FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23466
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1603837
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1155 Valley St., SUITE 400, SEATTLE, WASHINGTON 98109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 206-624-8100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Shares outstanding at May 5, 1999:
Class A Common Stock, $.001 par value, 28,891,626 shares
outstanding
Class B Common Stock, $.001 par value, 154,604 shares
outstanding
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Balance Sheets
(unaudited)
(Amounts in thousands except share data)
<TABLE>
March 31, December 31,
1999 1998
-------- ---------
<S> <C> <C>
Assets:
Storage centers:
Land $ 215,102 $ 212,154
Buildings and equipment, net 768,708 750,700
Construction in progress 73,657 81,043
--------- ---------
Total storage centers 1,057,467 1,043,897
Other real estate investments 34,849 33,057
Cash and cash equivalents 11,014 9,474
Restricted cash and investments 6,945 6,864
Other assets 57,680 60,615
--------- ----------
Total assets $1,167,955 $1,153,907
========== ==========
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 34,878 $ 41,201
Lines of credit 113,890 95,028
Notes payable 343,261 331,109
--------- ---------
Total liabilities 492,029 467,338
--------- ---------
Minority interest in other real estate
investments 29,678 34,759
Commitments and contingencies (Note E)
Shareholders' equity:
Series B Cumulative Redeemable Preferred
Stock; $0.001 par value; 2,300,000
authorized; 2,000,000 shares issued
and outstanding; liquidation preference 48,056 48,056
Series C Cumulative Redeemable Preferred
Stock; $0.001 par value: 2,000,000
authorized; 2,000,000 shares issued
and outstanding; liquidation preference 48,115 48,115
Class A Common Stock, $0.001 par value;
120,000,000 authorized; 28,884,174 and
28,677,367 issued and outstanding 606,696 605,484
Class B Common Stock, $0.001 par value;
500,000 authorized, 154,604 issued
and outstanding; net of loans to
shareholders of $4,002 (1,086) (1,086)
Accumulated net income less distributions(53,902) (47,312)
Accumulated other comprehensive income (1,631) (1,447)
-------- --------
Total shareholders' equity 646,248 651,810
-------- --------
Total liabilities and shareholders'
equity $1,167,955 $1,153,907
========== ==========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
<TABLE> For the three For the three
months ended months ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenue
Rental $ 42,496 $ 36,778
Other real estate
investments (626) (188)
Property management 355 525
------- -------
Total revenue 42,225 37,115
------- -------
Expenses
Operating expense 12,965 10,864
Depreciation and amortization 9,542 8,114
Real estate taxes 3,708 2,969
General, administrative and
other 1,494 1,025
------ ------
Total expenses 27,709 22,972
Income from operations 14,516 14,143
------ ------
Interest and other income 290 426
Interest expense (5,871) (4,461)
Other income ------ ------
(expense), net (5,581) (4,035)
------ ------
Minority interest 2,229 261
------ ------
Income before cumulative
effect of a change in
accounting principle 11,164 10,369
Cumulative effect of a change
in accounting principle (1,366)
--------- ---------
Net income $ 9,798 $ 10,369
========= =========
Basic net income per common share:
Income before change in
accounting principle $ 0.31 $ 0.32
Cumulative effect of a change
in accounting principle $ (.05)
--------- ---------
Net income $ 0.26 $ 0.32
========= =========
Diluted net income per common share:
Income before change
in accounting principle $ 0.31 $ 0.32
Cumulative effect of a change
in accounting principle $ (.05)
--------- ---------
Net income $ 0.26 $ 0.32
========= =========
Distributions per common share:
Basic $ 0.49 $ 0.48
========= =========
Diluted $ 0.49 $ 0.48
========= =========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
<TABLE>
Three months Three months
ended ended
March, 31, March, 31,
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 9,798 $ 10,369
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Cumulative change in accounting
principle 1,366
Depreciation and amortization 9,542 8,114
Other (216)
Loss from other real estate
investments 1,169 776
Minority interest in earnings
from investments in other real
estate investments (2,229) (261)
Changes in operating accounts:
Restricted cash (81) 80
Other assets 77 (2,073)
Accounts payable and other
liabilities 1,760 105
------ ------
Net cash provided by operating
activities 21,402 16,894
------ ------
Investing activities:
Construction, acquisition and
improvements to storage centers (33,646) (32,057)
Proceeds from sale of real estate 2,000
Purchase of other real estate
investments (3,736) (356)
Purchase of non-competition agreements
and other amortizable assets (175)
Decrease in loans to affiliates 1,280 311
Purchase of additional interest in
an affiliated partnership (1,176)
Distributions in excess of earnings
from other real estate investments 235
Net cash used in investing ------- -------
activities (37,278) (30,042)
------- -------
Financing activities:
Proceeds from notes payable 13,701 2,967
Net proceeds from lines of credit 19,215 31,079
Payment of loan costs (40)
Proceeds from exercise of stock
options and dividend reinvestment
plan 1,211 1,283
Distributions paid (16,388) (14,834)
Distributions to minority partners (253) (254)
Net cash provided by ------ ------
financing activities 17,446 20,241
------ ------
Net effect of translation on cash (30)
------ ------
Increase in cash and cash equivalents 1,540 7,093
Cash and cash equivalents at beginning
of period 9,474 7,248
------ ------
Cash and cash equivalents at end of
period $11,014 $14,341
======= =======
Supplemental schedule of cash flow information:
Cash paid for interest, net of
interest capitalized $ 4,797 $4,195
======= ======
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999
(unaudited)
Note A - Basis of Presentation
The consolidated financial statements include the accounts of
Shurgard Storage Centers, Inc. and its subsidiaries, including U.S.
and foreign subsidiaries. All intercompany balances and
transactions have been eliminated upon consolidation.
The consolidated financial statements included in this report
are unaudited. In our opinion, all adjustments necessary for a fair
presentation of such financial statements have been included and
such adjustments consisted only of normal recurring items. The
interim financial statements should be read in conjunction with our
1998 Annual Report. Interim results are not necessarily indicative
of results for a full year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Effective December 31, 1998, we adopted Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130) and No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components. SFAS No. 131 establishes standards for
determining an entity's operating segments and the type and level of
financial information to be disclosed in both annual and interim
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers (see Note G).
On June 16, 1998, the Financial Accounting Standards Board
(FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective
for fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. Under this statement certain
derivatives are recognized at fair market value and changes in fair
market value are recognized as gains or losses. We are studying this
pronouncement to determine its effect, if any, on our financial
statements.
On April 3, 1998, the AIPCA Accounting Standards Executive
Committee (AcSEC) issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities", which is effective
for fiscal years beginning after December 15, 1998. SOP 98-5
requires start-up activities and organization expenses to be
expensed as incurred. We have implemented SOP 98-5 in the first
quarter of 1999. This initial application for consolidated entities
is reported as a cumulative effect of a change in accounting
principle.
Basic average shares outstanding for the three months ended
March 31, 1999 and 1998 were 28,996,520 and 28,607,404,
respectively. Diluted average shares outstanding for the three
months ended March 31, 1999 and 1998 were 29,015,055 and 28,639,951,
respectively.
Certain amounts in the 1998 financial statements have been
reclassified to conform to the current presentation.
Note B - Lines of Credit
We have an unsecured domestic line of credit to borrow up to
$150 million at a spread over LIBOR, maturing September 30, 1999,
with the option to extend until September 2000. The amount
available and the spread vary based on the terms of the agreement;
as of March 31, 1999, the current available amount is $150 million,
of which approximately $103.4 million was outstanding. At March 31,
1999, the weighted average interest rate was 5.95%.
We have European credit lines (denominated in local currencies)
to borrow up to a total of $11.5 million of which $10.5 million had
been drawn down as of March 31, 1999. Of this amount, $0.5 million
matures in 1999 and $11 million matures in 2001. The weighted
average effective interest rate on these lines at March 31, 1999 was
5.1%.
Note C - Storage Centers
Building and equipment are presented net of accumulated
depreciation of $114.4 million and $106.5 million as of March 31,
1999 and December 31, 1998, respectively.
On March 17, 1999, we formed a partnership, Shurgard/Fremont
Partners II (SFPII), with Fremont Realty Capital L.L.C. (Fremont).
One of our wholly owned subsidiaries and an affiliate of Fremont are
the general partners of SFPII. We have a 10% equity interest and
the Fremont affiliate has a 90% equity interest in SFPII. Under the
terms of the agreements executed in connection with the formation of
SFPII, we contribute properties to SFPII shortly after construction
is completed. The first properties are expected to be contributed in
the second quarter of this year.
On May 29, 1998, we formed a partnership, Shurgard/Fremont
Partners I (SFP1), with Fremont Realty Capital L.L.C. (Fremont). The
general partners of SFP1 consist of one of our wholly owned
subsidiaries and an affiliate of Fremont. SFP1 has granted us an
option to acquire all of the properties owned by SFP1. The purchase
option is exercisable at certain times between December 15, 2000 and
December 31, 2002, depending upon the performance of the properties.
For a further discussion of this partnership, see NEW DEVELOPMENT
FINANCING ARRANGEMENT in our 1998 Annual Report on Form 10-K.
Note D - Shareholders' Equity
During the first three months of 1999, 50,398 shares of Class A
common stock were issued in accordance with our Dividend
Reinvestment Plan (the "Plan"). The Plan offers shareholders an
opportunity to invest cash dividends in additional shares at a 2%
discount from the current market price. All shareholders are
eligible to participate.
Under the Merger Agreement with Shurgard Inc., we are
contingently obligated to issue additional shares as consideration
for certain partnership interests held by Shurgard Inc. which were
not valued at the time of the merger. During the first quarter of
1999, we issued 145,286 shares related to this obligation.
Additional shares may be issued over the next two years as
consideration for similar interests in two other partnerships.
Note E - Contingent Liability and Commitments
As a general partner, we are contingently liable for the debt
of a European joint venture, which at March 31, 1999 totaled $23.9
million. We have also guaranteed our pro rata portion of the debt
of certain domestic joint ventures and joint venture partners, which
at March 31, 1999 totaled $32.3 million.
Additionally, we have guaranteed $12.5 million in lease
obligations for Shurgard Storage to Go, Inc., a containerized
storage business. We own only nonvoting stock in this start-up
venture which is not a qualified REIT subsidiary and is subject to
corporate level tax.
Note F - Purchase of Units of an Affiliated Party
On March 31, 1999, we purchased one Limited Partner unit in
Shurgard Institutional Fund LP II, from an unaffiliated third party,
for $1.2 million in cash. We now own 6.5 of 9.5 limited partner
units and are entitled to 67% of limited partner distributions. We
continue to own a general partnership interest in this partnership
which is consolidated in our financial statements.
Note G - Segment Reporting
SSCI has three reportable segments; Same, New and European
Stores. Our definition of Same Stores includes existing domestic
facilities acquired prior to January 1 of 1998 as well as developed
properties that have been operating a full two years as of January
1, 1999. We project that newly developed properties will reach
stabilization in an average of 21 to 24 months. New Stores include
existing domestic facilities that had not been acquired as of
January 1, 1998 as well as domestic developed properties that had
not been operating a full two years as of January 1, 1999. Our
definition of European Stores includes all non-domestic stores. We
are currently located in four European countries: Belgium, France,
Sweden and the United Kingdom.
The three reportable segments allow us to focus on increasing
net operating income from our existing domestic real estate assets,
renting up our new domestic facilities, and becoming a dominant
player in the European market. We evaluate each segment's
performance based on net operating income (NOI) which is defined as
rental revenue less direct operating expenses and real estate taxes.
NOI does not include any allocation of off-site management or
overhead costs.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. There
are no inter-segment sales and transfers.
SSCI does not allocate non-direct operating expenses,
depreciation & amortization, general, administrative and other,
interest expense, interest and other income (net) and minority
interest to the segments.
Using the definition of Same Store and New Store described
above, the portfolio of assets reported in these segments changes
from year to year. Assets transition from New Store to Same Store
over time. The following table illustrates the results using the
1999 Same Store, New Store and European store base for reportable
segments as of and for the quarters ended March 31, 1999 and 1998:
(in thousands)
<TABLE>
Same New European
Stores Stores Stores Total
------ ------ -------- ------
<S> <C> <C> <C> <C>
Quarter ended
March 31, 1999
Rental revenue $38,696 $4,723 $1,687 $45,106
Less unconsolidated
joint ventures (1,153) (1,457) (2,610)
------ ------ ------ -------
Consolidated revenue 37,543 3,266 1,687 42,496
Operating expenses 11,096 1,957 1,093 14,146
Less unconsolidated
joint ventures (278) (446) (724)
------ ------ ----- ------
Consolidated
operating expenses 10,818 1,511 1,093 13,422
------ ------ ----- ------
Consolidated NOI $26,725 $1,755 $594 $29,074
======= ====== ===== =======
Quarter ended
March 31, 1998
Rental revenue $37,467 $1,541 $718 $39,726
Less unconsolidated
joint ventures (2,233) (715) (2,948)
------ ------ ----- -------
Consolidated revenue 35,234 826 718 36,778
Operating expenses 11,445 645 341 12,431
Less unconsolidated
joint ventures (360) (314) (674)
------ ----- ---- ------
Consolidated
operating expenses 11,085 331 341 11,757
------ ---- ---- ------
Consolidated NOI $24,149 $495 $377 $25,021
======= ==== ==== =======
</TABLE>
The following table reconciles the reportable segments' rental
revenue per the table above to consolidated total revenue for the
quarters ended March 31, 1999 and 1998.
<TABLE>
(in thousands) 1999 1998
------- -------
<S> <C> <C>
Consolidated rental revenue $42,496 $36,778
Other real estate investments
income (loss) (626) (188)
Property management revenue 355 525
------- -------
Total revenue $42,225 $37,115
======= =======
</TABLE>
The following table reconciles the reportable segments' NOI per
the table above to consolidated net income for the quarters ended
March 31, 1999 and 1998.
<TABLE>
(in thousands) 1999 1998
------- -------
<S> <C> <C>
Consolidated NOI $29,074 $25,021
Other real estate investments
income (loss) (626) (188)
Property management revenue 355 525
Other operating expenses (14,287) (11,215)
Interest & other income (5,581) (4,035)
Minority interest 2,229 261
Change in accounting principle (1,366)
------ -------
Net income $9,798 $10,369
====== =======
</TABLE>
Part I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
When used in this discussion and elsewhere in this Quarterly
Report on Form 10-Q, the words "believes," "anticipates," "expects,"
"projects" and similar expressions are intended to identify forward-
looking statements regarding financial performance. ACTUAL RESULTS
MAY DIFFER MATERIALLY DUE TO UNCERTAINTIES INCLUDING THE RISK THAT
COMPETITION FROM NEW SELF STORAGE FACILITIES OR OTHER STORAGE
ALTERNATIVES MAY CAUSE RENT TO DECLINE, OCCUPANCY RATES TO DROP AND
DELAYS IN THE RENT-UP OF NEWLY DEVELOPED PROPERTIES, TAX LAW CHANGES
MAY CHANGE THE TAXABILITY OF FUTURE INCOME, AND LITIGATION MAY
MATERIALLY DECREASE LATE FEE REVENUE. ACTUAL RESULTS MAY DIFFER IF
INCREASES IN LABOR, TAXES, MARKETING, LITIGATION AND OTHER OPERATING
AND CONSTRUCTION EXPENSES OCCUR. Other factors which could affect
our financial results are described below and in Item 1 (Business)
and Item 7A of our most recent Annual Report on Form 10-K. Forward-
looking statements are based on estimates as of the date of this
report. The Company disclaims any obligation to publicly release
the results of any revisions to these forward-looking statements
reflecting new estimates, events or circumstances after the date of
this report.
