 1997;
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(n) no Default or Event of Default shall have occurred;
(o) no event, act or condition shall have occurred, which in the
reasonable judgment of the Administrative Agent, or the Required Banks, as the
case may be, has or is likely to have a Material Adverse Effect;
(p) the Administrative Agent shall have received a certification from
the Borrower in the form of Exhibit K with respect to the Qualifying
Unencumbered Properties listed on Exhibit F, and such other information with
respect to such Properties as the Administrative Agent shall reasonably request;
and
(q) the Administrative Agent shall have received a current Compliance
Certificate from the Borrower.
SECTION 3.2. Borrowings.
----------
The obligation of any Bank to make a Loan or to participate in any Letter
of Credit issued by the Fronting Bank and the obligation of the Fronting Bank to
issue a Letter of Credit on the occasion of any Borrowing is subject to the
satisfaction of the following conditions:
(a) receipt by the Administrative Agent of a Notice of Borrowing as
required by Section 2.2 or a Notice of Money Market Borrowing as required by
Section 2.3 or a request to cause a Fronting Bank to issue a Letter of Credit
pursuant to Section 2.16;
(b) immediately after such Borrowing, the aggregate outstanding
principal amount of the Loans plus the Letter of Credit Usage will not exceed
the lesser of the aggregate amount of the Commitments or the Loan Availability;
(c) immediately before and after such Borrowing or issuance of any
Letter of Credit, no Default or Event of Default shall have occurred and be
continuing both before and after giving effect to the making of such Loans;
(d) the representations and warranties of the Borrower contained in
this Agreement (other than representations and warranties which expressly speak
as of a different date) shall be true and correct in all material respects on
and as of the date of such Borrowing both before and after giving effect to the
making of such Loans;
(e) no law or regulation shall have been adopted, no order, judgment
or decree of any governmental authority shall have been issued, and no
litigation shall be pending, which does or seeks to enjoin, prohibit or
restrain, the making or repayment of the Loans, the issuance of any Letter of
Credit or the consummation of the transactions contemplated by this Agreement;
and
(f) no event, act or condition shall have occurred after the Closing
Date which, in the reasonable judgment of the Administrative Agent, or the
Required Banks, as the case may be, has had or is likely to have a Material
Adverse Effect;
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Each Borrowing hereunder or acceptance of a Letter of Credit issued hereunder
shall be deemed to be a representation and warranty by the Borrower on the date
of such Borrowing as to the facts specified in clauses (b), (c), (d), (e) and
(f) (to the extent that Borrower is or should have been aware of any Material
Adverse Effect) of this Section 3.2, except as otherwise disclosed in writing by
Borrower to the Banks. Notwithstanding anything to the contrary, no Borrowing
shall be permitted if such Borrowing would cause Borrower to fail to be in
compliance with any of the covenants contained in this Agreement or in any of
the other Loan Documents.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Administrative Agent, and each of the other Banks
which is or may become a party to this Agreement to make the Loans, the Borrower
makes the following representations and warranties as of the Closing Date. Such
representations and warranties shall survive the effectiveness of this
Agreement, the execution and delivery of the other Loan Documents and the making
of the Loans.
SECTION 4.1. Existence and Power.
-------------------
The Borrower is a limited partnership, duly formed and validly existing as
a limited partnership under the laws of the State of Delaware and has all powers
and all material governmental licenses, authorizations, consents and approvals
required to own its property and assets and carry on its business as now
conducted or as it presently proposes to conduct and has been duly qualified and
is in good standing in every jurisdiction in which the failure to be so
qualified and/or in good standing is likely to have a Material Adverse Effect.
CESRRI is a real estate investment trust or corporation, duly formed, validly
existing and in good standing as a real estate investment trust or a corporation
under the laws of the jurisdiction in which it is organized and has all powers
and all material governmental licenses, authorizations, consents and approvals
required to own its property and assets and carry on its business as now
conducted or as it presently proposes to conduct and has been duly qualified and
is in good standing in every jurisdiction in which the failure to be so
qualified and/or in good standing is likely to have a Material Adverse Effect.
SECTION 4.2. Power and Authority.
-------------------
The Borrower has the partnership power and authority to execute, deliver
and carry out the terms and provisions of each of the Loan Documents to which it
is a party and has taken all necessary partnership action, if any, to authorize
the execution and delivery on behalf of the Borrower and the performance by the
Borrower of such Loan Documents. The Borrower has duly executed and delivered
each Loan Document to which it is a party in accordance with the terms of this
Agreement, and each such Loan Document constitutes the legal, valid and binding
obligation of the Borrower, enforceable in accordance with its terms, except as
enforceability may be limited by applicable insolvency, bankruptcy or other laws
affecting creditors rights generally, or general principles of equity, whether
such enforceability is considered in a proceeding in equity or at law. CESRRI
has the power and authority, as general partner of the Borrower, to execute,
deliver and
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carry out the terms and provisions of each of the Loan Documents on behalf of
the Borrower to which the Borrower is a party and has taken all necessary action
to authorize, as general partner of the Borrower, the execution and delivery on
behalf of the Borrower and the performance by the Borrower of such Loan
Documents. The Borrower has obtained all consents and authorizations required
pursuant to the terms of any indenture, mortgage, deed of trust or other
material agreement to which it or any of its Consolidated Subsidiaries is a
party as may be necessary to allow Borrower and the Consolidated Subsidiaries to
lawfully execute, deliver and perform their obligations under the Loan Documents
to which they are parties.
SECTION 4.3. No Violation.
------------
Neither the execution, delivery or performance by or on behalf of the
Borrower of the Loan Documents to which it is a party, nor compliance by the
Borrower with the terms and provisions thereof nor the consummation of the
transactions contemplated by the Loan Documents, (i) will materially contravene
any applicable provision of any law, statute, rule, regulation, order, writ,
injunction or decree of any court or governmental instrumentality, (ii) will
materially conflict with or result in any breach of, any of the terms,
covenants, conditions or provisions of, or constitute a default under, or result
in the creation or imposition of (or the obligation to create or impose) any
Lien upon any of the property or assets of the Borrower or any of its
Consolidated Subsidiaries pursuant to the terms of any indenture, mortgage, deed
of trust, or other agreement or other instrument to which the Borrower (or of
any partnership of which the Borrower is a partner) or any of its Consolidated
Subsidiaries is a party or by which it or any of its property or assets is bound
or to which it is subject, or (iii) will cause a material default by the
Borrower under any organizational document of any person in which the Borrower
has an interest, or cause a material default under the Borrower's agreement or
certificate of limited partnership, the consequences of which conflict, breach
or default would have a Material Adverse Effect, or result in or require the
creation or imposition of any material Lien whatsoever upon any Property (except
as contemplated herein).
SECTION 4.4. Financial Information.
---------------------
(a) The consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries, dated as of December 31, 1996, and the related
consolidated statements of Borrower's financial position for the fiscal year
then ended, reported on by Arthur Andersen LLP, a copy of which has been
delivered to each of the Banks, fairly present, in conformity with GAAP, the
consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such fiscal year.
(b) The consolidated balance sheet of CESRRI, dated as of December
31, 1996, and the related consolidated statements of CESRRI's financial position
for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth
in the CESRRI 1996 Form 10-K, a copy of which has been delivered to each of the
Banks, fairly present, in conformity with GAAP, the consolidated financial
position of CESRRI and its Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for such fiscal year.
(c) The consolidated balance sheets of CESRRI, the Borrower and
Consolidated
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Subsidiaries for the quarter ending as of September 30, 1997, and the related
consolidated statements of Borrower's and CESRRI's operations and consolidated
statements of Borrower's and CESRRI's cash flow for such quarter and the portion
of Borrower's and CESRRI's fiscal year ended on such date fairly present the
financial condition of CESRRI and the Borrower on a consolidated basis as of the
date thereof (subject to normal year-end adjustments) and the results of their
operations and cash flows, on a consolidated basis, for the period then ended.
(d) Since September 30, 1997, nothing has occurred having a Material
Adverse Effect.
SECTION 4.5. Litigation.
----------
Except as set forth on Schedule 4.5 attached hereto, there is no action,
suit or proceeding pending against, or to the knowledge of the Borrower
threatened against or affecting, (i) the Borrower, CESRRI or any of their
Consolidated Subsidiaries, (ii) the Loan Documents or any of the transactions
contemplated by the Loan Documents or (iii) any of their assets, before any
court or arbitrator or any governmental body, agency or official in which there
is a reasonable likelihood of an adverse decision which could, individually, or
in the aggregate have a Material Adverse Effect or which in any manner draws
into question the validity of this Agreement or the other Loan Documents.
SECTION 4.6. Compliance with ERISA.
---------------------
(a) As of the date hereof, except as set forth on Schedule 4.6
attached hereto, Borrower is not a member of any Plan or Multiemployer Plan or
any other Benefit Arrangement.
(b) The transactions contemplated by the Loan Documents will not
constitute a nonexempt prohibited transaction (as such term is defined in
Section 4975 of the Code or Section 406 of ERISA) that could subject the
Administrative Agent, or the Banks to any tax or penalty or prohibited
transactions imposed under Section 4975 of the Code or Section 502(i) of ERISA.
SECTION 4.7. Environmental Matters.
---------------------
Except as set forth on Schedule 4.7, to the best of Borrower's knowledge,
(i) the operations of Borrower and each Consolidated Subsidiary comply in all
material respects with all Environmental Laws; (ii) none of Borrower's or any
Consolidated Subsidiary's present Properties or operations are subject to any
Environmental Claim or Materials of Environmental Concern which would have a
Material Adverse Effect on any such Person; (iii) as of the date hereof, neither
Borrower, nor any Consolidated Subsidiary has filed any notice under applicable
Environmental Laws reporting a release of a Materials of Environmental Concern
into the environment in violation of any Environmental Laws, except as the same
may have been heretofore remedied; (iv) there is not now on or in the Properties
of Borrower or any Consolidated Subsidiary any Materials of Environmental
Concern (except in compliance in all material respects with all applicable
Environmental Laws); and (v) as of the date hereof, neither Borrower, nor any
Consolidated
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Subsidiary has received any notice or claim to the effect that it is or may be
subject to any Environmental Claim.
SECTION 4.8. Taxes.
-----
As of the date hereof, United States Federal income tax returns of the
Borrower, CESRRI and their Consolidated Subsidiaries have been prepared and
filed through the taxable year ended December 31, 1996. The Borrower, CESRRI
and their Consolidated Subsidiaries have filed all United States Federal income
tax returns and all other material tax returns which are required to be filed by
them and have paid all taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower, CESRRI or any Consolidated Subsidiary,
except such taxes, if any, as are reserved against in accordance with GAAP, such
taxes as are being contested in good faith by appropriate proceedings or such
taxes, the failure to make payment of which when due and payable will not have,
in the aggregate, a Material Adverse Effect. The charges, accruals and reserves
on the books of the Borrower, CESRRI and their Consolidated Subsidiaries in
respect of taxes or other governmental charges are, in the opinion of the
Borrower, adequate.
SECTION 4.9. [Intentionally Deleted].
SECTION 4.10. Solvency.
--------
On the Closing Date and after giving effect to the transactions
contemplated by the Loan Documents occurring on the Closing Date, the Borrower
and each Consolidated Subsidiary furnishing a Guaranty pursuant to this
Agreement will be Solvent.
SECTION 4.11. Use of Proceeds; Margin Regulations.
-----------------------------------
All proceeds of the Loans will be used by the Borrower only in accordance
with the provisions hereof. No part of the proceeds of any Loan will be used by
the Borrower to purchase or carry any Margin Stock or to extend credit to others
for the purpose of purchasing or carrying any Margin Stock in any manner that
might violate the provisions of Regulations G, T, U or X of the Federal Reserve
Board. Neither the making of any Loan nor the use of the proceeds thereof will
violate or be inconsistent with the provisions of Regulations G, T, U or X of
the Federal Reserve Board.
SECTION 4.12. Governmental Approvals.
----------------------
No order, consent, approval, license, authorization, or validation of, or
filing, recording or registration with, or exemption by, any governmental or
public body or authority, or any subdivision thereof, is required to authorize,
or is required in connection with the execution, delivery and performance of any
Loan Document or the consummation of any of the transactions contemplated
thereby other than those that have already been duly made or obtained and remain
in full force and effect or those which, if not made or obtained, would not have
a Material Adverse Effect.
SECTION 4.13. Investment Company Act; Public Utility Holding Company Act.
----------------------------------------------------------
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Neither the Borrower, CESRRI nor any Consolidated Subsidiary is (x) an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended, (y) a
"holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of either a "holding company" or a "subsidiary company" within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or (z)
subject to any other federal or state law or regulation which purports to
restrict or regulate its ability to borrow money.
SECTION 4.14. Principal Offices.
-----------------
As of the Closing Date, the principal office, chief executive office and
principal place of business of the Borrower is 2345 Crystal Drive, Arlington,
Virginia 22202.
SECTION 4.15. REIT Status.
-----------
For the fiscal year ended December 31, 1997, CESRRI qualified and CESRRI
intends to continue to qualify as a real estate investment trust under the Code.
SECTION 4.16. Patents, Trademarks, etc.
------------------------
The Borrower has obtained and holds in full force and effect, or has the
right to use, all patents, trademarks, servicemarks, trade names, copyrights and
other such rights, free from burdensome restrictions, which are necessary for
the operation of its business as presently conducted, the impairment of which is
likely to have a Material Adverse Effect.
SECTION 4.17. Ownership of Property.
---------------------
Schedule 4.17 attached hereto and made a part hereof sets forth all the
real property owned or ground leased by the Borrower and Persons in which the
Borrower, directly or indirectly, owns an interest as of the Closing Date. As
of the Closing Date, the Borrower and such Persons have good and insurable fee
simple title (or leasehold title if so designated on Schedule 4.17) to all of
such real property, subject to Permitted Liens. As of the date of this
Agreement, there are no mortgages, deeds of trust, indentures, debt instruments
or other agreements creating a Lien against any of the Real Property Assets
except as disclosed on Schedule 4.17.
SECTION 4.18. No Default.
----------
No Event of Default or, to the best of the Borrower's knowledge, Default
exists under or with respect to any Loan Document and the Borrower is not in
default in any material respect beyond any applicable grace period under or with
respect to any other material agreement, instrument or undertaking to which it
is a party or by which it or any of its property is bound in any respect, the
existence of which Event of Default or Default is likely to result in a Material
Adverse Effect.
SECTION 4.19. Licenses, etc.
-------------
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The Borrower has obtained and does hold in full force and effect, all
franchises, licenses, permits, certificates, authorizations, qualifications,
accreditation, easements, rights of way and other consents and approvals which
are necessary for the operation of its businesses as presently conducted, the
absence of which is likely to have a Material Adverse Effect.
SECTION 4.20. Compliance With Law.
-------------------
To the Borrower's knowledge, the Borrower and each of the Real Property
Assets are in compliance with all laws, rules, regulations, orders, judgments,
writs and decrees, including, without limitation, all building and zoning
ordinances and codes, the failure to comply with which is likely to have a
Material Adverse Effect.
SECTION 4.21. No Burdensome Restrictions.
--------------------------
Except as may have been disclosed by the Borrower in writing to the Banks,
Borrower is not a party to any agreement or instrument or subject to any other
obligation or any charter or corporate or partnership restriction, as the case
may be, which, individually or in the aggregate, is likely to have a Material
Adverse Effect.
