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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-12452
AVALON PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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Maryland 06-1379111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identifica tion No.)
15 River Road
Wilton, Connecticut 06897
(Address of principal executive offices)
(203) 761-6500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $.01 per share New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
9% Series A Cumulative Redeemable Preferred Stock, New York Stock Exchange
par value $.01 per share (Name of each exchange on which registered)
(Title of each class)
8.96% Series B Cumulative Redeemable Preferred Stock, New York Stock Exchange
par value $.01 per share (Name of each exchange on which registered)
(Title of each class)
</TABLE>
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, as of March 14, 1997, was $943,979,517.
The number of shares of the Registrant's Common Stock, par value $.01
per share, outstanding as of March 14, 1997 was 33,528,672.
Documents Incorporated by Reference
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Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 6, 1997 are incorporated by reference herein as
portions of Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . 41
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PART I
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statement. Certain factors that
might cause such a difference are discussed in the section entitled
"Forward-Looking Statements" on page 1 of this Form 10-K.
ITEM 1. BUSINESS
General
Avalon Properties, Inc. ("Avalon" or the "Company") is an integrated
real estate operating company, concentrating exclusively on apartment community
acquisition, construction, development and management in the Mid-Atlantic and
Northeast regions of the United States. The Company was incorporated under the
laws of the State of Maryland in August 1993 and was formed to continue and
expand the multifamily apartment community acquisition, construction,
development and management operations of the Trammell Crow Residential
Mid-Atlantic and Northeast Groups (collectively, the "Predecessor"). Avalon is
a self-administered and self-managed equity Real Estate Investment Trust
("REIT"). As of March 14, 1997, the Company's portfolio includes 17,619 Class
A, institutional-quality apartment homes including 3,797 apartment homes under
construction (see "Communities") and the Company manages 1,224 apartment homes
for unaffiliated institutional owners. The Company's apartment communities are
conveniently located in areas within close proximity to recreational amenities,
schools, entertainment and dining, and easy access to employment. The Company
currently employs approximately 790 people.
A principal operating objective of the Company's management
("Management") is to increase operating cash flow growth and long-term
stockholder value. Management's strategies to achieve this objective include
(i) generating consistent, sustained earnings growth at each community through
increased revenue (from high occupancy and targeted value pricing) and
increased operating margins (from aggressive expense management); (ii)
selective investment in new acquisition and development communities in the
Company's targeted geographical areas; and (iii) the use of a conservative
capital structure to provide continued access to capital markets at the lowest
possible cost. Management believes that these strategies are best implemented
by building and acquiring institutional-quality assets in supply-constrained
markets while maintaining the financial discipline to ensure maximum balance
sheet flexibility. Management believes that these strategies will lead to
higher occupancy levels, increased rental rates and highly predictable and
growing cash flow.
OPERATING STRATEGIES: Intense focus on the operations of the existing
portfolio is an important strategy necessary to realize consistent, sustained
earnings growth. Management believes that such focus is best achieved when
operating only one type of real estate. To this end, the Company concentrates
exclusively on apartment community acquisition, construction, development and
management. The Company intends to increase earnings through focused on-site
property management that is expected to result in higher revenue from
Company-owned communities and operating cost containment. Ensuring resident
satisfaction by providing service that exceeds the resident's expectations,
increasing rents as market conditions allow, maximizing rent collections and
maintaining community occupancy at optimal levels comprise the principal
strategies to maximize revenue. Lease terms are generally staggered based on
vacancy exposure by apartment type so that lease expirations are better matched
to each community's rental patterns. On-site property management teams receive
bonuses based largely upon the net operating income produced at their community
as well as rental rate increases achieved and lease renewals (which implicitly
measure resident satisfaction). Controlling and leveraging operating expenses
also contributes to earnings growth. High occupancy through resident retention
is a principal strategy. High resident retention eliminates the cost of
preparing an apartment home for a new resident and reduces marketing and other
costs. The Company also aggressively pursues real estate tax appeals and
scrutinizes operating costs. Invoices are recorded on-site to ensure the
careful monitoring of budgeted versus actual expenses; supplies are purchased
in bulk and directly from manufacturers where possible; vendor contracts are
bid on a volume basis; turnover work is performed in-house or by third parties
depending upon the least costly alternative; and preventive maintenance is
undertaken regularly to maximize
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resident satisfaction and property and equipment life. Growth in the portfolio
and the resulting increase in revenue allows the Company to spread fixed
operating costs over a larger volume of revenue, thereby increasing operating
margins. The Company has enjoyed significant operating cost leverage in recent
years as operating costs, including write-off of deferred development costs, as
a percentage of total revenues have declined from 46% in 1991 to 38% in 1996.
INVESTMENT STRATEGIES: SELECTIVE ACQUISITIONS AND DEVELOPMENT IN
FAVORABLE MARKETS. Management believes that apartment communities present an
attractive investment opportunity compared to other real estate investments
because a broad potential resident base results in relatively stable demand
during all phases of a real estate cycle. The Company intends to pursue
appropriate new investments (both acquisitions of new communities and new
developments) where constraints to new supply exist and where new household
formations have out-paced multifamily permit activity in recent years.
Management has identified market characteristics that help create a favorable
supply-demand balance important for ownership of multifamily communities, which
include:
- - Market Characteristics-Supply. Management believes that the Company
can best achieve consistent earnings growth from both established and
new communities by investing and operating in markets that have
significant barriers to entry, thereby limiting supply and protecting
the revenue stream. As a long-term investor in multifamily real
estate, the Company is subject to long-term market risk. Management
believes that long-term market risk is better suited to markets that
have supply constraints that will protect the cash flow stream of an
investment. For these reasons, Management will generally avoid
markets with ease of entry, significant competition and easy access to
capital. Management believes that its targeted markets in the
Mid-Atlantic and Northeast regions of the United States have all of
the attributes required to provide significant supply constraints
favorable to owners of apartment communities.
- - Market Characteristics-Demand. Growth in household formation is a key
component to housing demand. The rate of new household formation in
the Company's principal markets has steadily increased since the
mid-1980s. The period from 1989 to 1995 has been characterized by a
lack of construction of new, comparable quality apartment communities
in the Company's principal markets. The Company believes that these
favorable market conditions and demand for new, quality housing
alternatives will provide increasing opportunities for earnings growth
at existing communities as well as new communities to be acquired or
developed by the Company. Accordingly, the ratio of renter household
growth to apartments constructed in Avalon's major markets for the
period 1990 through 1995 is 4:1. The same ratio in 1994 was 4:1 and
in 1995 the ratio was 5:1. A market with a ratio of 2:1 is considered
to be balanced with respect to supply and demand. An increasing ratio
indicates a market where demand is growing at a faster rate than
supply, and Management believes this is an indicator of improving
market conditions for ownership of apartment communities in the
Company's principal markets. Although these statistics primarily
reflect supply constraints, an increase in demand as measured by new
household formation is present in substantially all of the markets
currently served.
Acquisitions. Management has targeted certain markets in the
Northeast and Mid-Atlantic regions of the United States for acquisition
opportunities. The Company will continue to diversify its investments within
these regions, not just geographically, but also by the number of apartment
homes and features offered. Each acquisition candidate must have the potential
to deliver sustained earnings growth over time that meets or exceeds the
current portfolio growth rate. Additionally, the following criteria are
important in an acquisition community: i) the community must have been
completed after 1984 or, if older, must be in a non-duplicable in-fill location
and be able to support the capital investment required for a significant
renovation; ii) the community has existing tax-exempt debt financing; iii) the
community has adjacent zoned land that can be acquired with the community and
be developed. One of the characteristics of the Company's markets is the
presence of older apartment communities (often 10 to 30 years old or older)
that are currently attractive acquisition targets for the Company. In many
cases, these communities are in attractive in-fill locations, but are poorly
maintained and marketed, inefficiently managed and are challenging to renovate.
Improvements to landscaping amenities and the physical structure of the
buildings, coupled with more effective management and marketing, may result in
attractive yields on these communities. Management believes that many of these
older
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communities can support the capital investment required to bring the community
up to institutional-quality condition while delivering attractive
post-renovation yields.
The financial position of the Company continues to support the ability
to make selective acquisitions, and Management expects to continue its
acquisition efforts into 1997. Management's discipline to be selective in its
acquisition candidates is strengthened by the presence of a strong development
capability that is an important alternative source of portfolio growth.
Accordingly, as acquisition opportunities diminish, Management does not expect
to lower initial yield requirements to continue with portfolio growth through
acquisitions, as development opportunities may continue to offer attractive
yield alternatives. Beyond 1997, Management anticipates that attractive
acquisition opportunities may diminish as the current real estate recovery
progresses. Given a competitive acquisition environment, Management believes
that the Company enjoys an advantage over other real estate investors in the
following areas:
- - The Company maintains five offices throughout the Mid-Atlantic and
Northeast regions and has substantial knowledge of local markets which
facilitates the acquisition process.
- - The Company maintains a development capacity that lessens the
dependence on acquisitions for external earnings growth.
Management also expects to divest communities to help ensure that the
overall portfolio can meet earnings growth targets. Two communities in the
Hartford, Connecticut market were sold during 1996 pursuant to this strategy.
Further, as the real estate recovery progresses and acquisition opportunities
diminish, the reduced supply of acquisition candidates may provide a favorable
environment for the Company to sell assets. Accordingly, Management anticipates
additional dispositions will occur over the next several years.
New Developments. Management anticipates that selective development
of new apartment communities in the Company's supply-constrained markets will
remain an important component of portfolio growth for the next several years.
Because of its experience, Management believes that it understands and
appreciates the risks associated with development and that, generally, the
risks presented by development are justified by higher potential yields and the
ability to develop attractive new communities in locations where the
opportunity to acquire existing communities is limited. Generally, Management
believes that the long-term potential offered by a new development opportunity
will exceed the long-term potential offered by an acquisition opportunity
primarily because well executed, up-to-date, newly developed communities
generally attract greater demand at higher rents than an existing apartment
community.
Management has significant experience developing apartment communities
in its principal markets, as well as managing the unique development risks
presented by these markets. Since 1980, Management has developed approximately
17,000 apartment homes. Since the Company's initial pubic offering ("Initial
Offering"), Management has developed ten communities, totaling 1,929 apartment
homes. The development of each of these communities is managed by an
experienced development vice president, who operates out of the local
development office, under the supervision of senior Management. Combined years
of experience for officers principally involved in construction and development
matters exceeds 100 years. As a developer of real estate, the Company enjoys
opportunities that are not available to companies that strictly acquire
existing developed real estate. There are risks, however, to developing real
estate, including risk of zoning changes and unforeseen conditions (such as
unforeseen problems presented by soils or environmental conditions). Further,
there is the possibility that a Development Right (as hereinafter defined)
could proceed to development based on certain assumptions concerning economic
conditions that may not be realized due to subsequent unforeseen changes in
economic conditions These development risks, however, are not dissimilar to
the risks of acquiring real estate, and Management believes that the Company's
internal due diligence and financial analysis procedures mitigate these risks.
The following is a summary of how the internal development process functions
and how the Company mitigates risk.
Initial Financial Feasibility Projections. Before significant
time and money is incurred on a new development opportunity, a financial
feasibility review is performed. In preparing the financial projections
for a proposed new community, Management relies upon the rents in today's
marketplace, and no inflation of rent is assumed in the projections. A
minimum 7% economic vacancy rate is assumed in preparing these
projections, even though
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the Company's stabilized portfolio has historically operated at vacancy
rates of 4% to 5%. The operating budget is derived from analysis of
anticipated costs, from utility rates and estimated taxes in the local
community to the staffing demands independently estimated by both
development and property operations teams. The compensation of
development, construction and operations personnel have significant
components tied to the reliability of each team's forecasts.
Historically, actual operating results of communities that proceeded to
development have generally met or exceeded the initial operating
projections developed during the financial feasibility phase. Once a
development opportunity is determined to meet the Company's financial
feasibility guidelines, the process of obtaining entitlements is begun.
Entitlements Process. The Company operates in markets
dominated by no-growth attitudes and where little-to-no multifamily
zoning is readily available. The limited supply of zoned multifamily
land often requires the Company to "manufacture" the entitlements
necessary to develop a parcel by working through the local
entitlements process for extended periods of time, in most cases for
several years. There can be no assurance that the necessary
entitlements will be obtained. Because of these risks, the Company's
general policy is to acquire an option to purchase land, as opposed to
buying it, until zoning and related entitlements are in place. The
financial exposure associated with the entitlements process is largely
limited to overhead costs, third-party consultant costs and
non-refundable deposits, if any, should the zoning and site plan
approval process be unsuccessful. The Company's approach in measuring
and dealing with this risk is to provide a reserve that is increased
each quarter through a charge to earnings. Currently, this quarterly
charge is $150,000. In accordance with generally accepted accounting
principles ("GAAP"), the salaries (and related costs) of all persons
who spend substantially all of their time in development and
construction activities are capitalized into the cost of that
development. If a development opportunity does not proceed to
development, the accumulated capitalized direct costs, including
payroll and third-party costs for unsuccessful efforts, are written-off
against the established reserve.
Communities Under Construction. Once the entitlement process is
complete and permits are obtained, the option to acquire the land is
exercised and construction begins. In the development and construction
budget, a contingency for possible cost overruns exists throughout
construction. However, this contingency is adjusted during planning and
construction. The remaining contingency, if any, is removed only after
the job is completed.
Management believes that, by adhering to these principles, zoning,
site planning and construction risks as well as the risk of not achieving
projected yields are significantly reduced.
The success of the Company's development and acquisition strategies
depends upon trends in the economy as a whole, including interest rates, income
tax laws, governmental regulations, legislation, and population and demographic
trends. See "Communities." Also, as an owner of real estate, the Company is
subject to risks arising in connection with the availability of financing on
acceptable terms, as well as other risks relating to the real estate
investment, including environmental matters and changes in real estate and
zoning laws.
CAPITAL STRATEGIES: Maintaining a conservative capital structure that allows
the Company continuous, uninterrupted and cost-effective access to capital
markets has been, and continues to be, an important element of Management's
earnings growth strategy. The use of conservative financial policies is
illustrated by the investing and financing activities employed by the Company
since its Initial Offering.
Since the Company's Initial Offering, real estate investments have
been made totaling $697.5 million. These investments were financed primarily
from proceeds drawn under the Company's three-year revolving unsecured credit
facility (the "Unsecured Facility") and the two-year supplemental revolving
unsecured credit facility (the "Supplemental Unsecured Facility" and together
with the Unsecured Facility, the "Unsecured
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Facilities"). The Unsecured Facilities was subsequently repaid from capital
market offerings totaling $621.9 million through December 31, 1996. These
offerings include:
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Date Description of Offering
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July 1994 $33.7 million tax-exempt bond offering
August 1994 $102 million public offering of Common Stock
May 1995 $50.6 million tax-exempt unsecured custodial receipts offering
September 1995 $100 million unsecured senior notes offering
January 1996 $47.3 million direct placement of Common Stock to certain institutional investors
February 1996 $111.4 million 9% Series A Cumulative Redeemable Preferred Stock offering
October 1996 $107.5 million 8.96% Series B Cumulative Redeemable Preferred Stock offering
December 1996 $69.4 million public offering of Common Stock
</TABLE>
During this period, the Company has maintained a conservative
financial structure, as debt to total market capitalization (calculated on a
weighted average basis) was only 26.7%. The Company's financial position as of
December 31, 1996 demonstrates Management's continued discipline in applying
conservative capital policies:
- Total debt to total market capitalization totaled 20.8%.
- Long-term floating rate debt was only 1.7% of total market
capitalization. Management intends to limit the use of
long-term floating rate debt to no more than 10% of total
market capitalization.
- Debt service coverage for the year ended December 31, 1996
was 3.8x.
- At December 31, 1996, long-term debt maturities over the next
10 years total only $143.0 million, or approximately 9.6% of
the Company's total market capitalization. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
This history demonstrates Management's discipline to maintain a
conservative capital structure and the Company's ability to cost-effectively
access capital markets to maintain this conservative structure.
At December 31, 1996, 54% of outstanding long-term debt is tax-exempt
debt, and is generally collateralized by liens on certain Current Communities
(as hereinafter defined). Of the 46 Current Communities, 13 are currently
subject to mortgages that collateralize tax-exempt debt. As of December 31,
1996, the ratio of collateralized debt to undepreciated book value of real
estate assets was 19.5%. Although the use of tax-exempt debt generally
encumbers the related property with a lien, the positive effect of the lower
tax-exempt interest rate (compared to conventional debt) is a lower cost
capital structure and higher debt service coverage levels. Although Management
will continue the selective use of tax-exempt debt financing, tax law changes
that took effect in 1986 combined with attractive unsecured debt alternatives
from improved ratings will likely result in a decline in the use of tax-exempt
financing.
Another important element in delivering consistent earnings growth
relative to financial structure is managing exposure to floating rate debt.
Exposure to variable interest rates on outstanding balances under the Unsecured
Facilities is generally managed with interest rate protection agreements,
although no such agreements are currently in place. Further, the Company has
retained a consultant to help manage interest rate risk. Management believes
these policies reduce the risk of eroding earnings growth as a result of higher
interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for an
expanded discussion of current financing strategies.
Inflation and Tax Matters
Substantially all of the leases at the Current Communities are for a
term of one year or less, which may enable the Company to realize increased
rents upon renewal of existing leases or commencement of new
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leases. Such short-term leases generally minimize the risk to the Company of
the adverse effects of inflation, although as a general rule these leases
permit residents to leave at the end of the lease term without penalty. The
Company's current policy is to permit residents to terminate leases upon a
60-day written notice and payment of one month's rental as compensation for
early termination. Short-term leases combined with relatively consistent
demand allow rents, and therefore, cash flow from the portfolio to provide an
attractive inflation hedge.
The Company filed an election with its initial Federal income tax
return to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to maintain its qualification as a REIT in
the future. As a qualified REIT, with limited exceptions, the Company will not
be taxed under Federal and certain state income tax laws at the corporate level
on its net income. In addition, due to non-cash charges such as depreciation
and amortization, the cash available for distribution is expected to exceed net
income. Under current tax law, this excess will be treated by stockholders as
a non-taxable return of capital that will reduce the stockholders' basis in the
shares of the Company's Common Stock.
Environmental Matters
The Company's assessments of the Current Communities and Development
Communities (as hereinafter defined) have not revealed any environmental
liability that the Company believes would have a material adverse effect on the
Company's business, assets or results of operations, nor is the Company aware
of any such material environmental liability. Nevertheless, it is possible
that the Company's assessments did not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware.
The Company believes that the Current and Development Communities are
in compliance in all material respects with all Federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of its Current or Development Communities. The Company does not
believe that the cost of continued compliance with applicable environmental
laws or regulations will have a material adverse effect on the Company or its
financial condition or results of operations. There can be no assurance,
however, that future environmental laws, regulations or ordinances will not
require additional remediation of existing conditions that are not currently
actionable, or impose additional or more stringent requirements on the Current
and Development Communities, the costs of compliance with which would have a
material adverse effect on the Company or its financial condition.
ITEM 2. COMMUNITIES
The Company's real estate holdings consist exclusively of apartment
communities in various stages of the development cycle and can be divided into
three categories:
"Current Communities" are apartment communities where construction is
complete and the community has either reached stabilized occupancy or
is in the initial lease-up process. A "Stabilized Community" is a
Current Community that has completed its initial lease-up and has
attained a physical occupancy level of 95% or has been completed for
one year, whichever occurs earlier. An "Established Community" is a
Current Community that has been a Stabilized Community with stabilized
operating costs during both the current year and the beginning of the
previous calendar year such that its year-to-date operating results
are comparable between periods.
"Development Communities" are communities that are under construction
and may be partially complete and operating and for which a final
certificate of occupancy has not been received.
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"Development Rights" are development opportunities in the very
earliest phase of the development process for which the Company has an
option to acquire land or owns land to develop a new community and
where related pre-development costs have been incurred and capitalized
in pursuit of these new developments.
The Company's holdings under each of the above categories are
discussed in the following paragraphs.
Current Communities
The Current Communities are primarily garden-style apartment
communities consisting of two-and three-story buildings in landscaped settings.
Additionally, the Company holds seven high-rise apartment communities (Avalon
at Ballston-Washington Towers, Avalon at Ballston-Quincy and Vermont Towers,
Longwood Towers, 4100 Massachusetts Avenue, Avalon at Lake Arbor, Avalon Towers
and Avalon Summit) and two four-story mid-rise apartment communities
(Avalon Glen and Avalon at Park Center). Management has an extensive and
ongoing maintenance program to keep all communities and apartment homes free of
deferred maintenance and, where vacant, available for immediate occupancy. As
of March 14, 1997, there were 46 Current Communities. These Current
Communities are institutional-quality multifamily apartment communities located
in the following states:
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Number of Number of Percentage of Total
Communities at Apartment Homes at Apartment Homes at
------------------ -------------------- ---------------------
1-1-96 3-14-97 1-1-96 3-14-97 1-1-96 3-14-97
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Virginia 12 16 3,295 4,723 29.3% 34.2%
Connecticut 6 4 2,452 1,934 21.8% 14.0%
Maryland 10 13 2,885 3,736 25.6% 27.0%
New Jersey 2 4 938 1,504 8.3% 10.9%
Massachusetts 4 5 875 1,115 7.8% 8.1%
Washington, D.C. 1 1 308 308 2.7% 2.2%
New York 3 3 502 502 4.5% 3.6%
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38 46 11,255 13,822 100.0% 100.0%
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The Company (or its Predecessor) developed 24 and acquired 22 of the
Current Communities. All of the Current Communities are managed and operated
by the Company. During the year ended December 31, 1996, the Company completed
construction of 866 apartment homes in six communities for a capitalized cost
of $71 million. The Current Communities had a physical occupancy rate of 95.7%
at December 31, 1996. Average economic occupancy for Established Communities
decreased .4% from 96.3% in 1995 to 95.9% in 1996 while rental rates increased
4.8%, resulting in rental revenue growth of 4.4% during 1996. Thirty-four of
the Current Communities have more than 200 apartment homes, with the largest
having 932 apartment homes. The average age of 44 of the Current Communities,
weighted according to number of apartment homes, is approximately eight years.
The remaining Current Communities (Falkland Chase and Longwood Towers) are
older communities that were acquired by the Company. Falkland Chase underwent
extensive renovation in 1987. Longwood Towers is currently under substantial
renovation, which is scheduled to be completed within the next two to three
years.
To comply with the requirements of lenders and tax-exempt credit
enhancers, the Company holds eighteen Current Communities and one Development
Community in 11 qualified REIT subsidiaries. The Company owns general
partnership interests in two Current Communities (a 50% interest in Falkland
Chase and a 49% equity interest in Avalon Run), a 100% interest in a senior
participating mortgage note secured by another Current Community (Avalon Arbor)
which is accounted for as an investment in real estate, a 100% partnership
interest in 4100 Massachusetts Avenue, Avalon at Lake Arbor, Avalon at
Decoverly, Avalon at Ballston - Vermont and Quincy Towers and Avalon at Fairway
Hills II and holds direct fee simple interests in the remaining Current
Communities.
7
<PAGE> 10
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<TABLE>
<CAPTION>
-------------------------------------------------------------- ------------- -------------------------------- -------------
Number Approximate Year Average Physical
of Rentable Area Built or Size Occupancy
City and State Homes (Sq. Ft.) Acres Acquired (Sq. Ft.) at 12/31/96
---------------------------- -------------------- ------- ------------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
-------------------
1. Avalon Walk I Hamden, CT 430 433,010 23.3 1992 1,007 97.0%
2. Avalon Walk II Hamden, CT 334 327,730 15.1 1994 981 97.9%
3. Avalon Pavilions Manchester, CT 932 849,700 46.3 1990/92 912 94.1%
4. Avalon Glen Stamford, CT 238 221,685 4.1 1991/95 931 95.8%
5. 4100 Massachusetts Avenue Washington, D.C. 308 298,345 2.7 1994 969 96.4%
6. Longwood Towers Brookline, MA 250 226,000 4.2 1993 904 92.0%
7. Avalon at Lexington Lexington, MA 198 226,830 18.0 1994 1,146 97.5%
8. Avalon Summit Quincy, MA 245 194,063 9.1 1995/96 792 97.6%
(4) 9. Avalon Arbor Shrewsbury, MA 302 297,772 25.0 1991 986 95.0%
10. Avalon West Westborough, MA 120 159,900 10.1 1996 1,333 96.7%
11. Avalon Landing Annapolis, MD 158 117,078 13.8 1995 741 93.7%
12. Avalon at Fairway Hills I Columbia, MD 192 193,728 10.1 1987 1,009 93.2%
13. Avalon at Fairway Hills II Columbia, MD 527 529,727 32.0 1996 1,005 91.5%
14. Avalon at Symphony Glen Columbia, MD 174 178,350 10.0 1986 1,025 93.1%
15. Avalon Farm Frederick, MD 306 248,472 21.8 1988 812 97.7%
16. Avalon Fields Gaithersburg, MD 192 202,100 5.7 1996 1,053 97.4%
17. Avalon Knoll Germantown, MD 300 290,400 26.7 1985 968 95.3%
18. Avalon at Lake Arbor Mitchellville, MD 209 170,052 18.0 1995 814 95.2%
19. Avalon Lea Owings Mills, MD 296 300,440 15.7 1988 1,015 95.9%
20. Avalon at Decoverly Rockville, MD 368 368,446 25.0 1995 1,001 96.7%
21. Avalon Crossing Rockville, MD 132 154,488 5.0 1996 1,170 Lease-up
22. Avalon Ridge Silver Spring, MD 432 432,000 25.7 1988 1,000 95.1%
(5) 23. Falkland Chase Silver Spring, MD 450 346,500 22.3 1988 770 96.2%
(6) 24. Avalon Run Lawrenceville, NJ 426 438,370 19.6 1994 1,029 96.9%
25. Avalon Run East Lawrenceville, NJ 206 260,670 27.0 1996 1,265 98.1%
26. Avalon Watch Lawrenceville, NJ 512 487,424 64.0 1988 952 97.9%
27. Avalon Chase Marlton, NJ 360 312,840 58.5 1996 869 96.7%
28. Avalon View Fishkill, NY 288 286,560 41.0 1993 995 97.6%
29. Avalon Green Greenburgh, NY 105 115,930 16.9 1995 1,104 94.3%
30. Avalon Towers Long Beach, NY 109 124,805 1.3 1995 1,145 95.4%
31. Avalon at Park Center Alexandria, VA 492 382,200 8.5 1994 777 96.5%
(7) 32. Avalon at Ballston-
Quincy and Vermont Towers Arlington, VA 454 420,908 2.3 1997 927 N/A
33. Avalon at Ballston-
Washington Towers Arlington, VA 344 294,808 4.1 1990 857 94.2%
34. Avalon Birches Chesapeake, VA 312 262,920 20.9 1995 843 96.2%
35. AutumnWoods Fairfax, VA 420 355,320 24.2 1996 846 98.8%
36. Avalon Station Fredericksburg, VA 223 210,331 15.9 1994/96 943 90.1%
37. Avalon at Hampton I Hampton, VA 186 178,932 8.5 1985 962 95.2%
38. Avalon at Hampton II Hampton, VA 231 227,535 11.3 1986 985 93.9%
39. Avalon Park Manassas, VA 372 302,808 26.0 1988 814 97.3%
40. Avalon at Carter Lake Reston, VA 259 225,848 47.6 1994 872 98.1%
41. Avalon at Gayton Richmond, VA 328 282,408 27.6 1984 861 93.3%
42. Avalon at Boulders Richmond, VA 284 313,782 32.1 1996 1,105 94.7%
43. Avalon Woods Richmond, VA 268 158,669 18.5 1994 592 96.3%
44. Avalon Pointe Stafford, VA 140 119,272 20.2 1994 852 92.1%
45. Avalon at Dulles Sterling, VA 236 231,752 15.7 1986 982 98.3%
46. Avalon Pines Virginia Beach, VA 174 142,854 9.7 1996 821 92.5%
------- ----------- -------- -------- --------
13,822 12,903,762 N/A 934 95.7%
------- ----------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
------------------------------- ----------- -------- -------------------------------------- -----------
Average Economic Avg. Rental Rate (1)
Occupancy ----------------------- Financial
---------------------- $ Per $ Per Property (2) Reporting
1996 1995 Apt. Sq. Ft. EBITDA Cost (3)
----------------------------- ----------- -------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
-------------------
1. Avalon Walk I 94.6% 97.2% $ 985 $ 0.98 $ 3,554 $ 34,505
2. Avalon Walk II 94.4% 97.4% 966 0.98 2,666 23,597
3. Avalon Pavilions 93.6% 95.5% 816 0.90 5,980 56,523
4. Avalon Glen 95.7% 98.3% 1,526 1.64 3,148 30,077
5. 4100 Massachusetts Avenue 96.0% 96.0% 1,324 1.37 3,076 34,879
6. Longwood Towers 98.8% 99.5% 1,420 1.57 2,502 23,449
7. Avalon at Lexington 98.5% 98.5% 1,426 1.24 2,491 14,117
8. Avalon Summit 88.3% 98.9% 844 1.07 1,461 16,152
(4) 9. Avalon Arbor 96.6% 95.9% 848 0.86 1,932 27,822
10. Avalon West Lease-up N/A 1,160 0.87 887 10,624
11. Avalon Landing 95.3% 95.2% 735 0.99 841 9,261
12. Avalon at Fairway Hills I 96.5% 96.9% 831 0.82 1,204 9,368
13. Avalon at Fairway Hills II 94.2% N/A 801 0.80 1,471 33,807
14. Avalon at Symphony Glen 95.2% 95.9% 806 0.79 1,025 8,079
15. Avalon Farm 96.0% 94.9% 676 0.83 1,551 17,332
16. Avalon Fields 93.7% Lease-up 921 0.87 1,445 14,262
17. Avalon Knoll 95.5% 95.6% 790 0.82 1,689 7,905
18. Avalon at Lake Arbor 94.5% 94.0% 843 1.04 1,078 11,900
19. Avalon Lea 96.0% 96.3% 716 0.71 1,576 16,101
20. Avalon at Decoverly 96.7% 94.5% 974 0.97 2,985 30,978
21. Avalon Crossing Lease-up N/A N/A N/A 268 13,387
22. Avalon Ridge 94.9% 94.2% 818 0.82 2,602 25,030
(5) 23. Falkland Chase 96.8% 95.5% 790 1.03 N/A N/A
(6) 24. Avalon Run 94.8% 95.7% 1,029 1.00 N/A N/A
25. Avalon Run East Lease-up N/A - 675 16,002
26. Avalon Watch 96.0% 97.5% 1,002 1.05 3,982 28,340
27. Avalon Chase 95.8% N/A 897 1.03 2,308 23,615
28. Avalon View 97.6% 95.8% 894 0.90 1,876 17,773
29. Avalon Green 97.2% Lease-up 1,719 1.56 1,488 12,294
30. Avalon Towers 96.7% 94.8% 2,221 1.94 1,490 15,826
31. Avalon at Park Center 96.2% 93.6% 905 1.16 3,568 37,337
(7) 32. Avalon at Ballston-
Quincy and Vermont Towers N/A N/A N/A N/A N/A N/A
33. Avalon at Ballston-
Washington Towers 96.7% (8) 96.9% (8) 1,081 1.26 2,969 36,797
34. Avalon Birches 97.0% 97.6% 652 0.77 1,583 13,419
35. AutumnWoods 99.0% N/A 1,210 1.43 163 30,474
36. Avalon Station 81.1% 97.9% 676 0.72 974 11,838
37. Avalon at Hampton I 94.9% 96.7% 636 0.66 775 3,702
38. Avalon at Hampton II 95.5% 96.6% 648 0.66 1,086 8,144
39. Avalon Park 96.6% 96.1% 683 0.84 1,838 19,717
40. Avalon at Carter Lake 97.6% 94.4% 708 0.81 1,281 11,502
41. Avalon at Gayton 93.5% 95.5% 658 0.76 1,577 9,830
42. Avalon at Boulders 95.3% N/A 690 0.62 399 16,038
43. Avalon Woods 96.1% 96.8% 533 0.90 1,058 8,235
44. Avalon Pointe 96.3% 96.4% 719 0.84 739 7,748
45. Avalon at Dulles 96.4% 97.4% 802 0.82 1,433 11,599
46. Avalon Pines 95.9% N/A 645 0.79 498 8,578
-------- -------- -------- -------- --------- ----------
95.2% 95.8% 893 0.97 77,192 817,963
-------- -------- -------- -------- --------- ----------
</TABLE>
8
<PAGE> 11
PROFILE OF CURRENT AND DEVELOPMENT COMMUNITIES
(DOLLARS IN THOUSANDS, EXCEPT PER APARTMENT HOME DATA)
<TABLE>
<CAPTION>
-------------------------------------------------------------- ------------- ---------- ----------- -----------
Number Approximate Year Average
of Rentable Area Built or Size
City and State Homes (Sq. Ft.) Acres Acquired (Sq. Ft.)
----------------------------- ----------------------- ------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
DEVELOPMENT COMMUNITIES
-----------------------
47. Avalon Gates Trumbull, CT 340 373,032 37.0 N/A 1,097
48. Avalon Grove Stamford, CT 402 402,970 4.0 N/A 1,002
49. Avalon Springs Wilton, CT 102 180,720 12.0 N/A 1,772
50. Avalon Cove Jersey City, NJ 504 546,390 11.1 N/A 1,084
51. Avalon Commons Smithtown, NY 312 374,360 20.6 N/A 1,200
52. Avalon Court Melville, NY 154 190,576 10.8 N/A 1,238
53. Avalon Gardens Nanuet, NY 504 647,778 54.4 N/A 1,285
54. Avalon Willow Mamaroneck, NY 227 213,009 4.0 N/A 938
55. Avalon at Cameron Court Alexandria, VA 460 488,496 16 N/A 1,062
56. Avalon at Fair Lakes Fairfax, VA 234 288,225 10 N/A 1,232
57. Avalon Crescent Tysons Corner, VA 558 623,270 19.1 N/A 1,117
------- ----------- -------- --------
3,797 4,328,826 N/A 1,140
------- ----------- -------- --------
TOTAL: 17,619 17,232,588 N/A 978
======= =========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------- ----------- ---------- -----------------------
Average Economic Avg. Rental Rate (1)
Physical Occupancy -----------------------
Occupancy ----------- ---------- $ Per $ Per
at 12/31/96 1996 1995 Apt. Sq. Ft.
----------------------------- ------------ ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
DEVELOPMENT COMMUNITIES
-----------------------
47. Avalon Gates N/A N/A N/A N/A N/A
48. Avalon Grove N/A N/A N/A N/A N/A
49. Avalon Springs N/A N/A N/A N/A N/A
50. Avalon Cove N/A N/A N/A N/A N/A
51. Avalon Commons N/A N/A N/A N/A N/A
52. Avalon Court N/A N/A N/A N/A N/A
53. Avalon Gardens N/A N/A N/A N/A N/A
54. Avalon Willow N/A N/A N/A N/A N/A
55. Avalon at Cameron Court N/A N/A N/A N/A N/A
56. Avalon at Fair Lakes N/A N/A N/A N/A N/A
57. Avalon Crescent N/A N/A N/A N/A N/A
-------- -------- -------- -------- --------
N/A N/A N/A N/A N/A
-------- -------- -------- -------- --------
TOTAL: 95.7% 95.2% 95.8% $ 893 $ 0.97
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------- -------------------------
Financial
Property (2) Reporting
EBITDA Cost (3)
- ----------------------------------- ------------- ----------
<S> <C> <C>
DEVELOPMENT COMMUNITIES
-----------------------
47. Avalon Gates N/A 30,348
48. Avalon Grove N/A 45,637
49. Avalon Springs N/A 13,628
50. Avalon Cove N/A 85,831
51. Avalon Commons N/A 17,603
52. Avalon Court N/A 5,048
53. Avalon Gardens N/A 15,165
54. Avalon Willow N/A 5,217
55. Avalon at Cameron Court N/A N/A(9)
56. Avalon at Fair Lakes N/A 4,659
57. Avalon Crescent N/A 36,883
--------- ------------
N/A 260,019
--------- ------------
TOTAL: $ 77,192 $ 1,077,982
========= ============
</TABLE>
See Page 13 for notes.
9
<PAGE> 12
LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
<TABLE>
<CAPTION>
Washer &
1BR/2BR 2BR/3BR Parking Mini- Dryer Hook-Ups
1 Bath 2 Bath Other Spaces Blinds Carpeting or Units
- -------------------------------- -------- ----------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1. Avalon Walk I 192/76 88/74 0 802 All All All
2. Avalon Walk II 194/56 84/0 0 571 All All All
3. Avalon Pavilions 472/168 220/72 0 1,696 All All All
4. Avalon Glen 107/0 117/0 14 (10) 370 All All All
5. 4100 Massachusetts Avenue 161/16 101/3 27 (11) 357 None All All
6. Longwood Towers 105/48 19/21 57 (12) 210 None All Some
7. Avalon at Lexington 28/24 90/56 0 364 All All All
8. Avalon Summit 153/62 28/2 0 435 Some All None
9. Avalon Arbor 83/106 59/51 3 (13) 561 All All All
10. Avalon West 40/0 55/25 0 289 All All All
11. Avalon Landing 83/18 57/0 0 257 All All All
12. Avalon at Fairway Hills I 88/14 66/24 0 307 All All All
13. Avalon at Fairway Hills II 180/223 88/36 0 830 All All All
14. Avalon at Symphony Glen 86/14 54/20 0 279 Some All All
15. Avalon Farm 126/0 180/0 0 567 None All All
16. Avalon Fields 80/32 80/0 0 285 All All All
17. Avalon Knoll 136/56 80/28 0 510 Some All All
18. Avalon at Lake Arbor 110/0 87/0 12 (14) 312 All All All
19. Avalon Lea 130/28 108/30 0 518 All All All
20. Avalon at Decoverly 102/0 104/0 162 (15) 550 All All All
21. Avalon Crossing 0/54 60/0 18 (16) 224 All All All
22. Avalon Ridge 188/42 146/56 0 691 All All All
23. Falkland Chase 228/152 0/0 70 (17) 439 All Few Few
24. Avalon Run 144/90 108/84 0 709 All All All
25. Avalon Run East 64/11 95/36 0 345 All All All
26. Avalon Watch 251/0 179/82 0 768 All All All
27. Avalon Chase 132/48 156/24 0 726 All All All
28. Avalon View 112/48 64/64 0 614 All All All
29. Avalon Green 25/24 56/0 0 218 All All All
30. Avalon Towers 0/0 37/0 72 (18) 196 None All All
31. Avalon at Park Center 384/0 108/0 0 684 All All All
32. Avalon at Ballston-
Quincy and Vermont Towers 370/0 84/0 0 498 All All All
33. Avalon at Ballston-
Washington Towers 205/31 108/0 0 471 All All All
34. Avalon Birches 120/0 192/0 0 562 All All All
35. AutumnWoods 252/72 96/0 0 727 All All All
36. Avalon Station 68/31 100/24 0 682 All All All
37. Avalon at Hampton I 82/22 64/18 0 276 All All All
38. Avalon at Hampton II 95/44 56/36 0 350 All All All
39. Avalon Park 140/40 138/0 54 (19) 784 All All All
40. Avalon at Carter Lake 91/21 0/0 147 (14) 403 All Some None
41. Avalon at Gayton 156/54 88/30 0 518 All All All
42. Avalon at Boulders 90/0 179/15 0 571 All All All
43. Avalon Woods 200/0 48/0 20 (11) 434 All All All
44. Avalon Pointe 44/66 30/0 0 297 All All All
45. Avalon at Dulles 104/40 76/16 0 464 All All All
46. Avalon Pines 90/24 60/0 0 308 All All All
------------ ---------- ------- ----------
6291/1855 4093/927 656 23,029
------------ ---------- ------- ----------
</TABLE>
<TABLE>
<CAPTION>
Large
Vaulted Storage or Patio Deck
Ceilings Walk-in Balcony or
and/or Lofts Fireplace Closet Sunroom Other
- -------------------------------- ------------ ----------- -------- ----------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT COMMUNITIES
- -------------------
1. Avalon Walk I Some Some All All Double thermal pane windows, optional carports
2. Avalon Walk II Some Some All All Optional carports
3. Avalon Pavilions Some Some All All Double thermal pane windows, optional garages
4. Avalon Glen Some Some All All Controlled-access building entrances, outside
storage, optional underground garage and carports
5. 4100 Massachusetts Avenue Some Some Some All Hardwood entry floors, controlled-access entry,
24-hour front desk, underground parking
6. Longwood Towers None Some All No Garage with valet parking, grand lobby, central
laundry, across street from rapid transit stop
7. Avalon at Lexington Some Some All All Optional carports
8. Avalon Summit None None Some All Garbage disposals, laundry rooms, detached
garages, storage
9. Avalon Arbor Some Some All All Optional carports
10. Avalon West Some Some All All Security systems, ceiling fans in some
apartments, attached garages
11. Avalon Landing None Some All All Optional carports, bay windows, storm windows
12. Avalon at Fairway Hills I Some Some All All Some apartments have built-in bookcases
13. Avalon at Fairway Hills II Some Some Some All Optional bay windows, some apartments have built-
in bookcases
14. Avalon at Symphony Glen Some Some All All Double thermal pane windows, outside storage,
central laundry, some apartments have built-in
bookcases
15. Avalon Farm Some All All All Optional carports
16. Avalon Fields Some Some All All Ceiling fan hook-ups, pantries, security systems,
detached garages
17. Avalon Knoll Some Some All All Controlled-access building entrances, central
laundry, some apartments have built-in bookcases
18. Avalon at Lake Arbor Some None All All Thermal pane windows, energy-saving appliances,
controlled access, microwaves, garbage disposal,
some lake views, sprinkler system
19. Avalon Lea Some Some All All Some apartments have built-in bookcases
20. Avalon at Decoverly Some Some Some All Thermal pane windows, ice makers, garbage
disposals, gas utilities
21. Avalon Crossing Some Some All All Attached/detached garages, security systems,
pantries, ceiling fan hookups, 9' ceilings, 6'
windows
22. Avalon Ridge Some Some All All Central laundry, some apartments have built-in
bookcases, car wash
23. Falkland Chase None Some Some Some Laundry rooms, optional storage and garage
parking, controlled-access intercom systems, most
apartments have hardwood floors
24. Avalon Run Some Some All All Optional carports
25. Avalon Run East Some Some All All Security system with available 24-hour
monitoring, icemakers
26. Avalon Watch Some Some All All Garages
27. Avalon Chase None Some All All Some carports, some bay windows
28. Avalon View Some Some All All Optional carports
29. Avalon Green Some Some All All Security systems, central air conditioning,
ceiling fans in some apartments
30. Avalon Towers None None All All Alarm systems, jacuzzi tubs, ceramic tile/granite
backsplash in kitchens, microwaves, self-clean
ovens, some marble foyers in entrance area
31. Avalon at Park Center Some Some All All Optional sunrooms, wallpaper in kitchens and
baths, ceiling fans, controlled access in
mid-rise buildings, security systems in
garden apartments, controlled-access gates at
community entrance, some underground parking
32. Avalon at Ballston-
Quincy and Vermont Towers None Some All All Optional ceiling fans, optional garages
33. Avalon at Ballston-
Washington Towers None Some Some All Controlled-access building entrances
34. Avalon Birches Some All All All Garbage disposals, ceiling fans, ice-makers,
double sinks, storage
35. AutumnWoods Some Some All All Optional bay windows, optional storage, some
apartments have built-in bookcases
36. Avalon Station Some Some All All Garbage disposals, bay windows, 11 ft. ceilings
in dens
37. Avalon at Hampton I Some Some All All Double thermal pane windows, central laundry,
some apartments have built-in bookcases
38. Avalon at Hampton II Some Some All All Double thermal pane windows, central laundry,
some apartments have built-in bookcases
39. Avalon Park Some Some All All Microwave ovens, all apartments have custom
bookshelves and ceiling fans
40. Avalon at Carter Lake None None Some All Garbage disposals, storm windows, laundry
facilities
41. Avalon at Gayton Some Some All All Double thermal pane windows, some apartments have
built-in bookshelves, wet bars and controlled-
access building entrances, optional storage units
42. Avalon at Boulders None All All All Optional storage closets, garbage disposals,
ceiling fans
43. Avalon Woods Some None Some Some Private entrances, ceiling fans, sun rooms in
some units
44. Avalon Pointe Some None All All Garbage disposals, vaulted ceilings
45. Avalon at Dulles Some Some All All Some apartments have built-in bookcases,
pantries, optional bay windows
46. Avalon Pines Some All All All Garages, ceiling fans, garbage disposals
</TABLE>
10
<PAGE> 13
LIST OF FEATURES - CURRENT AND DEVELOPMENT COMMUNITIES
<TABLE>
<CAPTION>
Washer &
1BR/2BR 2BR/3BR Parking Mini- Dryer Hook-Ups
1 Bath 2 Bath Other Spaces Blinds Carpeting or Units
- -------------------------------- -------- ----------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT COMMUNITIES*
- ------------------------
47. Avalon Gates 122/0 168/50 0 784 All All All
48. Avalon Grove 246/0 144/12 0 549 All All All
49. Avalon Springs 0/0 70/32 0 162 All All All
50. Avalon Cove 238/0 240/26 0 568 All All All
51. Avalon Commons 128/40 112/32 0 568 All All All
52. Avalon Court 34/24 52/44 0 367 All All All
53. Avalon Gardens 208/48 144/104 0 1,210 All All All
54. Avalon Willow 151/0 76/0 0 379 All All All
55. Avalon at Cameron Court 208/0 252/0 0 860 All All All
56. Avalon at Fair Lakes 45/0 163/0 26 (20) 505 All All All
57. Avalon Crescent 186/24 312/0 36 (21) 977 All All All
------------ ------------ ------- ----------
Subtotals 1,566/136 1,733/300 62 6,929
------------ ------------ ------- ----------
TOTAL: 7,857/1,991 5,826/1,227 718 29,958
============ ============ ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Large
Vaulted Storage or Patio Deck
Ceilings Walk-in Balcony or
and/or Lofts Fireplace Closet Sunroom Other
- ------------------------------- ------------ ----------- -------- ----------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEVELOPMENT COMMUNITIES*
- ------------------------
47. Avalon Gates Some Some All All Reading room, security systems
48. Avalon Grove Some Some All All Security systems, controlled-access building
entrances
49. Avalon Springs All All All All Mail area, trash recycling building, security system
50. Avalon Cove Some Some All Most Security systems, controlled-access building
entrances
51. Avalon Commons Some Some All All Security system
52. Avalon Court Some Some All All Direct access garages, security systems
53. Avalon Gardens Some Some All All Security system, garages
54. Avalon Willow Some Some All All Security system, garages
55. Avalon at Cameron Court Some Some All All Direct access garages, intrusion alarms, microwaves,
garbage disposals, pantries, breakfast bars
56. Avalon at Fair Lakes Some Some Some All Controlled access building entrance, garbage
disposals, direct access garages, pantries,
breakfast bars
57. Avalon Crescent Some Some All All Pantries, icemakers, garbage disposals, security
alarms, sprinkler system, walk-in showers, ceramic
Subtotals
TOTAL:
</TABLE>
All apartment homes contain refrigerators and dishwashers and all homes are
cable TV ready.
* See page 13 for notes.
11
<PAGE> 14
Notes to Community Information tables on pages 8 through 12
(1) Represents the average rental revenue per occupied apartment home.
(2) Property EBITDA is defined as property earnings before interest,
income taxes, depreciation, amortization, extraordinary items,
gain/(loss) on sale of a community, minority interest and before
considering corporate general and administrative expenses and
central property management overhead. Gross EBITDA discussed in Note
(4) to the Selected Financial Data represents consolidated earnings
(net of general and administrative expenses and central property
management overhead), and including minority interest, but before
depreciation and amortization.
(3) Costs are presented in accordance with GAAP and exclude the step-up
in basis attributed to continuing investors. For Development
Communities, cost represents total costs incurred through December
31, 1996.
(4) Ownership through ownership of the Avalon Arbor note. See Note 4 to
consolidated financial statements.
(5) Owned by a partnership in which the Company has a 50% ownership
interest. Extensive renovation completed in 1987.
(6) Owned by a joint venture in which the Company has a 49% equity and
40% cash flow interest with the remaining 51% equity and 60% cash
flow interest held by an institutional investor.
(7) Community acquired on 1-11-97. See "Acquisition Activities and
Other Recent Developments."
(8) Excludes corporate apartment homes.
(9) Construction commenced in the first quarter of 1997.
(10) Comprised of 7 1BR/1.5BA, 3 2BR/1.5BA and 4 2BR/2.5BA.
(11) Efficiencies.
(12) Comprised of 7 guest rooms, 40 studio apartments, 10 3BR/3BA
apartments.
(13) Comprised of 3 apartment homes with 4BR.
(14) 2BR and 1-1/2BA.
(15) Comprised of 54 1BR/1.5BA, 64 2BR/3BA and 44 3BR/2BA.
(16) 2BR and 2-1/2BA.
(17) 35 2BR town homes and 35 3BR town homes.
(18) Comprised of 1 studio, 1 2BR/3BA, 3 3BR/3BA and 67 1BR/2BA.
(19) Comprised of 40 efficiencies and 14 2BR town homes.
(20) 3BR and 3BA.
(21) Comprised of 36 2BR/2-1/2BA + loft apartments.
13
<PAGE> 15
Development Communities
As of March 14, 1997, 11 Development Communities were under
construction which, when completed, will add a total of 3,797 apartment homes
to the Company's portfolio. Subsequent to year end, the Company commenced
construction on one of the Development Rights (Avalon at Cameron Court) which
had a capitalized cost at December 31, 1996 of approximately $769,000. The
Development Communities will resemble the Current Communities and have been
designed to offer similar amenities. The total capitalized cost of these
Development Communities, when completed, is expected to be approximately $459.4
million. The following is a summary of the Development Communities:
DEVELOPMENT COMMUNITIES SUMMARY
<TABLE>
<CAPTION>
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS %
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL
HOMES ($ MILLIONS) START OCCUPANCY DATE DATE (1) BUDGETED COST (2)
----------- ------------- ----------- ----------- ----------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Conventionally Financed
- -----------------------
Avalon Gates
Trumbull, CT 340 $ 34.9 Q3 1994 Q2 1996 Q3 1997 Q4 1997 9.6%
Avalon Cove
Jersey City, NJ 504 91.5 Q4 1994 Q2 1996 Q1 1997 Q3 1997 11.0%
Avalon Grove (3)
Stamford, CT 402 51.9 Q1 1995 Q3 1996 Q2 1997 Q3 1997 12.0%
Avalon Springs
Wilton, CT 102 15.5 Q3 1995 Q3 1996 Q1 1997 Q3 1997 11.4%
Avalon Commons
Smithtown, NY 312 30.6 Q1 1996 Q1 1997 Q3 1997 Q4 1997 11.1%
Avalon Crescent
Tysons Corner, VA 558 56.7 Q1 1996 Q4 1996 Q4 1997 Q1 1998 10.4%
Avalon Gardens
Nanuet, NY 504 53.1 Q3 1996 Q3 1997 Q4 1998 Q1 1999 10.1%
Avalon Court
Melville, NY 154 17.8 Q4 1996 Q3 1997 Q1 1998 Q2 1998 10.5%
Avalon at Fair Lakes
Fairfax, VA 234 23.2 Q1 1997 Q4 1997 Q3 1998 Q4 1998 10.0%
Avalon Willow
Mamaroneck, NY 227 39.5 Q1 1997 Q3 1998 Q4 1998 Q2 1999 9.7%
Avalon at Cameron Court
Alexandria, VA 460 44.7 Q1 1997 Q1 1998 Q4 1998 Q2 1999 10.2%
-------- ------------- -------------------
3,797 $ 459.4 10.6%
======== ============= ===================
</TABLE>
- -----------------
(1) Stabilized occupancy is defined as the first full quarter of 95%
or greater occupancy.
(2) Projected EBITDA represents gross potential earnings projected to
be achieved based on current rents prevailing in the respective
community's local market (without adjustment for potential growth
factors) and before interest, income taxes, depreciation,
amortization and extraordinary items, minus (a) economic vacancy
and (b) projected stabilized operating expenses. Total budgeted
cost includes all capitalized costs projected to be incurred to
develop the respective Development Community, including land
acquisition costs, construction costs, real estate taxes,
capitalized interest and loan fees, permits, professional fees,
allocated development overhead and other regulatory fees.
(3) Currently anticipated to be held by a joint venture.
14
<PAGE> 16
The Company intends to periodically update the projections in the
table on the preceding page to the extent Management believes there may be or
has been a material change in these projections on an aggregate basis. There
can be no assurance that the Company will complete the Development Communities,
that the Company's budgets, leasing, occupancy or earnings estimates will be
realized or that future developments will realize comparable returns.
In accordance with GAAP, the Company capitalizes interest expense
during construction until each building obtains a certificate of occupancy;
thereafter, interest for each completed building is expensed. Capitalized
interest during the years ended December 31, 1996, 1995 and 1994 totaled $12.2
million, $6.0 million and $2.8 million, respectively.
Development Rights
As of March 14, 1997, the Company was pursuing the development of 17
new apartment communities. The status of these new communities ranges from
land owned or under option for which design and architectural planning has just
commenced to land under option with completed site plans and drawings where
construction can commence almost immediately. Although there is no assurance
that all or any of these communities will proceed to development, the
successful completion of all of these communities would ultimately add 4,806
institutional-quality apartment homes to the Company's portfolio. Many of
these apartment homes will offer features similar to those offered by the
Current Communities, including vaulted ceilings, lofts, fireplaces,
dishwashers, disposals, washer/dryer connections, ice-makers, patios and decks.
Recreational facilities may include swimming pools, fitness facilities,
playgrounds, picnic areas, tennis courts, racquetball courts or indoor
basketball courts. Direct-access garages are also planned for certain
Development Rights.
The Company generally holds Development Rights through options to
acquire land, although one development right is controlled through a joint
venture partnership that owns land (New Canaan, CT). In connection with the
completion of the Initial Offering, the Company acquired, as part of the
Development Rights, those site plans, building permits, zoning approvals and
other materials associated with the Development Rights then in effect. As of
December 31, 1996, the cumulative capitalized costs for the 17 current
Development Rights is approximately $10.5 million including the capitalized
cost of $6.1 million related to the purchase of land in New Canaan,
Connecticut. The properties that comprise the Development Rights are located
in Maryland, Massachusetts, New Jersey, New York, and Connecticut and are in
different stages of the due diligence and regulatory approval process. The
decisions as to which of the Development Rights to pursue, if any, or to
continue to pursue once an investment in a Development Right is made are
business judgments to be made by Management after financial, demographic and
other analysis is performed. There can be no assurance that the Company will
succeed in obtaining zoning and other necessary governmental approvals or the
financing required to develop these communities, or that the Company will
decide to develop any particular community. Further, there can be no assurance
that construction of any particular community will be undertaken or, if
undertaken, will begin at the expected times or be completed within the
budgeted costs assumed in the financial projections. Finally, Management
intends to limit the percentage of debt used to finance new developments and
acquisitions. To comply with Management's self-imposed limitation in the use
of debt, future equity offerings may be required to finance the development of
those Development Rights scheduled to start construction after 1997.
Notwithstanding the lack of assurance with respect to the prospective
development of any particular community that is the subject of the Development
Rights, Management believes that the Development Rights, in the aggregate,
present attractive potential opportunities for future development and growth of
the Company's Funds from Operations (as hereinafter defined.)
Historically, Management has been successful in controlling land
through option agreements prior to commencing construction. Generally, this
allowed the Company to limit exposure to development risks by purchasing land
only when the entitlement process was complete and when construction could
commence immediately after the purchase of the land. Accordingly, at December
31, 1996, the Company did not
15
<PAGE> 17
directly own any unentitled and undeveloped land. The Company, however, holds
an 86.5% non-recourse joint venture partnership interest in a partnership that
owns undeveloped land. The Company may purchase undeveloped land before
development and financing plans are complete if, in Management's judgment,
controlling the land through an option agreement is not viable, the land can be
acquired under attractive terms, is in the advanced stages of the entitlement
process and can proceed to development within a medium-term planning and
marketing horizon. The current inventory of Development Rights is summarized
in the following table:
DEVELOPMENT RIGHTS SUMMARY
<TABLE>
<CAPTION>
TOTAL
ESTIMATED BUDGETED
NUMBER OF COST
LOCATION HOMES ($ MILLIONS)
----------------------- ------------ ---------------
<S> <C> <C>
1. Freehold, NJ 452 $ 37.4
2. Quincy, MA 171 15.5
3. New Canaan, CT (1) 104 23.2
4. Greenburgh - II, NY 500 64.2
5. Greenburgh - III, NY 294 37.7
6. Darien, CT 172 20.7
7. Fort Lee, NJ 351 52.6
8. Peabody, MA 434 35.8
9. Hull, MA 244 20.3
10.Jersey City, NJ 221 38.5
11.New Rochelle, NY 375 52.5
12.Melville - II, NY 350 37.0
13.Wilmington, MA 204 18.0
14.Gaithersburg - II, MD 96 9.0
15.Bronxville, NY (1) 110 18.8
16.Parsippany, NY 460 61.8
17.Danbury, CT 268 25.0
----------- -----------
Total 4,806 $ 568.0
=========== ===========
</TABLE>
(1) Currently anticipated that the land seller will retain a minority limited
partnership interest.
16
<PAGE> 18
Acquisition Activities and Other Recent Developments
Acquisitions of Existing Communities. In 1996, the Company acquired
six communities that total 1,765 apartment homes, and through March 14, 1997,
two additional communities were acquired. These communities are summarized as
follows:
On January 4, 1996, the Company acquired Avalon Chase, a 360 apartment
home, garden-style community located in Marlton, New Jersey, for approximately
$23,292,000.
On May 23, 1996, the Company purchased Avalon Pines, a 174 apartment
home, luxury garden-style community located in Virginia Beach, Virginia for
$8,420,000. In connection with this acquisition, the Company assumed a
conventional collateralized loan with an outstanding principal amount of
approximately $5,600,000 and bearing an 8.0% annual fixed interest rate with a
maturity date of December 2003. This community was managed by the Company
prior to its acquisition.
On July 23, 1996, the Company purchased Avalon at Fairway Hills II,
two luxury, garden-style communities located in Columbia, Maryland for
$32,430,000. These communities contain a total of 527 apartment homes.
On September 25, 1996, the Company purchased Avalon at Boulders in
Richmond, Virginia for $14,831,000. This luxury garden-style community
contains a total of 284 apartment homes.
On December 13, 1996, the Company acquired AutumnWoods in Fairfax,
Virginia for a total purchase price of $30,052,000, including the assumption of
a conventional collateralized loan with an outstanding principal balance of
approximately $24,300,000. This loan bears interest at a fixed rate of 9.25%
per annum and matures in November 1997. The Company expects to repay the loan
in August 1997, the earliest date on which the loan may be prepaid with no
penalty. This luxury, garden-style apartment community contains a total of 420
apartment homes.
On January 11, 1997, the Company acquired two apartment communities,
Avalon at Ballston-Quincy and Vermont Towers, in Arlington, Virginia for a
total purchase price of approximately $45,698,000 of which approximately
$700,000 was paid in the form of partnership units exchangeable for shares of
the Company's Common Stock (based on the market value of the Common Stock on
the closing date of the acquisition). One of these luxury, high-rise apartment
communities contains 222 apartment homes; the other contains a total of 232
apartment homes in two connected buildings.
Sale of Existing Communities. On November 1, 1996, the Company sold
two garden-style apartment communities, formerly Avalon Brooke and Avalon
Heights, located in Middletown (near Hartford), Connecticut, to a single buyer
for a total sale price of $32,650,000. The net cash proceeds from the sale
were used to retire indebtedness under the Company's Unsecured Facilities. In
connection with the sale, Avalon recognized a non-recurring gain totaling
approximately $7,850,000.
Land Acquisitions for New Developments. On January 4, 1996, the
Company purchased 19.1 acres of land in Tysons Corner, Virginia for
$13,750,000. Construction of a new apartment community, Avalon Crescent,
started in the first quarter of 1996. Construction of this 558 apartment home
community is scheduled for completion in the fourth quarter of 1997.
On February 7, 1996, the Company completed the purchase of 21 acres of
land in Smithtown, New York. Construction of a new garden-style apartment
community, Avalon Commons, started in the first quarter of 1996. Construction
of this 312 apartment home community is expected to be completed by the third
quarter of 1997.
17
<PAGE> 19
On July 3, 1996, the Company purchased a 47.4 acre tract of land in
Nanuet, New York for $7,000,000. A new 504 apartment home community, Avalon
Gardens, commenced construction in the third quarter of 1996.
On October 2, 1996, the Company purchased a 10.8 acre tract of land in
Melville, New York for $3,000,000. A new 154 apartment home community, Avalon
Court, commenced construction in the fourth quarter of 1996.
On December 4, 1996, the Company purchased a 10 acre tract of land in
Fairfax, Virginia for $3,642,500. Construction of a new 234 apartment home
community, Avalon at Fair Lakes, commenced in the first quarter of 1997.
The Company has contracted to purchase five tracts of land in
Mamaroneck, New York containing a total of four acres for an aggregate purchase
price of $6,010,000. The Company acquired the first 2.3 acres of land on
December 23, 1996 for $2,750,000 and expects to acquire the remaining tracts in
April 1997. Construction of a new 227 apartment home community, Avalon Willow,
started in the first quarter of 1997.
On January 15, 1997, the Company purchased seven acres of land in
Alexandria, Virginia for $4,300,000. Construction of a new 460 apartment home
community, Avalon at Cameron Court, commenced construction in the first quarter
of 1997.
On March 12, 1997, the Company purchased 8.29 acres of land in Quincy,
Massachusetts for $950,000. Construction of a new 171 apartment home
community, Avalon at Faxon Park, is expected to start in the second quarter of
1997.
Financing Activities. On January 18, 1996, the Company completed the
sale of 2,227,000 shares of its Common Stock to certain institutional investors
under its existing shelf registration statement at a purchase price of $21.25
per share. Net cash proceeds of approximately $46,700,000 were used to repay
amounts outstanding under the Unsecured Facility.
In January 1996, the Company arranged the Supplemental Unsecured
Facility in the amount of $35,000,000.
