UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
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Ohio 34-1747603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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5025 Swetland Court, Cleveland, Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (216) 261-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Shares, without par value New York Stock Exchange, Inc.
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Depositary Shares, each New York Stock Exchange, Inc.
representing 1/10 of a Share of
9-3/4% Class A Cumulative
Redeemable Preferred Shares,
without par value
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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. [ x ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, was $287,325,568 as of March 30,
1998.
The number of Common Shares outstanding as of March 30, 1998 was
17,073,773.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Portions of the Annual Performance Report to Shareholders for the
fiscal year ended December 31, 1997 (in Parts II, III and IV).
Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Shareholders to be held on May 7, 1998 (in Part III).
ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997<PAGE>
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Page
--------------------------
April 2, 1998
1997 Proxy
Item Form 10-K Statement
PART I
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1. Business 1 -
Strategy and Philosophy 2 -
Management and Operations Strategy 2 -
Acquisition and Development 3 -
Financing 5 -
Registration statements filed in 6 -
connection with financing
Acquisitions, development and
dispositions 6
Competitive Conditions 8
Main Offices 9 -
Employees 9 -
2. Properties 9 -
Market-rate Properties 10 -
Government-Assisted Properties 11 -
Congregate Care Facilities 11 -
Undeveloped Land 11 -
Indebtedness Encumbering the
Properties 11 -
Government Programs 11 -
Rental Assistance Program 12 -
Mortgage Insurance Programs 13 -
3. Legal Proceedings 15 -
4. Submission of Matters to a Vote
of Security Holders 15 -
PART II
5. Market for the Registrant's
Common Equity and Related
Stockholder Matters 16 -
6. Selected Financial and Other Data 17
7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 20 -
8. Financial Statements and
Supplementary Data 31 -<PAGE>
9. Changes and Disagreements with
Accountants on Accounting and
Financial Disclosure 31 -
PART III
10. Directors and Executive Officers
of the Registrant 32 49
11. Executive Compensation 33 45
12. Security Ownership of Certain
Beneficial Owners and Management 34 49
13. Certain Relationships and Related
Transactions 34 50
Glossary 35 -
PART IV
14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 38
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page 1
See "Glossary" for the definitions of certain capitalized terms
used in this Form 10-K.
PART I
Item 1. Business
Associated Estates Realty Corporation (the "Company"), a
fully integrated real estate company, was formed in July 1993 to
continue the business of the Associated Estates Group ("AEG") of
developing, acquiring, owning and managing multifamily
residential rental apartment facilities. The Company's portfolio
currently consists of 92 multifamily properties (the
"Properties") containing 18,920 suites located primarily in
Indiana, Ohio, Michigan and Pennsylvania. The total number of
properties owned also includes three properties located in
Florida, Georgia, and Maryland which contain a total of 1,004
suites that were acquired on February 3, 1998 as part of the
acquisition of MIG Realty Advisors, Inc. (MIG). The transaction
is discussed elsewhere in this report.
Of the Company's 18,920 suites, 16,823 suites are contained
in conventional, market-rate properties (the "Market-rate
Properties") and 1,927 suites are contained in properties, the
rents of which are subsidized by the United States Department of
Housing and Urban Development (the "Government-Assisted
Properties"). The remaining 170 suites are contained in
apartment communities for elderly persons that provide residents
with one daily meal, housekeeping, laundry and other services and
recreational and educational activities ("Congregate Care
Facilities"). Economic occupancy during 1997 averaged 94%.
Additionally, the Company owns eight undeveloped land parcels
containing an aggregate of 120.9 acres.
The Company is a self-administered and self-managed Real
Estate Investment Trust ("REIT") and accordingly, does not engage
or pay for a REIT advisor. The Company manages all of the
Properties, and either AEG or the Company has managed all of the
Properties continuously since their acquisition or development by
AEG or the Company. Of the Company's 92 Properties, 41 were
developed and two were acquired by AEG prior to the IPO and 49
Properties were acquired in separate transactions by the Company
after the IPO. Subsequent to the IPO, the Company also acquired
the remaining 50% interest in two of the Properties included in
the Company's Portfolio at the time of the IPO which were
previously owned by joint ventures (together with the 49
Properties referred to above, the "Acquired Properties").
Nine of the Acquired Properties are located in northern Ohio,
22 are located in central Ohio, 11 are located in Michigan, one
is located in Pittsburgh, Pennsylvania, two are located in
Indianapolis, Indiana, one is located in Cincinnati, one is
located in Coconut Creek, Florida, one is located in Duluth,
Georgia, and one is located in Columbia, Maryland. The 49
Properties acquired since the IPO contain 10,216 suites,
including 220 suites that were added to these Properties after
their acquisition.
page 2
The property located in Pittsburgh, Pennsylvania is owned by
Associated Estates Realty Corporation of Pennsylvania, Inc., a
wholly owned subsidiary of the Company. The property located in
Indianapolis, Indiana is owned by Associated Estates Realty
Corporation of Indiana, LLC, also a wholly owned subsidiary of
the Company. The property located in Duluth, Georgia is owned by
Associated Estates Realty Corporation of Georgia, also a wholly
owned subsidiary of the Company.
The Company also currently manages 7,052 residential suites
and eight commercial properties (containing an aggregate of
approximately 825,000 square feet of gross leasable area), not
owned by the Company. In addition, the Company owns
substantially all of the economic interests in five corporations
which provide management and other services for the Company.
Strategy and Philosophy. The Company, together with
affiliated entities, has assembled, through development,
acquisition and substantial rehabilitation, one of the largest
portfolios of multifamily properties in the Midwest. With the
acquisition of MIG, the Company's focus will expand beyond the
Midwest to a portfolio that targets selected markets throughout
the country. The Company is committed to unequaled resident
service and attentive, "hands-on" management necessary to
maintain and enhance its position as a leading owner, developer
and manager of multifamily properties.
The Company is committed to increasing its cash flow and
Funds From Operations (on an aggregate and per share basis) and
the value of its portfolio of Properties. The Company is also
committed to continuing growth through the active management of
the Properties and the selective acquisition and development of
additional multifamily properties.
Management and Operations Strategy. The Company has employed
a strategy of developing and acquiring a group of multifamily
properties in various locations that has resulted in a
strategically balanced portfolio allowing the Company to respond
to changing lifestyles and demographics. The Company provides a
variety of multifamily rental housing types with monthly rents
ranging from $382 to $910 and a portfolio average of $615 per
suite at December 31, 1997. The Company operates using a
centralized management approach to provide a stable operating
environment that maximizes the economic returns of the Properties
through consistent and predictable cash flow and enhances the
value of its properties. The management of the Properties is
supervised by a team of real estate professionals that together
possess over 70 years of experience in the property management
industry. A regional office has been established in the
Columbus, Ohio area within a one hour drive from each of the
Central Ohio Properties to provide closer oversight of these
Properties. With the acquisition of MIG, the Company also
expects to operate regional offices from MIG's existing offices
in Walnut Creek, California; West Palm Beach, Florida; and
Detroit, Michigan.
The Company's management approach is to monitor its
marketplace closely and to seek to provide superior services to
its residents through hands on management. All management
personnel work and live in close proximity to the Properties.
The Company believes this concept simplifies the handling of
management tasks and on-site situations and helps ensure that the
page 3
site staff provide quality service to their residents. The
Company has developed and has substantially completed the
installation of a proprietary leasing and marketing information
system known as LISA (R) at its Market-rate properties. This system
furnishes senior management up to the minute information concerning
leasing traffic, occupancy trends and daily activities on a property
by property basis and for the portfolio as a whole. This technology
greatly enhances the flow of information between management and
operations by providing an on-line communication link with each
of the Properties. In 1997, the Company adopted PeopleSoft
technology to streamline internal information needs. The Company
plans to implement Yardi Systems' rent collection system in 1998.
Over the years, the Company has also applied its management
approach to the management of properties for third parties. The
Company believes that third-party property management can broaden
the Company's knowledge of a market, create opportunities for
future acquisitions, enhance purchasing power, provide a network
for new personnel and generate fee income.
The Company intends to maximize all available sources of
capital which may include the selective disposition of certain
Properties and/or undeveloped land. Notwithstanding the
selective dispositions of assets, the Company plans to continue
its annual program of improvements to its Properties and its
ongoing practice of regular maintenance and periodic renovation,
which are intended to yield long-term benefits. The Company
believes that these activities will enhance shareholder value.
Acquisition and Development. Since completion of the IPO,
the Company has acquired 49 properties that contain an aggregate
of 10,216 suites, including the three properties containing a
total of 1,004 suites acquired in connection with the acquisition
of MIG, and a 316-suite property located in Toledo, Ohio, which
was purchased on February 19, 1998 in a separate unrelated
transaction. The Company intends to continue to acquire
primarily Market-rate Properties with attractive initial yields,
leases at below market rental rates or properties where the
Company believes it can grow cash flow and benefit from the
potential for capital appreciation, and where the Company
believes that its financial strength and management capabilities
can enhance value over time. Substantial rehabilitation and the
repositioning of apartment properties has historically been an
important component of AEG's business, and the Company believes
that it may be able to capitalize on this experience in
connection with future acquisitions.
The Company's strategy is to benefit from its investments,
principally in markets where the acquisition of a property or
properties can provide the basis whereby the Company can enhance
or bring an additional level of proficiency and expertise to the
day-to-day management of the properties. The Company believes
acquisition opportunities exist in markets experiencing favorable
economic growth patterns where multifamily properties can be
acquired at below replacement cost or where the construction of
multifamily apartments is difficult due to zoning restrictions or
where properties have been undermanaged. Upon completion of the
acquisition of MIG, the Company expects to deploy its capital in
two distinct types of markets: "continuous markets" and
page 4
"opportunistic markets". Continuous markets are defined as
markets with a diversified economy, a long trend of growth, and a
deep apartment market. These are markets where the Company
intends to be active on a regular basis, such as Columbus, Ohio;
Atlanta, Georgia; south Florida; the Research Triangle and the
Metro Washington, D.C. area. The Company expects to continuously
acquire in these markets, based on market research that will
drive the timing and pricing at which the pace of acquisitions
will take place. Opportunistic markets are defined as those
where the Company perceives a strategic opportunity because of
potential growth and good buying opportunities. Acquisitions in
these markets will be more concentrated in short time periods
while opportunities exist, and will occur less frequently than
in the continuous markets.
The Company currently is engaged, and as a matter of course,
engages in discussions with third-party owners of multifamily
properties and management and construction companies regarding
potential acquisitions or management by the Company of existing
multifamily properties or newly constructed multifamily
properties that the Company will acquire upon completion of
construction. At March 20, 1998, the Company was under contract
to purchase eight properties currently managed by MIG and three
properties in various stages of development in connection with
the acquisition of MIG. The eight managed properties, consisting
of 1,730 suites, are located in Arizona, California, Georgia,
Maryland (two) Missouri; North Carolina and Texas. The three
development properties, consisting of 1,216 suites, are located
in Florida. The acquisition of these properties, along with the
property management and advisory business of MIG, is subject to
shareholder approval. At March 20, 1998, the Company was also
under contract to purchase, in separate unrelated transactions,
two properties, one in Indiana and one in Kentucky, consisting of
360 suites, and three parcels of undeveloped land in Kentucky,
Ohio and Pennsylvania containing an aggregate of 144 acres, one
of which is located adjacent to a multifamily property presently
under contract by the Company. The Company also, in the normal
course of its business, enters into non binding letters of intent
concerning the possible acquisition of properties and businesses.
It is the Company's policy to not disclose information about
properties that are the subjects of such letters of intent.
There is no guarantee that the Company will be successful in
acquiring the two properties and the three land parcels currently
under contract. The Company expects that acquisitions will
continue to provide a source of growth for the Company.
Development of new properties is also an important component
of the Company's business. The Company plans to selectively
develop multifamily properties either on land currently owned or
controlled by the Company or on land the Company may acquire in
the future. The Company has completed the expansion of a total
of 220 suites on parcels of land adjacent to The Residence at
Newark, Muirwood Village at Zanesville, Wyndemere and Georgetown
Park Apartments. In addition, the Company has completed
construction of Bradford at Easton, a 324-suite multifamily
property in Columbus, Ohio. Construction is also in progress at
The Residence at Barrington, a 288-suite multifamily property
located in Aurora, Ohio having an anticipated completion date of
the fourth quarter of 1998. Construction of The Village of
Western Reserve was also underway at the end of 1997, with
completion of the 108 suites expected by Spring 1998. Over time,
page 5
the Company may alter its mix of acquisition and development to
take advantage of varying market opportunities.
The following schedule details construction in progress at
December 31, 1997:
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<CAPTION>
(dollars in thousands) Placed in December 31, 1997
Number Costs Service -----------------
of Incurred through Land Building Estimated
Property Suites to Date 12/31/97 Cost Cost Completion
-------------------- ------ ----------- -------- ---- -------- ----------
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AURORA, OHIO
The Residence at
Barrington-Phase I 168 $ 15,073 $11,162 $ 393 $ 3,518 1997
The Residence at
Barrington-Phase II 120 3,053 - 982 2,071 1998
288 18,126 11,162 1,375 5,589
ANN ARBOR, MICHIGAN
Arbor Landings Apts. II 160* 1,274 - 650 624 1998
FENTON, MICHIGAN
Georgetown Park Apts. III 120* 2,881 - 350 2,531 1998
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118* 511 - 402 109 1998
STREETSBORO, OHIO
The Village of
Western Reserve 108 5,525 2,948 426 2,151 1998
WESTLAKE, OHIO
Westlake 300* 628 - 523 105 1999
Other 349 1,686 82 592 1,012
----- ---------- ------- ------- ---------
1,443 $ 30,631 $14,192(1) $ 4,318 $ 12,121
* Estimated
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(1) Including land of $1,329.
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Financing. Seventy-one of the Company's 81 wholly owned
properties were unencumbered at December 31, 1997 with annualized
earnings before interest, depreciation and amortization of
approximately $51.9 million and an historical cost basis of
approximately $527.4 million. The remaining 10 of the Company's
wholly owned properties have an historical cost basis of $91.0
million and secured property specific debt of $57.8 million at
December 31, 1997. Unsecured debt, which totaled $260.3 million
at December 31, 1997, consisted of $92.5 million in Medium-Term
Notes, Senior Notes of $84.8 million and amounts drawn on the
revolving credit facility of $83 million. The Company's
proportionate share of the mortgage debt relating to the seven
joint venture properties was $18 million at December 31, 1997.
The weighted average interest rate on the secured, unsecured and
the Company's proportionate share of the joint venture debt was
7.53% at December 31, 1997.
The Company utilizes borrowings under a $100 million
unsecured revolving credit facility (the "Line of Credit") for
the acquisition and development of multifamily properties and
working capital purposes. The Line of Credit includes certain
restrictive covenants which, among others, require the Company to
maintain a minimum level of net worth, to limit dividends to 90%
page 6
of Distributable Cash Flow, to restrict the use of its borrowings
and to maintain certain debt coverage ratios. The Line of Credit
provides for a scaled reduction in the LIBOR or prime rate
margins and commitment fees based on the Company's credit
ratings. Based on the Company's present credit ratings, the
LIBOR margin is 125 basis points, subject to a competitive bid
option, fixed in increments of 30, 60, 90, 120 or 180 days and
Prime Rate borrowings are at the Prime Rate with no margin. An
annual commitment fee of between 15 basis points and 25 basis
points on the average daily unused amount of the facility is paid
quarterly in arrears. The Line of Credit expires in September
1998 and the Company has the option to extend the facility for an
additional one year period. The Company is negotiating an
increase in the Line of Credit to $175 million with a $100
million "stand by" facility and a more competitive rate
structure. At December 31, 1997, $83 million was drawn on the
Line of Credit with a weighted average interest rate of 7.04%.
During the year ending December 31, 1997, the Company issued
four Medium-Term Notes (the "MTN's") aggregating $50 million
under its $75 million and $102.5 million MTN programs. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest from 6.2% to 7.9% over terms of between
two to 30 years. The holder of a $5 million, 30 year MTN has the
option to require payment on February 20, 2002. The net proceeds
to the Company with respect to these issuances were $49.8
million, which were applied to amounts outstanding under the
Line of Credit.
Registration statements filed in connection with financing.
The Company has filed a shelf registration statement with the
Securities and Exchange Commission relating to the offering of up
to $368.8 million of debt securities, preferred shares,
depositary shares, common shares and common share warrants. The
total amount of the shelf filing included a $102.5 million
Medium-Term Note Program. The securities may be offered from
time to time at prices and upon terms to be determined at the
time of sale.
Acquisitions, development and dispositions. The Company<PAGE>
intends to continue to finance its multifamily property
acquisitions and development with the most appropriate sources of
capital, which may include undistributed Funds From Operations,
the issuance of equity securities, bank and other institutional
borrowings, the issuance of debt securities, the assumption of
mortgage indebtedness or through the exchange of properties. The
Company may also determine to raise additional working capital
through one or more of these sources.
During the year ended December 31, 1997, the Company
acquired eight multifamily properties containing 1,762 suites and
two parcels of land consisting of 14.7 acres for an aggregate
purchase price of $105.1 million, of which $4.5 million
represented liabilities assumed. The acquisitions are located in
Indianapolis, Indiana; Michigan, and Ohio, and were financed
primarily with proceeds from borrowings under the Line of Credit.
The Company also completed the construction of Bradford at
Easton, a 324-suite property in Columbus, Ohio. The Company is
also developing The Residence at Barrington, a 288-suite
multifamily property in Aurora, Ohio, that will be constructed in
two phases with an estimated completion of both phases in the
fourth quarter of 1998. Construction has also commenced at The
Village of Western Reserve, a 108-suite property located in
page 7
Streetsboro, Ohio that is expected to be completed in the second
quarter of 1998. In addition, the Company owns eight parcels of
undeveloped land, three of which are in Ohio and five of which
are in Michigan, containing approximately 121 acres on which an
estimated 1,346 suites could be developed. Development
activities for the construction of 288 suites have commenced with
respect to two of these parcels.
Subsequent to December 31, 1997, the Company acquired
four multifamily properties containing an aggregate of 1,320
suites for an aggregate purchase price of $74.4 million of which
$15.5 million represents liabilities assumed which includes
mortgage indebtedness of $15.0 million. The balance of the
purchase price was financed using borrowings under an unsecured
90 day term loan of $44.5 million and borrowings under the
Company's Line of Credit of approximately $14.4 million. The
properties are located in Coconut Creek, Florida; Duluth,
Georgia; Columbia, Maryland; and Toledo, Ohio. The Falls
Apartments was acquired by AERC of Georgia, a wholly owned
qualified REIT subsidiary of the Company. The Company will
manage all of the Acquired Properties; however, interim
management agreements have been entered into with the current
managers for the properties located in Florida, Georgia and
Maryland. The interim management agreements are cancelable upon
30 days notice by the Company. The Company has given notice to
the managing agent of Cypress Shores that an affiliate of MIG
Realty Advisors, Inc. ("MIGRA") will commence managing the
property on March 1, 1998. The Falls Apartments and Reflections
Apartments will be managed by affiliates of MIGRA.
The Company has also entered into separate contracts to
purchase three parcels of undeveloped land containing an
aggregate of 144 acres for an approximate purchase price of $9.8
million. One of the parcels is located in Avon, Ohio (a suburb
of Cleveland), one of the parcels is located in Crestview Hills,
Kentucky adjacent to a multifamily real estate property currently
under contract and one of the parcels is located in Cranberry
Township, Pennsylvania (a suburb of Pittsburgh). Approximately
838 multifamily apartments may be constructed on the undeveloped
land; 312 in Avon, Ohio; 300 in Crestview Hills, Kentucky; and<PAGE>
226 in Cranberry Township, Pennsylvania. The Company expects to
finance the undeveloped land acquisitions using borrowings under
the Line of Credit.
Subject to customary conditions to closing and the approval
of the Company's shareholders, the Company has entered into a
definitive merger agreement with MIGRA. Pursuant to the terms of
the merger agreement with MIGRA, the Company will also acquire
the property management business of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition fees that would have otherwise been received by MIGRA
upon the sale of certain of the properties owned by institutions
advised by MIGRA. Founded in 1982, MIGRA currently manages,
through its affiliated management companies, 36 Multifamily
Apartment Properties containing 11,059 suites.
The Company is also under contract to purchase eight
properties currently managed by MIGRA. The eight properties,
containing 1,730 suites, are located in Arizona, California,
Georgia, Maryland (two), Missouri, North Carolina and Texas.
page 8
In the fourth quarter of 1997, the Company sold a 90 acre
parcel of land, which was one of the assets acquired by the
Company at the time of the IPO that was zoned for office and
industrial use.
The Company intends to finance future acquisitions and
developments with the most appropriate sources of capital, which
may include undistributed Funds From Operations, the issuance of
equity or debt securities, bank and other institutional
borrowings, or through the exchange of properties. The Company
may also determine to raise additional working capital through
one or more of these sources.
Competitive Conditions. The Company operates in the
northern Ohio; central Ohio; Cincinnati, Ohio; Michigan;
Pittsburgh, Pennsylvania; Indianapolis, Indiana; and, most
recently, Coconut Creek, Florida; Atlanta, Georgia; and Columbia,
Maryland rental markets. The Company believes that the demand
for the Market-rate Property rental suites will increase as the
supply of Market-rate, multifamily apartment suites remains below
demand in the Company's markets. While demand does fluctuate
throughout the markets in which the Company operates, demand for
the most part exceeds the supply of multifamily housing available
in those markets. The rents at the majority of the Market-rate
Properties target the middle-market renter who comprises the
largest segment of renters in these markets. Consequently, we
believe there is a stable and consistent market for these suites.
In some cases, however, Market-rate Property rents are
established to target the upper-middle-income renters where the
location of the property, size of the unit and the property's
amenities contribute to the pricing of these suites.
The following two paragraphs contain forward-looking
statements and are subject to certain risks, trends and
uncertainties that could cause actual results to vary from those
projected. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgments and current knowledge. These forward-looking
statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that the Company's forward-looking
statements involve risks and uncertainty, including without
limitation risks of a lessening of demand for the apartments
owned by the Company, changes in government regulations affecting
the Government-Assisted Properties, and expenditures that cannot
be anticipated such as utility rate and usage increases,
unanticipated repairs, additional staffing, insurance increases
and real estate tax valuation reassessments.
Approximately 52% of the Company's multifamily properties
are located in the greater Cleveland/Akron area which is the
fourteenth largest consumer market in the United States
containing over four million people within a 50 mile radius of
Akron. In central Ohio, Columbus is the only city in the
northeast quadrant of the country that has experienced continuous
population growth since 1970, according to Census Bureau data.
Columbus, Ohio was selected by the E & Y Kenneth Leventhal Real
Estate Group as one of the 12 best apartment investment markets
in the country because of its well-diversified economic base,
strong rental growth and lower vacancy rates. The Company's
Michigan portfolio is located in ten separate markets having a
combined projected population growth of approximately 4.2%, or
page 9
153,000 people, with a projected 8.5% increase in job growth or
an additional 17,000 jobs.
With an average economic occupancy for the Core Portfolio
Market-rate Properties over 94%, and strong market fundamentals,
it would appear that opportunities exist for increasing the rate
of rental growth at the Company's Market-rate Properties. Though
the Company expected to increase rents at the Core Portfolio
Market-rate Properties by four to five percent in 1997, this was
overly optimistic as lower than expected inflation and the
dynamics of the respective markets impeded the Company's ability
to increase rents. While the Company anticipated a reduction in
its overall economic occupancy in conjunction with its four to
five percent rental growth objective, higher than expected
vacancies also depressed overall net collected rental growth.
The Company anticipates that rental revenues will increase
between two to three percent in 1998 when compared to 1997. The
1998 rental revenue increase objective should be achieved through
a combination of rent and occupancy increases. Markets like
Columbus and Indianapolis, where there is an abundance of
undeveloped land suitable for development, will continue to be
sensitive to the impact of new multifamily housing starts. Some
of these new starts, particularly those in proximity to the
Company's properties, may have a short-term effect on
occupancies. The Company believes that its 1998 rental revenue
growth objectives are reasonable given the geographic diversity
of the Company's Core Portfolio Market-rate Properties.
The Company expects that building and grounds repair and
maintenance expenditures for the Core Portfolio Properties will
increase when compared to the prior year as the Company continues
to maintain its properties to maximize their earnings potential.
