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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File number 1-12254
SAUL CENTERS, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1833074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
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COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
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Indicate by check mark whether 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form
10-K.
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The number of shares of Common Stock, $0.01 par value, outstanding as of
February 20, 1998 was 12,524,785.
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TABLE OF CONTENTS
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PART I Page Numbers
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions............... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 22
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation................. F-18
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PART I
ITEM 1. BUSINESS
General
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Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. The authorized capital stock of Saul
Centers consists of 30,000,000 shares of common stock, having a par value of
$0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common
stock is entitled to one vote for each share held. Saul Centers, together with
its wholly owned subsidiaries and the limited partnerships of which Saul Centers
or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". B. Francis Saul II serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers.
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, and purchased a land parcel which it
developed into a community shopping center. Therefore, as of December 31, 1997,
the Company's properties (the "Current Portfolio Properties") consisted of 30
operating shopping center properties (the "Shopping Centers") and three
predominantly office properties (the "Office Properties"). To facilitate the
placement of collateralized mortgage debt, the Company established Saul QRS,
Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of
Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul
Centers as the sole general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited partnership
interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II
Limited Partnership are held by the Operating Partnership as the sole limited
partner. Through this structure, the Company owns 100 percent of the Current
Portfolio Properties
Saul Centers operates as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (a "REIT"). Saul Centers generally will not
be subject to federal income tax, provided it annually distributes at least 95
percent of its real estate investment trust taxable income to its stockholders
and meets certain organizational and other requirements. Saul Centers has made
and intends to continue to make regular quarterly distributions to its
stockholders.
The Company's principal business activity is the ownership, management and
development of income-producing properties. The Company's long-term objectives
are to increase cash flow from operations and to maximize capital appreciation
of its real estate.
Management of the Current Portfolio Properties
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The Partnerships manage the Current Portfolio Properties and will manage
any subsequently acquired properties. The Management of the properties includes
performing property management, leasing, design,
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renovation, development and accounting duties for each property. The
Partnerships provide each property with a fully integrated property management
capability, with approximately 100 employees and with an extensive and mature
network of relationships with tenants and potential tenants as well as with
members of the brokerage and property owners' communities. The Company
currently does not, and does not intend to, retain third party managers or
provide management services to third parties.
The Company augments its property management capabilities by sharing with
The Saul Organization certain ancillary functions, at cost, such as computer and
payroll services, benefits administration and in-house legal services. The
company also shares insurance administration expenses on a pro rata basis with
The Saul Organization. The Saul Organization subleases office space to the
Company at its cost. Management believes that these arrangements result in
lower costs than could be obtained by contracting with third parties. These
arrangements permit the Company to capture greater economies of scale in
purchasing from third party vendors than would otherwise be available to the
Company alone and to capture internal economies of scale by avoiding payments
representing profits with respect to functions provided internally. The terms
of all sharing arrangements with The Saul Organization, including payments
related thereto, are reviewed periodically by the Audit Committee of the
Company's Board of Directors.
Principal Offices
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The principal offices of the Company are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and the Company's telephone number is (301)
986-6000.
Operating Strategies
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The Company's primary operating strategy is to focus on its community and
neighborhood shopping center business and to operate its properties to achieve
both cash flow growth and capital appreciation. Community and neighborhood
shopping centers typically provide reliable cash flow and steady long-term
growth potential. Management intends to actively manage its property portfolio
by engaging in strategic leasing activities, tenant selection, lease negotiation
and shopping center expansion and reconfiguration. The Company seeks to
optimize tenant mix by selecting tenants for its shopping centers that provide a
broad spectrum of goods and services, consistent with the role of community and
neighborhood shopping centers as the source for day-to-day necessities.
Management believes that such a synergistic tenanting approach results in
increased cash flow from existing tenants by providing the Shopping Centers with
consistent traffic and a desirable mix of shoppers, resulting in increased sales
and, therefore, increased percentage rents.
Management believes there is significant potential for growth in cash flow
as existing leases for space in the Shopping Centers expire and are renewed, or
newly available or vacant space is leased. The Company intends to renegotiate
leases aggressively and seek new tenants for available space in order to
maximize this potential for increased cash flow. As leases expire, management
expects to revise rental rates, lease terms and conditions, relocate existing
tenants, reconfigure tenant spaces and introduce new tenants to increase cash
flow. In those circumstances in which leases are not otherwise expiring,
management intends to attempt to increase cash flow through a variety of means,
including renegotiating rents in exchange for additional renewal options or in
connection with renovations or relocations, recapturing leases with below market
rents and re-leasing at market rates, as well as replacing financially troubled
tenants. When possible, management also will seek to include scheduled increases
in base rent, as well as percentage rental provisions in its leases.
The Shopping Centers contain numerous undeveloped parcels within the
centers which are suitable for development as free-standing retail facilities,
such as restaurants, banks, auto centers or cinemas. Management will continue
to seek desirable tenants for facilities to be developed on these sites and to
develop and lease these sites in a manner that complements the Shopping Centers
in which they are located.
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Management intends to negotiate lease renewals or to re-lease available
space in the Office Properties, while considering the strategic balance of
optimizing short-term cash flow and long-term asset value.
It is management's intention to hold properties for long-term investment
and to place strong emphasis on regular maintenance, periodic renovation and
capital improvement. Management believes that such characteristics as
cleanliness, lighting and security are particularly important in community and
neighborhood shopping centers, which are frequently visited by shoppers during
hours outside of the normal work day. Management believes that the Shopping
Centers generally are attractive and well maintained. The Shopping Centers will
undergo expansion, renovation, reconfiguration and modernization from time to
time when management believes that such action is warranted by changes in the
competitive environment of a Shopping Center. Several of the Shopping Centers
have been renovated recently, and a major expansion and renovation was completed
during 1997 at the Company's largest retail property. The Company will continue
its practice of expanding existing properties by undertaking new construction on
outparcels suitable for development as free standing retail facilities.
Redevelopment, Renovations and Acquisitions
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The Company's redevelopment, renovation and acquisition objective is to
selectively and opportunistically redevelop and renovate its properties, by
replacing leases with below market rents with strong, traffic-generating anchor
stores such as supermarkets and drug stores, as well as other desirable local,
regional and national tenants. The Company's strategy remains focused on
continuing the operating performance and internal growth of its existing
Shopping Centers, while enhancing this growth with selective retail
redevelopments and renovations.
Management also believes that attractive opportunities for investment in
existing and new shopping center properties will continue to be available.
Management believes that the Company will be well situated to take advantage of
these opportunities because of its access to capital markets, ability to acquire
properties either for cash or securities (including Operating Partnership
interests in tax advantaged transactions) and because of management's experience
in seeking out, identifying and evaluating potential acquisitions. In addition,
management believes its shopping center expertise should permit it to optimize
the performance of shopping centers once they have been acquired.
In evaluating a particular redevelopment, renovation, acquisition, or
development, management will consider a variety of factors, including (i) the
location and accessibility of the property; (ii) the geographic area (with an
emphasis on the Mid-Atlantic region) and demographic characteristics of the
community, as well as the local real estate market, including potential for
growth and potential regulatory impediments to development; (iii) the size of
the property; (iv) the purchase price; (v) the non-financial terms of the
proposed acquisition; (vi) the availability of funds or other consideration for
the proposed acquisition and the cost thereof; (vii) the "fit" of the property
with the Company's existing portfolio; (viii) the potential for, and current
extent of, any environmental problems; (ix) the current and historical occupancy
rates of the property or any comparable or competing properties in the same
market; (x) the quality of construction and design and the current physical
condition of the property; (xi) the financial and other characteristics of
existing tenants and the terms of existing leases; and (xii) the potential for
capital appreciation.
Although it is management's present intention to concentrate future
acquisition and development activities on community and neighborhood shopping
centers in the Mid-Atlantic region, the Company may, in the future, also acquire
other types of real estate in other regions of the country.
Capital Strategies
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As a general policy, the Company intends to maintain a ratio of its total
debt to total asset value of 50 percent or less and to actively manage the
Company's leverage and debt expense on an ongoing basis in order to maintain
prudent coverage of fixed charges. Asset value is the aggregate fair market
value of the Current Portfolio Properties and any subsequently acquired
properties as reasonably determined by management by
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reference to the properties' aggregate cash flow. Given the Company's current
debt level, it is management's belief that the ratio of the Company's total debt
to asset value as of December 31, 1997 remains less than 50 percent.
The organizational documents of the Company do not limit the absolute
amount or percentage of indebtedness that it may incur. The Board of Directors
may, from time to time, reevaluate the Company's debt capitalization policy in
light of current economic conditions, relative costs of capital, market values
of the Company Portfolio, opportunities for acquisition, development or
expansion, and such other factors as the Board of Directors then deems relevant.
The Board of Directors may modify the Company's debt capitalization policy based
on such a reevaluation and consequently, may increase or decrease the Company's
debt ratio above or below 50 percent.
The Company selectively continues to refinance or renegotiate the terms of
its outstanding debt in order to achieve longer maturities, and obtain generally
more favorable loan terms, whenever management determines the financing
environment is favorable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources -
- -Borrowing Capacity."
The Company intends to finance future acquisitions and to make debt
repayments by utilizing the sources of capital then deemed to be most
advantageous. Such sources may include undistributed operating cash flow,
secured or unsecured bank and institutional borrowings, private and public
offerings of debt or equity securities, proceeds from the Company's Dividend
Reinvestment and Stock Purchase Plan, and proceeds from the sale of properties.
Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary
Partnerships' level and securities offerings may include (subject to certain
limitations) the issuance of Operating Partnership interests convertible into
Common Stock or other equity securities.
Competition
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As an owner of, or investor in, commercial real estate properties, the
Company is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use.
Management believes that success in such competition is dependent in part upon
the geographic location of the property, the tenant mix, the performance of
property managers, the amount of new construction in the area and the
maintenance and appearance of the property. Additional competitive factors
impacting upon retail and
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commercial properties include the ease of access to the properties, the adequacy
of related facilities such as parking, and the demographic characteristics in
the markets in which the properties compete. Overall economic circumstances and
trends and new properties in the vicinity of each of the properties in the
Current Portfolio Properties are also competitive factors.
Environmental Matters
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The Current Portfolio Properties are subject to various laws and
regulations relating to environmental and pollution controls. The effect upon
the Company of the application of such laws and regulations either prospectively
or retrospectively is not expected to have a materially adverse effect on the
Company's property operations. As a matter of policy, the Company requires an
environmental study be performed with respect to a property that may be subject
to possible environmental hazards prior to its acquisition to ascertain that
there are no material environmental hazards associated with such property.
Employees
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As of February 20, 1998, the Company employed approximately 100 persons,
including six full-time leasing officers. None of the Company's employees are
covered by collective bargaining agreements. Management believes that its
relationship with employees is good.
Current Developments
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A significant enhancement to the Company's sustained historical internal
growth in shopping centers has been its continuing program of renovation and
expansion activities. These development activities serve to position the
Company's centers as architecturally consistent with the times in terms of
facade image, site improvements and flexibility to accommodate tenant size
requirements and merchandising evolution.
In February 1998, the Company commenced construction on a facade
renovation and retenanting of a 103,000 square foot anchor space at the 213,000
square foot French Market center in Oklahoma City, Oklahoma. The Company
successfully negotiated the termination of a below market Venture lease in the
fourth quarter of 1997. Construction of the first two new tenant spaces, a
40,000 square foot Bed, Bath and Beyond and an 8,000 square foot Lakeshore
Learning, a children's educational toy store, is projected to be completed in
late spring of 1998. The redevelopment will include a complete facade renovation
of the 103,000 square foot building to incorporate new anchor tenant
architectural features, new store fronts, tenant signage and decorative awnings.
The Company announced on March 23, 1998 that it will purchase, through
its operating partnership, a newly constructed, 100% leased office/flex building
adjacent to its Avenel Business Park in Gaithersburg, Maryland. The building
contains 46,335 square feet of net leasable area, which will increase the
Company's Avenel Business Park by 16%, to 332,000 square feet. The purchase
price is $5,600,000, to include $3,657,000 in debt assumption, with the balance
to be paid through the issuance of new units in Saul Centers' operating
partnership. The seller is a company which is an existing limited partner in the
operating partnership. The initial cash yield on the purchase price, after
deducting capital reserves and a market vacancy factor, is 10.3%. all of the
property's leases provide for contractual annual rental increases which will
further enhance this attractive return. Closing is expected on April 1, 1998.
The Company also continues to take advantage of retail
redevelopment, renovation and expansion opportunities within the portfolio, as
demonstrated by its redevelopment activities at Seven Corners, recently
completed facade renovation at Thruway and an expansion of the Leesburg Pike
shopping center. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Redevelopment, Renovation and
Acquisitions."
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Financial Information
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In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on
a fully converted basis. This represents a 10.0 percent increase over 1996 FFO
of $25,122,000. The following table represents a reconciliation from net income
before minority interests to FFO:
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<CAPTION>
For the Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
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Net income before minority interests $ 9,406 $ 12,703 $ 13,213
Depreciation and amortization of real property 10,642 10,860 10,425
Debt restructuring losses:
Disposition of interest rate protection agreements 4,392 972 ---
Write-off of unamortized loan costs 3,197 587 998
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Funds From Operations $ 27,637 $ 25,122 $ 24,636
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Cash Flow provided by (used in):
Operating activities $ 28,936 $ 29,677 $ 25,055
Investing activities $(16,094) $ (8,035) $(20,992)
Financing activities $(12,192) $(22,278) $ (4,416)
</TABLE>
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, which is disclosed in the
Consolidated Statements of Cash Flows for the applicable periods. There are no
material legal or functional restrictions on the use of FFO. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Management considers FFO a supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. FFO may not be comparable to
similarly titled measures employed by other REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts, is calculated using net
income excluding gains or losses from debt restructuring, sales of property,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
ITEM 2. PROPERTIES
Overview
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The Company is the owner and operator of a real estate portfolio of 33
properties totaling approximately 5.8 million square feet of gross leasable area
("GLA") located primarily in the Washington, D.C./Baltimore metropolitan area.
The portfolio is composed of 30 neighborhood and community Shopping Centers and
three Office Properties totaling approximately 5.1 and 0.7 million square feet
of GLA, respectively. With the exception of four Shopping Center properties
purchased or developed during the past three years, the Company Portfolio
consists of seasoned properties that had been owned and managed by The Saul
Organization for 15 years or more. The Company expects to hold its properties as
long-term investments, although it has no maximum period for retention of any
investment. It plans to selectively acquire additional income-producing
properties and to expand, renovate, and improve its properties when
circumstances warrant. See "Business--Operating Strategies" and "Business--
Capital Strategies."
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The Shopping Centers
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Community and neighborhood shopping centers typically are anchored by one
or more supermarkets, discount department stores or drug stores. These anchors
offer day-to-day necessities rather than apparel and luxury goods and,
therefore, generate consistent local traffic. By contrast, regional malls
generally are larger and typically are anchored by one or more full-service
department stores.
The Shopping Centers (typically) are seasoned community and neighborhood
shopping centers located in well established, highly developed, densely
populated, middle and upper income areas. Based upon census data, the average
estimated population within a three- and five-mile radius of the Shopping
Centers is approximately 110,000 and 260,000, respectively. The average
household income within a three and five-mile radius of the Shopping Centers is
$59,000 and $60,000, respectively, compared to a national average of $51,000.
Because the Shopping Centers generally are located in highly developed areas,
management believes that there is little likelihood that any significant numbers
of competing centers will be developed in the future.
The Shopping Centers range in size from 4,900 to 545,800 square feet of
GLA, with six in excess of 300,000 square feet, and a weighted average of
approximately 171,000 square feet. A majority of the Shopping Centers are
anchored by several major tenants. Eighteen of the 30 Shopping Centers are
anchored by a grocery store, and offer primarily day-to-day necessities and
services. As of February 1998, no single Shopping Center accounted for more
than 11.0 percent of the total Shopping Center GLA. Only one Shopping Center
tenant, Giant Food, accounted for more than 2.0 percent of the Company's total
revenues for the year ending December 31, 1997 and only three Shopping Center
tenants, Giant Food, Best Buy, and Chevy Chase Bank, F.S.B., individually
accounted for more than 1.5 percent of total revenues for this period.
The Office Properties
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The three Office Properties are all located in the Washington, D.C.
metropolitan area and contain an aggregate GLA of approximately 671,000 square
feet, composed of 638,000 and 33,000 square feet of office and retail space,
respectively. The Office Properties represent three distinct styles of
facilities, are located in differing commercial environments with distinctive
demographic characteristics, and are geographically removed from one another.
As a consequence, management believes that the Office Properties compete for
tenants in different commercial and geographic sub-markets of the metropolitan
Washington, D.C. market and do not compete with one another.
601 Pennsylvania Ave. is a nine-story, Class A office building (with a
small amount of street level retail space) built in 1986 and located in a prime
downtown location. Van Ness Square is a six-story office/retail building
rebuilt in 1990. Van Ness Square is located in a highly developed commercial
area of Northwest Washington, D.C. which offers extensive retail and restaurant
amenities. Management believes that the Washington, D.C. office market is one
of the strongest and most stable leasing markets in the nation, with relatively
low vacancy rates in comparison to other major metropolitan areas. Despite
continuing announcements of government downsizing, management believes that the
long-term stability of this market is attributable to the status of Washington,
D.C. as the nation's capital and to the presence of the federal government,
international agencies, and an expanding private sector job market throughout
the metropolitan area.
Avenel Business Park is a research park located in a Maryland suburb of
Washington, D.C. and consists of eight one-story buildings built in three phases
in 1981, 1985 and 1989. Management believes that, due to its desirable
location, the high quality of the property and the relative scarcity of research
and development space in its immediate area, Avenel should continue to attract
and retain desirable tenants in the future.
The following table sets forth, at the dates indicated, certain information
regarding the Current Portfolio Properties:
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SAUL CENTERS, INC.
SCHEDULE OF CURRENT PORTFOLIO PROPERTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants
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SHOPPING CENTERS
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Ashburn Village Ashburn, VA 108,204 1994 12.7 95% 100% Giant Food, Blockbuster
Beacon Mall Alexandria, VA 290,845 1972(1993) 32.3 69% 73% Giant Food, Office Depot, Outback Steakhouse,
Marshalls, Sneaker Stadium, Hollywood Video
Belvedere Baltimore, MD 54,941 1972 4.8 100% 100% Giant Food, Rite Aid
Boulevard Fairfax, VA 56,578 1994 5.0 100% 100% Danker Furniture, Petco
Clarendon Arlington, VA 6,940 1973 0.5 100% 100%
Clarendon Station Arlington, VA 4,868 1996 0.1 100% 100%
Crosstown Tulsa, OK 197,135 1975 26.4 20% 29%
Flagship Center Rockville, MD 21,500 1972,1989 0.5 100% 100%
French Market Oklahoma City, OK 213,658 1974(1984) 13.8 62% 94% Bed Bath & Beyond, Lakeshore Learning Center,
Fleming Food, Furr's Cafetaria
Germantown Germantown, MD 26,241 1992 2.7 92% 93%
Giant Baltimore, MD 70,040 1972(1990) 5.0 100% 100% Giant Food
The Glen Lake Ridge, VA 112,639 1994 14.7 100% 95% Safeway Marketplace, CVS Pharmacy
Great Eastern District Heights, MD 255,448 1972(1995) 23.9 89% 90% Giant Food, Caldor, Pep Boys
Hampshire Langley Langley Park, MD 134,425 1972(1979) 9.9 100% 100% Safeway, McCrory
Leesburg Pike Baileys Crossrds, VA 97,888 1966(1982/95) 9.4 100% 100% Zany Brainy, CVS Pharmacy, Hollywood Video
Lexington Mall Lexington, KY 315,551 1974 30.0 88% 95% McAlpin's, Dawahares of Lexington, Rite Aid
Lumberton Plaza Lumberton, NJ 189,729 1975(1992/96) 23.3 89% 82% Super Fresh, Rite Aid, Blockbuster, Mandee
North Washington Alexandria, VA 41,500 1973 2.0 100% 100% Mastercraft Interiors
Olney Olney, MD 53,765 1975(1990) 3.7 92% 83% Rite Aid
Park Rd. Washington, DC 106,650 1973(1993) 1.7 100% 100% Woolworth
Ravenwood Baltimore, MD 87,750 1972 8.0 100% 100% Giant Food
</TABLE>
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SAUL CENTERS, INC.
SCHEDULE OF CURRENT PORTFOLIO PROPERTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Leasable Year
Area Developed Land
(Square or Acquired Area Percentage Leased
Property Location Feet) (Renovated) Acres Dec-1997 Dec-1996 Anchor/Significant Tenants
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<S> <C> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS (CONTINUED)
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Seven Corners Falls Church, VA 545,061 1973(1994-7) 31.6 92% 88% Home Depot, Shoppers Club, Best Buy,
Michaels, Barnes & Noble, Ross Dress For
Less, Centex Life Solutions
Shops at Fairfax Fairfax, VA 64,580 1975(1992-3) 6.7 65% 54% Office Depot, Hollywood Video
Southdale Glen Burnie, MD 475,099 1972(1986) 39.6 99% 98% Giant Food, Hechinger, Circuit City,
Kids R Us, Michaels, Marshalls, PetSmart,
Value City Furniture
Southside Plaza Richmond, VA 352,516 1972 32.8 92% 97% CVS Pharmacy, Nick's Supermarket
Sunshine City Atlanta, GA 195,653 1976 14.6 88% 98% Bolton Furniture, MacFrugals, Pep Boys,
The Emory Clinic
Thruway Winston-Salem, NC 339,564 1972 30.5 96% 94% Stein Mart, Reading China & Glass,
Harris Teeter, Fresh Market,
Blockbuster, Bocock-Stroud, Houlihan's
Village Center Centreville, VA 142,881 1990 17.2 87% 84% Giant Food
West Park Oklhamoa City, OK 107,895 1975 11.2 66% 69% Homeland Stores, Treasury Drug
White Oak Silver Spring, MD 480,156 1972(1993) 28.5 100% 99% Giant Food, Sears, Rite Aid, Blockbuster
--------- ----- -------- --------
Total Shopping Centers 5,149,700 443.1 88% 90%
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COMMERCIAL PROPERTIES
- ---------------------
Avenel Business Park Gaithersburg, MD 285,218 1981/85/89 28.2 99% 86% Oncor, Inc., Quanta Systems, General
Services Administration
601 Pennsylvania Washington, DC 225,153 1973(1986) 1.0 100% 100% General Services Administration,
Capital Grille
Van Ness Square Washington, DC 161,058 1973(1990) 1.2 88% 77% United Mine Workers Pension Trust,
Office Depot, Pier 1
--------- ----- -------- --------
Total Commercial Properties 671,429 30.4 97% 89%
--------- ----- -------- --------
TOTAL PORTFOLIO 5,821,129 SF 473.5 89.0% 89.6%
--------- ----- -------- --------
</TABLE>
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in litigation,
including litigation arising out of the collection of rents, the enforcement or
defense of the priority of its security interests, and the continued development
and marketing of certain of its real estate properties. In the opinion of
management, litigation that is currently pending should not have a material
adverse impact on the financial condition or future operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
Saul Centers completed the Offerings on August 26, 1993. Shares of Common
Stock were sold at an initial offering price of $20 per share and the net
offering proceeds were used to acquire general partnership interests in the
Operating Partnership and Subsidiary Partnerships, which hold the Portfolio
Properties and the Management Functions. The shares are listed on the New York
Stock Exchange under the symbol "BFS". The high and low sales prices for the
Common Stock shares for each quarter of 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Period Share Price
------ -----------
High Low
-------- --------
<S> <C> <C> <C> <C>
January 1, 1997 -- March 31, 1997 $17 3/8 $15 1/2
April 1, 1997 -- June 30, 1997 $17 1/4 $15 1/8
July 1, 1997 -- September 30, 1997 $19 1/8 $16 3/16
October 1, 1997 -- December 31, 1997 $19 3/8 $16 1/4
January 1, 1996 -- March 31, 1996 $16 1/4 $13 7/8
April 1, 1996 -- June 30, 1996 $14 7/8 $13
July 1, 1996 -- September 30, 1996 $14 1/4 $12 5/8
October 1, 1996 -- December 31, 1996 $16 $13 1/2
</TABLE>
Holders
- -------
The approximate number of holders of record of the Common Stock was 550 as
of February 20, 1998.
Dividends
- ---------
Saul Centers was formed on June 10, 1993 and from that time through August
27, 1993, distributions were not paid to stockholders. Subsequent to its
initial public offering, the Company has declared and paid regular quarterly
distributions to its stockholders. The first distribution, in the amount of
$0.15 per share for the partial quarter ended September 30, 1993, was paid on
October 29, 1993 to stockholders of record as of October 15, 1993. This initial
amount was based upon a full quarterly distribution of $0.39 per share. The
Company paid four quarterly distributions in the amount of $0.39 per share,
during each of the years ended December 31, 1997, 1996, 1995 and 1994, totaling
$1.56 per share for each of these years, or an annual yield of 8.5 percent based
on the closing price of the Common Stock on the New York Stock Exchange as of
February 20, 1998. The Company has determined that 50.2 percent of the total
$1.56 per share paid in calendar year 1997 represents currently taxable dividend
income to the stockholders.
12
<PAGE>
The Company's estimate of cash flow available for distributions is believed
to be based on reasonable assumptions and represents a reasonable basis for
setting distributions. However, the actual results of operations of the Company
will be affected by a variety of factors, including actual rental revenue,
operating expenses of the Company, interest expense, general economic
conditions, federal, state and local taxes (if any), unanticipated capital
expenditures, and the adequacy of reserves. While the Company intends to
continue paying regular quarterly distributions, any future payments will be
determined solely by the Board of Directors and will depend on a number of
factors, including cash flow of the Company, its financial condition and capital
requirements, the annual distribution requirements required to maintain its
status as a REIT under the Code, and such other factors as the Board of
Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company contained herein has been
derived from the consolidated and combined financial statements of the Company
and The Saul Organization. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
report. The historical selected financial data have been derived from audited
financial statements for all periods.
13
<PAGE>
Saul Centers, Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor
to Saul
Saul Centers, Inc. Centers, Inc.
------------------------------------------------------ ----------
August 27, January 1,
through through
Years Ended December 31, December 31, August 26,
1997 1996 1995 1994 1993 1993
-------- -------- --------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
- ---------------
Total Revenue....................................... $ 67,717 $ 64,023 $ 61,469 $ 57,397 $ 18,519 $ 34,472
-------- -------- --------- -------- -------- --------
Operating expenses.................................. 50,722 49,761 47,258 42,787 13,594 39,744
Operating Income.................................... 16,995 14,262 14,211 14,610 4,925 (5,272)
Non-operating income
Sale of interest rate protection agreements....... (4,392) (972) -- -- -- --
-------- -------- --------- -------- -------- --------
Net income (loss) before extraordinary item
and minority interest............................. 12,603 13,290 14,211 14,610 4,925 (5,272)
Extraordinary item:
Early extinguishment of debt...................... (3,197) (587) (998) (3,341) (3,519) --
-------- -------- --------- -------- -------- --------
Net income (loss) before minority interests......... 9,406 12,703 13,213 11,269 1,406 (5,272)
Minority Interests.................................. (6,854) (6,852) (6,852) (4,274) (380) --
-------- -------- --------- -------- -------- --------
Net income (loss)................................... $ 2,552 $ 5,851 $ 6,361 $ 6,995 $ 1,026 $ (5,272)
======== ======== ========= ======== ======== ========
PER SHARE DATA:
- ---------------
Net income (loss) before extraordinary
item and minority interests....................... $ 0.76 $ 0.81 $ 0.87 $ 0.90 $ 0.30
Net income.......................................... $ 0.21 $ 0.49 $ 0.54 $ 0.59 $ 0.09
Weighted average shares outstanding: NO
Fully converted................................... 16,690 16,424 16,285 16,272 16,272
======== ======== ========= ======== ========
Common stock...................................... 12,297 12,031 11,892 11,879 11,879 COMMON
======== ======== ========= ======== ========
DIVIDENDS PAID:
- --------------- SHARES
Cash dividends to common stockholders...........(1) $ 19,063 $ 18,669 $ 18,531 $ 18,531 $ 1,782
======== ======== ========= ======== ========
Cash dividends per share.......................... $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 0.15
======== ======== ========= ======== ========
OUTSTANDING
BALANCE SHEET DATA:
- -------------------
Income-producing properties
(before accumulated depreciation)................. $335,268 $329,664 $ 321,662 $300,404 $263,519
Total assets........................................ 260,942 263,495 269,407 259,041 213,365
Total debt, including accrued interest.............. 273,731 273,731 273,979 248,681 192,199
OTHER DATA:
- -----------
Funds from operations (2)
Net income before minority interests.............. $ 9,406 $ 12,703 $ 13,213 $ 11,269
Depreciation and amortization of real property.... 10,642 10,860 10,425 9,582
Debt restructuring losses:
Disposition of interest rate protection
agreements.................................... 4,392 972 -- --
Write-off of unamortized loan costs............. 3,197 587 998 3,341
-------- -------- --------- --------
Funds from operations............................... $ 27,637 $ 25,122 $ 24,636 $ 24,192
======== ======== ========= ========
Cash flows provided by (used in):
Operating activities.............................. $ 28,936 $ 29,677 $ 25,055 $ 23,811
Investing activities.............................. $(16,094) $ (8,035) $ (20,992) $(43,487)
Financing activities.............................. $(12,192) $(22,278) $ (4,416) $ 17,948
</TABLE>
- --------------------
(1) By operation of the Company's dividend reinvestment plan, $4,305 and $3,378,
was reinvested in newly issued common stock during 1997 and 1996,
respectively.
(2) Funds From Operations (FFO) does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs, which is
disclosed in the Consolidated Statements of Cash Flows for the applicable
periods. There are no material legal or functional restrictions on the use
of FFO. FFO should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity. Management considers FFO a
supplemental measure of operating performance and along with cash flow from
operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs.
FFO may not be comparable to similarly titled measures employed by other
REITs. FFO, as defined by the National Association of Real Estate Investment
Trusts (NAREIT), represents net income excluding gains or losses from debt
restructuring, sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion is based on the consolidated financial statements
of the Company as of December 31, 1997 and for the year ended December 31, 1997.
Prior year data is based on the Company's consolidated financial statements as
of December 31, 1996 and 1995 and for the years ended December 31, 1996 and
1995.
Liquidity and Capital Resources
- -------------------------------
The Company's principal demands for liquidity are expected to be
distributions to its stockholders, debt service and loan repayments, expansion
and renovation of the Current Portfolio Properties and selective acquisition and
development of additional properties. In order to qualify as a REIT for federal
income tax purposes, the Company must distribute to its stockholders at least 95
percent of its "real estate investment trust taxable income," as defined in the
Internal Revenue Code of 1986, as amended. The Company anticipates that
operating revenues will provide the funds necessary for operations, debt
service, distributions, and required recurring capital expenditures. Balloon
principal repayments are expected to be funded by refinancings.
Management anticipates that during the coming year the Company may: 1)
redevelop certain of the Shopping Centers, 2) develop additional freestanding
outparcels or expansions within certain of the Shopping Centers, 3) acquire
existing neighborhood and community shopping centers and/or office properties
and 4) develop new shopping center sites. Acquisition and development of
properties are undertaken only after careful analysis and review, and such
property is expected to provide long-term earnings and cash flow growth. During
the coming year, any developments, expansions or acquisitions are expected to be
funded with bank borrowings from the Company's credit line or other external
capital resources available to the Company.
The Company expects to fulfill its long range requirements for capital
resources in a variety of ways, including undistributed cash flow from
operations, secured or unsecured bank and institutional borrowings, private or
public offerings of debt or equity securities and proceeds from the sales of
properties. Borrowings may be at the Saul Centers, Operating Partnership or
Subsidiary Partnership level, and securities offerings may include (subject to
certain limitations) the issuance of additional limited partnership interests in
the Operating Partnership which can be converted into shares of Saul Centers
common stock.
Management believes that the Company's current capital resources, including
approximately $46,500,000 of the Company's credit line which was available for
borrowing as of December 31, 1997, will be sufficient to meet its liquidity
needs for the foreseeable future.
15
<PAGE>
Financial Information
- ---------------------
In 1997, the Company reported Funds From Operations (FFO) of $27,637,000 on
a fully converted basis. This represents a 10.0 percent increase over 1996 FFO
of $25,122,000. The following table represents a reconciliation from net income
before minority interests to FFO:
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
Net income before minority interests $ 9,406 $ 12,703 $ 13,213
Depreciation and amortization of real property 10,642 10,860 10,425
Debt restructuring losses:
Disposition of interest rate protection agreements 4,392 972 ---
Write-off of unamortized loan costs 3,197 587 998
-------- -------- --------
Funds From Operations $ 27,637 $ 25,122 $ 24,636
======== ======== ========
Cash Flow provided by (used in):
Operating activities $ 28,936 $ 29,677 $ 25,055
Investing activities $(16,094) $ (8,035) $(20,992)
Financing activities $(12,192) $(22,278) $ (4,416)
</TABLE>
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, which is disclosed in the
Consolidated Statements of Cash Flows for the applicable periods. There are no
material legal or functional restrictions on the use of FFO. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Management considers FFO a supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. FFO may not be comparable to
similarly titled measures employed by other REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts, is calculated using net
income excluding gains or losses from debt restructuring, sales of property,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
Capital Strategy and Financing Activity
- ---------------------------------------
The Company's capital strategy is to maintain a ratio of total debt to
total asset value of 50 percent or less, and to actively manage the Company's
leverage and debt expense on an ongoing basis in order to maintain prudent
coverage of fixed charges. Management believes that current total debt remains
less than 50 percent of total asset value.
During 1997, the Company closed two long-term fixed rate mortgages, which
management believes enhance the balance sheet. The first was a $38.5 million
loan closed in January 1997, for a term of 16 years at a fixed interest rate of
7.88 percent, and a twenty-year principal amortization schedule. A balloon
payment of approximately $24.5 million will be due at maturity in January 2013.
This loan is secured by the 601 Pennsylvania Avenue office property. The
proceeds of this new loan were used to repay existing floating rate debt, which
had a weighted remaining term of less than 3 years and a weighted average
interest rate of LIBOR plus 2.05 percent, or 7.58 percent assuming the three
month LIBOR rate effective as of December 31, 1997.
In October 1997, the Company closed another loan in the amount of $147
million, for a 15-year term, at a fixed rate of 7.67 percent, and a twenty-five
year principal amortization schedule. A balloon payment of approximately $87.9
million will be due at maturity in October 2012. This loan is secured by nine
of the Company's retail properties. Also, in conjunction with the closing of
the loan, the Company closed a new three-
16
<PAGE>
year $60 million unsecured credit line, which replaces the previous secured
credit line. The interest rate floats at 1.375 percent to 1.625 percent over
LIBOR, depending on certain covenant tests. As of February 20, 1998,
outstanding borrowings total $18 million, leaving $42 million of uncommitted
credit availability. This availability provides the Company with capital to
pursue new redevelopment, renovation, and expansion opportunities within its
portfolio. The proceeds of these new loans were used to repay existing floating
rate debt, which had a remaining term of approximately 3.5 years. The Company
now has fixed interest rates on approximately 94 percent of its total debt
outstanding, which now has a weighted remaining term of approximately 14 years.
In connection with the refinancing, the Company sold all of its remaining
interest rate protection agreements.
Redevelopment, Renovations and Acquisitions
- -------------------------------------------
The Company has been selectively involved in redevelopment, renovation and
acquisition activities. It continues to evaluate land parcels for retail
development and potential acquisitions of operating properties for
opportunities to enhance operating income and cash flow growth. The Company also
continues to take advantage of retail redevelopment, renovation and expansion
opportunities within the portfolio, as demonstrated by its redevelopment
activities at Seven Corners, recently completed facade renovation at Thruway and
an expansion of the Leesburg Pike shopping center.
The newly constructed 127,000 square foot Home Depot and 70,000 square foot
Shoppers Club stores at Seven Corners shopping center, the Company's 545,000
square foot community shopping center in Falls Church, Virginia, opened during
the third quarter of 1997. The opening of Home Depot and Shoppers Club
substantially completes the Company's redevelopment of Seven Corners from an
enclosed mall to an updated community strip center. The redevelopment effort
added 145,000 square feet of new retail area.
During the second quarter, Centex Life Solutions executed a lease for a
31,000 square foot health concepts superstore and Michaels Stores signed a lease
for a 21,000 square foot arts and crafts store at Seven Corners. Saul Centers
had recently recaptured the space leased by Michaels and received a termination
fee from Petstuff, which had closed their store subsequent to merging with
PetSmart. Centex leased and substantially renovated the interior and exterior
of the former F&M Distributors drug store space. These two new anchor tenants
recently opened their stores.
In August 1997, the Company substantially completed construction on a
facade renovation of its Harris Teeter and Stein Mart anchored 340,000 square
foot, Thruway shopping center located in Winston-Salem, North Carolina.
Construction includes a 40-foot clock tower, a new tenant sign band, colonial
style anchor tenant features, new lighting and a complete facade upgrade.
Leesburg Pike is a 98,000 square foot shopping center, where a facade
renovation was completed in 1995. Construction was subsequently completed as of
June 1997 on a 13,000 square foot expansion of in-line shop space for new retail
uses. The expansion is 100 percent leased and occupied by tenants including
Hollywood Video and Men's Wearhouse.
Portfolio Leasing Status
- ------------------------
At December 31, 1997, the portfolio consisted of thirty Shopping Centers
and three Office Properties located in seven states and the District of
Columbia. The Office Properties consist of one office property and one
office/retail property, both located in the District of Columbia, and one
research park located in a Maryland suburb of Washington, DC.
At December 31, 1997, 89.0 percent of the Company's 5.8 million square feet
of leasable space was leased to tenants, as compared to 89.6 percent at December
31, 1996. The shopping center portfolio was 87.9 percent leased at December 31,
1997 versus 89.8 percent as of December 31, 1996. The Office Properties were
96.8 percent leased at December 31, 1997 compared to 88.5 percent as of December
31, 1996. The overall reduction in the year-end 1997 leasing percentage was
primarily caused by the Company's termination of a major
17
<PAGE>
retail lease for redevelopment, offset in part by improved leasing activity at
the Company's Avenel Business Park and Van Ness Square office properties. The
decline in the 1997 shopping center portfolio leasing percentage resulted
primarily from the Company's redevelopment activities at its French Market
property. In order to redevelop its French Market center in Oklahoma City, the
Company acquired the lease of a 103,000 square foot tenant, of which only 49,000
square feet was leased as of year end. The annual rent committed under the
49,000 square feet of new leases exceeds that of the former tenant's entire
space. Lease negotiations for the remaining space are in progress.
Results of Operations
- ---------------------
The following discussion compares the results of the Company for the year
ended December 31, 1997 with the year ended December 31, 1996, and compares the
year ended December 31, 1996 with the year ended December 31, 1995. This
information should be read in conjunction with the accompanying consolidated
financial statements and the notes related thereto.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Base rent increased to $51,779,000 in 1997 from $49,814,000 in 1996,
representing a $1,965,000 (3.9 percent) increase. The increase in base rent
resulted primarily from increased rents received at the redeveloped Seven
Corners, Leesburg Pike and Thruway shopping centers, and to a lesser extent,
increased shopping center minimum rents at several properties due to improved
leasing and generally higher rents on lease renewals.
Expense recoveries increased to $9,479,000 in 1997 from $9,301,000 in 1996,
representing an increase of $178,000 (1.9 percent). The increase in expense
recoveries resulted primarily from real estate tax recovered from tenants at the
recently redeveloped Seven Corners center.
Percentage rent was $2,948,000 in 1997, compared to $2,924,000 in 1996,
representing an increase of $24,000 (0.8%). This increase resulted from
generally improved reported sales throughout the portfolio.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $3,511,000 in 1997, compared to $1,984,000 in
1996, representing an increase of $1,527,000 (77.0%). The increase in other
income resulted from two large lease termination payments.
As a consequence of the foregoing the 1997 total revenues of $67,717,000
represented an increase of $3,694,000 (5.8 percent) over total revenues of
$64,023,000 in 1996.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, increased $6,000 (0.1 percent) to
$8,075,000 in 1997 from $8,069,000 in 1996.
The provision for credit losses was $505,000 in 1997 compared to $457,000
in 1996, representing an increase of $48,000 (10.5 percent) . The increase
resulted primarily from the provision required for a shopping center tenant
which vacated its space prior to lease expiration.
Real estate taxes were $6,084,000 in 1997 compared to $5,914,000 in 1996,
representing an increase of $170,000 (2.9 percent). This increase was generally
attributable to increased tax assessments at the Company's shopping center
properties, particularly its redeveloped Seven Corners and Leesburg Pike
shopping centers.
Interest expense was $20,308,000 in 1997 compared to $18,509,000 in 1996,
representing an increase of $1,799,000 (9.7 percent). The increase is primarily
attributable to higher interest rates resulting from the Company's refinancing
and conversion of approximately $263 million of its mortgage debt from floating
rate loans to longer term, fixed-rate loans during the period November 1996
through October 1997.
18
<PAGE>
Amortization of deferred debt expense decreased $1,128,000 (39.5 percent)
to $1,729,000 in 1997 from $2,857,000 in 1996. The decrease in the 1997 year's
expense resulted from the elimination of amortization on interest rate
protection agreements with notional values of $162.8 million and $87.0 million,
sold during the fourth quarters of 1997 and 1996, respectively, and reduced loan
cost amortization because new fixed rate debt costs are being amortized over a
longer term than the floating rate debt costs they replaced.
Depreciation and amortization expense decreased $218,000 (2.0 percent) from
$10,860,000 in 1996 to $10,642,000 in 1997. The decrease resulted primarily
from a non-recurring write-off of tenant improvement costs in 1996 upon the
early termination of tenant leases.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,379,000 in 1997
compared to $3,095,000 in 1996, representing an increase of $284,000 (9.2
percent). The increase in 1997 expenses resulted from generally higher
personnel expenses.
Non-operating item, sales of interest rate protection agreements, resulted
in losses of $4,392,000 and $972,000, in 1997 and 1996, respectively, due to
the write-off of unamortized costs in excess of sale proceeds received when the
Company sold a portion of its interest rate protection agreements.
Extraordinary item, early extinguishment of debt, losses were $3,197,000
and $587,000, in 1997 and 1996, respectively. The losses in each period
resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Base rent increased to $49,814,000 in 1996 from $47,673,000 in 1995,
representing a $2,141,000 (4.5 percent) increase. The increase in base rent
resulted primarily from increased rents received at the redeveloped Seven
Corners and Great Eastern shopping centers, and to a lesser extent, increased
shopping center minimum rents at several properties due to improved leasing and
generally higher rents on lease renewals.
Expense recoveries increased to $9,301,000 in 1996 from $8,770,000 in 1995,
representing an increase of $531,000 (6.1 percent). The increase in expense
recoveries resulted primarily from improved leasing levels at the recently
redeveloped Seven Corners, Great Eastern and Leesburg Pike shopping centers.
Percentage rent was $2,924,000 in 1996, compared to $2,782,000 in 1995,
representing an increase of $142,000 (5.1%). This increase resulted from
generally improved reported sales throughout the portfolio.
Other income, which consists primarily of parking income at two of the
Office Properties, kiosk leasing, temporary leases and payments associated with
early termination of leases, was $1,984,000 in 1996, compared to $2,244,000 in
1995, representing a decrease of $260,000 (11.6%). The decline in other income
resulted largely from a decline in lease termination payments.
As a consequence of the foregoing, the 1996 total revenues of $64,023,000
represented an increase of $2,554,000 (4.2 percent) over total revenues of
$61,469,000 in 1995.
Operating expenses, which consist mainly of repairs and maintenance,
utilities, payroll and insurance expense, decreased $71,000 (0.9 percent) to
$8,069,000 in 1996 from $8,140,000 in 1995.
The provision for credit losses was $457,000 in 1996 compared to $404,000
in 1995, representing an increase of $53,000 (13.1 percent) . The increase
resulted primarily from the provision required for a shopping center tenant
which vacated its space prior to lease expiration.
19
<PAGE>
Real estates taxes were $5,914,000 in 1996 compared to $5,427,000 in 1995,
representing an increase of $487,000 (9.0 percent). This was largely
attributable to the increased tax assessment resulting from the redevelopment
work put in place by the Company during the past two years.
Interest expense was $18,509,000 in 1996 compared to $17,639,000 in 1995,
representing an increase of $870,000 (4.9 percent). This increase is primarily
attributed to an approximately $14.6 million increase in average loan balances
resulting largely from the Company's acquisition and redevelopment activities.
Amortization of deferred debt expense increased $389,000 (15.8 percent) to
$2,857,000 in 1996 from $2,468,000 in 1995. This increase was primarily due to
an increased level of amortization arising from the November 1995 restructuring
of the Company's revolving credit agreement.
Depreciation and amortization expense increased $435,000 (4.2 percent) from
$10,425,000 in 1995 to $10,860,000 in 1996. This increase was due to the
redevelopment of the Seven Corners and Leesburg Pike shopping centers.
General and administrative expense, which consists primarily of
administrative payroll and other overhead expenses, was $3,095,000 in 1996
compared to $2,984,000 in 1995, representing an increase of $111,000 (3.7
percent).
Non-operating item, sales of interest rate protection agreements, resulted
in a loss of $972,000 in 1996 due to the write-off of unamortized costs in
excess of sale proceeds received when the Company sold a portion of its interest
rate protection agreements. The agreements sold had a notional value of $87.0
million, and were sold subsequent to the November 1996 closing of a $77.0
million fixed rate mortgage. No sale occurred in 1995.
Extraordinary item, early extinguishment of debt, decreased from a loss of
$998,000 in 1995 to a loss of $587,000 in 1996. The losses in each period
resulted from the write-off of unamortized loan costs when the Company
refinanced a portion of its loan portfolio.
Other
- -----
The Company has evaluated its information technology systems to ensure
compliance with the requirements to process transactions in the year 2000. The
Company's primary internal information systems are fully compliant new systems.
The majority of the Company's internal information systems are fully compliant
new systems. In the event that any of the Company's significant tenants or
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's operations may be affected. The Company does not anticipate any
material impact on its results from operations or its financial condition as a
result of any Year 2000 compliance issues.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its consolidated subsidiaries
are included in this report on the pages indicated, and are incorporated herein
by reference:
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
F-1 (a) Report of Independent Public Accountants
F-2 (b) Consolidated Balance Sheets - December 31, 1997 and 1996
F-3 (c) Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995.
F-4 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and
1995.
F-5 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.
F-6 (f) Notes to Consolidated Financial Statements
</TABLE>
The selected quarterly financial data included in Note 15 of The Notes to
Consolidated Financial Statements referred to above are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
The information required under Items 10, 11, 12, and 13 is contained in
pages 3 through 14, inclusive, of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held April 17, 1998, and is hereby incorporated
herein by reference. The Company's Proxy Statement was filed within 120 days
after the close of the Company's fiscal year in accordance with General
Instruction G(3) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
--------------------
The following financial statements of the Company and their
consolidated subsidiaries are incorporated by reference in Part II, Item 8.
(a) Report of Independent Public Accountants
(b) Consolidated Balance Sheets - December 31, 1997 and 1996
(c) Consolidated Statements of Operations - Years ended December 31,
1997, 1996 and 1995
(d) Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
(e) Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
2. Financial Statement Schedule and Supplementary Data
---------------------------------------------------
(a) Selected Quarterly Financial Data for the Company are incorporated
by reference in Part II, Item 8
(b) Report of Independent Public Accountants on the Schedule (included
in Report of Independent Public Accountants on the Financial Statements)
(c) Schedule of the Company:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
22
<PAGE>
3. Exhibits
--------
3. (a) First Amended and Restated Articles of Incorporation of Saul
Centers, Inc. filed with the Maryland Department of Assessments and
Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the 1993
Annual Report of the Company on Form 10-K is hereby incorporated by
reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3 (b) of the 1993 Annual Report of the Company on Form 10-K
is hereby incorporated by reference.
10. (a) First Amended and Restated Agreement of Limited Partnership of Saul
Holdings Limited Partnership filed as Exhibit No. 10.1 to
Registration Statement No. 33-64562 is hereby incorporated by
reference. The First Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, and the Third Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings Limited
Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by reference. The Fourth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Holdings Limited Partnership filed as Exhibit
10.(a) of the March 31, 1997 Quarterly Report of the Company is
hereby incorporated by reference.
(b) First Amended and Restated Agreement of Limited Partnership of Saul
Subsidiary I Limited Partnership and Amendment No. 1 thereto filed
as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby
incorporated by reference. The Second Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership, the Third Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership and the Fourth Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Subsidiary I
Limited Partnership is filed herewith.
(c) First Amended and Restated Agreement of Limited Partnership of Saul
II Subsidiary Partnership and Amendment No. 1 thereto filed as
Exhibit 10.3 to Registration Statement No. 33-64562 are hereby
incorporated by reference.
(d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration
Statement No. 33-64562 is hereby incorporated by reference.
(e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(g) Exclusivity and Right of First Refusal Agreement filed as Exhibit
10.7 to Registration Statement No. 33-64562 is hereby incorporated
by reference.
(h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(i) Agreement of Assumption dated as of August 26, 1993 executed by Saul
Holdings Limited Partnership and filed as Exhibit 10. (I) of the
1993 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
23
<PAGE>
(j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase
Plan as filed with the Securities and Exchange Commission as File
No. 33-80291 is hereby incorporated by reference.
(k) Deferred Compensation Plan for Directors dated as of December 13,
1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by reference.
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated as
of June 9, 1994 by and between Saul Holdings Limited Partnership and
Ameribanc Savings Bank, FSB as filed as Exhibit 10.(t) of the 1995
Annual Report of the Company on Form 10-K is hereby incorporated by
reference.
(m) Deed of Trust Note dated as of January 22, 1996 by and between Saul
Holdings Limited Partnership and Clarendon Station Limited
Partnership, filed as Exhibit 10.(s) of the March 31, 1997 Quarterly
Report of the Company, is hereby incorporated by reference.
(n) Loan Agreement dated as of November 7, 1996 by and among Saul
Holdings Limited Partnership, Saul Subsidiary II Limited Partnership
and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc.,
filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of
the Company, is hereby incorporated by reference.
(o) Promissory Note dated as of January 10, 1997 by and between Saul
Subsidiary II Limited Partnership and The Northwestern Mutual Life
Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997
Quarterly Report of the Company, is hereby incorporated by
reference.
(p) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I
Limited Partnership, as Borrower and Nomura Asset Capital
Corporation, as Lender, is filed herewith
(q) Revolving Credit Agreement dated as of October 1, 1997 by and
between Saul Holdings Limited Partnership and Saul Subsidiary II
Limited Partnership, as Borrower and U.S. Bank National
Association, as agent, is filed herewith.
23 Consent of Certified Public Accountants
27 Financial Data Schedule
Reports on Form 8-K.
--------------------
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
SAUL CENTERS, INC.