INTERNAL GROWTH
The primary way we analyze our performance is to measure year
over year improvements in Same Store operating results. Our
definition of Same Stores includes existing facilities acquired
prior to January 1 of 1998 as well as developed properties that have
been operating for a full two years as of January 1, 1999. We
project that newly developed properties will reach stabilization in
an average of 21 to 24 months. Please note that our definition of
Same Stores results in the addition of stores each year as new
acquisitions and developments meet the criteria for inclusion, and
that we then include these stores in the previous year's comparable
data. Other storage companies may define Same Stores differently,
which will affect the comparability of the data. The following
tables summarize same store operating performance for the first
quarter of 1999 and 1998:
Same Store Results
<TABLE>
(dollars in thousands Quarter ended March 31,
except average rent) --------------------------------
1999 1998 % Change
------- ------- --------
<S> <C> <C>
Rental revenue $38,696 $37,467 3.3%
Property operating expenses (1) 11,096 11,445 (3.1%)
------- -------
Net operating income $27,600 $26,022 6.1%
======= =======
Avg. annual rent per sq.ft (2) $10.19 $9.72 4.8%
Avg. sq. ft. occupancy 85% 85%
Total net rentable sq. ft. 16,700,000 16,700,000
Number of properties 257 257
</TABLE>
_______________
(1) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-
site management personnel.
(2) Average annual rent per square foot is calculated by dividing
actual rent collected by the average number of square feet occupied
during the period.
First quarter net operating income (NOI) for these centers has
risen 6.1% over the same quarter last year due primarily to
increases in revenue. Revenue gains were primarily a function of
changes in rental rates, which were partially offset by a decline in
other income which includes administrative fees, Ryder truck rentals
and retail sales. First quarter 1999 operating expenses declined
3.1% from 1998 levels primarily due to decreases in personnel costs
which include decreased insurance costs and lower on-site employee
bonuses as compared to the prior year quarter.
We believe our diversified portfolio minimizes the impact of
individual market fluctuations that result from economic or
competitive changes within those markets. Market conditions in
Illinois, Texas, and California contributed to above-average revenue
increases. Although occupancy declined in the Virginia, Maryland and
Michigan markets, revenue increased over the prior year quarter due
to rate increases. The Indiana market has experienced increased
competition and, as a result, we have reduced rental rates in order
to maintain occupancy.
NEW STORES
Our definition of New Stores, as shown in the table below,
includes existing domestic facilities that had not been acquired as
of January 1, 1998 as well as domestic developed properties that
have not been operating a full eight quarters as of January 1, 1999.
New Store Results
<TABLE>
(dollars in thousands Quarter Ended
except average rent) March 31,
------------------
1999 1998
------- --------
<S> <C> <C>
Rental revenue $ 4,723 $ 1,541
Property operating
expenses (1) 1,957 645
-------- --------
Net operating income $ 2,766 $ 896
======== ========
Number of properties 52 21
Number of property
months (2) 150 58
Total invested cost as
of March 31, 1999 $219.8 million
</TABLE>
_______________
(1) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-
site management personnel.
(2) Represents the sum of the number of months we operated each
property during the year.
Increases from year to year in net operating income (NOI) for the
new store portfolio reflect the greater number of property months
included for the periods presented. Although this increase gives
some indication of how much of our overall NOI growth results from
this segment, it is not a good method of evaluating the performance
of assets within this segment. We use different methods when
evaluating the performance of assets in this segment based on
whether they are acquisitions or developments. Acquisitions are
evaluated based on the yield on invested cost, while development
properties are evaluated based on comparisons of actual results to
pro forma NOI for the appropriate period from opening or at
stabilization. The performance of our acquisitions and developments
are discussed in the sections that follow.
DOMESTIC ACQUISITIONS
During the first three months of 1999, we did not purchase any
additional storage centers. During the first quarter of 1998, we
acquired a leasehold in an existing self storage center near
Phoenix, Arizona for $1.2 million. Additionally, during the last
nine months of 1998, we purchased seven existing storage centers
(two through a joint venture in which we own an 86% interest) for
$14.5 million. These eight properties total 347,000 net rentable
square feet and contributed net operating income of $561,000 for the
quarter ended March 31, 1999. The first quarter 1999 yield on these
properties was 13%, (calculated as actual 1999 NOI less lease
payments divided by purchase price). For a discussion of purchases
of partnership units, see Liquidity and Capital Resources.
DOMESTIC DEVELOPMENT
We opened two domestic storage centers in the first quarter of
1999, and, when all phases are complete, these two projects will
total approximately 140,000 net rentable square feet with an
estimated total cost of $8.8 million. One of these storage centers
was developed through our Florida joint venture.
We opened 24 storage centers in 1998, representing
approximately 1,600,000 net rentable square feet. Of the 24 stores
opened, one was developed through our California joint venture,
three were developed through our Tennessee and Florida joint
ventures, while another ten were contributed to Shurgard/Fremont
Partners I (SFPI) in which we own a 10% interest (see NEW
DEVELOPMENT FINANCING ARRANGEMENT in our 1998 Annual Report on Form
10-K). These 1998 developments together generated $644,000 in net
operating income for the first three months of 1999. For the one
month ended March 31, 1999, these developments had NOI of $259,000
which represents 24% of projected monthly NOI at stabilization.
Additionally, these developments averaged 37% occupancy for the
month of March 1999. The storage center developed through our
California joint venture is not included in the operating results
above as it is currently a managed property. For a further
discussion see OTHER REAL ESTATE INVESTMENTS in our 1998 Annual
Report on Form 10-K.
The 17 storage centers opened in 1997 (five of which were
contributed to SFP1 and seven of which were developed through our
Tennessee and Florida joint ventures), representing 1,181,000 net
rentable square feet, averaged 71% occupancy for the month of March
1999. These 1997 developments together generated $1,496,000 in net
operating income for the first three months of 1999. For the one
month ended March 31, 1999 these developments had net operating
income of $524,000 which represents 82% of projected monthly NOI at
stabilization. Total cost to develop these properties was $67.7
million.
In addition to the above completed developments, we had 18
storage centers under construction (five of these are being
developed in Florida through joint ventures) as of March 31, 1999.
As a general rule, to limit the risks of development, we do not
purchase land until the permitting process is complete.
Construction usually begins shortly after we obtain title to the
land. The following table summarizes domestic development projects
in progress at March 31, 1999.
<TABLE>
Number Estimated Total Cost to
of Completed Cost Date as of
Projects of Projects March 31, 1999
-------- -------------- --------------
<S> <C> <C> <C>
New Domestic Developments:
Construction in progress 18 $97 million $55.7 million
Land purchased pending construction 7 $26.1 million $4.1 million
Expansion of Existing Properties:
Construction in progress 4 $7.2 million $9.9 million
</TABLE>
We believe that a long-term strategy of growth through
development will result in superior returns over the long-term. A
development strategy, however, creates a short-term dilution of
earnings during the rent-up phase of a project. Although certain
costs, including real estate taxes and interest, are capitalized
during the construction period, net operating income does not
generally exceed interest expense on development projects for at
least the first year of operations. This rent-up deficit for our
pro-rata interest in developments was $607,000 (net operating income
of $717,000 less $1,324,000 of interest at 8.5% interest on invested
capital) for the first three months of 1999 compared to $637,000 for
the same period in 1998. For further discussion of the effect of
this dilution, see our 1998 Annual Report on Form 10-K.
NEW DEVELOPMENT FINANCING ARRANGEMENT
In order to expand our development capacity, broaden our access
to capital and minimize the effect of the rent-up deficit on funds
from operations (FFO), we have been pursuing alternative financing
options. On March 17, 1999, we formed a partnership,
Shurgard/Fremont Partners II (SFPII), with Fremont Realty Capital
L.L.C. (Fremont). One of our wholly owned subsidiaries and an
affiliate of Fremont are the general partners of SFPII. We have a
10% equity interest and the Fremont affiliate has a 90% equity
interest in SFPII. All major decisions by SFPII require approval of
both partners. SFPII will acquire up to 16 newly developed storage
centers and has entered into a commitment with a commercial bank to
finance 70% of its required capital.
We expect to contribute the first six to seven properties in
the second quarter of this year.
EUROPEAN OPERATIONS
As of March 31, 1999, SSC Benelux & Co., SCS (Benelux SCS), in
which we have a 13% equity position, was operating in Belgium,
Sweden, France and the United Kingdom. For a detailed discussion of
this investment see EUROPEAN OPERATIONS in our 1998 Annual Report on
Form 10-K.
Our pro rata portion of operating losses before the cumulative
effect of a change in accounting principle for European operations
was $255,000 and $56,000, for the quarters ended March 31, 1999, and
1998, respectively. Although the operations of existing stores are
improving, we believe Benelux SCS will continue to produce losses
through 2001 as financing costs and start up losses of the
additional stores and overhead costs necessary to carry out current
expansion plans will exceed operating income.
European Development
The following table summarizes European development by country
in U.S. dollars:
<TABLE>
Total Net
Number of Estimated Rentable Sq. Ft.
Properties Total Cost when complete
---------- ---------- -------------
<S> <C> <C> <C>
Opened in 1999
Sweden 1 $4.0 million 63,000
Opened in 1998
Belgium 3 $12.1 million 185,000
Sweden 4 $17.8 million 260,000
Opened in 1997
Belgium 2 $7.8 million 135,000
During 1999, we opened one storage center in Sweden with an
estimated total cost of $4 million and net rentable square feet of
63,000 when all phases are complete. The seven storage centers
opened in 1998 between April and the end of December, ranged from
3-43% occupancy for the last month of the quarter of 1999 and together
generated $53,000 in net operating income for the three months ended
the first quarter of 1999. Although it is too early to project rent-
up periods for these projects, they are renting up according to
plan.
The two storage centers opened in 1997 averaged 59% occupancy
for the last month of the quarter and together generated $124,000 in
net operating income for the first three months of 1999. For the
last month of this quarter, these developments had net operating
income of $33,000 which represents 61% of projected monthly NOI at
stabilization (as measured in the relevant local currency).
Because of the newness of storage to the European market, the
rent-up period for storage centers developed prior to 1998 has been
longer than that of domestic development projects. During the rent
up and initial product introduction period, rental rates are below
those we anticipate at stabilization. As each center reaches
stabilized occupancy, management's focus will change from increasing
occupancy to increasing rates.
There can be no assurance that these projections regarding
European development projects will occur. Assumed occupancy levels
and rates could be adversely affected if we experience competition
from other self-storage properties and other storage alternatives in
close proximity to our developments. Actual yields may also be
lower if major expenses such as property taxes, labor, and
marketing, among others, increase more than projected or if there
are significant changes in the exchange rates.
In addition to the above completed developments, we have
purchased five sites in the U.K. and one in Belgium on which we
intend to build storage centers. Subsequent to the end of the
quarter, we obtained the permits on one of the U.K. properties and
began construction. In order to compete for sites in the United
Kingdom, we have departed from our general policy of purchasing land
only after the permitting process is complete. As a result, we have
undertaken the additional risk that we may be unable to complete the
permitting process and cannot sell the property at a profit. The
following table summarizes European development projects in progress
at March 31, 1999:
</TABLE>
<TABLE>
Number Estimated Total Cost to
of Completed Cost Date as of
Projects of Projects March 31, 1999
-------- -------------- -----------
<S> <C> <C> <C>
New Developments:
Construction in progress 0
Land purchased pending 6 $41.6 million $17.2 million
construction
Expansion of Existing Properties
Construction in progress 0
</TABLE>
In the current state of the European self storage market, we
believe that a strategy of growth through development will result in
superior returns over the long-term. However, as discussed earlier,
this development strategy creates a short-term dilution of earnings
during the rent-up phase of a project. For further discussion, see
DOMESTIC DEVELOPMENT in our 1998 Annual Report on Form 10-K.
European Acquisitions
During 1997, we purchased three storage centers in France
totaling 116,000 net rentable square feet at a total cost of $7.1
million. One of these storage centers was located in Nice while the
other two were located in Paris. The properties in Paris were
recently developed and were still in the rent-up phase at the time
of acquisition. The Nice acquisition met the criteria for Same
Stores this quarter and is included in the Same Store results in the
following section.
<TABLE>
(dollars in thousands
except average rent) Quarter ended March 31,
-----------------------
<S> <C> <C>
Results for 1997 Acquisitions 1999 1998
----- -----
Rental revenue $ 287 $ 171
Property operating expenses(1) 165 113
----- -----
Net operating income $ 122 $ 58
===== =====
Avg. annual rent per sq. ft.(2) $ 22.40 $ 20.30
Avg. sq.ft. occupancy 62% 41%
Total net rentable sq. ft. 83,000 83,000
Number of properties 2 2
Number of property-months (3) 6 6
Purchase price $ 3.8 million
</TABLE>
_______________
(1) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred, such as off-site
management personnel.
(2) Average annual rent per square foot is calculated by dividing
actual rents collected by the average number of square feet occupied
during the period.
(3) Represents the sum of the number of months we operated each
property during the applicable period
We believe these French stores are on track to reach a yield at
stabilization in excess of 13% (based on achieving 85% occupancy at
current rates). These projections are based on numerous assumptions
and actual results may vary due to uncertainties including the risk
that competition from new self storage facilities or other storage
alternatives may cause rents to decline and may cause occupancy
rates to drop. Actual results may differ if increases in labor,
taxes, and other operating and construction expenses occur.
Additionally, there is foreign currency exchange risk.
European Same Store Operations
Our definition for European same stores includes existing
facilities acquired prior to January 1 of 1998 as well as developed
properties that have been operating a full two years as of January
1, 1999. The following table summarizes same store operating
performance for the quarters ended March 31, 1999 and 1998.
<TABLE>
(dollars in thousands
except average rent) Quarter ended March 31,
---------------------------
1999 1998 % Change
------- ------- --------
<S> <C> <C> <C>
Rental revenue $ 810 $ 629 29%
Property operating
expenses (1) 328 322 2%
------- -------
Net operating income $ 482 $ 307 57%
======= =======
Avg. annual rent per
sq.ft. (2) $ 13.50 $ 11.00 23%
Avg. sq.ft. occupancy 88% 78%
Total net rentable
sq.ft. 277,000 277,000
Number of properties 5 5
Total invested cost as
of March 31, 1999 $20.2 million
</TABLE>
_______________
(1) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-
site management personnel.
(2) Average annual rent per square foot is calculated by dividing
actual rent collected by the average number of square feet occupied
during the period.
In the first quarter of 1999, we increased rental rates of Same
Stores an average of 23% when measured in U.S. dollars and 17% in
local currency. This achievement brings the rental rates to the
levels we anticipated upon investing in the storage centers. We
attribute this success to increased product awareness in the market
which was obtained through extensive marketing efforts.
OTHER REAL ESTATE INVESTMENTS
The following table shows income (loss) from other real estate
investments for the quarter ended March 31, 1999 and 1998.
<TABLE>
(dollars in thousands) Quarter ended March 31,
-----------------------
1999 1998
------- --------
<S> <C> <C>
Containerized storage $ (771) $ (622)
Joint ventures (188) (74)
Participating mortgages 397 411
Other partnership investments (64) 97
-------- --------
Total $ (626) $ (188)
======== ========
</TABLE>
Containerized Storage
As discussed in our Annual Report, we have invested in Shurgard
Storage To Go, Inc., (STG) a containerized storage business. We own
only nonvoting stock in this start-up venture which is not a
qualified REIT subsidiary and is subject to corporate level tax. As
of March 31, 1999, we had invested $4.7 million in STG. We have
committed to lend up to $9 million under an unsecured five-year note
of which $7.4 million was outstanding at March 31, 1999. Our pro
rata portion of STG losses was $771,000 for the quarter ended March
31, 1999, which includes a $92,000 extraordinary expense reflecting
the write-off of start-up costs in accordance with SOP 98-5 and
$621,000 for the quarter ended March 31, 1998 which is net of a one
time $224,000 positive adjustment. Additionally, we currently
guarantee $12.5 million in lease obligations for STG.