SECTION 4.22. Brokers' Fees.
-------------
The Borrower has not dealt with any broker or finder with respect to the
transactions contemplated by this Agreement or otherwise in connection with this
Agreement, and the Borrower has not done any act, had any negotiations or
conversation, or made any agreements or promises which will in any way create or
give rise to any obligation or liability for the payment by the Borrower or the
Banks of any brokerage fee, charge, commission or other compensation to any
party with respect to the transactions contemplated by the Loan Documents, other
than the fees payable to the Administrative Agent and the Banks.
SECTION 4.23. Labor Matters.
-------------
As of the date hereof, there are no collective bargaining agreements or
Multiemployer Plans covering the employees of the Borrower (except for
agreements between Consolidated Engineering Services, Inc., and the
International Union of Operating Engineers, the International Brotherhood of
Electrical Workers and the United Association of Journeymen and Apprentices of
the Plumbing and Pipe Fitting Industry of the United States and Canada) and, as
of the date hereof, the Borrower has not suffered any strikes, walkouts, work
stoppages or other material labor difficulty within the last five years.
SECTION 4.24. Insurance.
---------
The Borrower currently maintains insurance at 100% replacement cost
insurance coverage (subject to customary deductibles) in respect of each of the
Real Property Assets, as well as commercial general liability insurance
(including "builders' risk" where applicable) against claims for personal and
bodily injury and/or death, to one or more persons, or property damage, as well
as
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workers compensation insurance, in each case with respect to liability and
casualty insurance with insurers having an A.M. Best policyholders rating of not
less than A-VII in amounts that a prudent owner of assets such as the Real
Property Assets would maintain.
SECTION 4.25. Organizational Documents.
------------------------
The documents delivered pursuant to Section 3.1(f) constitute, as of the
Closing Date, all of the organizational documents (together with all amendments
and modifications thereof) of the Borrower and CESRRI. The Borrower represents
that it has delivered to the Administrative Agent true, correct and complete
copies of each of the documents set forth in this Section 4.25.
SECTION 4.26. Qualifying Unencumbered Properties.
----------------------------------
As of the date hereof, each Property listed on Exhibit F is a Qualifying
Unencumbered Property, as defined herein.
SECTION 4.27. Ownership of Borrower and Consolidated Subsidiaries.
---------------------------------------------------
Schedule 4.27 sets forth, as of the date hereof, the general partners of
--------------
Borrower and the general partners, limited partners, and members of each
Consolidated Subsidiary that is a limited partnership or a limited liability
company and their respective ownership percentages and, as of the date hereof,
there are no other partnership or membership interests outstanding. Except as
set forth or referred to in the partnership agreement or similar organizational
document of Borrower or each Consolidated Subsidiary, as of the date hereof, no
partnership or membership interest (or any securities, instruments, warrants,
option or purchase rights, conversion or exchange rights, calls, commitments or
claims of any character convertible into or exercisable for partnership
interests) of any Consolidated Subsidiary is subject to issuance under any
security, instrument, warrant, option or purchase rights, conversion or exchange
rights, call, commitment or claim of any right, title or interest therein or
thereto. All of the partnership or membership interests in Borrower and each
Consolidated Subsidiary have been issued in compliance, in all material
respects, with all applicable Requirements of Law.
SECTION 4.28. Disclosure.
----------
The representations and warranties of Borrower contained in the Loan
Documents and all certificates, financial statements and other documents
delivered to the Administrative Agent in connection therewith, do not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading. As of the
Closing Date, Borrower has not intentionally withheld any material fact from the
Administrative Agent and the Banks in regard to any matter raised in the Loan
Documents. Notwithstanding the foregoing, with respect to projections of
Borrower's future performance, such representations and warranties are made in
good faith and to the best judgment of Borrower.
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SECTION 4.29. CESRRI's Ownership Interests.
----------------------------
CESSRI does not own or have any interest in any Property or any other
Person, other than its general and limited partnership interests in Borrower and
its interests in wholly-owned subsidiary corporations whose sole assets are
partnership interests of one percent (1%) or less in partnerships in which the
Borrower directly or indirectly owns a ninety-nine percent (99%) interest.
ARTICLE V
AFFIRMATIVE AND NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any Bank has any
Commitment hereunder or any Obligations remain unpaid:
SECTION 5.1. Information.
-----------
The Borrower will deliver to each of the Banks each of the financial
statements and other certificates, notices and other materials described on
Schedule 5.1 on the dates required on Schedule 5.1.
SECTION 5.2. Payment of Obligations.
----------------------
The Borrower, and each of its Consolidated Subsidiaries will each pay and
discharge, at or before maturity, all its respective material obligations and
liabilities including, without limitation, any obligation pursuant to any
agreement by which it or any of its properties is bound, in each case where the
failure to so pay or discharge such obligations or liabilities is likely to
result in a Material Adverse Effect, and will maintain in accordance with GAAP,
appropriate reserves for the accrual of any of the same.
SECTION 5.3. Maintenance of Property; Insurance; Leases.
------------------------------------------
(a) The Borrower will keep, and will cause each Consolidated
Subsidiary to keep, all property useful and necessary in its business, including
without limitation the Real Property Assets (for so long as it constitutes Real
Property Assets), in good repair, working order and condition, ordinary wear and
tear excepted, in each case where the failure to so maintain and repair will
have a Material Adverse Effect.
(b) The Borrower shall maintain, or cause to be maintained, insurance
comparable to that described in Section 4.24 hereof with insurers meeting the
qualifications described therein, which insurance shall in any event not provide
for less coverage than insurance customarily carried by owners of properties
similar to, and in the same locations as, the Real Property Assets. The
Borrower will deliver to the Administrative Agent upon the reasonable request of
the Administrative Agent from time to time (i) full information as to the
insurance carried, (ii) within five (5) days of receipt of notice from any
insurer a copy of any notice of cancellation or material change in coverage
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from that existing on the date of this Agreement and (iii) forthwith, notice of
any cancellation or nonrenewal of coverage by the Borrower.
SECTION 5.4. Conduct of Business and Maintenance of Existence.
----------------------------------- ------------
The Borrower and CESRRI will continue to engage in business of the same
general type as now conducted by the Borrower and CESRRI, and each will
preserve, renew and keep in full force and effect, its partnership, corporate or
trust existence, as applicable, and its respective rights, privileges and
franchises necessary for the normal conduct of business unless the failure to
maintain such rights and franchises does not have a Material Adverse Effect.
SECTION 5.5. Compliance with Laws.
--------------------
The Borrower will and will cause its Subsidiaries to comply in all
material respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without limitation,
Environmental Laws, and all zoning and building codes with respect to the Real
Property Assets and ERISA and the rules and regulations thereunder and all
federal securities laws) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings or where the failure to do so
will not have a Material Adverse Effect or expose the Administrative Agent or
any of the Banks to any material liability therefor.
SECTION 5.6. Inspection of Property, Books and Records.
--------------------------------- -------
The Borrower will keep proper books of record and account in which full,
true and correct entries shall be made of all dealings and transactions in
relation to its business and activities in conformity with GAAP, modified as
required by this Agreement and applicable law, and will permit representatives
of any Bank at such Bank's expense to visit and inspect any of its properties,
including without limitation the Real Property Assets, to examine and make
abstracts from any of its books and records and to discuss its affairs, finances
and accounts with its officers and independent public accountants, all at such
reasonable times during normal business hours, upon reasonable prior notice and
as often as may reasonably be desired. Administrative Agent shall coordinate
any such visit or inspection by any Bank requesting any such visit or
inspection.
SECTION 5.7. Existence.
---------
The Borrower shall do or cause to be done, all things necessary to
preserve and keep in full force and effect its, CESRRI's and their Consolidated
Subsidiaries, existence and its patents, trademarks, servicemarks, tradenames,
copyrights, franchises, licenses, permits, certificates, authorizations,
qualifications, accreditation, easements, rights of way and other rights,
consents and approvals the nonexistence of which is likely to have a Material
Adverse Effect.
SECTION 5.8. Financial Covenants.
-------------------
(a) EBITDA to Fixed Charges.
-----------------------
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The ratio of EBITDA to Fixed Charges shall not be less than 1.75:1.
(b) Implied Market Equity.
---------------------
Borrower Implied Market Equity shall not be less than Nine Hundred Million
Dollars ($900,000,000) plus seventy-five percent (75%) of Net Offering Proceeds
received by CESRRI or Borrower after the Effective Date.
(c) Leverage Ratio.
---------------
The Leverage Ratio shall not exceed fifty-five percent (55%).
(d) EBITDA to Interest Expense Ratio.
--------------------------------
The ratio of EBITDA to Interest Expense shall not be less than 2.0:1.
(e) Unencumbered NOI to Unsecured Debt Service Ratio.
------------------------------------------------
The ratio of Unencumbered NOI to Unsecured Debt Service shall not be less
than 2.0:1. For the purposes of calculating Unencumbered NOI in connection with
this ratio, Unencumbered NOI shall be calculated on an annualized basis based
upon the Qualifying Unencumbered Properties as of the end of the applicable
Fiscal Quarter, or other date of determination.
(f) Distributions.
-------------
(i) Subject to Section 5.8(f)(ii) below, aggregate distributions to
holders of all common and preferred OP Units of Borrower shall not exceed the
greater of (i) ninety-five percent (95%) (the "Distribution Limitation") of Cash
Available for Distribution for the four (4) consecutive Fiscal Quarters ending
on the last day of each Fiscal Quarter, or (ii) the minimum amount that must be
distributed to all partners of Borrower so that CESRRI will receive sufficient
distributions to enable it to distribute to its shareholders the amount required
to remain qualified as a real estate investment trust as defined in Section 856
of the Internal Revenue Code (or any successor provision thereto).
For purpose of this Section 5.8, the term "distributions" shall mean and
include all dividends and other distributions to, and the repurchase of stock
or limited partnership interests from, the holder of any equity interests in
Borrower or CESRRI. Notwithstanding the above, distributions shall not include
payments of cash in connection with the redemption or repurchase of OP Units
where the Borrower is obligated to any Person (other than CESRRI) to do so in
accordance with the provisions of Borrower's limited partnership agreement or
the purchase of stock for the purpose of obtaining the consideration to be
provided to a Person transferring a Property to the Borrower or a Consolidated
Subsidiary where the market price of such stock is below the value attributed to
such stock in the purchase agreement.
(ii) Aggregate distributions during the continuance of any Event of
Default shall
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not exceed the amount described in clause (ii) of Section 5.8(f)(i) above,
provided that the parties hereto expressly acknowledge that this Section
5.8(f)(ii) shall in no event limit or restrict in any way any of Administrative
Agent's or any Bank's rights, remedies or recourse under this Agreement or any
other Loan Document.
(g) Permitted Investments
---------------------
Notwithstanding the limitations set forth in Section 5.10, Borrower may
make the following investments ("Permitted Investments"), so long as (a) the
aggregate amount of all Permitted Investments does not exceed, at any time and,
without duplication, fifteen percent (15%) of Market Value, and (b) the
aggregate amount of each of the following categories of Permitted Investments
does not exceed the following amounts unless approved by the Required Banks:
Permitted Investments Maximum Amount
--------------------- --------------
Land: Ten percent (10%) of Market Value.
Non-Apartment Properties: Ten percent (10%) of Market Value,
excluding the Worldgate Retail Property
and the Skyline Retail Property.
Securities: Ten percent (10%) of Market Value,
excluding the Securities of Smith
Realty Company, Consolidated
Engineering Services, Inc., Smith
Management Construction, Inc., and
Brandywine Associates.
Investment Mortgages: Ten percent (10%) of Market Value.
For purposes of this Section 5.8(g), the aggregate amount of Permitted
Investments and the amounts of Permitted Investments in any category will be
reduced by the applicable value of any Permitted Investment that is disposed of
or is no longer invested in a Permitted Investment. Investments in partnerships,
joint ventures and other non-public entities will be treated as investments in
the assets owned by such partnership, joint venture and other entities, provided
that Borrower owns in excess of fifty percent (50%) of any such partnership,
joint venture or other entity. The value of each asset used in the calculation
of the foregoing limitations shall be the value of such asset used in the
determination of Market Value.
(h) Properties under Development.
----------------------------
(i) The Borrower shall not permit the aggregate Budgeted Project Costs of
Properties under Development at any time to exceed twenty-five percent (25%) of
Market Value.
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(ii) The Borrower shall not permit the Property Purchase Contract
Obligations at any time to exceed fifteen percent (15%) of Market Value.
(i) Maximum Leverage on Unencumbered Assets.
---------------------------------------
At any time while CESRRI or Borrower does not maintain the Investment Grade
Ratings, Unsecured Debt shall not exceed fifty percent (50%) of Unencumbered
Asset Value. At any time while CESRRI or Borrower does maintain the Investment
Grade Ratings, Unsecured Debt shall not exceed fifty-five percent (55%) of
Unencumbered Asset Value.
(j) Secured Debt.
------------
(i) Until the earlier of (A) the date which is twelve (12) months
following the Effective Date, or (B) the date of the repayment in full of the
FNMA Mortgage Pool #1, Secured Debt shall be Non-Recourse Indebtedness, except
for Permitted Recourse Debt, and the ratio of Secured Debt to Market Value shall
not exceed forty percent (40%). If FNMA Mortgage Pool #1 shall be repaid in full
prior to the date which is twelve (12) months following the Effective Date, from
the date of such repayment until the date which is twelve (12) months following
the Effective Date, Secured Debt shall be Non-Recourse Indebtedness, except for
Permitted Recourse Debt, and the ratio of Secured Debt to Market Value shall not
exceed thirty-five percent (35%). Following the date which is twelve (12) months
following the Effective Date, Secured Debt shall be Non-Recourse Indebtedness,
except for Permitted Recourse Debt, and the ratio of Secured Debt to Market
Value shall not exceed thirty percent (30%).
(ii) The Borrower shall not permit Permitted Recourse Debt to exceed
fifteen percent (15%) of Market Value.
(k) [INTENTIONALLY OMITTED]
(l) Calculation.
-----------
Each of the foregoing ratios and financial requirements shall be calculated
as of the last day of each Fiscal Quarter, but the covenants contained in
subsections (b), (c), (e), (g), (h), (i) and (j) shall be satisfied, to the best
of Borrower's knowledge, at all times. For purposes of determining compliance
with subsections (a), (d), (e) and (f), the period covered thereby shall be the
immediately preceding four (4) Fiscal Quarters. When required under Section
2.4(a) in connection with a Notice of Borrowing, or under Section 2.3 in
connection with a Money Market Loan Request, or at such other times as Borrower
may elect, an updated Compliance Certificate shall be submitted by the Borrower
to the Administrative Agent for the sole purpose of providing revised
calculations of the covenants contained in Section 5.8(e) and (i) updated from
the calculation thereof in the last Compliance Certificate submitted prior
thereto reflecting the amount of the additional Borrowing and any other
additional Unsecured Debt incurred since the most recent Compliance Certificate
based upon the debt service applicable thereto as determined in accordance with
the definition of Unsecured Debt Service. In connection with the addition or
removal of a Qualifying Unencumbered Property
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or a transaction contemplated in Section 5.17, but only if required under
Section 5.14, an updated Compliance Certificate shall also be submitted by the
Borrower to the Administrative Agent for the sole purpose of providing revised
calculations of the covenants contained in Section 5.8(e) and (i) updated from
the calculation thereof in the last Compliance Certificate submitted prior
thereto reflecting a proforma calculation of Unencumbered NOI using the
available historical information for the applicable Qualifying Unencumbered
Property and the value thereof as determined in accordance with the definition
of Unencumbered Asset Value.
