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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-2262
COMMERCIAL ASSETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 84-1240911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3410 Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9410
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, American Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
As of March 5, 1999, 10,364,029 shares of common stock were
outstanding, and the aggregate market value of the shares (based upon the
closing price of the Common Stock on that date as reported on the American Stock
Exchange, Inc.) held by non-affiliates was approximately $43,070,000.
Documents Incorporated by Reference
Portions of the proxy statement for the Registrant's 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report.
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<PAGE>
COMMERCIAL ASSETS, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
Item Page
PART I
1. Business............................................................. 1
Company Background............................................. 1
Industry Background............................................ 2
Financial Information about Industry Segments.................. 2
Growth and Operating Strategies................................ 3
Manager........................................................ 5
Competition.................................................... 6
Taxation of the Company........................................ 6
Regulations.................................................... 6
Insurance...................................................... 7
Capital Resources.............................................. 7
Dividend Reinvestment Plan..................................... 8
Restrictions on and Redemptions of Common Stock................ 8
Employees...................................................... 8
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of Security Holders.................. 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 10
6. Selected Financial Data.............................................. 10
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
Results of Operations.......................................... 11
Liquidity and Capital Resources................................ 14
Funds From Operations.......................................... 14
Year 2000 Compliance........................................... 15
7a. Quantitative and Qualitative Disclosures About Market Risk........... 15
8. Financial Statements and Supplementary Data.......................... 16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 16
PART III
10. Directors and Executive Officers of the Registrant................... 16
11. Executive Compensation............................................... 18
12. Security Ownership of Certain Beneficial Owners and Management....... 18
13. Certain Relationships and Related Transactions....................... 18
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 18
(i)
<PAGE>
PART I
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this report, our Annual Report to Stockholders and our filings with
the Securities Exchange Commission under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, as well as information
communicated orally or in writing between the dates of such SEC filings,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements may include
projections of our cash flow, dividends and anticipated returns on real estate
investments. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. Such
factors include: general economic and business conditions; interest rate
changes; financing and refinancing risks; risks inherent in owning real estate
or debt secured by real estate; future development rate of homesites;
competition; the availability of real estate assets at prices which meet our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to
Commercial Assets, Inc., a Maryland corporation and, where appropriate, our
subsidiaries.
Item 1. Business.
Company Background
We are a Maryland corporation formed in August 1993, and we have elected to be
treated for United States federal income tax purposes as a real estate
investment trust or "REIT". We are engaged in the ownership, acquisition,
development and expansion of manufactured home communities. Initially, we were a
wholly-owned subsidiary of Asset Investors Corporation. Asset Investors
contributed $75 million to our initial capital and in October 1993, Asset
Investors distributed 70% of our common stock to Asset Investors' stockholders.
Asset Investors currently owns 27% of our outstanding common stock and provides
management services to us. Our shares of common stock are listed on the American
Stock Exchange, Inc. ("AMEX") under the symbol "CAX."
Prior to 1998, we owned subordinate classes of Commercial Mortgage Backed
Securities ("CMBS bonds"). CMBS bonds generally are debt instruments that are
backed by mortgage loans on commercial real estate. The principal and interest
payments on the underlying mortgage assets are allocated among the several
classes or "tranches" of a series of CMBS bonds. Our subordinate tranches of
CMBS bonds included "first-loss" tranches, which bore the most risk in the event
of a default on the underlying mortgages and provided credit support for the
more senior tranches. In 1997, we decided to redeploy our assets into other
types of real estate investments in order to reduce the risk of our portfolio.
We restructured our CMBS bonds in November 1997 by selling, redeeming and
resecuritizing our various CMBS bonds from which we received $77.7 million in
cash and a small residual interest in two CMBS bonds. During most of 1998, we
invested our funds in short-term government securities and other short-term
investments pending our decision as to the type of real estate assets in which
we would invest.
In the third quarter of 1998, we decided to acquire interests in manufactured
housing communities. As of December 31, 1998, we held interests as owner, ground
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<PAGE>
lessor or mortgage lender (including participating mortgages) in six
manufactured home communities with a total of 640 developed homesites (sites
with homes in place), 50 sites ready for homes and 1,180 sites available for
future development. We expect to continue acquiring interests in manufactured
home communities during 1999.
Our principal executive offices are located at 3410 S. Galena Street, Suite 210,
Denver, Colorado 80231 and our telephone number is (303) 614-9410.
Industry Background
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social
activities and recreation and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that promote a sense of neighborhood. The communities provide an
attractive and affordable housing alternative for retirees, empty nesters and
start-up or single-parent families. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. In adult
communities, as least 80% of the tenants must be at least 55 years old, and in
all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some of the benefits an owner of real property enjoys,
including creditor protection laws in some states. These leases can be
cancelled, depending on state law, for non-payment of rent, violation of
community rules and regulations or other specified defaults. Generally, rental
rate increases are made on an annual basis. The size of these rental rate
increases depends upon the policies that are in place at each community. Rental
increases may be based on fixed dollar amounts, percentage amounts, inflation
indexes, or they may depend entirely on local market conditions. We own
interests in the underlying land, utility connections, streets, lighting,
driveways, common area amenities and other capital improvements and are
responsible for enforcement of community guidelines and maintenance. Each
homeowner within the manufactured home communities is responsible for the
maintenance of his or her home and leased site, including lawn care in some
communities.
The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Financial Information about Industry Segments
We operate in one industry segment, the ownership and management of real estate.
See the consolidated financial statements including their notes in Item 8 of
this Report on Form 10-K.
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Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. We believe that FFO, less a reserve, provides investors with an
understanding of our ability to incur and service debt and to make capital
expenditures. The Board of Governors of the National Association of Real Estate
Investment Trusts (also known as NAREIT) defines FFO as net income (loss),
computed in accordance with generally accepted account principles, excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. We calculate FFO in a manner consistent with NAREIT's definition. In
our calculation we include adjustments for:
o fees incurred in connection with property acquisitions; and
o nonrecurring costs related to discontinued classes of investments.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of our FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
o improving net operating income from our existing portfolio of
manufactured home communities; and
o acquiring additional communities at values that are accretive on a per
share basis.
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o reducing our exposure to downturns in regional real estate markets by
obtaining a geographically diverse portfolio of communities;
o ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing
long-term, fixed-rate, fully-amortized debt instead of higher cost,
short term debt;
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent
increases, expense efficiencies and in-part homesite development;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and
expense controls;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of
our communities and providing activities that improve the community
lifestyle; and
o recruiting and retaining capable community management personnel.
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<PAGE>
Future Acquisitions
In 1998, when we decided to enter the manufactured home community business, we
began to implement a business plan which called for the investment of our
capital in the acquisition of manufactured home communities. We have focused on
identifying acquisition opportunities that we believe provide returns that are
accretive to our stockholders. We plan on continuing this business plan during
1999, and hope to have largely invested our capital in manufactured home
communities during this year.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in the profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community. As an
alternative, we sometimes enter into ground leases with development companies
having similar terms to our participating mortgages.
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of the increasing acceptability of and demand
for manufactured homes and the continued constraints on development of new
manufactured home communities. We are actively seeking to acquire additional
communities and are currently engaged in various stages of negotiations relating
to the possible acquisition of a number of communities. The acquisition of
interests in additional communities could also result in our becoming
increasingly leveraged as we incur debt in connection with these transactions.
In 1998, we invested $23 million to acquire interests in six manufactured home
communities that are located in Arizona, Florida and California. These
communities have a total of 640 developed homesites (sites with homes in place),
50 sites ready for homes and 1,180 sites available for future development.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools at the
property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the
property is located;
o the potential for expansion of the physical layout of the property and
the number of sites;
o the occupancy and demand by residents for properties of a similar type
in the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of
the property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
o the replacement cost of the property.
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<PAGE>
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and expanding the number of sites available to be
leased to residents if justified by local market conditions and permitted by
zoning and other applicable laws. As of December 31, 1998, we held interests in
six communities with 50 sites ready for homes and 1,180 sites available for
future development.
Manager
Our daily operations are performed by a manager pursuant to a management
agreement currently in effect through December 31, 1999. The manager identifies
and performs due diligence on potential manufactured home community investments
for us. Since November 1997, Asset Investors has been our manager. In addition
to being our manager and a principal stockholder, Asset Investors separately
owns, acquires, develops and manages manufactured home communities, including
providing property management services on our communities. Consequently, we and
Asset Investors are involved in the same industry. The two companies have agreed
we shall invest at least $50 million in manufactured home communities before
Asset Investors makes any additional acquisitions of manufactured home
communities. Thereafter, the two companies will coordinate their efforts to
acquire manufactured home communities.
The management agreement was approved by our independent directors and may be
terminated by either party with our without cause at any time upon 60 days'
written notice. The manager provides all personnel and related overhead
necessary to conduct our regular business, and in return, the manager is paid
the following fees:
o Acquisition Fees equal to 0.5% of the cost of each real estate-related
asset acquired by us;
o Base Fees equal to 1% per year of the net book value of our real
estate-related assets;
o Incentive Fees equal to 20% of the amount by which our REIT income
exceeds (a) our average net worth, multiplied by (b) 1% over the ten
year United States Treasury rate.
During 1998, we paid $87,000 in Base Fees and $124,000 in Acquisition Fees to
Asset Investors. We did not pay any Incentive Fees in 1998. For 1999, the
management agreement relating to the Incentive Fee has been amended to provide
that such fee is based on our FFO, less an annual capital replacement reserve of
at least $50 per developed homesite, instead of REIT income because we believe
this is a better measure of our economic profitability and would, therefore, be
a more appropriate incentive for Asset Investors even if increased management
fees result.
In order to allocate investments between us and Asset Investors, the companies
have agreed that we will invest at least $50 million of our cash resources in
the acquisition of communities before Asset Investors will invest further cash
in the acquisition of communities. Thereafter, the companies will coordinate
their investments. In the ordinary course of our business, we are engaged in
discussions and negotiations with a number of manufactured home community owners
regarding the purchase of communities or interests in communities.
Asset Investors may acquire communities if a material portion of the purchase
price is paid for in units of limited partnership in Asset Investors Operating
Partnership ("OP Units") or Asset Investors' common stock.
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<PAGE>
We indemnify the manager and its affiliates with respect to all expenses,
losses, damages, liabilities, demands, charges or claims of any nature in
respect of acts or omissions of the manager made in good faith and in accordance
with the standards set forth in the management agreement.
Competition
There are numerous housing alternatives that compete with our manufactured home
communities in attracting residents. Our properties compete for residents with
other manufactured home communities, multifamily rental apartments, single
family homes and condominiums. The number of competitors in a particular area
could have a material effect on our ability to attract and maintain residents
and on the rents we are able to charge for homesites. In acquiring assets, we
compete with other REITs, pension funds, insurance companies, and other
investors, many of which have greater financial resources than we do. In
addition, Asset Investors is also involved in acquiring manufactured home
communities.
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
us to avail ourselves of the beneficial tax provisions applicable to REITs. Our
qualification as a REIT depends on our ability to meet various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our net income that is currently distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a corporation. If we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). Even if we qualify as a
REIT, we may be subject to certain state and local income and other taxes and to
Federal income and excise taxes on our undistributed income.
If in any taxable year we fail to qualify as a REIT and as a result, incur a tax
liability, we might need to borrow funds or liquidate certain investments in
order to pay the applicable tax. In this situation, we would not be compelled to
make distributions as required for entities claiming REIT status under the Code.
Moreover, unless we would be entitled to relief under certain statutory
provisions, we would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. Although we
currently intend to operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal, tax or other considerations may
cause us to fail to qualify as a REIT, or may cause the Board of Directors to
revoke the REIT election.
We and our stockholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or they transact
business or reside. The state and local tax treatment conferred upon us and our
stockholders may not conform to the Federal income tax treatment.
Regulations
General
Manufactured home communities, like other housing alternatives, are subject to
various laws, ordinances and regulations, including regulations relating to
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<PAGE>
recreational facilities such as swimming pools, clubhouses and other common
areas. We believe that we have obtained the necessary permits and approvals to
operate each of our properties in conformity with these laws.
Americans with Disabilities Act
Our current properties and any newly acquired communities must comply with the
Americans with Disabilities Act (the "ADA"). The ADA generally requires that
public facilities such as clubhouses, swimming pools and recreation areas be
made accessible to people with disabilities. As we previously mentioned, many of
our communities have public facilities. In order to comply with these
requirements we have made improvements at our communities in order to remove
barriers to access. If we should ever fail to comply with ADA regulations, we
could be fined or we could be forced to pay damages to private litigants. We
have made those changes required by the ADA which we believe are appropriate. We
believe that any further costs related to ADA compliance can be covered by cash
flow from the individual properties without causing any material adverse effect.
If ongoing changes involve a greater expenditure than we currently anticipate,
or if the changes must be made on a more accelerated basis than we anticipate,
our ability to make expected distributions could be adversely affected.
Rent Control Legislation
State and local laws, principally in Florida, might limit our ability to
increase rents on some of our properties, and thereby, limit our ability to
recover increases in operating expenses and the costs of capital improvements.
Enactment of rent control laws has been considered from time to time in
jurisdictions in which we operate. We presently expect to maintain manufactured
home communities and may purchase additional properties in markets that are
either subject to rent control laws or in which such legislation may be enacted.
Insurance
We believe that our properties are covered by adequate fire, flood and property
insurance policies. It is our policy to purchase insurance policies which
contain commercially reasonable deductibles and limits from reputable insurers.
We also believe that we have obtained adequate title insurance policies insuring
fee title to properties we have acquired.
Capital Resources
We have used our available cash balances, our FFO and our short-term investments
to provide working capital to support our operations, to pay dividends and to
acquire assets. Future acquisitions will be financed by the most appropriate
sources of capital, perhaps including our available cash and short-term
investment balances; undistributed FFO; long-term, secured debt; short-term,
secured debt; and the issuance of additional equity securities. This flexibility
allows us to offer more choices of "acquisition currency" to potential sellers
of manufactured home communities, including the ability to defer some or all of
the tax consequences of a sale. We believe that this flexibility may offer
sellers an incentive to enter into transactions with us on favorable terms.
Without further stockholder approval, we are authorized to issue up to
75,000,000 shares of common stock. As of March 5, 1999, 10,364,029 shares of
common stock were issued and outstanding. Future offerings of common stock may
result in the reduction of the net tangible book value per outstanding share and
a reduction in the market price of the common stock. We are unable to estimate
the amount, timing or nature of such future offerings as any such offerings will
depend on general market conditions or other factors.
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<PAGE>
In addition, the Board of Directors is authorized to issue 25,000,000 shares of
preferred stock, par value $.01 per share. Depending on the terms set by the
Board of Directors, the authorization and issuance of preferred stock could
adversely affect existing stockholders. The effects on existing stockholders
could include, among other things, dilution of ownership interests, restrictions
on dividends to be issued on common stock and preferences to holders of a new
class of stock in the distribution of assets upon liquidation. We do not
presently intend to issue preferred stock during 1999. As of March 5, 1999, we
have not authorized or issued additional classes of stock.
Dividend Reinvestment Plan
In 1998, we terminated our Automatic Dividend Reinvestment Plan due to the
administrative costs related to the plan.
Restrictions on and Redemptions of Common Stock
To qualify to be taxed as a REIT, we must comply with certain ownership
limitations with respect to shares of our common stock. Our Certificate of
Incorporation provides that shares of common stock generally may not be owned by
a person if the ownership of shares by such person would exceed 9.8% of our
outstanding shares or would result in the imposition of a tax on us. The Board
of Directors has waived this restriction with respect to Asset Investors'
ownership of 27% of our common stock.
Our Certification of Incorporation empowers the Board of Directors, at its
option, the redeem shares of common stock or to restrict transfers of shares to
comply with the requirements described above. The redemption price we would pay
if the Board of Directors exercises this option to redeem shares would be the
fair market value of the common stock as reflected in the latest quotations on
the American Stock Exchange. Our Certificate of Incorporation also provides that
if anyone acquires shares of our common stock in a manner or in a volume that
would result in our disqualification as a REIT under the Code, that acquisition
is deemed void to the fullest extent permitted under the law and the acquirer
will be deemed never to have had an interest in the shares. Furthermore, if a
transaction is determined to be void or invalid, the acquirer may be deemed to
have acted as agent on our behalf in acquiring such shares and may be deemed to
hold such shares on our behalf.
Each stockholder is required, upon demand, to disclose to the Board of Directors
in writing any information with respect to the direct and indirect ownership of
shares of our common stock as the Board of Directors deems necessary or prudent
in order to protect our tax status.
Employees
Pursuant to the management agreement, the manager provides all personnel
necessary to conduct our regular business. Consequently, we have no employees.
Certain employees of the manager serve as our officers.
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<PAGE>
Item 2. Properties.
The manufactured home communities in which we have interests are primarily
located in Arizona and Florida. We hold interests in these communities as owner,
ground lessor or mortgage lender (including participating mortgages). The
following table sets forth the states in which the communities in which we held
an interest on December 31, 1998 are located:
<TABLE>
<CAPTION>
Number of Sites
-----------------------------------------------------------------
Available for
Number of Ready for Homes Future
Communities Developed Development
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Arizona 3 337 -- 206
Florida 2 305 46 942
California 1 -- -- 30
--- ----- ----- ------
Total 6 642 46 1,178
=== ===== ===== ======
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Sites Ready Sites Availablet
Community Location Homesites Occupancy per Site for Homes for Developmen
- ------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C>
Cypress Greens(1) Lakeland, FL 85 100% $184 22 --
Riverside(1) Ruskin, FL 220 100 418 24 942
--------------------------------------------------------------------
Subtotal 305 100 353 46 942
--------------------------------------------------------------------
Participating Mortgage and Joint
Venture Communities
Fiesta Village Mesa, AZ 175 98 273 -- 206 (2)
Casa Encanta Mesa, AZ 111 87 350 -- -- (2)
Southern Palms Mesa, AZ 51 100 203 -- -- (2)
Cannery Village Newport Beach, CA -- -- -- -- 30
--------------------------------------------------------------------
Subtotal 337 95 288 -- 236
====================================================================
Total Communities 642 97% $319 46 1,178
====================================================================
<FN>
(1) We have leased this community to a third party under a long-term lease in
which we receive a base rent plus 50% of any profits from the community.
(2) We intend to redevelop the Fiesta Village, Casa Encanta, and Southern
Palms communities along with adjoining vacant land. The combined
redevelopment will result in the additional 206 spaces.
</FN>
</TABLE>
Item 3. Legal Proceedings.
At March 5, 1999, there were no material legal proceedings, pending or
threatened, to which we were a party or to which any of our respective
properties were subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1998.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the AMEX under the symbol "CAX." The high and low
closing sales prices of the shares of common stock as reported in published
financial sources and certain dividend information for the periods indicated
were as follows:
<TABLE>
<CAPTION>
Regular Special Capital Gain
Dividends Dividends Dividends
High Low Declared Declared Declared
---- --- -------- -------- --------
1998
<S> <C> <C> <C> <C> <C>
First Quarter $ 7 $ 6-7/16 $ -- $ -- $ --
Second Quarter 7 6-1/4 .13 -- --
Third Quarter 6-7/8 5-9/16 .13 -- --
Fourth Quarter 6-1/4 5-1/8 .13 -- --
1997
First Quarter $ 7 $ 6-3/8 $ .17 $ -- $ --
Second Quarter 6-11/16 6-3/16 .17 -- --
Third Quarter 7-3/16 6-5/8 .17 -- --
Fourth Quarter 7-11/16 6-9/16 .17 .26 .17
</TABLE>
As of March 5, 1999, 10,364,029 shares of common stock were issued and
outstanding and were held by 1,375 stockholders of record. We estimate there
were an additional 8,000 beneficial owners on that date whose shares were held
by banks, brokers or other nominees.
We, as a REIT, are required to distribute annually to stockholders at least 95%
of our "REIT taxable income," which, as defined by the Code and Treasury
regulations, is generally equivalent to net taxable ordinary income. We measure
our economic profitability and intend to pay regular dividends to our
stockholders based on FFO, less an annual capital replacement reserve of at
least $50 per developed homesite, during the relevant period. The future payment
of dividends, however, will be at the discretion of the Board of Directors and
will depend on numerous factors including, our financial condition, capital
requirements, the annual distribution requirements under the provisions of the
Code applicable to REITs and such other factors as the Board of Directors deems
relevant.
In 1998, 22,020 shares of common stock were issued to non-executive directors in
lieu of annual director fees as a private placement of our securities.
Item 6. Selected Financial Data.
Our selected financial data, set forth below, has been derived from and should
be read in conjunction with our audited consolidated financial statements
including their notes. Financial data as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, is included
elsewhere in this report on Form 10-K.
- 10 -
<PAGE>
Balance Sheet and Operating Data (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate, before accumulated depreciation $ 12,678 $ -- $ -- $ -- $ --
Investments in participating mortgages and joint
ventures 10,608 -- -- -- --
Cash equivalents and short-term investments 48,358 74,153 8,277 598 12,367
CMBS bonds 1,739 1,981 61,460 69,503 74,046
Total assets 78,234 78,148 72,406 71,590 87,604
Total stockholders' equity 77,254 77,705 71,919 70,465 74,672
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
RENTAL PROPERTY OPERATIONS:
Income from participating mortgages and leases $ 587 $ -- $ -- $ -- $ --
Depreciation (50) -- -- -- --
-------- -------- ------- -------- --------
537 -- -- -- --
-------- -------- ------- -------- --------
CMBS bonds revenues 161 9,172 9,838 8,980 5,938
Interest and other income 3,874 945 319 189 1,126
General and administrative expenses (420) (519) (805) (1,393) (1,220)
Management fees paid to manager (211) (1,678) (1,425) (1,151) (598)
Gain on restructuring of bonds -- 5,786 -- -- --
Net income 3,441 13,706 6,959 6,376 4,927
Per share amounts:
Basic and diluted earnings $ .33 $ 1.32 $ .68 $ .63 $ .49
Regular dividends $ .39 $ .68 $ .68 $ .68 $ .50
Special dividends $ -- $ .26 $ .04 $ -- $ .03
Capital gain on dividends $ -- $ .17 $ -- $ -- $ --
Weighted-average common shares outstanding 10,357 10,332 10,247 10,104 10,047
Weighted-average common shares and common share
equivalents outstanding 10,372 10,371 10,254 10,108 10,048
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with our consolidated
financial statements included elsewhere in this report. In 1998, we decided to
change our business from the ownership of high-risk CMBS bonds to the ownership,
acquisition, development and management of manufactured home communities. This
decision helped us to avoid the volatility incurred by other owners of these
securities following the capital market crisis in the third quarter of 1998.
Since our capital has not yet been entirely invested into this new business, our
financial performance, and consequently our stock price, has been adversely
affected during this period. During the last few months we have been focused on
the investment of our capital in the acquisition of manufactured home
communities. We believe that the investment of our capital will be substantially
completed during 1999, and we are hopeful that this will result in improved
performance.
- 11 -
<PAGE>
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Due to the change in our business from investing in CMBS bonds to owning and
operating manufactured home communities, the results of operations for 1998 are
not comparable to 1997.
Rental Property
During 1998, income from rental properties totaled $537,000, arising from our
initial investments in manufactured home communities.
Inflation
We do not believe that changes in inflation rates would have a material adverse
effect on our business. In fact, we believe that inflation may positively impact
our business, in light of the fact that manufactured home communities represent
a more affordable housing choice for many people than other alternatives
available, increased inflation rates may allow us to demand increased rents
without losing tenants.
Interest and Other Income
Interest and other income during 1998 was $3,874,000 compared to $945,000 for
1997. The increase is due to our temporary investment of the $77.7 million of
cash proceeds received in November 1997 from the restructuring of the CMBS
bonds. The average interest rates earned on these short-term investments were
5.40% and 5.44% during 1998 and 1997, respectively.
CMBS Bonds
Income from CMBS bonds was $161,000 during 1998 compared to $9,172,000 for 1997.
The earnings figures for 1998 represent the income from the retained equity
interest of the resecuritization of two CMBS bonds. All other income from the
CMBS bonds ceased after the restructuring of the CMBS bonds in November 1997.
General and Administrative Expenses
Our general and administrative expenses were $420,000 in 1998 compared to
$519,000 in 1997. General and administrative expenses decreased in 1998 compared
to 1997 primarily due to lower accounting and other expenses related to the
ownership of CMBS bonds.
Management Fees
During 1998, we incurred Base Fees of $87,000 on investments in manufactured
home communities, the retained equity interest from the CMBS bond
resecuritization and the investment in Westrec Marinar Management, Inc. We
incurred no Incentive Fees or Administrative Fees in 1998. During 1997, we
incurred management fees of $1,678,000, consisting of Base Fees of $598,000,
Incentive Fees of $1,024,000 and Administrative Fees of $56,000. We experienced
a large decrease in management fees during 1998 because we do not incur such
fees on cash equivalents and short-term investments of our cash resources.
Acquisition Fees
During 1998, we incurred Acquisition Fees of $124,000 as a result of our
investments in manufactured home communities. During 1997, we incurred
Acquisition Fees of $23,000 on acquisitions of CMBS bonds. The Acquisition Fees
- 12 -
<PAGE>
incurred in 1997 were capitalized as part of the cost of acquiring CMBS bonds.
Acquisition Fees were expensed in 1998 because the manager is Asset Investors,
owner of 27% of our common stock. If these fees had been paid to an unrelated
third party, then they would have been capitalized under generally accepted
accounting principles. For this reason, such fees are capitalized in our
calculation of FFO.