Joint Ventures
Pursuant to our affiliation agreements with two storage
operators, we have entered into 19 joint ventures in which our
economic interest in these joint ventures ranges from 50% to 90%.
Losses for these joint ventures totaled $188,000 for the quarter
ended March 31, 1999 due to the addition of new properties added
during the previous year and current quarter, offsetting earnings on
stabilized properties. Performance related to stores developed
through these joint ventures is included in the discussion in
DOMESTIC DEVELOPMENT. The table below summarizes certain financial
information related to the joint ventures described above.
<TABLE>
(dollars in thousands) Quarter ended March 31, (1)
---------------------------
1999 1998
Joint Ventures --------- --------
<S> <C> <C>
Operating properties:
Net operating income $ 890 $ 489
Total assets $ 46,615 $ 29,896
Total debt $ 31,505 $ 16,596
Number of operating
property months(2) 49 33
Number of operating
properties 17 11
Under construction properties:
Total assets $ 11,822 $ 5,957
Total debt $ 4,620 $ 2,372
Number of properties
under construction 5 3
</TABLE>
(1) Dollar amounts represent our pro rata portion of NOI, assets
and debt based on our ownership percentage.
(2) Represents the sum of the number of months we operated each
property during the applicable period.
Additionally, we have entered into an agreement with a
California developer under which it will purchase sites in southern
California and construct storage centers on them according to our
specifications. For further detail on this agreement see our Annual
Report on Form 10-K for the year ended December 31, 1998. At March
31, 1999, we had guaranteed $16.7 million in outstanding debt for
four properties related to this agreement and will guarantee
additional amounts as future properties are approved and developed.
Participating Mortgages and other Partnership Investments
We have $13.3 million invested in three participating mortgage
loans. All three mortgages are non-recourse to the borrower and are
secured by real estate, including four storage centers and
office/warehouse space. The first two mortgages total $11.9
million, bear interest at 8%, and mature in December 2004. The
third loan is for $1.4 million, bears interest at 10%, and matures
in October 1999. Additionally, we receive contingent interest
payments from all the mortgaged properties equal to 50% of both
operating cash flow and distributions from the gain on sale of real
property, as defined. We have options to purchase the properties at
established prices, generally exercisable in 1999 and extending
until maturity of the loans.
OTHER OPERATIONS
Property management revenue for the first three months of 1999
decreased $170,000 over the same period last year. This decline is
due to the elimination of management fees related to partnerships we
now consolidate for financial reporting purposes as well as a one
time partnership income increase that was included in the prior year
quarter.
Interest expense for the first three months of 1999 increased
$1.4 million over the first three months of 1998 due to an increase
in the outstanding debt balance (both in lines of credit and notes
payable) from $331 million at March 31, 1998 to $457 million at
March 31, 1999. Additionally, during the first quarter of 1999, we
capitalized $2,500,000 in interest related to the construction of
storage centers, while $1,595,000 in interest was capitalized in the
first quarter of 1998.
FUNDS FROM OPERATIONS
Funds from operations (FFO), pursuant to the National
Association of Real Estate Investment Trusts' (NAREIT) March 1995,
White Paper on Funds from Operations, is defined as net income
(calculated in accordance with GAAP) excluding gains or losses from
debt restructuring and sales of real estate, plus depreciation of
real estate and amortization of intangible assets exclusive of
deferred financing costs less dividends paid to preferred
stockholders. Contributions to FFO from unconsolidated entities in
which the reporting entity holds an active interest are to be
reflected in FFO on the same basis. We believe FFO is a meaningful
disclosure as a supplement to net income because net income
implicitly assumes that the value of assets diminish predictably
over time while we believe that real estate values have historically
risen or fallen with market conditions. FFO is not a substitute for
net cash provided by operating activities or net income computed in
accordance with GAAP, nor should it be considered an alternative
indication of our operating performance or liquidity. In addition,
FFO is not comparable to "funds from operations" reported by other
REITs that do not define funds from operations in accordance with
the NAREIT definition. The following table sets forth the
calculation of FFO in accordance with the NAREIT definition (in
thousands):
<TABLE>
Quarter ended
March 31,
---------------
1999 1998
------ -------
<S> <C> <C>
Net income $ 9,798 $ 10,369
Non-recurring revenue/expenses 1,645 (216)
Preferred dividend (2,188) (1,100)
Depreciation/amortization 9,542 8,114
Depreciation/ amortization
from unconsolidated joint
ventures and subsidiaries (378) (37)
Deferred financing costs (280) (280)
--------- -------
FFO as currently defined $ 18,139 $ 16,850
========= ========
</TABLE>
FFO for the first three months of 1999 rose $1.3 million over
FFO for the first three months of 1998. As previously discussed,
this growth reflects the improved performance of the original
portfolio of properties as well as the addition of properties over
the past three years through acquisitions and developments. Non-
recurring revenue and expenses in the table above includes the
effect of the cumulative change in accounting principle relating to
SOP 98-5 for both consolidated entities and our pro-rata portion of
unconsolidated joint ventures. (See Note A)
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1999, we invested $23.7
million in domestic development and expansion projects, $8.9 million
in European development projects, and $1.0 million in capital
improvements to our existing portfolio. The $3.7 million increase
in other real estate investments consists primarily of $3.5 million
invested in joint ventures and $0.2 million invested in our
containerized storage operation.
The balance on the domestic line of credit increased $22
million from December 31, 1998 to March 31, 1999. Draws on the line
of credit were used to fund the purchase of a partnership unit,
development activity, and general corporate purposes. Notes payable
increased $13.7 million primarily due to draws on loans from an
affiliated joint venture to fund development activity in Europe. At
March 31, 1999, the ratio of the Company's debt to total assets was
39% and its debt to total market capitalization was 35%.
We have an unsecured domestic line of credit to borrow up to
$150 million at a spread over LIBOR, maturing September 30, 1999,
with the option to extend until September 2000. The amount
available and the spread vary based on the terms of the agreement;
as of March 31, 1999, the current available amount is $150 million,
of which approximately $103.4 million was outstanding. At March 31,
1999, the weighted average interest rate was 5.95%.
We have European credit lines (denominated in local currencies)
to borrow up to a total of $11.5 million of which $10.5 million had
been drawn down as of March 31, 1999. Of this amount, $0.5 million
matures in 1999 and $11 million matures in 2001. The weighted
average effective interest rate on these lines at March 31, 1999 was
5.1%.
On March 31, 1999, we purchased one Limited Partnership unit in
Shurgard Institutional Fund LP II, from an unaffiliated third party,
for $1.2 million in cash. We now own 6.5 of 9.5 limited partner units
and are entitled to 67% of limited partner distributions. We
continue to own a general partnership interest in this partnership
which is consolidated in our financial statements.
We anticipate funding 1999 growth and our on-going development
program primarily through a combination of our lines of credit, long
term debt, preferred equity, and alternative capital sources. We
intend to pursue joint ventures with private institutions and public
pension funds to provide these alternative sources of capital. We
believe that our cash flow in 1999 will be sufficient to make
required principal payments and distribution payments in accordance
with REIT requirements. Cash provided by operating activities for
the three months ended March 31, 1999 was $21.4 million compared to
$16.9 million for the same period of 1998. On April 28, 1999, we
declared a dividend of $0.50 per share to be paid on May 24, 1999.
This dividend is approximately 79% of first quarter FFO.
YEAR 2000 COMPLIANCE
We are continuing the process of identifying our potential
risks relating to the Year 2000 issue in both our information
technology and non-information technology systems, and are
implementing solutions to mitigate those risks as they are
identified. We expect to complete our evaluation by June 30, 1999
and believe that we will be successful in implementing the
identified solutions in a timely manner.
Our risks relating to the Year 2000 are in the areas of
internal systems, external interface systems and third-party service
providers. We recently replaced most of our internal systems for
reasons other than Year 2000 issues, and due to this, very few
systems needed to be replaced as a result of our Year 2000
compliance program. We estimate that our total cost to replace
noncompliant systems will be approximately $300,000 to $400,000.
Through March 31, 1999, we have spent approximately $115,000 to
replace our network software and 31 out of 51 of our older, non-
compliant gate control systems at certain of our stores. We
estimate that the remaining gates will be replaced by September
1999. Systems still under evaluation include certain computer
hardware and our payroll system. We expect to complete this
evaluation by June 30, 1999.
We have been contacting third parties with whom we have
material relationships to attempt to determine their preparedness
with respect to Year 2000 issues and to analyze the risks to us if
they experience significant business interruptions as a result of
Year 2000 noncompliance. Through this process, we have confirmed
that several of our external interface systems and third party
service providers, including our primary bank systems, our transfer
agent, and our employee benefits administrator, are now Year 2000
compliant or have a plan to achieve compliance within a reasonable
time frame. We are continuing to evaluate the remaining external
systems and expect to complete this evaluation by June 30, 1999.
Should these external parties not perform the adjustments they have
indicated are necessary, we could experience inefficiencies in
operations or additional costs associated with fixing the problem or
changing vendors.
We believe the most likely worst-case scenarios that we might
confront with respect to the Year 2000 issues have to do with the
possible failure of third party systems over which we have no
control, such as, but not limited to, power and telephone services.
We are currently developing a specific Year 2000 contingency plan to
mitigate exposure to third party system failures.
The statements above regarding our expectations and estimates
relating to the Year 2000 issue constitute forward-looking
statements. These forward-looking statements are based on several
assumptions. If any of these assumptions are not satisfied or prove
to be incorrect, our actual experience could differ materially from
that indicated in the forward-looking statements. The risks and
uncertainties that may cause these assumptions to not be correct
include, among others, whether we have correctly identified our Year
2000 issues and whether third-party providers adequately address
their Year 2000 issues in a timely fashion.
Part II, Item 1: Legal Proceedings
On April 6, 1998, a lawsuit was filed against Shurgard Storage
Centers, Inc., in the Superior Court of California for Alameda
County. The plaintiff is a California unincorporated association,
the Consumer Justice Foundation, claiming to bring the action on
behalf of the general public. The Complaint alleges that the late
fees and lien fees collected by Shurgard are not liquidated damages
but constitute an unenforceable penalty in violation of the
California Business and Professions Code and the California Civil
Code. The plaintiff further alleges that imposing late fees and
lien fees constitutes an unfair business practice under the
California Business and Professions Code. The plaintiff seeks
restitution in an undisclosed amount, injunctive relief, as well as
costs and attorneys' fees. Subsequent to the end of the quarter,
this case was dismissed without prejudice.
Part II, Item 5: Other Information
On March 9, 1999, the Board approved the appointment of an
additional director, W. Thomas Porter to fill the vacant seat on the
Board.
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.1-Partnership Agreement, dated March 17, 1999,
between Shurgard Development II, Inc. and Fremont Storage
Partners II, L.L.C. forming Shurgard/Fremont Partners II
Exhibit 10.2-First Amendment to Partnership Agreement between
Shurgard Development II, Inc. and Fremont Storage Partners II,
L.L.C. forming Shurgard/Fremont Partners II as of April 27, 1999
Exhibit 10.3-Seventh Amendment to Amended and Restated Loan
Agreement dated as of April 28, 1999
Exhibit 27-Financial Data Schedule
Reports on Form 8-K:
During the quarter ended March 31, 1999, no reports were filed
on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SHURGARD STORAGE CENTERS, INC.
Date: May 12, 1999 By: /s/ Harrell Beck
-----------------
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
PARTNERSHIP AGREEMENT
by and between
SHURGARD DEVELOPMENT II, INC.
and
FREMONT STORAGE PARTNERS II, L.L.C.
creating
SHURGARD/FREMONT PARTNERS II
March 17, 1999
CONTENTS
ARTICLE I. GENERAL PROVISIONS 1
1.1 Formation and Name 1
1.2 Business of the Partnership 2
1.3 Place of Business of the Partnership 2
1.4 Duration of the Partnership 2
1.5 Partners' Names and Addresses 2
1.6 Title to Partnership Property 2
1.7 Registered Office and Registered Agent 3
1.8 Partnership Activity Prior to Operative Date 3
ARTICLE II. CAPITAL CONTRIBUTIONS; PROFITS AND LOSSES 3
2.1 Anticipated Capital Requirements 3
2.2 Capital Contributions by Partners 4
2.3 Capital Accounts 5
2.4 Profits and Losses 6
2.5 Allocations of Income and Loss for Federal
Income Tax Purposes; Curative Tax
Allocations 8
2.6 Tax Status and Returns 9
ARTICLE III. CASH DISTRIBUTIONS 9
3.1 Definitions 9
3.2 Distributions of Net Cash Flow 10
ARTICLE IV. CONTRIBUTION OF PROPERTIES 10
4.1 Identification of Properties to Be
Contributed 10
4.2 Closing of Property Contributions 11
ARTICLE V. MANAGEMENT OF THE PARTNERSHIP 11
5.1 Management of the Partnership 11
5.2 Designation of Representatives 11
5.3 Partnership Meetings 12
5.4 Engagement of Property Manager 12
5.5 Partnership Decisions 12
5.6 Appointment of Administrative Partner 14
5.7 Partnership Expenses 14
5.8 Liability of Partners; Indemnification 15
ARTICLE VI. OTHER AGREEMENTS OF THE PARTNERS 15
6.1 Provision of Information by Shurgard
Relating to Trade Area Properties 15
6.2 No Restrictions on Competitive Business
Activities 16
6.3 Financing Fees 16
ARTICLE VII. SSCI PURCHASE OPTION 17
7.1 Purchase Option 17
ARTICLE VIII. SALE, ASSIGNMENT OR TRANSFER OF
PARTNERSHIP INTEREST 17
8.1 Prohibited Transfers 17
8.2 Permitted Transfers 17
8.3 Change of Control of Shurgard 18
8.4 Other Transfers 19
ARTICLE IX. TERM, DISSOLUTION AND TERMINATION,
VOLUNTARY WITHDRAWAL AND DEFAULT 19
9.1 Term and Dissolution 19
9.2 Termination and Distributions 20
9.3 Distribution Upon Liquidation 21
9.4 Prohibition Against Withdrawal and Voluntary
Withdrawal 22
9.5 Default 22
ARTICLE X. BOOKS, RECORDS AND BANK ACCOUNTS 22
10.1 Books and Records 22
10.2 Accounting Basis and Fiscal Year 23
10.3 Reports 23
10.4 Bank Accounts 23
ARTICLE XI. REPRESENTATIONS AND WARRANTIES 23
11.1 Representations and Warranties by Each
Partner 23
11.2 Shurgard's Representations and Warranties 24
11.3 Fremont's Representations and Warranties 24
ARTICLE XII. MISCELLANEOUS 24
12.1 Notices 24
12.2 Successors and Assigns 25
12.3 Partition 25
12.4 Entire Agreement; Amendments 25
12.5 No Waiver 26
12.6 Foreign Status 26
12.7 Captions 26
12.8 Counterparts 26
12.9 Applicable Law 26
12.10Proprietary Control; Confidentiality 26
12.11Affiliate 27
12.12Covenant of Good Faith 27
12.13Severability 28
EXHIBITS
A. List of Properties
INDEX OF DEFINED TERMS
A
Act 1
Adjusted Deficit 7
Administrative Partner 13
Affiliate 27
Agreement 1
Annual Plan 12
B
Bankrupt Partner 19
C
Capital Account 5
Capital Budget 10
Carrying Value 10
Change of Control 17
Code 5
Confidential Partnership Information 26
Contribution Agreement 10
Credit Facility 3
D
Defaulting Partner 22
Designated Representatives 11
E
Event of Bankruptcy 19
Event of Dissolution 19
F
FRC 1
Fremont 1
L
Liquidator 20
M
Major Decisions 12
Management Agreement 11
N
Net Cash Flow 9
Net Losses 6
Net Profits 6
Non-Defaulting Partner 22
Nonrecourse deductions 7
O
Operative Date 3
P
Partner 1
partner nonrecourse debt minimum gain 7
Partner nonrecourse deductions 7
Partners 1
Partnership 1
partnership minimum gain 7
Priority Return 9
Properties 10
Property 10
Purchase Option 16
Purchase Option Agreement 16
S
Shurgard 1
Shurgard Trade Area Property 15
SSCI 1
T
Trade Area 10
transfer 17
U
Unreturned Capital 9
PARTNERSHIP AGREEMENT
This PARTNERSHIP AGREEMENT (this "Agreement") is made and
entered into as of February 12, 1999, by and between SHURGARD
DEVELOPMENT II, INC., a Washington corporation ("Shurgard"), and
FREMONT STORAGE PARTNERS II, L.L.C., a Delaware limited liability
company ("Fremont"). Shurgard and Fremont may each be referred
to herein individually as a "Partner" and collectively as the
"Partners."