SECTION 5.9. Restriction on Fundamental Changes.
----------------------------------
(a) Neither the Borrower nor CESRRI shall enter into any merger or
consolidation, unless (i) the Borrower or CESRRI is the surviving entity (except
in the case of a merger solely for the purpose of changing the corporate status
of CESRRI to a real estate investment trust), (ii) the entity which is merged
into Borrower or CESRRI is predominantly in the commercial real estate business,
and (iii) the merger or consolidation does not have a Material Adverse Effect.
Neither the Borrower nor CESRRI shall liquidate, wind-up or dissolve (or suffer
any liquidation or dissolution), discontinue its business or convey, lease,
sell, transfer or otherwise dispose of, in one transaction or series of
transactions, all or substantially all of its business or property, whether now
or hereafter acquired. Nothing in this Section 5.9(a) shall be deemed to
prohibit the sale or leasing of portions of the Real Property Assets in the
ordinary course of business.
(b) The Borrower shall not amend its agreement of limited partnership
or other organizational documents in any manner that would be materially
adverse to the Banks without the Administrative Agent's consent, which shall not
be unreasonably withheld. CESRRI shall not amend its articles of incorporation,
by-laws, or other organizational documents in any manner that would be
materially adverse to the Banks without the Administrative Agent's consent,
which shall not be unreasonably withheld.
(c) The Borrower shall deliver to Administrative Agent copies of all
amendments to its agreement of limited partnership or to CESRRI's, articles of
incorporation or declaration of trust, by-laws, or other organizational
documents no less than thirty (30) days after the effective date of any such
amendment.
SECTION 5.10. Changes in Business.
-------------------
Neither the Borrower nor CESRRI shall enter into any business
which is substantially different from the ownership, operation and development
of primarily multifamily residential properties and the provision of services
relating to real estate property, including the businesses operated by the
Property Service Businesses. The Borrower shall carry on its business operations
through the Borrower and its Subsidiaries.
SECTION 5.11. Margin Stock.
------------
None of the proceeds of any Loan will be used, directly or indirectly, for
the purpose, whether immediate, incidental or ultimate, of buying or carrying
any Margin Stock in any manner that might
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violate the provisions of Regulations G, T, U or X of the Federal Reserve Board.
SECTION 5.12. Hedging Requirements.
--------------------
Within five (5) Domestic Business Days after the last day of each calendar
quarter, commencing March 31, 1998, the Borrower shall have in effect "Interest
Rate Hedges" on Borrower Debt so that Borrower's Floating Rate Indebtedness
shall not exceed twenty percent (20%) of Market Value. "Interest Rate Hedges"
shall mean interest rate exchange, collar, cap, swap, adjustable strike cap,
adjustable strike corridor or similar agreements, each of which (i) shall have a
minimum term ending on the then-applicable Maturity Date or, in the case of
loans pursuant to which interest shall accrue at a rate other than a fixed rate,
a term equal to the term of such floating rate loan (to the extent the term of
such floating rate loan is less than the period ending on the then-applicable
Maturity Date), (ii) shall have the effect of capping the interest rates covered
thereby at a rate equal to or lower than the Hedge Rate at the time of purchase
or execution, and (iii) shall be with the Administrative Agent or an Approved
Bank as the counterparty. The Borrower shall submit evidence of its compliance
with Interest Rate Hedges to the Administrative Agent together with the
certificate required to be delivered by the Borrower pursuant to Schedule
5.1(c).
SECTION 5.13. CESRRI Status.
-------------
(a) Status. CESRRI shall at all times (i) maintain at least one class
------
of common shares having trading privileges on the New York Stock Exchange, or
American Stock Exchange, or which is the subject of price quotations in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System and (ii) maintain its status as a self-
directed and self-administered real estate investment trust under the Code.
(b) Indebtedness. CESRRI shall not, and shall not permit any of its
------------
Subsidiaries to, directly or indirectly, create, incur, assume or otherwise
become or remain directly or indirectly liable with respect to, any
Indebtedness, except:
(1) the Obligations; and
(2) Indebtedness which, after giving effect thereto, may be
incurred or may remain outstanding without giving rise to an Event of
Default or Default under any provision of this Article V.
(c) Restriction on Fundamental Changes.
----------------------------------
(1) CESRRI shall not have an Investment in any Person other than
Borrower, and the interests identified on Schedule 5.13(c)(1) as being
owned by CESRRI.
(2) CESRRI shall not acquire an interest in any Property other
than Securities issued by Borrower, and the interests identified on
Schedule 5.13(c)(2).
(d) Offering and Debt Proceeds. CESRRI shall concurrently contribute
--------------------------
to the
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Borrower all Net Offering Proceeds and all CESRRI Debt Proceeds upon receipt
thereof by CESRRI.
(e) Disposal of Partnership Interests. CESRRI will not directly or
---------------------------------
indirectly convey, sell, transfer, assign, pledge or otherwise encumber or
dispose of any of its partnership interests in Borrower, except for the
reduction of CESRRI's interest in the Borrower arising from Borrower's issuance
of partnership interests in the Borrower or the retirement of preference units
by Borrower, and except for the redemption of OP Units in connection with the
repurchase or redemption of stock by CESRRI.
SECTION 5.14. Acceptance of Qualifying Unencumbered Properties
------------------------------------------------
(a) The Banks have accepted the Properties listed on Exhibit F as of the
Effective Date as Qualifying Unencumbered Properties. If the Borrower desires
to add a Property as a Qualifying Unencumbered Property, the Borrower shall so
notify the Administrative Agent in writing. To the extent that increased Loan
Availability is necessary in order for a Borrowing to be permitted, such
notification shall be delivered to the Administrative Agent at least five (5)
Domestic Business Days prior to the submission of the applicable Notice of
Borrowing or Money Market Loan Request. The Property will be accepted as a
Qualifying Unencumbered Property when the Borrower delivers to the
Administrative Agent a certificate that the Property is a Qualifying
Unencumbered Property in the form attached hereto as Exhibit K, as well as the
following in form and substance satisfactory to the Administrative Agent:
(i) with respect to any Property being acquired by Borrower or a
Consolidated Subsidiary, a copy of the relevant materials relating to such
Property submitted by the Borrower to its board of directors, executive
committee or investment committee, as applicable for their approval, or
such other materials as Borrower deems relevant, as well as a copy of the
environmental report and, if applicable, any ground lease affecting such
Property;
(ii) if required under Section 2.3 or 2.4(a), or if the Borrower
otherwise so elects, an updated Compliance Certificate as described in
Section 5.8(l); and
(iii) if such Property is owned or leased by a Consolidated
Subsidiary, a Guaranty and all of the documents required to be provided
under Section 3.1, with respect to a Guaranty to be furnished by a
Consolidated Subsidiary, if not previously delivered to the Administrative
Agent, and, if such Property is subject to a Lien permitted under
subsection h of the definition of Permitted Liens, a Guaranty and the
Security Documents from the Consolidated Subsidiary which owns such Lien,
and all of the documents required to be provided under Section 3.1 with
respect to a Guaranty to be furnished by a Consolidated Subsidiary.
Following receipt of the foregoing certificate documents and information,
the Administrative Agent shall review them as expeditiously as is reasonably
practicable under the circumstances but in any event within five (5) Domestic
Business Days of receipt of all such documents and information. If, following
such review, the Administrative Agent has confirmed that such Property
constitutes a
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Qualifying Unencumbered Property, the Administrative Agent will promptly send
copies of the applicable certificate concerning Qualifying Unencumbered Property
status and the related property information and, if applicable, copies of the
Compliance Certificate updating the calculation of the covenants contained in
Section 5.8(e) and (i), the Guaranty and the Security Documents, to the Banks.
If, following such review, the Administrative Agent determines that such
Property does not constitute a Qualifying Unencumbered Property or that
Administrative Agent does not have sufficient information or documents to
determine whether the Property constitutes a Qualifying Unencumbered Property ,
the Administrative Agent will promptly so notify the Borrower that the Property
shall not be deemed to be a Qualifying Unencumbered Property.
(b) If, following a determination by the Administrative Agent that a
Property does not constitute a Qualifying Unencumbered Property, the Borrower
shall so request that the Administrative Agent submit such Property to the Banks
for the approval by the Required Banks, the Administrative Agent will submit
such documents and information to the other Banks for their review. The
Borrower also shall have the right, while acknowledging that a Property does not
meet the standards of a Qualifying Unencumbered Property, to submit the
applicable documents and information described in subparagraph (a) above to the
Administrative Agent and the Banks, and request that such Property nevertheless
be accepted by the Required Banks as a Qualifying Unencumbered Property. Each
Bank shall notify the Administrative Agent whether it approves or rejects of the
designation of such Property as a Qualifying Unencumbered Property within ten
(10) Domestic Business Days of receipt of such documents and information. If a
Bank shall fail to so notify the Administrative Agent, then such Bank shall be
deemed to have accepted such Property. If, following such review, the Property
is approved by the Required Banks, such Property shall immediately become a
Qualifying Unencumbered Property. If, following such review, the Property is
rejected by the Required Banks, the Administrative Agent will promptly so notify
the Borrower.
(c) From time to time the Borrower may elect that a Property cease to be a
Qualifying Unencumbered Property. Such election shall be in writing and shall
be effective upon delivery to the Administrative Agent, provided that, if the
ceasing of such Property to constitute a Qualifying Unencumbered Property shall
result in a reduction in Loan Availability or result in a violation of any other
limitation affecting the Qualifying Unencumbered Properties, such election shall
be delivered to the Administrative Agent five (5) Domestic Business Days before
such election shall become effective. Such election shall become effective on
such fifth Domestic Business Day so long as:
(i) no Default or Event of Default shall have occurred and be
continuing both at the time of such election and immediately after giving
effect to such election; and
(ii) the Borrower shall have delivered to the Administrative Agent an
updated Compliance Certificate with such election in accordance with
Section 5.8(l) demonstrating on a pro forma basis that the Borrower will
remain in compliance with Section 2.1 and 5.8 (e) and (i) hereof after
giving effect to such request and any prepayment to be made and/or the
acceptance of any Property as an additional or replacement Qualifying
Unencumbered Property to be given concurrently with such request, and the
Administrative Agent shall have reviewed and accepted such updated
Compliance Certificate.
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(d) A Property shall cease to be included in the calculation of
Unencumbered Asset Value if it shall cease to be a Qualifying Unencumbered
Property.
SECTION 5.15. Payment of Taxes and Claims.
---------------------------
Borrower shall pay (i) all taxes, assessments and other governmental
charges imposed upon it or on any of its properties or assets or in respect of
any of its franchises, business, income or property before any penalty or
interest accrues thereon, the failure to make payment of which will have a
Material Adverse Effect on Borrower, and (ii) all claims (including, without
limitation, claims for labor, services, materials and supplies) for sums,
material in the aggregate to Borrow-er, which have become due and payable and
which by law have or may become a Lien other than a judgment lien upon any of
Borrower's properties or assets, prior to the time when any penalty or fine
shall be incurred with respect thereto.
SECTION 5.16. Maintenance of Permits, Etc.
----------------------------
Borrower will maintain in full force and effect all Permits, franchises,
patents, trademarks, trade names, copyrights, authorizations or other rights
necessary for the operation of its business, except where the failure to obtain
any of the foregoing would not have a Material Adverse Effect on Borrower; and
notify Administrative Agent in writing, promptly after learning thereof, of the
suspension, cancellation, revocation or discontinuance of or of any pending or
threatened action or proceeding seeking to suspend, cancel, revoke or
discontinue any material Permit, patent, trademark, trade name, copyright,
governmental approval, franchise, authorization or right, except where such
suspension, cancellation, revocation or discontinuance would not have a Material
Adverse Effect.
SECTION 5.17. Disposal of Consolidated Subsidiary Interests.
---------------------------------------------
Neither Borrower nor CESRRI will directly or indirectly convey, sell,
transfer, assign, pledge or otherwise encumber or dispose of any of its
partnership or membership interests, whether owned directly or indirectly
through other Persons, in any Consolidated Subsidiary at any time when such
Consolidated Subsidiary owns a Qualifying Unencumbered Property, unless, after
giving effect to such transaction, there is no Default or Event of Default
hereunder, including, without limitation, a breach of Section 5.8 hereof. Upon
any such sale, transfer, assignment, pledge, encumbrance or disposal in
accordance with this Section 5.17, each Qualifying Unencumbered Property owned
by the applicable Consolidated Subsidiary shall cease to be a Qualifying
Unencumbered Property. Borrower shall provide the Administrative Agent with an
updated Compliance Certificate pursuant to Section 5.8(1) demonstrating
Borrower's continued compliance prior to the consummation of any such
transaction.
SECTION 5.18. Environmental Liabilities.
-------------------------
Neither Borrower nor any of its Subsidiaries shall become subject to any
Environmental
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Claim which has a Material Adverse Effect, including any arising out of or
related to (i) the release or threatened release of any Material of
Environmental Concern into the environment, or any remedial action in response
thereto, or (ii) any violation of any Environmental Laws. Notwithstanding the
foregoing provision, the Borrower shall have the right to contest in good faith
any claim of violation of an Environmental Law by appropriate legal proceedings
and shall be entitled to postpone compliance with the obligation being contested
as long as (i) no Event of Default shall have occurred and be continuing, (ii)
the Borrower shall have given Administrative Agent prior written notice of the
commencement of such contest, (iii) noncompliance with such Environmental Law
shall not subject the Borrower or such Subsidiary to any criminal penalty or
subject Administrative Agent, or any Bank to pay any civil penalty or to
prosecution for a crime, and (iv) no portion of any Property material to
Borrower or its condition or prospects shall be in substantial danger of being
sold, forfeited or lost, by reason of such contest or the continued existence of
the matter being contested.
ARTICLE VI
DEFAULTS
SECTION 6.1. Events of Default.