On January 30, 1996, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $327,670,000 of
securities. The registration statement provided for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
The remaining securities issuable under this registration statement were
carried forward into a shelf registration statement filed by the Company on
February 24, 1997 (described below).
On February 16, 1996, the Company completed an offering of 4,455,000
shares of 9% Cumulative Series A Redeemable Preferred Stock. The net cash
proceeds from the sale (approximately $108,225,000) were used to retire
indebtedness under the Company's Unsecured Facility, to retire construction
loans and for general corporate purposes.
On August 1, 1996, the Company completed a new tax-exempt credit
enhancement facility with the Federal National Mortgage Association ("Fannie
Mae") that will provide a long-term, cost-effective credit enhancement source
for the Company's current and future tax-exempt bond debt. In connection with
this facility, the Company completed the refinancing of approximately
$91,000,000 of its tax-exempt bond debt. The facility initially involves
eleven communities, seven that are financed with tax-exempt bonds and four
unencumbered communities that are pledged as additional collateral.
18
<PAGE> 20
In September 1996, pricing on the Company's Unsecured Facilities was
reduced. The consortium of banks providing the Company's $165,000,000
Unsecured Facility lowered the interest rate charged under the facility to
LIBOR plus 1.19% from LIBOR plus 1.44%. Pricing under the Supplemental
Unsecured Facility provided by First Union National Bank was reduced to LIBOR
plus .95% from LIBOR plus 1.25%.
On October 22, 1996, the Company completed an offering of 4,300,000
shares of 8.96% Series B Cumulative Redeemable Preferred Stock. The net cash
proceeds from the sale (approximately $104,114,000) were used to retire
indebtedness under the Company's Unsecured Facilities.
On December 13, 1996, the Company completed a public offering of
2,645,000 shares of common stock at a purchase price of $26.25 per share. The
net cash proceeds of approximately $66,000,000 from the offering were used
primarily to repay amounts outstanding under the Unsecured Facilities, to fund
the acquisition and development of additional apartment communities and for
general working capital purposes.
On February 24, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $350,000,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
19
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
In March 1996, Procida Construction Corporation, the original
contractor selected to build Avalon Cove, notified the Company that it was not
able to complete the contract within the guaranteed maximum price and
subsequently defaulted on its contractual obligations. In April 1996, the
Company filed a demand for arbitration with the American Arbitration
Association in New York against Procida Construction Corporation to recover any
excess over the original guaranteed maximum price contract and instituted suit
in the U.S. District Court to compel arbitration. Procida Construction has
since filed Chapter 11 Bankruptcy, and consequently no assurance can be
provided that collection efforts will be successful. Procida Construction has
an unspecified claim against Avalon Properties, Inc. arising out of its
termination. Management believes this claim is without merit. However, should
Procida Constrcution prevail, Management believes that the cost of this claim
would not have a material adverse impact on the financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1996.
20
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the ticker symbol "AVN." The following table sets forth the
quarterly high and low closing prices per share of the Company's Common Stock
on the NYSE for the years ended December 31, 1996 and 1995, as reported by the
NYSE. On March 3, 1997, there were 356 holders of record of 33,522,839 shares
of the Company's Common Stock.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ---------------------------------------
Closing Price Closing Price
-------------------------- Dividends ------------------------ Dividends
Quarter Ended High Low Paid High Low Paid
----------------- -------------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $23.000 $20.875 $ 0.37 $22.250 $18.000 $ 0.3
June 30 $22.125 $20.375 $ 0.37 $21.000 $19.125 $ 0.3
September 30 $23.750 $21.500 $ 0.37 $21.000 $19.125 $ 0.3
December 31 $29.000 $23.125 $ 0.38 $21.500 $19.000 $ 0.3
</TABLE>
On January 22, 1997, the Company declared a cash dividend on its
Common Stock of $.38 per share for the fourth quarter of 1996. The dividend
was paid on February 14, 1997 to all stockholders of record as of February 3,
1997. The Company expects to continue its policy of paying regular quarterly
cash dividends. However, dividend distributions will be declared at the
discretion of the Board of Directors and will depend on actual Funds from
Operations of the Company, its financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Code and such
other factors as the Board of Directors may deem relevant. The Board of
Directors may modify the Company's dividend policy from time-to-time.
The total of the four dividends paid in 1996 exceeds the net income
for the year ended December 31, 1996 computed in accordance with Federal income
tax regulations. Accordingly, the Company determined that 78% of the $1.49 per
share dividends paid and declared in 1996 represented ordinary dividend income
to its stockholders and 6% represented capital gain. The remaining 16% is
non-taxable return of capital that reduces the stockholders' basis in the
Company's Common Stock.
The Company has an optional Dividend Reinvestment and Stock Purchase
Plan (the "Plan") which allows holders of Common Stock to acquire additional
stock by automatically reinvesting dividends. Common Stock is acquired pursuant
to the Plan at a price equal to 98% of the market price of such stock, without
payment of any brokerage commission or service charge on such purchases. The
Plan also allows stockholders to purchase a limited amount of additional stock
at 100% of the market price of such stock by making optional cash payments
without payment of any brokerage commission or service charge on such
purchases. Stockholders who do not participate in the Plan continue to receive
cash dividends as declared.
21
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The following table below provides historical consolidated financial,
operating and other data for the Company and the Predecessor. The table should
be read with the consolidated financial statements of the Company and the notes
included in this report.
<TABLE>
<CAPTION>
Company (1)
-----------------------------------------------------------
Years ended 11/18/93
------------------------------------------- through
12/31/96 12/31/95 12/31/94 12/31/93
---------- ---------- ----------- -----------
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenue:
Rental income $ 123,354 $ 94,821 $ 71,756 $ 7,241
Management fees 1,439 1,926 2,077 211
Other income 420 466 468 21
----------- ---------- ----------- -----------
Total revenue 125,213 97,213 74,301 7,473
----------- ---------- ----------- -----------
Expenses:
Operating expenses 46,705 35,743 27,680 2,770
Interest expense 9,545 11,056 5,687 632
Depreciation and amortization 20,956 16,558 12,342 1,247
General and administrative 3,807 3,387 2,482 200
Development costs write-off 450 400 400 47
----------- ---------- ----------- -----------
Total expenses 81,463 67,144 48,591 4,896
----------- ---------- ----------- -----------
Equity in income
of joint ventures 1,025 440 701 44
Interest income 887 953 872 118
Investment interest expense -- -- -- --
Minority interest income 495 633 733 44
----------- ---------- ----------- -----------
Income (loss) before gain on sale of
communities and extraordinary items 46,157 32,095 28,016 2,783
Gain on sale of communities 7,850 -- -- --
Extraordinary items (2,356) (1,158) -- --
----------- ---------- ----------- -----------
Net income (loss) 51,651 30,937 28,016 2,783
Dividends attributable to preferred stock (10,422) -- -- --
----------- ---------- ----------- -----------
Net income (loss) available to common
stockholders $ 41,229 $ 30,937 $ 28,016 $ 2,783
=========== ========== =========== ===========
Net income per share (2) $ 1.34 $1.09 $1.10 $ 0.12
Cash dividends declared per share (2) $ 1.49 $1.46 $1.08 $ 0.17
Weighted average shares outstanding (2) 30,739,504 28,365,427 25,486,932 22,432,494
OTHER INFORMATION:
Funds from Operations (3) $ 54,622 $ 46,879 $ 39,485 $ 3,943
Gross EBITDA (4) $ 75,771 $ 58,756 $ 45,173 $ 4,544
Total rental communities (5) 45 38 31 22
Total number of apartment homes (5) 13,368 11,255 9,847 7,294
Development Starts: Communities 4 7 4 --
Apartment Homes 1,528 1,178 1,141 --
Developments Completed: Communities 6 1 3 --
Apartment Homes 1,390 246 958 --
Acquisitions Completed: Communities 6 7 6 1
Apartment Homes 1,765 1,304 1,594 250
Dispositions Completed: Communities 2 -- -- --
Apartment Homes 518 -- -- --
BALANCE SHEET INFORMATION:
Real estate, before
accumulated depreciation $ 1,081,906 $ 782,433 $ 593,632 $ 426,570
Total assets $ 1,082,771 $ 786,711 $ 602,558 $ 451,851
Notes payable and Unsecured Facilities $ 310,606 $ 340,686 $ 162,265 $ 94,648
</TABLE>
<TABLE>
<CAPTION>
Predecessor (1)
----------------------------------------
01/01/93 Year
through ended
11/17/93 12/31/92
----------- ----------
(Dollars in thousands, except per share information)
<S> <C> <C>
OPERATING INFORMATION:
Revenue:
Rental income $ 50,102 $ 50,823
Management fees 1,344 1,711
Other income 410 234
------------ ----------
Total revenue 51,856 52,768
------------ ----------
Expenses:
Operating expenses 21,620 23,032
Depreciation and amortization 10,851 10,828
Interest expense 24,557 23,092
General and administrative 1,341 1,574
Development costs write-off -- 119
------------ ----------
Total expenses 58,369 58,645
Equity in income
of joint ventures 344 162
Interest income 599 1,839
Investment interest expense (204) (2,922)
Minority interest income -- --
------------ ----------
Income (loss) before gain on sale of
communities and extraordinary items (5,774) (6,798)
Gain on sale of communities -- --
Extraordinary items 10,194 --
------------ ----------
Net income (loss) 4,420 (6,798)
Dividends attributable to preferred stock -- --
------------ ----------
Net income (loss) available to common
stockholders $ 4,420 $ (6,798)
============ ==========
Net income per share (2) $ -- $ --
Cash dividends declared per share (2) $ -- $ --
Weighted average shares outstanding (2) N/A N/A
OTHER INFORMATION:
Funds from Operations (3) $ 4,588 $ 3,460
Gross EBITDA (4) $ 29,239 $ 28,205
Total rental communities (5) 21 20
Total number of apartment homes (5) 7,044 6,756
Development Starts: Communities -- --
Apartment Homes -- --
Developments Completed: Communities -- --
Apartment Homes -- --
Acquisitions Completed: Communities -- --
Apartment Homes -- --
Dispositions Completed: Communities -- --
Apartment Homes -- --
BALANCE SHEET INFORMATION:
Real estate, before
accumulated depreciation $ -- $ 373,986
Total assets $ -- $ 372,041
Notes payable and Unsecured Facilities $ -- $ 359,888
</TABLE>
22
<PAGE> 24
Notes to Selected Financial Data
(1) See consolidated financial statements of the Company and the related
notes included in this report.
(2) Share and per share information is only presented for the Company
because no common stock was outstanding during periods presented for
the Predecessor. The first full year operating as a public company
was 1994 and the timing of dividend declarations and payments was such
that only three dividends were paid in 1994.
(3) Management generally considers Funds from Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations is determined in accordance with a resolution adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT"), and is defined as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation of
real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. The calculation of Funds from
Operations for the periods presented is reflected in the following
table:
SUMMARY CALCULATION OF FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Company Predecessor
------------------------------------------------------ ------------------------
Years ended 11-18-93 1-1-93 Year
------------------------------------------- through through ended
12-31-96 12-31-95 12-31-94 12-31-93 11-17-93 12-31-92
----------- ---------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 51,651 $ 30,937 $ 28,016 $ 2,783 $ 4,420 $ (6,798)
Depreciation (real estate related) 18,566 14,468 11,153 1,122 10,083 9,932
Joint venture adjustments 321 316 316 38 279 326
Preferred stock dividends (10,422) -- -- -- -- --
Gain on sale of communities (7,850) -- -- -- -- --
Extraordinary items 2,356 1,158 -- -- (10,194) --
----------- ----------- ----------- ----------- --------- ---------
Funds from Operations $ 54,622 $ 46,879 $ 39,485 $ 3,943 $ 4,588 $ 3,460
=========== =========== =========== =========== ========= =========
Weighted average
shares outstanding 30,739,504 28,365,427 25,486,932 22,432,494 -- --
=========== =========== =========== =========== ========= =========
</TABLE>
Funds from Operations does not represent net income or cash flows from
operations as determined in accordance with GAAP and Funds from
Operations should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity. Funds from
Operations does not measure whether cash flow is sufficient to fund
all of the Company's cash needs including principal amortization,
capital improvements and distributions to stockholders. Funds from
Operations does not represent cash flows from operating, investing or
financing activities as determined in accordance with GAAP, which are
discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's calculation of Funds from Operations, as
described above.
(4) Gross EBITDA represents earnings before interest, income taxes,
depreciation and amortization, gain on sale of communities and
extraordinary items. Gross EBITDA is relevant to an understanding of
the economics of the Company because it indicates cash flow available
from Company operations to service fixed obligations. Gross EBITDA
should not be considered as an alternative to operating income, as
determined in accordance with GAAP, as an indicator of the Company's
operating performance, or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. See
"Communities" for property EBITDA and the related definition.
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<PAGE> 25
(5) These amounts include communities and apartment homes only after
stabilized occupancy has occurred. A community is considered by the
Company to have achieved stabilized occupancy on the earlier of (i)
the first day of any month in which the community reaches 95% physical
occupancy or (ii) one year after completion of construction. These
amounts also include Falkland Chase, which has 450 apartment homes and
Avalon Run, which has 426 apartment homes, both of which are joint
venture investments.
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). The words "believe," "expect,"
"anticipate," "intend," "estimate", "assume" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. In addition,
information concerning construction, occupancy and completion of Development
Communities and Development Rights and related cost and EBITDA estimates, are
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and
other factors, which are in some cases beyond the control of the Company and
may cause the actual results, performance or achievements of the Company to
differ materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements.
Certain factors that might cause such differences include, but are not
limited to, the following: The Company may abandon development opportunities;
construction costs of a community may exceed original estimates; construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs and reduced rental revenues; occupancy
rates and market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available on favorable terms; the Company's cash flow may be insufficient to
meet required payments of principal and interest; and existing indebtedness may
not be able to be refinanced or the terms of such refinancing may not be as
favorable as the terms of existing indebtedness.
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
The Company's operations consist of the development, construction,
acquisition and operation of apartment communities in the Mid-Atlantic and
Northeast regions of the United States. As of March 14, 1997, the Company owned
43 completed and operating communities (including Avalon at Ballston-Quincy and
Vermont Towers which were purchased on January 11, 1997), a 50% general
partnership interest in another community (Falkland Chase), a 49% equity
interest (including a 40% cash flow interest) in another community (Avalon
Run), a 100% interest in a senior participating mortgage note secured by
another community (Avalon Arbor) and ownership interests in 11 communities
under construction. In total, 43 operating communities (including Avalon
Arbor) are included in the Company's operating results presented herein. In
addition, the income category "Equity in income of joint ventures" contained in
the Consolidated Statements of Operations includes income attributable to the
Company's 50% share of operating income from the general partnership interest
through which it holds one community (Falkland Chase), the Company's interest
in Avalon Run, the Company's 86.5% effective equity interest in Town Close
Associates and 100% of the operating income from the anticipated Avalon Grove
joint venture to be formed upon completion of construction (a Development
Community). The Company's investment in the senior participating mortgage note
relating to the Avalon Arbor community is presented as an investment in real
estate in the accompanying Consolidated Financial Statements in accordance with
GAAP.
RESULTS OF OPERATIONS
The changes in operating results from period-to-period are primarily
the result of increases in the number of apartment homes owned due to the
development and acquisition of additional communities. Where appropriate,
comparisons are made on a weighted average basis for the number of occupied
apartment homes
25
<PAGE> 27
in order to adjust for such changes in the number of apartment homes. For
Stabilized Communities, all occupied apartment homes owned are included in the
calculation of weighted average occupied apartment homes for each reporting
period. For communities in the initial lease-up phase, only apartment homes
that are completed and occupied are included in the weighted average number of
occupied apartment homes calculation for each reporting period.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
The Company's principal markets are characterized by high
barriers-to-entry and restrictive zoning regulations and it often requires
several years to obtain entitlements to build an apartment community. For this
reason, little new rental product has been added in the Company's principal
markets in recent years. For the markets north of Maryland, Management is not
aware of any significant level of planned apartment construction starts. For
the Washington, D.C. metropolitan area, permitting activity has increased, with
8,000 apartment homes in planning for delivery over the next 36-month period.
Estimated absorption during this period totals 9,000 apartment homes, which
would create a supply-demand balance that would be favorable for owners of
multifamily apartment communities. At December 31, 1996, Management had
positioned the Company's portfolio of Stabilized Communities to a physical
occupancy level of 95.7% and for the year ended December 31, 1996, these
communities achieved an average economic occupancy of 95.2%. Average economic
occupancy for the portfolio in 1995 was 95.8%. This high occupancy was
achieved through aggressive marketing efforts combined with limited and
targeted pricing adjustments. This positioning has resulted in overall growth
in rental revenue from Stabilized Communities. It is Management's strategy to
maximize total rental revenue through management of rental rates and occupancy
levels. If market and economic conditions change, Management may adopt a
strategy of maximizing rental rates, which could lead to lower occupancy
levels, if Management believes that this strategy will maximize rental revenue.
Given the currently high occupancy level of the portfolio, Management
anticipates that, for the foreseeable future, rental revenue and net income
gains from Stabilized Communities will continue primarily through higher rental
rates and enhanced operating cost leverage provided by high occupancy, rather
than through occupancy gains. Although Management believes the current
occupancy levels can be sustained for the foreseeable future at current rental
rates, no assurance can be given in this regard.
Income before gain on sale of communities and extraordinary items
increased $14,062,000 (43.8%) from $32,095,000 in 1995 to $46,157,000 in 1996.
The principal reasons for this increase are additional operating income from
newly completed and acquired communities during 1995 and 1996 as well as growth
in operating income from existing communities resulting principally from
increases in rental revenue. Property level EBITDA for Established Communities
increased by $2,351,000 (4.3%) to $57,181,000 from $54,830,000 as a result of a
4.3% increase in total revenue and a 4.4% increase in operating expenses. The
notable reasons for these increases are discussed in the following paragraphs.
Rental income increased $28,533,000 (30.1%) to $123,354,000 in 1996
from $94,821,000 in 1995. Of this increase, $3,591,000 relates to Established
Communities and $24,942,000 is attributable to newly completed or acquired
apartment homes.
Overall Portfolio - The $28,533,000 increase in rental income is
primarily due to increases in the weighted average number of occupied
apartment homes as well as an increase in the weighted average monthly
rental income per occupied apartment home. The weighted average
number of occupied apartment homes increased from 9,304 apartment
homes during 1995 to 11,043 apartment homes during 1996 as a result of
the development and acquisition of new communities. Weighted average
monthly revenue per occupied apartment home increased $47 (5.5%) from
$846 in 1995 to $893 in 1996. Average economic occupancy decreased .6%
from 95.8% in 1995 to 95.2% in 1996.
Established Communities - Weighted average monthly revenue per
occupied apartment home increased $41 (4.8%) from $849 in 1995 to $890
in 1996. Average economic occupancy
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<PAGE> 28
decreased .4% from 96.3% to 95.9%. Accordingly, rental revenue from
Established Communities increased $3,591,000 (4.4%) from $81,702,000
in 1995 to $85,293,000 in 1996. When combined with other income from
Established Communities, total revenue from Established Communities
increased by $3,553,000 in 1996, a 4.3% increase from 1995.
Management fees decreased $487,000 (25.3%) to $1,439,000 in 1996 from
$1,926,000 in 1995. The decrease is primarily due to a decline in the number
of apartment homes managed for third-party owners in 1996. This decline is due
to the sale and cancellation of management contracts of some third-party
communities in 1995 and 1996 as well as the acquisition of two Current
Communities in the third quarter of 1995 and one Current Community in the
second quarter of 1996 that were previously managed by the Company for
third-party owners prior to their acquisition. Management has decided not to
aggressively pursue new fee management business at this time. New fee
management business will be accepted in cases where it is profitable and where
it presents a possible acquisition opportunity. This creates a very selective
environment under which new fee management business will be added, which the
Company anticipates will result in an overall decline in this revenue source in
the future.
Operating expenses including write-off of deferred development costs
increased $11,012,000 (30.5%) to $47,155,000 in 1996 from $36,143,000 in 1995.
Overall Portfolio - This increase is due to the acquisition of new
communities as well as the completion of Development Communities
whereby maintenance, property taxes, insurance and other costs are
expensed as such communities move from the initial construction and
lease-up phase to the operating phase. The increased costs of snow
removal and other weather related expenses as a result of the severe
winter during the first quarter of 1996 also contributed to the
increase.
Established Communities - Operating expenses increased $1,202,000
(4.4%) to $28,438,000 from $27,236,000 in 1995. This increase was
concentrated in the maintenance category partially due to the severe
winter weather throughout the Northeast and Mid-Atlantic regions
during the first quarter of 1996 as well as increases in the property
taxes for newly stabilized development communities and marketing
expenses.
Interest expense decreased $1,511,000 (13.7%) to $9,545,000 in 1996
from $11,056,000 in 1995. This decrease is primarily attributable to the sale
of 4,872,000 shares of the Company's Common Stock, the sale of 4,455,000 shares
of the Company's Series A Cumulative Redeemable Preferred Stock and the sale of
4,300,000 shares of the Company's Series B Cumulative Redeemable Preferred
Stock in 1996, as the net cash proceeds from the sales were used principally to
retire indebtedness under the Company's Unsecured Facilities, variable rate
construction loans and to repay the mortgage note encumbering the Avalon at
Carter Lake community. Lower short-term interest rates under the Unsecured
Facilities due to negotiated rate reductions achieved as well as lower LIBOR
rates also contributed to the decline. Finally, an increase in capitalized
interest expense due to an increase in the number of apartment homes under
construction and lower interest and credit enhancement costs in connection with
the completion of the tax-exempt, credit enhancement facility with Fannie Mae
are other reasons for the overall decline.
Depreciation and amortization increased $4,398,000 (26.6%) to
$20,956,000 in 1996 from $16,558,000 in 1995. This increase reflects
additional depreciation expense for recently acquired and developed communities
and the amortization of the costs related to the issuance of tax-exempt
custodial receipts in May 1995 as well as the costs related to the closing of
the Unsecured Facility and the issuance of $100,000,000 of unsecured senior
notes in September 1995, offset by lower amortization expense due to the new
Fannie Mae credit enhancement facility.
General and administrative increased $420,000 (12.4%) to $3,807,000 in
1996 from $3,387,000 in 1995. This increase is primarily due to the
introduction of the restricted stock grant program under the
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<PAGE> 29
Amended and Restated 1995 Equity Incentive Plan (and related legal and proxy
costs) as well as staff additions related to growth in the Company's portfolio
and the implementation of the company-wide systems enhancement program.
Equity in income of joint ventures increased $585,000 to $1,025,000 in
1996 from $440,000 in 1995. This increase is principally the result of
non-recurring income from the anticipated Avalon Grove joint venture in which
the Company is allocated 100% of the lease-up period income. Increased net
income from the Falkland Partners joint venture due to an increase in rental
revenue as well as the income from the Town Close Associates joint venture that
was formed in June 1995 also contributed to the increase.
Gain on sale of communities totaled $7,850,000 during 1996 as a result
of the sale of two apartment communities near Hartford, Connecticut.
Extraordinary items totaled $2,356,000 during 1996 and reflect the
write-off of unamortized deferred financing costs associated with the
refinancing of tax-exempt bonds in conjunction with the completion of the new
credit enhancement facility with Fannie Mae.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Income before gain on sale of communities and extraordinary items
increased $4,079,000 (14.6%) from income of $28,016,000 in 1994 to income of
$32,095,000 in 1995. The principal reasons for this increase are increased
operating income from newly completed or acquired communities during 1994 and
1995 as well as growth in operating income from existing communities. Property
level EBITDA for Established Communities increased by $1,852,000 (4.4%) to
$43,563,000 from $41,711,000 as a result of a 4.1% increase in total revenue,
and a 3.3% increase in operating expenses. The notable reasons for these
increases are discussed in the following paragraphs.
Rental income increased $23,065,000 (32.1%) to $94,821,000 in 1995
from $71,756,000 in 1994. Of such increase, $2,521,000 related to Established
Communities and $20,544,000 was attributable to newly completed or acquired
apartment homes.
Overall Portfolio - The $23,065,000 increase in rental income was
primarily due to increases in the weighted average number of occupied
apartment homes as well as an increase in the weighted average monthly
rental income per occupied apartment home. The weighted average
number of occupied apartment homes increased from 7,500 apartment
homes during 1994 to 9,304 apartment homes during 1995 as a result of
the development and acquisition of new communities and increased
overall occupancy from Established Communities. Weighted average
monthly revenue per occupied apartment home increased $38 (4.7%) from
$808 to $846. Average economic occupancy increased .3% from 95.5% in
1994 to 95.8% in 1995.
Established Communities - Weighted average monthly revenue per
occupied apartment home increased $29 (3.6%) from $798 in 1994 to $827
in 1995. Average economic occupancy increased to 96.5% from 96.2%
(.3%). Increased rental rates and occupancy combined to generate a
total revenue increase from Established Communities of $2,564,000 in
1995, a 4.1% increase from 1994.
Management fees decreased $151,000 (7.3%) to $1,926,000 in 1995 from
$2,077,000 in 1994. The decrease is primarily due to a decrease in the number
of apartment homes managed for third-party owners due to the cancellation of
management contracts as well as the acquisition of three Current Communities
that were managed by the Company prior to their acquisition.
Operating expenses including write-off of deferred development costs
increased $8,063,000 (28.7%) to $36,143,000 in 1995 from $28,080,000 in 1994.
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<PAGE> 30
Overall Portfolio - This increase was due to the acquisition of new
communities as well as the completion of Development Communities
whereby maintenance, property taxes, insurance and other costs are
expensed as such communities move from the initial construction and
lease-up phase to the operating phase, and increased costs of
maintenance as communities stabilize and mature. Operating expenses
(including the write-off of deferred development costs) as a
percentage of total revenue declined to 37.2% in 1995 from 37.8% in
1994, reflecting favorable operating cost leverage and cost
containment.
Established Communities - Operating expenses increased $713,000 (3.3%)
to $22,253,000 from $21,540,000 in 1994. This increase was
concentrated in the maintenance, property taxes, and payroll
categories and was partially offset by decreases in insurance and
utilities costs.
Interest expense increased $5,369,000 (94.4%) to $11,056,000 in 1995
from $5,687,000 in 1994. The increase was primarily attributable to higher
average outstanding balances and interest rates under the Unsecured Facility,
higher weighted average interest rates on floating rate tax-exempt debt and
incremental interest on the issuance of $33,690,000 and $50,650,000 of
tax-exempt debt and $100,000,000 of unsecured senior notes in July 1994, May
1995 and September 1995, respectively.
Depreciation and amortization increased $4,216,000 (34.2%) to
$16,558,000 in 1995 from $12,342,000 in 1994. The increase reflects additional
depreciation expense for recently acquired and developed communities and the
amortization of the costs related to the issuance of tax-exempt bonds in July
1994, tax-exempt custodial receipts in May 1995 as well as the costs related to
the closing of the Unsecured Facility and the issuance of $100,000,000 of
unsecured senior notes in September 1995.
General and administrative increased $905,000 (36.5%) to $3,387,000 in
1995 from $2,482,000 in 1994. This increase reflects staff additions necessary
to manage growth in the Company, the cost of one additional independent
director and the introduction of the 1995 Equity Incentive Plan (and related
legal and proxy costs).
Equity in income of joint ventures decreased $261,000 (37.2%) to
$440,000 in 1995 from $701,000 in 1994. The decrease was principally the
result of non-recurring income from the Avalon Run joint venture during 1994 in
which the Company was allocated 100% of the lease-up period income.
Interest income increased $81,000 (9.3%) to $953,000 in 1995 from
$872,000 in 1994. This increase was primarily due to an increase in average
interest rates earned on invested cash balances between years, offset by lower
average cash balances.
Extraordinary items totaled $1,158,000 during 1995 and reflect the
write-off of unamortized deferred financing costs associated with the
retirement of the secured revolving credit facility.
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<PAGE> 31
DISCUSSION OF CAPITALIZED COMMUNITY IMPROVEMENTS AND EXPENSED TURNOVER ("MAKE
READY") COSTS
The Company maintains a policy with respect to capital expenditures
that generally provides that only non-recurring expenditures are capitalized.
Improvements and upgrades are capitalized only if the item exceeds $15,000,
extends the useful life of the asset and is not related to making an apartment
ready for the next resident. Under this policy, virtually all capitalized
costs are non-recurring, as recurring make ready costs are expensed as
incurred, including costs of carpet and appliance replacements, floor
coverings, interior painting and other redecorating costs. The application of
this policy in 1996 resulted in capitalized expenditures for Established
Communities of approximately $160 per apartment home plus an additional $23 per
apartment home that was revenue generating. For the year ended December 31,
1996, the Company charged to maintenance expense, including carpet and
appliance replacements, a total of approximately $9.1 million for Established
Communities. Management anticipates that capitalized costs per home will
gradually rise as the Company's portfolio of communities matures. The following
is a summary of expenditures for both recurring make ready costs (expensed) and
community upgrades (capitalized) for 1996.
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<PAGE> 32
EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY
MAINTENANCE (EXPENSED)
(Dollars in thousands, except per home data)
<TABLE>
<CAPTION>
1996 Maintenance
1996 Capitalized Upgrades Expensed
Number Balance at Balance at ------------------------- ---------------------
Community of Homes 12/31/95 (1) 12/31/96 (1) Total Per Home Total Per Home
- -------------------------------- ---------- --------------- ------------ ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STABILIZED
- ----------
Avalon Park 372 $ 19,635 $ 19,717 $ 82 $ 220 $ 385 $ 1,035
Avalon at Ballston-
Washington Towers 344 36,617 36,797 180 523 303 881
Avalon at Gayton 328 9,715 9,830 115 351 324 988
Avalon at Symphony Glen 174 8,034 8,079 45 259 187 1,075
Avalon at Hampton I 186 3,661 3,702 41 220 194 1,043
Avalon at Hampton II 231 8,093 8,144 51 221 215 931
Avalon at Dulles 236 11,540 11,599 59 250 276 1,169
Avalon Knoll 300 7,851 7,905 54 180 382 1,273
Avalon Lea 296 16,057 16,101 44 149 277 936
Avalon at Fairway Hills I 192 9,281 9,368 87 453 226 1,177
Avalon Ridge 432 24,874 25,030 156 361 457 1,058
Longwood Towers 250 16,600 16,620 20 80 450 1,800
Avalon Farm 306 17,270 17,332 62 203 286 935
Avalon Glen 238 30,066 30,077 11 46 263 1,105
Avalon Pavilions 932 56,418 56,523 105 113 586 629
Avalon View 288 17,725 17,773 48 167 358 1,243
4100 Massachusetts Ave. 308 34,859 34,879 20 65 390 1,266
Avalon at Carter Lake 259 11,413 11,502 89 344 261 1,008
Avalon Pointe 140 7,731 7,748 17 121 164 1,171
Avalon Station 127 5,920 5,933 13 102 131 1,031
Avalon Woods 268 8,237 8,235 (2) (7) 199 743
Avalon at Park Center 492 37,244 37,337 93 189 366 744
Avalon at Lexington 198 14,102 14,117 15 76 207 1,045
Avalon Watch 512 28,215 28,340 125 244 495 967
Avalon Walk I 430 34,417 34,505 88 205 236 549
Avalon Walk II 334 23,537 23,597 60 180 204 611
Avalon Landing 158 9,256 9,261 5 32 195 1,234
Avalon Birches 312 13,413 13,419 6 19 234 750
Avalon at Lake Arbor 209 11,895 11,900 5 24 267 1,278
Avalon at Decoverly 368 30,947 30,978 31 84 285 774
Avalon Summit West 125 6,764 6,764 -- -- 97 776
Avalon Towers 109 15,820 15,826 6 55 217 1,991
-------- --------- --------- ------- ------- -------- --------
9,454 587,207 588,938 1,731 183 9,117 964
-------- --------- --------- ------- ------- -------- --------
NEWLY ACQUIRED/DEVELOPED
- ------------------------
Avalon Green 105 12,017 12,294 277 2,638 163 1,552
Avalon Fields 192 14,103 14,262 159 828 75 391
Avalon West 120 6,938 10,624 3,686 30,717 71 592
Avalon Station II 96 3,771 5,905 2,134 22,229 35 365
Avalon Summit East 120 6,351 9,388 3,037 25,308 82 683
Avalon Run East 206 4,421 16,002 11,581 56,218 39 189
Avalon Crossing 132 4,465 13,387 8,922 67,591 33 --
Avalon Chase (2) 360 -- 23,615 23,615 65,597 423 1,175
Avalon Pines (2) 174 -- 8,578 8,578 49,299 77 443
Avalon at Fairway Hills II (2) 527 -- 33,807 33,807 64,150 207 393
Avalon at Boulders (2) 284 -- 16,038 16,038 56,472 73 257
AutumnWoods (2) 420 -- 30,474 30,474 72,557 15 36
-------- --------- --------- ------- ------- -------- --------
2,736 52,066 194,374 142,308 52,013 1,293 473
-------- --------- --------- ------- ------- -------- --------
NEW DEVELOPMENTS 3,337 87,525 260,019 172,494 51,691 96 N/A
- ----------------
OTHER
- -----
Longwood Towers - Renovation -- 1,089 6,829 5,740 (5) 22,960 -- --
Avalon Arbor (3) 302 27,234 27,822 588 1,947 311 1,030
Avalon Brooke (6) -- 13,258 -- (13,258) -- -- --
Avalon Heights (6) -- 12,217 -- (12,217) -- -- --
Corporate Level Expenditures -- 1,837 3,924 2,087 -- -- --
-------- --------- ---------- ------- ------- -------- --------
GRAND TOTAL 15,829 (4) $ 782,433 $1,081,906 N/A N/A $ 10,817 N/A
======== ========= ========== ======= ======= ======== ========
</TABLE>
(1) Costs are presented in accordance with generally accepted
accounting principles ("GAAP") and exclude the step-up in basis
attributed to continuing investors.
(2) Acquired in 1996.
(3) Ownership through ownership of the Avalon Arbor mortgage note.
See Note 4 to the consolidated financial statements. Increase in
capitalized value relates primarily to accrued interest and does
not reflect capitalized community upgrades.
(4) Excludes Falkland Chase and Avalon Run, 876 apartment homes owned
by joint ventures in which the Company holds a 50% interest and
49% interest, respectively.
(5) Represents renovation costs incurred.
(6) Sold in 1996.
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<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. A primary source of liquidity to the Company is cash flows
from operations. Operating cash flows have historically been determined by the
number of apartment homes, rental rates, occupancy levels and the Company's
expenses with respect to such apartment homes. The Company regularly reviews
short-term liquidity needs and the adequacy of Funds from Operations and other
expected liquidity sources to meet these needs. The Company believes that its
principal short-term liquidity needs are to fund normal recurring operating
expenses, debt service requirements and the minimum distribution required to
maintain the Company's REIT qualification under the Code. The Company
anticipates that these needs will be fully funded from cash flows provided by
operating activities. Any short-term liquidity needs not provided by current
operating cash flows would be funded from the Company's Unsecured Facilities.
Cash flows used in investing activities and provided by financing
activities have historically been dependent on the number of apartment homes
under active development and construction during any given period. Cash and
cash equivalents increased $12,440,000 from $1,801,000 at December 31, 1995 to
$14,241,000 at December 31, 1996 due to the excess of cash provided by
financing and operating activities over cash flow used in investing activities,
primarily due to the issuance of $351,000,000 of equity and debt securities in
1996 and the sale of two communities in the fourth quarter of 1996.
Net cash provided by operating activities increased $9,527,000 from
$56,314,000 to $65,841,000 primarily due to an increase in operating
income from newly developed and acquired communities and Established
Communities.
Net cash flows used in investing activities increased $71,451,000 from
$189,582,000 to $261,033,000, due to an increase in the number of
apartment homes under development from an average of 2,030 in 1995 to
2,910 in 1996 and the acquisition of six communities for $109,025,000
in 1996 compared to the acquisition of seven communities for
$87,958,000 in 1995, offset by the net proceeds of $31,663,000 from
the sale of two apartment communities in 1996.
Net cash provided by financing activities increased $75,425,000 from
$132,207,000 to $207,632,000, primarily due to the net proceeds
received from the completion of the sales of 4,872,000 shares of the
Company's common stock and the sale of 8,755,000 shares of the
Company's Series A and Series B Cumulative Redeemable Preferred Stock
in 1996 and increased borrowings under the Unsecured Facilities,
offset by an increase in dividends paid.
Cash and cash equivalents decreased $1,061,000 from $2,862,000 at
December 31, 1994 to $1,801,000 at December 31, 1995 due to the excess of cash
used in investing activities over cash flow provided by operating and financing
activities, primarily due to the acquisition and development of new communities
as more fully described below:
Net cash provided by operating activities increased $19,861,000 from
$36,453,000 to $56,314,000 primarily due to an increase in operating
income from newly developed and acquired communities as well as
Established Communities. The transfer of previously segregated
resident security deposits for communities located in Virginia
provided a $618,000 increase in unrestricted cash and cash
equivalents. The Company determined that security deposits related to
assets owned in Virginia need not be maintained in restricted
accounts. The release of these funds was used to repay balances
outstanding under the Unsecured Facility.
Cash flows used in investing activities increased $35,330,000 from
$154,252,000 to $189,582,000, due to an increase in the number of
apartment homes under development from an average of 1,524 in 1994 to
2,030 in 1995.
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<PAGE> 34
Net cash provided by financing activities increased $17,903,000 from
$114,304,000 to $132,207,000 due to the excess net proceeds received
from the issuance of $50,650,000 in unsecured tax-exempt custodial
receipts and $100,000,000 in unsecured senior notes in 1995 over the
proceeds received from the completion of the Company's second public
offering and the refunding of tax-exempt bonds in 1994, offset by an
increase in dividends paid and deferred financing costs.
At December 31, 1996, permanent mortgage indebtedness will require
balloon payments of principal amounts of indebtedness coming due over the years
1997 through 2002, including $24,335,000 in 1997 and $100,000,000 in 2002.
Additionally, bonds and related interest reserves requiring remarketing or that
have expiring credit enhancements total $44,655,000 in 1997. Certain of these
payments may be accelerated upon the termination of credit enhancements if such
credit enhancements are not renewed or replaced. Since Management anticipates
that only a small portion of the principal of such indebtedness will be repaid
prior to maturity and the Company may not have funds on hand sufficient to
repay such indebtedness, it may be necessary for the Company to refinance this
debt. Such refinancing could be accomplished through additional debt
financing, which may be collateralized by mortgages on individual communities
or groups of communities, by uncollateralized private or public debt offerings
or by additional equity offerings.
Capital Resources. To sustain the Company's active development and
acquisitions program, continuous access to the capital markets is required.
Management intends to match the long-term nature of its real estate assets with
long-term cost effective capital. Historically, the Company has demonstrated
regular and continuous access to the capital markets since the Initial
Offering, raising approximately $486 million in six offerings over a twenty
month period and over $351 million during 1996. These offerings include:
<TABLE>
<CAPTION>
Date Description of Offering
---- -----------------------
<S> <C>
July 1994 $33.7 million tax-exempt bond offering
August 1994 $102 million public offering of Common Stock
May 1995 $50.6 million tax-exempt unsecured custodial receipts offering
September 1995 $100 million unsecured senior notes offering
January 1996 $47.3 million direct placement of Common Stock to certain institutional investors
February 1996 $111.4 million 9% Series A Cumulative Redeemable Preferred Stock offering
October 1996 $107.5 million 8.96% Series B Cumulative Redeemable Preferred Stock offering
December 1996 $69.4 million public offering of Common Stock
</TABLE>
Management intends to operate in a manner that will permit future
access to the capital markets and intends to follow a focused strategy to help
ensure uninterrupted access to capital. This strategy includes:
1. Hire, train and retain associates with a strong resident service
focus, which should lead to higher rents, lower turnover and reduced
operating costs;
2. Manage, acquire and develop institutional quality communities with
in-fill locations that should provide consistent, sustained earnings
growth;
3. Operate in markets with growing demand (as measured by household
formation and job growth) and high barriers to entry. These
characteristics combine to provide a favorable demand-supply balance,
creating a favorable environment for future rental rate growth while
protecting existing and new communities from new supply. This
strategy is expected to result in a high level of quality to the
revenue stream;
4. Maintain a conservative capital structure largely comprised of equity
and modest, cost-effective leverage. Secured debt should generally be
avoided and used primarily to secure low cost, tax-exempt debt. Such a
structure should promote an environment for ratings upgrades that can
lead to a lower cost of capital;
5. Timely, accurate and detailed disclosures to the investment community;
6. Conservative accounting practices that provide a high level of quality
to reported earnings.
33
<PAGE> 35
Management believes that following these strategies provides a
disciplined approach to capital access that is expected to ensure that capital
resources are available to fund portfolio growth.
The following is a discussion of specific capital transactions,
arrangements and agreements that are important to the capital resources of the
Company.
Unsecured Facilities
In January 1996, the Company arranged a 2-year, Supplemental Unsecured
Facility provided by First Union National Bank in the amount of $35,000,000.
In September 1996, pricing on the Company's Unsecured Facilities was
reduced. The consortium of banks providing the Company's Unsecured Facility
lowered the interest rate charged under the facility to LIBOR plus 1.19% from
LIBOR plus 1.44%. Pricing under the Supplemental Credit Facility was reduced
to LIBOR plus .95% from LIBOR plus 1.25%. Current pricing level under the
Unsecured Facility is 1.125%.
Interest Rate Protection Agreements
The Company entered into an interest rate protection agreement in the
form of an accreting, swap transaction (the "Swap") with a triple A
counterparty (the "Counterparty") on May 30, 1995. The Swap serves to fix the
floating component of the Company's total interest rate at 5.89% on notional
amounts which increase over time. On the 15th day of each month during the
term of the agreement, the Company will pay to the Counterparty interest equal
to 5.89% on the then principal amount in effect, divided by twelve months. The
principal amount in effect during 1996 ranged from $15 million in January to
$44 million in December. The Counterparty will pay to the Company interest
equal to the actual 30 day LIBOR rate on the then principal amount in effect,
divided by twelve months. Payments made by the Company under the Swap totaled
$132,000 for the year ended December 31, 1996. The Swap terminated in February
1997.
The Company was not a party to any long-term interest rate agreements
in 1996, other than the Swap described above. The Company intends, however, to
evaluate the need for additional long-term interest rate protection agreements
as interest rate market conditions dictate and has engaged a consultant to
assist in managing the Company's interest rate risks and exposure.
Financing Transactions Completed
On January 18, 1996, the Company completed the sale of 2,227,000
shares of its Common Stock to certain institutional investors under its
existing shelf registration statement at a purchase price of $21.25 per share,
for an aggregate purchase price of $47,323,750. The net cash proceeds from the
sale (approximately $46,700,000) were used to retire indebtedness under the
Company's Unsecured Facility.
On February 16, 1996, the Company completed an offering of 4,455,000
shares of 9% Series A Cumulative Redeemable Preferred Stock (including 455,000
shares sold in connection with the exercise of the underwriters' overallotment
option). The gross proceeds of the offering totaled $111,375,000. The net
cash proceeds from the sale (approximately $108,225,000) were used to retire
indebtedness under the Company's Unsecured Facility, variable rate construction
loans and for general corporate purposes.
On August 1, 1996, the Company completed a new tax-exempt credit
enhancement facility with Fannie Mae that provides a long-term, cost-effective
credit enhancement source for the Company's current and future tax-exempt bond
debt. In connection with this facility, the Company completed the refinancing
of approximately $91,000,000 of its tax-exempt bond debt. The facility
involves eleven communities, seven that are financed with tax-exempt bonds and
four unencumbered communities that are pledged as additional collateral.
34
<PAGE> 36
On October 22, 1996, the Company completed an offering of 4,300,000
shares (including 300,000 shares sold in connection with the exercise of the
underwriters' overallotment option) of 8.96% Series B Cumulative Redeemable
Preferred Stock. The net cash proceeds from the sale (approximately
$104,114,000) were used to retire indebtedness under the Company's Unsecured
Facilities.
On December 13, 1996, the Company completed a public offering of
2,645,000 shares (including 345,000 shares sold in connection with the exercise
of the underwriters' overallotment option) of Common Stock at a purchase price
of $26.25 per share. The net cash proceeds from the sale (approximately
$66,000,000) were used primarily to repay amounts outstanding under the
Unsecured Facilities, to fund the acquisition and development of additional
apartment communities and to use for general working capital purposes.
Registration Statements Filed in Connection with Financings
On January 30, 1996, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $327,670,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock,
and was used in connection with the February 16, 1996 and October 22, 1996
offerings of Preferred Stock and the December 13, 1996 offering of Common
Stock. The remaining amount available under this registration statement was
carried forward into the registration statement filed on February 24, 1997 and
accordingly, no capacity remains under the registration statement filed on
January 30, 1996.
On February 24, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $350,000,000 of
securities. The registration statement provides for the issuance of Common
Stock, Preferred Stock, debt securities and warrants to purchase Common Stock.
Financing Commitments
The Company has received a commitment for tax-exempt financing on the
Avalon Fields Development Community. The Community Development Administration
of Maryland has issued $12.7 million of thirty-year fixed-rate bonds related to
Avalon Fields, at an all-in rate of 7.55%. Management expects to complete
documentation and receive funding of approximately $12.1 million in March 1997.
Future Financing Needs
Substantially all of the capital expenditures to complete the
communities currently under construction will be funded from proceeds of
permanent and construction financing commitments already in place or by the
Unsecured Facilities, and little, if any, additional capital sources are needed
to complete the communities. Except for Longwood Towers, the Company has no
present plans for any major capital improvements to any of the Current
Communities. The renovation of Longwood Towers is being funded by advances
under the Unsecured Facilities, operating cash flow or other financing sources
over a three-year period. Management expects to continue to fund deferred
development costs related to future developments from Funds from Operations and
advances under the Unsecured Facilities. The Company believes that these
sources of capital are adequate to take each of the proposed communities to the
point in the development cycle where construction can commence.
Management anticipates that available borrowing capacity under the
Unsecured Facilities and Funds from Operations will be adequate to meet future
expenditures required to commence construction of each of the Development
Rights. In addition, the Company currently anticipates funding construction of
some (but not all) of the Development Rights under the expected remaining
capacity of the Unsecured Facilities. However, before the construction of a
Development Right commences, the Company intends, if necessary, to issue
additional equity or debt securities, arrange additional capacity under the
Unsecured Facilities or future credit facilities or obtain additional
construction loan commitments not currently in place to ensure that
35
<PAGE> 37
adequate liquidity sources are in place to fund the construction of a
Development Right, although no assurance can be given in this regard.
The table on page 37 summarizes debt maturities for the next five
years (excluding the Unsecured Facilities):
36
<PAGE> 38
AVALON PROPERTIES, INC.
DEBT MATURITY SCHEDULE
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance Outstanding at
All-in Maturity ------------------------------
Community Interest Rate Date 12/31/95 12/31/96
- -------------------------------------------- ------------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) (1) 5.71% Nov-07 $ 16,719 $ 16,782
* Avalon Ridge (Custodial Receipts) (1) 5.69% Nov-07 26,614 26,724
* Avalon at Dulles 7.04% Jul-24 12,360 12,360
* Avalon Hampton II 7.04% Jul-24 11,550 11,550
* Avalon at Symphony Glen 7.06% Jul-24 9,780 9,780
* Avalon View 7.55% Aug-24 19,608 19,487
* Avalon at Lexington 6.56% Feb-25 15,486 15,284
* Avalon Knoll 6.95% Jun-26 14,130 14,070
* Avalon Landing 6.85% Jun-26 -- 6,969
* Avalon West 7.73% Dec-36 -- 8,771
----------- ---------
126,247 141,777
Variable Rate
* Avalon at Fairway Hills I Jun-26 11,500 11,500
* Avalon at Hampton I Jun-26 8,710 8,060
* Avalon Pointe Jun-26 6,387 6,387
----------- ---------
26,597 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods 9.25% Nov-97 -- 24,335
* Avalon at Carter Lake (2) 7.75% Nov-98 6,202 --
Unsecured Senior Notes 7.375% Sep-02 99,846 99,869
* Avalon Pines 8.00% Dec-03 -- 5,529
* Avalon Walk II 8.93% Nov-04 13,317 13,149
----------- ---------
119,365 142,882
Variable Rate-None -- --
----------- ---------
Total notes payable: 272,209 310,606
----------- ---------
Construction (all variable rate):
* Avalon Grove (2) LIBOR + 1.50% Nov-97 4,702 --
* Avalon Cove (2) LIBOR + 1.75% Mar-98 5,775 --
----------- ---------
Total construction notes payable: 10,477 --
----------- ---------
Total indebtedness - excluding
Unsecured Facilities $ 282,686 $ 310,606
=========== =========
</TABLE>
<TABLE>
<CAPTION>
Total Maturities
-----------------------------------------------------------------------------
Community 1997 1998 1999 2000 2001 Thereafter
- -------------------------------------------- --------- ---------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) (1) $ -- $ -- $ -- $ -- $ -- $ 16,782
* Avalon Ridge (Custodial Receipts) (1) -- -- -- -- -- 26,724
* Avalon at Dulles -- -- -- -- -- 12,360
* Avalon Hampton II -- -- -- -- -- 11,550
* Avalon at Symphony Glen -- -- -- -- -- 9,780
* Avalon View 173 230 290 330 350 18,114
* Avalon at Lexington 213 226 240 255 271 14,079
* Avalon Knoll 152 163 175 187 200 13,193
* Avalon Landing 77 83 89 95 101 6,524
* Avalon West 43 46 50 53 57 8,522
-------- ------- ------- ------- ------- ---------
658 748 844 920 979 137,628
Variable Rate
* Avalon at Fairway Hills I -- -- -- -- -- 11,500
* Avalon at Hampton I -- -- -- -- -- 8,060
* Avalon Pointe -- -- -- -- -- 6,387
-------- ------- ------- ------- ------- ---------
-- -- -- -- -- 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods 24,335 -- -- -- -- --
* Avalon at Carter Lake (2) -- -- -- -- -- --
Unsecured Senior Notes -- -- -- -- -- 99,869
* Avalon Pines 95 103 112 121 131 4,967
* Avalon Walk II 185 202 221 241 264 12,036
-------- ------- ------- ------- ------- ---------
24,615 305 333 362 395 116,872
Variable Rate-None -- -- -- -- -- --
-------- ------- ------- ------- ------- ---------
Total notes payable: 25,273 1,053 1,177 1,282 1,374 280,447
-------- ------- ------- ------- ------- ---------
Construction (all variable rate):
* Avalon Grove (2) -- -- -- -- -- --
* Avalon Cove (2) -- -- -- -- -- --
-------- ------- ------- ------- ------- ---------
Total construction notes payable: -- -- -- -- -- --
Total indebtedness - excluding
-------- ------- ------- ------- ------- ---------
Unsecured Facilities $ 25,273 $ 1,053 $ 1,177 $ 1,282 $ 1,374 $ 280,447
======== ======= ======= ======= ======= =========
</TABLE>
(1) Subject to remarketing November 1, 1997.
(2) Outstanding balances of $6,194,017 (Avalon at Carter Lake), $8,940,987
(Avalon Cove), and $4,744,258 (Avalon Grove) were repaid from proceeds of
the 9% Series A Cumulative Redeemable Preferred Stock offering on February
22, 1996.
* Indicates loan is collateralized.
37
<PAGE> 39
FUNDS FROM OPERATIONS
Management generally considers Funds from Operations to be an
appropriate measure of the operating performance of the Company. The Company
believes that in order to facilitate a clear understanding of the operating
results of the Company, Funds from Operations should be examined in conjunction
with the net income as presented in the consolidated financial statements
included elsewhere in this report. Funds from Operations is determined in
accordance with a resolution adopted by the Board of Governors of NAREIT, and
is defined as net income (loss) (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures.
The following table presents an analysis of Funds from Operations for
the periods presented (dollars in thousands):
38
<PAGE> 40
ANALYSIS OF 1996 AND 1995 FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Three months ended Years ended
-------------------------------- -----------------------------
12-31-96 12-31-95 12-31-96 12-31-95
---------------- ------------- ------------- --------------
<S> <C> <C> <C>
NET INCOME $ 21,348 $ 6,814 $ 51,651 $ 30,937
Depreciation (real estate related): 5,319 4,013 18,566 14,468
Joint venture adjustment 81 79 321 316
Gain on sale of communities (7,850) -- (7,850) --
Extraordinary items -- 1,158 2,356 1,158
Preferred stock dividends (4,352) -- (10,422) --
------------- ------------- ------------- -------------
FUNDS FROM OPERATIONS $ 14,546 $ 12,064 $ 54,622 $ 46,879
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 31,268,140 28,372,944 30,739,504 28,365,427
============= ============= ============= =============
OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION
Capital expenditures:
Community level (1) $ 521 $ 1,477 $ 1,731 $ 2,311
Corporate level (2) $ 277 $ 238 $ 2,087 $ 708
Loan principal amortization payments $ 211 $ 235 $ 634 $ 618
Capitalized deferred financing costs (3) $ 293 $ (443) $ 2,346 $ 5,136
</TABLE>
------------------
Footnotes to Funds from Operations
(1) The Company expenses all recurring non-revenue generating community
expenditures, including carpet and appliance replacements. See Discussion
of Capitalized Community Improvements and Expensed Turnover ("Make Ready")
Costs."
(2) Represents the cost of new office leasehold improvements, office equipment
and costs related to the implementation of the company-wide systems
enhancement program.
(3) Substantially all of the deferred financing costs incurred during the year
ended December 31, 1996 relate to the closing of the Supplemental Unsecured
Facility, closing on the Avalon West tax-exempt bonds and costs incurred
related to the credit enhancement facility with Fannie Mae.
39
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
40
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information pertaining to directors and executive officers of the
registrant is incorporated herein by reference to the registrant's Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to the
Annual Meeting of Stockholders to be held on May 6, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is incorporated
herein by reference to the registrant's Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the end of the year
covered by this Form 10-K with respect to the Annual Meeting of Stockholders to
be held on May 6, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of Management and certain
beneficial owners of the registrant's Common Stock is incorporated herein by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of the year covered by
this Form 10-K with respect to the Annual Meeting of Stockholders to be held on
May 6, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions is incorporated herein by reference to the registrant's Proxy
Statement to be filed with the Securities and Exchange Commission within 10
days after the end of the year covered by this Form 10-K with respect to the
Annual Meeting of Stockholders to be held on May 6, 1997.
41
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements and Financial Statement Schedule:
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for
the years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation F-16
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as a part of this report. F-19
(b) Reports on Form 8-K
On October 23, 1996, the Company filed a Current Report on Form 8-K relating to
the offering and sale of the Company's Series B Cumulative Redeemable Preferred
Stock.
On December 4, 1996, the Company filed a Current Report on Form 8-K relating to
the amendment and restatement of the Company's Bylaws.
On December 5, 1996, the Company filed a Current Report on Form 8-K, reporting
under item (1) the acquisitions of Avalon Chase, Avalon Pines, Avalon at
Fairway Hills II, Avalon at Boulders and AutumnWoods in unrelated transactions
for an aggregate contract purchase price of approximately $109,186,000 on
January 4, 1996, May 23, 1996, July 23, 1996, September 25, 1996, and December
11, 1996, respectively.
Historical and pro forma financial information concerning the communities
acquired and included in such filing are as set forth below:
1. Report of Independent Accountants
2. Combined Statement of Revenue and Certain Operating Expenses for the
Year Ended December 31, 1995
3. Notes to combined Statement of Revenue and Certain Operating Expenses
42
<PAGE> 44
4. Estimates of Net Income and Funds from Operations of Certain Acquired
Communities
5. Notes to Estimates of Net Income and Funds from Operations of Certain
Acquired Communities
6. Pro Forma Condensed Consolidated Statement of Operations for the Nine
Months Ended September 30, 1996 and for the Year Ended December 31, 1995
7. Notes to Pro Forma Condensed Consolidated Statement of Operations
On December 18, 1996, the Company filed a Current Report on Form 8-K relating
to offering and sale of the Company's Common Stock.
43
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1(i)(a) -- Amended and Restated Articles of Incorporation of the Company (1)
3.1(i)(b) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series A
Cumulative Redeemable Preferred Stock (5)
3.1(i)(c) -- Articles Supplementary to Amended and Restated Articles of Incorporation Establishing Series B
Cumulative Redeemable Preferred Stock (6)
3.1(ii)(a) -- Amended and Restated Bylaws of the Company (2)
4.1 -- Avalon Properties, Inc. 7-3/8% Senior Notes due 2002 (3)
4.2 -- Indenture dated as of September 18, 1995 (3)
4.3 -- First Supplemental Indenture dated as of September 18, 1995 (3)
10.1+ -- 1995 Equity Incentive Plan (4)
10.2(a) -- Credit Agreement with Fleet Bank, National Association (2)
10.2(b) -- Credit Agreement with First Union National Bank of Virginia (7)
10.3 -- Management Registration Rights Agreement between the Company and certain
Management stockholders (1)
10.4+ -- Employment Agreement between the Company and Mr. Michaux (1)
10.5+ -- Employment Agreement between the Company and Mr. Berman (1)
10.6 -- Form of Indemnification Agreement (1)
10.7 -- Swap Agreement with JP Morgan (7)
10.8+ -- Amendment to Employment Agreement with Richard L. Michaux, dated December 16, 1994 (2)
10.9+ -- Amendment to Employment Agreement with Charles H. Berman, dated December 15, 1994 (2)
10.10+ -- Amendment No. 2 to Employment Agreement with Richard L. Michaux, dated January 1, 1996 (7)
10.11+ -- Amendment No. 2 to Employment Agreement with Charles H. Berman, dated January 1, 1996 (7)
10.12 -- Master Reimbursement Agreement with Federal National Mortgage Association
12.1 -- Calculation of Ratios of Earnings to Fixed Charges (8)
12.2 -- Calculation of Ratios of Earnings to Combined Fixed Charges (8)
21.1 -- Schedule of Subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand, L.L.P.
27.1 -- Financial Data Schedule
</TABLE>
+ Management contract or compensatory plan or arrangement required to be
filed or incorporated by reference as an exhibit to this Form 10-K
pursuant to Item 14(c) of Form 10-K.
(1) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
filed on December 4, 1996.
(3) Incorporated by reference from the Company's Form 8-K Current Report dated
September 18, 1995.
44
<PAGE> 46
(4) Incorporated by reference from the Company's Proxy Statement for the
Annual Meeting of Stockholders held on May 9, 1995.
(5) Incorporated by reference from the Company's Registration Statement on
Form 8-A filed on February 15, 1996.
(6) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 23, 1996.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(8) Incorporated by reference from the Company's Registration Statement in
Form S-3 filed on February 24, 1997, Registration No. 333-22281.
45
<PAGE> 47
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.
AVALON PROPERTIES, INC.
Date: March 27, 1997 By /s/ RICHARD L. MICHAUX
-----------------------------------------------
Richard L. Michaux, Chairman of the Board
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 27, 1997 By /s/ CHARLES H. BERMAN
-----------------------------------------------
Charles H. Berman, President,
Chief Operating Officer and Director
Date: March 27, 1997 By /s/ THOMAS J. SARGEANT
-----------------------------------------------
Thomas J. Sargeant, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting 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.
Date: March 27, 1997 By /s/ MICHAEL A. FUTTERMAN
-----------------------------------------------
Michael A. Futterman, Director
Date: March 27, 1997 By /s/ CHRISTOPHER B. LEINBERGER
-----------------------------------------------
Christopher B. Leinberger, Director
Date: March 27, 1997 By /s/ ALLAN D. SCHUSTER
-----------------------------------------------
Allan D. Schuster, Director
46
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of
Avalon Properties, Inc.:
We have audited the consolidated balance sheets of Avalon Properties,
Inc. (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended December 31, 1996. We have also audited the
financial statement schedule included on pages F-16, F-17 and F-18 of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Avalon
Properties, Inc. as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years ended
December 31, 1996, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.
New York, New York
January 16, 1997
COOPERS & LYBRAND L.L.P.