RECITALS
A. Shurgard is a wholly owned subsidiary of Shurgard
Storage Centers, Inc., a Washington corporation ("SSCI"), and
Fremont is an affiliate of Fremont Realty Capital, L.L.C., a
Delaware LLC ("FRC").
B. SSCI is a developer and manager of real estate with
extensive experience related to locating, purchasing, developing,
leasing, financing and selling facilities used principally for
self-service storage of property and with extensive experience in
operating such facilities and providing equipment and services
related thereto.
C. Shurgard and Fremont desire to form the Partnership (as
defined in Section 1.1(c)) on the terms set forth herein to
acquire certain self-service storage properties recently
developed by SSCI and to operate such properties.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing, the
mutual promises of the parties hereto, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I. GENERAL PROVISIONS
1.1 Formation and Name
(a) Shurgard and Fremont hereby enter into and form a
partnership for the purposes and with the scope, restrictions and
limitations set forth herein.
(b) Except as provided herein to the contrary, the rights
and obligations of the Partners and the administration and
termination of the Partnership shall be governed by the
Washington Uniform Partnership Act (the "Act").
(c) The name of the partnership established pursuant to
this Agreement (the "Partnership") is SHURGARD/FREMONT PARTNERS
II, and such name will be used at all times in connection with
the Partnership's business and affairs.
1.2 Business of the Partnership
(a) The business of the Partnership shall be to operate
certain newly constructed self-service storage facilities (as
defined in Section 4.1(a), the "Properties") contributed by
Shurgard, to operate such facilities for use by members of the
public (including corporate entities), to sell and lease personal
property, including vehicles, storage containers and other
property, used or useful to the users of such facilities in
connection with such storage (including the hauling of property
to and from such facilities), to engage in any and all general
business activities not inconsistent with the operation of such
facilities and to sell such self-service storage facilities. In
furtherance of the Partnership's purpose and subject to the
limitations set forth in this Agreement, the Partnership shall
have the power to enter into and perform contracts, to own,
mortgage, pledge or otherwise deal in property, real or personal,
to exercise all rights, powers, and privileges and other
incidents of ownership with respect to assets or investments, to
borrow money and issue notes, drafts and bills of exchange, to
lend any of its assets or funds, and to carry on any other
activities necessary to, in connection with or incidental to, the
foregoing.
(b) The investment objective of the Partners is the long-
term appreciation in the value of the Properties and the
provision by the Partnership of quarterly distributions,
beginning at such time as there is sufficient cash from
operations to make such distributions after satisfaction of the
Partnership's working capital requirements.
1.3 Place of Business of the Partnership
The principal place of business of the Partnership will be
located in the same place as Shurgard's principal place of
business, as the same may change from time to time. The Partners
may, by mutual agreement at any time and from time to time,
change the location of the Partnership's principal place of
business to a location other than Shurgard's principal place of
business. The Partnership shall take all actions required under
the laws of the states in which it carries on business or owns
its properties to qualify the Partnership to so carry on its
business, or own its properties and enforce its contracts as is
contemplated hereby.
1.4 Duration of the Partnership
The Partnership will commence on the date of this Agreement
and will continue until terminated in accordance with Article IX.
1.5 Partners' Names and Addresses
The name, business address, telephone number, electronic
facsimile number and taxpayer identification number of each
Partner are as set forth in Section 12.1 or the signature page
hereto, as applicable. A Partner may change its address by
giving written notice to the other Partner in accordance with
Section 12.1.
1.6 Title to Partnership Property
All property owned by the Partnership, whether real or
personal, tangible or intangible, will be deemed to be owned by
the Partnership as an entity, and neither Partner, individually,
will have any ownership interest in such property. Except as
otherwise provided herein or agreed by the Partners, the
Partnership will hold all of its assets in its own name.
1.7 Registered Office and Registered Agent
The address of the registered office of the Partnership in
the State of Washington is 1155 Valley Street, Suite 400,
Seattle, WA 98109-4426. The registered agent for service of
process on the Partnership is Harrell L. Beck. Such place or
agent may be changed from time to time, as the Partners may
mutually agree.
1.8 Partnership Activity Prior to Operative Date
The Partners hereby acknowledge that although they have
formed the Partnership and entered into this Agreement on the
date hereof, the Partners have not yet finalized certain
documents referred to herein relating to the operation of the
Partnership's business and other matters, including, without
limitation, the Purchase Option Agreement and the Contribution
Agreement.. Such documents are expected to be finalized and
executed on or before March 31, 1999. As used in this Agreement,
the "Operative Date" of the Partnership is March 17, 1999, or
such earlier date as the Partners may mutually agree..
Prior to the Operative Date, the activities of the
Partnership shall be limited to performing administrative
functions, such as applying for business licenses and
qualifications, establishing bank accounts, and the performance
of such other activities as the Partners may mutually agree.
Unless the Partners otherwise mutually agree, neither Partner
shall have any obligation to make capital contributions prior to
the Operative Date.
ARTICLE II. CAPITAL CONTRIBUTIONS; PROFITS AND LOSSES
2.1 Anticipated Capital Requirements
(a) The total capital needs of the Partnership to fund the
development, operation (including operating losses), maintenance
and sale of self-service storage facilities of the Partnership
and the administration of the Partnership's business and affairs
are estimated to total approximately $88,000,000. Of the
Partnership's total capital needs, 30% are to be funded through
capital contributions by the Partners as provided in Section 2.2.
Any remaining amounts of Partnership capital needs will be funded
through a credit facility obtained by the Partnership (the
"Credit Facility"), such that of the Partnership's total
estimated capital needs, the capital contributions of the
Partners and the Credit Facility fund 30% and 70%, respectively.
The Partnership shall not enter into the Credit Facility unless
the terms thereof are mutually agreeable to each of the Partners.
The Partners currently contemplate that the Credit Facility may
be obtained from a third-party lender; however, if the
Partnership has not obtained a Credit Facility from a third-party
lender on or prior to March 26, 1999, then Shurgard may, itself
or through SSCI, provide the Credit Facility to the Partnership
on the terms set forth in Section 2.1(c).
(b) If the Credit Facility is obtained from a third-party
lender and is secured by the Properties, the aggregate Carrying
Value of the Properties contributed by SSCI shall be increased by
$50,000 to reflect SSCI's increased internal costs resulting from
the Partnership electing a secured Credit Facility. If the
Credit Facility is obtained from a third-party lender and is not
secured, SSCI agrees that it will bear the risks associated with
any required guarantee (as to principal or interest) provided
that the Carrying Value of property contributed by SSCI similarly
be increased by the amount of any third-party costs incurred by
SSCI associated with bearing such risks (but not including the
payment of such principal or interest).
(c) If the Partnership has not obtained a Credit Facility
from a third-party lender on or prior to March 15, 1999, then
Shurgard may, itself or through SSCI, provide an approximately
$61,600,000 non-revolving line of credit to the Partnership on
the terms set forth on the loan term sheet dated December 5,
1998, or on such other terms as Shurgard or SSCI and the
Partnership may agree. Notwithstanding Shurgard's election to
provide the non-revolving line of credit contemplated by this
Section 2.1(c) to the Partnership, the Partnership may decline to
accept the line of credit, in which event either Partner may
unilaterally terminate this Partnership Agreement in accordance
with Section 9.1(a) hereof.
2.2 Capital Contributions by Partners
(a) Subject to Section 2.2(c), Fremont shall contribute to
the Partnership 90% of all capital contributions and Shurgard
shall contribute 10% of all capital contributions, with such
capital contributions by Fremont and Shurgard funding 30% of the
total estimated capital needs of the Partnership. Any and all
capital contributions made by Fremont and Shurgard shall be made
in cash, except those contributions made by Shurgard as
contemplated in Section 4.1. All capital contributions shall be
made from time to time pursuant to a Capital Budget (as defined
in Section 4.1(b)) or an Annual Budget (as defined in
Section 5.4) as funds are needed by the Partnership and requested
by Shurgard in accordance with the procedures described below.
(b) Shurgard shall contribute the Properties listed on
Exhibit A attached hereto pursuant to the terms of Article IV and
the Contribution Agreement (as defined in Section 4.1(a)) as
contemplated and described therein. To effect such contribution,
Shurgard may direct title to such properties to be transferred
directly from SSCI to the Partnership; provided, however, that
for purposes of this Agreement, Shurgard shall be treated as
having made such contribution directly. In exchange for such
capital contribution, Shurgard shall be reimbursed pursuant to
Section 4.3 for certain costs incurred by it and SSCI in
connection with the development of such Properties, all in
accordance with the Contribution Agreement.
(c) The maximum amounts of capital contributions that may
be required from Fremont and Shurgard (net of any reimbursements
received by Shurgard pursuant to Section 4.3) pursuant to this
Agreement are approximately $23,760,000 and $2,640,000,
respectively. If additional capital is required, the Partners
shall mutually agree as to the source of such capital, giving
consideration to the availability of third-party loans, loans
from the Partners, and additional capital contributions.
(d) Fremont and Shurgard shall make capital contributions
upon 10 business days' written notice from Shurgard of the need
for such funds, which notice shall be consistent with the
applicable Capital Budget or Annual Budget, and shall contain
such additional documentation, explanation and certification as
Fremont may reasonably require. No more than one such
contribution by Fremont shall be required during any 30-day
period.
(e) The Partnership shall use its best efforts to operate
the Properties in accordance with budgets contained in the
applicable Annual Budgets. The Partners hereby acknowledge and
agree that these budgets will have been prepared for planning
purposes and to permit the Partners to monitor the costs and the
success of the Partnership's operations. Neither Shurgard nor
any Affiliate (as defined in Section 12.11) thereof has, however,
guaranteed that the Properties will perform as favorably as
budgeted in the applicable Annual Budget.
(f) No interest shall accrue on any contribution to the
capital of the Partnership. No Partner shall have the right to
withdraw, or to be repaid, any capital contributed by it, except
as specifically provided in this Agreement.
(g) Except as set forth in this Article II and Article IV,
no Partner has any obligation to make any capital contributions
or to extend any loans to the Partnership.
2.3 Capital Accounts
(a) There shall be established for each Partner on the
books of the Partnership a "Capital Account," which shall be
maintained and adjusted as provided in this Section 2.3. The
Capital Account of a Partner shall be initially credited by the
amount of cash and the fair market value of any property
contributed by such Partner to the Partnership (net of any
liabilities secured by such property that the Partnership is
considered to assume or take subject to under Section 752 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any
reimbursements due such Partner pursuant to Section 4.3). For
purposes of the foregoing sentence, the parties agree that the
fair market value of the Properties contributed by Shurgard
pursuant to Article IV shall be such Properties' Carrying Value
(as defined in Section 4.1). The Capital Account of a Partner
shall be further increased by any additional capital
contributions to the Partnership and the amount of Net Profits
(as defined in Section 2.4(a)) (or items of gross income)
allocated to such Partner pursuant to Section 2.4. The Capital
Account of a Partner shall be decreased by (i) the amount of any
Net Losses (or items of loss or deduction) allocated to such
Partner pursuant to Section 2.4, (ii) the amount of any cash
distributed to such Partner pursuant to Article III, and
(iii) the fair market value of any property distributed to such
Partner by the Partnership (net of any liabilities secured by
such property that the Partner is considered to assume or take
subject to under Section 752 of the Code). The Capital Account
of each Partner shall be adjusted appropriately to reflect any
other adjustment required pursuant to Treasury Regulations
Section 1.704-1 or 1.704-2.
(b) Upon the occurrence of any event specified in Treasury
Regulations Section 1.704-1(b)(2)(iv)(f), the Partnership may
cause the Capital Accounts of the Partners to be adjusted to
reflect the fair market value of the Partnership's assets at such
time in accordance with such Treasury Regulation.
(c) If any assets of the Partnership are distributed in
kind pursuant to this Agreement, the amount of Net Profits or Net
Losses that would have been realized had such assets been sold at
their fair market value, as determined by the Partners'
Designated Representatives (as defined in Section 5.1), shall be
allocated to the Partners pursuant to Section 2.4 immediately
prior to such distribution.
(d) If any interest in the Partnership is transferred in
accordance with the terms of this Agreement, the transfer shall
succeed to the capital account of the transferor to the extent it
relates to the transferred interest.
2.4 Profits and Losses
(a) The terms "Net Profits" and "Net Losses", as
appropriate, mean, for any period, the taxable income or tax loss
of the Partnership for such period as determined for federal
income tax purposes taking into account any separately stated
items, increased by the amount of any tax-exempt income of the
Partnership during such period and decreased by the amount of any
Code Section 705(a)(2)(B) expenditures (within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(iv)(i)) of the
Partnership; provided, however, that (i) Net Profits or Net
Losses of the Partnership shall be computed without regard to the
amount of any items of gross income, gain, loss or deduction that
are specially allocated pursuant to any of the provisions of
Section 2.4(e) and (ii) the Net Profits or Net Losses of the
Partnership (and the constituent items of income, gain, loss and
deduction) realized with respect to Section 704(c) Property (as
defined in Section 2.5) shall be computed in accordance with the
principles of Treasury Regulations Section 1.704-1(b)(2)(iv)(g).
(b) Except as provided in Sections 2.4(e) and (f), Net
Profits (including Net Profits from sales of Properties) shall be
allocated as follows:
(i) first, 90% to Fremont and 10% to Shurgard until
the cumulative Net Profits allocated the Partners pursuant to
this Section 2.4(b)(i) for the current and all prior periods
equal the cumulative Net Losses allocated to the Partners
pursuant to Section 2.4(c)(ii) for all prior periods;
(ii) second, 90% to Fremont and 10% to Shurgard until
the cumulative Net Profits allocated to Fremont pursuant to this
Section 2.4(b)(ii) equal the Priority Return (as defined in
Section 3.1) payable to them under Section 3.2(a)(i); and
(iii) third, 80% to Fremont and 20% to Shurgard.
(c) Except as provided in Sections 2.4(e) and (f) and
subject to the limitation provided in Section 2.4(d), Net Losses
(including Net Losses from sales of Properties) shall be
allocated as follows:
(i) first, 80% to Fremont and 20% to Shurgard until
the cumulative amount of Net Losses allocated to the Partners
pursuant to this Section 2.4(c)(i) for the current and all prior
periods equals the cumulative amount of Net Profits allocated to
the Partners pursuant to Section 2.4(b)(iii) for all prior
periods; and
(ii) thereafter, 90% to Fremont and 10% to Shurgard.
(d) Notwithstanding the allocation of Net Losses pursuant
to subsection (c), the amount of Net Losses allocated to any
Partner shall not exceed the maximum amount of Net Losses that
can be so allocated without causing such Partner to have an
Adjusted Deficit at the end of any fiscal year. In the event one
but not both of the Partners would have Adjusted Deficits as a
consequence of an allocation of Net Losses pursuant to subsection
(c), the limitation set forth in this subsection (d) shall be
applied on a Partner-by-Partner basis so as to allocate the
maximum permissible Net Losses to each Partner under Treasury
Regulations Section 1.704-1(b)(2)(ii)(d). For purposes of this
subsection (d) the term "Adjusted Deficit" shall mean, with
respect to any Partner, the deficit balance, if any, in such
Partner's Capital Account as of the end of the relevant fiscal
year, after giving effect to the following adjustments:
(i) The Capital Account shall be increased by any
amounts that such Partner is obligated to restore pursuant to any
provision of this Agreement or is deemed to be obligated to
restore pursuant to the next to the last sentences of Treasury
Regulations Section 1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) The Capital Account shall be decreased by the
items described in Treasury Regulations Sections 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-
1(b)(2)(ii)(d)(6).