-----------------
If one or more of the following events ("Events of Default") shall have
occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of any Loan,
or the Borrower shall fail to pay when due interest on any Loan or any fees or
any other amount payable hereunder and, except for the payments due on the
Maturity Date, the same shall continue for a period of ten (10) days after the
same becomes due;
(b) the Borrower or CESRRI, as applicable, shall fail to observe or
perform any covenant contained in Section 5.8, Section 5.9(a) or (b), or
Sections 5.10 to 5.13, inclusive;
(c) the Borrower or CESRRI, as applicable, shall fail to observe or
perform any covenant or agreement contained in this Agreement (other than those
covered by clauses (a), (b), (e), (f), (g), (h), (j), (n) or (o) of this Section
6.1) for thirty (30) days after written notice thereof has been given to the
Borrower by the Administrative Agent, or, if such default is of such a nature
that it cannot with reasonable effort be completely remedied within said period
of thirty (30) days, such additional period of time as may be reasonably
necessary to cure same, provided Borrower commences such cure within said thirty
(30) day period and diligently prosecutes same, until completion, but in no
event shall such extended period exceed ninety (90) days;
(d) any representation, warranty, certification or statement made by
the Borrower in this Agreement or in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made (or deemed to be made) and the
defect causing such representation or warranty to be incorrect when made (or
deemed to be made) is not removed within thirty (30) days after written notice
thereof from Administrative Agent to Borrower;
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(e) the Borrower, or any Subsidiary shall default in the payment when
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) of any amount owing in respect of any Recourse Debt (other than the
Obligations) for which the aggregate outstanding principal amount exceeds Five
Million Dollars ($5,000,000) and such default shall continue beyond the giving
of any required notice and the expiration of any applicable grace period and
such default has not been waived, in writing, by the holder of any such Recourse
Debt; or the Borrower, or any Subsidiary shall default in the performance or
observance of any obligation or condition with respect to any such Recourse Debt
or any other event shall occur or condition exist beyond the giving of any
required notice and the expiration of any applicable grace period, if the effect
of such default, event or condition is to accelerate the maturity of any such
Recourse Debt or to permit (without any further requirement of notice or lapse
of time) the holder or holders thereof, or any trustee or agent for such
holders, to accelerate the maturity of any such Recourse Debt;
(f) the Borrower, CESRRI or any Consolidated Subsidiary shall commence
a voluntary case or other voluntary proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any action to
authorize any of the foregoing;
(g) an involuntary case or other proceeding shall be commenced against
the Borrower, CESRRI or any Consolidated Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of ninety (90) days; or an order for relief shall be entered against the
Borrower, CESRRI or any Consolidated Subsidiary under the federal bankruptcy
laws as now or hereafter in effect;
(h) one or more final, non-appealable judgments or decrees in an
aggregate amount of Five Million Dollars ($5,000,000) or more shall be entered
by a court or courts of competent jurisdiction against the Borrower, CESRRI or
its Consolidated Subsidiaries (other than any judgment as to which, and only to
the extent, a reputable insurance company has acknowledged coverage of such
claim in writing) and (i) any such judgments or decrees shall not be stayed,
discharged, paid, bonded or vacated within thirty (30) days or (ii) enforcement
proceedings shall be commenced by any creditor on any such judgments or decrees
and not stayed or enjoined before having a Material Adverse Effect;
(i) there shall be a change in the majority of the directors or
trustees, as applicable, of CESRRI during any twelve (12) month period,
excluding any change in directors or trustees resulting from (x) the death or
disability of any director or trustee, or (y) satisfaction of any requirement
for the majority of the members of the board of directors or trustees of CESRRI
to
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qualify under applicable law as independent trustees or directors or (z) the
replacement of any director or trustee who is an officer or employee of CESRRI
or an affiliate of CESRRI with any other officer or employee of CESRRI or an
affiliate of CESRRI;
(j) any Person (including affiliates of such Person) or "group" (as
such term is defined in applicable federal securities laws and regulations)
shall acquire more than thirty percent (30%) of the common shares of CESRRI;
(k) [INTENTIONALLY OMITTED]
(1) if any Termination Event with respect to a Plan shall occur as a
result of which Termination Event or Events any member of the ERISA Group has
incurred or may incur any liability to the PBGC or any other Person and the sum
(determined as of the date of occurrence of such Termination Event) of the
insufficiency of such Plan and the insufficiency of any and all other Plans with
respect to which such a Termination Event shall occur and be continuing (or, in
the case of a Multiemployer Plan with respect to which a Termination Event
described in clause (ii) of the definition of Termination Event shall occur and
be continuing, the liability of the Borrower) is equal to or greater than Ten
Million Dollars ($10,000,000) and which the Administrative Agent reasonably
determines will have a Material Adverse Effect;
(m) if, any member of the ERISA Group shall commit a failure described
in Section 402(f)(1) of ERISA or Section 412(n)(1) of the Code and the amount of
the lien determined under Section 402(f)(3) of ERISA or Section 412(n)(3) of the
Code that could reasonably be expected to be imposed on any member of the ERISA
Group or their assets in respect of such failure shall be equal to or greater
than Ten Million Dollars ($10,000,000) and which the Administrative Agent
reasonably determines will have a Material Adverse Effect;
(n) at any time, for any reason the Borrower seeks to repudiate its
obligations under any Loan Document; or
(o) a default beyond any applicable notice or grace period under any
of the other Loan Documents, including, without limitation, under any of the
Guaranties.
SECTION 6.2. Rights and Remedies.
-------------------
(a) Upon the occurrence of any Event of Default described in Sections
6.1(f) or (g), the Commitments shall immediately terminate and the unpaid
principal amount of, and any and all accrued interest on, the Loans and any and
all accrued fees and other obligations hereunder shall automatically become
immediately due and payable, with all additional interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind (including, without limitation, valuation and
appraisement, diligence, presentment, notice of intent to demand or accelerate
and notice of acceleration), all of which are hereby expressly waived by the
Borrower; and upon the occurrence and during the continuance of any other Event
of Default, the Administrative Agent may (and upon the demand of the Required
Banks shall), by written notice to the Borrower, in addition to the exercise of
all of the rights and remedies permitted the Administrative
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Agent and the Banks at law or equity or under any of the other Loan Documents,
declare the Commitments terminated and the unpaid principal amount of and any
and all accrued and unpaid interest on the Loans and any and all accrued fees
and other obligations hereunder to be, and the same shall thereupon be,
immediately due and payable with all additional interest from time to time
accrued thereon and (except as otherwise provided in the Loan Documents) without
presentation, demand, or protest or other requirements of any kind (including,
without limitation, valuation and appraisement, diligence, presentment, notice
of intent to demand or accelerate and notice of acceleration), all of which are
hereby expressly waived by the Borrower.
(b) Notwithstanding anything to the contrary contained in this
Agreement or in any other Loan Document, the Administrative Agent, and the Banks
each agree that any exercise or enforcement of the rights and remedies granted
to the Administrative Agent or the Banks or the Fronting Bank under this
Agreement or at law or in equity with respect to this Agreement or any other
Loan Documents shall be commenced and maintained by the Administrative Agent on
behalf of the Administrative Agent and/or the Banks and/or the Fronting Bank.
The Administrative Agent shall act at the direction of the Required Banks in
connection with the exercise of any and all remedies at law, in equity or under
any of the Loan Documents or, if the Required Banks are unable to reach
agreement, then, from and after an Event of Default, the Administrative Agent
may pursue such rights and remedies as it may determine.
SECTION 6.3. Notice of Default.
-----------------
The Administrative Agent shall give notice to the Borrower under Section
6.1(c) promptly upon being requested to do so by the Required Banks and shall
thereupon notify all the Banks thereof. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default (other than nonpayment of principal of or interest on the Loans) unless
Administrative Agent has received notice in writing from a Bank or Borrower
referring to this Agreement or the other Loan Documents, describing such event
or condition. Should Administrative Agent receive notice of the occurrence of a
Default or Event of Default expressly stating that such notice is a notice of a
Default or Event of Default, or should Administrative Agent send Borrower a
notice of Default or Event of Default, Administrative Agent shall promptly give
notice thereof to each Bank.
SECTION 6.4. Actions in Respect of Letters of Credit.
---------------------------------------
(a) If, at any time and from time to time, any Letter of Credit shall
have been issued hereunder and an Event of Default shall have occurred and be
continuing, then, upon the occurrence and during the continuation thereof, the
Administrative Agent may, and upon the demand of the Required Banks shall,
whether in addition to the taking by the Administrative Agent of any of the
actions described in this Article VI or otherwise, make a demand upon the
Borrower to, and forthwith upon such demand (but in any event within ten (10)
days after such demand) the Borrower shall pay to the Administrative Agent, on
behalf of the Banks, in same day funds at the Administrative Agent's office
designated in such demand, for deposit in a special cash collateral account (the
"Letter of Credit Collateral Account") to be maintained in the name of the
Administrative Agent (on behalf of the Banks) and under its sole dominion and
control at such place
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as shall be designated by the Administrative Agent, an amount equal to the
amount of the Letter of Credit Usage under the Letters of Credit. Interest shall
accrue on the Letter of Credit Collateral Account at a rate equal to the rate on
overnight funds.
(b) The Borrower hereby pledges, assigns and grants to the
Administrative Agent, as administrative agent for its benefit and the ratable
benefit of the Banks a lien on and a security interest in, the following
collateral (the "Letter of Credit Collateral"):
(i) the Letter of Credit Collateral Account, all cash
deposited therein and all certificates and instruments, if any, from time to
time representing or evidencing the Letter of Credit Collateral Account;
(ii) all notes, certificates of deposit and other instruments
from time to time hereafter delivered to or otherwise possessed by the
Administrative Agent for or on behalf of the Borrower in substitution for or in
respect of any or all of the then existing Letter of Credit Collateral;
(iii) all interest, dividends, cash, instruments and other
Property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the then existing Letter of Credit
Collateral; and
(iv) to the extent not covered by the above clauses, all
proceeds of any or all of the foregoing Letter of Credit Collateral.
The lien and security interest granted hereby secures the payment of all
obligations of the Borrower now or hereafter existing hereunder and under any
other Loan Document.
(c) The Borrower hereby authorizes the Administrative Agent for the
ratable benefit of the Banks to apply, from time to time after funds are
deposited in the Letter of Credit Collateral Account, funds then held in the
Letter of Credit Collateral Account to the payment of any amounts, in such order
as the Administrative Agent may elect, as shall have become due and payable by
the Borrower to the Banks in respect of the Letters of Credit.
(d) Neither the Borrower nor any Person claiming or acting on behalf
of or through the Borrower shall have any right to withdraw any of the funds
held in the Letter of Credit Collateral Account, except as provided in Section
6.4(h) hereof.
(e) The Borrower agrees that it will not (i) sell or otherwise
dispose of any interest in the Letter of Credit Collateral or (ii) create or
permit to exist any lien, security interest or other charge or encumbrance upon
or with respect to any of the Letter of Credit Collateral, except for the
security interest created by this Section 6.4.
(f) If any Event of Default shall have occurred and be continuing:
(i) The Administrative Agent may, in its sole discretion without
notice to the Borrower except as required by law and at any time from time to
time, charge, set off or otherwise
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apply all or any part of first, (x) to amounts previously drawn on any Letter of
Credit that have not been reimbursed by the Borrower and (y) any Letter of
Credit Usage described in clause (ii) of the definition thereof that are then
due and payable and second, to any other unpaid obligations then due and payable
against the Letter of Credit Collateral Account or any part thereof, in such
order as the Administrative Agent shall elect. The rights of the Administrative
Agent under this Section 6.4 are in addition to any rights and remedies which
any Bank may have.
(ii) The Administrative Agent may also exercise, in its sole
discretion, in respect of the Letter of Credit Collateral Account, in addition
to the other rights and remedies provided herein or otherwise available to it,
all the rights and remedies of a secured party upon default under the Uniform
Commercial Code in effect in the Commonwealth of Virginia at that time.
(g) The Administrative Agent shall be deemed to have exercised
reasonable care in the custody and preservation of the Letter of Credit
Collateral if the Letter of Credit Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
property, it being understood that, assuming such treatment, the Administrative
Agent shall not have any responsibility or liability with respect thereto.
(h) At such time as all Events of Default have been cured or waived
in writing, all amounts remaining in the Letter of Credit Collateral Account
shall be promptly returned to the Borrower. Absent such cure or written waiver,
any surplus of the funds held in the Letter of Credit Collateral Account and
remaining after payment in full of all of the Obligations of the Borrower
hereunder and under any other Loan Document after the Maturity Date shall be
paid to the Borrower or to whomsoever may be lawfully entitled to receive such
surplus.
SECTION 6.5. Distribution of Proceeds after Default.
--------------------------------------
Notwithstanding anything contained herein to the contrary, during the
continuance of an Event of Default, to the extent proceeds are received by
Administrative Agent, such proceeds will be distributed to the Banks pro rata in
accordance with the unpaid principal amount of the Loans.
ARTICLE VII
THE ADMINISTRATIVE AGENT
SECTION 7.1. Appointment and Authorization.
-----------------------------
Each Bank irrevocably appoints and authorizes the Administrative Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement and the other Loan Documents as are delegated to the Administrative
Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto. Except as set forth in Sections 7.8 and 7.9
hereof, the provisions of this Article VII are solely for the benefit of
Administrative Agent and the Banks, and Borrower shall not have any rights to
rely on or enforce any of the provisions hereof. In performing its functions
and duties under this Agreement, Administrative Agent shall act solely as an
agent of the Banks and the Fronting Bank and does not assume and shall not be
deemed to have
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assumed any relationship of agency or trust with or for the Borrower.
SECTION 7.2. Agency and Affiliates.
---------------------
PNC shall have the same rights and powers under this Agreement as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Administrative Agent and PNC and its affiliates may accept deposits from,
lend money to, and generally engage in any kind of business with the Borrower,
CESRRI or any Subsidiary or affiliate of the Borrower as if it was not the
Administrative Agent hereunder, and the term "Bank" and "Banks" shall include
PNC in its individual capacity.
SECTION 7.3. Action by Administrative Agent.
------------------------------
The obligations of the Administrative Agent hereunder are only those
expressly set forth herein. Without limiting the generality of the foregoing,
the Administrative Agent shall not be required to take any action with respect
to any Default or Event of Default, except as expressly provided in Article VI.
The duties of Administrative Agent shall be administrative in nature. Subject
to the provisions of Sections 7.1, 7.5 and 7.6, the Administrative Agent shall
perform its obligations under this Agreement and the other Loan Documents in
good faith according to the same standard of care as that customarily exercised
by the Administrative Agent in administering its own similar loans, and shall at
all times keep accurate books of account reflecting the interests of the Banks
in the Loans. Such books shall be available to the Banks for inspection during
business hours with reasonable notice to the Administrative Agent. Except as
stated in the preceding two (2) sentences or as otherwise expressly set forth in
this Agreement, the Administrative Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement, and no
implied covenants, functions, responsibilities, duties, obligations, or
liabilities shall be read into this Agreement or otherwise exist. The duties of
the Administrative Agent shall be mechanical and administrative in nature; the
Administrative Agent shall not have by reason of this Agreement or any other
Loan Document a fiduciary relationship in respect of any Bank; and nothing in
this Agreement or any other Loan Document, expressed or implied, is intended to
or shall be construed so as to impose upon the Administrative Agent any
obligations in respect of this Agreement except as expressly set forth herein.
Without limiting the generality of the foregoing, the use of the term "agent" in
this Agreement with reference to the Administrative Agent is not intended to
connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable law. Instead, such term is used merely as a
matter of market custom, and is intended to create or reflect only an
administrative relationship between independent contracting parties. Each Bank
expressly acknowledges (i) that the Administrative Agent has not made any
representations or warranties to them and that no act by the Administrative
Agent hereafter taken, including any review of the affairs of the Borrower,
shall be deemed to constitute any representation or warranty by the
Administrative Agent to any Bank; and (ii) except as expressly provided herein,
that the Administrative Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Bank with credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter.
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SECTION 7.4. Consultation with Experts.
-------------------------
As between Administrative Agent and the Banks, the Administrative Agent may
consult with legal counsel, independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken by it in good faith in accordance with the advice of such counsel,
accountants or experts.
SECTION 7.5. Liability of Administrative Agent.
---------------------------------
As between Administrative Agent and the Banks, neither the Administrative
Agent, nor any of its affiliates nor any of its directors, officers, agents or
employees shall be liable for any action taken or not taken by it in connection
herewith (i) with the consent or at the request of the Required Banks or (ii) in
the absence of its own gross negligence or wilful misconduct. As between
Administrative Agent and the Banks, neither the Administrative Agent, nor any of
its directors, officers, agents or employees shall be responsible for or have
any duty to ascertain, inquire into or verify (i) any statement, warranty or
representation made in connection with this Agreement or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of the Borrower; (iii) the satisfaction of any condition specified in
Article III, except receipt of items required to be delivered to the
Administrative Agent or (iv) the validity, effectiveness or genuineness of this
Agreement, the other Loan Documents or any other instrument or writing furnished
in connection herewith. As between Administrative Agent and the Banks, the
Administrative Agent shall not incur any liability by acting in reliance upon
any notice, consent, certificate, statement, or other writing (which may be a
bank wire, telex or similar writing) believed by it to be genuine or to be
signed by the proper party or parties.