(Registrant)
Date:
------------------------------------------------------
Date:
------------------------------------------------------
B. Francis Saul II
Chairman of the Board of Directors
& Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1998 /s/ Philip D. Caraci
------------------------------------------------------
Philip D. Caraci, President and Director
Date: March 31, 1998 /s/ B. Francis Saul III
------------------------------------------------------
B. Francis Saul III, Vice President and Director
Date: March 31, 1998 /s/ Scott V. Schneider
------------------------------------------------------
Scott V. Schneider, Vice President and
Secretary (Principal Financial and Accounting Officer)
Date: March 31, 1998 /s/ Gilbert M. Grosvenor
------------------------------------------------------
Gilbert M. Grosvenor, Director
Date: March 31, 1998 /s/ General Paul X. Kelley
------------------------------------------------------
General Paul X. Kelley, Director
Date: March 31, 1998 /s/ Charles R. Longsworth
------------------------------------------------------
Charles R. Longsworth, Director
Date: March 31, 1998 /s/ Patrick F. Noonan
------------------------------------------------------
Patrick F. Noonan, Director
Date: March 31, 1998 /s/ Mr. Mark Sullivan III
------------------------------------------------------
Mark Sullivan III, Director
Date: March 31, 1998 /s/ James W. Symington
------------------------------------------------------
James W. Symington, Director
Date: March 31, 1998 /s/ John R. Whitmore
------------------------------------------------------
John R. Whitmore, Director
</TABLE>
25
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Saul Centers, Inc.:
We have audited the accompanying consolidated balance sheets of Saul Centers,
Inc., (a Maryland corporation) and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years ended December 31, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Saul Centers, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997, 1996 and 1995 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole, Schedule III "Real Estate and Accumulated
Depreciation", appearing on pages F-18 and F-19, is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. The schedule has been subjected
to the auditing procedures applied in our audit of the basic financial
statements and in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 6, 1998
F-1
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate investments
Land $ 65,630 $ 65,604
Buildings and equipment 269,638 264,060
--------------------- --------------------
335,268 329,664
Accumulated depreciation (92,615) (94,965)
--------------------- --------------------
242,653 234,699
Construction in progress 974 1,508
Cash and cash equivalents 688 38
Accounts receivable and accrued income, net 6,190 7,446
Prepaid expenses 5,423 4,808
Deferred debt costs, net 3,853 11,287
Other assets 1,161 3,709
--------------------- --------------------
Total assets $ 260,942 $ 263,495
===================== ====================
LIABILITIES
Notes payable $ 284,473 $ 273,261
Accounts payable, accrued expenses and other liabilities 13,093 14,733
Deferred income 1,430 1,441
--------------------- --------------------
Total liabilities 298,996 289,435
--------------------- --------------------
MINORITY INTERESTS -- --
--------------------- --------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,428,145 and 12,152,771 shares issued and
outstanding, respectively 124 121
Additional paid-in capital 20,447 15,950
Accumulated deficit (58,625) (42,011)
--------------------- --------------------
Total stockholders' equity (deficit) (38,054) (25,940)
--------------------- --------------------
Total liabilities and stockholders' equity $ 260,942 $ 263,495
===================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Base rent $ 51,779 $ 49,814 $ 47,673
Expense recoveries 9,479 9,301 8,770
Percentage rent 2,948 2,924 2,782
Other 3,511 1,984 2,244
--------------------- --------------------- --------------------
Total revenue 67,717 64,023 61,469
--------------------- --------------------- --------------------
OPERATING EXPENSES
Property operating expenses 8,075 8,069 7,911
Provision for credit losses 505 457 404
Real estate taxes 6,084 5,914 5,427
Interest expense 20,308 18,509 17,639
Amortization of deferred debt expense 1,729 2,857 2,468
Depreciation and amortization 10,642 10,860 10,425
General and administrative 3,379 3,095 2,984
--------------------- --------------------- --------------------
Total operating expenses 50,722 49,761 47,258
--------------------- --------------------- --------------------
OPERATING INCOME 16,995 14,262 14,211
Non-operating item
Sales of interest rate protection agreements (4,392) (972) --
--------------------- --------------------- --------------------
NET INCOME BEFORE EXTRAORDINARY
ITEM AND MINORITY INTERESTS 12,603 13,290 14,211
Extraordinary item
Early extinguishment of debt (3,197) (587) (998)
--------------------- --------------------- --------------------
NET INCOME BEFORE MINORITY INTERESTS 9,406 12,703 13,213
--------------------- --------------------- --------------------
MINORITY INTERESTS
Minority share of income (2,483) (3,430) (3,568)
Distributions in excess of earnings (4,371) (3,422) (3,284)
--------------------- --------------------- --------------------
Total minority interests (6,854) (6,852) (6,852)
--------------------- --------------------- --------------------
NET INCOME $ 2,552 $ 5,851 $ 6,361
===================== ===================== ====================
NET INCOME PER SHARE (BASIC)
Net income before extraordinary
item and minority interests $ 0.76 $ 0.81 $ 0.87
Extraordinary item (0.19) (0.04) (0.06)
--------------------- --------------------- --------------------
Net income before minority interests $ 0.57 $ 0.77 $ 0.81
===================== ===================== ====================
Net income $ 0.21 $ 0.49 $ 0.54
===================== ===================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
(Dollars in thousands, except per share amounts) STOCK CAPITAL DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY (DEFICIT):
BALANCE, DECEMBER 31, 1994 $ 119 $ 12,371 $ (16,926) $ (4,436)
Issuance of 8,913 shares of
common stock -- 140 -- 140
Net income -- -- 6,361 6,361
Distributions ($1.17 per share) -- -- (13,899) (13,899)
Distributions payable ($.39 per share) -- -- (4,633) (4,633)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1995 119 12,511 (29,097) (16,467)
Issuance of 257,454 shares of
common stock 2 3,439 -- 3,441
Net income -- -- 5,851 5,851
Distributions ($1.17 per share) -- -- (14,036) (14,036)
Distributions payable ($.39 per share) -- -- (4,729) (4,729)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1996 121 15,950 (42,011) (25,940)
Issuance of 275,374 shares of
common stock 3 4,497 -- 4,500
Net income -- -- 2,552 2,552
Distributions ($1.17 per share) -- -- (14,334) (14,334)
Distributions payable ($.39 per share) -- -- (4,832) (4,832)
----------------- --------------------- --------------------- --------------------
BALANCE, DECEMBER 31, 1997 $ 124 $ 20,447 $ (58,625) $ (38,054)
================= ===================== ===================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,552 $ 5,851 $ 6,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 6,854 6,852 6,852
Loss on sale of interest rate protection agreements 4,392 972 --
Loss on early extinguishment of debt 3,197 587 998
Depreciation and amortization 12,371 13,717 12,893
Provision for credit losses 505 457 404
Decrease (increase) in accounts receivable (406) (45) 41
Increase in prepaid expenses (1,426) (1,136) (2,273)
Decrease (increase) in other assets 2,548 (961) 1,250
Increase (decrease) in accounts payable and other
liabilities (1,640) 3,019 (745)
Increase (decrease) in deferred income (11) 364 (726)
--------------------- --------------------- --------------------
Net cash provided by operating activities 28,936 29,677 25,055
--------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments (4,377) (4,469) (4,852)
Additions to construction in progress (11,717) (3,566) (16,140)
--------------------- --------------------- --------------------
Net cash used in investing activities (16,094) (8,035) (20,992)
--------------------- --------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 223,600 98,620 114,000
Repayments on notes payable (212,388) (98,442) (89,568)
Proceeds from sale of interest rate protection agreements 1,370 681 --
Note prepayment fees (95) -- --
Additions to deferred debt expense (3,159) (961) (3,604)
Proceeds from the issuance of common stock 4,500 3,441 140
Distributions to common stockholders and
holders of convertible limited partnership
units in the Operating Partnership (26,020) (25,617) (25,384)
--------------------- --------------------- --------------------
Net cash used in financing activities (12,192) (22,278) (4,416)
--------------------- --------------------- --------------------
Net increase (decrease) in cash 650 (636) (353)
Cash, beginning of year 38 674 1,027
===================== ===================== ====================
Cash, end of year $ 688 $ 38 $ 674
===================== ===================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest net of amount capitalized $ 19,804 $ 18,829 $ 17,465
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION
ORGANIZATION
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on June 10, 1993. The authorized capital stock of Saul
Centers consists of 30,000,000 shares of common stock, having a par value of
$0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common
stock is entitled to one vote for each share held. Saul Centers, together with
its wholly owned subsidiaries and the limited partnerships of which Saul Centers
or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". Saul Centers operates as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (a "REIT").
FORMATION AND STRUCTURE OF COMPANY
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, and purchased a land parcel which it
developed into a community shopping center. Therefore, as of December 31, 1997,
the Company's properties (the "Current Portfolio Properties") consisted of 30
operating shopping center properties (the "Shopping Centers") and three
predominantly office properties (the "Office Properties"). To facilitate the
placement of collateralized mortgage debt, the Company established Saul QRS,
Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of
Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul
Centers as the sole general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited partnership
interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II
Limited Partnership are held by the Operating Partnership as the sole limited
partner. Through this structure, the Company owns 100 percent of the Current
Portfolio Properties.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been presented on
the historical cost basis of The Saul Organization because of affiliated
ownership and common management and because the assets and liabilities were the
subject of a business combination with the Operating Partnership, the Subsidiary
Partnerships and Saul Centers, all newly formed entities with no prior
operations.
F-6
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company, which conducts all of its activities through its subsidiaries,
the Operating Partnership and Subsidiary Partnerships, engages in the ownership,
operation, management, leasing, acquisition, renovation, expansion, development
and financing of community and neighborhood shopping centers and office
properties, primarily in the Mid-Atlantic region.
A majority of the Shopping Centers are anchored by several major tenants.
Eighteen of the 30 Shopping Centers are anchored by a grocery store and offer
primarily day-to-day necessities and services. As of December 1997, no single
Shopping Center accounted for more than 10.6 percent of the total Shopping
Center gross leasable area. Only Giant Food, at 6.5 percent of the Company's
1997 total revenues, accounted for more than 2.5 percent of revenues. Only two
other retail tenants represented more than 2.0 percent of total revenues for the
year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of Saul Centers, its subsidiaries, and the Operating Partnership
and Subsidiary Partnerships which are majority owned by Saul Centers. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REAL ESTATE INVESTMENT PROPERTIES
Real estate investment properties are stated at the lower of depreciated
cost or fair value less cost to sell. Management believes that these assets have
generally appreciated in value and, accordingly, the aggregate current value
exceeds their aggregate net book value and also exceeds the value of the
Company's liabilities as reported in these financial statements. These
financial statements are prepared in conformity with generally accepted
accounting principles, and accordingly, do not report the current value of the
Company's real estate assets.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is substantially complete and
the assets are placed in service, rental income, direct operating expenses, and
depreciation associated with such properties are included in current operations.
Expenditures for repairs and maintenance are charged to operations as incurred.
Repairs and maintenance expense totaled $2,479,000, $2,730,000 and $2,600,000,
for calendar years 1997, 1996, and 1995, respectively, and is included in
operating expenses in the accompanying financial statements. Interest expense
capitalized totaled $297,000, $384,000 and $525,000, for calendar years 1997,
1996 and 1995, respectively.
In the initial rental operations of development projects, a project is
considered substantially complete and available for occupancy upon completion of
tenant improvements, but no later than one year from the cessation of major
construction activity. Substantially completed portions of a project are
accounted for as separate projects. Depreciation is calculated using the
straight-line method and estimated useful lives of 33 to 50 years for buildings
and up to 20 years for certain other improvements. Leasehold improvements are
amortized over the lives of the related leases using the straight-line method.
F-7
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE AND ACCRUED INCOME
Accounts receivable primarily represent amounts currently due from tenants
in accordance with the terms of the respective leases. In addition, accounts
receivable included $1,663,000, $1,913,000 and $2,158,000, at December 31,
1997, 1996 and 1995, respectively, representing minimum rental income accrued on
a straight-line basis to be paid by tenants over the term of the respective
leases. Receivables are reviewed monthly and reserves are established with a
charge to current period operations when, in the opinion of management,
collection of the receivable is doubtful. Accounts receivable in the
accompanying financial statements are shown net of an allowance for doubtful
accounts of $506,000, $427,000 and $169,000, at December 31, 1997, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
---------------------------------
(In thousands)
For the Years
Ended December 31
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Beginning Balance............... $ 427 $ 169 $ 280
Provision for Credit Losses..... 505 457 404
Charge-offs..................... (426) (199) (515)
----- ----- -----
Ending Balance.................. $ 506 $ 427 $ 169
===== ===== =====
</TABLE>
DEFERRED DEBT COSTS
Deferred debt costs consists of fees and costs incurred to obtain long-term
financing and interest rate protection agreements. These fees and costs are
being amortized over the terms of the respective loans or agreements. Deferred
debt costs in the accompanying financial statements are shown net of accumulated
amortization of $171,000, $6,240,000 and $5,000,000, at December 31, 1997, 1996
and 1995, respectively.
REVENUE RECOGNITION
Rental and interest income is accrued as earned except when doubt exists as
to collectibility, in which case the accrual is discontinued. When rental
payments due under leases vary from a straight-line basis, because of free rent
periods or stepped increases (excluding those increases which approximate
inflationary increases), income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent property operating expenses billed to the tenants, including common
area maintenance, real estate taxes and other recoverable costs. Expense
recoveries are recognized in the period the expenses are incurred. Generally,
additional rental income based on tenant's revenues ("percentage rent") is
accrued on the basis of the prior year's percentage rent, adjusted to give
effect to current sales data.
INCOME TAXES
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ending December 31, 1993. A REIT generally will not be subject to federal
income taxation on that portion of its income that qualifies as REIT taxable
income to the extent that it distributes at least 95 percent of its REIT taxable
income to stockholders and complies with certain other requirements. Therefore,
no provision has been made for federal income taxes in the accompanying
financial statements. As of December 31, 1997 and 1996, the total tax basis of
the Company's assets was $276,754,000 and $276,975,000, and the tax basis of the
liabilities was $298,223,000 and $288,938,000, respectively.
F-8
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS' DEFERRED COMPENSATION PLAN
A Deferred Compensation Plan was established by Saul Centers, effective
January 1, 1994, for the benefit of its directors and their beneficiaries.
Before the beginning of any calendar year, a director may elect to defer all or
part of his or her director's fees to be earned in that year and the following
years. A director has the option to have deferred director's fees paid in cash,
in shares of common stock or in a combination of cash and shares of common
stock. If the director elects to have the deferred fees paid in stock, the
number of shares allocated to the director is determined based on the market
value of the common stock on the day the deferred director's fee was earned.
Deferred compensation of $144,500, $118,950, and $120,950 has been reported in
the Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995, respectively. The Company has registered 70,000 shares for use
under the plan, of which 40,000 were authorized at December 31, 1997. As of
December 31, 1997, 38,607 shares had been credited to the directors' deferred
fee accounts.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 121 required that an impairment loss be recognized when the carrying
amount of an asset exceeds the sum of the estimated future cash flows
(undiscounted) of the asset. The standard was implemented in 1996 and, in the
opinion of management, no such impairment loss reductions are required.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. The Company adopted SFAS No. 123 in 1996 utilizing the
method which provides for pro-forma disclosure of the impact of stock-based
compensation.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
establishes new standards for computing, presenting and disclosing earnings per
share. The standard was implemented in 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for the reporting and display of comprehensive
income in the Company's financial statements. Adoption of the new standard is
required for the year 1998. Because SFAS 130 address only disclosure-related
issues, its adoption will not have an impact on the Company's financial
condition or its results of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Adoption of the
new standard is required for the 1998. Because SFAS 131 addresses only
disclosure-related issues, its adoption will not have an impact on the Company's
financial condition or its results of operations.
CONSTRUCTION IN PROGRESS
Construction in progress includes the costs of redeveloping the French
Market shopping center and other predevelopment project costs. Development costs
include direct construction costs and indirect costs such as architectural,
engineering, construction management and carrying costs consisting of interest,
real estate taxes and
F-9
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance. Construction in progress balances as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Construction in Progress
- ------------------------
(In thousands)
<S> <C>
French Market.................. $807
Other development costs........ 167
----
Total $974
====
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and short-term investments with
maturities of three months or less.
PER SHARE DATA
Per share data is calculated in accordance with SFAS No. 128, "Earnings Per
Share". The Company has no dilative securities, therefore, basic and diluted
earnings per share are identical. Net income before minority interests is
presented on a fully converted basis, that is, assuming the limited partners
exercise their right to convert their partnership ownership into shares of Saul
Centers and is computed using weighted average shares of 16,690,417, 16,423,984
and 16,284,666, shares for the years ended December 31, 1997, 1996 and 1995,
respectively. Per share data relating to net income after minority interests is
computed on the basis of 12,297,254, 12,030,821 and 11,891,503, weighted average
common shares for the years ended December 31, 1997, 1996 and 1995,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassifications
have no impact on operating results previously reported.
3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization has a 26.2 percent limited partnership interest,
represented by 4,393,163 convertible limited partnership units, in the Operating
Partnership, as of December 31, 1997. These Convertible Limited Partnership
Units are convertible into shares of Saul Centers' common stock on a one-for-one
basis, provided the rights may not be exercised at any time that The Saul
Organization owns, directly or indirectly, in the aggregate more than 24.9
percent of the outstanding equity securities of Saul Centers. The impact of the
Saul Organization's 26.2 percent limited partnership interest in the Operating
Partnership is reflected as minority interests in the accompanying financial
statements.
4. NOTES PAYABLE
DECEMBER 31, 1997
During 1997 the Company repaid a total of $185.5 million of variable rate
mortgage notes which were outstanding at December 31, 1996, with the net
proceeds of a $147.0 million 15-year fixed rate mortgage note and
F-10
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a $38.5 million 16-year fixed rate mortgage note. The $44.0 million secured
revolving credit facility in effect at December 31, 1996 was replaced with a
$60.0 million unsecured revolving credit facility during 1997. Notes payable
totaled $284.5 million at December 31, 1997, as follows:
<TABLE>
<CAPTION>
Notes Payable Principal Interest Scheduled
---------------
(In thousands) Outstanding Rate Maturity
----------------------------- -------------- --------- ---------
<S> <C> <C> <C>
Fixed Rate
Mortgage Notes Payable $ 146,705 (a) 7.67% 10/2012
75,105 (b) 8.64% 12/2011
38,064 (c) 7.88% 1/2013
10,798 (d) 7.00% 5/2004
301 8.00% 1/2000
--------------
Subtotal 270,973
Variable Rate
Revolving Credit Facility 13,500 (e) 7.36% 9/2000
--------------
Total Notes Payable $ 284,473
==============
</TABLE>
(a) The loan is collateralized by nine shopping centers.
(b) The loan is collateralized by Avenel Business Park, Van Ness Square and
four shopping centers - Ashburn Village, Leesburg Pike, Lumberton Plaza and
Village Center.
(c) The loan is collateralized by 601 Pennsylvania Avenue.
(d) The stated interest rate of 7.00 percent increases by 0.25 percent in June
1998. For the final five years of the term of the loan, beginning in June
1999, the interest rate is fixed at the then current 5-year Treasury
Securities rate plus 2.00 percent. The loan is collateralized by The Glen
shopping center.
(e) The facility is a revolving credit facility totaling $60.0 million.
Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate
plus a spread of 1.375 percent to 1.625 percent (determined by certain debt
service coverage and leverage tests) or upon the bank's reference rate plus
1/2 percent at the Company's option. The line may be extended one year with
payment of a fee of 1/4 percent at the company's option. The interest rate
in effect on December 31, 1997 was based on a 30 Day LIBOR of 5.86 percent
and spread of 1.5 percent.
The mortgages outstanding at December 31, 1997 have a weighted average
remaining term of 13.7 years, and a weighted average interest rate of 7.90
percent. Of the $284.5 million total debt at December 31, 1997, $271.0 million
was fixed rate (95.3 percent of the total notes payable) and $13.5 million was
variable rate (4.7 percent of the total notes payable). The December 31, 1997
depreciated cost of properties collateralizing the mortgage notes payable
totaled $192.7 million.
Notes payable of $270.7 million at December 31, 1997 require monthly
installments of principal and interest, with principal amortization on schedules
averaging approximately 20 years. The $0.3 million note requires monthly
interest and an annual principal payment of $0.1 million. The remaining notes
payable totaling $13.5 million at December 31, 1997, require monthly
installments of interest only. Notes payable at December 31, 1997 totaling
$209.1 million are guaranteed by members of The Saul Organization.
F-11
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997, the scheduled maturities of all debt for years
ended December 31, are as follows:
<TABLE>
<CAPTION>
Debt Maturity Schedule
----------------------
(In thousands)
<S> <C>
1998............. $ 4,774
1999............. 5,163
2000............. 19,047
2001............. 5,949
2002............. 5,607
Thereafter....... 243,933
--------
$284,473
========
</TABLE>
DECEMBER 31, 1996
During 1996, the Company repaid a total of $76.6 million of variable rate
mortgage notes which were outstanding at December 31, 1995, with the net
proceeds of a $77.0 million 15-year fixed rate mortgage note. The revolving
credit facility in the amount of $100.1 million at December 31, 1995 was reduced
to $44.0 million during 1996, as a result of this fixed rate financing.
The mortgages outstanding at December 31, 1996 had a weighted average
remaining term of 7.2 years, and a December 31, 1996 weighted average interest
rate of 7.26 percent. A total of $185.0 million was variable rate (67.7 percent
of the total notes payable) and $88.3 million was fixed rate (32.3 percent of
the total notes payable). Notes payable of $115.0 million at December 31, 1996
required monthly installments of principal and interest, with principal
amortization on schedules averaging approximately 20 years. A $10.9 million note
required monthly installments of interest only through June 1997, with monthly
principal and interest thereafter. The remaining notes payable totaling $147.4
million at December 31, 1996, required monthly installments of interest only.
Notes payable at December 31, 1996 totaling $195.9 million were guaranteed by
members of The Saul Organization.
INTEREST RATE PROTECTION
As of December 31, 1996, the Company held interest rate protection agreements
with a total notional value of $162.8 million to limit the Company's exposure to
increases in interest rates on its variable rate debt. All of the interest rate
protection agreements were sold for cash proceeds of $1.465 million on October
1, 1997. The Company is exposed to interest rate risk on its line of credit
balance outstanding of $13.5 million at December 31, 1997. Income earned by
the operation of the interest rate protection agreements for the years ended
December 31, 1997, 1996 and 1995 was $499,000, $516,000 and $1,637,000,
respectively, and was reported as an offset to interest expense.
F-12
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASE AGREEMENTS
Lease income includes primarily base rent arising from noncancellable
commercial leases. Base rent for the years ended December 31, 1997, 1996, and
1995 amounted to $51,779,000, $49,814,000 and $47,673,000, respectively. Future
base rentals under noncancellable leases for years ended December 31, are as
follows:
<TABLE>
<CAPTION>
Future Base Rental Income
-------------------------
(In thousands)
<S> <C>
1998............. $ 51,205
1999............. 44,775
2000............. 39,507
2001............. 34,233
2002............. 28,089
Thereafter....... 200,397
--------
$398,206
========
</TABLE>
The majority of the leases also provide for rental increases and expense
recoveries based on increases in the Consumer Price Index or increases in
operating expenses, or both. These increases generally are payable in equal
installments throughout the year based on estimates, with adjustments made in
the succeeding year. Expense recoveries for the years ended December 31, 1997,
1996 and 1995 amounted to $9,479,000, $9,301,000 and $8,770,000, respectively.
In addition, certain retail leases provide for percentage rent based on sales in
excess of the minimum specified in the tenant's lease. Percentage rent amounted
to $2,948,000, $2,924,000, and $2,782,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
6. LONG-TERM LEASE OBLIGATIONS
Certain properties are subject to noncancellable long-term leases which
apply principally to land underlying the Shopping Centers. Certain of the
leases provide for periodic adjustments of the basic annual rent and require the
payment of real estate taxes on the underlying land. The leases will expire
between 2058 and 2068. Reflected in the accompanying financial statements is
minimum ground rent expense of $152,000 for each of the years ended December 31,
1997, 1996, and 1995. The minimum future rental commitments under these ground
leases are as follows:
<TABLE>
<CAPTION>
Ground Lease Rental Commitments
---------------------------------
(In thousands)
<S> <C> <C>
Annual Total
1998-2002 Thereafter
--------- ----------
Beacon Center................... $ 47 $3,512
Olney........................... 45 4,691
Southdale....................... 60 3,425
------- ------
$ 152 $11,628
======= =======
</TABLE>
The Company's Flagship Center consists of two developed outparcels that are
part of a larger adjacent community shopping center formerly owned by The Saul
Organization and sold to an affiliate of a tenant in 1991. The Company has a 90-
year ground leasehold interest which commenced in September 1991 with a minimum
rent of one dollar per year.
F-13
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
The Consolidated Statement of Operations for the year ended December 31,
1997 includes a charge for minority interests of $6,854,000, consisting of
$2,483,000 related to The Saul Organization's share of the net income for the
year and $4,371,000 related to distributions to minority interests in excess of
allocated net income for the year. The charge for the year ended December 31,
1996 of $6,852,000, consists of $3,430,000 related to The Saul Organization's
share of net income for the year and $3,422,000 related to distributions to
minority interests in excess of allocated net income for the year. The charge
for the year ended December 31, 1995 of $6,852,000 consists of $3,568,000
related to The Saul Organization's share of the net income for the year and
$3,284,000 related to distributions to minority interests in excess of allocated
net income for the year.
8. RELATED-PARTY TRANSACTIONS
Chevy Chase Bank, F.S.B. leases space in twelve of the properties. Total
rental income from Chevy Chase Bank, F.S.B. amounted to $1,181,000, $1,063,000
and $964,000, for the years ended December 31, 1997, 1996, and 1995,
respectively.
The Chairman and Chief Executive Officer, the President and a Vice
President of the Company remain officers of The Saul Organization and devote a
substantial amount of time to the management of the Company. The annual
compensation for these officers is fixed by the Compensation Committee of the
Board of Directors for each year.
The Company shares with The Saul Organization on a prorata basis certain
ancillary functions such as computer and payroll services and insurance expense
based on management's estimate of usage or time incurred, as applicable. Also,
The Saul Organization subleases office space to the Company. The terms of all
such arrangements with The Saul Organization, including payments related
thereto, are periodically reviewed by the Audit Committee of the Board of
Directors. Included in general and administrative expense for the years ended
December 31, 1997, 1996 and 1995, are charges totaling $1,624,000, $1,229,000
and $1,112,000, related to shared services, of which $1,436,000, $1,073,000 and
$975,000, was paid during the years ended December 31, 1997, 1996 and 1995,
respectively.
9. STOCK OPTION PLAN
The Company has established a stock option plan for the purpose of
attracting and retaining executive officers and other key personnel. The plan
provides for grants of options to purchase a specified number of shares of
common stock. A total of 400,000 shares are available under the plan. The plan
authorizes the Compensation Committee of the Board of Directors to grant options
at an exercise price which may not be less than the market value of the common
stock on the date the option is granted.
The Compensation Committee has granted options to purchase a total of
180,000 shares (90,000 shares from incentive stock options and 90,000 shares
from nonqualified stock options) to five Company officers. The options vested
25 percent per year over four years, have an exercise price of $20 per share and
a term of ten years, subject to earlier expiration upon termination of
employment. A total of 170,000 of the options expire September 23, 2003 and
10,000 expire September 24, 2004. As of December 31, 1997, all 180,000 of the
options are fully vested. No compensation expense has been recognized as a
result of these grants.
F-14
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NON-OPERATING ITEM - SALES OF INTEREST RATE PROTECTION AGREEMENTS
The Company sold a portion of its interest rate protection agreements with
a notional value of $87 million in November 1996 and all of the remaining
agreements with a notional value of $162.8 million on October 1, 1997. The
sales resulted in the $4,392,000 and $972,000, write-off of the unamortized
costs in excess of the proceeds received for the years ended December 31, 1997
and 1996, respectively.
11. EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
The consolidated statements of operations for the years ending December 31,
1997, 1996 and 1995 include $3,197,000, $587,000 and $998,000, respectively,
related to the repayment of debt associated with mortgage refinancings. These
amounts consist of the write-off of associated deferred financing costs.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure about fair value for all
financial instruments. The carrying values of cash, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value. Based on interest rates currently available to the Company, the carrying
value of the variable rate credit line payable is a reasonable estimation of
fair value, because the debt bears interest based on short-term interest rates.
Based upon management's estimate of borrowing rates and loan terms currently
available to the Company for fixed rate financing in the amount of the total
notes payable, the fair value is not materially different from its carrying
value.
13. COMMITMENTS AND CONTINGENCIES
Neither the Company nor the Current Portfolio Properties are subject to any
material litigation, nor, to management's knowledge, is any material litigation
currently threatened against the Company, other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items, individually or in aggregate, will not
have a material adverse impact on the Company or the Current Portfolio
Properties.
14. DISTRIBUTIONS
In December 1995, the Company established a Dividend Reinvestment and Stock
Purchase Plan (the "Plan"), to allow its stockholders and holders of limited
partnership interests an opportunity to buy additional shares of Common Stock by
reinvesting all or a portion of their dividends or distributions. The Plan
provides for investing in newly issued shares of Common Stock at a 3 percent
discount from market price without payment of any brokerage commission, service
charges or other expenses. All expenses of the Plan will be paid for by the
Company. The January 31, 1996 dividend was the initial dividend payment date
under which the Company's stockholders and holders of limited partnership
interests could participate in the Plan.
Of the distributions paid during 1997, $0.78 per share represented ordinary
dividend income and $0.78 per share represented return of capital to the
shareholders. The following summarizes distributions paid during the years
ending December 31, 1997 and December 31, 1996, including activity in the Plan:
F-15
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Total Distributions to Dividend Reinvestment Plan
---------------------------- --------------------------
Common Limit Partner Shares Discounted
Stockholders Unitholders Issued Share Price
------------ -------------- ------ ------------------
(In thousands)
Distributions during 1997
- -----------------------------
<S> <C> <C> <C> <C>
January 31 $ 4,729 $1,713 58,728 $16.01
April 30 4,752 1,713 68,913 15.16
July 31 4,779 1,715 63,291 16.98
October 31 4,803 1,713 72,901 17.10
------- ------
$19,063 $6,854
======= ======
Distributions during 1996
- -----------------------------
January 31 $ 4,633 $1,713 56,050 $14.19
April 30 4,654 1,713 58,980 13.94
July 31 4,678 1,713 67,421 12.61
October 31 4,704 1,713 64,154 14.19
------- ------
$18,669 $6,852
======= ======
</TABLE>
For the year ending December 31, 1995, the Company paid quarterly
distributions totaling $6,346,000 ($0.39 per share) per quarter consisting of
$4,633,000 and $1,713,000 related to common stockholders and limited partnership
unitholders, respectively. For the year ending December 31, 1995, a total of
$25,384,000 ($1.56 per share) was paid, consisting of $18,532,000 and $6,852,000
related to common stockholders and limited partnership unitholders,
respectively.
In December 1997, 1996 and 1995, the Board of Directors of the Company
authorized a distribution of $0.39 per share payable in January 1998, 1997 and
1996, to holders of record on January 16, 1998, January 17, 1997 and January 17,
1996, respectively. As a result, $4,832,000, $4,729,000 and $4,633,000 was paid
to common shareholders on January 30, 1998, January 31, 1997, and January 31,
1996 and $1,713,000 was paid to limited partnership unitholders on January 30,
1998, January 31, 1997 and January 31, 1996 ($0.39 per Operating Partnership
unit), respectively. These amounts are reflected as a reduction of
stockholders' equity and are included in accounts payable in the accompanying
financial statements.
F-16
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INTERIM RESULTS (UNAUDITED)
The following summary represents the results of operations of the Company
for the interim periods from January 1, 1996 through December 31, 1997.
<TABLE>
<CAPTION>
(In thousands, except Three Months Ended
per share amounts) ----------------------------------------------------------
12/31/1997 09/30/1997 06/30/1997 03/31/1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 17,386 $ 17,145 $ 16,624 $ 16,562
---------- ---------- ---------- ----------
Net income before extraordinary item
and minority interests (238) 4,381 4,211 4,249
Extraordinary Item:
Early extinguishment of debt (2,828) -- -- (369)
Minority interests (1,713) (1,715) (1,713) (1,713)
---------- ---------- ---------- ----------
Net Income $ (4,779) $ 2,666 $ 2,498 $ 2,167
========== ========== ========== ==========
Per Share Data:
Net income before extraordinary item
and minority interests $ (0.01) $ 0.26 $ 0.25 $ 0.26
Net Income $ (0.39) $ 0.22 $ 0.20 $ 0.18
(In thousands, except Three Months Ended
per share amounts) ----------------------------------------------------------
12/31/1996 09/30/1996 06/30/1996 03/31/1996
---------- ---------- ---------- ----------
Revenues $ 16,439 $ 16,131 $ 15,820 $ 15,633
---------- ---------- ---------- ----------
Net income before extraordinary item
and minority interests 2,553 4,115 3,223 3,399
Extraordinary Item:
Early extinguishment of debt (587) -- -- --
Minority interests (1,713) (1,713) (1,713) (1,713)
---------- ---------- ---------- ----------
Net Income $ 253 $ 2,402 $ 1,510 $ 1,686
========== ========== ========== ==========
Per Share Data:
Net income before extraordinary item
and minority interests $ 0.15 $ 0.25 $ 0.20 $ 0.21
Net Income $ 0.02 $ 0.20 $ 0.13 $ 0.14
</TABLE>
F-17
<PAGE>
<TABLE>
SCHEDULE III
SAUL CENTERS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(Dollars in Thousands)
Costs
Capitalized Basis at Close of Period
------------------------------------------------------------
Subsequent Buildings
Initial to and Leasehold
Basis Acquisition Land Improvements Interests Total
-------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS
Ashburn Village, Ashburn, VA $ 11,431 $ 359 $ 3,738 $ 8,052 $ -- $ 11,790
Beacon Center, Alexandria, VA 1,493 10,155 -- 10,554 1,094 11,648
Belvedere, Baltimore, MD 932 442 263 1,111 -- 1,374
Boulevard, Fairfax, VA 4,883 22 3,687 1,218 -- 4,905
Clarendon, Arlington, VA 385 351 635 101 -- 736
Clarendon Station, Arlington, VA 834 16 425 425 -- 850
Crosstown, Tulsa, OK 3,454 417 604 3,267 -- 3,871
Flagship Center, Rockville, MD 160 9 169 -- -- 169
French Market, Oklahoma City, OK 5,781 796 1,118 5,459 -- 6,577
Germantown, Germantown, MD 3,576 284 2,034 1,826 -- 3,860
Giant, Baltimore, MD 998 263 422 839 -- 1,261
The Glen, Lake Ridge, VA 12,918 265 5,300 7,883 -- 13,183
Great Eastern, District Heights., MD 3,472 7,980 2,264 9,188 -- 11,452
Hampshire Langley, Langley Park, MD 3,159 1,643 1,856 2,946 -- 4,802
Leesburg Pike, Baileys Crossroads, VA 2,418 4,772 1,132 6,058 -- 7,190
Lexington Mall, Lexington, KY 4,868 5,644 2,111 8,401 -- 10,512
Lumberton Plaza, Lumberton, NJ 4,400 7,337 950 10,787 -- 11,737
North Washington, Alexandria, VA 2,034 (1,169) 544 321 -- 865
Olney, Olney, MD 1,884 872 -- 2,756 -- 2,756
Park Rd., Washington, DC 942 215 1,011 146 -- 1,157
Ravenwood, Baltimore, MD 1,245 653 703 1,195 -- 1,898
Seven Corners, Falls Church, VA 4,848 36,913 4,913 36,848 -- 41,761
Shops at Fairfax, Fairfax, VA 2,708 3,384 992 5,100 -- 6,092
Southdale, Glen Burnie, MD 3,650 14,702 -- 17,730 622 18,352
Southside Plaza, Richmond, VA 6,728 3,015 1,878 7,865 -- 9,743
Sunshine City, Atlanta, GA 2,474 1,792 703 3,563 -- 4,266
Thruway, Winston-Salem, NC 4,778 8,360 5,464 7,569 105 13,138
Village Center, Centreville, VA 16,502 538 7,851 9,189 -- 17,040
West Park, Oklahoma City, OK 1,883 507 485 1,905 -- 2,390
White Oak, Silver Spring, MD 6,277 3,364 4,787 4,854 -- 9,641
-------------- --------------- -------------- -------------- --------------- --------------
Total Shopping Centers 121,115 113,901 56,039 177,156 1,821 235,016
-------------- --------------- -------------- -------------- --------------- --------------
COMMERCIAL PROPERTIES
Avenel Business Park, Gaithersburg, MD 21,459 3,573 3,093 21,939 -- 25,032
601 Pennsylvania Ave., Washington DC 5,479 43,492 5,667 43,304 -- 48,971
Van Ness Square, Washington, DC 812 25,437 831 25,418 -- 26,249
-------------- --------------- -------------- -------------- --------------- --------------
Total Commercial Properties 27,750 72,502 9,591 90,661 -- 100,252
-------------- --------------- -------------- -------------- --------------- --------------
Total $ 148,865 $ 186,403 $ 65,630 $ 267,817 $ 1,821 $ 335,268
============== =============== ============== ============== =============== ==============
<CAPTION>
Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Depreciation Debt Construction Acquired Lives in Years
--------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS
Ashburn Village, Ashburn, VA $ 723 $ 12,451 1994 3/94 40
Beacon Mall, Alexandria, VA 4,891 2,571 1960 & 1974 1/72 40 & 50
Belvedere, Baltimore, MD 621 2,754 1958 1/72 40
Boulevard, Fairfax, VA 113 554 1969 4/94 40
Clarendon, Arlington, VA 29 115 1949 7/73 33
Clarendon Station, Arlington, VA 20 301 1949 1/96 40
Crosstown, Tulsa, OK 1,816 -- 1974 10/75 40
Flagship Center, Rockville, MD -- 190 -- 1/72 --
French Market, Oklahoma City, OK 2,647 798 1972 3/74 50
Germantown, Germantown, MD 253 418 1990 8/93 40
Giant, Baltimore, MD 528 2,794 1959 1/72 40
The Glen, Lake Ridge, VA 730 10,798 1993 6/94 40
Great Eastern, District Heights., MD 1,811 11,976 1958 & 1960 1/72 40
Hampshire Langley, Langley Park, MD 1,449 10,968 1960 1/72 40
Leesburg Pike, Baileys Crossroads, VA 2,141 12,648 1965 2/66 40
Lexington Mall, Lexington, KY 3,974 2,751 1971 & 1974 3/74 50
Lumberton Plaza, Lumberton, NJ 4,759 8,922 1975 12/75 40
North Washington, Alexandria, VA 130 356 1952 7/73 33
Olney, Olney, MD 1,378 914 1972 11/75 40
Park Rd., Washington, DC 28 355 1950 7/73 30
Ravenwood, Baltimore, MD 513 7,071 1959 1/72 40
Seven Corners, Falls Church, VA 6,819 47,869 1956 7/73 33
Shops at Fairfax, Fairfax, VA 1,738 636 1975 6/75 50
Southdale, Glen Burnie, MD 8,548 2,894 1962 & 1987 1/72 40
Southside Plaza, Richmond, VA 4,458 10,599 1958 1/72 40
Sunshine City, Atlanta, GA 1,882 909 1970 2/76 40
Thruway, Winston-Salem, NC 3,182 27,381 1955 & 1965 5/72 40
Village Center, Centreville, VA 1,102 9,951 1990 8/93 40
West Park, Oklahoma City, OK 805 39 1974 9/75 50
White Oak, Silver Spring, MD 2,291 25,293 1958 & 1967 1/72 40
--------------- --------------
Total Shopping Centers 59,379 215,276
--------------- --------------
COMMERCIAL PROPERTIES
Avenel Business Park, Gaithersburg, MD 8,810 21,324 1984, 1986 12/84, 8/85 35 & 40
& 1990 & 2/86
601 Pennsylvania Ave., Washington DC 15,424 38,065 1986 7/73 35
Van Ness Square, Washington, DC 9,002 9,808 1990 7/73 35
--------------- --------------
Total Commercial Properties 33,236 69,197
--------------- --------------
Total $ 92,615 $ 284,473
=============== ==============
</TABLE>
F-18
<PAGE>
SCHEDULE III
SAUL CENTERS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
Depreciation and amortization related to the real estate investments reflected
in the statements of operations is calculated over the estimated useful lives of
the assets as follows:
Base building 33 - 50 years
Building components 20 years
Tenant improvements The lesser of the term of the lease or the
useful life of the improvements
The aggregate remaining net basis of the real estate investments for federal
income tax purposes was approximately $263,079,423 at December 31, 1997.
Depreciation and amortization are provided on the declining balance and
straight-line methods over the estimated useful lives of the assets.
The changes in total real estate investments and related accumulated
depreciation for each of the years in the three year period ended December 31,
1997 are summarized as follows.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- --------------------------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Total real estate investments:
Balance, beginning of year $ 329,664 $ 321,662 $ 300,404
Improvements 17,785 15,177 21,762
Retirements 12,181 7,175 504
----------------- ----------------- ------------------
Balance, end of year $ 335,268 $ 329,664 $ 321,662
================= ================= ==================
Total accumulated depreciation:
Balance, beginning of year $ 94,965 $ 92,237 $ 83,044
Depreciation expense 9,797 10,860 9,583
Retirements 12,147 8,132 390
----------------- ----------------- ------------------
Balance, end of year $ 92,615 $ 94,965 $ 92,237
================= ================= ==================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
SECOND AMENDMENT TO THE
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SAUL SUBSIDIARY I LIMITED PARTNERSHIP
THIS SECOND AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Second
Amendment"), dated July 21, 1994, is entered into by and among the undersigned
parties.
W I T N E S S E T H:
WHEREAS, Saul Subsidiary I Limited Partnership (the "Partnership") was
formed as a Maryland limited partnership pursuant to that certain Certificate of
Limited Partnership dated June 16, 1993 and filed on June 16, 1993 among the
partnership records of the Maryland State Department of Assessments and
Taxation, and that certain Agreement of Limited Partnership dated June 16, 1993
(the "Original Agreement");
WHEREAS, the Original Agreement was amended and restated in its entirety
by that certain First Amended and Restated Agreement of Limited Partnership of
the Partnership dated as of August 26, 1993, as amended by that certain First
Amendment date August 26, 1993 (as amended, the "Agreement");
WHEREAS, the undersigned parties desire to amend the Agreement to
reflect the transfer of the one percent (1%) general partnership interest in the
Partnership of Saul Centers, Inc. ("SCI") to Saul QRS, Inc. ("QRS"), a wholly-
owned subsidiary corporation of SCI.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
1. SCI hereby transfers its entire one percent (1%) general partnership
interest in the Partnership to QRS, a corporation which is a wholly-owned
subsidiary of SCI, pursuant to the provisions of Section 11.1.B of the
Agreement. QRS hereby accepts and agrees to be bound by all of the terms and
conditions of the Agreement.
2. SCI hereby withdraws as sole general partner of the Partnership, and
QRS is hereby admitted as a substituted general partner in the place and stead
of SCI pursuant to the provisions of Section 12.1 and Section 14.1.B (2) of the
Agreement.
3. SCI and QRS hereby agree to file an amended certificate with the
Maryland State Department of Assessments and Taxation (and any required
amendments to the foreign
1
<PAGE>
qualifications of the Partnership in each of the jurisdictions in which the
Partnership is doing business) to reflect the withdrawal of SCI as the sole
general partner of the Partnership and the admission of QRS as a substituted
general partner.
4. In order to reflect the aforementioned transfer of SCI's general
partnership interest to QRS, Exhibit A to the Agreement is hereby deleted in its
entirety and replaced with the Exhibit A attached to this Second Amendment.
5. The definition of "Articles of Incorporation" contained in Article I
of the Agreement is hereby deleted in its entirety.
6. The definition of "Independent Directors of the General Partner"
contained in Article I of the Agreement is hereby deleted in its entirety and
replaced with the following:
"Independent Director(s) of the General Partner" means the independent
------------------------------------------------
director(s) of the General Partner, as defined in the Articles of
Incorporation of the General Partner, as in effect from time to time.
7. All references to the "General Partner" in the definition of
"Registration Statement" contained in Article I of the Agreement shall
hereinafter be references to "Saul Centers, Inc."
8. All references to the "General Partner" in Section 3.1 of the
Agreement shall hereinafter be references to "Saul Centers, Inc." The reference
to "its Articles of Incorporation" in Section 3.1 of the Agreement shall
hereinafter be a reference to "the articles of incorporation of Saul Centers,
Inc."
9. Section 3.2 of the Agreement is hereby deleted in its entirety, and
replaced with the following:
Section 3.2. Powers
------
Subject to all of the terms, covenants, conditions and limitations
contained in this Agreement and any other agreement entered into by the
Partnership, the Partnership shall have full power and authority to do
any and all acts and thins necessary, appropriate, proper, advisable,
desirable, incidental to or convenient for the furtherance and
accomplishment of the purposes and business described herein and for the
protection and benefit of the Partnership, including, without
limitation, full power and authority to enter into, perform and carry
out contracts of any kind, borrow money and issue evidences of
indebtedness, whether or not secured by mortgage, deed of trust, pledge
or other lien, and acquire and
2
<PAGE>
develop real property; provided, however, that the Partnership shall not
-----------------
take, or refrain from taking, any action which, in the judgement of
General Partner, in its sole and absolute discretion, (i) could
adversely affect the ability of Saul Centers, Inc. to achieve or
maintain qualification as a REIT, (ii) could subject Saul Centers, Inc.
to any additional taxes under Section 857 or Section 4981 of the Code,
or (iii) could violate any law or regulation of any governmental body or
agency having jurisdiction of Saul Centers, Inc. or its securities,
unless such action (or inaction) shall have been specifically consented
to by Saul Centers, Inc. in writing.
10. The last sentence of Section 5.2 of the Agreement is hereby deleted
in its entirety.
11. All references to the "General Partner" in Section 7.1.A(3) of the
Agreement shall hereinafter be references to "Saul Centers, Inc."
12. Section 7.1.F of the Agreement is hereby deleted in its entirety and
replaced with the following:
F. The Limited Partners acknowledge that the taking of certain actions
hereunder by the General Partner may require the consent of the
Independent Director(s) of the General Partner.
13. Section 7.5 of the Agreement is hereby deleted in its entirety and
replaced with the following:
Section 7.5 (Intentionally Deleted)
14. Section 7.9.D of the Agreement is hereby deleted in its entirety and
replaced with the following:
D. Notwithstanding any other provision of this Agreement or the Act
(except for any limitations set forth in Section 3.1 of the Agreement),
any action of the General Partner of behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or
omission is necessary or advisable in order to (i) protect the ability
of Saul Centers, Inc. to achieve or maintain qualification as a REIT or
(ii) avoid Saul Center, Inc.'s incurring any taxes under Section 857 or
Section 4981 of the Code, is expressly authorized under this Agreement
and is deemed approved by all of the Limited Partners, to the extent
such approval may be necessary.
3
<PAGE>
15. Except as the context may otherwise require, any terms used in this
Second Amendment which are defined in the Agreement shall have the same meaning
for purposes of this Second Amendment as in the Agreement.
16. Except as herein amended, the Agreement is hereby ratified,
confirmed and reaffirmed for all purposes and in all respects.
17. This Second Amendment may be executed in counterparts, all of which
together shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Second Amendment
immediately upon affixing its signature hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the date first written above.
WITHDRAWING GENERAL PARTNER:
---------------------------
SAUL CENTERS, INC.
a Maryland Corporation
By:
___________________________________
Name: Philip D. Caraci
Title: President
NEW GENERAL PARTNER:
-------------------
SAUL QRS, INC.
a Maryland Corporation
By:
___________________________________
Name: Philip D. Caraci
Title: President
4
<PAGE>
EXHIBIT A
PARTNERS, CONSTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Amount of
Name and Address Cash/Net Partnership
of Partner Contribution Asset Value Interest
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
General Partner:
- ---------------
Saul Centers, Inc. Cash $ 1,019,871 1%
8401 Connecticut Avenue
Chevy Chase, Maryland
20815
Limited Partner:
- ---------------
Saul Holdings Limited Cash $ 19,680,129 99%
Partnership
8401 Connecticut Avenue The following $103,230,313
Chevy Chase, Maryland properties:
20815
Beacon Mall
Hampshire Langley
Lexington Mall
Southdale
Thruway
White Oak
Total ____________ ____________
$123,930,313 100%
____________ ____________
</TABLE>
5
<PAGE>
EXHIBIT A
PARTNERS, CONSTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Amount of
Name and Address Cash/Net Partnership
of Partner Contribution Asset Value Interest
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
General Partner:
- ---------------
Saul QRS, Inc. Cash $ 1,019,871 1%
8401 Connecticut Avenue
Chevy Chase, Maryland
20815
Limited Partner:
- ---------------
Saul Holdings Limited Cash $ 19,680,129 99%
Partnership
8401 Connecticut Avenue The following $103,230,313
Chevy Chase, Maryland properties:
20815
Beacon Mall
Hampshire Langley
Lexington Mall
Southdale
Thruway
White Oak
Total ____________ ____________
$123,930,313 100%
____________ ____________
</TABLE>
6
<PAGE>
THIRD AMENDMENT TO THE
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SAUL SUBSIDIARY I LIMITED PARTNERSHIP
THIS THIRD AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Third Amendment"),
dated as of July 21, 1994, is entered into by and among the undersigned parties.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Saul Subsidiary I Limited Partnership (the "Partnership") was
formed as a Maryland limited partnership pursuant to that certain Certificate of
Limited Partnership dated June 16,1993 and filed on June 16, 1993 among the
partnership records of the Maryland State Department of Assessments and
Taxation, and that certain Agreement of Limited Partnership dated June 16, 1993
(the "Original Agreement");
WHEREAS, the Original Agreement was amended and restated in its entirely by
that certain First Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of August 26, 1993, as amended by that certain First
Amendment dated August 26, 1993 and that certain Second Amendment dated July 21,
1994 (as amended, the "Agreement");
WHEREAS, the undersigned parties, constituting all of the Partners of the
Partnership, desire to amend the Agreement to reflect (1) an amended purpose and
separateness covenants for the Partnership, (2) the contribution of additional
assets to the Partnership by Saul Holdings Limited Partnership (the "Operating
Partnership"), (3) the contribution of a promissory note to the Partnership by
Saul QRS, Inc. ("QRS"), and (4) the admission of Saul Subsidiary II Limited
Partnership ("Sub II"), a Maryland limited partnership, as an additional Limited
Partner of the Partnership in exchange for the contribution of certain real
property to the Partnership, and (5) a special distribution to the Operating
Partnership.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
1. ARTICLE I of the Agreement is hereby amended by inserting the following
new definitions:
"Lender" is defined in Section 3.1.B hereof.
"Mortgage" is defined in Section 3.1.B hereof.
<PAGE>
"Properties" is defined in Section 3.1.A hereof.
2. Section 3.1 of the Agreement is hereby deleted in its entirety and
replaced with the following:
Section 3.1 Purpose and Business
--------------------
The sole purpose and nature of the business to be conducted by the
Partnership is to:
A. acquire, own, hold, maintain, manage, operate, improve, develop,
finance, pledge, encumber, mortgage, sell, exchange, lease, dispose of
and otherwise deal with the following seventeen (17) real properties
(together with all personal property used in connection with the operation
of such real properties, the "Properties"):
1. Beacon Mall
2. Lexington Mall
3. Thruway
4. Hampshire-Langley
5. Southdale
6. White Oak
7. Belvedere
8. French Market
9. Giant
10. Great Eastern
11. North Washington
12. Olney
13. Ravenwood
14. Southside Plaza
15. Sunshine City
16. West Park
17. Park Road Center
(the properties noted at 1 through 3 above are more fully described in
those certain Conveyance Agreements between Dearborn Corporation and the
Operating Partnership dated on or about the date of the Agreement; the
properties noted at 4 through 6 above are more fully described in those
certain Conveyance Agreements between Dearborn Corporation and the
Partnership dated on or about the date of the Agreement; the properties
noted at 7 through 16 above are more fully described in Attachment 2 to the
Third Amendment; and the property noted at 17 above is more fully described
in Attachment 3 to the Third Amendment), together with such other
activities as may be necessary or advisable in connection with the
ownership of the Properties; provided, however, that the Partnership shall
--------- -------
not take
-2-
<PAGE>
or fail to take any action if such action or failure would cause Saul
Centers, Inc. to fail to qualify as a REIT, unless Saul Centers, Inc.
voluntarily terminates its REIT status pursuant to its articles of
incorporation;
B. borrow funds from Value Line Mortgage Corporation or an affiliate
or designee thereof (the "Lender") in the approximate principal amount of
One Hundred Twenty-Eight Million Dollars ($128,000,000), pursuant to a Deed
to Secure Debt, Deed of Trust, Mortgage, Security Agreement and Assignment
of Rents; Modification and Consolidation Agreement and related documents
(the "Mortgage") to be entered into between the Partnership and the Lender,
for the purpose of operating the Properties, and incurring other
indebtedness to the extent not prohibited by the Mortgage; and
C. give security for the loan made pursuant to the Mortgage or for
any other indebtedness to the extent not prohibited by the Mortgage.