The foregoing definition of Adjusted Deficit is intended to
comply with the provisions of Treasury Regulations Section 1.704-
1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
(e) Notwithstanding the provisions of Sections 2.4(b) and
(c), special allocations of income, gain, loss or deduction may
be required for any fiscal year (or other period) as follows:
(i) If there is a decrease in the Partnership's
"partnership minimum gain," as defined in and determined under
Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d), the
minimum gain chargeback provisions of Treasury Regulations
Section 1.704-2(f), which are hereby incorporated into this
Agreement by this reference, shall be applied.
(ii) If there is a decrease in any Partner's share of
"partner nonrecourse debt minimum gain," as defined in and
determined under Treasury Regulations Section 1.704-2(i), the
partner nonrecourse debt minimum gain chargeback provisions of
Treasury Regulations Section 1.704-2(i)(4), which are hereby
incorporated into this Agreement by this reference, shall be
applied.
(iii) In the event that any Partner unexpectedly
receives any adjustments or allocations or distributions
described in Treasury Regulations Section 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and
gain shall be specially allocated to such Partner in accordance
with Treasury Regulations Section 1.704-1(b)(2)(ii)(d).
(iv) "Nonrecourse deductions," as defined in and
determined under Treasury Regulations Sections 1.704-2(b)(1) and
(c), shall be allocated among the Partners in proportion to their
capital contributions.
(v) "Partner nonrecourse deductions," as defined in
and determined under Treasury Regulations Sections 1.704-2(i)(1)
and (2), shall be specially allocated among the Partners in
accordance with Treasury Regulations Section 1.704-2(1).
(f) The allocations set forth in Sections 2.4(d) and 2.4(e)
are intended to comply with certain regulatory requirements under
Code Section 704(b). The Partners intend that, to the extent
possible, all allocations made pursuant to such Section of the
Code will, over the term of the Partnership, be offset either
with other allocations pursuant to Sections 2.4(d) and 2.4(e) or
with special allocations of other items of Partnership income,
gain, loss or deduction pursuant to this Section 2.4(f).
Accordingly, Shurgard is authorized and directed to make
offsetting allocations of Partnership income, gain, loss or
deduction under this Section 2.4(f) in whatever manner it
reasonably determines is appropriate so that, after such
offsetting special allocations are made (and taking into account
the reasonably anticipated future allocations of income and gain
pursuant to Sections 2.4(e)(i) and (ii) that are likely to offset
allocations previously made under Sections 2.4(e)(iv) and (v),
the Capital Accounts of the Partners are, to the extent possible,
equal to the Capital Accounts each would have if the provisions
of Sections 2.4(d) and 2.4(e) were not contained in this
Agreement and all Partnership income, gain, loss and deduction
were instead allocated in accordance with the provisions of
Sections 2.4(b) and (c).
2.5 Allocations of Income and Loss for Federal Income Tax
Purposes; Curative Tax Allocations
(a) The Partnership's ordinary income and losses and
capital gains and losses as determined for federal income tax
purposes (and each item of income, gain, loss or deduction
entering into the computation thereof) shall be allocated to the
Partners in the same proportions as the corresponding "book"
items are allocated pursuant to Section 2.4. Notwithstanding the
foregoing sentence, federal income tax items relating to any
"Section 704(c) Property" (as defined in Treasury Regulations
Section 1.704-3(a)(3)) shall be allocated among the Partners in
accordance with Section 704(c) of the Code and Treasury
Regulations Section 1.704-1(b)(2)(iv)(g) to take into account the
difference between the fair market value and the tax basis of
such Section 704(c) Property as of the date of contribution (with
respect to contributed property having book value differing from
tax basis) or its revaluation pursuant to Section 2.3(b) (in the
case of revalued property). Items described in this Section 2.5
shall neither be credited nor charged to the Partners' Capital
Accounts.
(b) In the event the adjusted tax basis of a Property
contributed by Shurgard to the Partnership pursuant to Article IV
differs from its Carrying Value, solely for income tax purposes,
allocations of income, gain, loss and deduction attributable to
such Property shall be specially allocated among the Partners so
as to take into account such difference in a manner consistent
with the principles of Section 704(c) of the Code so that the
aggregate allocations of taxable income or loss allocated to each
Partner for any fiscal year of the Partnership is, to the extent
possible, equal to the amount of taxable income or loss each
would have been allocated had the tax basis of such Property been
equal to its Carrying Value.
2.6 Tax Status and Returns
(a) Any provision hereof to the contrary notwithstanding,
the Partnership shall be subject, solely for federal income tax
purposes, to all provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code; provided, however, that the filing of
U.S. Partnership Returns of Income shall not be construed to
extend the purposes of the Partnership. At the request of any
Partner, the Partnership shall file an election under Section 754
of the Code and under the corresponding sections of applicable
state laws. Any costs or expenses associated with making such
elections shall be paid by the Partner requesting the election in
accordance with Section 8.2(d).
(b) The Partnership shall prepare or cause to be prepared
by the principal certified public accountant for the Partnership
not later than thirty (30) days prior to the date of required
filing thereof (including extensions) all tax returns and
statements, if any, that must be filed on behalf of the
Partnership with any taxing authority, and shall submit such
returns and statements to all the Partners for their approval
prior to filing, and when approved by the Partners, or when due,
if necessary, without approval, make timely filing thereof.
Shurgard shall provide preliminary tax information with respect
to the Partnership's immediately preceding taxable year (which
will be based on unaudited financial information) to Fremont not
later than forty-five (45) days prior to the required filing date
of the Partnership's tax returns (without extensions).
(c) Shurgard shall act as the "tax matters partner" of the
Partnership within the meaning of Section 6231(a)(7) of the Code
and in any similar capacity under applicable state or local tax
law. Shurgard shall keep the other Partners fully informed and
consult with them regarding matters for which it is responsible
while acting in such capacity. All expenses incurred by Shurgard
while acting in such capacity shall be paid or reimbursed by the
Partnership. Notwithstanding the foregoing, Shurgard shall not
have the authority to make elections or settle any tax-related
disputes with respect to the Partnership without the prior
written agreement of Fremont.
ARTICLE III. CASH DISTRIBUTIONS
3.1 Definitions
"Net Cash Flow" means cash funds received by the Partnership
from Partnership operations or sale or refinancing of Partnership
assets in excess of amounts reasonably required for the repayment
of Partnership borrowings (including loans made by the Partners,
if any) then due and payable and interest thereon, the payment of
other liabilities and cash expenditures, and working capital and
reserves that are required for the proper operation of business
of the Partnership during the next fiscal quarter pursuant to the
Annual Budget. "Net Cash Flow" shall not include capital
contributions and shall not be reduced by depreciation,
amortization, cost recovery deductions or similar noncash
allowances.
"Priority Return" means, with respect to the date of
computation, an amount equal to a cumulative 9% per annum return,
compounded quarterly, on the outstanding Unreturned Capital of
each Partner, computed for the period commencing on the date such
Unreturned Capital was originally contributed to the Partnership
and ending with the close of the fiscal period as to which the
Priority Return relates.
"Unreturned Capital" means, for any Partner, (a) the amount
of cash and the agreed value of any property actually contributed
by the Partner to the capital of the Partnership (net of any
reimbursements owed to Shurgard pursuant to Section 4.3) less
(b) the sum of all distributions previously made by the
Partnership to such Partner under Section 3.2(b).
3.2 Distributions of Net Cash Flow
Except as provided in Section 9.3 with respect to
distributions to be made upon dissolution of the Partnership, all
Net Cash Flow shall be distributed by the Partnership 60 days
after the end of each fiscal quarter in the following order of
priority:
(a) First, 90% to Fremont and 10% to Shurgard until the
cumulative distributions to each of the Partners during the term
of the Partnership equal the Priority Return;
(b) Second, 90% to Fremont and 10% to Shurgard until the
cumulative distributions to each of the Partners during the term
of the Partnership equals the aggregate capital contributions of
each Partner; and
(c) Third, 80% to Fremont and 20% to Shurgard.
ARTICLE IV. CONTRIBUTION OF PROPERTIES
4.1 Identification of Properties to Be Contributed
(a) Exhibit A hereto sets forth a list of certain self-
service storage facilities owned or leased and recently
constructed or currently under construction by SSCI (each, a
"Property" and, together, the "Properties"). On or following the
Operative Date, Shurgard will cause each of such Properties to be
contributed to the Partnership following the completion of
construction of such Property by SSCI pursuant to a Contribution
Agreement (the "Contribution Agreement") between the Partnership
and Shurgard dated on or prior to the Operative Date (except for
any such Property whose contribution is excluded under the terms
of the Contribution Agreement).
(b) On or prior to the Operative Date, the Partners shall
prepare a Capital Budget (the "Capital Budget") that sets forth
the estimated Carrying Value (as defined below) of each Property.
The Carrying Value shown on the Capital Budget for each Property
as to which construction has not been completed or as to which
final construction costs have not been determined is an estimate,
and the Capital Budget shall be revised to reflect the actual
Carrying Value of each such Property determined pursuant to the
terms of the Contribution Agreement. "Carrying Value" as used
herein shall mean the Final Carrying Value as defined in the
Contribution Agreement.
4.2 Closing of Property Contributions
In connection with the closing of Shurgard's contribution of
each Property to the Partnership, in accordance with the
Contribution Agreement, the Partnership shall reimburse Shurgard
for 97% of the Carrying Value of such Property at the time such
Property is contributed to the Partnership (or, with respect to
certain adjustments to Carrying Value contemplated by the
Contribution Agreement, following the contribution of such
Property to the Partnership), with reimbursement funded through
the Credit Facility and capital contributions by Fremont in
proportion to the funding percentages described in Sections
2.1(a) and 2.2. The remaining 3% of Carrying Value will
constitute a net capital contribution by Shurgard to the
Partnership and appropriately be credited to Shurgard's Capital
Account. For example, if Shurgard contributes a Property having
a Carrying Value of $5,000,000, the Partnership shall reimburse
Shurgard for $4,850,000 funded by $3,500,000 from the Credit
Facility (70% of the Carrying Value) and $1,350,000 from Fremont
capital contributions (90% of the Carrying Value remaining after
reimbursement from the Credit Facility). Shurgard's capital
account would accordingly be credited for $150,000 (reflecting
10% of such remaining Carrying Value).
ARTICLE V. MANAGEMENT OF THE PARTNERSHIP
5.1 Management of the Partnership
The Partners shall have exclusive management and control
over the affairs of the Partnership. The Partners shall have all
rights and powers of Partners as provided in the Act and as
otherwise provided by law, except that unless as expressly
provided in this Agreement, no Partner shall have any authority
to act for, or assume any obligations or responsibility on behalf
of, the other Partner. The Partners shall exercise their
management responsibilities through their designated
representatives (the "Designated Representatives"), through the
appointment of an administrative partner and through the
engagement of a property manager, all as more fully set forth in
this Article V. The business of the Partnership shall be
conducted in accordance with this Agreement and with the
policies, decisions, guidelines and budgets made or approved by
the Partners through their respective Designated Representatives.
5.2 Designation of Representatives
Each Partner shall designate at least two individuals as
such Partner's Designated Representatives. Each Partner shall
authorize each of its Designated Representatives, acting
individually, to take all actions and approve all matters that
such Partner is entitled or required to act upon in accordance
with this Agreement (subject to such Designated Representative's
delegated authority within its Partner's governance structure),
and the other Partner shall be entitled to rely upon all such
actions taken and matters approved by a Designated
Representative. Fremont's initial Designated Representatives are
Matthew Reidy and Claude Zinngrabe, and Shurgard's initial
Designated Representatives are Harrell L. Beck and Charles K.
Barbo. A Partner may at any time replace one or more of its
Designated Representatives by giving written notice of the
replacement to the other Partner.
5.3 Partnership Meetings
The Partnership shall hold regular quarterly meetings,
following distribution of the financial statements with respect
to the prior quarter. Unless otherwise agreed by the Partners,
such meetings shall be held at Shurgard's principal place of
business.
5.4 Engagement of Property Manager
On or prior to the Operative Date, the Partnership shall
engage SSCI to act as property manager of the Properties acquired
by Partnership, on the terms set forth in a Management Services
Agreement (the "Management Agreement"). Pursuant to the
Management Agreement and as more fully described therein, SSCI
will prepare for approval by the Partners annual budgets (each,
an "Annual Budget") relating to the operation of the Properties.
"Annual Budget," as used herein, unless the context clearly
indicates to the contrary, means the applicable Annual Budget as
approved by the Partners.
5.5 Partnership Decisions
(a) Subject to, and without limiting, the delegation of
authority to SSCI under the Management Agreement or the
delegation of authority to the administrative partner under
Section 5.6, and subject to Section 5.5(f), all decisions
pertaining to the business, affairs and operations of the
Partnership must be approved by each Partner. Except as provided
in Section 5.5(f), each Partner, acting through one or more of
its Designated Representatives, is entitled to one vote on all
matters presented to the Partners for approval. Requests for
approvals may be made by either Partner (i) at a Partnership
meeting, (ii) by written request, or (iii) orally. Required
approval may be given (i) by a vote taken at a Partnership
meeting, (ii) by a written approval, or (iii) as provided in
Section 5.5(d), by the absence of written disapproval or written
request for additional information.
(b) Except as otherwise expressly contemplated by this
Agreement, no action may be taken by either Partner with respect
to any matter that is a Major Decision unless the Major Decision
is approved by both Partners in accordance with Section 5.5(a)(i)
or (ii). The following are "Major Decisions":
(i) Approving the Annual Budget;
(ii) Entering into any amendment to the Management
Agreement or permitting the manager under the Management
Agreement to do any act that represents a material departure from
the Management Agreement;
(iii) Making any amendment to any Annual Budget
previously approved by the Partners;
(iv) Except for insured claims (including those settled
within the deductible or self-insured retention), compromising,
settling or adjusting claims, liabilities or causes of action of
or against the Partnership or a Property;
(v) Purchasing any real property other than as
specifically contemplated and identified by the Capital Budget;
(vi) Selling, exchanging or mortgaging a Property or
any interest in a Property, or any other assets of a Property,
except as specifically set forth in an Annual Budget;
(vii) Admitting any additional partners to the
Partnership;
(viii) Causing the Partnership to invest in or
become a partner, participant, venturer or shareholder, in any
other partnership, venture, corporation, business, enterprise or
the like;
(ix) Taking any action that would have a material
adverse impact upon the viability of allocations of Net Profits
and Net Losses under Section 704(b) of the Code;
(x) Taking any action that would be an Event of
Bankruptcy (as defined in Section 9.16(b));
(xi) Filing or revoking any election or otherwise
causing the Partnership to be characterized other than as a
partnership for federal, state, local or other tax purposes;
(xii) With respect to each Property owned by the
Partnership, causing the Partnership to perform any services or
enter into any lease or other contract that would cause any or
all of the gross income received by the Partnership attributable
to such Property to be treated as other than "rents from real
property" as defined in Section 856(d) of the Code; and
(xiii) Performing any act that would adversely
affect the qualification of SSCI as a real estate investment
trust pursuant to Sections 856-860 of the Code; and
(xiv) Approving the Partnership's attorneys and
certified public accountants.
(c) Action on all Major Decisions submitted to the Partners
for approval in accordance with Section 5.5(a) shall be taken by
the Partners as soon as reasonably practicable, and in any event
within 15 days of the date such Major Decision was submitted for
approval, except with respect to these Major Decisions described
in Section 5.5(b)(iv) and (xiv), as to which action shall be
taken within 5 business days of the date such Major Decision was
submitted for approval.