Costs Related to Potential Marina Investments
During the third quarter of 1998, we decided that we would no longer seek to
acquire interests in marinas, and we expensed $500,000 of costs related to
previously considered marina investments.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Interest Income
Interest income in 1997 and 1996 was $945,000 and $319,000, respectively. The
increase in interest income in 1997 as compared to 1996 is due to our investment
of the proceeds from the restructuring of the CMBS bonds in short-term
investments. The average interest rate earned on these funds was 5.44% and 5.14%
in 1997 and 1996, respectively.
CMBS Bonds
Income from CMBS bonds was $9,172,000 during 1997 compared to $9,838,000 in
1996. Earnings from CMBS bonds decreased by $1,138,000 because there were no
earnings in November or December 1997 after the restructuring of the CBMS bond
portfolio. This decrease was partially offset by higher income prior to the
restructuring. The income from the CMBS bonds prior to the restructuring was
higher due to the prepayments made in August 1997 on one bond and the earnings
on bonds acquired in March 1997 offset by income from the early redemption of
two bonds in May 1996 and prepayments made on another bond in 1996.
General and Administrative Expenses
Our general and administrative expenses were $519,000 and $805,000,
respectively, for 1997 and 1996. General and administrative expenses decreased
in 1997 compared to 1996 primarily due to lower stockholder relations expenses,
lower consulting and accounting expenses and the elimination of expenses from
dividend equivalent rights pursuant to the amendment to our stock option plan.
Management Fees
Management fee expenses were $1,678,000 and $1,425,000, respectively, for 1997
and 1996. The increase in management fees during 1997 compared with 1996 was due
to an increase of $311,000 in Incentive Fees, offset by a decrease of $58,000 in
Base Fees and Administrative Fees. Prior to the restructuring of the CMBS bond
portfolio, our manager received an Administrative Fee of up to $10,000 per year
for each CMBS bond. The increase in Incentive Fees was due to higher REIT income
before Incentive Fees partially offset by an increase in the average Ten-Year
U.S. Treasury Rate between 1996 and 1997. The increase in REIT income was
primarily a result of gains associated with the restructuring of the CMBS bonds
and nonrecurring expenses incurred in 1996 while the increase in the average
Ten-Year U.S. Treasury Rate had the effect of raising the threshold above which
Incentive Fees are paid. The decrease in Base Fees was due to the decrease in
average invested assets as a result of the restructuring of our CMBS bonds.
- 13 -
<PAGE>
Dividend Distributions
During 1998, we declared regular dividends of $.39 per share. During each of
1997 and 1996, we declared regular dividends of $.68 per share. In addition, we
declared special dividends of $.26 per share and $.04 per share in 1997 and
1996, respectively, and a capital gains dividend of $.17 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had cash and cash equivalents of $3,292,000 and
short-term investments of $45,066,000. Our principal activities that demand
liquidity include our normal operating activities, payments of principal and
interest on outstanding debt, acquisitions of or additional investments in
properties and payments of dividends to stockholders.
In 1998, the net cash provided by operating activities was $3,705,000 compared
to $4,428,000 during 1997. The decrease was primarily a result of lower income
from both short-term investments and investments in manufactured home
communities in 1998 than income from CMBS bonds in 1997.
Net cash used in investing activities was $70,524,000 during 1998 compared to
net cash provided by investing activities of $72,892,000 in 1997. The net cash
in 1998 was primarily used to acquire short-term investments and investments in
manufactured home communities. Investing activities in 1997 included $77,693,000
of net cash provided from the restructuring of the bonds.
Net cash used in financing activities decreased to $4,042,000 in 1998 compared
to $11,444,000 in 1997, primarily due to lower dividends.
We expect to meet our long-term liquidity requirements through our cash
balances, short-term investments, long-term, secured borrowings, cash generated
by operations and issuance of equity securities.
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that FFO,
less a reserve, provides investors with an understanding of our ability to incur
and service debt and make capital expenditures. The Board of Governors of NAREIT
defines FFO as net income (loss), computed in accordance with generally accepted
accounting principles, excluding gains and losses from debt restructuring and
sales of property, plus real estate related depreciation and amortization
(excluding amortization of financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. We calculate FFO in a manner
consistent with NAREIT's definition. In our calculation we include adjustments
for:
o fees incurred in connection with property acquisitions; and
o nonrecurring costs related to discontinued classes of investments.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
- 14 -
<PAGE>
For 1998, our FFO was as follows (in thousands):
1998
----
Net income $ 3,441
Real estate depreciation 50
Acquisition fees 124
Amortization of CMBS bonds 242
Costs related to potential marina investments 500
--------
Funds From Operations (FFO) $ 4,357
========
Weighted average common shares outstanding 10,357
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our critical hardware and software systems are currently Year 2000 compliant.
Upon failure of any system, data included in critical software (such as
rent-rolls and certain record-keeping systems) could be transferred to
alternative commercially available software at a reasonable cost and within a
reasonable time period. Consequently, we would be able to continue our business
operations without any material interruption or material effect on our business,
results of operations or financial condition. In addition, we anticipate that
any hardware or software that we acquire (including upgrades to existing
systems) between now and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
We invest funds primarily in government securities and other short-term
investments with interest rates of approximately 0.25% above the London
Interbank Offered Rate ("LIBOR"). Accordingly, changes in interest rates could
affect the returns from such investments. We intend to invest funds in
manufactured home communities during 1999, however, the timing and amount of
such investments will depend on a number of factors. See "Business - Growth and
Operating Strategies - Future Acquisitions."
- 15 -
<PAGE>
We do not currently have any notes payable but expect to borrow amounts in
connection with acquisitions of communities. We intend to borrow non-recourse,
secured, fixed rate, fully amortizing debt in connection with such acquisitions.
Accordingly, such debt would not cause us significant exposure to changing
interest rates.
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this report and
incorporated herein by reference. See "Index to Financial Statements" on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
We have had no changes in nor any disagreements with our accountants relating to
accounting or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Board of Directors and Officers" in
the proxy statement in connection with our 1999 Annual Meeting of Stockholders
which is to be filed after the date this report on Form 10-K is filed is hereby
incorporated by reference.
Executive Officers of the Registrant
The Executive Officers of the Company as of December 31, 1998 are:
Name Age Position with the Company
- --------------------------------------------------------------------------------
Terry Considine 51 Chairman of the Board of Directors and Chief
Executive Officer
Thomas L. Rhodes 59 Vice Chairman of the Board of Directors
Bruce E. Moore 56 President and Chief Operating Officer
David M. Becker 39 Chief Financial Officer, Secretary and Treasurer
Terry Considine has been our Chairman of the Board of Directors and Chief
Executive Officer since April 1998. From September 1996 to April 1998, Mr.
Considine served as our Co-Chairman of the Board of Directors and Co-Chief
Executive Officer. Mr. Considine also serves as Chairman of the Board of
Directors and Chief Executive Officer of Asset Investors. He is the sole owner
of Considine Investment Co, and since July 1994, he has been the Chairman of the
Board of Directors and Chief Executive Officer of Apartment Investment and
Management Company ("AIMCO"), one of the largest apartment REITs in the United
States. Mr. Considine has been and remains involved as a principal in a variety
of real estate activities, including the acquisition, renovation, development
and disposition of properties. Mr. Considine has also controlled entities
engaged in other businesses such as television broadcasting, gasoline
distribution and environmental laboratories. Mr. Considine received a B.A. from
Harvard College and a J.D. from Harvard Law School and was admitted as a member
of the Massachusetts Bar.
Mr. Considine has had substantial real estate experience. From 1975 through July
1994, partnerships or other entities in which Mr. Considine had controlling
interests invested in approximately 35 multifamily apartment properties and
commercial real estate properties. Six of these real estate assets (four of
which were multifamily apartment properties and two of which were office
properties) did not generate sufficient cash flow to service their related
indebtedness and were foreclosed upon by their lenders, causing pre-tax losses
- 16 -
<PAGE>
of approximately $11.9 million to investors and losses of approximately $2.7
million to Mr. Considine.
Thomas L. Rhodes has been our Vice Chairman of the Board of Directors since
April 1998. From September 1996 to April 1998, Mr. Rhodes served as Co-Chairman
of the Board of Directors and Co-Chief Executive Officer. From September 1996 to
April 1998, Mr. Rhodes also served as Asset Investors' Co-Chairman of the Board
of Directors and Co-Chief Executive Officer. Since April 1998, Mr. Rhodes has
also served as Vice Chairman of the Board of Directors of Asset Investors. Mr.
Rhodes has also been a Director of AIMCO since July 1994. Mr. Rhodes has served
as the President and a Director of National Review magazine since 1992. From
1976 to 1992, he held various positions at Goldman, Sachs & Co. and was elected
a General Partner in 1986. He currently serves as a Director of Delphi Financial
Group, Inc. and its subsidiaries, Delphi International, Ltd., Oracle Reinsurance
and The Lynde and Harry Bradley Foundation. Mr. Rhodes is Trustee of The
Heritage Foundation.
Bruce E. Moore has been our President and Chief Operating Officer since October
1998. He also serves as President and Chief Operating Officer of Asset
Investors. Mr. Moore is the founder and was the Chief Executive Officer of
Brandywine Financial Services Corporation and its affiliates, a private real
estate firm specializing in various aspects of the real estate industry
including asset management, consulting, development, property management,
brokerage and capital formation. He is a certified public accountant and holds a
Masters in Accounting and a Bachelor of Science in Economics from the Wharton
School of the University of Pennsylvania. Mr. Moore is a Director and past
President of the Media Youth Center, and a past advisory-board member for the
Department of Recreation and Intercollegiate Athletics for the University of
Pennsylvania. In addition, Mr. Moore is a member of the National Association of
Real Estate Investment Trusts and the International Council of Shopping Centers.
David M. Becker has functioned as our Chief Financial Officer, Secretary and
Treasurer since December 1997 and was appointed to such positions in April 1998.
Since December 1997, Mr. Becker has also served as Chief Financial Officer,
Secretary and Treasurer of Asset Investors and was appointed to such positions
in February 1998. From September 1995 until joining us, he was both the Chief
Financial Officer of Westfield Development Company, Inc. and Vice
President-Finance of The Frederick Ross Co., related companies involved in
commercial real estate development, brokerage and management. Prior to September
1995, he held various executive positions with CONCORD Services, Inc., a
privately-held company involved in multiple businesses including trading,
manufacturing and finance. CONCORD Services, Inc. declared bankruptcy in
February 1995. In addition, Mr. Becker was Chief Financial Officer and General
Counsel of Ramtron International Corporation, a publicly-held semiconductor
manufacturer, from October 1989 until July 1994. Mr. Becker is an attorney and
certified public accountant. He received a B.A. from the University of Northern
Iowa and a J.D. from the University of Denver.
There are no family relationships between any of the executive officers,
directors or persons nominated or chosen by us to become a director or executive
officer and there are no arrangements or understandings pursuant to which any of
them were selected as directors or officers. Except as described above, none of
the persons nominated to become directors or executive officers have been
involved in any legal proceedings during the past five years that are material
to an evaluation of the ability or integrity of such persons.
The information set forth under the caption "Compliance with Section 16(a) of
the Exchange Act" in the proxy statement is hereby incorporated by reference.
- 17 -
<PAGE>
Item 11. Executive Compensation.
The information set forth under the captions "Summary Compensation Table",
"Options/SAR Grants in Last Fiscal Year" and "Aggregate Option/SAR Exercises in
Last Fiscal Year and Fiscal Year-end Options/SAR Values" in the proxy statement
is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the proxy statement is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related
Transactions" in the proxy statement is hereby incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements listed in the Index to Financial Statements on
Page F-1 of this report are filed as part of this report.
(a)(2) The financial statement schedules listed in the Index to Financial
Statements on Page F-1 of this report are filed as part of this report.
All other schedules are omitted since they are not applicable, not
required, or the information required to be set forth therein is
included in the financial statements, or in notes thereto.
(a)(3) The Exhibit Index is included on page 18 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1998:
Current report on Form 8-K, dated November 20, 1998, reporting the
acquisition of manufactured housing community assets which included the
Statement of Excess Revenues Over Specific Operating Expenses of the
Moorings of Manatee Manufactured Home Community for the Year Ended
December 31, 1997 (audited) and the Period from January 1, 1998 to
September 30, 1998 (unaudited).
- 18 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMERCIAL ASSETS, INC. Page
Financial Statements:
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997............................................................ F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996........................ F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.............................. F-6
Notes to Consolidated Financial Statements............................ F-7
Financial Statement Schedules:
Schedule III--Real Estate and Accumulated Depreciation................ F-16
Schedule IV - Mortgage Loans on Real Estate........................... F-18
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
January 29, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,292 $ 74,153
Short-term investments 45,066 --
Real estate, net of accumulated depreciation of $50 12,628 --
Investments in participating mortgages 9,328 --
Investment in real estate joint venture 1,280 --
Investments in and notes receivable from Westrec 4,011 1,710
CMBS bonds 1,739 1,981
Other assets, net 890 304
---------- ----------
Total Assets $ 78,234 $ 78,148
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 872 $ 368
Management fees payable to related parties 108 75
---------- ----------
980 443
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares
issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,364 and
10,342 shares issued and outstanding, respectively 104 104
Additional paid-in capital 76,874 76,724
Retained earnings 276 877
---------- ----------
77,254 77,705
---------- ----------
Total Liabilities and Stockholders' Equity $ 78,234 $ 78,148
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C>
Income from participating mortgages and leases $ 587 $ -- $ --
Depreciation (50) -- --
--------- -------- --------
Income from property operations 537 -- --
--------- -------- --------
Interest and other income 3,874 945 319
CMBS bonds revenue 161 9,172 9,838
General and administrative expenses (420) (519) (805)
Management fees paid to manager (87) (1,678) (1,425)
Interest expense -- -- (2)
Elimination of dividend equivalent rights -- -- (966)
--------- -------- ---------
OPERATING INCOME 4,065 7,920 6,959
Acquisition fees paid to manager (124) -- --
Costs related to potential marina investments (500) -- --
Gain on restructuring of bonds -- 5,786 --
--------- -------- --------
NET INCOME $ 3,441 $ 13,706 $ 6,959
========= ======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ .33 $ 1.32 $ .68
========= ======== ========
DIVIDENDS DECLARED PER SHARE:
Regular dividends $ .39 $ .68 $ .68
Special dividends -- .26 .04
Capital gain dividends -- .17 --
--------- -------- --------
$ .39 $ 1.11 $ .72
========= ======== ========
Weighted-Average Common Shares Outstanding 10,357 10,332 10,247
Weighted-Average Common Shares and Common Share Equivalents Outstanding
10,372 10,371 10,254
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Retained
Earnings
(Dividends In Accumulated
Additional Excess of Other Total
Common Stock Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings) Income Equity
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1995 10,142 $ 102 $ 75,523 $ (915) $(4,245) $ 70,465
Comprehensive Income
Net income -- -- -- 6,959 -- 6,959
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
Comprehensive Income -- -- -- 6,959 856 7,815
------- ------ --------- -------- ------- ---------
Issuance of common stock 174 1 1,036 -- -- 1,037
Dividends -- -- -- (7,398) -- (7,398)
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1996 10,316 103 76,559 (1,354) (3,389) 71,919
Comprehensive Income
Net income -- -- -- 13,706 -- 13,706
Reversal of unrealized holding losses
upon restructuring of bonds -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ---------
Comprehensive Income -- -- -- 13,706 3,389 17,095
------- ------ --------- -------- ------- ---------
Issuance of common stock 26 1 165 -- -- 166
Dividends -- -- -- (11,475) -- (11,475)
------- ------ --------- ------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 104 76,724 877 -- 77,705
Issuance of common stock 22 -- 150 -- -- 150
Net income -- -- -- 3,441 -- 3,441
Dividends -- -- -- (4,042) -- (4,042)
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1998 10,364 $ 104 $ 76,874 $ 276 $ -- $ 77,254
======= ====== ========= ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,441 $ 13,706 $ 6,959
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of premium/discount on CMBS bonds and
short-term investments 274 (2,381) (2,155)
Accrued income on participating mortgages and leases
(443) -- --
Depreciation 50
Gain on restructuring of bonds -- (5,786) --
Issuance of common stock for dividend equivalent rights
-- -- 941
Increase in accounts payable and accrued liabilities 537 216 157
Decrease (increase) in other assets (154) (1,327) 18
-------- -------- --------
Net cash provided by operating activities 3,705 4,428 5,920
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of short-term investments (91,946) -- --
Collections on short-term investments 30,313 -- --
Proceeds from sale of short-term investments 16,085 -- --
Investments in participating mortgages, net (8,959) -- --
Purchases of real estate (12,671) -- --
Capital replacements (7) -- --
Investments in Westrec (2,301) -- --
Investment in real estate joint venture (1,280) -- --
Proceeds from restructuring of bonds -- 77,693 --
Collections on CMBS bonds 242 -- 9,857
Acquisitions of CMBS bonds -- (4,801) --
-------- -------- --------
Net cash provided by (used in) investing activities (70,524) 72,892 9,857
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,042) (11,475) (7,398)
Proceeds from the issuance of Common Stock -- 31 --
Paydowns on short-term financing -- -- (700)
-------- -------- --------
Net cash used in financing activities (4,042) (11,444) (8,098)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(70,861) 65,876 7,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
74,153 8,277 598
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,292 $ 74,153 $ 8,277
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. ("CAX" and, together with its subsidiaries, the
"Company") is a Maryland corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's common stock, par value $.01, (the "Common Stock") is
listed on the American Stock Exchange under the symbol "CAX."
Prior to 1998, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were secured and funded as to the payment of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate. In 1997, the Company decided to restructure its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note H). The Company temporarily invested
the proceeds from such restructuring in government securities and short-term
investments until the Company decided what class of assets to reinvest such
funds in.
In the third quarter of 1998, the Company decided to invest in manufactured home
communities and as of December 31, 1998 has invested $23 million in interests in
manufactured home communities and adjoining land with 640 developed homesites,
50 sites ready for homes and 1,180 sites available for future development.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 1999 ("the Management
Agreement"). Prior to October 1996, the Company was managed by subsidiaries of
MDC Holdings, Inc. ("MDC"). In September 1996, MDC sold Financial Asset
Management LLC ("FAM"), the manager at such time, to an investor group led by
Terry Considine, Thomas L. Rhodes and Bruce D. Benson. In November 1997, the
assets of FAM, including the Management Agreement, were acquired by Asset
Investors Corporation ("AIC" and together with its subsidiaries, "Asset
Investors"), the current manager. Mr. Considine is Chairman of the Board of
Directors and Chief Executive Officer of both the Company and Asset Investors.
Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both companies.
Asset Investors owns 27% of the Company's Common Stock. No change was made to
the Management Agreement during 1998 other than an extension. During 1999, the
Incentive Fee has been amended to provide that such fee is based on Adjusted
Funds From Operations ("AFFO") instead of REIT income. Generally, AFFO is book
net income plus depreciation, amortization and acquisition fees less an annual
capital replacement reserve equal to $50 per developed homesite.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
officers of Asset Investors are also officers of the Company.
F-7
<PAGE>
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Real Estate and Depreciation
Real estate is recorded at cost less accumulated depreciation. Depreciation is
computed using the straight line method over an estimated useful life of 25
years for land improvements and buildings. Significant renovations and
improvements, which improve or extend the useful life of the asset, are
capitalized and depreciated over the remaining estimated life. Maintenance,
repairs and minor improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of December 31, 1998, there has been no impairment of the Company's
investment in real estate.
Revenue Recognition
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of December 31, 1998, there is no reserve for uncollected interest
on the participating mortgages. Rent on ground leases is recognized when earned
and due from lessee.
CMBS Bonds
Earnings from CMBS bonds was comprised of coupon interest and the amortization
of the purchase discount. Amortization of the purchase discount was recognized
by the interest method using a constant effective yield and assumed an estimated
rate of future prepayments, defaults and credit losses which was adjusted for
actual experience. The allowance for credit losses was equal to the undiscounted
total of future estimated credit losses. In the event the Company adjusted the
estimate of future credit losses, such adjustments would be included in current
period earnings.
The Company classifies its CMBS bonds as available-for-sale. Accordingly, the
CMBS bonds are carried at fair value in the financial statements. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and reported as a net amount in stockholders' equity until realized. If
the fair value of a CMBS bond declines below its amortized cost basis and the
decline is considered to be "other than temporary," the amount of the write-down
would be included in the Company's income. The decline in fair value is
considered to be other than temporary if the cost basis exceeds the related
projected cash flow from the CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments generally approximate
their carrying basis or amortized cost.
F-8
<PAGE>
Income Taxes
CAX intends to operate in a manner that will permit it to qualify for the income
tax treatment accorded to a REIT. If it so qualifies, CAX's REIT income, with
certain limited exceptions, will not be subject to federal or state income tax
at the corporate level. Accordingly, no provision for taxes has been made in the
financial statements.
In order to maintain its status as a REIT, CAX is required, among other things,
to distribute annually to its stockholders at least 95% of its REIT income and
to meet certain asset, income and stock ownership tests. Regular and special
dividends declared in 1998, 1997 and 1996 represented ordinary taxable income to
the stockholders. In addition, the Company declared a capital gains dividend of
$.17 per share in 1997.
Earnings Per Share
Basic earnings per share for 1998, 1997 and 1996 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of any dilutive, unexercised
stock options in 1998, 1997 and 1996.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments are considered to be cash and cash
equivalents. The Company paid interest expense in cash of $8,000 in 1996. The
Company paid no interest expense in 1998 or 1997.
Non-cash investing and financing activities for 1998, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
Principal collections on CMBS bonds transferred to restricted
<S> <C> <C> <C>
cash $ $ 6,227 $ 1,214
Unrealized holding gains and losses on CMBS bonds -- 3,389 856
Issuance of Common Stock for services 150 135 --
Distributions of Common Stock pursuant to dividend equivalent
rights -- -- 96
Issuance of Common Stock as consideration for the elimination
of dividend equivalent rights -- -- 941
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996 consolidated
financial statements to conform to the classifications currently used. The
effect of such reclassifications on amounts previously reported is immaterial.
C. Short-term Investments
During 1998, the Company acquired short-term investments consisting of
F-9
<PAGE>
mortgage-backed bonds guaranteed by Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association. These investments are classified as
available-for-sale, and the fair market value at December 31, 1998 approximates
the carrying value of $45,066,000.
D. Investments in Manufactured Home Communities
During 1998, the Company acquired interests in six manufactured home communities
with 640 developed sites, 50 sites ready for homes, and 1,180 sites available
for future development. Total investment was $22,910,000 paid in cash.
The following unaudited pro-forma information has been prepared assuming the
acquisition of the interests in manufactured home communities and the
restructuring of the Company's CMBS bonds had been completed at the beginning of
the periods presented. The unaudited pro-forma information is presented for
informational purposes only and is not necessarily indicative of what would have
occurred if the restructurings and the acquisitions had been completed as of
those dates. In addition, the pro-forma information is not intended to be a
projection of future results. The unaudited, pro-forma results of operations for
1998 and 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
---- ----
Revenues (income from participating mortgages and leases, interest
<S> <C> <C>
income and CMBS bonds revenues) $ 5,375 $ 6,693
========== ==========
Income before gain on restructuring of bonds $ 3,724 $ 5,529
Gain on restructuring of CMBS bonds -- 6,069
---------- ----------
Net income $ 3,724 $ 11,598
========== ==========
Basic and diluted earnings per share $ .36 $ 1.12
========== ==========
</TABLE>
The Company is actively seeking to acquire additional communities and currently
is engaged in negotiations relating to the possible acquisition of a number of
communities. At any time, these negotiations are at various stages of
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
E. Investments in Participating Mortgages
As of December 31, 1998, the Company has investments in participating mortgages
secured by three manufactured home communities and adjoining land. The notes
accrue interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum of 12%
per annum. The loans mature in September 2007. The Company also receives
additional interest of 50% of the net profits and cash flows from the
properties. In addition, as of December 31, 1998, the Company has investments in
participating mortgages secured by individual homes and home sites within two
manufactured home communities. These mortgages accrue interest at 10% and pay
interest from the cash flows from the homesites. The Company also receives
additional interest of 50% of the net profits and cash flows from the homesites.
As of December 31, 1998, the Company had investments in participating mortgages
of $9,328,000 and income of $451,000 from these mortgages during 1998.
F-10
<PAGE>
F. Real Estate
Real estate at December 31, 1998, is as follows (in thousands):
Land $ 3,798
Land improvements and buildings 8,880
----------
12,678
Less accumulated depreciation (50)
Investment in real estate, net $ 12,628
==========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. The two
manufactured home communities involving the above real estate have been leased
to a third party. The first lease involves a community acquired by the Company
at a cost of $1.4 million and is for a term of 50 years. The Company receives
initial annual lease payments equal to 9% of its cost. The annual lease payments
increase by 4% per annum over the prior year's lease payments until the annual
lease payment equals 13% of the Company's cost. In addition, the Company
receives additional rent equal to 50% of the lessee's net cash flow from the
property. In the event of a sale of the property, the Company receives all
proceeds until it has realized its total purchase price of the property plus a
13% per annum rate of return. The Company then receives 50% of any sales
proceeds in excess of such amount.
The other community acquired by the Company involves two phases and has been
leased to the same third party for 50 years. Phase One has 220 developed
homesites and 24 sites ready for homes. Phase Two involves 940 sites available
for future development. Initial annual lease payments on Phase One is $890,000,
increasing by 4% per annum. There are no lease payments on Phase Two until the
sites are ready for homes, at which time, the annual lease payments on Phase Two
will be equal to 10% times the costs incurred in developing Phase Two. In
addition, the lessee pays to the Company additional rent equal to 50% of the
lessee's net cash flow from the property. In the event of a sale, the Company
receives 50% of any sales proceeds in excess of the Company's cost.