The Partnership shall not engage in any business unrelated to the
Properties and shall not own any assets other than those related to the
Properties or otherwise in furtherance of the purposes of the Partnership
as set forth above in this Section 3.1. The Partnership shall not incur
any indebtedness other than the indebtedness related to the Properties and
otherwise provided herein.
3. Section 7.1.A(9) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(9) [Intentionally Deleted]
4. Section 7.1.A (10) of the Agreement is hereby deleted in its entirely
and replaced with the following:
(10) invest assets of the Partnership on a temporary basis in
commercial paper, government securities, checking or savings accounts,
money market funds, or any other highly liquid investments deemed
appropriate by the General Partner;
5. Section 7.1.A(15) of the Agreement is hereby deleted in its entirety
and replaced with the following:
(15) [Intentionally Deleted]
-3-
<PAGE>
6. Section 7.6.A of the Agreement is hereby deleted in its entirety and
replaced with the following:
A. [Intentionally Deleted]
7. The following new Section 7.6.F is hereby added at the end of Section
7.6 of the Agreement:
F. The Partnership may hire Saul Subsidiary II Limited Partnership to
provide management services for Park Road Center, a property owned by the
Partnership and located in Washington, D.C. In such event, the Partnership
shall pay to Saul subsidiary II Limited Partnership in exchange for the
performance of such property management services a monthly fee in an amount
to be determined by the mutual agreement of the Partnership and Saul
Subsidiary II Limited Partnership. Any such fee amount shall be fair and
reasonable and no less favorable to the Partnership than could be obtained
from an unaffiliated third party.
8. The following new Article XVII is added to the Agreement:
ARTICLE XVIII - SEPARATENESS COVENANTS
A. The Partnership shall (i) observe all partnership
formalities, including the maintenance of current partnership books and
records, (ii) maintain its own separate and distinct books of account and
partnership records, (iii) cause its financial statements to be prepared in
a manner that indicates the separate existence of the Partnership and its
assets and liabilities, (iv) pay all its liabilities out of its own funds,
(v) identify itself as a separate and distinct entity in its financial
statements and legal documents, (vi) execute its legal documents under its
own name, (vii) independently make decision with respect to its business
and daily operations, (viii) maintain an arm's length relationship with its
Affiliates, (ix) allocate fairly and reasonably any overhead for shared
office space, and (x) use separate stationery, invoices and checks.
B. The Partnership shall not (i) commingle its assets with those
of, or pledge its assets for the benefit of, any other person, (ii) assume
or guarantee, or hold out its credit as being available to satisfy, the
liabilities of any other person, (iii) purchase obligations or securities
of, or make loans or advances
-4-
<PAGE>
to, an Affiliate or (iv) incur any indebtedness except in accordance with
the Mortgage.
9. QRS hereby agrees to assign to the Partnership a promissory note from
Saul Centers, Inc. in the amount of Two Hundred Sixty-One Thousand Four Hundred
Eighty-Five Dollars ($261,485), a copy of which is attached as Attachment 1 to
this Third Amendment.
10. The Operating Partnership agrees to contribute to the Partnership
certain assets more fully described in Attachment 2 to this Third Amendment, as
encumbered by certain indebtedness described in said Attachment 2.
11. Each of the undersigned parties hereby consents to a distribution by
the Partnership of Twenty-Five Million Dollars ($25,000,000) to the Operating
Partnership.
12. In exchange for its admission as a Two and 47/100 percent (2.47%)
limited partner in the Partnership, Sub II hereby agrees to contribute to the
Partnership certain real property more fully described in Attachment 3 to this
Third Amendment. Sub II hereby accepts and agrees to be bound by all of the
terms and conditions of the Agreement.
13. Pursuant to the terms of Section 4.2A of the Agreement, each of the
undersigned parties hereby consents to the additional capital contributions to
the Partnership of QRS, the Operating Partnership and Sub
14. In order to reflect the aforementioned capital contributions to the
Partnership by QRS, the Operating Partnership and Sub II, Exhibit A to the
Agreement is hereby deleted in its entirety and replaced with the Exhibit A
attached to this Third Amendment.
15. Except as the context may otherwise require, any terms used in this
Third Amendment which are defined in the Agreement shall have the same meaning
for purposes of this Third Amendment as in the Agreement.
16. Except as herein amended, the Agreement is hereby ratified, confirm
and reaffirmed for all purposes and in all respects.
17. This Third Amendment may be executed in counterparts, all of which
together shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each
-5-
<PAGE>
party shall become bound by this Third Amendment immediately upon affixing its
signature hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment
as of the date first written above.
GENERAL PARTNER:
---------------
SAUL QRS, INC.,
a Maryland corporation
By: /s/ Philip D. Caraci
-----------------------------------------
Name: Philip D. Caraci
------------------------------------
Title: President
----------------------------------
EXISTING LIMITED PARTNER:
-------------------------
SAUL HOLDINGS LIMITED PARTNERSHIP
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland
corporation, its sole general partner
By: /s/ Philip D. Caraci
-----------------------------------------
Name: Philip D. Caraci
------------------------------------
Title: President
----------------------------------
NEW LIMITED PARTNER:
--------------------
SAUL SUBSIDIARY II PARTNERSHIP,
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland
corporation, its sole general partner
By: /s/ Philip D. Caraci
-----------------------------------------
Name: Philip D. Caraci
------------------------------------
Title: President
----------------------------------
-6-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount of
of Partner Cash/Net Partnership
Limited Partner: Contribution Asset Value Interest
- ----------------------- ------------------------- ------------- -----------
<S> <C> <C> <C>
Saul Holdings Limited Cash
Partnership $ 19,680,129 96.53%
8401 Connecticut Ave. The following properties:
Chevy Chase, Maryland
20815 Beacon Mall $103,230,313
Hampshire Langley
Lexington Mall
Southdale
Thruway
White Oak
Belvedere $ 41,162,692
French Market
Giant
Great Eastern
North Washington
Olney
Ravenwood
Southside Plaza
Sunshine City
West Park
$83,000,000 of the $154,780,000 of
interest rate protection given by The First
National Bank of Chicago pursuant to that
certain Rate Cap. No. 93230.1.1000.S.C..3L
dated August 18, 1993
</TABLE>
<PAGE>
ATTACHMENT 1
PROMISSORY NOTE
---------------
August 1, 1994
Chevy Chase, Maryland
FOR VALUE RECEIVED, SAUL CENTERS, INC., a Maryland corporation (hereinafter
called "Borrower"), hereby promises to pay to order of SAUL QRS, INC, a Maryland
corporation, at its place of business at 8401 Connecticut Avenue, Chevy Chase,
Maryland, 20815, or at such other place as the holder hereof (the "Noteholder")
may in writing designate, in lawful money of the United States of America, the
principal sum of One Hundred Ninety-Three Thousand Five Hundred Sixty-Three
Dollars ($193,563), with interest from the date hereof on the principal balance
outstanding at a rate per annum equal to the standard rate of interest that is
published in the "Money Rates" section of The Wall Street Journal as the "Prime
-----------------------
Rate," as in effect from time to time.
Interest only shall be payable monthly in arrears on the first day of each
month beginning September 1, 1994. If not sooner paid, the entire principal
balance and all interest accrued thereon shall be payable on August 1, 2009.
All payments shall be made without offset or deduction of any kind or nature.
The principal sum of this Note may be prepaid in full or in part at any time
without penalty.
Notwithstanding anything to the contrary contained in this Note, Borrower
shall not be required to make any payment under this Note to the extent that the
making of such payment would (1) adversely affect the ability of Borrower to
maintain qualifications as a real estate investment trust ("REIT") as defined
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), unless Borrower voluntarily terminates its REIT status, or (2)
subject Borrower to any additional taxes under Section 857 or 4981 of the Code.
The due date of any such payment shall be delayed until such time as the adverse
tax consequences noted in the preceding sentence will not occur with respect to
Borrower. Interest at the rate specified above in this Note shall accrue on any
such delayed payment.
This Note shall be governed by the laws of the State of Maryland.
WITNESS the following signature.
SAUL CENTERS, INC., a Maryland corporation
By:
----------------------------------------
Title:
-------------------------------------
<PAGE>
PAY TO THE ORDER OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP, A MARYLAND LIMITED
PARTNERSHIP, WITHOUT RECOURSE.
SAUL QRS, INC. a Maryland corporation
By:
----------------------------------
Title:
-------------------------------
<PAGE>
ATTACHMENT 2
Saul Holdings Limited Partnership will contribute the following assets to the
Partnership, and the Partnership will assume the following indebtedness from
Saul Holdings Limited Partnership:
Gross Asset Value
of Property/Amount
Description of Property/Indebtedness of Indebtedness
------------------------------------ ------------------
1. Certain land and the improvements located thereon know as $3,800,000
Belvedere, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
2. Certain land and the improvements located thereon known as $4,400,000
French Market, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
3. Certain land and the improvements located thereon known as $4,000,000
Giant, as more fully described in the attached legal description,
together with all personal property located at and used in
connection with the operation of such real property.
4. Certain land and the improvements located thereon known as $9,100,000
Great Eastern, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
5. Certain land and the improvements located thereon known as $3,160,000
North Washington, as more fully described in the attached legal
description, together with all personal property located at and
used in connection with the operation of such real property.
6. Certain land and the improvements located thereon known as $8,500,000
Olney, as more fully described in the attached legal description,
together with all personal property located at and used in
connection with the operation of such real property.
2-1
<PAGE>
7. Certain land and the improvements located thereon known as $8,500,000
Ravenwood, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
8. Certain land and the improvements located thereon known as $10,600,000
Ravenwood, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
9. Certain land and the improvements located thereon known as $6,800,000
Sunshine City, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
10. Certain land and the improvements located thereon known as $970,000
West Park, as more fully described in the attached legal
description, together with all personal property located at
and used in connection with the operation of such real property.
11. $83,000,000 of the $154,780,000 of interest rate protection $5,337,000
given to Saul Holdings Limited Partnership by The First National
Bank of Chicago pursuant to that certain Rate Cap.
No. 93230.1.1000.S.C.3L dated August 18, 1993.
12. A portion of the indebtedness owed to Windy City ($24,004,308)
Holdings, Inc. evidenced by that certain Agreement of
Modification, Restatement and Consolidation of Promissory
Notes dated as of August 26, 1993, executed by Saul Holdings
Limited Partnership in the face amount of $43,034,557.19, which
encumbers Belvedere, Giant, Great Eastern, Olney Ravenwood and
Southside Plaza.
--------------
Total value of properties contributed, net of assumed
indebtedness $41,162,692
2-2
<PAGE>
ATTACHMENT 3
Saul Subsidiary II Limited Partnership will contribute the following real
property to the Partnership:
Gross Asset Value
Description of Property of Property
----------------------- ------------------
1. Certain land and the improvements located thereon known as $3,000,000
Park Road Center, as more fully described in the attached legal
description, together with all personal property located at and used in
connection with the operation of such real property.
3-1
<PAGE>
EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Name and Address Amount of
of Partner Cash/Net Partnership
General Partner: Contribution Asset Value Interest
- ---------------- ------------ ----------- --------
<S> <C> <C> <C>
Saul QRS, Inc. Cash $1,019,871
8401 Connecticut Ave. 1%
Chevy Chase, Maryland Promissory Note $ 193,563
20815
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount of
of Partner Cash/Net Partnership
General Partner: Contribution Asset Value Interest
- ---------------- ------------ ------------- ----------
<S> <C> <C> <C>
Saul Subsidiary II Park Road Center $ 3,000,000 2.47%
Limited Partnership
8401 Connecticut Ave.
Chevy Chase, Maryland ____________ -----
20815 Total $168,286,568 100%
============ =====
</TABLE>
<PAGE>
EXHIBIT 10(b)
FOURTH AMENDMENT
TO THE
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
SAUL SUBSIDIARY I LIMITED PARTNERSHIP
THIS FOURTH AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF SAUL SUBSIDIARY I LIMITED PARTNERSHIP (this "Fourth
Amendment"), dated as of September 30, 1997, is entered into by and among the
undersigned parties.
Preliminary Statement
Saul Subsidiary I Limited Partnership (the "Partnership") was formed as
a Maryland limited partnership pursuant to that certain Certificate of Limited
Partnership dated June 16, 1993 and filed on June 16, 1993 among the partnership
records of the Maryland State Department of Assessments and Taxation, and that
certain Agreement of Limited Partnership dated June 16, 1993 (the "Original
Agreement").
The Original Agreement was amended and restated in its entirety by that
certain First Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of August 26, 1993, as amended by that certain First
Amendment dated August 26, 1993, that certain Second Amendment dated July 21,
1994, and that certain Third Amendment dated as of July 21, 1994 (as amended,
the "Agreement").
The undersigned parties, constituting all of the Partners of the
Partnership, desire to amend the Agreement to resect: (i) the withdrawal of Saul
Subsidiary II Limited Partnership ("Sub II") as a Limited Partner and the
distribution of certain assets to Sub [I in redemption of its Partnership
Interest; (ii) an amended purpose and separateness covenants for the
Partnership; (iii) the contribution of additional assets to the Partnership by
the Operating Partnership; and (iv) the distribution of certain assets to the
Operating Partnership and the General Partner by the Partnership, as further
provided herein.
Accordingly, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
21
<PAGE>
1. Amendment of Article I. Article I of the Agreement is hereby
----------------------
amended by (i) deleting the definition of "Mortgage" contained therein, and
(ii) inserting the following new definitions:
"Loan" is defined in Section 3.1.B hereof
"Loan Agreement" is defined in Section 3.1.B hereof.
2. Amendment of Section 3.1. Section 3.1 of the Agreement is hereby
------------------------
deleted in its entirety and replaced with the following:
Section 3.1. Purpose and Business
--------------------
The sole purpose and nature of the business to be conducted by
the Partnership is to:
A. acquire, own, hold, maintain, manage, operate,
improve, develop, finance, pledge, encumber, mortgage, sell, exchange,
lease, dispose of and otherwise deal with the following nine (9) real
properties (together with all personal property used in connection with
the operation of such real properties, the "Properties"):
1. Thruway
2. Hampshire Langley
3. White Oak
4. Belvedere
5. Giant
6. Great Eastern
7. Ravenwood
8. Southside Plaza
9. Seven Corners
(the property noted at 1 above is more fully described in those certain
Conveyance Agreements between Dearborn Corporation and the Operating
Partnership dated on or about the date of the Agreement; the properties
noted at 2 and 3 above are more fully described in-those certain
Conveyance Agreements between Dearborn Corporation and the Partnership
dated on or about the date of the Agreement; the properties noted at 4
through 8 above are more fully described in Attachment 2 to the Third
Amendment; the property noted at 9 above is more fully described in
Attachment 1 to this Fourth Amendment), together with such other
activities as may be necessary or advisable in connection with the
ownership of the Properties; provided, however, that the Partnership
shall not take or fail to take any action if such action or failure
would cause Saul Centers, Inc. to fail to qualify as a REIT, unless Saul
Centers, Inc. voluntarily terminates its REIT status pursuant to its
articles of incorporation;
22
<PAGE>
B. borrow funds from Nomura Asset Capital Corporation or
an affiliate or designee thereof (the "Lender") in the approximate
principal amount of One Hundred Forty-Seven Million Dollars
($147,000,000) (the "Loan"), pursuant to that certain Loan Agreement
dated on or about the date hereof (the "Loan Agreement') to be entered
into between the Partnership and the Lender, for the purpose of
operating the Properties, and incurring other indebtedness to the extent
not prohibited by the Loan Agreement; and
C. give security for the Loan or for any other
indebtedness to the extent not prohibited by the Loan Agreement.
From and after the date on which the obligations of the Partnership
under the Loan are created and become outstanding, and continuing until
such time as the Loan has been paid in full and is no longer
outstanding, the Partnership shall not engage in any business unrelated
to the Properties and shall not own any assets other than those related
to the Properties or otherwise in furtherance of the purposes of the
Partnership as set forth above in this Section 3.1. The Partnership
shall not incur any indebtedness other than the indebtedness related to
the Properties and otherwise provided herein.
3. Amendment of Section 7.6.F. Section 7.6.F of the Agreement is hereby
--------------------------
deleted in its entirety and replaced with the following:
F. [Intentionally Deleted].
4. Amendment of Article XVIII. Article XVIII of the Agreement is hereby
--------------------------
deleted in its entirety and replaced by the following:
ARTICLE XVIII - SEPARATENESS COVENANTS
Notwithstanding any other provisions of this Agreement, from and
after the date on which the obligations of the Partnership under the
Loan are created and become outstanding, and continuing until such time
as the Loan has been paid in full and is no longer outstanding, the
General Partner and the Partnership shall take all actions necessary to
cause the Partnership and General Partner to comply with, and will
refrain from taking any actions in violation of, the defined term
"Special Purpose Bankruptcy Remote Entity," as such term is defined in
section 5.15 of the Loan Agreement. Any substitute General Partner
permitted under this agreement shall be required to comply with this
Article XVIII.
5. Withdrawal of Sub II. Sub II hereby withdraws as a Limited Partner
--------------------
and Sub II's Partnership Interest is hereby redeemed in exchange for a cash
distribution in the amount of $981,875 (to be funded by the Operating
Partnership on behalf of the Partnership, as set forth in paragraph 6(iii)
hereof) and an in-kind distribution of that certain property known as Park Road
23
<PAGE>
Center, as more fully described in the Third Amendment. Each of the undersigned
parties hereby acknowledges and agrees that the value of Park Road Center is
$3,516,000.
6. Contribution of Assets by the Operating Partnership. The Operating
---------------------------------------------------
Partnership hereby agrees to contribute to the Partnership the following assets:
(i) cash in the amount of $ 15,000,000; (ii) its agreement to convert the
account payable by the Partnership to the Operating Partnership in the amount of
$624,988 to capital; (iii) its agreement to fund on behalf of the Partnership
the $981,875 cash distribution to be made to Sub II pursuant to paragraph 5
hereof; (iv) its agreement to fund on behalf of the Partnership the $424,727
cash distribution to be made to the General Partner pursuant to paragraph 8(ii)
hereof; and (v) that certain property known as Seven Corners, as more fully
described in Attachment 1 to this Fourth Amendment, as encumbered by certain
indebtedness described in said Attachment 1 (which indebtedness shall be
immediately paid in full by the Partnership upon such contribution of the Seven
Corners property to the Partnership). Each of the undersigned parties hereby
acknowledges and agrees that the value of Seven Corners is $32,497,000 (gross
fair market value of $63,284,000, reduced by assumed indebtedness of
$30,787,000).
7. Distribution of Assets to the Operating Partnership. Each of the
---------------------------------------------------
undersigned parties hereby consents to a distribution by the Partnership to the
Operating Partnership of the following real properties, as each is more fully
described in the Third Amendment: Beacon Mall; Lexington Mall; Southdale; French
Market; North Washington; Olney; Sunshine City; and West Park. Each of the
undersigned parties hereby acknowledges and agrees that the aggregate value of
the foregoing real properties is $111,369,000.
8. Distribution of Assets to the General Partner. Each of the
---------------------------------------------
undersigned parties hereby consents to a distribution by the Partnership to the
General Partner of the following assets: (i) a promissory note of Saul Centers,
Inc. (a copy of which was attached as Attachment I to the Third Amendment)
having an outstanding balance of principal and accrued interest of $245,336; and
(ii) cash in the amount of $424,747 (to be funded by the Operating Partnership
on behalf of the Partnership, as set forth in paragraph 6(iv) hereof)
9. Amendment of Exhibit A. In order to reflect the foregoing
----------------------
distributions, Exhibit A to the Agreement is hereby deleted in its entirety and
replaced with the Exhibit A attached to this Fourth Amendment.
10. Pro Rata Distributions of Assets to the Partners. Each of the
------------------------------------------------
undersigned parties hereby consents to the following distributions by the
Partnership to the Partners, to be made on a pro rata basis, in proportion to
their respective Partnership Interests of the Partners as set forth on Exhibit A
attached to this Fourth Amendment (i.e., ninety-nine percent (99%) to the
Operating Partnership and one percent (1%) to the General Partner): (i) a
receivable from the Operating Partnership in the amount of $57,600,000 (which
will be distributed $57,024,000 to the Operating Partnership and $576,000 to the
General Partner); and (ii) a receivable from Saul Centers, Inc. in the amount of
$1,019,871 (which will be distributed $1,009,672 to the Operating Partnership
and $ 10,199 to the General Partner).
24
<PAGE>
11. Defined Terms. Except as the context may otherwise require, any
-------------
terms used in this Fourth Amendment which are defined in the Agreement shall
have the same meaning for purposes of this Fourth Amendment as in the Agreement.
12. Headings. All headings in this Fourth Amendment are for convenience
--------
of reference only and are not intended to qualify the meaning of any of the
provisions hereof
13. Ratification of Agreement. Except as herein amended, the Agreement
-------------------------
is hereby ratified, confirmed and reaffirmed for all purposes and in all
respects.
14. Counterparts. This Fourth Amendment may be executed in counterparts,
------------
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound by this Fourth
Amendment immediately upon affixing its signature hereto.
/signatures are on the following page/
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment to the First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership as of the date first above written.
GENERAL PARTNER:
SAUL QRS, INC., a Maryland corporation
Name: Scott V Schneider
Title: Vice President
LIMITED PARTNER:
SAUL HOLDINGS LIMITED PARTNERSHIP,
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland
corporation, its sole general partner
Name: Scott V. Schneider
Title: Vice President
WITHDRAWING LIMITED PARTNER:
SAUL SUBSIDIARY II LIMITED PARTNERSHIP,
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland
corporation, its sole general partner
Name: Scott V Schneider
Title: Vice President
26
<PAGE>
EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
General Partner:
Amount of
Name and Address Cash/Net Partnership
of Partner Contribution Asset Value Interest
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Saul QRS, Inc. Cash $ 1,019,871 1%
8401 Connecticut Ave.
Chevy Chase, Maryland 20815 Promissory Note $ 193,563
Limited Partner:
Saul Holdings Limited Partnership Cash $ 19,680,129 99%
8401 Connecticut Ave.
Chevy Chase, Maryland 20815 The following properties -
Beacon Mall $103,230,313
Hampshire Langley
Lexington Mall
Southdale
Thruway
White Oak
Belvedere $ 41,162,692
French Market
Giant
Great Eastern
North Washington
Olney
Ravenwood
Southside Plaza
Sunshine City
West Park
$83,000,000 of the $154,780,000 $ 5,337,000
of interest rate protection
given by The First National
Bank of Chicago pursuant to
that certain Rate Cap
No. 93230.1.1000.S.C.3L
dated August 18, 1993
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Amount of
Name and Address Cash/Net Partnership
of Partner Contribution Asset Value Interest
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash $ 15,000,000
Agreement to fund cash distributions $ 981,875
to Saul Subsidiary II Limited
Partnership
Agreement to fund cash distribution $ 424,747
to Saul QRS, Inc.
Conversion of account payable by the $ 624,988
Partnership to Saul Holdings
Limited Partnership into a
capital contribution
Seven Corners $ 32,497,000
</TABLE>
A-2
<PAGE>
ATTACHMENT 1
Saul Holdings Limited Partnership is contributing the following real property to
the Partnership, and in connection therewith the Partnership will assume the
following indebtedness from Saul Holdings Limited Partnership:
Description of Property/Indebtedness Gross Asset Value of Property or
Amount of Indebtedness
Certain land and the improvements $ 63,284,000
located thereon known as Seven Corners,
as more fully described in the attached
legal description, together with all
personal properly located at and used
in connection with the operation of such
real property.
That certain indebtedness of Saul Holdings (30,787,000)
Limited Partnership in the original
principal amount of $100,065,000 owed to
The First National Bank of Chicago and
certain other lenders (collectively, the
"First Chicago Lenders"), evidenced by
those certain documents and instruments
entered into between Saul Holdings
Limited Partnership and the First Chicago
Lenders on or about November 2, 1995,
as such documents may have been amended
from time to time.
Total value of property contributed, net
of assumed indebtedness $ 32,497,000
1 - 1
<PAGE>
- --------------------------------------------------------------------------------
LOAN AGREEMENT
Dated as of October 1, 1997
Between
SAUL SUBSIDIARY I LIMITED PARTNERSHIP,
as Borrower
AND
NOMURA ASSET CAPITAL CORPORATION,
as Lender
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C> <C>
Page
--
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION.............. 1
1.1 Specific Definitions................................. 1
1.2 Index of Other Definitions........................... 8
1.3 Principles of Construction........................... 10
II. GENERAL.............................................. 10
2.1 The Loan............................................. 10
2.2 Interest; Monthly Payments........................... 10
2.2.1 Generally 10
2.2.2 Accrued Interest 11
2.2.3 Property Cash Flow Allocation........................ 11
2.2.4 Default Rate 11
2.3 Loan Repayment and Defeasance........................ 11
2.3.1 Repayment 11
2.3.2 Mandatory Prepayments................................ 12
2.3.3 Voluntary Defeasance of the Note..................... 12
2.4 Release of Property.................................. 14
2.4.1 Release of All of the Properties..................... 14
2.4.2 Release of Individual Properties..................... 14
2.4.3 Release on Payment in Full........................... 15
2.4.4 Release of Portion of Seven Corners Property......... 15
2.5 Payments and Computations............................ 16
2.5.1 Making of Payments................................... 16
2.5.2 Computations 16
2.5.3 Late Payment Charge.................................. 16
III. CASH MANAGEMENT; ESCROWS AND RESERVES................ 16
3.1 Cash Management Arrangements......................... 17
3.2 Required Repairs; Required Repair Funds.............. 17
3.2.1 Required Repairs: Deposits........................... 17
3.2.2 Release of Required Repair Funds..................... 17
3.3 Tax and Insurance Escrow Fund........................ 18
3.3.1 Tax and Insurance Escrow Fund........................ 18
3.3.2 Payment of Insurance Premiums by Borrower............ 18
3.4 Capital Reserve Fund................................. 19
3.4.1 Capital Reserve Fund................................. 19
3.4.2 Payment of Capital Expenses.......................... 19
3.5 Rollover Reserve Fund................................ 19
3.5.1 Rollover Reserve Fund................................ 19
3.5.2 Payment of Leasing Expenses.......................... 20
3.6 Payment of Approved Operating Expenses............... 20
3.7 Security Deposits.................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Page
--
3.8 Grant of Security Interest; Application of Funds..... 21
3.9 Security in Lieu of Deposits......................... 21
IV. REPRESENTATIONS AND WARRANTIES....................... 22
4.1 Borrower Representations............................. 22
4.1.1 Organization; Special Purpose........................ 22
4.1.2 Proceedings; Enforceability.......................... 22
4.1.3 No Conflicts 23
4.1.4 Litigation 23
4.1.5 Agreements 23
4.1.6 Title 23
4.1.7 Survey 23
4.1.8 No Bankruptcy Filing................................. 23
4.1.9 Full and Accurate Disclosure......................... 24
4.1.10 No Plan Assets 24
4.1.11 Compliance 24
4.1.12 Contracts 24
4.1.13 Financial Information................................ 24
4.1.14 Condemnation 25
4.1.15 Federal Reserve Regulations.......................... 25
4.1.16 Utilities and Public Access.......................... 25
4.1.17 Not a Foreign Person................................. 25
4.1.18 Separate Lots 25
4.1.19 Assessments 25
4.1.20 Enforceability 25
4.1.21 Insurance 25
4.1.22 Use of Property; Licenses............................ 25
4.1.23 Flood Zone 26
4.1.24 Physical Condition................................... 26
4.1.25 Encroachments 26
4.1.26 Leases 26
4.1.27 Filing and Recording Taxes........................... 27
4.1.28 Investment Company Act............................... 27
4.1.29 Fraudulent Transfer.................................. 27
4.1.30 Partners 27
4.1.31 Management Agreement................................. 27
4.1.32 Hazardous Substances 28
4.2 Survival of Representations.......................... 28
4.3 Agreement Concerning Subordination, Nondisturbance... 28
V. AFFIRMATIVE COVENANTS................................ 29
5.1 Existence............................................ 29
5.2 Taxes and Other Charges.............................. 29
5.3 Repairs; Maintenance and Compliance.................. 29
5.4 Litigation........................................... 30
5.5 Performance of Other Agreements...................... 31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Page
--
5.7 Cooperate in Legal Proceedings....................... 31
5.8 Further Assurances................................... 31
5.9 Financial Reporting.................................. 31
5.9.1 Bookkeeping 31
5.9.2 Annual Reports 32
5.9.3 Monthly Reports 32
5.9.4 Other Reports 32
5.9.5 Annual Budget 32
5.9.6 Breach 33
5.10 Environmental Matters................................ 33
5.10.1 Hazardous Substances................................. 33
5.10.2 Environmental Monitoring............................. 34
5.10.3 Survival. 34
5.11 Title to the Property................................ 35
5.12 Estoppel Statement................................... 35
5.13 Principal Place of Business.......................... 35
5.14 Management Agreement................................. 35
5.15 Special Purpose Bankruptcy Remote Entity............. 35
5.16 Assumptions in Non-Consolidation Opinion............. 37
VI. NEGATIVE COVENANTS................................... 37
6.1 Management Agreement................................. 37
6.2 Liens 37
6.3 Dissolution.......................................... 38
6.4 Change In Business................................... 38
6.5 Debt Cancellation.................................... 38
6.6 Assets 38
6.7 Transfers............................................ 38
6.8 Debt 38
VII. INSURANCE; CASUALTY; AND CONDEMNATION................ 38
7.1 Insurance............................................ 38
7.1.1 Coverage 38
7.1.2 Policies 39
7.2 Casualty............................................. 40
7.2.1 Notice; Restoration.................................. 40
7.2.2 Settlement of Proceeds............................... 40
7.3 Condemnation......................................... 40
7.3.1 Notice; Restoration.................................. 40
7.3.2 Collection of Award.................................. 41
7.4 Application of Proceeds or Award..................... 41
7.4.1 Application to Restoration........................... 41
7.4.2 Application to Debt.................................. 41
7.4.3 Release of Property upon Casualty or Condemnation.... 42
7.4.4 Procedure for Application to Restoration............. 42
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
Page
--
VIII. DEFAULTS............................................. 43
8.1 Events of Default.................................... 43
8.2 Remedies............................................. 45
8.2.1 Acceleration. 45
8.2.2 Remedies Cumulative.................................. 45
8.2.3 Severance. 46
8.2.4 Delay 46
IX. SPECIAL PROVISIONS................................... 46
9.1 Sale of Note and Securitization...................... 46
9.1.1 Cooperation 46
9.1.2 Use of Information................................... 47
9.1.3 Borrower Obligations Regarding Disclosure Documents.. 47
9.1.4 Indemnities Regarding Filings........................ 48
9.1.5 Indemnification Procedure............................ 49
9.1.6 Contribution. 49
9.1.7 Rating Surveillance.................................. 50
9.2 Exculpation.......................................... 50
9.3 Termination of Manager............................... 51
9.4 Retention of Servicer................................ 51
X. MISCELLANEOUS........................................ 51
10.1 Survival............................................. 51
10.2 Lender's Discretion.................................. 52
10.3 Governing Law........................................ 52
10.4 Modification, Waiver in Writing...................... 52
10.5 Delay Not a Waiver................................... 52
10.6 Notices.............................................. 53
10.7 Trial by Jury........................................ 54
10.8 Headings............................................. 54
10.9 Severability......................................... 54
10.10 Preferences.......................................... 54
10.11 Waiver of Notice..................................... 54
10.12 Intentionally Deleted................................ 55
10.13 Expenses; Indemnity.................................. 55
10.14 Prior Agreements..................................... 56
10.15 Offsets, Counterclaims and Defenses.................. 56
10.16 Publicity............................................ 56
10.17 Controlling Agreement................................ 57
10.18 Conflict; Construction of Documents.................. 57
10.19 Brokers and Financial Advisors....................... 57
10.20 No Third Party Beneficiaries......................... 58
</TABLE>
iv
<PAGE>
Page
--
v
<PAGE>
Page
--
vi
<PAGE>
Page
--
vii
<PAGE>
Page
--
SCHEDULES
Schedule 1 - Allocated Loan Amounts
Schedule 2 - Location of Property
Schedule 3 - Matters Regarding Representations
Schedule 4 - Rent Roll
Schedule 5 - Required Repairs
Schedule 6 - Environmental Recommendations
Schedule 7 - Form of Monthly Operating Statement
Schedule 8 - Form of Leasing Status Report
Schedule 9 - Description of Deeds of Trust
Schedule 10 - Form of Subordination, Non-Disturbance and Attornment
Agreement
Schedule 11 - Legal Description of Released Property (Portion of Seven
Corners)
viii
<PAGE>
LOAN AGREEMENT
LOAN AGREEMENT dated as of October 1, 1997, 1997 between SAUL
SUBSIDIARY I LIMITED PARTNERSHIP, a Maryland limited partnership ("SAUL SUB I")
("BORROWER") and NOMURA ASSET CAPITAL CORPORATION, a Delaware corporation
(together with its successors and assigns, "LENDER").
I0 DEFINITIONS; PRINCIPLES OF CONSTRUCTION
I.1 SPECIFIC DEFINITIONS . The following terms have the meanings
--------------------
set forth below:
"AFFILIATE": as to any Person, any other Person that, directly or
indirectly, is in Control of, is Controlled by or is under common Control with
such Person or is a director or officer of such Person or of an Affiliate of
such Person.
"ALLOCATED LOAN AMOUNT": The principal portion of the Loan
attributable to each Property as set forth on SCHEDULE 1 attached hereto.
----------
"APPROVED CAPITAL EXPENSES": Capital Expenses incurred by Borrower
which (i) are included in the approved Capital Budget for the Current Month or
(ii) have been approved by Lender.
"APPROVED LEASING EXPENSES": expenses incurred in leasing space at
the Property pursuant to Leases entered into in accordance with the Loan
Documents, including brokerage commissions, tenant improvements and other
inducements, which expenses (i) are (A) specifically approved by Lender in
connection with approving the applicable Lease, (B) incurred in the ordinary
course of business and on market terms and conditions in connection with Leases
which do not require Lender's approval under the Loan Documents, or (C)
otherwise approved by Lender, which approval shall not be unreasonably withheld
or delayed, and (ii) are substantiated by executed Lease documents and brokerage
agreements.
"APPROVED OPERATING EXPENSES": Operating Expenses incurred by
Borrower which (i) are included in the approved Operating Budget for the Current
Month, (ii) are for electric, gas, oil, water, sewer or other utility service to
the Property or (iii) have been approved by Lender.
"BORROWER": Shall have the meaning set forth on the first page of
this Agreement, and shall also mean the permitted successors and assigns of the
entity identified on the first page of this Agreement as the Borrower.
"BUSINESS DAY": any day other than a Saturday, Sunday or any other
day on which national banks in New York are not open for business.
"CAPITAL EXPENSES": expenses that are required under GAAP to be
capitalized.
<PAGE>
"CODE": the Internal Revenue Code of 1986, as amended, any successor
statutes thereto, and applicable U.S. Department of Treasury regulations issued
pursuant thereto in temporary or final form.
"CONTROL": with respect to any Person, either (i) ownership directly
or through other entities of more than 50% of all beneficial equity interest in
such Person, or (ii) the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
through the ownership of voting securities, by contract or otherwise.
"CURRENT MONTH": as of any date of determination, the then current
calendar month.
"DEBT": the unpaid Principal, all interest accrued and unpaid
thereon, the Yield Maintenance Premium and all other sums due to Lender in
respect of the Loan, or under any Loan Document.
"DEBT SERVICE": with respect to any particular period, scheduled
Principal and interest payments under the Note in such period.
"DEBT SERVICE COVERAGE RATIO": as of any date, the ratio of (i) the
Net Operating Income for the 12-month period ending with the most recently
completed calendar month to (ii) the Debt Service for such period.
"DEFAULT": the occurrence of any event under any Loan Document which,
with the giving of notice or passage of time, or both, would be an Event of
Default.
"DEFAULT RATE": a rate per annum equal to the lesser of (a) the
maximum rate permitted by applicable law, or (b) four (4%) percent above the
Interest Rate or the Revised Interest Rate, as applicable.
"DEFEASANCE DEPOSIT": an amount equal to the sum of (i) an amount
sufficient to purchase U.S. Obligations which provide payments that will meet
the Scheduled Defeasance Payments, (ii) any reasonable costs and expenses
incurred or to be incurred in the purchase of such U.S. Obligations and (iii)
any revenue, documentary stamp or intangible taxes or any other tax or charge
due in connection with the transfer of the Note, the creation of the Defeased
Note and the Undefeased Note, if applicable, any transfer of the Defeased Note
or otherwise required to accomplish the agreements of Sections 2.3 and 2.4.
"DEPOSIT ACCOUNT": the account established and maintained pursuant to
the Deposit Account Agreement.
"DEPOSIT BANK": LaSalle National Bank, or such other bank as selected
by Lender from time to time.
2
<PAGE>
"ELIGIBLE ACCOUNT": (i) an account maintained with a federal or state
chartered depository institution or trust company whose (x) commercial paper,
short-term debt obligations or other short-term deposits are rated at least A-1
by the applicable Rating Agencies if the deposits in such account are to be held
in such account for 30 days or less or (y) long-term unsecured debt obligations
are rated at least AA- by the applicable Rating Agencies if the deposits in such
account are to be held in such account for more than 30 days; or (ii) a
segregated trust account maintained with the trust department of a federal or
state chartered depository institution or trust company acting in its fiduciary
capacity which institution or trust company is subject to regulations regarding
fiduciary funds on deposit substantially similar to 12 C.F.R. (S) 9.10(b); or
(iii) an account otherwise acceptable to the applicable Rating Agencies, as
confirmed in writing that such account would not, in and of itself, result in a
downgrade, qualification or withdrawal of the then current ratings assigned to
any Security.
"FAIR MARKET VALUE": With respect to a given Property, the fair
market value of such Property as if unencumbered by the Deed of Trust and any
other Loan Documents granting a Lien on such Property in favor of Lender, as
reasonably determined by Lender.
"FISCAL YEAR": each twelve month period commencing on January 1 and
ending on December 31 during each year of the Term.
"GAAP": generally accepted accounting principles in the United States
of America as of the date of the applicable financial report.
"GENERAL PARTNER": Saul QRS, Inc., a Maryland corporation.
"GOVERNMENTAL AUTHORITY": any court, board, agency, commission,
office or authority of any nature whatsoever for any governmental unit (federal,
state, county, district, municipal, city or otherwise) now or hereafter in
existence.
"INDEPENDENT DIRECTOR": an individual reasonably satisfactory to
Lender who shall not have been at the time of such individual's appointment as a
director, and may not have been at any time during the preceding five years (i)
a shareholder of, or an officer or employee of, Borrower or any of its
shareholders, subsidiaries or Affiliates (provided, however, that an individual
--------
holding 500 shares or less of Saul Centers, Inc. may be an Independent Director
if such individual meets the remaining conditions set forth in this definition),
(ii) a customer of, or supplier to, Borrower or any of its shareholders,
subsidiaries or Affiliates, (iii) a Person Controlling any such shareholder,
supplier or customer, or (iv) a member of the immediate family of any such
shareholder, officer, employee, supplier or customer of any other director of
the General Partner.
"INTEREST RATE": a rate of interest equal to 7.67% per annum.
"LEASE": any lease, or, to the extent of the interest therein of
Borrower, any sublease or sub-sublease, letting, license, concession or other
agreement (whether written or oral and whether now or hereafter in effect)
pursuant to which any person is granted a possessory interest in, or right
3
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to use or occupy, any space in a given Property, and every modification,
amendment or other agreement relating thereto and every guaranty or other
agreement entered into in connection therewith.
"LEGAL REQUIREMENTS": statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions of Governmental Authorities
affecting all or part of the Property or the construction, use, alteration or
operation thereof, whether now or hereafter enacted and in force, and all
permits, licenses and authorizations and regulations relating thereto, and all
covenants, agreements, restrictions and encumbrances contained in any
instrument, either of record or known to Borrower, at any time in force
affecting all or part of the Property, including any that may (i) require
repairs, modifications or alterations in or to all or part of the Property, or
(ii) in any way limit the use and enjoyment thereof.
"LIEN": any mortgage, deed of trust, lien, pledge, hypothecation,
assignment, security interest or any other encumbrance, charge or transfer of,
on or affecting all or part of the Property or any interest therein, or in
Borrower, including any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, the filing of any financing statement, and mechanic's, materialmen's
and other similar liens and encumbrances.
"LOAN DOCUMENTS": this Agreement and all other documents, agreements
and instruments evidencing, securing or delivered to Lender in connection with
the Loan, including the following, each of which is dated as of the date hereof:
(i) Note made by Borrower to Lender in the principal amount of the Loan (the
"NOTE"), (ii) the various deeds of trust made by Borrower for the benefit of
Lender, more particularly described on Schedule 9 hereto (collectively, the
----------
"DEEDS OF TRUST"), which cover the Properties, (iii) Assignments of Leases and
Rents from Borrower to Lender (collectively, the "ASSIGNMENTS OF LEASES"), (iv)
Assignments of Agreements from Borrower to Lender (collectively, the
"ASSIGNMENTS OF AGREEMENTS"), (v) Deposit Account Agreement among Borrower,
Lender, Manager and LaSalle National Bank (the "DEPOSIT ACCOUNT AGREEMENT"), and
(vi) that certain agreement by and among the Clearing Bank, Borrower and Lender
relating to the Clearing Account (the "CLEARING ACCOUNT AGREEMENT"); as each of
the foregoing may be (and each of the foregoing defined terms shall refer to
such documents as they may be) amended, restated, replaced, supplemented or
otherwise modified from time to time.
"MANAGEMENT AGREEMENT": the management agreement dated July 31, 1994,
between Borrower and Manager, as modified by an amendment of even date herewith,
pursuant to which Manager is to manage the Properties.
"MANAGEMENT FEE": the fee payable to Manager under the Management
Agreement.
"MANAGER": Saul Holdings Limited Partnership, a Maryland limited
partnership.
"MATURITY DATE": the date on which the final payment of principal of
the Note (or the Defeased Note, if applicable) becomes due and payable as
therein provided, whether at the Stated Maturity Date, by declaration of
acceleration, or otherwise.
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"NACC": Nomura Asset Capital Corporation, a Delaware corporation.
"NET OPERATING INCOME": for any period, all Operating Income during
such period minus all Operating Expenses during such period; determined by audit
or in accordance with other agreed-upon procedures determined by Lender;
provided that Net Operating Income shall not include payments to be received in
respect of U.S. Obligations purchased in connection with a Defeasance.
"OFFICERS' CERTIFICATE": a certificate delivered to Lender by
Borrower which is signed by a senior executive officer of the General Partner.
"OPERATING EXPENSES": for any period, all expenditures by or on
behalf of Borrower as and to the extent required to be expensed or allowed to be
expensed and in fact expensed under GAAP during such period in connection with
the ownership, operation, maintenance, repair or leasing of the Property,
including (i) Management Fees; Insurance Premiums; bank charges; expenses for
accounting, advertising, marketing, architectural services, utilities,
extermination, cleaning, trash removal, window washing, landscaping and
security; and reasonable and necessary legal expenses incurred in connection
with the operation of the Property; (ii) Taxes and Other Charges (excluding
fines, penalties, interest or Taxes or Other Charges payable by reason of
Borrower's failure to pay an imposition timely); (iii) wages, benefits, payroll
taxes, uniforms, insurance costs and all other related expenses for employees of
Borrower or its Affiliate engaged in the repair, operation or maintenance of the
Property; and (iv) the cost of tenant improvements, routine interior and
exterior maintenance, repairs and minor alterations; provided that Operating
Expenses will not include Debt Service, Capital Expenses, non-cash items such as
depreciation and amortization or any extraordinary one-time expenditures not
considered operating expenses under GAAP.
"OPERATING INCOME": for any period, all regular on-going revenues
actually received by Borrower from the operation of the Property during such
period, including (i) Rents and (ii) all other amounts received which in
accordance with GAAP are required to be or are included in Borrower's annual
financial statements as operating income of the Property; provided, that
Operating Income will not include income from non-recurring income sources,
advance Rents or other payments, deposits, escrows, any income otherwise
includable in Operating Income but paid to a Person other than Borrower, or
income from a sale, financing or other capital transaction.
"OPTIONAL PREPAYMENT DATE": October 11, 2012.
"OTHER CHARGES": all ground rents, impositions other than Taxes, and
any other charges now or hereafter levied or assessed or imposed against a
Property or any part thereof, including maintenance charges, vault charges and
license fees for the use of vaults, chutes and similar areas adjoining the
Property.
"PAYMENT DATE": the 11th day of each calendar month or, if in any
month the 11th day is not a Business Day, then the Payment Date for such month
shall be the first Business Day thereafter.
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"PERMITTED ENCUMBRANCES": (a) the Liens created by the Loan Documents, (b) all
Liens and other matters disclosed in the Title Insurance Policy, (c) Liens, if
any, for Taxes or Other Charges not yet payable or delinquent, (d) such
customary easements for utilities as Borrower may from time to time grant or
enter into, in its reasonable discretion, which easements shall not require
Lender's prior approval, provided that the same do not adversely affect the
--------
value or marketability of any Property, and (e) such other title and survey
exceptions as Lender approves in writing in Lender's sole discretion.
"PERMITTED TRANSFERS": (i) a Lease entered into in accordance with
the Loan Documents, (ii) a Special Transfer or (iii) a Transfer of a limited
partnership interest in Borrower, a direct or indirect interest in a limited
partner of Borrower or stock in the General Partner if either (A) such Transfer
would not cause the transferee to increase its direct or indirect interest in
Borrower or its stock in the General Partner to an amount which equals or
exceeds 49%, or (B) Borrower shall have delivered (or caused to be delivered)
(1) to Lender, written confirmation from the applicable Rating Agencies that
such Transfer will not cause a qualification, withdrawal or downgrading of the
ratings in effect immediately prior to such Transfer for the Securities then
outstanding and (2) to Lender and the applicable Rating Agencies, a substantive
non-consolidation opinion with respect to Borrower in form and substance
satisfactory to Lender and the applicable Rating Agencies.
"PERSON": any individual, corporation, partnership, joint venture,
estate, trust, unincorporated association, any federal, state, county or
municipal government or any bureau, department or agency thereof and any
fiduciary acting in such capacity on behalf of any of the foregoing.
"POOLING AND SERVICING AGREEMENT": the Servicing Agreement entered
into with the Servicer in connection with any Securitization.
"PROPERTIES": shall mean, collectively, the parcels of real property
and improvements thereon owned by Borrower and encumbered by a Deed of Trust,
together with all rights pertaining to the property and improvements, as more
particularly described in the Granting Clauses of the Deeds of Trust and
referred to therein as the "Property" or the "Trust Property," as the case may
be. A list of the Properties and their respective locations is set forth in
SCHEDULE 2.
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"RATING AGENCY": each of Standard & Poor's Ratings Group, a division
of McGraw-Hill, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. and Fitch Investors Service, Inc. or any other nationally-recognized
statistical rating agency which has been approved by Lender.
"RELEASE AMOUNT": with respect to (i) a given Property, other than
the Seven Corners Property, for which Borrower is seeking a release of Lien
pursuant to Section 2.4.2 hereof, one hundred ten percent (110%) of the
Allocated Loan Amount for such Property and (ii) the Seven Corners Property, if
Borrower is seeking a release of Lien for the same pursuant to Section 2.4.2
hereof, one hundred twenty percent (120%) of the Allocated Loan Agreement for
such Property;
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provided, however, that notwithstanding clause (i) of this paragraph, at such
- -------- -------
time as no more than four (4) of the Properties remain encumbered by the Liens
of the respective Deeds of Trust, the Release Amounts for each of the Properties
which have not yet been so released shall equal one hundred twenty percent
(120%) of the Allocated Loan Amount for such Property and provided further that,
-------- -------
in the case of any Property for which Borrower is seeking a release of Lien
pursuant to Section 7.4.3 hereof, the Release Amount shall be one hundred
percent (100%) of the Allocated Loan Amount for such Property. In no event shall
the Release Amount for any Property or Properties exceed the outstanding balance
of the Note or the Undefeased Note, as the case may be.
"RELEASE DATE": the earlier of (i) three years after the date hereof
and (b) two years from the "start-up day" (within the meaning of Section
860G(a)(9) of the Code) of the REMIC Trust.
"REMIC": a "real estate mortgage investment conduit" within the
meaning of Section 860D of the Code.
"REMIC TRUST": a REMIC that holds the Note.
"RENTS": all rents, rent equivalents, moneys payable as damages or in
lieu of rent or rent equivalents, royalties (including oil and gas or other
mineral royalties and bonuses), income, receivables, receipts, revenues,
deposits (including security, utility and other deposits), accounts, cash,
issues, profits, charges for services rendered, and other consideration of
whatever form or nature received by or paid to or for the account of or benefit
of Borrower or its agents or employees from any and all sources arising from or
attributable to the Property, including all receivables, customer obligations,
installment payment obligations and other obligations now existing or hereafter
arising or created out of the sale of the Property or any Lease, and proceeds,
if any, from business interruption or other loss of income insurance.
"REVISED INTEREST RATE": the per annum rate of interest that is the
greater of (i) the Interest Rate plus 5% and (ii) the Treasury Rate on the
Optional Prepayment Date plus 5%.
"SECURITY DEPOSIT ACCOUNT": that certain account established and
maintained by Lender at the Deposit Bank for the purpose of holding all security
deposits of lessees under Leases.
"SERVICER": the entity appointed by Lender to service the Loan or its
successor in interest, or if any successor servicer is appointed pursuant to the
Pooling and Servicing Agreement, such successor servicer.
"SEVEN CORNERS PROPERTY": the real property and improvements,
together with all rights pertaining thereto, owned by Borrower and located in
Falls Church, Virginia.
"SPECIAL TRANSFER": the sale by the original Borrower of all of the
Properties to one purchaser of all of the obligations of Borrower under the Loan
Documents; provided Lender shall have received (i) evidence in writing from the
applicable Rating Agencies to the effect that such a sale and assumption will
not result in a qualification, withdrawal or downgrading of the ratings in
effect
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<PAGE>
immediately prior to such sale for the Securities then outstanding. and
(ii) all reasonable out-of-pocket expenses incurred by Lender in connection with
such assumption.
"STATE": the state in which a given Property is located.
"STATED MATURITY DATE": October 11, 2022.
"TAXES": all real estate and personal property taxes, assessments,
water rates or sewer rents, now or hereafter levied or assessed or imposed
against all or part of the Property.
"TERM": the entire term of this Agreement, which shall expire upon
repayment in full of the Debt and full performance of each and every obligation
to be performed by Borrower pursuant to the Loan Documents.
"TITLE INSURANCE POLICIES": collectively, the mortgagee title
insurance policies, in form acceptable to Lender, issued with respect to the
Properties and insuring the liens of the Deeds of Trust.
"TRANSFER": any sale, conveyance, transfer, Lease (including any
amendment, extension, modification, waiver or renewal thereof), assignment,
mortgage, pledge, grant of a security interest or hypothecation, whether by law
or otherwise, of or in (i) all or part of the Property (including any legal or
beneficial direct or indirect interest therein), (ii) any direct or indirect
interest in Borrower, or (iii) any stock in the General Partner.
"TREASURY RATE": as of the Optional Prepayment Date, the linear
interpolation of the bond equivalent yields as reported in Federal Reserve
Statistical Release H.15-Selected Interest Rates under the heading "U.S.
Government Securities/Treasury Constant Maturities" (or such other recognized
source of financial market information as lender shall select) for the week
ending prior to the Optional Prepayment Date of U.S. Treasury constant
maturities with maturity dates (one longer and one shorter) most nearly
approximating the remaining term of the Note as of the Optional Prepayment Date.