(d) With respect to all Partnership decisions other than
Major Decisions, such matter will be deemed approved within
5 business days after it is submitted to a Partner for approval,
unless prior to the expiration of such period such Partner in
writing indicates its disapproval or requests further information
reasonably necessary to make such decision.
(e) The written approval by a Partner's Designated
Representative of an Annual Budget shall constitute for all
purposes that Partner's written consent to each specific item
expressly set forth in the Annual Budget.
(f) In the event that SSCI fails to timely exercise its
Purchase Option (as defined in Section 7.1), then after such date
the Partners shall be entitled to vote on all matters pertaining
to the business, affairs and operations of the Partnership,
including Major Decisions, in proportion to their respective
Capital Accounts at the time the vote is taken, rather than on
the basis of one vote per Partner, and the vote of the Partner
whose Capital Account constitutes a majority of the total Capital
Accounts at such time of both Partners shall prevail.
5.6 Appointment of Administrative Partner
Shurgard is hereby appointed as the administrative partner
(the "Administrative Partner") and as such is hereby authorized
and directed to implement the decisions of the Partners taken in
accordance with this Agreement, including disbursing Partnership
funds in accordance with such decisions, and to take such other
actions on behalf of the Partnership as it deems necessary and
advisable to implement such decisions, including executing in the
name of and behalf of the Partnership all agreements, consents,
certificates and other documents reasonably necessary or
advisable to implement such decisions.
5.7 Partnership Expenses
(a) Subject to the limitations of Section 5.7(c), the
Partnership shall pay and be responsible for all reasonable costs
and expenses incurred by or on behalf of the Partnership. To the
extent practicable, all Partnership expenses shall be billed
directly to and paid by the Partnership. If, however, acting
with the scope of such Partner's authority as granted by this
Agreement, a Partner should incur any of those expenses the
Partnership shall promptly reimburse such person for such
expenses upon receipt of satisfactory evidence of such payment.
(b) By way of illustration, and not in limitation upon the
scope of Section 5.7(a), the Partnership shall pay the following
costs and expenses:
(i) All state and local filing or similar expenses
incurred by the Partners in connection with the formation of the
Partnership;
(ii) All costs and expenses incurred by or on behalf of
SSCI in accordance with the Management Agreement that are
allocable to and are to be borne by the Partnership pursuant to
the terms of the Management Agreement; and
(iii) The actual out-of-pocket expenses incurred by
a Partner for goods, materials and services used for or by the
Partnership (provided any such services performed by a Partner
must be approved in advance to be eligible for reimbursement).
(c) Except as expressly provided for herein or in the
Management Agreement or as hereafter approved by the Partners, no
payment will be made to any Partner for the services of such
Partner or of any member, director, officer or employee of such
Partner rendered in connection with the business or affairs of
the Partnership.
5.8 Liability of Partners; Indemnification
The Partnership shall (to an extent not in excess of the net
assets of the Partnership, without additional contribution or
loan by any Partner) indemnify and hold harmless each Partner and
each member, partner or shareholder of any Partner and each of
their respective officers and directors and the successors,
heirs, executors and administrators of each of them and each
Designated Representative (herein "Indemnified Parties"), from
and against any loss, expense, damage or injury suffered or
sustained by such Indemnified Party by reason of any act,
omission or alleged act or omission arising in connection with
the business of the Partnership, including, but not limited to,
any judgment, fine, penalty, award, settlement, reasonable
attorneys' fees and other costs or expenses incurred in
connection with the defense or prosecution of any actual or
threatened action, suit, proceeding, appeal, investigation or
claim, be it civil, criminal, administrative, legislative or
other, or any appeal relating thereto that is brought or
threatened by any person, entity, governmental authority or
instrumentality, provided that the act, omission or alleged act
or omission upon which such actual or threatened action, suit,
proceeding, investigation or claim is based (a) is within the
scope of authority granted to such person pursuant to the terms
of this Agreement, (b) was performed or omitted in good faith in
what the Indemnified Party believed to be in the best interests
of the Partnership and (c) was not performed fraudulently or as a
result of gross negligence or willful malfeasance by such
Indemnified Party. The Partnership shall advance to any
Indemnified Party its expenses incurred in connection with such
defense or prosecution so long as net assets of the Partnership
are available therefor, the Partnership has no reason to believe
the Indemnified Party is not in fact entitled to indemnification
pursuant to this Section 5.8 and the Indemnified Party agrees in
writing to return the funds so advanced if it is subsequently
determined that such Indemnified Party was not entitled to
indemnification hereunder. To the extent that an Indemnified
Party has been successful on the merits in defense of any such
proceeding or in defense of any claim or matter therein, it shall
be deemed that the applicable criteria established in clauses (a)
and (b) have been satisfied. The indemnification provided
hereunder shall not be deemed exclusive of any other rights to
which the Indemnified Parties may be entitled under any
applicable statute, agreement, vote of the Partners or otherwise.
ARTICLE VI. OTHER AGREEMENTS OF THE PARTNERS
6.1 Provision of Information by Shurgard Relating to Trade
Area Properties
Shurgard has provided to Fremont a list of all self-service
storage facilities located within a five-mile radius of any
Property which are currently owned or operated by Shurgard or its
Affiliates, or which Shurgard or its Affiliates are currently
actively contemplating developing or acquiring (each such
existing or currently contemplated property, together with any
facility located within any such five-mile radius which hereafter
may be actively contemplated for development or acquisition by
Shurgard, a "Shurgard Trade Area Property.") For purposes of
this Section 6.1, Shurgard shall be deemed to be actively
contemplating developing or acquiring a facility when the
acquisition or development of such facility has received final
approval from SSCI's real estate committee. Upon request by
Fremont from time to time, Shurgard will update the list to
include any additional Shurgard Trade Area Properties, and will
provide Fremont with detailed property operating data (similar to
the monthly operating reports furnished by SSCI to the
Partnership under the Management Agreement) for each Shurgard
Trade Area Property owned or managed by Shurgard. All such
information is confidential and is subject to Section 12.10.
6.2 No Restrictions on Competitive Business Activities
Except as expressly provided in this Agreement, each Partner
and its Affiliates shall be free to engage in any and all
business activities whatsoever, including activities that compete
with the Partnership's business.
6.3 Financing Fees
If either Partner (or an Affiliate thereof) secures third-
party financing on behalf of the Partnership, in connection
therewith the Partnership shall pay to such Partner (or
Affiliate) a fee equal to 1% of the amount of the financing so
secured. Such 1% fee shall be payable at the closing of the
financing. The Partnership hereby acknowledges that FRC is
acting on the Partnership's behalf in attempting to secure a
Credit Facility for the Partnership, and accordingly a fee equal
to 1% of the amount of the Credit Facility will be payable to FRC
upon the closing of such Credit Facility in accordance with this
Section 6.3. The Partnership shall have the sole right to accept
or reject any financing proposal brought to it by either Partner,
and this Section 6.3 in no way obligates the Partnership to
accept any financing proposal. Except for the commitment fee set
forth in the loan term sheet (or specifically contemplated by
other written agreement to the terms of the loan by the
Partnership and Shurgard or SSCI) referred to in Section 2.1(c),
no financing fee shall be payable under this Section 6.3 to
either Partner in connection with any Credit Facility provided by
Shurgard or SSCI under Section 2.1(c).
ARTICLE VII. SSCI PURCHASE OPTION
7.1 Purchase Option
On or prior to the Operative Date, Fremont and the
Partnership shall enter into a Purchase Option Agreement with
SSCI (the "Purchase Option Agreement") pursuant to which they are
granting to SSCI an option to acquire all Properties owned or
leased by the Partnership or, at SSCI's option, to acquire
Fremont's entire interest in the Partnership (the "Purchase
Option").
ARTICLE VIII. SALE, ASSIGNMENT OR TRANSFER OF
PARTNERSHIP INTEREST
8.1 Prohibited Transfers
Except as specifically permitted in this Article VIII and as
contemplated by the Purchase Option Agreement with respect to the
transfer of Fremont's partnership interest to Shurgard, no
Partner may sell, assign, transfer, pledge, encumber, or grant a
lien or security interest in, or make a gift of (any such
transaction being generically referred to as a "transfer" in this
Agreement) all or any part of its interest in the Partnership or
in its rights to profits, losses or cash distributions of the
Partnership, either as an owner or a creditor. Any such transfer
prohibited by this Article VIII shall be ineffective, null and
void.
8.2 Permitted Transfers
A Partner may transfer an interest in itself without
obtaining any prior consent from the other Partner, so long as
the following conditions are satisfied: (a) all voting and other
Partnership management rights (including, without limitation, all
rights to receive information, to give and receive notices, etc.)
are not in any way affected by the transfer of the interest,
(b) the Partnership does not bear any of the costs and expenses
of any such transfer, (c) any such transfer complies with all
state and federal laws applicable thereto and does not constitute
a sale or transfer of an interest in the Partnership that could
or might result in a termination of the Partnership within the
meaning of Section 708 of the Code, as determined by counsel for
the Partnership, (d) the transferring Partner shall first
indemnify the other Partner and the Partnership against any and
all loss, damage, liability, claim, demand and expense (including
increased or accelerated income or property tax expense) arising
from or in any way connected with the Partner's transfer pursuant
to a written indemnity in form and substance reasonably
satisfactory to the nontransferring Partner, (e) the transfer
does not in any way limit the transferring Partner's obligation
to make capital contributions or to satisfy any of its other
obligations under this Agreement, and (f) the transfer does not
result in a default under or breach of any material agreement to
which the Partnership is a party.
8.3 Change of Control of Shurgard
(a) A "Change of Control" (as defined in Section 8.3(d)
below) of SSCI shall be considered a transfer of Shurgard's
interest in the Partnership. If the transaction resulting in the
Change of Control has been approved by no less than a majority of
the members of SSCI's board of directors as of the date of this
Agreement or directors who were subsequently elected to SSCI's
board of directors following the nomination by at least a
majority of the then-current members of SSCI's board of directors
(an "Approved Change of Control"), then Shurgard may not transfer
its interest in the Partnership without the prior written consent
of Fremont, which consent may not be unreasonably withheld. Any
Change of Control of SSCI which is not an Approved Change of
Control shall be an "Unapproved Change of Control," and in such
event Fremont shall have the rights set forth in Section 8.3(c).
(b) In the case of an Approved Change of Control occurring
prior to December 31, 2001, if Fremont reasonably withholds its
consent to such transfer then Fremont may, in its sole
discretion, require Shurgard to acquire its interest in the
Partnership at a price equal to Fremont's Unreturned Capital plus
that amount which would result in Fremont receiving a 7% return
on Fremont's capital contributions to the Partnership, and in the
case of an Approved Change of Control occurring after December
31, 2001, if Fremont reasonably withholds its consent to such
transfer then Fremont may required Shurgard to acquire the all of
the Properties then owned by the Partnership at the price
provided below with respect to an Unapproved Change of Control.
In calculating the price payable to Fremont under this Section
8.3(b), definitions and other calculations used pursuant to the
Purchase Option Agreement for purposes of calculating the "Base
Purchase Price" thereunder, including the definition of net
operating income, shall be utilized to the extent appropriate.
(c) In the case of an Unapproved Change of Control, Fremont
may at any time following such Unapproved Change of Control
require Shurgard to purchase all of the Properties from the
Partnership, with the purchase price for each Property determined
by utilizing a 9-1/4% capitalization rate applied to the greater
of (i) such Property's net operating income assuming pro forma
occupancy and rents at the stabilization date anticipated in the
such Property's initial pro forma budget or (ii) such Property's
actual annualized net operating income based on the three months
of operations prior to the date Fremont exercises its rights
under this Section 8.3(c). In calculating the purchase price of
the Properties under this Section 8.3(c), definitions and other
calculations used pursuant to the Purchase Option Agreement for
purposes of calculating the Purchase Price (as defined in the
Purchase Option Agreement) of the Properties under Article I of
that Agreement, including the definition of net operating income,
shall be utilized to the extent appropriate.
(d) As used herein, a "Change of Control" of SSCI shall
mean any sale of assets or stock, merger, tender offer, proxy
contest, business combination or other similar transaction (or
any of the foregoing in a related series of transactions, which
shall be deemed a single transaction) whereby (i) the persons who
held the voting and economic interests in SSCI prior to such
transaction do not hold at least 50% of the voting and economic
interests in SSCI or a successor entity following such
transaction; or (ii) if the persons who served as members of
SSCI's board of directors prior to the transaction do not
constitute a majority of the members of the board of directors of
SSCI or a successor entity following the transaction.
8.4 Other Transfers
Transfers, other than those expressly permitted by
Sections 8.1 and 8.2 and transfers by Shurgard as a result of a
Change of Control of Shurgard contemplated by Section 8.3, shall
be permitted only with the prior written consent of the
nontransferring Partner, which consent may be withheld in the
sole discretion of such Partner.
ARTICLE IX. TERM, DISSOLUTION AND TERMINATION,
VOLUNTARY WITHDRAWAL AND DEFAULT
9.1 Term and Dissolution
(a) In the event the Contribution Agreement, Management
Agreement, Purchase Option Agreement and documents relating to
the Credit Facility referred to in Sections 4.1(a), 5.4, 7.1 and
2.1, respectively, have not been executed by the parties thereto
on or prior to the Operative Date, then either Partner may
unilaterally terminate the Partnership by notice to the other
Partner, and the Partnership will be dissolved.
(b) Following the Operative Date, the Partnership will
continue until the happening of any of the following events
(individually referred to as an "Event of Dissolution") at which
time, subject to the rights contained herein of the Partners to
continue the Partnership, the Partnership will be dissolved:
(i) Both of the Partners have mutually agreed in
writing that the Partnership will be dissolved;
(ii) The sale or other disposition of all or
substantially all the assets of the Partnership and the
collection of all proceeds therefrom;
(iii) The occurrence of an Event of Bankruptcy (as
defined below) with respect to any Partner or the attempt by any
Partner to cause the Property to be partitioned in violation of
Section 12.3, unless within 90 days after such event the other
Partner elects not to treat such event as an Event of
Dissolution;
(iv) The tenth anniversary date of this Agreement; or
(v) A Partner causes a dissolution of the Partnership
in contravention of Section 9.4.
(c) A Partner to whom an Event of Bankruptcy has occurred
is referred to herein as a "Bankrupt Partner." A Bankrupt
Partner shall have no right to participate in the management and
control of the Partnership (including, without limitation, the
approval or disapproval of a Major Decision) and shall have no
authority to legally bind the Partnership. The term "Event of
Bankruptcy" as used herein means any one or more of the
following:
(i) If a Partner files a voluntary petition in
bankruptcy, or files any petition or answer seeking any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief for itself under the
present or any future Federal Bankruptcy Code or any other
present or future applicable federal, state or other statute or
law relating to bankruptcy, insolvency or other relief for
debtors, or seeks or consents to or acquiesces in the appointment
of any trustee, receiver, custodian, conservator or liquidator of
the Partner or of all or any substantial part of such Partner's
properties or such Partner's interest in the Partnership (the
term "acquiesces" as used in this Article IX includes, but is not
limited to, the failure to file a petition or motion to vacate or
discharge any order, judgment or decree within 15 business days
after the date of such order, judgment or decree); or
(ii) If a court of competent jurisdiction enters an
order, judgment or decree approving a petition filed against a
Partner seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under
the present or any future Federal Bankruptcy Code or any other
present or future applicable federal, state or other statute or
law relating to bankruptcy, insolvency or other relief for
debtors, and such Partner acquiesces in the entry of such order,
judgment or decree, or such order, judgment or decree remains
unvacated and unstayed for an aggregate of 60 days (whether or
not consecutive) from the date of entry thereof, or any trustee,
receiver, custodian, conservator or liquidator of such Partner or
of all or any substantial part of such Partner's properties or
interest in the Partnership is appointed without the consent or
acquiescence of such party and such appointment remains unvacated
and unstayed for an aggregate of 60 days (whether or not
consecutive); or
(iii) If a Partner is unable to pay its debts as
they become due or mature; or
(iv) If a Partner makes an assignment (other than
assignments solely for security purposes) of all or substantially
all its assets for the benefit of creditors or takes any other
similar action for the protection or benefit of creditors.