SECTION 7.6. Indemnification.
---------------
Each Bank shall, ratably in accordance with its Commitment, indemnify the
Administrative Agent and its affiliates and its directors, officers, agents and
employees (to the extent not reimbursed by the Borrower) against any cost,
expense (including counsel fees and disbursements), claim, demand, action, loss
or liability (except such as result from such indemnitee's gross negligence or
wilful misconduct) that such indemnitee may suffer or incur in connection with
its duties as Administrative Agent under this Agreement, the other Loan
Documents or any action taken or omitted by such indemnitee hereunder. In the
event that the Administrative Agent shall, subsequent to its receipt of
indemnification payment(s) from Banks in accordance with this section, recoup
any amount from the Borrower, or any other party liable therefor in connection
with such indemnification, the Administrative Agent shall reimburse the Banks
which previously made the payment(s) pro rata, based upon the actual amounts
--------
which were theretofore paid by each Bank. The Administrative Agent shall
reimburse such Banks so entitled to reimbursement within two (2) Domestic
Business Days of its receipt of such funds from the Borrower or such other party
liable therefor.
SECTION 7.7. Credit Decision.
---------------
Each Bank acknowledges that it has, independently and without reliance upon
the Administrative Agent, or any other Bank, and based on such documents and
information as it has
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deemed appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Bank also acknowledges that it will, independently and without
reliance upon the Administrative Agent, or any other Bank, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking any action under this
Agreement.
SECTION 7.8. Successor Administrative Agent.
------------------------------
The Administrative Agent may resign at any time by giving written notice
thereof to the Banks and the Borrower and shall resign, at the request of the
Required Banks, in the event its Commitment is reduced to an amount less than
the amount of the next largest Commitment. Further, the Required Banks may, for
good cause, remove Administrative Agent at any time by giving at least thirty
(30) Domestic Business Days' prior written notice to the Borrower and all other
Banks. Upon any such resignation or removal, the Required Banks shall have the
right to appoint a successor Administrative Agent, which shall be selected by
the Required Banks from between NationsBank, N.A. and U.S. Bank National
Association. In the event that both NationsBank, N.A., and U.S. Bank National
Association shall decline to serve, or following their resignation or removal,
the Required Banks shall have the right to appoint a successor Administrative
Agent, which successor Administrative Agent (other than NationsBank, N.A., and
U.S. Bank National Association) shall, provided no Event of Default has occurred
and is then continuing, be subject to Borrower's approval, which approval shall
not be unreasonably withheld or delayed. Any successor Administrative Agent
must be a Bank (i) the senior debt obligations of which (or such Bank's parent's
senior unsecured debt obligations) are rated not less than Baa by Moody's or a
comparable rating by a rating agency acceptable to the Required Banks and (ii)
which has total assets in excess of Ten Billion Dollars ($10,000,000,000). If
no successor Administrative Agent shall have been so appointed by the Required
Banks and approved by the Borrower, and shall have accepted such appointment,
within 30 days after the retiring Administrative Agent gives notice of
resignation, then the retiring Administrative Agent may, on behalf of the Banks,
appoint a successor Administrative Agent, which shall be the Administrative
Agent, who shall act until the Required Banks shall appoint a successor
Administrative Agent. Upon the acceptance by a successor Administrative Agent
of its appointment as the Administrative Agent hereunder, such successor
Administrative Agent shall thereupon succeed to and become vested with all the
rights and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. After any retiring Administrative Agent's resignation hereunder, the
provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was the Administrative Agent as
applicable. Any resignation or removal of the Administrative Agent shall take
effect upon the acceptance of appointment by a successor Administrative Agent in
accordance with the provisions of this Section 7.8.
SECTION 7.9. Consents and Approvals.
----------------------
(a) All communications from Administrative Agent to the Banks requesting
the Banks' determination, consent, approval or disapproval (i) shall be given in
the form of a written notice to each Bank, (ii) shall be accompanied by a
description of the matter or item as to which such determination, approval,
consent or disapproval is requested, or shall advise each Bank where such
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matter or item may be inspected, or shall otherwise describe the matter or issue
to be resolved, (iii) shall include, if reasonably requested by a Bank and to
the extent not previously provided to such Bank, written materials and a summary
of all oral information provided to Administrative Agent by Borrower in respect
of the matter or issue to be resolved, and (iv) shall include Administrative
Agent's recommended course of action or determination in respect thereof. Each
Bank shall reply promptly, but in any event within ten (10) Domestic Business
Days after receipt of the request therefor from Administrative Agent (the "Bank
Reply Period"). Unless a Bank shall give written notice to Administrative Agent
that it objects to the recommendation or determination of Administrative Agent
(together with a written explanation of the reasons behind such objection)
within the Bank Reply Period, such Bank shall be deemed to have approved of or
consented to such recommendation or determination. With respect to decisions
requiring the approval of the Required Banks or all the Banks, Administrative
Agent shall submit its recommendation or determination for approval of or
consent to such recommendation or determination to all Banks and upon receiving
the required approval or consent shall follow the course of action or
determination of the Required Banks (and each non-responding Bank shall be
deemed to have concurred with such recommended course of action) or all the
Banks, as the case may be.
(b) The Administrative Agent may at any time request instructions from the
Required Banks with respect to any actions or approvals which, by the terms of
this Agreement or of any of the Loan Documents, the Administrative Agent is
permitted or required to take or to grant without instructions from any Banks,
and if such instructions are promptly requested, the Administrative Agent shall
be absolutely entitled to refrain from taking any action or to withhold any
approval and shall not be under any liability whatsoever to any Person for
refraining from taking any action or withholding any approval under any of the
Loan Documents until it shall have received such instructions from the Required
Banks. Without limiting the foregoing, no Bank shall have any right of action
whatsoever against the Administrative Agent as a result of the Administrative
Agent acting or refraining from acting under this Agreement, or any of the other
Loan Documents in accordance with the instructions of Required Banks or, where
applicable, all Banks. The Administrative Agent shall promptly notify each Bank
at any time that the Required Banks have instructed the Administrative Agent to
act or refrain from acting pursuant hereto. Each Bank agrees that any action
taken by the Administrative Agent at the direction or with the consent of
Required Banks in accordance with the provisions of this Agreement or any Loan
Document, and the exercise by the Administrative Agent at the direction or with
the consent of Required Banks of the powers set forth herein or therein,
together with such other powers as are reasonably incidental thereto, shall be
authorized and binding upon all Required Banks, except for actions specifically
requiring the approval of all Banks.
SECTION 7.10. Delivery of Documents.
---------------------
The Administrative Agent shall as soon as reasonably practicable and, in
any event, within thirty (30) days, distribute to each Bank at its primary
address set forth on the appropriate counterpart signature page hereof, or at
such other address as a Bank may request in writing, (i) such Bank's Notes, (ii)
all documents set forth on the Closing Requirements attached hereto as Exhibit
O, (iii) all other documents or information which the Administrative Agent is
required to send to Banks pursuant to the terms of this Agreement, and (iv)
other information or documents received by the
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Administrative Agent at the request of any Bank. In addition, within fifteen
(15) Domestic Business Days after receipt of a request in writing from a Bank
for written information or documents provided by or prepared by Borrower, CESRRI
or any Consolidated Subsidiary or Investment Affiliate, the Administrative Agent
shall deliver such written information or documents to such requesting Bank if
Administrative Agent has possession of such written information or documents in
its capacity as the Administrative Agent or as a Bank.
SECTION 7.11. Inspection of Books and Records.
-------------------------------
Subject to the provisions of Section 5.6, each Bank shall have the right to
exercise the rights of the Administrative Agent set forth in the Loan Documents
to inspect the books and records of the Borrower, CESSRI, any Consolidated
Subsidiary and any other Person.
SECTION 7.12. Administrative Agent's Commitment.
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Prior to any Event of Default, PNC agrees to retain a Commitment, in an
amount equal to or greater than the Commitment of any other Bank.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair.
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If on or prior to the first day of any Interest Period for any Euro-Dollar
Borrowing or Money Market LIBOR Loan:
(a) the Administrative Agent has determined in good faith that
deposits in dollars (in the applicable amounts) are not being offered to the
Administrative Agent in the relevant market for such Interest Period, or
(b) Banks having 50% or more of the aggregate amount of the
Commitments advise the Administrative Agent that the Adjusted London Interbank
Offered Rate, as determined by the Administrative Agent, or any Bank making a
Money Market LIBOR Loan advises the Administrative Agent that the applicable
Money Market Margin quoted by such Bank, will not adequately and fairly reflect
the cost to such Bank of funding its Euro-Dollar Loans or the Money Market LIBOR
Loans, as applicable, for such Interest Period, the Administrative Agent shall
forthwith give notice thereof to the Borrower and the Banks, whereupon until the
Administrative Agent notifies the Borrower that the circumstances giving rise to
such suspension no longer exist, the obligations of the Banks to make Euro-
Dollar Loans and Money Market LIBOR Loans shall be suspended. Unless the
Borrower notifies the Administrative Agent at least two (2) Domestic Business
Days before the date of (i) any Euro-Dollar Borrowing for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
such Borrowing shall instead be made as a Base Rate Borrowing, or (ii) any Money
Market LIBOR Borrowing for which a Notice of Money Market Borrowing has
previously been given, the Money Market LIBOR Loans comprising such
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Borrowing shall bear interest for each day from and including the first day to
but excluding the last day of the Interest Period applicable thereto at the Base
Rate for such day.
SECTION 8.2. Illegality.
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If, on or after the date of this Agreement, the adoption of any applicable
law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not having
the force of law) made after the Closing Date of any such authority, central
bank or comparable agency shall make it unlawful for any Bank (or its Euro-
Dollar Lending Office) (x) to make, maintain or fund its Euro-Dollar Loans or
Money Market Loans, or (y) to participate in any Letter of Credit issued by the
Fronting Bank, or, with respect to the Fronting Bank, to issue any Letter of
Credit, the Administrative Agent shall forthwith give notice thereof to the
other Banks and the Borrower, whereupon until such Bank notifies the Borrower
and the Administrative Agent that the circumstances giving rise to such
suspension no longer exist, the obligation of such Bank in case of the event
described in clause (x) above to make Euro-Dollar Loans or Money Market Loans,
as applicable or in the case of the event described in clause (y) above, to
participate in any Letter of Credit issued by the Fronting Bank or, with respect
to the Fronting Bank, to issue any Letter of Credit, shall be suspended. With
respect to Euro-Dollar Loans and Money Market LIBOR Loans, before giving any
notice to the Administrative Agent pursuant to this Section 8.2, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will avoid
the need for giving such notice and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. If such Bank shall determine that it
may not lawfully continue to maintain and fund any of its outstanding Euro-
Dollar Loans or Money Market Loans to maturity and shall so specify in such
notice, the Borrower shall be deemed to have delivered a Notice of Interest Rate
Election and such Euro-Dollar Loan or Money Market Loans, as applicable shall be
converted as of such date to a Base Rate Loan in an equal principal amount from
such Bank (on which interest and principal shall be payable contemporaneously
with the related Euro-Dollar Loans or Money Market Loans, as applicable, of the
other Banks), and such Bank shall be deemed to have made such a Base Rate Loan.
If at any time, it shall be unlawful for any Bank to make, maintain or fund
its Euro-Dollar Loans or Money Market Loans, the Borrower shall have the right,
upon five (5) Domestic Business Day's notice to the Administrative Agent, to
either (x) cause a bank, reasonably acceptable to the Administrative Agent, to
offer to purchase the Commitment of such Bank for an amount equal to such Bank's
outstanding Loans, and to become a Bank hereunder, or obtain the agreement of
one or more existing Banks to offer to purchase the Commitment of such Bank for
such amount, which offer such Bank is hereby required to accept, or (y) repay in
full all Loans then outstanding of such Bank, together with interest and all
other amounts due thereon, upon which event, such Bank's Commitment shall be
deemed to be canceled pursuant to Section 2.11(e).
SECTION 8.3. Increased Cost and Reduced Return.
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(a) If, on or after (x) the date hereof in the case of Committed
Loans made
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pursuant to Section 2.1, or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System (but excluding
with respect to any Euro-Dollar Loan any such requirement reflected in an
applicable Euro-Dollar Reserve Percentage)), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending Office)
or shall impose on any Bank (or its Applicable Lending Office) or on the London
interbank market any other condition materially more burdensome in nature,
extent or consequence than those in existence as of the Closing Date, or the
date of the related Money Market Quote, as applicable, affecting such Bank's
Euro-Dollar Loans, Money Market Loans, its Note, or its obligation to make Euro-
Dollar Loans or Money Market Loans, and the result of any of the foregoing is to
increase the cost to such Bank (or its Applicable Lending office) of making or
maintaining any Euro-Dollar Loan or Money Market Loan, or to reduce the amount
of any sum received or receivable by such Bank (or its Applicable Lending
Office) under this Agreement or under its Note with respect to such Euro-Dollar
Loans or Money Market Loans, by an amount reasonably deemed by such Bank to be
material, then, within fifteen (15) days after demand by such Bank (with a copy
to the Administrative Agent), the Borrower shall pay to such Bank such
additional amount or amounts (based upon a reasonable allocation thereof by such
Bank to the Euro-Dollar Loans and Money Market Loans made by such Bank
hereunder) as will compensate such Bank for such increased cost or reduction to
the extent such Bank generally imposes such additional amounts on other
borrowers of such Bank in similar circumstances.
(b) If any Bank shall have reasonably determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) made after the Closing Date of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank (or its Parent) as a
consequence of such Bank's obligations hereunder to a level below that which
such Bank (or its Parent) could have achieved but for such adoption, change,
request or directive (taking into consideration its policies with respect to
capital adequacy) by an amount reasonably deemed by such Bank to be material,
then from time to time, within fifteen (15) days after demand by such Bank (with
a copy to the Administrative Agent), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank (or its Parent) for
such reduction to the extent such Bank generally imposes such additional amounts
on other borrowers of such Bank in similar circumstances.
(c) Each Bank will promptly notify the Borrower and the
Administrative Agent of any event of which it has knowledge, occurring after the
date hereof, which will entitle such Bank to compensation pursuant to this
Section 8.3 and will designate a different Applicable Lending Office
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if such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the reasonable judgment of such Bank, be otherwise
disadvantageous to such Bank. A certificate of any Bank claiming compensation
under this Section 8.3 and setting forth a reasonably detailed calculation of
the additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of demonstrable error. In determining such amount, such Bank may
use any reasonable averaging and attribution methods.
(d) If at any time, any Bank shall be owed amounts pursuant to this
Section 8.3, the Borrower shall have the right, upon five (5) Domestic Business
Day's notice to the Administrative Agent to either (x) cause a bank, reasonably
acceptable to the Administrative Agent, to offer to purchase the Commitment of
such Bank for an amount equal to such Bank's outstanding Loans, and to become a
Bank hereunder, or to obtain the agreement of one or more existing Banks to
offer to purchase the Commitment of such Bank for such amount, which offer such
Bank is hereby required to accept, or (y) repay in full all Loans then
outstanding of such Bank, together with interest and all other amounts due
thereon, upon which event, such Bank's Commitment shall be deemed to be canceled
pursuant to Section 2.11(e).