F-1
<PAGE> 49
AVALON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 12-31-96 12-31-95
---------------- -----------------
<S> <C> <C>
Real estate (Notes 2, 3 and 4)
Land $ 169,079 $ 128,754
Buildings and improvements 754,545 521,082
Furniture, fixtures and equipment 27,455 19,369
------------ ------------
951,079 669,205
Less, accumulated depreciation (44,547) (27,059)
------------ ------------
906,532 642,146
Construction in progress (including land) 130,827 113,228
------------ ------------
TOTAL REAL ESTATE, NET 1,037,359 755,374
Cash and cash equivalents (Notes 3 and 9) 14,241 1,801
Cash in escrow (Notes 3, 6 and 9) 3,945 3,940
Resident security deposits 5,995 4,193
Investments in joint ventures (Notes 3 and 7) 2,573 1,735
Deferred financing and other costs, net of accumulated amortization
of $2,113 and $1,980 at December 31, 1996 and 1995, respectively (Note 3) 7,702 9,959
Deferred development costs (Note 3) 5,179 5,404
Prepaid expenses and other assets 5,777 4,305
------------ ------------
TOTAL ASSETS $ 1,082,771 $ 786,711
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Unsecured Facilities (Notes 5 and 9) $ -- $ 58,000
Construction loans (Note 6) -- 10,477
Unsecured senior notes, 7-3/8% due 2002 (Note 6) 99,869 99,846
Mortgage notes payable (Notes 6 and 9) 167,231 114,900
Unsecured tax-exempt bonds (Notes 6 and 9) -- 14,130
Tax-exempt custodial receipts (Notes 6 and 9) 43,506 43,333
Payables for construction 12,613 9,710
Accrued expenses and other liabilities 10,580 11,522
Accrued interest payable 4,342 4,477
Resident security deposits 6,642 4,919
------------ ------------
TOTAL LIABILITIES 344,783 371,314
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
4,455,000 shares of 9% Series A Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $111,375,000)
(Note 1) 45 --
4,300,000 shares of 8.96% Series B Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $107,500,000)
(Note 1) 43 --
Common Stock, $.01 par value; 80,000,000 shares authorized;
33,391,992 and 28,373,065 shares issued and outstanding
at December 31, 1996 and 1995, respectively (Note 1) 334 284
Additional paid-in capital 752,159 425,946
Deferred compensation (1,699) --
Distributions in excess of accumulated earnings (12,894) (10,833)
------------ ------------
STOCKHOLDERS' EQUITY 737,988 415,397
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,082,771 $ 786,711
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 50
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------
12-31-96 12-31-95 12-31-94
---------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rental income (Note 3) $ 123,354 $ 94,821 $ 71,756
Management fees (Note 3) 1,439 1,926 2,077
Other income 420 466 468
---------- --------- ---------
Total revenue 125,213 97,213 74,301
---------- --------- ---------
Expenses:
Operating expenses 46,705 35,743 27,680
Interest expense 9,545 11,056 5,687
Depreciation and amortization 20,956 16,558 12,342
General and administrative 3,807 3,387 2,482
Write-off of deferred development costs (Note 3) 450 400 400
---------- --------- ---------
Total expenses 81,463 67,144 48,591
---------- --------- ---------
Equity in income of joint ventures (Notes 3 and 7) 1,025 440 701
Interest income 887 953 872
Minority interest income (Note 4) 495 633 733
---------- --------- ---------
Income before gain on sale of communities and extraordinary items 46,157 32,095 28,016
Gain on sale of communities 7,850 -- --
Extraordinary items (Note 11) (2,356) (1,158) --
---------- --------- ---------
Net income 51,651 30,937 28,016
Dividends attributable to preferred stock (10,422) -- --
---------- --------- ---------
Net income available to common stockholders $ 41,229 $ 30,937 $ 28,016
========== ========= =========
Per common share (Note 3):
Income before extraordinary items $ 1.42 $ 1.13 $ 1.10
========== ========= =========
Net income per common share $ 1.34 $ 1.09 $ 1.10
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 51
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Shares Issued Amount
---------------------------- ----------------------- Additional
Common Preferred Common Preferred Paid-in
Stock Stock Stock Stock Capital
------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at 12-31-93 23,543,964 -- $ 235 $ -- $ 328,664
Net income -- -- -- -- --
Dividends declared ($1.08
per share) -- -- -- -- --
Issuance of Common Stock,
net of offering costs 4,812,675 -- 49 -- 96,947
----------- ---------- ------ ------- ----------
Balance at 12-31-94 28,356,639 -- 284 -- 425,611
Net income -- -- -- -- --
Dividends declared ($1.46
per share) -- -- -- -- --
Issuance of Common Stock,
net of offering costs 16,426 -- -- -- 335
----------- ---------- ------ ------- ----------
Balance at 12-31-95 28,373,065 -- 284 -- 425,946
Net income -- -- -- -- --
Dividends declared to common
stockholders ($1.49 per share) -- -- -- -- --
Dividends declared to preferred
stockholders -- -- -- -- --
Issuance of Common Stock, net
of offering costs 4,910,064 -- 49 -- 112,496
Issuance of Restricted Common Stock 108,863 -- 1 -- 2,468
Deferred Compensation, net of
amortization -- -- -- -- --
Issuance of Series A Preferred
Stock, net of offering costs -- 4,455,000 -- 45 107,536
Issuance of Series B Preferred
Stock, net of offering costs -- 4,300,000 -- 43 103,713
----------- ---------- ------ ------- ----------
Balance at 12-31-96 33,391,992 8,755,000 $ 334 $ 88 $ 752,159
=========== ========== ====== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Distributions in
Excess of
Deferred Accumulated Stockholders'
Compensation Earnings Equity
------------ ------------------ ---------------
<S> <C> <C> <C>
Balance at 12-31-93 $ -- $ (1,219) $ 327,680
Net income -- 28,016 28,016
Dividends declared ($1.08
per share) -- (27,154) (27,154)
Issuance of Common Stock,
net of offering costs -- -- 96,996
--------- ---------- ----------
Balance at 12-31-94 -- (357) 425,538
Net income -- 30,937 30,937
Dividends declared ($1.46
per share) -- (41,413) (41,413)
Issuance of Common Stock,
net of offering costs -- -- 335
--------- ---------- ----------
Balance at 12-31-95 -- (10,833) 415,397
Net income -- 51,651 51,651
Dividends declared to common
stockholders ($1.49 per share) -- (45,774) (45,774)
Dividends declared to preferred
stockholders -- (7,938) (7,938)
Issuance of Common Stock, net
of offering costs -- -- 112,545
Issuance of Restricted Common Stock -- -- 2,469
Deferred Compensation, net of
amortization (1,699) -- (1,699)
Issuance of Series A Preferred
Stock, net of offering costs -- -- 107,581
Issuance of Series B Preferred
Stock, net of offering costs -- -- 103,756
--------- ---------- ----------
Balance at 12-31-96 $ (1,699) $ (12,894) $ 737,988
========= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
AVALON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended
-------------------------------------------
12-31-96 12-31-95 12-31-94
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 51,651 $ 30,937 $ 28,016
Items not requiring (providing) cash:
Depreciation and amortization 20,956 16,558 12,342
Equity in income of joint ventures (258) (754) (536)
Amortization of deferred compensation 427 -- --
Gain on sale of communities (7,850) -- --
Extraordinary items 2,356 1,158 --
Decrease (increase) in cash in escrow, net (84) 703 1,555
Increase in prepaids and other assets (270) (1,945) (1,181)
Increase (decrease) in other operating liabilities (1,087) 9,657 (3,743)
--------- --------- ---------
Net cash provided by operating activities 65,841 56,314 36,453
--------- --------- ---------
Cash flows used in investing activities:
Purchase of interest in joint venture (580) (4,986) --
Increase (decrease) in construction payables 2,903 5,544 (419)
Purchase and development of real estate (295,019) (190,140) (153,833)
Proceeds from the sale of communities, net of selling costs 31,663 -- --
--------- --------- ---------
Net cash used in investing activities (261,033) (189,582) (154,252)
--------- --------- ---------
Cash flows from financing activities:
Issuance of Common Stock, net of offering costs 112,545 335 96,996
Issuance of Preferred Stock, net of offering costs 211,337 -- --
Borrowings under Unsecured Facilities 265,000 235,625 143,821
Repayments of Unsecured Facilities (323,000) (207,395) (127,051)
Dividends paid (53,712) (41,413) (31,157)
Borrowings under tax-exempt bonds 15,771 50,333 22,140
Repayments of tax-exempt bonds (1,062) (7,000) --
Borrowings under notes payable -- 99,846 30,431
Repayments of notes payable (6,424) (1,908) (159)
Borrowings under construction notes 31 14,091 32,776
Repayments of construction notes (10,508) (5,171) (47,141)
Deposits into cash in escrow - Construction -- -- (118)
Notes payable to affiliate of Predecessor -- -- (3,555)
Payment of deferred financing costs (2,346) (5,136) (2,679)
--------- --------- ---------
Net cash provided by financing activities 207,632 132,207 114,304
--------- --------- ---------
Net increase (decrease) in cash 12,440 (1,061) (3,495)
Cash and cash equivalents, beginning of year 1,801 2,862 6,357
--------- --------- ---------
Cash and cash equivalents, end of year $ 14,241 $ 1,801 $ 2,862
========= ========= =========
Cash paid for interest, net of amount capitalized $ 8,723 $ 7,043 $ 5,018
========= ========= =========
</TABLE>
Non-cash investing and financing activities: In 1996, $5,581 and $24,335 of
debt was assumed in connection with the
Avalon Pines and AutumnWoods acquisitions, respectively. In 1994, $12,800 of
debt was assumed for two acquisitions.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization of the Company and Public Offerings
Avalon Properties, Inc. (the "Company") is a self-administered and
self-managed Real Estate Investment Trust ("REIT"), as defined under the
Internal Revenue Code of 1986, as amended, (the "Code") and was incorporated
under the General Corporation Law of Maryland on August 24, 1993. The Company
began operations on November 18, 1993 upon the completion of its initial public
offering. The Company is engaged principally in the development, construction,
acquisition and operation of residential apartment communities. Additionally,
the Company provides management services for communities owned by unrelated
parties.
On January 18, 1996, the Company completed the sale of 2,227,000
shares of its Common Stock to certain institutional investors under an existing
shelf registration statement at a purchase price of $21.25 per share. The net
cash proceeds of approximately $46,700 were used to repay amounts outstanding
under the Company's $165,000 unsecured revolving credit facility (the
"Unsecured Facility").
On February 16, 1996, the Company completed an offering of 4,455,000
shares of 9% Series A Cumulative Redeemable Preferred Stock (including 455,000
shares sold in connection with the exercise of the underwriters' overallotment
option). The net cash proceeds from the sale (approximately $108,225) were
used to retire indebtedness under the Company's Unsecured Facility, to retire
construction loans and to use for general corporate purposes.
On October 22, 1996, the Company completed an offering of 4,300,000
shares (including 300,000 shares sold in connection with the exercise of the
underwriters' overallotment option) of 8.96% Series B Cumulative Redeemable
Preferred Stock. The net cash proceeds from the sale (approximately $104,114)
were used to retire indebtedness under the Company's unsecured revolving credit
facilities ("Unsecured Facilities").
On December 13, 1996, the Company completed a public offering of
2,645,000 shares (including 345,000 shares sold in connection with the exercise
of the underwriters' over-allotment option) of Common Stock of a purchase price
of $26.25 per share. The net cash proceeds from the sate (approximately
$66,000) were used primarily to repay amounts outstanding under the Unsecured
Facilities, to fund the acquisition and development of additional apartment
communities and to use for general working capital purposes.
2. Acquisitions
During the period December 18, 1993 through December 31, 1995, the
Company acquired fourteen existing operating communities containing a total of
3,148 apartment homes from unrelated third parties for an aggregate contract
acquisition price of approximately $206,958 (cumulative capitalized cost of
$211,277).
For the year ended December 31, 1996, the Company acquired six
existing operating communities containing a total of 1,765 apartment homes from
unrelated third parties for an aggregate contract acquisition price of
approximately $109,025 (cumulative capitalized cost of $112,512). These
acquisitions have been accounted for as purchases of real estate and operating
results for those communities are reflected in the accompanying consolidated
financial statements from their respective dates of acquisition. These
communities were acquired with cash proceeds drawn under the Company's
Unsecured Facilities (see Note 5) and through the assumption of debt and are
described as follows:
On January 4, 1996, the Company acquired Avalon Chase, a 360 apartment
home, garden-style community located in Marlton, New Jersey, for approximately
$23,292.
F-6
<PAGE> 54
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
On May 23, 1996, the Company purchased Avalon Pines, a 174 apartment
home, luxury garden-style community located in Virginia Beach, Virginia for
$8,420. In connection with this acquisition, the Company assumed a
conventional secured loan with an outstanding principal amount of approximately
$5,600 and bearing an 8.0% annual fixed interest rate with a maturity date of
December 2003. This community was managed by the Company prior to its
acquisition.
On July 23, 1996, the Company purchased Avalon at Fairway Hills II,
two luxury, garden-style communities located in Columbia, Maryland for $32,430.
These communities contain a total of 527 apartment homes.
On September 25, 1996, the Company purchased Avalon at Boulders in
Richmond, Virginia for $14,831. This luxury garden-style community contains a
total of 284 apartment homes.
On December 13, 1996, the Company acquired AutumnWoods in Fairfax,
Virginia for a total purchase price of $30,052, including the assumption of a
conventional secured loan with an outstanding principal balance of
approximately $24,300. This loan bears interest at a fixed rate of 9.25% per
annum and matures in November 1997. The Company expects to repay the loan in
August 1997, the earliest date on which the loan may be prepaid with no
penalty. This luxury garden-style apartment community contains a total of 420
apartment homes.
The following pro forma operating results for the Company have been
prepared as if the acquisitions of Avalon Chase, Avalon Pines, Avalon at
Fairway Hills II, Avalon at Boulders and AutumnWoods had occurred on January 1,
1995. Unaudited pro forma financial information is presented for informational
purposes only and may not be indicative of what the actual results of
operations of the Company would have been had the events occurred as of January
1, 1995, and may not be indicative of the results of operations for future
periods.
<TABLE>
<CAPTION>
Pro Forma
------------------------------
Year ended Year ended
12-31-96 12-31-95
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
Revenue $ 133,106 $ 112,633
========== =============
Income before extraordinary items $ 47,286 $ 31,634
========== =============
Net income $ 42,358 $ 30,476
========== =============
Income before extraordinary items per common share $ 1.54 $ 1.12
========== =============
Net income per common share $ 1.38 $ 1.07
========== =============
</TABLE>
3. Summary of Significant Accounting Policies
Principles of Consolidation of the Company
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned partnerships and subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
F-7
<PAGE> 55
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Geographical Concentration
The Company develops and operates residential apartment communities
located in the Northeast and Mid-Atlantic Regions of the United States. This
concentration imposes on the Company certain risks, which include local
economic conditions, that are not within management's control.
Recently Issued Pronouncement
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
options described in Note 10. Had compensation cost for these options been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Pro Forma (unaudited)
--------------------------------------
Year ended Year ended
12-31-96 12-31-95
--------------- ---------------
<S> <C> <C>
Net income $ 51,193 $ 30,782
============ ============
Net income per share $ 1.67 $ 1.09
============ ============
</TABLE>
Real Estate
Buildings and improvements are recorded at cost and are depreciated on
a straight-line basis over their estimated useful lives of 40 years. The
Company's policy is to annually assess any impairment in value by making a
comparison of the current and projected operating cash flows of each of its
communities over its remaining useful life, on an undiscounted basis, to the
carrying amount of the community. Such carrying amounts would be adjusted, if
necessary, to reflect an impairment in the value of the assets. The cost of
buildings and improvements include capitalized interest, property taxes and
insurance incurred during the construction period. Furniture and fixtures are
stated at cost and depreciated over their estimated useful lives of seven
years. Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations or betterments which extend the economic
useful life of the assets are capitalized.
Investments in Joint Ventures
Investments in real estate joint ventures are accounted for under the
equity method except for Avalon Run which is accounted for under the cost
method.
F-8
<PAGE> 56
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Cash Equivalents
Cash equivalents consist of highly liquid assets with original
maturities of three months or less from the date of purchase. The majority of
the Company's cash, cash equivalents and cash in escrow is held at major
commercial banks.
Deferred Financing and Development Costs
Deferred financing costs include fees and costs incurred to obtain
financings and are amortized on a straight-line basis over the shorter of the
term of the loan or the credit enhancement facility, if applicable. Unamortized
financing costs are written-off when debt is retired before maturity date (see
Note 11). Fees and other incremental costs incurred in developing new
communities are capitalized as deferred development costs and are included in
the cost of the community when construction commences. The accompanying
consolidated financial statements include a charge to expense for unrecoverable
deferred development costs related to pre-development communities that may not
proceed to development.
Revenue Recognition
Apartment homes are leased to individual residents on a short-term
basis. Rental revenue is recognized monthly as earned. Fees for management of
communities owned by unrelated parties are also recognized monthly as earned.
Income Taxes
The Company elected to be taxed as a REIT under the Code commencing
with the taxable year ended December 31, 1993. To qualify as a REIT, the
Company must, along with other requirements, distribute dividends to its
stockholders in an amount equal to at least 95% of the Company's taxable
income, as defined in the Code. As long as the Company qualifies for taxation
as a REIT, the Company will not be subject to Federal corporate income taxes.
Accordingly, no provision for Federal income taxes has been made for any period
of the Company. However, the Company may be subject to certain state and local
income, excise or franchise taxes.
Net Income per Common Share
Net income per common share for the years ended December 31, 1996,
1995 and 1994 is based upon 30,739,504, 28,365,427 and 25,486,932 weighted
average number of shares of common stock outstanding, respectively.
4. Senior Participating Mortgage Note
The Company's ownership of the senior participating mortgage note
related to the Town Arbor Partnership ("Avalon Arbor") has been accounted for
as an investment in real estate. Minority interest represents the excess of
the interest income at the pay rate on the mortgage loan over the cash flow
from operations generated by the community. This excess is funded from
payments drawn from an escrow account established from contributions by the
minority partners. At December 31, 1996, the partnership had $2,996 of cash
from these contributions available to fund interest payments. The note bears
interest at 10.2%. Upon acquisition, the note was restructured to provide for
a 9% pay rate. The difference between the stated interest and the pay rate is
deferred interest and is added to the principal. The loan also provides for
contingent interest of 50% of gross revenues, as defined, and is payable prior
to any payments to the partners. No contingent interest has been paid through
December 31, 1996. The note entitles the holder to a 50% net residual value of
the property at maturity or upon prior disposition of the property. The note
may be prepaid subject to stipulated penalties.
F-9
<PAGE> 57
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
5. Unsecured Facilities
The Company's Unsecured Facility, which is provided by a consortium of
nine banks led by JP Morgan and Fleet Bank, provides for $165,000 in short-term
credit. The Unsecured Facility expires in April 1998. As of December 31, 1996,
approximately $10,054 of available capacity was used to provide letters of
credit and none was borrowed under the facility. Accordingly, the balance that
remained available at December 31, 1996 to be drawn under the Unsecured
Facility is $154,946. The Unsecured Facility bears interest based upon a
LIBOR, Prime or CD rate election at the Company's option. Current pricing
level is LIBOR plus 1.125%.
In January 1996, the Company arranged a two-year supplemental
unsecured facility provided by First Union National Bank (the "Supplemental
Unsecured Facility") in the amount of $35,000. The Supplemental Unsecured
Facility expires in January 1998 and bears a current interest rate of LIBOR
plus .95%. At December 31, 1996, $6,760 of available capacity was used to
provide letters of credit and none was borrowed under the Supplemental
Unsecured Facility. Accordingly, the balance that remains available at
December 31, 1996 to be drawn under the Supplemental Unsecured Facility is
$28,240.
The weighted average effective interest rates (excluding the cost of
unused line of credit fees) on borrowings under the Unsecured Facilities for
the years ended December 31, 1996 and 1995 were 7.3% and 7.8%, respectively.
Including the cost of unused fees, the weighted average effective interest
rates on borrowings under the Unsecured Facilities for the years ended December
31, 1996 and 1995 were 7.4% and 8.1%, respectively.
On May 30, 1995, the Company entered into an interest rate protection
agreement in the form of an accreting swap agreement (the "Swap") with a triple
A rated counterparty (the "Counterparty"). The Swap specifies that on the 15th
day of each month during the term of the agreement, commencing October 15,
1995, the Company shall pay the Counterparty a fixed rate of 5.89% on the then
principal amount in effect ($44,000 at December 31, 1996) which increases in
varying amounts to a maximum of $45,000 in February 1997, at which time the
agreement terminates. In return, the Counterparty will pay to the Company a
variable rate payment equal to 30-day LIBOR on the respective principal
amounts. This Swap serves to fix the variable component of the Company's total
interest rate at 5.89% on the principal amounts during the term of the Swap.
Payments made by the Company under the Swap totaled $132 for the year ended
December 31, 1996.
F-10
<PAGE> 58
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. Notes Payable
The following notes payable were outstanding at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
--------------- -------------
<S> <C> <C>
Tax-exempt bonds:
Notes with fixed interest at:
6.95%, maturing June 2026 (a) (c) $ 14,070 $ 14,130
7.04%, maturing July 2024 (c) 11,550 11,550
7.55%, maturing August 2024 (a) (c) 19,487 19,608
7.06%, maturing July 2024 (c) 9,780 9,780
7.04%, maturing July 2024 (c) 12,360 12,360
6.56%, maturing February 2025 (a) (c) 15,284 15,486
5.71%, maturing November 2007 (custodial receipts) (c) (e) 16,782 16,719
5.69%, maturing November 2007 (custodial receipts) (c) (e) 26,724 26,614
6.85%, maturing June 2026 (a) (c) 6,969 --
7.73%, maturing December 2036 (c) 8,771 --
----------- -----------
Total fixed rate notes 141,777 126,247
----------- -----------
Notes with variable interest at (b):
Variable rate, tax-exempt, maturing June 2026 (a) (c) 8,060 8,710
Variable rate, tax-exempt, maturing June 2026 (a) (c) 11,500 11,500
Variable rate, tax-exempt, maturing June 2026 (a) (c) 6,387 6,387
----------- -----------
Total variable rate notes 25,947 26,597
----------- -----------
Conventional notes with fixed interest at:
8.93%, maturing November 2004 (c) 13,149 13,317
7.75%, maturing November 1998 (c) (d) -- 6,202
7.375%, maturing September 2002 99,869 99,846
8.00%, maturing December 2003 (c) 5,529 --
9.25%, maturing November 1997 (c) 24,335 --
----------- -----------
Total fixed rate notes 142,882 119,365
----------- -----------
Total notes payable $ 310,606 $ 272,209
=========== ===========
Construction loans with variable interest at:
LIBOR plus 1.75%, maturing March 1998 (d) $ -- $ 5,775
LIBOR plus 1.50%, maturing November 1997 (d) -- 4,702
----------- -----------
Total construction notes payable $ -- $ 10,477
=========== ===========
</TABLE>
-------------
(a) Various lenders require cash to be held in escrow for interest,
property taxes, principal repayments and bond remarketing costs.
(b) Average interest rates on these notes ranged from 2.375% to 4.925%
during the year ended December 31, 1996 and 4.39% to 5.64% during the
year ended December 31, 1995.
(c) Note is collateralized by a community.
(d) Outstanding balances were repaid from proceeds of the cumulative
redeemable preferred stock offering on February 22, 1996.
(e) Subject to remarketing November 1, 1997.
F-11
<PAGE> 59
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Scheduled maturities of notes payable are as follows for the years ending
December 31:
<TABLE>
<S> <C>
1997 $ 25,273
1998 $ 1,053
1999 $ 1,177
2000 $ 1,282
2001 $ 1,374
Thereafter $ 280,447
---------
$ 310,606
=========
</TABLE>
Capitalized interest was $12,210, $6,027 and $2,831 for the years
ended December 31, 1996, 1995 and 1994, respectively. The weighted average
interest rates on all borrowings outstanding during the years ended December
31, 1996, 1995 and 1994 was 7.26%, 7.04% and 6.46%, respectively.
7. Investments in Joint Ventures
At December 31, 1996, investments in joint ventures consist of a 50%
general partnership interest in Falkland Partners, a 49% equity interest in
Avalon Run, an 86.5% effective equity interest in Town Close Associates (the
New Canaan development right) and 100% of the operating income from the
anticipated Avalon Grove joint venture (a Development Community). At December
31, 1995, investments in joint ventures included a 50% general partnership
interest in Falkland Partners, a 49% equity interest in Town Run Associates, a
50% general partnership interest in Evergreen Hamden Joint Venture and an 86.5%
effective equity interest in Town Close Associates. On February 15, 1996, the
Company assigned its 50% partnership interest in Evergreen Hamden Joint Venture
to the institutional partner in the joint venture. The following is a combined
summary of the financial position of these joint ventures for the dates
presented:
<TABLE>
<CAPTION>
12-31-96 12-31-95
---------- ----------
<S> <C> <C>
Assets:
Real estate, net $ 92,835 $ 60,821
Other assets 5,029 3,964
--------- ---------
$ 97,864 $ 64,785
========= =========
Liabilities and partners' equity:
Mortgage notes payable $ 26,000 $ 34,786
Other liabilities 3,786 3,686
Partners' equity 68,078 26,313
--------- ---------
$ 97,864 $ 64,785
========= =========
</TABLE>
The following is a combined summary of the results of operations of these joint
ventures for the periods presented:
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------------
12-31-96 12-31-95 12-31-94
------------ ------------ ------------
<S> <C> <C> <C>
Summary of operations:
Rental income $ 10,238 $ 9,004 $ 6,751
Other income 58 67 411
Operating expenses (4,238) (3,610) (3,720)
Mortgage interest expense (849) (1,027) (1,424)
Depreciation and amortization (1,779) (1,706) (998)
---------- -------- --------
Net income $ 3,430 $ 2,728 $ 1,020
========== ======== ========
</TABLE>
F-12
<PAGE> 60
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. Commitments and Contingencies
401(k) Savings Plan
Eligible employees of the Company participate in a contributory
employee savings plan. Under the plan, the Company may match a percentage of
contributions made by eligible employees, such percentage to apply to a maximum
of 4% of their annual salary. Expenses under this plan for 1996, 1995 and 1994
were not material.
Employment Agreements
The Company entered into employment agreements with two executives
that will expire on December 31, 1997 and will automatically be renewed for
successive one-year terms, unless otherwise terminated. Each employment
agreement provides for annual minimum base salary increases based on increases
in the Consumer Price Index, plus additional compensation as a discretionary
bonus as determined by the Compensation Committee of the Board of Directors.
Contingencies
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. These matters are generally covered
by insurance. While the resolution of these matters cannot be predicted with
certainty, Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
Financing
The Company has received a commitment for tax-exempt financing on the
Avalon Fields Development Community. The Community Development Administration
of Maryland has issued $12,700 million of thirty-year fixed-rate bonds related
to Avalon Fields, at an all-in rate of 7.55%. Management expects to complete
documentation and receive funding of approximately $12,088 in March 1997.
9. Value of Financial Instruments
Cash Equivalents and Cash in Escrow
The Company estimates that the fair value approximates carrying value
due to the relatively short maturity of these instruments.
Notes Payable, Loans Payable, Tax-Exempt Bonds, Custodial Receipts and
Revolving Credit Facility
The Company determines the fair value based on an analysis of
discounted future cash flows at a discount rate that approximates the Company's
effective current borrowing rate for instruments of comparable maturities.
Based on this analysis, the Company has determined that the fair value of these
instruments approximates carrying value. The Swap described in Note 5 had an
estimated unrealized loss of $28 at December 31, 1996 based upon a dealer
mark-to-market valuation.
10. Amended and Restated 1995 Equity Incentive Plan
The Company has adopted the 1995 Equity Incentive Plan (the "Plan"),
as amended and restated. Certain amendments to the Plan were approved by the
stockholders of the Company at the Annual Meeting held on May 7, 1996. Plan
participants include officers of the Company, key employees, non-employee
F-13
<PAGE> 61
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
directors, as well as other non-executive personnel of the Company. The Plan
authorizes (i) the grant of stock options that qualify as incentive stock
options under Section 422 of the Code, (ii) the grant of stock options that do
not so qualify, (iii) grants of shares of restricted and unrestricted Common
Stock contingent upon the attainment of performance goals or subject to other
restrictions, (iv) grants of shares of unrestricted Common Stock in lieu of
cash compensation and (v) dividend equivalent rights.
Under the Plan, a maximum of 882,750 shares of Common Stock may be
issued, plus any shares of Common Stock represented by awards under the
Company's 1993 Stock Option and Incentive Plan (the"1993 Plan") that are
forfeited, canceled, reacquired by the Company, satisfied without the issuance
of Common Stock or otherwise terminated (other than by exercise). Options
granted to officers, non-employee directors and employees under the Plan
generally vest ratably over a three-year term, expire ten years from the date
of grant and may be exercised at the market price on the date of grant.
Information with respect to stock options granted under the Plan and the 1993
Plan from 1993 to 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares Per Share
-------------- ---------------------
<S> <C> <C>
Options outstanding, December 31, 1993 1,116,250 $ 20.500
Exercised (16,000) 20.500
Granted 9,000 23.125
Forfeited (39,500) 20.500
------------ ---------------
Options outstanding, December 31, 1994 1,069,750 20.522
Exercised (15,000) 20.500
Granted 137,150 20.726
Forfeited (163,750) 20.511
------------ ---------------
Options outstanding, December 31, 1995 1,028,150 20.551
Exercised (36,413) 20.630
Granted 106,800 22.409
Forfeited (43,536) 20.636
------------ ---------------
Options outstanding, December 31, 1996 1,055,001 $ 20.733
============ ===============
Options exercisable:
December 31, 1994 362,548 $ 20.565
============ ===============
December 31, 1995 604,667 $ 20.031
============ ===============
December 31, 1996 908,345 $ 20.525
============ ===============
</TABLE>
Options to purchase 711,223, 924,350 and 882,750 shares of common
stock were available for grant under the Plan and the 1993 Plan at December 31,
1996, 1995 and 1994, respectively.
11. Extraordinary Items
In August 1996, the Company recorded a non-recurring charge to
earnings for the recorded value of the unamortized deferred financing costs
associated with the refinancing of tax-exempt bonds in conjunction with the
completion of the new credit enhancement facility with the Federal National
Mortgage Association.
In 1995, the unamortized deferred financing costs associated with
the retirement of the secured revolving credit facility were written off.
F-14
<PAGE> 62
AVALON PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
12. Quarterly Financial Information (Unaudited)
The following summary represents the quarterly results of operations
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------------------
1996 March 31 June 30 September 30 December 31
- ---- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Total revenue $ 28,108 $ 29,831 $ 32,811 $ 34,463
Income before extraordinary items $ 8,456 $ 8,979 $ 9,154 $ 16,996
Net income available to common stockholders $ 8,456 $ 8,979 $ 6,798 $ 16,996
Income before extraordinary items per common share $ 0.280 $ 0.282 $ 0.300 $ 0.554
Net income per common share $ 0.280 $ 0.282 $ 0.221 $ 0.554
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------------------
1995 March 31 June 30 September 30 December 31
- ---- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Total revenue $ 22,011 $ 23,164 $ 25,187 $ 26,851
Income before extraordinary items $ 7,992 $ 7,905 $ 8,226 $ 7,972
Net income available to common stockholders $ 7,992 $ 7,905 $ 8,226 $ 6,814
Income before extraordinary items per common share $ 0.282 $ 0.279 $ 0.290 $ 0.281
Net income per common share $ 0.282 $ 0.279 $ 0.290 $ 0.240
</TABLE>
13. Subsequent Events
On January 11, 1997, the Company acquired two apartment communities,
Avalon at Ballston-Quincy and Vermont Towers, in Arlington, Virginia for a total
purchase price of approximately $45,698 of which approximately $700 was paid in
the form of partnership units exchangeable for shares of the Company's Common
Stock (based on the market value of the Common Stock on the closing date of the
acquisition). One of these luxury, high-rise apartment communities contains
222 apartment homes; the other contains a total of 232 apartment homes in two
connected buildings.
On January 15, 1997, the Company purchased 7 acres of land in
Alexandria, Virginia for $4,300. Construction of a new 460 apartment home
community, Avalon at Cameron Court, commenced in the first quarter of 1997.
On February 24, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $350,000 of
securities. The registration statement provides for the issuance of common
stock, preferred stock, debt securities and warrants to purchase common stock.
On March 12, 1997, the Company purchased 8.29 acres of land in Quincy,
Massachusetts for $950. Construction of a new 171 apartment home community,
Avalon at Faxon Park, is expected to start in the second quarter of 1997.
F-15
<PAGE> 63
SCHEDULE III AVALON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TOTAL COST
------------------------------ -----------------
COSTS BUILDING/
SUBSEQUENT CONSTRUCTION
BUILDING & TO ACQUISITION/ IN PROGRESS &
LAND IMPROVEMENTS CONSTRUCTION LAND IMPROVEMENTS
------------- -------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Current Communities
- -------------------
4100 Massachusetts Avenue $ 6,848 $ 27,609 $ 422 $ 6,848 $ 28,031
Avalon Park 3,903 15,611 203 3,903 15,814
Avalon at Carter Lake 2,280 9,128 94 2,280 9,222
Avalon at Gayton 2,907 6,626 297 2,907 6,923
Avalon at Symphony Glen 1,594 6,377 108 1,594 6,485
Avalon at Hampton I 727 2,908 67 727 2,975
Avalon at Hampton II 1,601 6,461 82 1,601 6,543
Avalon at Dulles 2,302 9,207 90 2,302 9,297
Avalon Knoll 1,528 6,113 264 1,528 6,377
Avalon Lea 3,193 12,773 135 3,193 12,908
Avalon at Fairway Hills I 1,847 7,386 135 1,847 7,521
Avalon Ridge 4,938 19,755 337 4,938 20,092
Avalon at Lexington 1,924 12,061 591 1,924 12,193
Longwood Towers 3,310 13,240 70 3,310 13,310
Avalon Station 1,177 4,723 33 1,177 4,756
Avalon Farm 3,443 13,774 115 3,443 13,889
Avalon Watch 5,585 22,339 416 5,585 22,755
Avalon at Ballston 7,291 29,166 340 7,291 29,506
Avalon Pointe 1,537 6,175 36 1,537 6,211
Avalon at Park Center 7,293 29,400 644 7,293 30,044
Avalon Arbor 5,133 20,958 1,731 5,133 22,689
Avalon Glen 5,956 23,935 186 5,956 24,121
Avalon Green 1,820 10,156 318 1,820 10,474
Avalon Pavilions 11,256 45,023 244 11,256 45,267
Avalon View 3,529 14,114 130 3,529 14,244
Avalon Walk I 6,875 27,502 128 6,875 27,630
Avalon Walk II 2,225 21,222 150 2,225 21,372
Avalon Woods 1,490 6,610 135 1,490 6,745
Avalon at Decoverly 6,157 24,791 30 6,157 24,821
Avalon at Lake Arbor 2,354 9,541 5 2,354 9,546
Avalon Birches 2,678 10,735 6 2,678 10,741
Avalon Summit West 1,275 5,489 -- 1,275 5,489
Avalon Towers 3,118 12,702 6 3,118 12,708
Avalon Fields 2,608 11,654 -- 2,608 11,654
Avalon Crossing 2,199 11,188 -- 2,199 11,188
Avalon Run East 1,579 14,423 -- 1,579 14,423
Avalon Landing 1,849 7,404 8 1,849 7,412
Avalon Station II 542 5,363 -- 542 5,363
Avalon Summit East 426 8,962 -- 426 8,962
Avalon West 994 9,680 -- 994 9,680
---------- ---------- ---------------- -------------- -----------
129,241 562,284 7,556 129,241 569,381
---------- ---------- ---------------- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
TOTAL COST
---------------
TOTAL COST, NET YEAR OF
ACCUMULATED OF ACCUMULATED COMPLETION/
TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION
------------- --------------- ------------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Current Communities
4100 Massachusetts Avenue $ 34,879 $ 1,969 $ 32,910 $ -- 1994
Avalon Park 19,717 1,459 18,258 -- 1993**
Avalon at Carter Lake 11,502 570 10,932 -- 1994
Avalon at Gayton 9,830 757 9,073 -- 1993**
Avalon at Symphony Glen 8,079 609 7,470 9,780 1993**
Avalon at Hampton I 3,702 339 3,363 8,060 1993**
Avalon at Hampton II 8,144 642 7,502 11,550 1993**
Avalon at Dulles 11,599 861 10,738 12,360 1993**
Avalon Knoll 7,905 690 7,215 14,070 1993**
Avalon Lea 16,101 1,181 14,920 16,782 1993**
Avalon at Fairway Hills I 9,368 698 8,670 11,500 1993**
Avalon Ridge 25,030 1,829 23,201 26,724 1993**
Avalon at Lexington 14,117 974 13,143 15,284 1994
Longwood Towers 16,620 1,173 15,447 -- 1993
Avalon Station 5,933 291 5,642 -- 1994
Avalon Farm 17,332 1,259 16,073 -- 1993**
Avalon Watch 28,340 2,096 26,244 -- 1993**
Avalon at Ballston 36,797 2,507 34,290 -- 1993**
Avalon Pointe 7,748 369 7,379 6,387 1994
Avalon at Park Center 37,337 2,300 35,037 -- 1994
Avalon Arbor 27,822 3,128 24,694 -- 1993**
Avalon Glen 30,077 1,938 28,139 -- 1993**/95
Avalon Green 12,294 508 11,786 -- 1995
Avalon Pavilions 56,523 4,060 52,463 -- 1993**
Avalon View 17,773 1,310 16,463 19,487 1993**
Avalon Walk I 34,505 2,391 32,114 -- 1993**
Avalon Walk II 23,597 1,296 22,301 13,149 1994
Avalon Woods 8,235 576 7,659 -- 1994
Avalon at Decoverly 30,978 975 30,003 -- 1995
Avalon at Lake Arbor 11,900 390 11,510 -- 1995
Avalon Birches 13,419 529 12,890 -- 1995
Avalon Summit West 6,764 216 6,548 -- 1995
Avalon Towers 15,826 425 15,401 -- 1995
Avalon Fields 14,262 406 13,856 -- 1996
Avalon Crossing 13,387 106 13,281 -- 1996
Avalon Run East 16,002 152 15,850 -- 1996
Avalon Landing 9,261 394 8,867 6,969 1995
Avalon Station II 5,905 122 5,783 -- 1996
Avalon Summit East 9,388 182 9,206 -- 1996
Avalon West 10,624 202 10,422 8,771 1996
-------- --------------- ----------------- -------------------
698,622 41,879 698,743 180,873
-------- --------------- ----------------- -------------------
</TABLE>
F-16
<PAGE> 64
SCHEDULE III (Continued)
AVALON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TOTAL COST
---------------------------- ------------------
COSTS BUILDING/
SUBSEQUENT CONSTRUCTION
BUILDING & TO ACQUISITION/ IN PROGRESS &
LAND IMPROVEMENTS CONSTRUCTION LAND IMPROVEMENTS
---------- -------------- ------------------ --------- -----------------
<S> <C> <C> <C> <C> <C>
Acquisitions
- ------------
Avalon at Boulders 3,207 12,831 -- 3,207 12,831
Avalon at Fairway Hills II 6,761 27,046 -- 6,761 27,046
Avalon Chase 4,718 18,897 -- 4,718 18,897
Avalon Pines 1,714 6,864 -- 1,714 6,864
Autumn Woods 6,095 24,379 -- 6,095 24,379
---------- --------- --------- --------- ----------
22,495 90,017 -- 22,495 90,017
---------- --------- --------- --------- ----------
Development Communities*
- ------------------------
Avalon Commons
Avalon Cove 7,300 78,531 -- 7,300 78,531
Avalon Crescent 2,130 34,753 -- 2,130 34,753
Avalon Gates 2,005 28,343 -- 2,005 28,343
Avalon Grove 4,322 41,315 -- 4,322 41,315
Avalon Springs 1,586 12,042 -- 1,586 12,042
Avalon Gardens -- 15,165 -- -- 15,165
Avalon Court -- 5,048 -- -- 5,048
Avalon Willow -- 5,217 -- -- 5,217
Avalon at Fair Lakes -- 4,659 -- -- 4,659
17,343 242,676 -- 17,343 242,676
---------- --------- --------- --------- ----------
Major Renovations/Improvements
- ------------------------------
Longwood Towers -- -- 6,829 -- 6,829
Corporate -- 227 3,697 -- 3,924
- --------- ---------- --------- --------- --------- ----------
$ 169,079 $ 895,204 $ 18,082 $ 169,079 $ 912,827
========== ========= ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL COST
-------------
TOTAL COST, NET YEAR OF
ACCUMULATED OF ACCUMULATED COMPLETION/
TOTAL DEPRECIATION DEPRECIATION ENCUMBRANCES ACQUISITION
---------- ---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Acquisitions
- ------------
Avalon at Boulders 16,038 97 15,941 -- 1996
Avalon at Fairway Hills II 33,807 338 33,469 -- 1996
Avalon Chase 23,615 494 23,121 -- 1996
Avalon Pines 8,578 127 8,451 5,529 1996
Autumn Woods 30,439 35 30,439 24,335 1996
---------- --------- ------------ ----------
112,512 1,091 111,421 29,864
---------- --------- ------------ ----------
Development Communities*
- ------------------------
Avalon Commons
Avalon Cove 85,831 413 85,418 --
Avalon Crescent 36,883 -- 36,883 --
Avalon Gates 30,348 89 30,259 --
Avalon Grove 45,637 110 45,527 --
Avalon Springs 13,628 70 13,558 --
Avalon Gardens 15,165 -- 15,165 --
Avalon Court 5,048 -- 5,048 --
Avalon Willow 5,217 -- 5,217 --
Avalon at Fair Lakes 4,659 -- 4,659 --
--
260,019 682 259,337 --
---------- --------- ------------ ----------
Major Renovations/Improvements
- ------------------------------
Longwood Towers 6,829 -- 6,829 -- 1993
Corporate 3,924 895 3,029 -- --
- --------- ---------- ----------- ------------ ----------
1,081,906 $ 44,547 $ 1,037,359 $ 210,737
========== =========== ============ ==========
</TABLE>
*Under construction at December 31, 1996.
**Reflects acquisition of communities from the Predecessor of the Company on
November 18, 1993.
F-17
<PAGE> 65
AVALON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Depreciation of Avalon Properties, Inc. building, improvements, upgrades and
furniture, fixtures and equipment (FF&E) is calculated over the following
estimated useful lives, on a straight line basis:
Building - 40 years
Improvements, upgrades and FF&E - not to exceed 7 years
The aggregate cost of total real estate for Federal income tax purposes was
approximately $1.1 billion at December 31, 1996.
The changes in total real estate assets for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1996 1995 1994
--------------- -------------- -------------
<S> <C> <C> <C>
Balance, beginning of period $ 782,433 $ 593,632 $ 426,570
Acquisitions, Construction Costs and Improvements 299,473 188,801 167,062
------------- ------------- --------------
Balance, end of period $ 1,081,906 $ 782,433 $ 593,632
============= ============= ==============
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1996,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1996 1995 1994
-------------- --------------- -------------
<S> <C> <C> <C>
Balance, beginning of period $ 27,059 $ 12,395 $ 1,132
Depreciation for period 17,488 14,664 11,263
------------ -------------- -------------
Balance, end of period $ 44,547 $ 27,059 $ 12,395
============ ============== =============
</TABLE>
F-18
<PAGE> 1
EXHIBIT 10.12
--------------------------
MASTER REIMBURSEMENT AGREEMENT
DATED AS OF JULY 1, 1996
BY AND AMONG
FEDERAL NATIONAL MORTGAGE ASSOCIATION
AND
AVALON COLLATERAL, INC.
AVALON CHASE RIDGE, INC.
and
AVALON CHASE LEA, INC.,
AS BORROWERS
--------------------------
<PAGE> 2
MASTER REIMBURSEMENT AGREEMENT
THIS MASTER REIMBURSEMENT AGREEMENT is made and entered into
as of this 1st day of July, 1996, by and among AVALON COLLATERAL, INC., a
corporation duly organized and existing under the laws of Maryland ("COLLATERAL
INC."), AVALON CHASE RIDGE, INC., a corporation duly organized and existing
under the laws of Maryland ("CHASE RIDGE INC."), AVALON CHASE LEA, INC., a
corporation duly organized and existing under the laws of Maryland ("CHASE LEA
INC."; each of Collateral Inc., Chase Ridge Inc. and Chase Lea Inc. sometimes
being referred to herein as a "BORROWER" and collectively as the "BORROWERS")
and the FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FANNIE MAE"), a corporation
duly organized and existing under the Federal National Mortgage Association
Charter Act, 12 U.S.C. Section 1716 et. seq.. The meanings of initially
capitalized terms used herein and not defined are set forth in section 1.2.
RECITALS
WHEREAS, Collateral Inc. owns each of the five (5) multifamily
housing projects described in Section A and Section B of Exhibit A (the
"INITIAL BOND PROPERTIES"), which Initial Bond Properties are currently
financed by five (5) existing issues of tax-exempt housing bonds (the "EXISTING
BOND ISSUES") in accordance with five (5) trust indentures (the "EXISTING
INDENTURES");
WHEREAS, each of the Existing Bond Issues is supported by a
first priority mortgage, deed of trust or deed to secure debt (the "EXISTING
SECURITY INSTRUMENTS") and mortgage note secured thereby (the "EXISTING
MORTGAGE NOTES");
WHEREAS, each Issuer with respect to the three (3) Initial
Bond Properties described in "Section A: Floating Rate Bond Properties" of
Exhibit A (the "FLOATING RATE BOND PROPERTIES") has received a request from
Collateral Inc. to issue new bonds under the Related Act in order to (a)
provide purchase money financing with respect to the Floating Rate Bond
Property identified as Avalon Pointe, Stafford County, Virginia and (b)
refinance the Floating Rate Bond Properties identified as Avalon at Hampton I,
City of Hampton Virginia and Avalon Meadows, Howard County, Maryland, in each
case by the current refunding of the Existing Bond Issue with respect to each
such Floating Rate Bond Property through the simultaneous issuance of new
variable-rate, tax-exempt refunding housing bonds (the "FLOATING RATE BOND
TRANSACTIONS");
WHEREAS, each Issuer with respect to the two (2) Initial Bond
Properties described in "Section B: Fixed Rate Bond Properties" of Exhibit A
(the "FIXED RATE BOND PROPERTIES") has received a request from Collateral Inc.
to issue new bonds under the Related Act in order to refinance each such Fixed
Rate Bond Property by the current refunding of the Existing Bond Issue with
respect to each such Fixed Rate Bond Property through the simultaneous issuance
of new fixed-rate, tax-exempt refunding housing bonds (the "FIXED RATE
1
<PAGE> 3
BOND TRANSACTIONS"; the Floating Rate Bond Transactions and the Fixed Rate Bond
Transactions are referred to herein, collectively, as the "BOND TRANSACTIONS");
WHEREAS, each Issuer has determined that the issuance of the
Related Bonds with respect to the related Bond Transaction and the application
of the proceeds thereof to fund the Mortgage Loan relating thereto will promote
and serve the intended purposes of, and in all respects will conform to the
provisions and requirements of, the Related Act;
WHEREAS, in order to provide funding for the Mortgage Loan
with respect to each such Bond Transaction, the respective Issuer is issuing
and selling the Related Bonds and depositing the proceeds of the Related Bonds
with the Related Trustee, to be used to fund the Mortgage Loan with respect to
each such Initial Bond Property;
WHEREAS, the Mortgage Loan with respect to each Bond
Transaction will be (a) made in accordance with the requirements of Fannie Mae
and the Issuer, (b) evidenced by the Related Mortgage Note, (c) secured by the
Related Bond Mortgage, and (d) otherwise secured by the other Related Bond
Documents;
WHEREAS, the Related Mortgage Note, the Related Bond Mortgage
and the other Related Bond Documents with respect to each Initial Bond Property
will be executed by Collateral Inc. in favor of the Issuer with respect to such
Initial Bond Property;
WHEREAS, immediately following the origination of the Mortgage
Loan with respect to each Floating Rate Bond Transaction, the Issuer with
respect to each such Floating Rate Bond Transaction will, pursuant to an
Assignment, assign the Mortgage Loan, the Related Mortgage Note and the Related
Bond Mortgage, together with certain other collateral, to the Related Trustee
and Fannie Mae as their interests may appear;
WHEREAS, immediately following the origination of the Mortgage
Loan with respect to each Fixed Rate Bond Transaction, the Issuer with respect
to each such Fixed Rate Bond Transaction will, pursuant to an Assignment,
assign the Mortgage Loan, the Related Mortgage Note and the Related Bond
Mortgage, together with certain other collateral, to Fannie Mae;
WHEREAS, Collateral Inc. has requested that Fannie Mae provide
credit enhancement and liquidity support for each issue of Related Bonds with
respect to the Bond Transactions by issuing (i) a Related Fannie Mae Collateral
Agreement with respect to each Floating Rate Bond Transaction for the benefit
of the Related Trustee and (ii) a Related Fannie Mae Pass-Through Certificate
with respect to each Fixed Rate Bond Transaction for the benefit of the Related
Trustee;
WHEREAS, (i) Chase Ridge Inc. owns the multifamily housing
project described as Avalon Ridge, Montgomery County, Maryland, in "Section C:
Custodial Receipts Properties"
2
<PAGE> 4
of Exhibit A (the "AVALON RIDGE PROPERTY") and (ii) Chase Lea Inc. owns the
multifamily housing project described as Avalon Lea, Baltimore County,
Maryland, in "Section C: Custodial Receipts Properties" of Exhibit A (the
"AVALON LEA PROPERTY"; each of the Avalon Ridge Property and the Avalon Lea
Property sometimes being referred to herein as a "CUSTODIAL RECEIPTS PROPERTY"
and collectively as the "CUSTODIAL RECEIPTS PROPERTIES"). Each Custodial
Receipts Property is currently financed by an existing issue of tax-exempt
housing bonds (the "CUSTODIAL RECEIPTS BOND ISSUES") issued in accordance with
those certain Trust Indentures dated as of November 1, 1985, each by and
between Community Development Administration Department of Economic and
Community Development State of Maryland ("CDA") and Marine Midland Bank
(successor to Equitable Bank, National Association), as trustee (together with
its successors and assigns, the "CUSTODIAL RECEIPTS BOND TRUSTEE") (such trust
indentures, as amended, restated, supplemented or otherwise modified to the
date hereof and from time to time hereafter the "CUSTODIAL RECEIPTS BOND
INDENTURES");
WHEREAS, each of the Custodial Receipts Bond Issues is
supported by first priority mortgages, deeds of trust or deeds to secure debt,
dated as of November 11, 1985 (the "CUSTODIAL RECEIPTS FIRST SECURITY
INSTRUMENTS") by the related Borrower (or its predecessor-in-interest)
originally for the benefit of CDA and The Mutual Benefit Life Insurance Company
encumbering the related Custodial Receipts Property and securing the
obligations of the obligor under and with respect to the related mortgage note
(the "CUSTODIAL RECEIPTS MORTGAGE NOTES") and mortgage loan evidenced thereby
(the "CUSTODIAL RECEIPTS MORTGAGE LOANS");
WHEREAS, Guarantor (defined below) has (i) purchased the
Custodial Receipts Bond Issue with respect to each Custodial Receipts Property,
(ii) deposited such Custodial Receipts Bond Issues with Marine Midland Bank
(the "ORIGINAL CUSTODIAN") pursuant to that certain Amended and Restated
Custody Agreement dated as of June 1, 1995 between the Original Custodian, and
Guarantor as depositor (as amended, restated, supplemented or otherwise
modified to the date hereof and from time to time hereafter the "CUSTODIAL
RECEIPTS AGREEMENT"), and (iii) caused the issuance of the Related Custodial
Receipts in accordance with the Custodial Receipts Agreement (the "CUSTODIAL
RECEIPTS TRANSACTIONS");
WHEREAS, Guarantor, Collateral Inc., Fannie Mae and Crestar
Bank, not in its individual capacity but solely in its capacity as collateral
agent for Fannie Mae (in such capacity, together with its successors and
assigns the "C/R PLEDGE CUSTODIAN") have entered in to that certain Master
Assignment, Bond Pledge and Security Agreement, of even date herewith (as the
same may be amended, supplemented, otherwise modified or amended and restated
from time to time in accordance with its terms, the "CUSTODIAL RECEIPTS BOND
PLEDGE AGREEMENT") pursuant to which (a) Guarantor has assigned and conveyed
all of residual right, title and interest, if any, in and to, inter alia, the
Custodial Receipts Bond Issues to Collateral Inc., (b) Collateral Inc., and to
the extent that Guarantor is deemed to retain any residual interests, Guarantor
has pledged and granted to the C/R Pledge Custodian for the benefit of Fannie
Mae, all of its residual right, title and interest, if any, in and to, inter
alia, the Custodial Receipts Bond Issue as additional
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security for the Obligations, and (c) the C/R Pledge Trustee has acknowledged
and agreed that it shall hold such grant and pledge for the benefit of Fannie
Mae;
WHEREAS, (i) the Related Custodial Receipts with respect to
the Avalon Ridge Property are credit enhanced by a direct-draw letter of credit
(the "CHASE RIDGE CUSTODIAL RECEIPTS L/C") issued by Morgan Guaranty Trust
Company of New York ("MORGAN") in favor of the Custodial Receipts Custodian and
(ii) the Related Custodial Receipts with respect to the Avalon Lea Property are
credit enhanced by a direct-draw letter of credit (the "CHASE LEA CUSTODIAL
RECEIPTS L/C"; each of the Chase Ridge Custodial Receipts L/C and the Chase Lea
Custodial Receipts L/C sometimes being referred to herein as a "CUSTODIAL
RECEIPTS L/C" and collectively as the "CUSTODIAL RECEIPTS L/C'S") issued by
Morgan in favor of the Custodial Receipts Custodian;
WHEREAS, in consideration of Morgan's issuing the Custodial
Receipts L/C's, each of Chase Ridge Inc. and Chase Lea Inc. have entered into a
certain Reimbursement Agreement (the "CUSTODIAL RECEIPTS L/C REIMBURSEMENT
AGREEMENT"), dated as of July 1, 1996, with Morgan pursuant to which Chase
Ridge Inc. and Chase Lea Inc. have agreed to reimburse Morgan for all advances
made by Morgan pursuant to the terms of the Custodial Receipts L/C's;
WHEREAS, each of Chase Ridge Inc. and Chase Lea Inc. has
requested that Fannie Mae credit enhance their respective reimbursement
obligations to Morgan with respect to each Custodial Receipts Transaction by
issuing the Related Custodial Receipts Collateral Agreements for the benefit of
Morgan;
WHEREAS, each of Chase Ridge Inc. and Chase Lea Inc. has
agreed to secure its reimbursement obligations to Fannie Mae with respect to
any amounts advanced by Fannie Mae under each Related Custodial Receipts
Collateral Agreement and the other Obligations hereunder by, inter alia,
granting Fannie Mae second priority mortgages, deeds of trust or deeds to
secure debt encumbering the related Custodial Receipts Property;
WHEREAS, Fannie Mae has agreed to provide: (i) credit
enhancement and liquidity support for each issue of Related Bonds in a Floating
Rate Bond Transaction pursuant to and in accordance with the terms of a Related
Fannie Mae Collateral Agreement; (ii) credit enhancement for each issue of
Related Bonds in a Fixed Rate Bond Transaction pursuant to and in accordance
with the terms of a Related Fannie Mae Pass-Through Certificate; and (iii)
credit enhancement with respect to the respective reimbursement obligations of
Chase Ridge Inc. and Chase Lea Inc. to Morgan for certain amounts advanced by
Morgan under the Custodial Receipts L/C's, pursuant to and in accordance with
the terms of a Related Custodial Receipts Collateral Agreement;
WHEREAS, each Borrower is a direct, one hundred percent (100%)
subsidiary of Avalon Properties, Inc., a Maryland corporation ("GUARANTOR") and
will receive a material
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benefit from Fannie Mae's agreement to provide credit enhancement and liquidity
support to the other Borrowers;
WHEREAS, each Borrower has agreed, that the Borrowers be
jointly and severally liable for all of the Obligations;
WHEREAS, Collateral Inc. owns each of the four (4) multifamily
housing projects, including the real property and improvements located thereon,
described in Exhibit B (the "ADDITIONAL MORTGAGED PROPERTIES");
WHEREAS, in consideration of Fannie Mae agreeing to enter into
the Related Fannie Mae Credit Enhancement Instruments and in order to further
evidence and secure the obligations of each of the Borrowers to Fannie Mae,
Collateral Inc. and the other the Borrowers have agreed, among other things:
(i) to grant Fannie Mae second priority deeds of trust on the Bond Properties;
(ii) to grant Fannie Mae second priority deeds of trust on the Custodial
Receipts Properties; (iii) to grant Fannie Mae first priority deeds of trust on
the Additional Mortgaged Properties; (iv) to pay certain fees to Fannie Mae;
and (v) to reimburse Fannie Mae for amounts advanced pursuant to the Related
Fannie Mae Collateral Agreements and the Related Custodial Receipts Collateral
Agreements or otherwise advanced in accordance with this Agreement and the
other Transaction Documents;
WHEREAS, in order to further induce Fannie Mae to enter into
the Related Fannie Mae Credit Enhancement Instruments, Guarantor has agreed,
inter alia, to (a) grant a certain Guaranty for the benefit of Fannie Mae, and
(b) pledge, assign and grant Fannie Mae a security interest in all of its
remaining right, title and interest in the Custodial Receipts Bond Issues, if
any, as additional security for the Obligations, pursuant to the Custodial
Receipts Bond Pledge Agreement; and
WHEREAS, it is a condition to the execution and delivery of
the Related Fannie Mae Credit Enhancement Instruments by Fannie Mae that the
Borrowers enter into this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
undertakings set forth herein, the payment of certain fees to Fannie Mae, and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged by the parties hereto, Collateral Inc., Chase Ridge Inc., Chase
Lea Inc. and Fannie Mae agree as follows:
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I. DEFINITIONS
1 GENERAL INTERPRETATIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise provided
or unless the context otherwise requires:
(a) the terms defined in section 1.2 have the meanings
assigned to them in section 1.2 and include the plural as well as the singular,
and the use of any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with GAAP;
(c) references herein to "sections," "subsections,"
"paragraphs" and other subdivisions without reference to a document are to
designated sections, subsections, paragraphs and other subdivisions of this
Agreement;
(d) a reference to a subsection without further reference
to a section is a reference to such subsection as contained in the same section
in which the reference appears, and this rule shall also apply to paragraphs
and other subdivisions;
(e) a reference to an Exhibit or a Schedule without a
further reference to the document to which the Exhibit or Schedule is attached
is a reference to an Exhibit or Schedule to this Agreement;
(f) a reference to Fannie Mae forms, guides, memos,
updates or announcements shall mean such Fannie Mae forms, guides, memos,
updates or announcements as the same may be amended, supplemented, otherwise
modified, superseded or replaced from time to time;
(g) the words "attorneys' fees and expenses," "legal fees
and expenses," "attorneys' fees and costs," "attorneys' fees and court costs,"
and other words of similar import are deemed to include any actual costs and
expenses incurred by Fannie Mae's in-house counsel;
(h) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular provision; and
(i) the word "including" means "including, but not
limited to."
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2 DEFINED TERMS.
For all purposes of this Agreement, the following terms shall
have the respective meanings set forth below:
"ACTIVITY FEE" shall have the meaning given that term in section
4.4(b).
"ACTIVITY RATE" means the prime rate of interest as reported from day
to day in The Wall Street Journal as the base rate on corporate loans posted by
at least seventy-five percent (75%) of the nation's thirty (30) largest banks
plus two percent (2%) per annum. The Activity Rate will be the rate reported
on the applicable publication date as determined above, notwithstanding the
fact that such reported rate shall be the prime rate for the preceding business
day. If such rate is no longer available, then the Activity Rate shall mean
the base rate or prime rate of interest of any "Money Center" bank designated
by Fannie Mae, in its discretion, plus two percent (2%) per annum.
"ADDITIONAL MORTGAGED PROPERTIES" shall have the meaning given to that
term in the recitals to this Agreement. "ADDITIONAL MORTGAGED PROPERTIES"
shall also include each New Additional Property from and after the date of its
addition to the Fannie Mae Credit Facility, and shall exclude each Released
Property (which prior to such substitution or release, as applicable, was an
Additional Mortgaged Property), from and after the date of such substitution or
release. "ADDITIONAL MORTGAGED PROPERTY" means any one of the foregoing,
individually.
"ADVANCE" means the payment or deemed payment by Fannie Mae of any
monies, from the cash flow or the redemption of mortgages pledged by Fannie Mae
or otherwise, to either (i) a Related Trustee pursuant to the terms of a
Related Fannie Mae Collateral Agreement or (ii) to Morgan pursuant to the terms
of a Related Custodial Receipts Collateral Agreement.
"AFFILIATE", as applied to any Person, means any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of that Person, whether through the ownership of voting
securities, partnership interests or by contract or otherwise.
"AGGREGATE DEBT SERVICE COVERAGE RATIO" means, at any time, the ratio
of (a) the aggregate of the Net Operating Income for the applicable period for
all of the Properties plus the interest income actually accrued with respect to
the Release Price Cash Collateral, if any, held by Fannie Mae during the
applicable period, to (b) the aggregate Imputed Debt Service with respect to
all Bond Transactions and all Custodial Receipts Transactions, for the
applicable period.
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"AGGREGATE FACILITY AMOUNT" means at any time the total amount of all
Facility Amounts.
"AGGREGATE LOAN TO VALUE RATIO" means, at any time, the ratio
(expressed as a percentage) of (a) the Aggregate Facility Amount to (b) the
aggregate of the Values for all of the Properties plus the aggregate amount of
the Release Price Cash Collateral, if any, held by Fannie Mae at such time.
"AGREEMENT" means this Master Reimbursement Agreement, as amended,
supplemented, or otherwise modified or amended and restated from time to time
in accordance with its terms.
"ALLOCABLE FACILITY AMOUNT" means the portion of the Aggregate
Facility Amount allocated to a particular Property by Fannie Mae in accordance
with section 5.1.
"ALLOCATED RELEASE PRICE CASH COLLATERAL" means, with respect to each
Floating Rate Bond Property, the portion of the aggregate amount of all Release
Price Cash Collateral allocable to such Floating Rate Bond Property on a pro
rata basis, as determined by Fannie Mae in its discretion.
"ALTERATIONS" shall mean the meaning given to such term in section
2.2(o).
"ALTERNATE CREDIT FACILITY", with respect to an issue of Related
Bonds, shall have the meaning given that term in the Related Indenture.
"ALTERNATIVE DSC SHORTFALL COLLATERAL" shall have the meaning given to
such term in section 3.1(c).
"APPLICABLE LAW" means (a) all applicable provisions of all
constitutions, statutes, rules, regulations and orders of all governmental
bodies, all Governmental Approvals and all orders, judgments and decrees of all
courts and arbitrators, (b) all zoning, building, environmental and other laws,
ordinances, rules, regulations and restrictions of any Governmental Authority
affecting the ownership, management, use, operation, maintenance or repair of
any Property, including the Americans with Disabilities Act (if applicable),
the Fair Housing Amendment Act of 1988 and Hazardous Materials Laws, (c) any
building permits or any conditions, easements, rights-of-way, covenants,
restrictions of record or any recorded or unrecorded agreement affecting or
concerning any Property including planned development permits, condominium
declarations, and reciprocal easement and regulatory agreements with any
Governmental Authority, (d) all laws, ordinances, rules and regulations,
whether in the form of rent control, rent stabilization or otherwise, that
limit or impose conditions on the amount of rent that may be collected from the
units of any Property, and (e) all terms of any insurance policy that any
Borrower is required to maintain under the Mortgages, all requirements of the
issuers of any such policy, and all orders, rules, regulations and other
requirements of the National Board of Fire Underwriters (or any body exercising
similar functions) applicable to or affecting the
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<PAGE> 10
operation or use of any Property or the consummation of the transactions to be
effected by this Agreement or any of the other Transaction Documents.
"ASSIGNMENT" means, individually, any Assignment of Deed of Trust and
Other Loan Documents with respect to a Bond Transaction by an Issuer (a) with
respect to each Floating Rate Bond Transaction, to the Related Trustee and
Fannie Mae as their interests may appear, and (b) with respect to each Fixed
Rate Bond Transaction, to Fannie Mae, in each case as such Assignment may be
amended, supplemented or, otherwise modified or amended and restated from time
to time in accordance with its terms. "ASSIGNMENTS" means every such
Assignment, collectively.