"UCC": with respect to any given Property, the Uniform Commercial
Code as in effect in its State.
"U.S. OBLIGATION": direct non-callable obligations of the United
States of America.
"YIELD MAINTENANCE PREMIUM": the amount (if any) which, when added to
the unpaid Principal or the principal amount of the Defeased Note, as
applicable, will be sufficient to purchase U.S. Obligations providing the
required Scheduled Defeasance Payments.
I.2 INDEX OF OTHER DEFINITIONS . The following terms are defined in
--------------------------
the sections or Loan Documents indicated below:
"Accrued Interest" - 2.2.2
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"Annual Budget" - 5.9.5
"Award" - 7.3.2
"Capital Budget" - 5.9.5
"Capital Reserve Fund" - 3.4.1
"Capital Reserve Subaccount" - Deposit Account Agreement
"Casualty" - 7.1.3
"Casualty/Condemnation Prepayment" - 2.3.2
"Casualty/Condemnation Subaccount" - Deposit Account Agreement
"Clearing Account" - 3.1
"Clearing Bank" - 3.1
"Condemnation" - 7.3.1
"Defeasance" - 2.3.3
"Defeasance Date" - 2.3.3
"Defeased Note" - 2.3.3
"Disclosure Document" - 9.1.2
"Environmental Laws" - 4.1.32
"Equipment" - Deeds of Trust
"Event of Default" - 8.1
"Exchange Act" - 9.1.2
"Funds" - 3.8
"Hazardous Substances" - 4.1.32
"Improvements" - Deeds of Trust
"Insurance Premiums" - 7.1.2
"Insured Casualty" - 7.2.2
"Lender's Consultant" - 5.10.1
"Liabilities" - 9.1.3
"Licenses" - 4.1.22
"Loan" - 2.1
"Lockbox Event" - 3.1
"Lockbox Termination" - 3.1
"Monthly Debt Service Payment Amount"- 2.2.1
"Nomura" - 9.1.2
"Nomura Group" - 9.1.2
"Operating Budget" - 5.9.5
"Operating Expense Subaccount" - Deposit Account Agreement
"Permitted Investments" - Deposit Account Agreement
"Policies" - 7.1.2
"Principal" - 2.1
"Provided Information" - 9.1
"Registration Statement" - 9.1.3
"Remedial Work" - 5.10.2
"Required Records" - 5.9.6
"Required Repair Fund" - 3.2.1
"Required Repairs" - 3.2.1
"Restoration" - 7.4.1
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"Rollover Letter of Credit" - 3.9
"Rollover Reserve Fund" - 3.5.1
"Rollover Reserve Subaccount" - Deposit Account Agreement
"Scheduled Defeasance Payments" - 2.3.3
"Securities" - 9.1
"Securities Act" - 9.1.2
"Securitization" - 9.1
"Security Agreement" - 2.3.3
"Special Purpose Bankruptcy Remote Entity" - 5.15
"Subaccounts" - Deposit Account Agreement
"Successor Borrower" - 2.3.3
"Tax and Insurance Escrow Fund" - 3.3.1
"Tax and Insurance Escrow Subaccount" - Deposit Account Agreement
"Undefeased Note" - 2.3.3
"Underwriter Group" - 9.1.2
I.3 PRINCIPLES OF CONSTRUCTION . Unless otherwise specified, (i)
--------------------------
all references to sections and schedules are to those in this Agreement, (ii)
the words "hereof," "herein" and "hereunder" and words of similar import refer
to this Agreement as a whole and not to any particular provision, (iii) all
definitions are equally applicable to the singular and plural forms of the terms
defined, (iv) the word "including" means "including but not limited to," and (v)
accounting terms not specifically defined herein shall be construed in
accordance with GAAP.
II. GENERAL
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II.1 THE LOAN . Lender is making a loan (the "LOAN") to Borrower on
--------
the date hereof, in the aggregate original principal amount (the "PRINCIPAL") of
$147,000,000.00, which shall mature on the Stated Maturity Date. Borrower
acknowledges receipt of the Loan, the proceeds of which are being and shall be
used solely to (i) repay and discharge any existing loans relating to the
Properties, (ii) fund the Tax and Insurance Escrow Fund and the Required Repair
Fund, and (iii) pay approved costs and expenses incurred in connection with the
Loan. No amount repaid in respect of the Loan may be reborrowed.
II.2 INTEREST; MONTHLY PAYMENTS .
--------------------------
II.2.1 GENERALLY . (a) From the date hereof to but not including
---------
the Optional Prepayment Date, Borrower shall pay interest on the unpaid
Principal at the Interest Rate. From and after the Optional Prepayment Date,
interest on the unpaid Principal shall accrue at the Revised Interest Rate and
be payable as provided in Sections 2.2.2 and 2.2.3(b).
(b On the date hereof, Borrower shall pay interest on the unpaid
Principal from the date hereof through October 10, 1997. On November 11, 1997
and each Payment Date thereafter through and including the Maturity Date, the
Principal and interest thereon at the Interest Rate shall be payable in equal
monthly installments of $1,102,623.87 (the "MONTHLY DEBT SERVICE PAYMENT
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AMOUNT"); which is based on the Interest Rate and a 300-month amortization
schedule. The Monthly Debt Service Payment Amount due on any Payment Date shall
first be applied to the payment of interest accrued from the 11th day of the
month preceding the Payment Date through the 10th day of the month in which the
Payment Date occurs, notwithstanding that the Payment Date may not have been the
11th day of such month because the 11th day of such month is not a Business Day.
The remainder of such Monthly Debt Service Payment Amount shall be applied to
the reduction of the unpaid Principal.
II.2.2 ACCRUED INTEREST . From and after the Optional Prepayment
----------------
Date, all interest accruing in respect of the unpaid Principal in excess of the
Interest Rate ("ACCRUED INTEREST") shall, to the extent not paid, be deferred,
be added to the Debt and, to the extent permitted by applicable law, accrue
interest at the Revised Interest Rate, compounded monthly. All Accrued Interest
shall be due and payable on the Maturity Date.
II.2.3 PROPERTY CASH FLOW ALLOCATION (a On each Payment Date
-----------------------------
during every period commencing on the occurrence of a Lockbox Event and ending
on the date of the Lockbox Termination relating to such Lockbox Event, any Rents
deposited into the Deposit Account during the immediately preceding calendar
month shall, subject to Section 3.8 hereof, be applied as follows in the
following order of priority: (i) First, to make required payments to the Tax
and Insurance Escrow Fund for each of the Properties; (ii) Second, to Lender to
pay the Monthly Debt Service Payment Amount (plus, if applicable, interest at
the Default Rate); (iii) Third, to make required payments to the Capital Reserve
Fund for each of the Properties; (iv) Fourth, to make required payments to the
Rollover Reserve Fund for each of the Properties; (v) Fifth, payments for
Approved Operating Expenses for each of the Properties; and (vi) Lastly, payment
to Borrower of any excess amounts.
(b Commencing on the first Payment Date after the Optional
Prepayment Date and continuing on each Payment Date thereafter until the entire
Debt has been paid in full, and at any time during the continuance of an Event
of Default (subject to the right of Lender, to apply Rents to the Debt following
an Event of Default, as provided in Section 10(a)(viii) of the Deeds of Trust),
any Rents deposited into the Deposit Account (or otherwise received by Borrower)
during the immediately preceding calendar month shall be applied by Lender as
follows in the following order of priority: (i) First, to make required
payments to the Tax and Insurance Escrow Fund for each of the Properties; (ii)
Second, to Lender to pay the Monthly Debt Service Payment Amount (plus, if
applicable, interest at the Default Rate); (iii) Third, payments for Approved
Operating Expenses for each of the Properties; (iv) Fourth, to make required
payments to the Capital Reserve Fund for each of the Properties; (v) Fifth, to
make required payments to the Rollover Reserve Fund for each of the Properties;
(vi) Sixth, payments to Lender to prepay the unpaid Principal until paid in
full; (vii Seventh, payments to Lender to be applied against Accrued Interest
and interest accrued thereon; and (viii) Lastly, payment to Borrower of any
excess amounts.
II.2.4 DEFAULT RATE. After the occurrence and during the
------------
continuance of an Event of Default, the entire unpaid Principal shall bear
interest at the Default Rate, and shall be payable upon demand from time to
time, to the extent permitted by applicable law. Payment or acceptance
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of interest at the Default Rate is not a permitted alternative to timely payment
and shall not constitute a waiver of any Default or Event of Default or an
amendment to this Agreement or any other Loan Document and shall not otherwise
prejudice or limit any rights or remedies of Lender.
II.3 LOAN REPAYMENT AND DEFEASANCE.
-----------------------------
II.3.1 REPAYMENT. Borrower shall repay any unpaid Principal in
---------
full on the Maturity Date, together with interest thereon to (but excluding) the
date of repayment. Other than as set forth in Sections 2.3.2, 2.3.3 and 7.4.3
below, Borrower shall have no right to prepay all or any portion of the
Principal before the sixth Payment Date immediately preceding the Optional
Prepayment Date. From and after the sixth Payment Date immediately preceding
the Optional Prepayment Date, the Principal may be prepaid in whole or in part
without penalty or premium.
II.3.2 MANDATORY PREPAYMENTS. The Loan is subject to mandatory
---------------------
prepayment, without premium or penalty (other than in connection with such a
prepayment while an Event of Default exists), in certain instances of Insured
Casualty or Condemnation (each a "CASUALTY/CONDEMNATION PREPAYMENT"), in the
manner and to the extent set forth in Section 7.4.2. Each Casualty/Condemnation
Prepayment shall be made on a Payment Date and include all accrued and unpaid
interest on the Principal prepaid up to but not including such Payment Date or,
if not paid on a Payment Date, include interest that would have accrued on the
Principal prepaid to but not including the next Payment Date.
II.3.3 VOLUNTARY DEFEASANCE OF THE NOTE. (a) Subject to the terms
--------------------------------
and conditions set forth in this Section 2.3.3, Borrower may defease all or any
portion of the Principal (hereinafter, a "DEFEASANCE"); provided, that no such
Defeasance may occur prior to the Release Date. Each Defeasance shall be
subject, in each case, to the satisfaction of the following conditions
precedent:
(i Borrower shall provide not less than thirty (30) days' prior
written notice to Lender specifying a Payment Date (the "DEFEASANCE DATE")
on which the Defeasance is to occur. Such notice shall indicate the amount
of Principal to be defeased (and, if such Defeasance involves the release
of any Property pursuant to Section 2.4.2 hereof, such notice shall also
identify such Property or Properties).
(ii Borrower shall pay to Lender (A) all accrued and unpaid
interest on the unpaid Principal to but not including the Defeasance Date,
(B) all other sums, not including scheduled interest or Principal payments,
then due under the Loan Documents, (C) the required Defeasance Deposit for
such Defeasance, and (D) all reasonable costs and expenses of Lender
incurred in the Defeasance, including any costs and expenses associated
with a release of Lien as provided in Section 2.4 and reasonable attorney's
fees and expenses. If for any reason the Defeasance Date is not a Payment
Date, Borrower shall also pay interest that would have accrued on the Note
to but not including the next Payment Date.
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(iii Except in the case of a Defeasance of the entire
outstanding Principal balance of the Note, no Event of Default shall exist
(unless such Event of Default relates solely to the Property or Properties
to be released in connection with a partial Defeasance).
(iv If only a portion of the unpaid Principal is the subject of
the Defeasance, Borrower shall execute and deliver all necessary documents
to amend and restate the Note and issue two substitute notes: one having a
principal balance equal to the defeased portion of the original Note (the
"DEFEASED NOTE") and the other having a principal balance equal to the
undefeased portion of the original Note (the "UNDEFEASED NOTE"). The
Defeased Note and Undefeased Note shall have terms identical to the terms
of the Note, except for the principal balance. A Defeased Note cannot be
the subject of any further Defeasance.
(v Borrower shall execute and deliver a security agreement, in
form and substance satisfactory to Lender, creating a first priority lien
on the Defeasance Deposit and the U.S. Obligations purchased with the
Defeasance Deposit in accordance with this Section 2.3.3 (the "SECURITY
AGREEMENT").
(vi Borrower shall deliver (A) an opinion of counsel for
Borrower in form satisfactory to Lender in its sole discretion stating,
among other things, that (1) Lender has a perfected first priority security
interest in the Defeasance Deposit and the U.S. Obligations delivered by
Borrower and (2) such U.S. Obligations have been validly assigned to the
REMIC Trust, (B) if required by the applicable Rating Agencies, a non-
consolidation opinion with respect to the Successor Borrower in form and
substance satisfactory to Lender and the applicable Rating Agencies, (C) an
Officer's Certificate certifying that the requirements set forth in this
Section 2.3.3(a) have been satisfied, (D) a certificate from an independent
certified public accountant certifying that the amounts of the U.S.
Obligations comply with all of the requirements of this Agreement, and (E)
such other certificates, documents or instruments as Lender may reasonably
request.
.
(vii Lender shall receive evidence in writing from the
applicable Rating Agencies to the effect that such Defeasance will not
result in a qualification, withdrawal or downgrading of the ratings in
effect immediately prior to such Defeasance for the Securities then
outstanding.
(b In connection with each Defeasance, Borrower hereby appoints
Lender as its agent and attorney-in-fact for the purpose of using the Defeasance
Deposit to purchase U.S. Obligations (which purchases, if made by Lender, shall
be made by Lender on an arms-length basis at then prevailing market rates) which
provide payments on or prior to, but as close as possible to, all successive
Payment Dates after the Defeasance Date through and including the Optional
Prepayment Date, for the entire unpaid Principal in the case of a Defeasance, or
for the principal amount of the Defeased Note, in the case of a Defeasance for
only a portion of the unpaid Principal (including, on the Optional Prepayment
Date, the unpaid Principal of either the Note or the Defeased Note), and in
amounts equal to the scheduled payments due on such dates under the Note or the
Defeased Note, as applicable (the "SCHEDULED DEFEASANCE PAYMENTS"). Borrower,
pursuant to the
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Security Agreement or other appropriate document, shall irrevocably authorize
and direct that the payments received from the U.S. Obligations be made directly
to Lender and applied to satisfy the obligations of Borrower under the Note or
the Defeased Note, as applicable. Any portion of the Defeasance Deposit in
excess of the amount necessary to purchase the U.S. Obligations required by this
Section 2.3.3(b) and satisfy Borrower's obligations under Section 2.3 or 2.4
shall be remitted to Borrower. Any amounts received in respect of the U.S.
Obligations in excess of the amounts necessary to make monthly payments pursuant
to Section 2.2 shall be retained by Lender until payment in full of the Debt.
Semi-annual payments in respect of U.S. Obligations shall be applied to payments
under the Note or the Defeased Note, as applicable, as the same become due
thereunder.
(c If requested by Borrower in connection with any Defeasance under
this Section 2.3.3, NACC shall establish or designate a successor entity (the
"SUCCESSOR BORROWER") and Borrower shall transfer and assign all obligations,
rights and duties under and to the Note or the Defeased Note, as applicable,
together with the pledged U.S. Obligations, to such Successor Borrower. The
obligation of NACC to establish or designate a Successor Borrower shall be
retained by NACC notwithstanding the sale or transfer of this Agreement unless
such obligation is specifically assumed by the transferee. Such Successor
Borrower shall assume the obligations under the Note or the Defeased Note, as
applicable, and the Security Agreement, and Borrower shall be relieved of its
obligations thereunder. Borrower shall pay $1,000 to any such Successor
Borrower as consideration for assuming the obligations under the Note or the
Defeased Note, as applicable, and the Security Agreement. Notwithstanding
anything in this Agreement to the contrary, no other assumption fee shall be
payable upon a transfer of the Note or the Defeased Note in accordance with this
Section 2.3.3, but Borrower shall pay all reasonable out-of-pocket costs and
expenses incurred by Lender, including Lender's reasonable attorneys' fees and
expenses, incurred in connection therewith. For purposes of this Section
2.3.3(c), the term "NACC" shall include NACC and its successors and assigns.
II.4 RELEASE OF PROPERTY. Except as set forth in this Section
-------------------
2.4, no repayment, prepayment or defeasance of all or any portion of the Note
shall cause, give rise to a right to require, or otherwise result in, the
release of the Lien of the Deed of Trust on any Property.
II.4.1 RELEASE OF ALL OF THE PROPERTIES. (a) If Borrower has
--------------------------------
elected to defease the Note in its entirety, and the requirements of Section 2.3
have been satisfied, the Properties shall be released from the Lien of the Deeds
of Trust, and the U.S. Obligations, pledged pursuant to the Security Agreement,
shall be the sole source of collateral securing the Note.
(b In connection with the releases of the Lien, Borrower shall
submit to Lender, not less than ten (10) days prior to the Defeasance Date, a
form of release for execution by Lender appropriate in the States in which the
Properties are located and satisfactory to Lender in its reasonable discretion
and all other documentation Lender requires to be delivered by Borrower,
together with an Officer's Certificate certifying that such documentation (i) is
in compliance with all Legal Requirements, and (ii) will effect such release in
accordance with the terms of this Agreement.
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II.4.2 RELEASE OF INDIVIDUAL PROPERTIES. Borrower on one or more
--------------------------------
occasions may obtain (i) the release of an individual Property from the Lien of
the Deed of Trust thereon (and related Loan Documents) and (ii) the release of
Borrower's obligations under the Loan Documents with respect to such Property
(other than those expressly stated to survive), upon payment of the applicable
Release Amount and satisfaction of each of the following conditions:
(a In connection with a Defeasance of the Note under Section 2.3.3,
the principal balance of the Defeased Note shall equal or exceed the Release
Amount and the requirements of Section 2.3.3, shall have been satisfied.
(b Borrower shall submit to Lender, not less than ten (10) days
prior to the date of such release, a release of Lien (and related Loan
Documents) for such Property (for execution by Lender) in a form appropriate in
each jurisdiction in which the Property is located satisfactory to Lender in its
reasonable discretion and all other documentation Lender requires to be
delivered by Borrower in connection with such release, together with an
Officer's Certificate certifying that such documentation (i) is in compliance
with all Legal Requirements, (ii) will effect such release in accordance with
the terms of this Agreement, and (iii) will not impair or otherwise adversely
affect the Liens, security interests and other rights of Lender under the Loan
Documents not being released (or as to the parties to the Loan Documents and
Properties subject to the Loan Documents not being released).
(c With respect to any release of an individual Property, after
giving effect to such release, the Debt Service Coverage Ratio for all of the
Properties then remaining subject to the Liens of the Deeds of Trust shall be
equal to the greater of (i) the Debt Service Coverage Ratio on the Closing Date
and (ii) the Debt Service Coverage Ratio on the date of the release of such
Property.
II.4.3 RELEASE ON PAYMENT IN FULL. Lender shall, upon the written
--------------------------
request and at the expense of Borrower, upon payment in full of the Debt in
accordance herewith, release the Liens of the Deeds of Trust if not theretofore
released.
II.4.4 RELEASE OF PORTION OF SEVEN CORNERS PROPERTY. (a) Lender
--------------------------------------------
agrees that it will release the portion of the Seven Corners Property described
in Schedule 11 annexed hereto (the "Released Property") from the lien of the
-----------
applicable Deed of Trust for development as a hotel project, with up to 30,000
square feet of compatible retail space, substantially in accordance with the
existing Agreement dated December 11, 1995, between Borrower and the Board of
Supervisors of Fairfax County, Virginia, recorded in Deed Book 9612, Page 1848
in the office of the Fairfax County Clerk (it being understood and agreed that
any such development which deviates materially from the terms and provisions of
such Agreement shall be subject to Lender's prior consent (not to be
unreasonably withheld or delayed)) at Borrower's request and without the
requirement of the payment of the applicable Release Amount (or any portion
thereof), on the following terms and conditions: (i) no Default or Event of
Default shall have occurred and be continuing, (ii) the Released Property and
the portion of the Seven Corners Property remaining encumbered by the Deed of
Trust (the "Remaining Property") shall constitute separate tax lots, (iii) the
Released Property and the Remaining Property
15
<PAGE>
shall, subject to the provisions of Section 2.4.4(b) below, be legally
subdivided, (iv) Borrower shall deliver to Lender an updated survey showing the
Released Property and the Remaining Property, (v) the Released Property shall be
transferred to and developed by an Affiliate of Borrower, (vi) the transferee of
the Released Property and Borrower shall enter into a reciprocal easement
agreement, satisfactory in all respects to Lender, which shall provide for
pedestrian and vehicular access to and from the Remaining Property, easements
for all utility services provided to the Remaining Property over or across the
Released Property, easements benefitting the Remaining Property for parking on
the Released Property and the completion by the transferee of all improvements
on the Released Property required for the continued compliance of the Remaining
Property with all applicable Legal Requirements, (vii) Borrower shall provide
Lender with an endorsement to the Title Insurance Policy relating to the Seven
Corners Property confirming the matters described in clauses (ii) and (iii)
above, insuring that the lien of the Deed of Trust on the Remaining Property is
unaffected by the release of the Released Property therefrom and insuring
Lender's lien on Borrower's interest in the foregoing reciprocal easement
agreement, (viii) Borrower shall furnish Lender with evidence reasonably
satisfactory to Lender that the Improvements located on the Remaining Property
shall continue to be in compliance with applicable Legal Requirements
notwithstanding such subdivision, the failure (if any) of the transferee to
complete the planned improvements thereon, and any violations of Legal
Requirements on or by the Released Property, and (ix) Borrower shall deliver to
Lender such documents or instruments as Lender may reasonably require and shall
pay the reasonable out of pocket costs incurred by Lender in connection with
such release.
(b) Notwithstanding anything to the contrary contained in Section
2.2.4(a) above, if Borrower reasonably determines that it is unable to cause the
Released Property to be legally subdivided from the Remaining Property, then
Borrower shall have the right, upon notice to Lender, prior to development of
the Released Property as provided herein, to enter into a long-term ground lease
of the Released Property on the terms and conditions set forth in this Section
2.2.4(b). Such ground lease shall be a "triple-net" lease with an Affiliate of
Borrower and shall be otherwise in form and substance reasonably satisfactory to
Lender. In connection with any such ground lease and as a condition precedent
to the release of the Released Property, Borrower shall deliver to Lender (i) a
currently dated substantive non-consolidation opinion of Borrower's counsel,
covering (inter alia) Borrower, the General Partner and the ground lessee, and
otherwise in form and substance reasonably satisfactory to Lender and (ii)
written confirmation, reasonably satisfactory to Lender, from the appropriate
rating agency or agencies, that the rating(s) of Securities issued in the
Securitization (if any) will not be downgraded as a result of the proposed
ground lease and release of the Released Property from the lien of the
applicable Deed of Trust. Upon satisfaction of all of the conditions set forth
herein and in Section 2.2.4(a) above (other than subdivision as provided clause
(iii) thereof and the other conditions therein that are applicable only in the
case of a subdivision), Lender shall release the Released Property from the lien
of the applicable Deed of Trust.
II.5 PAYMENTS AND COMPUTATIONS.
-------------------------
II.5.1 MAKING OF PAYMENTS. Each payment by Borrower hereunder or
------------------
under the Note shall be made in funds settled through the New York Clearing
House Interbank Payments System or other funds immediately available to Lender
by 11:00 a.m., New York City time, on the
16
<PAGE>
date such payment is due, to Lender by deposit to such account as Lender may
designate by written notice to Borrower. Whenever any payment hereunder or under
the Note shall be stated to be due on a day that is not a Business Day, such
payment shall be made on the first Business Day thereafter.
II.5.2 COMPUTATIONS. Interest payable hereunder or under the Note
------------
shall be computed on the basis of the actual number of days elapsed and a 360-
day year.
II.5.3 LATE PAYMENT CHARGE. If any Principal, interest or other
-------------------
sum due under any Loan Document is not paid by Borrower on the date on which it
is due, Borrower shall pay to Lender upon demand an amount equal to the lesser
of four (4%) percent of such unpaid sum or the maximum amount permitted by
applicable law, in order to defray the expense incurred by Lender in handling
and processing such delinquent payment and to compensate Lender for the loss of
the use of such delinquent payment. Such amount shall be secured by the Loan
Documents.
III. CASH MANAGEMENT; ESCROWS AND RESERVES
-------------------------------------
III.1 CASH MANAGEMENT ARRANGEMENTS. All Rents shall be transmitted
----------------------------
directly by tenants of each of the Properties into an account of Borrower (the
"CLEARING ACCOUNT") maintained by Borrower at a local bank selected by Borrower
(the "CLEARING BANK"). All Rents received by Borrower or Manager shall be
deposited into the Clearing Account within one (1) Business Day of receipt.
Borrower may, in its sole discretion, withdraw and dispose of any and all
amounts on deposit from time to time in the Clearing Account, until (x) the
Optional Prepayment Date occurs or (y) if earlier, a Lockbox Event occurs, and
Lender has given notice to the Clearing Bank of such event as required by the
provisions of the Clearing Account Agreement. Subject to the provisions of this
Section 3.1, (a) from and after the occurrence of a Lockbox Event, and until the
Lockbox Termination (if any) in respect of such Lockbox Event, and (b) in any
case, from and after the Optional Prepayment Date, all funds on deposit in the
Clearing Account shall be swept by the Clearing Bank on a daily basis into the
Deposit Account and applied and disbursed in accordance with this Agreement and
the Deposit Account Agreement. The Deposit Account and all Subaccounts shall at
all times be Eligible Accounts. A "LOCKBOX EVENT" shall mean (i) either (A) the
failure by Borrower to pay any Monthly Debt Service Payment Amount, or any
payment into any Fund, within five (5) days after the due date thereof, or (B)
an Event of Default other than the failure by Borrower to pay when due any
Monthly Debt Service Payment Amount or payment into any Fund, and (ii) the
giving by Lender to the Clearing Bank of notice of such failure or Event of
Default, in accordance with the terms and provisions of the Clearing Account
Agreement. "LOCKBOX TERMINATION" shall mean the giving by Lender to the
Clearing Bank, in accordance with the terms and provisions of the Clearing
Account Agreement, of a notice and direction to terminate such sweeping of funds
into the Deposit Account. Lender shall be required to give a Lockbox
Termination notice to the Clearing Bank if and only if, for one year after the
occurrence of a Lockbox Event, no Event of Default shall have occurred and, as
of the end of such one-year period, the Debt Service Coverage Ratio shall be at
least equal to the Debt Service Coverage Ratio immediately prior to such Lockbox
Event. Upon a Lockbox Termination, the sweep of funds from the Clearing Account
to the Deposit Account shall cease until the earlier of the occurrence of
another Lockbox Event or the Optional Prepayment Date.
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<PAGE>
III.2 REQUIRED REPAIRS; REQUIRED REPAIR FUNDS.
---------------------------------------
III.2.1 REQUIRED REPAIRS: DEPOSITS. Borrower shall perform and
--------------------------
complete each item of the repairs at the Properties described on SCHEDULE 5 (the
----------
"REQUIRED REPAIRS") on or before the deadline for such item set forth on
SCHEDULE 5. On the date hereof, Borrower shall deposit with Lender the amount
- ----------
set forth on SCHEDULE 5 (the "REQUIRED REPAIR FUND").
----------
III.2.2 RELEASE OF REQUIRED REPAIR FUNDS. Lender shall disburse
--------------------------------
the Required Repair Fund to Borrower within thirty (30) days after the delivery
by Borrower to Lender of a request therefor, accompanied by the following items,
provided that on the date such payment is to be made, no Default or Event of
Default shall have occurred and be continuing: (i) an Officer's Certificate (A)
certifying that all Required Repairs have been completed in a good and
workmanlike manner and in accordance with all applicable Legal Requirements, (B)
identifying each Person that supplied materials or labor in connection with the
Required Repairs and (C) stating that each such Person has been or, upon receipt
of the requested disbursement, will be paid in full, (ii) copies of appropriate
Lien waivers or other evidence of payment satisfactory to Lender, (iii) at
Lender's option, a title search for the Property indicating that it is free from
all Liens not previously approved by Lender (other than Permitted Encumbrances
as to which this Agreement expressly provides that Lender's prior approval is
not required), (iv) a copy of each License required by applicable law in
connection with such Required Repairs in question, and (v) such other evidence
as Lender shall reasonably request that the Required Repairs have been completed
and paid for.
III.3 TAX AND INSURANCE ESCROW FUND.
-----------------------------
III.3.1 TAX AND INSURANCE ESCROW FUND. Subject to Sections 3.3.2
-----------------------------
and 3.9 hereof, Borrower shall pay to Lender on each Payment Date (i) one-
twelfth of the Taxes that Lender estimates will be payable during the next
twelve (12) months in order to accumulate with Lender sufficient funds to pay
all such Taxes at least thirty (30) days prior to their respective due dates,
and (ii) one-twelfth of the Insurance Premiums that Lender estimates will be
payable for the renewal of the coverage afforded by the Policies upon the
expiration thereof in order to accumulate with Lender sufficient funds to pay
all such Insurance Premiums at least thirty (30) days prior to the expiration of
the Policies (the amounts in the foregoing clauses (i) and (ii) being called the
"TAX AND INSURANCE ESCROW FUND"). Lender will apply the Tax and Insurance
Escrow Fund to payments of Taxes and Insurance Premiums required to be made by
Borrower pursuant to Sections 5.2 and 7.1, or to reimburse Borrower for such
amounts upon presentation of evidence of payment and an Officer's Certificate in
form and substance satisfactory to Lender; subject, however, to Borrower's right
to contest Taxes in accordance with Section 5.2 In making any payment relating
to the Tax and Insurance Escrow Fund, Lender may do so according to any bill,
statement or estimate procured from the appropriate public office (with respect
to Taxes) or insurer or agent (with respect to Insurance Premiums), without
inquiry into the accuracy of such bill, statement or estimate or into the
validity of any tax, assessment, sale, forfeiture, tax lien or title or claim
thereof. If the amount of the Tax and Insurance Escrow Fund shall exceed the
amounts due for Taxes and Insurance Premiums pursuant to Sections 5.2 and 7.1.
Lender shall, in its sole discretion, return any excess to Borrower or credit
such excess against future payments to be made to the Tax and Insurance Escrow
Fund. If at any
18
<PAGE>
time Lender determines that the Tax and Insurance Escrow Fund
is not or will not be sufficient to pay the Taxes or Insurance Premiums next
coming due, Lender shall notify Borrower of such determination and Borrower
shall increase its monthly payments to Lender by the amount that Lender
estimates is sufficient to make up the deficiency at least thirty (30) days
prior to delinquency of the Taxes and/or expiration of the Policies, as the case
may be.
III.3.2 PAYMENT OF INSURANCE PREMIUMS BY BORROWER. Notwithstanding
-----------------------------------------
any provisions to the contrary contained in Section 3.3.1 above or elsewhere in
this Agreement, for so long as (i) Borrower shall pay all Insurance Premiums on
a monthly basis when due, (ii) Borrower shall submit to Lender, promptly
thereafter, evidence satisfactory to Lender of each such monthly payment, and
(iii) no Event of Default shall exist, Borrower shall be required to maintain on
deposit with Lender only an amount equal to one-twelfth of the annual Insurance
Premiums that Lender estimates will be payable for the renewal of the coverage
afforded by the Policies upon the expiration thereof, and shall not be required
pay to Lender the additional monthly deposits for Insurance Premiums described
in clause (ii) of Section 3.3.1 above. If any of the conditions described in
clauses (i) through (iii) of this Section 3.3.2 shall cease at any time to be
met, Borrower shall, commencing with the first Payment Date occurring after the
failure of such condition and on each Payment Date thereafter, deposit with
Lender the amounts described in Section 3.3.1 above in respect of Insurance
Premiums (in addition to the amounts required to be deposited in respect of
Taxes), subject to and in accordance with the provisions thereof.
III.4 CAPITAL RESERVE FUND.
--------------------
III.4.1 CAPITAL RESERVE FUND. Borrower shall pay to Lender on each
--------------------
Payment Date (in addition to other payments required hereunder) a monthly
installment of $24,435, as such monthly installment may be proportionately
reduced from time to time by Lender, in connection with the release of one or
more Properties as provided in Sections 2.4.2 and 7.4.3, to the extent
applicable (the "CAPITAL RESERVE FUND"). If the amount of the Capital Reserve
Fund shall exceed the amounts due for Approved Capital Expenses pursuant to the
terms hereof, Lender shall, in its discretion, return any excess to Borrower or,
if future Capital Reserve Fund payments are then required, credit such excess
against such future payments.
III.4.2 PAYMENT OF CAPITAL EXPENSES. From time to time (but not
---------------------------
more often than once per month), Lender shall disburse funds held in the Capital
Reserve Fund to Borrower, within fifteen (15) days after the delivery by
Borrower to Lender of a request therefor, provided (i) no Event of Default
shall have occurred and be continuing; (ii) such disbursement is for a Capital
Expense; and (iii) the request for disbursement is accompanied by (A) an
Officer's Certificate from the appropriate Borrower certifying (v) the amount
of funds to be disbursed, (w) that such funds will be used to pay Capital
Expenses and a description thereof, (x) that all outstanding trade payables
(other than those to be paid from the requested disbursement or those otherwise
permitted to be outstanding under Section 6.8) have been paid in full, (y) that
the same has not been the subject of a previous disbursement, and (z) that all
previous disbursements have been used to pay the previously
19
<PAGE>
identified Capital Expenses, and (B) reasonably detailed documentation as to the
amount, necessity and purpose therefor.
III.5 ROLLOVER RESERVE FUND.
---------------------
III.5.1 ROLLOVER RESERVE FUND. Subject to Section 3.9 hereof,
---------------------
Borrower shall pay to Lender $67,500 on each Payment Date (in addition to other
payments required hereunder). Lender will apply such payments (the "ROLLOVER
RESERVE FUND") to payment of Approved Leasing Expenses pursuant to the terms
hereof. If the amount of the Rollover Reserve Fund shall exceed the amounts due
for Approved Leasing Expenses pursuant to the terms hereof, Lender shall, in its
discretion, return any excess to Borrower, credit such excess against future
payments to the Rollover Reserve Fund or allocate such excess to other
Subaccounts. If Lender determines in its reasonable judgment that the amount of
the Rollover Reserve Fund will be insufficient to pay the amounts due or to
become due for Approved Leasing Expenses, Lender may, in its reasonable
discretion, adjust the monthly amounts required to be deposited into the
Rollover Reserve Fund upon thirty (30) days' notice to Borrower. Alternatively,
Lender may in its reasonable discretion determine that the amount of the
Rollover Reserve Fund will exceed the amounts due or to become due for Approved
Leasing Expenses, in which case Lender shall reduce the monthly amounts to be
deposited therein.
III.5.2 PAYMENT OF LEASING EXPENSES. From time to time (but not
---------------------------
more than once per month) Lender shall disburse funds held in the Rollover
Reserve Fund to Borrower, within fifteen (15) days after the delivery by
Borrower to Lender of a request therefor, provided (i) no Event of Default shall
have occurred and be continuing; (ii) such disbursement is for an Approved
Leasing Expense; and (iii) the request for disbursement is accompanied by (A) an
Officer's Certificate from the appropriate Borrower certifying (v) the amount of
funds to be disbursed, (w) that such funds will be used only to pay (or
reimburse such Borrower for) Approved Leasing Expenses and a description
thereof, (x) that all outstanding trade payables (other than those to be paid
from the requested disbursement or those otherwise permitted to be outstanding
under Section 6.8) have been paid in full, (y) that the same has not been the
subject of a previous disbursement, and (z) that all previous disbursements have
been used only to pay (or reimburse such Borrower for) the previously identified
Approved Leasing Expenses, and (B) reasonably detailed supporting documentation
as to the amount, necessity and purpose therefor.
III.6 PAYMENT OF APPROVED OPERATING EXPENSES. From time to time
--------------------------------------
(1) after the occurrence of a Lockbox Event and prior to a Lockbox Termination
and (2) after the Optional Prepayment Date (but in any event not more than once
per month), Lender shall disburse funds held in the Operating Expense Subaccount
to Borrower, provided (i) no Event of Default shall have occurred and be
continuing; (ii) such disbursement is for an Approved Operating Expense; and
(iii) such disbursement is requested by Borrower in writing, accompanied by (A)
an Officer's Certificate certifying (v) the amount of funds to be disbursed, (w)
that such funds will be used to pay Approved Operating Expenses and a
description thereof, (x) that all outstanding trade payables (other than those
to be paid from the requested disbursement or those otherwise permitted to be
outstanding under Section 6.8) have been paid in full, (y) that the same has not
been the subject of a previous disbursement, and (z) that all previous
disbursements have been or will be used to pay the previously identified
Approved Operating Expenses, and (B) reasonably detailed documentation as to the
20
<PAGE>
amount, necessity and purpose therefor. Subject to satisfaction of the
preceding conditions, if Lender receives from Borrower a valid request for a
disbursement for payment of Approved Operating Expenses for the then Current
Month at least five Business Days prior to the Payment Date occurring in such
Current Month, then the disbursement in respect of such Approved Operating
Expenses shall be made to Borrower on such Payment Date. If Borrower shall fail
to validly request a disbursement for payment of Approved Operating Expenses for
the then Current Month at least five (5) Business Days prior to the Payment Date
in such Current Month, then Lender shall retain in the Operating Expense
Subaccount an amount equal to the anticipated Operating Expenses for the then
Current Month as set forth in the approved Operating Budget for such month, and
Lender shall, subject to satisfaction of the preceding conditions, disburse the
same to Borrower five (5) Business Days after Lender receives a valid request
therefor.
III.7 SECURITY DEPOSITS. During the continuance of any Event of
-----------------
Default, Borrower shall, upon Lender's request, if permitted by applicable Legal
Requirements, turn over to Lender the security deposits (and any interest
theretofore earned thereon) under Leases, to be held by Lender subject to the
terms of the Leases. Any letter of credit or other instrument that Borrower
receives in lieu of a cash security deposit shall (i) be maintained in full
force and effect in the full amount unless replaced by a cash deposit as
hereinabove described, (ii) be issued by an institution reasonably satisfactory
to Lender, (iii) if permitted pursuant to any Legal Requirements, name Lender as
payee or mortgagee thereunder (or at Lender's option, be fully assignable to
Lender) and (iv) in all respects, comply with any applicable Legal Requirements
and otherwise be reasonably satisfactory to Lender. Borrower shall, upon
request, provide Lender with evidence reasonably satisfactory to Lender of
Borrower's compliance with the foregoing.
III.8 GRANT OF SECURITY INTEREST; APPLICATION OF FUNDS. As
------------------------------------------------
security for payment of the Debt and the performance by Borrower of all other
terms, conditions and provisions of the Loan Documents, Borrower hereby pledges
and assigns to Lender, and grants to Lender a security interest in, all of
Borrower's right, title and interest in and to the Required Repair Fund, the Tax
and Insurance Escrow Fund, the Capital Reserve Fund and the Rollover Reserve
Fund (collectively, the "FUNDS"). Borrower shall not, without obtaining the
prior written consent of Lender, further pledge, assign or grant any security
interest in any Fund, or permit any Lien to attach thereto, or any levy to be
made thereon, or any UCC-l Financing Statements, except those naming Lender as
the secured party, to be filed with respect thereto. This Agreement is, among
other things, intended by the parties to be a security agreement for purposes of
the UCC. Upon the occurrence and during the continuance of an Event of Default,
Lender may apply any sums in any Fund to the payment of the Debt and/or to the
payment of Required Repairs, Taxes, Insurance Premiums, Capital Expenses,
Approved Leasing Expenses and/or Operating Expenses, in any order in its sole
discretion. No Fund shall constitute a trust fund and may be commingled with
other monies held by Lender. Sums in each Fund shall be held by Lender in a
Subaccount and invested in Permitted Investments. Earnings or interest, if any,
on each Fund shall become part of such Fund and shall be disbursed as provided
herein for such Fund. Lender shall not be liable for any loss sustained on the
investment of any funds constituting any Fund. Amounts disbursed to Borrower
under Sections 3.2 through 3.7 shall be used by Borrower solely to pay the
expenses for which such disbursement is requested.
21
<PAGE>
III.9 SECURITY IN LIEU OF DEPOSITS. Provided no Default or Event
----------------------------
of Default shall have occurred and be continuing hereunder, Borrower shall have
the right, in lieu of making the payments required pursuant to Section 3.3
and/or Section 3.5 hereof, to deliver to Lender (i) a single letter of credit in
form, substance and amount acceptable to Lender, and issued by a bank acceptable
to Lender or (ii) other security for such obligations as shall be acceptable to
Lender. In the event that Borrower posts a letter of credit in lieu of making
any payments under any or all of the foregoing provisions, such letter of credit
shall be for a term of at least one (1) year and shall itself provide for
automatic, successive renewal terms of at least one (1) year each through the
term of the Loan. Notwithstanding such provision for automatic renewal, in the
event that Borrower or Lender receives notice that the letters of credit will
not be renewed, Borrower shall provide Lender with a replacement letter of
credit in form, substance and amount acceptable to Lender, and issued by a bank
acceptable to Lender, no later than thirty (30) days prior to the expiration
date of the original letter of credit. If Borrower should fail to timely
provide Lender with such replacement letter of credit, Lender shall be entitled
to draw upon the original letter of credit and apply the proceeds thereof to
Borrower's obligations under the foregoing sections by depositing the required
amounts in the Tax and Insurance Escrow Fund and/or the Rollover Reserve Fund,
as appropriate. Such letter of credit or other collateral shall constitute
security for the Loan, and upon the occurrence and continuance of an Event of
Default, Lender may draw upon such letter of credit or other security and apply
the proceeds thereof to the payment of the Debt and/or to the payment of
Required Repairs, Taxes, Insurance Premiums, Approved Leasing Expenses and/or
Operating Expenses, in any such order and priority as Lender shall determine in
its sole discretion. In addition, in the case of a letter of credit (a
"Rollover Letter of Credit") delivered to Lender in lieu of making the payments
required by Section 3.5 of this Agreement, Lender shall have the right,
semiannually on the first day of the fifth month and the eleventh month
(respectively occurring after the month in which the Rollover Letter of Credit
is posted) and on each anniversary of each such date for so long as a Rollover
Letter of Credit is being maintained pursuant to the provisions of this
Section,, to review the amounts anticipated to become due for Approved Leasing
Expenses during the 12-month period immediately following such determination and
the then available amount of the Rollover Letter of Credit. If Lender
determines, in its reasonable discretion, that an amount greater than the
available amount of the existing Rollover Letter of Credit will be required to
pay the amounts to become due for Approved Leasing Expenses during such 12-month
period, then Lender shall notify Borrower, in writing, of the additional amount
required to pay such Approved Leasing Expenses. Thereupon, Borrower shall
furnish to Lender an amendment increasing the amount of the existing Rollover
Letter of Credit to the amount specified by Lender in such notice, or a
substitute Rollover Letter of Credit in such specified amount. If Borrower
shall fail to furnish Lender with such amendment to or substitution for the
existing Rollover Letter of Credit within 30 days after receipt of request by
Lender therefor, then Borrower shall deposit with Lender, in cash, the
difference between the amount of such existing Rollover Letter of Credit and the
amount specified by Lender in such notice as required, in Lender's reasonable
determination, to pay the Approved Leasing Expenses due or to become due during
the ensuing 12-month period. Alternatively, Lender may in its reasonable
discretion determine that the amount of the existing Rollover Letter of Credit
exceeds the amounts necessary to pay the Approved Leasing Expenses due or to
become due during such 12-month period, in which case Lender shall notify
Borrower, in writing, of such determination. Borrower may thereupon reduce the
amount of the existing Rollover Letter of Credit or obtain a substitute Rollover
Letter of Credit in the amount specified by Lender in such notice.
22
<PAGE>
IV. REPRESENTATIONS AND WARRANTIES
------------------------------
IV.1 BORROWER REPRESENTATIONS. Borrower hereby represents and
------------------------
warrants as of the date hereof that, except to the extent (if any) disclosed on
SCHEDULE 3 with reference to a specific subsection of this Section 4.1:
- ----------
IV.1.1 ORGANIZATION; SPECIAL PURPOSE. Borrower has been duly
-----------------------------
organized and is validly existing and in good standing, with requisite power and
authority, and all rights, licenses, permits and authorizations, governmental or
otherwise, necessary to own its properties and to transact the business in which
it is now engaged. Borrower is duly qualified to do business and is in good
standing in each jurisdiction where it is required to be so qualified in
connection with its properties, business and operations. Each of Saul Sub I and
the Saul Sub I General Partner is a Special Purpose Bankruptcy Remote Entity,
and the sole business of Borrower is the ownership, management and operation of
the Properties.
IV.1.2 PROCEEDINGS; ENFORCEABILITY. Borrower has taken all
---------------------------
necessary action to authorize the execution, delivery and performance of the
Loan Documents. The Loan Documents have been duly executed and delivered by
Borrower and constitute legal, valid and binding obligations of Borrower,
enforceable, to the best of Borrower's knowledge, against Borrower in accordance
with their respective terms, subject to applicable bankruptcy, insolvency and
similar laws affecting rights of creditors generally, and general principles of
equity.
IV.1.3 NO CONFLICTS. The execution, delivery and performance of
------------
the Loan Documents by Borrower will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, or result in
the creation or imposition of any Lien (other than pursuant to the Loan
Documents) upon any of the property of Borrower pursuant to the terms of, any
agreement or instrument to which such Borrower is a party or by which its
property is subject, nor will such action result in any violation of the
provisions of any statute or any order, rule or regulation of any Governmental
Authority having jurisdiction over Borrower or any of its properties; and any
consent, approval, authorization, order, registration or qualification of or
with any Governmental Authority required for the execution, delivery and
performance by Borrower of the Loan Documents has been obtained and is in full
force and effect.
IV.1.4 LITIGATION. There are no actions, suits or proceedings at
----------
law or in equity by or before any Governmental Authority now pending or, to
Borrower's knowledge, threatened against or affecting Borrower or any Property,
which, if determined against Borrower or such Property, might materially
adversely affect the condition (financial or otherwise) or business of such
Borrower or the condition or ownership of such Property.
IV.1.5 AGREEMENTS. Borrower is not a party to any agreement or
----------
instrument or subject to any restriction which might adversely affect Borrower
or any Property, or Borrower's business, properties, operations or condition,
financial or otherwise. Borrower is not in default in any material respect in
the performance, observance or fulfillment of any of the obligations, covenants
or
23
<PAGE>
conditions contained in any Permitted Encumbrance or any other agreement or
instrument to which it is a party or by which it or any Property is bound.
IV.1.6 TITLE. Borrower has good and indefeasible title in fee to
-----
the real property comprising part of each Property and good title to the balance
of each such Property, free and clear of all Liens except the Permitted
Encumbrances. The Deeds of Trust when properly recorded in the appropriate
records, together with any UCC financing statements required to be filed in
connection therewith, will create (i) a valid, perfected first priority-lien on
each Property and (ii) perfected security interests in and to, and perfected
collateral assignments of, all personalty included in such Property (including
the Leases affecting such Property), all in accordance with the terms thereof,
in each case subject only to any applicable Permitted Encumbrances. The
Permitted Encumbrances do not materially adversely affect the value or use of
any Property, or Borrower's ability to repay the Loan. There are no claims for
payment for work, labor or materials affecting any Property which are or may
become a Lien prior to, or of equal priority with, the Liens created by the Loan
Documents.
IV.1.7 SURVEY. The surveys for the Properties delivered to Lender
------
do not fail to reflect any material matter affecting the Properties or the title
thereto.
IV.1.8 NO BANKRUPTCY FILING. Borrower is not contemplating either
--------------------
the filing of a petition by it under any state or federal bankruptcy or
insolvency law or the liquidation of all or a major portion of its property, and
Borrower has no knowledge of any Person contemplating the filing of any such
petition against it.
IV.1.9 FULL AND ACCURATE DISCLOSURE. No statement of fact made by
----------------------------
Borrower in any Loan Documents contains any untrue statement of a material fact
or omits to state any material fact necessary to make statements contained
therein not misleading in any material respect. There is no material fact
presently known to Borrower that has not been disclosed to Lender which
adversely affects, or, as far as Borrower can reasonably foresee, might
adversely affect, in any material respect, the Properties or the business,
operations or condition (financial or otherwise) of Borrower.
IV.1.10 NO PLAN ASSETS. Borrower is not an "employee benefit
--------------
plan," as defined in Section 3(3) of ERISA, subject to Title I of ERISA, and
none of the assets of Borrower constitutes or will constitute "plan assets" of
one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101.
IV.1.11 COMPLIANCE. Borrower and each Property and the use thereof
----------
comply in all material respects with all applicable Legal Requirements. To the
best of Borrower's knowledge, Borrower is not in default or violation of any
order, writ, injunction, decree or demand of any Governmental Authority, the
violation of which might materially adversely affect the condition (financial or
otherwise) or business of Borrower. There has not been and shall never be
committed by Borrower or, to the best of Borrower's knowledge, any other Person
in occupancy of or involved with the operation or use of any Property, any act
or omission affording any Governmental Authority the right of forfeiture as
against any Property or any part thereof or any monies paid in performance of
Borrower's obligations under any Loan Document.
24
<PAGE>
IV.1.12 CONTRACTS. There are no service, maintenance or repair
---------
contracts affecting any Property that are not terminable on one (1) month's
notice or less without cause and without penalty or premium. All service,
maintenance or repair contracts affecting the Properties have been entered into
at arms-length in the ordinary course of the applicable Borrower's business and
provide for the payment of fees in amounts and upon terms comparable to existing
market rates.
IV.1.13 FINANCIAL INFORMATION. All financial data, including the
---------------------
statements of cash flow and income and operating expense, that have been
delivered to Lender in respect of the Properties (i) are true, complete and
correct in all material respects, (ii) accurately represent the financial
condition of the Properties as of the date of such reports, and (iii) to the
extent prepared by an independent certified public accounting firm, have been
prepared in accordance with GAAP consistently applied throughout the periods
covered, except as disclosed therein. Borrower has no contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments that are known to such
Borrower and reasonably likely to have a materially adverse effect on any
Property or the operation thereof, except as referred to or reflected in such
financial statements. Since the date of such financial statements, there has
been no materially adverse change in the financial condition, operations or
business of Borrower from that set forth in said financial statements.
IV.1.14 CONDEMNATION. No Condemnation or other proceeding has been
------------
commenced or, to Borrower's best knowledge, is contemplated with respect to all
or part of any Property or for the relocation of roadways providing access to
any Property.
IV.1.15 FEDERAL RESERVE REGULATIONS. No part of the proceeds of
---------------------------
the Loan will be used for the purpose of purchasing or acquiring any "margin
stock" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System or for any other purpose that would be inconsistent with
such Regulation U or any other Regulation of such Board of Governors, or for any
purpose prohibited by Legal Requirements or any Loan Document.
IV.1.16 UTILITIES AND PUBLIC ACCESS. Each Property has rights of
---------------------------
access to public ways and is served by water, sewer, sanitary sewer and storm
drain facilities adequate to service it for its intended uses. All public
utilities necessary or convenient to the full use and enjoyment of each
Property are located in the public right-of-way abutting such Property, and all
such utilities are connected thereto so as to serve such Property. All roads
necessary for the use of each Property for its current purpose have been
completed and dedicated to public use and accepted by all Governmental
Authorities.
IV.1.17 NOT A FOREIGN PERSON. Borrower is not a "foreign person"
--------------------
within the meaning of (S) 1445(f)(3) of the Code.
IV.1.18 SEPARATE LOTS. Each Property is one or more separate tax
-------------
lots and is not a portion of any other tax lot that is not a part of such
Property.
25
<PAGE>
IV.1.19 ASSESSMENTS. There are no pending or proposed special or
-----------
other assessments for public improvements or otherwise affecting any Property,
or any contemplated improvements to any Property that may result in such special
or other assessments.
IV.1.20 ENFORCEABILITY. The Loan Documents are not subject to, and
--------------
Borrower has not asserted, any right of rescission, set-off, counterclaim or
defense, including the defense of usury. To the best of Borrower's knowledge,
no exercise of any of the terms of the Loan Documents, or any right thereunder,
will render any Loan Document unenforceable as a whole or impair the principal
protections available to Lender thereunder.