G. Investment in Real Estate Joint Venture
In November 1997, the Company invested $1,280,000 in a joint venture involving
the development of 30 homesites near Newport Beach, California. The Company
receives a priority return from the venture until the Company has received an
amount equal to 9% times $1,250,000 for 1999. The Company's subsequent annual
priority return increases by 5% over the prior year's amount. The other venturer
then receives a similar percentage return on its $300,000 investment in the
venture. In the event the property is sold, the Company receives all proceeds
until it has received its investment plus 20% per annum. The other venturer then
receives all proceeds until it has received its investment plus 20% per annum.
Any excess sales proceeds are then shared equally. The Company did not record
any income from this real estate joint venture in 1998.
H. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold, one bond was redeemed and the remaining two CMBS bonds were
resecuritized by contributing the bonds and related restricted cash to an owner
trust in which the Company retained an equity interest. In a private placement,
the trust then sold debt securities representing senior interests in the trust's
assets. The principal balance of the equity interest retained by the Company is
$5,000,000. However, since the equity interest represents the first-loss class
of the portfolio and provides credit support for the senior debt securities, the
F-11
<PAGE>
Company valued the equity interest at its then estimated fair market value of
$2,000,000. During 1998, the Company received $403,000 of which $242,000 was
recorded as a reduction in the net book value of the retained equity interest,
resulting in a net book value of $1,739,000 which the Company believes
approximates fair market value at December 31, 1998.
In 1997, three mortgages underlying one of the Company's CMBS bonds were
prepaid. As a result of the prepayment, the Company recognized $482,000 of
income from a prepayment penalty received and $2,305,000 of income from
accelerated discount amortization.
I. Investments in and Notes Receivable from Westrec
Prior to deciding to acquire manufactured home communities, the Company
evaluated acquiring interests in marinas and, in connection with this, acquired
a 12% interest in Westrec Marina Management Inc. ("Westrec") for approximately
$2,500,000 in March 1998. In the third quarter of 1998, the Company decided to
invest in manufactured housing communities and not to invest in marinas. The
Company has valued its investment in Westrec common stock at the price at which
the Company can re-sell such stock to Westrec. The Company has expensed $500,000
for the portion of its investment in Westrec in excess of the sales price plus
additional due diligence, legal, and other costs incurred in connection with
investigating investments in marinas. The Company also has a note receivable
from an affiliate of Westrec. The outstanding balance of the note receivable
(including interest receivable) is $1,883,000 and $1,710,000 at December 31,
1998 and 1997, respectively. In May 1998, the Company issued to an affiliate of
Westrec warrants to purchase 322,000 shares of Common Stock at $6.60 per share.
These warrants were cancelled in 1998.
J. Stock Option Plan
The Company has a Stock Incentive Plan for the issuance of non-qualified stock
options to its directors and officers, employees and consultants which as of
December 31, 1998, permitted the issuance of up to an aggregate of 3,000,000
shares of Common Stock, of which 454,000 and 717,000 related to outstanding
stock options as of December 31, 1998 and 1997, respectively. The exercise price
for stock options may not be less than 100% of the fair market value of the
shares of Common Stock at the date of the grant. The stock options have various
terms ranging up to 10 years.
Prior to May 30, 1996, stock options granted under the Stock Option Plan
automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During 1996, the Company incurred $96,000 of expenses from DERs
covering 16,000 shares of Common Stock which were subject to issuance pursuant
to options granted under the plan. On May 30, 1996, the Company's stockholders
approved the issuance of Common Stock in exchange for the elimination of DERs
for such options and, as a result, the Company recorded a $966,000 charge during
1996.
F-12
<PAGE>
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1998. As of December 31, 1998, the outstanding options have
exercise prices ranging from $5.625 to $6.875 and have a remaining
weighted-average life of 2.3 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1995 $ 6.94 574,000
Granted 5.86 83,000
Forfeited 6.68 (9,000)
------ ----------
Outstanding - December 31, 1996 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ ----------
Outstanding - December 31, 1997 6.74 717,000
Granted 6.62 38,000
Forfeited 7.50 (290,000)
Expired 7.25 (11,000)
------ -----------
Outstanding - December 31, 1998 $ 6.23 454,000
====== ==========
Options granted to date vest over various periods up to two years. As of
December 31, 1998, 1997 and 1996, 445,000, 660,000 and 454,000, respectively, of
the outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1998, 1997 and 1996, the estimated weighted-average, grant-date fair
value of options granted was $.76, $.42 and $.45, respectively. The Company
assumed lives of five to ten years and risk-free interest rates equal to the
Five- or Ten-Year U.S. Treasury rate on the date the options were granted
depending on option term. In addition, the expected stock price volatility and
dividend growth rates were estimated based upon historical averages over the two
years ended December 31, 1998, adjusted for changes based upon the Company's
investment in manufactured home community assets.
F-13
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $3,402 $ 13,670 $ 6,932
Pro forma basic and diluted earnings per share $ 0.33 $ 1.32 $ 0.68
</TABLE>
K. Management Fees
The Company operates under a management agreement, pursuant to which the manager
advises the Company on its business and oversees its daily operations, subject
to the supervision of the Company's Board of Directors. Asset Investors has been
the manager since November 1997. Prior to November 1997, FAM was the manager.
The Management Agreement provides that the manager receives a "Base Fee," an
"Acquisition Fee" and an "Incentive Fee." The Base Fee is payable quarterly in
an amount equal to 1% per annum of the Company's average net book value of real
estate-related assets. The Acquisition Fee equals 0.5% of the cost of each real
estate asset acquired. The Incentive Fee equals 20% of the amount by which the
Company's REIT taxable income exceeds the amount calculated by multiplying the
Company's "average net worth" by the "Ten-Year United States Treasury rate" plus
1%. In 1997 and 1996, the manager also received "Administrative Fees" on each
CMBS bond outstanding. Administrative Fees were terminated in connection with
the November 1997 restructuring of the CMBS bond portfolio.
Fees paid to the manager during 1998, 1997 and 1996 were (in thousands):
1998 1997 1996
---- ---- ----
Base Fees $ 87 $ 598 $ 654
Acquisition Fees 124 23 --
Incentive Fees -- 1,024 713
Administrative Fees -- 56 58
------ -------- --------
$ 211 $ 1,701 $ 1,425
====== ======== ========
Acquisition Fees incurred in 1997 were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees in 1997 relating to the gain on the restructuring of the CMBS bonds.
Acquisition Fees incurred in 1998 were expensed because such fees were paid to
Asset Investors, owner of 27% of the Company's Common Stock.
The Management Agreement has been extended through December 31, 1999. During
1999, the Incentive Fee has been amended to provide that such fee is based on
CAX's Funds From Operations, less an annual capital replacement reserve of at
least $50 per developed homesite, instead of REIT income. In general, Funds From
Operations is equal to book net income plus depreciation, amortization and
acquisition fees.
L. Commitments
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
The Company has agreed to acquire from time to time ground leases related to
individual homesites. The purchase price for each lease will be equal to the
base annual rent provided for in each such ground lease divided by 9%. The
Company is not required to acquire such leases in groups of less than 10 leases.
F-14
<PAGE>
The maximum number of leases the Company might purchase is approximately 500 for
total consideration of approximately $20 million.
M. Operating Segments
The Company has recently begun investing in manufactured home communities and
management assesses the performance of the Company as one operating segment.
N. Other Matters
The Company's Charter authorizes the Board of Directors to issue 25,000,000
shares, par value $.01 per share, of Preferred Stock. The Board of Directors is
authorized to fix the terms of the Preferred Stock, including preferences,
powers and rights (including voting rights) senior to the Common Stock. To date,
the Company has not issued any shares of Preferred Stock.
O. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1998 and 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
1998
- -------------------------------------------------- --------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Income from rental property operations $ 390 $ 147 $ -- $ --
CMBS bonds 37 40 44 40
Interest and other income 767 1,012 1,042 1,053
Net income 967 486 986 1,002
Per share amounts:
Basic and diluted earnings .09 .05 .09 .10
Regular dividends .13 .13 .13 --
Stock prices (1)
High 6-1/4 6-7/8 7 7
Low 5-1/8 5-9/16 6-1/4 6-7/16
Weighted-average common shares outstanding 10,364 10,364 10,359 10,342
Weighted-average common shares and common share
equivalents outstanding 10,366 10,373 10,387 10,378
1997
- -------------------------------------------------- --------------- ----------------- --------------- ----------------
CMBS bonds revenue $ 1,512 $ 3,423 $ 2,193 $ 2,044
Interest and other income 734 51 49 111
Gain on restructuring of bonds 5,786 -- -- --
Net income 7,677 2,484 1,810 1,735
Per share amounts:
Basic and diluted earnings .74 .24 .17 .17
Regular dividends .17 .17 .17 .17
Special dividends .26 -- -- --
Capital gains dividends .17 -- -- --
Stock prices (1)
High 7-11/16 7-3/16 6-11/16 7
Low 6-9/16 6-5/8 6-3/16 6-3/8
Weighted-average common shares outstanding 10,342 10,342 10,326 10,316
Weighted-average common shares and common share
equivalents outstanding 10,408 10,381 10,348 10,351
- --------------------------------------------------
<FN>
(1) Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Commercial Assets, Inc.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 1998
(In Thousands Except Site Data)
December 31, 1998
------------------------------------------------
Cost Total
Capital- Cost
Initial Cost ized Total Cost Net of
---------------- Subsequ- ---------------------- Accumu- Accumu-
Number Buildings uent Buildings lated lated
Date Year of and to and Depreci- Depreci- Encum-
Property Name Acquired Location Developed Sites Land Improvements Acquis. Land Improvements Total ation ation brances
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cypress Greens 1998 Lakeland, FL 1986 107 $ 240 $1,129 $7 $240 $1,136 $1,376 $16 $ 1,360 $ --
Riverside 1998 Ruskin, FL 1984 1,186 3,558 7,744 -- 3,558 7,744 11,302 34 11,268 --
==================================================================================
Total 1,293 $3,798 $8,873 $7 $3,798 $8,880 $12,678 $50 $12,628 $ --
==================================================================================
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1998, 1997, 1996
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Real Estate
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Real estate acquisitions 12,671 -- --
Additions 7 -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ 12,678 $ -- $ --
========== ========= =======
Accumulated Depreciation
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Depreciation (50) -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ (50) $ -- $ --
========== ========= =======
</TABLE>
See Report of Independent Auditors and accompanying notes to consolidated
financial statements.
F-17
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
to Delinquent
Final Periodic Face Amount Carrying Principal or
Interest Maturity Payment Prior of Mortgages Amount of Interest
Description Rate Date Terms Liens Mortgages
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiesta Village (1) 9/2007 (1) $ -- $ 8,033 $ 8,462 $ --
Savanna Club 10% 9/2018 (2) -- 822 828 --
Sun Lake 10% 9/2018 (2) -- 38 38 --
========= ============== =============== ===============
$ -- $ 8,893 $ 9,328 $ --
========= ============== =============== ===============
<FN>
(1) The Fiesta Village loan is comprised of five mortgage loans secured by
three manufactured home communities and adjoining land. The notes accrue
interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum
of 12% per annum.
(2) Interest is paid from any cash flows from the property.
</FN>
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ -- $ -- $ --
Additions during period:
Investments in participating mortgages 8,913 -- --
Accrued interest 371 -- --
Loan costs 70 -- --
Deductions during period:
Collections of principal (20) -- --
Collections of interest (2) -- --
Amortization of loan costs (4) -- --
---------- --------- --------
Balance at close of period $ 9,328 $ -- $ --
========== ========= =======
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Charter of Commercial Assets,
Inc. (the "Registrant"), (incorporated herein by
reference to Exhibit 3.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form 10 (as
amended, the "Form 10") of the Registrant,
Commission File No.
1-22262, filed on August 31, 1993).
3.2 By-laws of the Registrant, (incorporated herein by
reference to Exhibit 3.2 to Amendment No. 1 to the
Form 10 of the Registrant, Commission File No.
1-22262, filed on August 31, 1993).
3.3 Amendment to the By-laws of the Registrant dated as
of January 14, 1997 (incorporated herein by
reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-22262, filed on March
24, 1997).
4.1 Form of certificate representing common stock of the
Registrant (incorporated herein by reference to
Exhibit 4.2 to the Form 10-Q for the period ended
March 31, 1994, of the Registrant, Commission File
No. 1-22262, filed on May 16, 1994).
4.2 Automatic Dividend Reinvestment Plan relating to the
common stock of the Registrant (incorporated herein
by reference to Exhibit 4.2 to Amendment No. 1 to
the Form 10 of the Registrant, Commission File No.
1-22262, filed on August 31, 1993).
10.1 Contribution Agreement, dated as of August 20, 1993,
between the Registrant and Asset Investors
(incorporated herein by reference to Exhibit 10.1 to
Amendment No. 1 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on August 31,
1993).
10.2 Registration Rights Agreement, dated as of August
20, 1993, between the Registrant and Asset Investors
(incorporated herein by reference to Exhibit 10.2 to
Amendment No. 2 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on September 15,
1993).
10.3* Management Agreement, dated as of January 1, 1995,
between the Registrant and Financial Asset
Management Corporation (incorporated herein by
reference to Exhibit 10.3(b) to the Registrant's
Quarterly Report on Form 10Q, Commission filed on
May 12, 1995).
10.3(a)* Amendment to the Management Agreement dated as of
January 1, 1996 between the Registrant and Financial
Asset Management Corporation (incorporated herein by
reference to Exhibit 10.3(a) to the Registrant's
Quarterly Report on Form 10-Q for the period ended
March 31, 1996, Commission File No. 1-22262, filed
on May 15, 1996).
- 19 -
<PAGE>
10.3(b)* Assignment of the Management Agreement dated as of
April 1, 1996 between Financial Asset Management
Corporation and Financial Asset Management LLC
(incorporated herein by reference to Exhibit 10.3(b)
to the Registrant's Quarterly Report on Form 10-Q,
Commission File No. 1-22262, filed on May 15, 1996).
10.3(c)* Amendment to the Management Agreement dated as of
January 1, 1997, between the Registrant and
Financial Asset Management LLC (incorporated herein
by reference to Exhibit 10.3(c) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 1-22262,
filed on March 24, 1997).
10.4* 1998 Stock Incentive Plan of the Registrant
(incorporated herein by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q,
Commission File No. 1-22262, filed on July 31,
1998).
10.7* Form of Indemnification Agreement between the
Registrant and each Director of the Registrant
(incorporated herein by reference to Exhibit 10.5 to
Amendment No. 1 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on August 31,
1993).
10.8 Trust Agreement, dated as of November 3, 1997,
between CAX DTR Securitization Corp. and Wilmington
Trust Company (incorporated herein by reference to
Exhibit 10.9 to the Registrant's Current Report on
Form 8-K dated November 3, 1997, Commission File No.
1-22262, filed on November 14, 1997).
10.8(a) Note Purchase Agreement, dated as of November 3,
1997, among Structured Mortgage Trust 1997-2, CAX
DTR Securitization Corp., and PaineWebber
Incorporated Company (incorporated herein by
reference to Exhibit 10.9(a) to the Registrant's
Current Report on Form 8-K dated November 3, 1997,
Commission File No. 1-22262, filed on November 14,
1997).
10.8(b) Trust Indenture and Security Agreement, dated as of
November 3, 1997, between Structured Mortgage Trust
1997-2 and LaSalle National Bank, as Indenture
Trustee Company (incorporated herein by reference to
Exhibit 10.9(b) to the Registrant's Current Report
on Form 8-K dated November 3, 1997, Commission File
No. 1-22262, filed on November 14, 1997).
10.8(c) Contribution Agreement, dated as of November 3,
1997, between Commercial Assets, Inc. and CAX DTR
Securitization Corp. Company (incorporated herein by
reference to Exhibit 10.9(c) to the Registrant's
Current Report on Form 8-K dated November 3, 1997,
Commission File No. 1-22262, filed on November 14,
1997).
10.8(d) Securitization Cooperation Agreement, dated as of
November 3, 1997, among CAX DTR Securitization
Corp., Commercial Assets, Inc., Structured Mortgage
Trust 1997-2, and PaineWebber Incorporated Company
(incorporated herein by reference to Exhibit 10.9(d)
to the Registrant's Current Report on Form 8-K dated
November 3, 1997, Commission File No.
1-22262, filed on November 14, 1997).
- 20 -
<PAGE>
10.8(e) Side Letter Agreement, dated as of November 3, 1997,
between Commercial Assets, Inc. and PaineWebber
Incorporated Company (incorporated herein by
reference to Exhibit 10.9(e) to the Registrant's
Current Report on Form 8-K dated November 3, 1997,
Commission File No.
1-22262, filed on November 14, 1997).
10.9 Asset Purchase Agreement effective as of November
20, 1998, between The Moorings of Manatee, Inc. and
Community Acquisition & Development Corp.
(incorporated herein by reference to Exhibit 10.10
to the Registrant's Current Report on Form 8-K dated
November 20, 1998, Commission File No. 1-22262,
filed on December 4, 1998).
10.9(a) Assignment of Agreement effective as of November 20,
1998, between Community Acquisition & Development
Corp. and CAX Riverside, L.L.C. (incorporated herein
by reference to Exhibit 10.10(a) to the Registrant's
Current Report on Form 8-K dated November 20, 1998,
Commission File No. 1-22262, filed on December 4,
1998).
10.9(b) Agreement for Assignment of Contracts and Convenant
not to Compete effective as of November 20, 1998,
between Moorings Development and Marketing
Corporation, Riverside Sod and Supply Company, Barry
Spencer and Community Acquisition & Development
Corp. (incorporated herein by reference to Exhibit
10.10(b) to the Registrant's Current Report on Form
8-K dated November 20, 1998, Commission File No.
1-22262, filed on December 4,
1998).
10.9(c) Assignment of Agreement effective as of November 20,
1998, between Community Acquisition & Development
Corp. and CAX Riverside, L.L.C. (incorporated herein
by reference to Exhibit 10.10(c) to the Registrant's
Current Report on Form 8-K dated November 20, 1998,
Commission File No. 1-22262, filed on December 4,
1998).
10.10 Securities Purchase Agreement, dated as of March 26,
1998, between Registrant and Westrec Marina
Management, Inc. (incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q dated March 31, 1998, Commission File
No. 1-22262, filed on May 14, 1998).
10.10(a) Put and Call Agreement dated as of November 30,
1998, between the Registrant and Westrec Marina
Management, Inc. and Michael M. Sachs.
10.10(b) Secured Promissory Note dated as of November 30,
1998, between the Registrant and Michael M. Sachs.
10.11 Form of Amended and Restated Promissory Note entered
into in connection with investments in mortgages on
three manufactured home communities and adjoining
land.
10.11(a) Amended and Restated Combination Deed of Trust,
Assignment of Rents, Security Agreement and Fixture
Financing Statement entered into in connection with
investments in mortgages on three manufactured home
communities and adjoining land.
- 21 -
<PAGE>
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent - Ernst & Young LLP.
27.1 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 22 -
<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.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: March 24, 1999 By /s/Terry Considine
----------------------------------------
Terry Considine
Chairman and Chief Executive Officer
Date: March 24, 1999 By /s/Thomas L. Rhodes
----------------------------------------
Thomas L. Rhodes
Vice Chairman
Date: March 24, 1999 By /s/Bruce E. Moore
----------------------------------------
Bruce E. Moore
President and Chief Operating Officer
Date: March 24, 1999 By /s/David M. Becker
----------------------------------------
David M. Becker
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/Terry Considine Director March 24, 1999
- ------------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 24, 1999
- ------------------------------
Thomas L. Rhodes
/s/Raymond T. Baker Director March 24, 1999
- ------------------------------
Raymond T. Baker
/s/Bruce D. Benson Director March 24, 1999
- ------------------------------
Bruce D. Benson
/s/Thomas C. Fries Director March 24, 1999
- ------------------------------
Thomas C. Fries
/s/Donald L. Kortz Director March 24, 1999
- ------------------------------
Donald L. Kortz
/s/Robert J. Malone Director March 24, 1999
- ------------------------------
Robert J. Malone
- 23 -
PUT AND CALL AGREEMENT
This Put and Call Agreement (this "Agreement") is made and entered into
as of November 30, 1998 ("Date of Grant"), by and among Westrec Marina
Management, Inc., a California corporation ("Westrec"), Commercial Assets, Inc.,
a Maryland corporation ("Purchaser"), and Michael M. Sachs, an individual
("Sachs").
WHEREAS, Purchaser has purchased 326,740 shares of the Class A Common
Stock of Westrec (the "Class A Shares") and 82,351 shares of the Class B Common
Stock of Westrec (the "Class B Shares," and collectively with the Class A
Shares, the "Shares");
WHEREAS, Westrec desires to grant to Purchaser an option to sell to
Westrec the Shares in the manner set forth below;
WHEREAS, Purchaser desires to grant to Westrec an option to purchase
the Shares;
WHEREAS, concurrently herewith Sachs is executing and delivering (i) a
Secured Promissory Note payable to Purchaser in payment of certain indebtedness
previously incurred (the "Note"), and (ii) a Stock Pledge Agreement to secure
Sachs' obligations under the Note and hereunder.
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. Grant of Put Option. Westrec hereby grants to Purchaser, and
Purchaser hereby accepts, as of the Date of Grant, on the terms and conditions
hereinafter set forth, an option (the "Put Option") to sell to Westrec the
Shares.
2. Exercisability of Put Option. Purchaser may exercise the Put Option
as follows: on each of the dates listed on Schedule A hereto (each, a "Put
Option Exercise Date"), Purchaser may sell to Westrec the number of Class A and
Class B Shares appearing opposite that date, in each case for a price equal to
$6.37 per Share (the "Put Exercise Price"). In addition, at any time after (i)
the Note becomes due and payable in full by virtue of having been accelerated,
(ii) Westrec has failed to purchase timely any Shares hereunder as to which
Purchaser has delivered a Put Exercise Notice, (iii) Westrec makes any
distribution to its stockholders which is out of the ordinary course of its
business, (iv) Westrec incurs any additional indebtedness, other than
indebtedness incurred in the ordinary course of its business, or (v) Westrec
sells, transfers or otherwise conveys a material amount of its assets for
consideration which is less than the fair market value of such assets (or a
subsidiary of Westrec sells an amount of its assets which is material to Westrec
for consideration which is less than the fair market value of such assets),
Purchaser may exercise the Put Option in full and cause Westrec to purchase all
remaining Shares by providing written notice in the manner set forth in Section
3 below, and any date specified by Purchaser in such notice in accordance with
Section 3 (which date shall in no event be later than January 31, 2001) shall be
deemed the Put Option Exercise Date for such exercise. Westrec shall give
Purchaser notice promptly upon the occurrence of any event described in (iii)
through (v) above.
<PAGE>
3. Exercise of Put Option. Purchaser may exercise the Put Option as of
any Put Option Exercise Date with respect to all or any portion of the Shares
that, under Section 2 of this Agreement, may be sold on such date. Such exercise
shall be effected by the delivery to Westrec not less than thirty (30) days
prior to such Put Option Exercise Date of a written notice of such exercise (the
"Put Exercise Notice") which shall specify the number of Shares required to be
purchased by Westrec pursuant to such Put Exercise Notice (the "Exercised Put
Shares"). In the event that the Put Option is so timely exercised, the parties
shall consummate the sale of the Exercised Put Shares on such Put Option
Exercise Date by (a) the delivery by Purchaser to Westrec or its designee of
stock certificates duly endorsed for transfer to Westrec or its designee
representing the Shares included in the number of Exercised Put Shares and (b)
the delivery by Westrec or its designee to Purchaser by wire transfer or
cashier's or certified check of an amount equal to the number of Exercised Put
Shares times the Put Exercise Price.
4. Guarantee of Put Option. Sachs hereby personally guarantees the
obligations of Westrec to purchase the Exercised Put Shares upon each exercise
of a Put Option in accordance with Sections 2 and 3 of this Agreement. Sachs
hereby waives presentment for payment, demand, notice of demand, notice of
nonpayment or dishonor, protest and notice of protest. No failure to exercise
and no delay in exercising any right, power or privilege under the guaranty
provided herein shall operate as a waiver thereof, nor shall any single or
partial exercise or any right, power or privilege hereunder preclude any other
right, power or privilege. Sachs agrees that this guaranty shall not be
discharged, released or exonerated in any way by any declaration by Purchaser of
default in respect of the obligations guaranteed hereby, the exercise by
Purchaser of any rights against Westrec or the failure of Purchaser to exercise
any rights against Westrec with respect to any default by Westrec. Sachs'
guarantee, as set forth herein, is an absolute and unconditional guarantee and
is a guarantee of payment, not of collection.
5. Call Option. Purchaser hereby grants to Westrec as of the Date of
Grant, on the terms and conditions set forth herein, an option (the "Call
Option") to purchase all or any portion of the Shares.
6. Exercisability of Call Option. The Call Option shall be exercisable
by Westrec or its designee, from time to time, on or before January 31, 2001 at
$6.37 per Share (the "Call Exercise Price").
7. Exercise of Call Option. Westrec or its designee may exercise the
Call Option or any portion thereof by the delivery to Purchaser of a written
notice of such exercise (the "Call Exercise Notice"), which Call Exercise Notice
shall specify the number of Shares to be purchased by Westrec or its designee
pursuant to such Call Exercise Notice (the "Exercised Call Shares") and the date
on which such purchase shall be consummated (the "Call Option Exercise Date"),
which shall be not earlier than ten days after the Call Exercise Notice is
provided and in any event not later than January 31, 2001. In the event that the
Call Option is so timely exercised, the parties shall consummate the sale of the
Exercised Call Shares on such Call Option Exercise Date by (a) the delivery by
Purchaser to Westrec or its designee of stock certificates duly endorsed for
transfer to Westrec or its designee representing the Shares included in the
number of Exercised Call Shares and (b) the delivery by Westrec or its designee
to Purchaser by wire transfer or cashier's or certified check of an amount equal
2
<PAGE>
to the number of Exercised Call Shares times the Call Exercise Price.