SECTION 8.4. Taxes.
-----
(a) Any and all payments by the Borrower to or for the account of any
Bank, or the Administrative Agent hereunder or under any other Loan Document
shall be made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding, in the case of each Bank and
the Administrative Agent, taxes imposed on its income, and franchise taxes
imposed on it, by the jurisdiction under the laws of which such Bank or the
Administrative Agent (as the case may be) is organized or any political
subdivision thereof and, in the case of each Bank, taxes imposed on its income,
and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof or by any other
jurisdiction (or any political subdivision thereof) as a result of a present or
former connection between such Bank or Administrative Agent and such other
jurisdiction or by the United States (all such non-excluded taxes, duties,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Non-Excluded Taxes"). If the Borrower shall be
required by law to deduct any Non-Excluded Taxes from or in respect of any sum
payable hereunder or under any Note or Letter of Credit, (i) the sum payable
shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
8.4) such Bank, the Fronting Bank or, the Administrative Agent (as the case may
be) receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law and (iv) the Borrower shall
furnish to the Administrative Agent, at its address referred to in Section 9.1,
the original or a copy of a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note or
Letter of Credit or from the execution or delivery of, or otherwise with respect
to, this Agreement or any Note or Letter of Credit (hereinafter
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referred to as "Other Taxes").
(c) The Borrower agrees to indemnify each Bank, the Fronting Bank,
and the Administrative Agent for the full amount of Non-Excluded Taxes or Other
Taxes (including, without limitation, any Non-Excluded Taxes or Other Taxes
imposed or asserted by any jurisdiction on amounts payable under this Section
8.4) paid by such Bank, the Fronting Bank, or the Administrative Agent (as the
case may be) and, so long as such Bank, the Fronting Bank or the Administrative
Agent has promptly paid any such Non-Excluded Taxes or Other Taxes, any
liability for penalties and interest arising therefrom or with respect thereto.
This indemnification shall be made within fifteen (15) days from the date such
Bank, the Fronting Bank, or the Administrative Agent (as the case may be) makes
demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
shall provide the Borrower with (A) two duly completed copies of Internal
Revenue Service Form 1001 or 4224, as appropriate, or any successor form
prescribed by the Internal Revenue Service, and (B) an Internal Revenue Service
Form W-8 or W-9, or any successor form prescribed by the Internal Revenue
Service, and shall provide Borrower with two further copies of any such form or
certification on or before the date that any such form or certification expires
or becomes obsolete and after the occurrence of any event requiring a change in
the most recent form previously delivered by it to Borrower, certifying (i) in
the case of a Form 1001 or 4224, that such Bank is entitled to benefits under an
income tax treaty to which the United States is a party which reduces the rate
of withholding tax on payments of interest or certifying that the income
receivable pursuant to this Agreement is effectively connected with the conduct
of a trade or business in the United States, and (ii) in the case of a Form W-8
or W-9, that it is entitled to an exemption from United States backup
withholding tax. If the form provided by a Bank at the time such Bank first
becomes a party to this Agreement indicates a United States interest withholding
tax rate in excess of zero, withholding tax at such rate shall be considered
excluded from "Non-Excluded Taxes" as defined in Section 8.4(a).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.4(c) with respect to
Non-Excluded Taxes imposed by the United States; provided, however, that should
a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Non-Excluded Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Bank shall reasonable request to assist such Bank to recover such Taxes so long
as Borrower shall incur no cost or liability as a result thereof.
(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.4, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to eliminate or reduce
any such additional payment which may thereafter accrue if such change, in the
judgment of such Bank, is not otherwise disadvantageous to such Bank.
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(g) If at any time, any Bank shall be owed amounts pursuant to this
Section 8.4, the Borrower shall have the right, upon five (5) Domestic Business
Day's notice to the Administrative Agent to either (x) cause a bank, reasonably
acceptable to the Administrative Agent, to offer to purchase the Commitment of
such Bank for an amount equal to such Bank's outstanding Loans, and to become a
Bank hereunder, or to obtain the agreement of one or more existing Banks to
offer to purchase the Commitment of such Bank for such amount, which offer such
Bank is hereby required to accept, or (y) repay in full all Loans then
outstanding of such Bank, together with interest and all other amounts due
thereon, upon which event, such Bank's Commitment shall be deemed to be canceled
pursuant to Section 2.11(e).
SECTION 8.5. Base Rate Loans Substituted for Affected Euro-Dollar Loans.
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If (i) the obligation of any Bank to make Euro-Dollar Loans or Money Market
Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded
compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans or
Money Market Loans and the Borrower shall, by at least five (5) Euro-Dollar
Business Days' prior notice to such Bank through the Administrative Agent, have
elected that the provisions of this Section 8.5 shall apply to such Bank, then,
unless and until such Bank notifies the Borrower that the circumstances giving
rise to such suspension or demand for compensation no longer exist:
(a) Borrower shall be deemed to have delivered a Notice of Interest
Rate Election with respect to such affected Euro-Dollar Loans or Money Market
Loans and thereafter all Loans which would otherwise be made by such Bank as
Euro-Dollar Loans or Money Market Loans shall be made instead as Base Rate Loans
(on which interest and principal shall be payable contemporaneously with the
related Euro-Dollar Loans or Money Market Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans or Money Market Loans has
been repaid, all payments of principal which would otherwise be applied to repay
such Euro-Dollar Loans or Money Market Loans shall be applied to repay its Base
Rate Loans instead.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Notices.
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All notices, requests and other communications to any party hereunder shall
be in writing (including bank wire, telex, facsimile transmission followed by
telephonic confirmation or similar writing) and shall be given to such party:
(x) in the case of the Borrower, the Administrative Agent, or any Bank at its
address, telex number or facsimile number set forth on Schedule II hereto , or
(y) in the case of any party, such other address, telex number or facsimile
number as such party may hereafter specify for the purpose by notice to the
Administrative Agent and the Borrower. Each such notice, request or other
communication shall be effective (i) if given by telex or facsimile
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transmission, when such telex or facsimile is transmitted to the telex number or
facsimile number specified in this Section 9.1 and the appropriate answerback or
facsimile confirmation is received, (ii) if given by certified registered mail,
return receipt requested, with first class postage prepaid, addressed as
aforesaid, upon receipt or refusal to accept delivery, (iii) if given by a
nationally recognized overnight carrier, twenty-four (24) hours after such
communication is deposited with such carrier with postage prepaid for next day
delivery, or (iv) if given by any other means, when delivered at the address
specified in this Section 9.1; provided that notices to the Administrative Agent
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under Article II or Article VIII shall not be effective until received.
SECTION 9.2. No Waivers.
----------
No failure or delay by the Administrative Agent, or any Bank in exercising
any right, power or privilege hereunder or under any Note shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification.
-------------------------
(a) The Borrower shall pay within thirty (30) days after written
notice from the Administrative Agent (i) all reasonable out-of-pocket costs and
expenses of the Administrative Agent (including reasonable fees and
disbursements of special counsel Marcus & Shapira, LLP), in connection with the
preparation of this Agreement, the Loan Documents and the documents and
instruments referred to therein, and any waiver or consent hereunder or any
amendment hereof or any Default or alleged Default hereunder, (ii) all
reasonable out-of-pocket costs and expenses of PNC in connection with the
syndication of the Loans, subject to a maximum reimbursement of $10,000, and, in
addition thereto, all reasonable fees and disbursements of special counsel
Marcus & Shapira, LLP in connection with the syndication of the Loans, (iii) any
reasonable out-of-pocket costs and expenses incurred by Administrative Agent to
verify the status of any Property as a Qualifying Unencumbered Property,
including, without limitation, any title searches, lien checks and other similar
actions, and (iv) if an Event of Default should be continuing, all reasonable
out-of-pocket expenses incurred by the Administrative Agent, and each Bank,
including reasonable fees and disbursements of counsel for the Administrative
Agent, and each of the Banks, in connection with the enforcement of the Loan
Documents and the instruments referred to therein and such Event of Default and
collection, bankruptcy, insolvency and other enforcement proceedings resulting
therefrom.
(b) The Borrower agrees to indemnify the Administrative Agent, and
each Bank, their respective affiliates and the respective directors, officers,
agents and employees of the foregoing (each an "Indemnitee") and hold each
Indemnitee harmless from and against any and all liabilities, losses, damages,
reasonable costs and reasonable expenses of any kind, including, without
limitation, the reasonable fees and disbursements of counsel, which may be
incurred by such Indemnitee in connection with any investigative, administrative
or judicial proceeding that may at any time (including, without limitation, at
any time following the payment of the Obligations) be asserted against any
Indemnitee, as a result of, or arising out of, or in any way related to or by
reason of, (i) any of the transactions contemplated by the Loan Documents or the
execution, delivery or
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performance of any Loan Document, (ii) any violation by the Borrower or the
Environmental Affiliates of any applicable Environmental Law, (iii) any
Environmental Claim arising out of the management, use, control, ownership or
operation of property or assets by the Borrower or any of the Environmental
Affiliates, including, without limitation, all on-site and off-site activities
of Borrower or any Environmental Affiliate involving Materials of Environmental
Concern, (iv) the breach of any environmental representation or warranty set
forth herein, but excluding those liabilities, losses, damages, costs and
expenses (a) for which such Indemnitee has been compensated pursuant to the
terms of this Agreement, (b) incurred solely by reason of the gross negligence,
wilful misconduct, bad faith or fraud of any Indemnitee as finally determined by
a court of competent jurisdiction, (c) violations of Environmental Laws relating
to a Property which are caused by the act or omission of such Indemnitee after
such Indemnitee takes possession of such Property or (d) any liability of such
Indemnitee to any third party based upon contractual obligations of such
Indemnitee owing to such third party which are not expressly set forth in the
Loan Documents. In addition, the indemnification set forth in this Section
9.3(b) in favor of any director, officer, agent or employee of Administrative
Agent, or any Bank shall be solely in their respective capacities as such
director, officer, agent or employee. The Borrower's obligations under this
Section 9.3(b) shall survive the termination of this Agreement and the payment
of the Obligations.
SECTION 9.4. Sharing of Set-Offs.
-------------------
In addition to any rights now or hereafter granted under applicable law or
otherwise, and not by way of limitation of any such rights, upon the occurrence
and during the continuance of any Event of Default, each Bank is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrower or to any other Person, any
such notice being hereby expressly waived, but subject to the prior consent of
the Administrative Agent, to set off and to appropriate and apply any and all
deposits (general or special, time or demand, provisional or final) and any
other indebtedness at any time held or owing by such Bank (including, without
limitation, by branches and agencies of such Bank wherever located) to or for
the credit or the account of the Borrower against and on account of the
Obligations of the Borrower then due and payable to such Bank under this
Agreement or under any of the other Loan Documents, including, without
limitation, all interests in Obligations purchased by such Bank. Each Bank
agrees that if it shall by exercising any right of set-off or counterclaim or
otherwise, receive payment of a proportion of the aggregate amount of principal
and interest due with respect to any Note held by it or Letter of Credit
participated in by it, or, in the case of the Fronting Bank, Letter of Credit
issued by it, which is greater than the proportion received by any other Bank or
Letter of Credit issued or participated in by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Notes held by the other Banks, and such other adjustments
shall be made, as may be required so that all such payments of principal and
interest with respect to the Notes held by the Banks or Letter of Credit issued
or participated in by such other Banks shall be shared by the Banks pro rata;
provided that nothing in this Section 9.4 shall impair the right of any Bank to
exercise any right of set-off or counterclaim it may have to any deposits not
received in connection with the Loans and to apply the amount subject to such
exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes or the Letters of Credit. The Borrower agrees, to
the fullest extent it may effectively do so under applicable law, that any
holder of a participation in a Note or a Letter of Credit, whether or not
acquired pursuant to the foregoing arrangements, may exercise
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rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation. Notwithstanding
anything to the contrary contained herein, any Bank may, by separate agreement
with the Borrower, waive its right to set off contained herein or granted by law
and any such written waiver shall be effective against such Bank under this
Section 9.4.
SECTION 9.5. Amendments and Waivers.
----------------------
Any provision of this Agreement or the Notes, the Letters of Credit or
other Loan Documents may be amended or waived or consented to if, but only if,
such amendment, waiver or consent is in writing and is signed by the Borrower,
the Administrative Agent, and the Required Banks provided that no such
amendment, waiver or consent with respect to this Agreement, the Notes, the
Letters of Credit or any other Loan Documents shall, unless signed by all the
Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for any reduction or termination
of any Commitment, (iv) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Notes, or the number of Banks, which
shall be required for the Banks or any of them to take any action under this
Section 9.5 or any other provision of this Agreement, (v) release the
Guaranties or (vi) modify the provisions of this Section 9.5.
SECTION 9.6. Successors and Assigns.
----------------------
(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or otherwise transfer any of
its rights under this Agreement or the other Loan Documents without the prior
written consent of all Banks and the Administrative Agent and a Bank may not
assign or otherwise transfer any of its interest under this Agreement except as
permitted in subsection (b) and (c) of this Section 9.6.
(b) Any Bank may at any time grant (i) prior to the occurrence of an
Event of Default, to an existing Bank, one or more banks, finance companies,
insurance companies or other financial institutions in minimum amounts of not
less than $10,000,000 (or any lesser amount in the case of participations to an
existing Bank or in the case of participations with respect to Money Market
Loans only) and (ii) after the occurrence and during the continuance of an Event
of Default, to any Person in any amount (in each case, a "Participant"),
participating interests in its Commitment or any or all of its Loans, with (and
subject to) the consent of the Administrative Agent (other than with respect to
Money Market Loans) and, provided that no Event of Default shall have occurred
and be continuing, the Borrower, which consent shall not be unreasonably
withheld or delayed. Any participation made during the continuation of an Event
of Default shall not be affected by the subsequent cure of such Event of
Default. In the event of any such grant by a Bank of a participating interest
to a Participant, whether or not upon notice to the Borrower and the
Administrative Agent, such Bank shall remain responsible for the performance of
its obligations hereunder, and the Borrower and the Administrative Agent shall
continue to deal solely and directly with such Bank in
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connection with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest
shall provide that such Bank shall retain the sole right and responsibility to
enforce the Obligations of the Borrower hereunder including, without limitation,
the right to approve any amendment, modification or waiver of any provision of
this Agreement; provided that such participation agreement may provide that such
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Bank will not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii), (iii), (iv) or (v) of Section 9.5 without the
consent of the Participant. The Borrower agrees that each Participant shall, to
the extent provided in its participation agreement, be entitled to the benefits
of Article VIII with respect to its participating interest. An assignment or
other transfer which is not permitted by subsection (c) or (d) below shall be
given effect for purposes of this Agreement only to the extent of, and subject
to the restrictions with respect to, a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to (i) prior to the occurrence of
an Event of Default, an existing Bank or one or more banks, finance companies,
insurance or other financial institutions in minimum amounts of not less than
Ten Million Dollars ($10,000,000) (or any lesser amount in the case of
assignments to an existing Bank) and (ii) after the occurrence and during the
continuance of an Event of Default, to any Person in any amount (in each case,
an "Assignee"), all or a proportionate part of all, of its rights and
obligations under this Agreement, the Notes and the other Loan Documents, and,
in either case, such Assignee shall assume such rights and obligations, pursuant
to a an Assignment and Assumption Agreement in substantially the form of Exhibit
"E" hereto executed by such Assignee and such transferor Bank, with (and subject
to) the consent of the Administrative Agent and, provided that no Event of
Default shall have occurred and be continuing, the Borrower, which consent shall
not be unreasonably withheld or delayed; provided that if an Assignee is an
affiliate of such transferor Bank or was a Bank immediately prior to such
assignment, no such consent shall be required; and provided further that such
assignment may, but need not, include rights of the transferor Bank in respect
of outstanding Money Market Loans. Upon its receipt of an Assignment and
Assumption Agreement executed by a transferor Bank and an Assignee,
Administrative Agent shall, if such Assignment and Assumption Agreement has been
properly completed and is in substantially the form of Exhibit E, (i) accept
such Assignment and Assumption Agreement, (ii) record the information contained
therein in the Administrative Agent's records, and (iii) give prompt notice
thereof to Borrower. Upon execution and delivery of such instrument and payment
by such Assignee to such transferor Bank of an amount equal to the purchase
price agreed between such transferor Bank and such Assignee, such Assignee shall
be a Bank party to this Agreement and shall have all the rights and obligations
of a Bank with a Commitment as set forth in such instrument of assumption, and
no further consent or action by any party shall be required and the transferor
Bank shall be released from its obligations hereunder to a corresponding extent.