"ASSIGNMENT OF MANAGEMENT AGREEMENT" means, individually, any
Assignment of Management Agreement with respect to a Property by a Borrower for
the benefit of Fannie Mae and consented to by Guarantor, as such Assignment may
be amended, supplemented or otherwise modified from time to time in accordance
with its terms. "ASSIGNMENTS OF MANAGEMENT AGREEMENT" means every such
Assignment of Management Agreement, collectively.
"ASSUMPTION AND DIRECTION AGREEMENT" means that certain Assumption and
Direction Agreement by and among Crestar Bank, not in its individual capacity
but solely in its capacity as trustee with respect to the Custodial Receipts
Bond Issues, Guarantor and Collateral Inc., as such agreement may be amended,
supplemented otherwise modified or amended and restated from time to time.
"AVALON LEA PROPERTY" shall have the meaning given that term in the
Recitals to this Agreement.
"AVALON POINTE PROJECT" means the Bond Property identified on Exhibit
A as Avalon Pointe Project, Stafford County, Virginia.
"AVALON POINTE RESTRICTIVE COVENANTS AGREEMENT" shall mean that
certain Amended and Restated Declaration of Restrictive Covenants dated as of
October 1, 1989, and recorded on October 31, 1989 in the real estate records of
Stafford County, Virginia at Deed Book 705, Page 246, as amended by Amendment
to Declaration of Restrictive Covenants dated as of January 16, 1991 and
recorded on April 30, 1991 in the real estate records of Stafford County,
Virginia at Deed Book 794, Page 581, and as such agreement may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms.
"AVALON RIDGE PROPERTY" shall have the meaning given that term in the
Recitals to this Agreement.
"BOND DOCUMENTS" means, collectively, the Related Bond Documents for
all Bond Properties financed by the Bond Transactions, and "BOND DOCUMENT"
means any one of the foregoing, individually.
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"BOND FEES" shall mean: (i) with respect to each issue of Related
Bonds in a Floating Rate Bond Transaction, the ongoing fees and expenses of the
Issuer, the Related Trustee, the Remarketing Agent, any tender agent and any
rebate analyst, each as set forth on Exhibit A attached hereto; (ii) with
respect to each issue of Related Bonds in a Fixed Rate Bond Transaction, any
fees payable by any Borrower in connection with such Related Bond and not
included in the actual fixed rate of interest set forth in the Related Mortgage
Note; and (iii) with respect to each issue of Related Custodial Receipts, any
fees payable by any Borrower in connection with such Related Custodial Receipts
and not included in the actual fixed rate of interest set forth in the
applicable Custodial Receipts Mortgage Note.
"BONDHOLDERS" (a) with respect to any Related Bonds, shall have the
meaning given that term in the Related Indenture and (b) with respect to any
Related Custodial Receipts, shall have the meaning given to the term "Holder"
in the Custodial Receipts Agreement with respect to such Related Custodial
Receipts.
"BOND MORTGAGE" means the first priority Security Instrument on each
Bond Property in a Bond Transaction securing the obligations of the related
Borrower under and with respect to the Related Mortgage Note and the related
Mortgage Loan, and "BOND MORTGAGES" means every such Bond Mortgage,
collectively.
"BOND PROPERTIES" means the Initial Bond Properties and the Custodial
Receipts Bond Properties, collectively. "BOND PROPERTIES" shall also include
each New Bond Property from and after the date of its addition to the Fannie
Mae Credit Facility, and shall exclude each Released Property (which prior to
its substitution or release, as applicable, was a Bond Property), from and
after the date of such substitution or release. "BOND PROPERTY" means any one
of the foregoing, individually.
"BOND PROPERTY LOAN DOCUMENT" means with respect to each Bond
Transaction, any of the documents, agreements or instruments granting,
evidencing or securing the Mortgage Loan with respect to such Bond Transaction,
including the Related Mortgage Note, the Related Mortgages, the title policy,
UCC fixture filings and UCC financing statements (in each case relating to such
Mortgage Loan) and the assignment of such Mortgage Loan by the prior holder
thereof to the Related Trustee, as each such document, agreement or instrument
may be amended, supplemented, otherwise modified or amended and restated from
time to time in accordance with its respective terms, and "BOND PROPERTY LOAN
DOCUMENTS" means every such Bond Property Loan Document with respect to such
Mortgage Loan, collectively.
"BONDS" means, collectively, the Related Securities for all Bond
Properties.
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"BOND TRANSACTION CLOSING DATE" with respect to a particular Bond
Transaction, means the date the Related Bonds are issued and paid for.
"BOND TRANSACTIONS" shall have the meaning given to such term in the
recitals to this Agreement. "BOND TRANSACTIONS" shall also include each Fixed
Rate Bond Transaction and each Floating Rate Bond Transaction that becomes part
of the Fannie Mae Credit Facility after the date hereof. "BOND TRANSACTION"
means any one of the foregoing, individually.
"BORROWER" AND "BORROWERS" shall have the meaning given that term in
the Introduction to this Agreement.
"BORROWER ORGANIZATIONAL DOCUMENTS" means Collateral Inc.'s
Organizational Documents, Chase Ridge Inc.'s Organizational Documents and Chase
Lea Inc.'s Organizational Documents, collectively.
"BUSINESS DAY" means any day other than (a) a Saturday or a Sunday,
(b) any day on which banking institutions located in the City of New York, New
York are required or authorized by law to close, (c) any day on which The New
York Stock Exchange is closed, or (d) any day on which Fannie Mae is closed.
"CAP" means an interest rate cap, and includes an interest rate cap
which has an initial "calculation period" that begins on the last day of a
Reset Period which commences on or after the date such cap was obtained (i.e. a
"future" cap).
"CASH MANAGEMENT ACCOUNT" means a deposit account or accounts with a
financial institution or institutions acceptable to Fannie Mae into which the
Borrowers shall cause Gross Cash Flow from the Properties to be deposited on a
daily basis upon the occurrence of a Cash Management Triggering Event or a
Lock-Box Triggering Event, as more particularly described in the Cash
Management Agreement.
"CASH MANAGEMENT AGREEMENT" means a Cash Management, Security Pledge
and Assignment Agreement among the Borrowers, Fannie Mae and, at Fannie Mae's
option, the Servicer, for the benefit of Fannie Mae and substantially in the
form of Exhibit G (subject to modifications approved by Fannie Mae), as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.
"CASH MANAGEMENT NOTICE" shall have the meaning given to such term in
section 3.1(b).
"CASH MANAGEMENT SYSTEM COLLATERAL" shall have the meaning given to
the term "Collateral" in the Cash Management Agreement.
"CASH MANAGEMENT TEST" shall have the meaning given to such term in
section 3.1(b).
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"CASH MANAGEMENT TEST SHORTFALL" shall have the meaning given to such
term in section 3.1(c).
"CASH MANAGEMENT TRIGGERING EVENT" shall have the meaning given to
such term in section 3.1(b).
"CASUALTY", with respect to any Property, means any damage to, or
destruction or loss of, all or any portion of the Property, whether by fire or
other cause.
"CDA" shall have the meaning given to such term in the Recitals to
this Agreement.
"CHASE LEA CUSTODIAL RECEIPTS L/C" shall have the meaning given that
term in the Recitals to this Agreement.
"CHASE LEA INC." means Avalon Chase Lea, Inc., a Maryland corporation.
"CHASE LEA INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).
"CHASE LEA INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).
"CHASE LEA ISSUER " means the issuer with respect to the Permanent
Chase Lea Refunding Bonds.
"CHASE LEA TERMINATION FEE" means a commitment termination fee equal
to, (i) $693,135.00 if such termination fee is required to be paid on or before
July 31, 1997, (ii) $643,299.00 if such termination fee is required to be paid
after July 31, 1997 but on or before July 31, 1998, (iii) $589,904.00 if such
termination fee is required to be paid after July 31, 1998 but on or before
July 31, 1999, (iv) $532,696.00 if such termination fee is required to be paid
after July 31, 1999 but on or before July 31, 2000, (iv) $471,404.00 if such
termination fee is required to be paid after July 31, 2000 but on or before
July 31, 2001 and (v) $405,736.00 if such termination fee is required to be
paid on or after the Final Chase Ridge/Chase Lea Conversion Date.
"CHASE RIDGE CUSTODIAL RECEIPTS L/C" shall have the meaning given that
term in the Recitals to this Agreement.
"CHASE RIDGE INC." means Avalon Chase Ridge, Inc., a Maryland
corporation.
"CHASE RIDGE INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).
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"CHASE RIDGE INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).
"CHASE RIDGE ISSUER" means the issuer with respect to the Permanent
Chase Ridge Refunding Bonds.
"CHASE RIDGE TERMINATION FEE" means a commitment termination fee equal
to, (i) $1,110,626.00 if such termination fee is required to be paid on or
before July 31, 1997, (ii) $1,030,283.00 if such termination fee is required to
be paid after July 31, 1997 but on or before July 31, 1998, (iii) $944,308.00
if such termination fee is required to be paid after July 31, 1998 but on or
before July 31, 1999, (iv) $852,305.00 if such termination fee is required to
be paid after July 31, 1999 but on or before July 31, 2000, (iv) $753,851.00 if
such termination fee is required to be paid after July 31, 2000 but on or
before July 31, 2001 and (v) $648,945.00 if such termination fee is required to
be paid on or after the Final Chase Ridge/Chase Lea Conversion Date.
"CODE" means the Internal Revenue Code of 1954, as amended (herein the
"1954 CODE") and the Internal Revenue Code of 1986, as amended (herein the
"1986 CODE"), in each case to the extent made applicable to matters relating to
the Related Bonds and the Properties by Section 1313(a) of the Tax Reform Act
of 1986, and with respect to a specific section thereof such reference shall be
deemed to include (a) the applicable regulations promulgated or proposed under
such section or any previous corresponding section, (b) any successor provision
of similar import hereafter enacted, (c) any corresponding provision of any
subsequent Internal Revenue Code and (d) the applicable regulations promulgated
or proposed under the provisions described in (b) and (c).
"COLLATERAL" means all cash, Government Obligations, assets and
property, real and personal (including the Bond Properties, the Additional
Mortgaged Properties, the Release Price Cash Collateral, the Replacement
Reserve Accounts and all funds contained in such accounts, and cash and any
investments in the Principal Reserve Funds, the Shortfall Cash Collateral, the
Alternative DSC Shortfall Collateral, the Cash Management Account, the Cash
Management System Collateral, the Hedges and the Hedge Documents), pledged by
any of the Borrowers or the Guarantor pursuant to any Bond Document or any
Mortgage Document or any other Transaction Document and the Proceeds thereof.
"COLLATERAL INC." means Avalon Collateral, Inc., a Maryland
corporation.
"COLLATERAL INC.'S ARTICLES OF INCORPORATION" shall have the meaning
given that term in section 2.1(a).
"COLLATERAL INC.'S ORGANIZATIONAL DOCUMENTS" shall have the meaning
given that term in section 2.1(a).
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"CONDEMNATION", with respect to any Property, means (a) any action or
proceeding for the taking of the Property, or any part thereof or interest
therein, for public or quasi-public use under the power of eminent domain, by
reason of any public improvement or condemnation proceeding, or in any other
similar manner or (b) the conveyancing of any Property under the threat or
contemplation of any action or proceeding described in clause (a).
"CONDEMNATION PROCEEDS" means the proceeds of any Condemnation.
"CONTINGENT OBLIGATION" as to any Person (the "GUARANTEEING PERSON"),
means any obligation of (a) the guaranteeing person or (b) another Person
(including any bank under any letter of credit) to induce the creation of which
the guaranteeing person has issued a reimbursement, counterindemnity or similar
obligation, in either case, guaranteeing or in effect guaranteeing any
indebtedness, leases, dividends or other obligations (the "PRIMARY
OBLIGATIONS") of any other third person (the "PRIMARY OBLIGOR") in any manner,
whether directly or indirectly, including any obligation of the guaranteeing
person, whether or not contingent, (i) to purchase any such primary obligation
or any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (iv)
otherwise to assure or hold harmless the owner of any such primary obligation
against loss in respect thereof; provided, however, that the term Contingent
Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business. The amount of any Contingent
Obligation of any guaranteeing person shall be deemed to be the lesser of (a)
an amount equal to the stated or determinable amount of the primary obligation
in respect of which such Contingent Obligation is made and (b) the maximum
amount for which such guaranteeing person may be liable pursuant to the terms
of the instrument embodying such Contingent Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Contingent Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrowers in good
faith.
"CONTROLLED GROUP" means all members of a group of corporations and
all trades or businesses (whether or not incorporated) under common control
which, together with the Borrowers, are treated as a single employer under
Section 414 of the Code.
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"COUNTERPARTY" shall have the meaning given that term in section
3.2(d).
"CREDIT ENHANCEMENT COMPONENT" means the portion of the Facility Fee
payable by a Borrower with respect to the Facility Amount of each issue of
Related Securities after subtracting (i) amounts on deposit from time to time
in the Principal Reserve Fund, if any, with respect to such issue of Related
Securities and (ii) Allocated Release Price Cash Collateral deposited with
Fannie Mae from time to time, if any, with respect to such issue of Related
Securities. With respect to each issue of Related Securities as of the date
hereof the "CREDIT ENHANCEMENT COMPONENT" shall be the percentage identified as
the Credit Enhancement Component with respect to such Related Securities on
Exhibit C. For each New Bond Property added to the Fannie Mae Credit Facility
pursuant to section 5.4 or section 5.5, the "CREDIT ENHANCEMENT COMPONENT"
shall be the amount set forth in the New Property Confirmation with respect to
such New Bond Property.
"C/R PLEDGE CUSTODIAN" shall have the meaning given to such term in
the Recitals to this Agreement.
"CUSTODIAL ACCOUNT" shall have the meaning given that term in section
3.2(g).
"CUSTODIAL RECEIPTS AGREEMENT" shall have the meaning given to such
term in the recitals to this Agreement.
"CUSTODIAL RECEIPTS BOND ISSUES" shall have the meaning given to such
term in the recitals to this Agreement. "CUSTODIAL RECEIPTS BOND ISSUE" means
any one of the foregoing, individually.
"CUSTODIAL RECEIPTS BOND INDENTURES" shall have the meaning given to
such term in the recitals to this Agreement. "CUSTODIAL RECEIPTS BOND
INDENTURE" means any one of the foregoing, individually.
"CUSTODIAL RECEIPTS BOND PLEDGE AGREEMENT" has the meaning given to
that term in the Recitals to this Agreement.
"CUSTODIAL RECEIPTS BOND TRUSTEE" shall have the meaning given to such
term in the recitals to this Agreement.
"CUSTODIAL RECEIPTS CUSTODIAN" means Crestar Bank, not in its
individual capacity but solely in its capacity as the custodian under the
Custodial Receipts Agreement.
"CUSTODIAL RECEIPTS DOCUMENTS" means, collectively, the Related
Custodial Receipts Documents for each of the Bond Properties financed by the
Custodial Receipts Transactions, and "CUSTODIAL RECEIPTS DOCUMENT" means any
one of the foregoing, individually.
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"CUSTODIAL RECEIPTS FIRST SECURITY INSTRUMENTS" shall have the meaning
given to such term in the recitals to this Agreement. "CUSTODIAL RECEIPTS
FIRST SECURITY INSTRUMENT" means any one of the foregoing, individually.
"CUSTODIAL RECEIPTS GUARANTY" means each Guaranty issued by Avalon
Properties, Inc. for the benefit of Morgan, with respect to the obligations of
either Chase Ridge, Inc. or Chase Lea, Inc. under the Custodial Receipts
Reimbursement Agreement, and Custodial Receipts Guarantees means every such
Custodial Receipts Guaranty, collectively.
"CUSTODIAL RECEIPTS L/C REIMBURSEMENT AGREEMENT" shall have the
meaning given to such term in the recitals to this Agreement.
"CUSTODIAL RECEIPTS L/C'S" shall have the meaning given to such term
in the recitals to this Agreement. "CUSTODIAL RECEIPTS L/C" means any one of
the foregoing, individually.
"CUSTODIAL RECEIPTS MORTGAGE LOANS" shall have the meaning given to
such term in the recitals to this Agreement. "CUSTODIAL RECEIPTS MORTGAGE
LOAN" means any one of the foregoing, individually.
"CUSTODIAL RECEIPTS MORTGAGE NOTES" shall have the meaning given to
such term in the recitals to this Agreement. "CUSTODIAL RECEIPTS MORTGAGE
NOTE" means any one of the foregoing, individually.
"CUSTODIAL RECEIPTS PROPERTIES" shall have the meaning given to such
term in the recitals to this Agreement. "CUSTODIAL RECEIPTS PROPERTY" means
any one of the foregoing, individually.
"CUSTODIAL RECEIPTS TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement. "CUSTODIAL RECEIPTS TRANSACTION" means
any one of the foregoing, individually.
"DETERMINATION DATE" means the first (1st) day of October of each year
during the term of this Agreement.
"DUS GUIDE" means the Fannie Mae Multifamily Delegated Underwriting
and Servicing (DUS) Guide, as such DUS Guide may be amended, supplemented or
otherwise modified from time to time, including by Lender Memos, Guide Updates
and Guide Announcements (all references to Parts, Chapters, Sections and other
subdivisions of the DUS Guide shall be deemed references to (a) the Parts,
Chapters, Sections and other subdivisions in effect on the Fannie Mae Facility
Closing Date and (b) any successor provisions to such Parts, Chapters, Sections
and other subdivision).
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"ENVIRONMENTAL CLAIM" means any notice of violation, claim, demand,
abatement, order or other order or direction (conditional or otherwise) by any
person or entity for any damage, including personal injury (including sickness,
disease or death), tangible or intangible property damage, contribution,
indemnity, indirect or consequential damages, damage to the environment,
pollution, contamination or other adverse effects on the environment, removal,
cleanup or remedial action or for fines, penalties or restrictions, resulting
from or based upon (a) the existence or occurrence, or the alleged existence or
occurrence, of a Hazardous Substance Activity or (b) the violation, or alleged
violation, of any Hazardous Materials Laws in connection with any Property.
"ENVIRONMENTAL REPORTS" means any Phase I environmental report meeting
the requirements of the DUS Guide, and any additional environmental report
delivered to Servicer or Fannie Mae with respect to any Property.
"ERISA" means the Employee Retirement Income Security Act of 1974 as
amended from time to time.
"EVENT OF DEFAULT" shall have the meaning given that term in section
7.1.
"EXISTING BOND ISSUES" shall have the meaning given that term in the
recitals to this Agreement.
"EXISTING INDENTURES" shall have the meaning given such term in the
recitals to this Agreement.
"EXISTING MORTGAGE NOTES" shall have the meaning given such term in
the recitals to this Agreement.
"EXISTING SECURITY INSTRUMENTS" shall have the meaning given such term
in the recitals to this Agreement.
"FACILITY", with respect to an issue of Related Securities, means (i)
the credit enhancement and liquidity support of the Related Bonds in a Floating
Rate Bond Transaction as provided by Fannie Mae subject and pursuant to the
Related Fannie Mae Collateral Agreement, (ii) the credit enhancement of the
Related Bonds in a Fixed Rate Bond Transaction as provided by Fannie Mae
subject and pursuant to the Related Fannie Mae Pass-Through Certificate and
(iii) the credit enhancement of Chase Ridge Inc.'s and Chase Lea Inc.'s
reimbursement obligations to Morgan under the Custodial Receipts L/C
Reimbursement Agreement as provided by Fannie Mae subject and pursuant to the
Related Custodial Receipts Collateral Agreement.
"FACILITY AMOUNT", with respect to particular Related Securities,
means the aggregate principal amount of such Related Securities then
outstanding.
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"FACILITY FEE" shall have the meaning set forth in section 4.4(a).
"FALKLAND CHASE BOND TRANSACTION" shall have the meaning set forth in
section 5.4(b).
"FALKLAND CHASE CREDIT ENHANCEMENT" shall have the meaning set forth
in section 5.4(b).
"FALKLAND CHASE PROJECT" shall have the meaning set forth in section
5.4(b).
"FALKLAND CHASE REFUNDING DOCUMENTS" shall have the meaning set forth
in section 5.4(b).
"FANNIE MAE CREDIT FACILITY" means all of the Facilities,
collectively.
"FANNIE MAE FACILITY CLOSING DATE" means July 31, 1996.
"FINAL CHASE RIDGE/CHASE LEA CONVERSION DATE" means August 31, 2001.
"FINANCING LEASE" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee or to be otherwise
disclosed as such in a note to such balance sheet.
"FIXED RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, shall have the meaning given that term in the Related
Indenture.
"FIXED RATE BOND PROPERTIES" shall have the meaning given that term in
the recitals of this Agreement. "FIXED RATE BOND PROPERTIES" shall also
include each New Bond Property added as a Fixed Rate Bond Property from and
after the date of its addition to the Fannie Mae Credit Facility, and shall
exclude each Released Property (which prior to its substitution or release, as
applicable, was a Fixed Rate Bond Property), from and after the date of such
substitution or release. "FIXED RATE BOND PROPERTY" means any one of the
foregoing, individually.
"FIXED RATE BOND TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement. "FIXED RATE BOND TRANSACTIONS" shall
also include the bond transaction with respect to each New Bond Property added
to Fannie Mae Credit Facility as a Fixed Rate Bond Property after the date
hereof, and shall exclude the bond transaction with respect to each Released
Property (which prior to its substitution or release, as applicable, was a
Fixed Rate Bond Property), from and after the date of such substitution or
release. "FIXED RATE BOND TRANSACTION" means any one of the foregoing,
individually.
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"FLOATING RATE BOND PROPERTIES" shall have the meaning given that term
in the recitals of this Agreement. "FLOATING RATE BOND PROPERTIES" shall also
include each New Bond Property added as a Floating Rate Bond Property from and
after the date of its addition to the Fannie Mae Credit Facility, and shall
exclude each Released Property (which prior to its substitution or release, as
applicable, was a Floating Rate Bond Property), from and after the date of such
substitution or release. "FLOATING RATE BOND PROPERTY" means any one of the
foregoing, individually.
"FLOATING RATE BOND TRANSACTIONS" shall have the meaning given to such
term in the recitals to this Agreement. "FLOATING RATE BOND TRANSACTIONS"
shall also include the bond transaction with respect to each New Bond Property
added to Fannie Mae Credit Facility as a Floating Rate Bond Property after the
date hereof, and shall exclude the bond transaction with respect to each
Released Property (which prior to its substitution or release, as applicable,
was a Floating Rate Bond Property), from and after the date of such
substitution or release. "FLOATING RATE BOND TRANSACTION" means any one of the
foregoing, individually.
"FRAUDULENT TRANSFER LAWS" shall have the meaning given that term in
section 8.21(b).
"GAAP" means generally accepted accounting principles in effect in the
United States from time to time.
"GOVERNMENT OBLIGATIONS" means direct obligations of, and obligations
on which the full and timely payment of principal and interest is
unconditionally guaranteed by the full faith and credit of the United States of
America; provided that Government Obligations shall not include (a) any
investments with a final maturity or any agreements with a term greater than
365 days from the date of the investment (except obligations that provide for
the optional or mandatory tender, at par, by the holder thereof at least once
within 365 days of the date of purchase and any obligations that are
irrevocably deposited with a Related Trustee for payment of the Related Bonds
pursuant to and in accordance with the Related Indenture), (b) mortgage backed
securities, (c) interest-only or principal-only stripped securities, and (d)
investments which may be prepaid or called at a price less than its purchase
price prior to stated maturity.
"GOVERNMENTAL ACTION" means any pending or, to the actual knowledge of
any Borrower, threatened suit, proceeding, order, or governmental inquiry or
opinion involving any Property that alleges the violation of any Hazardous
Materials Law.
"GOVERNMENTAL APPROVAL" means an authorization, permit, consent,
approval, license, registration or exemption from registration or filing with,
or report to, any Governmental Authority.
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"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"GROSS CASH FLOW" means, for any period, with respect to any of the
Properties, all gross rents collected from or on behalf of tenants at such
Property (other than unforfeited tenant security deposits), any other income,
receipts or reserves (but only to the extent such reserves were included as
Operating Expenses at the times they were set aside) derived from such Property
(including from the use or operation thereof) without regard to its source,
including tenant reimbursements for utilities, services and supplies, security
deposit forfeitures, parking rents or fees, concessions and vending fees and
laundry income and proceeds from rental interruption insurance, but excluding
Insurance Proceeds (other than proceeds from rental interruption insurance),
Condemnation Proceeds, proceeds from the sale of the Related Securities,
unearned portions of prepaid rent, other refundable items, interest on any
account established for the deposit of refundable items, and proceeds from the
sale or other disposition of all or any portion of a Property.
"GUARANTY" means that certain Payment Guaranty of even date herewith
executed by Guarantor for the benefit of Fannie Mae, as it may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms.
"GUARANTOR" means Avalon Properties, Inc., a Maryland corporation.
"HAZARDOUS MATERIALS" means petroleum and petroleum products,
flammable explosives, radioactive materials (excluding radioactive materials in
smoke detectors), polychlorinated biphenyls, lead, asbestos in any form that is
or could become friable, hazardous waste, toxic or hazardous substances or
other related materials whether in the form of a chemical, element, compound,
solution, mixture or otherwise and shall also include those materials defined
as "hazardous substances," "extremely hazardous substances," "hazardous
chemicals," "hazardous materials," "toxic substances," "solid waste," "toxic
chemicals," "air pollutants," "toxic pollutants," "hazardous wastes,"
"extremely hazardous waste," or "restricted hazardous waste" by Hazardous
Materials Law or regulated by Hazardous Materials Law in any manner whatsoever.
"HAZARDOUS MATERIALS LAW" means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other binding
governmental requirements and any court judgments applicable to any Borrower or
any Property relating to industrial hygiene or to environmental or unsafe
conditions or to human health including, those relating to the generation,
manufacture, storage, handling, transportation, disposal, release, emission or
discharge of Hazardous Materials, those in connection with the construction,
fuel supply, power generation and transmission, waste disposal or any other
operations or processes relating to any
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Property, and those relating to the atmosphere, soil, surface and ground water,
wetlands, stream sediments and vegetation on, under, in or about any Property.
"HAZARDOUS SUBSTANCE ACTIVITY" means any storage, holding, existence,
release, spill, leaking, pumping, pouring, injection, escaping, deposit,
disposal, dispersal, leaching, migration, use, treatment, emission, discharge,
generation, processing, abatement, removal, disposition, handling or
transportation of any Hazardous Materials from, under, into or on any Property
in violation of Hazardous Materials Laws, including the discharge of any
Hazardous Materials emanating from any Property in violation of Hazardous
Materials Laws through the air, soil, surface water, groundwater or property
and also including the abandonment or disposal of any barrels, containers and
other receptacles containing any Hazardous Materials from or on any Property in
violation of Hazardous Materials Laws, in each case whether sudden or
nonsudden, accidental or nonaccidental.
"HEDGE" means a Swap or a Cap.
"HEDGE DOCUMENTS" means the documents evidencing and governing a
Hedge.
"HEDGE PERIOD" means with respect to each Hedge the actual stated term
of such Hedge as provided in the applicable Hedge Documents.
"HEDGE RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, means 5.7% per annum.
"HEDGE SECURITY AGREEMENT" means, with respect to each Hedge, an
Interest Rate Hedge Security Agreement among a Borrower, Fannie Mae and the
Related Custodian, for the benefit of Fannie Mae and substantially in the form
of Exhibit F (subject to modifications approved by Fannie Mae), as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms, and "HEDGE SECURITY
AGREEMENTS" means every Hedge Security Agreement, collectively.
"HEDGE TEST FAILURE" shall have the meaning given to such term in
section 3.1(a).
"HEDGE TEST NOTICE" shall have the meaning given to such term in
section 3.1(a).
"HEDGE TESTS" shall have the meaning given to such term in section
3.1(a).
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"IMPOSITIONS" means, with respect to any Property, all real estate and
personal property taxes, water, sewer and vault charges and all other taxes,
levies, assessments, common charges and other similar charges, general and
special, ordinary and extraordinary, foreseen and unforeseen, of every kind and
nature whatsoever, which at any time prior to, at or after the execution of
this Agreement may be assessed, levied or imposed by, in each case, a
Governmental Authority or any other Person upon such Property or the rents or
the ownership, use, occupancy or enjoyment thereof, and any interest, costs or
penalties with respect to any of the foregoing.
"IMPUTED DEBT SERVICE" with respect to each Property, means the
aggregate amount of the Imputed Interest Payments plus the Imputed Principal
Payments with respect to such Property for the applicable period.
"IMPUTED INTEREST PAYMENTS" means with respect to each Mortgage Loan
and each Custodial Receipts Mortgage Loan, the total amount of all interest
that would be payable on the outstanding principal amount of such Mortgage Loan
or Custodial Receipts Mortgage Loan for the applicable period, at the
Underwriting Rate applicable to such Mortgage Loan or Custodial Receipts
Mortgage Loan.
"IMPUTED PRINCIPAL PAYMENTS" means:
(i) with respect to each Mortgage Loan in a Fixed Rate Bond
Transaction, the aggregate amount of the scheduled principal
amortization on such Mortgage Loan for the applicable period;
(ii) prior to June 30, 2006, with respect to each Mortgage Loan in
a Floating Rate Bond Transaction the aggregate amount of
assumed monthly principal payments during the applicable
period that would be necessary to fully amortize such Mortgage
Loan over thirty (30) years assuming the interest rate with
respect to such Mortgage Loan is equal to the Hedge Rate;
(iii) on or after July 1, 2006, with respect to each Mortgage Loan
in a Floating Rate Bond Transaction the actual aggregate
amount of the monthly payments required to be made to the
Principal Reserve Fund with respect to such Mortgage Loan
during the applicable period; and
(iv) with respect to each Custodial Receipts Mortgage Loan, the
aggregate amount of assumed monthly principal payments during
the applicable period that would be necessary to fully
amortize such Custodial Receipts Mortgage Loan over three
hundred and fifty-nine (359) months assuming the interest rate
with respect to such Mortgage Loan is equal to the
Underwriting Rate.
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"INDEBTEDNESS" of any Person at any date means, without duplication,
(a) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current trade liabilities
incurred in the ordinary course of business and payable in accordance with
customary practices), (b) any other indebtedness of such Person which is
evidenced by a note, bond, debenture or similar instrument, (c) all obligations
of such Person under Financing Leases, (d) all obligations of such person in
respect of acceptances issued or created for the account of such Person, (e)
all liabilities secured by any Lien on any property owned by such Person even
though such Person has not assumed or otherwise become liable for the payment
thereof, and (f) all Contingent Obligations.
"INITIAL BOND PROPERTIES" shall have the meaning given that term in
the recitals of this Agreement.
"INITIAL CHASE RIDGE/CHASE LEA CONVERSION DATE" means November 1,
1997, provided, however, that if the Related Custodial Receipts have been
redeemed in full and all of Fannie Mae's obligations under the Related
Custodial Receipts Collateral Agreement have been terminated, then at the
request of the Borrowers such date shall be extended with respect to the
related Custodial Receipts Property until up to November 1, 1998, so long as
(a) Fannie Mae determines in its reasonable discretion that the Borrowers have
complied with their obligations under section 5.5(c)(ii) and (b) Borrower shall
agree to pay to Fannie Mae and Servicer on a monthly basis, pursuant to
documentation acceptable to Fannie Mae in its discretion, a commitment fee
equal to the Facility Fee that would be payable with respect to such Custodial
Receipts Transaction under section 4.4 if such Related Custodial Receipts were
still outstanding.
"INSURANCE PROCEEDS" means, with respect to any Property, all
insurance proceeds, damages, claims and rights of action and the right thereto
under any insurance policies with respect to a Casualty insuring and relating
to any portion of such Property.
"INTEREST ACCOUNT", with respect to each issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given that term in the
Related Indenture and "INTEREST ACCOUNTS" means every such Interest Account,
collectively.
"INTEREST RESERVE REQUIREMENT", with respect to each issue of Related
Bonds in a Floating Rate Bond Transaction, shall have the meaning given that
term in the Related Indenture.
"INTERIM REPLACEMENT CHASE LEA CREDIT ENHANCEMENT" shall have the
meaning given to such term in section 5.5(a).
"INTERIM REPLACEMENT CHASE LEA CUSTODIAL RECEIPTS" means an issue of
custodial receipts (or other similar pass-through securitization instrument for
federal income tax purposes) supported by the Custodial Receipts Bond Issue
with respect to the Chase Lea Bond Property.
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"INTERIM REPLACEMENT CHASE LEA CUSTODIAL RECEIPTS TRANSACTION" means
the transaction with respect to the Interim Replacement Chase Ridge Custodial
Receipts to be credit enhanced by Fannie Mae's Interim Replacement Chase Lea
Credit Enhancement as contemplated in section 5.5.
"INTERIM REPLACEMENT CHASE RIDGE CREDIT ENHANCEMENT" shall have the
meaning given to such term in section 5.5(a).
"INTERIM REPLACEMENT CHASE RIDGE CUSTODIAL RECEIPTS" means an issue of
custodial receipts (or other similar pass-through securitization instrument for
federal income tax purposes) supported by the Custodial Receipts Bond Issue
with respect to the Chase Ridge Bond Property.
"INTERIM REPLACEMENT CHASE RIDGE CUSTODIAL RECEIPTS TRANSACTION" means
the transaction with respect to the Interim Replacement Custodial Receipts to
be credit enhanced by Fannie Mae's Interim Replacement Chase Ridge Credit
Enhancement as contemplated in section 5.5.
"INTERIM REPLACEMENT CUSTODIAL RECEIPTS DOCUMENTS" shall have the
meaning given to such term in section 5.5(c).
"INTERIM REPLACEMENT CUSTODIAL RECEIPTS TRANSACTIONS" means the
Interim Replacement Chase Lea Custodial Receipts Transaction and the Interim
Replacement Chase Ridge Custodial Receipts Transaction, collectively, and
"INTERIM REPLACEMENT CUSTODIAL RECEIPTS TRANSACTION" means any one of
foregoing, individually.
"ISSUER" means the issuer with respect to an issue of Related Bonds in
a Bond Transaction, and "ISSUERS" means every such Issuer, collectively. As of
the date hereof, the Issuer with respect to each issue of Related Bonds is
listed on Exhibit A.
"LEASE" means any lease, any sublease or subsublease, license,
concession or other agreement (whether written or oral and whether now or
hereafter in effect) pursuant to which any Person is granted a possessory
interest in, or right to use or occupy all or any portion of any space in any
Property, and every modification, amendment or other agreement relating to such
lease, sublease, subsublease or other agreement entered into in connection with
such lease, sublease, subsublease or other agreement, and every guarantee of
the performance and observance of the covenants, conditions and agreements to
be performed and observed by the other party thereto.
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"LIABILITIES" shall have the meaning set forth in section 4.5(a).
"LIEN" means any mortgage, deed of trust, deed to secure debt, charge
(whether fixed or floating), pledge, lien, encumbrance, assignment,
hypothecation, security interest, conditional sale, capital lease or other
title retention, preferential right, trust arrangement or any other
encumbrance, security agreement or arrangement securing any obligation of any
Person.
"LIQUIDITY COMPONENT" means the portion of the Facility Fee payable by
a Borrower with respect to the Facility Amount of each issue of Related
Securities in a Floating Rate Bond Transaction on account of Fannie Mae's
Liquidity Commitment. With respect to each issue of Related Securities in a
Floating Rate Bond Transaction as of the date hereof the "LIQUIDITY COMPONENT"
shall be .125% per annum or 12.5 "basis points" as set forth on Exhibit C. For
each New Bond Property added to the Fannie Mae Credit Facility pursuant to
section 5.4 or section 5.5, the "LIQUIDITY COMPONENT" shall be the amount set
forth in the New Property Confirmation with respect to such New Bond Property.
"LIQUIDITY COMMITMENT", with respect to each issue of Related Bonds in
a Floating Rate Bond Transaction shall have the meaning given to that term in
the Related Fannie Mae Collateral Agreement.
"LOCK-BOX NOTICE" shall have the meaning given to such term in section
3.1(b).
"LOCK-BOX TEST" shall have the meaning given to such term in section
3.1(b).
"LOCK-BOX TRIGGERING EVENT" shall have the meaning given to such term
in section 3.1(b).
"MANAGEMENT AGREEMENTS" means each of the management agreements
between Borrower and Guarantor identified on Exhibit I.
"MATERIAL ADVERSE EFFECT" means any circumstance, act, condition or
event of whatever nature (including any adverse determination in any
litigation, arbitration, or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, or circumstance or circumstances, whether or not related, that
could reasonably be expected to have a material adverse change in or a
materially adverse effect upon any of (a) the business, operations, property or
condition (financial or otherwise) of any Borrower or Guarantor, (b) the
present or future ability of any Borrower to perform the Obligations, (c) the
validity, priority, perfection or enforceability of this Agreement or any other
Transaction Document or the rights or remedies of Fannie Mae under any
Transaction Document, or (d) the value of, or Fannie Mae's ability to have
recourse against, any Property.
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"MAXIMUM LTV PERCENTAGE" initially means 58.7%, and upon the addition
of a New Bond Property or an New Additional Property to the Fannie Mae Credit
Facility pursuant to section 5.4 or section 5.5, the "MAXIMUM LTV PERCENTAGE"
shall thereafter be the percentage set forth in the New Property Confirmation
delivered in connection with such New Property.
"MAXIMUM RATE", with respect to each issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given that term in the
Related Indenture.
"MINIMUM DSC RATIO" initially means 1.755:1, and upon the addition of
a New Bond Property or an New Additional Property to the Fannie Mae Credit
Facility pursuant to section 5.4 or section 5.5, the "MINIMUM DSC RATIO" shall
thereafter be the ratio set forth in the New Property Confirmation delivered in
connection with such New Property.
"MINIMUM SUBSTITUTE PROPERTY VALUE" means, with respect to each
Released Property, the Allocable Facility Amount for such Released Property
divided by the Maximum LTV Percentage expressed as a decimal.
"MODE" with respect to each Mortgage Loan in a Floating Rate Bond
Transaction, shall have the meaning given that term in the Related Indenture.
"MOODY'S INVESTORS SERVICE" means Moody's Investors Service, Inc., a
corporation organized and existing under the laws of the State of Delaware, and
its successors and assigns, if such successors and assigns shall continue to
perform the functions of a securities rating agency.
"MORGAN" shall have the meaning given to such term in the recitals to
this Agreement.
"MORTGAGE" means any Bond Mortgage and any Reimbursement Mortgage,
individually, and "MORTGAGES" means every such Mortgage, collectively.
"MORTGAGE" shall include any Security Instrument in favor of Fannie Mae or a
Related Trustee on any New Property from and after the date of its addition to
the Fannie Mae Credit Facility, and shall exclude any Mortgage on a Released
Property released from the lien of such Mortgage, from and after the date of
release.
"MORTGAGE DOCUMENTS" means, collectively, the Bond Property Loan
Documents for all Bond Properties in a Bond Transaction, the Reimbursement Loan
Documents and the Custodial Receipts L/C Reimbursement Agreement.
"MORTGAGE LOAN" with respect to an issue of Related Bonds in a Bond
Transaction, shall have the meaning given that term in the Related Indenture,
and "MORTGAGE LOANS" shall mean every such Mortgage Loan, collectively.
"MORTGAGE NOTE RATE", with respect to a Related Mortgage Note, shall
have the meaning assigned to such term in such Related Mortgage Note.
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"MORTGAGE RIGHTS" (i) with respect to each Floating Rate Bond
Transaction, shall have the meaning given such term in the Related Fannie Mae
Collateral Agreement and (ii) with respect to each Custodial Receipts
Transaction, shall have the meaning given such term in the Related Custodial
Receipts Collateral Agreement.
"MULTIFAMILY RESIDENTIAL PROPERTY" means a residential property
containing five (5) or more dwelling units in which not more than twenty
percent (20%) of the net rentable area is or will be rented to non-residential
tenants.
"NET OPERATING INCOME" means, for any period, with respect to any of
the Properties, the amount, if any, without duplication, by which the Gross
Cash Flow for such Property during such period exceeds the Operating Expenses
for such Property during such period.
"NEW ADDITIONAL PROPERTY" means a Multifamily Residential Property
substituted for an Additional Mortgaged Property pursuant to section 5.2 or
otherwise added to the Fannie Mae Credit Facility by a Borrower as Collateral
for the Obligations.
"NEW BOND PROPERTY" means a Multifamily Residential Property added to
the Fannie Mae Credit Facility in connection with Fannie Mae's issuance of a
new Related Fannie Mae Credit Enhancement Instrument.
"NEW PROPERTY" means a New Additional Property or a New Bond Property.
"NEW PROPERTY CONFIRMATION" shall have the meaning given that term in
section 5.4.
"OBLIGATIONS" means the obligations of the Borrowers (i) to pay
principal, interest and fees and any other amounts on the Mortgage Loans and
the Custodial Receipts Mortgage Loans when due and payable, (ii) to pay all
amounts due under the terms of the Custodial Receipts L/C Reimbursement
Agreement, (iii) to make all required deposits into the Principal Reserve
Funds, Interest Accounts, the Replacement Reserve Accounts, the Cash Management
Account, the Custodial Accounts and any and all other loan funds, escrow funds,
revenue funds, debt service funds, reserve funds, redemption funds or other
funds or accounts required to be maintained under the Transaction Documents,
(iv) to reimburse Fannie Mae and Servicer for all Advances and for all other
sums advanced and costs and expenses incurred by Fannie Mae and Servicer in
accordance with the terms of this Agreement or any other Transaction Document,
(v) to pay all other amounts payable under the Transaction Documents, and (vi)
to observe and perform each of the terms, conditions and provisions of this
Agreement and the other Transaction Documents.
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"OFFICIAL STATEMENT" means with respect to each Bond Transaction the
Official Statement or any reoffering or remarketing circular approved by a
Borrower and issued in connection with the issuance or remarketing of an issue
of Related Bonds, as such statement may be amended, supplemented, otherwise
modified or amended and restated from time to time in accordance with its
terms, and "OFFICIAL STATEMENTS" means every such Official Statement,
collectively.
"OPERATING EXPENSES" means, for any period, with respect to any of the
Properties, the aggregate of all direct, ordinary, normal, recurring and
necessary expenses thereof including, without duplication, (a) Impositions, (b)
property and liability insurance premiums, (c) wages, salaries and benefits of
personnel employed on site to manage, lease, maintain and operate such
Property, (d) costs or expenses of utility services to such Property and tenant
spaces to the extent payable by a Borrower, (e) costs or expenses of providing
security services to such Property, if any, (f) costs or expenses of in-house
or outside service arrangements for landscaping, janitorial, window washing and
cleaning, trash, debris, make ready units, cable and satellite television,
recreational services and other services, (g) expenses of maintaining,
repairing and cleaning the grounds, parking, amenities, exterior and interior
spaces of such Property, (h) expenses of repairing and maintaining in good
operable condition the mechanical, structural, electrical, elevator, heating,
ventilating, air conditioning and plumbing systems, (i) property management
fees payable to parties other than the Borrowers (and specifically including
management fees paid to any Affiliate of any Borrower), (j) administrative
expenses including advertising incurred at the site of such Property, (k) legal
fees associated with lease documentation and tenant matters and legal,
accounting and other professional fees relating to the operation of the
Properties, (l) (for all purposes hereunder other than the calculation of
Value) the replacement and repair amount with respect to such Property, (m)
costs for water and sewage fees, and (n) any other items that are treated as
noncapital expenses under GAAP. All of the foregoing (including Impositions)
shall be computed on an accrual basis and in accordance with GAAP consistently
applied. During any period the Properties are managed by an Affiliate of any
Borrower, Operating Expenses shall also include an amount equal to the
difference, if any, by which management fees paid by owners of similar
properties in the same geographic location exceed management fees then payable
by the Borrowers. In addition, for all purposes Operating Expenses shall
exclude (i) payments on the Obligations and any other interest payments or
principal payments on any Indebtedness, (ii) depreciation and amortization,
(iii) all legal, accounting and professional fees not included in clause (k)
above, and (iv) items that would be treated as capital expenses under GAAP
consistently applied and calculated in accordance with Fannie Mae Form 4254.
"ORIGINAL CUSTODIAN" shall have the meaning given to such term in the
recitals to this Agreement.
"PASS-THROUGH RATE" with respect to each Mortgage Loan in a Floating
Rate Bond Transaction, shall have the meaning given such term in the Related
Mortgage Note.
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"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMANENT CHASE LEA CREDIT ENHANCEMENT" shall have the meaning given
that term in section 5.5(a).
"PERMANENT CHASE LEA REFUNDING BONDS" means an issue of tax exempt
housing finance bonds issued by the Chase Lea Issuer in order to refinance (by
repurchase and a subsequent remarketing pursuant to an amended and restated
trust indenture and related bond documents) or refund (by the issuance of new
refunding bonds) the Related Custodial Receipts and the Custodial Receipts Bond
Issue with respect to the Chase Lea Bond Property.
"PERMANENT CHASE LEA REFUNDING TRANSACTION" means the tax-exempt bond
issue and mortgage loan transaction to be credit enhanced by Fannie Mae's
Permanent Chase Lea Credit Enhancement as contemplated in section 5.5.
"PERMANENT CHASE RIDGE CREDIT ENHANCEMENT" shall have the meaning
given that term in section 5.5(a).
"PERMANENT CHASE RIDGE REFUNDING BONDS" means an issue of tax exempt
housing finance bonds issued by the Chase Ridge Issuer in order to refinance
(by repurchase and a subsequent remarketing pursuant to an amended and restated
trust indenture and related bond documents) or refund (by the issuance of new
refunding bonds) the Related Custodial Receipts and the Custodial Receipts Bond
Issue with respect to the Chase Ridge Bond Property.
"PERMANENT CHASE RIDGE REFUNDING TRANSACTION" means the tax-exempt
bond issue and mortgage loan transaction to be credit enhanced by Fannie Mae's
Permanent Chase Lea Credit Enhancement as contemplated in section 5.5.
"PERMANENT REFUNDING BOND ISSUE" means either the issue of Permanent
Chase Ridge Refunding Bonds or the issue of Permanent Chase Lea Refunding
Bonds, and "PERMANENT REFUNDING BOND ISSUES" means both such bond issues,
collectively.
"PERMANENT REFUNDING DOCUMENTS" shall have the meaning given that term
in section 5.5.
"PERMANENT REFUNDING MORTGAGE LOAN" and "PERMANENT REFUNDING MORTGAGE
LOANS" shall have meanings given such terms in section 5.5.
"PERMANENT REFUNDING TRANSACTIONS" means the Permanent Chase Lea
Refunding Transaction and the Permanent Chase Ridge Refunding Transaction,
collectively, and "PERMANENT REFUNDING TRANSACTION" means any one of foregoing,
individually.
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"PERMITS" means all permits, or similar licenses or approvals issued
and/or required by an applicable Governmental Authority or any Applicable Law
in connection with the ownership, use, occupancy, leasing, management,
operation, repair, maintenance or rehabilitation of any Property or any
Borrower's business.
"PERMITTED LIENS" means, with respect to each Property: (i) exceptions
to title contained in the marked-up title insurance commitments insuring the
lien of the Mortgage with respect to such Property (other than notes or other
informational items set forth therein) listed on Exhibit E; (ii) Liens created
by, or permitted by, the applicable Mortgage Documents, the applicable Bond
Documents and/or the applicable Custodial Receipts Documents with respect to
such Property; (iii) Liens created by the Leases with respect to such Property;
(iv) Liens approved by Fannie Mae; and (v) solely with respect to the Bond
Property commonly known as Avalon Meadows Apartments, Howard County Maryland,
the Shared Facilities Agreement.
"PERMITTED TRANSFER" shall have the meaning given that term in section
5.6(b).
"PERSON" means an individual, an estate, a trust, a corporation, a
partnership, a limited liability company or any other organization or entity
(whether governmental or private).
"PLAN" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group or (ii)
maintained pursuant to a collective bargaining agreement or any other agreement
under which more than one employer makes contributions and to which a member of
the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five (5) plan years made
contributions.
"POTENTIAL EVENT OF DEFAULT" means any of the events specified in
section 7.1 which with the passage of time or giving of notice or both would
constitute an Event of Default.
"PREPAYMENT PREMIUM", with respect to a Mortgage Loan, shall have the
meaning given such term in the Related Mortgage Note.
"PRINCIPAL RESERVE FUND" with respect to any Floating Rate Bond
Property, shall have the meaning given that term in the Related Indenture, and
"PRINCIPAL RESERVE FUNDS" shall mean every such Principal Reserve Fund,
collectively.
"PROCEEDS" mean all "proceeds" as such term is defined in Section
9-306(1) of the UCC and, in any event, shall include all interest, dividends or
other earnings, income or distributions from or in respect of, or from or in
respect of investments or reinvestments of, the Cash Management Account or the
Cash Management System Collateral, all collections and distributions with
respect to the Mortgage Loans and all other proceeds of Collateral.
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"PROHIBITED ACTIVITIES OR CONDITIONS", with respect to a particular
Mortgage, shall have the meaning given that term in such Mortgage.
"PROPERTY" means any of the Bond Properties or any of the Additional
Mortgaged Properties, individually. "PROPERTIES" means every such Bond
Property and Additional Mortgaged Property, collectively.
"PROPOSED TRANSFER" shall have the meaning given that term in section
5.6(a).
"PROPOSED TRANSFEREE" shall have the meaning given that term in
section 5.6(a).
"RATING AGENCIES" means Standard & Poor's and Moody's Investors
Service, their successors in interest, or any other nationally recognized
rating agency acceptable to Fannie Mae.
"REGULATORY AGREEMENT", with respect to each Bond Property, means the
Land Use Restriction Agreement, Tax Regulatory Agreement or similar instrument
to assure continuation of the exclusion of interest on the Related Securities
from gross income, each as defined in the Related Indenture, and "REGULATORY
AGREEMENTS" means every such Regulatory Agreement, collectively.
"REIMBURSEMENT LOAN DOCUMENTS" means, collectively, the Reimbursement
Mortgages and each of the other documents, agreements and instruments granting,
evidencing or perfecting security interests granted in connection with the
obligations secured by the Reimbursement Mortgages, including the Hedge
Security Agreements, if any, the Cash Management Agreement, if any, the
Guaranty, the Replacement Reserve Agreements, the Assignment of Management
Agreement, title policies, UCC fixture filings and UCC financing statements, as
each such document, agreement or instrument may be amended, supplemented,
otherwise modified or amended and restated from time to time in accordance with
its respective terms, and "REIMBURSEMENT LOAN DOCUMENT" means any one of the
foregoing, individually.
"REIMBURSEMENT MORTGAGES" means, collectively, (i) the first priority
Security Instruments on each of the Additional Mortgaged Properties securing
the obligations of the Borrowers under all of the Related Mortgage Notes and
under this Agreement, (ii) the second priority Security Instruments on each of
the Bond Properties other than the Custodial Receipts Properties, securing the
obligations of the Borrowers under all of the Related Mortgage Notes, other
than the Related Mortgage Note evidencing the Mortgage Loan secured by the
first priority Mortgage on such Bond Property, and under this Agreement, and
(iii) the second priority Security Instruments on each of the Custodial
Receipts Properties, securing the obligations of the Borrowers under all of the
Related Mortgage Notes and under this Agreement, and "REIMBURSEMENT MORTGAGE"
means any one of the foregoing, individually.
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"RELATED ACT" with respect to each issue of Related Bonds in a Bond
Transaction, shall have the meaning given to the term "Act" in the Related
Indenture.
"RELATED BOND DOCUMENTS" means, with respect to an issue of Related
Bonds, the Related Bonds, the Related Indenture, the Related Fannie Mae Credit
Enhancement Instrument, the Regulatory Agreement (and any other agreement
relating to rental restrictions on the applicable Bond Property), the Related
Pledge Agreement, if applicable, the Related Financing Agreement, a Tax
Certificate (or other applicable agreement relating to arbitrage in connection
with the proceeds of such Related Bonds) and all other documents, instruments
and agreements executed and delivered in connection with the issuance, sale,
delivery and/or remarketing of the Related Bonds, as each such agreement or
instrument may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.
"RELATED BOND MORTGAGE" with respect to a particular Bond Property in
a Bond Transaction, means the first priority Bond Mortgage encumbering such
Bond Property and securing the Related Mortgage Note.
"RELATED BONDS" means with respect to each Floating Rate Bond Property
and each Fixed Rate Bond Property, the tax-exempt multifamily revenue bonds
issued pursuant to Applicable Law and the Related Indenture.
"RELATED CUSTODIAL RECEIPTS" with respect to each Custodial Receipts
Property, the custodial receipts issued pursuant to the Custodial Receipts
Agreement with respect to such Custodial Receipts Property and evidencing an
interest in the underlying Custodial Receipts Bond Issue.
"RELATED CUSTODIAL RECEIPTS COLLATERAL AGREEMENT" means, with respect
to a Custodial Receipts Transaction, the Credit Enhancement Agreement between
Fannie Mae and Morgan pursuant to which Fannie Mae has agreed to provide credit
enhancement of Chase Ridge Inc.'s or Chase Lea's Inc.'s, as the case may be,
reimbursement obligations to Morgan for advances made by Morgan under the terms
of the Custodial Receipts L/C with respect to such Custodial Receipts
Transaction and not reimbursed to Morgan pursuant to the terms of the related
Custodial Receipts L/C Reimbursement Agreement, as such Related Custodial
Receipts Collateral Agreement may be amended, supplemented, otherwise modified
or amended and restated from time to time in accordance with its terms, and
"RELATED CUSTODIAL RECEIPTS COLLATERAL AGREEMENTS" means every such Related
Custodial Receipts Collateral Agreement, collectively.
"RELATED CUSTODIAL RECEIPTS DOCUMENTS" means, with respect to each
issue of Related Custodial Receipts, the Custodial Receipts Bond Indenture, the
Custodial Receipts Bond Issue, the Custodial Receipts Mortgage Note, the
Custodial Receipts First Security Instrument, the Regulatory Agreement (and any
other agreement relating to rental restrictions on the applicable Bond
Property), a Tax Certificate (or other applicable agreement relating to
arbitrage in
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connection with the proceeds of such Related Custodial Receipts), the Custodial
Receipts Agreement, the Related Custodial Receipts, the Custodial Receipts L/C,
the Related Custodial Receipts Collateral Agreement, the Custodial Receipts L/C
Reimbursement Agreement, the Custodial Receipts Bond Pledge Agreement, the
Custodial Receipts Guaranty, the title policy, UCC fixture filings and UCC
financing statements (in each case relating to such Custodial Receipts
Transaction), and all other documents, instruments and agreements executed and
delivered in connection with the issuance, sale, delivery and/or remarketing of
all or any part of such Related Custodial Receipts, as each such agreement or
instrument may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.
"RELATED FANNIE MAE COLLATERAL AGREEMENT" means, with respect to a
Floating Rate Bond Transaction, the Collateral Agreement between Fannie Mae and
the Related Trustee pursuant to which Fannie Mae has agreed to provide credit
enhancement and liquidity support for the Related Bonds, as such Related Fannie
Mae Collateral Agreement may be amended, supplemented, otherwise modified or
amended and restated from time to time in accordance with its terms, and
"RELATED FANNIE MAE COLLATERAL AGREEMENTS" means every such Related Fannie Mae
Collateral Agreement, collectively.
"RELATED FANNIE MAE CREDIT ENHANCEMENT INSTRUMENT" means any
individual Related Fannie Mae Collateral Agreement, Related Custodial Receipts
Collateral Agreement or Related Fannie Mae Pass-Through Certificate and
"RELATED FANNIE MAE CREDIT ENHANCEMENT INSTRUMENTS" means every such Related
Fannie Mae Credit Enhancement Instrument, collectively.
"RELATED FANNIE MAE PASS-THROUGH CERTIFICATE" means, with respect to a
Fixed Rate Bond Transaction, the Guaranteed Mortgage Pass-Through Certificate
issued to and registered in the name of the Related Trustee by Fannie Mae or,
in the event a substitute Guaranteed Mortgage Pass-Through Certificate shall be
delivered to such Related Trustee pursuant to the Related Indenture, such
substitute Guaranteed Mortgage Pass-Through Certificate, and "RELATED FANNIE
MAE PASS-THROUGH CERTIFICATES" means every such Related Fannie Mae Pass-Through
Certificate, collectively.
"RELATED FINANCING AGREEMENT", with respect to an issue of Related
Bonds in a Bond Transaction, shall have the meaning given that term in the
Related Bond Indenture and "RELATED FINANCING AGREEMENTS" means every such
Related Financing Agreement, collectively.
"RELATED INDENTURE" means, (i) with respect to an issue of Related
Bonds, the indenture of trust between an Issuer and a Related Trustee pursuant
to which such Related Bonds were issued, (ii) with respect to each Custodial
Receipts Bond Issue, means the Custodial Receipts Bond Indenture with respect
to such Custodial Receipts Bond Issue and (iii) with respect to an issue of
Related Custodial Receipts, means the Custodial Receipts Agreement with respect
to such Related Custodial Receipts, in each case as such Related Indenture may
be amended,
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supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms. "RELATED INDENTURES" means every such Related
Indenture, collectively.
"RELATED MORTGAGE" means (a) with respect to a particular Bond
Property in a Bond Transaction, the Related Bond Mortgage and the Related
Second Mortgage, collectively, encumbering such Bond Property, (b) with respect
to a particular Bond Property in a Custodial Receipts Transaction, the
Reimbursement Mortgage encumbering such Bond Property and (c) with respect to a
particular Additional Mortgaged Property, the Reimbursement Mortgage
encumbering such Additional Mortgaged Property.
"RELATED MORTGAGE NOTE" means, with respect to an issue of Related
Bonds, the Multifamily Note (together with all addenda thereto) executed by a
Borrower in favor of an Issuer and secured by, among other things, one or more
Related Bond Mortgages, as such Related Mortgage Note may be amended,
supplemented, otherwise modified or amended and restated from time to time in
accordance with its terms, and "RELATED MORTGAGE NOTES" means every such
Related Mortgage Note, collectively.
"RELATED PLEDGE AGREEMENT", with respect to an issue of Related Bonds
in a Floating Rate Bond Transaction, shall have the meaning given to the term
"Pledge Agreement" in the Related Indenture.
"RELATED PURCHASED BOND", with respect to an issue of Related Bonds in
a Floating Rate Bond Transaction, shall have the meaning given the term
"Purchased Bond" in the Related Indenture, and "RELATED PURCHASED BONDS" means
every such Related Purchased Bond, collectively.
"RELATED REMARKETING AGREEMENT", with respect to an issue of Related
Bonds in a Floating Rate Bond Transaction, shall have the meaning given to the
term "Remarketing Agreement" in the Related Indenture.
"RELATED SECOND MORTGAGE", with respect to a particular Bond Property
in a Bond Transaction, means the second priority Reimbursement Mortgage
encumbering such Bond Property.
"RELATED SECURITIES", with respect to any Bond Property, means either
the Related Bonds or the Related Custodial Receipts, as the case may be.
"RELATED TRUSTEE" means (i) with respect to an issue of Related Bonds,
the entity designated as the "Trustee" under the Related Indenture, (ii) with
respect to an Related Custodial Receipts Bond Issue, means the Custodial
Receipts Bond Trustee and (iii) with respect to an issue of Related Custodial
Receipts, means the Custodial Receipts Custodian. "RELATED TRUSTEES" means
every such Related Trustee, collectively.
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"RELEASE PRICE" shall have the meaning given to such term in section
5.3(a).
"RELEASE PRICE CASH COLLATERAL" shall have the meaning given that term
in section 5.3(a).
"RELEASED PROPERTY" means a Property released or proposed to be
released from the lien of a Mortgage pursuant to section 5.2 or section 5.3.
"REMARKETING AGENT", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given such term in the
Related Indenture.
"RENT ROLL" shall have the meaning given that term in section 2.1(s).
"REPLACEMENT RESERVE ACCOUNT", with respect to a particular Property,
means the replacement reserve account established pursuant to the Replacement
Reserve Agreement relating to such Property, and "REPLACEMENT RESERVE ACCOUNTS"
means every such Replacement Reserve Account, collectively.
"REPLACEMENT RESERVE AGREEMENT", with respect to a particular
Property, means the Replacement Reserve and Security Agreement between a
Borrower and Fannie Mae relating to such Property and establishing such
Borrower's obligation to fund certain replacement reserve accounts, as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms, and "REPLACEMENT
RESERVE AGREEMENTS" means every such Replacement Reserve Agreement,
collectively.
"REQUIRED HEDGE TERM" means: (i) with respect to each Hedge that
Borrowers are required to obtain for a Hedge Period commencing on the Bond
Transaction Closing Date with respect to any Related Bonds, a term of seven (7)
years beginning on the applicable Bond Transaction Closing Date and ending on
the date which is the seventh (7th) anniversary of such Bond Transaction
Closing Date; (ii) with respect to each Hedge that the Borrowers are required
to obtain for an issue of Unhedged Bonds upon the occurrence of a Hedge Test
Failure, a term of five (5) years beginning on the date that the Borrowers are
required to obtain such Hedge under section 3.1(a) and ending on the date which
is the fifth (5th) anniversary of such date; and (iii) with respect to each
other Hedge, a term ending on the earliest of (a) the date which is the fifth
(5th) anniversary of the effective date of such Hedge, (b) the date on which
the Related Fannie Mae Collateral Agreement terminates or (c) the maturity date
of the Related Bonds; provided, however, that if either of the Permanent
Refunding Bond Issues is added to the Fannie Mae Credit Facility as Unhedged
Bonds in accordance with Section 5.5, the Required Hedge Term with respect to
such Permanent Refunding Bond Issues shall be five (5) years.
"RESERVE COMPONENT" means the portion of the Facility Fee payable by
the Borrowers with respect to each issue of Related Bonds in a Floating Rate
Bond Transaction with respect to (i) amounts on deposit from time to time in
the Principal Reserve Fund, if any, with respect to
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such issue of Related Bonds and (ii) the Allocated Release Price Cash
Collateral deposited by the Borrowers with Fannie Mae from time to time, if
any, with respect to such issue of Related Bonds. With respect to each issue
of Related Bonds as of the date hereof the "RESERVE COMPONENT" shall mean .30%
per annum, or 30 basis points. With respect to each issue of Related Bonds
relating to a New Bond Property added to the Fannie Mae Credit Facility
pursuant to section 5.4 or section 5.5, "RESERVE COMPONENT" shall mean the
amount set forth in the New Property Confirmation with respect to such New Bond
Property.