IV.1.21 INSURANCE. Borrower has obtained and have delivered to
---------
Lender insurance policies reflecting the insurance coverages, amounts and other
requirements set forth in this Agreement.
IV.1.22 USE OF PROPERTY; LICENSES. Each Property is used
-------------------------
exclusively for retail and other appurtenant and related uses. All
certifications, permits, licenses and approvals, including certificates of
completion and occupancy permits and any applicable liquor licenses required for
the legal use, occupancy and operation of each Property (collectively, the
"LICENSES"), have been obtained and are in full force and effect. The use being
made of each Property is in conformity with the certificate of occupancy issued
for such Property. The representations set forth in the preceding two sentences
are to the best of Borrower's knowledge to the extent that such representations
relate to Licenses maintained by tenants of the Property and use of the Property
by tenants.
IV.1.23 FLOOD ZONE. To the best of Borrower's knowledge, none of
----------
the Improvements is located in an area as identified by the Federal Emergency
Management Agency as an area having special flood hazards.
IV.1.24 PHYSICAL CONDITION. Except for the Required Repairs set
------------------
forth on SCHEDULE 5 hereto and the matters disclosed in the engineering reports
----------
concerning the Properties which reports have been obtained by Lender in
connection with the closing of the Loan, each Property, including all
Improvements, parking facilities, systems, Equipment and landscaping pertaining
thereto, is in good condition, order and repair in all material respects; and,
to the best of Borrower's knowledge, there exists no structural or other
material defect or damages to any Property, whether latent or otherwise.
Borrower has received no notice from any insurance company or bonding company of
any defect or inadequacy in any Property, or any part thereof, which would
adversely affect its insurability or cause the imposition of extraordinary
premiums or charges thereon or any termination of any policy of insurance or
bond.
IV.1.25 ENCROACHMENTS. All of the improvements included in
-------------
determining the appraised value of any Property lie wholly within the boundaries
and building restriction lines of such Property, and, except as shown on the
surveys of the Properties delivered by Borrower to Lender in connection with the
closing of the Loan, no improvement on an adjoining property encroaches upon any
Property, and no easement or other encumbrance upon any Property encroaches upon
any of the Improvements, so as to materially adversely affect the value or
marketability of any Property, except those insured against by the Title
Insurance Policy.
26
<PAGE>
IV.1.26 LEASES. Attached hereto as SCHEDULE 4 is a true, correct
------ ----------
and complete rent roll for each Property (the "RENT ROLL"), which includes all
Leases affecting such Property. Except as set forth in SCHEDULE 4, with respect
----------
to the Rent Roll applicable to a given Property: (i) each Lease is in full
force and effect; (ii) the tenants under the Leases have accepted possession of
and are in occupancy of all of their respective demised premises, have commenced
the payment of rent under such Leases, and, to the best of Borrower's knowledge,
there are no offsets, claims or defenses to the enforcement thereof; (iii) all
rents due and payable under the Leases have been paid and no portion thereof has
been paid for any period more than thirty (30) days in advance; (iv) the rent
payable under each Lease is the amount of fixed rent set forth in the Rent Roll,
and Borrower has not received written notice from any tenant of any claim or
basis for a claim by the tenant thereunder for an adjustment to the rent; (v)
Borrower has received no notice of default from any tenant under any of the
Leases which which default remains uncured; to the best of Borrower's knowledge,
there are no defaults on the part of the landlord under any Lease; and no event
has occurred which, with the giving of notice or passage of time, or both, would
constitute such a default; (vi) to Borrower's best knowledge, there is no
present material default by the tenant under any Lease; (vii) Borrower does not
hold any security deposits under the Leases; and (viii) none of the Leases
contains any option to purchase or right of first refusal to purchase any
Property or any part thereof. Neither the Leases nor the Rents have been
assigned or pledged except to Lender, and no other Person has any interest
therein except the tenants thereunder.
IV.1.27 FILING AND RECORDING TAXES. All transfer taxes, deed
--------------------------
stamps, intangible taxes or other amounts in the nature of transfer taxes
required to be paid by any Person under applicable Legal Requirements in
connection with the transfer of any Property to Borrower have been paid. All
mortgage, mortgage recording, stamp, intangible or other similar taxes required
to be paid by any Person under applicable Legal Requirements in connection with
the execution, delivery, recordation, filing, registration, perfection or
enforcement of any of the Loan Documents have been paid.
IV.1.28 INVESTMENT COMPANY ACT. Borrower is not (i) an "investment
----------------------
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended; (ii) a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate" of
either a "holding company" or a "subsidiary company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended; or (iii) subject to any
other federal or state law or regulation which purports to restrict or regulate
its ability to borrow money.
IV.1.29 FRAUDULENT TRANSFER. Borrower has not entered into the
-------------------
Loan or any Loan Document with the actual intent to hinder, delay, or defraud
any creditor, and Borrower has received reasonably equivalent value in exchange
for its obligations under the Loan Documents. Giving effect to the transactions
contemplated by the Loan Documents, the fair saleable value of Borrower's assets
exceeds and will, immediately following the execution and delivery of the Loan
Documents, exceed Borrower's total liabilities, including subordinated,
unliquidated, disputed or contingent liabilities. The fair saleable value of
Borrower's assets is and will, immediately following the execution and delivery
of the Loan Documents, be greater than Borrower's probable liabilities,
including the maximum amount of its contingent liabilities or its debts as such
debts become absolute
27
<PAGE>
and matured. Borrower's assets, now or immediately following the execution and
delivery of the Loan Documents, do not and will not constitute unreasonably
small capital to carry out its business as conducted or as proposed to be
conducted. Borrower does not intend to, and does not believe that it will, incur
debts and liabilities (including contingent liabilities and other commitments)
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts to be payable on or in respect of obligations of Borrower).
IV.1.30 PARTNERS. The sole general partner of Saul Sub I is the
--------
Saul Sub I General Partner. Saul Centers, Inc., a Maryland corporation, is the
owner of all of the issued and outstanding capital stock of the Saul Sub I
General Partner, all of which capital stock has been validly issued and fully
paid and is nonassessable. The only limited partner of Borrower is Saul
Holdings Limited Partnership, a Maryland limited partnership. The stock of the
Saul Sub I General Partner and the limited partnership interests in Borrower are
owned free and clear of all liens, warrants, options and rights to purchase.
Borrower has no obligation to any Person to purchase, repurchase or issue any
ownership interest in it.
IV.1.31 MANAGEMENT AGREEMENT. The Management Agreement is in full
--------------------
force and effect. There is no default, breach or violation existing thereunder,
and no event has occurred (other than payments due but not yet delinquent) that,
with the passage of time or the giving of notice, or both, would constitute a
default, breach or violation thereunder, by either party thereto. Borrower's
rights under the Management Agreement will not be adversely affected by the
execution and delivery of the Loan Documents, Borrower's performance thereunder,
the recordation of the Deeds of Trust, or the exercise of any remedies by
Lender.
IV.1.32 HAZARDOUS SUBSTANCES. To the best of Borrower's knowledge
--------------------
and except as set forth in the environmental reports delivered to Lender in
connection with the closing of the Loan, (i) no Property is in violation of any
Legal Requirement pertaining to or imposing liability or standards of conduct
concerning environmental regulation, contamination or clean-up, including the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Emergency Planning and Community
Right-to-Know Act of 1986, the Hazardous Substances Transportation Act, the
Solid Waste Disposal Act, the Clean Water Act, the Clean Air Act, the Toxic
Substance Control Act, the Safe Drinking Water Act, the Occupational Safety and
Health Act, any state super-lien and environmental clean-up statutes and all
amendments to and regulations in respect of the foregoing laws (collectively,
"ENVIRONMENTAL LAWS"); (ii) no Property is subject to any private or
governmental Lien or judicial or administrative notice or action or inquiry,
investigation or claim relating to hazardous, toxic, dangerous and/or regulated
substances, wastes, materials, raw materials which include hazardous
constituents, pollutants or contaminants, including asbestos, asbestos
containing materials, petroleum, tremolite, anthlophylite, actinolite,
polychlorinated biphenyls and any other substances or materials which are
included under or regulated by Environmental Laws or which are considered by
scientific opinion to be otherwise dangerous in terms of the health, safety and
welfare of humans (collectively, "HAZARDOUS SUBSTANCES"); (iii) no Hazardous
Substances are or have been (including the period prior to the applicable
Borrower's acquisition of any Property), discharged, generated, treated,
disposed of or stored on, incorporated in, or removed or transported from such
Property other than in compliance with all Environmental Laws; (iv) no Hazardous
Substances are present in, on or under
28
<PAGE>
any nearby real property which could migrate to or otherwise affect any
Property; and (v) no underground storage tanks exist on any Property.
IV.2 SURVIVAL OF REPRESENTATIONS. All of the representations and
---------------------------
warranties in Section 4.1 and elsewhere in the Loan Documents by Borrower (i)
shall survive for so long as any portion of the Debt remains owing to Lender and
(ii) shall be deemed to have been relied upon by Lender notwithstanding any
investigation heretofore or hereafter made by Lender or on its behalf.
IV.3 AGREEMENT CONCERNING SUBORDINATION, NONDISTURBANCE. Lender hereby
--------------------------------------------------
agrees that if the tenant under any Lease requiring approval by Lender pursuant
to the provisions of the Deed of Trust requests, as a condition to subordinating
to the Debt and the lien of the applicable Deed of Trust such tenant's interests
in the applicable Property under such Lease, that Lender enter into a
subordination, nondisturbance and attornment agreement, Lender shall, in
connection with such approved Lease, execute and deliver to such tenant a
subordination, nondisturbance and attornment agreement substantially in the form
of SCHEDULE 10 attached hereto, with such changes thereto as may be reasonably
acceptable to Lender.
V. AFFIRMATIVE COVENANTS
---------------------
Until the end of the Term or the Defeasance of the entire unpaid
Principal, Borrower hereby covenants and agrees with Lender that:
V.1 EXISTENCE. Borrower shall (i) do or cause to be done all
---------
things necessary to preserve, renew and keep in full force and effect its
existence, rights, and franchises, (ii) continue to engage in the business
presently conducted by it, (iii) obtain and maintain all Licenses, and (iv)
qualify to do business and remain in good standing under the laws of each
jurisdiction, in each case as and to the extent required for the ownership,
maintenance, management and operation of the Properties.
V.2 TAXES AND OTHER CHARGES. Borrower shall pay all Taxes and
-----------------------
Other Charges as the same become due and payable (except to the extent that
Taxes are payable by Lender pursuant to Section 3.3.1 hereof, subject, however,
to Lender's right to apply sums in any Fund to the payment of the Debt after an
Event of Default, as provided in Section 3.8). Borrower shall deliver to Lender
receipts for payment, to the extent available, or other evidence reasonably
satisfactory to Lender that the Taxes and Other Charges have been so paid no
later than ten (10) days before they would be delinquent if not paid (provided,
however, that Borrower need not furnish such receipts for payment of Taxes paid
by Lender pursuant to Section 3.3.1). Borrower shall not suffer and shall
promptly cause to be paid and discharged any Lien (other than a Permitted
Encumbrance) against any Property, and shall promptly pay for all utility
services provided to any Property. After prior notice to Lender, Borrower, at
its own expense, may contest by appropriate legal proceeding, promptly initiated
and conducted in good faith and with due diligence, the amount or validity or
application of any Taxes or Other Charges, provided that (i) no Default or Event
of Default has occurred and remains uncured, (ii) such proceeding shall suspend
the collection of the Taxes or Other Charges, (iii) such proceeding shall be
permitted under and be conducted in accordance with the provisions of any other
instrument to which Borrower is subject and shall not constitute a default
thereunder, (iv) no part of or interest in any Property will be in danger of
being sold, forfeited, terminated, canceled or lost, (v) Borrower
29
<PAGE>
shall have furnished such security as may be required in the proceeding, or as
may be requested by Lender, to insure the payment of any such Taxes or Other
Charges, together with all interest and penalties thereon, and (vi) Borrower
shall promptly upon final determination thereof pay the amount of such Taxes or
Other Charges, together with all costs, interest and penalties. Lender will pay
over any such cash deposit or part thereof held by Lender to the claimant
entitled thereto or to Borrower, at any time when, in the judgment of Lender,
the entitlement of Borrower or such claimant is established and provided, in the
--------
case of Borrower, that no Event of Default exists. Notwithstanding the
foregoing, Borrower may freely contest the amount, validity or application of
Taxes or Other Charges as permitted by applicable law, if Borrower has paid the
contested Taxes or Other Charges in full.
V.3 REPAIRS; MAINTENANCE AND COMPLIANCE. (a) Borrower shall cause
-----------------------------------
the Properties to be maintained in a good and safe condition and repair and
shall not remove, demolish or materially alter the Improvements or Equipment
(except for normal replacement of the Equipment). Notwithstanding the
foregoing, it shall not be a Default for Borrower to perform (i) tenant
improvements required by the terms of the Leases to be performed by Borrower (or
for tenants to perform tenant improvements permitted by the terms of the Leases
to be performed by the tenants thereunder), (ii) capital expenditures made in
the ordinary course of Borrower's business, including without limitation facade
renovations, (iii) pad development under Leases approved by Lender, (iv)
Restoration in accordance with the terms, conditions and provisions of Sections
7.2, 7.3 and 7.4 of this Agreement, and (v) nonstructural alterations (except as
expressly provided in the foregoing clause (iii)) not affecting building
systems, changing the amount of gross leasable area of any Property or any of
the common areas constituting a part thereof, or changing the use of the
Property from retail and other ancillary and related uses. Borrower shall
promptly comply with all Legal Requirements, subject to Borrower's right to
contest Legal Requirements as provided below in this Section. In connection
with any and all repairs, improvements or alterations carried out at the
Properties (or any of them) the cost of which for any one project exceeds the
sum of $300,000, Borrower shall deliver to Lender an Officer's Certificate (A)
certifying that all such work has been completed in a good and workmanlike
manner and in accordance with all applicable Legal Requirements, (B) identifying
each Person that supplied materials or labor in connection with such work and
(C) stating that each such Person has been or will be paid in full and, at
Lender's option and promptly upon request by Lender, any or all of the
following: (i) copies of appropriate Lien waivers or other evidence of payment
satisfactory to Lender, (ii) a title search for the Property in question,
indicating that it is free of all Liens not previously approved by Lender (other
than Permitted Encumbrances as to which this Agreement expressly provides that
Lender's prior approval is not required), (iii) copies of all Licenses required
by applicable law in connection with such work and (v) such other evidence as
Lender shall reasonably request that the work has been completed and paid for.
Notwithstanding any provision to the contrary contained in this Section, any
work constituting Required Repairs shall be subject to the provisions of Section
3.2, and any work constituting Restoration shall be subject to the provisions of
Section 7.4.4.
(b) Borrower shall promptly repair, replace or rebuild any part of any
Property that becomes damaged, worn or dilapidated and shall complete and pay
for any Improvements at any time in the process of construction or repair.
After prior notice to Lender, Borrower, at its own expense, may contest by
appropriate legal proceeding, promptly initiated and conducted in good faith and
with due diligence, the validity or application of any Legal Requirements,
provided that (i) no
30
<PAGE>
Default or Event of Default has occurred and remains uncured, (ii) such
proceeding shall suspend the enforcement of such Legal Requirements, (iii) such
proceeding shall be permitted under and be conducted in accordance with the
provisions of any other instrument to which Borrower is subject and shall not
constitute a default thereunder, (iv) no part of or interest in any Property
will be in danger of being sold, forfeited, terminated, canceled or lost, (v)
Borrower shall have furnished such security as may be required in the
proceeding, or as may be requested by Lender, to insure the payment or
performance (as the case may be) of any such Legal Requirements (including all
interest and penalties), and (vi) Borrower shall promptly upon final
determination thereof pay in full or perform such Legal Requirements (as the
case may be), together with all costs, interest and penalties; and Lender may
pay over any such cash deposit or part thereof held by Lender to the claimant
entitled thereto at any time when, in the judgment of Lender, the entitlement of
such claimant is established.
V.4 LITIGATION. Borrower shall give prompt written notice to
----------
Lender of any litigation or governmental proceedings pending or threatened
against Borrower which might materially adversely affect such Borrower's
condition (financial or otherwise) or business or any Property.
V.5 PERFORMANCE OF OTHER AGREEMENTS. Borrower shall observe and
-------------------------------
perform each and every term to be observed or performed by it pursuant to the
terms of any agreement or recorded instrument affecting or pertaining to any
Property.
V.6 NOTICE OF DEFAULT. Borrower shall promptly advise Lender of any
-----------------
material adverse change in its condition, financial or otherwise, or of the
occurrence of any Default or Event of Default of which it has knowledge.
V.7 COOPERATE IN LEGAL PROCEEDINGS. Borrower shall cooperate fully
------------------------------
with Lender with respect to, and permit Lender, at its option, to participate
in, any proceedings before any Governmental Authority which may in any way
affect the rights of Lender under any Loan Document. All costs and expenses of
Lender's optional participation in any such proceedings shall be borne by Lender
(except for costs and expenses relating to proceedings in connection with
enforcing or preserving any rights, in response to third party claims or the
prosecuting or defending of any action or proceeding or other litigation, in
each case against, under or affecting the Loan Documents or any other security
given for the Loan and enforcing any obligations of or collecting any payments
due from Borrower under any Loan Document or with respect to the Properties or
in connection with any refinancing or restructuring of the Loan in the nature of
a "work-out", or any insolvency or bankruptcy proceedings, provided that such
--------
costs and expenses have not arisen by reason of the gross negligence, illegal
acts, fraud or willful misconduct of Lender).
V.8 FURTHER ASSURANCES. Borrower shall, at Borrower's sole cost
------------------
and expense, (i) furnish to Lender all instruments, documents, boundary surveys,
footing or foundation surveys, certificates, plans and specifications,
appraisals, title and other insurance reports and agreements, reasonably
requested by Lender; (ii) execute and deliver to Lender such documents,
instruments, certificates, assignments and other writings, and do such other
acts necessary or desirable, to evidence, preserve and/or protect the collateral
at any time securing or intended to secure the Debt, as Lender may reasonably
require; and (iii) do and execute all and such further lawful and reasonable
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acts, conveyances and assurances for the better and more effective carrying out
of the intents and purposes of the Loan Documents, as Lender shall reasonably
require from time to time.
V.9 FINANCIAL REPORTING.
-------------------
V.9.1 BOOKKEEPING. Borrower shall keep on a Fiscal Year basis, in
-----------
accordance with GAAP, proper and accurate books, records and accounts reflecting
all of the financial affairs of Borrower and all items of income and expense and
any services, equipment or furnishings provided in connection with the operation
of each of the Properties, whether such income or expense is realized by
Borrower or by any other Person, except lessees under Leases who are not
Affiliates of Borrower. Lender shall have the right from time to time during
normal business hours upon reasonable notice to examine such books, records and
accounts at the office of Borrower or other Person maintaining them, and to make
such copies or extracts thereof as Lender shall desire. After an Event of
Default, Borrower shall pay any reasonable costs incurred by Lender to examine
its accounting records, as Lender shall determine to be necessary or appropriate
in the protection of Lender's interest.
V.9.2 ANNUAL REPORTS. Borrower shall furnish to Lender annually,
--------------
(i) within forty-five (45) days after each Fiscal Year, an unaudited operating
statement with respect to each of the Properties; (ii) within 100 days after
each Fiscal Year, a complete copy of the annual consolidated financial
statements of Saul Centers, Inc., audited by a "big five" accounting firm or
another independent certified public accountant reasonably acceptable to Lender,
in accordance with GAAP; and (iii) within 100 days after each Fiscal Year, a
consolidating schedule of operating statements distinguishing the respective
operating statements of each of the Properties and the operating statements of
all other properties of Saul Centers, Inc., certified by such "big five"
accounting firm or independent certified public accountant. Each of the
operating statements with respect to the Properties as described in clause (i)
above (x) shall set forth the income and expenses for the subject Property for
the immediately preceding calendar year, including a statement of annual Net
Operating Income, and (y) shall be accompanied by an Officer's Certificate from
Borrower certifying (1) that such statement presents fairly the financial
condition of such Property and has been prepared in accordance with GAAP and (2)
whether there exists a Default or Event of Default, and if so, the nature
thereof, the period of time it has existed and the action then being taken to
remedy it.
V.9.3 MONTHLY REPORTS. Borrower shall furnish to Lender within
---------------
thirty (30) days after the end of each calendar month the following items,
accompanied by an Officer's Certificate certifying that such items are true,
correct, accurate, and complete and fairly present the financial condition and
results of the operations of Borrower and the Properties in accordance with GAAP
(subject to normal year-end adjustments) as applicable: (i) monthly and year-to-
date operating statements, noting Net Operating Income and other information
necessary and sufficient under GAAP to fairly represent the financial position
and results of operation of each of the Properties during such calendar month,
each in substantially the form attached hereto as SCHEDULE 7; (ii) with respect
----------
to the first month in each calendar quarter, a statement of the actual Capital
Expenses made by each Borrower during the prior calendar quarter as of the last
day of such prior calendar quarter; (iii) a calculation reflecting the annual
Debt Service Coverage Ratio as of the last day of such calendar month; (iv) a
statement by Borrower that it has not incurred any indebtedness other than
Permitted Indebtedness; and (v) occupancy rates, rent rolls and leasing status
reports substantially in the form
32
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attached hereto as SCHEDULE 8 (identifying the leased premises, names of all
----------
tenants, units leased, monthly rental and all other charges payable under each
Lease, Lease commencement dates and Lease expiration dates, and listing
delinquencies of over thirty (30) days for each Property).
V.9.4 OTHER REPORTS. Borrower shall furnish to Lender, within ten
-------------
(10) Business Days after request, such further detailed information with respect
to the operation of the Properties and the financial affairs of Borrower as may
be reasonably requested by Lender or any applicable Rating Agency.
V.9.5 ANNUAL BUDGET. During each period commencing on a Lockbox
-------------
Event and ending on the date of the Lockbox Termination (if any) with respect to
such Lockbox Event and in any case after the Optional Prepayment Date, Borrower
shall prepare and submit (or shall cause Manager to prepare and submit) to
Lender by November 15 of each year during the Term, for approval by Lender,
which approval shall not be unreasonably withheld or delayed, a proposed pro
forma budget for each of the Properties for the succeeding Fiscal Year (the
"ANNUAL BUDGET"), and, promptly after preparation thereof, any revisions to such
Annual Budget. Lender's failure to approve or disapprove any Annual Budget
within thirty (30) days after Lender's receipt thereof shall be deemed to
constitute Lender's approval thereof. Each Annual Budget shall consist of (i)
an operating expense budget (the "OPERATING BUDGET") showing, on a month-by-
month basis, in reasonable detail, each line item of the Borrower's anticipated
Operating Income and Operating Expenses (on a cash and accrual basis), including
amounts required to establish, maintain and/or increase reserves, and (ii) a
Capital Expense budget (the "CAPITAL BUDGET") showing, on a month-by-month
basis, in reasonable detail, each line item of anticipated Capital Expenses.
The approved Annual Budgets for the period commencing on the date hereof and
ending on December 31, 1997 has been submitted to and approved by Lender.
V.9.6 BREACH. If Borrower fails to provide to Lender or its
------
designee any of the financial statements, certificates, reports or information
(the "REQUIRED RECORDS") required by this Section 5.9 within thirty (30) days
after the date upon which such Required Record is due, Borrower shall pay to
Lender, at Lender's option and in its sole discretion, an amount equal to $5,000
for each Required Record that is not delivered; provided Lender has given
--------
Borrower at least fifteen (15) days prior written notice of such failure, and
provided further that Lender shall not require any such payment after a
- -------- -------
Securitization as contemplated by Section 9.1 of this Agreement.
V.10 ENVIRONMENTAL MATTERS.
---------------------
V.10.1 HAZARDOUS SUBSTANCES. So long as Borrower owns or is in
--------------------
possession of the Properties, Borrower (i) shall keep the Properties free from
Hazardous Substances unrelated to the operation of the Property in question by
Borrower or any tenant thereof and in compliance with all Environmental Laws and
provided that Borrower shall not generate, store, handle, process, dispose of or
- --------
otherwise use Hazardous Substances (or knowingly permit tenants under any Leases
to do any of the foregoing) at, in, on, under or about any of the Properties in
a manner that could reasonably foreseeably lead to the imposition on Borrower,
Lender, or any Property of any liability or lien of any nature whatsoever under
any Environmental Laws, (ii) shall promptly notify Lender if (A) Borrower shall
become aware that any Hazardous Substance is on or near the Properties in
violation of any
33
<PAGE>
Environmental Laws, (B) Borrower shall become aware that any Property is in
violation of any Environmental Laws or (C) Borrower or Manager shall have
received notice from any Governmental Authority regarding any condition on or
near any Property which condition could pose a threat to the health, safety or
welfare of humans, (iii) shall remove such Hazardous Substances and/or cure such
violations and/or remove such threats, as applicable, as required by law (or as
shall be required by Lender in the case of removal which is not required by law
but is recommended by a licensed hydrogeologist, licensed environmental engineer
or other qualified consultant engaged by Lender and which, if not cured or
removed could have a material adverse effect on the value or operation of any
Property), promptly after Borrower becomes aware of same, at Borrower's sole
expense and (iv) shall comply with all of the environmental consultants'
recommendations described on SCHEDULE 6 attached hereto. Nothing herein shall
----------
prevent Borrower from recovering expenses from any other party that may be
liable for such removal or cure.
V.10.2 ENVIRONMENTAL MONITORING. Borrower shall give prompt
------------------------
written notices to Lender of (i) any proceeding or inquiry by any party with
respect to the presence of any Hazardous Substance on, under, from or about any
Property, (ii) all claims made or threatened by any third party against
Borrower or any Property relating to any loss or injury resulting from any
Hazardous Substance, and (iii) Borrower's discovery of any occurrence or
condition on any real property adjoining or in the vicinity of any Property that
could cause such Property to be subject to any investigation or cleanup pursuant
to any Environmental Law. Borrower shall permit Lender to join and participate
in, as a party if it so elects, any legal proceedings or actions initiated with
respect to the Properties in connection with any Environmental Law or Hazardous
Substance, and Borrower shall be responsible to pay all reasonable attorneys'
fees and disbursements incurred by Lender in connection therewith. Upon
Lender's request, at any time and from time to time, Borrower shall provide an
inspection or audit of the Properties prepared by a licensed hydrogeologist,
licensed environmental engineer or qualified environmental consulting firm
approved by Lender indicating the presence or absence of Hazardous Substances
on, in or near any Property. The cost and expense of such audit or inspection
shall be paid by Borrower not more frequently than once every five (5) calendar
years after the occurrence of a Securization, unless Lender, in its good faith
judgment, determines that reasonable cause exists for the performance of an
environmental inspection or audit of any Property, in which case such
inspections or audits shall be at Borrower's sole expense. If Borrower fails
to provide any such inspection or audit within thirty (30) days after such
request (provided that such 30-day period shall, upon Borrower's request, be
--------
extended for such additional period as may be reasonably necessary to complete
such inspection or audit, but in no event more than an additional 30 days),
Lender may order same, and Borrower hereby grants to Lender and its employees
and agents access to such Property and a license to undertake such inspection or
audit (subject to the rights of tenants of the Property). The cost of such
inspection or audit may be added to the Debt and shall bear interest thereafter
at the Default Rate until paid. If any environmental site assessment report
prepared in connection with such inspection or audit recommends that an
operations and maintenance plan be implemented for any Hazardous Substance,
Borrower shall cause such operations and maintenance plan to be prepared and
implemented at its expense upon request of Lender. In the event that any
investigation, site monitoring, containment, cleanup, removal, restoration or
other work of any kind is reasonably necessary or desirable under an applicable
Environmental Law ("REMEDIAL WORK"), Borrower shall commence and thereafter
diligently prosecute to completion all such Remedial Work within thirty (30)
days after written demand by
34
<PAGE>
Lender for performance thereof (or such shorter period of time as may be
required under applicable law). All Remedial Work shall be performed by
contractors approved in advance by Lender, and under the supervision of a
consulting engineer approved by Lender. All costs of such Remedial Work shall be
paid by Borrower, including Lender's reasonable attorneys' fees and
disbursements incurred in connection with the monitoring or review of such
Remedial Work. Borrower shall not install or permit to be installed on any
Property any underground storage tank, unless such tank installation is required
by a tenant under the provisions of a Lease approved by Lender or permitted
under the provisions of such Lease to be performed by the tenant thereunder, and
provided that such tank shall be installed and maintained in compliance with
- --------
applicable Environmental Laws.
V.10.3 SURVIVAL. The obligations and liabilities of Borrower under
--------
this Section 5.10 shall survive the Term and the exercise by Lender of any of
its rights or remedies under the Loan Documents, including the acquisition of
Properties by foreclosure or a conveyance in lieu of foreclosure.
V.11 TITLE TO THE PROPERTY. Borrower will warrant and defend the
---------------------
title to each Property, and the validity and priority of the Lien of the
applicable Deed of Trust, subject only to Permitted Encumbrances, against the
claims of all Persons.
V.12 ESTOPPEL STATEMENT. After request by Lender, Borrower shall
------------------
within ten (10) days furnish Lender with a statement, duly acknowledged and
certified, setting forth (i) the unpaid Principal, (ii) the Interest Rate, (iii)
the date installments of interest and/or Principal were last paid, (iv) any
offsets or defenses to the payment of the Debt, and (v) that the Loan Documents
are valid, legal and binding obligations and have not been modified or if
modified, giving particulars of such modification. Within ten (10) days after
request by Lender (but no more frequently than twice in any year), Borrower
shall furnish to Lender a certificate reaffirming all representations and
warranties of Borrower set forth in the Loan Documents as of the date requested
by Lender or, to the extent of any changes to any such representations and
warranties, so stating such changes; and Borrower shall use diligent, good faith
efforts to furnish to Lender, within thirty (30) days after request by Lender
(but no more frequently than once a year), tenant estoppel certificates from
each tenant at the Properties, which certificates shall be in form and substance
reasonably satisfactory to Lender.
V.13 PRINCIPAL PLACE OF BUSINESS. Borrower shall not change its
---------------------------
principal place of business without first giving Lender thirty (30) days' prior
notice.
V.14 MANAGEMENT AGREEMENT. Borrower shall (i) cause the Properties
--------------------
to be operated pursuant to the Management Agreement; (ii) promptly perform and
observe all of the covenants required to be performed and observed by it under
the Management Agreement and do all things necessary to preserve and to keep
unimpaired its material rights thereunder; (iii) promptly notify Lender of any
default under the Management Agreement of which it is aware; (iv) if and only if
Manager is not an Affiliate of Borrower, promptly deliver to Lender a copy of
each financial statement, business plan, capital expenditure plan, and property
improvement plan and any other material notice, report and estimate received by
Borrower under the Management Agreement; and
35
<PAGE>
(v) promptly enforce the
performance and observance of all of the covenants and agreements required to be
performed and observed by Manager under the Management Agreement.
V.15 SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY. Borrower shall
----------------------------------------
continue to be a Special Purpose Bankruptcy Remote Entity. A "SPECIAL PURPOSE
BANKRUPTCY REMOTE ENTITY" means a corporation, limited partnership or limited
liability company which (i) is organized solely for the purpose of (A) owning
its Property or Properties or (B) acting as a general partner of the limited
partnership that owns its Property or Properties or member of the limited
liability company that owns its Property or Properties, (ii) will not engage in
any business unrelated to (A) the ownership of its Property or Properties, (B)
acting as general partner of the limited partnership that owns its Property or
Properties or (C) acting as a member of the limited liability company that owns
its Property or Properties, as applicable, (iii) will not have any assets other
than those related to its Property or Properties or its partnership or member
interest in the limited partnership or limited liability company that owns its
Property or Properties, as applicable, (iv) will not engage in, seek or consent
to any dissolution, winding up, liquidation, consolidation, merger, asset sale,
transfer of partnership or membership interests other than Permitted Transfers
(if such entity is a general partner in a limited partnership or a member in a
limited liability company), or amendment of its limited partnership agreement,
articles of incorporation, articles of organization, certificate of formation or
operating agreement (as applicable), unless such amendment does not otherwise
contravene any term, provision or condition of any of the Loan Documents and
would not result in Borrower's or the General Partner's failure to be a Special
Purpose Bankruptcy Remote Entity, and provided that Borrower shall promptly
--------
furnish Lender with copies of any and all such amendments (regardless of whether
Lender's consent to the same is required hereunder), (v) if such entity is a
limited partnership, has, as its only general partners, Special Purpose
Bankruptcy Remote Entities that are corporations, (vi) if such entity is a
corporation, has at least one (1) Independent Director, and has not caused or
allowed and will not cause or allow the board of directors of such entity to
take any action requiring the unanimous affirmative vote of one hundred percent
(100%) of the members of its board of directors unless an Independent Director
shall have participated in such vote, (vii) if such entity is a limited
liability company, has at least one member that is a Special Purpose Bankruptcy
Remote Entity that is a corporation and such corporation is the managing member
of such limited liability company, (viii) if such entity is a limited liability
company, has articles of organization, a certificate of formation and/or an
operating agreement, as applicable, providing that (A) such entity will dissolve
only upon the bankruptcy of the managing member, (B) the vote of a majority-in-
interest of the remaining members is sufficient to continue the life of the
limited liability company in the event of such bankruptcy of the managing member
and (C) if the vote of a majority-in-interest of the remaining members to
continue the life of the limited liability company following the bankruptcy of
the managing member is not obtained, the limited liability company may not
liquidate its Property or Properties without the consent of the applicable
Rating Agencies for as long as the Loan is outstanding, (ix) without the
unanimous consent of all of its partners, directors or members, as applicable,
shall not (A) file a bankruptcy or insolvency petition or otherwise institute
insolvency proceedings with respect to itself or to any other entity in which it
has a direct or indirect legal or beneficial ownership interest, (B) dissolve,
liquidate, consolidate, merge, or sell all or substantially all of its assets or
the assets of any other entity in which it has a direct or indirect legal or
beneficial ownership interest, (C) engage in any other business activity, or
amend its organizational documents,
36
<PAGE>
(x) is and will remain solvent and is maintaining and will maintain adequate
capital for the normal obligations reasonably foreseeable in a business of its
size and character and in light of its contemplated business operations, (xi)
has not and will not fail to correct any known misunderstanding regarding the
separate identity of such entity, (xii) has maintained and will maintain its
accounts, books and records separate from any other person or entity and will
file its own tax returns, as applicable, (xiii) has maintained and will maintain
its books, records, resolutions and agreements as official records, (xiv) has
not and will not commingle its funds or assets with those of any other Person,
(xv) has held and will hold its assets in its own name, (xvi) has conducted and
will conduct its business in its name, (xvii) has maintained and will maintain
its financial statements, accounting records and other entity documents separate
from any other Person, provided, however, that financial statements for such
--------
entity may be prepared on a consolidated basis with other Persons if such entity
is identified therein as a separate entity, (xviii) has paid (directly or
indirectly through reimbursement) and will pay directly its own liabilities,
including the salaries of its own employees, if any, out of its own funds and
assets, (xix) has observed and will observe all partnership, corporate or
limited liability company formalities, as applicable, (xx) has no indebtedness
other than the Loan and liabilities in the ordinary course of business relating
to the ownership and operation of its Property or Properties; (xxi) will not
assume or guarantee or become obligated for the debts of any other Person or
hold out its credit as being available to satisfy the obligations of any other
Person except for the Loan and the liabilities permitted pursuant to this
Agreement, (xxii) will not acquire obligations or securities of its partners,
members or shareholders, (xxiii) has allocated and will allocate fairly and
reasonably any overhead for shared office space and uses separate stationery,
invoices and checks, (xxiv) except in connection with the Loan will not pledge
its assets for the benefit of any other Person, (xxv) has held itself out and
identified itself and will hold itself out and identify itself as a separate and
distinct entity under its own name and not as a division or part of any other
Person, other than common advertising, (xxvi) has maintained and will maintain
its assets in such a manner that it will not be costly or difficult to
segregate, ascertain or identify its individual assets from those of any other
Person, (xxvii) will not make loans to any Person, and (xxviii) will not enter
into or be a party to, any transaction with its partners, members, shareholders
or Affiliates except in the ordinary course of its business and on terms which
are intrinsically fair and are no less favorable to it than would be obtained in
a comparable arm's-length transaction with an unrelated third party.
V.16 ASSUMPTIONS IN NON-CONSOLIDATION OPINION. Borrower shall
----------------------------------------
conduct its business so that the assumptions made in that certain substantive
non-consolidation opinion, dated as of the date hereof, delivered by Borrower's
counsel in connection with the Loan, shall be true and correct in all respects.
VI. NEGATIVE COVENANTS
------------------
Until the end of the Term or the Defeasance of the entire unpaid
Principal, Borrower covenants and agrees with Lender that it will not, directly
or indirectly:
VI.1 MANAGEMENT AGREEMENT. Without Lender's prior consent: (i)
--------------------
surrender, terminate or cancel the Management Agreement or otherwise replace the
Manager or enter into any other management agreement (except pursuant to Section
9.3); (ii) reduce or consent to the reduction
37
<PAGE>
of the term of the Management Agreement; (iii) increase or consent to the
increase of the amount of any charges under the Management Agreement, provided,
--------
however, that Borrower may without Lender's prior consent increase the incentive
portion of the Manager's fee by an amount not to exceed one (1%) percent, so
long as such increase is consistent with market conditions concerning comparable
management contracts; or (iv) otherwise modify, change, supplement, alter or
amend in any material respect, or waive or release any of its rights and
remedies under, the Management Agreement; provided, however, that Borrower shall
--------
be permitted to make immaterial changes, modifications, or amendments to the
Management Agreement without Lender's prior approval, it being understood and
agreed that no change, modification or amendment to the Management Agreement
which affects the financial rights or obligations of Borrower, Lender or Manager
shall be deemed an "immaterial change".
VI.2 LIENS. Without Lender's prior consent, create, incur, assume,
-----
permit or suffer to exist any Lien on any portion any of the Properties or legal
or beneficial ownership interest in such Borrower, except Permitted
Encumbrances;
VI.3 DISSOLUTION. Dissolve, terminate, liquidate, merge with or
-----------
consolidate into another Person;
VI.4 CHANGE IN BUSINESS. Enter into any line of business other
------------------
than the ownership and operation of the Properties, or make any material change
in the scope or nature of its business objectives, purposes or operations, or
undertake or participate in activities other than the continuance of its present
business;
VI.5 DEBT CANCELLATION. Cancel or otherwise forgive or release any
-----------------
claim or debt owed to any Borrower by any Person, except for adequate
consideration and in the ordinary course of Borrower's business in its
reasonable judgment;
VI.6 ASSETS. Purchase or own any property other than the
------
Properties owned by Borrower on the date hereof and personal property related to
the ownership and operation of the Properties;
VI.7 TRANSFERS. Make, suffer or permit the occurrence of any
---------
Transfer other than a Permitted Transfer; or
VI.8 DEBT. Create, incur or assume any indebtedness other than the
----
Debt and unsecured trade debt customarily payable within sixty (60) days.
VII. INSURANCE; CASUALTY; AND CONDEMNATION
-------------------------------------
VII.1 INSURANCE .
---------
VII.1.1 COVERAGE. Borrower, at its sole cost, for the mutual benefit
---------
of Borrower and Lender, shall obtain and maintain during the Term the following
policies of insurance:
38
<PAGE>
(a) Property insurance insuring against loss or damage by
standard, "all-risk" perils, which shall (i) be in an amount equal to the
greatest of (A) the then full replacement cost of the Properties without
deduction for physical depreciation, (B) the unpaid Principal, and (C) such
amount as is necessary so that the insurer would not deem Borrower a co-
insurer under such policies, (ii) have a deductible for each Property in an
amount no greater than five (5%) percent of the full replacement cost of
such Property, (iii) be paid annually in advance or monthly in accordance
with the provisions of Section 3.3 of this Agreement, and (iv) contain a
"Replacement Cost Endorsement" with a waiver of depreciation.
(b) Flood insurance if any part of any Property is located in an
area identified by the Federal Emergency Management Agency as an area
having special flood hazards and in which flood insurance has been made
available under the National Flood Insurance Program, in an amount at least
equal to the unpaid Principal or the maximum limit of coverage available
with respect to such Property under such program, whichever is less.
(c) Comprehensive public liability insurance, including broad
form property damage, blanket contractual and personal injuries (including
death resulting therefrom) coverages and containing minimum limits per
occurrence of $1,000,000 and $ 2,000,000 in the aggregate for any policy
year; together with at least $ 20,000,000 excess and/or umbrella liability
insurance for any and all claims, including all legal liability imposed
upon such Borrower and all court costs and attorneys' fees incurred in
connection with the ownership, operation and maintenance of the Properties.
(d) Rental loss and/or business interruption insurance in an
amount equal to the greater of (i) the estimated Rents for the next
succeeding twelve (12) month period or (ii) the projected Operating
Expenses and Debt Service for such period. The amount of such insurance
shall be increased from time to time during the Term as and when the
estimated or actual Rents increase.
(e) Insurance against loss or damage from (i) leakage of
sprinkler systems and (ii) explosion of steam boilers, air conditioning
equipment, high pressure piping, machinery and equipment, pressure vessels
or similar apparatus now or hereafter installed in any of the Improvements
(without exclusion for explosions), in an amount at least equal to
$25,000,000.
(f) Worker's compensation insurance with respect to any employees
of Borrower, as required by any Legal Requirement.
(g) During any period of repair or restoration, builder's "all-
risk" insurance in an amount equal to not less than the full insurable
value of the applicable Property, against such risks (including fire and
extended coverage and collapse of the Improvements to agreed limits) as
Lender may request, in form and substance reasonably acceptable to Lender.
39
<PAGE>
(h) Coverage to compensate for the cost of demolition and the
increased cost of construction for each Property in an amount reasonably
satisfactory to Lender.
(i) Such other insurance (including earthquake insurance and
hurricane insurance) as may from time to time be reasonably required by
Lender in order to protect its interests.
VII.1.2 POLICIES. All policies of insurance (the "POLICIES")
--------
required pursuant to Section 7.1.1 shall (i) be issued by companies approved by
Lender and licensed to do business in the State, with a claims paying ability
rating of "AA" or better by Standard & Poor's Ratings Group; (ii) name Lender
and its successors and/or assigns as their interest may appear as the mortgagee;
(iii) contain a Non-Contributory Standard Lender Clause and a Lender's Loss
Payable Endorsement, or their equivalents, naming Lender as the person to which
all payments made by such insurance company in excess of $150,000 shall be paid;
(iv) contain a waiver of subrogation against Lender; (v) be assigned (to the
full extent of Borrower's interest therein and to the full extent assignable
under the terms thereof and under applicable law) and the originals or certified
copies thereof delivered to Lender; (vi) contain such provisions as Lender deems
reasonably necessary or desirable to protect its interest, including
endorsements providing that neither Borrower nor Lender nor any other party
shall be a co-insurer under the Policies and that Lender shall receive at least
thirty (30) days' prior written notice of any modification, reduction or
cancellation of any of the Policies; and (vii) be satisfactory in form and
substance to Lender and approved by Lender as to amounts, form, risk coverage,
deductibles, loss payees and insureds. Borrower shall pay the premiums for its
Policies (the "INSURANCE PREMIUMS") as the same become due and payable and
furnish to Lender evidence of the renewal of each of the Policies together with
(unless such Insurance Premiums have been paid by Lender pursuant to Section
3.3) receipts for or other evidence of the payment of the Insurance Premiums
reasonably satisfactory to Lender. If Borrower does not furnish such evidence
and receipts at least twenty (20) days prior to the expiration of any expiring
Policy, then Lender may, but shall not be obligated to, procure such insurance
and pay the Insurance Premiums therefor, and Borrower agrees to reimburse Lender
for the cost of such Insurance Premiums promptly on demand. Within thirty (30)
days after request by Lender, Borrower shall obtain such increases in the
amounts of coverage required hereunder as may be reasonably requested by Lender,
taking into consideration changes in the value of money over time, changes in
liability laws, changes in prudent customs and practices, and the like.
VII.2 CASUALTY.
--------
VII.2.1 NOTICE; RESTORATION. If any Property is damaged or
-------------------
destroyed, in whole or in part, by fire or other casualty (a "CASUALTY"),
Borrower shall give prompt notice thereof to Lender. Following the occurrence
of a Casualty, Borrower, regardless of whether insurance proceeds are available
but subject to the provisions of Section 7.4.3, shall promptly proceed to
restore, repair, replace or rebuild the affected Property in accordance with
Legal Requirements to be of at least equal value and of substantially the same
character as prior to such damage or destruction.
VII.2.2 SETTLEMENT OF PROCEEDS. In the event of a Casualty covered
----------------------
by any of the Policies (an "INSURED CASUALTY") where the loss does not exceed
$300,000, Borrower may
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settle and adjust any claim without the consent of Lender; provided such
adjustment is carried out in a competent and timely manner; and Borrower is
hereby authorized to collect and receipt for any such insurance proceeds. In the
event of an Insured Casualty where the loss equals or exceeds$300,000, Borrower
may, with Lender's consent (which consent shall not be unreasonably withheld or
delayed), settle and adjust of any claim and agree with the insurer(s) to be
paid on the loss, and the proceeds of any such Policy shall be due and payable
solely to Lender and held by Lender in the Casualty/Condemnation Subaccount and
disbursed in accordance herewith. The expenses incurred by Lender (in the
adjustment and collection of insurance proceeds shall become part of the Debt
and be secured hereby and shall be reimbursed by Borrower to Lender upon demand.
VII.3 CONDEMNATION.
------------
VII.3.1 NOTICE; RESTORATION. Borrower shall promptly give Lender
-------------------
notice of the actual or threatened commencement of any condemnation or eminent
domain proceeding affecting Property (a "CONDEMNATION") and shall deliver to
Lender copies of any and all papers served in connection with such Condemnation.
Following the occurrence of a Condemnation, Borrower, regardless of whether an
Award is available but subject to the provisions of Section 7.4.3, shall
promptly proceed to restore, repair, replace or rebuild the affected Property in
accordance with Legal Requirements to the extent practicable to be of at least
equal value and of substantially the same character as prior to such
Condemnation.
VII.3.2 COLLECTION OF AWARD. Lender is hereby irrevocably
-------------------
appointed as Borrower's attorney-in-fact, coupled with an interest, with
exclusive power to collect, receive and retain any award or payment in respect
of a Condemnation (an "AWARD") and to make any compromise or settlement in
connection with such Condemnation, which power of attorney shall be effective
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding any Condemnation (or any transfer made in lieu of or in
anticipation of such a Condemnation), Borrower shall continue to pay the Debt
at the time and in the manner provided for in the Loan Documents, and the Debt
shall not be reduced unless and until any Award shall have been actually
received and applied by Lender to expenses of collecting the Award and to
discharge of the Debt. Lender shall not be limited to the interest paid on the
Award by the condemning authority but shall be entitled to receive out of the
Award interest at the rate or rates provided in the Note. If any Property is
sold, through foreclosure or otherwise, prior to the receipt by Lender of such
Award, Lender shall have the right, whether or not a deficiency judgment on the
Note shall be recoverable or shall have been sought, recovered or denied, to
receive all or a portion of the Award sufficient to pay the Debt. Borrower
shall cause any Award that is payable to Borrower to be paid directly to Lender.
Lender shall hold such Award in the Casualty/Condemnation Subaccount and
disburse such Award in accordance with the terms hereof.
VII.4 APPLICATION OF PROCEEDS OR AWARD.
--------------------------------
VII.4.1 APPLICATION TO RESTORATION. In the event of an Insured
--------------------------
Casualty or Condemnation where (i) the loss is in an aggregate amount less than
twenty percent (20%) of the Fair Market Value of the affected Property
immediately prior to such Insured Casualty or Condemnation, (ii) in the
reasonable judgment of Lender, such Property can be restored within six (6)
months, and
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prior to the Scheduled Maturity Date and the expiration of the
business interruption insurance with respect thereto, to an economic unit not
less valuable and not less useful than the same was prior to the Insured
Casualty or Condemnation, and after such restoration will adequately secure the
unpaid Principal, and (iii) no Default or Event of Default shall have occurred
and be then continuing, then the proceeds of insurance or the Award, as the case
may be (after reimbursement of any expenses incurred by Lender), shall be
disbursed to Borrower for application to the cost of restoring, repairing,
replacing or rebuilding such Property (the "RESTORATION"), in the manner set
forth herein. Borrower shall commence and diligently prosecute such
Restoration; provided that (i) Borrower shall pay (and if required by Lender,
Borrower shall deposit with Lender in advance) all costs of such Restoration in
excess of the net proceeds of insurance or the Award made available pursuant to
the terms hereof; and (ii) Lender shall have received evidence reasonably
satisfactory to it that, during the period of the Restoration, the Rents for the
affected Property will be at least equal to the sum of the Operating Expenses
and Debt Service for such Property, as reasonably determined by Lender.
VII.4.2 APPLICATION TO DEBT. Except as provided in Sections 7.4.1
-------------------
(and subject to the provisions of Section 7.4.3), the proceeds of insurance
collected upon any Insured Casualty, and any Award, may, at the option of
Lender in its sole discretion, be applied to the payment of the Debt or applied
to reimburse the Borrower for the cost of any Restoration, in the manner set
forth in Section 7.4.4. Any such application to the Debt shall be without any
prepayment consideration, unless an Event of Default has occurred and is
continuing at the time the insurance proceeds are received from the insurance
company or the Award is received from the condemning authority, as the case may
be, in which event Borrower shall pay to Lender an additional amount equal to
the Yield Maintenance Premium, if any, that would be required under Section
2.3.3 if a Defeasance Deposit were to be made by Borrower with respect to a
Defeased Note in the amount of the insurance proceeds or Award applied to the
Debt. Any such application to the Debt shall be subject to the provisions of
Section 2.3.2 of this Agreement. After any such application to the Debt, the
unpaid Principal shall be reamortized over the remaining term thereof.
VII.4.3 RELEASE OF PROPERTY UPON CASUALTY OR CONDEMNATION.
-------------------------------------------------
Notwithstanding the provisions of Section 7.4.2, if all of the conditions to
release of the proceeds of insurance relating to a Casualty or of an Award (as
the case may be) set forth in Section 7.4.1 are not met, then Borrower may
elect, at its option, to obtain the release of the Property affected by the
Casualty or Condemnation in question, as provided in this Section. Borrower may
obtain the release of such Property from the Lien of the Deed of Trust thereon
(and related Loan Documents) and the release of Borrower's obligations under the
Loan Documents with respect to such Property (other than those expressly stated
to survive), upon payment of the applicable Release Amount and satisfaction of
the other conditions set forth in Sections 2.4.2(b) and (c). Borrower shall
receive a credit against the applicable Release Amount in the amount of the
insurance proceeds or Award collected upon such Casualty or Condemnation (as the
case may be). The Release Amount so paid by Borrower shall be applied by Lender
first, to Lender's reasonable costs and expenses in connection with such release
- -----
(including reasonable attorneys' fees and expenses) and second to the Debt, in
------
such order, proportion and priority as Lender may designate in its sole and
absolute discretion. After any such application to the Debt, the unpaid
Principal shall be reamortized over the remaining term thereof.