8. Adjustments. The number of shares of Class A Common Stock and Class
B Common Stock of Westrec comprising the Class A Shares and Class B Shares,
respectively, shall be adjusted from time to time as follows:
(a) If Westrec shall at any time or from time to time declare
or pay a dividend, or make a distribution, on outstanding shares of
Class A Common Stock or Class B Common Stock in shares of capital stock
of Westrec or subdivide the outstanding shares of Class A Common Stock
or Class B Common Stock into a greater number of shares of Class A
Common Stock or Class B Common Stock, or combine the outstanding shares
of Class A Common Stock or Class B Common Stock into a smaller number
of shares of Class A Common Stock or Class B Common Stock, or issue by
reclassification of shares of Class A Common Stock or Class B Common
Stock any shares of its capital stock, then, in each such case:
(i) the number of Shares subject to an exercise of
the Put Option and Call Option thereafter shall be adjusted
proportionately to reflect the increase or decrease in the
number of Shares held by Purchaser as a result of that
dividend, distribution, subdivision, combination, or issuance,
so that, notwithstanding that event, by exercising the Put
Option in full on each remaining Put Exercise Date Purchaser
shall remain able to cause Westrec to purchase all Shares
owned by Purchaser and by exercising the Call Option in full
prior to its expiration Westrec shall remain able to cause
Purchaser to sell all of the Shares not previously purchased
under this Agreement; and
(ii) an adjustment made pursuant to this Section 8(a)
shall become effective for purposes of subclause (i) of this
Section 8(a), (A) in the case of any such dividend or
distribution, immediately after the close of business on the
record date for the determination of holders of Class A Common
Stock or Class B Common Stock entitled to receive such
dividend or distribution, or (B) in the case of any
subdivision, combination or reclassification, at the close of
business on the day upon which such corporate action becomes
effective.
(b) The number of shares of Class A Common Stock and Class B
Common Stock comprising the Class A Shares and Class B Shares,
respectively, adjusted as herein provided, shall remain in effect until
further adjustment as required herein.
9. Legal Fees. Westrec shall pay any reasonable fees incurred by
Purchaser and payable to Purchaser's legal counsel for the review of this
Agreement, the Note and the Stock Pledge Agreement.
10. Representations and Warranties of Purchaser. Purchaser represents
and warrants that:
3
<PAGE>
(a) Authority. Purchaser has the right and power to enter
into, execute, deliver and perform this Agreement.
(b) Due Execution; Validity. This Agreement has been duly
executed and delivered by Purchaser and constitutes the legal, valid
and binding obligation of Purchaser, enforceable against it in
accordance with its terms. Purchaser is not a party to, subject to or
bound by any agreement, contract, lease, license, indenture, law,
regulation or commitment of any kind or any judgment, order, writ,
prohibition, injunction or decree of any court or other governmental
body that would prevent, or that would be breached or violated by, the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(c) Regulatory Approvals. No consent, approval or
authorization of, or declaration, filing or registration with, any
governmental or regulatory authority is required to be obtained or made
by Purchaser in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(d) Brokerage. Purchaser has not dealt with, and is not
obligated to make any payment to, any finder, broker, investment banker
or financial advisor in connection with any of the transactions
contemplated by this Agreement or the negotiations looking toward the
consummation of such transactions.
(e) Ownership of Shares. Purchaser owns the Shares to be
transferred to Westrec or its designee by Purchaser pursuant hereto
free of any adverse claims and any and all covenants, conditions,
restrictions, voting trust arrangements, liens, charges, encumbrances,
options and adverse claims or rights whatsoever, other than any thereof
that may exist under that certain Stockholders Agreement dated as of
March 28, 1998.
(f) Absence of Prior Transfers. There has been no sale,
assignment or other transfer or conveyance of any interest in any of
the Shares.
11. Representations and Warranties of Westrec. Westrec hereby
represents and warrants that:
(a) Authority. Westrec has the right and power to enter into,
execute, deliver and perform this Agreement.
(b) Due Execution; Validity. This Agreement has been duly
executed and delivered by Westrec and constitutes the legal, valid and
binding obligation of Westrec, enforceable against it in accordance
with its terms. Westrec is not a party to, subject to or bound by any
agreement, contract, lease, license, indenture, law, regulation or
commitment of any kind or any judgment, order, writ, prohibition,
injunction or decree of any court or other governmental body that would
prevent, or that would be breached or violated by, the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
4
<PAGE>
(c) Regulatory Approvals. No consent, approval or
authorization of, or declaration, filing or registration with, any
governmental or regulatory authority is required to be obtained or made
by Westrec in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(d) Brokerage. Westrec has not dealt with, and is not
obligated to make any payment to, any finder, broker, investment banker
or financial advisor in connection with any of the transactions
contemplated by this Agreement or the negotiations looking toward the
consummation of such transactions.
12. Notices. All notices and other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be deemed
given if delivered personally or five days after mailing by certified or
registered mail, postage prepaid, return receipt requested, addressed as
follows:
If to Westrec or Sachs, to:
Westrec Marina Management, Inc.
16633 Ventura Boulevard, 6th Floor
Encino, CA 91436
Attention: Michael M. Sachs
Facsimile: (818) 907-1104
With a copy to:
Gibson, Dunn & Crutcher LLP
2029 Century Park East, Suite 4000
Los Angeles, CA 90067
Attention: Russell C. Hansen, Esq.
Facsimile: (310) 551-8741
If to Purchaser, to:
Commercial Assets, Inc.
3410 South Galena Street
Denver, CO 80231
Attention: President
Facsimile: (303) 614-9401
or at such other address of any party as such party shall specify by written
notice so given, and such notice shall be deemed to have been delivered as of
the date so personally delivered or mailed.
13. Nontransferability. Neither the Put Option nor any interest therein
may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than to an affiliate of Purchaser.
5
<PAGE>
14. Maintenance of Shares. Purchaser shall not assign, transfer or in
any way dispose of the Shares, or any other security received as a holder of
Shares in any transaction contemplated by Section 8 of this Agreement, other
than to an affiliate of Purchaser and other than to Westrec or its designee
pursuant to this Agreement, except after January 31, 2001 to the extent that the
Put Option and the Call Option are not fully exercised.
15. Shareholder Rights. Unless and until either the Put Option or the
Call Option is exercised fully and the Shares sold to Westrec or its designee
hereunder, Purchaser shall retain all rights as a shareholder of Westrec,
including all voting rights and rights to receive any and all dividends and
other distributions. Purchaser shall be entitled to vote, receive dividends and
be deemed for any purpose the holder of the Shares (or any other securities to
which Purchaser may be entitled, pursuant to Section 8 of this Agreement) until
the Put Option or Call Option shall have been duly exercised, either in whole or
in part, in accordance with the provisions of this Agreement.
16. Governing Law. This Agreement and the Option granted hereunder
shall be governed by and construed and enforced in accordance with the laws of
the State of California.
17. Effective Date. This Agreement shall become effective at the time
of the execution hereof.
6
<PAGE>
IN WITNESS WHEREOF, Westrec, Purchaser and Sachs have duly executed
this Agreement as of the Date of Grant.
WESTREC MARINA MANAGEMENT, INC.
a California corporation
By: /s/ Michael M. Sachs
-------------------------------
Name: Michael M. Sachs
Title: Chairman
COMMERCIAL ASSETS, INC.
a Maryland corporation
By: /s/ David M. Becker
-------------------------------
Name: David M. Becker
Title: Chief Financial Officer
/s/ Michael M. Sachs
-----------------------------------
Michael M. Sachs
7
<PAGE>
SCHEDULE A
PUT OPTION EXERCISE SCHEDULE
<TABLE>
<CAPTION>
Put Option
Exercise Date Class A Shares Class B. Shares Total Shares Put Exercise Price
- ------------- -------------- --------------- ------------ ------------------
<S> <C> <C> <C> <C>
Aug. 31, 2000 5,912 1,490 7,402 $47,163.00
Sep. 30, 2000 17,879 4,474 22,371 142,539.00
Oct. 31, 2000 17,758 4,440 22,198 141,437.00
Nov. 30, 2000 17,620 4,405 22,025 140,334.00
Dec. 31, 2000 17,701 4,425 22,126 140,978.00
Jan. 31, 2001 250,375 62,594 312,969 1,994,113.00
-------- -------- -------- ------------
TOTAL 327,245 81,828 409,091 $2,606,564.00
</TABLE>
8
SECURED PROMISSORY NOTE
$1,856,713 November 30, 1998
FOR VALUE RECEIVED, Michael M. Sachs, an individual ("Payor"),
hereby promises to pay to the order of Commercial Assets, Inc., a Maryland
corporation ("Payee"), the principal sum of One Million Eight Hundred Fifty Six
Thousand Seven Hundred Thirteen Dollars ($1,856,713), together with interest
accruing from the date hereof on the unpaid principal balance hereunder at a
rate of interest per annum equal to (a) 8% from the date of this Note through
May 31, 1999; (b) 9% during the period from June 1, 1999 through November 30,
1999; (c) 10% during the period from December 1, 1999 through May 31, 2000; (d)
11% during the period from June 1, 2000 through November 30, 2000; and (e) 12%
during the period from December 1, 2000 until the principal is paid in full.
Principal and interest shall be payable in installments as set forth on Schedule
A hereto. Payments shall first be applied to accrued and unpaid interest and
thereafter to principal until the principal and interest due hereunder have been
paid in full; provided, however, that all principal and interest due hereunder
shall be paid in full not later than August 31, 2000.
This Note may be prepaid in whole or in part at any time or
from time to time at the option of Payor without any penalty whatsoever. All
prepayments shall be first applied to accrued interest on the date of such
prepayment. The amount of any prepayment in excess of the accrued interest on
the date of such prepayment shall be applied to reduce the principal balance due
hereunder.
The principal amount of this Note and all accrued and unpaid
interest thereon and each installment thereof shall be due and payable as
provided above and in Schedule A, without presentment, demand, protest or
further notice (including, without limitation, any notice of intent to
accelerate or notice of acceleration), all of which Payor hereby expressly
waives. Any payment otherwise due hereunder on a day that is not a business day
shall be due and payable on the next succeeding business day. For purposes of
this Note, "business day" means any day on which banks in Colorado are open for
business.
If any Event of Default occurs hereunder, then Payee may, by
written notice to Payor, declare the entire principal of and all unpaid and
accrued interest on this Note to be, and this Note shall upon receipt of that
notice become immediately and automatically due and payable in full, without
presentment, demand, protest or further notice (including, without limitation,
any notice of intent to accelerate or notice of acceleration), all of which
Payor hereby expressly waives; except that this Note will immediately become due
and payable in full upon the occurrence of an Event of Default as described in
clauses (iii)-(vi) below without the need for any notice of default from Payee
to Payor. For purposes hereof, an "Event of Default" shall be deemed to occur if
(i) Payor fails to make any scheduled payment of principal or interest on the
date that payment is due hereunder and fails to cure that default within five
business days; (ii) Westrec Marina Management Inc. ("Westrec") fails to make any
payment, or to perform any obligation, when due under that certain Put and Call
Agreement, dated as of the date hereof, between Westrec, Payee, and Michael M.
Sachs, an individual; (iii) either Payor or Westrec makes an assignment for the
<PAGE>
benefit of creditors; (iv) an order for relief with respect to either Payor or
Westrec is entered under the United States Bankruptcy Code; (v) Payor or Westrec
commences any proceedings relating to Payor or Westrec under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction; (vi) any such proceeding is commenced
against Payor or Westrec and either (A) Payor or Westrec (as the case may be) by
any act indicates its approval thereof, consent thereto or acquiescence therein
or (B) the proceeding is not dismissed within 90 days, (vii) Westrec Financial,
Inc. ("Westrec Financial") makes any distribution to its stockholders which is
out of the ordinary course of its business, except to the extent of
distributions of up to two times the aggregate amount of the principal payments
theretofore made under this Note, (viii) Westrec Financial incurs any additional
indebtedness, other than indebtedness incurred in the ordinary course of its
business, or (ix) Westrec Financial sells, transfers or otherwise conveys a
material amount of its assets for consideration which is less than the fair
market value of such assets (or a subsidiary of Westrec Financial sells an
amount of its assets which is material to Westrec Financial for consideration
which is less than the fair market value of such assets),
If Payor fails to pay any amount due under this Note when due,
Payor promises and agrees to pay, on demand, all costs of collection including,
without limitation, all attorneys' fees and expenses incurred by Payee.
This Note is secured pursuant to a Stock Pledge Agreement
dated on or about the date hereof between Payor and Payee.
Payor agrees to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Payee upon the failure by Payor to make
any payment when due.
Nothing contained in this Note or in any agreements between
Payor and Payee shall be deemed to require the payment by Payor of interest on
the indebtedness evidenced by this Note in excess of the amount which Payee may
lawfully contract to charge under applicable usury and other laws (the "Maximum
Legal Rate"). This Note is expressly limited so that in no contingency or event
shall the amount paid or agreed to be paid to Payee for the use, forbearance or
detention of money to be loaned hereunder exceed the Maximum Legal Rate. If,
under any circumstance whatsoever, the fulfillment of any obligation under this
Note shall involve exceeding the Maximum Legal Rate, then the obligation to be
fulfilled by Payor shall be reduced the minimum amount required so that such
obligation shall not exceed the Maximum Legal Rate. This paragraph shall control
every other provision of this Note and all other agreements between Payor and
Payee deemed to pertain to this Note.
No failure to exercise and no delay in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise or any right, power or privilege hereunder preclude
any other right, power or privilege.
This Note is non-negotiable and shall inure only to the
benefit of Payee, any successor entity of Payee, and any corporation, trust or
other entity controlled by Payee to which this Note is transferred or assigned.
2
<PAGE>
This Note has been executed and delivered in the State of
California and shall be governed by and construed in accordance with the laws
thereof, without giving effect to conflicts of laws provisions.
/s/ Michael M. Sachs
-------------------------------
Michael M. Sachs
3
<PAGE>
Schedule A
Payments of Principal
<TABLE>
<CAPTION>
Payment Interest Interest Principal
Date Rate Payment Paid Paid Balance
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C>
$1,856,713.00
Dec. 31, 1998 8.00% $26,563.00 $12,378.00 $14,185.00 1,842,528.00
Jan. 31, 1999 8.00% 26,564.00 12,284.00 14,280.00 1,828,248.00
Feb. 28, 1999 8.00% 26,563.00 12,188.00 14,375.00 1,813,872.00
Mar. 31, 1999 8.00% 26,563.00 12,092.00 14,471.00 1,799,401.00
Apr. 30, 1999 8.00% 26,564.00 11,996.00 14,568.00 1,784,834.00
May 31, 1999 8.00% 26,564.00 11,899.00 14,663.00 1,770,169.00
June 30, 1999 9.00% 104,884.00 13,276.00 91,608.00 1,678,561.00
July 31, 1999 9.00% 104,321.00 12,589.00 91,732.00 1,586,829.00
Aug. 31, 1999 9.00% 103,759.00 11,901.00 91,858.00 1,494,971.00
Sept. 30, 1999 9.00% 103,196.00 11,212.00 91,984.00 1,402,987.00
Oct. 31, 1999 9.00% 102,634.00 10,522.00 92,112.00 1,310,876.00
Nov. 30, 1999 9.00% 102,072.00 9,832.00 92,240.00 1,218,636.00
Dec 31, 1999 10.00% 149,454.00 10,155.00 139,299.00 1,079,336.00
Jan. 31, 1999 10.00% 148,454.00 8,994.00 139,460.00 939,877.00
Feb. 28, 2000 10.00% 147,454.00 7,832.00 139,622.00 800,254.00
Mar. 31, 2000 10.00% 146,455.00 6,669.00 139,786.00 660,469.00
Apr. 30, 2000 10.00% 145,455.00 5,504.00 139,951.00 520,518.00
May 31, 2000 10.00% 144,455.00 4,338.00 140,117.00 380,401.00
June 30, 2000 11.00% 145,800.00 3,487.00 142,313.00 238,089.00
July 31, 2000 11.00% 144,699.00 2,182.00 142,517.00 95,571.00
Aug. 31, 2000 11.00% 96,447.00 876.00 95,571.00 0.00
------------ ----------- ------------ -------------
TOTAL $2,048,920.00 $192,206.00 $1,856,714.00 $0.00
</TABLE>
4
SCHEDULE OF OMITTED
AMENDED AND RESTATED PROMISSORY NOTES
The Company has also entered into four additional Amended and Restated
Promissory Notes which are substantially identical to the following Amended and
Restated Promissory Note in all material respects except as to the maker and
principal balance. Listed below are the material details in which such documents
differ from the document filed as part of this exhibit.
Principal Balance
Maker
--------------------------------------- ---------------------
Fiesta SPE, L.L.C. $1,550,000.00
Fiesta/Encanta MHP, L.L.C. $ 375,000.00
Southern Palms MHP, L.L.C. $1,125,000.00
Fiesta/Encanta MHP, L.L.C. $3,900,000.00
<PAGE>
AMENDED AND RESTATED
PROMISSORY NOTE
$1,350,000.00 Phoenix, Arizona
August 18, 1998
FOR VALUE RECEIVED, CASA ENCANTA COMMERCIAL, L.L.C. an Arizona limited
liability company (hereinafter called the "Maker"), promises to pay to the order
of COMMERCIAL ASSETS, INC., a Maryland corporation (hereinafter sometimes called
"Lender"), or its assigns, at its office at 3410 S. Galena Street, Denver,
Colorado 80231, Attention: Terry Considine, or at such other place as the holder
or holders hereof may from time to time designate in writing, the principal sum
of ONE MILLION THREE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($1,350,000.00),
or so much thereof as remains unpaid from time to time (hereinafter called
"Principal Balance"), together with interest on the Principal Balance at the
rate hereinafter specified, in coin or currency, which, at the time or times of
payment, is legal tender for payment of public and private debts in the United
States of America, all in accordance with the terms hereinafter set forth.
From and after the date hereof, and until this promissory note (the
"Note") is fully paid, interest on the Principal Balance shall be computed at
the rate of fifteen percent (15%) per annum. Interest, computed at said rate for
the portion of the month of August, 1998, remaining after the date (the
"Disbursement Date") on which funds are disbursed hereunder, shall be prepaid on
the Disbursement Date. Installments of interest shall thereafter be due and
payable in one hundred twenty (120) consecutive, monthly payments, commencing on
October 1, 1998, and continuing thereafter on the first day of each and every
calendar month through and including September 30, 2007. From the Disbursement
Date until September 1, 1999, payments on this Note shall be computed and made
based upon a rate (the "Pay Rate") of nine percent (9%) per annum applied to the
Principal Balance for the preceding calendar month. The difference between the
interest which accrues and the payment of interest made for each calendar month
shall be added to the Principal Balance at the end of each calendar month. The
Pay Rate shall be increased annually by one percent (1%) as of September 1,
1999, and on each September 1st thereafter until the Pay Rate is twelve percent
(12%) per annum, where the Pay Rate shall remain for the term of this Note.
Maker understands and agrees that payments which are made based upon the Pay
Rate shall cause the Principal Balance to increase each month, which, in turn
shall result in the required payment amount increasing each month. The entire
Principal Balance, and all unpaid, accrued interest thereon, shall be due and
payable in full on September 30, 2007 (hereinafter called "Maturity Date"). Any
payments made by Maker in addition to the aforesaid regular, monthly payments of
interest shall be applied first to accrued and unpaid interest and the remainder
thereof shall be applied to the Principal Balance; provided, however, that, if
the holder hereof has made any advance of monies under the terms of any
instrument securing this Note, which the Maker has not repaid, the holder hereof
may, at its option, first apply any monies received from the Maker to repayment
of any such advance, plus interest thereon at the rate of eighteen percent (18%)
per annum (hereinafter called "Default Rate"), from the date of such advance, in
<PAGE>
such order as said holder may elect, and the balance, if any, shall be applied
to any regularly scheduled, required, monthly payment of interest then due, in
the manner above provided. All interest payable hereunder shall be computed on
the basis of a 360 day year of twelve (12) thirty (30) day months, provided that
partial month interest shall be computed on the basis of actual number of days
principal is outstanding.
In the event that any required payment of principal and/or interest is
not made within ten (10) days of the due date thereof, a late payment charge of
five cents ($.05) for each dollar ($1.00) so overdue may be charged by the
holder hereof for the purpose of defraying a portion of the expense incident to
handling such overdue payment. In the event that any such overdue payment is not
made within one (1) month of the due date thereof, an additional late payment
charge of three cents ($.03) for each dollar ($1.00) so overdue may be charged
by the holder thereof for such purpose, and said holder may charge an additional
three cents ($.03) for each dollar ($1.00) so overdue for each additional month,
or fraction thereof, during which any such payment remains past due. The
foregoing late payment charges apply individually to each required payment of
principal and interest which is past due, and once imposed will not be adjusted
pro rata on a daily basis.
The Maker agrees to pay an effective rate of interest which is the
stated rate provided in this Note plus any additional rate of interest resulting
from any charges of interest or in the nature of interest paid or to be paid in
connection with the loan evidenced hereby, including without limitation, all
amounts paid by or on behalf of the Maker to Lender, reasonably incurred to
originate, receive or evidence the loan represented by this Note.
Notwithstanding any provision herein or in the Deed of Trust or any Other Loan
Document contained, the total liability of the Maker for payments in the nature
of interest hereunder or thereunder shall not exceed interest at the maximum
rate permitted by the laws of the State of Arizona, if any, and any amount paid
as interest in excess of said maximum rate shall not be deemed to be a payment
of interest and shall be refunded to the Maker, and the Maker does hereby agree
to accept such refund.
Time is of the essence hereof. Notwithstanding any provision herein
which may be construed to provide to the contrary, in the event of any default
in the payment of any payment of principal and/or interest, or any part thereof,
when due hereunder, in the event of any default in the payment of any other sum
of money required to be paid hereunder, under the Deed of Trust or under any
Other Loan Document, or in the event of any default in the performance of or
compliance with any other covenant or condition of this Note or any other
covenant or condition of the Deed of Trust or of any Other Loan Document, then,
in any such case, the entire Principal Balance, with all accrued interest, any
late payment charges and any applicable reinvestment charge, shall, at the
option of the holder hereof, become immediately due and payable, without notice,
at the place of payment aforesaid. Failure to exercise this option, however
often, shall not constitute a waiver of the right to exercise it thereafter;
provided, however, that such option may not be exercised as to any given default
subsequent to the correction of that default. From and after the date of
occurrence of any such default, and from and after the Maturity Date, interest
shall accrue on the Principal Balance at the Default Rate and shall be due and
2
<PAGE>
payable on the first day of each calendar month or on demand, at Lender's
option; provided, however, that if all defaults are corrected and the
indebtedness secured hereby is fully reinstated in accordance with Arizona law,
the interest payable thereon shall again be computed at the rate provided on
page 1 of this Note, unless and until another default shall occur. Except as
hereinafter expressly provided, no modification or amendment of the terms of
this Note shall be effective unless made in a writing signed by the parties
hereto.
Each Maker, co-maker, endorser, surety and guarantor hereby guaranties
payment of this Note, waives demand, presentment, notice of nonpayment, protest,
notice of protest, notice of dishonor and diligence in collection and agrees
that without any notice to any such parties, the holder hereof, alone or
together with any present or future owner or owners of any property covered by
the Deed of Trust or by any Other Loan Document (herein called "Trust
Property"), may from time to time extend, renew, or otherwise modify the date or
dates or amount or amounts of payment above recited, or the holder hereof may
from time to time waive any right it has hereunder, under the Deed of Trust or
under any Other Loan Document and may release any part or parts of the Trust
Property from such Deed of Trust or Other Loan Document, with or without
consideration, and that, in any such case, each maker, co-maker, endorser,
surety and guarantor shall continue liable to pay the unpaid balance of the
indebtedness evidenced hereby as so extended, renewed or modified, and
notwithstanding any such waiver or release; and further agrees to pay all costs
of collection, including court costs and a reasonable amount for attorneys' fees
(including but not limited to court costs and reasonable attorneys' fees on
appeal), in case any payment shall not be made when due, and all costs and
expenses, including court costs and reasonable attorneys' fees (including court
costs and reasonable attorneys' fees on appeal), incurred in protecting the
security for this Note or in preserving the Trust Property, or in exercising or
defending, or in obtaining the right to exercise, the rights and remedies of
Lender hereunder, under the Deed of Trust or under any Other Loan Document,
whether suit be brought or not, and in probate, bankruptcy, insolvency,
arrangement, reorganization, receivership and other debtor-relief proceedings,
whether or not the holder hereof prevails therein, together with interest
thereon at the Default Rate from and after the date of payment of any such
costs, expenses and/or fees by said holder.
This Note is secured by a Combination Deed of Trust, Assignment of
Rents, Security Agreement and Fixture Financing Statement of even date herewith
(herein called "Deed of Trust") covering the Trust Property, which is located in
Maricopa County, Arizona, by other instruments and agreements and by any other
instrument, agreement or document governing any other loan by Lender to Maker or
an affiliate thereof (as contemplated below) (collectively, the "Other Loan
Documents"), and by one (1) or more Guaranties, if any. The Deed of Trust
provides for "Additional Interest" (as defined therein) to be paid by Maker, in
addition to the principal, interest and other charges set forth in this Note.
Notwithstanding anything to the contrary in this Note, the Deed of
Trust, or any other Loan Document, the Principal Balance of this Note is not
prepayable in part, without the express written consent of Lender.