"RESET PERIOD", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, shall have the meaning given such term in the
Related Indenture.
"RESET RATE", with respect to an issue of Related Bonds in a Floating
Rate Bond Transaction, shall have the meaning given such term in the Related
Indenture.
"SALEM STATION PROJECT" means the Additional Mortgaged Property
identified on Exhibit B as Salem Station I & II Apartments, Richmond,
Spotsylvania County, Virginia.
"SALEM STATION RESTRICTIVE COVENANTS AGREEMENT" shall mean that
certain Declaration of Restrictive Covenants dated as of December 1, 1985, and
recorded on December 27, 1985 in the real estate records of Spotsylvania
County, Virginia at Book 671, Page 465 as Document Number 13018, and as such
agreement may be amended, supplemented, otherwise modified or amended and
restated from time to time in accordance with its terms.
"SECURITY INSTRUMENT" means a written instrument creating a valid lien
on a Property either in favor of or held by Fannie Mae and/or a Related
Trustee, as such instrument may be amended, supplemented, otherwise modified or
amended and restated from time to time in accordance with its terms. A
Security Instrument may be in the form of a mortgage, deed of trust, deed to
secure debt or security deed.
"SERVICER" means the independent contractor engaged to service the
Mortgage Loans, and the Mortgage Documents for Fannie Mae and any replacements
or successors engaged by Fannie Mae. The initial Servicer pursuant to a
written contract with Fannie Mae is Washington Capital DUS, Inc.
"SERVICING AGREEMENT" means any agreement with respect to the
servicing of the Mortgage Loans and the Mortgage Documents, between Fannie Mae
and an independent contractor, if any, designated from time to time by Fannie
Mae as the Servicer of the Mortgage Loans, the Custodial Receipts Documents,
the Bond Documents and the Mortgage Documents, as any such Servicing Agreement
may be amended, supplemented, otherwise modified or amended and restated from
time to time in accordance with its terms; provided that the Servicing
Agreement may be a Fannie Mae guide or announcement made applicable to the
Mortgage Loans by an agreement between Fannie Mae and the Servicer.
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"SERVICING FEE COMPONENT" means with respect to each issue of Related
Securities .09% per annum or 9 basis points initially; provided, however, that
in the event a successor servicer is appointed to service the Mortgage Loans,
the Servicing Fee Component shall be adjusted (subject to section 6.1) to the
amount agreed upon among Fannie Mae and such successor servicer, but in any
event the average Servicing Fee Component for all Bonds shall not exceed .125%
or 12.5 basis points.
"SHORTFALL CASH COLLATERAL" means either (i) a letter of credit in
form and substance and provided by a financial institution satisfactory to
Fannie Mae in its discretion or (ii) cash collateral deposited with Fannie Mae
or its designee and otherwise held in a manner approved by Fannie Mae in its
discretion.
"SHORTFALL HEDGE" shall have the meaning given that term in section
3.2(e).
"SINGLE-PURPOSE" means, with respect to a Person, that such Person at
all times since its formation: (i) has been a duly formed and existing limited
partnership or corporation, as the case may be; (ii) has been duly qualified in
each jurisdiction in which such qualification was at such time necessary for
the conduct of its business; (iii) has complied with the provisions of its
organizational documents and the laws of its jurisdiction of formation in all
respects; (iv) has observed all customary formalities regarding its partnership
or corporate existence, as the case may be; (v) has accurately maintained its
financial statements, accounting records and other partnership or corporate
documents separate from those of any other Person, provided, however, that the
Borrowers shall not be precluded from also preparing consolidated financial
statements with that of Guarantor so long as such consolidated financial
statements include notes indicating each Borrower's separate ownership of its
own assets; (vi) has not commingled its assets or funds with those of any other
Person; (vii) has accurately maintained its own bank accounts, payroll and
books and accounts separate from those of any other Person; (viii) has paid its
own liabilities from its own separate assets; (ix) has identified itself in all
dealings with the public, under its own name and as a separate and distinct
entity; (x) has not identified itself as being a division or a part of any
other Person (other than as a wholly-owned subsidiary of the Guarantor); (xi)
has not identified any other Person as being a division or a part of such
Person; (xii) has been adequately capitalized in light of its contemplated
business operations; (xiii) has not assumed, guaranteed or become obligated for
the liabilities of any other Person (except in connection with the endorsement
of negotiable instruments in the ordinary course of business) or held out its
credit as being available to satisfy the obligations of any other Person; (xiv)
has not acquired obligations or securities of any other Person; (xv) has not
made loans or advances to any other Person; (xvi) has not entered into and was
not a party to any transaction with any Affiliate of such Person, except in the
ordinary course of business and on terms which are no less favorable to such
Person than would be obtained in a comparable arm's-length transaction with an
unrelated third-party lender or issuer; (xvii) has conducted its own business
in its own name; (xviii) has paid the salaries of its own employees, if any,
and maintained a sufficient number of employees in light of its contemplated
business operations; (xix) has allocated fairly and reasonably any overhead for
shared office space; (xx) has used stationery, invoices and
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checks separate from those of any other Person; (xxi) has not pledged its
assets for the benefit of any other entity or made any loans or advances to any
Person; (xxii) has not engaged in a non-exempt prohibited transaction described
in Section 406 of ERISA or Section 4975 of the Code; (xxiii) has not acquired
obligations or securities of its partners or Affiliates; (xxiv) has corrected
any actually known misunderstanding regarding its separate identity; and (xxv)
has not commingled its business functions with those of any other Person except
on an arms length basis and for fair consideration.
"STANDARD & POOR'S" means Standard & Poor's, a Division of the
McGraw-Hill Companies, Inc. and its successors and assigns if such successors
and assigns shall continue to perform the functions of a securities rating
agency.
"SUBSIDIARY" means, as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which
is otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.
"SUBSTITUTION PERCENTAGE" shall have the meaning given that term in
section 5.2(a).
"SWAP" means an interest rate swap, and includes an interest rate swap
which has an initial "calculation period" that begins on the last day of a
Reset Period which commences on or after the date such swap was obtained (i.e.
a "future" swap).
"TAX CERTIFICATE", with respect to each issue of Related Bonds, shall
have the meaning given that term in the Related Indenture, and "TAX
CERTIFICATES" means every such Tax Certificate, collectively.
"TAXES" shall have the meaning given that term in section 2.2(q).
"TENDER AGENT" shall have the meaning given that term in the Related
Indenture.
"TERMINATION FEE" means, either the Chase Lea Termination Fee or the
Chase Ridge Termination Fee as applicable under the circumstances.
"TERMINATION PAYMENTS" shall have the meaning given that term in
section 3.2(i).
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"TRANSACTION DOCUMENTS" means, collectively, the Bond Documents, the
Mortgage Documents, the Custodial Receipts Documents, this Agreement, the Hedge
Documents, if any, and all other agreements, instruments or documents executed
by any Borrower in connection with the Bonds, the Mortgage Loans, this
Agreement or the transactions contemplated thereby or hereby, including those
listed in Exhibit D, and "TRANSACTION DOCUMENT" means any one of the foregoing,
individually.
"UCC" or "UNIFORM COMMERCIAL CODE", with respect to a Property, means
the Uniform Commercial Code as in effect in the state where such Property is
located.
"UNDERWRITING RATE" means:
(i) with respect to each Mortgage Loan in a Fixed Rate Bond
Transaction, 7.0%;
(ii) with respect to each Mortgage Loan in a Floating Rate Bond
Transaction and bearing interest at the Fixed Rate, the
Pass-Through Rate then in effect under the Related Mortgage
Note, plus the Facility Fee payable with respect to such
Floating Rate Bond Transaction, plus the Bond Fees payable
with respect to such Floating Rate Bond Transaction;
(iii) with respect to each Mortgage Loan in a Floating Rate Bond
Transaction and bearing interest at the Variable Rate or the
Reset Rate, the aggregate effective rate of interest that
would be payable on such Mortgage Loan for the applicable
period, assuming that the interest rate applicable to such
Mortgage Loan is comprised of the sum of the Facility Fee
payable with respect to such Floating Rate Bond Transaction,
plus the Bond Fees payable with respect to such Floating Rate
Bond Transaction, plus the higher of (a) 5.7% and (b) the
annualized statement of the average Pass-Through Rate in
effect under the Related Mortgage Note for each day of the
immediately preceding twelve (12) month period; and
(iv) with respect to each Custodial Receipts Mortgage Loan, 7.05%.
"UNHEDGED BONDS" means the Related Bonds with respect to each Initial
Bond Property in a Floating Rate Bond Transaction and any Related Bonds with
respect to a New Bond Property that are designated as "Unhedged Bonds" in the
New Property Confirmation by Fannie Mae in its discretion.
"VALUE" means, as of any date of determination, the value attributed
to any Property by Fannie Mae in accordance with the standards and procedures
utilized for underwriting purposes for similar Multifamily Residential
Properties in accordance with the applicable provisions of the DUS Guide as of
such date of determination, it being acknowledged that in evaluating the Value
of a Property, Fannie Mae may take into account all factors relevant to the
value of such
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Property including the current condition of the Property, and in evaluating the
Value of a Property without an extended operating history, such Value shall be
based on projections and pro formas satisfactory to Fannie Mae.
"VARIABLE RATE", with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, means the "Weekly Variable Rate", as such term
is defined in the Related Indenture.
"WITHDRAWAL" means, with respect to an issue of Related Bonds in a
Floating Rate Bond Transaction, a withdrawal of funds from the Principal
Reserve Fund with respect to such Related Bonds in order to either (i)
reimburse Fannie Mae for an Advance or (ii) make any payment otherwise due from
a Borrower under the Related Bond Documents (including a payment to purchase
Related Purchased Bonds on behalf of a Borrower) other than a payment to redeem
any Related Bonds.
3 INTERPRETATION.
The parties to this Agreement acknowledge that each party and
their respective counsel have participated in the drafting and revision of this
Agreement and the other Transaction Documents. Accordingly, the parties agree
that any rule of construction which disfavors the drafting party shall not
apply in the interpretation of this Agreement and the other Transaction
Documents or any statement or supplement or exhibit to this Agreement or to the
other Transaction Documents.
II.
REPRESENTATIONS, WARRANTIES AND COVENANTS
1 REPRESENTATIONS AND WARRANTIES OF BORROWERS.
To induce Fannie Mae to enter into this Agreement and to execute and deliver
the Related Fannie Mae Credit Enhancement Instruments, each Borrower represents
and warrants to Fannie Mae as follows:
(a) DUE ORGANIZATION; OWNERSHIP STRUCTURE.
(i) Collateral Inc. is a Single-Purpose
corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland pursuant to those certain
Articles of Incorporation dated February 29, 1996 and duly filed on
March 1, 1996 with the Maryland State Department of Assessments and
Taxation, as amended pursuant to the amendments listed on Schedule K
hereto ("COLLATERAL INC.'S ARTICLES OF INCORPORATION"). Copies of
Collateral Inc.'s Articles of Incorporation, By-Laws and other
organizational documents, as amended pursuant to the amendments listed
on Schedule K hereto ("COLLATERAL INC.'S ORGANIZATIONAL DOCUMENTS")
certified as true,
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correct and complete by a duly authorized officer of Collateral Inc.,
have been delivered to Fannie Mae. Collateral Inc.'s Organizational
Documents are in full force and effect and have not been otherwise
supplemented, amended or modified.
(ii) Chase Ridge Inc. is a Single-Purpose
corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland pursuant to those certain
Articles of Incorporation dated October 22, 1993 and duly filed on
October 27, 1993 in the office of the Maryland State Department of
Assessments and Taxation, as amended pursuant to the amendments listed
on Schedule K hereto ("CHASE RIDGE INC.'S ARTICLES OF INCORPORATION").
Copies of Chase Ridge Inc.'s Articles of Incorporation, By-Laws and
other organizational documents, as amended pursuant to the amendments
listed on Schedule K hereto ("CHASE RIDGE INC.'S ORGANIZATIONAL
DOCUMENTS") certified as true, correct and complete by a duly
authorized officer of Chase Ridge Inc., have been delivered to Fannie
Mae. Chase Ridge Inc.'s Organizational Documents are in full force
and effect and have not been otherwise supplemented, amended or
modified.
(iii) Chase Lea Inc. is a Single-Purpose
corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland pursuant to those certain
Articles of Incorporation dated October 22, 1993 and duly filed on
October 27, 1993 in the office of the Maryland State Department of
Assessments and Taxation, as amended pursuant to the amendments listed
on Schedule K hereto ("CHASE LEA INC.'S ARTICLES OF INCORPORATION").
Copies of Chase Lea Inc.'s Articles of Incorporation, By-Laws and
other organizational documents, as amended pursuant to the amendments
listed on Schedule K hereto ("CHASE LEA INC.'S ORGANIZATIONAL
DOCUMENTS") certified as true, correct and complete by a duly
authorized officer of Chase Lea Inc., have been delivered to Fannie
Mae. Chase Lea Inc.'s Organizational Documents are in full force and
effect and have not been otherwise supplemented, amended or modified.
(iv) Each Borrower currently qualifies and is
taxed as a "Qualified REIT Subsidiary" as defined in Subchapter M of
the Code. Guarantor is the record and beneficial owner of, and has
good title to, 100 percent (100%) of the ownership interests in each
Borrower, free and clear of all liens, security interests, options,
rights of first refusal and adverse claims of title of any kind or
character, and no portion of such interest is the subject of any
agreement providing for the sale or transfer thereof. Guarantor
currently qualifies and is taxed as a real estate investment trust
under Subchapter M of the Code. The Diagram of Ownership Structure
attached hereto as Exhibit J accurately depicts the legal and
beneficial ownership interests in each Borrower as of the date hereof.
(v) Each of Collateral Inc. and Guarantor is
qualified to transact business and is in good standing in the
Commonwealth of Virginia and the States of
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Maryland and in each other jurisdiction in which such qualification
and/or standing is necessary to the conduct of its business and where
the failure to be so qualified would adversely affect the validity of,
the enforceability of, or the ability of any Borrower to perform the
Obligations under this Agreement and the other Transaction Documents.
Each of Chase Ridge Inc. and Chase Lea Inc. is qualified to transact
business and in good standing in the State of Maryland and in each
other jurisdiction in which such qualification and/or standing is
necessary to the conduct of its business and where the failure to be
so qualified would adversely affect the validity of, the
enforceability of, or the ability of any Borrower to perform the
Obligations under this Agreement and the other Transaction Documents.
(vi) Each Borrower's chief executive office and
office where it keeps its books and records as to the Collateral is
located at 5904 Richmond Highway, Suite 300, Alexandria, Virginia
22303.
(b) POWER AND AUTHORITY. Each Borrower and Guarantor has
the requisite power and authority (i) to own its properties and to carry on its
business as now conducted and as contemplated to be conducted in connection
with the performance of the Obligations hereunder and under the other
Transaction Documents and (ii) to execute and deliver this Agreement and the
other Transaction Documents and to carry out the transactions contemplated by
this Agreement and the other Transaction Documents.
(c) DUE AUTHORIZATION. The execution, delivery and
performance of this Agreement and the other Transaction Documents have been
duly authorized by all necessary action and proceedings by or on behalf of
Guarantor and each Borrower, and no further approvals or filings of any kind,
including any approval of or filing with any Governmental Authority, are
required by or on behalf of any Borrower or Guarantor as a condition to the
valid execution, delivery and performance by any Borrower or Guarantor of this
Agreement or any of the other Transaction Documents.
(d) VALID AND BINDING OBLIGATIONS. This Agreement and
the other Transaction Documents have been duly authorized, executed and
delivered by each Borrower and Guarantor and constitute the legal, valid and
binding obligations of each Borrower and Guarantor, enforceable against each
Borrower and Guarantor in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting
the enforcement of creditors' rights generally or by equitable principles or by
the exercise of discretion by any Court.
(e) NON-CONTRAVENTION; NO LIENS. Neither the execution
and delivery of this Agreement and the other Transaction Documents, nor the
fulfillment of or compliance with the terms and conditions of this Agreement
and the other Transaction Documents, the issuance of the Bonds nor the payment
of the Obligations:
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(i) does or will conflict with or result in any
breach or violation of any Applicable Law, rule or regulation enacted
or issued by any Governmental Authority or other agency having
jurisdiction over any Borrower or Guarantor, any of the Properties or
any other portion of the Collateral or other assets of any Borrower or
Guarantor, or any judgment or order applicable to any Borrower or
Guarantor or to which any Borrower or Guarantor, any of the Properties
or other assets of either any Borrower or Guarantor are subject;
(ii) does or will conflict with or result in any
material breach or violation of, or constitute a default under, any of
the terms, conditions or provisions of any of the Borrower
Organizational Documents, any indenture, existing agreement or other
instrument to which any Borrower or Guarantor is a party or to which
any Borrower or Guarantor, any of the Properties or any other portion
of the Collateral or other assets of any Borrower or Guarantor are
subject;
(iii) does or will result in or require the
creation of any Lien on all or any portion of the Collateral or any of
the Properties, except for the Permitted Liens; or
(iv) does or will require the consent or approval
of any creditor of any Borrower or Guarantor, any Governmental
Authority or any other Person except such consents or approvals which
have already been obtained.
(f) PENDING LITIGATION OR OTHER PROCEEDINGS. There is no
pending or, to the best knowledge of any Borrower, threatened action, suit,
proceeding or investigation, at law or in equity, before any court, board, body
or official of any Governmental Authority or arbitrator against or affecting
any Property or any other portion of the Collateral or other assets of any
Borrower or Guarantor, which, if decided adversely to such Borrower or
Guarantor, (i) would have, or may reasonably be expected to have, a Material
Adverse Effect or (ii) would adversely affect the exclusion of interest on the
Bonds from gross income for federal income tax purposes. No Borrower is in
default with respect to any order of any Governmental Authority.
(g) SOLVENCY. None of the Borrowers or Guarantor is
insolvent or will be rendered insolvent by the transactions contemplated by
this Agreement or the other Transaction Documents and after giving effect to
such transactions, none of the Borrowers or Guarantor will be left with an
unreasonably small amount of capital with which to engage in its business or
undertakings, nor will any Borrower or Guarantor have incurred, have intended
to incur, or believe that it has incurred, debts beyond its ability to pay such
debts as they mature. No Borrower received less than a reasonably equivalent
value in exchange for incurrence of the Obligations. There (i) is no
contemplated, pending or, to the best of any Borrower's knowledge, threatened
bankruptcy, reorganization, receivership, insolvency or like proceeding,
whether voluntary or involuntary, affecting any Borrower or Guarantor or any of
the Properties and
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(ii) has been no assertion or exercise of jurisdiction over any Borrower or
Guarantor or any of the Properties by any court empowered to exercise
bankruptcy powers.
(h) RATIOS. As of the Bond Transaction Closing Date for
each Bond Transaction, the Aggregate Debt Service Coverage Ratio for all
Properties for the twelve (12) month period ending on July 1, 1996 is not less
than the Minimum DSC Ratio, and the Aggregate Loan to Value Ratio is not
greater than the Maximum LTV Percentage.
(i) TITLE. Collateral Inc. has good, valid, marketable
and indefeasible title in fee to each Property, other than the Avalon Ridge
Property and the Avalon Lea Property, free and clear of all Liens whatsoever
except the Permitted Liens. Chase Ridge Inc. has good, valid, marketable and
indefeasible title in fee to the Avalon Ridge Property free and clear of all
Liens whatsoever except the Permitted Liens. Chase Lea Inc. has good, valid,
marketable and indefeasible title in fee to the Avalon Lea Property free and
clear of all Liens whatsoever except the Permitted Liens. Each Bond Mortgage,
if and when properly recorded in the appropriate records, together with any
Uniform Commercial Code financing statements required to be filed in connection
therewith, will create a valid, perfected first priority mortgage or deed of
trust lien on the Bond Property intended to be encumbered thereby (including
the Leases of such Bond Property and the rents and revenues and all rights to
collect the rents and revenues under such Leases), subject only to Permitted
Liens. Each Reimbursement Mortgage with respect to an Additional Mortgaged
Property, if and when properly recorded in the appropriate records, together
with any Uniform Commercial Code financing statements required to be filed in
connection therewith, will create a valid, perfected first priority mortgage or
deed of trust lien on the Additional Mortgaged Property intended to be
encumbered thereby (including the Leases of such Additional Mortgaged Property
and the rents and revenues and all rights to collect the rents and revenues
under such Leases), subject only to Permitted Liens. Each Reimbursement
Mortgage with respect to a Bond Property, if and when properly recorded in the
appropriate records, together with any Uniform Commercial Code financing
statements required to be filed in connection therewith, will create a valid,
perfected second priority mortgage or deed of trust lien on the Bond Property
intended to be encumbered thereby (including the Leases of such Bond Property
and the rents and revenues and all rights to collect the rents and revenues
under such Leases), subject only to Permitted Liens. Except for (i) any
Permitted Liens and (ii) claims for work, labor or materials affecting any
Property that will either (x) be paid in full in the ordinary course of
Borrowers' business or (y) if in dispute, be bonded over in the ordinary course
of Borrowers' business, and which in the aggregate for all Properties do not
exceed $100,000.00, there are no Liens or claims for work, labor or materials
affecting any Property which are or may be prior to, subordinate to, or of
equal priority with, the Liens created by the Mortgage Documents.
(j) COMPLIANCE WITH EXISTING BOND ISSUES AND EXISTING
SECURITY INSTRUMENTS. No event has occurred since the Borrowers acquired their
respective Properties and no condition currently exists with respect to any
Borrower or any Bond Property that would constitute an event of default or
which, with the lapse of time, if not cured, or with the giving of
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notice or both, would become an event of default under any of the Regulatory
Agreements, any of the Existing Security Instruments any of the Custodial
Receipts Documents or any other document executed in connection with any of the
Existing Bond Issues or the Custodial Receipts Transactions. Each Borrower has
complied in all material respects with the requirements of each loan agreement
executed in connection with the Existing Bond Issues.
(k) COMPLIANCE WITH TAX CERTIFICATES. No Borrower has
taken or will take any action, or permit any action that is within any
Borrower's control to be taken, that would impair the exclusion from gross
income for federal income tax purposes of the interest payable on any of the
Existing Bond Issues or the Bonds. As of the Fannie Mae Facility Closing Date,
each Borrower is in compliance with all material requirements of all of the Tax
Certificates. Each Borrower has complied and will comply with all the terms
and conditions of the Tax Certificates, including the terms and conditions of
the exhibits thereto, and the representations set forth in the Tax Certificates
pertaining to any Borrower are true and accurate in all material respects.
(l) COMPLIANCE WITH REGULATORY AGREEMENTS. Each of the
Bond Properties is in compliance with all material requirements of the
applicable Regulatory Agreement. Each Borrower intends to cause the
residential units in each Bond Property to be rented or available for rental on
a basis which satisfies the requirements of the Regulatory Agreement with
respect to such Bond Property. All Leases with respect to each Bond Property
will comply with all Applicable Laws and the Regulatory Agreement with respect
to such Bond Property.
(m) TAXES. The Borrowers have filed all property and
similar tax returns required to have been filed by it with respect to each
Property and have paid and discharged, or caused to be paid and discharged, all
installments for the payment of real estate, property or similar taxes due to
date, and all other material Impositions imposed against, affecting or relating
to each Property other than those which have not become due, together with any
fine, penalty, interest or cost for nonpayment pursuant to such returns or
pursuant to any assessment received by it. No Borrower has knowledge of any
new proposed tax, levy or other governmental or private assessment or charge in
respect of any Property which has not been disclosed in writing to Fannie Mae.
(n) ZONING. Each Property complies in all material
respects with all Applicable Laws affecting such Property. Without limiting
the foregoing, all material Permits, including certificates of occupancy, have
been issued and are in full force and effect. No Borrower nor, to the knowledge
of any Borrower, any former owner of any Property, has received any written
notification or threat of any actions or proceedings regarding the
noncompliance or nonconformity of any Property with any Applicable Laws or
Permits, nor is any Borrower otherwise aware of any such pending actions or
proceedings.
(o) LIABILITY FOR HAZARDOUS SUBSTANCES. No Borrower nor
Guarantor has any liability, contingent or otherwise, in connection with any
Hazardous Substance Activity on
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or affecting any Property in violation of Hazardous Materials Laws, except for
potential claims for potential liability of Collateral Inc. or Guarantor with
respect to the presence of (i) radon gas on the Properties commonly known as
Avalon Knoll, Avalon at Carter Lake and Avalon at Gayton, and (ii) non-friable
asbestos located in the vinyl floor tiles of certain portions of the Property
commonly known as Avalon at Carter Lake, in each case, as such radon gas and
asbestos are disclosed in the Environmental Reports with respect to such
Properties, delivered to Fannie Mae prior to the date of this Agreement.
Notwithstanding the foregoing, the Borrowers and Guarantor represent and
warrant that as of the Fannie Mae Facility Closing Date no such claims have
been asserted or threatened.
(p) PROHIBITED ACTIVITIES OR CONDITIONS. Except as
disclosed in any Environmental Report delivered to Fannie Mae prior to the date
of this Agreement, or otherwise disclosed in writing by the Borrowers to Fannie
Mae prior to the date of this Agreement, (i) to the best knowledge of the
Borrowers, no Prohibited Activities or Conditions exist or have existed at,
upon, under or within any Property that have not been remedied and (ii) no
Borrower nor Guarantor has at any time caused or permitted any Prohibited
Activities or Conditions to exist at, upon, under or within any Property.
(q) HAZARDOUS MATERIALS LAWS. Except as disclosed in an
Environmental Report delivered to Fannie Mae prior to the date of this
Agreement, or otherwise disclosed in writing by the Borrowers to Fannie Mae
prior to date of this Agreement, (i) no Borrower nor, to the knowledge of any
Borrower, any other party has been or is involved in operations at any Property
which operations could reasonably be expected to lead to (x) the imposition of
liability on any Borrower or Guarantor under any Hazardous Materials Law in
effect as of the date of this Agreement, or on any subsequent or former owner
of any Property, or (y) the creation of a Lien with respect to a liability on
any Property under any Hazardous Materials Law in effect as of the date hereof;
(ii) no Borrower nor Guarantor nor to the best knowledge of any Borrower, any
predecessor-in-interest with respect to any Property has permitted any tenant
or occupant of any Property to engage in any activity that could reasonably be
expected to impose a claim or liability under any Hazardous Materials Law in
effect as of the date hereof on such tenant or occupant, on any Borrower or on
any other subsequent or former owner of any Property; and (iii) no Borrower nor
Guarantor has received, and no Borrower has knowledge of the issuance of, any
claim, citation or notice of any Governmental Actions.
(r) LEASES. Each Borrower has delivered to Servicer, on
behalf of Fannie Mae, true, complete and correct copies of its forms of
apartment leases for each Property, and each Lease with respect to such
Property is in the form thereof, with no material modifications thereto, except
as previously disclosed in writing to Servicer or Fannie Mae. Except as set
forth in a Rent Roll, no Lease for any unit in any Property (i) is for a term
in excess of one year, including any renewal or extension period unless such
renewal or extension period is subject to termination by the Borrowers upon not
more than 30 days' written notice except to the extent that a longer term may
be required under Applicable Law, (ii) provides for prepayment of more
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than one month's rent (other than as set forth on Exhibit M), or (iii) was
entered into in other than the ordinary course of business.
(s) RENT ROLL. Each Borrower has executed and delivered
to Servicer, on behalf of Fannie Mae, a Certification to Property Rent Roll
(the "RENT ROLL"), for each Property, each dated as of and delivered within
thirty (30) days prior to the Fannie Mae Facility Closing Date and otherwise in
the form promulgated by Fannie Mae. Each Rent Roll sets forth each and every
unit subject to a Lease which is in full force and effect as of the date of
such Rent Roll. The information set forth on each Rent Roll is true, correct
and complete as of its date and there has occurred no material adverse change
in the information shown on any Rent Roll from the date of each such Rent Roll
to the Fannie Mae Facility Closing Date. Except as disclosed in the Rent Roll
with respect to each Property or otherwise previously disclosed in writing to
Servicer or Fannie Mae, no Lease is in effect as of the date of the Rent Roll
with respect to such Property.
(t) STATUS OF LANDLORD UNDER LEASES. Except for any
assignment of leases and rents which is a Permitted Lien or which is to be
released in connection with the consummation of the transactions contemplated
by this Agreement, each Borrower is the respective owner and holder of the
landlord's interest under each of the Leases of units in each Property owned by
such Borrower and there are no prior outstanding assignments of any such Lease,
or any portion of the rents, additional rents, charges, issues or profits due
and payable or to become due and payable thereunder which were not discharged
as of the Fannie Mae Facility Closing Date.
(u) ENFORCEABILITY OF LEASES. Each Lease constitutes the
legal, valid and binding obligation of the applicable Borrower and, to the
knowledge of the Borrowers, of each of the other parties thereto, enforceable
in accordance with its terms, subject only to bankruptcy, insolvency,
reorganization or other similar laws relating to creditors' rights generally,
and equitable principles, and except as disclosed in writing to Fannie Mae, no
notice of any default by any Borrower which remains uncured has been sent by
any tenant under any such Lease.
(v) NO LEASE OPTIONS. All premises demised to tenants
under Leases are occupied by such tenants as tenants only. No Lease contains
any option or right to purchase, right of first refusal or any other similar
provisions. No option or right to purchase, right of first refusal, purchase
contract or similar right exists with respect to any Property except such
options or purchase rights that are granted by Applicable Law.
(w) INSURANCE. The Borrowers have delivered to Servicer
or Fannie Mae true and correct certified copies of all policies of insurance
currently in effect as of the date of this Agreement with respect to the
Properties. Each such insurance policy complies in all material respects with
the requirements set forth in the Mortgage Documents.
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(x) TAX PARCELS. Each Property is on one or more
separate tax parcels, and each such parcel (or parcels) is (or are) separate
and apart from any other property.
(y) ENCROACHMENTS. Except as set forth in the marked-up
title insurance commitments identified on Exhibit E, none of the improvements
located on any Property encroaches upon the property of any other Person nor
lies outside of the boundaries and building restriction lines of such Property
and no improvement located on property adjoining such Property lies within the
boundaries of or in any way encroaches upon such Property.
(z) INDEPENDENT UNIT. Each Property is an independent
unit which does not rely on any drainage, sewer, access, parking, structural or
other facilities located on any property not included in such Property or on
public or utility easements for the (i) fulfillment of any zoning, building
code or other requirement of any Governmental Authority that has jurisdiction
over such Property (other than property which any Borrower has rights to
utilize pursuant to a recorded covenant or other agreement of record which is a
Permitted Lien and which is not subject to revocation without any Borrower's
consent), (ii) structural support, or (iii) the fulfillment of the requirements
of any Lease or other agreement affecting such Property. The Borrowers,
directly or indirectly, have the right to use all amenities, easements, public
or private utilities, parking, access routes or other items necessary or
currently used for the operation of each Property. All public utilities are
installed and operating at each Property and all billed installation and
connection charges have been paid in full. Each Property is either (x)
contiguous to or (y) benefits from an irrevocable unsubordinated easement
permitting access from such Property to a physically open, dedicated public
street, and has all necessary permits for ingress and egress and is adequately
serviced by public water, sewer systems and utilities. No building or other
improvement not located on a Property relies on any part of the Property to
fulfill any zoning requirements, building code or other requirement of any
Governmental Authority that has jurisdiction over the Property for structural
support or to furnish to such building or improvement any essential building
systems or utilities.
(aa) CONDITION OF THE PROPERTIES. Each Property is in
good condition, order and repair, there exist no structural or other material
defects in such Property, whether latent or otherwise and no Borrower has
received notice from any insurance company or bonding company of any defects or
inadequacies in such Property, or any part of it, which would adversely affect
the insurability of such Property or cause the imposition of extraordinary
premiums or charges for insurance or of any termination or threatened
termination of any policy of insurance or bond. No claims have been made
against any contractor, architect or other party with respect to the condition
of any Property or the existence of any structural or other material defect
therein. No Property has been materially damaged by Casualty which has not
been fully repaired or for which Insurance Proceeds have not been received or
are not expected to be received except as previously disclosed in writing to
Fannie Mae or Servicer. There are no proceedings pending for partial or total
Condemnation of any Property except as disclosed in writing to Fannie Mae or
Servicer. The average term of each issue of Related Securities does
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not exceed 120% of the average reasonably expected economic life of the
facilities of the Bond Property with respect to such Related Securities.
(bb) NO CONTRACTUAL DEFAULTS. Except as otherwise set
forth in Exhibit L hereto, there are no defaults by any Borrower or Guarantor
or, to the knowledge of the Borrowers, by any other Person under any contract
to which any Borrower or Guarantor is a party relating to any Property,
including any management, rental, service, supply, security, maintenance or
similar contract, that either (i) individually or in the aggregate, would cause
a Material Adverse Effect, or (ii) involves, in any individual instance, an
actual or potential disputed amount that is equal to or in excess of
$10,000.00. Except as otherwise set forth in Exhibit L hereto, no Borrower nor
Guarantor or to the knowledge of any Borrower, any other person has received
notice or has any knowledge of any existing circumstances in respect of which
it could receive any notice of default or breach in respect of any contracts
affecting or concerning any Property, that either (i) individually or in the
aggregate, would cause a Material Adverse Effect, or (ii) involves, in any
individual instance, an actual or potential disputed amount that is equal to or
in excess of $10,000.00.
(cc) COMPLIANCE WITH THE TRANSACTION DOCUMENTS. Each
Borrower is in compliance with all provisions of the Transaction Documents to
which it is a party or by which it is bound. The representations and
warranties made by each Borrower in the Transaction Documents are true,
complete and correct as of the Fannie Mae Facility Closing Date.
(dd) ERISA. Each Borrower and Guarantor are in compliance
in all material respects with all applicable provisions of ERISA and has not
incurred any liability to the PBGC on a Plan under Title IV of ERISA. None of
the assets of any Borrower or Guarantor constitute plan assets (within the
meaning of Department of Labor Regulation Section 2510.3-101) of any employee
benefit plan subject to Title I of ERISA.
(ee) OFFICIAL STATEMENT. The statements and information
concerning each Borrower, their Affiliates and the Related Bond Property set
forth in each Official Statement are each complete and correct as of its date
and, as of its date, do not contain any untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(ff) FINANCIAL INFORMATION. The written financial
projections relating to each Borrower and Guarantor and delivered to Servicer,
on behalf of Fannie Mae, on or prior to the date hereof, if any, were prepared
on the basis of assumptions believed by each Borrower, in good faith at the
time of preparation, to be reasonable and no Borrower is aware of any fact or
information that would lead it to believe that such assumptions are incorrect
or misleading in any material respect; provided, however, that no
representation or warranty is made that any result set forth in such financial
projections shall be achieved. The financial statements of each Borrower and
Guarantor which have been furnished to Servicer on behalf of Fannie Mae are
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complete and accurate in all material respects and present fairly the financial
condition of each Borrower and Guarantor, as of their respective dates in
accordance with GAAP, applied on a consistent basis, and since the date of the
most recent of such financial statements no event has occurred which would
have, or may reasonably be expected to have a Material Adverse Effect, and
there has not been any material transaction entered into by any Borrower or
Guarantor other than transactions in the ordinary course of business. No
Borrower or Guarantor has any material Contingent Obligation which is not
otherwise disclosed in its most recent financial statements.
(gg) ACCURACY OF INFORMATION. No information, statement
or report furnished in writing to Fannie Mae, any Issuer, Servicer or any
Related Trustee by any Borrower or Guarantor in connection with this Agreement,
the Bond Documents, the Mortgage Documents, the Custodial Receipts Documents or
any other Transaction Document or in connection with the consummation of the
transactions contemplated hereby and thereby (including any information
furnished by any Borrower or Guarantor in connection with the preparation of
any materials related to the issuance delivery or offering of any of the Bonds
on the Bond Transaction Closing Date) contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading; and the representations and warranties of each Borrower and the
statements, information and descriptions contained in each Borrower's closing
certificates, as of the Fannie Mae Facility Closing Date, are true, correct and
complete in all material respects, do not contain any untrue statement or
misleading statement of a material fact; and the estimates and the assumptions
contained herein and in any certificate of any Borrower delivered as of the
Fannie Mae Facility Closing Date are reasonable and based on the best
information available to each Borrower.
(hh) NO CONFLICTS OF INTEREST. To the best knowledge of
each Borrower, no member, officer, agent or employee of any Issuer has been or
is in any manner interested, directly or indirectly, in that Person's own name,
or in the name of any other Person, in the Related Securities, the Related Bond
Documents with respect to any Bond Property, the Related Custodial Receipts
Documents, the Bond Property Loan Documents with respect to any Bond Property,
any Borrower or Guarantor or any Bond Property, in any contract for property or
materials to be furnished or used in connection with such Bond Property or in
any aspect of the transactions contemplated by the Bond Documents, the Related
Bond Property Loan Documents with respect to any Bond Property or the Related
Custodial Receipts Documents.
(ii) GOVERNMENTAL APPROVALS. No Governmental Approval not
already obtained or made is required for the execution and delivery or
approval, as the case may be, of this Agreement, the Bond Documents, the
Custodial Receipts Documents, the Mortgage Documents or any other Transaction
Document or the performance of the terms and provisions hereof or thereof by
any Borrower or Guarantor.
(jj) GOVERNMENTAL ORDERS. No Borrower is presently under
any cease or desist order or other orders of a similar nature, temporary or
permanent, of any Governmental
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Authority which would have the effect of preventing or hindering performance of
its duties hereunder, nor are there any proceedings presently in progress or to
its knowledge contemplated which would, if successful, lead to the issuance of
any such order.
(kk) NO RELIANCE. Each Borrower acknowledges, represents
and warrants that it understands the nature and structure of the transactions
relating to the refinancings of the Bond Properties, that it is familiar with
the provisions of all of the documents and instruments relating to such
refinancings to which it or any Issuer is a party or of which it is a
beneficiary; that it understands the risks inherent in such transactions,
including the risk of loss of all or any of the Bond Properties and the
Additional Mortgaged Properties; and that it has not relied on any Issuer or
Fannie Mae for any guidance or expertise in analyzing the financial or other
consequences of the transactions contemplated by this Agreement, any Related
Indenture or any other Transaction Document or otherwise relied on any Issuer
or Fannie Mae in any manner in connection with interpreting, entering into or
otherwise in connection with this Agreement, any other Transaction Document or
any of the matters contemplated hereby or thereby.
(ll) ARBITRAGE BONDS. No money on deposit in any fund or
account in connection with any of the Existing Bond Issues, whether or not such
money was derived from other sources, has been used by or under the direction
of any Borrower or Guarantor in a manner which would cause any of the Existing
Bond Issues to be ``arbitrage bonds'' within the meaning of Section 103(c) of
the Internal Revenue Code of 1954, as amended.
(mm) COMPLIANCE WITH APPLICABLE LAW. Each Borrower and
Guarantor is in compliance with Applicable Law, including all Governmental
Approvals, if any, except for such items of noncompliance that, singly or in
the aggregate, have not had and are not reasonably expected to cause, a
Material Adverse Effect.
(nn) CONTRACTS WITH AFFILIATES. No Borrower has entered
into or is a party to any contract, lease or other agreement with any Affiliate
of such Borrower for the provision of any service, materials or supplies to any
Property or Properties (including any contract, lease or agreement for the
provision of property management services, cable television services or
equipment, gas, electric or other utilities, security services or equipment,
laundry services or equipment or telephone services or equipment), other than
the Management Agreements and that certain Shared Facilities Agreement dated as
of July 31, 1996 (the "SHARED FACILITIES AGREEMENT") by and between Collateral
Inc. and Guarantor with respect to the Bond Property commonly known as Avalon
Meadows.
(ao) COMPLIANCE WITH SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT. The Salem Station Project is in compliance with all material
requirements of the Salem Station Restrictive Covenants Agreement. The
Borrowers intend to cause the residential units in the Salem Station Project to
be rented or available for rental on a basis which satisfies the requirements
of the Salem Station Restrictive Covenants Agreements. All Leases with respect
to
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the Salem Station Project will comply with all applicable laws and the Salem
Station Restrictive Covenants Agreement.
2 AFFIRMATIVE COVENANTS OF OWNER.
Each Borrower agrees and covenants with Fannie Mae that, at
all times during the term of this Agreement:
(a) COMPLIANCE WITH AGREEMENTS; NO AMENDMENTS. Each
Borrower shall comply with all the terms and conditions of each Transaction
Document to which it is a party or by which it is bound. Each Borrower shall
use commercially reasonable efforts to cause the Related Trustee in each Bond
Transaction and each Custodial Receipts Transaction at all times to comply with
the terms of the Related Bond Documents and/or the Related Custodial Receipts
Documents to which each such Related Trustee is a party.
(b) MAINTENANCE OF EXISTENCE. Each Borrower shall
maintain its existence and continue to be a corporation organized under the
laws of the state of Maryland, duly qualified to do business in each
jurisdiction in which such qualification is necessary to the conduct of its
business and where the failure to be so qualified would adversely affect the
validity of, the enforceability of or ability to perform its obligations under
this Agreement or any other Transaction Document.
(c) MAINTENANCE OF QRS STATUS. At all times during which
any Borrower is bound by the terms of this Agreement, each such Borrower shall
continue to qualify as a "Qualified REIT Subsidiary" (as defined in Subchapter
M of the Code) of Guarantor.
(d) FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER
INFORMATION. The Borrowers shall keep and maintain at all times complete and
accurate books of accounts and records in sufficient detail to correctly
reflect (x) all of the Borrowers' financial transactions and assets and (y) the
results of the operation of each Property and copies of all written contracts,
Leases and other instruments which affect each Property (including all bills,
invoices and contracts for electrical service, gas service, water and sewer
service, waste management service, telephone service and management services).
In addition, the Borrowers shall furnish, or cause to be furnished, to
Servicer, and upon Fannie Mae's request, to Fannie Mae:
(i) Annual Financial Statements. As soon as
available, and in any event within one hundred and twenty (120) days
after the close of each fiscal year of each Borrower during the term
of this Agreement, each Borrower's audited balance sheet as of the end
of such fiscal year, its audited statement of income, retained
earnings for such fiscal year and its audited statement of cash flows
for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the prior fiscal year, prepared in accordance with GAAP,
consistently applied, and certified by the chief financial officer of
such Borrower to the effect that
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such financial statements have been prepared in accordance with GAAP,
consistently applied, and that such financial statements fairly
present the results of its operations and financial condition for the
periods and dates indicated, with such certification of such
Borrower's chief financial officer to be free of exceptions and
qualifications as to the scope of the audit or as to the going concern
nature of the business.
(ii) Quarterly Financial Statements. As soon as
available, and in any event within forty-five (45) days after each of
the first three fiscal quarters of each fiscal years during the term
of this Agreement, each Borrower's unaudited balance sheet as of the
end of such fiscal quarter and its unaudited statement of income and
retained earnings and its unaudited statement of cash flows for the
portion of the fiscal year ended with the last day of such quarter,
all in reasonable detail and stating in comparative form the
respective figures for the corresponding date and period in the
previous fiscal year, accompanied by a certificate of the chief
financial officer of such Borrower to the effect that such financial
statements have been prepared in accordance with GAAP, consistently
applied, and that such financial statements fairly present the results
of its operations and financial condition for the periods and dates
indicated subject to year end adjustments in accordance with GAAP.
(iii) Monthly Property Statements. On a monthly
basis within thirty (30) days of the last day of the prior month, a
statement of income and expenses of each Property accompanied by a
certificate of the chief financial officer of each Borrower to the
effect that each such statement of income and expenses fairly,
accurately and completely presents the operations of each such
Property for the period indicated.
(iv) Annual Property Statements. On an annual
basis within forty-five (45) days of the end of the fiscal year, an
annual statement of income and expenses of each Property accompanied
by a certificate of the chief financial officer of each Borrower to
the effect that each such statement of income and expenses fairly,
accurately and completely presents the operations of each such
Property for the period indicated.
(v) Updated Rent Rolls. Upon Servicer's or
Fannie Mae's request, a current Rent Roll for each Property, showing
the name of each tenant, and for each tenant, the space occupied, the
lease expiration date, the rent payable, the rent paid and any other
information requested by Servicer or Fannie Mae and in the form
required by Servicer or Fannie Mae and accompanied by a certificate of
the chief financial officer of each Borrower to the effect that each
such Rent Roll fairly, accurately and completely, in all material
respects, presents the information required therein as of the date
thereof.
(vi) Security Deposit Information. Upon
Servicer's or Fannie Mae's request, an accounting of all security
deposits held in connection with any lease of any part of any
Property, including the name and identification number of the accounts
in which such security deposits are held, the name and address of the
financial institutions in
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which such security deposits are held and the name of the person to
contact at such financial institution, along with any authority or
release necessary for Servicer or Fannie Mae to access information
regarding such accounts.
(vii) Security Law Reporting Information. So long
as Guarantor is a reporting company under the Securities and Exchange
Act of 1934, promptly upon the mailing thereof to the shareholders of
Guarantor, the Borrowers shall furnish to Servicer and upon Fannie
Mae's request, to Fannie Mae, copies of all financial statements,
reports and proxy statements so mailed. Promptly upon the filing
thereof, copies of all registration statements (other than the
exhibits thereto and any registration statements on Form S-8 or its
equivalent) and annual, quarterly or monthly reports (excluding Form
4, Statement of Changes in Beneficial Ownership, or its equivalent,
unless they reflect a change in control in Guarantor) or current
reports on Form 8K which Guarantor shall have filed with the United
States Securities and Exchange Commission or other Governmental
Authorities.
(viii) Accountants' Reports. Promptly upon receipt
thereof, copies of any reports or management letters submitted to any
Borrower by its independent certified public accountants in connection
with the examination of its financial statements made by such
accountants (except for reports otherwise provided pursuant to clause
(i) above).
(ix) Other Reports. Promptly upon request
therefor, all schedules, financial statements or other similar reports
delivered by any Borrower pursuant to the Transaction Documents or
otherwise requested by Servicer or Fannie Mae with respect to any
Borrower's business affairs or condition (financial or otherwise) or
any of the Properties.
(e) CERTIFICATE OF COMPLIANCE. The Borrowers shall
deliver to Servicer concurrently with the delivery of the financial statements
and/or reports required to be delivered pursuant to paragraphs (d)(i) and
(d)(ii) above a certificate signed by the chief financial officer of each
Borrower stating that, to the best of the knowledge of such chief financial
officer, following reasonable inquiry, no Event of Default or Potential Event
of Default has occurred, or if an Event of Default or Potential Event of
Default has occurred, specifying the nature thereof.
(f) MAINTAIN LICENSES. The Borrowers shall procure and
maintain in full force and effect all licenses, Permits, charters and
registrations which are material to the conduct of its business and shall abide
by and satisfy all terms and conditions of all such licenses, Permits, charters
and registrations.
(g) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND
ACCOUNTANTS. To the extent permitted by law and in addition to the applicable
requirements of the Mortgages, each Borrower shall permit Fannie Mae or
Servicer:
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(i) to inspect, make copies and abstracts of, and
have reviewed or audited, such books and records of each Borrower as
may relate to the Obligations or any Property;
(ii) to discuss each Borrower's affairs, finances
and accounts with any of such Borrower's officers, partners and
employees;
(iii) to discuss each Borrower's affairs, finances
and accounts with its independent public accountants, provided that
the chief financial officer of such Borrower has been given the
opportunity by Servicer or Fannie Mae to be a party to such
discussions; and
(iv) to receive any other information that Fannie
Mae or Servicer reasonably deems necessary or relevant in connection
with any Mortgage Loan, any Transaction Document or the Obligations.
Notwithstanding the foregoing, prior to an Event of Default or
Potential Event of Default all such inspections shall be conducted at
reasonable times during normal business hours.
(h) INFORM FANNIE MAE AND SERVICER OF MATERIAL EVENTS.
The Borrowers shall promptly inform Fannie Mae and Servicer in writing of any
of the following (and shall deliver to Fannie Mae and Servicer copies of any
related written communications, complaints, orders, judgments and other
documents relating to the following) of which any Borrower has or obtains
actual knowledge:
(i) Defaults. The occurrence of any Event of
Default or any Potential Event of Default under this Agreement or any
other Transaction Document;
(ii) Regulatory Proceedings. The commencement of
any rulemaking or disciplinary proceeding or the promulgation of any
proposed or final rule which would have, or may reasonably be expected
to have, a Material Adverse Effect or adversely affect the tax-exempt
status of the interest payable on any of the Related Securities;
(iii) Legal Proceedings. The commencement or
threat of, or amendment to, any proceedings by or against any Borrower
or Guarantor in any Federal, state or local court or before any
Governmental Authority, or before any arbitrator, which, if adversely
determined, would have, or at the time of determination may reasonably
be expected to have, a Material Adverse Effect or adversely affect the
tax-exempt status of the interest payable on any of the Related
Securities;
(iv) Bankruptcy Proceedings. The commencement of
any proceedings by or against any Borrower or Guarantor under any
applicable bankruptcy, reorganization, liquidation, insolvency or
other similar law now or hereafter in effect or
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of any proceeding in which a receiver, liquidator, trustee or other
similar official is sought to be appointed for it;
(v) Regulatory Supervision or Penalty. The
receipt of notice from any Governmental Authority having jurisdiction
over any Borrower or Guarantor that (A) any Borrower or Guarantor is
being placed under regulatory supervision, (B) any license, Permit,
charter, membership or registration material to the conduct of any
Borrower's or Guarantor's respective business or the Properties is to
be suspended or revoked or (C) any Borrower or Guarantor is to cease
and desist any practice, procedure or policy employed by such Borrower
or Guarantor, as the case may be, in the conduct of its business, and
such cessation would have, or may reasonably be expected to have, a
Material Adverse Effect or would adversely affect the tax-exempt
status of the interest on any Bonds; and
(vi) Environmental Claim. The receipt of notice
from any Governmental Authority or other Person relating to any
Environmental Claim involving any Borrower or Guarantor or any of its
assets, including the Properties.
(i) SINGLE-PURPOSE ENTITY. Each Borrower shall at all
times maintain and conduct itself as a Single-Purpose entity.
(j) INSPECTION. Each Borrower shall permit any Person
designated by Fannie Mae (including Servicer): (i) to make entries upon and
inspections of the Properties; and (ii) to otherwise verify, examine and
inspect the amount, quantity, quality, value and/or condition of, or any other
matter relating to, any Property; provided, however, that prior to an Event of
Default or Potential Event of Default all such entries, examinations and
inspections shall be conducted at reasonable times during normal business
hours.
(k) COMPLIANCE WITH APPLICABLE LAWS. Each Borrower shall
comply in all material respects with all Applicable Laws now or hereafter
affecting any Property or any part of any Property or requiring any
alterations, repairs or improvements to any Property, except to the extent a
Borrower may be diligently and continuously contesting such Applicable Law in
good faith and in a timely, appropriate and legal manner and Fannie Mae
reasonably determines that such contest will not likely cause a Material
Adverse Effect. Each Borrower shall procure and continuously maintain in full
force and effect, and shall abide by and satisfy all material terms and
conditions of all Permits.
(l) WARRANTY OF TITLE. Each Borrower shall warrant and
defend (a) the title to each Property and every part of each Property, subject
only to Permitted Liens, and (b) the validity and priority of the lien of the
applicable Mortgage Documents, subject only to Permitted Liens, in each case
against the claims of all Persons whatsoever. The Borrowers shall reimburse
Fannie Mae and Servicer for any losses, costs, damages or expenses (including
reasonable
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attorneys' fees and court costs) incurred by Fannie Mae or Servicer if an
interest in any Property, other than with respect to a Permitted Lien, is
claimed by others.
(m) DEFENSE OF ACTIONS. The Borrowers shall appear in
and defend any action or proceeding purporting to affect the security for this
Agreement or the rights or power of Fannie Mae or Servicer hereunder or under
any other Transaction Document, and shall, pursuant to section 4.2, pay all
costs and expenses, including the cost of evidence of title and reasonable
attorneys' fees, in any such action or proceeding in which Fannie Mae may
appear in accordance with the provisions of this Agreement or the other
Transaction Documents. If the Borrowers fail to perform any of the covenants
or agreements contained in this Agreement or in any other Transaction Document,
or if any action or proceeding is commenced that is not diligently defended by
the Borrowers which affects in any material respect Fannie Mae's or any Related
Trustee's interest in any Property or any part thereof, including eminent
domain, code enforcement or proceedings of any nature whatsoever under any
Applicable Law, whether now existing or hereafter enacted or amended, then
Fannie Mae may, with ten (10) days prior notice to the Borrowers, but without
demand upon the Borrowers, without obligation to do so, and without releasing
the Borrowers from any Obligation, make such appearances, disburse such sums
and take such action as Fannie Mae or Servicer deems necessary or appropriate
to protect Fannie Mae's or such Related Trustee's interest, including
disbursement of attorney's fees, entry upon such Property to make repairs or
take other action to protect the security of said Property, payment, purchase,
contest or compromise of any encumbrance, charge or lien which in the judgment
of Fannie Mae appears to be prior or superior to the Transaction Documents, and
procurement of satisfactory insurance required to be maintained by the
Borrowers under the Transaction Documents; provided, however, that Fannie Mae
shall not be required to give prior notice to the Borrowers if Fannie Mae
reasonably determines that such appearance, disbursement or action is necessary
to prevent a Material Adverse Effect. In the event (i) that any Mortgage is
foreclosed in whole or in part or that any Transaction Document is put into the
hands of an attorney for collection, suit, action or foreclosure, or (ii) of
the foreclosure of any mortgage, deed to secure debt, deed of trust or other
security instrument prior to or subsequent to any Mortgage or any Transaction
Document in which proceeding Fannie Mae is made a party or (iii) of the
bankruptcy of any of the Borrowers or Guarantor or an assignment by any of the
Borrowers or Guarantor for the benefit of its creditors, the Borrowers shall be
chargeable with and agree to pay all costs of collection and defense, including
actual attorneys' fees in connection therewith and in connection with any
appellate proceeding or post-judgment action involved therein, which shall be
due and payable together with all required service or use taxes.
(n) PROPERTY MANAGEMENT; MAINTENANCE OF PROPERTIES. The
Borrowers shall continue to operate each Property as a Multifamily Residential
Property, and shall manage or cause to be managed the operations of each
Property in accordance with the applicable provisions of the Mortgage Documents
and the other Transaction Documents. The Borrowers (i) shall not commit waste
or permit impairment or deterioration of any Property, (ii) shall not abandon
any Property, (iii) shall restore or repair promptly and in a good and
workmanlike manner all or any part of any Property to the equivalent of its
condition existing immediately
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prior to such Casualty, or such other lesser condition as Fannie Mae may
approve in writing, in the event of any Casualty thereto, whether or not
Insurance Proceeds are available to cover in whole or in part the costs of such
restoration or repair, (iv) shall keep each Property, including improvements,
fixtures, equipment, machinery and appliances thereon in good repair and shall
replace fixtures, equipment, machinery and appliances on each Property when
necessary to keep such items in good repair, (v) shall generally operate and
maintain each Property in accordance with the standards for "Class A"
Multifamily Residential Properties in the regional market in which each such
Property is located and (vi) shall give notice in writing to Fannie Mae of,
and, unless otherwise directed in writing by Fannie Mae, appear in and defend,
any action or proceeding purporting to affect any Property, the security of any
Mortgage or the rights or powers of Fannie Mae under any of the Transaction
Documents. Except as provided in section 2.2(o), neither the Borrowers nor any
tenant or other person shall remove, demolish or alter any improvement now
existing or hereafter erected on any Property or any fixture, equipment,
machinery or appliance in or on any Property except when incident to the
replacement of fixtures, equipment, machinery and appliances with items of like
kind.
(o) ADDITIONS TO THE PROPERTIES. Except as otherwise
provided in the Mortgage Documents, the Borrowers shall have the right to
undertake any alteration, improvement, demolition, removal, or construction
(collectively, "ALTERATIONS") to the Properties without the prior consent of
Fannie Mae; provided, however, that in any case, no such Alteration shall be
made to any Property without the prior written consent of Fannie Mae if (i)
such Alteration could reasonably be expected to have a Material Adverse Effect
on the value of such Property or its operation as a multifamily housing
facility in substantially the same manner in which it is being operated on the
date of this Agreement, (ii) the construction of such Alteration could
reasonably be expected to result in interference to the occupancy of tenants of
such Property such that tenants in occupancy with respect to 5% or more of the
Leases would be permitted to terminate their Leases or to abate the payment of
all or any portion of their rent, or (iii) such Alteration will be completed in
more than twelve (12) months from the date of commencement or in the last year
of the term of this Agreement. Notwithstanding the foregoing, the Borrowers
must give prior written notice to Fannie Mae of any Borrower's intent to
construct Alterations with respect to such Property costing in excess of
$100,000; provided, however, that the preceding requirement shall not be
applicable to Alterations made, conducted or undertaken by the Borrowers as
part of the routine maintenance and repair of the Properties pursuant to
section 2.2(n) or as otherwise required by the Mortgage Documents.
(p) ERISA. The Borrowers shall at all times remain in
compliance in all material respects with all applicable provisions of ERISA and
similar requirements of the PBGC.
(q) TAXES. If any tax, assessment or Imposition (other
than a tax measured by gross or net income of, or an excise, franchise or gross
receipts tax imposed on, any Related Trustee or Fannie Mae (or any transferee
or assignee thereof, including a participation holder)) ("TAXES") is levied,
assessed or charged by the United States or any political subdivision or taxing
authority thereof or therein upon any of the Transaction Documents or the
obligations
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secured thereby, the interest of Fannie Mae or any Related Trustee in the
Properties, or Fannie Mae or any Related Trustee by reason of or as holder of
the Transaction Documents, the Borrowers shall pay all such Taxes to, for, or
on account of Fannie Mae or the applicable Related Trustee (or provide funds to
Fannie Mae or such Related Trustee for such payment, as the case may be) upon
receipt of written notice that such amounts have become due and payable (or
upon such amounts becoming due and payable if any Borrower has received prior
written notice thereof) and shall promptly furnish proof of such payment to
Fannie Mae or such Related Trustee, as applicable. In the event of passage of
any law or regulation permitting, authorizing or requiring such Taxes to be
levied, assessed or charged, which law or regulation in the opinion of counsel
to Fannie Mae or any Related Trustee may prohibit the Borrowers from paying the
Taxes to or for Fannie Mae or such Related Trustee, the Borrowers shall enter
into such further instruments as may be reasonably required by Fannie Mae and
permitted by Applicable Law to obligate the Borrowers to pay such Taxes.
(r) FURTHER ASSURANCES. The Borrowers, at the request of
Fannie Mae, shall execute and deliver and, if necessary, file or record such
statements, documents, agreements, UCC financing and continuation statements
and such other instruments and take such further action as Fannie Mae from time
to time may request as reasonably necessary, desirable or proper to carry out
more effectively the purposes of this Agreement or any of the other Transaction
Documents or to subject the Collateral to the lien and security interests of
the Mortgage Documents or to evidence, perfect or otherwise implement, to
assure the lien and security interests intended by the terms of the Transaction
Documents or in order to exercise or enforce its rights under the Transaction
Documents. In addition, the Borrowers shall cooperate with each of the Rating
Agencies in connection with any review of the transactions described in the
Transaction Documents which may be undertaken by either of the Rating Agencies
after the date of this Agreement.
(s) MONITORING COMPLIANCE. Upon the request of Servicer,
from time to time, and at any time certification of the matters set forth below
is provided to the Issuer, the Related Trustee or any other Governmental
Authority, the Borrowers shall promptly provide to Servicer the following:
(i) the Borrowers' certification of each Bond
Property's compliance with the rules qualifying such Bond Property for
federal tax exemption pursuant to Section 103 of the Code and the
regulations issued under such Section 103 and the requirements of the
Regulatory Agreement with respect to such Bond Property;
(ii) If any Property has received or receives a tax
credit allocation, Borrowers' certification of such Property's
compliance with the requirements of Section 42 of the Code and the
regulations issued under Section 42 and if the tax credits have not
yet been syndicated, Borrowers' report regarding progress in
syndicating the tax credit allocation until the syndication is
completed; and
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(iii) Such other documents, certificates and other
information as may be deemed necessary to enable Servicer to perform
the functions under the Servicing Agreement.
(t) CONTINUING DISCLOSURE. The Borrowers shall cooperate
with each Remarketing Agent in complying with all federal securities laws
relating to continuing disclosure that are applicable to the Bonds, including
Rule 15c2-12, promulgated by the Securities and Exchange Commission under the
Securities Exchange Related Act of 1934, as such rule may be amended from time
to time.
(u) LEASES. Each unit in each Property will be leased
pursuant to the form leases delivered to, and acceptable to, Fannie Mae and
Servicer, with no material modifications to such approved form lease, except as
disclosed in writing to Fannie Mae and Servicer. Without the prior written
consent of Fannie Mae, no Borrowers shall enter into any Lease for any unit in
any Property that (i) is for a term in excess of one year, including any
renewal or extension period unless such renewal or extension period is subject
to termination by such Borrower upon not more than thirty (30) days' written
notice, except to the extent that a longer term may be required under
Applicable Law, (ii) provides for prepayment of more than one month's rent,
(iii) is entered into in other than the ordinary course of Borrowers' business,
or (iv) contains any option or right to purchase, right of first refusal or any
other similar provisions, except such options or purchase rights that are
granted by Applicable Law.
3 NEGATIVE COVENANTS OF BORROWERS. The Borrowers enter into the
covenants and agreements with Fannie Mae set forth in this section 2.3. Each
covenant and agreement shall apply continuously during the term of this
Agreement:
(a) OTHER ACTIVITIES. No Borrower shall:
(i) either directly or indirectly sell,
transfer, exchange or otherwise dispose of any of its assets
except as permitted hereunder, by the Mortgages or the Cash
Management Agreement;
(ii) take any action or omit to take any
action that, if taken or omitted, would adversely affect the
exclusion of interest on the Bonds from gross income for
Federal income tax purposes pursuant to Section 103 of the
Code;
(iii) engage in any business or activity
other than in connection with the ownership, management and
operation of (A) with respect to Collateral Inc., each
Property other than the Avalon Ridge Property and the Avalon
Lea Property, (B) with respect to Chase Ridge Inc., the Avalon
Ridge Property, and (C) with respect to Chase Lea Inc. the
Avalon Lea Property;
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(iv) amend its respective Borrower
Organizational Documents in any manner inconsistent with this
Agreement or the other Transaction Documents without the prior
written consent of Fannie Mae;
(v) dissolve or liquidate in whole or in
part;
(vi) merge or consolidate with any
Person; or
(vii) use, or permit to be used, any
Property for any uses or purposes other than as a Multifamily
Residential Property.