Real estate tax increases should begin to moderate as the effect
of the reassessed values diminishes over time. Utility
expenditures will vary over prior periods as the effect of
weather related usage variances is factored into the level of
utility expense.
The market for the Government-Assisted Properties is unique
in that the residents of these properties receive assistance
under the Rental Assistance Program. See "Item 2. The
Properties-Government Programs." At many of the Government-<PAGE>
Assisted Properties, waiting lists of qualified applicants are
maintained which minimize the need to advertise these suites.
The average Economic Occupancy of these Properties consistently
exceeds 98%.
Main Offices. The Company's offices are located at 5025
Swetland Court in Richmond Heights, Ohio. The headquarters
contain approximately 41,000 square feet and a 3.7 acre parcel of
adjacent land for further development or expansion.
Employees. The Company has approximately 885 employees;
approximately 150 of whom are located at the Company's
headquarters and the remainder work at the respective sites of
the individual Properties. The Company believes that its
relations with its employees are good.
Item 2. The Properties
The Northeastern Ohio Properties consist of (i) 46
Properties containing 9,397 suites, eight of which are owned by
page 10
joint ventures in which the Company owns interests ranging
between 33-1/3% and 66-2/3%, (ii) two properties that are
currently under construction that, when completed in the second
quarter of 1998 and the fourth quarter of 1998, respectively,
will contain an aggregate 396 suites, and (iii) one undeveloped
land parcel consisting of 39 acres. The joint ventures consist of
two general partnerships and six limited partnerships in which
the Company is a general partner. The Company has the authority
to manage the day-to-day operations of the Properties owned by
the joint ventures. With respect to seven of these joint
ventures, the unanimous consent of the Company's joint venture
partners is required for any sale of the Property owned by the
joint venture or the refinancing of the indebtedness encumbering
such Property.
The Northwestern Ohio Properties consist of six Properties
containing 1,060 suites.
The Central Ohio Properties consist of (i) 22 Properties
consisting of 3,577 suites, (ii) one newly-constructed property
containing 324 suites, and (iii) two undeveloped land parcels
consisting of 20 acres.
The Michigan Properties consist of (i) 11 Properties
consisting of 2,608 suites, and (ii) undeveloped land parcels
adjacent to three of the Michigan Properties consisting of
approximately 29 acres.
In addition, the Company was under contract to purchase
eight properties currently managed by MIG and three properties in
various stages of development in connection with the acquisition
of MIG. The eight managed properties, consisting of 1,730
suites, are located in Arizona, California, Georgia, Maryland
(two) Missouri, North Carolina and Texas. The three development
properties, consisting of 1,216 suites, are located in Florida.
The acquisition of these properties, along with the property
management and advisory business of MIG, is subject to
shareholder approval. The Company is also under contract to
purchase, in separate unrelated transactions, two properties in
Indiana and Kentucky consisting of 360 suites and three parcels
of undeveloped land in Kentucky, Ohio and Pennsylvania consisting
of an aggregate of 144 acres. One of the land parcels under
contract is located adjacent to a multifamily property presently<PAGE>
under contract by the Company. There can be no assurances,
however, that the Company will be successful in acquiring the
properties or land parcels under contract.
Market-rate Properties. Seventy-four of the Company's
Properties are market-rate apartment properties in townhome,
garden and high-rise buildings consisting of 16,823 suites.
Upon closing of the IPO, the Company acquired a noteholder
interest in one property, in which one of the principals of the
Company has a general partnership interest. Since 1984, the
property has been unable to generate sufficient cash flow to meet
the scheduled interest payments under these notes. The
noteholder is entitled to substantially all cash flows from
operations. To the extent that the cumulative unpaid debt
service on the notes is greater than seven years of aggregate
principal and interest amortization (the cumulative amount of
debt service), which occurred in 1995, the Company can exercise
page 11
its rights under a security agreement and foreclose on the
property.
Government-Assisted Properties. Sixteen of the Company's
Properties are Government-Assisted Properties consisting of 2,085
suites (1,927 of which are Contract Suites and 158 of which are
market rate suites). Pursuant to the HUD rental subsidy program,
these suites must be held available to persons meeting the
criteria for eligibility (either low-income elderly or family).
A portion of the rent for these suites is paid directly to the
Company by eligible residents and the balance is remitted to the
Company by HUD. Increases in rents are established by the
provisions of the applicable HAP Contract. See "Government
Programs."
Congregate Care Facilities. The Company's two Congregate
Care Facilities were developed to bridge a gap in the housing
market for the elderly between traditional rental housing and
skilled nursing homes. The Congregate Care Facilities are
designed for older persons who do not require on-site medical or
custodial care but have special concerns that are not fulfilled
by traditional apartment housing. Residents of the Company's
Congregate Care Facilities pay market rental rates that are
unregulated and are not subsidized.
Undeveloped Land. The Company also owns eight tracts of
undeveloped land, including three undeveloped land parcels in
Ohio-two in the Central region and one in the Northern region-
consisting of 10, 10 and 39 acres, respectively, that are zoned
for multifamily property development. In addition, the Company
owns undeveloped land parcels adjacent to five of the Michigan
Properties consisting of 17.7, 20, 15, 4.7 and 4.5 acres,
respectively, all of which are currently zoned for multifamily
property development.
Indebtedness Encumbering the Properties. AEG financed and,
in many cases, refinanced the acquisition, development and
rehabilitation of its Properties with a variety of sources of
mortgage indebtedness, including indebtedness insured by HUD
under programs administered pursuant to Section 221(d)(4) of the
National Housing Act. See "Government Programs." The mortgage
indebtedness currently encumbering nine of the Properties,
including four of the Government-Assisted Properties (one of
which is a joint venture property) and one of the Congregate Care
Facilities, is insured by HUD under this program. Pursuant to<PAGE>
this program, certain aspects of the Company's operation of the
subject Properties are governed by the provisions of separate
Regulatory Agreements. See "Government Programs." Other sources
of financing have included tax-exempt and conventional mortgage
financing.
Government Programs. Twenty of the Company's Properties
(including one of its Congregate Care Facilities) benefit from,
and certain aspects of their operations are governed by
regulation pursuant to, the rental assistance and/or the mortgage
insurance program described below. Eighteen of these Properties
are each owned by a wholly owned subsidiary of the Company and
the Company is a joint venture partner in two of these Properties
with the Company's interest ranging from 50% to 66-2/3%. The
following summary of the programs is qualified in its entirety by
reference to the applicable Federal statutes and the regulations
page 12
promulgated thereunder. There can be no assurance that the terms
of such programs will not change or that any such changes will
not be detrimental to the Company.
Rental Assistance Program. The Company currently
is entitled to receive rental assistance subsidies from
HUD under Section 8 of the United States Housing Act of
1937, as amended (the "Rental Assistance Program"), for
1,927 of the 2,085 rental suites in 16 multifamily
properties (the "Government-Assisted Properties").
Approximately 92.4% of the total rental suites in the
Government-Assisted Properties (the "Contract Suites")
are eligible to receive rental assistance (one
Government-Assisted Property contains 39 Contract
Suites and 158 non-subsidized suites). The Company is
a 50% joint venture partner in one Government-Assisted
Property consisting of 108 suites.
The Rental Assistance Program is a federal rent
subsidy program designed to assist in making housing
available to low and very low income persons and
families. Under the Rental Assistance Program, HUD
will make monthly housing assistance payments ("HAP
Payments") to or for the account of the Company with
respect to Contract Suites on behalf of persons and
families meeting HUD eligibility requirements
("Eligible Residents"). The amount of each monthly HAP
Payment with respect to each Contract Suite is equal to
the rent (the "Contract Rent") agreed to by HUD
pursuant to the terms of a Housing Assistance Payments
Contract (a "HAP Contract"), less the rent payment
payable by the Eligible Resident for such month. An
Eligible Resident is required to make rent payments
(including a reasonable allowance for the cost of
utilities paid by the resident) not exceeding 30% of
the Eligible Resident's adjusted income. Thus, the
total rental income payable to, or for the account of,
the Company with respect to each Government-Assisted
Property is equal to the rent paid by Eligible
Residents and the HAP Payments actually paid by HUD
pursuant to the applicable HAP Contract.
Below is a table setting forth the final
expiration dates of the HAP Contracts for the Company's
Government-Assisted Properties:
page 13
<TABLE>
<CAPTION>
Final
Property Expiration Date
<S> <C>
Shaker Park Gardens II August 2000
Statesman II November 2000
Tallmadge Acres March 2001
Puritas Place September 2011
Jennings Commons November 2001
West High Apartments November 2001
Rainbow Terrace January 2002
Somerset West: 39 suites March 2002
Lake Shore Village October 2002
State Road Apartments December 2016
St. James (Riverview) November 2009
Twinsburg Apartments June 2009
Village Towers November 2009
Hillwood I July 2016
Ellet Development December 2017
Sutliff Apartments II November 2019
</TABLE>
Contract Rents are adjusted at least annually in
accordance with one of two adjustment processes, the
annual adjustment factor method or the budget method.
Contract Rents for all but one of the Government-
Assisted Properties are adjusted pursuant to the
"annual adjustment factor" method. Annual adjustment
factors are determined each year by HUD and applied
to then current Contract Rents. The annual
adjustment factors are calculated by HUD for
individual metropolitan areas based on either a local
consumer price index survey or pursuant to a formula
which includes components reflecting changes in
market area rents and utility costs.
Additionally, HUD may permit special additional
adjustments to reflect increases in actual and
necessary expenses of owning and maintaining Contract
Suites which result from substantial general
increases in real property taxes, utility rates,
insurance or similar costs, upon demonstration that
such general cost increases are not adequately
compensated for by the annual adjustments.
The Contract Rents for one Government-Assisted
Property are determined by the budget method, in
which the Contract Rents are based on the total cost
of operating the Government-Assisted Property, the
amount necessary to fund required reserves and an
amount which provides a reasonable return on the
owner's equity. Contract Rents are revised to
reflect an annual operating budget submitted by the
Company as approved by HUD.
Mortgage Insurance Programs. The mortgage
indebtedness encumbering nine of the Properties
including four of the Government-Assisted Properties
(one of which is a joint venture property and one of
the Company's Congregate Care Facilities) is insured
page 14
by HUD pursuant to the mortgage insurance program
administered under Section 221(d)(4) of the National
Housing Act.
Owners of projects financed by loans insured by
HUD under the HUD programs previously described are
required to enter into Regulatory Agreements with HUD
which remain in effect so long as the mortgage loan
on the property is insured or held by HUD. Each
wholly owned subsidiary of the Company that benefits
from a government program has entered into a separate
Regulatory Agreement in connection with the Property
owned by it. The Regulatory Agreements contain
certain covenants that restrict the operation of the
subject Properties.
______________
page 15
Item 3. Legal Proceedings
Other than routine litigation and administrative proceedings
arising in the ordinary course of business, the Company is not
presently involved in any litigation; nor, to the knowledge of
the Company, is any litigation threatened against the Company or
any of the Properties, which is reasonably likely to have a
material adverse effect on the liquidity or results of operations
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
The issuance of common shares of the Company in connection
with the proposed purchase of MIG Realty Advisors, Inc., and the
related purchase of multifamily properties, as discussed
previously herein, is subject to approval of the shareholders at
the annual meeting of shareholders to be tentatively held on May
7, 1998.
page 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The following table shows the high and low sales price of
the Company's common shares on the New York Stock Exchange (the
"NYSE") for each quarter in 1997 and 1996 and the dividends paid
per common share with respect to each such quarter.
<TABLE>
<CAPTION>
Price Range Dividends Declared
1997 1996 Per Share
High Low High Low 1997 1996
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $24-5/8 $22-3/8 $21-7/8 $20-1/2 $ .465 $ .45
Second Quarter $23-5/8 $21-3/4 $21-1/2 $20-1/8 $ .465 $ .45
Third Quarter $24 $22 $21-1/8 $20 $ .465 $ .45
Fourth Quarter $24-3/16 $22-1/2 $24 $20-1/8 $ .465 $ .45
------ -----
$1.860 $1.80
</TABLE>
The number of holders of record of the Company's common
shares at December 31, 1997 was 479.
The Company anticipates that dividends will be paid
quarterly using net cash provided by operations. On December 10,
1997, the Company declared a $0.465 per share dividend for
shareholders of record on December 31, 1997, which was paid on
January 15, 1998. On March 17, 1998, the Company declared a
dividend of $0.465 per common share for the quarter ending March
31, 1998 which is payable on May 1, 1998 to shareholders of
record on April 15, 1998.
The Company maintains a dividend reinvestment plan under
which shareholders may elect to reinvest their dividends
automatically in common shares. Under the plan, the Company may,
from time to time, elect to purchase common shares in the open
market on behalf of participating shareholders or may issue new
common shares to such shareholders.
page 17
Item 6. Selected Financial and Other Data
The following tables set forth selected financial and other
data for the Company on an historical consolidated basis
(combined basis prior to November 19, 1993). The historical
financial information contained in the tables has been derived
from and should be read in conjunction with (i) the financial
statements and notes thereto of the Company included elsewhere
herein, and (ii) Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company
included elsewhere herein.
page 18
<TABLE>
<CAPTION>
Associated
Estates Group
("AEG"
-Predecessor)
Associated Estates Realty For the period For the period
Corporation November 19- January 1-
(Dollars in thousands except December 31, November 18,
per share amounts and 1997 1996 1995 1994 1993 1993
average monthly rental revenue)-------- -------- ------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue:
Rental $ 101,640 $ 87,975 $70,045 $48,859 $ 4,256 $ 32,879
Property management, acquisi-
tion and disposition fees 3,752 3,780 4,213 3,931 448 3,192
Painting services 1,664 1,634 1,067 1,271 247 1,287
Interest 926 238 486 617 235 596
Other 828 828 1,266 587 28 378
------- ------ ------ ------ ----------- ---------
Total revenue 108,810 94,455 77,077 55,265 5,214 38,332
Expenses:
Property operating and main-
tenance expenses (before de-
preciation and amortization) 43,230 37,056 29,279 21,084 1,623 16,365
Painting services 1,492 1,436 1,001 1,257 197 1,211
Cost associated with
abandoning properties 310 - 46 - - -
General and administrative 6,085 5,912 5,471 4,193 425 2,780
Depreciation and amortization 19,266 15,536 12,657 8,122 639 4,788
Charge for unrecoverable
funds advanced to non-owned
properties and other 1,764 - - - - -
Interest expense 19,144 15,516 11,649 6,494 644 10,159
Nonrecurring property
transfer costs - - - - 530 -
------ ------ ------ ------ ----- ------
Total expenses 91,291 75,456 60,103 41,150 4,058 35,303
Income from operations 17,519 18,999 16,974 14,115 1,156 3,029
Equity in net income (loss) of
joint ventures 561 305 297 134 (170) (149)
------ ------ ------ ------ ----- ------
Income before extraordinary
item 18,080 19,304 17,271 14,249 986 2,880
Gain on sale of land 1,608 - - - - -
Extraordinary item 1,024 - (1,097) (727) (3,876) -
--------- -------- ------- ------- ------------- ----------
Net income (loss) $ 20,712 $ 19,304 $16,174 $13,522 $ (2,890) $ 2,880
Net income (loss) applicable
to common shares $ 15,228 $ 13,820 $14,041 $13,522 $ (2,890)
Earnings per common share data
- Basic:
Income before extraordinary
item $ .88 $ .99 $ 1.09 $ 1.19 $ .09
Net income (loss) $ .94 $ .99 $ 1.01 $ 1.13 $ (.27)
Weighted average common shares 16,200 13,932 13,869 11,942 10,862
outstanding
Earnings per common share-Diluted:
Income before extraordinary
item $ .88 $ .99 $ 1.09 $ 1.19 $ .09
Net income $ .94 $ .99 $ 1.01 $ 1.13 $ (.27)
Weighted average common shares 16,222 13,932 13,869 11,942 10,862
outstanding
Dividends declared per common
share $ 1.86 $ 1.80 $ 1.72 $ 1.60 $ .19
Other data:
Cash flow provided by (used
in):
Operating activities $ 29,936 $ 31,060 $ 28,881 $ 34,481 $ 139 $ 10,680
Investing activities $131,908) $(75,771) $(94,151) $(113,567) $ (2,013) $ 780
Financing activities $102,936 $ 43,149 $ 66,247 $ 49,651 $ 30,242 $ (8,523)
Funds From Operations (a) $ 34,651 $28,915 $ 27,253 $ 22,316 $ 2,219 $ 8,149
Earnings before interest, de-
preciation and amortization
(b) $ 61,488 $52,414 $ 41,270 $ 30,667 $ 3,027 $ 19,583
Total properties (at end of
period) 88 84 78 66 45 45
Core Portfolio:
Total multifamily suites (at
end of period) 17,600 15,838 14,501 12,093 8,704 8,704
Average monthly rental revenue
per multifamily suite $ 587 $ 581 $ 564 $ 529 $ 518 $ 519
Economic Occupancy (d) 94.0% 95.5% 95.7% 95.2% 94.3% 94.1%
</TABLE>
page 19
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
Balance Sheet Data at December 31: -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Real estate and other fixed assets
before accumulated depreciation $646,499 $ 513,966 $ 433,965 $ 312,716 $ 161,838
Real estate and other fixed assets
after accumulated depreciation 515,830 401,864 336,663 227,303 84,201
Total assets 553,910 424,711 355,456 242,761 129,705
Total debt (c) 318,170 217,813 171,234 105,113 60,389
Total shareholders' equity 181,158 158,016 139,170 94,897 45,079
</TABLE>
(a) The Company considers Funds From Operations ("FFO"), as
defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), to be an appropriate measure
of the performance of an equity REIT. FFO is defined by
NAREIT as net income (loss) before depreciation and
amortization of real estate assets, determined in
accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from extraordinary
items, unusual or non-recurring items and sales of depreciated
property. FFO of unconsolidated partnerships and joint
ventures is determined on a similar basis. FFO should not
be considered as an alternative to net income (as
determined in accordance with GAAP) as an indicator of the
Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all
of the Company's needs. FFO presented herein is not
necessarily comparable to FFO presented by other real
estate companies due to the fact that not all real estate
companies use the same definition.
(b) Includes earnings before interest, depreciation and
amortization. Income from joint ventures was calculated
on the same basis. Income before interest, depreciation
and amortization does not represent cash generated from
operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of
cash available to fund cash needs and should not be
considered an alternative to net income as an indicator of
the Company's operating performance or as an alternative
to cash flow as a measure of liquidity.
(c) Amount excludes the Company's share of mortgage
indebtedness relating to the unconsolidated joint ventures
of approximately $17,752, $17,969, $18,164, $18,342 and
$19,105 at December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(d) Economic Occupancy is calculated as the actual rent
revenue divided by the total rent expected to be earned
based on the market rental rate for all suites.
page 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
Associated Estates Realty Corporation (the "Company") is a
Real Estate Investment Trust ("REIT") which, at December 31,
1997, owned or was a joint venture partner in 88 multifamily
properties containing 17,600 suites located in Ohio, Michigan,
Indiana and western Pennsylvania.
The following discussion should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in
this report. Historical results and percentage relationships set
forth in the Consolidated Statements of Operations contained in
the financial statements, including trends which might appear,
should not be taken as indicative of future operations.
Liquidity and Capital Resources
The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31, 1994.
REIT's are subject to a number of organization and operational
requirements including a requirement that 95% of the income that
would otherwise be considered as taxable income be distributed to
its shareholders. Providing the Company continues to qualify as
a REIT, it will generally not be subject to a Federal income tax
on net income.
The Company expects to meet its short-term liquidity
requirements generally through its net cash provided by
operations. The Company believes that its net cash provided by
operations will be sufficient to meet both operating requirements
and the payment of dividends in accordance with REIT requirements
in both the short and long term.
Financing:
The Company utilizes borrowings under a $100 million
unsecured revolving credit facility (the "Line of Credit") for
the acquisition and development of multifamily properties and
working capital purposes. The Company reached an agreement to
increase the total borrowing capacity under the Line of Credit
from $75 to $100 million in September 1997. The Line of Credit
includes certain restrictive covenants which, among others,
requires the Company to maintain a minimum level of net worth, to
limit dividends to 90% of Distributable Cash Flow, to restrict
the use of its borrowings and to maintain certain debt coverage
ratios. The Line of Credit provides for a scaled reduction in
the LIBOR or prime rate margins and commitment fees based on the
Company's credit ratings. Based on the Company's present credit
ratings, the LIBOR margin is 125 basis points fixed in increments
of 30, 60, 90, 120 or 180 days and Prime Rate borrowings are at
the Prime Rate with no margin. An annual commitment fee of
between 15 basis points and 25 basis points on the average daily
unused amount of the facility is paid quarterly in arrears. The
Line of Credit expires in September 1998. At December 31, 1997,
$83 million was drawn on the Line of Credit with a weighted
average interest rate of 7.04%.
Seventy-one of the Company's 81 wholly owned properties were
unencumbered at December 31, 1997 with annualized earnings before
interest, depreciation and amortization of approximately $51.9
million and an historical cost basis of approximately $527.4<PAGE>
million. The remaining ten of the Company's wholly owned
properties, have an historical cost basis of $91.0 million and
secured property specific debt of $57.8 million at December 31,
1997. Unsecured debt, which totaled $260.3 million at December
31, 1997, consisted of $92.5 million in Medium-Term Notes, Senior
page 21
Notes of $84.8 million and amounts drawn on the revolving credit
facility of $83.0 million. The Company's proportionate share of
the mortgage debt relating to the seven joint venture properties
was $17.8 million at December 31, 1997. The weighted average
interest rate on the secured, unsecured and the Company's
proportionate share of the joint venture debt was 7.53% at
December 31, 1997.
During the year ended December 31, 1997, the Company issued
four Medium-Term Notes (the "MTN's") aggregating $50 million
under its $75 million and $102.5 million MTN programs. The
principal amounts of these MTN's range from $2.5 million to $20
million and bear interest from 6.2% to 7.9% over terms of between
2 to 30 years. The holder of a $5 million, 30 year MTN has the
option to require payment on February 20, 2002. The net proceeds
to the Company with respect to these issuances were $49.8
million, which were applied to amounts outstanding under the Line
of Credit.
Registration statements filed in connection with financing:
The Company has filed a shelf registration statement with
the Securities and Exchange Commission relating to the proposed
offering of up to $368.8 million of debt securities, preferred
shares, depositary shares, common shares and common share
warrants. The total amount of the shelf filing includes a $102.5
million MTN program. The securities may be offered from time to
time at prices and upon terms to be determined at the time of
sale.
Acquisitions, development and dispositions:
The Company intends to continue to finance its multifamily
property acquisitions and development with the most appropriate
sources of capital, which may include undistributed Funds From
Operations, the issuance of equity securities, bank and other
institutional borrowings, the issuance of debt securities, the
assumption of mortgage indebtedness or through the exchange of
properties. The Company may also determine to raise additional
working capital through one or more of these sources.
During the year ended December 31, 1997, the Company
acquired, in separate purchase transactions, eight multifamily
properties containing an aggregate of 1,762 suites and two
parcels of land consisting of 14.5 acres for an aggregate
purchase price of $105.1 million, of which $4.5 million
represents liabilities assumed. The acquired properties are
located in Clinton Township and Farmington Hills, Michigan;
Indianapolis, Indiana; and Cincinnati, Columbus and Toledo, Ohio.
The purchase price of the acquired properties has been financed
primarily with proceeds from borrowings on the Company's Line of
Credit.
Subsequent to December 31, 1997, the Company acquired four
multifamily properties containing an aggregate of 1,320 suites
for an aggregate purchase price of $74.4 million of which $15.5
million represents liabilities assumed which includes mortgage
indebtedness of $15.0 million. The balance of the purchase price
was financed using borrowings under an unsecured 90 day term loan
of $44.5 million and borrowings under the Company's Line of
Credit of approximately $14.4 million. The properties are
located in Coconut Creek, Florida; Duluth, Georgia; Columbia,
Maryland; and Toledo, Ohio. The Falls Apartments was acquired by
AERC of Georgia, a wholly owned qualified REIT subsidiary of the
Company. The Company will manage all of the Acquired Properties;
however, interim management agreements have been entered into
with the current managers for the properties located in Florida,
Georgia and Maryland. The interim management agreements are
cancelable upon 30 days notice by the Company. The Company has
given notice to the managing agent of Cypress Shores that an
affiliate of MIG Realty Advisors, Inc. ("MIGRA") will commence
page 22
managing the property on March 1, 1998. The Falls Apartments and
Reflections Apartments will be managed by affiliates of MIGRA.