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VII.4.4 PROCEDURE FOR APPLICATION TO RESTORATION. If Borrower is
----------------------------------------
entitled to reimbursement out of insurance proceeds or an Award held by Lender,
such proceeds or Award shall be disbursed from time to time from the
Casualty/Condemnation Subaccount upon Lender being furnished with (i) evidence
satisfactory to it of the estimated cost of completion of the Restoration, (ii)
funds or, at Lender's option, assurances satisfactory to Lender that such funds
are available, sufficient in addition to the proceeds of insurance or Award to
complete the proposed Restoration, (iii) such architect's certificates, waivers
of lien, contractor's sworn statements, title insurance endorsements, bonds,
plats of survey and such other evidences of cost, payment and performance as
Lender may reasonably require and approve, and (iv) all plans and specifications
for such Restoration, such plans and specifications to be approved by Lender
prior to commencement of any work. No payment made prior to the final
completion of the Restoration shall exceed ninety (90%) of the value of the work
performed from time to time; funds other than the proceeds of insurance or Award
shall be disbursed prior to disbursement of such proceeds or Award; and at all
times, the undisbursed balance of such proceeds or Award remaining in the hands
of Lender, together with funds deposited for that purpose or irrevocably
committed to the satisfaction of Lender by or on behalf of such Borrower for
that purpose, shall be at least sufficient in the reasonable judgment of Lender
to pay for the cost of completion of the Restoration, free and clear of all
Liens or claims for Lien. Any surplus that remains out of the insurance
proceeds held by Lender after payment of such costs of Restoration shall be paid
to Borrower. Any surplus that remains out of the Award received by Lender after
payment of such costs of Restoration shall, in the sole and absolute discretion
of Lender, be retained by Lender and applied to payment of the Debt or returned
to Borrower.
VIII. DEFAULTS
VIII.1 EVENTS OF DEFAULT. Each of the following events shall
-----------------
constitute an "EVENT OF DEFAULT":
(a) on any Payment Date, the Monthly Debt Service Payment Amount,
or any required payment to the Tax and Insurance Escrow Fund, the Capital
Reserve Fund or the Rollover Reserve Fund for any Property, is not paid in
full;
(b) any portion of the Debt, other than the regularly scheduled
payments described in the foregoing clause (a), is not paid within five (5)
days after Lender notifies Borrower in writing that the same is due and
payable;
(c) any of the Taxes or Other Charges are not paid when due,
subject to Borrower's right to contest Taxes in accordance with Section
5.2;
(d) the Policies are not kept in full force and effect, or if
originals or certified copies thereof are not delivered to Lender within
ten (10) days after written request;
(e) a Transfer other than a Permitted Transfer occurs;
(f) any representation or warranty made by Borrower herein or in
any Loan Document, or in any report, certificate, financial statement or
other instrument,
43
<PAGE>
agreement or document furnished by or on behalf of Borrower in connection
with any Loan Document, shall be false or misleading in any material
respect as of the date the representation or warranty was made, and the
default described above in this clause (f) is not cured by Borrower within
30 days after written notice by Lender;
(g) Borrower shall make an assignment for the benefit of
creditors, or shall generally not be paying its debts as they become due;
(h) a receiver, liquidator or trustee shall be appointed for
Borrower; or Borrower shall be adjudicated a bankrupt or insolvent; or any
petition for bankruptcy, reorganization or arrangement pursuant to federal
bankruptcy law, or any similar federal or state law, shall be filed by or
against, consented to, or acquiesced in by, Borrower; or any proceeding for
the dissolution or liquidation of Borrower shall be instituted; provided,
however, if such appointment, adjudication, petition or proceeding was
involuntary and not consented to by such Borrower, only upon the same not
being discharged, stayed or dismissed within sixty (60) days;
(i) Borrower shall assign or attempt to assign its rights or
interest under any Loan Document in contravention of any Loan Document;
(j) Borrower shall breach any negative covenant contained in
Section 6 or any covenant contained in Section 5.15 and with respect to
Section 5.15 such breach is not cured by Borrower within fifteen (15) days
after written notice by Lender;
(k) Borrower shall be in default under any other mortgage, deed
of trust or security agreement covering any part of any Property whether it
be superior or junior in Lien to the Deed of Trust;
(l) any Property becomes subject to any mechanic's, materialman's
or other Lien and such Lien is not bonded or discharged within thirty (30)
days after Borrower first receives notice in writing of such Lien, except a
Lien for Taxes not then due or other Permitted Encumbrance;
(m) Borrower shall fail to cure properly any violation of a Legal
Requirement within thirty (30) days after such Borrower first receives
written notice of such violation, provided that, if such violation cannot
--------
reasonably be cured within such thirty (30) day period, and Borrower shall
have commenced to cure such violation within such thirty (30) day period
and thereafter diligently and expeditiously proceeds to cure the same, then
such thirty (30) day period shall be extended for an additional period of
time as is reasonably necessary for Borrower in the exercise of due
diligence to cure such violation, such additional period not to exceed 90
days;
(n) except as expressly permitted by the provisions of this
Agreement, the alteration, improvement, demolition or removal of any of
the Improvements without the prior consent of Lender;
44
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(o) without Lender's prior consent, (i) the Manager under the
Management Agreement (or any successor management agreement) resigns or is
removed, or (ii) the ownership, management or control of the Manager is
transferred to a person or entity other than an Affiliate of Borrower, or
(iii) there is any material change in the Management Agreement (or any
successor management agreement);
(p) a default has occurred and continues beyond any applicable
cure period under the Management Agreement (or any successor management
agreement) if such default permits the Manager to terminate the Management
Agreement (or such successor management agreement);
(q) Borrower shall cease to operate any Property for retail,
office and ancillary uses (other than temporary cessation in connection
with renovations to such Property or as a result of a Casualty or
Condemnation);
(r) an Event of Default as defined or described in any other Loan
Document occurs; or any other event shall occur or condition shall exist,
if the effect of such event or condition is to accelerate the maturity of
any portion of the Debt;
(s) Borrower shall fail to pay when due any deposit into any
Fund;
(t) any of the assumptions contained in any substantive non-
consolidation opinion, delivered to Lender by Borrower's counsel in
connection with the Loan or otherwise hereunder, were not true and correct
as of the date of such opinion or thereafter became untrue or incorrect,
and the default described above in this clause (t) is not cured by Borrower
within 15 days after written notice by Lender; or
(u) Borrower shall continue to be in Default under any of the
other terms, covenants or conditions of this Agreement not specified in
subsections (a) through (t) above, for ten (10) days after notice to such
Borrower from Lender, in the case of any Default which can be cured by the
payment of a sum of money, or for thirty (30) days after notice from Lender
in the case of any other Default; provided, however, that if such non-
monetary Default is susceptible of cure but cannot reasonably be cured
within such thirty (30)-day period, and such Borrower shall have commenced
to cure such Default within such thirty (30)-day period and thereafter
diligently and expeditiously proceeds to cure the same, such thirty (30)-
day period shall be extended for an additional period of time as is
reasonably necessary for such Borrower in the exercise of due diligence to
cure such Default, such additional period not to exceed ninety (90) days.
VIII.2 REMEDIES.
--------
VIII.2.1 ACCELERATION. Upon the occurrence of an Event of Default
------------
(other than an Event of Default described in paragraph (f), (g) or (h) of
Section 8.1) and at any time thereafter, in addition to any other rights or
remedies available to it pursuant to the Loan Documents or at law
45
<PAGE>
or in equity, Lender may take such action, without notice or demand, that Lender
deems advisable to protect and enforce its rights against Borrower and in and to
any Property, including declaring the Debt to be immediately due and payable;
and upon any Event of Default described in paragraph (f), (g) or (h) of Section
8.1, the Debt shall immediately and automatically become due and payable,
without notice or demand, and Borrower hereby expressly waives any such notice
or demand, anything contained in any Loan Document to the contrary
notwithstanding.
VIII.2.2 REMEDIES CUMULATIVE. Upon the occurrence of an Event of
-------------------
Default, all or any one or more of the rights, powers, privileges and other
remedies available to Lender against Borrower under the Loan Documents or at law
or in equity may be exercised by Lender at any time and from time to time,
whether or not all or any of the Debt shall be declared due and payable, and
whether or not Lender shall have commenced any foreclosure proceeding or other
action for the enforcement of its rights and remedies under any of the Loan
Documents. Any such actions taken by Lender shall be cumulative and concurrent
and may be pursued independently, singly, successively, together or otherwise,
at such time and in such order as Lender may determine in its sole discretion,
to the fullest extent permitted by law, without impairing or otherwise affecting
the other rights and remedies of Lender permitted by law, equity or contract or
as set forth in the Loan Documents. Without limiting the generality of the
foregoing, Borrower agrees that if an Event of Default is continuing, (i) to the
extent permitted by applicable law, Lender is not subject to any "one action" or
"election of remedies" law or rule, and (ii) all liens and other rights,
remedies or privileges provided to Lender shall remain in full force and effect
until Lender has exhausted all of its remedies against all of the Properties,
each of the Deeds of Trust have been foreclosed, all of the Properties have been
sold and/or otherwise realized upon in satisfaction of the Debt or the Debt has
been paid in full. To the extent permitted by applicable law, nothing contained
in any Loan Document shall be construed as requiring Lender to resort to any
portion of any Property for the satisfaction of any of the Debt in preference or
priority to any other portion, and Lender may seek satisfaction out of the
entirety of all of the Properties or any part of any Property in its absolute
discretion.
VIII.2.3 SEVERANCE. Lender shall have the right from time to time
---------
to sever the Note and the other Loan Documents into one or more separate notes,
deeds of trust and other security documents in such denominations as Lender
shall determine in its sole discretion for purposes of evidencing and enforcing
its rights and remedies, provided that no such severance will adversely affect
--------
or diminish the rights of Borrower as presently set forth in this Agreement or
any of the other Loan Documents or increase the obligations of Borrower above
those presently set forth in this Agreement and the other Loan Documents.
Borrower shall execute and deliver to Lender from time to time, promptly after
the request of Lender, a severance agreement and such other documents as Lender
shall request in order to effect the severance described in the preceding
sentence, all in form and substance reasonably satisfactory to Lender.
VIII.2.4 DELAY. No delay or omission to exercise any remedy, right
-----
or power accruing upon an Event of Default shall impair any such remedy, right
or power or be construed as a waiver thereof, but any such remedy, right or
power may be exercised from time to time and as often as may be deemed
expedient. A waiver of one Default or Event of Default shall not be construed
to be a waiver of any subsequent Default or Event of Default or to impair any
remedy, right or power consequent thereon.
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IX. SPECIAL PROVISIONS
------------------
IX.1 SALE OF NOTE AND SECURITIZATION.
-------------------------------
IX.1.1 COOPERATION. At Lender's request (to the extent not already
-----------
required to be provided by Borrower under this Agreement), Borrower shall use
reasonable efforts to satisfy the market standards to which Lender customarily
adheres or which may be reasonably required in the marketplace or by the Rating
Agencies in connection with the sale of the Note or participation therein or the
first successful securitization (such sale and/or securitization, the
"SECURITIZATION") of rated single or multi-class securities (the "SECURITIES")
secured by or evidencing ownership interests in the Note and the Deeds of Trust.
Without limiting the generality of the foregoing, Borrower shall:
(a) at no cost to Borrower other than for the expenses of Provided
Information being delivered by Borrower or Manager in connection with the
closing of the Loan, (i) provide such financial and other information with
respect to the Properties, Borrower and its Affiliates, Manager and any tenants
of the Properties, (ii) provide business plans and budgets relating to the
Properties and (iii) perform or permit or cause to be performed or permitted
such site inspection, appraisals, market studies, environmental reviews and
reports (Phase I's and, if appropriate, Phase II's), engineering reports and
other due diligence investigations of the Properties, as may be reasonably
requested by Lender or the Rating Agencies or as may be necessary or appropriate
in connection with the Securitization (the items provided to Lender pursuant to
this paragraph (a) being called the "PROVIDED INFORMATION"), together, if
customary, with appropriate verification of and/or consents to the Provided
Information through letters of auditors or opinions of counsel of independent
attorneys acceptable to Lender and the Rating Agencies;
(b) at Borrower's expense, cause counsel to render opinions as to non-
consolidation, fraudulent conveyance, true sale and true contribution and any
other opinion customary in securitization transactions with respect to the
Properties and Borrower and its Affiliates, which counsel and opinions shall be
reasonably satisfactory to Lender and the Rating Agencies;
(c) make such representations and warranties as of the closing date of
the Securitization with respect to the Properties, Borrower and the Loan
Documents as are customarily provided in securitization transactions and as may
be reasonably requested by Lender or the Rating Agencies and consistent with the
facts covered by such representations and warranties as they exist on the date
thereof, including the representations and warranties made in the Loan
Documents;
(d) provide current certificates of good standing and qualification
with respect to Borrower from appropriate Governmental Authorities; and
(e) execute such amendments to the Loan Documents and Borrower's
organizational documents, and establish and fund such reserve funds (including
reserve funds for deferred maintenance and capital improvements) as may be
requested by Lender or the Rating Agencies or otherwise to effect the
Securitization, provided that nothing contained in this subsection (e) shall
result in a material economic change in the transaction.
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IX.1.2 USE OF INFORMATION. Borrower understands that certain of
------------------
the Provided Information and the Required Records may be included in disclosure
documents in connection with the Securitization, including a prospectus or
private placement memorandum (each, a "DISCLOSURE DOCUMENT") and may also be
included in filings with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the Securities and
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or provided or made
available to investors or prospective investors in the Securities, the Rating
Agencies, and service providers relating to the Securitization. In the event
that the Disclosure Document is required to be revised prior to the sale of all
Securities, Borrower shall cooperate with Lender in updating the Provided
Information or Required Records for inclusion or summary in the Disclosure
Document by providing all current information pertaining to Borrower and the
Properties necessary to keep the Disclosure Document accurate and complete in
all material respects with respect to such matters.
IX.1.3 BORROWER OBLIGATIONS REGARDING DISCLOSURE DOCUMENTS. In
---------------------------------------------------
connection with a preliminary and a final private placement or prospectus, as
applicable, Borrower agrees:
(a) if requested by Lender, to certify in writing that such Borrower
has carefully examined those portions of such memorandum or prospectus, as
applicable, pertaining to Borrower, the Properties and the Loan, including
applicable portions of the sections entitled "Special Considerations",
"Description of the Deeds of Trust", "Description of the Deeds of Trust Loans
and Trust Property", "The Manager", "The Borrower" and "Certain Legal Aspects of
the Deeds of Trust Loan", and such sections (and any other sections reasonably
requested and pertaining to Borrower, the Properties or the Loan) do not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading;
(b) to indemnify Lender and the Affiliates of Nomura Securities
International, Inc. ("NOMURA"), that have filed the registration statement
relating to the Securitization (the "REGISTRATION STATEMENT"), each of its
directors, each of its officers who have signed the Registration Statement and
each person or entity who controls Nomura within the meaning of Section 15 of
the Securities Act or Section 30 of the Exchange Act of 1933, as amended
(collectively, the "NOMURA GROUP"), and Nomura, each of its directors and each
person who controls Nomura, within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act (collectively, the "UNDERWRITER GROUP")
for any losses, claims, damages or liabilities (the "LIABILITIES") to which
Lender, the Nomura Group or the Underwriter Group may become subject insofar as
the Liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the applicable portions of
such sections applicable to, Borrower, the Properties or the Loan, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated in the applicable portions of such sections
or necessary in order to make the statements in the applicable portions of such
sections or in light of the circumstances under which they were made, not
misleading; and
(c) to reimburse Lender and Nomura for any legal or other expenses
reasonably incurred by Lender and Nomura in connection with investigating or
defending the Liabilities.
48
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Borrower's respective Liabilities under clause (a) or (b) above shall be limited
to Liabilities arising out of or based upon any such untrue statement or
omission made therein in reliance upon and in conformity with information
furnished to Lender by or on behalf of Borrower in connection with the
preparation of those portions of the Disclosure Document pertaining to Borrower,
the Properties or the Loan or in connection with the underwriting of the debt,
including financial statements of Borrower, operating statements, rent rolls,
environmental site assessment reports and property condition reports with
respect to the Properties. The foregoing indemnity will be in addition to any
liability which Borrower may otherwise have.
IX.1.4 INDEMNITIES REGARDING FILINGS. (a) In connection with
-----------------------------
filings under the Exchange Act, Borrower agrees to (i) indemnify Lender, the
Nomura Group and the Underwriter Group for any Liabilities to which Lender, the
Nomura Group or the Underwriter Group may become subject insofar as the
Liabilities arise out of or are based upon the omission or alleged omission to
state in the Provided Information or Required Records a material fact required
to be stated in the Provided Information or Required Records in order to make
the statements in the Provided Information or Required Records, in light of the
circumstances under which they were made not misleading and (ii) reimburse
Lender or Nomura for any legal or other expenses reasonably incurred by Lender
and Nomura in connection with defending or investigating the Liabilities.
(b) NACC agrees (i) to indemnify Borrower for any Liabilities to
which Borrower may become subject insofar as the Liabilities arise out of or are
based on any violations by NACC of the Securities Act, the Exchange Act or other
applicable law in connection with a Securitization, other than Liabilities
arising out of or based upon the acts or omissions, or alleged acts or
omissions, of Borrower giving rise to Borrower's obligations to indemnify the
Nomura Group and the Underwriter Group as provided in this Section 9.1.
IX.1.5 INDEMNIFICATION PROCEDURE. Promptly after receipt by an
-------------------------
indemnified party under Section 9.1.3 or 9.1.4 of notice of the commencement of
any action for which a claim for indemnification is to be made against Borrower
or NACC, as the case may be, such indemnified party shall notify the indemnitor
in writing of such commencement, but the omission to so notify the indemnitor
will not relieve Borrower or NACC, as the case may be, from any liability that
such indemnitor may have to any indemnified party hereunder except to the extent
that failure to notify causes prejudice to the indemnitor. In the event that
any action is brought against any indemnified party, and such party notifies the
indemnitor of the commencement thereof, the indemnitor will be entitled, jointly
with any other indemnifying party, to participate therein and, to the extent
that it (or they) may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice of commencement, to assume the
defense thereof with counsel satisfactory to such indemnified party. After
notice from Borrower to such indemnified party under this Section 9.1.5, the
indemnitor shall not be responsible for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, if the defendants in
any such action include both the indemnitor and the indemnifying party, and the
indemnitor shall have reasonably concluded that there are any legal defenses
available to it and/or other indemnified parties that are different from or
additional to those available to the indemnitor, then the indemnified party or
parties shall have the right to select separate
49
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counsel to assert such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. The
indemnitor shall not be liable to any indemnified party for the expenses of more
than one separate counsel unless there are legal defenses available to it that
are different from or additional to those available to another indemnified
party.
IX.1.6 CONTRIBUTION. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
Section 9.1.3 or 9.1.4 is for any reason held to be unenforceable by an
indemnified party in respect of any Liabilities (or action in respect thereof)
referred to therein which would otherwise be indemnifiable under Section 9.1.3
or 9.1.4, Borrower shall contribute to the amount paid or payable by the
indemnified party as a result of such Liabilities (or action in respect
thereof); provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person not guilty of such fraudulent
misrepresentation. In determining the amount of contribution to which the
respective parties are entitled, the following factors shall be considered: (i)
the Nomura Group's and Borrower's relative knowledge and access to information
concerning the matter with respect to which the claim was asserted; (ii) the
opportunity to correct and prevent any statement or omission; and (iii) any
other equitable considerations appropriate in the circumstances. Lender and
Borrower hereby agrees that it may not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation.
IX.1.7 RATING SURVEILLANCE. Lender will retain the Rating Agencies
-------------------
to provide rating surveillance services on Securities, at the sole expense of
Lender.
50
<PAGE>
IX.2 EXCULPATION. Subject to the qualifications below, Lender
-----------
shall not enforce the liability and obligation of Borrower to perform and
observe the obligations contained in the Loan Documents by any action or
proceeding wherein a money judgment shall be sought against Borrower, except
that Lender may bring a foreclosure action, an action for specific performance
or any other appropriate action or proceeding to enable Lender to enforce and
realize upon its interest under the Loan Documents, or in the Properties, the
Rents or any other collateral given to Lender pursuant to the Loan Documents;
provided, however, that, except as specifically provided herein, any judgment in
any such action or proceeding shall be enforceable against Borrower only to the
extent of Borrower's interest in the Property, in the Rents and in any other
collateral given to Lender, and Lender agrees that it shall not sue for, seek or
demand any deficiency judgment against Borrower in any such action or proceeding
under or by reason of or under or in connection with any Loan Document. The
provisions of this section shall not, however, (i) constitute a waiver, release
or impairment of any obligation evidenced or secured by any Loan Document; (ii)
impair the right of Lender to name Borrower as a party defendant in any action
or suit for foreclosure and sale under any Deed of Trust to which it is a party;
(iii) affect the validity or enforceability of any guaranty made in connection
with the Loan or any of the rights and remedies of Lender thereunder; (iv)
impair the right of Lender to obtain the appointment of a receiver; (v) impair
the enforcement of any of the Assignments of Leases; (vi) constitute a
prohibition against Lender to commence any other appropriate action or
proceeding in order for Lender to fully realize the security granted by the
Deeds of Trust or to exercise its remedies against the Properties; or (vii)
constitute a waiver of the right of Lender to enforce the liability and
obligation of Borrower, by money judgment or otherwise, to the extent of any
loss, damage, cost, expense, liability, claim or other obligation incurred by
Lender (including reasonable attorneys' fees and costs reasonably incurred)
arising out of or in connection with the following:
(a) fraud or intentional misrepresentation by Borrower or any
guarantor in connection with the Loan;
(b) the gross negligence or willful misconduct of Borrower;
(c) the breach of any representation, warranty, covenant or
indemnification in any Loan Document concerning Environmental Laws or
Hazardous Substances, including Sections 4.1.32 and 5.10, and clauses
(viii) through (xi) of Section 10.13(b);
(d) the removal or disposal of any portion of any Property after
an Event of Default;
(e) the misapplication or conversion by Borrower of (x) any
insurance proceeds paid by reason of any Insured Casualty, (y) any Award
received in connection with a Condemnation, or (z) any Rents received by
Borrower or Manager following an Event of Default;
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<PAGE>
(f) failure to pay charges for labor or materials or other
charges payable by Borrower that can create Liens on any portion of any
Property unless such charges are the subject of a bona fide dispute in
which Borrower is contesting the amount or validity thereof;
(g) any security deposits collected with respect to the
Properties which are not delivered to Lender upon a foreclosure of or
action in lieu thereof, except to the extent any such security deposits
were applied in accordance with the terms and conditions of any of the
Leases prior to such foreclosure or action in lieu thereof; and
(h) Borrower's indemnifications of Lender set forth in Sections
9.1.3 and 9.1.4.
Notwithstanding anything to the contrary in this Agreement or any of the Loan
Documents, Lender shall not be deemed to have waived any right which Lender may
have under Section 506(a), 506(b), 1111(b) or any other provisions of the U.S.
Bankruptcy Code to file a claim for the full amount of the Debt or to require
that all collateral shall continue to secure all of the Debt in accordance with
the Loan Documents.
IX.3 TERMINATION OF MANAGER. If an Event of Default shall be
----------------------
continuing, Borrower shall, at the request of Lender, terminate the Management
Agreement and replace the Manager with a manager approved by Lender and any
applicable Rating Agency, at then market rate management fees and otherwise on
terms and conditions satisfactory to Lender.
IX.4 RETENTION OF SERVICER. Lender reserves the right to retain
---------------------
the Servicer to act as its agent hereunder with such powers as are specifically
delegated to the Servicer by Lender, whether pursuant to the terms of this
Agreement, the Pooling and Servicing Agreement, the Deposit Account Agreement or
otherwise, together with such other powers as are reasonably incidental thereto.
Borrower shall pay any reasonable fees and expenses of the Servicer in
connection with a Defeasance, release of Property, assumption or modification of
the Loan or enforcement of the Loan Documents, but in no event shall Borrower be
responsible for the Servicer's fees in connection with ordinary, ongoing
administration of the Loan.
X. MISCELLANEOUS
-------------
X.1 SURVIVAL. This Agreement and all covenants, agreements,
--------
representations and warranties made herein and in the certificates delivered
pursuant hereto shall survive the making by Lender of the Loan and the execution
and delivery to Lender of the Note, and shall continue in full force and effect
so long as all or any of the Debt is unpaid. All Borrower's covenants and
agreements in this Agreement shall inure to the benefit of the respective legal
representatives, successors and assigns of Lender.
X.2 LENDER'S DISCRETION. Whenever pursuant to this Agreement,
-------------------
Lender exercises any right given to it to approve or disapprove, or any
arrangement or term is to be satisfactory to Lender, the decision of Lender to
approve or disapprove or to decide whether arrangements or terms are
satisfactory or not satisfactory shall (except as is otherwise specifically
herein provided) be in the sole discretion of Lender and shall be final and
conclusive.
52
<PAGE>
X.3 GOVERNING LAW. PARTIES AGREE THAT THE STATE OF MARYLAND HAS A
-------------
SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION
EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
MARYLAND APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY
APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE
PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS CREATED
PURSUANT TO THE LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO
THE LAW OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS LOCATED, IT BEING
UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE
LAW OF THE STATE OF MARYLAND SHALL GOVERN THE VALIDITY AND THE ENFORCEABILITY OF
ALL LOAN DOCUMENTS AND THE DEBT. TO THE FULLEST EXTENT PERMITTED BY LAW,
BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT
THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS
AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF MARYLAND.
X.4 MODIFICATION, WAIVER IN WRITING. No modification, amendment,
-------------------------------
extension, discharge, termination or waiver of any provision of this Agreement
or of any other Loan Document, nor consent to any departure by Borrower
therefrom, shall in any event be effective unless the same shall be in a writing
signed by the party against whom enforcement is sought, and then such waiver or
consent shall be effective only in the specific instance, and for the purpose,
for which given. Except as otherwise expressly provided herein, no notice to or
demand on Borrower shall entitle Borrower to any other or future notice or
demand in the same, similar or other circumstances.
X.5 DELAY NOT A WAIVER. Neither any failure nor any delay on the
------------------
part of Lender in insisting upon strict performance of any term, condition,
covenant or agreement, or exercising any right, power, remedy or privilege
hereunder, or under any other Loan Document, shall operate as or constitute a
waiver thereof, nor shall a single or partial exercise thereof preclude any
other future exercise, or the exercise of any other right, power, remedy or
privilege. In particular, and not by way of limitation, by accepting payment
after the due date of any amount payable under any Loan Document, Lender shall
not be deemed to have waived any right either to require prompt payment when due
of all other amounts due under the Loan Documents, or to declare a Default for
failure to effect prompt payment of any such other amount.
X.6 NOTICES. All notices, consents, approvals and requests
-------
required or permitted hereunder or under any other Loan Document (a "NOTICE")
shall be given in writing and shall be effective for all purposes if hand
delivered or sent (i) by certified or registered United States mail, postage
prepaid, or (ii) by (A) expedited prepaid delivery service, either commercial or
United States Postal Service, with proof of attempted delivery, and (B)
telecopier (with answer back
53
<PAGE>
acknowledged), in any case addressed as follows (or to such other address or
Person as a party shall designate from time to time by notice to the other
party):
If to Lender:
Nomura Asset Capital Corporation
Two World Financial Center
Building B
New York, New York 10281
Attention: Sheryl McAfee
Telecopier: 212-667-1206
with copies to:
Nomura Asset Capital Corporation
Two World Financial Center
Building B
New York, New York 10281
Attention: Barry Funt
Telecopier: 212-667-1567
and
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Kenneth J. Friedman, Esq.
Telecopier: 212-856-7802
If to Borrower:
c/o Saul Centers, Inc.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Attention: Scott Schneider
Telecopier: (301) 986-6023
with a copy to:
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, DC 20037
Attention: Sheldon J. Weisel, Esq.
Telecopier: (202) 663-8007
54
<PAGE>
A notice shall be deemed to have been given: in the case of hand delivery, at
the time of delivery; in the case of registered or certified mail, when
delivered or the first attempted delivery on a Business Day; or in the case of
expedited prepaid delivery and telecopy, upon the first attempted delivery on a
Business Day.
X.7 TRIAL BY JURY. BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY
-------------
JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO TRIAL BY JURY
FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD
TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN
CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY
AND VOLUNTARILY BY Borrower, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY
PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY Borrower.
X.8 HEADINGS. The Section headings and Table of Contents in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
X.9 SEVERABILITY. Wherever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
X.10 PREFERENCES. Lender shall have the continuing and exclusive
-----------
right to apply or reverse and reapply any and all payments by Borrower to any
portion of the Debt. To the extent Borrower makes a payment to Lender, or
Lender receives proceeds of any collateral, which is in whole or part
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such payment or proceeds received, the Debt or part thereof
intended to be satisfied shall be revived and continue in full force and effect,
as if such payment or proceeds had not been received by Lender.
X.11 WAIVER OF NOTICE. Borrower shall not be entitled to any
----------------
notices of any nature whatsoever from Lender except with respect to matters for
which this Agreement or any other Loan Document specifically and expressly
provides for the giving of notice by Lender to Borrower and except with respect
to matters for which Borrower is not, pursuant to applicable Legal Requirements,
permitted to waive the giving of notice. Borrower hereby expressly waives the
right to receive any notice from Lender with respect to any matter for which no
Loan Document specifically and expressly provides for the giving of notice by
Lender to Borrower.
X.12 INTENTIONALLY DELETED.
55
<PAGE>
X.13 EXPENSES; INDEMNITY. (a) Borrower shall reimburse Lender upon
-------------------
receipt of notice for all reasonable costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by Lender in connection with (i) the
preparation, negotiation, execution and delivery of the Loan Documents and the
consummation of the transactions contemplated thereby and all the costs of
furnishing all opinions by counsel for Borrower; (ii) Borrower's and Lender's
ongoing performance under and compliance with the Loan Documents, including
confirming compliance with environmental and insurance requirements; (iii) the
negotiation, preparation, execution, delivery and administration of any
consents, amendments, waivers or other modifications of or under any Loan
Document and any other documents or matters requested by Lender; (iv) filing and
recording of any Loan Documents; (v) title insurance, surveys, inspections and
appraisals; (vi) enforcing or preserving any rights, in response to third party
claims or the prosecuting or defending of any action or proceeding or other
litigation, in each case against, under or affecting Borrower, the Loan
Documents, the Properties or any other security given for the Loan; and (vii)
enforcing any obligations of or collecting any payments due from Borrower under
any Loan Document or with respect to the Properties or in connection with any
refinancing or restructuring of the Loan in the nature of a "work-out", or any
insolvency or bankruptcy proceedings; provided, however, that Borrower shall not
be liable for the payment of any such costs and expenses to the extent the same
arise by reason of the gross negligence, illegal acts, fraud or willful
misconduct of Lender. It is understood and agreed by Lender and Borrower,
however, that Borrower shall not be responsible for the payment of costs and
expenses in connection with the ordinary and ongoing administration of the Loan
(including, without limitation, the Servicer's fees and expenses except as
expressly stated to the contrary in Section 9.4). Any costs and expenses due
and payable to Lender hereunder which are not paid by Borrower within ten (10)
days after demand may be paid from any amounts in the Deposit Account, with
notice thereof to Borrower.
(b) Borrower shall indemnify and hold harmless Lender from and against
any and all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or
nature whatsoever (including the reasonable fees and disbursements of counsel
for Lender in connection with any investigative, administrative or judicial
proceeding commenced or threatened, whether or not Lender shall be designated a
party thereto), that may be imposed on, incurred by, or asserted against Lender
(collectively, the "INDEMNIFIED LIABILITIES") in any manner, relating to or
arising out of or by reason of (i) any breach by Borrower of their obligations
under, or any material misrepresentation by Borrower contained in, any Loan
Document; (ii) the use or intended use of the proceeds of the Loan; (iii) any
information provided by or on behalf of Borrower, or contained in any
documentation approved by Borrower; (iv) ownership of any Deed of Trust, the
Properties or any interest therein, or receipt of any Rents; (v) any accident,
injury to or death of persons or loss of or damage to property occurring in, on
or about any Property or on the adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (vi) any use, nonuse or condition in,
on or about any Property or on adjoining sidewalks, curbs, adjacent property or
adjacent parking areas, streets or ways; (vii) performance of any labor or
services or the furnishing of any materials or other property in respect of any
Property; (viii) the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release of any Hazardous Substance
on, from or affecting any Property; (ix) any personal injury (including wrongful
death) or property damage (real or personal) arising out of or related to such
Hazardous Substance; (x) any lawsuit brought or threatened, settlement reached,
or government
56
<PAGE>
order relating to such Hazardous Substance; (xi) any violation of the
Environmental Laws, which is based upon or in any way related to such Hazardous
Substance, including, without limitation, the costs and expenses of any Remedial
Work, attorney and consultant fees and disbursements, investigation and
laboratory fees, court costs, and litigation expenses; (xii) any failure of any
Property to comply with any Legal Requirement; (xiii) any claim by brokers,
finders or similar persons claiming to be entitled to a commission in connection
with any Lease or other transaction involving any Property or any part thereof
under any Legal Requirement, or any liability asserted against Lender with
respect thereto; and (xiv) the claims of any lessee of any portion of any
Property or any person acting through or under any lessee or otherwise arising
under or as a consequence of any Lease; provided, however, that Borrower shall
not have any obligation to Lender hereunder to the extent that such Indemnified
Liabilities arise from the gross negligence, illegal acts, fraud or willful
misconduct of Lender. To the extent that the undertaking to indemnify and hold
harmless set forth in the preceding sentence may be unenforceable because it
violates any law or public policy, Borrower shall contribute the maximum portion
that it is permitted to pay and satisfy under applicable law to the payment and
satisfaction of all Indemnified Liabilities incurred by Lender. Any amounts
payable to Lender by reason of the application of this paragraph shall become
immediately due and payable and shall bear interest at the Default Rate from the
date loss or damage is sustained by Lender until paid. The obligations and
liabilities of Borrower under this Section 10.13 shall survive the Term and the
exercise by Lender of any of its rights or remedies under the Loan Documents,
including the acquisition of any Property by foreclosure or a conveyance in lieu
of foreclosure.
X.14 PRIOR AGREEMENTS. This Agreement and the other Loan Documents
----------------
contain the entire agreement of the parties hereto and thereto in respect of the
transactions contemplated hereby and thereby, and all prior agreements among or
between such parties, whether oral or written, are superseded by the terms of
this Agreement and the other Loan Documents.
X.15 OFFSETS, COUNTERCLAIMS AND DEFENSES. Borrower hereby waives
-----------------------------------
the right to assert a counterclaim, other than a compulsory counterclaim, in any
action or proceeding brought against it by Lender or its agents, including
Servicer. Any assignee of Lender's interest in and to the Loan Documents shall
take the same free and clear of all offsets, counterclaims or defenses that are
unrelated to the Loan Documents which Borrower may otherwise have against any
assignor of such documents, and no such unrelated offset, counterclaim or
defense shall be interposed or asserted by Borrower in any action or proceeding
brought by any such assignee upon such documents, and any such right to
interpose or assert any such unrelated offset, counterclaim or defense in any
such action or proceeding is hereby expressly waived by Borrower.
X.16 PUBLICITY. All news releases, publicity or advertising by
---------
Borrower or its Affiliates through any media intended to reach the general
public, which refers to the Loan Documents, the Loan, Lender, Nomura, the Loan
purchaser, the Servicer or the trustee in a Securitization (except for notices
required by applicable law), shall be subject to the prior written approval of
Lender, and all such news releases, publicity or advertising by Lender or its
Affiliates referring to Borrower or the Properties (except for notices required
by applicable law and customary "tombstone"-type advertisements) shall be
subject to the prior written approval of Borrower.
57
<PAGE>
X.17 CONTROLLING AGREEMENT. Borrower and Lender intend at all times
---------------------
to comply with applicable state law or applicable United States federal law (to
the extent that it permits Lender to contract for, charge, take, reserve or
receive a greater amount of interest than under state law) and that this Section
10.17 shall control every other agreement in the Loan Documents. If the
applicable law (state or federal) is ever judicially interpreted so as to render
usurious any amount called for under the Note or any other Loan Document, or
contracted for, charged, taken, reserved or received with respect to the Debt,
or if Lender's exercise of the option to accelerate the maturity of the Loan of
any prepayment by Borrower results in Borrower having paid any interest in
excess of that permitted by applicable law, then it is Borrower's and Lender's
express intent that all excess amounts theretofore collected by Lender shall be
credited against the unpaid Principal and all other Debt (or, if the Debt has
been or would thereby be paid in full, refunded to Borrower), and the provisions
of the Loan Documents immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of any
new document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for thereunder. All sums paid
or agreed to be paid to Lender for the use, forbearance or detention of the Loan
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of the Loan until payment
in full so that the rate or amount of interest on account of the Debt does not
exceed the maximum lawful rate from time to time in effect and applicable to the
Debt for so loan as the Debt is outstanding. Notwithstanding anything to the
contrary contained in any Loan Document, it is not the intention of Lender to
accelerate the maturity of any interest that has not accrued at the time of such
acceleration or to collect unearned interest at the time of such acceleration.
X.18 CONFLICT; CONSTRUCTION OF DOCUMENTS. In the event of any
-----------------------------------
conflict between the provisions of this Agreement and any of the other Loan
Documents, the provisions of this Agreement shall control. The parties hereto
acknowledge that they were represented by counsel in connection with the
negotiation and drafting of the Loan Documents and that the Loan Documents shall
not be subject to the principle of construing their meaning against the party
that drafted them.
X.19 BROKERS AND FINANCIAL ADVISORS. Borrower hereby represents
------------------------------
that it has dealt with no financial advisors, brokers, underwriters, placement
agents, agents or finders in connection with the Loan other than Preminger &
Glazer, whose fee shall be paid by Borrower pursuant to a separate agreement.
Borrower and Lender hereby agree to indemnify and hold the other harmless from
and against any and all claims, liabilities, costs and expenses of any kind in
any way relating to or arising from a claim by any Person that such Person acted
on behalf of the indemnifying party in connection with the transactions
contemplated herein. The provisions of this Section 10.19 shall survive the
expiration and termination of this Agreement and the repayment of the Debt.
X.20 NO THIRD PARTY BENEFICIARIES. The Loan Documents are solely
----------------------------
for the benefit of Lender and Borrower and nothing contained in any Loan
Document shall be deemed to confer upon anyone other than the Lender and
Borrower any right to insist upon or to enforce the performance or observance of
any of the obligations contained therein.
58
<PAGE>
[Signature Page Follows]
59
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed by their duly authorized representatives, all as of the day
and year first above written.
SAUL SUBSIDIARY I LIMITED PARTNERSHIP, a Maryland
limited partnership
By: Saul QRS, Inc., a Maryland corporation, its sole
general partner
By:
---------------------------------------------
Name:
Title:
NOMURA ASSET CAPITAL CORPORATION,
a Delaware corporation
By:
---------------------------------------------
Name:
Title:
60
<PAGE>
EXHIBIT 10(q)
REVOLVING CREDIT AGREEMENT
--------------------------
THIS REVOLVING CREDIT AGREEMENT is made and entered into as of the
first day of October, 1997, by and between SAUL HOLDINGS LIMITED PARTNERSHIP, a
Maryland limited partnership and SAUL SUBSIDIARY II LIMITED PARTNERSHIP, a
Maryland limited partnership (hereinafter collectively called "BORROWER"); and
U.S. BANK NATIONAL ASSOCIATION, a national banking association ("AGENT") as
agent for itself and for the other financial institutions (collectively, the
"LENDERS") which may in the future become parties to that certain Intercreditor
Agreement with Agent in its capacity as Agent and Lender (the "INTERCREDITOR
AGREEMENT").
WITNESSETH THAT, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto hereby agree as follows:
DEFINITIONS
-----------
For the purposes of this Agreement, the following terms shall have the following
respective meanings, unless the context hereof clearly requires otherwise:
Acquisition Costs: All costs of acquiring Real Estate Assets,
-----------------
including purchase price and reasonable and customary closing costs, as
determined by Agent.
Adjusted EBITDA: An amount equal to ninety seven percent (97%) of
---------------
EBITDA.
Adjusted EBITDA/Debt Service Coverage Ratio: The ratio obtained by
-------------------------------------------
dividing Adjusted EBITDA by Debt Service.
Adjusted Eurodollar Rate: With respect to each Interest Period
------------------------
applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary,
to the next one hundredth of one percent) determined by dividing the Eurodollar
Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage.
Advance: Any portion of the Loan advanced by a Lender to or for the
-------
benefit of Borrower in accordance with the terms hereof and as to which Borrower
has elected one (1) of the available interest rate options and, if applicable,
an Interest Period. An Advance may be a Eurodollar Rate Advance or a Reference
Rate Advance; provided, however, that if Borrower has made no election of an
interest rate option with respect to any Advance, Borrower shall be deemed to
have elected that it be a Reference Rate Advance.
Advance Date: The date on which an Advance of Loan proceeds requested
------------
by Borrower hereunder is funded.
<PAGE>
Agreement: This Revolving Credit Agreement, including any amendments
---------
hereof and supplements hereto executed by Borrower and Agent on behalf of
Lenders.
Applicable Margin: With respect to:
-----------------
(a) Reference Rate Advances -- 0.00%.
(b) Eurodollar Rate Advances -- shall vary as follows:
(i) 1.375%, effective upon Agent's determination in its sole
discretion, on the first day of each fiscal quarter for purposes of determining
the Applicable Margin for such quarter, that the Leverage Ratio is not greater
than fifty five percent (55%) and the Adjusted EBITDA/Debt Service Coverage
Ratio is not less than 1.80 and continuing thereafter for so long as such tests
are satisfied, as determined by Agent; and
(ii) 1.500%, effective upon Agent's determination, in its
sole discretion, on the first day of each fiscal quarter for purposes of
determining the Applicable Margin for such quarter, that the Leverage Ratio is
not greater than sixty percent (60%) and the Adjusted EBITDA/Debt Service
Coverage Ratio is not less than 1.70 and continuing thereafter for so long as
such tests are satisfied, as determined by Agent; and
(iii) 1.625% at all other times.
Approved Asset: An Unencumbered Asset which has been approved by
--------------
Lenders pursuant to SECTION 2.B.2.
Board: The Board of Governors of the Federal Reserve System or any
-----
successor thereto.
Borrower: As defined in the preamble to this Agreement.
--------
Business Day: Any day, other than a Saturday, a Sunday, or a legal
------------
holiday in the State of Minnesota, on which national banks are permitted to be
open.
Calculation Date: The date upon which Borrower submits a Draw
----------------
Request, the date upon which Borrower requests that Agent issue a Letter of
Credit, the date upon which Borrower requests the release of a Negative Pledge
with respect to an Approved Asset, the date upon which a Capital Event occurs,
or the date upon which there exists an Event of Default under the Loan, as
applicable.
Capital Event: The occurrence from time to time of an equity or debt
-------------
offering by any Borrower (which shall specifically exclude stock issued in
<PAGE>
connection with a dividend reinvestment plan), a Disqualifying Environmental
Event, or if an Encumbrance, Imposition or Lien arises against an Approved
Asset.
Capitalization Value: For any period of determination, an amount as
--------------------
determined by Agent in its sole discretion, equal to the sum of (a) the
aggregate Adjusted EBITDA for the previous four calendar quarters, divided by
ten percent (10%) (provided that, with respect to Real Estate Assets which
Borrower has owned for more than three (3) months but less than one (1) year, as
of the Calculation Date, Adjusted EBITDA shall be annualized based upon the
period of time Borrower has owned them); (b) 100% of the value of Unrestricted
Cash and Cash Equivalents; (c) 100% of the aggregate costs incurred and paid to
the Calculation Date by the Borrower with respect to Real Estate Assets Under
Development, including those projects which have been operating for less than
one year; provided, however, with respect to any Real Estate Asset Under
Development which does not continue to meet the Minimum Lease Up Requirement,
only 75% of the aggregate costs incurred and paid to the Calculation Date by the
Borrower shall be taken in account in calculating Capitalization Value; and (d)
50% of the Acquisition Costs with respect to Real Estate Assets which, as of the
date of calculation, Borrower has owned for less than three (3) months.
Closing Date: The date of this Agreement.
------------
Code: The Internal Revenue Code of 1986, as amended.
----
Commitment Percentage: Each Lender's share of all right, title, and
----------------------
interest in the Loan and the Loan Documents, as set forth on Schedule 1 attached
----------
hereto, as amended and modified by unilateral action of Agent from time to time
to reflect the sale or assignment of a portion or portions of the Loan.
Debt Service: For any period of determination, the following amount
------------
incurred by Borrower during the previous four (4) fiscal quarters, as determined
by Agent in its sole discretion: (a) Interest Expense plus (b) the aggregate
----
amount of scheduled principal payments of indebtedness of the Borrower
(excluding optional prepayments but expressly including scheduled principal
payments in respect of any indebtedness which is not amortized through equal
periodic installments of principal and interest over the term of such
indebtedness, including, without limitation, balloon payments at maturity that
are not refinanced or paid off on or before the maturity date thereof) required
to be made during such time period by the Borrower plus (c) the aggregate amount
----
of capitalized interest required in accordance with GAAP to be paid or accrued
by the Borrower during such time period, plus (d) expenses attributable to
----
preferred stock or a similar type of investment.
Default Rate: The Default Rate of interest specified in SECTION
------------
1.2(C) hereof.
<PAGE>
Disqualifying Environmental Event: Any release or threatened release
---------------------------------
of Hazardous Substances, any violation of Environmental Laws or any other
similar environmental event with respect to a Real Estate Asset which is not
cured within sixty (60) days or that would cause, in Agent's determination, such
Real Estate Asset to no longer be financeable on a non-recourse (with customary
exceptions) debt basis under the then generally accepted underwriting standards
of national insurance company or pension fund real estate institutional lenders.
In the event that such release or threatened release, violation or similar
environmental event is susceptible of cure but is not cured within said sixty
(60) days, so long as Borrower is diligently and continuously pursuing such
cure, as evidenced to Agent's satisfaction, Agent shall permit Borrower an
additional one hundred twenty (120) days to effectuate such cure; provided,
however that such additional one hundred twenty (120) days shall not apply where
such release or threatened release, violation or similar environmental event
results, in Lender's judgment, in a matter which is of an emergency nature.
Distribution. With respect to:
------------
(i) the Borrower, any distribution of cash or other cash
equivalent, directly or indirectly, to the partners of the
Borrower; or any other distribution on or in respect of any
partnership interests of the Borrower excluding distributions
reinvested pursuant to Borrower's distribution reinvestment
program; and
(ii) the Guarantor, the declaration or payment of any
dividend on or in respect of any shares of any class of capital
stock of Guarantor, excluding dividends payable solely in shares
of common stock by Guarantor and dividends reinvested pursuant to
Guarantor's dividend reinvestment program; the purchase,
redemption, or other retirement of any shares of any class of
capital stock of Guarantor, directly or indirectly through a
subsidiary of Guarantor, or otherwise; the return of capital by
Guarantor to its shareholders as such; or any other distribution
on or in respect of any shares of any class of capital stock of
Guarantor (except as excluded above).
Draw Request: A written request by Borrower for an Advance of Loan
------------
proceeds under this Agreement, in the form and with the certifications included
within Exhibit A attached hereto and hereby made a part hereof.
---------
EBITDA: For any period of determination, an amount equal to
------
Borrower's earnings before interest, taxes, depreciation and amortization, all
as calculated in accordance with GAAP, as determined by Agent.
Encumbrance: As defined in SECTION 5.6.
-----------
<PAGE>
Environmental Law: Any judgment, decree, order, law, license, rule or
-----------------
regulation pertaining to environmental matters, including without limitation,
those arising under the Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 as
amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986
("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic
Substances Control Act, or any state or local statute, regulation, ordinance,
order or decree relating to health, safety or the environment.
Eurodollar Business Day: A Business Day which is also a day for
-----------------------
trading by and between banks in United States dollar deposits in the interbank
Eurodollar market and a day on which banks are open for business in New York
City.
Eurodollar Rate: With respect to each Interest Period applicable to a
---------------
Eurodollar Rate Advance, the interest rate per annum (rounded upward, if
necessary, to the next one-one hundredth of one percent) as determined by Agent
at which United States dollar deposits are offered in the interbank Eurodollar
market two (2) Eurodollar Business Days prior to the first day of such Interest
Period for delivery in Immediately Available Funds on the first day of such
Interest Period and in an amount approximately equal to the Advance to which
said Interest Period is to apply as determined by Agent and for a maturity
comparable to the Interest Period; provided that, in lieu of determining the
rate in the foregoing manner, Agent may substitute the per annum Eurodollar
interest rate (LIBOR) for United States dollars displayed on the Reuters Screen
LIBO page two (2) Eurodollar Business Days prior to the first day of such
Interest Period (rounded upward, if necessary, to the next one-hundredth of one
percent) then applicable to amounts approximately equal to the Advance to which
such Interest Period is to apply for a maturity comparable to the Interest
Period. "Reuters Screen LIBO page" means the display designated as page "LIBO"
on the Reuters Monitor Money Rate Screen (or such other page as may replace the
LIBO page on such service) for the purpose of displaying Reuters interbank
offered rates of major banks for United States dollar deposits.
Eurodollar Rate Advance: An Advance, in the minimum amount of
-----------------------
$1,000,000.00 and in integral multiples of $100,000.00 in excess thereof, with
respect to which the interest rate is determined by reference to the Adjusted
Eurodollar Rate.
Eurodollar Reserve Percentage: As of any day, that percentage
-----------------------------
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board for determining the actual reserve requirement (including any basic,
supplemental or emergency reserves) for a member bank of the Federal Reserve
System, with deposits comparable in amount to those held by a Lender in respect
of "Eurocurrency Liabilities" as such term is defined in Regulation D of the
Board. The rate of interest applicable to any outstanding Eurodollar Rate
Advances shall
<PAGE>
be adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
Event of Default: Any event set forth in SECTION 6.1.
----------------
Extension Period: As defined in SECTION 1.14.
----------------
Funds from Operations. Net income, computed in accordance with GAAP,
---------------------
excluding minority interests, gains, or losses from debt restructuring and sales
of property (inclusive of non-recurring items such as asset sales or property
valuation adjustments), plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures will be calculated to reflect
Funds From Operations on the same basis.
GAAP: Generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of any date of
determination. Except as may be expressly provided to the contrary herein, all
accounting terms used herein shall be interpreted, and all accounting
determinations hereunder shall be made, in accordance with GAAP. To the extent
any change in GAAP affects any computation or determination required to be made
pursuant to this Agreement, such computation or determination shall be made as
if such change in GAAP had not occurred, unless Borrower and Agent on behalf of
Lenders agree in writing on an adjustment to said computation or determination
to account for such change in GAAP.
Governmental Requirements: All laws, statutes, codes, ordinances, and
-------------------------
governmental rules, regulations and requirements applicable to Borrower, Agent,
any Lender and/or the Approved Assets.
Guarantor: Saul Centers, Inc., a Maryland corporation.
---------
Guaranty: That certain Guaranty of even date herewith executed by
--------
Guarantor, including any amendments thereof and supplements thereto executed by
Guarantor to Agent and Lenders.
Hazardous Substances: Any hazardous waste, as defined by 42 U.S.C.
--------------------
(S) 9601(5), any hazardous substances as defined by 42 U.S.C. (S) 9601(14), any
pollutant or contaminant as defined by 42 U.S.C. (S)9601(33) or any toxic
substances,
<PAGE>
oil or hazardous materials or other chemicals or substances regulated by any
Environmental Laws.
Immediately Available Funds: Funds with good value on the day and in
---------------------------
the city in which payment is received.
Imposition: As defined in SECTION 5.6.
----------
Intercreditor Agreement: As defined in the Preamble to this
-----------------------
Agreement.
Interest Expense: For any period of determination, an amount
----------------
determined by Agent in its sole discretion equal to the aggregate amount of
interest required in accordance with GAAP to be paid or accrued (but excluding
interest reserves funded from the proceeds of any construction loan) by the
Borrower during such time period on: (i) all indebtedness of the Borrower
(including the Loan and including original issue discount and amortization of
prepaid interest, if any) (ii) all amounts available for borrowing, or for
drawing under letters of credit, if any, issued for the account of the Borrower,
but only if such interest was or is required to be reflected as an item of
expense, excluding commitment fees, agency fees, facility fees, balance
deficiency fees and similar fees and expenses in connection with the borrowing
of money and (iii) preferred stock or a similar type of investment.