(b) NO AMENDMENTS TO TRANSACTION DOCUMENTS. Unless
Fannie Mae shall otherwise consent in writing, no Borrower shall agree to any
amendment of, supplement to, or waiver, modification, or termination of, any of
the terms or provisions of any Transaction Document.
(c) COMPLIANCE WITH THE TRANSACTION DOCUMENTS. No
Borrower shall fail to comply with any provision of any the Transaction
Documents to which it is a party or by which it is bound.
(d) VALUE OF SECURITY. No Borrower shall take any action
which could reasonably be expected to have any Material Adverse Effect.
(e) ZONING. No Borrower shall initiate or consent to any
zoning reclassification of any Property or seek any variance under any zoning
ordinance or use or permit the use of any Property in any manner that could
result in the use becoming a nonconforming use under any zoning ordinance or
any other applicable land use law, rule or regulation.
(f) LIENS. No Borrower shall create, incur, assume or
suffer to exist any Lien on any Property or any part of any Property, except
the Permitted Liens;
(g) SALE. No Borrower shall sell, convey, transfer,
assign or otherwise relinquish any Property or any part of any Property without
the prior written consent of Fannie Mae (which consent may be granted or
withheld in Fannie Mae's discretion), or any interest in any Property, other
than (i) as may be permitted by the Mortgage Documents with respect to such
Property, or (ii) in accordance with the provisions of section 5.2 or section
5.3, or (iii) to enter into Leases for units in a Property to any tenant in the
ordinary course of business.
(h) USE OF PROCEEDS. The proceeds from the issuance and
sale of the Bonds shall not be used for any purpose other than the refinancing
of the Bond Properties.
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(i) INDEBTEDNESS. The Borrowers shall not incur or be
obligated at any time with respect to Indebtedness (other than the Mortgage
Loans and the Custodial Receipts Mortgage Notes) in excess of $100,000 in the
aggregate for all Borrowers.
(j) SINGLE-PURPOSE ENTITY. No Borrower shall cease at
any time during the term hereof to be a Single-Purpose entity.
(k) PRINCIPAL PLACE OF BUSINESS. No Borrower shall
change its principal place of business or the location of its books and
records, each as set forth in section 2.1(a), without first giving thirty (30)
days' prior written notice to Fannie Mae.
4 CERTAIN COVENANTS WITH RESPECT TO FLOATING RATE BOND
TRANSACTIONS.
With respect to each Floating Rate Bond Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:
(a) PREPAYMENT OF MORTGAGE LOANS IN FLOATING RATE BOND
TRANSACTIONS. If a Borrower elects, or is required, to prepay any Related
Mortgage Note in whole or in part, subject to and in accordance with the terms
and conditions of such Related Mortgage Note, the Borrowers shall be obligated
to pay all amounts, if any, due under or in connection with the Related Bonds
that will not have been paid as a result of the prepayment of such Related
Mortgage Note, including accrued interest on the Related Bonds to the date of
redemption (calculated at the Maximum Rate to the extent and for the period
that such Related Bonds bear interest at the Variable Rate), and the premium,
if any, payable to the applicable Bondholders by reason of such redemption,
until such Related Bonds have been redeemed in accordance with the Related Bond
Documents, together with and in addition to, any prepayment premium due
pursuant to the Related Mortgage Note. Notwithstanding anything to the
contrary contained in the Transaction Documents, the Borrowers shall not make a
voluntary prepayment of any Mortgage Loan in a Floating Rate Bond Transaction
that would result in a redemption of all or any part of any Related Bonds
pursuant to the Related Indenture unless (i) the Borrowers have deposited with
the Related Trustee on or prior to the date on which such Related Trustee will
call the applicable Related Bonds for redemption, all amounts required for such
redemption, (ii) the Borrowers have received the prior written consent of
Fannie Mae; provided that Fannie Mae shall not withhold its consent if Fannie
Mae determines that (A) such prepayment by the Borrowers is permitted by the
terms of the Related Mortgage, and (B) in light of such opinions of legal
counsel, opinions of certified public accountants that prepare the audited
financial statements of the Borrowers and Guarantor and such other similar
information and opinions as may be provided by the Borrowers to Fannie Mae, no
part of any payments made by the Borrowers prior to or concurrently with the
voluntary prepayment will likely result in an avoidance or any other recovery
or disgorgement pursuant to the Bankruptcy Code (including sections 544, 547,
549 or 550 thereof) or any other applicable bankruptcy or insolvency law which
would result in Fannie Mae having any liability under any Related Fannie Mae
Collateral Agreement, or the Borrowers provide cash collateral or makes other
arrangements acceptable to
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Fannie Mae in its discretion to ameliorate such risk of avoidance, recovery or
disgorgement, and (iii) with respect to the prepayment in part or in full
(other than a prepayment in connection with a mandatory application of
Insurance Proceeds or Condemnation Proceeds) of the Facility Amount prior to
the seventh (7th) anniversary of the Facility, Fannie Mae has received a
Prepayment Premium pursuant to the Related Mortgage Note.
(b) INTEREST RESERVE REQUIREMENT WITH RESPECT TO FLOATING
RATE BOND TRANSACTIONS. The Borrowers shall deposit with the Related Trustee
with respect to each Floating Rate Bond Transaction, on or before the date the
Related Mortgage Note is executed and delivered, for deposit into the Interest
Account with respect to each Floating Rate Bond Transaction, the Interest
Reserve Requirement for such Floating Rate Bond Transaction. If the Interest
Account with respect to a Floating Rate Bond Transaction is not otherwise
replenished to the Interest Reserve Requirement for such Floating Rate Bond
Transaction from the receipt of the monthly payments under the Related Mortgage
Note pursuant to the Related Indenture, the Borrowers shall promptly deposit
with the Related Trustee the amount necessary for amounts on deposit in such
Interest Account to equal the Interest Reserve Requirement for such Floating
Rate Bond Transaction.
(c) PRINCIPAL RESERVE FUND. The Borrowers agree that as
a condition to Fannie Mae's executing and delivering the Related Fannie Mae
Collateral Agreement, the Borrowers shall fund, and replenish, the applicable
Principal Reserve Fund with respect to each Floating Rate Bond Transaction as
and when required by the Related Mortgage Note and this Agreement. The
Borrowers acknowledge that the Related Mortgage Note for each Initial Bond
Property provides that the obligation to fund the applicable Principal Reserve
Fund shall commence on July 1, 2006, and that prior to such time, the Borrowers
shall not be required to fund the such Principal Reserve Fund; provided,
however, that, the commencement date of the Borrowers' obligation to fund the
Principal Reserve Fund relating to each New Bond Property entering the Fannie
Mae Credit Facility as a Floating Rate Bond Transaction, shall be determined by
Fannie Mae in its discretion. The Borrowers agree that they shall replenish
each Principal Reserve Fund by delivery to the Related Trustee the amount equal
to any loss from the investment of amounts on deposit in such Principal Reserve
Fund, as and when such loss is incurred and irrespective of the reason for such
loss. The Borrowers acknowledge and agree that amounts on deposit in the
Principal Reserve Fund with respect to each Mortgage Loan in a Floating Rate
Bond Transaction shall be applied toward the mandatory redemption of the
Related Bonds, and the corresponding reduction of amounts owed under the
Related Mortgage Note, as and to the extent provided in the Related Indenture.
The Borrowers further acknowledge and agree that, as provided in the Related
Mortgage Note, the Mortgage Loan with respect to any Floating Rate Bond
Transaction shall not be deemed to have been amortized by reason of deposits
into the Principal Reserve Fund with respect to such Mortgage Loan until such
deposits have been withdrawn from such Principal Reserve Fund and applied to
the redemption of the Related Bonds as provided in the Related Indenture. So
long as no Event of Default or no Potential Event of Default has occurred and
is continuing, investment income derived from amounts on deposit in the
Principal Reserve Funds shall be paid to the applicable Borrower by
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the Related Trustees to the extent and in the manner provided in the Related
Indenture. At the request of the Borrowers, Fannie Mae shall direct the
Related Trustee to apply funds in a particular Principal Reserve Fund to prepay
the principal amount of Related Bonds, if each of the following conditions are
met:
(i) no Event of Default has occurred and is continuing;
and
(ii) either (x) the Related Bonds are then bearing
interest at a Variable Rate, or (y) the Related Securities are then
bearing interest at a Reset Rate and the applicable Borrower has the
right under the Related Indenture to prepay the Related Bonds.
Upon the occurrence and during the continuance of an Event of Default or a
Potential Event of Default, Fannie Mae shall have the absolute right, in its
discretion, to apply the funds in the Principal Reserve Funds in accordance
with section 7.2(d).
(d) INTEREST RATE ADJUSTMENTS IN FLOATING RATE BOND
TRANSACTIONS. Fannie Mae and each of the Borrowers acknowledges and agrees
that the interest rate on any issue of Related Bonds in a Floating Rate Bond
Transaction may be adjusted to the Variable Rate or Reset Rate or converted to
the Fixed Rate, in each case as provided in, and subject to the terms and
conditions of, the Related Indenture and this Agreement. Notwithstanding the
foregoing, so long as the Related Fannie Mae Collateral Agreement remains in
effect and Fannie Mae has any obligations, direct or contingent, under such
Related Fannie Mae Collateral Agreement, no Borrower shall direct or cause the
interest rate on any Related Bonds to be converted to the Fixed Rate (from the
Variable Rate or the Reset Rate), to the Reset Rate (from the Variable Rate or
a prior Reset Rate) or to the Variable Rate (from the a Reset Rate) unless
Fannie Mae consents to such conversion. Fannie Mae will consent to such
conversion (and deliver written evidence of such consent to the Related Trustee
in accordance with the requirements of the Related Indenture), if:
(i) in the case of a conversion to the Fixed Rate, (A) no
Event of Default or Potential Event of Default has occurred and is
continuing, (B) such Borrower complies with the terms and conditions
of sections 3.2 and 4.2, (C) the Fixed Rate applicable to such Related
Bonds is equal to or less than the Hedge Rate, (D) such Borrower shall
have given Fannie Mae not less than sixty (60) days prior written
notice of its intent to convert to the Fixed Rate and (E) such
Borrower shall have given Fannie Mae not less than fifty (50) days
prior final written notice and confirmation of its election to convert
to the Fixed Rate; or
(ii) in the case of conversion to the Reset Rate, (A) no
Event of Default or Potential Event of Default has occurred and is
continuing, (B) such Borrower complies with the terms and conditions
of sections 3.2 and 4.2, (C) the Reset Rate on such Related Bonds is
equal to or less than the Hedge Rate, (D) such Borrower shall have
given Fannie Mae not less than sixty (60) days prior written notice of
its intent to convert to the Reset
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Rate and (E) such Borrower shall have given Fannie Mae not less than
fifty (50) days prior final written notice and confirmation of its
election to convert to the Reset Rate; or
(iii) in the case of conversion to the Variable Rate, (A)
no Event of Default or Potential Event of Default has occurred and is
continuing, (B) such Borrower complies with the terms and conditions
of sections 3.2 and 4.2, (C) such Borrower shall have given Fannie Mae
not less than sixty (60) days prior written notice of its intent to
convert to the Variable Rate and (D) such Borrower shall have given
Fannie Mae not less than fifty (50) days prior final written notice
and confirmation of its election to convert to the Variable Rate.
(e) REMOVAL OF REMARKETING AGENT. With respect to each
Floating Rate Bond Transaction, the Borrowers agree that (i) after the
occurrence of any Event of Default or (ii) if, at any time, Fannie Mae
determines that there is a basis in fact for the removal of the then existing
Remarketing Agent with respect to such Floating Rate Bond Transaction and the
designation of a new Remarketing Agent with respect to such Floating Rate Bond
Transaction, if Fannie Mae so directs, the Borrowers immediately shall take
such action as is required under the Related Remarketing Agreement to remove
the existing Remarketing Agent with respect to such Floating Rate Bond
Transaction and replace such Remarketing Agent, without interruption of
service, with a Remarketing Agent acceptable to Fannie Mae. The Borrowers
acknowledge and agree that any Remarketing Agent's failure to perform any of
its duties or obligations under or with respect to the Related Indenture or the
Related Remarketing Agreement, including, failure to give or deliver any notice
or information required under the Related Indenture or the Related Remarketing
Agreement, shall constitute sufficient basis in fact for such Remarketing
Agent's removal.
(f) CHANGES IN REMARKETING AGENT OR REMARKETING
AGREEMENT. The Borrowers agree that no Borrower will change any Remarketing
Agent, or appoint or engage any Person as a Remarketing Agent or change the
fees payable to any Remarketing Agent, without Fannie Mae's prior written
consent.
(g) ASSIGNMENT OF RIGHTS TO THE RELATED TRUSTEES. With
respect to each Floating Rate Bond Transaction, the Borrowers acknowledge and
agree that (i) the Related Trustee is the assignee of the applicable Issuer's
right, title and interest in and to the Bond Property Loan Documents with
respect to such Floating Rate Bond Transaction and certain rights as and to the
extent provided in the Assignment, (ii) Fannie Mae is the assignee of the
Mortgage Rights with respect to each Floating Rate Bond Transaction as and to
the extent provided in the Related Fannie Mae Collateral Agreement, and (iii)
by virtue of such Related Fannie Mae Collateral Agreement referred to in clause
(ii) above, Fannie Mae shall, as and to the extent provided in such Related
Fannie Mae Collateral Agreement, be entitled to exercise certain rights and
receive certain benefits which would otherwise be available to the Related
Trustee under the Bond Property Loan Documents with respect to such Floating
Rate Bond Transaction. The Borrowers further acknowledge and agree that Fannie
Mae has delegated or may delegate certain
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matters and functions related to or arising under the Bond Property Loan
Documents with respect to each Floating Rate Bond Transaction to Servicer, as
an independent contractor, pursuant to the Servicing Agreement.
5 CERTAIN COVENANTS WITH RESPECT TO FIXED RATE BOND
TRANSACTIONS.
With respect to each Fixed Rate Bond Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:
(a) DEBT SERVICE FUND REQUIREMENT WITH RESPECT TO FIXED
RATE BOND TRANSACTIONS. The Borrowers shall deposit with the Related Trustee
with respect to each Fixed Rate Bond Transaction, on or before the date the
Related Mortgage Note is executed and delivered, for deposit into the initial
debt service fund (or other similar fund required to be established in
connection with such Fixed Rate Bond Transaction) with respect to each Fixed
Rate Bond Transaction, the initial funding requirement required by the Rating
Agency for such Fixed Rate Bond Transaction, which requirement shall not be
less than one (1) month's payment of interest and principal, if any, on the
Related Mortgage Note.
(b) ASSIGNMENT OF MORTGAGE LOANS TO FANNIE MAE. With
respect to each Fixed Rate Bond Transaction, the Borrowers acknowledge and
agree that Fannie Mae is the assignee of the all of the Issuer's right, title
and interest in and to the Bond Property Loan Documents with respect to such
Fixed Rate Bond Transaction and as such, Fannie Mae shall be entitled to
exercise all rights and receive all benefits available to the owner and holder
of the Bond Property Loan Documents with respect to such Fixed Rate Bond
Transaction. The Borrowers further acknowledge and agree that Fannie Mae has
delegated or may delegate certain matters and functions related to or arising
under the Bond Property Loan Documents with respect to each Fixed Rate Bond
Transaction to Servicer, as an independent contractor, pursuant to the
Servicing Agreement.
6 CERTAIN COVENANTS WITH RESPECT TO CUSTODIAL RECEIPTS
TRANSACTIONS.
With respect to each Custodial Receipts Transaction, the
Borrowers agree and covenant with Fannie Mae that, at all times during the term
of this Agreement:
(a) LIMITATIONS ON CREDIT ENHANCEMENT OF THE CUSTODIAL
RECEIPTS TRANSACTIONS. The Borrowers shall use best efforts to commence, and
diligently pursue to completion, the implementation of the Permanent Chase Lea
Refunding Transaction and the Permanent Chase Ridge Refunding Transaction not
later than the Initial Chase Ridge/Chase Lea Conversion Date. Notwithstanding
anything to the contrary in this Agreement or any other Transaction Document:
(i) on or before the Initial Chase Ridge/Chase Lea
Conversion Date the Borrowers shall, with respect to each
Custodial Receipts Property, cause the
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implementation of either the Permanent Refunding Transaction
or the Interim Custodial Receipts Transaction; and
(ii) if the Borrowers shall have caused the
implementation of the Interim Custodial Receipts Transaction
with respect to either the Chase Ridge Bond Property or the
Chase Lea Bond Property, then the Borrowers shall use best
efforts to commence, and diligently pursue to completion, the
implementation of the Permanent Refunding Transaction with
respect to such Custodial Receipts Property not later than the
Final Chase Ridge/Chase Lea Conversion Date.
(b) CHASE LEA/CHASE RIDGE TERMINATION FEE.
(i) Subject to the limitations set forth in section 2.6(c) and
2.6(d) below, the Borrowers shall pay Fannie Mae the Chase Ridge
Termination Fee and the Chase Lea Termination Fee on the Initial Chase
Ridge/Chase Lea Conversion Date unless, with respect to each such
Custodial Receipts Property:
(A) the Permanent Refunding Transaction with
respect to such Custodial Receipts Property,
has been completed in accordance with the
requirements of sections 5.5(a), 5.5(b),
5.5(e) and 5.5(d); or
(B) the Interim Replacement Custodial Receipts
Transaction with respect to such Custodial
Receipts Property, has been completed in
accordance with the requirements of sections
5.5(a), 5.5(c), 5.5(d) and 5.5(e);
(ii) Subject to the limitations set forth in section 2.6(c)
and 2.6(d) below, the Borrowers shall be required to pay Fannie Mae
the Chase Ridge Termination Fee and the Chase Lea Termination Fee on
the Final Chase Ridge/Chase Lea Conversion Date unless, with respect
to each such Custodial Receipts Property:
(A) such Termination Fee was previously paid by
the Borrowers pursuant to subsection
2.6(b)(i) above; or
(B) the Permanent Refunding Transaction with
respect to such Custodial Receipts Property,
has been completed in accordance with the
requirements of sections 5.5(a), 5.5(b),
5.5(d) and 5.5(e).
(iii) In addition, notwithstanding the foregoing, but subject
to the limitations set forth in section 2.6(c) and 2.6(d) below, the
Borrowers shall pay to Fannie Mae the Chase Ridge Termination Fee
and/or the Chase Lea Termination Fee as of any date that the Borrowers
cause either such Custodial Receipts Property to be released from the
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Fannie Mae Credit Facility in accordance with section 5.3. or
otherwise cause redemption of the Related Custodial Receipts or the
termination of the Related Custodial Receipts Collateral Agreement
with respect to either such Custodial Receipts Property; provided,
however, that no such Termination Fee shall be payable in connection
with a redemption of Related Custodial Receipts that occurs in
connection with an extension of the Initial Chase Ridge/Chase Lea
Conversion Date in accordance with the terms of the definition of
Initial Chase Ridge/Chase Lea Conversion Date.
(iv) Each Termination Fee due and owing under this section
2.6(c) shall be payable by the Borrower to Servicer for remittance to
Fannie Mae within ten (10) Business Days of Borrowers' receipt of
written notice that such Termination Fee has become due and payable.
(c) CERTAIN WAIVERS OF CHASE LEA/CHASE RIDGE TERMINATION
FEE. Notwithstanding anything to the contrary contained herein:
(i) The Borrowers shall not be required to pay the Chase Ridge
Termination Fee on the Initial Chase Ridge/Chase Lea Conversion Date
if Fannie Mae determines in its reasonable discretion that the
Borrowers have satisfied their obligations under subsection 5.5(c)(ii)
and either:
(A) Fannie Mae is not permitted, under then Applicable
Law, to enter into the Interim Replacement Chase
Ridge Credit Enhancement; or
(B) the Interim Replacement Custodial Receipts
Transaction fails to occur because (w) a Person other
than any of the Borrowers requires material
modification of any of the terms, conditions or
documentation specified for the Interim Replacement
Chase Ridge Credit Enhancement in section 5.5, (x) as
a result of such material modification, Fannie Mae
determines that the conditions to its obligation to
provide such Interim Replacement Chase Ridge Credit
Enhancement have not been satisfied in accordance
with subsection 5.5, (y) the Borrowers make a written
request to Fannie Mae requesting that,
notwithstanding such material modification, Fannie
Mae proceed with the Interim Replacement Chase Ridge
Credit Enhancement, and (z) notwithstanding such
request, Fannie Mae determines not to provide the
Interim Replacement Chase Ridge Credit Enhancement.
(iii) The Borrowers shall not be required to pay the Chase Lea Termination
Fee on the Initial Chase Ridge/Chase Lea Conversion date if Fannie
Mae determines in its reasonable discretion that the Borrowers have
satisfied their obligations under subsection 5.5(c)(ii) and either:
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(A) Fannie Mae is not permitted, under then Applicable
Law, to enter into the Interim Replacement Chase Lea
Credit Enhancement; or
(B) such Interim Replacement Custodial Receipts
Transaction fails to occur because (w) a Person other
than any of the Borrowers requires material
modification of any of the terms, conditions or
documentation specified for the Interim Replacement
Chase Lea Credit Enhancement in section 5.5, (x) as a
result of such material modification, Fannie Mae
determines that the conditions to its obligation to
provide such Interim Replacement Chase Lea Credit
Enhancement have not been satisfied in accordance
with subsection 5.5, (y) the Borrowers make a written
request to Fannie Mae requesting that,
notwithstanding such material modification, Fannie
Mae proceed with the Interim Replacement Chase Lea
Credit Enhancement, and (z) notwithstanding such
request, Fannie Mae determines not to provide the
Interim Replacement Chase Lea Credit Enhancement.
(iv) In addition, the Borrowers shall not be required to pay
the Chase Ridge Termination Fee if Fannie Mae determines in its
reasonable discretion that the Borrowers have satisfied their
obligations under subsection 5.5(c)(ii) and either:
(A) Fannie Mae is not permitted, under then
Applicable Law, to enter into the Permanent
Chase Ridge Credit Enhancement; or
(B) the Permanent Chase Ridge Refunding
Transaction fails to occur because (w) a
Person other than any of the Borrowers
requires material modification of any of the
terms, conditions or documentation specified
for the Permanent Chase Ridge Credit
Enhancement in section 5.5, (x) as a result
of such material modification, Fannie Mae
determines that the conditions to its
obligation to provide such Permanent Chase
Ridge Credit Enhancement have not been
satisfied in accordance with subsection 5.5,
(y) the Borrowers make a written request to
Fannie Mae requesting that, notwithstanding
such material modification, Fannie Mae
proceed with the Permanent Chase Ridge Credit
Enhancement, and (z) notwithstanding such
request, Fannie Mae determines not to provide
the Permanent Chase Ridge Credit Enhancement.
(v) In addition, the Borrowers shall not be required to pay
the Chase Lea Termination Fee if Fannie Mae determines in its
reasonable discretion that the Borrowers have satisfied their
obligations under subsection 5.5(c)(ii) and either:
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(A) Fannie Mae is not permitted, under then
Applicable Law, to enter into the Permanent
Chase Lea Credit Enhancement; or
(B) the Permanent Chase Lea Refunding Transaction
fails to occur because (w) a Person other
than any of the Borrowers requires material
modification of any of the terms, conditions
or documentation specified for the Permanent
Chase Lea Refunding Transaction in section
5.5, (x) as a result of such material
modification, Fannie Mae determines that the
conditions to its obligation to provide such
Permanent Chase Lea Credit Enhancement have
not been satisfied in accordance with
subsection 5.5, (y) the Borrowers make a
written request to Fannie Mae requesting
that, notwithstanding such material
modification, Fannie Mae proceed with the
Permanent Chase Ridge Credit Enhancement, and
(z) notwithstanding such request, Fannie Mae
determines not to provide the Permanent Chase
Ridge Credit Enhancement.
(d) CERTAIN REDUCTIONS IN CHASE LEA/CHASE RIDGE
TERMINATION FEE. Notwithstanding anything to the contrary contained herein, if
(i) an Interim Replacement Custodial Receipts Transactions fails to occur on or
before the Initial Chase Ridge/Lea Chase Termination Date because a Person
other than any of the Borrowers requires material modification of any of the
terms, conditions or documentation specified for the Interim Replacement
Custodial Receipts Transactions in section 5.5(d), (ii) such material
modification is deemed unacceptable by the Borrowers and (iii) the Borrowers
provide Fannie Mae with written notice specifying such unacceptable material
modification (a "FAILED CUSTODIAL RECEIPTS REPLACEMENT"), then the Termination
Fee otherwise payable with respect to such Failed Custodial Receipts
Replacement shall be reduced and be payable as follows:
(A) if such Failed Custodial Receipts Replacement relates
to the Chase Ridge Bond Property, then the Chase
Ridge Termination Fee shall be reduced to $491,200.00
which amount shall be payable, at the Borrowers'
option, either immediately in a single lump-sum
payment or in sixteen (16) equal quarterly
installments of $30,700.00, which installments shall
be payable by the Borrowers commencing as of the
first day of the fiscal quarter immediately following
such Failed Custodial Receipts Replacement and on the
first day of each subsequent fiscal quarter until
paid in full; and
(B) if such Failed Custodial Receipts Replacement relates
to the Chase Lea Bond Property, then the Chase Ridge
Termination Fee shall be reduced to $308,800.00 which
amount shall be payable in sixteen (16) equal
quarterly installments of $19,300.00, which
installments shall be payable by the Borrowers
commencing as of the first day of the fiscal quarter
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immediately following such Failed Custodial Receipts
Replacement and on the first day of each subsequent
fiscal quarter until paid in full.
(e) ASSIGNMENT CERTAIN RIGHTS AND INTERESTS TO FANNIE
MAE. With respect to each Custodial Receipts Transaction, the Borrowers
acknowledge and agree that, pursuant to the terms of the Related Custodial
Receipts Collateral Agreements, Fannie Mae is (or has the right to become) the
assignee of all of Morgan's right, title and interest in and to the Related
Custodial Receipts Documents (other than the Custodial Receipts Guaranty) with
respect to such Custodial Receipts Transaction and as such, Fannie Mae shall be
entitled to exercise all rights and receive all benefits available to the owner
and holder of such Custodial Receipts Loan Documents. The Borrowers further
acknowledge and agree that:
(i) Collateral Inc. has pledged, assigned and granted
Fannie Mae a security interest in all of its residual interests in the
Custodial Receipts Bond Issues and certain other collateral pursuant
to the Custodial Receipts Bond Pledge Agreement;
(ii) Subject to its obligations under the Custodial
Receipts Agreement, Guarantor has pledged, assigned and granted Fannie
Mae a security interest in all of its right, title and interest in the
Custodial Receipts Bond Issues and certain other collateral pursuant
to the Custodial Receipts Bond Pledge Agreement, as additional
security for the Obligations, and that by virtue of such Custodial
Receipts Bond Pledge Agreement, Fannie Mae shall, as and to the extent
provided in such Custodial Receipts Bond Pledge Agreements, be
entitled to exercise certain rights and receive certain benefits, more
particularly set forth therein;
(iii) in accordance with and subject to the terms of the
Assumption and Direction Agreement, (A) Fannie Mae's consent shall be
required prior to any Borrower or Guarantor giving any directions to
Crestar Bank with respect to the Custodial Receipts Bond Issues, (B)
upon an Event of Default, Fannie Mae shall have the sole right to
direct Crestar Bank and (C) the Borrowers and Guarantor shall
cooperate in all respects with Fannie Mae in the giving of such notice
and direction; and
(iv) Fannie Mae has delegated or may delegate certain matters
and functions related to or arising under the Custodial Receipts
Documents to Servicer, as an independent contractor, pursuant to the
Servicing Agreement.
7 CERTAIN COVENANTS WITH RESPECT TO SALEM STATION PROJECT.
The Borrowers agree and covenant with Fannie Mae that, at all
times during the term of this Agreement:
(a) COMPLIANCE WITH SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT.
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The Borrowers shall comply in all material respects with all provisions of the
Salem Station Restrictive Covenants Agreement, including, all applicable
reporting requirements, and all rental limitations and restrictions.
(b) TERMINATION OF SALEM STATION RESTRICTIVE COVENANTS
AGREEMENT. Notwithstanding anything herein to the contrary, on or before April
1, 2002, the Borrowers shall use commercially reasonable efforts to cause the
Salem Station Restrictive Covenants Agreement to be fully satisfied and
discharged of record by obtaining appropriate release documentation from each
party-in-interest to the Salem Station Restrictive Covenants Agreement and
causing such release documentation to be recorded in the land records of
Spotsylvania County, Virginia. Satisfaction of the requirements of this
section 2.7(b) shall be evidenced by the Borrowers' delivery to Fannie Mae of
an endorsement to Fannie Mae's title insurance policy with respect to the Salem
Station Project, in form and substance acceptable to Fannie Mae, confirming
that the Salem Station Restrictive Covenants Agreement is no longer an
exception to the title insurance provided thereunder or evidence satisfactory
to Fannie Mae that the Borrowers have used commercially reasonable efforts to
cause the satisfaction and release of such Salem Station Restrictive Covenants
Agreement.
8 CERTAIN COVENANTS WITH RESPECT TO AVALON POINTE PROJECT.
The Borrowers agree and covenant with Fannie Mae that, at all
times during the term of this Agreement:
(a) COMPLIANCE WITH AVALON POINTE RESTRICTIVE COVENANTS
AGREEMENT. The Borrowers shall comply in all material respects with all
provisions of the Avalon Pointe Restrictive Covenants Agreement, including, all
applicable reporting requirements, and all rental limitations and restrictions.
(b) TERMINATION OF AVALON POINTE RESTRICTIVE COVENANTS
AGREEMENT. Notwithstanding anything herein to the contrary, the Borrowers
shall use commercially reasonable efforts to cause the Avalon Pointe
Restrictive Covenants Agreement to be fully satisfied and discharged of record
as soon as reasonably possible by obtaining appropriate release documentation
from each party-in-interest to the Avalon Pointe Restrictive Covenants
Agreement and causing such release documentation to be recorded in the land
records of Stafford County, Virginia. Satisfaction of the requirements of this
section 2.8(b) shall be evidenced by the Borrowers' delivery to Fannie Mae of
an endorsement to Fannie Mae's title insurance policy with respect to the
Avalon Pointe Project, in form and substance acceptable to Fannie Mae,
confirming that the Avalon Pointe Restrictive Covenants Agreement is no longer
an exception to the title insurance provided thereunder or evidence
satisfactory to Fannie Mae that the Borrowers have used commercially reasonable
efforts to cause the satisfaction and release of such Avalon Pointe Restrictive
Covenants Agreement.
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III.
FINANCIAL COVENANTS; INTEREST RATE PROTECTION;
CASH MANAGEMENT SYSTEM
1 BORROWERS' FINANCIAL COVENANTS.
(a) FINANCIAL COVENANTS WITH RESPECT TO UNHEDGED BONDS. With
respect to each issue of Unhedged Bonds, the Borrowers shall not be required to
comply with the interest rate protection provisions set forth in section 3.2 of
this Agreement if Fannie Mae determines, in its discretion, that as of each
Determination Date all of the following conditions are satisfied (the "HEDGE
TESTS"):
(i) no Event of Default or Potential Event of Default
exists as of such Determination Date;
(ii) the Aggregate Loan to Value Ratio as of such
Determination Date shall be equal to or less than the Maximum LTV
Percentage;
(iii) the Aggregate Debt Service Coverage Ratio on a
combined basis for the twelve (12) month period ending within sixty
(60) days of the date this test is applied shall equal or exceed the
Minimum DSC Ratio.
The Borrowers shall deliver to Servicer all information necessary to calculate
the Hedge Tests at least sixty (60) days prior to each Determination Date. If
Fannie Mae determines that any of the Hedge Tests set forth in clauses (i)
through (iii) above are not satisfied as of any Determination Date (a "HEDGE
TEST FAILURE"), the Borrowers shall be required, within ten (10) Business Days
of Borrowers' receipt of notice (a "HEDGE TEST NOTICE") from Fannie Mae or
Servicer specifying the Hedge Test Failure, to obtain a Hedge satisfying all of
the requirements of section 3.2 of this Agreement for each of the Mortgage
Loans with respect to Unhedged Bonds; provided, however, that if such Hedge
Test Failure consists of a failure to satisfy either the loan to value test set
forth in clause (ii) above and/or the debt service coverage test set forth in
clause (iii) above, the Borrowers may cure such Hedge Test Failure by providing
Fannie Mae with Shortfall Cash Collateral in an amount at least equal to the
amount by which the Bonds would have to be theoretically reduced in order for
the Borrowers to satisfy such Hedge Tests. Such Shortfall Cash Collateral
shall be released by Fannie Mae if and to the extent that Fannie Mae determines
on any subsequent annual Determination Date that the Hedge Tests are satisfied
without including such Shortfall Cash Collateral. If Fannie Mae or the
Servicer is not able to or does not perform the Hedge Tests on any
Determination Date because the Borrowers have failed to provide the necessary
information at least sixty (60) days prior to such Determination Date, then a
Hedge Test Failure shall be deemed to have occurred and the Borrowers shall be
required, within ten (10) Business Days of their receipt of a Hedge Test Notice
from Fannie Mae or
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Servicer, to obtain a Hedge satisfying all of the requirements of section 3.2
of this Agreement for each of the Mortgage Loans with respect to Unhedged
Bonds.
(b) FINANCIAL COVENANTS WITH RESPECT TO CASH MANAGEMENT
SYSTEM. Prior to the occurrence of a Cash Management Triggering Event or a
Lock-Box Triggering Event, the Borrowers may collect the Gross Cash Flow from
all of the Properties directly from tenants and other Persons obligated to pay
such Gross Cash Flow. A "CASH MANAGEMENT TRIGGERING EVENT" shall have occurred
if, as of any Determination Date, the Aggregate Debt Service Coverage Ratio (as
determined by Fannie Mae on a combined basis for the twelve (12) month period
ending within sixty (60) days of the date this test is applied), including any
Shortfall Cash Collateral or Alternative DSC Shortfall Collateral previously
pledged by the Borrowers in accordance with section 3.1(c), falls below 1.45:1
(the "CASH MANAGEMENT TEST"). A "LOCK-BOX TRIGGERING EVENT" shall have
occurred if, as of any Determination Date, the Aggregate Debt Service Coverage
Ratio (as determined by Fannie Mae on a combined basis for the twelve (12)
month period ending within sixty (60) days of the date this test is applied),
including any Shortfall Cash Collateral or Alternative DSC Shortfall Collateral
previously pledged by the Borrowers in accordance with section 3.1(c), falls
below 1.25:1 (the "LOCK-BOX TEST"). Upon the occurrence of:
(i) a Cash Management Triggering Event, and at all times
thereafter but subject to section 3.1(c) below, the Borrowers shall
cause the Gross Cash Flow from all of the Properties to be deposited
into the Cash Management Account in accordance with the terms of the
Cash Management Agreement, which shall be entered into between the
Borrowers and Fannie Mae within ten (10) Business Days of Borrowers'
receipt of notice (a "CASH MANAGEMENT NOTICE") from Fannie Mae or
Servicer specifying that a Cash Management Triggering Event has
occurred. The Borrowers acknowledge and agree that the Cash
Management Agreement imposes certain requirements and restrictions
upon Borrowers' rights, duties and obligations with respect to the
Gross Cash Flow of the Properties, including provisions requiring: (A)
the Cash Management Account to be established by the Borrowers in
Fannie Mae's name and under Fannie Mae's sole dominion and control;
(B) the Borrowers to grant Fannie Mae a perfected, first priority
security interest in and to the Cash Management Account and all of the
Cash Management System Collateral as security for Borrowers' payment
and performance of the Obligations; (C) that so long as no Event of
Default has occurred, Fannie Mae shall cause the Gross Cash Flow to be
withdrawn from the Cash Management Account on a daily basis and
transferred to an account established and controlled by Borrowers; and
(D) that upon the occurrence of an Event of Default, Fannie Mae shall
have the right to cancel all future transfers from the Cash Management
Account and to apply all funds deposited into the Cash Management
Account in payment of the outstanding Obligations of Borrowers; and
(ii) a Lock-Box Triggering Event and at all times thereafter,
the Borrowers shall cause all tenants of all of the Properties to make
rent payments directly to the financial
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institution or institutions at which the Cash Management Account is
located and otherwise cause the Gross Cash Flow from all of the
Properties to be deposited directly into the Cash Management Account
in accordance with the terms of the Cash Management Agreement, which
shall be entered into between the Borrowers and Fannie Mae within five
(5) Business Days of Borrowers' receipt of notice (a "LOCK-BOX
NOTICE") from Fannie Mae or Servicer specifying that a Lock-Box
Triggering Event has occurred. Upon and at all times following a
Lock-Box Triggering Event, distributions from the Cash Management
Account shall be made only after the payment of debt service and such
other amounts as specified in the Cash Management Agreement.
The Borrowers shall deliver to Servicer all information necessary to calculate
the Cash Management Test and the Lock-Box Test at least sixty (60) days prior
to each Determination Date. If Fannie Mae or the Servicer is not able to or
does not perform the Cash Management Test or the Lock-Box Test on any
Determination Date because the Borrowers have failed to provide the necessary
information at least sixty (60) days prior to such Determination Date, then a
Lock-Box Triggering Event shall be deemed to have occurred and the Borrowers
shall be required to cause all tenants of all of the Properties to make rent
payments directly to the financial institution or institutions at which the
Cash Management Account is located and otherwise cause the Gross Cash Flow from
all of the Properties to be deposited directly into the Cash Management Account
in accordance with the terms of the Cash Management Agreement, which shall be
entered into between the Borrowers and Fannie Mae within five (5) Business Days
of Borrowers' receipt of a Lock-Box Notice from Fannie Mae or Servicer. In
addition, within thirty (30) days following the occurrence of a Cash Management
Triggering Event or a Lock-Box Triggering Event and in either case, execution
and delivery of the Cash Management Agreement, the Borrowers shall deliver or
cause to be delivered to Fannie Mae, one or more opinions, in form and
substance and delivered by counsel satisfactory to Fannie Mae in its
discretion, confirming that upon (A) creation of the Cash Management Account,
(B) delivery and acknowledgement of the "RESTRICTED ACCOUNT LETTER" (as defined
in the Cash Management Agreement) by the depository with respect to such Cash
Management Account, and (C) filing of the financing statements in accordance
with the requirements of the Cash Management Agreement, Fannie Mae shall have a
valid and perfected security interest in the Cash Management Account under the
laws of the state in which such Cash Management Account is located.
(c) BORROWERS' RIGHT TO POST ADDITIONAL COLLATERAL. Upon
their receipt of a Cash Management Notice, the Borrowers shall be entitled to
post additional collateral in the form of either (i) Shortfall Cash Collateral
in an amount at least equal to the difference between (x) the Net Operating
Income of all Properties as determined by Fannie Mae on the Determination Date
and (y) the actual amount of Net Operating Income required to satisfy the Cash
Management Test (such difference, the "CASH MANAGEMENT TEST SHORTFALL") or (ii)
an Additional Mortgaged Property ("ALTERNATIVE DSC SHORTFALL COLLATERAL")
pledged as collateral for the Fannie Mae Credit Facility in accordance with
section 5.4, provided, that such Alternative DSC Shortfall Collateral is
acceptable to Fannie Mae in its discretion and has annual Net Operating Income,
as
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determined by Fannie Mae in its discretion, that is at least equal to the Cash
Management Test Shortfall. Such Shortfall Cash Collateral or Alternative DSC
Shortfall Collateral shall be released by Fannie Mae if and to the extent that
Fannie Mae determines on any subsequent annual Determination Date that the Cash
Management Test is satisfied without including such Shortfall Cash Collateral
or Alternative DSC Shortfall Collateral.
(d) CASH MANAGEMENT SYSTEM TAKE-OUT. The Borrowers and
Fannie Mae acknowledge and agree that following the occurrence of (i) a
Lock-Box Triggering Event or a Cash Management Triggering Event and (ii)
implementation of the cash management system as contemplated under the Cash
Management Agreement, Fannie Mae will agree to discontinue such cash management
system and terminate the Cash Management Agreement if Fannie Mae determines in
its discretion that as of any subsequent Determination Date (A) no Event of
Default or Potential Event of Default has occurred and is continuing and (B)
the Aggregate Debt Service Coverage Ratio (as determined by Fannie Mae on a
combined basis for the thirty-six (36) month period ending within sixty (60)
days of the date this test is applied), including any Shortfall Cash Collateral
or Alternative DSC Shortfall Collateral previously pledged by the Borrowers in
accordance with section 3.1(c), was equal to or in excess of 1.45:1.
(e) COSTS AND EXPENSES OF FINANCIAL TESTS. In each instance,
the Borrowers shall pay all of Fannie Mae's and Servicer's costs and expenses
(including reasonable legal fees and expenses, but excluding the internal
overhead expenses of Fannie Mae and Servicer, such as salaries and other
compensation of employees) incurred by Fannie Mae or Servicer in determining
whether the Hedge Test, the Cash Management Test or the Lock-Box Test have been
satisfied.
2 INTEREST RATE PROTECTION.
Subject to the limitations in section 3.1(a) applicable to the
Unhedged Bonds, the terms, conditions and provisions of this section 3.2 shall
apply to each issue of Related Bonds in a Floating Rate Bond Transaction.
(a) INTEREST RATE MODES. To protect against fluctuations
in interest rates no Related Bonds shall initially bear interest at or be
converted to: (i) the Fixed Rate unless the Fixed Rate applicable to such
Related Bonds is equal to or less than the Hedge Rate; (ii) the Reset Rate
unless (A) the Reset Rate applicable to such Related Bonds is equal to or less
than the Hedge Rate, and (B) the Reset Period with respect to such Related
Bonds is equal to or in excess of the Required Hedge Term, or such Reset Period
is less than the Required Hedge Term and the Borrowers shall obtain and
maintain at all times during such Reset Period a "forward" Swap or Cap in
accordance with section 3.2(c); or (iii) the Variable Rate unless the Borrowers
shall obtain, and maintain at all times during which the Related Bonds bear
interest at such Variable Rate, a Hedge in accordance with this section 3.2.
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(b) VARIABLE RATE HEDGE REQUIREMENTS. If an issue of
Related Bonds is issued bearing interest at the Variable Rate, a Hedge must be
in place on the Bond Transaction Closing Date with respect to such issue for a
period of time equal to or in excess of the Required Hedge Term. Effective not
later than the last day of any Hedge Period, or the last day of any other
period that the Variable Rate and a Hedge are in effect, or the last day of any
Reset Period where the Related Bonds will subsequently bear interest at the
Variable Rate, the Borrowers shall either (i) secure a new Hedge for a period
of time equal to or in excess of the Required Hedge Term, (ii) adjust the
Related Bonds to a Reset Rate equal to or less than the Hedge Rate for a period
equal to or greater than the Subsequent Hedge Period, or (iii) convert the
Related Bonds to a Fixed Rate equal to or less than the Hedge Rate. Any
adjustment or conversion under the preceding clauses (ii) or (iii) shall be in
accordance with the Related Bond Documents and the related Bond Property Loan
Documents.
(c) RESET RATE HEDGE REQUIREMENTS. Notwithstanding
anything herein to the contrary, any Reset Period may be for a period less than
the Required Hedge Term if, prior to the commencement of such Reset Period, the
Borrowers shall obtain a "forward" Swap or Cap that: (i) has an initial
"calculation period" that begins on the date that such Reset Period ends, and
that ends on the date that is the last day of the Required Hedge Term; (ii) if
a "forward" Cap, has been fully paid for by Borrowers, and if a "forward" Swap,
is not subject to any unpaid fees or expenses; and (ii) otherwise complies with
the requirements of this section 3.2.
(d) GENERAL HEDGE TERMS AND CONDITIONS. Each Hedge
shall be (i) obtained on terms and conditions approved by Fannie Mae in its
discretion, (ii) evidenced and governed by Hedge Documents in form and
substance acceptable to Fannie Mae in its discretion and (iii) with a
counterparty acceptable to Fannie Mae in its discretion (a "COUNTERPARTY").
Except as provided in section 3.2(e), if any Hedge required under this
Agreement constitutes a Swap, such Swap shall provide for a fixed rate of
interest equal to or less than the Hedge Rate, and if any Hedge required under
this Agreement constitutes a Cap, such Cap shall require the Counterparty with
respect thereto to make interest payments equal to the amount by which the
notional interest rate payable under the terms of the Hedge Documents with
respect to such Cap exceeds the Hedge Rate.
(e) SPECIAL HEDGE TERMS AND CONDITIONS. If the
Borrowers are unable to obtain a Hedge with a fixed rate of interest (with
respect to a Swap) or a notional interest rate (with respect to a Cap) that is
equal to or less than the Hedge Rate, the Borrowers may obtain a Hedge (a
"SHORTFALL HEDGE") at an interest rate in excess of the Hedge Rate if the
Borrowers provide Fannie Mae with Shortfall Cash Collateral in an amount at
least equal to the aggregate amount of all interest that would accrue on the
initial notional principal amount of such Shortfall Hedge at an assumed
interest rate equal to the difference between the interest rate with respect to
such Shortfall Hedge and the Hedge Rate for the full term of such Shortfall
Hedge. Such Shortfall Cash Collateral shall be released by Fannie Mae upon the
expiration of the Hedge Period with respect to the Shortfall Hedge, provided,
however, that if the Related Bonds will bear interest at the Variable Rate or
in a Reset Period of less than the Required Hedge Term,
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prior to any release of such Shortfall Cash Collateral, the Borrowers shall
have obtained a new Hedge with respect to such Related Bonds satisfying the
requirements of this section 3.2.
(f) HEDGE PAYMENT TERMS. Under each Swap arrangement,
the Counterparty shall pay a rate based on the PSA Municipal Swap Index (as
defined below) and the Borrowers shall pay a fixed rate to the Counterparty, in
each case based on the notional amount of the Swap. If the PSA Municipal Swap
Index is not published on any reset date under the Swap, the Counterparty must
determine an appropriate index as a substitute for the PSA Municipal Swap Index
on each such reset date. The index so determined shall equal the prevailing
rate determined by the Counterparty for bonds that are rated in the highest
short-term rating category by the Rating Agencies in respect of issuers of not
less than five (5) "high grade" component issuers selected by the Counterparty
which shall include, without limitation, issuers of general obligation bonds,
and that are subject to tender by holders thereof for purchase on not more than
seven (7) days notice and the interest on which is (i) variable, determined on
a weekly basis, (ii) excludable from gross income for federal income tax
purposes, and (iii) not subject to a "minimum tax" or similar tax. The PSA
Municipal Swap index rate is the rate determined on the basis of an index based
upon the weekly interest rate resets of tax-exempt variable rate issues
included in a database maintained by Municipal Market Data which meet specific
criteria established by the Public Securities Association.
(g) SECURITY INTEREST IN HEDGE PAYMENTS. Fannie Mae
shall be granted an enforceable, perfected, first priority lien on and security
interest in each Hedge, payments due under the Hedge (including scheduled and
termination payments) and each Custodial Account (as defined below) in order to
secure Borrowers' obligations to Fannie Mae under this Agreement pursuant to a
Hedge Security Agreement to be delivered by the Borrowers to Fannie Mae no
later than the commencement date of each Hedge Period with respect to each
Hedge required to be obtained under the terms of this Agreement. Pursuant to
the terms of the Hedge Security Agreement with respect to each Hedge, the
Counterparty with respect to such Hedge shall make all payments under such
Hedge (including any Termination Payments due from such Counterparty upon
termination of such Hedge) directly to a custodial account (the "CUSTODIAL
ACCOUNT") designated by Fannie Mae pursuant to such Hedge Security Agreement.
As provided in the applicable Hedge Security Agreement, each Custodial Account
with respect to a Swap shall be established in Fannie Mae's name and each
Custodial Account with respect to a Cap shall be established in the name of the
Related Trustee.
(h) CHANGE IN HEDGE. The Borrowers may change the type
of Hedge (i.e., from a Swap to a Cap or from a Cap to a Swap) which is in place
at any time with respect to the applicable Related Bonds so long as the
replacement Hedge and the new Counterparty complies with the terms of this
Agreement, including any consent or approval rights.
(i) TERMINATION. The Borrowers shall not terminate any
existing Hedge unless (i) either (x) the Borrowers shall have obtained Fannie
Mae's prior written consent to such termination, or (y) no Event of Default or
Potential Event of Default then exists and after such
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termination the Borrowers will be in compliance with the requirements under
this Agreement relating to Hedges, and (ii) the Borrowers shall have paid all
"breakage" and termination fees (collectively, "TERMINATION PAYMENTS") due
under the applicable Hedge Documents.
(j) PERFORMANCE UNDER HEDGE DOCUMENTS. The Borrowers
agree to comply fully with, and to pay and otherwise perform when due, its
obligations under all applicable Hedge Documents and all other agreements
evidencing, governing and/or securing any Hedge arrangement contemplated under
this section 3.2; provided, however, that the Borrowers shall not exercise
without Fannie Mae's prior written consent, and shall exercise at Fannie Mae's
direction, any rights or remedies under any Hedge Documents, including, if any
event of default then exists under the applicable Hedge Documents, the right of
termination. Notwithstanding anything herein to the contrary, Fannie Mae shall
not have any liability, responsibility, obligation or accountability for the
performance, payment or remittance of any of Borrowers' obligations or a
Counterparty's obligations under any Hedge or Hedge Document.
(k) FANNIE MAE RIGHT TO CONVERT TO RESET RATE, FIXED
RATE. The Borrowers shall with respect to each issue of Related Bonds, at
least seventy (70) days prior to the expiration date of each Hedge Period, give
notice, and provide evidence satisfactory, to Fannie Mae that the Borrowers
will either (i) secure a new Hedge with respect to such Related Bonds, or (ii)
adjust such Related Bonds to a Reset Rate for a period not shorter than five
(5) years, or (iii) convert such Related Bonds to the Fixed Rate, in each case
in accordance with this section 3.2. If Fannie Mae determines in its
discretion upon receipt of Borrowers' notice required pursuant to the preceding
sentence that additional evidence substantiating Borrowers' election is
necessary, Fannie Mae shall request such additional evidence within ten (10)
Business Days of its receipt of Borrowers' notice and the Borrowers shall
provide such additional evidence within five (5) Business Days of its receipt
of such request. If the Borrowers fail to timely provide the foregoing notice
and/or satisfactory evidence, Fannie Mae is hereby granted the right to direct
on behalf of the Borrowers (and the Borrowers hereby appoint Fannie Mae as
Borrowers' attorney-in-fact, with full authority in the place and stead of the
Borrowers, to make such direction, which power-of-attorney shall be irrevocable
and deemed coupled with an interest) that the interest rate on such Related
Bonds be (x) adjusted to a Reset Rate pursuant to the Related Indenture, (y)
converted to a Fixed Rate pursuant to the Related Indenture, or (z) adjusted
to, or remain at, the Weekly Variable Rate pursuant to the Related Indenture,
without a Hedge being in place (without waiving any right to declare an Event
of Default under this Agreement because of Borrowers' failure to comply with
the requirements of this section 3.2). Fannie Mae shall have the right at any
time to revoke any prior direction it may give in connection with any proposed
adjustment or conversion of the interest rate on any issue of Related Bonds as
contemplated above in this section 3.2 without waiving any of its rights under
this Agreement. A copy of any such direction or revocation of a direction
shall be given to the Borrowers promptly after it is issued. Fannie Mae shall
have the further right, in its discretion, to take no action upon Borrowers'
failure to provide timely notice and/or evidence as required by this section
3.2 or otherwise to comply with this section 3.2, without waiving any of its
rights under this Agreement.
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IV.
FANNIE MAE REIMBURSEMENT; FEES; INDEMNIFICATION
1 REIMBURSEMENT OBLIGATIONS UNDER FANNIE MAE CREDIT ENHANCEMENT
INSTRUMENTS; POTENTIAL EVENT OF DEFAULT.
(a) REIMBURSEMENT OBLIGATIONS UNDER FANNIE MAE CREDIT
ENHANCEMENT INSTRUMENTS. The Borrowers unconditionally promise and agree that:
(i) Advances other than for Purchased Bonds. By
2:00 p.m. Washington, D.C. time on each date on which Fannie Mae shall
have provided an Advance (other than an Advance with respect to
Related Purchased Bonds), the Borrowers shall, without notice or
demand, pay Servicer for remittance to Fannie Mae, an amount equal to
the amount of such Advance;
(ii) Withdrawals other than for Purchased Bonds.
After first paying all amounts payable pursuant to subsection (i)
above, by 2:00 p.m., Washington, D.C. time on each date on which the
Related Trustee with respect to any Related Bonds shall have made a
Withdrawal (other than a Withdrawal with respect to Related Purchased
Bonds), the Borrowers shall, without notice or demand, pay Servicer,
for remittance to such Related Trustee for deposit into the Principal
Reserve Fund with respect to such Related Bonds, an amount equal to
the amount of such Withdrawal;
(iii) Advances With Respect to Related Purchased
Bonds. In reimbursement for an Advance with respect to Related
Purchased Bonds, by 2:00 p.m. Washington, D.C. time on (A) the
effective date of any Alternate Credit Facility or (B) the first to
occur of the date (1) on which the Related Purchased Bonds purchased
with such Advance are (x) remarketed by the Remarketing Agent with
respect to such Related Bonds and the proceeds of the remarketing are
delivered to the Related Trustee or the Tender Agent or (y) redeemed
or otherwise paid in full and cancelled or (2) on which the Related
Fannie Mae Collateral Agreement either terminates in full or
terminates as a liquidity facility for the Related Bonds or (3) which
is ninety (90) days following such Advance, the Borrowers shall,
without notice or demand, pay Servicer for remittance to Fannie Mae,
an amount equal to the amount of such Advance;
(iv) Withdrawals With Respect to Related Purchased
Bonds. In reimbursement for a Withdrawal with respect to Related
Purchased Bonds, by 2:00 p.m. Washington, D.C. time on (A) the
effective date of any Alternate Credit Facility or (B) the first to
occur of the date (1) on which the Related Purchased Bonds purchased
with such Withdrawal are (x) remarketed by the Remarketing Agent with
respect to such Related Bonds and the proceeds of the remarketing are
delivered to the Related Trustee
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or the Tender Agent or (y) redeemed or otherwise paid in full and
cancelled or (2) on which the Related Fannie Mae Collateral Agreement
either terminates in full or terminates as a liquidity facility for
the Related Bonds or (3) which is ninety (90) days following such
Withdrawal, the Borrowers shall, without notice or demand, pay
Servicer, for remittance to the Related Trustee for deposit into the
Principal Reserve Fund with respect to the Related Bonds, an amount
equal to the amount of such Withdrawal; and
(v) Activity Fee. The Borrowers shall, without
notice or demand, pay Servicer for remittance to Fannie Mae the
Activity Fee, pursuant to section 4.4(b) hereof, with respect to the
amount of all Advances and Withdrawals until such amounts have been
fully and completely paid, provided, however, with respect to Advances
made to purchase Related Purchased Bonds, the Activity Fee shall be
due and payable on the first Business Day of each month and on the
date such Advance is reimbursed in full.
(b) CREDITS RELATING TO REMARKETING PROCEEDS AND THE
CANCELLATION OF PURCHASED BONDS. Borrowers' obligation to reimburse Fannie Mae
for amounts described in clauses (iii), (iv) and (v) of section 4.1(a) to the
extent Advances relate to Related Purchased Bonds shall be reduced as and to
the extent that remarketing proceeds become available and are applied to such
reimbursement and/or replenishment. In addition, the obligation to replenish a
Withdrawal which was used to purchase Related Purchased Bonds shall be
satisfied upon the date such Related Purchased Bonds are cancelled.
(c) FUNDS DEEMED ADVANCED UNDER RELATED FANNIE MAE CREDIT
ENHANCEMENT INSTRUMENT. The Borrowers and Fannie Mae acknowledge and agree
that any reference in this Agreement to payments made under any Related Fannie
Mae Credit Enhancement Instrument or to the provision by Fannie Mae of funds
under any Related Fannie Mae Credit Enhancement Instrument (or words of similar
import) shall, for all purposes under this Agreement, including Borrowers'
obligation to reimburse Fannie Mae and to pay the Activity Fee, be construed to
refer, in addition, to any and all funds that, pursuant to any written
agreement between the Servicer and Fannie Mae, are advanced by the Servicer or
which otherwise would have been required to be advanced by Fannie Mae under any
Related Fannie Mae Credit Enhancement Instrument but for the advance of the
Servicer. No agreement between the Servicer and Fannie Mae pursuant to which
the Servicer may advance funds on behalf of Fannie Mae shall be construed to
create a guaranty or other surety obligation by the Servicer with respect to
the Obligations.
2 COSTS, FEES AND EXPENSES.
In addition to Borrowers' obligations set forth in section 4.1
and in the other Transaction Documents, the Borrowers hereby agree absolutely
and unconditionally to pay, or cause to be paid, to Fannie Mae or Servicer, as
the case may be, the following:
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(a) any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae or Servicer may pay or incur in connection
with any payment under any Related Fannie Mae Credit Enhancement Instrument,
including payments of any fees and charges in connection with any accounts
established to facilitate payments under any Related Fannie Mae Credit
Enhancement Instrument, or the performance of Fannie Mae's obligations under
any Related Fannie Mae Credit Enhancement Instrument;
(b) any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae may pay or incur in connection with the
approval and documentation of any Hedge arrangement required under the terms of
this Agreement;
(c) any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) which Fannie Mae may pay or incur following and in
connection with a Cash Management Triggering Event or a Lock-Box Triggering
Event, including those paid or incurred in the preparation, execution, delivery
or approval of the Cash Management Account, any Cash Management Notice, any
Lock-Box Notice or the grant or perfection of Fannie Mae's security interest in
and to any Shortfall Collateral or Alternative DSC Shortfall Collateral;
(d) the amount of any fees, costs, or charges or expenses
(including the reasonable fees and expenses of attorneys, accountants and other
experts) incurred by Fannie Mae or Servicer in connection with the
administration or enforcement of, or preservation of rights or remedies under,
this Agreement or any of the other Transaction Documents or in connection with
the foreclosure upon, sale of or other disposition of any security granted
pursuant to the Transaction Documents;
(e) any and all reasonable fees, costs, charges and
expenses (including the reasonable fees and expenses of attorneys, accountants
and other experts) incurred by Fannie Mae or Servicer in connection with the
disbursement or application of insurance or condemnation awards, proceeds,
payments or damages to the costs of restoration and repair of any Property;
(f) any payments or advances made by Fannie Mae or
Servicer on behalf of the Borrowers pursuant to any of the Transaction
Documents;
(g) all reasonable expenses incurred in connection with
or related to the execution and delivery of the Related Fannie Mae Credit
Enhancement Instruments, the sale of the Bonds or the Obligations and the
preparation and review of this Agreement and the other Transaction Documents
and the consummation of the transactions contemplated hereby and thereby,
including fees payable to any agencies rating the Bonds or the Obligations from
which ratings were requested and received, any tax or governmental charge
imposed in connection with
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the execution and delivery of the Related Fannie Mae Credit Enhancement
Instruments and the reasonable fees and disbursements of Fannie Mae's and
Servicer's counsel and accountants, including fees and expenses relating to any
(i) amendments, consents or waivers to this Agreement or any of the other
Transaction Documents (whether or not any such amendments, consents or waivers
are entered into), (ii) requests to evaluate any substitute or additional
collateral, (iii) proposed Hedge arrangement, (iv) proposed or actual change in
the mode of interest borne by the Bonds, or (v) proposed or actual release or
substitution of a Property; and
(h) all documentary stamp, recording, transfer, mortgage,
intangible or filing or other taxes or fees (excluding taxes measured by gross
or net income, excise, franchise or gross receipts taxes) and any and all
liabilities with respect to, or resulting therefrom which may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of or filing of record, recordation, release or discharge of, this
Agreement, the Mortgages, or any other Transaction Document; and
(i) interest on any and all amounts referred to in
paragraphs (a) through (g) of this section 4.2 from the date when due under
this Agreement until payment of all such amounts in full, payable at the
Activity Rate, in immediately available funds.
All amounts to be paid pursuant to clauses (a) through (i) of this section 4.2
shall be payable separate and apart from principal, interest and other amounts
due under the Mortgage Loans and under the Related Custodial Receipts and shall
be due and payable within thirty (30) days of Borrowers' receipt of written
demand therefor.
3 PAYMENT OF CERTAIN OTHER FEES AND EXPENSES.
(a) BOND FEES. In addition to the foregoing, the
Borrowers shall pay, or cause to be paid, when due the Bond Fees applicable
with respect to each issue of Related Securities. Such Bond Fees shall be paid
by the Borrowers in accordance with the terms of the Related Bond Documents and
the Related Custodial Receipts Documents, as the case may be.
(b) FANNIE MAE ADVANCES. Fannie Mae shall have the right
but not the obligation to pay any fee or expense due and owing by the Borrowers
pursuant to sections 4.2 and 4.3 or any Related Financing Agreement on behalf
of the Borrowers if the Borrowers fail to pay such fee or expense when due. If
Fannie Mae pays any such fee or expense and the Borrowers receive written
notice of such payment, the Borrowers shall pay such amount and the Activity
Fee relating to such amount to Fannie Mae in the same manner as any Advance.
(c) PREPAYMENT PREMIUM. The Borrowers agree to pay the
Prepayment Premium pursuant to each Related Mortgage Note and each Custodial
Receipts Mortgage Note (i) whether prepayment of such Related Mortgage Note or
Custodial Receipts Mortgage Note is
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voluntary or involuntary (in connection with acceleration of the unpaid
principal balance of such Related Mortgage Note or Custodial Receipts Mortgage
Note; provided, however, that no Prepayment Premium shall be payable upon a
prepayment in connection with a mandatory application of Insurance Proceeds or
Condemnation Proceeds) or the Related Mortgage is satisfied or released by
foreclosure (whether by power of sale or judicial proceeding) or in lieu of
foreclosure or by any other means and (ii) in the event that an Alternate
Credit Facility is provided to the Related Trustee in substitution for the
Related Fannie Mae Credit Enhancement Instrument.