The remainder of the acquisitions, development and
dispositions section contains forward-looking statements and
certain risks, trends and uncertainties that could cause actual
results to vary from those contained in the forward-looking
statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgements and current knowledge of management. These forward-
looking statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Factors which could cause actual results to differ
materially from those projected include the general economic
climate; the supply and demand for multifamily properties;
interest rate levels; the availability of financing and other
risks associated with the acquisition, development and
disposition of properties, including risks that development or
lease-up may not be completed on schedule, or that the merger did
not close. Furthermore, there can be no assurances that the
Company will be successful in acquiring the multifamily
properties and the land parcels under contract as described
below.
The Company has three newly constructed multifamily
properties in lease-up. Bradford at Easton, a 324 suite property
located in Columbus, Ohio was completed in the fourth quarter of
1997 and presently has 270 suites leased. The Residence at
Barrington, a planned 288 suite property located in Aurora, Ohio
(a city located southeast of Cleveland), had 120 suites completed
and 146 suites leased. The Village of Western Reserve, a 108
suite property in Streetsboro, Ohio (also located southeast of
Cleveland) had 43 suites completed and 71 suites leased. The
Company has also commenced construction on a 120 suite expansion
to Georgetown Park Apartments, a multifamily property owned by
the Company in Fenton, Michigan. The Village of Western Reserve
and The Residence at Barrington (the "New Construction
Properties") are scheduled for completion in the second and
fourth quarter of 1998, respectively. The Company anticipates
completing the Georgetown addition in the fourth quarter of 1998.
The Company is anticipating the construction of an
additional 398 suites (collectively the "Suite Additions") during
1998 on land adjacent to multifamily properties currently owned
by the Company as follows:
<TABLE>
<CAPTION>
Property Location Suites
--------------------------- ------------------- ------
<S> <C> <C>
Arbor Landings Apartments II Ann Arbor, Michigan 160
Georgetown Park Apartments III Fenton, Michigan 120
Aspen Lakes II Grand Rapids, Michigan 118
Total Suites 398
</TABLE>
The Company is exploring opportunities to dispose of several
of its multifamily properties.
The Company has also entered into separate contracts to
purchase three parcels of undeveloped land containing an
aggregate of 144 acres for an approximate purchase price of $9.8
million. One of the parcels is located in Avon, Ohio (a suburb
of Cleveland), one of the parcels is located in Crestview Hills,
Kentucky adjacent to a multifamily real estate property currently
under contract and one of the parcels is located in Cranberry
Township, Pennsylvania (a suburb of Pittsburgh). Approximately
838 multifamily apartments may be constructed on the undeveloped
land; 312 in Avon, Ohio; 300 in Crestview Hills, Kentucky; and
226 in Cranberry Township, Pennsylvania. The Company expects to
finance the undeveloped land acquisitions using borrowings under
page 23
the Line of Credit.
The Proposed Merger with MIG Realty Advisors, Inc.:
Subject to customary conditions to closing and the approval
of the Company's shareholders, the Company has entered into a
definitive merger agreement with MIGRA. Pursuant to the terms of
the merger agreement with MIGRA, the Company will also acquire
the property management business of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition fees that would have otherwise been received by MIGRA
upon the sale of certain of the properties owned by institutions
advised by MIGRA. Founded in 1982, MIGRA currently manages,
through its affiliated management companies, 36 Multifamily
Apartment Properties containing 11,059 suites. MIGRA's asset
management, property management, investment advisory and mortgage
servicing operations are collectively referred to herein as the
"MIGRA Operations."
In exchange for their interest in MIGRA and the affiliated
property management businesses, the shareholders of MIGRA will
receive approximately 408,318 (based on the average closing
prices of the Company's common shares for the 20 trading days
preceding the date of the merger agreement price, which average
price is $23.63) of the Company's common shares at the closing of
the merger. Subject to the achievement of certain performance
criteria, the shareholders of MIGRA have the opportunity to
receive additional contingent consideration to be paid in the
form of the Company's common shares. Such contingent
consideration may aggregate up to $3.1 million and $6.4 million
on the first and second anniversary of the merger, respectively.
A portion of the shares to be issued will be based on the average
closing price of the Company's common shares for the 20 days
immediately preceding the contingent payment date. Assuming all
contingent consideration is paid, the total purchase price for
MIGRA, the property management business, and the rights to the
disposition fees will be approximately $19.1 million.
The Company may reduce the purchase price for the MIGRA
Operations to the extent that any of MIGRA's or a MIGRA
affiliate's advisory clients have not consented to the assignment
of or have terminated any advisory, asset, property management or
mortgage servicing agreement to the Company. Conversely, the
purchase price may be increased to the extent that MIGRA enters
into any new asset or property management or mortgage servicing
agreement on or before the 90 days preceding the closing of the
merger. In no event, however, will the amount of any price
increase exceed the amount of any price decrease.
The Proposed Acquisition of Multifamily Real Estate Properties:
On January 28, 1998 (the "Contract Date"), the Company
entered into a contract to acquire certain assets, consisting
principally of the multifamily properties as further described
below, (the "Proposed Acquisition Properties"). The Proposed
Acquisition Properties are as follows:
<TABLE>
<CAPTION>
Number Year
of Placed
Name of Property Location Suites in Service
---------------------------- ------------------------ ------ ----------
<S> <C> <C> <C>
20th and Campbell Apartments Phoenix, Arizona 204 1989
Annen Woods Apartments Pikesville, Maryland 132 1987
Desert Oasis Apartments Palm Desert, California 320 1990
Fleetwood Apartments Houston, Texas 104 1993
Hampton Point Apartments Silver Springs, Maryland 352 1986
Morgan Place Apartments Atlanta, Georgia 186 1989
Peachtree Apartments St. Louis, Missouri 156 1989
Windsor Falls Apartments Raleigh, North Carolina 276 1994
</TABLE>
page 24
The seller of the Proposed Acquisition Properties has
agreed to exchange its assets for a combination of cash and an
equity interest (the "Equity Consideration") in the Company
totaling $108.5 million. The cash portion of the purchase price
may not exceed $11.1 million. The number of common shares issued
will be determined based on the amount of Equity Consideration
divided by the average closing price of the Company's common
shares over the 20 day period preceding the purchase of the
Proposed Acquisition Properties. For purposes of determining the
number of shares issued as Equity Consideration, however, to the
extent that the 20 day average price does not exceed the average
closing price of the Company's common shares over the 20 day
period preceding the Contract Date times 106%, no adjustment in
the number of shares determined at the Contract date will be made.
The Company intends to finance any cash portion of the purchase
price with borrowings made available through the Company's
revolving credit facility (the "Line of Credit"). The amount of
cash ultimately paid will be determined at the discretion of the
Seller in an amount up to $10 million.
Dividends:
On December 10, 1997, the Company declared a dividend of
$0.465 per common share for the quarter ending December 31, 1997
which was paid on January 15, 1998 to shareholders of record on
December 31, 1997. On November 24, 1997, the Company declared a
dividend of $0.60938 per depositary share on its Class A
Cumulative Preferred Shares (the "Perpetual Preferred Shares")
which was paid on December 15, 1997 to shareholders of record on
December 4, 1997.
Cash flow sources and applications:
Net cash provided by operating activities decreased
$1,124,100 from $31,060,500 to $29,936,400 for the year ended
December 31, 1996 when compared with the year ended December 31,
1997. This decrease was primarily the result of increases in
accounts and notes receivable and restricted cash which was
offset somewhat by decreases in other operating assets and
liabilities and an increase in cash provided by the income
derived from the Company's multi-family property operations.
Net cash flows used for investing activities of $131,908,000
for the year ended December 31, 1997 were primarily used for the
acquisition and development of multifamily real estate,
properties and undeveloped land parcels.
Net cash flows provided by financing activities of
$102,936,400 for the year ended December 31, 1997 were primarily
comprised of borrowings on the Line of Credit and the issuance of
MTN's and the 1,750,000 common shares. Funds were also used to
pay dividends on the Company's common and Perpetual Preferred
Shares as well as repayments on the Line of Credit.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1997 to the year ended
December 31, 1996
Overall, total revenue increased $14,354,800 or 15.2% and
total expenses increased $15,833,700 or 21.0% for the year. Net
income applicable to common shares increased $1,408,400 or 10.2%,
after the dividends on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the year
ended December 31, 1997 to the year ended December 31, 1996, the
term Core Portfolio Properties refers to the 35 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 32 properties acquired during 1994 and 1995 and the<PAGE>
acquisition of the remaining 50% interest in two properties in
page 25
which the Company was a joint venture partner at the time of the
IPO. Acquired Properties refers to the 14 properties acquired
between January 1, 1996 and December 31, 1997.
During the year ended December 31, 1997, the Acquired
Properties generated total revenues of $18,768,700 while
incurring property, operating and maintenance expenses of
$7,048,300.
Rental Revenues:
Rental revenues increased $13,664,500 or 15.5% for the year.
Rental revenues from the Acquired Properties increased
$12,685,292 for the year. Increases in occupancy and suite rents
at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $979,300 or 1.2% increase in rental
revenue from these properties. The balance of the increase
resulted from increased rental revenues attributable to office
space and other miscellaneous rental revenue items.
Other Revenues:
Other income increased $687,600 or 64.5% for the year. The
increase is due primarily to (i) an increase in the amount of
real estate tax refunds received as well as (ii) an increase in
the amount of interest income earned in comparison to the prior
year.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$6,173,800 or 16.7% for the year. Operating and maintenance
expenses at the Acquired Properties increased $4,730,300 for the
year due primarily to the operating and maintenance expenses
incurred at the eight properties acquired during 1997 and the
recognition of a full year's operating expenses at the six
properties acquired during 1996. Property operating and
maintenance expenses at the Core Portfolio Properties increased
$1,443,400, or 4.2% when compared to the prior 12 month period
primarily due to increases in personnel, utilities and building
and grounds repair and maintenance expenses which were offset by
a decrease in advertising expenses. Building renovations and
suite and common area refurbishment in the Core Portfolio
Properties that were not considered to be capital in nature
averaged $565 per suite for the year ended December 31, 1997 as
compared to $515 per suite for the year ended December 31, 1996.
Other expenses:
Depreciation and amortization increased $3,730,200 or 24.0%
for the year primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
Cost associated with abandoned projects of $309,800 were
expensed during the year. These costs consist primarily of
certain pre-development costs, such as architectural, legal and
accounting fees, that were incurred on projects that the Company
decided not to pursue.
General and administrative expenses increased $172,500 or
2.9% for the year. This increase is primarily attributable to
payroll and related expenses.
A charge for unrecoverable funds advanced to non-owned
properties and other costs totaling $1,764,000 was incurred
during 1997. This charge primarily relates to the write-off of
two advances to managed but non-owned properties (third parties)
that were deemed to be uncollectible.
page 26
Interest expense increased $3,628,300 or 23.4% for the year
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit that were used for
the acquisition of properties.
The gain on sale of land resulted from the sale of a 90-acre
parcel of land zoned for office and industrial use which was one
of the assets acquired by the Company at the time of the
Company's initial public offering.
Extraordinary items:
In 1997, unamortized debt discount was written off upon the
early repayment of mortgage debt of $1,023,713 and was recognized
as an extraordinary item in the Consolidated Statements of
Income.
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $5,484,400.
Comparison of the year ended December 31, 1996 to the year ended
December 31, 1995
Overall, total revenue increased $17,377,900 or 22.6% and
total expenses increased $15,352,800 or 25.5% for the year. Net
income applicable to common shares decreased $221,200 or 1.6%,
after the dividends on the Company's Perpetual Preferred Shares.
In the following discussion of the comparison of the year
ended December 31, 1996 to the year ended December 31, 1995, the
term Core Portfolio Properties refers to the 36 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 21 properties acquired during 1994 and the
acquisition of the remaining 50% interest in two properties in
which the Company was a joint venture partner at the time of the
IPO. Acquired Properties refers to the 21 properties acquired
between January 1, 1995 and December 31, 1996.
During the year ended December 31, 1996, the Acquired
Properties generated total revenues of $24,525,700 while
incurring property, operating and maintenance expenses of
$9,534,800.
Rental Revenues:
Rental revenues increased $17,929,700 or 25.6% for the year.
Rental revenues from the Acquired Properties increased
$15,564,900 for the year. Increases in occupancy and suite rents
at the Core Portfolio Market-rate and Government-Assisted
Properties resulted in a $2,364,800 or 3.9% increase in rental
revenue from these properties. The balance of the increase
resulted from increased rental revenues attributable to office
space and other miscellaneous rental revenue items.
Other Revenues:
Property management fees decreased $432,800 or 10.3% for the
year. This decrease was due in part to a decline in management
fees attributable to a supplemental management fee pursuant to
the terms of the management contract between the Company and a
managed property. No supplemental management fee was earned at
this managed property in 1996 due to an increase in operating and
repair and maintenance expenses.
page 27
Painting service revenue increased $567,300 or 53.2% for
the year and reflects an increase in revenue generated from suite
painting and major renovation projects when compared to the
previous year. The increase in painting service revenue was
partially offset by an increase in painting service expenses as
discussed elsewhere herein.
Other income decreased $686,200 or 39.2% for the year. The
decrease is due primarily to a reduction in the amount of real
estate tax refunds received in comparison to the prior year as
well as a reduction of supervisory management fees earned for
overseeing the improvement of tenant space at the commercial
properties managed by the Company.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$7,778,900 or 26.6% for the year. Operating and maintenance
expenses at the Acquired Properties increased $6,780,800 for the
year due primarily to the operating and maintenance expenses
incurred at the six properties acquired during 1996 and the
recognition of a full year's operating expenses at the 15
properties acquired during 1995. Property operating and
maintenance expenses at the Core Portfolio Properties increased
$998,100, or 3.8% when compared to the prior 12 month period
primarily due to increases in personnel, utilities and real
estate taxes which were partially offset by a decrease in
building and grounds repair and maintenance expenses for suite
improvements such as the replacement of appliances and carpeting.
Total expenditures for building renovations and suite and common
area refurbishment in the Core Portfolio Properties that were not
considered to be capital in nature averaged $270 per suite for
the year ended December 31, 1996 as compared to $301 per suite
for the year ended December 31, 1995.
Other expenses:
Depreciation and amortization increased $2,878,200 or 22.7%
for the year primarily due to the increased depreciation and
amortization expense recognized on the Acquired Properties.
Painting service expenses increased $435,500 or 43.5% for
the year. These increases were primarily the result of payroll
related expenses attributable to the increased sales activity of
the painting company.
General and administrative expenses increased $441,300 or
8.1% for the year. This increase is primarily attributable to
payroll and related expenses.
Interest expense increased $3,864,500 or 33.2% for the year
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit that were used for
the acquisition of properties.
Extraordinary items:
The extraordinary item of $1,097,500 recognized during 1995
primarily relates to the write off of $911,000 of deferred
financing costs in connection with the extinguishment of the
Revolving Credit Facility. The balance of the extraordinary item
recognized during the year relates to the write off of deferred
financing costs in connection with the repayment of certain
mortgage indebtedness.
pge 28
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $2,132,700.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
increased $255,700 or 83.8%, $7,800 or 2.6%, and $163,900 or
122.8% for the years ended December 31, 1997, 1996 and 1995,
respectively. These increases are primarily attributable to
increased rents and occupancies.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 6,744,700 $ 6,570,700 $ 6,562,900
Cost of operations 3,943,400 3,968,800 3,955,800
2,801,300 2,601,900 2,607,100
Interest income 19,700 19,200 22,600
Interest expense (1,763,200) (1,782,700) (1,801,600)
Depreciation (447,300) (483,600) (481,100)
Amortization (49,600) (49,600) (49,600)
----------- ----------- -----------
Net income $ 560,900 $ 305,200 $ 297,400
</TABLE>
Outlook
The following two paragraphs contain forward-looking
statements and are subject to certain risks, trends and
uncertainties that could cause actual results to vary from those
projected. Readers are cautioned not to place undue reliance on
forward-looking statements, which are based only on current
judgments and current knowledge. These forward-looking
statements are intended to be covered by the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that the Company's forward-looking
statements involve risks and uncertainty, including without
limitation risks of a lessening of demand for the apartments
owned by the Company, changes in government regulations affecting
the Government-Assisted Properties, and expenditures that cannot
be anticipated such as utility rate and usage increases,
unanticipated repairs, additional staffing, insurance increases
and real estate tax valuation reassessments.
Approximately 52% of the Company's multifamily properties
are located in the greater Cleveland/Akron, Ohio area which is
the fourteenth largest consumer market in the United States
containing over four million people within a 50 mile radius of
Akron. In central Ohio, Columbus is the only city in the
northeast quadrant of the country that has experienced continuous
population growth since 1970, according to Census Bureau data.
Columbus, Ohio was selected by the E & Y Kenneth Leventhal Real
Estate Group as one of the 12 best investment markets in the
country because of its well-diversified economic base, strong
rental growth and lower vacancy rates. The Company's Michigan
page 29
portfolio is located in ten separate markets having a combined
projected population growth of approximately 4.2%, or 153,000
people, with a projected 8.5% increase in job growth or an
additional 17,000 jobs.
With an average economic occupancy for the Core Portfolio
Market-rate Properties over 94%, and strong market fundamentals,
it would appear that opportunities exist for increasing the rate
of rental growth at the Company's Market-rate Properties. Though
the Company expected to increase rents at the Core Portfolio
Market-rate Properties by four to five percent in 1997, lower
than expected inflation and the dynamics of the respective
markets impeded the Company's ability to increase rents. While
the Company anticipated a reduction in its overall economic
occupancy in conjunction with its four to five percent rental
growth objective, higher than expected vacancies also depressed
overall revenue growth.
The Company anticipates that rental revenues will increase
between two to three percent in 1998 when compared to 1997. The
1998 rental revenue increase objective should be achieved through
a combination of rent and occupancy increases. Markets like
Columbus and Indianapolis, where there is an abundance of
undeveloped land suitable for development, will continue to be
sensitive to the impact of new multifamily housing starts. Some
of these new starts, particularly those in proximity to the
Company's properties, may have a short-term effect on
occupancies. The Company believes that its 1998 rental revenue
growth objectives are reasonable given the geographic diversity
of the Company's Core Portfolio Market-rate Properties.
The Company expects that building and grounds repair and
maintenance expenditures for the Core Portfolio Properties will
increase when compared to the prior year as the Company continues
to maintain its properties to maximize their earnings potential.
Real estate tax increases should begin to moderate as the effect
of the reassessed values diminishes over time. Utility
expenditures will vary over prior periods as the effect of
weather related usage variances is factored into the level of
utility expense.
Inflation
Substantially all of the Market-rate residential leases at
the properties allow, at the time of renewal, for adjustments in
the rent payable thereunder, and thus may enable the Company to
seek increases in rents. The substantial majority of these
leases are for one year or less and the remaining leases are for
terms up to two years. The short-term nature of these leases
generally serves to reduce the risk to the Company of the adverse
effect of inflation.
Contingencies
There are no recorded amounts resulting from environmental
liabilities as there are no known contingencies with respect
thereto. Future claims for environmental liabilities are not
measurable given the uncertainties surrounding whether there
exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no
condition is known to exist that would give rise to a liability
for site restoration, post closure and monitoring commitments, or
other costs that may be incurred with respect to the sale or
disposal of a property. Phase I environmental audits have been
page 30
completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance
covering (i) pre-existing contamination, (ii) on-going third
party contamination, (iii) third party bodily injury and (iv)
remediation. The policy is for a five year term and carries a
limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million
policy term aggregate. Management has no plans to abandon any of
the properties and is unaware of any other material loss
contingencies. The Company has completed the installation of
financial reporting and leasing management systems, which
together comprise the Company's primary reporting systems, that
are Year 2000 compliant.
HUD recently notified the Company that Rainbow Terrace
Apartments, Inc., (the Company's subsidiary corporation that owns
Rainbow Terrace Apartments) is in default under the terms of the
Regulatory Agreement and Housing Assistance Payments Contract
("HAP Contract") pertaining to this property. Among other
matters, HUD alleges that the property is poorly managed and
Rainbow Terrace Apartments has failed to complete certain
physical improvements to the property. Moreover, HUD claims that
the property is not in compliance with numerous technical
regulations concerning whether certain expenses are properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
Rainbow Terrace Apartments believes that it has corrected the
management deficiencies cited by HUD in the Comprehensive
Management Review (other than the completion of certain physical
improvements to the property) and, in a series of written
responses to HUD, justified the expenditures questioned by HUD as
being properly chargeable to the property in accordance with
HUD's regulations. Moreover, Rainbow Terrace Apartments believes
it has repaired any physical deficiencies noted by HUD in its
Comprehensive Management Review that might pose a threat to the
life and safety of its residents. The Company is unable to
predict the outcome of the controversy with HUD, but does not
believe it will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
page 31
Item 8. Financial Statements and Supplementary Data.
The response to this item is included in a separate
section at the end of this report.
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
page 32
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding the Company's Directors contained
in the Notice of Annual Meeting and Proxy Statement for the
Annual Meeting of Shareholders to be tentatively held on May
7,1998, is incorporated by reference in this Annual Report on
Form 10-K.
The Executive Officers of the Company as of March 1, 1998
are:
<TABLE>
<CAPTION>
Name Age Position with the Company
------------------- ---- --------------------------------------
<S> <C> <C>
Jeffrey I. Friedman 46 Chairman of the Board, President, Chief
Executive Officer and Director
Dennis W. Bikun 41 Chief Financial Officer and Treasurer
Martin A. Fishman 56 Vice President - General Counsel and
Secretary
</TABLE>
Jeffrey I. Friedman has been Chairman of the Board,
President and Chief Executive Officer of the Company since its
organization. Mr. Friedman joined AEG in 1974 and was the Chief
Executive Officer and President of Associated Estates
Corporation, a company in the AEG group, from 1979 to 1993.
Dennis W. Bikun has been Chief Financial Officer of the
Company since its organization. Mr. Bikun joined AEG in 1983 as
Director of Information Management Services of Associated Estates
Corporation. From 1985 to 1991 he was a Vice President of
Associated Estates Corporation, and was the Chief Financial
Officer of Associated Estates Corporation from 1991 until the
formation of the Company. Mr. Bikun is a Certified Public
Accountant.
Martin A. Fishman has been Vice President - General Counsel
of the Company since its organization. Mr. Fishman joined AEG in
1986 as Vice President - General Counsel of Associated Estates
Corporation, a position he held until the formation of the
Company.
In addition to the executive officers named in the table
above, the following persons hold positions in senior management
with the Company as indicated:
Barbara E. Hasenstab joined the Company in 1996 as Director
of Investor Relations. Ms. Hasenstab has 19 years of experience
in investor relations and is 44 years old.
JoAnn C. Hirsh joined the Company in 1997 as Director of
Government Programs. Ms. Hirsh is responsible for compliance
with federal, state and local HUD regulations. Ms. Hirsh is a
Certified Public Accountant and is 41 years old.
Terrence P. Keenan joined the Company in 1995 as Director of
Construction and Development. Mr. Keenan has 16 years of
experience in the construction of real estate properties and is
39 years old.
page 33
Steven E. Lee joined the Company in 1997 and is currently a
Director of Operations. He has been involved in multifamily
property management for 15 years. Mr. Lee has supervisory
responsibility for properties in Columbus, Michigan and northern
Ohio, as well as the Company's four properties in Cincinnati,
Ohio; Indianapolis, Indiana and Pittsburgh, Pennsylvania. Mr.
Lee is a Certified Property Manager and is 42 years old.
Jeffrey Lustic joined AEG in 1980 and is currently the
Company's Director of Budgets, having responsibility for
coordinating and monitoring the annual operating budgets for the
Properties. Mr. Lustic is 41 years old.
John W. McGinty joined AEG in 1990 and is currently the
Director of Financial Reporting, having overall responsibility
for all aspects of financial reporting. Mr. McGinty is a
Certified Public Accountant and is 40 years old.
Richard Q. Mansfield joined the Company in 1995 and is
currently a Director of Operations. He has been involved in
multifamily property management for 20 years. Mr. Mansfield has
supervisory responsibility for properties in northeast Ohio and
is 42 years old.