3
<PAGE>
Maker hereby acknowledges and agrees that Lender is making and in the
future, may make, one or more loans or other financial considerations to
entities in which The Norman Andrus Irrevocable Trust, u/a/d July 29, 1997 is a
member, and that a breach or default under the applicable agreements,
instruments and documents governing one or more of such loans shall
automatically constitute a default hereunder, in which case, Lender shall have
all rights and remedies herein provided, or otherwise available at law or in
equity.
This Note is made with reference to and shall be construed in
accordance with and governed by the laws of the State of Arizona. This Note
amends, replaces and supercedes that Promissory Note dated August 18, 1998 in
the amount of $1,250,000.00, made by Maker and payable to Lender.
IN WITNESS WHEREOF, the Maker has executed this Promissory Note as of
the date first above written.
CASA ENCANTA COMMERCIAL, L.L.C.
an Arizona limited liability company
By: /s/ Norman Andrus
-------------------------------------
Norman Andrus
Its: Manager
By: COMMUNITY ACQUISITION AND
DEVELOPMENT CORPORATION,
a Delaware corporation
Its: Manager
By: /s/ Joseph W. Gaynor
-------------------------------
Joseph W. Gaynor
Its: President
661401\10169.0007
4
SCHEDULE OF OMITTED
AMENDED AND RESTATED COMBINATION DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FINANCING
STATEMENTS
The Company has also entered into four additional Amended and Restated
Combination Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Financing Statements which are substantially identical to the following Amended
and Restated Combination Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Financing Statement in all material respects except as to the
trustor, property and indebtedness. Listed below are the material details in
which such documents differ from the document filed as part of this exhibit.
Trustor Property Indebtedness
- ---------------------------- ---------------------------------------------------
Fiesta SPE, L.L.C. Fiesta Village Manufactured Home $1,550,000.00
Community
Fiesta/Encanta MHP, L.L.C. Land $ 375,000.00
Southern Palms MHP, L.L.C. Southern Palms Manufactured Home $1,125,000.00
Community
Fiesta/Encanta MHP, L.L.C. Casa Encanta Manufactured Home $3,900,000.00
Community
<PAGE>
WHEN RECORDED, RETURN TO:
James B. Connor
Gallagher & Kennedy, P.A.
2600 North Central Avenue
Phoenix, Arizona 85004-3020
AMENDED AND RESTATED
COMBINATION DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT
THIS INSTRUMENT made to be effective as of the 18th day of August,
1998, between CASA ENCANTA COMMERCIAL, L.L.C., an Arizona limited liability
company (hereinafter referred to as "Trustor"), whose address is 4614 S. Kachina
Drive, Tempe, Arizona 85282, LAWYERS TITLE OF ARIZONA, INC., an Arizona
corporation (hereinafter referred to as "Trustee"), whose address is 2425 East
Camelback Road, Suite 700, Phoenix, Arizona 85016, and COMMERCIAL ASSETS, INC.,
a Maryland corporation (hereinafter referred to as "Beneficiary"), whose address
is 3410 South Galena Street, Denver, Colorado 80231, Attention: Terry Considine.
WHEREAS, Trustor is the owner of certain real property located in the
County of Maricopa, State of Arizona, legally described on Exhibit A attached
hereto and hereby made a part hereof (hereinafter referred to as "Premises"),
which Premises are subject to certain Permitted Encumbrances approved in writing
by Beneficiary (hereinafter referred to as "Permitted Encumbrances") and
attached hereto as Exhibit B; and
WHEREAS, there have been constructed upon, under and on the Premises
certain buildings, structures and other improvements (hereinafter referred to as
"Improvements"), which are owned by Trustor; and
WHEREAS, Trustor is justly indebted to Beneficiary in the principal
amount of ONE MILLION THREE HUNDRED FIFTY THOUSAND AND NO/100 Dollars
($1,350,000.00), as evidenced by one (1) Amended and Restated Promissory Note in
the amount of $1,350,000.00, made by Trustor, payable to the order of
Beneficiary, and dated of even date herewith (hereinafter referred to as"Note");
WHEREAS, said principal amount, together with interest thereon at the
rate of fifteen percent (15.0%) per annum, is payable in accordance with the
terms of said Note, with the entire unpaid principal balance and any unpaid,
accrued interest thereon maturing and being due and payable in full not later
than September 30, 2007; and
WHEREAS, there are now, or may in the future be, located on, within or
<PAGE>
about the Premises and Improvements certain items of furniture, fixtures,
equipment, furnishings, machinery and personal property, owned by Trustor, and
now or hereafter attached or affixed to or installed or located within, and used
or usable in connection with the maintenance and operation of, the Premises and
the Improvements, whether attached or detached, including but not limited to any
and all such furniture; appliances; carpeting; floor coverings; draperies;
furnishings; fences; partitions; dynamos; doors; windows; millwork; overhead
doors; screens; storm windows and doors; locks; hardware; shades; awnings;
motors; engines; boilers; tanks; water heaters; pumps; furnaces; heat registers;
radiators; thermostats; plumbing; sinks; water closets; basins; faucets;
elevators; conveyors; switchboards; cleaning, call, vacuum and sprinkler
systems; fire extinguishing apparatus and equipment; water tanks; lighting,
heating, ventilating, air conditioning and air cooling units and equipment;
incinerating, communicating and refrigerating equipment; water, gas and electric
supply fixtures, machinery, ducts, piping, wiring, conduits, outlets,
appurtenances and equipment; burglar alarm and security systems; electronic
intercommunication system; maintenance and cleaning equipment and supplies;
parking lot lighting; and trees, bushes and shrubs, whether or not permanently
affixed to the real estate, together with all appurtenances, extensions,
additions, improvements, betterments, renewals, accessions, replacements,
proceeds, products and substitutions thereto, therefor and thereof, but
expressly excluding all equipment, trade fixtures, inventory and personal
property owned by any tenant and used in operating the business being conducted
in the Improvements by a tenant, as opposed to being owned by Trustor and used
in the maintenance and operation of the Premises and Improvements themselves,
and all water, water rights, shares of stock evidencing water rights, claims to
water, and agreements relating to the supply of water, whether real or personal,
now or hereafter (i) appurtenant thereto, (ii) made or used in connection
therewith, or (iii) arising from the ownership thereof, and all the reversions,
remainders, rents, issues and profits thereof; (hereinafter collectively
referred to as "Property").
WHEREAS, affiliates of Trustor, as contemplated under Section 1.4,
below, may also become indebted to Beneficiary, and to secure such indebtedness,
such affiliates shall grant to Beneficiary liens and security interests in real
and personal property collateral and the Trustor intends that all such
collateral and Beneficiary's security interests therein shall secure also the
Note and other obligations of Trustor owed to Beneficiary;
NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged; in consideration of the loan evidenced by the Note; and to secure
the payment of principal, interest, late payment charges and reinvestment
charges evidenced or provided for by the Note, the payment by Trustor to
Beneficiary as herein provided of all sums advanced by Beneficiary pursuant to
any term hereof, with interest thereon, and the performance and observance of
all of the covenants and agreements herein contained and contained in the Other
Loan Documents (defined below), the Note, all of the terms of which are hereby
incorporated herein and made a part hereof by reference as if fully set forth
herein, and this Deed of Trust, TRUSTOR DOES HEREBY GRANT, BARGAIN, SELL,
CONVEY, WARRANT, ASSIGN, PLEDGE AND CONFIRM UNTO BENEFICIARY, ITS SUCCESSORS AND
ASSIGNS, FOREVER, WITH POWER OF SALE AND RIGHT ON ENTRY AND POSSESSION, all of
2
<PAGE>
Trustor's right, title and interest in and to the Premises, including all
rights, easements, privileges and appurtenances thereunto belonging or in
anywise appertaining, the Improvements, the Property and all rents, issues,
income and profits therefrom, including but not limited to Trustor's interest
in, to and under any leases thereof and all right to collect any and all rents
from tenants of the Premises and Improvements; and all other rights, interests
and property herein assigned by Trustor to Beneficiary or in which a security
interest is herein granted by Trustor to Beneficiary (all of which property
shall be hereinafter collectively referred to as the "Trust Property"). To have
and to hold the Trust Property, together with all privileges, hereditaments and
appurtenances thereunto now or hereafter belonging, or in anywise appertaining,
and the proceeds and products of all Improvements and Property, unto Trustee,
its successors and assigns, forever in trust for the benefit of Beneficiary, its
successors and assigns, forever; provided, nevertheless, that these presents are
upon the express condition that, if Trustor shall pay or cause to be paid in
full the Note, the provisions hereof, including, without limitation, those set
forth in Article VI, below, and if Trustor shall strictly observe and perform
all of the terms, covenants and conditions herein and therein set forth, and
upon the payment to Trustee of all fees, costs, charges, expenses and
liabilities incurred by Trustee, then this Combination Deed of Trust, Assignment
of Rents, Security Agreement and Fixture Financing Statement (hereinafter
referred to as "Deed of Trust"), and the estate, right and interest of Trustee
and Beneficiary in and to the Trust Property created hereby, shall cease and be
and become void and of no force and effect and shall be satisfied and released
at Trustor's expense, otherwise to remain in full force and effect.
Trustor and Beneficiary further agree as follows:
ARTICLE I
GENERAL COVENANTS AND WARRANTIES
Section I.1. Payment of Indebtedness. Trustor shall duly, punctually and fully
pay each and every installment of principal and interest on the Note and all
other indebtedness secured hereby, as and when the same shall become due, and
shall duly, punctually and fully do and perform all things on its part to be
done or performed under the Note, under this Deed of Trust and under any other
instrument or agreement which refers to or secures the Note and including any
monetary or other obligation (and any instrument, agreement or document which
creates, evidences or secures such obligation) owed by any affiliate of Trustor
(as contemplated by Section 1.4, below) to Beneficiary (hereinafter referred to
as the "Other Loan Documents"). Time is of the essence hereof.
Section I.2. Representations and Warranties. Trustor represents and warrants to
Beneficiary, as follows:
(a) Trustor is a limited liability company duly organized, validly existing
and in good standing under the laws of the State of Arizona, the
current member in which is The Norman Andrus Irrevocable Trust, u/a/d
7/29/97 (hereinafter referred to, together with their successors in
interest, as the "Members").
3
<PAGE>
(b) Fee Title. Trustor is the lawful owner of and has good and marketable
fee simple absolute title to the Trust Property; Trustor has good right
and lawful authority to grant, bargain, sell, convey, warrant,
mortgage, assign, pledge and confirm the same as provided herein; and
the Trust Property is free and clear of all deeds of trust, mortgages,
liens, pledges, security interests, charges and encumbrances, excepting
only Permitted Encumbrances. Trustor warrants and will defend the title
to the Trust Property against all claims and demands whatsoever, except
those made under Permitted Encumbrances.
(c) Prohibitions. There is no provision in any indenture, contract or
agreement, to which Trustor is a party or by which it is bound, or any
law, statute, ordinance, governmental rule, regulation or restriction,
or any order of any court or administrative agency, to which Trustor is
subject or by which Trustor is bound, which prohibits the execution and
delivery by Trustor of this Deed of Trust, the Note or any Other Loan
Documents, or the performance or observance by Trustor of any of the
terms, covenants or conditions of this Deed of Trust, the Note or any
Other Loan Document.
(d) Authorization. Execution and delivery of this Deed of Trust, the Note
and all Other Loan Documents have been duly and validly authorized, and
the Note, this Deed of Trust and each Other Loan Document have been
duly and validly executed and delivered by and on behalf of Trustor and
are valid, binding and enforceable obligations of Trustor in accordance
with their terms.
(e) Litigation. There are no actions, suits or proceedings pending or, to
the knowledge of Trustor, threatened against Trustor or the Trust
Property in any court or before any federal, state, municipal or other
governmental agency, which, if decided adversely to any of them, would
have a materially adverse effect upon this Deed of Trust, upon the
Trust Property or upon the value thereof, including but not limited to
notices, demands for payment or compensation for injury or damage to
persons, the environment or natural resources, actions, suits,
proceedings, or damage settlements relating to Hazardous Substances (as
that term is hereinafter defined), and Trustor is not in default with
respect to any order of any court or governmental agency.
(f) Financial Statements. The financial statements of Trustor, Norman
Andrus, The Norman Andrus Irrevocable Trust and the Trust Property,
heretofore furnished to Beneficiary, fairly present the financial
condition of Trustor, Norman Andrus, The Norman Andrus Irrevocable
Trust on the dates thereof and the results of operations of Trustor and
the Trust Property for the period or periods indicated therein, all in
conformity with generally accepted accounting principles consistently
followed. There has been no material adverse change in the condition,
financial or otherwise, of Trustor, Norman Andrus, The Norman Andrus
Irrevocable Trust, or the Trust Property since the latest financial
statement so furnished.
(g) No Default. Trustor is not in default in the payment of the principal
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of or interest on any indebtedness for borrowed money and is not in
default under any instrument or agreement under and subject to which
any indebtedness for borrowed money has been incurred or is secured,
and no event has occurred under the provisions of any such instrument
or agreement which, with or without the lapse of time or the giving of
notice, or both, constitutes or would constitute a default or an event
of default thereunder.
(h) Use. The Premises are neither agricultural property, property in
agricultural use, nor the homestead of Trustor or any Member, but
rather are the site of one or more mobile home parks and appurtenances
thereto.
(i) Regulations. All applicable building, zoning, occupational safety and
health, energy and environmental laws, ordinances and regulations
affecting the Trust Property permit the use and occupancy thereof for
its intended purposes and have been complied with, and Trustor has
obtained the necessary consents, permits and licenses to operate the
Improvements for their intended purposes.
(j) (i) to the best of Trustor's knowledge after due inquiry, and
except (a) as disclosed in that Phase I Environmental Site
Assessment, prepaid by EnviroAssessments, Inc., as its Project
No. 8497605, and dated May 29, 1998, and (b) minute quantities
used in the ordinary course of cleaning and maintaining the
Trust Property and disposed of in accordance with all
applicable Environmental Regulations (as that term is
hereinafter defined), no dangerous, toxic or hazardous
pollutants, contaminants, chemicals, wastes, materials or
substances, as defined in or governed by the provisions of the
Federal Resource Conservation and Recovery Act of 1976, the
Federal Comprehensive Environmental Response Compensation and
Liability Act of 1980, and/or the Superfund Amendments and
Reauthorization Act of 1986 (42 U.S.C. 6901 et seq. and 42
U.S.C. 9601 et seq.), as amended, or any other federal, state
or local hazardous substance, hazardous waste or environmental
laws, statutes, codes, ordinances, regulations, directives,
requirements or rules (hereinafter collectively referred to as
"Environmental Regulations"), and also including
urea-formaldehyde, polychlorinated biphenyls, dioxin,
asbestos, asbestos containing materials, nuclear fuel or
waste, and petroleum, including but not limited to crude oil
or any fraction thereof, natural gas, natural gas liquids,
gasoline and synthetic gas or any other waste, substance,
pollutant or contaminant which would subject the owner of the
Premises to any damages, penalties or liabilities under any
applicable Environmental Regulation (herein collectively
referred to as "Hazardous Substances") have, to the best of
Trustor's knowledge, ever been placed, located, produced,
generated, created, stored, treated, transported,
incorporated, discharged, emitted, spilled, released,
deposited, disposed of or allowed to escape in, upon, under,
over or from the Trust Property;
(ii) no threat exists of a spill, discharge, release or emission of
a Hazardous Substance upon or from the Trust Property into the
environment;
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(iii) to the best of Trustor's knowledge, the Premises have not ever
been used as or for a mine, a landfill, a dump or other
disposal facility, industrial or manufacturing purposes, or a
gasoline service station;
(iv) no underground storage tank is now located in the Premises or
has, to the best of Trustor's knowledge, previously been
located therein but has been removed therefrom;
(v) no violation of any Environmental Regulation now exists or, to
the best of Trustor's knowledge, has ever existed in, upon,
under, over or from the Trust Property;
(vi) to the best of Trustor's knowledge, no notice of any violation
or alleged violation in, upon, under, over or from the Trust
Property of any Environmental Regulation has been issued or
given by any governmental entity or agency responsible for
administering or enforcing the same;
(vii) to the best of Trustor's knowledge, no person, party or
private or governmental agency or entity has given any notice
of or asserted any claim, cause of action, penalty, cost or
demand for payment or compensation, whether or not involving
any injury or threatened injury to human health, the
environment or natural resources, resulting or allegedly
resulting from any activity or event described in (i) above;
(viii) there are not now, nor to the best of Trustor's knowledge,
have there ever been, any actions, suits, proceedings or
damage settlements relating in any way to Hazardous Substances
in, upon, under, over or from the Trust Property;
(ix) to the best of Trustor's knowledge, there is no investigation
or report involving the Trust Property by any governmental
entity or agency which in any way relates to Hazardous
Substances;
(x) the Trust Property is not listed in the United States
Environmental Protection Agency's National Priorities List of
Hazardous Waste Sites or any other list, schedule, log,
inventory or record of Hazardous Substance sites maintained by
any federal, state or local governmental agency; and
(xi) the Trust Property is subject to no lien or claim for lien in
favor of any governmental entity or agency as a result of any
presence, release or threatened release of any Hazardous
Substance in, on, under, over or from the Trust Property.
(k) Accessibility Regulations. The Trust Property is in full compliance
with the provisions of the Americans with Disabilities Act of 1990 and
of all other applicable federal, state and local statutes, laws,
ordinances, codes, regulations, rules and requirements relating to the
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accessibility thereof for disabled, handicapped and physically
challenged persons (hereinafter referred to as "Accessibility
Regulations").
Section I.3. Notice of Default. Trustor covenants and agrees with Beneficiary,
so long as any amount secured hereby shall remain unpaid, to give to Beneficiary
prompt notice in writing of any condition or event which constitutes an Event of
Default (as defined in Section 3.1 hereof), or which, after notice or lapse of
time, or both, would constitute such an Event of Default.
Section I.4. Other Loans. Trustor acknowledges and agrees that Beneficiary is
making, and in the future may make, other loans to entities in which The Norman
Andrus Irrevocable Trust, u/a/d July 29, 1997 is a member (and therefore such
entities are affiliates of Trustor), and that a breach or default under the
applicable agreements, instruments and documents governing one or more of such
loans shall automatically constitute a default hereunder, in which case,
Beneficiary shall have all rights and remedies herein provided, or otherwise
available at law or in equity. Casa Encanta Commercial, L.L.C., an Arizona
limited liability company, is an affiliate of Trustor.
Section I.5. Further Actions. Trustor shall procure, do, execute, acknowledge
and deliver each and every further act, deed, conveyance, transfer, document and
assurance necessary or proper for the carrying out more effectively of the
purposes of this Deed of Trust and, without limiting the foregoing, for
granting, bargaining, selling, conveying, warranting, mortgaging, assigning,
pledging and confirming unto Beneficiary all of the Trust Property, or property
intended so to be, whether now owned or hereafter acquired by Trustor,
including, without limitation, the preparation, execution and filing of any
documents, such as financing statements and continuation statements, deemed
advisable by Beneficiary for perfecting and maintaining its lien on the Trust
Property.
This Deed of Trust shall further constitute and be deemed to be a Security
Agreement under the Arizona Uniform Commercial Code, now in force and as
hereafter amended, and Trustor hereby grants to Beneficiary a first and only,
present and continuing security interest in any Property, leases, rents, issues,
income, profits, instruments, general intangibles, accounts, contract rights and
claims included within or related to the Trust Property, and in all deposits
made pursuant to Section 1.7 hereof and all insurance policies and unearned
premiums prepaid thereon, insurance proceeds, and awards, payments or
consideration for the taking of the Trust Property, or any portion thereof, by
condemnation or exercise of the power of eminent domain, or from any sale in
lieu or in anticipation thereof, assigned by Trustor to Beneficiary hereunder,
to the extent that a security interest may be granted therein under the terms of
the Arizona Uniform Commercial Code.
Trustor agrees to supply Beneficiary with an inventory of all such property in a
form acceptable to Beneficiary, at any time, from time to time, upon receipt of
a written request therefor from Beneficiary.
Section I.6. Use; Waste. Trustor shall not commit or permit waste upon the Trust
Property and shall cause the Trust Property and every part thereof, including
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but not limited to parking areas, Improvements and all ingress and egress
easements, if any, to be continually maintained, preserved and kept in safe and
good repair, working order and condition, and will comply with all present and
future laws, statutes, ordinances, rules and regulations (including but limited
to all Environmental Regulations and the Accessibility Regulations) of any
governmental authority having or claiming jurisdiction with reference to the
Trust Property and the manner of leasing, using, operating or maintaining the
same (hereinafter collectively referred to as "Governmental Requirements"), as
now existing or as hereafter amended, if applicable, and with all private
covenants and restrictions, if any, affecting the title to the Trust Property,
or any thereof (hereinafter collectively referred to as "Private Restrictions"),
and will not commit, suffer or permit any violation thereof, and will from time
to time make all necessary and proper restorations, rebuildings, repairs,
renewals, replacements, additions and betterments to the Trust Property, whether
required as the result of casualty or otherwise, and whether or not insurance or
condemnation proceeds are made available or are sufficient therefor, in a good
and workmanlike manner, so that the value and efficient use thereof shall be
fully preserved and maintained, and so that all Governmental Requirements and
Private Restrictions shall be complied with. Trustor shall forthwith give
Beneficiary written notice if it receives notice of any violation of any
Governmental Requirements or Private Restrictions, or if any material damage or
destruction occurs to the Trust Property.
Trustor agrees not to make any use of the Trust Property, other than as a mobile
home park and appurtenances thereto; not to demolish or remove the Improvements,
or make additions to or structural alterations of the Improvements, without the
prior written consent of Beneficiary; not to remove from the Premises or
Improvements any of the Property, unless immediately replaced with like property
of at least equal value; and not to add any new Improvements or Property, unless
all of such replacements and additions shall be free of any vendor's lien, title
reservation or other security interest prior hereto, excepting only Permitted
Encumbrances. All such replacements and additions shall be subject to the lien
hereof and the security interest created hereby, which shall be prior to all
other liens and security interests thereon and therein, excepting Permitted
Encumbrances.
Beneficiary or its agents may enter upon the Trust Property at all reasonable
times to inspect the same and for the purpose of protecting its security and
preserving its rights hereunder, but shall not be liable to any person, party or
entity for failure to do so.
Trustor covenants and agrees not to commence construction of any tenant finish
improvements, new buildings or Improvements upon the Premises or any additions
to existing Improvements, without the prior written consent of Beneficiary; to
promptly complete with due diligence any buildings, Improvements and additions
for which Beneficiary's consent is obtained hereunder, free and clear of all
liens, charges and encumbrances, except the lien hereof and Permitted
Encumbrances; and to keep and perform each and every term, condition and
covenant of any and all leases upon the Trust Property or any portion thereof
(hereinafter referred to as "Leases") to be by Trustor kept and performed, so as
to keep the Leases at all times in full force and effect, and agrees not to
anticipate or collect rents more than one (1) month in advance under any Lease
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without, in each instance, the prior written consent of Beneficiary. Beneficiary
shall not be liable to either Trustor or the tenants for the performance of any
of the terms, covenants and conditions of the Leases. Trustor shall not by any
act or omission diminish or impair the value of the Trust Property and likewise
shall not in any way weaken, diminish or impair the security hereof.
Trustor shall not seek, petition for, make, consent to or acquiesce in any
change in the Governmental Requirements and Private Restrictions relating to the
uses of the Trust Property, including but not limited to zoning and building
codes and ordinances, without Beneficiary's prior written consent. Except as may
be shown on the title policy issued to Beneficiary and insuring the first lien
position of this Deed of Trust, (a) Trustor shall not, by act or omission,
permit any property which is not subject to this Deed of Trust to rely on the
Trust Property or any part thereof or any interest therein to fulfill any
governmental requirement for the existence or use of the Trust Property, and (b)
the Trust Property shall not rely on any property which is not subject to this
Deed of Trust to fulfill any governmental requirement for the existence or use
of the Trust Property.
Section I.7. Taxes and Assessments. Trustor shall, at least twenty (20) days
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 the Trust
Property or upon or against the Note or the indebtedness secured hereby or upon
or against the interest of Beneficiary in the Trust Property or in the Note or
the indebtedness secured hereby (hereinafter referred to as "Impositions") and
will thereafter deliver the paid receipts therefor to Beneficiary within ten
(10) days after payment of any such Imposition. In the event of any legislative
enactment or judicial decision after the date of this Deed of Trust, imposing
upon Beneficiary the obligation to pay any such Imposition, or deducting the
lien of this Deed of Trust from the value of the Trust Property for the purpose
of taxation, or changing in any way the laws now in force for the taxation of
deeds of trust, mortgages or debts secured thereby, or the manner of the
operation of any such Imposition, so as to affect the interests of Beneficiary,
then, and in such event, Trustor shall bear and promptly pay the full amount of
such Imposition or any such tax; provided, however, that, if for any reason
payment thereof by Trustor would be unlawful or unenforceable, or if payment
thereof by Trustor would constitute usury or would render the loan or
indebtedness secured hereby wholly or partially usurious under any of the terms
or provisions of the Note or of this Deed of Trust, or otherwise, Beneficiary
may declare the whole sum secured by this Deed of Trust, with interest thereon,
to be immediately due and payable. Trustor shall not suffer to exist and shall
promptly pay and discharge any mechanic's, statutory or other lien or
encumbrance on the Trust Property or any part thereof (hereinafter referred to
as "Liens"), except for Permitted Encumbrances. Trustor shall perform all of its
obligations under the Permitted Encumbrances, and shall provide notice to
Beneficiary of any notices received in regard to any Permitted Encumbrances
(immediately upon receipt). To the extent any Permitted Encumbrances are deeds
of trust or other security instruments, Trustor agrees that a default thereunder
shall be deemed,w without notice or cure rights, to be an Event of Default
hereunder.