4 FACILITY AND ACTIVITY FEES.
In addition to any other fees and amounts payable to Fannie
Mae under this Agreement or the other Transaction Documents, the following fees
shall be payable by the Borrowers to Fannie Mae with respect to the Related
Fannie Mae Collateral Agreements, the Mortgage Documents and the Bonds:
(a) FACILITY FEE. The Borrowers shall, in consideration
of Fannie Mae's entering into the Related Fannie Mae Credit Enhancement
Instruments and so long as any Related Fannie Mae Credit Enhancement Instrument
shall remain in effect, be responsible for paying to Servicer, for remittance
to Fannie Mae, a facility fee (the "FACILITY FEE"). The Facility Fee shall be
calculated with respect to each issue of Related Securities is set forth on the
Schedule of Facility Fee Information attached hereto as Exhibit C. With
respect to each Fixed Rate Bond Transaction, the Facility Fee shall be included
in the actual fixed rate of interest set forth in and payable under the Related
Mortgage Note. With respect to each Floating Rate Bond Transaction and each
Custodial Receipts Transaction the Facility Fee shall be payable monthly, on
the first day of each month (x) with respect to each Floating Rate Bond
Transaction, as part of the Mortgage Note Rate under the Related Mortgage Note
and (y) with respect to each Custodial Receipts Transaction, directly to
Servicer on behalf of Fannie Mae as one the Obligations of the Borrowers under
this Agreement. With respect to each Floating Rate Bond Transaction, the
Facility Fee shall be calculated as of the last day of each month based on the
amount then on deposit in the Principal Reserve Fund and the Allocated Release
Price, if any, as of such date with respect to the Related Bond. The initial
payment for the month in which the applicable Related Securities are issued
shall be a prorated amount if the applicable Related Securities are issued on
other than the first day of a month, such proration to be determined by
multiplying the fee otherwise payable for the entire month by a fraction, the
numerator of which is the number of days in such month from and including the
date on which the applicable Related Securities are issued to and including the
last day of the month and the denominator of which is the number of days in
such month.
(b) ACTIVITY FEE. In addition to the Facility Fee, the
Borrowers shall, in consideration of Fannie Mae providing the Related Fannie
Mae Credit Enhancement Instruments, pay to Servicer, for the account of and
remittance to Fannie Mae, an activity fee (the "ACTIVITY FEE") with respect to
each Advance and each Withdrawal. The Activity Fee shall, with respect
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to each Advance and each Withdrawal, be an amount equal to the amount of such
Advance or such Withdrawal, as the case may be, multiplied by the Activity
Rate, and further multiplied by a fraction, the numerator of which is the
number of days that such Advance or such Withdrawal is outstanding (i.e., until
Fannie Mae is reimbursed) and the denominator of which is 365 days or 366 days,
as applicable. The Activity Fee shall be payable so long as the Advance or
Withdrawal remains unreimbursed, in whole or in part, to Fannie Mae. The
Activity Fee shall not be due to Fannie Mae if Fannie Mae is reimbursed for all
funds provided under the Related Fannie Mae Credit Enhancement Instruments by
2:00 p.m., Washington, D.C. time, on the date on which Fannie Mae shall have
provided such funds. Any reimbursement payment received after 2:00 p.m.,
Washington, D.C. time, shall be treated as if it were paid at 9:00 a.m.,
Washington, D.C. time, on the next Business Day. The Activity Fee shall be
payable initially on the first (1st) day of each month following any Advance or
Withdrawal and shall be payable on the first (1st) day of each successive month
for so long as such Advance or Withdrawal shall remain outstanding. The
Activity Fee shall be otherwise due and payable as provided in this Agreement.
Upon receipt by Servicer, the Activity Fee shall be remitted immediately to
Fannie Mae.
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5 INDEMNIFICATION.
(a) INDEMNIFICATION. The Borrowers hereby release Fannie
Mae, Servicer and their respective officers, directors, members, shareholders,
officials, agents, independent contractors and employees and each of them and
each Person, if any, who controls Fannie Mae or Servicer within the meaning of
either Section 15 of the Securities Act of 1933, as amended, or Section 20 of
the Securities Exchange Act of 1934, as amended (each an "INDEMNIFIED PARTY"),
from, and covenant and agree to indemnify, hold harmless and defend each such
indemnified party from and against, any and all claims, losses, liabilities
(including penalties), actions, suits, judgments, demands, damages, costs,
charges or expenses (including reasonable fees and expenses of attorneys,
consultants and auditors and costs of investigation) and obligations whatsoever
(herein collectively referred to as "LIABILITIES") of any nature arising out
of, relating to or in connection with: (i) the transactions provided for in
this Agreement or the other Transaction Documents or otherwise in connection
with any Property, the Bonds, the Mortgage Loans, the Custodial Receipts Bond
Issues, the Custodial Receipts, the Custodial Receipts Transactions or the
execution or amendment of any document relating thereto; (ii) the approval of
the refinancing of the Bond Properties or the making of the Mortgage Loans;
(iii) any act or omission of any of the Borrowers or any of their Affiliates,
agents, servants, employees or licensees, in connection with the Properties,
the Mortgage Loans, the Custodial Receipts Bond Issues, the Custodial Receipts,
the Custodial Receipts Transactions, this Agreement or the other Transaction
Documents; (iv) the issuance and sale, resale or remarketing of any Bonds or
any certifications or representations made by any person (other than any Issuer
or the party seeking indemnification in connection therewith), including, (A)
any untrue statement or alleged untrue statement of a material fact contained
in any offering documents relating to any of the Bonds or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (B) the violation by any Borrower of any Federal, state or local
securities or real estate laws, rules or regulations in connection with the
issuance, offer and sale of any of the Bonds; (v) the operations of any
Property, or the conditions, occupancy, use, possession, conduct or management
of work done in or about, or from the planning, design, acquisition,
installation or construction of any Property, or any part of any Property; (vi)
the exercise by Fannie Mae or Servicer of their respective powers or duties
under this Agreement or any other Transaction Document; (vii) any Related
Trustee's acceptance or administration of the trusts created by the Related
Indenture and the exercise of its powers or duties thereunder, and under any
Regulatory Agreement or any other agreements in connection therewith to which
it is a party; (viii) errors, omissions, interruptions, losses or delays in
transmission or delivery of any messages by mail, cable, telegraph, telex,
telephone or otherwise; (ix) any other circumstances whatsoever relating to or
resulting from a payment or nonpayment by Fannie Mae in accordance with the
terms of any Fannie Mae Credit Enhancement Instrument; (x) any circumstances
whatsoever relating to or in connection with the Salem Station Restrictive
Covenants Agreement, including, any violation by Collateral Inc. or any
predecessor in interest to the Salem Station Project of any terms, conditions,
requirements or restrictions of the Salem Station Restrictive Covenants
Agreement; and (xi) all reasonable costs, counsel fees, expenses or liabilities
incurred in connection with any such claim or proceeding referred to in clauses
(i) through (x) above; provided, however, that the foregoing release and
indemnification shall not be effective to the extent such Liabilities are
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caused by the gross negligence, bad faith or willful misconduct of an
indemnified party or relate to disclosure provided by Fannie Mae for inclusion
under the subheading "Federal National Mortgage Association" of any Official
Statement. Neither Fannie Mae nor Servicer shall have any liability to the
Borrowers or to any other person as a result of any reduction of the credit
rating of any of the Bonds or any deterioration of Fannie Mae's financial
condition, nor shall any such reduction or deterioration reduce or diminish in
any respect Borrowers' obligations under this Agreement. In the event that any
action or proceeding is brought against any indemnified party with respect to
which indemnity may be sought hereunder, the Borrowers, upon written notice
from the indemnified party, shall assume the investigation and defense thereof,
including the employment of counsel selected by the Borrowers, but acceptable
to the indemnified party, and shall assume the payment of all expenses related
thereto, with full power to litigate, compromise or settle the same in its
discretion, provided that if such settlement or compromise shall contain or
infer an admission regarding, or relating in any way to, any indemnified party,
such indemnified party shall have the right to review and approve or disapprove
any such compromise or settlement. Each indemnified party shall have the
right, if such indemnified party shall conclude in good faith that a conflict
of interest exists (either between such indemnified party and one or more other
indemnified parties or with respect to such indemnified party and the proposed
joint counsel), to employ one separate counsel (per indemnified party),
together with appropriate local counsel engaged by such primary counsel and
whose fees shall be billed through such primary counsel, in any such action or
proceeding and participate in the investigation and defense thereof, and the
Borrowers shall pay the reasonable fees and expenses of such separate counsel;
provided that if such conflict of interest is between such indemnified party
and the proposed joint counsel, then before such indemnified party retains such
separate counsel, the Borrowers shall have the right to attempt to identify
alternative joint counsel, as to whom no conflict of interest exists and which
is otherwise acceptable to the such indemnified party, and who may,
accordingly, represent the Borrowers and all of the indemnified parties. If
separate counsel are employed as described above, the Borrowers and any such
indemnified party agree to cooperate as may reasonably be required in order to
ensure the proper and adequate defense of any such action, suit or proceeding,
including making available to each other, and their counsel and accountants,
all books and records relating to such action, suit or proceeding. If any such
counsel determines that the rendering of such assistance will adversely affect
the defense or interests of its client, such counsel shall not be required to
comply with the terms of the immediately preceding sentence. Each of the
Borrowers and the indemnified parties shall be entitled to assert the
attorney/client and work product privileges, as applicable, in response to any
requests for disclosure of any communications, work product or information that
the Borrowers or such indemnified party believes may be protected pursuant to
such privileges, and discussions between indemnified parties and counsel shall
not be deemed a waiver of such privileges.
Notwithstanding any permitted transfer of any Property to
another Person or the release of any Property from the lien of any Mortgage,
the Borrowers shall remain obligated to indemnify each indemnified party
pursuant to this section 4.5 with respect to acts occurring prior
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to the date of permitted transfer of legal title to such Property or release of
such Property from the lien of any Mortgage, as applicable (irrespective of
when a claim is actually made).
(b) SURVIVAL. The indemnity provisions of this section
4.5 shall survive the termination of this Agreement and foreclosure or release
of the Mortgages or other disposition of the Properties to the fullest extent
allowable under the applicable statute of limitations.
6 LIABILITY OF BORROWERS.
The obligations of the Borrowers under this Agreement shall be
absolute, unconditional and irrevocable and shall be paid and performed
strictly in accordance with the terms of this Agreement under all circumstances
whatsoever, including the following circumstances: (a) any invalidity or
unenforceability of this Agreement or any of the other Transaction Documents or
any other agreement or instrument related to the Transaction Documents; (b) any
amendment or waiver of, or any consent to or departure from, the terms of this
Agreement, any Related Fannie Mae Credit Enhancement Instrument, any of the
other Transaction Documents, or any other agreement or instrument related to
the Transaction Documents, any extensions of time or other modifications of the
terms and conditions for any act to be performed in connection with this
Agreement, any Related Fannie Mae Credit Enhancement Instruments or any of the
other Transaction Documents, other than any amendment, waiver, consent,
extension or modification entered into in strict accordance with the terms of
this Agreement; (c) the existence of any claim, set-off, defense or other right
which the Borrowers may have at any time against any Issuer, any Related
Trustee, any tender agent, Fannie Mae, Servicer, Remarketing Agent or any other
Person, whether in connection with this Agreement, any of the other Transaction
Documents, any Property, or any unrelated transaction; (d) the surrender or
impairment of any security for the performance or observance of any of the
agreements or terms of this Agreement or the other Transaction Documents; (e)
defect in title to any Property, any acts or circumstances that may constitute
failure of consideration, destruction of, damage to or condemnation of any
Property, commercial frustration of purpose, or any change in the tax or other
laws of the United States of America or of the State or any political
subdivision of either; (f) the breach by any Issuer, any Related Trustee, any
tender agent, Servicer, Remarketing Agent, Fannie Mae or any other Person of
its obligations under any Transaction Document or (g) any other circumstance,
happening or omission whatsoever.
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7 FANNIE MAE AND SERVICER NOT LIABLE.
Neither Fannie Mae, Servicer nor any of their officials,
officers, directors, members, shareholders, agents, independent contractors or
employees shall be responsible for or liable to any Borrower, any Affiliate of
any Borrower or any members, partners, Affiliates, independent contractors or
employees of any Borrower or any Affiliate of any Borrower for (i) any act or
omission of Fannie Mae, Servicer or any other Person made in good faith with
respect to the validity, sufficiency, accuracy or genuineness of documents, or
of any endorsement(s) thereon (except for documents and endorsements provided
by Fannie Mae or Servicer, as applicable), even if such documents should in
fact prove to be in any or all respects invalid, insufficient, fraudulent or
forged, (ii) the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any Related Fannie Mae Credit
Enhancement Instrument or the rights or benefits under any Related Fannie Mae
Credit Enhancement Instrument or proceeds under any Related Fannie Mae Credit
Enhancement Instrument, in whole or in part, that may prove to be invalid or
ineffective for any reason, (iii) failure of any Related Trustee to comply
fully with all conditions required in order to effect any Advance, (iv) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, telecopier or otherwise; (v) for any loss or
delay in the transmission or otherwise of any document or draft required in
order to make any Advance, or (vi) any consequences arising from causes beyond
the control of Fannie Mae. In furtherance and not in limitation of the
foregoing, Fannie Mae or Servicer may accept documents that appear on their
face to be valid and in order, without any responsibility for further
investigation. None of the above shall affect, impair, or prevent the vesting
of rights or powers of Fannie Mae or Servicer under this Agreement. In
furtherance and extension and not in limitation of the specific provision set
forth above, any action taken or omitted by Fannie Mae under or in connection
with any Transaction Document or any related certificates or other documents
shall be binding upon the Borrowers, the Related Trustee, the Issuer, the
Remarketing Agent and the tender agent and shall not under the Related Fannie
Mae Credit Enhancement Instrument put Fannie Mae under any resulting liability
to any of them except to the extent such liability is caused by Fannie Mae's
bad faith, gross negligence or willful misconduct.
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8 WAIVERS AND CONSENTS.
THE BORROWERS AGREE TO BE BOUND BY THIS AGREEMENT AND TO THE
EXTENT PERMITTED BY LAW, (A) WAIVE AND RENOUNCE ANY AND ALL REDEMPTION AND
EXEMPTION RIGHTS AND THE BENEFIT OF ALL VALUATION AND APPRAISAL PRIVILEGES
AGAINST THE INDEBTEDNESS AND OBLIGATIONS EVIDENCED BY THIS AGREEMENT AND THE
OTHER TRANSACTION DOCUMENTS OR BY ANY EXTENSION OR RENEWAL OF THIS AGREEMENT
AND THE OTHER TRANSACTION DOCUMENTS; (B) WAIVE PRESENTMENT AND DEMAND FOR
PAYMENT, NOTICES OF NONPAYMENT AND OF DISHONOR (UNLESS SUCH NOTICES ARE
EXPRESSLY REQUIRED UNDER THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT),
PROTEST OF DISHONOR AND NOTICE OF PROTEST; (C) WAIVE ALL NOTICES IN CONNECTION
WITH THE DELIVERY AND ACCEPTANCE OF THIS AGREEMENT AND THE OTHER TRANSACTION
DOCUMENTS AND ALL OTHER NOTICES IN CONNECTION WITH THE PERFORMANCE, DEFAULT OR
ENFORCEMENT OF THE PAYMENT OF ANY OBLIGATIONS UNDER THIS AGREEMENT AND THE
OTHER TRANSACTION DOCUMENTS EXCEPT AS REQUIRED BY THIS AGREEMENT OR THE OTHER
TRANSACTION DOCUMENTS; (D) AGREE THAT THEIR LIABILITIES UNDER THIS AGREEMENT
AND THE OTHER TRANSACTION DOCUMENTS SHALL BE UNCONDITIONAL AND WITHOUT REGARD
TO THE LIABILITY OF ANY OTHER PERSON; AND (E) AGREE THAT ANY CONSENT, WAIVER OR
FORBEARANCE UNDER THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS WITH
RESPECT TO AN EVENT SHALL OPERATE ONLY FOR SUCH EVENT AND NOT FOR ANY
SUBSEQUENT EVENT.
9 SUBROGATION.
The Borrowers acknowledge that Fannie Mae is to be fully
subrogated to the extent of any payment made by Fannie Mae pursuant to any
Related Fannie Mae Collateral Agreement and any additional interest due on any
late payment, to the rights of the Related Trustee and the respective
Bondholders to any moneys paid or payable under the Related Securities and all
security therefor under the Related Indenture. The Borrowers further
acknowledge that Fannie Mae is to be fully subrogated to the extent of any
payment made by Fannie Mae pursuant to any Related Custodial Receipts
Collateral Agreement and any additional interest due on any late payment, to
the rights of Morgan to any moneys paid or payable under the Related Custodial
Receipts or the related Custodial Receipts L/C Reimbursement Agreement and all
security therefor under the Related Indenture. The Borrowers agree to such
subrogation and further agree to execute such instruments and to take such
actions as, in the judgment of Fannie Mae, are necessary to evidence such
subrogation and to perfect the rights of Fannie Mae to the extent necessary to
provide reimbursement hereunder.
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10 APPLICATION OF PAYMENTS.
Payments made by the Borrowers in respect of the Obligations
shall be applied in the manner provided in the Mortgage Documents.
11 PLEDGE OF RIGHTS TO CERTAIN FUNDS AND INVESTMENTS.
To secure Borrowers' obligations under this Agreement, to the
extent, if any, that the Borrowers retain an interest in and to all funds and
accounts and investments of funds and accounts now or hereafter held: by (a)
the Related Trustees under the Related Indentures as security for the payment
of the Bonds, including the Principal Reserve Funds, and any and all loan
funds, escrow funds, revenue funds, debt service funds, reserve funds,
redemption funds and other funds and securities and other instruments
comprising investments of any of the foregoing and interest and other income
derived from any of the foregoing held as security for the payment of the
Bonds, the Borrowers hereby pledge and assign to Fannie Mae and grant to Fannie
Mae a security interest in such funds, accounts, and investments which pledge,
assignment and grant shall be subject only to the rights of each Related
Trustee under the Related Indenture) and (b) by Servicer with respect to
payments payable under any of the Transaction Documents including the
Replacement Reserve Accounts and any and all escrow funds, completion repair
funds and other funds, and any securities and other instruments comprising
investments of any of the foregoing and interest income and other proceeds
derived from any of the foregoing. The Borrowers covenant and agree that it
will defend Fannie Mae's rights and security interests created by this section
4.11 against the claims and demands of all Persons. In addition to its other
rights and remedies under this Agreement and the other Transaction Documents,
Fannie Mae shall have all the rights and remedies of a secured party under the
Uniform Commercial Code or other applicable law with respect to the security
interests created by this section 4.11, subject only to the rights of the
Related Trustees under the Related Indentures. Fannie Mae's rights under this
section 4.11 are in addition to, and not in lieu of, its rights and remedies
described elsewhere in this Agreement.
12 PURCHASED BONDS.
The Borrowers acknowledge that any Related Purchased Bonds
will be purchased for and registered in the name of the applicable Borrower, to
the extent that Fannie Mae has provided the funds to purchase such Related
Purchased Bonds or moneys in the applicable Principal Reserve Fund were used
for such purposes and will be pledged to Fannie Mae pursuant to the Related
Pledge Agreement.
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13 NONRECOURSE OBLIGATIONS.
(a) NON-RECOURSE LIABILITY. Subject to the provisions of
section 4.13(b), section 4.13(c) and the Guaranty and notwithstanding any other
provision in the Related Mortgage Notes, the Mortgages or any other Transaction
Document, the personal liability of the Borrowers, Guarantor and their
respective affiliates, shareholders, members, partners, officers, directors and
employees to pay and perform the Obligations shall be limited to (i) the real
and personal property described as "Property" in the Mortgages, (ii) the
personal property described in and pledged under any other Mortgage Document,
(iii) the rents, profits, issues, products and income of the Properties
received or collected by or on behalf of any Borrower (the "RENTS AND PROFITS")
to the extent such receipts are necessary, first, to pay the Operating Expenses
then due and payable as of the time of receipt of such Rents and Profits, and
then, to pay principal and interest due under the Related Mortgage Notes, the
Custodial Receipts L/C Reimbursement Agreement, any other sums due under the
Mortgages or any other Mortgage Document and any other Obligations then due and
owing to Fannie Mae under this Agreement, except to the extent that the
Borrowers did not have the legal right, because of a bankruptcy, receivership
or similar judicial proceeding, to direct the disbursement of such sums.
Except as provided in section 4.13(b), section 4.13(c) and in the Guaranty,
Fannie Mae shall not seek (A) any judgment for a deficiency against any of the
Borrowers or Guarantor, or any Borrower's or Guarantor's heirs, legal
representatives, successors or assigns, in any action to enforce any right or
remedy under any of the Related Mortgage Notes, the Custodial Receipts L/C
Reimbursement Agreement, the Mortgages, this Agreement or any other Transaction
Document, or (B) any judgment on any of the Related Mortgage Notes, the
Custodial Receipts L/C Reimbursement Agreement or the Obligations except as may
be necessary in any action brought under any of the Mortgages to enforce the
lien against the Property encumbered thereby or to exercise any remedies under
any other Mortgage Documents.
(b) EXCEPTIONS TO NON-RECOURSE LIABILITY. If, without
obtaining Fannie Mae's prior written consent, (i) a "Transfer" shall occur
which, pursuant to Uniform Covenant 19 of the any of the Mortgages, gives
Fannie Mae the right, at its option, to declare all sums secured by any such
Mortgage immediately due and payable, or (ii) any Borrower shall voluntarily
encumber or permit the encumbrance of any Property with the lien of any
"Subordinate Instrument" (as defined in the Related Mortgage with respect to
such Property) in connection with any financing by such Borrower, any of such
events shall constitute an Event of Default hereunder and under the other
Mortgage Documents, and if such Event of Default shall continue for thirty (30)
days then, from and after the date that is thirty (30) days after such event,
(x) section 4.13(a) shall not apply, and (y) the Borrowers and, solely to the
extent provided in the Guaranty, Guarantor shall be personally liable on a
joint and several basis for full recourse liability under this Agreement and
the other Mortgage Documents.
(C) EXCEPTIONS TO EXCULPATION. Notwithstanding section
4.13(a), each Borrower and Guarantor (but excluding other affiliates, members,
partners, officers, directors
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and employees of each Borrower and Guarantor and further excluding the
shareholders of Guarantor) shall be personally liable on a joint and several
basis in the amount of any loss, damage or cost (including reasonable
attorneys' fees and expenses) resulting from (1) fraud or intentional
misrepresentation by any of the Borrowers, any Borrower's agents or employees
or Guarantor, in connection with obtaining the Mortgage Loans evidenced by the
Related Mortgage Notes, obtaining the credit enhancement evidenced by the
Related Fannie Mae Credit Enhancement Instruments, or in complying with any of
the Obligations, (2) Insurance Proceeds, Condemnation Proceeds, security
deposits from tenants and other sums or payments received by or on behalf of
the Borrowers in their capacity as owners of the Properties and not applied in
accordance with the provisions of the Mortgages (except to the extent that the
Borrowers did not have the legal right, because of a bankruptcy, receivership
or similar judicial proceeding, to direct disbursement of such sums or
payments), (3) all Rents and Profits (except to the extent that the Borrowers
did not have the legal right, because of a bankruptcy, receivership or similar
judicial proceeding, to direct the disbursement of such sums) received by or on
behalf of the Borrowers in its capacity as owner of the Properties and not
applied first (a) to the payment of the Operating Expenses as such Operating
Expenses become due and payable, and then (b) to the payment of principal and
interest due under the Related Mortgage Notes, any other sums due under the
Mortgages or any other Mortgage Document and any other Obligations then due and
owning to Fannie Mae under this Agreement, (4) the Borrowers' failure to
deposit all Gross Cash Flow into the Property Accounts when required in
accordance with the Cash Management Agreement, if any (except to the extent
that the Borrowers did not have the legal right because of a bankruptcy,
receivership or similar judicial proceeding to deposit such sums), (5) the
Borrowers' failure following an Event of Default to deliver to Fannie Mae on
demand all Rents and Profits and security deposits (except to the extent that
the Borrowers did not have the legal right because of a bankruptcy,
receivership or similar judicial proceeding to direct disbursement of such
sums), (6) the Borrowers' failure following an Event of Default to deliver to
Fannie Mae on demand all books and records relating to the Properties, (7) the
Borrowers' indemnification obligations set forth in section 4.5(a), excluding
(A) the indemnification obligations set forth in clause (v) of such section
4.5(a) and (B) the indemnification obligations set forth in clause (x) of such
section 4.5(a) to the extent such indemnification obligations relate to clause
(v) of such section 4.5(a), (8) failure of any Borrower to remain a
Single-Purpose entity or to comply with any of the provisions of subsections
2.3(a)(iii) or 2.3(a)(iv) or (9) all or any portion of the Obligations of all
or any of the Borrowers being rendered invalid or unenforceable by the
application of Fraudulent Transfer Laws.
(d) NO IMPAIRMENT OF CERTAIN RIGHTS. Although the
personal liability of Borrowers, Guarantor and their respective affiliates,
shareholders, members, partners, officers, directors and employees may be
limited pursuant to section 4.13, no provision of this section 4.13 shall (i)
affect any guaranty or similar agreement executed in connection with the debt
evidenced by the Related Mortgage Notes and the Custodial Receipts L/C
Reimbursement, or otherwise in connection with the Obligations, (ii) release or
reduce the Obligations or the debt evidenced by the Related Mortgage Notes and
the Custodial Receipts L/C Reimbursement Agreement, (iii) impair the right of
Fannie Mae to enforce the provisions of paragraph 6 of the
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portion of each Mortgage identified as the "Multifamily Instrument", (iv)
impair the lien of any Mortgage or (v) impair the right of Fannie Mae to
enforce the provisions of the Cash Management Agreement, any Replacement
Reserve Agreement, any Hedge Security Agreement, any Custodial Agreement, the
Assignment of Management Agreement, or any other agreement defined as an
"Ancillary Collateral Agreement" in any Mortgage.
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14 APPLICATION FOR FANNIE MAE CREDIT ENHANCEMENT INSTRUMENTS.
Upon the terms and subject to the conditions set forth in this
Agreement and subject to the condition that the Mortgage Loans be originated by
an independent third-party lender or issuer and comply with the other
requirements of the Fannie Mae Charter Act for multifamily loans, the Borrowers
hereby apply to Fannie Mae for and hereby request Fannie Mae (a) with respect
to each Fixed Rate Bond Transaction, to deliver to each Related Trustee for the
account of the Borrower, the Related Fannie Mae Pass-Through Certificate in the
Facility Amount, and (b) with respect to each Floating Rate Bond Transaction
and each Custodial Receipts Transaction, to execute and deliver the Related
Fannie Mae Collateral Agreement. While each Bond Transaction, each Custodial
Receipts Transaction and the Related Fannie Mae Credit Enhancement Instrument
represents a separate and independent obligation of each Borrower and Fannie
Mae, respectively, the Borrowers acknowledge that, in requesting Fannie Mae to
execute and deliver the Related Fannie Mae Credit Enhancement Instruments,
Borrowers intend that all of the obligations of the Borrowers arising under the
Bond Transactions and the Custodial Receipts Transactions be treated as if they
were a single, integrated Indebtedness of the Borrowers. Accordingly, the
Borrowers agree that if any of the Borrowers fails to pay fully, when due, any
amount payable under any Related Mortgage Note, any Custodial Receipts Mortgage
Note or any Custodial Receipts L/C Reimbursement Agreement or their respective
Related Mortgages, then Fannie Mae may elect to treat such unpaid amount as
being due and owing by the Borrowers on a joint and several basis, and such
amount may be realized upon on a pro rata basis or otherwise, in each case in
Fannie Mae's discretion, from the value each of the Properties and the other
Collateral. Similarly, if any of the Borrowers fails to pay fully, when due,
to Fannie Mae any other amount which such Borrowers is obligated to pay under
this Agreement, the unpaid amount shall be deemed to be due and owing by all of
the Borrowers on a joint and several basis, and such amount may be realized
upon on a pro rata basis or otherwise, in each case in Fannie Mae's discretion,
from the value each of the Properties and the other Collateral. It is a
material part of the consideration for Fannie Mae's agreement to execute and
deliver the Related Fannie Mae Credit Enhancement Instruments that the
Borrowers not be able to put one or more of the Mortgage Loans or the Custodial
Receipts Mortgage Loans in default without putting all such Mortgage Loans and
Custodial Receipts Mortgage Loans in default. Accordingly, the Borrowers
expressly agree that irrespective of the actual payments made by any Borrower
under the Mortgage Loans, the Custodial Receipts Mortgage Loans or this
Agreement, if the amount actually paid is not sufficient to pay fully and
timely all such obligations, then the failure to pay shall exist with respect
to all of the Mortgage Loans and Custodial Receipts Mortgage Loans
notwithstanding that the amount paid was sufficient to pay fully some but not
all of the amounts due and owing with respect to the Mortgage Loans and the
Custodial Receipts Mortgage Loans or other Obligations.
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V.
ALLOCABLE FACILITY AMOUNTS; SUBSTITUTION, RELEASE, AND ADDITION
OF PROPERTIES; CERTAIN PERMITTED TRANSFERS
1 ALLOCABLE FACILITY AMOUNTS.
Fannie Mae shall determine the Allocable Facility Amount for
each Property annually on or before the Determination Date. The Allocable
Facility Amount, once determined by Fannie Mae as aforesaid, shall remain in
effect until the next Determination Date.
2 SUBSTITUTION OF ADDITIONAL MORTGAGED PROPERTIES.
An Additional Mortgaged Property may be released from the lien
of a Mortgage and a New Additional Property substituted therefor if each of the
following conditions are met:
(a) the New Additional Property is owned by Collateral
Inc. and has a Value equal to or greater than the product of 125% (the
"SUBSTITUTION PERCENTAGE") times the Minimum Substitute Property Value of the
Released Property;
(b) the New Additional Property has Net Operating Income
(as determined by Fannie Mae in its discretion) for the twelve (12) month
period ending within sixty (60) days of the date this test is applied, equal to
or greater than the Net Operating Income (as determined by Fannie Mae in its
discretion) of the Additional Mortgaged Property being released from the lien
for the corresponding twelve (12) month period multiplied by the Substitution
Percentage;
(c) no Event of Default or Potential Event of Default
shall have occurred and be continuing;
(d) the applicable Borrower shall cause the Released
Property to be immediately conveyed by such Borrower to Guarantor, or such
other Person (other than another Borrower) as such Borrower may otherwise
determine;
(e) the New Additional Property meets all of Fannie Mae's
then applicable underwriting criteria for new loans secured by Multifamily
Residential Property;
(f) all documentation relating to the foregoing is
acceptable to Fannie Mae in its discretion in all respects, including legal
opinions, title insurance, Security Instruments, Replacement Reserve
Agreements, assignments and any amendments to this Agreement or the other
Transaction Documents; and
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(g) with respect to each proposed New Additional
Property, the Borrowers shall pay Fannie Mae and Servicer a due diligence fee
plus all costs and expenses (including reasonable legal fees and expenses)
incurred by Fannie Mae or Servicer in connection with the foregoing. Such
amounts shall be paid by the Borrowers promptly upon receipt of invoices
therefor, and shall be payable regardless of whether the property substitution
does or does not (for any reason) ultimately occur.
3 RELEASE OF PROPERTIES.
A Property may be released from the lien of a Mortgage without
another Multifamily Residential Property being substituted therefor if each of
the following conditions are met:
(a) the Borrowers shall either redeem or otherwise remove
Bonds from the Fannie Mae Credit Facility and/or post cash collateral in a
manner acceptable to Fannie Mae in its discretion, in either case in an amount
equal to 110% of the Allocable Facility Amount of the Released Property (the
"RELEASE PRICE"). The Release Price requirement shall be satisfied by (i) if
the Released Property is a Bond Property, the amount of Related Bonds
outstanding with respect to such Bond Property immediately prior to such
release (provided, that, the requirements of section 5.3(c) have been
satisfied), plus (ii) the amount of any other Bonds redeemed by the Borrowers
to obtain such release, plus (iii) the amount of any letter of credit in form
and substance and provided by a financial institution satisfactory to Fannie
Mae in its discretion or any cash collateral deposited with Fannie Mae or its
designee and otherwise held in a manner approved by Fannie Mae in its
discretion ("RELEASE PRICE CASH COLLATERAL") and posted by the Borrowers to
obtain such release; and
(b) no Event of Default or Potential Event of Default
shall have occurred and be continuing; and
(c) if the Released Property is a Bond Property, then
either (i) the Related Fannie Mae Credit Enhancement Instrument shall, subject
to subsection 5.3(h), terminate on or before the Released Property is released
from the lien of any Related Mortgage, or (ii) Fannie Mae, in its discretion,
shall have consented to the transfer of such Bond Property and the assumption
of the Related Mortgage Note, the Related Mortgage and the other related
Transaction Documents in accordance with section 5.6; and
(d) the applicable Borrower shall cause the Released
Property to be immediately conveyed by such Borrower to Guarantor or such other
Person (other than another Borrower) as such Borrower may determine; and
(e) if the Released Property is a Custodial Receipts
Property, then the Obligations of the Borrower with respect to such Custodial
Receipts Property shall be assumed
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by Collateral Inc. pursuant to documentation in form and substance accepted to
Fannie Mae in its discretion, and such Borrower shall be released by Fannie Mae
from such Obligations pursuant to release documentation prepared by Fannie Mae
and reasonably acceptable to such Borrower; and
(f) all documentation relating to the foregoing is
acceptable to Fannie Mae in all respects, including legal opinions, release
documentation and any amendments to this Agreement or the other Transaction
Documents; and
(g) the Borrowers shall pay, with respect to each
Released Property, to Fannie Mae and Servicer, a due diligence fee plus all
costs and expenses (including reasonable legal fees and expenses) incurred by
Fannie Mae or Servicer in connection with the foregoing. Such amounts shall be
paid by the Borrowers promptly upon receipt of invoices therefor, and shall be
payable regardless of whether the property is or is not (for any reason)
ultimately released from the lien of a Mortgage; and
(h) Fannie Mae shall execute and deliver to the
appropriate Borrower (i) a release of the lien of the Related Mortgage in
recordable form and (ii) if the Released Property is a Custodial Receipts
Property, a partial release with respect to those portions of the pledged
collateral relating to such Custodial Receipts Property and pledged under the
Custodial Receipts Bond Pledge Agreement, provided, in each instance, that
Fannie Mae reasonably determines, in light of such opinions of certified public
accountants that prepare the audited financial statements of the appropriate
Borrower and such other similar information and opinions as may be provided by
such Borrower to Fannie Mae, that no part of any payments made by such Borrower
prior to or concurrently with the release of the lien of the Related Mortgage
will likely result in an avoidance or any other recovery or disgorgement
pursuant to the Bankruptcy Code (including sections 544, 547, 549 or 550
thereof) or any other applicable bankruptcy law which would result in Fannie
Mae having any liability under any Related Fannie Mae Collateral Agreement, or
such Borrower will provide cash collateral or make other arrangements
acceptable to Fannie Mae in its discretion to ameliorate such risk of
avoidance, recovery or disgorgement.
4 ADDITION OF NEW PROPERTIES TO THE CREDIT FACILITY.
(a) IN GENERAL. At the request of the Borrowers and
Servicer, Fannie Mae may, from time to time, consent to the addition of a New
Bond Property (and to the extent required to meet the underwriting requirements
established by Fannie Mae with respect to the addition of a New Bond Property,
a New Additional Property) to the Fannie Mae Credit Facility; provided,
however, that:
(i) such consent may be granted or withheld by Fannie Mae in
its discretion;
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(ii) the underwriting with respect to each such New Property
shall be conducted by Servicer and reviewed by Fannie Mae and shall
take into account all facts and circumstances deemed relevant by
Servicer and Fannie Mae in their discretion;
(iii) the terms and conditions relating to the addition of
such New Property shall be determined by Servicer and Fannie Mae in
their discretion;
(iv) all documentation deemed necessary by Servicer or Fannie
Mae for the making of a new loan, if applicable, and the addition of
such New Property shall be fully executed and delivered by each party
thereto and shall be in form and substance acceptable to Servicer and
Fannie Mae in their discretion;
(v) any loan made in conjunction with the addition of such New
Property must be originated by an independent third-party lender or
issuer and otherwise comply with applicable Fannie Mae Charter Act
requirements;
(vi) the Borrowers shall pay or cause to be paid all fees,
costs, charges and expenses (including the fees and expenses of
attorneys, accountants and other experts) incurred by or on behalf of
Fannie Mae or Servicer in connection with the addition of such New
Property in accordance with section 4.2.
The addition of any New Bond Property and any New Additional Property to the
Credit Facility shall become effective only upon satisfaction of all of the
requirements set forth above and Fannie Mae's execution and delivery to the
Borrowers of a Confirmation of Addition of New Property, substantially in the
form of Exhibit H attached hereto (a "NEW PROPERTY CONFIRMATION"). Upon the
execution and delivery of the New Property Confirmation in accordance with this
section 5.4, this Agreement shall be automatically deemed amended and
supplemented to incorporate the terms and provisions of such New Property
Confirmation including any provisions, (A) specifying whether the New Property
is a New Bond Property or a New Additional Property, (B) specifying whether a
New Bond Property is a Floating Rate Bond Property or a Fixed Rate Bond
Property, (C) specifying whether the Related Bonds with respect to a New Bond
Property are Unhedged Bonds, (D) specifying the Credit Enhancement Component,
the Reserve Component and if applicable, the Liquidity Component, with respect
to a New Bond Property, (E) specifying the amendment and restatement of any of
the Exhibits to this Agreement, (F) modifying the Allocable Facility Amount of
all or any of the Properties and (G) modifying the Maximum LTV Percentage
and/or the Minimum DSC Ratio.
(b) ADDITION OF FALKLAND CHASE. On or before December
31, 1996, the Borrowers in conjunction with Servicer, may request that a new
tax-exempt housing bond transaction (the "FALKLAND CHASE BOND TRANSACTION")
with respect to that certain Multifamily Residential Property located in Silver
Spring, Maryland and commonly known as Falkland Chase (the "FALKLAND CHASE
PROJECT") be added to the Fannie Mae Credit Facility as a new Floating Rate
Bond Transaction and that the bonds with respect to such Falkland Chase Bond
Transaction
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be deemed Unhedged Bonds for purposes of Section 3.1(a). Subject to
satisfaction in full of the conditions and limitations set forth in this
Section 5.4(b), Fannie Mae will consider granting its approval to the addition
of the Falkland Chase Bond Transaction and providing credit enhancement and, if
applicable, liquidity support (the "FALKLAND CHASE CREDIT ENHANCEMENT") with
respect thereto by issuing a collateral agreement substantially in the form of
a Related Fannie Mae Collateral Agreement for the benefit of the trustee with
respect to the Falkland Chase Bond Transaction. Fannie Mae's consideration of
providing the Falkland Chase Credit Enhancement and consenting to the bonds
with respect to the Falkland Chase Bond Transaction being qualified as Unhedged
Bonds is subject to Fannie Mae's determination in Fannie Mae's discretion that
each of the following conditions have been satisfied in full:
(i) the Falkland Chase Bond Transaction shall close on or
before March 31, 1997;
(ii) no Event of Default or Potential Event of Default
exists as of the proposed date for the addition of the Falkland Chase
Project;
(iii) the Falkland Chase Project shall be owned in fee by
Collateral Inc.;
(iv) the ratio (expressed as a percentage) of the Facility
Amount of the proposed Falkland Chase Bond Transaction to the Value of
the Falkland Chase Project plus the amount of any Shortfall Cash
Collateral (which, if the Shortfall Cash Collateral is a letter of
credit, has a term of at least one year and shall be in an "evergreen
format") or Value of any proposed New Additional Property offered by
the Borrowers in connection with the Falkland Chase Bond Transaction,
will be equal to or less than 50%;
(v) the ratio of (A) the Net Operating Income of the
Falkland Chase Project plus (I) the Net Operating Income of any
proposed New Additional Property offered by the Borrowers in
connection with the Falkland Chase Bond Transaction for the twelve
(12) month period ending within sixty (60) days of the proposed date
for the addition of the Falkland Chase Project, and (II) the amount of
any Shortfall Cash Collateral (which, if the Shortfall Cash Collateral
is a letter of credit, has a term of at least one year and shall be in
an "evergreen format") but only to the extent such Shortfall Cash
Collateral is not included in the calculation of the loan to value
ratio pursuant to section 5.4(b)(iv), to (B) to the anticipated
Imputed Debt Service with respect to the Falkland Chase Project for
the twelve (12) month period immediately following the proposed date
for the addition of the Falkland Chase Project, each as determined by
Fannie Mae in its discretion, will equal or exceed 2.2:1;
(vi) the mortgage loan with respect to the Falkland Chase
Bond Transaction shall be originated by an independent third-party
lender or issuer and comply with applicable Fannie Mae Charter Act
requirements;
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(vii) all documentation (including any amendments to this
Agreement and the other Transaction Documents) relating to Falkland
Chase Bond Transaction shall be the same in all material respects as
the documentation with respect to the Related Bonds, subject to such
modifications as may be necessary and which, in any event, are
approved by Fannie Mae in its discretion and the terms and conditions
of the bonds, the related bond documents, mortgage loan documents and
other documents delivered in connection with the Falkland Chase Bond
Transaction (the "FALKLAND CHASE REFUNDING DOCUMENTS"), shall be
satisfactory to Fannie Mae, including the following:
(A) such Falkland Chase Bond Transaction shall be
incorporated into and be governed by the terms of
this Agreement;
(B) the principal amount of the mortgage loan with
respect to the Falkland Chase Bond Transaction shall
be equal to or less than $26,000,000.00;
(C) if the Falkland Chase Bond Transaction will be a
Floating Rate Bond Transaction, then, the terms and
conditions governing the availability of and
conversion between interest rate modes applicable to
such Falkland Chase Bond Transaction and the related
mortgage loan shall conform to the interest rate mode
provisions applicable to the existing Bonds and the
existing Mortgage Loans in Floating Rate Bond
Transactions;
(D) the maturity date of the mortgage loan with respect
to the Falkland Chase Bond Transaction shall be June
1, 2026, provided, however, that the principal
amortization schedule or principal reserve fund
payment schedule, as the case may be, of such
mortgage loan shall be sufficient to cause such
mortgage loan to fully amortize by April 1, 2027;
(E) the Falkland Chase Refunding Documents shall contain
cross-default and cross-collateralization provisions
that conform to the Bond Documents;
Notwithstanding the foregoing, the Prepayment Premium with
respect to the Falkland Chase Bond Transaction shall continue
for not less than seven (7) (assuming the bonds bear interest
at other than a fixed rate) years from the Fannie Mae Facility
Closing Date;
(viii) the Borrowers shall execute and deliver to Fannie Mae
a certificate confirming that all of the representations and
warranties set forth in this Agreement (including those with respect
to the Aggregate Debt Service Coverage Ratio and the Aggregate Loan to
Value Ratio as set forth in section 2.1(h)) shall be true, correct and
complete after giving effect to the Falkland Chase Bond Transaction,
subject to such modifications as the Borrowers may determine are
necessary to make the representations and warranties contained in such
certificate true, correct and complete as of such date;
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provided, however, that such modifications may be considered by Fannie
Mae in its determination to grant or withhold its approval to the
addition of the Falkland Chase Bond Transaction;
(ix) if the Falkland Chase Bond Transaction will be a
Floating Rate Bond Transaction, then, so long as Fannie Mae provides
credit enhancement for the such Falkland Chase Bond Transaction, only
Fannie Mae shall provide liquidity support, if applicable;
(x) each of the Borrowers and Guarantor, to the extent
applicable, shall have delivered to Fannie Mae appropriate evidence
satisfactory to Fannie Mae of its authority to execute and deliver the
Falkland Chase Refunding Documents to which it is a party;
(xi) Fannie Mae shall have received from Servicer such
representations, warranties, undertakings and such other certificates
as Fannie Mae shall customarily require relating to the Falkland Chase
Bond Transaction;
(xii) Fannie Mae shall have received such opinions of bond
counsel, trustee's counsel and issuer's counsel, and such other
opinions and certificates as Fannie Mae shall reasonably require
relating to the Falkland Chase Bond Transaction;
(xiii) Fannie Mae shall have received an opinion of counsel
to the Borrowers concerning such matters as Fannie Mae may reasonably
require relating to the Falkland Chase Bond Transaction and Fannie Mae
shall otherwise have received satisfactory evidence that all
conditions to the effectiveness and enforceability of the Falkland
Chase Refunding Documents have been fully satisfied;
(xiv) all legal opinions relating to the Falkland Chase
Bond Transaction shall be the same in all material respects as the
opinions relating to the Bond Documents and otherwise in form and
substance satisfactory to Fannie Mae;
(xv) Fannie Mae shall have received certified copies of
all consents and authorizations (including Governmental Approvals, if
any), necessary for the Issuer or the Borrowers to execute, deliver
and perform their respective obligations under the Falkland Chase
Refunding Documents;
(xvi) Fannie Mae shall have received certified copies of
(A) the Issuer's charter or certificate of incorporation and by-laws,
if any, (B) the resolution or resolutions of the Issuer authorizing
the execution, delivery and performance of its obligations under the
Falkland Chase Refunding Documents to which it is a party and (C)
certified copies of all other documents evidencing any other official
action of such Issuer taken with respect to the Falkland Chase Bond
Transaction, as each such item is then in full force and effect;
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(xvii) Fannie Mae shall have received copies of all
documents relating to the closing of such Falkland Chase Bond
Transaction, authenticated to Fannie Mae's reasonable satisfaction;
(xviii) Fannie Mae shall have received true and correct
copies of rating letters from the Rating Agency rating the Falkland
Chase Bond Transaction confirming that the bonds issued in such
transaction have received the same rating afforded other debt
instruments of the character of the bonds issued in the Falkland Chase
Bond Transaction and which are credit enhanced by Fannie Mae;
(xix) the Borrowers shall have executed and delivered to
Fannie Mae such amendments and modifications to this Agreement or the
other Transaction Documents and Fannie Mae shall have received such
other documents, certificates, filings, legal opinions, approvals or
instruments, as Fannie Mae shall deem necessary in order to effectuate
the Falkland Chase Bond Transaction;
(xx) Fannie Mae shall have received payment in full of all
fees and expenses (including reasonable fees and disbursements of
Fannie Mae's and the Servicer's counsel and accountants), incurred in
connection with or related to the Falkland Chase Bond Transaction and
the preparation, review, execution and delivery of the Falkland Chase
Refunding Documents; and
(xxi) Subject to the qualifications set forth above, all
documentation relating to the foregoing shall be acceptable to Fannie
Mae in its discretion in all respects, including all legal opinions,
title insurance policies and endorsements, Security Instruments,
Replacement Reserve Agreements, indentures, collateral agreements,
assignments and any amendments necessary to this Agreement or the
other Transaction Documents.
Upon satisfaction in full of the conditions and limitations set forth in this
section 5.4(b) with respect to the Falkland Chase Bond Transaction, the
Falkland Chase Project shall thereafter be deemed a New Bond Property that
shall be added to the Fannie Mae Credit Facility. The addition of the Falkland
Chase Project to the Fannie Mae Credit Facility shall become effective only
upon Fannie Mae's execution and delivery to the Borrowers of a New Property
Confirmation. Upon the execution and delivery of any such New Property
Confirmation in accordance with this section 5.4(b), this Agreement shall be
automatically deemed amended and supplemented to incorporate the terms and
provisions of such New Property Confirmation.
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5 CREDIT ENHANCEMENT OF THE INTERIM CUSTODIAL RECEIPTS
TRANSACTIONS AND PERMANENT REFUNDING BOND ISSUES.
(a) AGREEMENT TO CREDIT ENHANCE. Subject to satisfaction
in full of the conditions and limitations set forth in sections 5.5(b)
5.5(d) and 5.5(e), at the request of the Borrowers and Servicer,
Fannie Mae will provide credit enhancement and, if applicable,
liquidity support for (i) the Permanent Chase Lea Refunding Bonds (the
"PERMANENT CHASE LEA CREDIT ENHANCEMENT"), and/or (ii) the Permanent
Chase Ridge Bonds (the "PERMANENT CHASE RIDGE CREDIT ENHANCEMENT"), in
either case, by issuing a collateral agreement or Fannie Mae Mortgage
Backed Security, substantially in the form of the applicable Related
Fannie Mae Credit Enhancement Instruments. In addition, subject to
satisfaction in full of the conditions and limitations set forth in
sections 5.5(c) 5.5(d) and 5.5(e), at the request of the Borrowers and
Servicer, Fannie Mae will provide credit enhancement for (i) the
Interim Replacement Chase Lea Custodial Receipts (the "INTERIM
REPLACEMENT CHASE LEA CREDIT ENHANCEMENT"), and/or (ii) the Interim
Replacement Chase Ridge Custodial Receipts (the "INTERIM REPLACEMENT
CHASE RIDGE CREDIT ENHANCEMENT"), in either case, by issuing a
collateral agreement or other credit enhancement instrument,
substantially in the form of the Related Custodial Receipts Collateral
Agreements. Fannie Mae's obligation to issue the Permanent Chase Lea
Credit Enhancement, the Permanent Chase Ridge Credit Enhancement, the
Interim Replacement Chase Lea Credit Enhancement and the Interim
Replacement Chase Ridge Credit Enhancement shall be separate and
distinct obligations of Fannie Mae.
(b) CERTAIN CONDITIONS TO PERMANENT CHASE RIDGE CREDIT
ENHANCEMENT AND PERMANENT CHASE LEA CREDIT ENHANCEMENT. Fannie Mae's
obligation to issue the Permanent Chase Lea Credit Enhancement and the
Permanent Chase Ridge Credit Enhancement shall be separate and
distinct obligations of Fannie Mae, but each such obligation shall be
subject to Fannie Mae's determination in Fannie Mae's discretion that
each of the following conditions have been satisfied in full:
(i) No Event of Default or Potential Event of
Default shall have occurred;
(ii) concurrently with the consummation of each
such Permanent Refunding Bond Transaction (A) the applicable
Custodial Receipts Property shall be conveyed to Collateral
Inc., (B) the Obligations of Chase Ridge Inc. or Chase Lea
Inc., as the case may be, with respect to such Custodial
Receipts Property shall be assumed by Collateral Inc. pursuant
to documentation in form and substance acceptable to Fannie
Mae in its reasonable discretion, and (C) such Borrower shall
be released by Fannie Mae from all remaining Obligations of
such Borrower pursuant to release documentation prepared by
Fannie Mae and reasonably acceptable to such Borrower;
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(iii) The mortgage loan with respect to each
Permanent Refunding Transaction (each a "PERMANENT REFUNDING
MORTGAGE LOAN"; and collectively, the "PERMANENT REFUNDING
MORTGAGE LOANS") shall be originated by an independent
third-party lender or issuer and comply with applicable Fannie
Mae Charter Act requirements;
(iv) With respect to each Permanent Refunding
Transaction, the following underwriting tests shall be
satisfied:
(A) The effective interest rate with respect such
Permanent Refunding Mortgage Loan (i.e. the
actual fixed rate that would be payable under
the mortgage note, if such Permanent
Refunding Bond Transaction will be a Fixed
Rate Bond Transaction or the initial
Pass-Through Rate plus the Facility Fee plus
the Bond Fees that would be payable under the
mortgage note, if such Permanent Refunding
Transaction will be a Floating Rate Bond
Transaction) shall not exceed the applicable
Underwriting Rate;
(B) the ratio (expressed as a percentage) of (1)
the Facility Amount of each proposed
Permanent Refunding Transaction to (2) the
Value of the applicable project plus the
amount of any Shortfall Cash Collateral
(which, if the Shortfall Cash Collateral is a
letter of credit, has a term of at least one
year and shall be in an "evergreen format")
and/or the Value of any proposed New
Additional Property offered by the Borrowers
in connection with such Permanent Refunding
Transaction, will be equal to or less than
(I) 99.1% with respect to the Permanent Chase
Ridge Credit Enhancement and (II) 97.7% with
respect to the Permanent Chase Lea Credit
Enhancement; and
(C) the ratio of (1) the Net Operating Income of
the applicable project plus (I) the Net
Operating Income of any proposed New
Additional Property offered by the Borrowers
in connection with such Permanent Refunding
Transaction for the twelve (12) month period
ending within sixty (60) days of the proposed
closing date for such Permanent Refunding
Transaction, and/or (II) the amount of any
Shortfall Cash Collateral (which, if the
Shortfall Cash Collateral is a letter of
credit, has a term of at least one year and
shall be in an "evergreen format") but only
to the extent such Shortfall Cash Collateral
is not included in the calculation of the
loan to value ratio pursuant to section
5.5(b)(iv)(B), for the twelve (12) month
period ending within sixty (60) days of the
proposed date for the
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addition such project, to (2) to the
anticipated Imputed Debt Service with respect
to the applicable project for the twelve (12)
months immediately following the anticipated
date for the addition of the applicable
project, each as determined by Fannie Mae in
its discretion, will be equal to or exceed
1.14:1;
(v) All documentation (including any amendments to
this Agreement and the other Transaction Documents) relating
to each Permanent Refunding Transaction shall be the same in
all material respects as the documentation relating to the
existing Bonds, subject to such modifications as may be
necessary and which, in any event, are agreed to by the
Borrowers and approved by Fannie Mae in its discretion and the
terms and conditions of each Permanent Refunding Bond Issue,
the related bond documents, mortgage loan documents and other
documents delivered in connection with each Permanent
Refunding Transaction (the "PERMANENT REFUNDING DOCUMENTS"),
shall be satisfactory to Fannie Mae, including the following:
(A) such Permanent Refunding Transaction shall be
incorporated into and be governed by the
terms of this Agreement;
(B) the principal amount of (x) the Permanent
Refunding Mortgage Loan with respect to the
Chase Lea project shall be equal to or less
than $16,835,000.00 and (y) the Permanent
Refunding Mortgage Loan with respect to the
Chase Ridge project shall be equal to or less
than $26,815,000.00;
(C) if either such Permanent Refunding
Transaction will be a Floating Rate Bond
Transaction, then, the terms and conditions
governing the availability of and conversion
between interest rate modes applicable to
such Permanent Refunding Transaction and the
related Permanent Refunding Mortgage Loan
shall conform to the interest rate mode
provisions applicable to the existing Bonds
and the existing Mortgage Loans in Floating
Rate Bond Transactions;
(D) the Maturity Date of each Permanent Refunding
Mortgage Loan shall be June 1, 2026, provided
however, that the principal amortization
schedule of each such Permanent Refunding
Mortgage Loan shall be sufficient to cause
such Permanent Refunding Mortgage Loan to
fully amortize by November 1, 2027;
(E) the Permanent Refunding Documents shall
contain cross-default and
cross-collateralization provisions that
conform to the existing Transaction
Documents;
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(F) if either such Permanent Refunding
Transaction will be a Floating Rate Bond
Transaction, then, such transaction shall be
subject to the interest rate protection
provisions of section 3.2 and shall not be
eligible for the exceptions set forth in
section 3.1(a); and
Notwithstanding the foregoing, the Prepayment Premium with
respect to each such Permanent Refunding Transaction shall
continue for not less than ten (10) years from the Fannie Mae
Facility Closing Date;
(vi) the Borrowers shall execute and deliver to
Fannie Mae (A) a certificate in form and substance approved by
Fannie Mae confirming that all of the representations and
warranties set forth in this Agreement are true, correct and
complete in all material respects with respect to the
applicable Custodial Receipts Property after giving effect to
each such Permanent Refunding Transaction and (B) a
certificate confirming that no Event of Default or Potential
Event of Default exists or will exist after giving effect to
such Permanent Refunding Transaction;
(vii) if either Permanent Refunding Bond Issue will
be a Floating Rate Bond Transaction, then, so long as Fannie
Mae provides credit enhancement for the such Permanent
Refunding Bond Issue, only Fannie Mae shall provide liquidity
support, if applicable;
(viii) each of the Borrowers and Guarantor, to the
extent applicable, shall have delivered to Fannie Mae
appropriate evidence satisfactory to Fannie Mae of its
authority to execute and deliver the Permanent Refunding
Documents to which it is a party;
(ix) Fannie Mae shall have received from Servicer
such representations, warranties, undertakings and such other
certificates as Fannie Mae shall customarily require relating
to the Permanent Refunding Transaction;
(x) Fannie Mae shall have received such opinions of
bond counsel, trustee's counsel and issuer's counsel, and such
other opinions and certificates as Fannie Mae shall reasonably
require relating to the Permanent Refunding Transaction;
(xi) Fannie Mae shall have received an opinion of
counsel to the Borrowers concerning such matters as Fannie Mae
may reasonably require relating to the Permanent Refunding
Transaction and Fannie Mae shall otherwise have received
satisfactory evidence that all conditions to the effectiveness
and enforceability of the Permanent Refunding Documents have
been fully satisfied;
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(xii) All legal opinions relating to the Permanent
Refunding Transaction shall be the same in all material
respects as the opinions relating to the existing Transaction
Documents and otherwise in form and substance satisfactory to
Fannie Mae;
(xiii) Fannie Mae shall have received certified
copies of all consents and authorizations (including
Governmental Approvals, if any), necessary for the Chase Ridge
Issuer or the Chase Lea Issuer or the Borrowers to execute,
deliver and perform their respective obligations under the
applicable Permanent Refunding Documents;
(xiv) Fannie Mae shall have received certified
copies of (A) each Issuer's charter or certificate of
incorporation and by-laws, if any, (B) the resolution or
resolutions of such Issuer authorizing the execution, delivery
and performance of its obligations under the applicable
Permanent Refunding Documents to which it is a party and (C)
certified copies of all other documents evidencing any other
official action of such Issuer taken with respect thereto as
each such item is then in full force and effect;
(xv) Fannie Mae shall have received copies of all
documents relating to the closing of such Permanent Refunding
Transaction, authenticated to Fannie Mae's reasonable
satisfaction;
(xvi) Fannie Mae shall have received true and
correct copies of rating letters from the Rating Agency rating
the Permanent Refunding Bond Issue confirming that such bonds
have received the same rating afforded other debt instruments
of the character of the Permanent Refunding Bond Issue which
are enhanced by Fannie Mae;
(xvii) the Borrowers shall have executed and
delivered to Fannie Mae such amendments and modifications to
this Agreement or the other Transaction Documents and Fannie
Mae shall have received such other documents, certificates,
filings, legal opinions, approvals or instruments, as Fannie
Mae shall deem necessary in order to effectuate the Permanent
Refunding Transaction;
(xviii) Fannie Mae shall have received payment in
full of all fees and expenses (including reasonable fees and
disbursements of Fannie Mae's and the Servicer's counsel and
accountants), incurred in connection with or related to the
Permanent Refunding Transaction and the preparation, review,
execution and delivery of the Permanent Refunding Documents;
and
(xix) Subject to the qualifications set forth above,
all documentation relating to the foregoing shall be
acceptable to Fannie Mae in its discretion in all
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respects, including all legal opinions, title insurance
policies and endorsements, Security Instruments, Replacement
Reserve Agreements, indentures, collateral agreements,
assignments and any amendments necessary to this Agreement or
the other Transaction Documents.