Terrence J. O'Driscoll joined AEG in 1988 and is currently
the Company's Director of Finance. Mr. O'Driscoll is a Certified
Public Accountant and is 41 years old.
James G. Owen joined AEG in 1986 and is currently Director
of Operations, with supervisory responsibility for properties in
northeast Ohio, including the government-subsidized properties.
Mr. Owen is a Certified Property Manager and is 43 years old.
Lita L. Weiss joined AEG in 1987 as Associate Counsel. Ms.
Weiss has been practicing law for 19 years with an emphasis in
employment, housing, regulatory and premises security law. Ms.
Weiss is 65 years old.
Nan R. Zieleniec joined AEG in 1990 and is currently the
Director of Human Resources, having responsibility for all areas
of human resource planning and administration. Ms. Zieleniec is
39 years old.
Item 11. Executive Compensation.
The information on Executive Compensation contained in the
Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Shareholders to be tentatively held on May 7, 1998, is
incorporated by reference in this Annual Report on Form 10-K.
page 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information on Security Ownership of Certain Beneficial
Owners and Management contained in the Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Shareholders to be
tentatively held on May 7, 1998, is incorporated by reference in
this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions.
The information on Certain Relationships and Related
Transactions contained in the Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Shareholders to be held
tentatively on May 7, 1998, is incorporated by reference in this
Annual Report on Form 10-K.
page 35
GLOSSARY
Unless the context otherwise requires, the following
capitalized terms shall have the meanings set forth below for the
purposes of this Form 10-K.
"AEG" means the Associated Estates Group, which includes (i)
various general partnerships, limited partnerships and
corporations which sold interests in 45 multi-family properties
to the Company, (ii) Associated Estates Corporation, (iii) A.E.C.
Management Company, (iv) Estates Mortgage Company, (v) Associated
Health Care Management, Inc., (vi) Merit Management Corporation,
(vii) Merit Painting Services, Inc. and (viii) The Children's
Computer Co.
"Central Ohio" means the area comprising the following Ohio
counties: Franklin, Fairfield, Licking, Madison, Muskingum,
Pickaway and Warren.
"Central Ohio Properties" means multifamily Properties
acquired by the Company located in Central Ohio.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Common Shares" means the Common Shares, without par value,
of the Company.
"Company" means Associated Estates Realty Corporation, an
Ohio corporation, including, where the context requires, its
subsidiaries and the Service Companies.
"Congregate Care Facility" means a residential apartment
community for elderly persons that provides services to its
residents which may include prepared meals, housekeeping and
laundry service and a variety of recreational and educational
activities.
"Contract Rent" means monthly rental amounts, as determined
by HUD, for each Contract Suite payable pursuant to a HAP
Contract.
"Contract Suite" means a suite contained in a
Government-Assisted Property for which the owner of such property
receives rent subsidies from HUD pursuant to a HAP Contract.
"Market-rate Properties" means multifamily Properties which
are operated as conventional multifamily residential apartments,
the operations of which are not subject to regulation by HUD.
"Distributable Cash Flow" means Funds From Operations less
scheduled mortgage debt amortization payments and provisions for
ongoing capitalized improvements to the Properties.
"Economic Occupancy" means the actual rent revenue divided
by the total rent expected to be earned based on the market
rental rate for all suites.
page 36
"Economic Vacancies" means the dollar amount of rent lost
due to suites not being leased determined at the Potential Suite
Rent of each vacant suite.
"Eligible Resident" means a family or individual whose
income, as determined in accordance with HUD regulations, does
not exceed income limits promulgated by HUD for the housing
market area and which meets certain other conditions specified in
the regulations.
"Funds From Operations" or "FFO" means net income (computed
in accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property and
extraordinary and nonrecurring items, plus depreciation and
amortization, and after adjustments for unconsolidated
partnerships and joint ventures.
"Government-Assisted Properties" means multifamily
Properties, the rents of which are subsidized and certain aspects
of the operations of which are regulated by HUD pursuant to
Section 8 of the National Housing Act of 1937.
"HAP Contract" means the agreement between HUD and the owner
of a Government-Assisted Property which provides for rent
subsidies to be paid by HUD to such owner and obligates such
owner to comply with certain HUD regulations governing certain
aspects of its operations of such Government-Assisted Properties.
"HAP Payment" means a housing assistance payment the owner
of a Government-Assisted Property receives from HUD pursuant to a
HAP Contract.
"HUD" means the United States Department of Housing and
Urban Development.
"IPO" means initial public offering. The Company completed
an initial public offering of 7,250,000 common shares in November
1993, the proceeds of which were used to acquire the various
businesses from AEG.
"Michigan Properties" means multifamily Properties acquired
by the Company located in Michigan.
"National Housing Act" means the National Housing Act, as
amended from time to time.
"Northern Ohio" means the area comprising the following Ohio
counties: Cuyahoga, Geauga, Lake, Lorain, Lucas, Medina, Portage
and Summit.
"Northern Ohio Properties" means multifamily Properties
acquired by the Company located in Northern Ohio.
"Perpetual Preferred Shares" means the 2,250,000 Depositary
Shares, each representing 1/10 of a share of the Company's 9.75%
Class A Cumulative Redeemable Preferred Shares.
"Physical Occupancy" means the total number of suites less
the number of unoccupied suites divided by the total number of
suites expressed as a percentage.
page 37
"Potential Suite Rent" means the rent at which a suite is
expected to be leased based on its market value.
"Property" means a multifamily residential rental apartment
facility.
"Properties" means, collectively, the Northern Ohio
Properties (including approximately 63,000 square feet of
commercial space contained in a mixed-use multifamily Property
and other commercial space ancillary to certain of the
multifamily Properties), the Central Ohio Properties, the
Michigan Properties, the Western Pennsylvania Property, the
Indianapolis, Indiana Property and seven tracts of primarily
undeveloped land owned by the Company.
"Regulatory Agreement" means an agreement between HUD and
the owner of a property, the mortgage indebtedness of which is
insured by HUD, pursuant to which certain aspects of the
operations of such property are regulated.
"REIT" means a real estate investment trust as defined
pursuant to Sections 856 through 860 of the Code; a type of
corporate ownership of real estate in which income is taxed only
at the level of the individual shareholders.
"Service Companies" means Associated Estates Management
Company, Merit Management Corporation, Merit Painting Services,
Inc., Estates Mortgage Company and Children's Computer Company.
These are management and service companies in which Associated
Estates Realty Corporation owns substantially all of the economic
interests in order to provide the Company with as much of the
economic benefits of such corporations' operations as possible
while furthering the Company's current intention of complying
with the Code requirements for qualification as a REIT.
"Suite" means an apartment unit in a multifamily Property.
"Total Market Capitalization" means the aggregate market
value of the Company's outstanding Common and Perpetual Preferred
Shares and total long-term debt of the Company.
page 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed as part of this Report.
1. Financial Statements: The following documents are
filed as part of this report.
Report of Independent Accountants - Associated
Estates Realty Corporation.
Consolidated Balance Sheets as of December 31, 1997
and 1996.
Consolidated Statements of Income for the
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996, and
1995.
Notes to Financial Statements.
2. Financial Statement Schedules: The following
financial statement schedule of Associated Estates
Realty Corporation is filed as part of this Report
and should be read in conjunction with the
Consolidated Financial Statements of Associated
Estates Realty Corporation.
<TABLE>
<CAPTION>
Schedule Page
--------
<S> <C>
III Real Estate and Accumulated
Depreciation. F-30
</TABLE>
Schedules not listed above have been omitted
because they are not applicable or are not
required or the information required to be set
forth therein is included in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K were filed on July 1, 1997 and December 2,
1997 and on Form 8-K/A-1 on July 3, 1997 in which information
regarding Items 5 and 7 of Form 8-K was reported.
(c) Exhibits: The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into, this Report.
page 39
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
- --------- ------------------------------------ ----------------
<S> <C> <C>
3.1 Second Amended and Restated Articles Exhibit 3.1 to
of Incorporation of the Company Form S-11 filed
June 30, 1994
(File No. 33-
80950 as
amended)
3.2 Code of Regulations of the Company Exhibit 3.2 to
Form S-11 filed
June 30, 1994
(File No. 33-
80950 as
amended).
4.1 Specimen Stock Certificate Exhibit 3.1 to
Form S-11 filed
September 2,
1993 (File No.
33-68276 as
amended).
4.2 Form of Indemnification Agreement Exhibit 4.2 to
Form S-11 filed
September 2,
1993 (File No.
33-68276 as
amended).
4.3 Promissory Note dated October 23, Exhibit 4.3 to
1991 from Triangle Properties Limited Form S-11 filed
Partnership, et. al., in favor of PFL September 2,
Life Insurance Company; Open End 1993 (File No.
Mortgage from Triangle Properties 33-68276 as
Limited Partnership I, et. al., in amended).
favor of PFL Life Insurance Company
(The Registrant undertakes to provide
additional long-term loan documents
upon request).
4.4 Promissory Note dated February 28, Exhibit 4.4 to
1994 in the amount of $25 million. Form 10 -K
Open-End Mortgage Deed and Security filed March 31,
Agreement from AERC to National City 1993.
Bank (Westchester Townhouse); Open-
End Mortgage Deed and Security
Agreement from AERC to National City
Bank (Bay Club); Open-End Mortgage
Deed and Security Agreement from
Winchester II Apartments, Inc. to
National City Bank (Winchester II
Apartments); and Open-End Mortgage
Deed and Security Agreement from
Portage Towers Apartments, Inc. to
National City Bank (Portage Towers
Apartments).
</TABLE>
page 40
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
- -------- ----------------------------------- -----------------
<S> <C> <C>
4.6 Indenture dated as of March 31, 1995 Exhibit 4.6 to
between Associated Estates Realty Form 10-Q filed
Corporation and National City Bank. May 11, 1995.
4.7 $75 Million 8-3/8% Senior Note due Exhibit 4.7 to
April 15, 2000 Form 10-Q filed
May 11, 1995.
4.8 Revolving Credit Facility - Second Exhibit 4.8 to
Amended and Restated Credit Agreement Form 10-Q filed
dated September 26, 1995, by and November 11,
among the Company, as Borrower, and 1995
National City Bank, as Agent, and the
Banks identified therein.
4.8a Fourth Amendment to Revolving Credit Exhibit 4.1 to
Facility dated March 8, 1996, by and Form 10-Q filed
among the Company, as Borrower, and May 13, 1996.
National City Bank, as Agent, and the
banks identified therein.
4.8b Fifth Amendment to Credit Agreemen Exhibit 4.8b to
dated November 27, 1996, by and among Form 10-K filed
the Company, as Borrower, the banks March 26, 1997
and lending institutions, as Banks,
and National City Bank, as Agent.
4.8c Third Amended and Restated Credit Exhibit 4.8c
Agreement dated November 12, 1997, by filed herewith
and among the Company, as Borrower,
the banks and National City Bank, as
Agent, and the Banks identified
therein.
4.8d Seventh Amendment to Credit Agree Exhibit 4.8d
By and Among Associated Estates filed herewith
Realty Corporation, Borrower,
National City Bank, as Agent and The
Banks Identified therein.
4.9 Form of Medium-Term Note-Fixed Rate- Exhibit 4(i) to
Senior Security. Form S-3 filed
December 7,
1995 (File No.
33-80169) as
amended.
4.10 Form of Preferred Share Certificate. Exhibit 4.1 to
Form 8-K filed
July 12, 1995.
</TABLE>
page 41
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
- -------- -------------------------------- ------------------
<S> <C> <C>
4.11 Form of Deposit Agreement and Exhibit 4.2 to
Depositary Receipt. Form 8-K filed
July 12, 1995.
4.12 Ten Million Dollar 7.10% Senior Notes Exhibit 4.12 to
Due 2002. Form 10-K filed
March 28, 1996.
10 Associated Estates Realty Corporati Exhibit 10 to
Directors Deferred Compensation Form 10-Q filed
Plan. November 14,
1996
10.1 Registration Rights Agreement among Exhibit 10.1 to
the Company and certain holders of Form S-11 filed
the Company's Common Shares. September 2,
1993 (File No.
33-68276 as
amended).
10.2 Stock Option Plan Exhibit 10.2 to
Form S-11 filed
September 2,
1993 (File No.
33-68276 as
amended).
10.3 Amended and Restated Employment Exhibit 10.1 to
Agreement between the Company and Form 10-Q filed
Jeffrey I. Friedman. May 13, 1996.
10.4 Equity-Based Incentive Compensation Exhibit 10.4 to
Plan Form 10-K filed
March 29, 1995.
10.5 Long-Term Incentive Compensation Plan Exhibit 10.5 to
Form 10-K filed
March 29, 1995.
10.6 Lease Agreement dated November 29, Exhibit 10.6 to
1990 between Royal American Form 10-K filed
Management Corporation and Airport March 29, 1995.
Partners Limited Partnership.
10.7 Sublease dated February 28, 1994 Exhibit 10.7 to
between the Company as Sublessee, and Form 10-K filed
Progressive Casualty Insurance March 29, 1995.
Company, as Sublessor.
</TABLE>
page 42
[CAPTION]
<TABLE>
Filed herewith or
incorporated
herein by
Number Title reference
- ------- ------------------------------------ -----------------
<S> <C> <C>
10.8 Assignment and Assumption Agreement Exhibit 10.8 to
dated May 17, 1994 between the Form 10-K filed
Company, as Assignee, and Airport March 29, 1995.
Partners Limited Partnership, as
Assignor.
10.9 Form of Restricted Share Agreement Exhibit 10.9 to
dated December 6, 1995 by and between Form 10-K filed
the Company and William A. Foley, March 28, 1996.
Gerald C. McDonough, Frank E. Mosier
and Richard T. Schwarz.
10.10 Pledge Agreement dated May 23, 1997 Exhibit 10.01 to
between Jeffrey I. Friedman and the Form 10-Q filed
Company. August 8, 1997
10.11 Secured Promissory Note dated May 23, Exhibit 10.02 to
1997 in the amount of $1,671,000 Form 10-Q filed
executed by Jeffrey I. Friedman in August 8, 1997
favor of the Company.
10.12 Unsecured Promissory Note dated May Exhibit 10.03 to
23, 1997 in the amount of $1,671,000 Form 10-Q filed
executed by Jeffrey I. Friedman in August 8, 1997
favor of the Company.
10.14 Share Option Agreement dated November Exhibit 10.14 to
18, 1993 by and between the Company Form 10-K filed
and William A. Foley, Gerald C. March 30, 1993.
McDonough, Frank E. Mosier and
Richard T. Schwarz.
21.1 List of Subsidiaries Exhibit 21.1
filed herewith.
23.1 Consent of Independent Accountants Exhibit 23.1
filed herewith.
27 Financial Data Schedule Exhibit 27 filed
herewith.
</TABLE>
page 43
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, on
the 23rd day of March, 1998.
ASSOCIATED ESTATES REALTY CORPORATION
By /s/ Jeffrey I. Friedman
Jeffrey I. Friedman, Chairman of the
Board, President and Chief Executive
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 indicated on the 23rd day of
March, 1998.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ---------------------------------- ---------------
<S> <C> <C>
/s/ Jeffrey I. Friedman Chairman of the Board, President, March 23, 1998
Jeffrey I. Friedman Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Dennis W. Bikun Chief Financial Officer (Principal March 23, 1998
Dennis W. Bikun Financial Officer and Principal
Accounting Officer)
/s/ Albert T. Adams Director March 23, 1998
Albert T. Adams
/s/ Gerald C. McDonough Director March 23, 1998
Gerald C. McDonough
Director March 23, 1998
Mark L. Milstein
/s/ Frank E. Mosier Director March 23, 1998
Frank E. Mosier
/s/ Richard T. Schwarz Director March 23, 1998
Richard T. Schwarz
/s/ Jerome Spevack Director March 23, 1998
Jerome Spevack
</TABLE>
page F-1
INDEX TO FINANCIAL STATEMENTS
ASSOCIATED ESTATES REALTY CORPORATION<PAGE>
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Report of Independent Accountants F-2
Balance Sheets at December 31, 1997 and 1996 F-3
Statement of Operations for the three years
ended December 31, 1997 F-4
Statement of Changes in Shareholders' Equity
for the three years ended December 31,1997 F-5
Statements of Cash Flows for the three years ended
December 31, 1997 F-6
Notes to Financial Statements F-7
Financial Statement Schedules:
III - Real Estate and Accumulated Depreciation
at December 31, 1997 F-31
</TABLE>
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
page F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Associated Estates Realty Corporation
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of shareholders' equity
and of cash flows listed in the accompanying index present fairly,
in all material respects, the financial position of Associated
Estates Realty Corporation and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Cleveland, Ohio
March 18, 1998
page F-3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
<S> <C> <C>
Real estate assets
Land $ 54,906,050 $ 44,241,900
Buildings and improvements 550,156,521 430,920,893
Furniture and fixtures 24,997,001 20,286,700
630,059,572 495,449,493
Less: accumulated depreciation (130,668,538) (112,102,829)
499,391,034 383,346,664
Construction in progress 16,439,393 18,516,982
Real estate, net 515,830,427 401,863,646
Cash and cash equivalents 2,251,819 1,286,959
Restricted cash 10,125,513 5,625,003
Accounts and notes receivable
Rents 2,256,158 1,569,907
Affiliates and joint ventures 14,439,155 6,738,635
Other 2,385,829 2,010,754
Deferred charges and prepaid expenses 6,621,404 5,616,394
$ 553,910,305 $ 424,711,298
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 57,817,981 $ 69,024,253
Unsecured debt 260,352,307 148,788,707
Total indebtedness 318,170,288 217,812,960
Accounts payable and accrued expenses 16,197,356 14,361,609
Dividends payable 7,938,692 6,895,071
Resident security deposits 4,867,011 4,154,418
Funds held on behalf of managed properties
Affiliates and joint ventures 7,124,217 6,261,225
Other 2,340,115 2,275,086
Accrued interest 3,776,884 2,521,644
Accumulated losses and distributions of joint
ventures in excess of investment and advances 12,337,664 12,413,087
Total liabilities 372,752,227 266,695,100
Commitments and contingencies - -
Shareholders' equity
Preferred shares, Class A cumulative, without
par value; 3,000,000 authorized; 225,000
issued and outstanding 56,250,000 56,250,000
Common shares, without par value, $.10 stated
value; 50,000,000 authorized; 17,073,773
and 15,322,381 issued and outstanding
at December 31, 1997 and 1996, respectively 1,707,377 1,532,238
Paid-in capital 171,752,807 133,073,035
Accumulated dividends in excess of net income (48,552,106) (32,839,075)
Total shareholders' equity 181,158,078 158,016,198
$ 553,910,305 $ 424,711,298
</TABLE>
The accompanying notes are an integral part
of these financial statements.
page F-4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues
Rental $ 101,639,584 $ 87,975,036$ 70,045,335
Property management fees 3,752,230 3,779,676 4,212,514
Painting services 1,663,927 1,633,842 1,066,579
Other 1,754,207 1,066,594 1,752,809
108,809,948 94,455,148 77,077,237
Expenses
Property operating and maintenance 43,229,949 37,056,123 29,277,260
Depreciation and amortization 19,265,827 15,535,587 12,657,372
Painting services 1,491,527 1,436,486 1,001,029
Cost associated with abandoned projects 309,794 - 45,611
General and administrative 6,084,654 5,912,197 5,470,882
Charge for unrecoverable funds advanced to
non-owned properties and other 1,764,044 - -
Interest expense 19,144,260 15,515,956 11,651,439
91,290,055 75,456,349 60,103,593
Income before gain on sale of land, equity
in net income of joint ventures and
extraordinary items 17,519,893 18,998,799 16,973,644
Gain on sale of land 1,607,829 - -
Equity in net income of joint ventures 560,934 305,189 297,406
Income before extraordinary items 19,688,656 19,303,988 17,271,050
Extraordinary items-extinguishment of debt 1,023,713 - (1,097,531)
Net income $ 20,712,369 $ 19,303,988$ 16,173,519
Net income applicable to common shares $ 15,227,948 $ 13,819,566$ 14,040,789
Earnings Per Common Share - Basic:
Income before extraordinary items $ .88 $ .99$ 1.09
Extraordinary items $ .06 $ -$ (.08)
Net income $ .94 $ .99$ 1.01
Earnings Per Common Share - Diluted:
Income before extraordinary items $ .88 $ .99$ 1.09
Extraordinary items $ .06 $ -$ (.08)
Net income $ .94 $ .99$ 1.01
Weighted average number of common shares
outstanding - Basic 16,199,928 13,931,807 13,869,595
- Diluted 16,221,564 13,931,807 13,869,595 <PAGE>
</TABLE>
The accompanying notes are an integral part
of these financial statements.
page F-5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Accumulated
Cumulative Dividends in
Preferred Common Paid-In Excess of
Total Shares Shares Capital Net Income
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 94,897,191 $ - $1,386,938 $104,730,272 $(11,220,019)
Net income 16,173,519 - - - 16,173,519
Issuance of 3,000 restricted
common shares - - 300 (300) -
Issuance of 225,000 preferred
shares, net of underwriters'
discounts and offering expenses 54,087,035 56,250,000 - (2,162,965) -
Common share dividends declared (23,855,336) - - - (23,855,336)
Preferred share dividends declared (2,132,730) - - - (2,132,730)
Balance, December 31, 1995 139,169,679 56,250,000 1,387,238 102,567,007 (21,034,566)
Net income 19,303,988 - - - 19,303,988
Issuance of 1,450,000 common
shares, net of underwriters'
discounts and offering expenses
of $1,774,222 30,669,528 - 145,000 30,524,528 -
Unrealized holding losses on
investment securities (18,500) - - (18,500) -
Common share dividends declared (25,624,075) - - - (25,624,075)
Preferred share dividends declared (5,484,422) - - - (5,484,422)
Balance, December 31, 1996 158,016,198 56,250,000 1,532,238 133,073,035 (32,839,075)
Net income 20,712,369 - - - 20,712,369
Issuance of 1,317 restricted
common shares - - 131 (131) -
Issuance of 1,750,000 common
shares, net of underwriters'
discounts and offering expenses
of $2,286,806 38,838,194 - 175,000 38,663,194 -
Stock options exercised 1,717 - 8 1,709 -
Unrealized holding gains on
investment securities 15,000 - - 15,000 -
Common share dividends declared (30,940,979) - - - (30,940,979)
Preferred share dividends declared (5,484,421) - - - (5,484,421)
Balance, December 31, 1997 $181,158,078 $ 56,250,000 $1,707,377 $171,752,807 $(48,552,106)<PAGE>
</TABLE>
The accompanying notes are an integral part
of these financial statements.
page F-6
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 20,712,369 $ 19,303,988 $ 16,173,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,265,827 15,535,587 12,657,372
(Gain) loss on extinguishment of debt (1,023,713) - 1,096,506
Gain on sale of land (1,607,829) - -
Charge for unrecoverable funds advanced to
non-owned properties and other 1,764,044 - -
Equity in net income of joint ventures (560,936) (305,189) (297,406)
Earnings distributed from joint ventures 502,891 423,959 244,625
Net change in - Accounts and notes receivable (2,825,370) (1,052,793) 105,429
- Accounts and notes receivable
affiliates and joint ventures (4,358,520) (3,387,067) (1,161,853)
- Accounts payable and accrued expenses (37,248) 1,584,630 2,128,390
- Other operating assets and liabilities 1,677,352 131,711 1,182,829
- Restricted cash (4,500,510) (564,619) (337,538)
- Funds held for non-owned managed
properties 862,992 188,755 (905,724)
- Funds held for non-owned managed
properties affiliates and joint
ventures 65,029 (798,481) (2,004,684)
Total adjustments 9,224,009 11,756,493 12,707,946
Net cash flow provided by operations 29,936,378 31,060,481 28,881,465
Cash flow from investing activities:
Real estate acquired or developed (net of liabilities
assumed) (131,446,648) (74,176,202) (93,106,549)
Fixed asset additions (1,994,607) (1,680,625) (1,238,134)
Net proceeds received from sale of land 4,892,668 - -
Loans receivable - affiliates (3,342,000) - -
(Contributions to) Distributions from joint ventures (17,378) 86,018 193,687
Net cash flow used for investing activities (131,907,965) (75,770,809) (94,150,996)
Cash flow from financing activities:
Principal payments on mortgage notes (19,306,272) (2,921,236) (22,495,032)
Proceeds from mortgage notes 8,100,000 - -
Proceeds from senior and medium-term notes 50,000,000 42,500,000 84,682,000
Line of credit borrowings 370,900,000 170,950,000 110,444,000
Line of credit repayments (309,400,000) (167,050,000) (132,344,000)
Deferred financing and offering costs (815,651) (822,030) (2,571,544)
Common share dividends paid (29,897,358) (24,692,838) (23,439,254)
Preferred share dividends paid (5,484,421) (5,484,422) (2,132,730)
Stock options exercised 1,717 - -
Proceeds from the issuance of common shares, net
of $2,187,500 and $1,609,500 of underwriting
commissions and $99,306 and $164,722 of
offering expenses paid in 1997 and 1996, respectively 38,838,432 30,669,528 -
Proceeds from the issuance of preferred shares, net of
$1,771,875 of underwriting commissions and $374,333
of offering expenses paid - - 54,103,792
Net cash flow provided by financing activities 102,936,447 43,149,002 66,247,232
Increase (decrease) in cash and cash equivalents 964,860 (1,561,326) 977,701
Cash and cash equivalents, beginning of period 1,286,959 2,848,285 1,870,584
Cash and cash equivalents, end of period $ 2,251,819 $ 1,286,959 $ 2,848,285
</TABLE>
The accompanying notes are an integral part
of these financial statements.
page F-7
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties. At December
31, 1997, the Company owned or was a joint venture partner in 88
multifamily properties containing 17,600 suites. Additionally,
the Company managed 40 non-owned properties, 32 of which were
multifamily properties consisting of 7,052 suites and eight of
which were commercial properties containing an aggregate of
approximately 825,000 square feet of gross leasable area.