Notwithstanding the foregoing, Trustor shall not be in default hereunder in
respect to the payment of any Impositions or Liens which Trustor shall be
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required by any provision hereof to pay, so long as Trustor shall first notify
Beneficiary, in writing, at least thirty (30) days prior to the due date
thereof, if any, or otherwise at least ten (10) days before commencement of any
contest thereof, of its intention to contest the amount, applicability and/or
validity of such Imposition or Lien and shall thereafter, in good faith, in
compliance with all applicable statutes, and with all possible promptness,
diligently contest the same, and Trustor may postpone or defer payment of all or
a portion of said Impositions or Liens, if, but only if, permitted by statute,
and if neither the Trust Property, nor any portion thereof, would, by reason of
such postponement or deferment, be in danger of being forfeited or lost;
provided, however, that Trustor shall furnish to Beneficiary, prior to
commencing any such contest, cash or other security satisfactory to Beneficiary
to indemnify Beneficiary against any loss or liability by reason of any such
contest and to pay any such Imposition or Lien, together with interest and
penalties thereon, if any, if such contest should fail. Upon a final
adjudication of any such contest, and, in any event, at least thirty (30) days
prior to the date on which the interest of Beneficiary in the Trust Property
would otherwise forfeit by reason of the nonpayment of any such Impositions or
Liens, Trustor shall pay the amount thereof then due, including any penalties
and interest thereon. Beneficiary may, at its option, make such payment from the
security deposited by Trustor, if Trustor fails to so pay the same.
In order to further secure the payment of the sums and the performance of the
obligations secured hereby, Trustor shall pay to Beneficiary, monthly, in
addition to, concurrently with, and at the same time as each monthly payment of
principal and/or interest required hereunder, or under the Note, a sum
equivalent to one-twelfth (1/12) (or such greater fraction as may be necessary
to accumulate sufficient funds to make any payment due less than thirteen (13)
months after the date thereof) of the amount estimated by Beneficiary to be
sufficient to enable Beneficiary to pay, at least thirty (30) days before they
become due, all Impositions. No interest shall be payable by Beneficiary upon
the amounts so paid, and Beneficiary shall not be required to maintain the same
in a separate account, but may commingle the same with its general funds. Upon
demand by Beneficiary, Trustor shall deliver and pay over to Beneficiary such
additional sums as are necessary to make up any deficiency in the amount
necessary to enable Beneficiary to fully pay any of the items hereinabove
mentioned. Beneficiary shall not be required to pay any such items in an amount
in excess of the sums deposited or paid over by Trustor to Beneficiary pursuant
to this paragraph. Any excess sums so paid shall be retained by Beneficiary and
shall be applied to pay said items, as and when they become due in the future,
unless all amounts secured hereby have been paid in full, in which case all
excess sums so paid shall be refunded to Trustor. At Trustor's written request,
and if no Event of Default exists hereunder, Beneficiary shall use, or, at
Beneficiary's option, permit Trustor to use, all sums paid by Trustor pursuant
to this paragraph to pay the items hereinabove mentioned prior to delinquency.
In the event of the occurrence of any Event of Default hereunder, Beneficiary
may apply against the indebtedness secured hereby, in such a manner as
Beneficiary may determine, any funds of Trustor then held under this paragraph,
in which funds Trustor hereby grants to Beneficiary a security interest.
Section I.8. Insurance. Trustor shall obtain, maintain and keep in full force
and effect during the term of this Deed of Trust, with all premiums paid
thereon, the following insurance:
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A. Insurance upon all Improvements and Property against loss or damage by
fire, lightning and other risks customarily covered by standard "all
risk" (or special form cause of loss) and extended coverage
endorsements, together with theft, vandalism, malicious mischief,
collapse, replacement cost, agreed amount, and restoration in
conformance with applicable laws and ordinances, endorsements, all in
such amounts as may be from time to time required by Beneficiary, but
in no event less than the full replacement cost of the Improvements now
existing or hereafter erected or placed upon the Premises, including
the cost of debris removal, and of all Property;
B. Broad form boiler and machinery insurance on all equipment and objects
necessary to operate the Trust Property, including but not limited to
heating, ventilating and air-conditioning equipment, elevators,
conveyors, and water heaters, providing for full repair and replacement
cost coverage, if applicable;
C. Comprehensive general public liability insurance against claims for
bodily injury. personal injury, death and/or property damage occurring
in, on or about the Trust Property, with coverage limits satisfactory
to Beneficiary (which shall initially be at least equal to
$1,000,000.00 with respect to any one (1) person, accident or
occurrence), and including contractual liability coverage for the tort
liability assumed by Trustor hereunder and under any Other Loan
Document;
D. Rent and rental value insurance, insuring against the loss of all rents
from the Trust Property for a period of at least twelve (12) months
after the casualty;
E. Flood insurance upon the Trust Property in such form and amount as may
from time to time be required by Beneficiary, if the Trust Property is
located in a designated flood plain area; and
F. Insurance upon the Trust Property against such other casualties and
contingencies as Beneficiary may from time to time reasonably require,
including but not limited to sprinkler insurance in amounts acceptable
to Beneficiary, all in such manner and form as may be satisfactory to
Beneficiary.
Trustor shall, at its sole cost and expense, from time to time and at any time
when Beneficiary shall so request, provide Beneficiary with evidence of the full
replacement cost of the Trust Property in a form acceptable to Beneficiary.
Trustor shall promptly notify Beneficiary and the appropriate insurer in writing
of any loss covered by any of the above-mentioned types of insurance.
All insurance provided for in this Section 1.8 shall be effected under a valid,
enforceable and manually signed policy or policies of insurance in form and
substance approved by Beneficiary, shall be issued by insurers of recognized
responsibility, which are licensed to do business in the State of Arizona, which
have a minimum rating of A and a financial class size of IX or larger, according
to Best's Key Rating Guide for Property-Liability, and which are acceptable to
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Beneficiary, and shall be satisfactory to Beneficiary in all other respects.
All policies maintained by Trustor pursuant to the foregoing Subsections A, B,
D, E and F shall (a) include a first mortgagee clause in favor of Beneficiary,
(b) provide that any losses payable thereunder shall be payable to Beneficiary
and assigns (pursuant to a loss payee clause in favor of, and acceptable to,
Beneficiary, to be attached to each such policy), (c) include effective waivers
by the insurer of all claims for insurance premiums against Beneficiary, (d)
provide that any losses shall be payable notwithstanding (i) any act of
negligence by Trustor or Beneficiary, (ii) any foreclosure or other proceedings
or notice of sale relating to the Trust Property, (iii) the vacancy of the
Improvements, (iv) any waiver of subrogation rights by the insured, and/or (v)
any change in the title to or ownership of any of the Trust Property, and (e) be
written in amounts sufficient to prevent Trustor from becoming a co-insurer
under said policies. The liability insurance policies described in the foregoing
Subsection C shall name Beneficiary as an additional named insured, shall
contain a separation or severability of interests clause and shall waive
contribution from any other insurance carried by Beneficiary in the event of
loss. Trustor shall cause the originals of the policies of all such insurance to
be deposited with Beneficiary. At least fifteen (15) days prior to the date on
which the premiums on each such policy shall become due and payable, Trustor
shall furnish Beneficiary with proof reasonably satisfactory to Beneficiary of
payment thereof. Each of such policies shall contain an agreement by the insurer
that the same shall not be amended, modified, canceled, reduced or terminated
for any reason, including but not limited to a failure to pay premiums and/or
expiration by its terms, without at least thirty (30) days' prior written notice
to Beneficiary. If this Deed of Trust is foreclosed, the purchaser at the
foreclosure sale shall, after the expiration of any statutory period of
redemption, become the sole and absolute owner of any and all such policies,
with the sole right to collect and retain all unearned premiums thereon, and,
for this purpose, Trustor hereby assigns and grants a security interest in said
policies and unearned premiums to Beneficiary.
If, under the terms and provisions of any Lease, the tenant thereunder is
required to maintain insurance of the types and for the amounts as set forth
above, and, if, pursuant to the terms of the Lease, such insurance is to be
maintained for the benefit of both the lessor and any beneficiary of the lessor,
Beneficiary will accept such policy or policies in lieu of the policies required
by this Section; provided the same meet all of the requirements set forth above.
In the event the tenant fails to maintain and keep such insurance in full force
and effect, Trustor shall then obtain such policy or policies as are required by
this Section.
In the event of loss, Trustor shall immediately give written notice thereof, and
of any claims filed under insurance policies as a result thereof, to
Beneficiary, and (i) if an Event of Default then exists hereunder, or (ii) if
Trustor does not promptly and in good faith make proof of loss and settle,
adjust or compromise any claims for loss, damage or destruction under any
policies of insurance maintained pursuant to Subsections A, B, D, E and F
hereof, and collect the proceeds thereof, Beneficiary is authorized and
empowered (but not obligated or required) to make proof of loss; settle, adjust
or compromise said claims; and collect and receive all such proceeds. The amount
of any such settlement, adjustment or compromise of claims shall always be
subject to Beneficiary's approval. Trustor agrees to pay all costs and expenses
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incurred by Beneficiary in connection therewith, including court costs and
attorneys' fees (prior to trial, at trial and on appeal), on demand, which costs
and expenses shall also be secured hereby and shall bear interest from the date
paid at the Default Rate specified in the Note (hereinafter referred to as
"Default Rate"), but Beneficiary shall not be liable to Trustor for any failure
by Beneficiary to collect or to exercise diligence in collecting any such
proceeds.
All proceeds of such insurance are hereby assigned, and shall be paid, to
Beneficiary. Such proceeds shall, at Beneficiary's option, be applied first to
the payment of all costs and expenses incurred by Beneficiary in obtaining such
proceeds, and second, at Beneficiary's option, either to the reduction of the
indebtedness hereby secured in such order as Beneficiary may elect, whether then
due and payable or not, without reinvestment charge, or to the restoration or
repair of the Trust Property, without affecting the lien of this Deed of Trust
or the obligations of Trustor hereunder Interest upon the entire indebtedness
secured hereby shall continue until any such proceeds are received and applied
to such indebtedness by Beneficiary. Pending a decision as to the proper use and
application of any insurance proceeds, and during any such restoration or
repair, Beneficiary shall not be liable for interest on such proceeds. If
Beneficiary elects to apply any such insurance proceeds to the restoration or
repair of the Trust Property, it shall not be liable for supervising such
restoration or repair or for supervising the disbursement of such insurance
proceeds therefor, but such disbursement shall proceed in a manner acceptable to
Beneficiary, which shall be similar to the manner in which major national banks
permit construction loan advances, and which shall be designed to include
reasonable controls to assure that such restoration or repair will be promptly
completed in a good and workmanlike manner and paid for in full, free of
mechanics' liens.
Notwithstanding the foregoing, Beneficiary shall be required to permit such
proceeds to be used for the restoration or repair of the Trust Property, if, but
only if, (a) the portion remaining can with restoration or repair continue to be
operated for the purposes utilized immediately prior to the damage or
destruction; (b) no Event of Default exists hereunder or under the Note or any
Other Loan Document; (c) the appraised value of the Trust Property after such
restoration or repair shall not have been reduced from its value immediately
prior to such damage, as confirmed in writing by an M.A.I. appraiser acceptable
to Beneficiary; (d) the tenants certify to Beneficiary their intention to remain
in possession of the Trust Property without any abatement or adjustment of
rental payments (other than temporary abatements during the period of
restoration and repair); (e) no liens will be placed on the Trust Property; and
(f) all other provisions of this Section 1.8 shall apply with respect to such
restoration or repair.
In the event proceeds are to be applied to the restoration of the Trust
Property, Trustor shall deposit with Beneficiary, prior to commencing any such
restoration or repair, the amount, if any, by which the cost of such restoration
or repair exceeds the amount of such insurance proceeds, which amount shall be
disbursed to pay costs of such restoration or repair prior to, and in the same
manner as, such insurance proceeds. Any surplus which may remain after payment
of all costs of restoration or repair may, at the option of Beneficiary, be
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applied to reduction of the indebtedness hereby secured, in any order which
Beneficiary may determine, whether then matured or to mature in the future,
without reinvestment charge, or be paid to Trustor, as its interest may appear,
the choice of application to be solely at the discretion of Beneficiary. Trustor
agrees to promptly complete any such restoration and repair in a good and
workmanlike manner, in accordance with all Governmental Requirements,
Accessibility Regulations and Private Restrictions.
In no event shall Beneficiary be held responsible for failure to pay for any
insurance required hereby, or for any loss or damage growing out of a defect in
any policy thereof or growing out of any failure of any insurance company to pay
for any loss or damage insured against or for failure by Beneficiary to obtain
such insurance or to collect the proceeds thereof.
In order to further secure the payment of the sums and the performance of the
obligations secured hereby, Trustor shall pay to Beneficiary, monthly, in
addition to, concurrently with, and at the same time as each monthly payment of
principal and/or interest required hereunder, or under the Note, a sum
equivalent to one-twelfth (1/12) (or such greater fraction as may be necessary
to accumulate sufficient funds to make any payment due less than thirteen (13)
months after the date thereof) of the amount estimated by Beneficiary to be
sufficient to enable Beneficiary to pay, at least thirty (30) days before they
become due, all premiums for insurance acquired herein. No interest shall be
payable by Beneficiary upon the amounts so paid, and Beneficiary shall not be
required to maintain the same in a separate account, but may commingle the same
with its general funds. Upon demand by Beneficiary, Trustor shall deliver and
pay over to Beneficiary such additional sums as are necessary to make up any
deficiency in the amount necessary to enable Beneficiary to fully pay any of the
items hereinabove mentioned. Beneficiary shall not be required to pay any such
items in an amount in excess of the sums deposited or paid over by Trustor to
Beneficiary pursuant to this paragraph. Any excess sums so paid shall be
retained by Beneficiary and shall be applied to pay said items, as and when they
become due in the future, unless all amounts secured hereby have been paid in
full, in which case all excess sums so paid shall be refunded to Trustor. At
Trustor's written request, and if no Event of Default exists hereunder,
Beneficiary shall use, or, at Beneficiary's option, permit Trustor to use, all
sums paid by Trustor pursuant to this paragraph to pay the items hereinabove
mentioned prior to delinquency. In the event of the occurrence of any Event of
Default hereunder, Beneficiary may apply against the indebtedness secured
hereby, in such a manner as Beneficiary may determine, any funds of Trustor then
held under this paragraph, in which funds Trustor hereby grants to Beneficiary a
security interest.
Section I.9. Utilities. Trustor shall pay or cause to be paid promptly, when
due, all charges or fees for utilities or services, including but not limited to
electricity, water, gas, telephone, sanitary sewer, and trash and garbage
removal, supplied to the Trust Property, and, upon request of Beneficiary, shall
furnish receipts to Beneficiary showing such payment.
Section I.10. Financial Statements. Trustor covenants and agrees with
Beneficiary, as long as any amount secured hereby remains unpaid, at Trustor's
sole cost and expense, to (a) at all times keep proper and accurate books of
account in which full, true and correct entries will be made of all transactions
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affecting the Trust Property in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved; (b) at
all reasonable times permit Beneficiary and its representatives to inspect such
books and records and to make copies thereof; (c) no later than fifteen (15)
days after the end of each calendar month after the date hereof, certify as
correct and furnish Beneficiary with such information and statements as it may
reasonably request concerning the financial, business and operational status of
Trustor and/or the Trust Property and concerning performance by Trustor of the
covenants and agreements contained in the Note and in this Deed of Trust; (d)
upon the existence of any uncured Event of Default hereunder, such reports
required under (c), above shall be compiled by an independent certified public
accountant selected by Trustor and acceptable to Beneficiary; and (e) annually
furnish to Beneficiary, as soon as available, but in any event within one
hundred twenty (120) days after the close of each fiscal year of Trustor, at
Trustor's sole cost and expense, Trustor's annual financial statements and an
operating statement for the Trust Property for said fiscal year, all prepared in
accordance with generally accepted accounting principles consistently applied,
and certified as true, correct and complete by Trustor, which operating
statements shall include at least a statement of gross income (itemized as to
source), all operating expenses (itemized), depreciation charges and net income,
and shall reflect the operation of the Trust Property during said fiscal year,
all in reasonable detail and setting forth comparable figures for the preceding
fiscal year, as well as a tenants' list and current rent schedule. If Trustor
fails to supply to Beneficiary any financial and/or operating statements which
Trustor is hereby required to so supply, or at any time Trustor is otherwise in
default hereunder, Beneficiary or its authorized representatives may have access
to all of Trustor's books and records for the purpose of auditing the same
and/or itself obtaining such statements, at Trustor's expense.
Beneficiary, by giving written notice to Trustor at any time within sixty (60)
days after receiving the above-mentioned financial and operating statements from
Trustor, may elect to have a person or firm of its choice make a confirmatory
examination of Trustor's books and records pertaining to the Trust Property. Any
such confirmatory examination shall be at Beneficiary's sole cost and expense,
unless said examination reveals significant errors or discrepancies in the
above-mentioned financial and operating statements, in which event the
confirmatory examination shall be at the sole cost and expense of Trustor.
Section I.11. Beneficiary's Right to Perform. If Trustor shall fail to observe,
comply with, or perform any of the terms, covenants and conditions herein with
respect to the procuring and delivery of insurance, the payment of Impositions
or Liens, the keeping of the Trust Property in repair, the furnishing of
financial and operating statements, the removal and/or disposal of Hazardous
Substances, or any other term, covenant or condition herein or in the Note or
any Other Loan Document contained, Beneficiary may itself observe, comply with
or perform the same, may make such advances to observe, comply with and perform
the same as Beneficiary shall deem appropriate, and may enter the Trust Property
for the purpose of observing, complying with and performing any such term,
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covenant or condition. Beneficiary may expend such sums, including reasonable
attorneys' fees (prior to trial, at trial and on appeal), to sustain the lien of
this Deed of Trust or its priority, or to protect or enforce its rights
hereunder, or to obtain the right to enforce its rights and remedies hereunder,
including the payment of any Liens, claims and encumbrances, other than
Permitted Encumbrances which are not in default, as it may deem desirable.
Trustor agrees to repay all sums so advanced or expended upon demand, with
interest thereon at the Default Rate from the date of advancement or
expenditure, and all sums so advanced or expended, with interest, shall be
secured hereby, but no such advance or expenditure shall be deemed to relieve
Trustor from any default hereunder. Beneficiary shall not be bound to inquire
into the validity of any Imposition or Lien which Trustor fails to pay as and
when required hereby and which Trustor has not given notice to Beneficiary of
its intention to contest in accordance with the terms hereof.
Section I.12. Due on Transfer. In the event Trustor transfers, leases (except as
permitted under the terms of an Assignment of Leases and Rents from Trustor to
Beneficiary dated as of the date of this Deed of Trust) or conveys to any other
party any interest in the Trust Property or any portion thereof, legal or
equitable, voluntarily or by operation of law, without the prior written consent
of Beneficiary; in the event Trustor shall sell or otherwise dispose of the
Trust Property, or any interest therein or portion thereof, without the prior
written consent of Beneficiary; in the event Trustor shall further encumber the
Trust Property, or any portion thereof, without the prior written consent of
Beneficiary; or in the event any change occurs in the Members of Trustor
(hereinafter referred to as "Members"), without the prior written consent of
Beneficiary may, at its election, declare the entire indebtedness hereby secured
to be immediately due and payable, without notice to Trustor (which notice
Trustor hereby expressly waives), and upon such declaration the entire
indebtedness hereby secured shall be immediately due and payable, anything
hereinabove or in the Note to the contrary notwithstanding. As used herein,
"transfer" shall include transfers by sale, gift, bequest, or otherwise. If
Trustor shall fail to pay such sums, Beneficiary may, without further notice or
demand on Trustor, invoke any remedies permitted under the terms hereof,
including, without limitation, Article III. As used herein, "transfer" shall
include transfers by sale, gift, bequest, or otherwise.
In the event Trustor shall request the consent of Beneficiary to a conveyance or
encumbrance, Trustor shall deliver a written request to Beneficiary together
with complete information regarding such conveyance or encumbrance and shall
allow Beneficiary thirty (30) days after delivery of all required information
for evaluation of such request. In the event that such request is not approved
within such thirty (30) day period, it shall be deemed not approved. Beneficiary
may charge an administrative fee to process any such sale, conveyance, transfer,
deed of trust or other encumbrance. Such approval may be subject to such
modifications of the loan terms, interest rate, and maturity date as may be
established by Beneficiary. Consent as to any one transaction shall not be
deemed to be a waiver of the right to require consent to future or successive
transactions. If the Trust Property should be transferred to a privately held
corporation, limited liability company or a partnership pursuant to the terms of
this Section 1.12 during the term of this Deed of Trust, thereafter a subsequent
transfer of a stock, member, or partnership interest shall constitute a
conveyance for purposes of this Section 1.12 and the consent of Beneficiary
shall be required.
Notwithstanding any provision to the contrary herein, Beneficiary shall consent,
without transfer fee, to transfers by Members of their ownership interest in
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Trustor to (i) the estates or legal representatives of a member and (ii) a
trust, custodianship or other fiduciary arrangement in respect of which the
member is the trustee, custodian or other fiduciary with voting power over such
trust, custodianship or other fiduciary arrangement; provided that in each case
(a) there exists no default or Event of Default; (b) Norman Andrus remains as
Manager of Trustor; (c) written notice of any such transfer and copies of all
proposed transfer documents are delivered to Beneficiary at least thirty (30)
days prior to any such transfer; (d) Trustor pays Beneficiary's out of pocket
expenses in connection with such transfer; and (e) copies of the executed
transfer documents and the related amendments to Trustor's operating agreement
are promptly delivered to Beneficiary upon completion of the transfer.
No transfer, conveyance, lease, sale, change or other disposition shall relieve
(a) Trustor from personal liability for its obligations hereunder or under the
Note, or (b) any Guarantor from his or her liability, whether or not the
transferee assumes this Deed of Trust. Beneficiary may, without notice to
Trustor, deal with any successor owner of all or any portion of the Trust
Property in the same manner as with Trustor, without in any way discharging the
liability of Trustor hereunder or under the Note.
Trustor shall not mortgage, pledge or otherwise grant a security interest in any
of the Trust Property as collateral security for any other loan or forbearance,
without the prior written consent of Beneficiary.
Section I.13. Assignment of Rents.
(a) As additional security for the indebtedness secured by this Deed of
Trust, Trustor does hereby bargain, sell, assign, transfer and set over
unto Beneficiary all the rents, issues, profits and other income of any
kind which, whether before or after foreclosure, or during the full
statutory period of redemption, if any shall accrue and be owing for
the use or occupation of the Trust Property or any part thereof.
(b) Trustor agrees that upon or at any time after (i) the occurrence of an
Event of Default hereunder, or under the Note, or under any separate
Assignment of Leases and Rents securing the Note, or (ii) the
recordation of notice of trustee's sale or sale for the foreclosure of
this Deed of Trust, or (iii) the commencement of an action to foreclose
this Deed of Trust, or (iv) the commencement of any period of
redemption after judicial foreclosure of this Deed of Trust,
Beneficiary shall, in any such event, and at any such time, upon
application to the Superior Court in the county where the Trust
Property or any part thereof is located, by an action separate from the
foreclosure or trustee's sale, in the foreclosure action, or by
independent action (it being understood and agreed that the existence
of a foreclosure action or pending trustee's sale is not a prerequisite
to any action for a receiver hereunder), be entitled to the appointment
of a receiver for the rents, issues, profits and all other income of
every kind which shall accrue and be owing for the use or occupation of
the Trust Property or any part thereof, whether before or after
foreclosure or trustee's sale, or during the full statutory period of
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redemption, if any, upon a showing that Trustor has breached any
covenant contained in this Deed of Trust, the Note or any such separate
Assignment of Leases and Rents, including, without limitation, any
covenant relating to any of the following:
(1) Repayment of tenant security deposits, with interest thereon,
as required by applicable state laws, if any;
(2) Payment when due of prior or current real estate taxes or
special assessments with respect to the Trust Property, or the
periodic escrow for payment of the same;
(3) Payment when due of premiums for insurance of the types
required hereby, or the periodic escrow for payment of the
same; or
(4) Keeping of the covenants required of a lessor or licensor
pursuant to applicable state laws, if any.
Beneficiary shall be entitled to the appointment of a receiver without regard to
waste, adequacy of the security or solvency of Trustor. The court shall
determine the amount of the bond to be posted by the receiver. The receiver, who
shall be an experienced property manager, shall collect (until the indebtedness
secured hereby is paid in full and, in the case of a foreclosure sale, during
the entire redemption period, if any) the rents, issues, profits and all other
income of any kind from the Trust Property, manage and operate the Trust
Property, execute leases within or beyond the period of the receivership, if
approved by the court, make tenant finish improvements required by Leases and
apply all rents, issues, profits and other income collected by such receiver in
the following order:
(A) to payment of all reasonable fees of the receiver, if any,
approved by the court;
(B) to the items listed in clauses (1) through (4) above (to the
extent applicable) in the priority as numbered;
(C) to expenses for normal maintenance, operation and management
of the Trust Property and for construction of tenant finish
improvements required by Leases executed by the receiver;
(D) the balance to Beneficiary to be credited, prior to
commencement of foreclosure or a trustee's sale, against the
indebtedness secured hereby, in such order as Beneficiary may
elect, or to be credited, after commencement of foreclosure or
notice of a trustee's sale, to the amount required to be paid
to effect a reinstatement prior to foreclosure or trustee's
sale, or to be credited, after a foreclosure or trustee's
sale, to any deficiency and then to the amount required to be
paid to effect a redemption, pursuant to applicable state
laws, or their successors, as the case may be, with any excess
to be paid to Trustor; provided, however, that if this Deed of
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Trust is not reinstated nor the Trust Property redeemed, as
and during the times provided by said state laws, or their
successors, the entire amount received pursuant hereto, after
deducting therefrom the amounts applied by Beneficiary to any
deficiency, shall be the property of the purchaser of the
Trust Property at the foreclosure or trustee's sale, together
with all or any part of the Trust Property acquired through
foreclosure.