Interest Period: With respect to each Eurodollar Rate Advance, the
---------------
period commencing on the date of such Advance or on the last day of the
immediately preceding Interest Period, if any, applicable to an outstanding
Advance and ending on the numerically corresponding day one (1), two (2), three
(3) or six (6) months thereafter, as Borrower may elect in the applicable notice
or request of or for borrowing, continuation or conversion; provided that:
-------------
(1) Any Interest Period that would otherwise end on a day which is
not a Eurodollar Business Day shall be extended to the next succeeding
Eurodollar Business Day, unless such Eurodollar Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding Eurodollar Business Day; and
(2) Any Interest Period that begins on the last Eurodollar Business
Day of a calendar month (or a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Eurodollar Business Day of a calendar month.
No Interest Period may end after the Maturity Date, and each Interest
Period must end on a date such that no default exists under SECTION 1.3 hereof
as a result of a failure by Borrower to prepay the Advance to which such
Interest Period applies. Any payment of a Eurodollar Rate Advance on a date
other than the last
<PAGE>
day of the Interest Period applicable thereto shall be accompanied by an
additional payment in an amount computed in accordance with SECTION 1.12.
Lenders: Each Lender that is a party to this Agreement and which
-------
hereafter becomes party to the Intercreditor Agreement, collectively, and each
of their respective permitted successors and assigns.
Letter of Credit: An irrevocable letter of credit issued by Agent
----------------
pursuant to this Agreement for the account of Borrower.
Letter of Credit Fee: As defined in SECTION 2.A.7.
--------------------
Letter of Credit Participation: As defined in SECTION 2.A.9.
------------------------------
Leverage Ratio: The ratio of Total Adjusted Outstanding Indebtedness
--------------
to Capitalization Value.
Loan: The loan evidenced by the Note.
----
Loan Availability. That portion of the Revolving Commitment Amount
-----------------
determined by Agent to be available to be advanced as more particularly
described in SECTION 2.B.3.
Loan Documents: The documents described in SECTION 2.B.1, which
--------------
evidence, secure or otherwise relate to the Loan, including but not limited to
the Note, this Agreement, the Letter of Credit applications, the Letters of
Credit, and the Guaranty, the Negative Pledge Agreements, and including any
amendments thereof and supplements thereto executed by Agent on behalf of the
Lenders and Borrower (and/or any other party thereto).
Major Asset: The Unencumbered Assets known as Beacon, Lexington and
-----------
Southdale, and such other Approved Assets as Borrower and Lenders may agree to
designate as a Major Asset from time to time.
Majority Lenders: Lenders holding not less than fifty one percent
----------------
(51%) of the then aggregate outstanding unpaid principal amount of the Loan or,
if no such principal amount is then outstanding, not less than fifty one percent
(51%) of the Revolving Commitment.
Maturity Date: September 30, 2000, unless extended pursuant to the
-------------
terms of SECTION 1.14.
Maximum Drawing Amount: The maximum aggregate amount that the
----------------------
beneficiaries may at any time draw under outstanding Letters of Credit, as such
maximum aggregate amount may be reduced from time to time pursuant to the terms
of the Letters of Credit.
<PAGE>
Minimum Equity Value: For any period of determination, an amount
--------------------
equal to Capitalization Value less Total Adjusted Outstanding Indebtedness.
Minimum Lease Up Requirement: Any Real Estate Asset that on any date
----------------------------
of determination has been improved with a building or buildings which have an
aggregate average occupancy of all building(s) in such Real Estate Asset of not
less than 50% for the fiscal quarter most recently ended, other than Cross Town
Shopping Center in Tulsa, Oklahoma and except as otherwise approved by Agent.
For purposes of this definition, a tenant shall be deemed to be in "occupancy"
if such tenant or its subtenant(s) is in possession of the leased premises and
such tenant is paying stipulated rent, if any; provided, however, when
determining whether the Minimum Lease Up Requirement has been satisfied pursuant
to SECTION 2.B.2 hereof, a tenant shall be deemed to be in occupancy if, within
six (6) months prior to the date of determination, such tenant entered into a
lease for space in the Real Estate Asset which such tenant previously did not
occupy and there exists no default under such lease and no material
contingencies to such tenant's occupancy under the lease other than completion
of tenant improvement work.
Net Equity Proceeds: The proceeds of a sale of an equity interest in
-------------------
the Borrower or the Guarantor (including those attributable to a dividend
reinvestment program), net of usual and customary closing costs and expenses.
Note: The Unsecured Revolving Promissory Note(s) of even date
----
herewith executed and delivered by Borrower to Lenders in the maximum principal
amount of Sixty Million and No/100ths Dollars ($60,000,000.00), to evidence the
Loan, as the same may be amended, modified or replaced from time to time.
Obligations: All indebtedness, obligations and liabilities of the
-----------
Borrower to any of the Lenders and the Agent, individually or collectively,
under this Agreement, any of the other Loan Documents, or in respect to the
Loan, the Note or Reimbursement Obligations incurred or the Letter of Credit
applications or the Letters of Credit or other instruments at any time
evidencing any thereof, whether existing on the date of this Agreement or
arising or incurred hereafter, direct or indirect, joint or several, absolute or
contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise.
Permanent Loan Estimate: For any period of determination, a
-----------------------
determination by Agent of a hypothetical principal amount of indebtedness which
Borrower could incur assuming (i) payments of annual debt service equal to
Unencumbered Adjusted EBITDA measured with respect to the Approved Assets only
divided by 1.50, (ii) an interest rate equal to two percent (2.0%) in excess of
the then-current annual yield on ten-year United States Treasury obligations
issued most recently prior to such date and (iii) a twenty five (25) year
principal amortization schedule.
<PAGE>
Person: Any natural person, corporation, limited liability company,
------
partnership (general or limited), limited liability partnership, joint venture,
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
Real Estate Assets: The fixed and tangible properties consisting of
------------------
land, buildings and/or other improvements owned or ground-leased by the Borrower
at the relevant time of reference thereto.
Real Estate Assets Under Development: Any Real Estate Assets for
-------------------------------------
which the Borrower, is actively pursuing construction and for which construction
is proceeding to completion without undue delay from permit denial, construction
delays or otherwise, all pursuant to such Person's ordinary course of business;
provided that such Real Estate Asset will no longer be considered a Real Estate
Asset Under Development on the date which is six (6) months after the Borrower
obtains the necessary governmental approvals to permit occupancy of the
building. Notwithstanding the foregoing, tenant improvements to previously
constructed and/or leased Real Estate Assets shall not be considered Real Estate
Assets Under Development.
Reference Rate: The rate of interest from time to time publicly
--------------
announced by Agent as its "reference rate". Agent may lend to its customers at
rates that are at, above or below the Reference Rate. For purposes of
determining any interest rate hereunder or under any Loan Document which is
based on the Reference Rate, such interest rate shall change as and when the
Reference Rate shall change.
Reference Rate Advance: An Advance with respect to which the interest
----------------------
rate is determined by reference to the Reference Rate.
Regulatory Change: Any change after the date hereof in federal, state
-----------------
or foreign laws or regulations or the adoption or making after such date of any
interpretations, directives or requirements applying to a class of banks
including such Lender under any federal, state or foreign laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof.
Reimbursement Obligations: The Borrower's obligation to reimburse the
-------------------------
Lenders and the Agent on account of any drawing under any Letter of Credit as
provided in SECTION 2.A.4. Notwithstanding the foregoing, unless Borrower shall
notify Agent of its intention to repay the Reimbursement Obligations on the date
of the related drawing under any Letter of Credit, as set forth in SECTION
2.A.4, such Reimbursement Obligation shall simultaneously with such drawing be
converted to and become a Reference Rate Advance.
<PAGE>
Revolving Commitment: The obligation of the Lenders to make Advances
--------------------
to Borrower and to participate in the issuance, extension and renewal of Letters
of Credit and the obligation of Agent to issue, extend and renew Letters of
Credit, in an aggregate principal amount at any time not to exceed the Revolving
Commitment Amount upon the terms and subject to the conditions and limitations
set forth in this Agreement.
Revolving Commitment Amount: Sixty Million and No/100ths Dollars
---------------------------
($60,000,000.00).
Termination Date: The earlier of (a) the Maturity Date, or (b) the
----------------
date on which the Note is declared to be immediately due and payable pursuant to
the terms hereof or of the Note.
Total Adjusted Outstanding Indebtedness: As of any date of
---------------------------------------
determination, the sum as determined by Agent of all obligations, contingent and
otherwise of the Borrower, whether secured or unsecured, that in accordance with
GAAP should be classified upon the obligor's balance sheet as liabilities, or to
which reference should be made by footnotes thereto, including in any event and
whether or not so classified: (a) all debt and similar monetary obligations,
whether direct or indirect (excluding trade payables and other operating
expenses paid by Borrower within sixty days); (b) all liabilities secured by any
mortgage, pledge, security interest, lien, charge, or other encumbrance existing
on property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; (c) all guarantees for borrowed money,
endorsements and other contingent obligations, whether direct or indirect, in
respect of indebtedness or obligations of others, including any obligation to
supply funds (including partnership obligations and capital requirements) to or
in any manner to invest in, directly or indirectly, the debtor, to purchase
indebtedness, or to assure the owner of indebtedness against loss, through an
agreement to purchase goods, supplies, or services for the purpose of enabling
the debtor to make payment of the indebtedness held by such owner or otherwise,
and the obligations to reimburse the issuer in respect of any letters of credit;
and (d) preferred stock outstanding or a similar type of investment.
Total Revolving Outstandings: As of any date of determination, the
----------------------------
aggregate unpaid principal balance of Advances outstanding on such date.
Transferees: As defined in SECTION 7.7.
-----------
Transferred Interest: As defined in SECTION 7.7.
--------------------
Unencumbered Adjusted EBITDA: Adjusted EBITDA calculated only with
----------------------------
respect to the Approved Assets.
Unencumbered Asset. Any Real Estate Asset that on any date of
------------------
determination: (a) is not subject to any material liens (including any such
lien
<PAGE>
imposed by the organizational documents of the owner of such asset), (b) is not
the subject of any matter that materially adversely affects the value of such
Real Estate Asset, (c) is not the subject of a Disqualifying Environmental
Event, (d) has been improved with a building or buildings which (1) have been
issued a certificate of occupancy (where available) or is otherwise lawfully
occupied for its intended use, and (2) are fully operational, (e) is wholly
owned or ground-leased by the Borrower and (f) has not been designated by the
Borrower in writing to the Agent as a Real Estate Asset that is not an
Unencumbered Asset, which designation shall not be permitted during the
continuance of an Event of Default and shall be accompanied by a compliance
certificate in the form of Exhibit B-6 attached hereto.
-----------
Uniform Customs: With respect to any Letter of Credit, the Uniform
---------------
Customs and Practice for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500, or any successor version thereof
adopted by the Agent in the ordinary course of its business as a letter of
credit issuer and in effect at the time of issuance of such Letter of Credit.
Unrestricted Cash and Cash Equivalents: As of any date of
--------------------------------------
determination, the sum of (a) the aggregate amount of unrestricted cash then
held by the Borrower and (b) the aggregate amount of unrestricted cash
equivalents (valued at fair market value) then held by the Borrower. As used in
this definition, (i) "unrestricted" means the specified asset is not subject to
any liens in favor of any Person and (ii) "cash equivalents" includes overnight
deposits and also means that such asset has a liquid, par value in cash and is
convertible to cash on demand. Notwithstanding anything contained herein to the
contrary, the term Unrestricted Cash and Cash Equivalents shall not include the
commitments of the Lenders to make Advances under this Agreement or any other
commitments from which the access to such cash or cash equivalents would create
indebtedness or tenant security and other restricted deposits, until forfeited
or otherwise entitled to be retained by the Borrower.
ARTICLE I.
LOAN
----
1.1 - Principal Advances
- ------------------------
Upon the terms and subject to the conditions set forth in this Agreement,
each Lender severally agrees to lend to Borrower, through the Agent, an amount
up to such Lender's Commitment Percentage of Advances on a revolving basis, at
any time and from time to time, in accordance with the terms hereof, from the
Closing Date to the Termination Date, during which period Borrower may borrow,
repay and reborrow in accordance with the terms hereof, for the purpose of
funding pre-development, development, acquisitions, renovations/expansions and
working capital, distributions and principal amortization requirements of the
Borrower; provided, however, that (A) at no time shall any Lender be obligated
to lend to Borrower more than its Commitment Percentage of the total amount of
proceeds of the Loan which Borrower has then qualified to receive hereunder, and
(B) the
<PAGE>
amount of the Total Revolving Outstandings shall never exceed the lesser of (x)
the Revolving Commitment Amount and (y) the Loan Availability.
All Advances by each Lender shall be evidenced by a Note. Each Note
executed by the Borrower shall be in the aggregate principal amount equal to
such Lender's Commitment Percentage of the Revolving Commitment Amount. Each
Lender shall enter in its ledgers and records the amount of each such Advance,
the amount of each Advance made, and of each payment made upon the Loan, and
each Lender is authorized by Borrower to enter on a schedule attached to the
Note a record of such Advances and payments; provided, however, that the failure
by any Lender to make any such entry or any error by such Lender in making such
entry shall not limit or otherwise affect the obligations of Borrower hereunder
and under the Note. Notwithstanding the express principal amount of the Note,
Borrower shall not at any time be obligated to repay more or less than the total
of all Advances made by each Lender pursuant hereto and to the other Loan
Documents, together with interest thereon at the rates specified below and in
the Note, computed on each Advance from the date it is so made by such Lender,
and all other advances made by such Lender pursuant to the terms of the Loan
Documents, with interest thereon as therein provided, less all payments of
principal of and interest on the Note, and of such advances and interest
thereon, made by Borrower. The entire unpaid principal amount of the Loan shall
be due and payable on the Termination Date.
1.2 - Interest
- --------------
Interest shall accrue and be payable on the Advances from the date made as
follows:
A. Each Eurodollar Rate Advance shall bear interest on the unpaid
principal amount thereof during the Interest Period applicable thereto at a rate
per annum equal to the sum of (i) the Adjusted Eurodollar Rate for such Interest
Period, plus (ii) the Applicable Margin. (If Borrower has made no election of
an interest rate option with respect to any Advance, said Advance shall be
deemed to be a Reference Rate Advance.) Notwithstanding anything to the
contrary herein set forth, the Adjusted Eurodollar Rate payable upon any
Eurodollar Rate Advance shall not decrease during any Interest Period.
B. Each Reference Rate Advance shall bear interest on the unpaid
principal amount thereof at a varying rate per annum equal to the sum of (i) the
Reference Rate, plus (ii) the Applicable Margin.
C. Any Advance not paid when due, whether at the date scheduled
therefor or earlier upon acceleration, shall bear interest until paid in full
(i) during the balance of any Interest Period applicable to such Advance, at a
rate per annum equal to the sum of
<PAGE>
the rate applicable to such Advance during such Interest Period plus four
percent (4%), and (ii) otherwise, at a rate per annum equal to the sum of (x)
the Reference Rate, plus (y) the Applicable Margin for Reference Rate Advances,
plus (z) four percent (4%) (herein called the "DEFAULT RATE").
D. Interest shall be payable by Borrower (i) with respect to each
Advance, on the first Business Day of each calendar month, commencing on the
first Business Day of the next calendar month after the calendar month in which
the first Advance is made; (ii) with respect to all Advances, upon any permitted
prepayment (on the amount prepaid); and (iii) with respect to all Advances, on
the Termination Date; provided that interest under SECTION 1.2(C) shall be
payable on demand, at Lenders' option. Interest on the Loan shall be computed
on the basis of actual days elapsed and a year of 360 days.
E. In no event shall the Reference Rate or any applicable Adjusted
Eurodollar Rate ever exceed the maximum rate permitted by applicable law (if any
such maximum rate is established by applicable law), and such maximum rate shall
change if and when applicable law changes to permit a higher maximum rate.
Borrower and Lenders agree that no payment of interest or other consideration
made or agreed to be made by Borrower to Lenders pursuant to the Note, this
Agreement or any other instrument evidencing or securing the Loan shall, at any
time, be deemed to have been computed at an interest rate in excess of the
maximum rate of interest permissible by law, if any. In the event such payments
of interest or other consideration provided for in the Note, this Agreement or
any other instrument referring to or securing the Note shall result in payment
of an effective rate of interest which, for any period of time, is in excess of
the limit of the usury law or any other law applicable to the loan evidenced
hereby, all sums in excess of those lawfully collectible as interest for the
period in question shall, without further agreement or notice between or by any
party or parties hereto, be applied to the principal balance immediately upon
receipt of such monies by Lenders with the same force and effect as though
Borrower had specifically designated, and Lenders had agreed to accept, such
extra payments as a principal payment, without premium or penalty. If principal
has been fully paid, any such excess amount shall be refunded to Borrower. This
provision shall control over every other obligation of Borrower and Lenders
under the Note, under this Agreement and under any instrument which secures the
Note.
F. In the event that any required payment of principal and/or
interest under the Note or hereunder is not made on the due date thereof,
Borrower shall pay to Agent on behalf of Lenders a late payment charge equal to
five percent (5%) of the amount of the overdue payment, for the purpose of
reimbursing Lenders for a portion of the expense incident to handling the
overdue payment.
1.3 - Conversions and Continuations
- -----------------------------------
On the terms and subject to the limitations hereof, Borrower shall have the
option at any time and from time to time to convert all or any portion of the
Advances into Reference Rate Advances or Eurodollar Rate Advances, or to
<PAGE>
continue a Eurodollar Rate Advance as such; provided, however that a Eurodollar
Rate Advance may be converted or continued only on the last day of the Interest
Period applicable thereto and no Advance may be converted to, or continued as, a
Eurodollar Rate Advance if an Event of Default has occurred and is continuing on
the proposed date of continuation or conversion. In addition, Advances may be
converted to, or continued as, Eurodollar Rate Advances only in amounts of
$1,000,000.00 and in integral multiples of $100,000.00 in excess thereof.
Borrower shall give Agent on behalf of Lenders written notice of any
continuation or conversion of any Advance, and such notice must be given not
later than 10:00 A.M. (Minneapolis time) two (2) Eurodollar Business Days prior
to the requested date of conversion or continuation in the case of the
continuation of, or conversion to, a Eurodollar Rate Advance, and not later than
10:00 A.M. (Minneapolis time) one day prior to the date of the requested
conversion to a Reference Rate Advance. Each such notice shall specify (A) the
amount to be continued or converted, (B) the date for the continuation or
conversion (which must be (i) the last day of the preceding Interest Period for
any continuation as Eurodollar Rate Advances, (ii) a Eurodollar Business Day in
the case of any conversion to Eurodollar Rate Advances, and (iii) a Business Day
in the case of conversions to Reference Rate Advances), and (C) in the case of
conversions to, or continuations as, Eurodollar Rate Advances, the Interest
Period applicable thereto. Any notice given by Borrower under this Section
shall be irrevocable. If Borrower shall fail to notify Agent on behalf of
Lenders of the continuation of any Eurodollar Rate Advance within the time
required by this Section, such Advance shall, on the last day of the Interest
Period applicable thereto, automatically be converted into a Reference Rate
Advance of the same principal amount.
1.4 - Prepayments.
- -----------------
Borrower may prepay Reference Rate Advances, in whole or in part, at any
time after one (1) Business Day's prior written notice of said prepayment from
Borrower to Agent on behalf of Lenders, without premium or penalty. Any such
prepayment must be accompanied by payment, in full, of all unpaid, accrued
interest on the amount prepaid. Borrower may prepay Eurodollar Rate Advances
only after three (3) Business Days' prior written notice of such prepayment from
Borrower to Agent on behalf of Lenders and on the last day of the Interest
Period applicable thereto, unless such prepayment (whether voluntary or
mandatory upon an acceleration following an Event of Default) is accompanied by
an additional payment in an amount computed pursuant to SECTION 1.12. Any such
prepayment must be accompanied by payment, in full, of all unpaid, accrued
interest on the amount prepaid. Notwithstanding the foregoing, Borrower may
make partial prepayments pursuant to SECTION 2.B.3, without premium or penalty
and without payment of such accrued interest, except the additional payment
provided for above with respect to prepayment of Eurodollar Rate Advances. Any
such partial prepayments shall be applied first to prepayment of Reference Rate
Advances.
<PAGE>
1.5 - Up-Front Fee
- ------------------
In addition to any other fees set forth in this Agreement, Borrower shall
pay to Agent on behalf of Lenders, in Immediately Available Funds an up-front
fee in the amount of Three Hundred Thousand and No/100ths Dollars ($300,000.00),
payable on the Closing Date.
1.6 - Non-Usage Fees
- --------------------
In addition to any other fees set forth in this Agreement, Borrower shall
pay to Agent on behalf of Lenders in Immediately Available Funds a non-usage fee
of 0.30% per annum of the unadvanced Revolving Commitment Amount (after
deducting the undrawn amount of any Letters of Credit outstanding hereunder),
payable on the first day of each calendar quarter, calculated in arrears based
on average daily balance of the unadvanced Revolving Commitment Amount during
the prior calendar quarter; the first quarter for which the non-usage fee shall
be payable shall commence on October 1, 1997 and the first payment of such fee
shall be due and payable on January 1, 1998; provided, however such percentage
shall be equal to 0.25% per annum if as of the last day of the previous quarter
the Leverage Ratio is not greater than sixty percent (60%) and the Adjusted
EBITDA/Debt Service Coverage Ratio is not less than 1.70; and provided, further,
such percentage shall be equal to 0.20% per annum if as of the last day of the
previous quarter the Leverage Ratio is not greater than fifty five percent (55%)
and the Adjusted EBITDA/Debt Service Coverage Ratio is not less than 1.80. The
non-usage fee shall be shared among the Lenders in accordance with the daily
average Commitment Percentages of the Lenders during such calendar quarter.
1.7 - Payments.
- --------------
The unpaid principal balance of, and all unpaid, accrued interest on, and
other amounts due with respect to, the Loan shall be due and payable and paid in
full by Borrower, on the Termination Date. Payments and prepayments of
principal of, and interest on, the Note and all fees, expenses and other
obligations under this Agreement payable to Agent and Lenders shall be made
without setoff, deduction or counterclaim in Immediately Available Funds not
later than 1:00 P.M. (Minneapolis time) on the dates called for under this
Agreement and the Note to Agent at the Agent's main office in Minneapolis,
Minnesota. Funds received after such time shall be deemed to have been received
on the next Business Day. Whenever any payment to be made hereunder or on the
Note shall be stated to be due on a day which is not a Business Day, such
payment shall be made on the next succeeding Business Day and such extension of
time, in the case of a payment of principal, shall be included in the
computation of any interest on such principal payment. All principal amounts
paid or prepaid hereunder may be reborrowed in accordance with the provisions of
this Agreement.
1.8 - Interest Rate Not Ascertainable, Etc.
- ------------------------------------------
If, on or prior to the date for determining the Adjusted Eurodollar Rate in
respect of the Interest Period for any Eurodollar Rate Advance, any Lender
<PAGE>
determines (which determination shall be conclusive and binding, absent error)
that:
(a) deposits in dollars (in the applicable amount) are not being made
available to such Lender in the relevant market for such Interest Period,
or
(b) the Adjusted Eurodollar Rate will not adequately and fairly
reflect the cost to such Lender of funding or maintaining Eurodollar Rate
Advances for such Interest Period,
then such Lender shall forthwith give notice to Borrower of such determination,
whereupon the obligation of such Lender to make or continue, or to convert any
Advances to, Eurodollar Rate Advances shall be suspended until such Lender
notifies Borrower that the circumstances giving rise to such suspension no
longer exist. While any such suspension continues, all further Advances by such
Lender shall be Reference Rate Advances. No such suspension shall affect the
interest rate then in effect during the applicable Interest Period for any
Eurodollar Rate Advance outstanding at the time such suspension is imposed.
1.9 - Increased Cost.
- --------------------
If any Regulatory Change:
A. shall subject any Lender to any tax, duty or other charge with respect
to its Eurodollar Rate Advances, the Note, or its obligation to make Eurodollar
Rate Advances or shall change the basis of taxation of payment to such Lender of
the principal of or interest on Eurodollar Rate Advances or any other amounts
due under this Agreement in respect of Eurodollar Rate Advances or its
obligation to make Eurodollar Rate Advances (except for changes in the rate of
tax on the overall net income of such Lender imposed by the jurisdiction in
which such Lender's principal office is located); or
B. shall impose, modify or deem applicable any reserve, special deposit,
capital or similar requirement (including, without limitation, any such
requirement imposed by the Board, but excluding with respect to any Eurodollar
Rate Advance any such requirement to the extent included in calculating the
applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the
account of, or credit extended by, such Lender or shall impose on such Lender or
on the interbank Eurodollar market any other condition affecting its Eurodollar
Rate Advances, the Note or its obligation to make Eurodollar Rate Advances;
and the result of any of the foregoing is to increase the cost to such Lender of
making or maintaining any Eurodollar Rate Advance, or to reduce the amount of
any sum received or receivable by such Lender under this Agreement or under the
Note, then, within thirty (30) days after demand by such Lender, Borrower shall
pay to such Lender such additional amount or amounts as will compensate such
Lender for such increased cost or reduction. Such Lender will promptly notify
<PAGE>
Borrower of any event of which it has knowledge, occurring after the date
hereof, which will entitle it to compensation pursuant to this Section. A
certificate of any Lender claiming compensation under this Section, setting
forth the additional amount or amounts to be paid to it hereunder and stating in
reasonable detail the basis for the charge and the method of computation, shall
be conclusive in the absence of error. In determining such amount, such Lender
may use any reasonable averaging and attribution methods. Failure on the part
of any Lender to demand compensation for any increased costs or reduction in
amounts received or receivable with respect to any Interest Period shall not
constitute a waiver of such Lender's rights to demand compensation for any
increased costs or reduction in amounts received or receivable in any subsequent
Interest Period.
1.10 - Illegality
- -----------------
If any Regulatory Change shall make it unlawful or impossible for any
Lender to make, maintain or fund any Eurodollar Rate Advances, such Lender shall
notify Borrower, whereupon the obligation of such Lender to make or continue, or
to convert any Advances to, Eurodollar Rate Advances shall be suspended until
such Lender notifies Borrower that the circumstances giving rise to such
suspension no longer exist. If any Lender determines that it may not lawfully
continue to maintain any Eurodollar Rate Advances to the end of the applicable
Interest Periods, all of the affected Advances shall be automatically converted
to Reference Rate Advances as of the date of such Lender's notice, and upon such
conversion Borrower shall compensate such Lender in accordance with SECTION
1.12.
1.11 - Capital Adequacy
- -----------------------
In the event that any Regulatory Change reduces or shall have the effect of
reducing the rate of return on any Lender's capital or the capital of its parent
corporation (by an amount such Lender deems material) as a consequence of the
Loan to a level below that which such Lender or its parent corporation could
have achieved but for such Regulatory Change (taking into account such Lender's
policies and the policies of its parent corporation with respect to capital
adequacy), then Borrower shall, within ten (10) days after written notice and
demand from such Lender, pay to such Lender additional amounts sufficient to
compensate such Lender, or its parent corporation, for such reduction. Any
determination by such Lender under this Section and any certificate as to the
amount of such reduction given to Borrower by such Lender shall be final,
conclusive and binding for all purposes, absent error.
1.12 - Funding Losses; Eurodollar Rate Advances
- -----------------------------------------------
Borrower shall compensate any Lender, upon its written request, for all
losses, expenses and liabilities (including any interest paid by such Lender to
lenders of funds borrowed by it to make or carry Eurodollar Rate Advances to the
extent not recovered by such Lender in connection with the re-employment of such
<PAGE>
funds, including loss of anticipated profits) and which such Lender may sustain:
(A) if for any reason, other than a default by such Lender, a funding of a
Eurodollar Rate Advance does not occur on the date specified therefor in the
Borrower's request or notice as to such Advance hereunder, or (B) if, for
whatever reason (including, but not limited to, acceleration of the maturity of
Advances following an Event of Default), any repayment of a Eurodollar Rate
Advance, or a conversion pursuant to SECTION 1.10, occurs on any day other than
the last day of the Interest Period applicable thereto. Such Lender's request
for compensation shall set forth in reasonable detail the basis for the amount
requested and shall be final, conclusive and binding, absent error.
1.13 - Discretion of Lender as to Manner of Funding
- ---------------------------------------------------
Any Lender shall be entitled to fund and maintain its funding of Eurodollar
Rate Advances in any manner it may elect, it being understood, however, that for
the purposes of this Agreement all determinations hereunder (including, but not
limited to, determinations under SECTION 1.12, but excluding determinations that
such Lender may make from the Reuters screen LIBO page) shall be made as if such
Lender had actually funded and maintained each Eurodollar Rate Advance during
the Interest Period for such Advance through the purchase of deposits, having a
maturity corresponding to the last day of the Interest Period and bearing an
interest rate equal to the Eurodollar Rate for such Interest Period.
1.14 - Extension of Maturity Date
- ---------------------------------
Borrower may elect to extend the Maturity Date for one (1) additional
period of one (1) year (the "EXTENSION PERIOD") upon the written request of
Borrower given to Agent not less than thirty (30) days nor more than one hundred
twenty (120) days prior to the Maturity Date then existing, such extension being
subject to satisfaction of all of the following conditions:
A. Payment by Borrower on or before the first day of the Extension
Period of an extension fee equal to One Hundred Fifty Thousand and No/100ths
Dollars (0.25% of the Revolving Commitment Amount) in Immediately Available
Funds;
B. At the time of the extension request and on the first day of the
Extension Period, there shall exist no uncured Event of Default or event which,
with the giving of notice or passage of time, or both, could become an Event of
Default;
C. The delivery from Borrower to Agent on behalf of Lenders of all
financial information relating to Borrower and Guarantor requested by
Lenders and reflecting that no material adverse change, financial or otherwise,
as determined by Agent in its sole discretion, shall have occurred with respect
to any Borrower or Guarantor.
<PAGE>
Notwithstanding Borrower's right to extend the Maturity Date as set forth
above, Borrower hereby agrees that Lenders shall have no commitment or
obligation to extend the Maturity Date beyond September 30, 2000 unless each of
the foregoing conditions shall have been satisfied.
ARTICLE II.A.
LETTERS OF CREDIT
-----------------
2.A. - Terms of the Letter of Credit Facility
- ---------------------------------------------
2.A.1. Letters of Credit. Upon the terms and subject to the conditions
-----------------
of this Agreement, Agent agrees, in its individual capacity, to issue, extend
and renew Letters of Credit for the account of Borrower from time to time
between the Closing Date and the Termination Date in such form as may be
requested by Borrower and reasonably agreed to by Agent and in such amounts as
the Borrower shall request up to an aggregate amount at any time outstanding not
exceeding the Revolving Commitment Amount; provided, however, that, after giving
-------- -------
effect to such issuance, (a) the Maximum Drawing Amount shall not exceed
$10,000,000 at any one time, (b) the sum of (i) the Maximum Drawing Amount on
all Letters of Credit and (ii) Total Revolving Outstandings shall not exceed the
Loan Availability in effect at such time, and (c) the total number of Letters of
Credit outstanding shall not exceed five (5).
2.A.2. Procedures for Letters of Credit. Each request for a Letter of
--------------------------------
Credit shall be made by the Borrower, in writing, by telex, facsimile
transmission or electronic conveyance received by the Agent by 2:00 p.m.,
Minneapolis time, on a Business Day which is not less than five (5) Business
Days preceding the requested date of issuance (which shall also be a Business
Day) and shall be accompanied by a certificate executed by the Borrower in the
form of Exhibit B-7. Each request for a Letter of Credit shall specify (i) the
-----------
date of issuance of the requested Letter of Credit, (ii) the amount of the
requested Letter of Credit, (iii) the name of the account party on such Letter
of Credit, and (iv) the beneficiary of such Letter of Credit. The Agent may
require that such request be made on such letter of credit application and
reimbursement agreement form as the Agent may from time to time specify, along
with satisfactory evidence of the authority and incumbency of the representative
of the Borrower making such request. Each request for a Letter of Credit shall
be deemed a representation by the Borrower that on the date of issuance of such
Letter of Credit and after giving effect thereto the applicable conditions
specified in ARTICLE III have been and will be satisfied. Unless the Agent
determines that any applicable condition specified in ARTICLE III has not been
satisfied, the Agent will issue the requested Letter of Credit at its principal
office in Minneapolis, Minnesota not later than 3:00 p.m. on the requested date
of issuance.
2.A.3. Terms of Letters of Credit. Letters of Credit shall be issued in
--------------------------
support of obligations of the Borrower. All Letters of Credit must expire not
later
<PAGE>
than thirty (30) days prior to the Maturity Date. Each Letter of Credit
so issued, extended or renewed shall be subject to the Uniform Customs.
2.A.4. Agreement to Repay Letter of Credit Drawing. If the Agent has
-------------------------------------------
received documents purporting to draw under a Letter of Credit that the Agent
believes conform to the requirements of the Letter of Credit, or if the Agent
has decided that it will comply with the Borrower's written request or
authorization to pay a drawing on any Letter of Credit that the Agent does not
believe conforms to the requirements of the Letter of Credit, it will notify
Borrower, of that fact. Except as contemplated in SECTION 2.A.10 below, the
Borrower shall reimburse the Agent for the account of the Agent or (as the case
may be) the Lenders by 9:30 a.m. (Minneapolis time) on the day on which such
drawing is to be paid in Immediately Available Funds in an amount equal to the
amount of such drawing. In addition, Borrower agrees to reimburse or pay to
Agent for the account of the Agent or (as the case may be) the Lenders with
respect to each Letter of Credit issued, extended or renewed by Agent hereunder:
A. Upon reduction (but not termination) of the Revolving Commitment
Amount to an amount less than the then Maximum Drawing Amount, an amount equal
to such difference, which amount shall be held by the Agent in a non-interest
bearing account as cash collateral for the benefit of Lenders and the Agent for
all Reimbursement Obligations, and
B. Upon the termination of the Revolving Commitment, or the
acceleration of the Reimbursement Obligations with respect to all Letters of
Credit in accordance with SECTION 6.2(C), an amount equal to the then Maximum
Drawing Amount on all Letters of Credit, which amount shall be held by Agent in
a non-interest bearing account as cash collateral for the benefit of Lenders and
Agent for all Reimbursement Obligations.
2.A.5. Obligations Absolute. The obligation of the Borrower under
--------------------
SECTION 2.A.4. to repay the Agent for any amount drawn on any Letter of Credit
shall be absolute, unconditional and irrevocable, shall continue for so long as
any Letter of Credit is outstanding, notwithstanding any termination of this
Agreement, and shall be paid strictly in accordance with the terms of this
Agreement, under all circumstances whatsoever, including without limitation the
following circumstances:
A. Any lack of validity or enforceability of any Letter of Credit;
B. The existence of any claim, setoff, defense or other right which the
Borrower may have or claim at any time against any beneficiary, transferee or
holder of any Letter of Credit (or any Person for whom any such beneficiary,
transferee or holder may be acting), the Agent or any other Person, whether in
connection with a Letter of Credit, this Agreement, the transactions
contemplated hereby, or any unrelated transaction; or
<PAGE>
C. Any statement or any other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any respect
or any statement therein being untrue or inaccurate in any respect whatsoever.
Neither the Agent nor its officers, directors or employees shall be liable or
responsible for, and the obligations of the Borrower to the Agent shall not be
impaired by:
(i) The use which may be made of any Letter of Credit or any acts or
omissions of any beneficiary, transferee or holder thereof in connection
therewith;
(ii) The validity, sufficiency or genuineness of documents, or of any
endorsements thereon, even if such documents or endorsements should, in fact,
prove to be in any or all respects invalid, insufficient, fraudulent or forged;
(iii) The acceptance by the Agent of documents that appear on their
face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary; or
(iv) Any other action of the Agent in making or failing to make
payment under any Letter of Credit if in good faith and in conformity with U.S.
or foreign laws, regulations or customs applicable thereto.
2.A.6. Increased Cost for Letters of Credit. If any Regulatory Change
------------------------------------
shall either (a) impose, modify or make applicable any reserve, deposit, capital
adequacy or similar requirement against Letters of Credit issued by the Agent,
or (b) shall impose on the Agent any other conditions affecting this Agreement
or any Letter of Credit; and the result of any of the foregoing is to increase
the cost to the Agent of issuing or maintaining any Letter of Credit, or reduce
the amount of any sum received or receivable by the Agent hereunder, then, upon
written demand (which demand shall be given by the Agent promptly after it
determines such increased cost or reduction), the Borrower shall pay to the
Agent the additional amount or amounts as will compensate the Agent for such
actual or imputed increased cost or reduction. A certificate submitted to the
Borrower by the Agent setting forth the basis for the determination of such
additional amount or amounts necessary to compensate the Agent as aforesaid, and
stating in reasonable detail the basis for the charge and the method of
computation, shall be conclusive and binding on the Borrower absent error.
2.A.7. Letter of Credit Fees. For each Letter of Credit issued, the
---------------------
Borrower shall pay to the Agent a fee (a "LETTER OF CREDIT FEE") in an amount
equal to the 1.375% per annum of the face amount of each outstanding Letter of
Credit, which fee (a) shall be payable quarterly in arrears on the first day of
each calendar quarter for the immediately preceding calendar quarter, with a
final payment on the Maturity Date or any earlier date on which the Revolving
Commitment shall terminate (which Letter of Credit Fee shall be pro-rated for
any
<PAGE>
calendar quarter in which such Letter of Credit is issued, drawn upon or
otherwise reduced or terminated) and (b) shall be for the account of the Agent
and the Lenders as follows: (i) an amount equal to 0.125% per annum of the face
amount of the Letter of Credit shall be for the account of the Agent as issuer
and (ii) the remainder of the Letter of Credit Fee shall be for the account of
the Lenders (including the Agent) pro rata in accordance with their respective
Commitment Percentages. In addition to the Letter of Credit Fee, the Borrower
shall pay to the Agent, on demand, all issuance, amendment, drawing and other
fees regularly charged by the Agent to its letter of credit customers and all
out-of-pocket expenses incurred by the Agent in connection with the issuance,
amendment, administration or payment of any Letter of Credit.
2.A.8 Regulations U and X. No portion of any Letter of Credit is
-------------------
to be obtained, for the purpose of purchasing or carrying any "margin security"
or "margin stock" as such terms are used in Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224.
2.A.9 Letter of Credit Participation. Each Lender severally
------------------------------
agrees that it shall be absolutely liable, without regard to the occurrence of
any default or Event of Default or any other condition precedent whatsoever, to
the extent of such Lender's Commitment Percentage, to reimburse Agent on demand
pursuant to SECTION 2.A.10 for the amount of each draft paid by Agent under each
Letter of Credit to the extent that such amount is not reimbursed by the
Borrower pursuant to SECTION 2.A.4 (such agreement for a Lender being called
herein the "LETTER OF CREDIT PARTICIPATION" of such Lender).
2.A.10 Letter of Credit Payments; Advance of Loan. Notwithstanding
------------------------------------------
anything contained in SECTION 2.A.4 above to the contrary, unless Borrower shall
have notified the Agent prior to 11:00 a.m. (Minneapolis time) on the Business
Day immediately prior to the date of such drawing that Borrower intends to
reimburse Agent for the amount of such drawing, Borrower shall be deemed to have
requested a Reference Rate Advance on the date on which such drawing is honored
and in an amount equal to the amount of such drawing. The Borrower may
thereafter convert any such Reference Rate Advance to a Eurodollar Rate Advance
in accordance with SECTION 1.3. Each Lender shall, in accordance with SECTION
1.1, make available such Lender's Commitment Percentage of such Advance to
Agent, the proceeds of which shall be applied directly by Agent to reimburse
Agent and/or Lenders for the amount of such draw. Agent is irrevocably
authorized by the Borrower and each of the Lenders to honor draws on each Letter
of Credit by the beneficiary thereof in accordance with the terms of the Letter
of Credit. The responsibility of the Agent to the Borrower and the Lenders
shall be only to determine that the documents (including each draft) delivered
under each Letter of Credit in connection with such presentment shall be in
conformity in all material respects with such Letter of Credit.
<PAGE>
ARTICLE II.B
CONDITIONS OF BORROWING
-----------------------
Lenders shall not be required to make any Advances hereunder until the pre-
closing requirements, conditions and other requirements set forth below have
been completed and fulfilled to the satisfaction of Lenders, with respect to
said Advance, at Borrower's sole cost and expense.
2.B.1 - Prerequisites to Effectiveness of Agreement
- ---------------------------------------------------
The obligations of Lenders to make Advances and the effectiveness of this
Agreement are subject to the following documents, certificates and opinions,
each in form and substance acceptable to Lenders and its counsel, having been
delivered to and approved by Lenders. It is agreed, however, that Lenders may,
in their discretion, make such Advances prior to completion and fulfillment of
any or all of such pre-closing requirements, conditions and other requirements,
without waiving its right to require such completion and fulfillment before any
additional Advances are made.
A. This Agreement duly executed by Borrower, Agent and Lenders; the Note
duly executed by Borrower; the Negative Pledge Agreements with respect to each
Unencumbered Asset duly executed by the applicable Borrower and in recordable
form and the Guaranty duly executed by Guarantor;
B. Recordation of a Negative Pledge Agreement with respect to each
Approved Asset among the land records in which each Approved Asset is located.
C. A copy of the Certificate of Limited Partnership of each Borrower and
all amendments thereto, and a Certificate of Good Standing for each Borrower,
each currently certified by the Secretary of State of its state of organization;
each Borrower's Agreement of Limited Partnership and Transaction Authorization,
all currently certified by such Borrower's general partner, and upon which Agent
and Lenders may rely until revoked by written notice to Agent and Lenders;
D. A copy of the Articles of Incorporation of Guarantor and all
amendments thereto, and a Certificate of Good Standing for Guarantor, each
currently certified by the Secretary of State of its state of incorporation;
Guarantor's By-Laws, Resolutions of Guarantor's Board of Directors authorizing
the transactions described herein, and an incumbency certificate for Guarantor
(including the names, titles and specimen signatures of officers thereof
authorized to execute Loan Documents), all currently certified by Guarantor's
corporate secretary or assistant secretary, as appropriate, and upon which Agent
and Lenders may rely until revoked by written notice to Agent and Lenders;
<PAGE>
E. A Certificate from the general partner of each Borrower and from a
duly authorized officer of Guarantor, setting forth the names, titles, specimen
signatures and telephone numbers of all persons authorized to (i) sign Draw
Requests and/or other documents, instruments, certificates and agreements to be
delivered by any Borrower and/or Guarantor to Agent and/or any Lender hereunder,
and/or (ii) to give instructions to Agent hereunder, each of which Certificates
shall be deemed to be in full force and effect until forty-eight (48) hours
after receipt by Agent of an amendment thereof duly executed by said duly
authorized officer or Guarantor;
F. A signed, written opinion from counsel to each Borrower and Guarantor,
addressed to Agent and each Lender and currently dated, as to the due
organization, existence, qualification and good standing of each Borrower and
Guarantor; as to the due authorization, validity, legality, binding nature and
enforceability of the Loan Documents listed in SECTION 2.B.1(A), without the
consent or approval of any other Person; that, to such counsel's knowledge, the
execution, delivery and performance by each Borrower and Guarantor of the Loan
Documents to which each is a party will not violate any contracts or agreements
of such Borrower or Guarantor or any applicable Governmental Requirements; as to
the absence, to such counsel's knowledge, of litigation or governmental
proceedings which could materially, adversely affect such Borrower or Guarantor;
and such other matters as may be required by Agent on behalf of Lenders;
G. The most current available annual financial statements for Borrower
and Guarantor on a consolidated basis, as well as financial statements for each
of the three (3) full fiscal years of each immediately preceding the time period
covered by said current financial statements; and
H. A sworn statement from and agreement by each Borrower and Guarantor
listing all guarantees and contingent liabilities to which such Borrower and
Guarantor is a party or for which such Borrower or Guarantor may be liable and
agreeing to periodically update said listing, to which sworn statement shall be
attached (or in which sworn statement shall be described) current financial
statements of such Borrower and of Guarantor, which shall be, in such sworn
statement, certified and sworn to by such Borrower and Guarantor as being true,
correct, complete and not misleading in any material respect, and such Borrower
and Guarantor shall also, in such sworn statement, certify that there has been
no material change in the financial status of such Borrower or of Guarantor
since the dates thereof.
I. With respect to each Unencumbered Asset which is to become an Approved
Asset on the Closing Date, (i) a written description of the Unencumbered Asset,
including the size, legal description and location of the Unencumbered Asset;
(ii) a title report, dated within thirty (30) days of the date on which such
Unencumbered Asset is included as an Approved Asset, running in favor of the
Agent on behalf of the Lenders , together with a copy of each document referred
to therein (collectively "TITLE EVIDENCE"), evidencing that such Real Estate
Asset is
<PAGE>
an Unencumbered Asset; (iii) a current, certified rent roll for such
Unencumbered Asset; and (iv) pro forma operating and capital budgets.
J. Receipt of a Closing Certificate and a Compliance Certificate in the
form attached hereto as Exhibit B-1 (if Borrower has requested that an Advance
-----------
be funded on the Closing Date).
K The Borrower agrees that at the request of any Lender it will furnish
all materials described in this SECTION 2.B.1 to such Lender after the Closing
Date.
L. All proceedings in connection with the transactions contemplated by
this Agreement, the other Loan Documents and all other documents incident
thereto shall be satisfactory in form and substance to each of the Lenders and
to the Agent's counsel, and the Agent, each of the Lenders and such counsel
shall have received all information and such counterpart originals or certified
or other copies of such documents as the Agent may request.
M. The Borrower shall have paid to the Agent, for the accounts of the
Lenders or for its own account, as applicable, all of the fees and expenses that
are due and payable as of the Closing Date in accordance with this Agreement.
N. The obligation of the Agent to issue any Letter of Credit shall be
subject to the fulfillment of the following conditions:
(1) Representations and Warranties. The representations and
------------------------------
warranties contained in ARTICLE IV shall be true and correct on and as of the
date upon which Borrower requests that Agent issue the Letter of Credit and on
the date of issuance of each Letter of Credit with the same force and effect as
if made on such date.
(2) No Default. No default or Event of Default shall have occurred
----------
and be continuing on the date upon which Borrower requests that Agent issue the
Letters of Credit and on the date of issuance of each Letter of Credit or will
exist upon issuance of the Letter of Credit.
(3) Notices and Requests. The Agent shall have received the
---------------------
Borrower's application for such Letters of Credit specified under SECTION 2.A.2.
(4) No Legal Impediment. No change shall have occurred in any law or
-------------------
regulations thereunder or interpretations thereof that in the reasonable opinion
of the Agent or Majority Lenders would make it illegal for such Lenders to
participate in the issuance, extension or renewal of such Letter of Credit or,
in the reasonable opinion of the Agent, would make it illegal to issue, extend
or renew such Letter of Credit.
Any Lender may advance to itself, pursuant to the provisions of SECTIONS
3.1 and 5.1, proceeds of the Loan sufficient to pay all reasonable costs and
expenses
<PAGE>
incurred by such Lender in connection with preparation and negotiation of the
Loan Documents and the review of the foregoing.
2.B.2 - Conditions Precedent to Approval of an Unencumbered Asset
- -----------------------------------------------------------------
If and when Borrower wishes to have Lenders approve an Unencumbered Asset
for inclusion as an Approved Asset, Borrower shall submit to Agent (with a copy
to each Lender) a written request for such approval, together with a
certificate, signed by Borrower in the form attached hereto as Exhibit B-3, that
-----------
the proposed Unencumbered Asset complies with all of the terms, provisions and
conditions of this Agreement, and the following conditions shall be satisfied in
the sole discretion of Lenders:
A. Borrower shall provide, at the time of its request for approval, (i) a
written description of the Unencumbered Asset, including the size, legal
description and location of the Unencumbered Asset; (ii) Title Evidence
evidencing that such Real Estate Asset is an Unencumbered Asset; (iii) a
current, certified rent roll for such Unencumbered Asset; (iv) operating
statement covering the prior three (3) year period for such Unencumbered Asset;
(v) pro forma operating and capital budgets; and (vi) evidence that such
Unencumbered Asset meets the Minimum Lease Up Requirement.
B. Agent shall have completed to its satisfaction, and at the Borrower's
expense, an inspection of the Unencumbered Asset, if it elects to do so.
C. All proceedings in connection with the transactions contemplated by
this Agreement, the other Loan Documents and all other documents incident
thereto shall be satisfactory in form and substance to each of the Lender's and
to the Agent's counsel, and the Agent, each of the Lenders and such counsel
shall have received all information and such counterpart originals or certified
or other copies of such documents as the Agent may request.
D. If Borrower requests Lenders' approval to add an Approved Asset or
release an Approved Asset more than five times during any twelve month period,
then with respect to each subsequent request for approval of an Unencumbered
Asset during such twelve month period, Borrower shall pay a review fee of
$2,500.00 to Agent who shall retain such fee for its own account.
Upon receipt of the above-mentioned written request, certificate and other
items ("APPROVAL PREREQUISITES"), Agent may, on behalf of the Lenders, engage
legal counsel to review the deliveries, all at Borrower's sole cost and expense.
If the Approval Prerequisites are satisfied as determined by Agent, whose
approval shall not be unreasonably withheld, and if the proposed Unencumbered
Asset complies with the terms, provisions, requirements and conditions of this
Agreement, also in Agent's reasonable determination, Agent may, on behalf of the
Lenders, approve the proposed Unencumbered Asset, in writing as an Approved
Asset. Upon such
<PAGE>
approval, Borrower shall execute and deliver to Agent for recordation a Negative
Pledge Agreement with respect to such Approved Asset.
Nothing set forth herein or in any other Loan Document shall be read,
deemed, construed or interpreted to impose any explicit or implicit obligation
of any kind upon the Lenders to approve any Unencumbered Asset so that it is
thereafter included as an Approved Asset, such approval to be, in each instance,
subject to the sole, entire, unfettered and absolute discretion of the Lenders
in all respects.
2.B.3 - Determination of Loan Availability
- ------------------------------------------
Loan Availability shall be calculated by Agent on behalf of the Lenders on
the first day of each calendar quarter and on each Calculation Date.
For any period of determination, Loan Availability shall equal the lesser
of the following amounts:
A. Unencumbered Adjusted EBITDA for the previous four (4) quarters
attributable to the Approved Assets multiplied by six (6); or
B. The Permanent Loan Estimate (using Unencumbered Adjusted EBITDA for
the previous four (4) quarters) for such Approved Assets.
provided, however, Loan Availability shall be reduced on a dollar for dollar
basis by (x) the face amount of any Letters of Credit issued by Agent and
outstanding hereunder and (y) the amount of any Imposition, Lien or Encumbrance
arising with respect to any Approved Asset until same is paid in full,
discharged or bonded over to the satisfaction of the Lenders:
In no event shall Lenders be obligated to make Advances which in the
aggregate exceed Loan Availability as determined by Agent from time to time. If
at any time Loan Availability is less than the Total Revolving Outstandings,
Borrower shall, within thirty (30) days of such determination by Agent, either
(i) cure the cause of such reduction in Loan Availability, or (ii) pay the
excess to Agent on behalf of the Lenders. No additional Advances shall be made
hereunder and no additional Letters of Credit shall be issued hereunder until
such time as Agent determines that Loan Availability exceeds the Total Revolving
Outstandings. It shall be an Event of Default if Borrower fails to cure the
cause of the reduction in Loan Availability or make the required payment within
such thirty (30) day period.