Through special purpose entities, collectively referred to as the
"Service Companies", the Company provides to both owned and non-
owned properties, management, painting and computer services as
well as mortgage origination and servicing.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, and the Service
Companies. The Company holds a preferred share interest in the
Service Companies which entitles it to receive 95% of the
economic benefits from operations and which is convertible into a
majority interest in the voting common shares. The outstanding
voting common shares of these Service Companies are held by an
executive officer of the Company. The Service Companies are
consolidated because, from a financial reporting perspective, the
Company is entitled to virtually all economic benefits and has
operating control.
Investments in joint ventures, which are 50% or less owned
by the Company, are presented using the equity method of
accounting.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
Cash Equivalents
The Company considers highly liquid investments with an
original maturity of three months or less when purchased to be
cash equivalents.
page F-8
Real Estate and Depreciation
Real estate assets are stated at cost less accumulated<PAGE>
depreciation. Included in construction in progress are parcels of
undeveloped land held for future development. Depreciation is
provided on a straight-line basis over the estimated useful lives
of the assets as follows:
Buildings and improvements 10 - 30 years
Furniture, fixtures and equipment 3 - 10 years
Management reviews the carrying value of real estate assets
using estimated future cash flows, including estimated proceeds
from disposition, whenever an event or change in circumstances
indicates that the asset value may not be recoverable.
Expenditures that extend the life or improve an asset beyond
its original condition are capitalized. Expenditures for
maintenance and repairs, and costs incurred in connection with
resident turnover such as suite cleaning, painting, carpet
cleaning or replacement, appliance repair or replacement and
other associated costs are charged to operations.
Deferred Leasing and Financing Costs
Costs incurred in obtaining long-term financing are deferred
and amortized over the life of the associated instrument on a
straight-line basis, which approximates the effective interest
method. Costs incurred with respect to shelf registrations are
capitalized and allocated on a pro rata basis to subsequent
offerings thereunder. External costs incurred in the leasing of
commercial and retail space are amortized on a straight-line
basis over the terms of the related lease agreements.
Revenue Recognition
The Company's residential property leases are for terms of
generally one year or less. Rental income is recognized on the
straight-line basis. Retroactive revenue increases related to
budget based Government-Assisted Properties are recognized based
on applications submitted to the U.S. Department of Housing and
Urban Development ("HUD"). Provision is made for estimated
amounts of revenue increases that may not be granted.
Revenues earned by the Service Companies are recognized on
the accrual basis.
Income Taxes
The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986 (the "Code"), as amended. As a
REIT, the Company is entitled to a tax deduction for dividends
paid to its shareholders, thereby effectively subjecting the
distributed net income of the Company to taxation at the
shareholder level only, provided it distributes at least 95% of
its taxable income and meets certain other qualifications.
page F-9
At December 31, 1997 and 1996, the Company's net tax basis
of properties exceeds the amount set forth in the Company's
Consolidated Balance Sheets by $83 million and $78 million,
respectively.
Reclassifications
Certain reclassifications have been made to the 1996 and
1995 financial statements to conform to the 1997 presentation.
Recent Accounting Pronouncements
Effective December 31, 1997, the Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 128 -
Earnings Per Share (Note 14).
In June 1997, the FASB issued SFAS No. 130 - Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a
business during a period and other events and circumstances from
nonowner sources. The new standard becomes effective for the
Company for the year ending December 31, 1998, and requires that
comparative information from earlier years be restated to conform
to the requirements of this standard.
In June 1997, the FASB issued SFAS No. 131 - Disclosure
about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for disclosure about operating
segments in annual financial statements and selected information
in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. The statement supersedes SFAS No. 14 -
Financial Reporting for Segments of a Business Enterprise. The
new standard becomes effective for the Company for the year
ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the
requirements of this standard.
2. DEVELOPMENT, ACQUISITIONS AND DISPOSITION ACTIVITY
Development Activity
Construction in progress, including the cost of land, for
the development of multifamily properties was $16,439,393 and
$18,516,982 at December 31, 1997 and 1996, respectively. The
Company capitalizes interest costs on funds used in construction,
real estate taxes and insurance from the commencement of
development activity through the time the property is ready for
leasing. Interest, real estate taxes and insurance aggregating
approximately $1,880,830, $1,394,800 and $440,000 were
capitalized during the years ended December 31, 1997, 1996 and
1995, respectively. During 1997, one project was completed,
Bradford at Easton, a 324 suite property located in Columbus,
Ohio at a total cost of construction of $18.8 million. During
1997, the construction and leasing of 175 suites at three
properties were completed at a total cost of $14.2 million.
During 1996, the construction and leasing of 116 suites at two
properties were completed at a total cost of $6.5 million.
page F-10
During 1995, the construction and leasing of 132 additional
suites adjacent to three of the Company's properties were
completed at a total cost of $6 million.
Acquisition Activity
During 1997, the Company acquired, in separate purchase
transactions, eight multifamily properties containing an
aggregate of 1,762 suites and two parcels of land consisting of
14.7 acres for an aggregate purchase price of $105.1 million, of
which $4.5 million represented liabilities assumed. The acquired
properties are located in Clinton Township and Farmington Hills,
Michigan; Indianapolis, Indiana; and Cincinnati, Columbus and
Toledo, Ohio. The purchase price of the acquired properties has
been financed primarily with proceeds from borrowings on the
Company's Line of Credit (Note 6).
During 1996, the Company acquired, in separate purchase
transactions, six multifamily properties containing an aggregate
of 1,289 suites and three parcels of undeveloped land consisting
of 43 acres for an aggregate purchase price of $59.1 million,
which were financed with (i) borrowings under the Company's Line
of Credit of $46.1 million; (ii) net proceeds of $9.9 million
from the issuance of a Medium-Term Note; and (iii) the assumption
of mortgage indebtedness with a stated value of $3.1 million.
During 1995, the Company acquired, in separate purchase
transactions, 15 multifamily properties consisting of 2,276
suites and three parcels of land consisting of 89.7 acres for an
aggregate cost of $106 million. These acquisitions were financed
with (i) $2.5 million of available cash, (ii) $42.2 million of
proceeds from the Perpetual Preferred Share offering (Note 13),
(iii) borrowings under the Revolving Credit Facility and Line of
Credit of $37.4 million, and (iv) the assumption of mortgage
indebtedness with a stated value of $23.9 million. The mortgage
indebtedness was adjusted to market value at the date of
acquisition, using interest rates reflecting the Company's
incremental borrowing rate.
Disposition Activity
In December 1997, the Company sold a 90 acre parcel of land
zoned for office and industrial use, which was one of the assets
acquired by the Company at the time of the Company's initial
public offering of common shares. Net cash proceeds from the
sale of $4.9 million, resulting in a gain of $1.6 million were
placed in a trust restricting the Company to use these funds
exclusively for the purchase of other property of like-kind and
qualifying use. The like-kind exchange was consummated
subsequent to December 31, 1997.
3. RESTRICTED CASH
Restricted cash, some of which is required by HUD for
certain government-subsidized properties, includes funds held in
trust for a pending like-kind exchange (Note 2), residents'
security deposits, reserve funds for replacements and other
escrows held for the future payment of real estate taxes and
insurance. The reserve funds for replacements are intended to
provide cash to defray future costs that may be incurred to
page F-11
maintain the associated property. In addition, certain escrows
are maintained in connection with mortgage servicing operations.
Restricted cash is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Like-kind exchange trust $ 4,863,760 $ -
Resident security deposits 805,172 793,160
Escrow and reserve funds for
replacements required by
mortgagees 4,456,581 4,831,843
$ 10,125,513 $ 5,625,003
</TABLE>
Amounts held in the like-kind exchange trust were invested
in money market funds at December 31, 1997. Resident security
deposits are held in separate bank accounts in the name of the
properties for which the funds are being held. Reserve funds for
replacements are invested in a combination of money market funds,
U.S. treasury bills with maturities less than 18 months, and
collateralized mortgage obligations issued by the Federal Home
Loan Mortgage Company ("FHLMC") maturing in 2023.
Debt securities owned with a purchased maturity of less than
18 months are classified as "held to maturity" and securities
with a purchased maturity greater than 18 months are classified
as "available for sale". At December 31, 1997 and 1996, treasury
bills with a cost of $1,873,088 and $1,899,433 had fair values of
$1,904,255 and $1,929,890, respectively, and are stated at cost
in the Consolidated Balance Sheet. Investments in obligations
issued by the FHLMC were stated at fair value which compares to
cost of $398,000 and $423,000 at December 31, 1997 and 1996,
respectively. Included in additional paid-in capital is a
$15,000 unrealized holding gain and $18,500 unrealized holding
loss at December 31, 1997 and 1996, respectively, related to
available for sale securities.
4. DEFERRED CHARGES AND PREPAID EXPENSES
Deferred charges and prepaid expenses consist of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred financing and leasing costs $ 3,739,789 $ 3,407,556
Less: accumulated amortization (886,000) (620,093)
2,853,789 2,787,463
Prepaid expenses 2,325,067 1,393,936
Other assets 1,442,548 1,434,995
$ 6,621,404 $ 5,616,394
</TABLE>
Amortization expense was $700,118, $608,594 and $765,404 for
the years ended December 31, 1997, 1996 and 1995, respectively.
page F-12
5. EXTRAORDINARY ITEMS AND NON-RECURRING CHARGE
In 1997, unamortized debt discount was written off upon the
early repayment of mortgage debt. In 1995, deferred financing
costs were written off upon the early termination of the
Revolving Credit Facility and early repayment of mortgage debt.
These transactions have been reflected as an extraordinary credit
or charge in 1997 and 1995, respectively.
During 1997, the Company wrote off $1,764,044 of
receivables, principally comprised of two advances to managed but
non-owned and non-related party properties. This write off is
reflected as a charge for unrecoverable funds advanced to non-
owned properties and other in the Consolidated Statements of
Income.
6. DEBT
The Company's borrowings are evidenced by both secured and
unsecured debt. Secured debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Conventional mortgage debt, maturing
at various dates to 2018 $ 29,396,477 $ 37,737,709
Federally insured mortgage debt, maturing
at various dates to 2028 28,421,504 31,286,544
$ 57,817,981 $ 69,024,253<PAGE>
</TABLE>
Conventional Mortgage Debt
Conventional mortgages payable are comprised of four and six
loans (nonrecourse, fixed rate, project specific loans) at
December 31, 1997 and 1996, respectively, each of which is
collateralized by the associated real estate and resident leases.
Mortgages payable are generally due in monthly installments of
principal and/or interest and mature at various dates through
March 1, 2007. At December 31, 1997, three of the four
conventional mortgages have a fixed rate and the remaining
mortgage ($8,100,000) is a variable rate. The average interest
rate on conventional mortgages was 8.45% and 8.02% at December
31, 1997 and 1996, respectively.
Federally Insured Mortgage Debt
Federally insured mortgage debt which encumbered seven and
eight of the properties at December 31, 1997 and 1996,
respectively (including one property which is funded through
Industrial Development Bonds), is insured by HUD pursuant to one
of the mortgage insurance programs administered under the
National Housing Act of 1934. These government-insured loans are
nonrecourse to the Company. Payments of principal, interest and
HUD mortgage insurance premiums are made in equal monthly
installments and mature at various dates through March 1, 2024.
At December 31, 1997, six of the seven federally insured
mortgages have a fixed rate and the remaining mortgage
($1,892,401) is a variable rate. Interest rates on the
HUD-insured indebtedness range from 7.0% to 10.25% (averaging
8.18% at December 31, 1997).
page F-13
Under certain of the mortgage agreements, the Company is
required to make escrow deposits for taxes, insurance and
replacement of project assets. The variable rate mortgage is
secured by a letter of credit which is renewed annually.
Real estate assets pledged as collateral for all mortgage
debt had a net book value of $50,030,137 and $65,757,695 at
December 31, 1997 and 1996, respectively.
Unsecured debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Senior Notes, due 2000 to 2002 with
interest payable quarterly, net of
unamortized discounts of $147,693
and $211,293 $ 84,852,307 $ 84,788,707
Medium-Term Notes, due 2001 to 2026
with interest payable quarterly 92,500,000 42,500,000
Line of Credit, due 1998 83,000,000 21,500,000
$ 260,352,307 $ 148,788,707
</TABLE>
Senior Notes
The Senior Notes with aggregate net proceeds of $83.6
million after underwriting commissions, offering expenses and
discount, were issued during 1995 in the principal amounts of $75
million and $10 million and accrue interest at 8.38% and 7.10%,
respectively, and mature in 2000 and 2002, respectively. The
balance of the $75 million Senior Note, net of unamortized
discounts, was $74.9 million and $74.8 million at December 31,
1997 and 1996, respectively.
Medium-Term Notes Program
The Company issued ten Medium-Term Notes (the "MTN's")
having an aggregate balance of $92.5 million and $42.5 million at
December 31, 1997 and 1996, respectively. The principal amounts
of these MTN's range from $2.5 million to $20 million and bear
interest from 6.18% to 7.93% over terms ranging from two to 30
years, with a stated weighted average maturity of 10.27 years at
December 31, 1997. The holders of two MTN's with stated terms of
30 years each may request repayment five and seven years from the
issue date of the respective MTN. Should these holders request
prepayment, the weighted average maturity would be 5.48 years.
The weighted average interest rate of the ten MTN's is 6.97%.
Six of the MTN's in the aggregate amount of $42.5 million were
issued in 1996, with the balance issued in 1997.
The Company's current MTN Program provides for the issuance
from time-to-time of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At December
31, 1997, $82.5 million of additional MTN borrowings were
available under the current program.
page F-14
Line of Credit
During September 1997, the Company reached an agreement with
its agent bank to increase its $75 million unsecured credit
facility (the "Line of Credit") to $100 million. The Company
also negotiated a competitive bid option which could further
reduce interest cost on its Line of Credit. The Line of Credit
includes certain restrictive covenants which, among others,
requires the Company to (i) maintain a minimum level of net
worth, (ii) limit dividends to 90% of Distributable Cash Flow, as
defined in the agreement, (iii) restrict the use of its
borrowings, and (iv) maintain certain debt coverage ratios. The
Line of Credit provides for a scaled reduction in the LIBOR,
prime rate and commitment fee margins based on the Company's
credit ratings. For the year ended December 31, 1997, based on
the Company's present credit ratings, the LIBOR margin was 125
basis points, fixed in increments of 30, 60, 90, 120 or 180 days
or, alternatively, borrowings are at prime rate. An annual
commitment fee of 15 to 25 basis points on the average daily
unused amount of the facility is payable quarterly in arrears.
The Company also exercised its option to extend the line for one
additional year through September 1998. The weighted average
interest rate on borrowings outstanding under the Line of Credit
was 7.04% at December 31, 1997.<PAGE>
As of December 31, 1997, the scheduled maturities of secured
and unsecured indebtedness for each of the next five years and
thereafter, are as follows:
<TABLE>
<C> <C>
1998 $ 84,004,936
1999 29,191,859
2000 76,038,727
2001 22,231,604
2002 26,208,474
Thereafter 80,494,688
$ 318,170,288
</TABLE>
7. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
At December 31, 1997, the Company's interests in the joint
venture partnerships are as follows:
<TABLE>
<CAPTION>
Ownership
<S> <C>
Americana 33-1/3%
Euclid House 33-1/3%
Gates Mills Towers 33-1/3%
Watergate 33-1/3%
College Towers 50%
Highland House 50%
Lakeshore Village 50%
</TABLE>
page F-15
Summarized financial information for these joint ventures is
as follows:
<TABLE>
<CAPTION>
Balance sheet data
1997 1996
---------- ----------
<S> <C> <C>
Real estate, net $13,812,528 $14,928,492
Other assets 4,171,028 3,633,528
$17,983,556 $18,562,020
Amounts payable to the Company $ 147,349 $ 227,577
Mortgages payable 51,132,057 51,769,320
Other liabilities 2,995,699 3,312,635
Accumulated deficit (36,291,549) (36,747,512)
$17,983,556 $18,562,020
</TABLE>
<TABLE>
<CAPTION>
Operating data
1997 1996 1995
<S> <C> <C> <C>
Rental revenues $18,775,127 $18,254,406 $ 18,295,281
Other revenues 129,490 127,729 135,488
Operating and maintenance expenses 11,020,783 11,093,688 10,993,346
Depreciation and amortization 1,384,453 1,493,727 1,486,041
Interest expense 5,119,462 5,176,499 5,230,842
Net income $ 1,379,919 $ 618,221 $ 720,540
Company's proportionate interest in:
Depreciation and amortization $ 496,983 $ 533,248 $ 530,731
Interest expense 1,763,156 1,782,706 1,801,622
Net income of joint ventures 560,934 305,189 297,406<PAGE>
</TABLE>
The Company's proportionate share of net distributions was
$485,513, $509,977 and $438,312 for the years ended December 31,
1997, 1996 and 1995, respectively. Revenues from property
management fees charged to joint ventures aggregated $764,338,
$746,514 and $745,924 for the years ended December 31, 1997, 1996
and 1995, respectively. The corresponding expenses are included
in the operating and maintenance expenses of the joint ventures,
as set forth above.
Lakeshore Village is governed by regulations pursuant to the
property's rent subsidy and mortgage insurance programs under
HUD, which contain provisions governing certain aspects of the
operations of the property (Note 10). Rent subsidies of
$785,883, $802,517 and $809,032 for the years ended December 31,
1997, 1996 and 1995, respectively, were received by the property.
8. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
The Company provides management and other services to (and
is reimbursed for certain expenses incurred on behalf of) certain
non-owned properties in which the Company's Chief Executive
Officer and/or other related parties have varying ownership
interests. The entities which own these properties, as well as
other related parties, are referred to as "affiliates". The
Company also provides similar services to joint venture
properties.
page F-16
Summarized affiliate and joint venture transaction activity
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Property management fee and other
miscellaneous service revenues
- affiliates $ 2,416,850 $ 2,530,165 $ 2,779,609
- joint ventures 921,701 903,593 883,532
Painting service revenues
- affiliates 460,218 944,769 419,133
- joint ventures 165,956 155,763 195,156
Expenses incurred on behalf of and
reimbursed by (1) - affiliates 4,478,437 3,959,548 3,558,591
- joint ventures 2,540,621 2,509,324 2,431,008
Interest income - affiliates 697,990 201,238 98,326
Interest expense - affiliates (297,246) (261,071) (208,812)
- joint ventures (24,091) (21,865) (15,449)
<FN>
(1) Primarily payroll and employee benefits, reimbursed at cost.
<FN>
</TABLE>
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties were $4,542,798
and $1,111,215 in the aggregate at December 31, 1997 and 1996,
respectively. Other miscellaneous payables due to affiliates and
joint venture properties were $329,000 and $219,747 in the
aggregate at December 31, 1997 and 1996, respectively.
In the normal course of business, the Company advances funds
on behalf of, or holds funds for the benefit of affiliates and
joint ventures. Funds advanced to affiliates and joint ventures
aggregated $9,048,403 and $847,954 at December 31, 1997,
respectively, and $5,010,697 and $616,723 at December 31, 1996,
respectively. Except for insignificant amounts, advances to
affiliates bear interest; on a weighted average basis; the rate
charged was 8.0% during 1997 and 7.0% during 1996. The Company
held funds for the benefit of affiliates and joint ventures in
the aggregate amount of $4,989,674 and $1,805,543 at December 31,
1997, respectively, and $4,666,068 and $1,375,410 at December 31,
1996, respectively.
Subsequent to December 31, 1997, certain affiliated entities
which owed the Company a substantial amount of the advances
described above, made capital calls to their partners for the
purpose of effecting repayment of such advances. Thereafter,
approximately $3.5 million of advances were repaid pursuant to
such capital calls. However, a corporation (the "Corporation")
owned by a member of the Company's board of directors, and his
siblings (including the wife of the Company's Chairman and Chief
Executive Officer) which serves as general partner of certain
affiliated entities, has informed the Company that the Corporation
has caused the commencement of a review of expenditures relating to
approximately $2.9 million of capital calls from certain HUD
subsidized affiliated entities, to determine the appropriateness
of such expenditures and whether certain of such expenditures
are properly the responsibility of the Company. Should
this review result in any dispute with respect to the foregoing
expenditures, such disagreement will be resolved through binding
arbitration. The Company believes that all expenditures were
appropriate and, accordingly, does not believe that the ultimate
outcome of any disagreement will have a material adverse effect on
page F-17
the Company's financial position, results of operations or cash
flows.
At December 31, 1997, two notes of equal amounts were
receivable from the Company's Chief Executive Officer aggregating
$3,342,000 (included in "Accounts and notes receivables-
affiliates and joint ventures"). The notes were entered into on
May 23, 1997 and bear interest, payable quarterly at the 30-day
LIBOR plus the LIBOR margin on the Company's Line of Credit, with
principal due May 1, 2002. The 30-day LIBOR averaged 5.52%
during 1997 while the LIBOR margin on the Company's Line of
Credit ranged from 150 to 100 basis points. One of the notes is
collateralized by 150,000 of the Company's common shares; the
other note is unsecured. The Company recognized interest income
of $143,289 at December 31, 1997 relating to these notes.
9. NOTEHOLDER INTEREST
The Company has a noteholder interest in one multifamily
property which, since 1984, has been unable to generate
sufficient cash flow, as defined, to meet the scheduled interest
payments under notes payable to the Company. Accordingly, the
Company is entitled to all cash flows from operations. To the
extent that the cumulative unpaid debt service on the notes is
greater than seven years of aggregate principal and interest
amortization (the cumulative amount of debt service), which
occurred in 1995, the Company can exercise its rights under a
security agreement and foreclose on the property. Because, in
substance, the Company will eventually own title to the property,
most likely through foreclosure, the property is presented in the
financial statements as if owned by the Company. Summarized
financial information for this property is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Real estate, net $ 1,441,646 $ 1,484,399
Other assets 803,416 1,124,209
$ 2,245,062 $ 2,608,608
Mortgage notes payable $ 4,295,287 $ 4,453,316
Other liabilities 399,677 419,586
Accumulated deficit (2,449,902) (2,264,294)
$ 2,245,062 $ 2,608,608
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Rental and other revenue $ 2,264,592 $ 2,270,750 $ 2,250,140
Property operating and
maintenance expenses 1,392,571 1,202,178 1,295,223
Depreciation and 148,224 143,949 143,893
amortization
Interest expense 325,764 335,644 353,334
Net income $ 398,033 $ 588,979 $ 457,690<PAGE>
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company owns one property which derives part of its
rental revenues from commercial tenants with noncancellable
operating leases. Future minimum lease payments to be received,
page F-18
assuming no new or renegotiated leases, or option extensions, for
each of the next five years and thereafter, are as follows:
<TABLE>
<S> <C>
1998 $ 996,620
1999 974,102
2000 657,329
2001 327,036
2002 80,057
Thereafter 424,120
$ 3,459,264
</TABLE>
The Company leases certain equipment under capital leases.