The receiver shall file periodic accountings as the court determines are
necessary and a final accounting at the time of his discharge. Beneficiary shall
have the right, at any time and without limitation, to advance money to the
receiver to pay any part or all of the expenses which the receiver should
otherwise pay as above provided, if cash were available from the Trust Property,
and all sums so advanced, with interest thereon at the Default Rate from the
date advanced, shall be a part of the sum required to be paid to redeem from any
foreclosure sale or reinstate prior to a foreclosure or trustee's sale. Said
sums shall be proved by the affidavit of Beneficiary, its agent or attorney,
describing the expenses for which the same were advanced and describing the
Trust Property.
(c) Upon the happening of any of the events set forth above, or during any
period of redemption after foreclosure sale, and prior to the
appointment of a receiver as hereinbefore provided, Beneficiary shall
have the right to collect the rents, issues, profits and other income
of every kind from the Trust Property and apply the same in the manner
hereinbefore provided for the application thereof by a receiver. The
rights set forth in this Subsection (c) shall be binding upon the
occupiers of the Trust Property from the date of filing by Beneficiary
in the office where this Deed of Trust is recorded, in the county in
which the Trust Property is located, of a notice of default in the
terms and conditions of this Deed of Trust and service of a copy of the
notice upon the occupiers of the Trust Property or as otherwise
provided under Arizona law. Enforcement hereof shall not cause
Beneficiary to be deemed a beneficiary in possession, unless it elects
in writing to be so deemed. For the purpose aforesaid, Beneficiary may
enter and take possession of the Trust Property, manage and operate the
same and take any action which, in Beneficiary's judgment, is necessary
or proper to conserve the value of the Trust Property. Beneficiary may
also take possession of, and for these purposes use, any and all of the
Property contained in the Trust Property.
(d) Beneficiary shall have, in addition to all other rights and remedies
provided herein and in the Other Loan Documents and at law or in
equity, the rights and remedies afforded by Arizona Revised Statutes
Section 33-702.B, without regard to the adequacy of the security or to
the solvency of Trustor or to whether Trustee or Beneficiary has
commenced to exercise any other right or remedy provided herein or in
any Other Loan Document or at law or in equity.
(e) The costs and expenses (including any receiver's fees and reasonable
attorneys' fees) incurred by Beneficiary pursuant to the powers herein
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contained shall be immediately reimbursed by Trustor to Beneficiary on
demand, shall be secured hereby and shall bear interest from the date
incurred at the Default Rate. Beneficiary shall not be liable to
account to Trustor for any action taken pursuant hereto, other than to
account for any rents actually received by Beneficiary.
Section I.14. Estoppel Certificates. At any time and from time to time, within
three (3) business days after receipt from Beneficiary of a written request
therefor, Trustor shall prepare, execute and deliver to Beneficiary, and/or any
other party which Beneficiary may designate, an estoppel certificate stating:
(a) the amount of the unpaid principal balance and accrued interest secured by
this Deed of Trust on the date thereof; (b) the date upon which the last payment
secured by this Deed of Trust was made and the date the next payment secured by
this Deed of Trust is due; and (c) that the provisions of the Note, this Deed of
Trust and any Other Loan Documents described in said request have not been
amended or changed in any manner, that there are no defaults or events of
default then existing under the terms of the Note, this Deed of Trust or any
Other Loan Document described in said request, and that Trustor has no defenses,
claims or offsets against full enforcement thereof according to their terms, or
listing and describing any such amendments, changes, defaults, events of
default, defenses, claims or offsets which do exist.
Section I.15. Hazardous Substances. Except for minute quantities used in the
ordinary course of cleaning and maintaining the Trust Property and disposed of
in accordance with all applicable Environmental Regulations, Trustor shall not
place, locate, produce, generate, create, store. treat, handle, transport,
incorporate, discharge, emit, spill, release, deposit or dispose of any
Hazardous Substance in, upon, under, over or from the Trust Property and shall
not permit any Hazardous Substance to be placed, located, produced, generated,
created, stored, treated, handled, transported, incorporated, discharged,
emitted, spilled, released, deposited, disposed of or to escape therein,
thereupon, thereunder, thereover or therefrom; and Trustor shall comply with all
Environmental Regulations which are applicable to the Trust Property. Trustor
agrees to promptly and properly remove and dispose of any Hazardous Substance
found on or in the Trust Property, at Trustor's sole cost and expense and in
compliance with all applicable Environmental Regulations.
At any time and from time to time, if Beneficiary so requests, Trustor shall
have any environmental assessment, review, audit and/or report relating to the
Trust Property heretofore provided by Trustor to Beneficiary updated and/or
amplified, at Trustor's sole cost and expense, by an engineer or scientist
acceptable to Beneficiary, or shall have such an assessment, review, audit
and/or report prepared for Beneficiary, at Trustor's sole cost and expense, if
none has previously been so provided.
Trustor shall indemnify Beneficiary, its directors, officers, employees, agents,
contractors, licensees, invitees, successors and assigns (hereinafter
collectively referred to as "Indemnified Parties") against, shall hold the
Indemnified Parties harmless from, and shall reimburse the Indemnified Parties
for, any and all claims, demands, judgments, penalties, liabilities, costs,
damages and expenses incurred by the Indemnified Parties, including court costs
and attorneys' fees (prior to trial, at trial and on appeal), in any action,
administrative proceeding or negotiations against or involving any of the
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Indemnified Parties, resulting from any breach of the foregoing covenants, from
the incorrectness or untruthfulness or any warranty or representation set forth
in Subsection 1.2(j) hereof, from a failure by Trustor to perform any of its
obligations hereunder with respect to any Hazardous Substance, or from the
discovery of any Hazardous Substance in, upon, under or over, or emanating from,
the Trust Property, it being the intent of Trustor and Beneficiary that the
Indemnified Parties shall have no liability for damage or injury to human
health, the environment or natural resources caused by, for abatement, clean-up,
removal or disposal of, or otherwise with respect to, Hazardous Substances by
virtue of the interest of Beneficiary in the Trust Property created hereby or as
the result of Beneficiary exercising any of its rights or remedies with respect
thereto hereunder, including but not limited to becoming the owner thereof by
foreclosure or conveyance in lieu of foreclosure.
The foregoing covenants, representations and warranties of Subsection 1.2(j) and
of this Section 1.15 shall be deemed continuing covenants, representations and
warranties for the benefit of the Indemnified Parties, including but not limited
to any transferee of the title of Beneficiary. Such indemnification shall
survive payment of the Note, but shall become null and void and of no further
force or effect in the event Beneficiary or any other party obtains title to the
Trust Property through foreclosure or exercise of power of sale under this Deed
of Trust or deed in lieu of foreclosure or exercise of power of sale. Any
amounts covered by the foregoing indemnification shall bear interest from the
date paid at the Default Rate and shall be secured hereby.
Section I.16. Accessibility Regulations. Trustor covenants and agrees that it
will comply with all applicable Accessibility Regulations during the entire term
of this Deed of Trust. All future maintenance, renovation, repair and
construction conducted on the Premises shall all be completed in accordance with
all applicable Accessibility Regulations. Failure to comply with the provisions
of any Accessibility Regulation shall constitute an Event of Default under the
terms of this Deed of Trust and shall entitle the Beneficiary to exercise all
remedies available to it hereunder. Trustor hereby agrees to indemnify and hold
harmless the Indemnified Parties from and against any claims, losses, damages,
liabilities, judgments, costs and expenses (including, without limitation,
reasonable attorneys' fees and costs in the investigation, defense and
settlement of claims or remediation) incurred by the Indemnified Parties as a
result of or in connection with violations of the Accessibility Regulations.
Trustor shall bear, pay and discharge, as and when the same become due and
payable, any and all such judgments or claims for damages, penalties or
otherwise, against the Indemnified Parties, shall hold the Indemnified Parties
harmless against all claims, losses, damages, liabilities, costs and expenses,
and shall assume the burden and expense of defending all suits, administrative
proceedings and negotiations of any description with any and all persons,
political subdivisions or government agencies arising out of any of the
occurrences set forth in this Section. Such indemnification shall survive
payment of the Note, but shall become null and void and of no further force or
effect in the event Beneficiary or any other party obtains title to the Trust
Property through foreclosure or exercise of power of sale under this Deed of
Trust or deed in lieu of foreclosure or exercise of power of sale.
Section I.17. Maintain Existence. Trustor agrees to maintain its existence as a
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limited liability company under the laws of the State of Arizona and not to
terminate its existence during the term hereof, without the prior written
consent of Beneficiary.
Section I.18. Future Advances. From time to time, upon request from Trustor, and
subject to the review and approval thereof by Beneficiary, Beneficiary may
advance funds to pay for the improvement, repair or remodeling of the Premises
or for other purposes, in excess of the amount stated under the Note.
Beneficiary may impose such conditions and requirements as Beneficiary deems
necessary.
ARTICLE II
TAKING OF PROPERTY
In case of a taking of or damage to all or any part of the Trust Property as a
result of, or a sale thereof in lieu of or in anticipation of, the exercise of
the power of condemnation or eminent domain, or the commencement of any
proceedings or negotiations which might result in such a taking, damage or sale,
Trustor shall promptly give Beneficiary written notice thereof, generally
describing the nature of such taking, damage, sale, proceedings or negotiations
and the nature and extent of the taking, damage or sale which has resulted or
might result therefrom, as the case may be, and Beneficiary shall have the right
to participate in such proceedings or negotiations. Should any of the Trust
Property be taken or damaged by exercise of the power of condemnation or eminent
domain, or be sold by private sale in lieu or in anticipation thereof, Trustor
does hereby irrevocably assign, set over and transfer to Beneficiary any award,
payment or other consideration for the property so taken, damaged or sold. Such
award, payment or consideration shall, at Beneficiary's option, be applied first
to the payment of all costs and expenses incurred by Beneficiary in obtaining
and preserving such award, payment or consideration, and second, at
Beneficiary's option, either to the reduction of the indebtedness hereby secured
by application thereof to said indebtedness, in any order which Beneficiary may
determine, whether then due and payable or not, without reinvestment charge, or
to the restoration or repair of the Trust Property, without affecting the lien
of this Deed of Trust or the obligations of Trustor hereunder.
If (a) an Event of Default then exists hereunder, or (b) Trustor does not
promptly and in good faith compromise, settle and collect all awards, payments
or consideration for the property so taken, damaged or sold, Beneficiary is
authorized, at its option, in the name of Trustor or in its own name, to
compromise, settle, collect and receipt for all awards, payments or
consideration for the property so taken, damaged or sold. The amount of any such
compromise or settlement shall always be subject to Beneficiary's approval.
Trustor agrees to pay all costs and expenses incurred by Beneficiary in
connection therewith, including court costs and attorneys' fees (prior to trial,
at trial and on appeal), on demand, which costs and expenses shall also be
secured hereby and shall bear interest from the date paid at the Default Rate,
but Beneficiary shall not be liable to Trustor for any failure by Beneficiary to
collect or to exercise diligence in collecting any such award, payment or
consideration.
Interest upon the entire indebtedness secured hereby shall continue until any
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such award, payment or consideration is received and applied by Beneficiary to
said indebtedness, and, pending a decision as to the proper application of said
award, payment or consideration, and pending the completion of any such repairs
or restoration, Beneficiary shall not be liable for interest thereon. Trustor
will, in good faith and with due diligence, file and prosecute what would,
absent this assignment, be its claims for any such award, payment or
consideration and will cause the same to be collected and paid over to
Beneficiary. If Beneficiary elects to apply any such award, payment or
consideration to the restoration or repair of the Trust Property, it shall not
be liable to supervise such restoration or repair or to supervise the
disbursement of such award, payment or consideration therefor, but such
disbursement shall proceed in a manner acceptable to Beneficiary, which shall be
similar to the manner in which major national banks permit construction loan
advances, and which shall be designed to include reasonable controls to assure
that such restoration or repair will be promptly completed in a workmanlike
manner and paid for in full, free of mechanics' liens. In such event, Trustor
shall deposit with Beneficiary, prior to commencing any such restoration or
repair, the amount, if any, by which the cost of such restoration or repair
exceeds the amount of such award, payment or consideration, which deposited
amount shall be disbursed to pay costs of such restoration or repair prior to,
and in the same manner as, such award, payment or consideration. Any surplus
which may remain after payment of all costs of restoration or repair may, at the
option of Beneficiary, be applied in reduction of the indebtedness hereby
secured, in any order which Beneficiary may determine, whether then matured or
to mature in the future, without reinvestment charge, or be paid to Trustor, as
its interest may appear, the choice of application to be solely at the
discretion of Beneficiary.
ARTICLE III
DEFAULT AND REMEDIES THEREFOR
Section III.1. Events of Default. If any one or more of the following events
(herein referred to as "Events of Default") shall occur:
(a) Default in the payment of any payment of principal, interest and/or any
other sum of money required to be paid pursuant to the Note, to this
Deed of Trust, to any other instrument securing the Note, to any Lease
or to the Commitment, as and when due; provided, however, that with
respect to any amount or sum due to Beneficiary as a result of
Beneficiary having made an advance on behalf of Trustor which is to be
reimbursed by Trustor to Beneficiary, a default will not be deemed to
have occurred until Beneficiary has given written notice to Trustor of
such advance, and Trustor has not fully reimbursed Beneficiary together
with any interest as is required to be paid thereon, within three (3)
business days of the date of such notice; or
(b) Default by Trustor under any term, covenant or condition contained in
Section 1.7, 1.8 or Section 1.12 of this Deed of Trust; or
(c) Default by Trustor under any term, covenant or condition of this Deed
of Trust, of the Note, of any Other Loan Document, of any Lease or of
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the Commitment, other than a default described in Subsections (a) and
(b) above, which default shall not be remedied within fifteen (15) days
after notice thereof by Beneficiary,or such longer period as is
reasonably required, not to exceed thirty (30) days, provided that such
default is capable of cure other than by the payment of money and
further provided that Trustor is diligently prosecuting such cure to
completion; or
(d) Any representation or warranty made by or on behalf of Trustor or any
Guarantor or any Member to Beneficiary in connection with the loan
secured hereby proves to be untrue in any material respect; or
(e) Trustor or any 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, 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 or receiver for the Trust
Property or for any portion of its assets; or
(f) A trustee or receiver is appointed for the Trust Property, for Trustor,
for any Guarantor or for any portion of any of Trustor's or any
Guarantor's assets, or an involuntary petition in bankruptcy or
insolvency is filed against Trustor or any Guarantor, and is not
discharged or dismissed within thirty (30) days after such appointment
or filing; or
(g) Any judgment is entered in any court against Trustor or any Guarantor
and is not satisfied in full within thirty (30) days after all rights
to appeal from the same have expired, or any writ of execution or
attachment or similar process is issued or levied against any part of
the Trust Property or any interest therein; or
(h) Default by any Guarantor under any term, covenant, or condition of the
Guaranty executed by them dated as of the date hereof, which default
shall have extended beyond any period of grace provided therein;
then, in any such case, Beneficiary may, at its option, without notice, declare
the principal of and the accrued interest on the Note, and all sums advanced
hereunder, with interest thereon, to be forthwith due and payable, and thereupon
the Note and all other indebtedness secured hereby, including both principal and
all unpaid interest accrued thereon, including all applicable late payment
charges and reinvestment charges, and including all sums advanced hereunder and
interest thereon, shall be and become immediately due and payable without
presentment, demand or notice of any kind. Time is of the essence hereof.
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Section III.2. Remedies. In the event of the happening of an Event of Default,
or in case the principal of the Note shall have become due and payable in full,
whether by lapse of time or by acceleration, then and in every such case the
holder of the Note may, at its option,
(a) Proceed to protect and enforce its rights by a suit or suits in equity
or at law for the specific performance of any covenant or agreement
contained herein, in the Note or in any Other Loan Document, or in aid
of the execution of any right, power or remedy herein or therein
granted, or for the foreclosure of this Deed of Trust, or for damages,
or to collect the indebtedness secured hereby, or for the enforcement
of any other appropriate legal, equitable, statutory or contractual
remedy, and shall be entitled to the appointment of a receiver to
operate and protect the Trust Property and to collect rents due under
any Lease, and/or
(b) (1) cause Trustee to sell the Trust Property, and all estate, right,
title and interest, claim and demand therein, and right of redemption
thereof, in such order as Beneficiary may choose, all, in accordance
with applicable law, or (2) institute proceedings for the complete or
partial foreclosure of the lien of this Deed of Trust upon the Trust
Property as a mortgage, in either case, Trustor to remain liable for
any deficiency, if permitted by law, and to the extent permitted by
Section 4.11 of this Deed of Trust.
Any such sale or sales made under this Deed of Trust, whether made
under the power of sale herein granted or under or by virtue of
judicial proceedings or of a judgment or decree of foreclosure and
sale, shall operate to divest all the estate, right, title, interest,
claim and demand whatsoever, whether at law or in equity, of Trustor in
and to the properties and rights so sold, and shall be a perpetual bar
both at law and in equity against Trustor and against any and all
persons claiming or who may claim the same, or any part thereof from,
through or under Trustor.
Further, the holder of the Note, in exercising its rights hereunder, shall also
have, without limitation, all of the rights and remedies provided by the Arizona
Uniform Commercial Code, including the right to proceed under the Arizona
Uniform Commercial Code provisions governing default as to any fixtures,
equipment, instruments, general intangibles, accounts, contract rights, claims
or personal property which may be included in or related to the Trust Property
and as to any deposits, policies, unearned premiums, proceeds, awards, payments
or consideration assigned to Beneficiary as further security hereunder,
separately from the real estate included in the Trust Property, or to proceed as
to any or all of such property in accordance with its rights and remedies in
respect of said real estate. If Beneficiary should elect to proceed separately
as to any such property, Trustor agrees to make such property available to
Beneficiary at a place or places reasonably acceptable to Beneficiary, and, if
any notification of intended disposition of any of such property is required by
law, such notification shall be deemed commercially reasonable and reasonably
and properly given if mailed at least ten (10) (days before such disposition in
the manner below provided.
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Section III.3. Purchase by Beneficiary. In case of any sale of any of the Trust
Property pursuant to the power of sale contained herein or pursuant to any
judgment or decree of any court or otherwise in connection with the enforcement
of any of the terms of this Deed of Trust, Beneficiary, its successors or
assigns, may become the purchaser, and, for the purpose of making settlement for
or payment of the purchase price, shall be entitled to turn in and use the Note
and any claims for interest accrued and unpaid thereon, late payment charges and
reinvestment charges, together with additions to the debt accrued, and interest
thereon, if any, in order that there may be credited as paid on the purchase
price, at Beneficiary's option, any sum then due hereunder and/or under the
Note, including principal and interest thereon, late payment charges,
reinvestment charges, and any accrued additions to the deed of trust debt and
interest thereon, or any portion thereof.
Section III.4. Trustee's Sale. In the event Beneficiary elects to have the Trust
Property sold under the Trustee's power of sale, Beneficiary shall deliver to
Trustee written notice of the breach and the nature thereof, and of its election
to cause the Trust Property to be sold by Trustee at one or more sales.
Thereafter, Trustee shall sell, after giving proper notice in the manner
required by law, the Trust Property at public auction at the time and place
fixed by it in the notice of Trustee's sale, to the highest bidder for cash in
lawful money of the United States, payable in accordance with law. Trustee may
postpone or continue the sale from time to time in the manner provided by law.
Trustee shall deliver to the purchaser its deed conveying the property sold, but
without any covenant or warranty, express or implied. Any persons, including
Trustor, Trustee or Beneficiary, may purchase at the sale.
Section III.5. Remedies Cumulative. Each and every right, power or remedy herein
specifically given shall be cumulative with and in addition to every other
right, power or remedy, express or implied, given or now or hereafter existing
at law, in equity, by statute, in the Note, herein or in any Other Loan
Document, and each and every right, power and remedy herein specifically given
or otherwise so existing may be exercised concurrently or separately, from time
to time, as often and in such order as may be deemed expedient by Beneficiary or
the holder of the Note, and the exercise or the beginning of the exercise of one
right, power or remedy shall not be deemed a waiver of the right to exercise at
the same time or thereafter any other right, power or remedy. No delay or
omission of Beneficiary in the exercise of any such right, power or remedy shall
impair any such right, power or remedy or any other right, power or remedy of
Beneficiary or be construed to be a waiver of any default or acquiescence
therein. Beneficiary shall have all rights, powers and remedies available under
the law in effect now and/or at the time such rights, powers and remedies are
sought to be enforced, whether or not they are available under the law in effect
on the date hereof.
Section III.6. Use of Proceeds. The purchase money proceeds and avails of any
trustee's sale or foreclosure sale of the Trust Property, or any part thereof,
and the proceeds and avails of any other remedy hereunder, unless to the
contrary provided by Section 1.13 hereof, shall, to the extent not inconsistent
with the provisions of the law, be paid and applied as follows:
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(a) First, to the payment of costs, charges and expenses of such trustee's
sale or foreclosure proceedings and sale and of all proper expenses
(including court costs and maximum attorneys' fees permitted by law),
liabilities and advances incurred or made in connection therewith or
otherwise incurred or made hereunder by Beneficiary, and to reimburse
Beneficiary for payment of all Impositions, Liens and encumbrances
superior to the lien of these presents which have been paid by
Beneficiary;
(b) Second, to the payment to Beneficiary of the amount then owing and
unpaid under the Note and this Deed of Trust for principal, interest,
advances and interest thereon, reinvestment charges and late payment
charges and, in case any such proceeds shall be insufficient to pay the
whole amount so due, then to the payment of such items in any order
determined by Beneficiary; and
(c) Third, any excess to be paid to Trustor, its successors or assigns, or
to whomsoever may be lawfully entitled to receive the same.
Trustee waives the right to elect to deposit the balance (if any) of the
proceeds of the sale with the clerk of superior court, as provided in Arizona
Revised Statutes Section 33-812, except as to that portion remaining after
payment of the costs and expenses of the sale, including attorneys' fees
incurred by Beneficiary and Trustee, payment of the secured indebtedness, and
all other obligations provided in this Deed of Trust.
Section III.7. Restoration. In case Beneficiary shall have proceeded to enforce
any right, remedy or power under this Deed of Trust by foreclosure, sale, entry
or otherwise, and such proceedings shall have been discontinued or abandoned for
any reason or shall have been determined adversely to Beneficiary, then and in
every such case Trustor and Beneficiary shall be restored to their former
positions and rights hereunder with respect to the Trust Property, and all
rights, remedies and powers of Beneficiary shall continue in full force and
effect as if no such proceedings had been initiated.
Section III.8. Proof of Claim. In the case of any receivership, insolvency,
bankruptcy, reorganization, arrangement, readjustment, composition, dissolution,
liquidation, termination or other judicial proceedings affecting Trustor, its
creditors or its property, Beneficiary, to the extent permitted by law, shall be
entitled to file such proofs of claim and other documents as may be necessary or
advisable in order to have its claims allowed in such proceedings for the entire
amount due and payable under the Note, this Deed of Trust and any Other Loan
Document, at the date of institution of such proceedings, and for any additional
amounts which may become due and payable hereunder and thereunder after such
date, including but not limited to Beneficiary's costs, expenses and attorneys'
fees incurred in connection therewith.
Section III.9. Marshaling of Assets. Trustor, for itself and on behalf of all
persons, parties and entities which may claim under Trustor, hereby waives all
requirements of law relating to the marshaling of assets, if any, which would be
applicable in connection with the enforcement by Beneficiary of its remedies for
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an Event of Default hereunder, absent this waiver.
Section III.10. No Waiver. No waiver of any provision hereof shall be implied
from the conduct of the parties. Any such waiver must be in writing and must be
signed by the party against which such waiver is sought to be enforced. The
waiver or release by Beneficiary of any breach of the provisions, covenants and
conditions set forth herein on the part of Trustor to be kept and performed
shall not be a waiver or release of any other breach, preceding, contemporaneous
or subsequent, of the same or any other provision, covenant or condition
contained herein. The subsequent acceptance of any sum in payment of any
indebtedness secured hereby or any other payment hereunder by Trustor to
Beneficiary shall not be construed to be a waiver or release of any preceding
breach by Trustor of any provision, covenant or condition of this Deed of Trust,
other than the failure of Trustor to pay the particular sum so accepted,
regardless of Beneficiary's knowledge of such preceding breach at the time of
acceptance of such payment. No payment by Trustor or receipt by Beneficiary of a
lesser amount than the full amount secured hereby shall be deemed to be other
than on account of the sums due and payable hereunder, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment be
deemed an accord and satisfaction, and Beneficiary may accept any check or
payment without prejudice to Beneficiary's right to recover the balance of such
sums or to pursue any other remedy provided in this Deed of Trust. The consent
by Beneficiary to any matter or event requiring such consent shall not
constitute a waiver of the necessity for such consent to any subsequent matter
or event.
ARTICLE IV
MISCELLANEOUS
Section IV.1. Successors and Assigns. Whenever any of the parties hereto is
referred to, such reference shall be deemed to include and apply to the
successors and assigns of such party, subject to the provisions of Section 1.12
hereof; and all covenants, promises and agreements by or on behalf of Trustor in
this Deed of Trust contained shall bind Trustor and also its successors and
assigns and shall inure to the benefit of Beneficiary and its successors and
assigns, whether elsewhere herein so expressed or not. All representations and
warranties contained herein or otherwise heretofore made by Trustor or any
Guarantor or Member, to Beneficiary shall survive the execution and delivery
hereof. The singular of all terms used herein shall include the plural, the
plural shall include the singular, and the use of any gender herein shall
include all other genders, where the context so requires or permits.