2.B.4 - Release from Negative Pledge
- ------------------------------------
If and when Borrower wishes to have Lenders approve a release of a Negative
Pledge with respect to a Major Asset, Borrower shall submit to Agent a written
request for such approval, together with a certificate, signed by Borrower in
the form attached hereto as Exhibit B-2 and the appropriate form of release to
-----------
be executed by Agent on behalf of the Lenders. If and when Borrower wishes to
have
<PAGE>
Agent release a Negative Pledge with respect to an Approved Asset which is not
a Major Asset, Borrower shall submit to Agent a written request for such
release, together with a certificate, signed by Borrower in the form attached
hereto as Exhibit B-2 and the appropriate form of release to be executed by
-----------
Agent on behalf of the Lenders. In addition, if Borrower requests that Lenders
approve the addition of an Approved Asset or that Lenders release a Major Asset
or other Approved Asset more than five (5) times during any twelve (12) month
period, then with respect to each subsequent request therefor during such twelve
(12) month period, Borrower shall pay a release fee of $2,500.00 to Agent who
shall retain such fee for its own account. Upon receipt of the above-mentioned
written request, certificate and other items ("RELEASE PREREQUISITES"), Agent
may engage legal counsel to review the deliveries, all at Borrower's sole cost
and expense. In connection with the requested release of an Approved Asset
which is not a Major Asset, if the Release Prerequisites are satisfied as
determined by Agent in its reasonable discretion, if there exists no default or
Event of Default hereunder, and if the proposed release of the Approved Asset
would not cause a default under the terms, provisions, requirements and
conditions of this Agreement, also in Agent's reasonable determination, Agent
shall approve the release of such Approved Asset, which approval shall not be
unreasonably withheld. In the event the Approved Asset which is the subject of
the requested release is a Major Asset, then the approval of the Lenders shall
be required, which approval may be given or withheld by Lenders in their sole
discretion. If a release of an Approved Asset is approved in accordance with
the foregoing provisions, Agent shall thereupon recalculate Loan Availability
taking into account such release. If necessary, Borrower shall make a payment
as required pursuant to SECTION 2.B.3 if Loan Availability is then less than
Total Revolving Outstandings. Following receipt of such payment, Agent shall
execute and deliver to Borrower the release with respect to such Negative
Pledge.
ARTICLE III.
ADVANCES OF LOAN PROCEEDS
-------------------------
3.1 - General
- -------------
Subject to the limitations on Advances contained elsewhere in this
Agreement, the Loan proceeds shall be advanced by each Lender, to or for the
benefit of Borrower, in accordance with the terms and conditions set forth in
this ARTICLE III. All monies advanced by each Lender (including amounts payable
to such Lender and advanced by such Lender to itself pursuant to the terms
hereof) shall constitute loans made to Borrower under this Agreement, evidenced
by the Note and secured by the other Loan Documents, and interest shall be
computed thereon as prescribed by this Agreement and the Note, from the date
advanced to or for the benefit of Borrower.
No Advance shall constitute a waiver of any condition precedent to the
obligation of any Lender to make any further Advance or preclude such Lender
from thereafter requiring Borrower to satisfy any such condition precedent with
respect to any prior or further Advance. No Advance shall constitute a waiver of
<PAGE>
any default or Event of Default hereunder which may exist at the time of said
Advance, whether or not the same is known to such Lender. All conditions
precedent to the obligation of each Lender to make any Advance are imposed
hereby solely for the benefit of such Lender, and no other party may require
satisfaction of any such condition precedent or shall be entitled to assume that
such Lender will make or refuse to make any Advance in the absence of strict
compliance with such condition precedent. All requirements of this Agreement
may be waived by each Lender, in whole or in part, at any time.
Each Lender may, but shall not be obligated to, advance to itself, when
due, from the proceeds of the Loan, without further order or request from
Borrower, all interest payable to such Lender under the terms hereof or of the
Note, and may, at such Lender's option, without any obligation to do so, advance
to itself all other sums due or to become due to such Lender under this
Agreement or under any of the other Loan Documents, including but not limited to
its fees, administration fees, attorneys' fees, other consultants' fees and all
out-of-pocket expenses incurred by such Lender in connection with this Agreement
and with the Loan. Each Lender shall also have the right, but not the
obligation, after the occurrence of an Event of Default, to advance and directly
apply the proceeds of the Loan to the satisfaction of any of Borrower's other
obligations hereunder or under any of the other Loan Documents.
3.2 - Inspections
- -------------------
Agent shall have access to each Real Estate Asset at all reasonable times
and shall have the right to enter each Real Estate Asset and to conduct such
inspections thereof as it shall deem necessary or desirable for the protection
of the Lender's interests; provided that Agent gives reasonable prior notice
thereof to Borrower. Borrower may elect to accompany Agent on any such
inspections. No Lender shall be obligated to conduct any inspection of any Real
Estate Asset.
Neither Borrower nor any third party shall have the right to use or rely
upon any reports generated by Agent for any purpose whatsoever. Borrower shall
be responsible for making its own inspections of each Approved Asset.
3.3 - Lender Responsibility
- ---------------------------
It is expressly understood and agreed that neither Agent nor any Lender
assumes liability or responsibility for the any representations made by Borrower
or for any acts on the part of Borrower.
3.4 - Procedure for Advances
- ----------------------------
A. At the time of each Advance, there shall exist no default or Event of
Default hereunder, and all representations and warranties made herein shall be
true and correct on and as of each Advance Date with the same effect as if made
on
<PAGE>
that date. Each Advance shall be made pursuant to a Draw Request submitted by
Borrower to Agent on behalf of the Lenders.
B. Not later than 10:00 A.M. (Minneapolis time) two (2) Eurodollar
Business Days prior to the Advance Date if any portion of the requested Advance
is desired by Borrower to be a Eurodollar Rate Advance, and one Business Day
prior to the Advance Date if any portion of the requested Advance is to be a
Reference Rate Advance, Borrower shall deliver to Agent (with a copy to each
Lender) a request, in writing, designating the amount of such portion (in the
minimum amount of $1,000,000.00 and in integral multiples of $100,000.00 in
excess thereof) and designating the initial Interest Period applicable thereto.
Notwithstanding anything herein set forth to the contrary, there may not be more
than five (5) Eurodollar Rate Advances outstanding at any given time during the
term of the Note. If no such request is made by Borrower with respect to any
Advance, the entire Advance shall be deemed to be a Reference Rate Advance.
C. On each Advance Date, if all the terms and conditions of this Agreement
have been complied with by Borrower, to the satisfaction of Lenders, if no
default or Event of Default exists hereunder, and if Lenders have approved the
Draw Request, each Lender shall advance to Agent its Commitment Percentage of
the principal amount of the requested Advance by delivering to Agent a wire
transfer of funds. Agent shall then forward the Advance to Borrower. All
Advances actually so made shall be deemed to be loans to Borrower, shall reduce
the available amount of the Revolving Loan Commitment, and shall bear interest
at the rates provided herein from the date so advanced.
D. To the extent agreed upon by the Lenders, each Lender shall also have
the right, but not the obligation, to advance and directly apply the proceeds of
any Advance to the satisfaction of any of Borrower's obligations hereunder or
under the other Loan Documents. Any Advance by a Lender for such purpose shall
be part of the Loan and shall be evidenced and secured by the Loan Documents
from the date made. Borrower hereby authorizes each Lender to hold, use,
advance and apply Loan proceeds for the payment or performance of any obligation
of Borrower hereunder, including but not limited to the obligation to pay
interest on the Loan.
E. In the event that a Lender shall determine, in its sole judgment, that
proper documentation to support a requested Advance, as required by this
Agreement, has not been furnished, it may withhold payment of such Advance, or
of such portion of such Advance as shall not be so supported by proper
documentation, and shall promptly notify Borrower of the discrepancy in or
omission of such documentation. Until such time as such discrepancy or omission
is corrected to the satisfaction of such Lender, it may withhold such funds.
F. Borrower shall provide notice to Agent in the Draw Request of the
proposed use of the requested Advance. If Borrower anticipates using the
Advance for purposes of financing construction on a Real Estate Asset Under
Development, Borrower shall provide evidence to Agent at the time of each such
Draw Request
<PAGE>
that Borrower has entered into leases for not less than fifty percent (50%) of
the rentable square footage of such Real Estate Asset Under Development. If
Borrower fails to provide the foregoing evidence, Lenders shall have no
obligation to make the requested Advance for such construction.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF BORROWER
------------------------------------------
Each Borrower represents and warrants to Agent and Lenders that:
4.1 - Legal Status of Borrower
- ------------------------------
Such Borrower is a limited partnership, duly organized, validly existing
and in good standing under the laws of the State of Maryland and is duly
authorized to transact business in the jurisdictions in which the Approved
Assets owned by it are located, and has all power, authority, permits, consents,
authorizations and licenses necessary to carry on its business, to acquire,
develop, demolish, construct, renovate, expand, equip, own and operate each
Approved Asset owned by such Borrower and to execute, deliver and perform this
Agreement and the other Loan Documents; and this Agreement and the other Loan
Documents executed to date by such Borrower have been duly authorized, executed
and delivered by and on behalf of such Borrower so as to constitute this
Agreement and said other Loan Documents the valid and binding obligations of
such Borrower, enforceable in accordance with their terms.
4.2 - No Breach of Applicable Agreements or Laws
- ------------------------------------------------
The consummation of the transactions contemplated hereby and the execution,
delivery and/or performance of this Agreement and the other Loan Documents will
not result in any breach of or constitute a default under the organizational
documents of Borrower and Guarantor, any mortgage, deed of trust, lease, bank
loan, credit agreement, guaranty or other instrument or violate any Governmental
Requirements, to which such Borrower or Guarantor is a party, or by which such
Borrower or Guarantor may be bound or affected.
4.3 - No Litigation or Defaults
- -------------------------------
There are no actions, suits or proceedings pending or, to the knowledge of
such Borrower, threatened, in writing, against or affecting such Borrower,
Guarantor or the Approved Assets, in which an adverse result would have a
material adverse effect upon such Borrower, Guarantor or the Approved Assets,
except as listed on Schedule 4.3 attached hereto and hereby made a part hereof,
------------
or involving the validity or enforceability of the Loan Documents or the
priority of the lien thereof, at law or in equity; and, to the best knowledge of
Borrower and Guarantor, neither Borrower nor Guarantor is in default under any
order, writ, injunction, decree or demand of any court or any administrative
body having jurisdiction over such Borrower or Guarantor.
<PAGE>
4.4 - Financial and Other Information
- -------------------------------------
The financial statements of, and other financial and cash flow information
for, Borrower and Guarantor on a consolidated basis previously or hereafter
delivered to Lenders fairly and accurately present, or will, in all material
respects, fairly and accurately present, the financial condition of Borrower and
Guarantor on a consolidated basis as of the dates of such statements and
information, and the cash flows of each Borrower and Guarantor for the periods
covered by such information, and neither this Agreement nor any document,
financial statement, financial, cash flow or credit information, certificate or
statement referred to herein or furnished to Lenders by each Borrower and
Guarantor contains, or will contain, any untrue statement of a material fact or
omits, or will omit, a material fact, or is or will be misleading in any
material respect.
4.5 - No Defaults under Loan Documents or Other Agreements
- ----------------------------------------------------------
There is, and, until Agent and Lenders have been fully repaid the entire
indebtedness evidenced or to be evidenced by the Note, there will be, no default
or Event of Default on the part of Borrower under the Loan Documents and none of
Borrower nor Guarantor is or will be in default under any instrument or
agreement under and subject to which any recourse indebtedness in excess of
$100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10
million in the aggregate for borrowed money has been issued or is secured, and
no event has occurred, or will occur, which, with the lapse of time or the
giving of notice or both, would constitute an Event of Default thereunder.
4.6 - Fiscal Years
- ------------------
The fiscal year of each Borrower and of Guarantor ends on December 31.
4.7 - Guarantor
- ---------------
Guarantor is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, and has all power, authority,
permits, consents, authorizations and licenses necessary to carry on its
business in the State of Maryland and to execute, deliver and perform the
Guaranty and the other Loan Documents to which it is or will be a party, and all
actions required to authorize the execution, delivery and performance by it of
the Guaranty and such other Loan Documents have been duly taken and are in full
force and effect; and the Guaranty and such other Loan Documents have been duly
authorized, executed and delivered by and on behalf of Guarantor so as to
constitute the Guaranty and such other Loan Documents, when executed by
Guarantor, to be the valid and binding obligations of Guarantor, enforceable in
accordance with their terms.
<PAGE>
4.8 - No Brokers
- ----------------
Borrower has not dealt with any brokers in connection with this Loan and no
brokerage fees or commissions are payable by or to any person in connection with
this Agreement or the Advances. Lenders shall not be responsible for the
payment of any fees or commissions to any broker and Borrower shall indemnify,
defend and hold Lenders harmless from and against any claims, liabilities,
obligations, damages, costs and expenses (including attorneys' fees and
disbursements) made against or incurred by Lenders as a result of claims made by
any broker or person claiming by, through or under Borrower, Guarantor or their
affiliates in connection with the Loan.
4.9 - No Violation of Usury Laws
- --------------------------------
The undersigned represents and warrants that the Loan and this Note are made
exclusively for business purposes in connection with holding, developing, and
managing real estate for profit, within the meaning and intent of Maryland Code
Annotated, Commercial Law Section 12-103(e), as amended, and that none of the
proceeds of the Loan or the Note will be used for personal, family or household
purposes of any person.
4.10 - Subsidiaries
- -------------------
Except for Saul Subsidiary I Limited Partnership, Saul Subsidiary II
Limited Partnership, Guarantor, Saul QRS, Inc. and SC Finance Corporation, there
are no entities which are required under GAAP to be consolidated with Holdings
for financial reporting purposes, except as otherwise disclosed to Agent in
writing from time to time.
4.11 - Miscellaneous
- --------------------
Borrower is not
A. Engaged principally or as one of its important activities in the
business of extending credit for the purpose of purchasing or carrying margin
stock (as defined in Regulation U of the Board), and the value of all margin
stock owned by Borrower does not constitute more than twenty-five percent (25%)
of the value of the assets of Borrower. No portion of any Advance is to be
used, and no portion of any Letter of Credit is to be obtained, for the purpose
of purchasing or carrying any "margin security" or "margin stock" as such terms
are used in Regulations U and X of the Board of Governors of the Federal Reserve
System, 12 C.F.R. Parts 221 and 224.
B. An "investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as amended.
C. A "holding company" or a "subsidiary company" of a holding company or
an "affiliate" of a holding company or a subsidiary company of a holding company
<PAGE>
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
4.12 - REIT Status. Guarantor has not taken any action that would prevent it
- ------------------
from maintaining its existence as a qualified real estate investment trust
within the meaning of the Internal Revenue Code; for its tax year ended December
31, 1997 or from maintaining such qualification at all times during the term of
the Revolving Commitment and for so long as any Letter of Credit remains
outstanding.
4.13 - Title to Properties.
- --------------------------
The Borrower has good title as of the Closing Date (with respect to
Approved Assets designated as such on the Closing Date) or the date of
designation as an Approved Asset (with respect to Approved Assets acquired
and/or designated as such after the Closing Date), and in each case to the best
of its knowledge thereafter, the Borrower or Guarantor holds good and clear
record and marketable fee simple title to, subject to no mortgages, conditional
sales agreements, title retention agreements, liens or, except as otherwise set
forth in the title reports delivered by Borrower, encumbrances.
THE WARRANTIES AND REPRESENTATIONS IN THIS ARTICLE IV, AND ANY ADDITIONAL
REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN AND IN THE OTHER LOAN DOCUMENTS,
SHALL BE DEEMED TO HAVE BEEN RENEWED AND RESTATED BY BORROWER AND GUARANTOR AT
THE TIME OF EACH REQUEST BY BORROWER FOR AN ADVANCE.
ARTICLE V.
COVENANTS OF BORROWER
---------------------
While this Agreement is in effect, and until Agent and Lenders have been paid in
full the principal of and interest on all Advances made by Lenders hereunder and
all other amounts payable hereunder and under the other Loan Documents and so
long as any Letter of Credit is outstanding:
<PAGE>
5.1 - Paying Costs of Loan
- --------------------------
Borrower shall pay all reasonable costs and expenses of Agent and all costs
and expenses of Borrower in connection with each Approved Asset and the Loan,
the preparation and review of the Loan Documents and the evaluation, making,
closing, funding, administration, transfer and/or repayment of the Loan and the
review of Unencumbered Assets, including but not limited to the attorneys' fees,
consultants' fees, administration fees, and all other costs and expenses payable
to third parties incurred by Agent or Borrower in connection with the Loan.
Such costs and expenses shall be so paid by Borrower whether or not the Loan is
fully advanced.
5.2 - Maintenance of Ownership Structure
- ----------------------------------------
The current limited partners of Saul Holdings Limited Partnership, those
Persons controlling, controlled by or under common control with such current
limited partners, and such other persons or entities as the Agent may approve in
writing upon the written request of Borrower, shall continue to own legally and
beneficially, directly or indirectly, thirty percent (30%) or more, in the
aggregate, of (x) the limited partnership units of Borrower and (y) the common
stock of the Guarantor on a fully diluted basis. Borrower shall immediately
give written notice of the violation of this covenant to Agent.
5.3 - Keeping of Records
- ------------------------
Borrower shall set up and maintain accurate and complete books, accounts
and records pertaining to each Approved Asset in a manner reasonably acceptable
to Lenders. Borrower will permit representatives of Agent to have free access
to and to inspect and copy all books, records and contracts of Borrower relating
to each Approved Asset, and will permit representatives of Agent to have free
access to and to inspect and copy all other books, records and contracts of
Borrower at all reasonable times and upon reasonable prior notice to Borrower.
Any such inspection shall be for the sole benefit and protection of Agent, and
neither Agent nor any Lender shall have any obligation to disclose the results
thereof to Borrower or to any third party.
5.4 - Providing Financial Information
- -------------------------------------
Borrower shall furnish to Lenders such financial information concerning
each Borrower and Guarantor, and each Borrower's and Guarantor's other assets
and investments, as each Lender may reasonably request, and shall furnish to
Agent, at Borrower's sole cost and expense the following:
A. Fiscal Year. Not later than one hundred ten (110) days after the end
-----------
of each fiscal year, a consolidated balance sheet, a consolidated statement of
profit and loss and consolidated statement of cash flows, as of the end of such
fiscal year, for the Guarantor and Saul Holdings Limited Partnership
("HOLDINGS"), on a
<PAGE>
consolidated basis certified by independent accountants satisfactory to Agent as
being complete and correct and fairly presenting the financial condition and
results of operations as of the end of such year and for that fiscal year for
Guarantor and Holdings together with a statement from the chief financial
officer for each of the Borrower and the Guarantor, in the forms attached hereto
as Exhibits B-4 and B-5.
------------ ---
B. Fiscal Quarter.
--------------
(i) Not later than fifty (50) days after the end of each fiscal
quarter, a balance sheet, statement of profit and loss and statement of cash
flows for such fiscal quarter, for the Guarantor and its consolidated
subsidiaries, to be prepared on an accrual basis and certified as complete and
correct by the chief financial officer of such entities; and
(ii) Not later than fifty (50) days after the end of each fiscal
quarter, a statement from the chief financial officer for each of the Borrower
and the Guarantor, in the forms attached hereto as Exhibits B-4 and B-5,
------------ ---
together with documentation showing all calculations necessary to support such
statement.
C. Copies of all 8Ks, 10Ks and 10Qs filed with the U.S. Securities and
Exchange Commission, the Maryland State Securities Commission, and any other
state regulators regarding the Guarantor, which shall be delivered to Agent
(with a copy to each Lender) as and when filed or distributed; and
D. Budget. Not later than sixty (60) days after the end of each fiscal
year, a copy of the pro forma operating and capital budgets for each of the
Approved Assets for the succeeding fiscal year, which Budget shall be in form
satisfactory to the Agent, in its reasonable discretion.
E. Rent Rolls. Not later than forty-five (45) days after the end of each
fiscal quarter, a copy of the rent roll for each of the Approved Assets as of
the end of such quarter in form satisfactory to the Agent, and a tenant lease
expiration summary, each certified as being true, correct and complete by the
chief financial officer of the Borrower.
F. Such other statements or reports as the Lenders may through Agent
reasonably request in form and detail satisfactory to such Lenders.
All such financial statements shall be in reasonable detail, shall be prepared
in general accordance with GAAP (except that assets may be valued based on
market value), or in accordance with another accounting method acceptable to
Agent, and shall be certified as true, correct and complete by Borrower (by its
chief financial officer) or Guarantor. In addition, Borrower shall permit Agent
and each Lender to examine all of Borrower's and Guarantor's books and records
pertaining thereto.
<PAGE>
5.5 - Maintaining Insurance Coverage
- ------------------------------------
Borrower shall, at all times until Agent and Lenders have been fully repaid
all indebtedness evidenced by the Note, maintain, or cause to be maintained, in
effect, adequate insurance with respect to each Approved Asset.
5.6 - Transferring, Conveying or Encumbering Approved Assets; Payment of
- ------------------------------------------------------------------------
Impositions and Liens; Maintenance of Existence
- -----------------------------------------------
Borrower shall not voluntarily or involuntarily agree to, cause, suffer or
permit (A) any sale, transfer or conveyance of any interest of Borrower, legal
or equitable, in any Approved Asset or any part or portion thereof; or (B) any
mortgage, pledge, encumbrance or lien to be imposed or remain outstanding
against any Approved Asset, or any security interest to exist therein
(hereinafter each called an "ENCUMBRANCE"), except as created by the Loan
Documents (if any), without, in each instance, complying with the provisions of
SECTION 2.B.4 hereof. In the event that any Encumbrance arises against any
Approved Asset, Borrower shall give written notice thereof to Agent within five
(5) days after the imposition of such Encumbrance. Agent shall thereupon
recalculate Loan Availability taking into account such Encumbrance. If
necessary, Borrower shall make a payment as required pursuant to SECTION 2.B.3
if Loan Availability is then less than Total Revolving Outstandings.
Borrower shall, before any penalty or interest attaches thereto because of
delinquency in payment, pay and discharge, or cause to be paid and discharged,
all taxes, assessments, levies and governmental charges imposed upon or against
each Approved Asset or upon or against the Note or the indebtedness evidenced
hereby (hereinafter referred to as "IMPOSITIONS"). In the event any Impositions
are payable in installments, Borrower shall have the right to pay the same in
such installments, even though such Impositions then bear interest, so long as
Borrower pays each such installment prior to delinquency. Borrower shall not
suffer to exist and shall promptly pay and discharge any mechanic's, statutory
or other lien or Encumbrance on the Approved Asset or any part thereof
(hereinafter collectively referred to as "LIENS"). In the event that any
Imposition or Lien arises against any Approved Asset, Borrower shall give
written notice thereof to Agent within five (5) days after the occurrence of
such Imposition or Lien. Agent shall thereupon recalculate Loan Availability
taking into account such Imposition or Lien. If necessary, Borrower shall make
a payment as required pursuant to SECTION 2.B.3 if Loan Availability is then
less than Total Revolving Outstandings.
Each Borrower shall maintain its existence as a duly organized and
qualified limited partnership, in good standing under the laws of the state of
its formation and the laws of each state in which any Approved Asset is located,
and neither Borrower nor Guarantor shall be dissolved, merged, wound-up or
terminated. Borrower will cause Guarantor to do or cause to be done all things
necessary to preserve and keep in full force and effect Guarantor's existence as
a Maryland corporation. Borrower will cause Guarantor at all times to maintain
its existence as a qualified real estate investment trust (a "REIT") within the
meaning of the Internal Revenue Code and not to take any action which could lead
to its
<PAGE>
disqualification as a REIT. Within thirty (30) days after request by Agent from
time to time, Guarantor shall provide evidence that Guarantor continues to
qualify as a REIT.
5.7 - Complying with the Loan Documents, Contracts and Laws
- -----------------------------------------------------------
Borrower shall cause all of the representations, warranties and covenants
herein to remain true and correct during the term of the Loan, shall comply with
and perform all of its agreements and obligations under the Loan Documents, and
shall comply with all requests by Lenders which are consistent with the terms
thereof. Borrower shall promptly provide Agent with copies of any notices of
default or deficiency received from any creditor under loans with a principal
balance in excess of $100,000.00 and shall promptly cure the same. Borrower
shall comply in all material respects with all applicable laws, rules,
regulations, orders and directions of any governmental authority having
jurisdiction over it or its business.
5.8 - Financial Covenants
- -------------------------
Borrower hereby covenants and agrees that so long as the Revolving
Commitment remains outstanding:
A. Minimum Equity Value. As of the end of each fiscal quarter and any
other Calculation Date, Borrower shall provide evidence to Agent that Borrower
has Minimum Equity Value of not less than the sum of $150 million plus ninety
percent (90%) of Net Equity Proceeds.
B. Portfolio Loan to Value. As of the end of each fiscal quarter and any
other Calculation Date, Borrower shall provide evidence to Agent that the ratio
of Total Adjusted Outstanding Indebtedness to Capitalization Value does not
exceed sixty five percent (65%).
C. Interest Expense Coverage. As of the end of each fiscal quarter and
any other Calculation Date, Borrower shall provide evidence to Agent that the
ratio of Adjusted EBITDA to Interest Expense is not less than 1.90 to 1.
D. Debt Service Coverage. As of the end of each fiscal quarter and any
other Calculation Date, Borrower shall provide evidence to Agent that the ratio
of Adjusted EBITDA to Debt Service is not less than 1.60 to 1.
E. Minimum Fixed Rate Debt. Borrower covenants and agrees that not less
than seventy five percent (75%) of Total Adjusted Outstanding Indebtedness shall
(x) accrue interest at a fixed rate of interest and (y) have a term of not less
than five (5) years. Absent Lenders' prior written approval, the Revolving
Commitment shall constitute the only unsecured indebtedness incurred by Borrower
which accrues interest at a floating rate of interest. In addition, Borrower
hereby agrees that to the extent Borrower would like to incur secured
indebtedness
<PAGE>
accruing interest at a floating rate of interest from time to time, Borrower
shall provide prior written notice to Agent. In the event that at any time
Borrower intends to receive advances under indebtedness accruing interest at a
floating rate of interest (including the Revolving Commitment), which advances
aggregate in excess of $60 million, then Borrower shall provide prior written
notice thereof to Agent and the Lenders may thereupon require that the Borrower
make interest rate protection arrangements satisfactory to Borrower and Lenders
with respect to all advances of floating rate indebtedness (including the
Revolving Commitment) exceeding in the aggregate $60 million. The Borrower shall
thereafter maintain such arrangements in full force and effect, and shall not,
without the approval of the Lenders, modify, terminate, or transfer such
arrangements.
F. Payout Ratio. For each of the following calendar years, Distributions
shall not exceed the following percentage of Funds from Operations with respect
to the Borrower and the Guarantor on a consolidated basis:
Calendar Year Percentage
------------- ----------
1997 96%
1998 94%
1999 92%
5.9 Miscellaneous
- --- -------------
Each Borrower shall also:
A. Maintain its qualification to transact business in its state of
organization, in each state in which an Approved Asset is located, and in each
jurisdiction where failure so to qualify would permanently preclude Borrower
from enforcing its rights with respect to any material asset or would expose
Borrower to any material liability.
B. File all tax returns and reports which are required by law to be filed
by it and pay before they become delinquent all taxes, assessments and
governmental charges and levies imposed upon it and all claims or demands of any
kind which, if unpaid, might result in the creation of a lien upon its property;
provided that the foregoing items need not be paid if they are being contested
in good faith by appropriate proceedings in accordance with the applicable terms
of SECTION 5.6, and as long as Borrower's title to its property is not
materially adversely affected, its use of such property in the ordinary course
of its business is not materially interfered with, and adequate reserves with
respect thereto have been set aside on Borrower's books in accordance with GAAP.
The provisions of SECTION 5.6 shall control over the provisions of this
Subsection if and to the extent such provisions are inconsistent.
C. Give prompt written notice to Agent of (i) the breach of any
representation, warranty or covenant contained in this Agreement or in any of
the Loan Documents (which notice shall be accompanied by a certificate from
<PAGE>
Borrower in the form of Exhibit B-8 attached hereto); (ii) the creation of any
-----------
Encumbrance, Lien or Imposition in excess of $50,000.00 against any Approved
Asset; (iii) the occurrence of any Capital Event (which notice shall be
accompanied by a certificate from Borrower in the form of Exhibit B-6 attached
-----------
hereto) and any release or threatened release of Hazardous Substances, any
violation of Environmental Laws or similar environmental event with respect to a
Real Estate Asset that could become a Disqualifying Environmental Event; and
(iv) the commencement of any action, suit or proceeding before any court or
arbitrator or any governmental department, board, agency or other
instrumentality affecting any Borrower or Guarantor or any property of any
Borrower or Guarantor or to which any Borrower or Guarantor is a party in which
an adverse determination or result could have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of any
Borrower or Guarantor or on the ability of any of them to perform its respective
obligations under this Agreement and the other Loan Documents, stating the
nature and status of such action, suit or proceeding. The Borrower will and
will cause the Guarantor to give notice to the Agent in form and detail
reasonably satisfactory to the Agent, within ten (10) days of any judgment not
covered by insurance, final or otherwise, against the Borrower the Guarantor in
an amount in excess of $100,000.
D. Maintain, preserve, protect and keep the Real Estate Assets in good
repair, working order and condition and make all necessary and proper repairs,
renewals and replacements, normal wear and tear excepted.
ARTICLE VI.
DEFAULTS
--------
6.1 - Events of Default
- -----------------------
Each of the following events shall constitute an Event of Default under
this Agreement:
A. Borrower shall default in the payment of principal due according to
the terms hereof or of the Note and shall fail to cure said default within five
(5) days after the due date thereof, provided, however, in no event shall such
grace period apply with respect to payments due on the Termination Date;
B. Borrower shall default in the payment of interest on Advances made by
Lenders, or in the payment of any fees, including any Letter of Credit Fee, or
any other amounts payable hereunder, under the Note or under any of the other
Loan Documents and shall fail to cure said default within five (5) days after
the due date thereof;
C. Borrower shall default in the performance of or fail to observe any of
the covenants contained in Section 5.8 of this Agreement and such default, if
-----------
curable, as determined by Agent, is not cured within ten (10) days;
<PAGE>
D. Borrower shall default in the performance or observance of any other
agreement, covenant or condition required to be performed or observed by
Borrower under the terms of this Agreement or the Loan Documents, which default,
if curable, is not cured within thirty (30) days after Agent on behalf of
Lenders gives Borrower written notice thereof;
E. Any representation or warranty made by any Borrower or Guarantor in
this Agreement or in any of the other Loan Documents, or in any certificate or
document furnished under the terms of this Agreement or in connection with the
Loan, shall be untrue or incomplete in any material respect;
F. Any other event or occurrence herein expressly stated to be an Event
of Default occurs or exists;
G. Any Loan Document is not in full force and effect or a default has
occurred and is continuing thereunder after giving effect to any cure or grace
period in any such document;
H. Any mortgaging, conveyance or other voluntary transfer or encumbrance
of any of the Approved Assets or any portion thereof occurs without the prior
consent of Agent; provided, however, the prior consent of the Lenders shall be
required with respect to any mortgaging, conveyance or other voluntary transfer
or encumbrance of any of the Major Assets or any portion thereof ;
I. Borrower or Guarantor shall commit an act of bankruptcy, shall file a
voluntary petition in a bankruptcy, reorganization, composition, readjustment,
arrangement, insolvency, liquidation, dissolution or similar proceeding under
any present or future statute, law or regulation, shall consent to voluntary or
involuntary adjudication in bankruptcy or to reorganization, or shall be
adjudicated bankrupt or insolvent under any applicable law or laws pursuant to a
voluntary proceeding, or admits, in writing, to having become insolvent or to be
unable to pay its debts as they become due, or becomes unable to pay its debts
as they mature, or makes an assignment for the benefit of its creditors, or is
dissolved, liquidated, terminated or merged, or if it applies for, or if it
consents to, the appointment of a trustee, custodian or receiver for it or a
substantial portion of its assets.
J. A custodian, trustee or receiver is appointed for any portion of the
assets of Borrower or Guarantor, or an involuntary petition in bankruptcy or
insolvency is filed against Borrower or Guarantor and is not discharged within
ninety (90) days after such appointment or filing;
L. Borrower or Guarantor permits the attachment or judicial seizure of
any of its assets with a value in excess of One Hundred Thousand and No/100ths
Dollars ($100,000.00);
M. Borrower or Guarantor shall be dissolved, liquidated, terminated or
merged without Lenders' prior written consent;
<PAGE>
N. Guarantor shall be terminated, dissolved, liquidated or wound-up, or
shall contest, repudiate or purport to revoke the Guaranty, or the Guaranty for
any reason (except pursuant to the express terms thereof) shall cease to be in
full force and effect as to Guarantor or shall be judicially declared
unenforceable or null and void;
O. Any entity comprising the Borrower or Guarantor is enjoined,
restrained or in any way prevented by any court order or judgment or if a notice
of lien, levy, or assessment is filed of record with respect to all or any part
of the Approved Assets by any governmental department, office or agency which
could materially adversely affect the performance of the obligations of such
parties hereunder or under the Loan Documents, or if any proceeding is filed or
commenced seeking to enjoin, restrain or in any way prevent the foregoing
parties from conducting all or a substantial part of their respective business
affairs and failure to vacate, stay, dismiss, set aside or remedy any of the
foregoing within sixty (60) days after the occurrence thereof.
P. The default (after the expiration of any notice or cure periods) under
any recourse indebtedness in excess of $100,000.00 in the aggregate or any
nonrecourse indebtedness in excess of $10 million in the aggregate of Borrower
or Guarantor or the maturity of any recourse indebtedness in excess of
$100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10
million in the aggregate of Borrower or Guarantor (other than indebtedness under
this Agreement) shall be accelerated, or Borrower or Guarantor thereof shall
fail to pay any such recourse indebtedness in excess of $100,000.00 in the
aggregate or any nonrecourse indebtedness in excess of $10 million in the
aggregate, in each case when due (after the lapse of any applicable grace
period) or, in the case of such indebtedness payable on demand, when demanded
(after the lapse of any applicable grace period), or any event shall occur or
condition shall exist and shall continue for more than the period of grace, if
any, applicable thereto and shall have the effect of causing, or permitting the
holder of any such indebtedness or any trustee or other person, party or entity
acting on behalf of such holder to cause, such recourse indebtedness in excess
of $100,000.00 in the aggregate or any nonrecourse indebtedness in excess of $10
million in the aggregate to become due prior to its stated maturity or to
realize upon any collateral given as security therefor.
Q. There shall occur a material adverse change of any kind, financial or
otherwise with respect to any Borrower or Guarantor, as determined by Majority
Lenders in their sole discretion.
R. There shall occur any default or event which with the giving of
notice, passage of time or both, would be a default under any other loans from
one or more Lenders to Borrower or Guarantor;
<PAGE>
6.2 - Rights and Remedies
- -------------------------
Upon the occurrence of an Event of Default, unless such Event of Default is
subsequently waived in writing by Agent on behalf of Lenders, Agent, acting on
behalf of the Lenders, or Lenders, as the case may be, shall be entitled, at the
option of Lenders, to exercise any or all of the following rights and remedies,
consecutively or simultaneously, and in any order:
A. Lenders may make one (1) or more further Advances, without liability
to make any subsequent Advances.
B. Lenders may suspend their obligation to make Advances under this
Agreement, without notice to Borrower.
C. Subject to the provisions of SECTIONS 2.A.9 and 2.A.10, Lenders may
terminate their obligation to make Advances under this Agreement, and may
declare the entire unpaid principal balance of the Advances made under this
Agreement and all Reimbursement Obligations to be immediately due and payable,
together with accrued and unpaid interest on such Advances, without notice to or
demand on Borrower.
D. Agent may terminate its obligation to issue, extend or renew Letters
of Credit.
E. Lenders may exercise any or all remedies specified herein and/or in
the other Loan Documents, and/or any other remedies which they may have therefor
at law, in equity or under statute.
F. Agent, on behalf of Lenders, may cure the Event of Default on behalf
of Borrower.
G. Borrower hereby irrevocably authorizes Lenders to set off any sum due
to or incurred by Lenders against all deposits and credits of Borrower with, and
any and all claims of Borrower against, Lenders. Such right shall exist whether
or not Lenders shall have made any demand hereunder or under any other Loan
Document, whether or not said sums, or any part thereof, or deposits and credits
held for the account of Borrower is or are matured or unmatured, and regardless
of the existence or adequacy of any collateral, guaranty or any other security,
right or remedy available to Lenders. Lenders agree that, as promptly as is
reasonably possible after the exercise of any such setoff right, Agent shall
notify Borrower of the exercise by Lenders of such setoff right; provided,
however, that the failure of Agent to provide such notice shall not affect the
validity of the exercise of such setoff rights. Nothing in this Agreement shall
be deemed a waiver or prohibition of or restriction on Lenders to all rights of
banker's lien, setoff and counterclaim available pursuant to law.
<PAGE>
In addition, upon the occurrence of any event described in SECTION 6.1(F) hereof
which will not become an Event of Default prior to the expiration of some period
of time, Lenders may suspend their obligations to fund Advances hereunder
immediately upon the occurrence of said event.
ARTICLE VII.
MISCELLANEOUS
-------------
7.1 - Binding Effect; Waivers; Cumulative Rights and Remedies
- -------------------------------------------------------------
The provisions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, personal representatives, legal representatives, successors and
assigns, subject to the provisions of SECTION 5.6; provided, however, that
neither this Agreement nor the proceeds of the Loan may be assigned by Borrower
voluntarily, by operation of law or otherwise, without the prior written consent
of Agent on behalf of the Lenders. No delay on the part of Agent or Lenders in
exercising any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder constitute such a waiver or exhaust the same, all
of which shall be continuing. The rights and remedies of Lenders specified in
this Agreement shall be in addition to, and not exclusive of, any other rights
and remedies which Lenders would otherwise have at law, in equity or by statute,
and all such rights and remedies, together with Lenders' rights and remedies
under the other Loan Documents, are cumulative and may be exercised
individually, concurrently, successively and in any order.
7.2 - Survival
- --------------
All agreements, representations and warranties made in this Agreement shall
survive the execution of this Agreement, the making of the Advances by Lenders,
and the execution of the other Loan Documents, and shall continue until Lenders
receive payment in full of all indebtedness of Borrower incurred under this
Agreement and under the other Loan Documents and for so long as any Letter of
Credit remains outstanding.
7.3 - Governing Law; Waiver of Jury Trial
- -----------------------------------------
THIS AGREEMENT, THE RIGHTS OF THE PARTIES HEREUNDER, AND THE CONSTRUCTION,
INTERPRETATION, VALIDITY AND ENFORCEABILITY HEREOF AND OF ALL OF THE LOAN
DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL
LAWS OF THE STATE OF MARYLAND, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES
RELATING TO NATIONAL BANKS. BORROWER, AGENT AND LENDERS HEREBY WAIVE ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THE LOAN, THE LOAN
DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY.
<PAGE>
AT THE OPTION OF LENDERS, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT
SITTING IN THE STATE OF MARYLAND OR MARYLAND STATE COURT; AND BORROWER CONSENTS
TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
VENUE IN SUCH FORUM IS NOT CONVENIENT. IN THE EVENT BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
LENDERS, AT THEIR OPTION, SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE
OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
7.4 - Counterparts
- ------------------
This Agreement may be executed in any number of counterparts, all of which
shall constitute a single Agreement.
7.5 - Notices
- -------------
Any notice required or permitted to be given by either party hereto to the
other under the terms of this Agreement, or documents related hereto, shall be
in writing and shall be sent by manual delivery, telegram, facsimile
transmission, overnight courier, or United States registered or certified mail,
return receipt requested (postage prepaid), addressed to such party at the
address specified on the signature page hereof, or at such other address in the
United States of America as such party shall have specified to the other party
hereto in writing, at least ten (10) days prior to the effective date of said
change of address. All periods of notice shall be measured from the date of
delivery thereof if manually delivered, from the date of sending thereof if sent
by telegram or facsimile transmission, from the first Business Day after the
date of sending if sent by overnight courier, or from four (4) days after the
date of mailing if so mailed; provided, however, that any notice to Lenders
designating, continuing or converting any Advance as or into a Eurodollar Rate
Advance shall be deemed to have been given only when received by Lenders.
7.6 - No Third Party Reliance
- -----------------------------
No third party shall be entitled to rely upon this Agreement or to have any
of the benefits of any Lender's interest hereunder, unless such third party is
an express assignee of all or a portion of Lenders' interest hereunder.
7.7 - Sale of Loan; Participations or Syndication
- -------------------------------------------------
Any Lender may at any time sell, assign, transfer, syndicate, grant
participations in or otherwise dispose of any portion of the Loan (each such
interest so disposed of being herein called a "TRANSFERRED INTEREST") to banks,
insurance
<PAGE>
companies or other financial institutions (hereinafter called "TRANSFEREES"),
pursuant to such transfer agreements, co-lender agreements, participation
agreements, and/or agency agreements into which such Lender and its Transferees
may enter and by which Borrower shall agree in writing to abide. Borrower agrees
that each Transferee shall be entitled to the benefits of this Agreement with
respect to its Transferred Interest. In addition, Borrower hereby agrees that
any Lender may, at any time and from time to time, in its ordinary course of
business and in accordance with applicable law, (A) assign an undivided interest
in the Loan to an affiliate of such Lender, or (B) pledge or assign the same to
any Federal Reserve Bank in accordance with applicable law. At the request of
any Lender, in the event of any such sale, assignment, transfer or syndication,
Borrower shall execute separate new Notes to the assignor and its assignee, in
the amounts of their respective interests in the Loan after said assignment, and
shall deliver the same to the assignor and the assignee, in exchange for the
assignor's existing Note. All such separate new Notes shall be entitled to all
the rights and benefits accorded to the existing Note under the terms of the
Loan Documents. No such assignment shall be binding upon Borrower until a Lender
gives written notice thereof to Borrower. Agent and each Lender may divulge all
information relating to Borrower, Guarantor or any Real Estate Asset which Agent
or such Lender has to any actual or potential Transferee, and Borrower shall
cooperate with Agent and each Lender in satisfying the requirements of any
Transferee with respect to the transfer. Borrower agrees that each Transferee
shall be entitled to the benefits hereof with respect to its Transferred
Interest and that each Transferee may exercise any and all rights of banker's
lien, setoff and counterclaim as if such Transferee were a direct lender to
Borrower. If any Lender makes any assignment to a Transferee, then upon notice
to Borrower such Transferee, to the extent of such assignment (unless otherwise
provided therein), shall become a Lender hereunder and shall have all the rights
and obligations of a Lender hereunder, and such Lender shall be released from
its duties and obligations under this Agreement to the extent of such
assignment. Borrower further acknowledges that notwithstanding the provisions of
this Agreement which require the consent or approval of Agent, Majority Lenders
or Lenders, the terms and provisions of the Intercreditor Agreement and any
future Assignment and Assumption Agreement which any Lender(s) may execute from
time to time in connection with a transfer of all or a portion of Loan may
require that Agent or one or more Lenders obtain the consent or approval of
another Person or Lender; provided, however in no event shall Agent obligate
itself to obtain the approval of one or more Lenders with respect to the release
of an Approved Asset which is not a Major Asset pursuant to SECTION 2.B.4. In
the event of a conflict between the provisions of this Agreement relating to
consent or approval and the provisions of the Intercreditor Agreement or any
future Assignment and Assumption Agreement, the provisions of the Intercreditor
Agreement and any future document shall control, whether or not Borrower is
advised by Agent or any Lender of such conflict. Notwithstanding the foregoing,
nothing contained herein shall require the Borrower to communicate directly with
the Lenders in lieu of communicating with Agent on behalf of Lenders. While
Agent may provide Borrower with a copy of the Intercreditor Agreement, as
amended from time to time and any Assignment and Assumption Agreement
<PAGE>
executed from time to time and request that Borrower acknowledge the terms and
provisions thereof, Borrower shall not have the right to approve or disapprove
such agreements.
7.8 - Time of the Essence
- -------------------------
Time is of the essence hereof with respect to the dates, terms and
conditions of this Agreement.
7.9 - Entire Agreement; No Oral Modifications
- ---------------------------------------------
This Agreement, the Guaranty, the other Loan Documents and the other
documents mentioned herein set forth the entire agreement of the parties with
respect to the Loan and supersede all prior written or oral understandings and
agreements between them with respect thereto. No modification or waiver of any
provision of this Agreement shall be effective unless set forth in writing and
signed by the parties hereto.
7.10 - Captions
- ---------------
The headings or captions of the Articles and Sections set forth herein are
for convenience only, are not a part of this Agreement and are not to be
considered in interpreting this Agreement.
7.11 - Borrower-Lender Relationship
- -----------------------------------
The relationship between Borrower and Lenders created hereby and by the
other Loan Documents shall be that of a borrower and a lender only, and in no
event shall any Lender be deemed to be a partner of, or a joint venturer with,
Borrower.
7.12 - Rules of Interpretation
- ------------------------------
In this Agreement, in the computation of a period of time from a
specified date to a later specified date, unless otherwise stated, the word
"from" means "from and including" and the word "to" or "until" each means "to
but excluding". The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. References to
Sections, Subsections, Exhibits, schedules and like references are to this
Agreement unless otherwise expressly provided. The words "include", "includes"
and "including" shall be deemed to be followed by the phrase "without
limitation". Unless the context in which used herein otherwise clearly
requires, "or" has the inclusive meaning represented by the phrase "and/or"
where permitted by the context.
<PAGE>
7.13 - Expenses
- ---------------
Borrower agrees to pay (a) the costs of producing and reproducing this
Agreement, the other Loan Documents and the other agreements and instruments
mentioned herein, (b) the reasonable fees, expenses and disbursements of the
Agent's outside counsel or any local counsel to the Agent incurred in connection
with the preparation, administration or interpretation of the Loan Documents and
other instruments mentioned herein, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, (c) the fees,
expenses and disbursements of the Agent incurred by the Agent in connection with
the preparation, administration or interpretation of the Loan Documents and
other instruments mentioned herein, including, without limitation, the costs
incurred by the Agent in connection with its inspection of the Unencumbered
Assets, and the fees and disbursements of the Agent's counsel in preparing the
documentation, (d) [intentionally omitted], (e) all expenses (including
attorneys' fees and costs, which attorneys may be employees of any Lender or the
Agent, and the fees and costs of appraisers, engineers, investment bankers,
surveyors or other experts retained by the Lender or Agent in connection with
any such enforcement proceedings) incurred by any Lender or the Agent in
connection with (i) the enforcement of or preservation of rights under any of
the Loan Documents against the Borrower or any of its Subsidiaries or any
Guarantor or the administration thereof after the occurrence and during the
continuance of an Event of Default (including, without limitation, expenses
incurred in any restructuring and/or "workout" of the Loan), and (ii) any
litigation, proceeding or dispute whether arising hereunder or otherwise, in any
way related to any Lender's or the Agent's relationship with the Borrower or any
of its Subsidiaries or any Guarantor, (f) all reasonable fees, expenses and
disbursements of the Agent incurred in connection with title searches or
releases of Negative Pledge Agreements, and (g) all costs incurred by the Agent
in the future in connection with its inspection(s) of the Unencumbered Assets.
The covenants of this Section shall survive payment or satisfaction of payment
of amounts owing with respect to the Note.
ARTICLE VIII.
AGENT
-----
8.1 - Authorization
- -------------------
The Borrower, without further inquiry or investigation, shall, and is
hereby authorized by the Lenders to, assume that all actions taken by the Agent
hereunder and in connection with or under the Loan Documents are duly authorized
by the Lenders. The Lenders shall notify Borrower of any successor to Agent by
a writing signed by Lenders.
8.2 - Employees and Agents
- --------------------------
The Agent may exercise its powers and execute its duties by or through
employees or agents and shall be entitled to take, and to rely on, advice of
counsel concerning all matters pertaining to its rights and duties under this
Agreement and the other Loan Documents. The Agent may utilize the services of
such Persons as
<PAGE>
the Agent in its sole discretion may reasonably determine, and all reasonable
fees and expenses of any such Persons shall be paid by the Borrower.
8.3 - No Liability
- ------------------
Neither the Agent, nor any of its shareholders, directors, officers or
employees nor any other Person assisting them in their duties nor any agent or
employee thereof, shall be liable for any waiver, consent or approval given or
any action taken, or omitted to be taken, in good faith by it or them hereunder
or under any of the other Loan Documents, or in connection herewith or
therewith, or be responsible for the consequences of any oversight or error of
judgment whatsoever, except that the Agent may be liable for losses due to its
willful misconduct or gross negligence.
8.4 - Payments
- --------------
A. A payment by the Borrower to the Agent hereunder or any of the other
Loan Documents for the account of any Lender shall constitute a payment to such
Lender. The Agent agrees to distribute to each Lender such Lender's pro rata
--- ----
share of payments received by the Agent for the account of the Lenders, as
provided herein or in any of the other Loan Documents.
B. If in the reasonable opinion of the Agent the distribution of any
amount received by it in such capacity hereunder, under the Note, under the
Intercreditor Agreement or under any of the other Loan Documents might involve
it in material liability, it may refrain from making distribution until its
right to make distribution shall have been adjudicated by a court of competent
jurisdiction, provided that the Agent shall invest any such undistributed
--------
amounts in overnight obligations on behalf of the Lenders and interest thereon
shall be paid pro rata to the Lenders. If a court of competent jurisdiction
--- ----
shall adjudge that any amount received and distributed by the Agent is to be
repaid, each Person to whom any such distribution shall have been made shall
either repay to the Agent its proportionate share of the amount so adjudged to
be repaid or shall pay over the same in such manner and to such Persons as shall
be determined by such court.
8.5 - Agent as Lender
- ---------------------
In its individual capacity as a Lender, Agent shall have the same
obligations and the same rights, powers and privileges in respect to the
Advances made by it, and as the holder of any Note, as it would have were it not
also the Agent.
8.6 - Successor Agent
- ---------------------
Agent, or any successor Agent, may resign as Agent at any time by giving
written notice thereof to the Lenders and to the Borrower. Upon any such
resignation, the Majority Lenders shall have the right to appoint a successor
Agent, which is a Lender under this Agreement. If, in the case of a resignation
by the
<PAGE>
Agent, no successor Agent shall have been so appointed by the Majority Lenders,
and shall have accepted such appointment, within thirty (30) days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of the Lenders, appoint any one of the other Lenders as a successor
Agent. Upon the acceptance of any appointment as Agent hereunder by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring or removed Agent,
and the retiring or removed Agent shall be discharged from all further duties
and obligations as Agent under this Agreement. After any Agent's resignation or
removal hereunder as Agent, the provisions of this SECTION 8.6 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement. The Agent agrees that it shall not assign any of its
rights or duties as Agent to any other Person.
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be duly
executed and delivered as of the day and year first above set forth.
WITNESS/ATTEST: SAUL HOLDINGS LIMITED PARTNERSHIP,
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland corporation,
its sole general partner
By:
-------------------------------------------
B. Francis Saul II
Its:
WITNESS/ATTEST: SAUL SUBSIDIARY II LIMITED PARTNERSHIP,
a Maryland limited partnership
By: Saul Centers, Inc., a Maryland corporation,
its sole general partner
By:
-------------------------------------------
B. Francis Saul II
Its:
Address: 8401 Connecticut Avenue
Chevy Chase, Maryland 20814
<PAGE>
U.S. BANK NATIONAL ASSOCIATION
By:
---------------------------------------------
Address: First Bank Place - MPFP0802
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attn: Real Estate Banking
Division Head
<PAGE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in the Company's December 31, 1997 Form 10-K into the
previously filed Registration Statement File No. 33-80291.
Arthur Andersen LLP
Washington, D.C.
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997 OF SAUL CENTERS, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 688
<SECURITIES> 0
<RECEIVABLES> 6,190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 335,268
<DEPRECIATION> 92,615
<TOTAL-ASSETS> 260,942
<CURRENT-LIABILITIES> 0
<BONDS> 284,473
0
0
<COMMON> 124
<OTHER-SE> (38,178)
<TOTAL-LIABILITY-AND-EQUITY> 260,942
<SALES> 0
<TOTAL-REVENUES> 67,717
<CGS> 0
<TOTAL-COSTS> 18,717
<OTHER-EXPENSES> 6,084
<LOSS-PROVISION> 505
<INTEREST-EXPENSE> 22,037
<INCOME-PRETAX> 12,603
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,603
<DISCONTINUED> 0
<EXTRAORDINARY> (3,197)
<CHANGES> 0
<NET-INCOME> 2,552
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