Such equipment is included in property, plant and equipment with
a cost of $1,038,169, and accumulated depreciation of $426,093 at
December 31, 1997. The Company also leases certain equipment
under operating leases. Future minimum lease payments under all
capital and noncancellable operating leases in which the Company
is the lessee, principally for ground leases, for each of the
next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
1998 $ 323,586 $ 127,166
1999 198,511 101,261
2000 62,457 101,261
2001 14,101 101,261
2002 5,875 101,261
Thereafter - 5,276,679
------- ----------
604,530 $ 5,808,889
Less interest 51,897
---------
$ 552,633
</TABLE>
Certain of the ground lease agreements contain provisions
which, upon expiration of the lease, require reversion of the
land and building to the lessor. Such provisions exist for nine
properties included in the financial statements and expire at
various dates from 2021 to 2086. Rental revenues derived from
such properties were $9,476,338, $9,376,871 and $9,257,290 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Furthermore, at the end of the term of the lease, any remaining
replacement reserves revert to the lessor. Management believes
that the replacement reserves will be utilized for their intended
purpose prior to the end of the lease term. Such cash reserves
included in restricted cash were $1,564,010 and $1,481,538 at
December 31, 1997 and 1996, respectively. With respect to such
leases, the Company incurred ground rent expense of $101,261 for
each of the years ended December 31, 1997, 1996 and 1995.
The Company owns one property which is subject to a warranty
deed reversion provision. This provision requires that the
assignment of fee simple title shall expire in 2037. At December
31, 1997, the net book value of this property was $1,618,097.
Certain of the Company's properties are governed by
regulations pursuant to rent subsidies or mortgage insurance
programs, which contain provisions governing certain aspects of
page F-19
the operations of the properties. Among other things, such
provisions may include the maintenance of a reserve fund for
replacements, the renting of properties to qualifying residents,
and the requirement to make distributions in accordance with
certain regulations. Certain approvals may be required to
encumber properties having rental subsidies.
The rent subsidy program provides that HUD will make monthly
housing assistance payments to the Company on behalf of persons
who reside in approved properties and who meet the eligibility
criteria. The amount of the total monthly rental and the subsidy
is determined at least annually by HUD. This arrangement is
evidenced by a contract between HUD and the Company. Such
contracts have scheduled expiration dates between September 2000
and December 2018. HUD may abate subsidy payments if the Company
defaults on any obligations under such contracts and fails to
cure each default after receiving notice thereof. Rent subsidies
of $11,004,881, $11,174,488 and $10,666,547 for the years ended
December 31, 1997, 1996 and 1995, respectively, were received or
recognized in income by the 15 wholly owned properties eligible
for federal rent subsidies. As discussed in Note 6, certain
obligations are insured by federal mortgage insurance programs.
The Company believes that the contracts will be renewed or that
the properties will be operated as conventional, market-rate
apartments upon expiration of the contracts.
HUD recently notified the Company that Rainbow Terrace
Apartments, Inc., (the Company's subsidiary corporation that owns
Rainbow Terrace Apartments) is in default under the terms of the
Regulatory Agreement and Housing Assistance Payments Contract
("HAP Contract") pertaining to this property. Among other
matters, HUD alleges that the property is poorly managed and
Rainbow Terrace Apartments has failed to complete certain
physical improvements to the property. Moreover, HUD claims that
the property is not in compliance with numerous technical
regulations concerning whether certain expenses are properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
Rainbow Terrace Apartments believes that it has corrected the
management deficiencies cited by HUD in the Comprehensive
Management Review (other than the completion of certain physical
improvements to the property) and, in a series of written
responses to HUD, justified the expenditures questioned by HUD as
being properly chargeable to the property in accordance with
HUD's regulations. Moreover, Rainbow Terrace Apartments believes
it has repaired any physical deficiencies noted by HUD in its
Comprehensive Management Review that might pose a threat to the
life and safety of its residents. The Company is unable to
predict the outcome of the controversy with HUD, but does not
believe it will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
page F-20
11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were
determined by management using available market information and
appropriate valuation methodologies. Considerable judgment is
necessary to interpret market data and develop estimated fair
values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize
on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
Rents, accounts and notes receivable, accounts payable,
accrued expenses and other liabilities are carried at amounts
which reasonably approximate corresponding fair values.
Mortgages and notes payable with an aggregate carrying value
of $57,817,981 and $69,024,253 at December 31, 1997 and 1996,
respectively, have an estimated aggregate fair value of
approximately $60,958,924 and $69,029,601, respectively. The
Line of Credit is carried at an amount which approximates fair
market value. Estimated fair value is based on interest rates
currently available to the Company for issuance of debt with
similar terms and remaining maturities.
Senior and Medium-Term Notes with an aggregate carrying
value of $177,352,307 and $127,288,707 at December 31, 1997 and
1996, respectively, have an estimated fair value of $185,572,168
and $130,446,465, respectively.
The Company may, from time to time, enter into interest rate
agreements to manage interest costs and risks associated with
changing rates. On December 12, 1997, the Company entered into a
treasury lock rate agreement for a notional amount of
$20,000,000. The carrying value of the agreement was zero and
the fair market value was a liability of approximately $76,000 at
December 31, 1997.
Disclosure about the fair value of financial instruments is
based on pertinent information available to management as of
December 31, 1997 and 1996. Although management is not aware of
any factors that would significantly affect the fair value
amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since these dates and
current estimates of fair value may differ significantly from the
amounts presented herein.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31,
1997, 1996 and 1995 was $19,628,642, $16,294,050 and $10,430,373,
respectively, which is net of capitalized interest.
The following summarizes the non-cash investing and
financing activities of the Company which are not reflected in
the Consolidated Statements of Cash Flows:
page F-21
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Assumption of mortgage debt in
connection with the acquisition
of properties $ - $ 3,036,251 $ 25,791,140
Assumption of liabilities in
connection with the acquisition
of properties 4,448,956 923,691 1,081,530
Dividends declared but not paid 7,938,692 6,895,071 5,963,834
Capital lease obligations 339,745 319,802 35,946
Offering expenses accrued 37,771 96,785 58,089<PAGE>
</TABLE>
13. PREFERRED AND COMMON SHARES
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
On December 17, 1996, the Company completed an offering of
1,450,000 common shares at $22.375 per share. The net proceeds
of approximately $30.7 million were applied to reduce debt.
On July 27, 1995, the Company completed an offering of
2,250,000 Depositary Shares, each representing 1/10 of a share of
the Company's 9.75% Class A Cumulative Redeemable Preferred
Shares (the "Perpetual Preferred Shares"). Net proceeds to the
Company after expenses relating to the offering and underwriting
discounts and commissions were approximately $54.1 million, which
were utilized for acquisitions and to reduce existing debt.
Dividends on the Perpetual Preferred Shares are cumulative from
the date of issue and are payable quarterly. Except in certain
circumstances relating to the preservation of the Company's
status as a REIT, the Perpetual Preferred Shares are not
redeemable prior to July 25, 2000. On and after July 25, 2000,
the Perpetual Preferred Shares will be redeemable for cash at the
option of the Company.
The Company is authorized to issue 3,000,000 Class B
Cumulative Preferred Shares, without par value, and 3,000,000
Noncumulative Preferred Shares, without par value. There are no
noncumulative preferred shares issued or outstanding at December
31, 1997, 1996 or 1995.
14. EARNINGS AND DIVIDENDS PER SHARE
Earnings Per Share
Earnings per share ("EPS") has been computed pursuant to the
provisions of SFAS No. 128 which became effective after December
15, 1997; all periods prior thereto have been restated to conform
with the provisions of this Statement.
The following table provides a reconciliation of both income
before extraordinary items and the number of common shares used
in the computations of basic EPS, which utilizes the weighted
average number of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS, which includes
all such shares.
page F-22
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Income Before Extraordinary Items
Income $ 19,688,656 $ 19,303,988 $ 17,271,050
Less: Preferred stock dividends 5,484,421 5,484,422 2,132,730
Applicable to common shares $ 14,204,235 $ 13,819,566 $ 15,138,320
Number of Shares
Basic-average shares outstanding 16,199,928 13,931,807 13,869,595
Add: Dilutive effect of stock
options 21,636 - -
Diluted shares 16,221,564 13,931,807 13,869,595
Per-Share Amount-Income
Before Extraordinary Item
Basic $ .88 $ .99 $ 1.09
Diluted $ .88 $ .99 $ 1.09 <PAGE>
</TABLE>
Options to purchase 389,274, 369,349 and 349,600 shares of
common stock were outstanding at December 31, 1997, 1996 and
1995, respectively (Note 15), a portion of which has been
reflected above using the treasury stock method.
Dividends Per Share
Total dividends declared per common share and the related
components for the years ended December 31, 1997 and 1996, as
reported for income tax purposes, were as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Non-Taxable
Ordinary Return of
Date Paid Income Capital Dividends
<S> <C> <C> <C> <C>
1st quarter 5/1/97 $ .325 $ .14 $ .465
2nd quarter 8/1/97 .325 .14 .465
3rd quarter 10/31/97 .325 .14 .465
4th quarter 1/15/98 .325 .14 .465
$1.300 $ .56 $1.860
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996
Non-Taxable
Ordinary Return of
Date Paid Income Capital Dividends
<S> <C> <C> <C> <C>
1st quarter 5/1/96 $ .32 $ .13 $ .45
2nd quarter 8/1/96 .32 .13 .45
3rd quarter 11/1/96 .32 .13 .45
4th quarter 1/31/97 .32 .13 .45
$1.28 $ .52 $1.80<PAGE>
</TABLE>
page F-23
15. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a defined contribution retirement plan
pursuant to Section 401(k) of the Internal Revenue Code, whereby
eligible employees may elect to contribute between 1% and 12% of
their gross wages. The Company matches such contributions at a
rate of 25% up to a maximum participant contribution of 4%. The
Company made contributions to this plan, net of reimbursements
from managed but non-owned properties, of $60,016, $46,555 and
$39,827 for the years ended December 31, 1997, 1996 and 1995,
respectively. Additionally, the Company offers medical, dental
and life insurance benefits to employees.
AERC Share Option Plan
The Company provides an incentive and nonqualified stock
option plan (the "AERC Share Option Plan") under which 543,093 of
the Company's common shares are reserved for awards of share
options to eligible key employees. Options may be granted at per
share prices not less than fair market value at the date of
grant, and in the case of incentive options, must be exercisable
within ten years thereof. Option awards granted are vested in
equal annual increments over no fewer than three years, beginning
on the first anniversary of the date of grant. Activity under
the AERC Share Option Plan is summarized as follows:
<TABLE>
<CAPTION>
Granted and
Authorized Outstanding Available Exercisable
<S> <C> <C> <C> <C>
Balance at December 31, 1993 543,093 344,850 198,243 -
Granted (at $22.00 per share) - - - 114,950
Balance at December 31, 1994 543,093 344,850 198,243 114,950
Forfeited (at $22.00 per share) - (20,250) 20,250 -
Exercisable - - - 101,450
Balance at December 31, 1995 543,093 324,600 218,493 216,400
Granted (at $20.25 per share) - 25,000 (25,000) -
Forfeited (at $22.00 per share) - (4,001) 4,001 -
Exercisable - - - 104,199
Balance at December 31, 1996 543,093 345,599 197,494 320,599
Granted (at $24.06 per share) - 197,494 (197,494) -
Exercised (at $22.44 to
$23.75 per share) - (75) - (75)
Exercisable - - - 8,333
Balance at December 31, 1997 543,093 543,018 - 328,857
</TABLE>
The weighted average exercise prices of options outstanding
at December 31, 1995, 1996 and 1997 were $22.00, $21.87 and
$22.67 per share, respectively. The weighted average exercise
prices of options exercisable at December 31, 1995 and 1996 were
$22.00 and $21.96 per share at December 31, 1997.
Long-Term Plan
In 1995, the Company's shareholders approved a long-term
incentive compensation plan (the "Long-Term Plan"). Participants
in the Long-Term Plan will earn incentive compensation over a
three year period (the "Plan Period") based on specific levels of
Funds From Operations per share, as defined, that are established
page F-24
at the outset of the Plan Period. Initial awards under the Long-
Term Plan were based on the Plan Period beginning January 1, 1995
and ending December 31, 1997. There were no charges to earnings
under this plan in 1996 or 1997. An accrual for $273,207 was
recorded under this plan at December 31, 1995, but subsequently
reversed during 1996. Beginning with the calendar year 1998, a
new three year Plan Period will begin each year. Payment of the
incentive compensation earned under the Long-Term Plan may be
made in cash, restricted shares of the Company's common shares or
a combination thereof as determined by the board of directors.
The first payment eligibility date under the Long-Term Plan will
be made in 1998, the second in 2001, and then it is anticipated
that participants will be eligible for payments each year
thereafter until the Long-Term Plan terminates in 2005.
Omnibus Equity Plan
In 1995, the Company's shareholders approved an equity-based
incentive compensation plan (the "Omnibus Equity Plan"). The
Omnibus Equity Plan provides for the grant to participants of
options to purchase common shares, awards of common shares
subject to restrictions on transfer, awards of common shares
issuable in the future upon satisfaction of certain conditions,
rights to purchase common shares and other awards based on common
shares. The option price with respect to the grant of options to
purchase common shares will be determined at the time of the
grant but will not be less than 100% of the fair market value of
the common shares at the date of the grant or 110% in the case of
a participant who, at the date of grant, owns shares with more
than 10% of the total combined voting power of all classes of
stock of the Company. The rights to purchase common shares will
enable a participant to purchase common shares (i) at the fair
market value of such shares on the date of such grant or (ii) at
85% of such fair market value on such date if the grant is made
in lieu of cash compensation. Under the terms of the Omnibus
Equity Plan, these grants and awards may not aggregate more than
1,400,000 common shares and no participating employee may receive
awards with respect to more than 250,000 common shares during any
calendar year.
Restricted shares and option awards granted are vested in
equal annual increments over three and five years, respectively,
beginning on the first anniversary of the date of grant.
Activity under the Omnibus Equity Plan is summarized as follows:
<TABLE>
<CAPTION>
Granted and
Authorized Outstanding Available Exercisable
<S> <C> <C> <C> <C>
Authorized 1,400,000 - 1,400,000 -
Restricted shares granted (at
$20.40 per share) - 3,000 (3,000) -
Exercisable - - - 1,000
Balance at December 31, 1995 and
1996 1,400,000 3,000 1,397,000 1,000
Restricted shares granted (at
$22.81 per share) - 1,317 (1,317) -
Options granted (at $24.06 per
share) - 483,506 (483,506) -
Exercisable - - - 1,000
Balance at December 31, 1997 1,400,000 487,823 912,177 2,000
</TABLE>
Deferred compensation of $30,600, $40,800 and $61,200 at
December 31, 1997, 1996 and 1995, respectively, has been
reflected as a reduction of paid-in capital in the accompanying
financial statements relating to the issuance of 1,317 restricted
shares in 1997 and 3,000 restricted shares in 1995.
Options Granted to Outside Directors
The Company has granted options to outside directors on a
periodic basis since the IPO. The shares granted are determined
page F-25
by the Company's Executive Compensation Committee. Option awards
granted vest one year from the date of grant. Activity is
summarized as follows:
<TABLE>
<CAPTION>
Granted Exercisable
<S> <C> <C>
Balance at December 31, 1993 20,000 -
Granted (at $22.00 per share) 5,000 -
Forfeited (at $22.00 per share) (5,000) -
Exercisable - 15,000
Balance at December 31, 1994 20,000 15,000
Granted (at $22.00 per share) 5,000 -
Exercisable - 5,000
Balance at December 31, 1995 25,000 20,000
Granted (at $22.00 per share) 5,000 -
Forfeited (at $22.00 per share) (6,250) (6,250)
Exercisable - 5,000
Balance at December 31, 1996 23,750 18,750
Granted (at $24.06 per share) 20,000 -
Exercisable - 5,000
Balance at December 31, 1997 43,750 23,750
</TABLE>
The weighted average exercise prices of options outstanding
at December 31, 1995 and 1996 were $22.00 per share and $22.94
per share at December 31, 1997. The weighted average exercise
prices of options exercisable at December 31, 1995, 1996 and 1997
were $22.00 per share.
Executive Compensation
The Company has an employment agreement with the President
and Chief Executive Officer for an initial three-year term which
commenced November 18, 1993 and is automatically extended for an
additional year at the end of each year of the agreement. Annual
base salary under the agreement was $458,480, $440,000 and
$385,000 for 1997, 1996, and 1995, respectively. The initial
agreement provided for an annual cash bonus equal to 15% to 100%
of the base salary if the Company's Distributable Cash Flow, as
defined, per common share, for any year exceeded, by 5% to 20% or
more, the amount for the immediate preceding year. Under the
bonus plan, $101,000 was earned in 1995. This employment
agreement was amended in January 1996 to provide for a
performance bonus based upon annual performance benchmarks tied
to Funds From Operations per share. The incentive amounts are
set at the beginning of each fiscal year commensurate with the
responsibilities of a CEO. In 1997 and 1996, respectively, $0
and $227,854 in incentive compensation was earned.
SFAS 123
The Company does not recognize compensation cost for stock
options when the option exercise price equals or exceeds the
market value on the date of the grant. Had compensation cost for
the Company's stock-based compensation plans been determined
based on the fair values of the options granted at the grant
dates, consistent with the method of SFAS 123, the Company's net
income and earnings per share would have been as follows:
page F-26
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income applicable
to common shares
As reported $15,227,948 $13,819,566 $14,040,789
Pro forma $15,152,835 $13,812,182 $14,030,289
Income per common share (Basic and Diluted)
As reported $ .94 $ .99 $ 1.01
Pro forma $ .94 $ .99 $ 1.01
</TABLE>
The fair value of each option grant was estimated on the
date of grant using the Black-Sholes options pricing model using
the following assumptions:
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Risk free interest rate or range 5.8%-6.2% 6.5%-6.9% 7.2%
Dividend yield 7.8% 7.9% 7.9%
Expected life or range 7-8 years 7-8 years 7 years
Expected volatility or range 16.3% 17.4%-17.6% 19.8%
Weighted average per share fair
value of an option granted
during the year $1.82 $1.91 $2.51
</TABLE>
The pro forma effect on net income as set forth above is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
page F-27
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)<PAGE>
<TABLE>
<CAPTION>
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 24,798,341 $26,823,699 $ 28,127,471 $29,060,437
Income before
extraordinary item 5,225,527 5,356,942 5,776,024 3,330,163
Extraordinary item - (1,043,446) 19,733 -
Net income 5,225,527 6,400,388 5,756,291 3,330,163
Net income applicable
to common shares 3,854,421 5,029,284 4,385,186 1,959,057
Basic:
Income before
extraordinary item
per common share $ .25 $ .26 $ .26 $ .11
Net income per common
share $ .25 $ .32 $ .26 $ .11
Weighted average number
of shares outstanding
(in thousands) 15,322 15,322 17,053 17,073
Diluted:
Income before
extraordinary item
per common share $ .25 $ .26 $ .26 $ .11
Net income per common
share $ .25 $ .32 $ .26 $ .11
Weighted average number
of shares outstanding
(in thousands) 15,351 15,335 17,074 17,097<PAGE>
</TABLE>
<TABLE>
<CAPTION>
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 21,924,332 $23,426,287 $ 24,041,986 $25,062,543
Income before
extraordinary item 4,791,177 4,924,206 4,984,243 4,604,362
Net income 4,791,177 4,924,206 4,984,243 4,604,362
Net income applicable
to common shares 3,420,072 3,553,101 3,613,138 3,233,255
Basic:
Income before
extraordinary item
per common share $ .25$ .25 $ .26$ .23
Net income per common share $ .25$ .25 $ .26$ .23
Weighted average number
of shares outstanding
(in thousands) 13,872 13,872 13,872 14,109
Diluted:
Income before
extraordinary item
per common share $ .25$ .25 $ .26$ .23
Net income per common share $ .25$ .25 $ .26$ .23
Weighted average number
of shares outstanding
(in thousands) 13,872 13,872 13,872 14,109<PAGE>
</TABLE>
page F-28
17. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
As more fully described in Note 2, during the years ended
December 31, 1997 and 1996, the Company completed the acquisition
of eight and six multifamily properties (the "Acquired
Properties") with total suites of 1,762 and 1,289, during 1997
and 1996, respectively, for an aggregate purchase price of $104.6
million and $57.4 million. The multifamily property acquisitions
are summarized as follows:
<TABLE>
<CAPTION>
Month
Acquired by
Multifamily Property Location Suites the Company
---------------------------- --------------------- ------ -----------
1996 Acquisitions:
<S> <C> <C> <C>
Aspen Lakes Grand Rapids, Michigan 144 September
Chestnut Ridge Pittsburgh, Pennsylvania 468 March
Perimeter Lakes Dublin, Ohio 189 September
The Residence at Washington Washington Ct. House, Ohio 72 February
Spring Brook Apartments Holland, Michigan 168 June
Summer Ridge Apartments Kalamazoo, Michigan 248 April
1,289
1997 Acquisitions:
Clinton Place Apartments Clinton Twp., Michigan 202 August
Hawthorne Hills Apartments Toledo, Ohio 88 May
Oak Bend Commons Columbus, Ohio 102 May
Remington Place Apartments Cincinnati, Ohio 234 April
Saw Mill Village Apartments Columbus, Ohio 340 April
Spring Valley Detroit, Michigan 224 October
The Gables at White River Indianapolis, Indiana 228 February
Waterstone Apartments Indianapolis, Indiana 344 August
1,762
3,051
</TABLE>
The operating results of the Acquired Properties are
included in the results of operations of the Company from the
dates of acquisition.
The following unaudited supplemental pro forma operating
data for 1997 is presented to reflect, as of January 1, 1997, the
effects of: (i) the eight property acquisitions completed in
1997, and (ii) the offering of 1,750,000 common shares. The
following unaudited supplemental pro forma operating data for
1996 is presented to reflect, as of January 1, 1996, the effects
of: (i) the six property acquisitions completed in 1996, (ii) the
offering of 1,450,000 common shares completed in 1996, (iii) the
offering of 1,750,000 common shares completed in 1997, and (iv)
the eight property acquisitions completed in 1997.
<TABLE>
<CAPTION>
December 31,
(In thousands, except per share amounts) 1997 1996
<S> <C> <C>
Revenues $113,397 $107,993
*Net income 22,178 23,921
*Net income applicable to common shares 16,693 18,436
*Net income per common share
(Basic and Diluted) $ 0.98 $ 1.08
Weighted average common shares outstanding:
- Basic 17,074 17,074
- Diluted 17,096 17,074
*Before extraordinary item
</TABLE>
The 1997 and 1996 pro forma financial information does not
include the revenue and expenses for Oak Bend Apartments and
Waterstone Apartments, properties that were acquired in 1997, for
the period January 1, 1997 through the date the properties were
acquired by the Company or for the period January 1, 1996 through
December 31, 1996, respectively. The revenue and expenses of the
aforementioned properties were excluded from the pro forma
financial information for such periods as they were under
page F-29
construction during substantially all of the periods prior to
their acquisition.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
transactions had been completed as set forth, nor does it purport
to represent the results of operations of future periods of the
Company.
18. SUBSEQUENT EVENTS
Proposed merger
Subject to customary conditions to closing and the approval
of the Company's shareholders, the Company has entered into a
definitive merger agreement with MIG Realty Advisors, Inc.
("MIGRA"). Pursuant to the terms of the merger agreement with
MIGRA, the Company will also acquire the property management
business of several of MIGRA's affiliates and the right to
receive certain asset management fees, including disposition fees
that would have otherwise been received by MIGRA upon the sale of
certain of the properties owned by institutions advised by MIGRA.
Founded in 1982, MIGRA currently manages, through its affiliated
management companies, 36 Multifamily Apartment Properties
containing 11,059 suites. MIGRA's asset management, property<PAGE>
management, investment advisory and mortgage servicing operations
are collectively referred to herein as the "MIGRA Operations".