(c) CERTAIN CONDITIONS TO INTERIM REPLACEMENT CREDIT
ENHANCEMENT. Fannie Mae's obligation to issue the Interim Replacement
Chase Lea Credit Enhancement and the Interim Replacement Chase Ridge
Credit Enhancement shall be separate and distinct obligations of
Fannie Mae, but each such obligation shall be subject to Fannie Mae's
determination in Fannie Mae's discretion that each of the following
conditions have been satisfied in full:
(i) No Event of Default or Potential Event of
Default shall have occurred;
(ii) Fannie Mae determines in its reasonable
discretion that the Borrowers used best efforts to commence
and diligently pursue to completion, the implementation of the
Permanent Refunding Transaction with respect to each Custodial
Receipts Property and such Permanent Refunding Transaction
failed to occur because the issuer and/or the underwriter with
respect to such Permanent Refunding Transaction required
economic terms or requirements (which economic terms and
requirements shall include but not be limited to (A) rental
restrictions, (B) initial or annual fees payable to such
issuer, (C) initial or annual fees payable to such underwriter
and/or (D) indemnification obligations required by such issuer
or underwriter) such that the economic terms and requirements
of the issuer and/or the underwriter for such Permanent
Refunding Transaction, when taken as a whole, were materially
more burdensome in terms of their economic impact on the
Borrowers than the economic terms and requirements imposed by
the Related Issuer with respect to the Bond Transaction
relating to the Bond Property identified on Exhibit A as
Avalon Knoll, Montgomery County, Maryland; provided, however,
that (1) rental restrictions comparable to the existing rental
restrictions with respect to each Custodial Receipts Property
will not be considered to be materially more burdensome in
terms of their economic impact than the requirements imposed
with respect to the above transaction and (2) indemnification
obligations to the issuer and/or the underwriter for the
Permanent Refunding Transaction that are not greater in scope
than the indemnification obligations guaranteed by the
Guarantor pursuant to the Guaranty will not be deemed to be
materially more burdensome in terms of their economic impact
than those imposed with respect to the above transaction;
(iii) With respect to each Interim Replacement
Custodial Receipts Transaction, the following underwriting
tests shall be satisfied:
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(A) the ratio (expressed as a percentage) of (1)
the Facility Amount of each proposed Interim
Replacement Custodial Receipts Transaction to
(2) the Value of the applicable project plus
the amount of any Shortfall Cash Collateral
(which, if the Shortfall Cash Collateral is a
letter of credit, has a term of at least one
year and shall be in an "evergreen format")
and/or the Value of any proposed New
Additional Property offered by the Borrowers
in connection with such Interim Replacement
Custodial Receipts Transaction, will be equal
to or less than (I) 99.1% with respect to the
Interim Replacement Chase Ridge Credit
Enhancement and (II) 97.7% with respect to
the Interim Replacement Chase Lea Credit
Enhancement; and
(B) the ratio of (1) the Net Operating Income of
the applicable project plus (I) the Net
Operating Income of any proposed New
Additional Property offered by the Borrowers
in connection with such Interim Replacement
Custodial Receipts Transaction for the twelve
(12) month period ending within sixty (60)
days of the proposed closing date for such
Interim Replacement Custodial Receipts
Transaction, and/or (II) the amount of any
Shortfall Cash Collateral (which, if the
Shortfall Cash Collateral is a letter of
credit, has a term of at least one year and
shall be in an "evergreen format") but only
to the extent such Shortfall Cash Collateral
is not included in the calculation of the
loan to value ratio pursuant to section
5.5(b)(iv)(B), for the twelve (12) month
period ending within sixty (60) days of the
proposed date for the addition such project,
to (2) to the anticipated Imputed Debt
Service with respect to the applicable
project for the twelve (12) months
immediately following the anticipated date
for the addition of the applicable project,
each as determined by Fannie Mae in its
discretion, will be equal to or exceed
1.14:1;
(iv) All documentation (including any amendments to
this Agreement and the other Transaction Documents) relating
to each Interim Replacement Custodial Receipts Transaction
shall be the same in all material respects as the
documentation relating to the existing Custodial Receipts
subject to such modifications as may be necessary and which,
in any event, are agreed to by the Borrowers and approved by
Fannie Mae in its discretion and the terms and conditions of
the Interim Replacement Custodial Receipts and the related
documents delivered in connection with each Interim
Replacement Custodial Receipts Transaction (the "INTERIM
REPLACEMENT CUSTODIAL RECEIPTS DOCUMENTS"), shall be
satisfactory to Fannie Mae, including the following:
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(A) such Interim Replacement Custodial Receipts
Transaction shall be incorporated into and be
governed by the terms of this Agreement;
(B) the Facility Amount of (x) the Interim
Replacement Custodial Receipts Transaction
with respect to the Chase Lea Bond Property
shall be equal to or less than $16,835,000.00
and (y) the Interim Replacement Custodial
Receipts Transaction with respect to the
Chase Ridge Bond Property shall be equal to
or less than $26,815,000.00;
(D) the termination date of each of the Interim
Replacement Chase Lea Credit Enhancement and
the Interim Replacement Chase Ridge Credit
Enhancement shall be on or before August 31,
2001;
(E) the Interim Replacement Custodial Receipts
Documents shall contain cross-default and
cross-collateralization provisions that
conform to the existing Transaction Documents
with respect to which Fannie Mae is a party
or of which Fannie Mae is a beneficiary;
(F) the Interim Replacement Custodial Receipts
Documents shall contain provisions requiring
the Borrowers to deposit funds on a monthly
basis into a trust or escrow fund to be
established for the benefit of Fannie Mae and
otherwise in form and substance in acceptable
to Fannie Mae in its discretion, which
payments will be sufficient in amount to
amortize the Custodial Receipts Mortgage Loan
over three hundred and sixty (360) months at
an assumed interest rate equal to 7.05% per
annum;
(v) the Borrowers shall execute and deliver to
Fannie Mae (A) a certificate in form and substance approved by
Fannie Mae confirming that all of the representations and
warranties set forth in this Agreement are true, correct and
complete in all material respects with respect to the
applicable Custodial Receipts Property after giving effect to
each such Interim Replacement Custodial Receipts Transaction
and (B) a certificate confirming that no Event of Default or
Potential Event of Default exists or will exist after giving
effect to such Interim Replacement Custodial Receipts
Transaction;
(vi) each of the Borrowers and Guarantor, to the
extent applicable, shall have delivered to Fannie Mae
appropriate evidence satisfactory to Fannie Mae of its
authority to execute and deliver the Interim Replacement
Custodial Receipts Documents to which it is a party;
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(vii) Fannie Mae shall have received from Servicer
such representations, warranties, undertakings and such other
certificates as Fannie Mae shall customarily require relating
to the Interim Replacement Custodial Receipts Transaction;
(viii) Fannie Mae shall have received such opinions
of custodian's counsel, trustee's counsel and depositor's
counsel, and such other opinions and certificates as Fannie
Mae shall reasonably require relating to the Interim
Replacement Custodial Receipts Transaction;
(ix) Fannie Mae shall have received an opinion of
counsel to the Borrowers concerning such matters as Fannie Mae
may reasonably require relating to the Interim Replacement
Custodial Receipts Transaction and Fannie Mae shall otherwise
have received satisfactory evidence that all conditions to the
effectiveness and enforceability of the Interim Replacement
Custodial Receipts Documents have been fully satisfied;
(x) All legal opinions relating to the Interim
Replacement Custodial Receipts Transaction shall be the same
in all material respects as the opinions relating to the
existing Transaction Documents and otherwise in form and
substance satisfactory to Fannie Mae;
(xi) the Borrowers shall have executed and delivered
to Fannie Mae such amendments and modifications to this
Agreement or the other Transaction Documents and Fannie Mae
shall have received such other documents, certificates,
filings, legal opinions, approvals or instruments, as Fannie
Mae shall deem necessary in order to effectuate the Interim
Replacement Custodial Receipts Transaction;
(xii) Fannie Mae shall have received payment in full
of all fees and expenses (including reasonable fees and
disbursements of Fannie Mae's and the Servicer's counsel and
accountants), incurred in connection with or related to the
Interim Replacement Custodial Receipts Transaction and the
preparation, review, execution and delivery of the Interim
Replacement Custodial Receipts Documents; and
(xiii) Subject to the qualifications set forth
above, all documentation relating to the foregoing shall be
acceptable to Fannie Mae in its discretion in all respects,
including all legal opinions, title insurance policies and
endorsements, Security Instruments, Replacement Reserve
Agreements, indentures, collateral agreements, assignments and
any amendments necessary to this Agreement or the other
Transaction Documents.
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(d) FACILITY FEE COMPONENTS WITH RESPECT TO PERMANENT AND
INTERIM CREDIT ENHANCEMENT TRANSACTIONS.
(i) With respect to each Permanent Refunding Transaction:
(A) if such Permanent Refunding Transaction
is brought into the Fannie Mae Credit Facility as a
Fixed Rate Bond Transaction that is not subject to
remarketing or interest rate adjustment prior to
maturity, then the Credit Enhancement Component with
respect to such Permanent Refunding Transaction shall
be equal to .50% or 50 "basis points" per annum;
(B) if such Permanent Refunding Transaction
is brought into the Fannie Mae Credit Facility as a
Fixed Rate Bond Transaction that is subject to
remarketing or interest rate adjustment prior to
maturity, then the Credit Enhancement Component with
respect to such Permanent Refunding Transaction shall
be equal to .53% or 53 "basis points" per annum; and
(C) if such Permanent Refunding Transaction
is brought into the Fannie Mae Credit Facility as a
Floating Rate Bond Transaction, then (A) the Credit
Enhancement Component with respect to such Permanent
Refunding Transaction shall be equal to .53% or 53
"basis points" per annum, (B) the Reserve Component
with respect to such Permanent Refunding Transaction
shall be equal to .30% or 30 "basis points" per annum
and (C) the Liquidity Component with respect to such
Permanent Refunding Transaction shall be equal to
.125% or 12.5 "basis points" per annum.
(ii) With respect to each Interim Replacement Custodial
Receipts Transaction, the Credit Enhancement Component shall
be equal to .50% or 50 "basis points" per annum.
(e) CONFIRMATION OF PERMANENT AND INTERIM CREDIT
ENHANCEMENT TRANSACTIONS. Upon satisfaction in full of the conditions
and limitations set forth in section 5.5(c) with respect to either the
Interim Replacement Chase Lea Custodial Receipts or the Interim
Replacement Chase Ridge Custodial Receipts, the applicable Custodial
Receipts Property shall continue to be part of the Fannie Mae Credit
Facility as a Custodial Receipts Property. Fannie Mae's consent to
each such Interim Custodial Receipts Transaction shall be evidenced by
Fannie Mae's execution and delivery of a collateral agreement
substantially in the form of the Related Custodial Receipts Collateral
Agreements. Upon satisfaction in full of the conditions and
limitations set forth in this section 5.5 with respect to either the
Permanent Chase Lea Bonds or the Permanent
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Chase Ridge Bonds, the applicable Custodial Receipts Property shall
cease to be a Custodial Receipts Property for purposes of this
Agreement and shall thereafter be deemed a New Bond Property that
shall be added to the Fannie Mae Credit Facility. The addition of
each such Custodial Property to the Fannie Mae Credit Facility shall
become effective only upon Fannie Mae's execution and delivery to the
Borrowers of a New Property Confirmation. Upon the execution and
delivery of any such New Property Confirmation in accordance with this
section 5.5, this Agreement shall be automatically deemed amended and
supplemented to incorporate the terms and provisions of such New
Property Confirmation.
6 CERTAIN PERMITTED TRANSFERS OF BOND PROPERTIES.
(a) CONDITIONS TO PERMITTED TRANSFERS. At the request of
the Borrowers, Fannie Mae shall, from time to time, consent to the sale and
transfer of a Bond Property subject to Fannie Mae credit enhancement (a
"PROPOSED TRANSFER") to an independent third-party purchaser if Fannie Mae
determines that each of the following conditions have been satisfied in full:
(i) no Event of Default or Potential Event of Default
shall have occurred and be continuing either immediately before or
immediately after giving effect to the Proposed Transfer;
(ii) at the time of such Proposed Transfer, Fannie Mae
continues to provide credit enhancement, and if applicable, liquidity
support, with respect to new bond transactions similar to the Related
Bonds pursuant to guaranteed mortgage pass-through certificates or
collateral agreements, as the case may be, similar to the Related
Fannie Mae Credit Enhancement Instrument and the provision of such
credit enhancement and, if applicable, liquidity support, continues to
be permitted under the Fannie Mae Charter Act;
(iii) the Borrowers shall either redeem or otherwise remove
Bonds from the Fannie Mae Credit Facility and/or post cash collateral
in a manner acceptable to Fannie Mae, in either case in an amount
equal to 110% of the Allocable Facility Amount of the Bond Property
that is proposed to be transferred, which redemption, removal or cash
collateral requirement shall be satisfied by (1) the amount of Related
Bonds outstanding immediately prior to the Proposed Transfer, plus (2)
the amount of any other Bonds redeemed by the Borrowers to obtain
approval of the Proposed Transfer, plus (3) the amount of any Release
Price Cash Collateral posted by the Borrowers to obtain approval for
the Proposed Transfer;
(iv) the Borrowers cause to be submitted to Fannie Mae all
information required by Fannie Mae to evaluate the Proposed Transferee
and the Bond Property as if
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a new loan were being made to the Proposed Transferee and secured by
the Bond Property proposed to be transferred;
(v) the proposed transferee shall be a Single-Purpose
entity, shall not be an Affiliate of any Borrower or Guarantor and
meets the eligibility, credit, management and otherwise satisfies the
then applicable underwriting standards customarily applied by Fannie
Mae for approval of new borrowers (the "PROPOSED TRANSFEREE");
(vi) at the time of such Proposed Transfer, the Bond
Property proposed to be transferred shall be subject to
re-underwriting in accordance with Fannie Mae's then applicable
standards (including satisfaction of loan to value ratio requirements,
debt service coverage ratio requirements, physical maintenance
requirements, replacement reserve requirements and all other
applicable conditions, requirements and limitations), customarily
applied by Fannie Mae for approval of new loans secured by liens on
new Multifamily Residential Properties and such re-underwriting shall
be conducted by or on behalf of Servicer and Fannie Mae taking into
account all facts and circumstances deemed relevant by Servicer and
Fannie Mae;
(vii) the Proposed Transferee shall: (1) assume, from and
after the transfer date, all of the obligations of the Borrowers under
and with respect to the Related Bonds, the other Bond Documents, the
Bond Property Loan Documents with respect to such Bond Property, and
the related Fannie Mae credit enhancement pursuant to documentation in
form and substance acceptable to Fannie Mae; (2) enter into a
reimbursement agreement and such other documentation deemed necessary
by Fannie Mae to evidence and secure its reimbursement and other
obligations to Fannie Mae; (3) agree to credit enhancement pricing
and, if applicable, liquidity pricing that shall be determined by
Fannie Mae; and (4) amend, modify, supplement or amend and restate the
Related Bond Documents and the Bond Property Loan Documents with
respect to such Bond Property, all as deemed necessary by Fannie Mae;
(viii) the Borrowers shall have obtained the consent of the
Issuer with respect to the Related Bonds, the Related Trustee and each
other party to the Related Bond Documents and the Bond Property Loan
Documents if such consent to a transfer of a Bond Property is required
under the terms of such documents;
(ix) all documentation relating to the foregoing shall be
acceptable to Fannie Mae in all respects, including legal opinions,
release documentation and any amendments to this Agreement or the
other Transaction Documents;
(x) the Borrowers or the Permitted Transferee shall have
paid to Fannie Mae its customary transfer and assumption fees
consisting of a $3000 non-refundable application fee and, upon
completion of the Proposed Transfer transaction, a transfer fee equal
to one percent (1%) of the Allocable Facility Amount of the Bond
Property that is
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proposed to be transferred. In addition, the Borrowers shall have
paid or caused to have been paid to Fannie Mae and Servicer, customary
due diligence fees plus all costs and expenses (including reasonable
legal fees and expenses) incurred by Fannie Mae or Servicer in
connection with the foregoing, to the extent such expenses exceed
$3000. Such additional amounts shall be paid by the Borrowers
promptly upon receipt of invoices therefor, and shall be payable
regardless of whether the Bond Property is or is not (for any reason)
ultimately transferred; and
(xi) the Borrowers or the Permitted Transferee shall have
paid to the appropriate parties all other fees, costs and expenses
(including legal fees and expenses) payable by the Borrowers to each
of the related Issuer, the Related Trustee, the related Remarketing
Agent, Fannie Mae and Servicer under the terms of the Bond Property
Loan Documents and the Bond Documents with respect to such Bond
Property in connection with the Proposed Transfer.
(b) PERMITTED TRANSFERS. Fannie Mae's consent to a
Proposed Transfer shall become effective upon (i) Fannie Mae's determination,
that each of the conditions set forth in section 5.6(a) above have been
satisfied in full, and (ii) Fannie Mae's execution and delivery to the
Borrowers of a written instrument confirming that each of the conditions set
forth in section 5.6(a) above have been satisfied in full and releasing the
Borrowers from their Obligations under this Agreement from and after the
transfer date, solely to the extent such Obligations relate to the Bond
Property to be released. Any transfer of a Bond Property consented to by
Fannie Mae in accordance with the provisions set forth above (a "PERMITTED
TRANSFER") shall be made together with and subject to (1) the Related Bonds,
(2) the other Related Bond Documents (subject to any amendments and
modifications required by Fannie Mae in accordance with subsection (a) above),
(3) the Bond Property Loan Documents with respect to such Bond Property
(subject to any amendments and modifications required by Fannie Mae in
accordance with subsection (a) above), and (4) appropriate Fannie Mae credit
enhancement with respect to such Bond Property. Notwithstanding anything
herein or in the Bond Property Loan Documents with respect to such Bond
Property to the contrary, the Borrowers shall not be required to pay the
Prepayment Premium otherwise required under any the Related Mortgage Note in
connection with a Permitted Transfer.
7 CERTAIN PREPAYMENT PREMIUM WAIVERS.
Notwithstanding anything to the contrary contained in this
Agreement, any Related Fannie Mae Credit Enhancement Instrument or any Related
Mortgage Note, the Borrowers shall not be required to pay the Prepayment
Premium otherwise required under any of the Related Mortgage Notes upon the
release or substitution of any Bond Property in accordance with section 5.2 or
section 5.3 hereof, except to the extent that, after giving effect to such
prepayment, either (i) the Aggregate Facility Amount is less than either (a)
$91,000,000.00, if such prepayment occurs prior to the addition of the Falkland
Chase Bond Transaction to the Fannie Mae Credit Facility, or (b)
$117,000,000.00, if such prepayment occurs upon or after the
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addition of the Falkland Chase Bond Transaction to the Fannie Mae Credit
Facility, or (ii) the amount of any such prepayment when added to the aggregate
amount of all prior reductions in the Aggregate Facility Amount exceeds
$10,000,000.00.
8 CERTAIN PERMITTED CHANGES IN CONTROL.
Notwithstanding anything to the contrary contained in this
Agreement or any of the Mortgages, Fannie Mae acknowledges and agrees that
Fannie Mae will not unreasonably withhold its consent to a "Change of Control"
under the Uniform Covenant 19(b)(iii) of the Mortgages, provided that
Collateral Inc. gives Fannie Mae not less than forty-five (45) days prior
written notice of such Change of Control. The Borrowers acknowledge and agree
that time is of the essence with respect to such notice and that the preceding
agreement of Fannie Mae and the remaining provisions of this section 5.8 shall
be null and void unless such notice is timely given by Collateral Inc. If
Fannie Mae shall have received such notice not less than forty-five (45) days
prior to any such Change of Control and Fannie Mae determines in its reasonable
discretion not to grant its consent to such Transfer, then Fannie Mae and the
Borrowers acknowledge and agree that (a) within one hundred and eighty (180)
days from the date that Fannie Mae provides Collateral Inc. with written notice
of its refusal to grant its consent to such Transfer, the Borrowers shall cause
the Related Trustees to replace each and every Facility with alternate credit
enhancement in accordance with the requirements of section 6.2 and (b)
notwithstanding the provisions of Section 6.2(e), the Borrowers shall not be
required to pay the Prepayment Premium otherwise required under any of the
Related Mortgage Notes.
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VI.
SERVICING; REPLACEMENT OF CREDIT ENHANCEMENT
1 Servicing.
The Borrowers acknowledge that Fannie Mae has designated or
may designate an independent contractor to service the Mortgage Loans, the Bond
Property Loan Documents and the Reimbursement Loan Documents. The Borrowers
agree that to the extent that any provision in this Agreement or any other
Transaction Document requires, at stipulated dates or at the request of Fannie
Mae, the delivery by the Borrowers of certain notices, documents, certificates,
opinions, and financial or other information to Fannie Mae or the Lender (as
such term is used and defined in the Mortgage Documents), all such items shall
instead be delivered to, or at the request of, Servicer, subject to the
provisions of this section. The Borrowers acknowledge and agree that Fannie
Mae has delegated or may delegate certain functions to Servicer with respect to
the Transaction Documents, subject to and in accordance with the Servicing
Agreement. The Borrowers further acknowledge and agree that in connection with
any provision in this Agreement or in any other Transaction Document requiring
that any notices, documents or other information shall be given to Servicer, or
that Servicer shall have the right to request any documents or other
information from the Borrowers, Fannie Mae shall have the right to instruct the
Borrowers to instead (a) deliver such items directly to Fannie Mae or to such
other Person as Fannie Mae may, from time to time, designate, and (b) act in
accordance with the instructions of Fannie Mae with respect to any such items
or any other rights Servicer may have under this Agreement or under any other
Transaction Document. In addition, the Borrowers agree that any right of
Fannie Mae to give or deliver to the Borrowers any notice or other
communications, or to receive from the Borrowers any document or other
information, may be given, delivered or received by Servicer, unless otherwise
directed by Fannie Mae. The Borrowers shall act in accordance with any
instructions received from Fannie Mae pursuant to this section. The Borrowers
further acknowledge and agree that Fannie Mae reserves the unconditional right
to remove or replace Servicer with or without cause, with a substitute Servicer
chosen by Fannie Mae and upon any such removal or replacement, Fannie Mae shall
notify the Borrowers of the identity of the new servicer, if any.
2 REPLACEMENT OF FANNIE MAE CREDIT ENHANCEMENT.
Except as otherwise permitted upon a substitution or release
of a Property pursuant to section 5.2 or section 5.3, respectively, the
Borrowers will not cause any Related Trustee to terminate any Facility (except
in connection with the repayment of all of the outstanding Related Securities
or in connection with a Permitted Transfer) or replace any Facility with
alternate credit enhancement unless prior to or simultaneously with the
effectiveness of such termination or replacement:
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(a) Fannie Mae's Facility is replaced or terminated with
respect to all of the outstanding Bonds, and all of the Related Fannie Mae
Credit Enhancement Instruments are terminated in full except to the extent that
such Related Fannie Mae Credit Enhancement Instruments continue to impose
liability on Fannie Mae for any avoidance, recovery or disgorgement risk that
is addressed to Fannie Mae's satisfaction in accordance with the requirements
of subsection 6.2(d);
(b) the alternate credit enhancer's short term debt
obligations are rated in the highest short term category and long term debt
obligations are rated at least "A" by the Rating Agencies;
(c) the Borrowers shall have received a statement from
Fannie Mae to the effect that the Borrowers have paid to Fannie Mae the amount
of all Advances, Activity Fees and any other outstanding obligations of the
Borrowers to Fannie Mae hereunder, whether or not such Advances, Activity Fees
or other amounts are otherwise then due;
(d) Fannie Mae reasonably determines, in light of such
opinions of legal counsel, opinions of certified public accountants that
prepare the audited financial statements of the Borrowers and Guarantor and
such other similar information and opinions as may be provided by the Borrowers
to Fannie Mae, that no part of any payments made by the Borrowers prior to or
concurrently with the credit enhancement termination or replacement will likely
result in an avoidance or any other recovery or disgorgement pursuant to the
Bankruptcy Code (including sections 544, 547, 549 or 550 thereof) or any other
applicable bankruptcy or insolvency law which would result in Fannie Mae having
any liability under any Related Fannie Mae Collateral Agreement, or the
Borrowers will provide cash collateral or make other arrangements acceptable to
Fannie Mae in its discretion to ameliorate such risk of avoidance, recovery or
disgorgement; and
(e) the Borrowers shall have paid the Prepayment Premium
with respect to the Mortgage Loans in accordance with the requirements of the
Related Mortgage Notes calculated based on the assumption that the Mortgage
Loan is being prepaid in full on the day immediately preceding the effective
date of the alternative credit enhancement.
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VII.
EVENTS OF DEFAULT AND REMEDIES
1 EVENTS OF DEFAULT.
Each of the following events shall constitute an "Event of
Default" under this Agreement, whatever the reason for such event and whether
it shall be voluntary or involuntary, or within or without the control of the
Borrowers, or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any Governmental
Authority:
(a) the occurrence of an "EVENT OF DEFAULT" under any
other Transaction Document or the occurrence of any other default under any
Transaction Document beyond any specified cure period set forth therein; or
(b) the failure by any Borrower to pay when due any
amount payable by such Borrower under any Related Mortgage Note, any Mortgage,
this Agreement or any other Transaction Document, including any fees, costs or
expenses; or
(c) the failure by any Borrower to perform or observe any
covenant set forth in subsections 2.2(b), (c), (g), (h), (j) or (q), in
subsections 2.3 (a), (b), (d), (e), (g) to (i) inclusive or (k), in section
2.4, in section 2.5, in section 2.6, in section 2.7 or in Article III; or
(d) the failure by any Borrower to perform or observe any
covenant set forth in subsection 2.2(a), (e), (d), or (k) to (m), inclusive,
hereunder, within ten (10) days after receipt of notice from Servicer or Fannie
Mae; or
(e) the failure by any Borrower to perform or observe any
covenant set forth in subsection 2.2(i) or 2.3(j) hereunder, within twenty (20)
days after receipt of notice from Servicer or Fannie Mae; or
(f) any warranty, representation or other written
statement made by or on behalf of any Borrower contained in this Agreement, any
other Transaction Document or in any instrument furnished in compliance with or
in reference to any of the foregoing, is false or misleading in any material
respect on any date when made or deemed made; or
(g) any other Indebtedness in an aggregate amount in
excess of $100,000 of or assumed by the Borrowers (i) is not paid when due nor
within any applicable grace period in any agreement or instrument relating to
such Indebtedness or (ii) becomes due and payable before its normal maturity by
reason of a default or event of default, however described, or any other event
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of default shall occur and continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Indebtedness; or
(h) (i) any Borrower or Guarantor shall (A) commence a
voluntary case under the Federal bankruptcy laws (as now or hereafter in
effect), (B) file a petition seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, debt
adjustment, winding up or composition or adjustment of debts, (C) consent to or
fail to contest in a timely and appropriate manner any petition filed against
it in an involuntary case under such bankruptcy laws or other laws, (D) apply
for or consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of a substantial part of its property, domestic or
foreign, (E) admit in writing its inability to pay, or generally not be paying,
its debts as they become due, (F) make a general assignment for the benefit of
creditors, (G) assert that the any Borrower or Guarantor has no liability or
obligations under this Agreement or any other Transaction Document to which it
is a party, or (H) take any action for the purpose of effecting any of the
foregoing; or (ii) a case or other proceeding shall be commenced against any
Borrower or Guarantor in any court of competent jurisdiction seeking (A) relief
under the Federal bankruptcy laws (as now or hereafter in effect) or under any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding upon or composition or adjustment of debts, or (B) the
appointment of a trustee, receiver, custodian, liquidator or the like of any
Borrower or Guarantor, or of all or a substantial part of the property,
domestic or foreign, of any Borrower or Guarantor and any such case or
proceeding shall continue undismissed or unstayed for a period of 60
consecutive calendar days, or any order granting the relief requested in any
such case or proceeding against any Borrower or Guarantor (including an order
for relief under such Federal bankruptcy laws) shall be entered; or
(i) if any provision of this Agreement or any other
Transaction Document or the lien and security interest purported to be created
hereunder or under any Transaction Document shall at any time for any reason
cease to be valid and binding in accordance with its terms on any Borrower or
shall be declared to be null and void, or the validity or enforceability hereof
or thereof or the validity or priority of the lien and security interest
created hereunder or under any other Transaction Document shall be contested by
any Borrower seeking to establish the invalidity or unenforceability hereof or
thereof, any Borrower shall deny that it has any further liability or
obligation hereunder or thereunder; or
(j) if a "Transfer" (as defined in any Related Mortgage)
or a "Change in Control" (as defined in any Related Mortgage) shall occur in
violation of Uniform Covenant 19(b) of any Related Mortgage or if any Property
or any part thereof is otherwise conveyed, assigned, mortgaged, pledged, leased
or encumbered in any way other than as permitted under this Agreement or any
Related Mortgage without the prior written consent of Fannie Mae; or
(k) (x) the execution by any Borrower of a chattel
mortgage or other security agreement on any materials, fixtures or articles
used in the construction or operation of the
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improvements located on any Property or on articles of personal property
located therein, excluding equipment leases and security interests granted in
the ordinary course of business in office equipment at Borrowers' rental
office, or (y) if any such materials, fixtures or articles are purchased
pursuant to any conditional sales contract or other security agreement or
otherwise so that the ownership thereof will not vest unconditionally in any of
the Borrowers free from encumbrances, or (z) if the Borrowers do not furnish to
Fannie Mae upon request the contracts, bills of sale, statements, receipted
vouchers and agreements, or any of them, under which any Borrower claims title
to such materials, fixtures, or articles; or
(l) failure of any Borrower, upon request, to furnish to
Fannie Mae the results of official searches made by any Governmental Authority,
or failure by any Borrower to comply with any requirement of any Governmental
Authority within 30 days after written notice of such requirement shall have
been given to the Borrowers by such Governmental Authority; provided that, if
action is commenced and diligently pursued by the Borrowers within such 30
days, then the Borrowers shall have an additional 30 days to comply with such
requirement; or
(m) a dissolution or liquidation for any reason (whether
voluntary or involuntary) of any Borrower or Guarantor; or
(n) if any Borrower shall fail to qualify as a "qualified
REIT subsidiary" of Guarantor under Subchapter M of the Code; or
(o) if Guarantor shall fail to qualify as a real estate
investment trust under Subchapter M of the Code;
(p) the failure by Guarantor to perform or observe any
term, covenant, condition or agreement under the Guaranty within ten (10) days
after receipt of notice from Servicer or Fannie Mae;
(q) any judgment against any of the Borrowers or any
attachment or other levy against any portion of the assets of any Borrower with
respect to a claim in an amount in excess of $100,000.00 individually, and/or
$250,000.00 in the aggregate for all such claims for all of the Borrowers,
remains unpaid, unstayed on appeal, undischarged, unbonded, not fully insured
or undismissed for a period of sixty (60) days; or
(r) if, following an optional or mandatory tender of
Related Bonds in accordance with the Related Indenture in any Floating Rate
Bond Transaction, the Related Bonds have not been remarketed, but have been
purchased by the Related Trustee on behalf of and as agent for the applicable
Borrower with funds provided by Fannie Mae under the Related Fannie Mae
Collateral Agreement and such Related Bonds have not been remarketed as of the
ninetieth (90th) day following such purchase, then, at any time following such
ninetieth (90th) day, and provided the Related Bonds have not then been
remarketed, such failed remarketing shall, at Fannie Mae's option, constitute
an Event of Default under this Agreement; or
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(s) the failure by any Borrower to maintain insurance
with respect to each Property in accordance with the terms of the Related
Mortgage with respect to each such Property; or
(t) the failure by any Borrower to perform or observe the
covenants with respect to Hazardous Materials or Hazardous Materials Laws set
forth in any Mortgages or in any other Transaction Document including, the
covenants set forth in Paragraph D of the Rider to Multifamily Instrument
constituting a part of each Mortgage; or
(u) the failure by any Borrower to perform or observe any
term, covenant, condition or agreement hereunder, other than as set forth in
subsections (a) through (t) above, or in any other Transaction Document, within
thirty (30) days after receipt of notice from Servicer or Fannie Mae
identifying such failure; provided, however, that if in Fannie Mae's judgment,
(i) the cure of such failure requires a period in excess of 30 days, (ii) such
failure will not result in a Material Adverse Effect, and (iii) corrective
action is instituted by the Borrowers within such period and pursued diligently
and in good faith, then such failure shall not constitute an Event of Default
unless such failure is not cured by the Borrowers within sixty (60) days after
receipt of notice from Servicer or Fannie Mae identifying such failure; or
(v) any Borrower or Guarantor shall have asserted that it
has no liability or obligations under this Agreement or under any Transaction
Document to which it is a party or that the liens and the security interests
purported to be created by the Mortgage Loan Documents shall not be a valid and
perfected first priority security interest subject to no Liens except Permitted
Liens; or (b) any Governmental Authority having jurisdiction over any Borrower
or Guarantor shall find or rule that any material provision of this Agreement
or any Transaction Document to which it is a party is not valid and binding on
such person or that the lien and the security interest purported to be created
by any Mortgage Loan Document shall not be a valid and perfected first priority
security interest subject to no Liens except Permitted Liens; or
(w) a Reset Period expires and the Borrowers have not
either (i) received the prior written consent of Fannie Mae to a change in Mode
or the maintenance of the existing Mode or (ii) delivered Alternate Credit
Facilities in accordance with the terms of the Related Bond Documents and
section 6.2.
2 REMEDIES.
Upon the occurrence of an Event of Default and, solely with
respect to subsection (d) below, upon the occurrence of a Potential Event of
Default, Fannie Mae may in its discretion, but shall not be obligated to,
exercise any or all of the following remedies:
(a) declare all amounts payable by the Borrowers under
this Agreement or the other Transaction Documents to be forthwith due and
payable, and the same shall thereupon
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become due and payable without demand, presentment, protest or notice of any
kind, all of which are hereby expressly waived; or
(b) exercise all or any of its rights and remedies as it
may otherwise have under Applicable Law and under this Agreement or the other
Transaction Documents or otherwise by such suits, actions, or special
proceedings in equity or at law, or by proceedings in the office of any board
or officer having jurisdiction, either for specific performance of any covenant
or agreement contained in this Agreement or any other Transaction Document, or
in aid or execution of any power therein granted or for the enforcement of any
proper legal or equitable remedy; or
(c) demand and the Borrowers shall provide cash
collateral or Government Obligations in the full amount of the outstanding
obligations under all of the Bonds whether or not due and payable; or
(d) apply all or any portion of the Collateral to any
Obligations or other obligation of the Borrowers under this Agreement or any
other Transaction Document, in such amounts, at such times and in such order as
determined by Fannie Mae in its discretion. The Borrowers acknowledge that
this may include, among other things, applying funds or directing any Related
Trustee to apply funds on deposit in a Principal Reserve Fund or the Cash
Management Account to prepay the applicable Related Securities or to prepay any
other Related Securities or reimbursement or other payment obligations under
this Agreement or any other Transaction Document. Such funds may be applied to
prepay or reduce amounts outstanding under one or more issues of Related
Securities regardless of whether such amounts are then due and owing; or
(e) deliver to the Related Trustees written notice that
an Event of Default has occurred under this Agreement and directing the Related
Trustees to take such action pursuant to the Transaction Documents as Fannie
Mae may determine, including a request that the Related Trustees declare the
principal of all or a portion of the Related Securities then outstanding and
the interest accrued thereon to be immediately due and payable in accordance
with the terms and conditions of the Related Indentures.
No failure or delay on the part of Fannie Mae to exercise any right or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right or remedy hereunder preclude any further exercise thereof
or the exercise of any further right or remedy hereunder or under any other
Transaction Document. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law or under any Transaction Document.
No exercise by Fannie Mae of any remedy under any Transaction Document shall
operate as a limitation on any rights or remedies of Fannie Mae under this
Agreement.
In order to entitle Fannie Mae to exercise any remedy reserved to Fannie Mae in
this Article, it shall not be necessary to give any notice, other than such
notice as may be required under the
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applicable provisions of any of the Transaction Documents. The rights and
remedies of Fannie Mae specified in this Agreement are for the sole and
exclusive benefit, use and protection of Fannie Mae, and Fannie Mae is
entitled, but shall have no duty or obligation to the Borrowers, any Issuer,
any Related Trustee, any Bondholder with respect to any of the Bonds, or
otherwise, (a) to exercise or to refrain from exercising any right or remedy
reserved to Fannie Mae hereunder, or (b) to cause any Related Trustee or any
other party to exercise or to refrain from exercising any right or remedy
available to it under any of the Transaction Documents.
VIII.
MISCELLANEOUS
1 WAIVERS, AMENDMENTS.
This Agreement may be amended only by a written instrument
duly executed by each of the parties hereto. The Borrowers may take any action
herein prohibited or omit to perform any act herein required to be performed or
omit to perform any act herein required to be performed by it, only if the
Borrowers shall first obtain the written consent of Fannie Mae thereto. No
course of dealing between the Borrowers and Fannie Mae, nor any delay in
exercising any rights hereunder, shall operate as a waiver of any rights of
Fannie Mae hereunder. Unless otherwise specified in such waiver or consent, a
waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.
2 SURVIVAL OF REPRESENTATION AND WARRANTIES.
All statements contained in any Transaction Document or in any
certificate, financial statement or other instrument delivered by or on behalf
of any Borrower pursuant to or in connection with this Agreement (including any
such statement made in or in connection with any amendment hereto or thereto)
shall constitute representations and warranties made under this Agreement. All
representations and warranties made under this Agreement (a) shall be made and
shall be true at and as of the date of this Agreement, the Fannie Mae Facility
Closing Date and the date of each Advance, and (b) shall survive the execution
and delivery of this Agreement, regardless of any investigation made by Fannie
Mae or on its behalf.
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3 NOTICES.
All notices, directions, certificates or other communications
hereunder shall be given by certified or registered mail, return receipt
requested, OR by overnight courier addressed to the appropriate notice address
set forth below. Any of the parties hereto may, by a notice to the other party
specifically captioned "Notice of Change of Address pursuant to section 8.3 of
the Master Reimbursement Agreement", designate any further or different address
to which subsequent notices, certificates or other communications shall be sent
without any requirement of execution of any amendment to this Agreement. Any
such notice, certificate or communication shall be deemed to have been given as
of the date of actual delivery or the date of failure to deliver by reason of
refusal to accept delivery or changed address of which no notice was given
pursuant to this section 8.3. Unless otherwise directed by Fannie Mae pursuant
to section 8.19, all notices pursuant to this Agreement shall also be given to
Servicer in accordance with this section 8.3. The notice addresses are as
follows:
(a) if to Borrowers:
c/o Avalon Properties, Inc.
5904 Richmond Highway, Suite 300
Alexandria, Virginia 22303
Attention: Chief Financial Officer
with copies to:
c/o Avalon Properties, Inc.
15 River Road, Suite 210
Wilton, Connecticut 06897
Attention: Joanne Lockridge
and to:
Baber & Kalinowski, P.C.
3050 Chain Bridge Road, Suite 305
Fairfax, Virginia 22030
Attention: Brant Baber, Esq.
(b) if to Fannie Mae:
if by mail or overnight courier:
Fannie Mae
3900 Wisconsin Avenue, N.W.
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Washington, D.C. 20016
Attention: Senior Vice President -
Multifamily Activities
if by messenger:
Fannie Mae
3939 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Attention: Senior Vice President -
Multifamily Activities
in each case, with copies to:
Fannie Mae
Southeast Regional Office
950 East Paces Ferry Road
Suite 1900
Atlanta, Georgia 30326
Attention: Vice President - Multifamily
Activities
and to:
Fannie Mae
3900 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Attention: Multifamily Mortgage
Operations-Manager
Multifamily Deliveries
(c) if to Servicer:
Washington Capital DUS, Inc.
1616 North Fort Myer Drive, Suite 1210
Arlington, Virginia 22209
Attention: Bridget O. Schmitz
Executive Vice President
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4 PAYMENT PROCEDURE.
The Borrowers agree that, unless otherwise directed pursuant
to section 6.1, all amounts due to Fannie Mae under Article 4 of this Agreement
shall be paid to Servicer for remittance to Fannie Mae pursuant to the
Servicing Agreement. All payments to be made to Servicer, for the account of
Fannie Mae, pursuant to this Agreement shall be paid in immediately available
funds to Servicer in accordance with the Related Mortgage Note or in accordance
with instructions given to the Borrowers by Servicer. Except as otherwise
provided above in this section 8.4, all payments to be made to Fannie Mae
pursuant to this Agreement shall be made before 2:00 p.m., Washington, D.C.
time, on the date when due, in lawful currency of the United States of America
and in immediately available funds by wire transfer to an account designated in
writing by Fannie Mae unless the Borrowers are otherwise instructed in writing
by Fannie Mae. Notwithstanding the foregoing, in connection with Borrowers'
obligation to reimburse Fannie Mae by 2:00 p.m., Washington, D.C. time for
certain payments made by Fannie Mae as provided in Article 4 of this Agreement,
such payment will, unless otherwise directed pursuant to section 8.19, be
deemed to have been timely made if made to Servicer, for remittance to Fannie
Mae, by wire transfer to an account designated in writing by Servicer, before
2:00 p.m., Washington, D.C. time.
5 CONTINUING OBLIGATION.
This Agreement is a continuing obligation of the Borrowers and
shall, until the later of the date upon which all amounts due and owing to
Fannie Mae hereunder shall have been paid in full and the date Fannie Mae's
obligations under the last remaining Related Fannie Mae Credit Enhancement
Instrument are terminated, (a) be binding upon the Borrowers and its successors
and assigns and (b) inure to the benefit of and be enforceable by Fannie Mae
and its successors, transferees and assigns; provided, that the Borrowers may
not assign all or any part of this Agreement without the prior written consent
of Fannie Mae. Notwithstanding the foregoing, the Obligations of (i) Chase
Ridge Inc. shall terminate upon Chase Ridge Inc.'s receipt of a release from
Fannie Mae in accordance with Section 5.3(e) or Section 5.5(b)(ii) and (ii)
Chase Lea Inc. shall terminate upon Chase Lea Inc.'s receipt of a release from
Fannie Mae in accordance with Section 5.3(e) or Section 5.5(b)(ii).
6 SATISFACTION REQUIREMENT.
If any agreement, certificate or other writing, or any action
taken or to be taken, is by the terms of this Agreement required to be
satisfactory to, or subject to the satisfaction of, Fannie Mae, then, unless
otherwise expressly specified herein, the determination of such satisfaction
shall be made by Fannie Mae in its sole and exclusive judgment.
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7 CONSENT OF FANNIE MAE.
If any provision of this Agreement provides for the approval,
consent, election, determination, exercise of discretion, choice, designation,
judgment or waiver of or by Fannie Mae and if a basis for Fannie Mae granting
such approval, consent, determination, election, exercise of discretion,
choice, designation, judgment or waiver is not otherwise stated (i.e., that
such approval, consent, election, determination, exercise of discretion,
choice, designation, judgment or waiver will be "reasonable"), then in each
case such approval, consent, determination, election, exercise of discretion,
choice, designation, judgment or waiver will be given by Fannie Mae in its sole
and absolute discretion.
8 GOVERNING LAW.
This Agreement shall be construed and enforced in accordance
with, and the rights and remedies of the parties hereto shall be governed by,
the laws of the District of Columbia without regard to conflicts of law,
principles, except to the extent that Federal laws may prevail; provided,
however, that matters respecting the creation, perfection, priority and
foreclosure of the Lien on each Property granted pursuant to or in connection
with the Transaction Documents shall be governed by, and construed and enforced
in accordance with, the internal law of the state or commonwealth in which such
Property is situated without giving effect to the conflicts of law principles
of such state or commonwealth.
9 JURISDICTION, CONSENT TO SERVICE .
(a) Each of the Borrowers hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any District of Columbia court or Federal court of the United
States of America sitting in the District of Columbia, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to
this Agreement, the Bond Documents, the Mortgage Documents, the Custodial
Receipts Documents and every other Transaction Document, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such District of Columbia court or,
to the extent permitted by law, in such Federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. Nothing in this Agreement shall effect
any right that Fannie Mae may otherwise have to bring any action or proceeding
relating to this Agreement, the Bond Documents, the Mortgage Documents, the
Custodial Receipts Documents or the other Transaction Documents against any
Borrower or its properties in the courts of any jurisdiction.
(b) Each Borrower hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter
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have to the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement, the Bond Documents, the Mortgage Documents, the
Custodial Receipts Documents or the other Transaction Documents in any District
of Columbia or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in section 8.3. Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.
10 WAIVERS OF JURY TRIAL.
BORROWERS AND FANNIE MAE (A) COVENANT AND AGREE NOT TO ELECT A
TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING UNDER THIS AGREEMENT OR ANY OF
THE OTHER TRANSACTION DOCUMENTS TRIABLE BY A JURY AND (B) WAIVE ANY RIGHT TO
TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST.
THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND
VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL BY EACH BORROWER, AND
THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE
AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. FURTHER, EACH
BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF FANNIE MAE
(INCLUDING, BUT NOT LIMITED TO, THE FANNIE MAE'S COUNSEL) HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, TO OWNER THAT FANNIE MAE WILL NOT SEEK TO ENFORCE THE
PROVISIONS OF THIS SECTION 8.10.
11 COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
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<PAGE> 132
12 SEVERABILITY.
Any provision of this Agreement that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or nonauthorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction and the remaining portion of such provision
and all other remaining provisions will be construed to render them enforceable
to the fullest extent. The parties shall endeavor in good-faith negotiations
to replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
13 BUSINESS DAYS.
If any payment under this Agreement shall be specified to be
made upon a day which is not a Business Day, it shall be made on the next
succeeding day which is a Business Day and such extension of time shall in any
case be included in computing interest, if any, in connection with such
payment.
14 ENTIRE AGREEMENT.
This Agreement and the other Transaction Documents constitute
the entire contract between the parties relative to the subject matter hereof.
Any previous agreement among the parties with respect to the subject matter
hereof is superseded by this Agreement and the other Transaction Documents.
Nothing in this Agreement or the other Transaction Documents, expressed or
implied, is intended to confer upon any party other than the respective parties
hereto and thereto any rights, remedies, obligations or liabilities under or by
reason of this Agreement or the other Transaction Documents; provided, however,
that as to Persons other than Fannie Mae and the Borrowers that are parties to
any of the Transaction Documents, such Persons shall not have any rights,
remedies, obligations or liabilities under this Agreement or any of the
Transaction Documents except under such Transaction Documents as to which such
Persons are direct parties.
15 HEADINGS.
Section, subsection and paragraph headings in this Agreement
are included herein for convenience of reference only and shall not constitute
a part of this Agreement for any other purposes.
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<PAGE> 133
16 FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS.
To the extent permitted by law, the parties to this Agreement
agree that they will, from time to time, execute, acknowledge and deliver, or
cause to be executed, acknowledged and delivered, such supplements to this
Agreement and such further instruments as Fannie Mae may request and as may be
reasonably required in the opinion of Fannie Mae or its counsel to effectuate
the intention of or facilitate the performance of this Agreement or any other
Transaction Document.
17 ASSIGNMENT; TRANSFERS; THIRD-PARTY RIGHTS.
The Borrowers shall not assign this Agreement, or delegate any
of the Obligations hereunder, without the prior written consent of Fannie Mae.
This Agreement may not be transferred in any respect without the prior written
consent of Fannie Mae. Nothing in this Agreement shall confer any right upon
any holder of any Bond or any other Person other than the parties hereto and
their successors and permitted assigns; provided, however, that notwithstanding
anything to the contrary herein, Servicer shall be a third-party beneficiary
with respect to Borrowers' covenants and obligations under section 4.5.
18 WAIVER OF CLAIMS.
IN ORDER TO INDUCE FANNIE MAE TO EXECUTE AND DELIVER THE
AGREEMENTS, THE BORROWERS HEREBY REPRESENT AND WARRANT THAT THEY HAVE NO
CLAIMS, SET-OFFS OR DEFENSES AS OF THE FANNIE MAE FACILITY CLOSING DATE IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR IN
CONNECTION WITH ANY OF THE OTHER TRANSACTION DOCUMENTS. TO THE EXTENT ANY SUCH
CLAIMS, SET-OFFS OR DEFENSES MAY EXIST, WHETHER KNOWN OR UNKNOWN, THEY ARE EACH
HEREBY WAIVED AND RELINQUISHED IN THEIR ENTIRETY.
19 DISCLAIMER; ACKNOWLEDGEMENTS.
Approval by Fannie Mae of the Borrowers, the Mortgage Loans,
the Bonds or otherwise shall not constitute a warranty or representation by
Fannie Mae as to any matter. Nothing set forth in this Agreement, in any of
the Transaction Documents or in the subsequent conduct of the parties shall be
deemed to constitute Fannie Mae as the partner or joint venturer of any person
for any purpose whatsoever.
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<PAGE> 134
20 CONFLICTS BETWEEN AGREEMENTS.
Any terms and conditions contained in this Agreement that may
also be contained in any of the Related Mortgage Notes, any of the Related
Mortgages, any of the Reimbursement Loan Documents or any other Transaction
Document to which any of the Borrowers and Fannie Mae are parties, shall not,
to the extent reasonably practicable, be construed to be in conflict with each
other but rather shall be construed as duplicative, confirming, additional, or
cumulative provisions. To the extent that any ultimate conflict is determined
to exist between the terms and conditions of this Agreement and those set forth
in any of the Related Mortgage Notes, any of the Related Mortgages, any of the
Reimbursement Loan Documents or any of the other Transaction Document to which
any of the Borrowers and Fannie Mae are parties, the terms and conditions of
this Agreement shall control.
21 JOINT AND SEVERAL LIABILITY.
(a) JOINT AND SEVERAL LIABILITY. Notwithstanding anything
contained in this Agreement or any of the other Transaction Documents to the
contrary (but subject, however, to the provisions of subsection 8.21(b)), all
Obligations of any or all the Borrowers under this Agreement and the other Loan
Documents shall be joint and several Obligations of each Borrower.
(b) MAXIMUM LIABILITY OF EACH BORROWER; CONTRIBUTION AMONG
BORROWERS.
(i) Maximum Liability of each Borrower. Notwithstanding
anything contained in this Agreement or any of the other Transaction
Documents to the contrary, if the Obligations of any Borrower
hereunder exceed the limitations imposed under any Fraudulent Transfer
Law (as hereinafter defined), then such Obligations of such Borrower
shall be limited to a maximum aggregate amount equal to the largest
amount that would not render its Obligations subject to avoidance as a
fraudulent transfer or conveyance under Section 548 of Title 11 of the
United States Code or any applicable provisions of comparable state
law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after
giving effect to all other liabilities of such Borrower, contingent or
otherwise, that are relevant under the Fraudulent Transfer Laws
(specifically excluding, however, any liabilities of such Borrower in
respect of intercompany indebtedness to any other Borrower or any
other Affiliate of the Borrowers to the extent that such indebtedness
would be discharged in an amount equal to the amount paid by such
Borrower in respect of the Obligations) and after giving effect (as
assets) to the value (as determined under the applicable provisions of
the Fraudulent Transfer Laws) of any rights to subrogation,
reimbursement, indemnification or contribution of such Borrower
pursuant to applicable law or pursuant to the terms of any agreement.
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<PAGE> 135
(ii) Contribution Among Borrowers. The Borrowers together
desire to allocate among themselves in a fair and equitable manner,
their Obligations arising under this Agreement. Accordingly, in the
event any payment or distribution is made on any date by any Borrower
under this Agreement that exceeds its Fair Share (as defined below) as
of such date, that Borrower shall be entitled to a contribution from
each of the other the Borrowers in the amount of such other Borrower's
Fair Share Shortfall (as defined below) as of such date, with the
result that all such contributions will cause each Borrower's
Aggregate Payments (as defined below) to equal its Fair Share as of
such date provided, however, that notwithstanding the foregoing, no
Borrower shall be entitled to receive contribution payments which
exceed the amount of payments such Borrower has made on account of the
Obligations as of any date of determination. "FAIR SHARE" means, with
respect to a Borrower as of any date of determination, an amount equal
to (a) the ratio of (X) the Adjusted Maximum Amount (as defined below)
with respect to such Borrower to (Y) the aggregate of the Adjusted
Maximum Amounts with respect to all the Borrowers multiplied by (b)
the aggregate amount paid or distributed on or before such date by all
the Borrowers hereunder in respect of the Obligations. "FAIR SHARE
SHORTFALL" means, with respect to a Borrower as of any date of
determination, the excess, if any, of the Fair Share of such Borrower
over the Aggregate Payments of such Borrower. "ADJUSTED MAXIMUM
AMOUNT" means, with respect to a Borrower as of any date of
determination, the maximum aggregate amount of the Obligations of such
Borrower under this Agreement determined as of such date in accordance
with subsection 8.21(b)(i); provided that, solely for purposes of
calculating the "Adjusted Maximum Amount" with respect to any Borrower
for purposes of this subsection 8.21(b)(ii), any assets or liabilities
of such Borrower arising by virtue of any rights to subrogation,
reimbursement or indemnification or any rights to or obligations of
contribution hereunder shall not be considered as assets or
liabilities of such Borrower. "AGGREGATE PAYMENTS" means, with
respect to a Borrower as of any date of determination, an amount equal
to (a) the aggregate amount of all payments and distributions made on
or before such date by such Borrower in respect of this Agreement
(including in respect of this subsection 8.21(b)(ii)) minus (b) the
aggregate amount of all payments received on or before such date by
such Borrower from the other Borrowers as contributions under this
subsection 8.21(b)(ii). The amounts payable as contributions under
this subsection 8.21(b)(ii) shall be determined as of the date on
which the related payment or distribution is made by the applicable
Borrower. The allocation among the Borrowers of their obligations as
set forth in this subsection 8.21(b)(ii) shall not be construed in any
way to limit the liability of any Borrower hereunder.
(c) BORROWERS' RIGHTS OF SUBROGATION, ETC.. Until the Obligations
shall have been paid and performed in full, each Borrower shall withhold
exercise of any right of subrogation, contribution, reimbursement or indemnity
(whether contractual (including any such right under subsection 8.21(b)(ii)),
statutory, equitable, under common law or otherwise) and any other rights to
enforce any claims or remedies which it now has or may hereafter have against
any other Borrower or any of the Collateral or against any other guarantor or
security for the
134
<PAGE> 136
Obligations. Each Borrower further agrees that, to the extent its agreement to
withhold exercise of such rights of subrogation, contribution, reimbursement
and indemnity and such other rights as set forth above is found by a court of
competent jurisdiction to be void or voidable for any reason, any such rights
such Borrower may have against any other Borrower, any Collateral or any other
guarantor or security for the Obligations shall be junior and subordinate to
any rights Fannie Mae may have against such Borrower, such Collateral, such
guarantor or such security.
(d) SUBORDINATION OF OBLIGATIONS BETWEEN BORROWERS. Any
indebtedness of a Borrower (a "DEBTOR AFFILIATE") now or hereafter held by any
other Borrower (a "CREDITOR AFFILIATE") is hereby subordinated to the
Obligations of such Debtor Affiliate to Fannie Mae. If Fannie Mae so requests
after an Event of Default has occurred and is continuing, such indebtedness
shall be collected, enforced and received by such Creditor Affiliate as trustee
for Fannie Mae and be paid over to Fannie Mae on account of the Obligations.
(e) FANNIE MAE' RIGHTS. Each Borrower hereby agrees that Fannie
Mae may, without demand and at any time and from time to time and without the
consent of, or notice to, such Borrower, without incurring responsibility to
such Borrower, and without impairing or releasing the obligations of such
Borrower hereunder, upon or without any terms or conditions and in whole or in
part:
(i) change the manner, place or terms of payment of,
and/or change or extend the time of payment of, renew, increase,
accelerate or alter, any of the Obligations of any other Borrower, any
security therefor, or any liability incurred directly or indirectly in
respect thereof, and the Obligations of such Borrower shall apply to
the Obligations of such other Borrower as so changed, extended,
renewed or altered;
(ii) subject to the limitations imposed by subsection
8.21(b)(i), if any, take and hold security for the payment of the
Obligations of any other Borrower and sell, exchange, release,
surrender, realize upon or otherwise deal with in any manner and in
any order any property by whomsoever at any time pledged or mortgaged
to secure, or howsoever securing, such Obligations or any liabilities
(including any of those hereunder) incurred directly or indirectly in
respect thereof or hereof, and/or any offset thereagainst;
(iii) exercise or refrain from exercising any rights
against any other Borrower or any Collateral;
(iv) release or substitute any one or more endorsers,
guarantors, or other obligors in respect of the Obligations of any
other Borrower;
(v) settle or compromise any of the Obligations of any
other Borrower, any security therefor or any liability (including any
of those hereunder) incurred directly or indirectly in respect thereof
or hereof, or subordinate the payment of all or any part
135
<PAGE> 137
thereof to the payment of any liability (whether due or not) of such
other Borrower to its creditors other than Fannie Mae;
(vi) subject to the limitations imposed by subsection
8.21(b)(i), if any, apply any sums by whomsoever paid or howsoever
realized to any liability or liabilities of any other Borrower to
Fannie Mae regardless of what liability or liabilities of such
Borrower to Fannie Mae remain unpaid; and/or
(vii) consent to or waive any breach by any other Borrower
of, or any act, omission or default by any other Borrower under, this
Agreement or any of the other Transaction Documents.
(f) OBLIGATIONS ABSOLUTE. No invalidity, irregularity or
unenforceability of all or any part of the Obligations of any Borrower shall
affect, impair or be a defense to the Obligations of any other Borrower in
respect thereof, and the Obligations of each Borrower under subsection 8.21(a)
in respect of the Obligations of each other Borrower shall be primary, absolute
and unconditional notwithstanding the occurrence of any event or the existence
of any other circumstances which might constitute a legal or equitable
discharge of a surety or guarantor for the Obligations of such other Borrower
except payment and performance in full thereof.
(g) RELIANCE. Fannie Mae shall not be required to inquire into
the capacity or powers of any Borrower, or any of the officers, directors,
partners or agents acting or purporting to act on behalf of any Borrower, as a
condition to the liability of any other Borrower hereunder, and any Obligations
made or created in reliance upon the professed exercise of such powers shall
become Obligations of such other Borrower hereunder.
[The remainder of this page has been intentionally left blank]
136
<PAGE> 138
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective duly authorized
officers or representatives as of the date hereof.
AVALON COLLATERAL, INC., a Maryland corporation
By:
-----------------------------
Thomas J. Sargeant
Chief Financial Officer and Secretary
AVALON CHASE RIDGE, INC., a Maryland
corporation
By:
-----------------------------
Thomas J. Sargeant
Chief Financial Officer and Secretary
AVALON CHASE LEA, INC., a Maryland corporation
By:
-----------------------------
Thomas J. Sargeant
Chief Financial Officer and Secretary
FEDERAL NATIONAL MORTGAGE ASSOCIATION
By:
-----------------------------
Thomas W. White
Senior Vice President
S-1
<PAGE> 139
EXHIBIT A
BOND PROPERTIES, ISSUERS AND RELATED INFORMATION
SECTION A. FLOATING RATE BOND PROPERTIES:
<TABLE>
<CAPTION>
Bond/Loan Bond
Project Issuer Amount Trustee
- ------- ------ ------ -------
<S> <C> <C> <C>
1. Avalon Meadows Howard County, $11,500,000 Crestar Bank
Apartments Project Maryland
Howard County, MD
2. Avalon at Hampton I Hampton Redevelopment $8,060,000 Crestar Bank
Project and Housing Authority
City of Hampton, VA
3. Avalon Pointe Project Hampton Redevelopment $6,387,000 Crestar Bank
Stafford County, VA and Housing Authority
</TABLE>
<TABLE>
<CAPTION>
Fees
------------------
Issuer Trustee Remark. Total
Project Agent Bonds
- ------- -----
<S> <C> <C> <C> <C> <C>
1. Avalon Meadows -- .0374% .125% .1624% Howard County, Maryland Multifamily Housing
Apartments Project Revenue Refunding Bonds (Avalon Meadows
Howard County, MD Apartments Project), Series 1996
2. Avalon at Hampton I -- .05335% .125% .17835% Hampton Redevelopment and Housing Authority
Project Multifamily Housing Revenue Refunding Bonds
City of Hampton, VA Series 1996A (Avalon at Hampton I Project)
3. Avalon Pointe Project -- .067325% .125% .192325% Hampton Redevelopment and Housing Authority
Stafford County, VA Multifamily Housing Revenue Bonds 1996 Series
(Avalon Pointe Project)
</TABLE>
NY1-419670
(AVALON Master Reimbursement Agreement)
<PAGE> 140
SECTION B. FIXED RATE BOND PROPERTIES:
<TABLE>
<CAPTION>
Bond/Loan Bond
Project Issuer Amount Trustee
- ------- ------ ------ -------
<S> <C> <C> <C>
1. Avalon Landing Apartments Anne Arundel County, $7,000,000 Crestar Bank
Project Maryland
Anne Arundel County, MD
2. Avalon Knoll Apartments Housing $14,130,000 Crestar Bank
Montgomery County, MD Opportunities
Commission of
Montgomery County
</TABLE>
<TABLE>
<CAPTION>
Mortgage Loan Interest Components
-----------------------------------------
Pass- Servicing Facility Actual
Project Through Fee Fee Note Rate Bonds
- ------- Rate -----
<S> <C> <C> <C> <C> <C>
1. Avalon Landing Apartments 6.15%(1) .09% .50% 6.74% Anne Arundel County, Maryland
Project Multifamily Housing Revenue
Anne Arundel County, MD Refunding Bonds (Avalon Landing
Apartments Project), Series 1996
2. Avalon Knoll Apartments 6.287%(2) .09% .50% 6.877% Housing Opportunities Commission
Montgomery County, MD of Montgomery County Multifamily
Housing Revenue Bonds (Avalon
Knoll Apartments) 1996 Issue C
</TABLE>
- -----------------------------
(1) The Pass-Through Rate for the Anne Arundel County, Maryland
Multifamily Housing Revenue Refunding Bonds (Avalon Landing Apartments
Project), Series 1996 includes the Trustee's fee equal to .0472% per annum
of the outstanding principal amount of the related Mortgage Loan. There is no
Issuer's fee payable in connection with this transaction.
(2) The Pass-Through Rate for the Housing Opportunities Commission
of Montgomery County Multifamily Housing Revenue Bonds (Avalon Knoll
Apartments), 1996 Issue C includes the Trustee's fee equal to .02357% per annum
of the outstanding principal amount of the related Mortgage Loan and the
Issuer's Fee equal to .145% per annum of the outstanding principal amount of
the related Mortgage Loan.
Exh. A-2
<PAGE> 141
SECTION C. CUSTODIAL RECEIPTS PROPERTIES:
<TABLE>
<CAPTION>
Project Bond Issuer Bonds
------- ----------- -----
<S> <C> <C>
1. Avalon Ridge Community Development Community Development Administration
Montgomery County, MD Administration, Department of Multifamily Development Revenue Bonds, 1985
Economic and Community Issue A (Chase Ridge)
Development State of Maryland
2. Avalon Lea Community Development Community Development Administration
Baltimore County, MD Administration, Department of Multifamily Development Revenue Bonds, 1985
Economic and Community Issue B (Chase Lea)
Development State of Maryland
</TABLE>
<TABLE>
<CAPTION>
Project Custodial Receipts Amount
------- ------------------ ------
<S> <C> <C>
1. Avalon Ridge Avalon Properties, Inc., $26,815,000
Montgomery County, MD Custodial Receipts,
Series 1995 A
2. Avalon Lea Avalon Properties, Inc., $16,835,000
Baltimore County, MD Custodial Receipts,
Series 1995-B
</TABLE>
Exh. A-3
<PAGE> 1
EXHIBIT 21.1
SCHEDULE OF SUBIDIARIES OF AVALON PROPERTIES, INC.
Avalon Chase Glen, Inc.
Avalon Chase Grove, Inc.
Avalon Chase Hampton II, Inc.
Avalon Chase Heritage, Inc.
Avalon Chase Lea, Inc.
Avalon Chase Ridge, Inc.
Avalon 4100 Massachusett Ave., Inc.
Avalon Town Green II, Inc.
Avalon Town Meadows, Inc.
Avalon Town View, Inc.
Avalon Transactions, Inc.
Lexington Ridge-Avalon, Inc.
Town Cove Jersey City Urban Renewal, Inc.
Avalon Decoverly, Inc.
Avalon Lake Arbor, Inc.
Avalon Commons, Inc.
Avalon Collateral, Inc.
Town Cove II Jersey City Urban Renewal, Inc.
Avalon Fairway II, Inc.
Avalon Ballston II, Inc.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Avalon Properties, Inc. on Form S-3 (File No. 333-2281) of our report dated
January 16, 1997, on our audits of the consolidated financial statements and
financial statement schedule of Avalon Properties, Inc. as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
New York, New York
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,241
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,956
<PP&E> 1,081,906
<DEPRECIATION> 44,547
<TOTAL-ASSETS> 1,082,771
<CURRENT-LIABILITIES> 33,177
<BONDS> 310,606
0
88
<COMMON> 334
<OTHER-SE> 737,566
<TOTAL-LIABILITY-AND-EQUITY> 1,082,771
<SALES> 0
<TOTAL-REVENUES> 125,213
<CGS> 0
<TOTAL-COSTS> 68,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,545
<INCOME-PRETAX> 46,157
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 2,356
<CHANGES> 0
<NET-INCOME> 51,651
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 0
</TABLE>