(d) Dissolution of the Partnership shall be effective on
the day on which the event giving rise to the dissolution occurs,
but the Partnership shall not terminate until the assets of the
Partnership have been distributed as provided in Section 9.2.
Notwithstanding the dissolution of the Partnership, prior to the
termination of the Partnership the business of the Partnership
and the affairs of the Partners will continue to be governed by
this Agreement.
9.2 Termination and Distributions
(a) Upon the occurrence of an Event of Dissolution,
Shurgard shall act as the liquidating partner on the terms set
forth in this Section 9.2, unless Shurgard has caused the Event
of Dissolution under Section 9.1(b)(iii), (iv) or (v), in which
case Fremont shall act as the liquidating partner. Any Partner
who caused the Event of Dissolution shall have no authority or
power to bind the Partnership or the other Partners, but such
Partner shall be obligated to assist the liquidating partner (the
"Liquidator") in the dissolution and winding-up of the
Partnership and the assets thereof.
(b) The Liquidator shall undertake to wind up and liquidate
the assets of the Partnership as promptly as business
circumstances and orderly business practices will permit. During
the period of such winding-up, the Partnership's business and
affairs shall be conducted in a manner to maintain and to
preserve the value of its assets, consistent with the winding-up
of the affairs thereof, and no further business shall be
undertaken except for the completion of any incomplete
transactions that may be necessary to wind up the affairs of the
Partnership in an orderly manner and except that the Properties
may be operated in the ordinary course of business if the Partner
not causing the Event of Dissolution so elects.
9.3 Distribution Upon Liquidation
(a) The Liquidator shall apply and distribute the proceeds
of the liquidation of the assets of the Partnership (to the
extent available) in the following order of priority:
(i) To the payment of the debts and liabilities of the
Partnership (other than those to Partners) in the order of
priority provided by law; provided, however, that the Liquidator
shall first pay, to the extent permitted by law, liabilities with
respect to which any Partner is or may be personally liable;
(ii) To the payment of the expenses of liquidation of
the Partnership in the order of priority provided by law;
provided, however, the Liquidator shall first pay, to the extent
permitted by law, expenses with respect to which any Partner is
or may be personally liable;
(iii) To the setting up of such reserves as the
Liquidator may deem reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Partnership arising
out of or in connection with its business; provided, however,
that any such reserves will be held by the Liquidator for the
purposes of (A) disbursing such reserves in payment of any of
such contingencies and (B) at the expiration of such period as
the Liquidator deems advisable, distributing the balance
thereafter remaining in the manner and in the priority provided
below;
(iv) To the payment of any loans from the Partners to
the Partnership; and
(v) To and among the Partners in accordance with the
positive Capital Account balances of the Partners, as determined
after taking into account all Capital Account adjustments for the
taxable year of the Partnership's liquidation. If any part of
the Partnership's assets consists of notes, accounts receivable
or other noncash assets, the Liquidator shall take whatever steps
it deems appropriate to convert such assets into cash or into any
other form that would facilitate the distribution thereof. No
assets of the Partnership may be distributed in kind to any
Partner without the prior written consent of the other Partner.
(b) If distributions pursuant to Section 9.3(a)(v) are
insufficient to return to any Partner the full amount of such
Partner's Capital Account or Unreturned Capital, such Partner
shall have no recourse against any other Partner. No Partner
shall have any obligation to restore a deficit in such Partner's
Capital Account either on liquidation of the Partnership or
liquidation of such Partner's interest in the Company.
9.4 Prohibition Against Withdrawal and Voluntary Withdrawal
Neither Partner may withdraw from the Partnership without
the prior written consent of the other Partner. No Partner shall
have the right to voluntarily cause the dissolution of the
Partnership in any manner or for any reason whatsoever.
9.5 Default
If any Partner fails to perform in any material respect any
of its obligations hereunder or violates the terms of this
Agreement in any material respect (such Partner being referred to
as the "Defaulting Partner"), any other Partner (a
"Non-Defaulting Partner") shall have the right to give the
Defaulting Partner a default notice specifically setting forth
the nature of the default and stating that the Defaulting Partner
has a period of 10 days to cure such default, if it is a default
in payment of money to the Partnership or the Non-Defaulting
Partner pursuant to this Agreement, or a period of 30 days to
cure such default, if it is any other default hereunder. If the
Defaulting Partner does not cure such default in payment of money
within such 10-day period, or in the case of any other default
the Defaulting Partner has not cured such default within such
30-day period, or if such other default cannot be cured within
such 30-day period the Defaulting Partner has not commenced in
good faith the curing of such default within such 30-day period
or does not prosecute diligently, expeditiously and continuously
the completion of such cure, a Non-Defaulting Partner shall, in
addition to other rights and remedies it may have hereunder or at
law or in equity, have the right to bring any proceeding in the
nature of specific performance, injunction or other equitable
remedy, it being acknowledged by each of the Partners that
damages at law may be an inadequate remedy for a default or
threatened breach of this Agreement; and to bring any action at
law by or on behalf of the Partnership as may be permitted by
applicable law, in order to recover damages. In addition to and
without limiting the foregoing, if the Defaulting Partner does
not cure a default in the payment of money within such 10-day
period, the Non-Defaulting Partner shall also be entitled, in its
sole discretion, (a) to provide such funds to the Partnership,
either in the form of a loan (which loan shall be secured by an
interest in the Defaulting Partner's interest in the Partnership)
or as a capital contribution (which capital contribution shall be
property reflected in the Capital Account of the Non-Defaulting
Partner) or (b) to not make any further capital contributions to
the Partnership until such monetary default has been cured by the
Defaulting Partner.
ARTICLE X. BOOKS, RECORDS AND BANK ACCOUNTS
10.1 Books and Records
The Partners shall keep or cause to be kept complete and
accurate books and records reflecting all financial activities of
the Partnership. The books and records shall be maintained at
the principal place of business of the Partnership, or at such
other place as the Partners may mutually agree, and shall be
available for examination and duplication by each Partner or its
duly authorized representative, at such Partner's expense, at any
and all reasonable times.
10.2 Accounting Basis and Fiscal Year
The books and records of the Partnership for financial
accounting purposes shall be maintained in accordance with the
accrual method of accounting and in accordance with generally
accepted accounting principles. The fiscal year of the
Partnership will be concurrent with the calendar year.
10.3 Reports
Within 35 days of the end of each fiscal quarter and within
90 days after the end of each fiscal year of the Partnership, the
Partners shall cause the property manager and/or the certified
public accountants for the Partnership to prepare and distribute
to each of the Partners financial reports of the Partnership,
including a balance sheet, an income statement, and a statement
of cash flows or source and application of funds statement. The
financial information included in the year-end report shall be
accompanied by an audit report issued by Deloitte & Touche
L.L.P., or such other independent certified public accountant as
may be mutually selected by the Partners. Within 90 days after
the end of each fiscal year, the Partners shall cause the
property manager and/or the certified public accountants for the
Partnership to furnish to each Partner such information as may be
needed to enable such Partner to file its federal income tax
return, any required state income tax return and any other
reporting or filing requirements imposed by any governmental
agency or authority. The cost of all such reporting and audits
shall be paid by the Partnership as a partnership expense. Any
Partner may, at any time, at its own expense, cause an audit of
the Partnership books to be made by a certified public accountant
of such Partner's own selection.
10.4 Bank Accounts
The bank accounts of the Partnership will be maintained in
such banking institutions as the Partners may determine. Such
accounts may be used for the payment of the expenditures incurred
in connection with the business of the Partnership and for
payments to the Partners in accordance with this Agreement. Any
and all cash receipts of the Partnership shall be deposited in
such accounts. All such amounts shall be and remain the property
of the Partnership, and shall be received, held and disbursed by
the Partners for the purposes specified in this Agreement. There
may not be deposited in any of said accounts any funds other than
funds belonging to the Partnership, and no other funds may in any
way be commingled with such funds. This Section 10.4 is not
intended to in anyway limit or define SSCI's rights and
obligations to establish and maintain accounts pursuant to the
Management Agreement.
ARTICLE XI. REPRESENTATIONS AND WARRANTIES
11.1 Representations and Warranties by Each Partner
Each Partner hereby represents and warrants to the other
Partner the following:
(a) It has the legal power, right and authority to
consummate the transactions contemplated hereby. All actions
required to be taken by it to consummate the transactions
contemplated hereby have been taken.
(b) This Agreement and all other documents that have been
executed and delivered by such Partner pursuant to this Agreement
constitute valid and binding obligations of such Partner,
enforceable against such Partner in accordance with their
respective terms.
(c) The execution and delivery of this Agreement by such
Partner, the incurrence by it of the obligations herein set
forth, the consummation of the transactions contemplated hereby,
the compliance by such Partner with the terms of this Agreement
and the operation by it of the business of the Partnership do not
and will not conflict with or result in a breach of any of the
terms, conditions or provisions of, or do not and will not
constitute a default under, (i) any bond, note or other evidence
of indebtedness or other contract, indenture, mortgage, deed of
trust, loan agreement, lease or other instrument to which such
Partner is a party or by which it is bound or (ii) any order,
finding or decree of any court or governmental authority having
jurisdiction.
11.2 Shurgard's Representations and Warranties
Shurgard hereby represents and warrants to Fremont that it
is a corporation duly organized and validly existing under the
laws of the state of Washington and that the individuals who
executed this Agreement on behalf of Shurgard have full power and
authority to enter into this Agreement. For all purposes Fremont
is entitled to rely on the approval by either of Shurgard's
Designated Representatives, acting individually, as to all
matters relating to or arising out of this Agreement and the
transactions contemplated hereby.
11.3 Fremont's Representations and Warranties
Fremont hereby represents and warrants to Shurgard that it
is a limited partnership duly organized and validly existing
under the laws of the state of California and that the
individuals who executed this Agreement on behalf of Fremont have
full power and authority to enter into this Agreement. For all
purposes Shurgard is entitled to rely on the approval by either
of Fremont's Designated Representatives, acting individually, as
to all matters relating to or arising out of this Agreement and
the transactions contemplated hereby.
ARTICLE XII. MISCELLANEOUS
12.1 Notices
Any and all notices, elections or demands permitted or
required to be made under this Agreement must be in writing,
signed by the Partner giving such notice, election or demand, and
must be delivered personally, transmitted by electronic facsimile
with receipt confirmed or sent by nationally reputed courier
service that provides verification of delivery, to the other
Partner, at the address set forth below, or at such other address
as may be supplied by written notice given in conformity with the
terms of this Section 12.1. The date of personal delivery or the
date of refusal or receipt, as the case may be, is the date such
notice is effective.
If a Shurgard: If to Fremont:
Shurgard Development II, Fremont Storage Partners II,
Inc. L.L.C.
Attn: Chief Executive c/o Fremont Realty Capital
Officer Attn: President
1155 Valley Street, 50 Fremont Street,
Suite 400 Suite 3500
Seattle, WA 98109-4426 San Francisco, CA 94105
Facsimile: (206) 652-3760 Facsimile: (415) 284-8183
with a copy to: with a copy to:
Shurgard Storage Centers, Fremont Group, L.L.C.
Inc. Attn: General Counsel
Attn: General Counsel 50 Fremont Street,
1155 Valley Street, Suite 3500
Suite 400 San Francisco, CA 94105
Seattle, WA 98109-4426 Facsimile: (415) 512-7121
Facsimile: (206) 652-3760
12.2 Successors and Assigns
Subject to the restrictions on transfer set forth in Article
VIII, this Agreement shall be binding on and shall inure to the
benefit of the respective parties hereto and their permitted
successors and assigns.
12.3 Partition
The Partners hereby agree that no Partner or any
successor-in-interest to any Partner will have the right while
this Agreement remains in effect to have the Property of the
Partnership partitioned, or to file a complaint or institute any
proceeding at law or in equity to have the Property of the
Partnership partitioned, and each Partner, on behalf of its
successors and assigns, hereby waives any such right. It is the
intention of the Partners that, during the term of this
Agreement, the rights of the Partners and their
successors-in-interest, as among themselves, shall be governed by
the terms of this Agreement and the Act and that the right of any
Partner or its successor-in-interest to transfer its interest in
the Property shall be subject to the limitations and restrictions
of this Agreement. Any attempt by a Partner to have the Property
partitioned will, unless the other Partner elects otherwise,
constitute an Event of Dissolution in accordance with Section 9.2
(a)(iii).
12.4 Entire Agreement; Amendments
This Agreement, together with the agreements expressly
contemplated hereby, constitutes the full and complete agreement
of the parties hereto with respect to the subject matter hereof,
and expressly supersedes the provisions of that certain letter
agreement between the parties dated October 12, 1998 and
subsequently amended. This Agreement may be amended, modified or
otherwise changed only in writing signed by both Partners hereto.
Without limiting the generality of the foregoing, no amendment to
this Agreement may be effected nor may any other action be taken
that would result in the admission of additional partners to the
Partnership, except by the specific written agreement of both
Partners.
12.5 No Waiver
The failure of any Partner to insist on strict performance
of a covenant hereunder or of any obligation hereunder,
irrespective of the length of time for which such failure
continues, will not be a waiver of such Partner's rights to
demand strict compliance in the future. No consent or waiver,
express or implied, to or of any breach or default in the
performance of any obligation hereunder will constitute a consent
or waiver to or of any other breach or default in the performance
of the same or any other obligation hereunder.
12.6 Foreign Status
By executing this Agreement, each Partner declares under
penalties of perjury that, for purposes of Section 1446 of the
Code, it is not a foreign person, that its name, office address
and tax identification number are accurately set forth herein and
that it will notify the Partnership within 60 days of any change
to foreign status.
12.7 Captions
Titles or captions of Articles or Sections contained in this
Agreement are inserted only as a matter of convenience and for
reference, and in no way define, limit, extend or describe the
scope of this Agreement or the intent of any provision hereof.
12.8 Counterparts
This Agreement and any amendments hereto may be executed in
any number of counterparts, all of which together for all
purposes constitute one agreement, binding on both the Partners
notwithstanding that both Partners have not signed the same
counterpart.
12.9 Applicable Law
This Agreement and the rights and obligations of the parties
hereunder shall be governed by and interpreted, construed and
enforced in accordance with the laws of the state of Washington.
References in this Agreement to provisions of the Code and
Treasury Regulations thereunder shall apply to corresponding
successor provisions.
12.10 Proprietary Control; Confidentiality
Fremont agrees that certain information prepared or to be
prepared by or on behalf of the Partnership is of a competitively
sensitive and proprietary nature and is intended solely for use
in official business of the Partnership (the "Confidential
Partnership Information"), and may not be otherwise disseminated
in any form to any third, unrelated person or entity, except with
the prior written consent of Shurgard, and, in that circumstance,
only subject to an agreement ensuring the confidentiality and
establishing the proprietary nature of the materials so
disseminated. Notwithstanding the foregoing, Fremont may,
without the prior written consent of Shurgard, disclose
Confidential Partnership Information, subject to an agreement
ensuring the confidentiality and establishing the proprietary
nature of the materials so disseminated (and providing Shurgard
with the right to enforce such agreement), to potential investors
in Fremont and their advisors and to Fremont's financial
consultants and other advisors, provided that Fremont promptly
informs Shurgard of what Confidential Partnership Information has
been disclosed and to whom and provides Shurgard with a copy of
the executed confidentiality agreement. The Confidential
Partnership Information includes (a) identification of sites or
facilities which are potentially competitive with the Properties,
including information regarding Shurgard Trade Area Properties
provided to Fremont pursuant to Section 6.1; (b) financial
information relating to a single Property or group of Properties
(as contrasted with summary financial information relating to the
Properties in the aggregate, which does not constitute
Confidential Partnership Information); and (c) such other
proprietary information as Shurgard or SSCI reasonably identifies
as Confidential Partnership Information (through the placement of
an appropriate legend on the information or other written notice)
at the time such information is provided to the Partnership.