In exchange for their interest in MIGRA and the affiliated
property management businesses, the shareholders of MIGRA will
receive approximately 408,318 (based on the average closing
prices of the Company's common shares for the 20 trading days
preceding the date of the merger agreement price, which average
price is $23.63) of the Company's common shares at the closing of
the merger. Subject to the achievement of certain performance
criteria, the shareholders of MIGRA have the opportunity to
receive additional contingent consideration to be paid in the
form of the Company's common shares. Such contingent
consideration may have a value of up to $3.1 million and $6.4
million on the first and second anniversary of the merger,
respectively. A portion of the shares to be issued will be based
on the average closing price of the Company's common shares for
the 20 days immediately preceding the contingent payment date.
Assuming all contingent consideration is paid, the total purchase
price for MIGRA, the property management business, and the rights
to the disposition fees will be approximately $19.1 million.
The Company may reduce the purchase price for the MIGRA
Operations to the extent that any of MIGRA's or a MIGRA
affiliate's advisory clients have not consented to the assignment
of or have terminated any advisory, asset, property management or
mortgage servicing agreement to the Company. Conversely, the
purchase price may be increased to the extent that MIGRA enters
into any new asset or property management or mortgage servicing
agreement on or before the 90 days preceding the closing of the
merger. In no event, however, will the amount of any price
increase exceed the amount of any price decrease.
Acquisition Activity
From January 1 through February 26, 1998, the Company
acquired four multifamily properties containing 1,320 suites for
an aggregate purchase price of $74.4 million of which $15.5
million represents liabilities assumed including mortgage
indebtedness of $15.0 million. The balance of the purchase price
page F-30
was financed using borrowings under an unsecured 90 day term loan
of $44.5 million and borrowings under the Company's Line of
Credit of approximately $14.4 million. The properties are
located in Coconut Creek, Florida; Duluth, Georgia; Columbia,
Maryland; and Toledo, Ohio.
Proposed Acquisitions
On January 28, 1998 (the "Contract Date"), the Company
entered into a contract to acquire certain assets, consisting
principally of the multifamily properties as further described
below, from MIG Residential REIT, Inc. (the "Proposed
Acquisition Properties"). The Proposed Acquisition Properties
are as follows:
<TABLE>
<CAPTION>
Number of
Name of Property Location Suites
<S> <C> <C>
20th and Campbell Apartments Phoenix, Arizona 204
Annen Woods Apartments Pikesville, Maryland 132
Desert Oasis Apartments Palm Desert, California 320
Fleetwood Apartments Houston, Texas 104
Hampton Point Apartments Silver Springs, Maryland 352
Morgan Place Apartments Atlanta, Georgia 186
Peachtree Apartments St. Louis, Missouri 156
Windsor Falls Apartments Raleigh, North Carolina 276
</TABLE>
The seller of the Proposed Acquisition Properties has agreed
to exchange its assets for a combination of cash and an equity
interest (the "Equity Consideration") in the Company totaling
$108.5 million. The seller may elect to receive a portion of the
total consideration in cash, up to a maximum of $11.1 million. The
number of common shares issued will be determined based on the
amount of Equity Consideration divided by the average closing
price of the Company's common shares over the 20 day period
preceding the purchase of the Proposed Acquisition Properties.
For purposes of determining the number of shares issued as Equity
Consideration, however, to the extent that the 20 day average
price does not exceed the average closing price of the Company's
common shares over the 20 day period preceding the Contract Date
times 106%, no adjustment in the number of shares determined at the
Contract Date will be made. The Company intends to finance any
cash portion of the purchase price with borrowings made available
through the Company's Line of Credit.
The Company has also entered into separate contracts to
purchase three parcels of undeveloped land containing an
aggregate of 144 acres for an approximate purchase price of $9.8
million. One of the parcels is located in Avon, Ohio (a suburb
of Cleveland), one of the parcels is located in Crestview Hills,
Kentucky adjacent to a multifamily real estate property currently
under contract and one of the parcels is located in Cranberry
Township, Pennsylvania (a suburb of Pittsburgh). Approximately
838 multifamily apartments may be constructed on the undeveloped
land; 312 in Avon, Ohio; 300 in Crestview Hills, Kentucky; and
226 in Cranberry Township, Pennsylvania. The Company expects to
finance the undeveloped land acquisitions using borrowings under
the Line of Credit.
There can be no assurances, however, that the Company will
be successful in its attempts to acquire the Proposed Acquisition
Properties and the five parcels of undeveloped land currently
under contract.
page F-31
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<TABLE>
<CAPTION>
Initial Cost Historical Cost
----------------------------------- ---------------------
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C> <C>
Barrington $ - $ 982,153 $ 9,821,240 $ - $ 982,153$ 9,821,240
Bay Club - 129,295 3,621,553 47,201 129,295 3,668,754
Cloisters - 646,512 6,035,141 - 646,512 6,035,141
Colonnade West - 180,264 1,114,901 681,816 277,146 1,699,835
Cultural Gardens - 84,377 1,417,195 127,837 84,377 1,545,032
Edgewater Landing - 417,639 4,518,082 165,413 417,639 4,683,495
Ellet - - 2,174,674 136,088 - 2,310,762
Gates Mills Club - 65,441 3,110,746 323,277 66,845 3,432,619
Gates Mills III 6,761,826 277,898 7,387,584 224,329 277,898 7,611,913
Hawthorne Hills Apartments - 370,282 2,709,278 - 370,282 2,709,278
Hillwood I - - 1,449,483 148,019 - 1,597,502
Holly Park - 497,500 6,947,935 17,946 497,500 6,965,881
Huntington Hills - 360,799 3,181,028 - 360,799 3,181,028
Jennings - 205,100 1,665,155 11,893 205,100 1,677,048
Kensington Village - 887,632 4,931,272 44,260 887,632 4,975,532
Mallard's Crossing 4,411,473 941,070 8,499,249 - 941,070 8,499,249
Memphis Manor - 128,948 852,270 100,701 128,948 952,971
Park Place - 145,000 1,447,097 262,807 161,077 1,693,827
Pinecrest - 302,150 2,156,000 - 302,150 2,156,000
Portage Towers - 388,353 5,609,249 2,168,397 524,150 7,641,849
Puritas Place - 199,426 2,697,720 327,407 199,426 3,025,127
Rainbow Terrace 1,935,123 256,000 8,194,477 1,380,277 256,000 9,574,754
Riverview Towers - - 2,300,004 153,213 - 2,453,217
Shaker Park Gardens 2,942,292 276,787 3,012,464 5,254 276,787 3,017,718
Somerset West 7,618,558 389,527 9,004,652 5,200 389,527 9,009,852
State Road - - 1,184,542 59,464 - 1,244,006
Statesman II - 222,657 1,632,507 52,125 222,657 1,684,632
Sutliff II - - 3,276,512 169,572 - 3,446,084
Tallmadge Acres - 235,559 4,643,644 782,071 269,869 5,391,405
The Oaks 1,892,401 170,000 2,241,624 25,047 170,000 2,266,671
The Triangle 16,885,005 - 20,578,668 1,344,995 - 21,923,663<PAGE>
Timbers (3) - 400,111 4,056,547 84,978 400,111 4,141,525
Treetops - 1,189,861 6,555,769 - 1,189,861 6,555,769
Twinsburg - - 2,833,574 310,484 - 3,144,058
Vantage Villa - 565,952 4,598,362 4,065 565,952 4,602,427
Villa Moderne - 96,584 746,332 65,436 102,564 805,788
Village Towers - - 2,442,343 164,584 - 2,606,927
Washington Manor (3) - 289,388 1,489,494 849 289,388 1,490,343
West High - - 2,714,785 67,093 - 2,781,878
West Park Plaza - 127,890 820,402 36,018 127,890 856,420
Westchester Townhouses - 693,300 5,685,526 26,625 693,300 5,712,151
Western Reserve Village - 265,317 2,596,864 - 265,317 2,596,864
Westlake Investment - 35,685 323,834 739,102 35,685 1,062,936
Williamsburg at Greenwood - 843,642 12,929,692 32,604 843,642 12,962,296
Village
</TABLE>
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Historical Cost
------------------------------------
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C>
Barrington $10,803,393$ 131,278 $ 10,672,115 5-30 September, 1995
Bay Club 3,798,049 1,098,954 2,699,095 10-30 December, 1990
Cloisters 6,681,653 465,859 6,215,794 5-30 September, 1995
Colonnade West 1,976,981 1,270,011 706,970 10-30 July, 1964
Cultural Gardens 1,629,409 1,448,190 181,219 10-30 April, 1966
Edgewater Landing 5,101,134 595,557 4,505,577 5-30 April, 1994
Ellet 2,310,762 1,481,253 829,509 30 January, 1978
Gates Mills Club 3,499,464 2,577,718 921,746 5-30 December, 1980
Gates Mills III 7,889,811 6,158,522 1,731,289 6-40 December, 1978
Hawthorne Hills Apartments 3,079,560 50,780 3,028,780 5-30 May, 1997
Hillwood I 1,597,502 1,308,646 288,856 14-30 June, 1976
Holly Park 7,463,381 1,933,966 5,529,415 10-30 September, 1990
Huntington Hills 3,541,827 2,120,684 1,421,143 30 October, 1982
Jennings 1,882,148 900,382 981,766 10-30 November, 1981
Kensington Village 5,863,164 380,792 5,482,372 5-30 September, 1995
Mallard's Crossing 9,440,319 852,402 8,587,917 5-30 February, 1995
Memphis Manor 1,081,919 893,219 188,700 5-30 December, 1966
Park Place 1,854,904 1,508,010 346,894 5-30 October, 1966
Pinecrest 2,458,150 736,635 1,721,515 7-30 September, 1987
Portage Towers 8,165,999 5,270,078 2,895,921 6-40 May, 1973
Puritas Place 3,224,553 1,606,456 1,618,097 5-30 October, 1981
Rainbow Terrace 9,830,754 8,829,344 1,001,410 3-30 September, 1981
Riverview Towers 2,453,217 1,511,435 941,782 30 October, 1979
Shaker Park Gardens 3,294,505 3,013,816 280,689 15-17 May, 1964
Somerset West 9,399,379 5,015,449 4,383,930 5-30 March, 1982
State Road 1,244,006 946,643 297,363 14-30 September, 1977
Statesman II 1,907,289 1,638,728 268,561 13 May, 1987
Sutliff II 3,446,084 2,772,137 673,947 5-30 December, 1979
Tallmadge Acres 5,661,274 3,784,936 1,876,338 6-40 June, 1981
The Oaks 2,436,671 945,582 1,491,089 7-30 June, 1985
The Triangle 21,923,663 6,754,785 15,168,878 5-30 March, 1989<PAGE>
Timbers (3) 4,541,636 1,403,069 3,138,567 7-30 September, 1987
Treetops 7,745,630 504,353 7,241,277 5-30 September, 1995
Twinsburg 3,144,058 1,863,356 1,280,702 10-30 July, 1979
Vantage Villa 5,168,379 331,784 4,836,595 5-30 October, 1995
Villa Moderne 908,352 758,278 150,074 15-30 October, 1963
Village Towers 2,606,927 1,605,455 1,001,472 30 October, 1979
Washington Manor (3) 1,779,731 898,431 881,300 10-30 July, 1994
West High 2,781,878 2,730,696 51,182 5-15 December, 1981
West Park Plaza 984,310 836,409 147,901 5-30 April, 1964
Westchester Townhouses 6,405,451 2,215,201 4,190,250 7-30 November, 1989
Western Reserve Village 2,862,181 19,545 2,842,636 10-30 August, 1996
Westlake Investment 1,098,621 871,458 227,163 15-30 October, 1985
Williamsburg at Greenwood 13,805,938 1,672,881 12,133,057 5-30 February, 1994
Village
</TABLE>
page F-32
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Initial Cost Historical Cost
----------------------------------- ----------------------
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
<S> <C> <C> <C> <C> <C> <C>
Winchester (4) 4,295,287 299,660 5,133,088 1,121,323 344,355 6,209,716
Winchester II - 352,200 8,295,653 393,687 372,877 8,668,663
CENTRAL OHIO
Arrowhead Station - 477,838 4,216,425 54,208 477,838 4,270,633
Bedford Commons - 928,921 5,963,753 2,720 928,921 5,966,473
Bolton Estates - 707,601 5,124,052 12,794 707,601 5,136,846
Bradford at Easton - 2,033,450 16,273,455 - 2,033,450 16,273,455
Residence at Christopher - 1,560,355 13,753,580 2,418 1,560,355 13,755,998
Wren
Colony Bay East - 714,150 4,952,909 25,363 714,150 4,978,272
Heathermoor - 1,796,346 9,087,316 2,563 1,796,346 9,089,879
Kensington Grove - 533,117 4,600,057 - 533,117 4,600,057
Lake Forest - 840,155 6,134,704 61,636 840,155 6,196,340
Muirwood Village at - 789,836 4,656,965 1,501 789,836 4,658,466
Bennell (3)
Muirwood Village at - 205,097 3,728,615 2,471 205,097 3,731,086
London
Muirwood Village at - 152,812 1,475,391 439 152,812 1,475,830
Mt. Sterling
Muirwood Village at - 368,530 4,820,330 2,830,964 368,530 7,651,294
Zanesville
Oak Bend Commons - 732,803 4,989,741 - 732,803 4,989,741
Apartments
Pendleton Lakes East (3) - 1,313,824 8,026,991 72,224 1,313,824 8,099,215
Perimeter Lakes - 1,268,762 8,778,081 - 1,268,762 8,778,081
The Residence at Newark - 323,159 2,807,885 1,331,872 323,159 4,139,757
Saw Mill Village - 2,548,488 17,332,159 - 2,548,488 17,332,159
Sheffield at Sylvan - 347,590 3,102,488 1,774,059 526,332 4,697,805
Sterling Park - 645,538 3,919,325 1,171 645,538 3,920,496
Residence at Turnberry - 868,868 11,567,161 4,376 868,868 11,571,537
Wyndemere - 602,128 2,782,217 1,502,476 602,128 4,284,693<PAGE>
The Residence at - 289,960 2,579,835 - 289,960 2,579,835
Washington
SOUTHERN OHIO
Remington Place - 1,644,583 10,118,924 - 1,644,583 10,118,924
MICHIGAN
Arbor Landings - 1,032,000 7,565,585 19,732 1,032,000 7,585,317
Aspen Lakes Apartments 2,976,016 339,596 5,589,292 - 339,596 5,589,292
Central Park Place - 1,013,474 7,362,973 37,696 1,013,474 7,400,669
Country Place Apartments - 767,864 4,181,210 - 767,864 4,181,210
Clinton Place Apartments - 1,219,248 9,549,845 - 1,219,248 9,549,845
Georgetown Park - 1,778,286 10,640,423 5,378,330 1,778,286 16,018,753
Apartments
Oaks and Woods at Hampton - 3,025,954 27,204,231 - 3,025,954 27,204,231
The Landings at the - 814,961 7,189,546 7,491 814,961 7,197,037
Preserve
Spring Brook Apartments - 609,742 5,307,960 - 609,742 5,307,960
Spring Valley Apartments - 1,432,830 13,454,915 - 1,432,830 13,454,915
Summer Ridge - 1,250,919 11,193,520 - 1,250,919 11,193,520<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Historical Cost
------------------------------------
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
<S> <C> <C> <C> <C> <C>
Winchester (4) 6,554,071 5,117,455 1,436,616 5-30 March, 1972
Winchester II 9,041,540 6,583,394 2,458,146 6-40 March, 1979
CENTRAL OHIO
Arrowhead Station 4,748,471 408,425 4,340,046 5-30 March, 1995
Bedford Commons 6,895,394 596,827 6,298,567 5-30 December, 1994
Bolton Estates 5,844,447 587,721 5,256,726 5-30 July, 1994
Bradford at Easton 18,306,905 338,589 17,968,316 5-30 October, 1995
Residence at Christopher 15,316,353 1,741,912 13,574,441 5-30 March, 1994
Wren
Colony Bay East 5,692,422 446,181 5,246,241 5-30 February, 1995
Heathermoor 10,886,225 1,021,500 9,864,725 5-30 August, 1994
Kensington Grove 5,133,174 376,516 4,756,658 5-30 July, 1995
Lake Forest 7,036,495 702,622 6,333,873 5-30 July, 1994
Muirwood Village at 5,448,302 596,310 4,851,992 5-30 March, 1994
Bennell (3)
Muirwood Village at 3,936,183 476,204 3,459,979 5-30 March, 1994
London
Muirwood Village at 1,628,642 189,610 1,439,032 5-30 March, 1994
Mt. Sterling
Muirwood Village at 8,019,824 853,258 7,166,566 5-30 March, 1994
Zanesville
Oak Bend Commons 5,722,544 96,570 5,625,974 5-30 May,1997
Apartments
Pendleton Lakes East (3) 9,413,039 903,749 8,509,290 5-30 March, 1994
Perimeter Lakes 10,046,843 367,440 9,679,403 5-30 Sept, 1996
The Residence at Newark 4,462,916 509,825 3,953,091 5-30 March, 1994
Saw Mill Village 19,880,647 391,824 19,488,823 5-30 April, 1997
Sheffield at Sylvan 5,224,137 525,665 4,698,472 5-30 March, 1994
Sterling Park 4,566,034 439,480 4,126,554 5-30 August, 1994
Residence at Turnberry 12,440,405 1,465,032 10,975,373 5-30 March, 1994
Wyndemere 4,886,821 421,399 4,465,422 5-30 September, 1994<PAGE>
The Residence at 2,869,795 163,923 2,705,872 10-30 February, 1996
Washington
SOUTHERN OHIO
Remington Place 11,763,507 245,516 11,517,991 5-30 April, 1997
MICHIGAN
Arbor Landings 8,617,317 746,926 7,870,391 5-30 January, 1995
Aspen Lakes Apartments 5,928,888 235,292 5,693,596 5-30 September, 1996
Central Park Place 8,414,143 740,652 7,673,491 5-30 December, 1994
Country Place Apartments 4,949,074 355,945 4,593,129 5-30 June, 1995
Clinton Place Apartments 10,769,093 108,523 10,660,570 5-30 August, 1997
Georgetown Park 17,797,039 1,388,415 16,408,624 10-30 December, 1994
Apartments
Oaks and Woods at 30,230,185 2,178,155 28,052,030 5-30 August, 1995
Hampton
The Landings at the 8,011,998 545,832 7,466,166 5-30 September, 1995
Preserve
Spring Brook Apartments 5,917,702 265,545 5,652,157 5-30 June, 1996
Spring Valley Apartments 14,887,745 74,950 14,812,795 5-30 October, 1997
Summer Ridge 12,444,439 653,234 11,791,205 5-30 April, 1996<PAGE>
</TABLE>
page F-33
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Initial Cost Historical Cost
------------------------------------- -----------------------
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
INDIANA
<S> <C> <C> <S> <C> <C>
The Gables at White River - 1,064,131 11,953,275 - 1,064,131 11,953,275
Waterstone Apartments - 1,508,469 22,803,984 - 1,508,469 22,803,984
PENNSYLVANIA
Chestnut Ridge - 2,145,735 19,159,234 - 2,145,735 19,159,234
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington - 1,375,016 - - 1,375,016 -
Westlake Investment - 523,314 - - 523,314 -
Western Reserve Village - 425,742 - - 425,742 -
CENTRAL OHIO
Muirwood Village at Mt. - 125,926 - - 125,926 -
Sterling
Wyndemere - 200,140 - - 200,140 -
MICHIGAN
Arbor Landings - Phase II - 649,507 - - 649,507 -
Aspen Lakes Apts. - 402,100 - - 402,100 -
Georgetown Park - 350,000 - - 350,000 -
Apartments
The Landings at the - 266,020 - - 266,020 -
Preserve
$ 49,717,981$ 57,934,844 $522,586,563 24,937,961 58,469,408 546,989,960
Management Service Companies 3,920,657 754,643 3,166,014
Land, Building & Improvements $ 28,858,618 $ 59,224,051$550,155,974
</TABLE>
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997<PAGE>
Historical Cost
--------------------------------------
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
INDIANA
<S> <C> <C> <C> <C> <C>
The Gables at White River 13,017,406 346,978 12,670,428 5-30 Feb., 1997
Waterstone Apartments 24,312,453 256,864 24,055,589 5-30 August, 1997
PENNSYLVANIA
Chestnut Ridge 21,304,969 1,171,495 20,133,474 5-30 March, 1996
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington 1,375,016 - 1,375,016 - September, 1995
Westlake Investment 523,314 - 523,314 - October, 1985
Western Reserve Village 425,742 - 425,742 - August, 1996
CENTRAL OHIO
Muirwood Village at Mt. Sterling 125,926 - 125,926 - December, 1996
Wyndemere 200,140 - 200,140 - March, 1997
MICHIGAN
Arbor Landings - Phase II 649,507 - 649,507 - August, 1995
Aspen Lakes Apts. 402,100 - 402,100 - September, 1996
Georgetown Park Apartments 350,000 - 350,000 - December, 1994
The Landings at the Preserve 266,020 - 266,020 - September, 1995
605,459,368 118,348,916 487,110,452
Management Service Companies 3,920,657 508,575 3,412,082 10-30 November, 1993
Land, Building & Improvements 609,380,025 118,857,491 490,522,534
FURNITURE, FIXTURE & EQUIPMENT 24,997,001 11,811,047 13,185,954
Construction in progress 12,121,939 - 12,121,939
$ 646,498,965$130,668,538 $ 515,830,427
<FN>
(1) Encumbrances include mortgage debt, deferred liability and other
obligations secured by the real estate assets.
(2) Improvements include the purchase price adjustment for certain
properties in which cash was paid to unrelated third parties to
acquire their interests.
(3) The following properties were combined for operating, marketing <PAGE>
and reporting purposes.
Muirwood Gemstar combined with Muirwood Bennell, Bentley Station
combined with Pendleton Lakes, Timbers II combined with Timbers
I, and Colonade Elyria combined with Washington Manor.
(4) Refer to Note 9 to the December 31, 1997 financial statements of
Associated Estates Realty Corporation.
</FN>
</TABLE>
page F-34
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Initial Cost Historical Cost
------------------------------------ ------------------------
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC HAS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C> <C>
College Towers - $ 340,000 $ 3,351,247 $ 36,558$ 340,000 $ 3,387,805
Highland House - 54,053 209,903 - 54,053 209,903
Lakeshore Village 4,218,878 482,217 3,861,676 - 482,217 3,861,676
4,218,878 876,270 7,422,826 36,558 876,270 7,459,384
INVESTMENTS IN WHICH
AERC HAS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 11,998,412 504,207 7,127,922 582,019 504,207 7,709,941
Euclid House 1,635,855 105,000 1,218,156 7,371 105,000 1,225,527
Gates Mills Towers 18,901,008 - 10,358,694 9,458,595 1,351,214 18,466,075
Watergate 14,377,903 499,849 13,538,629 603,762 499,849 14,142,391
46,913,178 1,109,056 32,243,401 10,651,747 2,460,270 41,543,934
Land, Building and $ 51,132,056$1,985,326 $ 39,666,227 $ 10,688,305$ 3,336,540 $ 49,003,318
Improvements
</TABLE>
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Historical Cost
-------------------------------------
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC HAS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C>
College Towers $ 3,727,805 $ 3,310,251 $ 417,554 7-30 January, 1969
Highland House 263,956 209,903 54,053 5-30 June, 1964
Lakeshore Village 4,343,893 1,963,020 2,380,873 3-30 October, 1982
8,335,654 5,483,174 2,852,480
INVESTMENTS IN WHICH
AERC HAS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 8,214,148 7,273,515 940,633 5-30 June, 1968
Euclid House 1,330,527 1,163,473 167,054 7-30 August, 1969
Gates Mills Towers 19,817,289 12,027,080 7,790,209 10-30 December, 1969
Watergate 14,642,240 12,670,699 1,971,541 5-30 July, 1971
44,004,204 33,134,767 10,869,437
Land, Building and
Improvements 52,339,858 38,617,941 13,721,917
Furniture, Fixtures and Equipment 2,847,139 2,779,379 67,760
Construction in Progress 22,851 - 22,851
$55,209,848 $ 41,397,320 $ 13,812,528
<FN>
(1) Encumbrances include mortgage debt and other obligations secured
by the real estate assets.
(2) Improvements include the purchase price adjustment for certain
properties in which cash was paid to unrelated third parties to
acquire their interests.