Upon the consummation of any assignment pursuant to this subsection (c), the
transferor Bank, the Administrative Agent and the Borrower shall make
appropriate arrangements so that, if required, new Notes are issued to the
Assignee, and, if necessary, to the transferor Bank. Upon execution and delivery
of such replacement Notes, the original Notes evidencing all or the portion of
the Commitment being assigned shall be canceled and returned to Borrower. In
connection with any such assignment, the transferor Bank shall pay to the
Administrative Agent an administrative fee for processing such assignment in the
amount of $3,000. If the Assignee is not incorporated under the laws of
the United States of America or a state thereof, it shall deliver to the
Borrower and the
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Administrative Agent certification as to exemption from deduction or withholding
of any United States federal income taxes in accordance with Section 8.4. Any
assignment made during the continuation of an Event of Default shall not be
affected by any subsequent cure of such Event of Default.
(d) Any Bank (each, a "Designating Lender") may at any time designate
one Designated Lender to fund Money Market Loans on behalf of such Designating
Lender subject to the terms of this Section 9.6(d) and the provisions in Section
9.6(b) and (c) shall not apply to such designation. No Bank may designate more
than one (1) Designated Lender at any one time. The parties to each such
designation shall execute and deliver to the Administrative Agent for its
acceptance a Designation Agreement. Upon such receipt of an appropriately
completed Designation Agreement executed by a Designating Lender and a designee
representing that it is a Designated Lender, the Administrative Agent will
accept such Designation Agreement and will give prompt notice thereof to the
Borrower, whereupon, (i) the Borrower shall execute and deliver to the
Designating Lender a Bid Rate Note payable to the order of the Designated
Lender, (ii) from and after the effective date specified in the Designation
Agreement, the Designated Lender shall become a party to this Agreement with a
right (subject to the provisions of Section 2.3) to make Money Market Loans on
behalf of its Designating Lender pursuant to Section 2.3 after the Borrower has
accepted a Money Market Loan (or portion thereof) of the Designating Lender and
subject to the terms of this Agreement, and (iii) the Designated Lender shall
not be required to make payments with respect to any obligations in this
Agreement except to the extent of excess cash flow of such Designated Lender
which is not otherwise required to repay obligations of such Designated Lender
which are then due and payable; provided, however, that regardless of such
designation and assumption by the Designated Lender, the Designating Lender
shall be and shall remain obligated to the Borrower, the Administrative Agent,
and the Banks for each and every of the obligations of the Designating Lender
and its related Designated Lender with respect to this Agreement, including,
without limitation, any indemnification obligations under Section 7.6 hereof and
any sums otherwise payable to the Borrower by the Designated Lender. Each
Designating Lender shall serve as the administrative agent of the Designated
Lender and shall on behalf of, and to the exclusion of, the Designated Lender:
(i) receive any and all payments made for the benefit of the Designated Lender
and (ii) give and receive all communications and notices and take all actions
hereunder, including, without limitation, votes, approvals, waivers, consents
and amendments under or relating to this Agreement and the other Loan Documents.
Any such notice communication, vote, approval, waiver, consent or amendment
shall be signed by the Designating Lender as administrative agent for the
Designated Lender and shall not be signed by the Designated Lender on its own
behalf and shall be binding upon the Designated Lender to the same extent as if
signed by the Designated Lender on its own behalf. The Borrower, the
Administrative Agent, and the Banks may rely thereon without any requirement
that the Designated Lender sign or acknowledge the same. No Designated Lender
may assign or transfer all or any portion of its interest hereunder or under any
other Loan Document, other than assignments to the Designating Lender which
originally designated such Designated Lender or otherwise in accordance with the
provisions of Section 9.6 (b) and (c), and any such assignment or transfer shall
be null and void.
(e) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Notes and the Letter(s) of Credit participated in
by such Bank or, in the case of the
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Fronting Bank, issued by it, to a Federal Reserve Bank. No such assignment shall
release the transferor Bank from its obligations hereunder.
(f) Administrative Agent shall maintain, at its address referred to
on Schedule II, a copy of each Assignment and Assumption Agreement delivered to
and accepted by it and shall record in its records the names and addresses of
each Bank and the Commitment of, and principal amount of the Loans owing to,
such Bank from time to time. Borrower and Banks may treat each Person whose name
is recorded in the Administrative Agent's records as a Bank hereunder for all
purposes of this Agreement.
(g) Borrower will use reasonable efforts to cooperate with the
Administrative Agent and Banks in connection with the assignment of interests
under this Agreement or the sale of participations herein.
SECTION 9.7. Collateral.
----------
Each of the Banks represents to the Administrative Agent and each of the
other Banks that it in good faith is not relying upon any Margin Stock as
collateral in the extension or maintenance of the credit provided for in this
Agreement.
SECTION 9.8. Governing Law; Submission to Jurisdiction.
-----------------------------------------
(a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF VIRGINIA
(WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT AND ANY ACTION FOR ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA
OR OF THE UNITED STATES OF AMERICA FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND,
BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND APPELLATE COURTS FROM ANY
THEREOF. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE HAND
DELIVERY, OR MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE
PREPAID, TO THE BORROWER AT ITS ADDRESS ON SCHEDULE II HERETO. THE BORROWER
HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
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BROUGHT IN THE COURTS REFERRED TO ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES
AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION.
SECTION 9.9. Counterparts; Integration; Effectiveness.
-------------------------- -------------
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof. This Agreement shall become effective upon receipt by the
Administrative Agent and the Borrower of counterparts hereof signed by each of
the parties hereto (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Administrative Agent in
form satisfactory to it of telegraphic, telex or other written confirmation from
such party of execution of a counterpart hereof by such party). Within twenty
(20) Domestic Business Days following the Closing Date, the Administrative Agent
shall execute and deliver to the Borrower such releases, termination statements
and other similar documents as may be necessary to release the collateral held
by the Administrative Agent pursuant to the Existing Agreement and shall cause
all of the promissory notes held by the lenders under the Existing Agreement to
be returned to the Borrower.
SECTION 9.10. WAIVER OF JURY TRIAL.
--------------------
THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS WAIVE THE RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT
MATTER OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS RELATED TO ANY OF THE LOAN DOCUMENTS. THIS WAIVER IS KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY MADE BY BORROWER, THE ADMINISTRATIVE AGENT AND THE
BANKS AND BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS ACKNOWLEDGE THAT NONE
OF THE THEM NOR ANY PERSON ACTING ON BEHALF OF ANY OF THEM HAS OR HAVE MADE ANY
REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO
MODIFY OR NULLIFY ITS EFFECT. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE
BANKS FURTHER ACKNOWLEDGE THAT EACH OF THEM HAS BEEN REPRESENTED (OR HAS HAD THE
OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE
MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED BY ITS OWN FREE
WILL, AND THAT EACH OF THEM HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH
COUNSEL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS AGREE THAT THE
OBLIGATIONS EVIDENCED BY THIS AGREEMENT ARE EXEMPTED TRANSACTIONS UNDER THE
TRUTH-IN-LENDING ACT, 15 U.S.C. SECTION 1601, ET SEQ.
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THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS FURTHER ACKNOWLEDGE THAT
EACH OF THEM HAS READ AND UNDERSTANDS THE MEANING OF THIS WAIVER PROVISION.
SECTION 9.11. Survival.
--------
All indemnities set forth herein shall survive the execution and delivery
of this Agreement and the other Loan Documents and the making and repayment of
the Loans hereunder.
SECTION 9.12. Domicile of Loans.
-----------------
Each Bank may transfer and carry its Loans at, to or for the account of any
domestic or foreign branch office, subsidiary or affiliate of such Bank.
SECTION 9.13. Limitation of Liability.
-----------------------
No claim may be made by the Borrower or any other Person acting by or
through Borrower against the Administrative Agent, or any Bank or the
affiliates, directors, officers, employees, attorneys or agent of any of them
for any consequential or punitive damages in respect of any claim for breach of
contract or any other theory of liability arising out of or related to the
transactions contemplated by this Agreement or by the other Loan Documents, or
any act, omission or event occurring in connection therewith; and the Borrower
hereby waives, releases and agrees not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.
SECTION 9.14. Recourse Obligation.
-------------------
(a) This Agreement and the Obligations hereunder are fully recourse to the
Borrower. Notwithstanding the foregoing, no recourse under or upon any
obligation, covenant, or agreement contained in this Agreement shall be had
against any officer, director, shareholder or employee of the Borrower or CESRRI
except in the event of fraud or misappropriation of funds on the part of such
officer, director, shareholder or employee.
(b) Subject to the exceptions and qualifications set forth hereinbelow,
the general and limited partners of Borrower and any Consolidated Subsidiary
shall not be personally liable for the payment of the Obligations of the
Borrower and any Consolidated Subsidiary respectively, and any judgment or
decree in any action brought to enforce any Obligation shall be enforceable only
against the Borrower and any Consolidated Subsidiary and the assets of Borrower
and any Consolidated Subsidiary, and any such judgment or decree shall not be
subject to execution upon or be a lien upon the assets of the general or limited
partners of the Borrower other than their respective partnership interests in
Borrower and any Consolidated Subsidiary. Notwithstanding the foregoing, the
general partner of Borrower shall be fully and personally liable as general
partner for the following:
(i) the commission of fraud by the Borrower or any material
misrepresentation made by the Borrower in connection with, arising out of, or in
any way related or
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incidental to the application for or closing of this Agreement, the Notes or any
advance made thereunder, or any of the Loan Documents executed or delivered in
connection herewith or the transactions related hereto or thereto; and
(ii) any fraudulent conveyance made by Borrower, CESRRI or any
Subsidiary.
Nothing contained herein shall affect, reduce or otherwise limit the
obligations of any Consolidated Subsidiary on the Guaranty furnished by any
such party.
SECTION 9.15. Confidentiality.
---------------
The Administrative Agent, and each Bank shall use reasonable efforts to
assure that information about Borrower, CESRRI and its Subsidiaries and
Investments Affiliates, and the Properties thereof and their operations, affairs
and financial condition, not generally disclosed to the public, which is
furnished to Administrative Agent, or any Bank pursuant to the provisions hereof
or any other Loan Document is used only for the purposes of this Agreement and
shall not be divulged to any Person other than the Administrative Agent, the
Banks, and their affiliates and respective officers, directors, employees and
agents who are actively and directly participating in the evaluation,
administration or enforcement of the Loan, except: (a) to their attorneys and
accountants, (b) in connection with the enforcement of the rights and exercise
of any remedies of the Administrative Agent, and the Banks hereunder and under
the other Loan Documents, (c) in connection with assignments and participations
and the solicitation of prospective assignees and participants referred to in
Section 9.6 hereof, and (d) as may otherwise be required or requested by any
regulatory authority having jurisdiction over the Administrative Agent, or any
Bank or by any applicable law, rule, regulation or judicial process.
SECTION 9.16. Bank's Failure to Fund.
----------------------
(a) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any Borrowing that such Bank will not make available
to the Administrative Agent such Bank's share of such Borrowing, the
Administrative Agent may assume that such Bank has made such share available to
the Administrative Agent on the date of such Borrowing in accordance with
Section 2.4(b) or Section 2.16(e) hereof, and the Administrative Agent may, in
reliance upon such assumption, make available to Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Administrative Agent, such Bank and Borrower
severally agree to repay to the Administrative Agent forthwith on demand such
corresponding amount together with interest thereon, in accordance with the
provisions of Section 2.4(c) or Section 2.16(e) hereof. If such Bank shall repay
to the Administrative Agent such corresponding amount, such amount so repaid
shall constitute such Bank's Loan included in such Borrowing for purposes of
this Agreement. Nothing contained in this Section 9.16(a) or Sections 2.4(c) or
2.16(e), shall he deemed to reduce the Commitment of any Bank or in any way
affect the rights of Borrower with respect to any defaulting Bank or
Administrative Agent. The failure of any Bank to make available to the
Administrative Agent such Bank's share of any Borrowing in accordance with
Sections 2.4(b) or 2.16(e) hereof shall not relieve any other Bank of its
obligations
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to fund its Commitment, in accordance with the provisions hereof.
(b) If a Bank does not advance to Administrative Agent such Bank's
pro rata share of a Loan in accordance herewith, then neither Administrative
Agent, nor the other Banks shall be required or obligated to fund such Bank's
pro rata share of such Loan.
(c) As used herein, the following terms shall have the meanings set
forth below:
(i) "Defaulting Bank" shall mean any Bank which (x) does not
---------------
advance to the Administrative Agent such Bank's pro rata share of a Loan in
accordance herewith for a period of five (5) Domestic Business Days after notice
of such failure from Administrative Agent, (y) shall otherwise fail to perform
such Bank's obligations under the Loan Documents for a period of five (5)
Domestic Business Days after notice of such failure from Administrative Agent,
or (z) shall fail to pay the Administrative Agent, or any other Bank, as the
case may be, upon demand, such Bank's pro rata share of any costs, expenses or
disbursements incurred or made by the Administrative Agent pursuant to the terms
of the Loan Documents for a period of five (5) Domestic Business Days after
notice of such failure from Administrative Agent, and in all cases, such failure
is not as a result of a good faith dispute as to whether such advance is
properly required to be made pursuant to the provisions of this Agreement, or as
to whether such other performance or payment is properly required pursuant to
the provisions of this Agreement.
(ii) "Junior Creditor" means any Defaulting Bank which has not
--------------
(x) fully cured each and every default on its part under the Loan Documents and
(y) unconditionally tendered to the Administrative Agent such Defaulting Bank's
pro rata share of all costs, expenses and disbursements required to be paid or
reimbursed pursuant to the terms of the Loan Documents.
(iii) "Payment in Full" means, as of any date, the receipt by
---------------
the Banks who are not Junior Creditors of an amount of cash, in lawful currency
of the United States, sufficient to indefeasibly pay in full all Senior Debt.