Notwithstanding the foregoing, Confidential Partnership
Information shall not include (i) information in the public
domain, (ii) information known to Fremont prior to November 25,
1997, (iii) information disclosed to Fremont from a source
Fremont reasonably believes has no obligation of confidentiality
to Shurgard or its Affiliates, or (iv) information disclosed to
Fremont more than two years prior to its disclosure by Fremont.
It is further understood and agreed by Fremont that money
damages may not be a sufficient remedy for any breach of this
Section 12.10 and that Shurgard shall be entitled to equitable
relief, including injunction and specific performance, as a
remedy for any such breach. Such remedies shall not be deemed to
be the exclusive remedies for a breach of this Section 12.10 but
shall be in addition to all other remedies available at law or
equity. In the event of litigation relating to this Section
12.10, the prevailing party shall be entitled to recover all its
costs and expenses in connection therewith (including without
limitation court costs and reasonable attorneys' fees and
expenses) from the unsuccessful party, whether or not the action
is prosecuted to judgment or other final determination.
12.11 Affiliate
The term "Affiliate" means any person or entity owning,
directly or indirectly, a 10% or greater legal or beneficial
interest in such entity or any entity in which such person or
entity, directly or indirectly, owns a 10% or greater legal or
beneficial interest or is serving as an executive officer
thereof.
12.12 Covenant of Good Faith
Each Partner covenants and agrees that whenever it is
authorized by this Agreement to take or omit to take any action,
or to give or withhold any approval or consent, whether or not in
its sole discretion, it will take or omit to take such action, or
give or withhold such approval or consent, in good faith and not
in an arbitrary or capricious manner.
12.13 Severability
If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and
the application of such provision to other persons or
circumstances shall not be affected thereby and shall be enforced
to the greatest extent permitted by law.
IN WITNESS WHEREOF, this Agreement has been duly executed,
effective as of the date first set forth above.
SHURGARD DEVELOPMENT II, INC.
/s/ Harrell Beck
---------------
By: Harrell Beck
Its: Senior Vice President
Taxpayer I.D. No. 91-1934789
FREMONT STORAGE PARTNERS II, L.L.C.
By: Fremont Realty Capital Investors, L.P.
Its: Managing Member
By: Fremont Resources, Inc.
Its: General Partner
/s/ Claude L. Zinnegrabe, Jr.
-----------------------------
By: Claude L. Zinnegrabe, Jr.
Its: Executive Vice President
Taxpayer I.D. No.
EXHIBIT A
PROPERTIES
Champions
Cityplace
Clinton Township
Country Club Hills
Henderson Street
Merrifield
Mill Creek
Oak Farm Dairy
Pier 57
Redmond
Sandy Plains
Schaumburg South
Southlake
Val Vista
Van Ness
FIRST AMENDMENT TO PARTNERSHIP AGREEMENT
This FIRST AMENDMENT TO PARTNERSHIP AGREEMENT (this
"Amendment") is made and entered into as of April 27,
1999, by and between SHURGARD DEVELOPMENT II, INC., a
Washington corporation ("Shurgard"), and FREMONT STORAGE
PARTNERS II, L.L.C., a Delaware limited liability company
("Fremont"). Shurgard and Fremont may each be referred to
herein individually as a "Partner" and collectively as the
"Partners."
RECITALS
WHEREAS, the Partners formed Shurgard/Fremont Partners
II, a Washington general partnership (the "Partnership")
pursuant to that certain Partnership Agreement dated as of
March 17, 1999 (the "Agreement");
WHEREAS, the Partners wish to amend said Agreement in
certain respects;
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing, the
mutual promises of the parties hereto, and for other good
and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as
follows:
1. The Agreement shall be amended as follows:
(a) The date set forth in the preamble of the
Agreement shall be corrected to read "March 17,
1999."
(b) The reference in Section 2.1(a) to "$88,000,000"
shall be changed to read "$92,400,762."
(c) The first sentence of Section 2(c) shall be
amended in its entirety to read as follows:
The maximum amounts of capital contributions that
may be required from Fremont and Shurgard (net of
any reimbursements received by Shurgard pursuant
to Section 4.3) pursuant to this Agreement are
approximately $24,948,206 and $2,772,023,
respectively.
(d) Exhibit A shall be amended to add thereto the
following property:
Beecaves
2. Except as expressly provided herein, the Agreement
shall remain unmodified and in full force and effect.
IN WITNESS WHEREOF, this Agreement has been duly
executed, effective as of the date first set forth above.
SHURGARD DEVELOPMENT II, INC.
/s/ Harrell Beck
----------------
By: Harrell Beck
Its: Senior Vice President
Taxpayer I.D. No. 91-1934789
FREMONT STORAGE PARTNERS II,
L.L.C.
By: Fremont Realty Capital Investors, L.P.
Its: Managing Member
By: Fremont Resources, Inc.
Its: General Partner
/s/ Claude L. Zinnegrabe, Jr.
----------------------------
By: Claude L. Zinnegrabe, Jr.
Executive Vice President
Taxpayer I.D. No.
SEVENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED LOAN
AGREEMENT (this "Seventh Amendment") is made as of April 28,
1999, by and among BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, a national banking association, d/b/a Seafirst Bank,
KEYBANK NATIONAL ASSOCIATION, a national banking association,
U.S. BANK NATIONAL ASSOCIATION, a national banking association,
and LASALLE NATIONAL BANK, a national banking association (each
individually a "Lender" and collectively the "Lenders"), BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national
banking association, d/b/a Seafirst Bank, as agent for Lenders
(the "Agent"), and SHURGARD STORAGE CENTERS, INC., a Washington
corporation ("Borrower").
RECITALS
A. Lenders, Agent and Borrower are parties to that certain
Amended and Restated Loan Agreement dated as of September 9,
1996, as amended by that certain First Amendment to Amended and
Restated Loan Agreement dated as of November 14, 1996, that
certain Second Amendment to Amended and Restated Loan Agreement
dated as of March 12, 1997, that certain Third Amendment to
Amended and Restated Loan Agreement dated as of July 28, 1997,
that certain Fourth Amendment to Amended and Restated Loan
Agreement dated as of January 30, 1998, that certain Fifth
Amendment to Amended and Restated Loan Agreement dated as of
May 1, 1998, and that certain Sixth Amendment to Amended and
Restated Loan Agreement dated as of October 27, 1998
(collectively, the "Loan Agreement").
B. Borrower has requested, and Lenders and Agent have
agreed, to amend the Loan Agreement upon certain terms and
conditions contained in this Seventh Amendment.
NOW, THEREFORE, Lenders, Agent and Borrower agree as
follows:
AGREEMENT
1. Capitalized Terms. Capitalized terms not otherwise
defined in this Seventh Amendment shall have the meanings set
forth in the Loan Agreement.
2. Amendments to Definitions in Loan Agreement.
a. The definition of "Second Joint Venture" shall be
added to Section 1.1 of the Loan Agreement to read as follows:
"Second Joint Venture" means Shurgard/Fremont
Partners II, a Washington general partnership.
b. The definition of "Second Joint Venture Investor"
shall be added to Section 1.1 of the Loan Agreement to read as
follows:
"Second Joint Venture Investor" means Fremont
Storage Partners II, L.P., a Delaware limited liability
company.
c. The definition of "Second JV Subsidiary" shall be
added to Section 1.1 of the Loan Agreement to read as follows:
"Second JV Subsidiary" means Shurgard
Development II, Inc., a Washington corporation.
3. Conditions to Effectiveness. Notwithstanding anything
contained herein to the contrary, this Seventh Amendment shall
not become effective until each of the following conditions is
fully and simultaneously satisfied:
(a) Delivery of Amendment. Borrower, Agent and each
Lender shall have executed and delivered counterparts of this
Seventh Amendment to Agent.
(b) Consent of Guarantor. Shurgard Texas Limited
Partnership, a Washington limited partnership, shall have
executed the Guarantor's Consent attached hereto.
4. Representations and Warranties. Borrower hereby
represents and warrants to Lenders and Agent that each of the
representations and warranties set forth in Article 6 of the Loan
Agreement is true and correct in each case as if made on and as
of the date of this Seventh Amendment and Borrower expressly
agrees that it shall be an additional Event of Default under the
Loan Agreement if any representation or warranty made hereunder
shall prove to have been incorrect in any material respect when
made.
5. No Further Amendment. Except as expressly modified by
this Seventh Amendment, the Loan Agreement and the other Loan
Documents shall remain unmodified and in full force and effect
and the parties hereby ratify their respective obligations
thereunder. Without limiting the foregoing, Borrower expressly
reaffirms and ratifies its obligation to pay or reimburse Agent
and Lenders on request for all reasonable expenses, including
legal fees, actually incurred by Agent or such Lender in
connection with the preparation of this Seventh Amendment, the
other Amendment Documents, and the closing of the transactions
contemplated hereby and thereby.
6. Consent to Second Joint Venture Transaction.
(a) Formation of Second Joint Venture. Agent and
Lenders acknowledge that Borrower has disclosed that it intends
to form the Second JV Subsidiary, a wholly-owned subsidiary, that
will enter into a joint venture with the Second Joint Venture
Investor or one of its affiliates under which the Second JV
Subsidiary will own a 10% interest in the Second Joint Venture
and the Second Joint Venture Investor or its affiliate will own a
90% interest. Section 8.1 of the Loan Agreement provides that,
without the consent of Agent (with the approval of Majority
Banks), Borrower will not permit any Relevant Subsidiary to enter
into a joint venture or partnership if such action would have a
Material Adverse Effect. Based on the written materials
regarding the proposed joint venture provided to Agent and
Lenders prior to the date hereof (the joint venture described in
such materials being referred to herein as the "Second Proposed
Joint Venture"), Agent and Lenders, for purposes of Section 8.1
of the Loan Agreement, consent to the Second JV Subsidiary's
participation in the Second Proposed Joint Venture including the
transfer of properties by the Second JV Subsidiary contemplated
thereby. Agent and Lenders acknowledge that, by virtue of on
such consent, the Second Proposed Joint Venture is not prohibited
by Section 8.1 whether or not it subsequently has a Material
Adverse Effect on the Second JV Subsidiary. The properties to be
transferred by the Second JV Subsidiary into the Second Proposed
Joint Venture are referred to herein as the "Second Proposed JV
Properties."
(b) Transfer of Negative Pledge Properties. Agent and
Lenders acknowledge that the Second Proposed JV Properties may
first be transferred to the Second JV Subsidiary by Borrower or
may be transferred by Borrower directly to the Second Joint
Venture and that some or all of such properties may constitute
Negative Pledge Properties. Agent and Lenders agree that (i) the
procedures set forth in Section 4.2 of the Loan Agreement for the
removal of Negative Pledge Properties shall not apply to
Borrower's transfer of the Second Proposed JV Properties to the
Second JV Subsidiary or to the Second Joint Venture as
contemplated by the Second Proposed Joint Venture; and (ii) in
lieu of such procedures, Borrower may remove any Second Proposed
JV Properties that are Negative Pledge Properties from such
status solely by providing prior written notice to Agent
identifying the Negative Pledge Properties being so removed.
7. Miscellaneous.
(a) Entire Agreement. This Seventh Amendment and the
other Amendment Documents comprise the entire agreement of the
parties with respect to the subject matter hereof and supersedes
all prior oral or written agreements, representations or
commitments.
(b) Counterparts. This Seventh Amendment may be
executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed
shall be deemed to be an original, and all of which taken
together shall constitute one and the same Seventh Amendment.
(c) Governing Law. This Seventh Amendment and the
other agreements provided for herein and the rights and
obligations of the parties hereto and thereto shall be construed
and interpreted in accordance with the laws of the State of
Washington.
(d) Oral Agreements Not Enforceable.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FOREBEAR FROM ENFORCING REPAYMENT
OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the parties hereto have caused this
Seventh Amendment to be executed by their respective officers or
agents thereunto duly authorized as of the date first above
written.
BORROWER:
SHURGARD STORAGE CENTERS, INC.
By /s/ Harrell Beck
-----------------
Its Chief Financial Officer
------------------------
Address: 1155 Valley Street
Suite 400
Seattle, WA 98109-4426
Attn: Kristin Stred
Telephone: (206) 624-8100
Telefax: (206) 624-1645
LENDERS:
Pro Rata Share of
Total Commitment
From Closing until BANK OF AMERICA NATIONAL TRUST
September 30, 2000: AND SAVINGS ASSOCIATION
$45,450,000 30.3%
By /s/ Robert Peters
------------------
Its Vice President
--------------
Address: Columbia Seafirst Center
Floor 12
701 Fifth Avenue
Seattle, WA 98104
Attn: Robert Peters
Metropolitan Commercial Banking
Division
Telephone: (206) 358-3133
Telefax: (206) 585-1794
From Closing until KEYBANK NATIONAL ASSOCIATION
September 30, 2000:
$37,350,000 24.9%
By/s/ Thomas A. Crandall
---------------------
Its Vice President
---------------------
Address: 700 Fifth Avenue
Seattle, WA 98111
Attn: Richard J. Ameny, Jr.
Telephone: (206) 684-6014
Telefax: (206) 684-6035
From Closing until U.S. BANK NATIONAL ASSOCIATION
September 30, 2000:
$37,350,000 24.9%
By/s/ Miles Silverthorn
-------------------
Its Vice President
-------------------
Address: 1420 Fifth Avenue,
Floor 11, WWH733
Seattle, WA 98101
Attn: Miles Silverthorn
Telephone: (206) 344-4278
Telefax: (206) 344-2332
From Closing until LASALLE NATIONAL BANK
September 30, 2000:
$29,850,000 19.9%
By/s/ Klay Scmeisser
-----------------
Its Officer
-----------------
Address: 135 South LaSalle Street
Suite 1225
Chicago, Illinois 60603
Attn: Klay Schmeisser
Telephone: (312) 904-0647
Telefax: (312) 904-6691
AGENT:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By/s/ Dora Brown
--------------
Its Vice President
--------------
Address: Bank of America National Trust
and Savings Association d/b/a
Seafirst Bank
701 Fifth Ave., Floor 16
Seattle, WA 98124
Attn: Dora A. Brown, Seafirst Agency
Services
Telephone: (206) 358-0101
Telefax: (206) 358-0971
GUARANTOR'S CONSENT
Shurgard Texas Limited Partnership, a Washington limited
partnership (the "Guarantor"), is a guarantor of the
indebtedness, liabilities and obligations of Shurgard Storage
Centers, Inc., a Washington corporation (the "Borrower"), under
the Amended and Restated Loan Agreement referred to in the within
and foregoing Seventh Amendment to Amended and Restated Loan
Agreement (the "Seventh Amendment") and the other Loan Documents
described in the Loan Agreement. The Guarantor hereby
acknowledges that it has received a copy of the Seventh Amendment
and hereby consents to its contents, including all prior and
current amendments to the Loan Agreement, and the other Loan
Documents described therein (notwithstanding that such consent is
not required). The Guarantor hereby confirms that its guarantee
of the obligations of Borrower remains in full force and effect,
and that the obligations of Borrower under the Loan Documents
shall include the obligations of Borrower under the Loan
Documents as amended by the Seventh Amendment.
GUARANTOR: SHURGARD TEXAS LIMITED PARTNERSHIP,
a Washington limited partnership
By: Shurgard Storage Centers, Inc., a Washington
corporation, its General Partner
By/s/ Harrell Beck
---------------
Its Chief Financial Oficer
----------------------
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