Section IV.2. Severability. The unenforceability or invalidity of any provision
or provisions of this Deed of Trust as to any persons or circumstances shall not
render that provision nor any other provision or provisions herein contained
unenforceable or invalid as to any other persons or circumstances, and all
provisions hereof, in all other respects, shall remain valid and enforceable.
Beneficiary shall be subrogated for further security to the lien, whether or not
released of record, of any and all encumbrances paid out of the proceeds of the
Note or out of any advances made by Beneficiary hereunder.
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Section IV.3. Notices. All notices and elections provided for herein shall be in
writing and shall be deemed to have been given (unless otherwise required by the
specific provisions hereof or by law in respect to any matter) when deposited in
the United States mail, registered or certified, return receipt requested,
postage prepaid, addressed as follows:
If to Trustor: CASA ENCANTA COMMERCIAL, L.L.C.
4614 S. Kachina Drive
Tempe, Arizona 85282
Attn: Norman Andrus
If to Beneficiary: COMMERCIAL ASSETS, INC.
3410 South Galena Street
Denver, Colorado 80231
Attn: Terry Considine
or addressed to any such party at such other address as such party shall
hereafter furnish by written notice to the other party hereto, at least ten (10)
days prior to the effective date of said change in address.
Section IV.4. Obligation to Defend. Trustor, at its sole cost and expense, shall
appear in and defend any dispute, action, suit or proceeding purporting to
relate to or affect the Note or the security therefor, including but not limited
to this Deed of Trust. If any action or proceeding relating to or affecting the
Note, this Deed of Trust or the Trust Property is commenced or threatened, to
which action or proceeding Beneficiary is made a party, or in which it becomes
necessary or desirable, in Beneficiary's opinion, to defend or uphold, or to
consider defending or upholding, the lien of this Deed of Trust, or to protect
the Trust Property or any part thereof, or to exercise, or to obtain the right
to exercise, any of Beneficiary's rights and remedies hereunder, Including any
foreclosure or commencement of foreclosure proceedings or probate, bankruptcy,
insolvency, arrangement, reorganization or other debtor-relief proceedings, or
with respect to which Beneficiary otherwise incurs costs or expenses, all sums
paid by Beneficiary in order to determine the merits thereof, to establish or
defend the rights and liens of this Deed of Trust, to protect the Trust Property
or any part thereof, and to exercise, or to obtain the right to exercise, any of
Beneficiary's rights and remedies hereunder, and/or otherwise incurred by
Beneficiary in connection therewith (including reasonable attorneys' fees and
costs and allowances prior to trial, at trial and on appeal), and whether suit
be brought or not, and whether or not Beneficiary prevails therein, shall be
paid, upon demand, to Beneficiary by Trustor, together with interest thereon at
the Default Rate from the date paid, and any such sum or sums shall be secured
hereby.
Section IV.5. Modification. In the event Beneficiary (a) grants any extension of
time or forbearance with respect to the payment of any indebtedness secured by
this Deed of Trust; (b) takes other or additional security for the payment
thereof; (c) waives or fails to exercise any right, power or remedy granted
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herein, in the Note or in any other document which secures or refers to the
Note; (d) grants any release, with or without consideration, of the whole or any
part of the security for the payment of the indebtedness secured hereby or the
release of any person, party or entity liable for payment of said indebtedness;
and/or (e) amends or modifies in any respect any of the terms and provisions
hereof, of the Note (including substitution of another note) or of any Other
Loan Document; then, and in any such event, such act or omission to act shall
not release Trustor under any covenant of this Deed of Trust or of the Note, nor
preclude Beneficiary from exercising any right, power or privilege herein or
therein granted or intended to be granted, and shall not in any way impair or
affect the lien or priority of this Deed of Trust. In the event any additional
real property, improvements, leases, fixtures or personal property not herein
specifically identified shall be or become a part of the Trust Property, then
this Deed of Trust shall immediately attach to and constitute a lien against or
security interest in such additional items, as appropriate, without further act
or deed of either party hereto.
Section IV.6. Governing Law. This instrument shall be governed by and
interpreted in accordance with the laws of the State of Arizona. Trustor agrees
to pay an effective rate of interest which is the stated rate provided for in
the Note plus any additional rate of interest resulting from any charges of
interest or in the nature of interest paid or to be paid in connection with the
loan evidenced thereby, including without limitation, all amounts paid by or on
behalf of Trustor to Beneficiary pursuant to the terms of the Commitment.
Notwithstanding any provision herein, in the Note or in any Other Loan Document,
the total liability for payments in the nature of interest hereunder and
thereunder shall not exceed interest at the maximum rate permitted by the laws
of the State of Arizona on the indebtedness secured hereby, if any, and any
amounts paid in excess of said maximum rate shall be refunded to Trustor, and
Trustor hereby agrees to accept such refund. This instrument shall be construed
in accordance with its intent and with the fair meaning of its provisions, and
without regard to any presumption on other rule of interpretation requiring
construction thereof against the party which caused the same to be drafted.
Section IV.7. Execution in Counterparts. This Deed of Trust may be executed
simultaneously in two (2) or more identical counterparts. each of which,
standing alone, shall be an original, but all of which shall constitute but one
(1) agreement.
Section IV.8. Fixture Filing Statement. This instrument shall be deemed to be a
Fixture Financing Statement within the meaning of the Arizona Uniform Commercial
Code:
a. Name and address of Debtor CASA ENCANTA COMMERCIAL, L.L.C.
4614 S. Kachina Drive
Tempe, Arizona 85282
Attn: Norman Andrus
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b. Name and address of COMMERCIAL ASSETS, INC.
Secured Party: 3410 South Galena Street
Denver, Colorado 80231
Attn: Terry Considine
c. Description of the types See page 2 above.
(or items) of property
covered by this Financing
Statement:
d. Description of real estate See Exhibit A hereto.
to which the collateral is
attached or upon which it
is or will be located:
Some of the above-described collateral is or is to become fixtures upon the
above-described real estate, and this Financing Statement is to be filed for
record in the public real estate records.
Section IV.9. Notice to Trustor. The undersigned Trustor requests that a copy of
any notice of sale be mailed to it at its mailing address, as set forth above.
Section IV.10. Accurate Reflection of Agreements. Trustor hereby acknowledges
and agrees that the Note, the Commitment and the Other Loan Documents accurately
reflect the agreements and understandings of the parties thereto with respect to
the subject matter thereof, and hereby waives any claims against Beneficiary
that Trustor may now have or may hereafter acquire to the effect that the actual
agreements and understandings of the parties to the Note, the Commitment and the
Other Loan Documents, with respect to the subject matter thereof, may not be
accurately set forth in the Note, the Commitment and the Other Loan Documents.
Section IV.11. Descriptive Headings. The descriptive headings of the several
sections of this Deed of Trust are inserted for convenience only and do not
constitute a part of this Deed of Trust.
ARTICLE V
OTHER DUTIES AND RIGHTS OF TRUSTEES
Section V.1. Trustee Compensation. Trustee shall be entitled to reasonable
compensation for all services rendered or expenses incurred in the
administration or execution of the trust created by this Deed of Trust and
Trustor agrees to pay the same, subject to all statutory limitations. Trustee
and Beneficiary shall be indemnified, held harmless and reimbursed by Trustor
for any liability, damage or expense, including attorneys' fees and amounts paid
in settlement, that either or both of them may incur or sustain in the execution
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of this Deed of Trust, or in the doing of any act that either or both of them
are required or permitted to do by the terms of this Deed of Trust or by law.
Section V.2. Fees. For any statement requested by Trustor regarding the
obligations secured, the ownership of the Trust Property, the liens on the Trust
Property, the amounts held in any impound or reserve fund established, the
amount required to reinstate the Deed of Trust or similar matters, Beneficiary
or Trustee may charge a reasonable fee, not to exceed the maximum amount
permitted by law at the time of the request.
Section V.3. Trustee's Powers. At any time or from time to time, upon written
request of Beneficiary, without affecting the personal liability of any person
for payment of the secured indebtedness, and without affecting the security for
the full amounts secured by this Deed of Trust, Trustee may:
(a) Release and reconvey all or any part of the Trust Property;
(b) Consent to the making and recording, or either, of any map or plat of
all or part of the Trust Property;
(c) Join in granting any easement on the Trust Property; or
(d) Join in or consent to any extension agreement or any agreement
subordinating the lien, encumbrance or charge created by this Deed of
Trust.
Section V.4. Successor Trustee. Beneficiary may, in its discretion, appoint a
successor trustee in the manner prescribed by law. Trustee may resign by
recording a notice of resignation and by mailing or delivering notice of
resignation to Beneficiary and to Trustor in the manner prescribed by law. Upon
Trustee's resignation, Beneficiary may appoint a successor trustee, which
appointment shall constitute a substitution of trustee upon the mailing and
recording of written notice by Beneficiary in the manner prescribed by law for
the substitution of a trustee of a deed of trust. A successor trustee shall,
without conveyance from the predecessor trustee, succeed to all the
predecessor's title, estate, rights, powers and duties.
Section V.5. Acceptance. Trustee accepts this Trust when this Deed of Trust,
duly executed and acknowledged, is made a public record as provided by law.
Trustee is not obligated to notify any party of a pending sale under any other
deed of trust or of any action or proceeding in which Trustor, Beneficiary or
Trustee shall be a party, unless brought by Trustee.
Section V.6. Costs. Trustor shall pay all costs, fees and expenses of this Deed
of Trust, including, without limiting the generality of the foregoing, the fees
of Trustee for issuance of any deed of partial release and partial reconveyance
or deed of release and full conveyance. Trustor shall pay all lawful charges,
costs and expenses, including charges for the preparation of title reports and
attorneys' fees incurred by Beneficiary and Trustee, in the event of
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reinstatement of this Deed of Trust following default in the performance of
Trustor's obligations. Notwithstanding any other provision hereof, the foregoing
obligations shall be subject to any statutory limitation on the amount of such
fees and costs.
ARTICLE VI
CONTINGENT INTEREST AGREEMENT
SECURED BY DEED OF TRUST
Trustor further agrees and promises to pay to the order of Beneficiary
such amounts as hereinafter described as "Additional Interest," which Additional
Interest shall be in addition to and not in substitution for all principal,
interest and other charges payable by Trustor under the Note and any other sums
payable by Trustor to Beneficiary. The obligation to pay the Additional Interest
shall continue notwithstanding the payment in full of the Note. (For convenience
all of the foregoing together with this Deed of Trust and the Other Loan
Documents shall hereinafter collectively be referred to as the "Loan
Documents.")
1. Definitions. As used in this Article certain terms shall have the
meanings hereinafter set forth:
"Affiliate" shall mean any Person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with the Person in question, which, in the case of a Person which is a
partnership, shall include each of the constituent partners thereof. The term
"control," as used in the immediately preceding sentence, means, with respect to
a Person that is a corporation, the right to the exercise, directly or
indirectly, of more than 50% of the voting rights attributable to the shares of
the controlled corporation, and, with respect to a Person that is not a
corporation, the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of the controlled Person;
"Improvements" shall mean those certain improvements
constructed upon the Land;
"Land" shall mean that certain land encumbered by the Deed of
Trust as of the date hereof;
"Leases" shall mean all leases and occupancy agreements, and
all amendments and extensions and renewals thereof or thereto, covering any
portion of the Property;
"Lessees" shall mean all lessees (or permitted assignees or
subtenants at any level thereof) under Leases and all other tenants or occupants
of any portion of the Property;
"Non-Qualified Income" shall mean any income or revenue that
would not be treated as "rents from real property" within the meaning of Section
856(d) of the Internal Revenue Code of 1986, as amended, (the "Code"), or any
successor provision thereto, if it were derived by an entity treated as a real
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estate investment trust within the meaning of the Code.
"Person" shall mean an individual, partnership, corporation,
trust, unincorporated association, or other entity or association;
"Property" shall mean the Land and the Improvements located
thereon, collectively; and
2. Definition of Additional Interest. Trustor shall pay to Beneficiary,
in addition to the principal, interest and other charges payable by Trustor
under the Note and all other sums payable by Trustor to Beneficiary as
additional interest on the Loan ("Additional Interest"), at the times and in the
manner set forth below in lawful money of the United States, an amount equal to
the Additional Interest Amount (as defined hereinbelow) and to the Contingent
Profits Interest (as defined hereinbelow).
(a) "Additional Interest Amount" shall mean fifty percent
(50%) of the Net Revenues (as herein defined).
(b) "Contingent Profits Interest" shall mean an amount equal
to fifty percent (50%) of the Net Sales Profits (as hereinafter defined).
(c) Trustor acknowledges that Trustor and Beneficiary have
conferred specifically concerning the contingent and uncertain nature of the
Additional Interest Amount and the Contingent Profits Interest and that Trustor
and Beneficiary understand and agree that the Additional Interest Amount,
Contingent Profits Interest and each element thereof payable as a result of this
Agreement is speculative in nature, and both the payment and amount, if any, of
each element of the Additional Interest Amount and the Contingent Profits
Interest is dependent on a number of contingencies which are not within
Beneficiary's control.
(d) Notwithstanding anything herein to the contrary, neither
Net Revenues nor Net Sales Profits shall include any Non-Qualified Income.
3. Definition of Gross Revenues. For purposes of this Agreement, the
term "Net Revenues" shall mean: (i) all gross proceeds, income, rents, issues,
profits, revenues and consideration, of whatever form or nature, received by or
paid to or for the account or benefit of Trustor, its officers, agents,
employees, members, managers or shareholders or any Affiliate of Trustor, from
any and all sources, resulting from or attributable to the ownership, operation,
leasing, occupancy or use of the Property arising during the period from the
date of this Agreement and distributed to Trustor; less (ii) all ordinary and
necessary expenditures of operating cash flow, for operating expenses, real
estate taxes and assessments, insurance premiums, regularly scheduled debt
service payments of interest and/or principal, and, if pre-approved by
Beneficiary in writing, capital improvements; all as determined on the basis of
sound cash basis accounting practices applied on a consistent basis.
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Notwithstanding anything included within the above definition of "Net
Revenues," there shall be excluded from Net Revenues: (1) any security or other
deposits of the Lessee under any Lease, unless and until such deposit or
deposits are actually applied to rent owing under said Lease; (2) the proceeds
of any financing or refinancing, with respect to all or any part of the
Property; and (3) the proceeds of any sale or other disposition (excluding
Leases for occupancy purposes only), of all or any portion of the Property.
It is understood and agreed that no income or expense used in
calculating Gross Revenues shall be used in calculating Net Sales Profits.
4. Definition of Net Sales Profits. As used herein "Net Sales Profits"
shall mean the "Gross Sales Refinancing Proceeds" (as hereinafter defined) from
the sale or refinancing of the Property minus the sums of (a) "Approved Closing
Costs" (as hereinafter defined) and (b) "Approved Deductions" (as hereinafter
defined).
(a) "Gross Sales Refinancing Proceeds" shall mean gross
proceeds of whatever form or nature, including without limitation (i) cash and
the cash equivalent of the fair market value of any non-cash consideration
received in lieu of cash (including the present value of any promissory note
received as part of the proceeds of the sale, transfer, conveyance or
refinancing of the Property, such present value to be determined by Beneficiary
in its reasonable discretion), payable directly or indirectly to or for the
benefit or account of the Trustor, its officers, agents, employees or
shareholders, or any Affiliate of Trustor from or with respect to the sale,
transfer or conveyance of the Property (provided, nothing herein shall be
construed to authorize Trustor to accept any consideration other than cash
consideration in connection with the sale of the Property) and (ii) including
with respect to a condemnation or taking in eminent domain of any part of the
Property or any interest therein, or a conveyance in lieu thereof, the entire
condemnation award or compensation payable in connection with such taking or
conveyance (including without limitation any amounts attributable to the value
of any unexpired Lease which are otherwise payable to an Affiliate of Trustor or
any of Trustor's officers, agents, employees or shareholders), and (iii)
including in the case of any damage or injury to the Property covered by
insurance, in the event Beneficiary does not elect to allow any insurance
payments, awards, proceeds, compensation claims or recovery related thereto (the
"Insurance Proceeds") to be applied to the restoration of the Property pursuant
to the provisions of Section 1.8 of the Deed of Trust, but rather elects to
apply the same to the payment or prepayment of the indebtedness secured thereby,
any and all Insurance Proceeds with respect to such damage or injury to the
Property, whether direct or consequential. Trustor agrees that any refinancing
shall be limited in the amount sufficient only to repay the Note and any other
indebtedness secured by the encumbrance against the Property (which encumbrance
is deemed senior to this Deed of Trust).
(b) "Approved Closing Costs" shall mean: (i) costs of title
insurance premiums, transfer taxes, escrow and recording fees and other usual
and ordinary closing costs which are customarily paid by the seller in Maricopa
County, in each case actually paid or payable by Trustor an pre-approved by
35
<PAGE>
Beneficiary in writing (which approval will not be unreasonably withheld, and
(ii) a sales commission or fee of not to exceed three percent (3%) of the total
purchase price for the Property.
(c) "Approved Deductions" shall mean:
(1) Principal Indebtedness. The Principal Balance of
the Loan, which is $____________ as of the date hereof.
(2) Interest Expense. Interest and any and all other
amounts payable under the Note, the Deed of Trust, and/or any other
agreement or instrument which secures, evidences or refers to the Loan,
other than Additional Interest arising hereunder, which has accrued on
or after the date hereof.
5. Deposit of Rents/Reserves. As long as this Agreement is in effect
the Trustor covenants, warrants, and agrees that all Gross Revenues received by
the Trustor or its officers, agents, employees or shareholders, or any
Affiliate, shall be deposited with Beneficiary from time to time, upon request,
and shall be pledged as additional security for Trustor's obligations under this
Agreement, the Note and the Deed of Trust. All Gross Revenues shall be used only
for (a) Expenses unless other uses are approved by the Beneficiary in writing,
and (b) repayment by the Trustor of the Loan.
6. Payment of Indebtedness/Additional Interest Upon Sale or Refinance.
(a) Upon the sale or refinance of the Property, one hundred
percent (100%) of the Net Sale Proceeds (the term "Net Sales Proceeds" shall
mean Gross Sale Proceeds less Approved Closing Costs) shall be applied as
follows:
First, to prepay the principal, interest, and other
indebtedness outstanding under the Loan Documents, except for Additional
Interest, in such manner and in such order as the Beneficiary, in its sole
discretion, may determine.
Second, provided Trustor is not in default under the
Loan Documents to be reimbursement of Trustor for any Expense Advances made by
Trustor during the term of this Agreement;
Third, to the payment of any Additional Interest,
including Contingent Profits Interest owing to Beneficiary under this Agreement;
and
Fourth, the remainder, if any, to Trustor or any
other Person legally entitled thereto.
(b) All accrued but unpaid Additional Interest shall be due
36
<PAGE>
and payable upon the occurrence of one or more of the following events:
(1) a default occurs under this Agreement or the
Note, the Deed of Trust, or any other Loan Document, which is not fully
cured within the time, if any, provided for cure herein or therein, and
Beneficiary elects to accelerate the maturity date of the Note on
account thereof (hereinafter a "Default"); or
(2) the sale or refinance of the Property.
(c) Notwithstanding anything contained herein to the contrary,
no Net Sale Proceeds from the sale or refinance of the Property shall be paid to
Trustor until the outstanding Principal Balance of the Note together with all
accrued but unpaid interest thereon, and all other indebtedness under the Note,
the Deed of Trust, the Other Loan Documents have been paid and discharged in
full.
7. Books and Accounting.
(a) Fiscal Year Statements. Within fifteen (15) days of the
close of each calendar month and within sixty (60) days after the close of each
Fiscal Year of Trustor (as hereinafter defined) Trustor shall furnish to
Beneficiary a statement of operation of the Property for such month or Fiscal
Year, as the case may be, showing in reasonable detail and in a format approved
by Beneficiary the Gross Revenues, and Net Sales Proceeds for the Property for
such period as well as all data necessary for the calculation of any amounts,
which statement shall be certified to by the president of Trustor to have been
prepared in accordance with the terms of this Agreement and to present correctly
in accordance with such terms the items shown therein; and in the case of the
annual statement, financial statements and schedules, including a balance sheet
and statement of operations for the Property for such Fiscal Year, prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with past practices and bearing the unqualified opinion of a firm of
independent certified public accountants satisfactory to Beneficiary, covering
the operations of the Property and including also all items necessary to
calculate Gross Revenues and Net Sales Proceeds for such Fiscal Year on the cash
basis provided for herein. Trustor's "Fiscal Year" shall mean each twelve (12)
month period beginning on January 1, and ending on the next December 31, however
the first Fiscal Year shall end December 31, 1998.
(b) Books and Records. The Trustor shall keep and maintain at
all times at the address of the Trustor designated in the Deed of Trust proper
and accurate books, records, and accounts reflecting all items of income and
expenses in connection with (a) the operation of the Property or in connection
with any services, equipment or furnishings provided with respect to such
operation of the Property, (b) the sale or refinance of the Property, and (c)
such other information or data reasonably necessary to calculate Net Sales
Proceeds and Net Sales Profits. The Beneficiary or its designee shall have the
right from time to time at all times during normal business hours to examine
such books, records, and accounts at the office of the undersigned, for the
37
<PAGE>
purpose of verifying the accuracy of the Contingent Fees paid or payable
hereunder.
(c) Trustor's Certificate. Trustor shall supply the
Beneficiary with copies of all documents or instruments which produce or will
produce Net Sales Proceeds, Net Sales Profits as and when executed, and will,
from time to time, as and when required by the Beneficiary, prepare and execute
for the benefit of the Beneficiary certifications as to the timely and accurate
calculation of the present value of Net Cash Flow Profits and Net Sales Profits
due to the Beneficiary as Additional Interest, which certifications shall
constitute representations which shall survive the reconveyance and release of
any instrument securing this Agreement and repayment of the Loan and the
obligations under the Loan Documents.
(d) Net Sales Profits Settlement. Within sixty (60) days after
the sale, transfer, conveyance or refinance of the Property, the Trustor shall,
without expense to the holder hereof, deliver to such holder, a statement of the
actual Net Cost Flow prepared and certified by an independent public accountant
and shall be prepared in accordance with generally accepted accounting
principles. If the Additional Interest due the holder hereof shall be greater
than that previously paid to the holder, the statement shall be accompanied by
payment to the holder of the difference. If the Additional Interest due the
holder hereof shall be less than that previously paid to the holder, the holder
shall pay to the Trustor within thirty (30) days after receipt of such statement
the difference.
8. Relationship to Beneficiary and Trustor as Creditors and Debtors
Only. Beneficiary and Trustor intend that the relationship between them shall be
solely that of creditor and debtor. Nothing contained in this Agreement or in
any other document or instrument made in connection with the Loan, including
without limitation Beneficiary's right to receive Contingent Profits Interest
shall be deemed or construed to create a partnership, tenancy-in-common, joint
tenancy, joint venture or co-ownership by or between Beneficiary and Trustor.
Beneficiary shall not be in any way responsible or liable for the debts, losses,
obligations or duties of Trustor with respect to the Property or otherwise. All
obligations to pay real property or other taxes, assessments, insurance
premiums, and all other fees and charges arising from the ownership, operation
or occupancy of the Property and to perform all Leases and other agreements and
contracts relating to the Property shall be the sole responsibility of Trustor.
Trustor, at all times consistent with the terms and provisions of this Agreement
and the other documents and instruments evidencing, securing or otherwise
relating to the Loan, shall be free to determine and follow its own policies and
practices in the conduct of its business on the Property.
9. Covenant Survival. The covenants and obligations of Trustor pursuant
to this Deed of Trust, including without limitation, this Article VI, shall
continue for a period of eleven (11) years after payment in full of the Note.
38
<PAGE>
IN WITNESS WHEREOF, The undersigned has caused this instrument to be
duly executed as of the day and year first above written.
CASA ENCANTA COMMERCIAL, L.L.C.,
an Arizona limited liability company
By: /s/ Norman Andrus
--------------------------------
Name: Norman Andrus
Title: Manager
By: COMMUNITY ACQUISITION AND
DEVELOPMENT CORPORATION,
a Delaware corporation
Its: Manager
By: /s/ Joseph W. Gaynor
------------------------
Joseph W. Gaynor
Its: President
39
<PAGE>
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 15th day of
October, 1998, by Norman Andrus, as Manager of CASA ENCANTA COMMERCIAL, L.L.C.,
an Arizona limited liability company, and by Joseph W. Gaynor President of
Community Acquisition and Development Corporation, as Manager, on behalf of said
entity.
/s/ Kathleen Little
-------------------------------
My Commission Expires: Notary Public
April 23, 2000
40
Commercial Assets, Inc.
Subsidiaries as of January 29, 1999
CAX Cannery, L.L.C.
CAX Cypress Greens, L.L.C.
CAX DTR Securitization Corp.
CAX New Era Homes, L.L.C.
CAX Riverside, L.L.C.
Commercial Assets Finance, Inc.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-74689) of Commercial Assets, Inc. of our report dated January 29,
1999, with respect to the financial statements and schedules of Commercial
Assets, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
Ernst & Young LLP
Denver, Colorado
March 24, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3292
<SECURITIES> 45066
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48771
<PP&E> 12678
<DEPRECIATION> (50)
<TOTAL-ASSETS> 78234
<CURRENT-LIABILITIES> 980
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 77150
<TOTAL-LIABILITY-AND-EQUITY> 78234
<SALES> 0
<TOTAL-REVENUES> 4622
<CGS> 0
<TOTAL-COSTS> 50
<OTHER-EXPENSES> 631
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3441
<INCOME-TAX> 0
<INCOME-CONTINUING> 3441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3441
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