(iv) "Senior Debt" means (x) collectively, any and all
-----------
indebtedness, obligations and liabilities of the Borrower to the Banks who are
not Junior Creditors from time to time, whether fixed or contingent, direct or
indirect, joint or several, due or not due, liquidated or unliquidated,
determined or undetermined, arising by contract, operation of law or otherwise,
whether on open account or evidenced by one or more instruments, and whether for
principal, premium, interest (including, without limitation, interest accruing
after the filing of a petition initiating any proceeding referred to in Section
6.1(f) or (g)), reimbursement for fees, indemnities, costs, expenses or
otherwise, which arise under, in connection with or in respect of the Loans or
the Loan Documents, and (y) any and all deferrals, renewals, extensions and
refundings of, or amendments, restatements, rearrangements, modifications or
supplements to, any such indebtedness, obligation or liability.
(v) "Subordinated Debt" means (x) any and all indebtedness,
-----------------
obligations and liabilities of Borrower to one or more Junior Creditors from
time to time, whether fixed or contingent, direct or indirect, joint or several,
due or not due, liquidated or unliquidated, determined or undetermined, arising
by contract, operation of law or otherwise, whether on open account or
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evidenced by one or more instruments, and whether for principal, premium,
interest (including, without limitation, interest accruing after the filing of a
petition initiating any proceeding referred to in Section 6.1(f) or (g)),
reimbursement for fees, indemnities, costs, expenses or otherwise, which arise
under, in connection with or in respect of the Loans or the Loan Documents, and
(y) any and all deferrals, renewals, extensions and refundings of, or
amendments, restatements, rearrangements, modifications or supplements to, any
such indebtedness, obligation or liability.
(d) Immediately upon a Bank's becoming a Junior Creditor, no Junior
Creditor shall, prior to Payment in Full of all Senior Debt:
(i) accelerate, demand payment of, sue upon, collect, or
receive any payment upon, in any manner, or satisfy or otherwise discharge, any
Subordinated Debt, whether for principal, interest and otherwise;
(ii) take or enforce any Liens to secure Subordinated Debt or
attach or levy upon any assets of Borrower, to enforce any Subordinated Debt;
(iii) enforce or apply any security for any Subordinated Debt;
or
(iv) incur any debt or liability, or the like, to, or receive
any loan, return of capital, advance, gift or any other property, from, the
Borrower.
(e) In the event of:
(i) any insolvency, bankruptcy, receivership, liquidation,
dissolution, reorganization, readjustment, composition or other similar
proceeding relating to Borrower;
(ii) any liquidation, dissolution or other winding-up of the
Borrower, voluntary or involuntary, whether or not involving insolvency,
reorganization or bankruptcy proceedings;
(iii) any assignment by the Borrower for the benefit of
creditors;
(iv) any sale or other transfer of all or substantially all
assets of the Borrower; or
(v) any other marshalling of the assets of the Borrower;
each of the Banks shall first have received Payment in Full of all Senior Debt
before any payment or distribution, whether in cash, securities or other
property, shall be made in respect of or upon any Subordinated Debt. Any
payment or distribution, whether in cash, securities or other property that
would otherwise be payable or deliverable in respect of Subordinated Debt to any
Junior Creditor but for this Agreement shall be paid or delivered directly to
the Administrative Agent for distribution to the Banks in accordance with this
Agreement until Payment in Full of all Senior Debt. If any Junior Creditor
receives any such payment or distribution, it shall promptly pay over or deliver
the same to
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the Administrative Agent for application in accordance with the preceding
sentence.
(f) Each Junior Creditor shall file in any bankruptcy or other
proceeding of Borrower in which the filing of claims is required by law, all
claims relating to Subordinated Debt that such Junior Creditor may have against
Borrower and assign to the Banks who are not Junior Creditors all rights of such
Junior Creditor thereunder. If such Junior Creditor does not file any such
claim prior to forty-five (45) days before the expiration of the time to file
such claim, Administrative Agent, as attorney-in-fact for such Junior Creditor,
is hereby irrevocably authorized to do so in the name of such Junior Creditor
or, in Administrative Agent's sole discretion, to assign the claim to a nominee
and to cause proof of claim to be filed in the name of such nominee. The
foregoing power of attorney is coupled with an interest and cannot be revoked.
The Administrative Agent shall, to the exclusion of each Junior Creditor, have
the sole right, subject to Section 9.5 hereof, to accept or reject any plan
proposed in any such proceeding and to take any other action that a party filing
a claim is entitled to take. In all such cases, whether in administration,
bankruptcy or otherwise, the Person or Persons authorized to pay such claim
shall pay to Administrative Agent the amount payable on such claim and, to the
full extent necessary for that purpose, each Junior Creditor hereby transfers
and assigns to the Administrative Agent all of the Junior Creditor's rights to
any such payments or distributions to which Junior Creditor would otherwise be
entitled.
(g) (i) If any payment or distribution of any character or any
security, whether in cash, securities or other property, shall be received by
any Junior Creditor in contravention of any of the terms hereof, such payment or
distribution or security shall be received in trust for the benefit of, and
shall promptly be paid over or delivered and transferred to, Administrative
Agent for application to the payment of all Senior Debt, to the extent necessary
to achieve Payment in Full. In the event of the failure of any Junior Creditor
to endorse or assign any such payment, distribution or security, Administrative
Agent is hereby irrevocably authorized to endorse or assign the same as
attorney-in-fact for such Junior Creditor.
(ii) Each Junior Creditor shall take such action (including,
without limitation, the execution and filing of a financing statement with
respect to this Agreement and the execution, verification, delivery and filing
of proofs of claim, consents, assignments or other instructions that
Administrative Agent may require from time to time in order to prove or realize
upon any rights or claims pertaining to Subordinated Debt or to effectuate the
full benefit of the subordination contained herein) as may, in Administrative
Agent's sole and absolute discretion, be necessary or desirable to assure the
effectiveness of the subordination effected by this Agreement.
(h) (i) Each Bank that becomes a Junior Creditor understands and
acknowledges by its execution hereof that each other Bank is entering into this
Agreement and the Loan Documents in reliance upon the absolute subordination in
right of payment and in time of payment of Subordinated Debt to Senior Debt as
set forth herein.
(ii) Only upon the Payment in Full of all Senior Debt shall any
Junior Creditor be subrogated to any remaining rights of the Banks which are not
Defaulting Banks to receive payments or distributions of assets of the Borrower
made on or applicable to any Senior Debt.
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(iii) Each Junior Creditor agrees that it will deliver all
instruments or other writings evidencing any Subordinated Debt held by it to
Administrative Agent, promptly after request therefor by the Administrative
Agent.
(iv) No Junior Creditor may at any time sell, assign or
otherwise transfer any Subordinated Debt, or any portion thereof, including,
without limitation, the granting of any Lien thereon, unless and until
satisfaction of the requirements of Section 9.6 above and the proposed
transferee shall have assumed in writing the obligation of the Junior Creditor
to the Banks under this Agreement, in a form acceptable to the Administrative
Agent.
(v) If any of the Senior Debt should be invalidated, avoided
or set aside, the subordination provided for herein nevertheless shall continue
in full force and effect and, as between the Banks which are not Defaulting
Banks and all Junior Creditors, shall be and be deemed to remain in full force
and effect.
(vi) Each Junior Creditor hereby irrevocably waives, in respect
of Subordinated Debt, all rights (x) under Sections 361 through 365, 502(e) and
509 of the Bankruptcy Code (or any similar sections hereafter in effect under
any other Federal or state laws or legal or equitable principles relating to
bankruptcy, insolvency, reorganizations, liquidations or otherwise for the
relief of debtors or protection of creditors), and (y) to seek or obtain
conversion to a different type of proceeding or to seek or obtain dismissal of a
proceeding, in each case in relation to a bankruptcy, reorganization, insolvency
or other proceeding under similar laws with respect to the Borrower. Without
limiting the generality of the foregoing, each Junior Creditor hereby
specifically waives (A) the right to seek to give credit (secured or otherwise)
to the Borrower in any way under Section 364 of the Bankruptcy Code unless the
same is subordinated in all respects to Senior Debt in a manner acceptable to
Administrative Agent in its sole and absolute discretion and (B) the right to
receive any collateral security (including any "super priority" or equal or
"priming" or replacement Lien) for any Subordinated Debt unless the Banks which
are not Defaulting Banks have received a senior position acceptable to the Banks
in their sole and absolute discretion to secure all Senior Debt (in the same
collateral to the extent collateral is involved).
(i) (i) In addition to and not in limitation of the subordination
effected by this Section 9.16, the Administrative Agent and each of the Banks
which are not Defaulting Banks may in their respective sole and absolute
discretion, also exercise any and all other rights and remedies available at law
or in equity in respect of a Defaulting Bank; and
(ii) The Administrative Agent shall give each of the Banks
notice of the occurrence of a default under this Section 9.16 by a Defaulting
Bank and if the Administrative Agent and/or one or more of the other Banks
shall, at their option, fund any amounts required to be paid or advanced by a
Defaulting Bank, the other Banks who have elected not to fund any portion of
such amounts shall not be liable for any reimbursements to the Administrative
Agent and/or to such other funding Banks.
(j) Notwithstanding anything to the contrary contained or implied
herein, a Defaulting Bank shall not be entitled to vote on any matter as to
which a vote by the Banks is required
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hereunder, including, without limitation, any actions or consents on the part of
the Administrative Agent as to which the approval or consent of all the Banks or
the Required Banks is required under Article VIII, Section 9.5 or elsewhere, so
long as such Bank is a Defaulting Bank; provided, however, that in the case of
any vote requiring the unanimous consent of the Banks, if all the Banks other
than the Defaulting Bank shall have voted in accordance with each other, then
the Defaulting Bank shall be deemed to have voted in accordance with such Banks.
(k) Each of the Administrative Agent and any one or more of the Banks
which are not Defaulting Banks may, at their respective option, (i) advance to
the Borrower such Bank's pro rata share of the Loans not advanced by a
Defaulting Bank in accordance with the Loan Documents, or (ii) pay to the
Administrative Agent such Bank's pro rata share of any costs, expenses or
disbursements incurred or made by the Administrative Agent pursuant to the terms
of this Agreement not theretofore paid by a Defaulting Bank. Immediately upon
the making of any such advance by the Administrative Agent or any one of the
Banks, such Bank's pro rata share and the pro rata share of the Defaulting Bank
shall be recalculated to reflect such advance. All payments, repayments and
other disbursements of funds by the Administrative Agent to Banks shall
thereupon and, at all times thereafter be made in accordance with such Bank's
recalculated pro rata share unless and until a Defaulting Bank shall fully cure
all defaults on the part of such Defaulting Bank under the Loan Documents or
otherwise existing in respect of the Loans or this Agreement, at which time the
pro rata share of the Bank(s) which advanced sums on behalf of the Defaulting
Bank and of the Defaulting Bank shall be restored to their original percentages.
SECTION 9.17. No Bankruptcy Proceedings.
-------------------------
Each of the Borrower, the Banks and the Administrative Agent hereby agrees
that it will not institute against any Designated Lender or join any other
Person in instituting against any Designated Lender any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding under any
federal or state bankruptcy or similar law, until one year and one day after the
later to occur of (i) the payment in full of the latest maturing commercial
paper note issued by such Designated Lender and (ii) the later to occur of (a)
the payment in full of the Obligations or (b) the Maturity Date.
100
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.,
a Delaware limited partnership
By: Charles E. Smith Residential Realty, Inc., a
Maryland corporation, its general partner
By: ________________________________
W.D. Minami,
Senior Vice President,
Chief Financial Officer, and
Treasurer
Commitments
- -----------
PNC BANK, NATIONAL ASSOCIATION, as Administrative
Agent and as a Bank
By:_________________________________
Name:____________________________
Title:___________________________
NATIONSBANK, N.A, as Syndication Agent and as a Bank
By:_________________________________
Name:____________________________
Title:___________________________
U.S. BANK NATIONAL ASSOCIATION, as Documentation
Agent and as a Bank
By:_________________________________
Name:____________________________
Title:___________________________
101
<PAGE>
JOINDER
CHARLES E. SMITH RESIDENTIAL REALTY, INC., joins in this Agreement solely
for the purpose of making the representations and warranties with respect to it
contained in Article IV of the Agreement and for the purpose of covenanting and
agreeing to be bound by the covenants and agreements with respect to it
contained in Article V of the Agreement.
Charles E. Smith Residential Realty, Inc., a Maryland
corporation
By:____________________________
W.D. Minami,
Senior Vice President,
Chief Financial Officer, and
Treasurer
102
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CHARLES E. SMITH RESIDENTIAL REALTY L.P.
<TABLE>
<CAPTION>
STATE OF INCORPORATION/
NAME FORMATION
<S> <C>
Smith One, Inc. Delaware
Smith Two, Inc. Delaware
Smith Three, Inc. Delaware
Smith Four, Inc. Delaware
Smith Five, Inc. Delaware
Smith Six, Inc. Delaware
Smith Seven, Inc. Delaware
Charles E. Smith Residential Realty L.P. Delaware
Smith Employment Services L.P. Delaware
Courthouse Hill L.L.C. Delaware
Smith Property Holdings Springfield L.L.C. Delaware
Smith Property Holdings 2000 Commonwealth L.L.C. Delaware
Smith Property Holdings Cathedral Place L.L.C. Delaware
Smith Property Holdings Crystal Plaza L.L.C. Delaware
Smith Property Holdings Dearborn Place L.L.C. Delaware
Smith Property Holdings One East Delaware L.L.C. Delaware
Smith Property Holdings Lincoln Towers L.L.C. Delaware
Smith Property Holdings One, L.P. Delaware
Smith Property Holdings One (D.C.) L.P. Delaware
Smith Property Holdings Crystal Towers L.P. Delaware
Smith Property Holdings Two L.P. Delaware
Smith Property Holdings Two (D.C) L.P. Delaware
Smith Property Holdings Three L.P. Delaware
Smith Property Holdings Three (D.C.) L.P. Delaware
Smith Property Holdings Four L.P. Delaware
Smith Property Holdings Kenmore L.P. Delaware
Smith Property Holdings Five L.P. Delaware
Smith Property Holdings Five (D.C.) L.P. Delaware
First Herndon Associates Limited Partnership Virginia
Smith Property Holdings Six L.P. Delaware
Smith Property Holdings Six (D.C.) L.P. Delaware
Smith Property Holdings Van Ness L.P. Delaware
Smith Property Holdings Columbia Road L.P. Delaware
Smith Property Holdings Seven L.P. Delaware
Metropolitan Acquisition Finance L.P. Delaware
Smith Realty Company Maryland
Consolidated Engineering Services, Inc. Maryland
Smith Management Construction, Inc. Maryland
Charles E. Smith Insurance Agency, Inc. District of Columbia
</TABLE>
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation by reference
of our report included in this Form 10-K, into Charles E. Smith Residential
Realty L.P.'s previously filed Registration Statement File No. 33-82382.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
March 25, 1998
E-4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,059
<PP&E> 1,014,509
<DEPRECIATION> 210,186
<TOTAL-ASSETS> 865,506
<CURRENT-LIABILITIES> 16,185
<BONDS> 610,971
0
79,675
<COMMON> (344,044)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 865,506
<SALES> 0
<TOTAL-REVENUES> 200,104
<CGS> 0
<TOTAL-COSTS> 104,493
<OTHER-EXPENSES> 6,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,348
<INCOME-PRETAX> 52,297
<INCOME-TAX> 0
<INCOME-CONTINUING> 52,297
<DISCONTINUED> 0
<EXTRAORDINARY> 87
<CHANGES> 0
<NET-INCOME> 50,329
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.88
</TABLE>