</FN>
</TABLE>
page F-35
SCHEDULE III (continued)
ASSOCIATED ESTATES REALTY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
The Aggregate Cost for Federal Income Tax purposes was
approximately $600 million and $500 million at December 31, 1997
and 1996, respectively.
The changes in Total Real Estate Assets for the years ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Balance, beginning of period $ 513,966,475 $ 433,964,558
Disposal of fixed assets (3,284,839) (130,924)
New acquisition properties 105,681,282 61,376,510
Improvements 30,136,048 18,756,331
Balance, end of period $ 646,498,966 $ 513,966,475
</TABLE>
The changes in Accumulated Depreciation and Amortization for
the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Balance, beginning of period $ 112,102,829 $ 97,301,859
Disposal of fixed assets - (126,024)
Depreciation for period 18,565,709 14,926,994
Balance, end of period $ 130,668,538 $ 112,102,829
</TABLE>
Exhibit 4.8c
THIRD AMENDED AND RESTATED
CREDIT AGREEMENT
by and among
ASSOCIATED ESTATES REALTY CORPORATION
an Ohio corporation
("Borrower")
NATIONAL CITY BANK, as Agent (the "Agent")
and
THE BANKS IDENTIFIED ON SCHEDULE 1
Dated as of November 12, 1997<PAGE>
10/31/97
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated
as of November 12, 1997, by and among ASSOCIATED ESTATES REALTY
CORPORATION, an Ohio corporation (hereinafter, "Borrower"), the
banks and lending institutions set forth on Schedule 1 hereto
(the "Banks"), and NATIONAL CITY BANK, a national banking
association ("NCB"), in its capacity as agent for the Banks (in
such capacity, NCB and any successor to NCB as agent as aforesaid
is referred to as the "Agent").
ARTICLE 1.
INTERPRETATION
Section 1.1 General. For the purposes of this
Agreement, the following general rules of interpretation shall
apply to the extent they are not clearly inconsistent with the
context or the subject matter of specific provisions hereof:
(a) The expression "this Agreement" shall mean this
Credit Agreement (including all of the Schedules and Exhibits
annexed hereto) as originally executed, or, if supplemented,
amended or restated from time to time, as so supplemented,
amended or restated;
(b) Singular nouns shall include the plural and vice
versa, and all references to dollars shall mean United States
Dollars;
(c) Accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with
Generally Accepted Accounting Principles (as hereinafter
defined); and
(d) All Schedules and Exhibits to this instrument
shall be deemed to be incorporated herein by reference.
Section 1.2 Definitions. In addition to terms defined
elsewhere in this Agreement, the terms set forth below shall have
the following meanings for the purpose of this Agreement:
"Accountants" means Price, Waterhouse & Co., or such
other nationally recognized firm of certified public accountants
as may from time to time be selected by Borrower and acceptable
to Agent, with the consent of the Required Banks.
"Adjusted Prime Rate" means, at any time, the sum of
the Prime Rate plus the Prime Rate Margin in effect at such time.
"Affiliate" means, in relation to any Person (in this
definition called "Affiliated Person"), any Person (other than a
Subsidiary) which (directly or indirectly) controls or is
controlled by or is under common control with such Affiliated
Person. For the purposes of this definition, the term "control"
shall mean the possession (directly or indirectly) of the power
to direct or to cause the direction of the management or the
policies of a Person, whether through the ownership of shares of
any class in the capital or any other voting securities of such
Person, by contract or otherwise.
"Agent" means NCB, acting in such capacity for the
Banks under the Loan Documents pursuant to this Agreement, and
includes (where the context so admits) any other Person or
Persons succeeding to such functions in accordance with
Article 8, below.
"Agency Fee" means an annual fee, payable
semi-annually, in advance, to the Agent in consideration for its
serving as the Agent in respect of the Loan Documents, in an
amount per annum equal to the lesser of (i) $100,000.00 or
(ii) the aggregate of $30,000.00, plus an additional sum of
$20,000.00 for each bank or lending institution in addition to
NCB participating as a Bank under this Agreement.
"Apartment Suites" means all multi-family residential
rental units owned by Borrower or Borrower's Consolidated
Subsidiaries, without regard to whether such units are subject to
any governmental financial support, operating assistance or
regulation.
"Applicable Margin" means, as at any date, a percentage
per annum for Prime Rate Loans and Ratable Libor Rate Loans,
determined by reference to Borrower's Debt Rating as set forth
below:
<TABLE>
<CAPTION>
Debt Rating Ratable Libor Prime
Level S&P Moody's Rate Margin Rate Margin
<S> <C> <C> <C> <C>
1 A- to A+ A3 to A1 95 -0-
2 BBB+ Baa1 105 -0-
3 BBB Baa2 115 -0-
4 BBB- Baa3 125 -0-
5 <BBB- <Baa3 200 25
</TABLE>
The Applicable Margin for each Prime Rate Loan and Ratable Libor
Rate Loan (the "Prime Rate Margin" and the "Libor Margin",
respectively) shall be determined by reference to the Debt Rating
in effect as of the Draw Date for such Loans (subject, in the
case of each Prime Rate Loan, to adjustment during the pendency
of such Loan to reflect any changes in Borrower's Debt Rating),
provided that:<PAGE>
(A) if the applicable Debt Ratings established by S&P and
Moody's shall be at differing levels, the Applicable Margin
shall be determined by reference to the higher Debt Rating,
provided, however, that if the difference between the Debt
Ratings shall be more than one level, the Applicable Margin
shall be one (1) level higher than the lower of the two Debt
Ratings;
(B) if only one of S&P and Moody's shall have a Debt Rating
in effect, then: (x) if both S&P and Moody's are engaged in
the business of rating Indebtedness, the Applicable Margin
shall be the applicable percentage for the grade that is one
level below the available Debt Rating; or (y) if either S&P
or Moody's is no longer engaged in the business of rating
Indebtedness, the Applicable Margin shall be the applicable
percentage for the available Debt Rating; and
(C) if neither S&P nor Moody's shall have a Debt Rating in
effect, the Applicable Margin shall be the applicable
percentage for the lowest Debt Rating as shown on the
preceding table.
"Assets Under Development" means, as of the date of the
determination thereof, any new real estate project (or the
expansion area of any existing real estate project) owned by
Borrower or any of its Consolidated Subsidiaries on which the
construction of one or more new, income-producing buildings has
been commenced and is continuing, provided, however, that
projects (or, in the case of phased projects as to which discrete
portions thereof are constructed and completed at different
times, identifiable phases of such projects) shall cease being
Assets Under Development at such time as a certificate of
occupancy is issued with respect to the construction performed
with respect to such projects or discrete phases. For the
purposes of this Agreement, land and improvements comprised in
Assets Under Development shall be valued at the then-current book
values thereof (as determined in accordance with GAAP).
"Banks" means, collectively, each of the banks or
lending institutions identified on Schedule 1 hereto, as such
Schedule may be amended from time to time pursuant to
Section 2.1(b) hereof, and the respective successors and assigns
of such banks and lending institutions. "Bank" means any one of
the Banks.
"Business Day" means any day other than a Saturday or
Sunday on which commercial banking institutions are open for
business in Cleveland, Ohio; for all purposes relevant to the
issuance of Libor Rate Loans (including, without limitation, the
determination of the Libor Rate and of the Draw Date for each
such Loan and including both Ratable Libor Rate Loans and
Competitive Bid Loans), "Business Day" shall mean any day other
than a Saturday or Sunday on which commercial banking
institutions are open for business in Cleveland, Ohio, and in
London, England.
"Capitalized Income Value" means, as of any date, an
amount equal to Borrower's EBITDA including Service EBITDA in an
amount not to exceed $1,500,000 on an annualized basis, divided<PAGE>
by nine and three-quarters (9.75%) percent (the "Capitalization
Factor"). For the purposes of this provision, Borrower's EBITDA
shall be subject to adjustment to reflect any acquisitions made
by Borrower during the applicable fiscal period on a pro forma
basis acceptable to the Agent, assuming the lesser of 90% or
actual occupancy.
"Closing Date" means the date first set forth in the
preamble of this instrument.
"Closing Fee" means that fee, calculated and payable on
the Closing Date by Borrower to the Agent for the benefit of the
Banks in accordance with Section 5.10(b), below.
"Code" means the United States Internal Revenue Code of
1986, as amended from time to time, or any successor federal tax
code, and any reference to any statutory provision shall be
deemed to be a reference to any successor provision or
provisions.
"Commitment Fee" means a fee, payable quarterly in
arrears, on the final day of each calendar quarter during the
pendency of this Agreement and on the Termination Date, to the
Agent for the benefit of the Banks in accordance with their
respective Pro Rata Shares. The amount of the Commitment Fee for
each quarter shall be determined: (a) by calculating the average
daily unused portion of the Maximum Commitment during such
quarter (the "Unused Component") by subtracting the average daily
Outstanding Amount during such period (determined, solely for the
purpose of such calculation, by including only Ratable Loans and
Letters of Credit; Competitive Bid Loans shall not be included as
Obligations for the limited purpose of calculating the Commitment
Fee or the Outstanding Amount in connection with the
determination of the Commitment Fee) from the full amount of the
Maximum Commitment, without regard to whether the entire Maximum
Commitment would then be available to Borrower, and (b) by
multiplying the Unused Component by (i) 0.15%, if the average
daily Outstanding Amount during such period shall exceed Fifty
Million Dollars ($50,000,000.00), or (ii) by multiplying the
Unused Component by 0.20%, if the average daily Outstanding
Amount during such period shall be Fifty Million Dollars
($50,000,000.00)or less; and (c) by dividing the result of such
multiplication by four (4) in the case of quarterly payments or
by the appropriate annualizing factor in the case of the payment
which is due on the Termination Date computed in each case on the
basis of a 360-day year for the actual number of days elapsed.
"Competitive Bid Fee" means a fee, in the amount of One
Thousand Two Hundred and Fifty Dollars ($1,250), which shall be
earned, and shall be due and payable, as provided in Section
2.3(a)(vii), below.
"Competitive Bid Borrowing Notice" means the notice, to
be submitted by the Borrower to the Agent in accordance with
Section 2.3 of this Agreement, reflecting Borrower's acceptance
of Banks' Competitive Bid Quotes submitted as therein provided.<PAGE>
"Competitive Bid Loan" means the Loans made or to be
made to Borrower by one or more Banks in accordance with
Section 2.3 of this Agreement.
"Competitive Bid Note" means, collectively,the
promissory notes of Borrower which are to be dated executed and
delivered by Borrower to the Banks, together with any amendment,
modification, supplement or renewal thereof and with any
instruments given in substitution or replacement therefor.
"Competitive Bid Quote" means an offer by a Bank, in
response to a Competitive Bid Quote Request, which shall be
substantially similar in every material respect to the form which
is attached hereto as Exhibit A, and shall be delivered by such
Bank to the Agent in accordance with Section 2.3, below.
"Competitive Bid Quote Request" means the request by
the Borrower for the Banks to offer to make Competitive Bid Loans
to Borrower in the amount and for the Interest Periods to be set
forth therein; each Competitive Bid Quote Request shall be
substantially similar in every material respect to the form
attached hereto as Exhibit B.
"Competitive Libor Bid Rate" means the annual rate of
interest (expressed as a single rate by reference to Libor)
offered by a Bank to Borrower in such Bank's Competitive Bid
Quote made pursuant to Section 2.3, below.
"Compliance Certificate" means a certificate,
substantially in the form of Exhibit C, evidencing Borrower's
compliance with the applicable requirements imposed by this
Agreement after giving effect to the making of each Loan.
"Consolidated Subsidiaries" means all of Borrower's
direct, wholly-owned subsidiaries with which Borrower reports
financial results on a consolidated basis in accordance with
GAAP.
"Contingent Obligation" means any direct or indirect
liability, contingent or otherwise, with respect to any
Indebtedness, lease, dividend, letter of credit, banker's
acceptance or other obligation of another Person incurred to
provide assurance to the obligee of such obligation that such
obligation will be paid or discharged, that any agreements
relating thereto will be complied with, or that the holders of
such obligation will be protected (in whole or in part) against
loss in respect thereof. Contingent Obligations shall include,
without limitation, (i) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with
recourse or sale with recourse by any Person of the obligation of
another Person; (ii) any liability for the obligations of another
Person through any agreement (contingent or otherwise) (A) to
purchase, repurchase or otherwise acquire such obligation or any
security therefor, or to provide funds for the payment or
discharge of such obligation (whether in the form of loans,
advances, stock purchases, capital contributions or otherwise),
(B) to maintain the solvency of any balance sheet item, level of
income or financial condition of another, or (C) to make take-or-<PAGE>
pay, pay-or-play or similar payments if required regardless of
nonperformance by any other party or parties to an agreement, if
in the case of any agreement described under subclauses (A), (B)
or (C) of this sentence the purpose or intent thereof is to
provide the assurance described above. The amount of any
Contingent Obligation shall be equal to the amount of the
obligation so guaranteed or otherwise supported.
"Conventional Apartment Projects" means multi-family,
income-producing properties which are not subject to any
financial support or operating assistance or regulation (other
than landlord/tenant laws and regulations generally applicable to
all apartment projects) imposed by or available from any Federal,
state or local government or governmental instrumentality;
without limiting the generality of the foregoing, projects which
are so-called "congregate care facilities", "assisted living
facilities" or "Section 8 housing projects" shall not be
considered to be Conventional Apartment Projects for the purposes
of this Agreement.
"Corrective Bid" means a supplemental Competitive Bid
Quote submitted by a Bank to the Agent as and when provided in
Section 2.3(c), below, or to the Borrower as and when provided in
Section 2.3(d), below, correcting a manifest error contained in a
Competitive Bid Quote therefore submitted by such Bank.
"Credit Commitment" means, in relation to any Bank, the
maximum amount to be loaned (or otherwise made available) by such
Bank to Borrower as such Bank's share of Ratable Loans or Letters
of Credit, exclusive of any Competitive Bid Loans from such Bank
to Borrower. Each Bank's Credit Commitment as of the date hereof
is set forth on the attached Schedule 1.
"Debt Rating" means, as of any date, the rating most
recently announced by either S&P or Moody's for any class of
long-term, unsecured public indebtedness issued by Borrower
(without regard to whether such indebtedness has been or will be
issued by Borrower). For the purposes of this Agreement: (a) if
any rating established by S&P or Moody's shall be changed, such
changes will be effective as of the date on which the same is
first announced publicly by the rating agency making such change;
and (b) if S&P or Moody's shall change the basis on which ratings
are established, each reference to the Debt Rating announced by
S&P or Moody's, as the case may be, shall refer to the
then-equivalent rating by S&P or Moody's as the case may be.
"Default" means any event or occurrence which, with the
giving of notice or the passage of time, or both, would
constitute an Event of Default.
"Default Interest Rate" means an annual rate of
interest equal to the lesser of (i) two and one-fourth percent
(2-1/4%) above the Prime Rate; or (ii) the maximum rate of
interest which may lawfully be charged in respect of the
Obligations.
"Direct Invitation to Bid" means the Borrower's request
to each of the Banks for the submission of Competitive Bid Quotes<PAGE>
which is issued in accordance with Section 2.4(d) of this
Agreement.
"Distributable Cash Flow" means, with respect to any
fiscal period of Borrower, an amount equal to the Net Income of
Borrower and its Consolidated Subsidiaries for such period,
exclusive of gains or losses from the sale of property and
exclusive of non-recurring and extraordinary items, plus
depreciation and amortization, and after adjustments for
unconsolidated joint ventures less capital expenditures funded by
operations and loan amortization payments.
"Distribution" means:
(i) The declaration or payment of any dividends or
other distributions on or in respect of capital stock
(except distributions in such common stock); or
(ii) The redemption, acquisition or other retirement
of Securities, except such redemptions, acquisitions or
other retirements made as a part of the same
transaction from the net proceeds of the sale of such
Securities.
"Dividend" means any payment or distributions declared
or made in respect of capital stock (including, without
limitation, distributions in such capital stock).
"Draw Date" means, in relation to any Loan, the day on
which such Loan is made or to be made to Borrower pursuant to
this Agreement.
"EBITDA" means, for any fiscal quarter of Borrower, the
product of Net Income for such fiscal quarter, increased by the
sum for such period of interest expense, income and franchise tax
expense, and amortization and depreciation (in each case as
determined in accordance with GAAP) deducted in determining Net
Income for such period.
"Employee Benefit Plan" means an "employee benefit
plan" as defined in Section 3(3) of ERISA.
"Environmental Laws" means all present and future laws,
statutes, ordinances, rules, regulations, orders, and
determinations of any Federal, state or local governmental
authority pertaining to health, protection of the environment,
natural resources, conservation, wildlife, waste management,
regulation of activities involving Hazardous Substances, and
pollution, including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act
("Superfund" or "CERCLA"), 42 U.S.C. SS 9601 et seq., the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42
U.S.C. SS 9601(20)(D), the Resource Conservation and Recovery Act
("RCRA"), 42 U.S.C. SS 6901 et seq., the Federal Water Pollution
Control Act, as amended by the Clean Water Act (the "Clean Water
Act"), 33 U.S.C. SS 1251 et seq., the Clean Air Act ("CAA"), 42
U.S.C. SS 7401 et seq., and the Toxic Substances Control Act, 15
U.S.C. SS 2601 et seq., together with any and all applicable
licenses, permits or governmental approvals pertaining to, or<PAGE>
establishing standards with respect to, any of the foregoing
matters, as any of the foregoing may be amended or supplemented.
"ERISA" means the Employee Retirement Income Security
Act of 1974, and the rules and regulations issued thereunder, as
the same may be amended from time to time, and including any
successor statute.
"ERISA Affiliate" means, in relation to any Person, any
trade or business (whether or not incorporated) which is a member
of a group of which that Person is a member and which is under
common control with such Person within the meaning of the
regulations promulgated under Section 414 of the Code, as amended.
"ERISA Liabilities" means the aggregate of all unfunded
vested benefits under any plan of Borrower or any ERISA Affiliate
of Borrower under any Plan covered by ERISA that is not a Multi-
employer Plan, and all potential withdrawal liabilities of any
thereof under all Multiemployer Plans.
"Event of Default" means any event or condition
described in Section 7.1 of this Agreement.
"Extraordinary Disposition" means, with respect to
Borrower, the sale, lease, transfer or other disposition of
assets, other than assets transferred or disposed in the ordinary
course of business, whether by way of the sale of assets or the
sale of stock or other rights in which Borrower has any ownership
interest, and whether in one transaction or a series of related
or unrelated transactions.
"Face Amount" means, as to any Letter of Credit which
is issued or to be issued pursuant to Section 2.14 of this
Agreement, the maximum amount which is available at the time of
such determination to be drawn under such Letter of Credit.
"Floating Rate Debt" means any Indebtedness for
Borrowed Money which bears interest at a rate or rates which
fluctuate or may fluctuate from time to time (whether by
Borrower's election or by reference to any index) during the
pendency of such Indebtedness, provided, however, that any such
Indebtedness as to which Borrower has procured and maintains an
interest-rate hedging instrument eliminating the risk of
interest-rate fluctuation shall, to the extent and during the
term of such hedging instrument, not be considered to be
"Floating Rate Debt" for the purposes of this Agreement. For
purposes of this definition, "interest-rate hedging instrument"
shall mean an interest-rate hedging instrument with a maturity
date not less than twelve months after the date such instrument
is purchased and with a maximum rate of interest not to exceed
three percentage points in excess of the rate on the Indebtedness
for which the hedging instrument was procured.
"Funded Percentage" means, with respect to each Bank at
any time, such Bank's share of all Obligations outstanding at
such time, expressed as a fraction having as a denominator the
Outstanding Amount at such time and having as a numerator the
aggregate of (x) such Bank's Pro Rata Share of all Ratable Loans<PAGE>
and all Letters of Credit then outstanding, and (y) the
outstanding principal balance at such time of all Competitive Bid
Loans advanced by such Bank to Borrower.
"Generally Accepted Accounting Principles" or "GAAP"
means generally accepted accounting principles in effect from
time to time in the United States, consistently applied as
regards any specific fiscal period.
"Guaranteed Pension Plan" means any pension plan
maintained by Borrower or any ERISA Affiliate of Borrower, or to
which Borrower or any ERISA Affiliate contributes, some or all of
the benefits under which are guaranteed by the Pension Benefit
Guaranty Corporation within the U.S. Department of Labor.
"Hazardous Substances" means (i) any hazardous wastes
and/or toxic chemicals, materials, substances or wastes as
defined by or for the purposes of any of the Environmental Laws;
(ii) any "oil", as defined by the Clean Water Act, as amended
from time to time, and regulations promulgated thereunder
(including crude oil or any fraction thereof and any petroleum
products or derivatives thereof); (iii) any substance, the
presence of which is prohibited, regulated or controlled by any
other applicable federal or state or local laws, regulations,
statutes or ordinances now in force or hereafter enacted relating
to waste disposal or environmental protection with respect to the
exposure to, or manufacture, possession, presence, use,
generation, storage, transportation, treatment, release,
emission, discharge, disposal, abatement, cleanup, removal,
remediation or handling of any such substances; (iv) any asbestos
or asbestos-containing materials, polychlorinated biphenyls
("PCBs") in the form of electrical equipment, fluorescent light
fixtures with ballasts, cooling oils or any other form, urea
formaldehyde, atmospheric radon at levels over four picocuries
per cubic liter; (v) any solid, liquid, gaseous or thermal
irritant or contaminant, such as smoke, vapor, soot, fumes,
alkalis, acids, chemicals, pesticides, herbicides, sewage,
industrial sludge or other similar wastes; (iv) industrial,
nuclear or medical by-products; and (vii) any underground storage
tank(s).
"Head Office" means, in relation to the Agent, the head
office of National City Bank, located at 1900 East Ninth Street,
Cleveland, Ohio 44101-0756 or such other office as may be
designated as such by written notice to Borrower and the Banks by
National City Bank or any successor Agent.
"Indebtedness" means, in relation to any Person, at any
particular time, all of the obligations of such Person which, in
accordance with GAAP, would be classified as indebtedness upon a
balance sheet (including any footnote thereto) of such Person
prepared at such time, and in any event shall include, without
limitation:
(i) all indebtedness of such Person arising or
incurred under or in respect of (A) any guaranties
(whether direct or indirect) by such Person of the
indebtedness, obligations or liabilities of any other
Person, or (B) any endorsement by such Person of any of<PAGE>
the indebtedness, obligations or liabilities of any
other Person (otherwise than as an endorser of
negotiable instruments received in the ordinary course
of business and presented to commercial banks for
collection of deposit), or (C) the discount by such
Person, with recourse to such Person, of any of the
indebtedness, obligations or liabilities of any other
Person;
(ii) all indebtedness of such Person arising or
incurred under or in respect of any agreement,
contingent or otherwise made by such Person (A) to
purchase any indebtedness of any other Person or to
advance or supply funds for the payment or purchase of
any indebtedness of any other Person or (B) to
purchase, sell or lease (as lessee or lessor) any
property, products, materials or supplies or to
purchase or sell transportation or services, primarily
for the purpose of enabling any other Person to make
payment of any indebtedness of such other Person or to
assure the owner or holder of such other Person's
indebtedness against loss, regardless of the delivery
or non-delivery of the property, products, materials or
supplies or the furnishing or non-furnishing of the
transportation or services, or (C) to make any loan,
advance, capital contribution or other investment in
any other Person for the purpose of assuring a minimum
equity, asset base, working capital or other balance
sheet condition for or as at any date, or to provide
funds for the payment of any liability, dividend or
stock liquidation payment, or otherwise to supply funds
to or in any manner invest in any other Person,
provided that any Indebtedness attributable to
Borrower's interests in joint ventures shall, to the
extent that the same is consistent with GAAP and with
applicable legal requirements, reflect accumulated
losses and distributions from such interests in excess
of Borrower's investment and advances therein.
(iii) all indebtedness, obligations and liabilities
secured by or arising under or in respect of any Lien,
upon or in Property owned by such Person, even though
such Person has not assumed or become liable for the
payment of such indebtedness, obligations and
liabilities;
(iv) all indebtedness created or arising under any
conditional sale or other title retention agreement
with respect to Property acquired by such Person, even
though the rights and remedies of the seller or lender
(or lessor) under such agreement in the event of
default are limited to repossession or sale of such
Property; and
(v) all indebtedness arising or incurred under or in
respect of any Contingent Obligation.
"Indebtedness for Borrowed Money" means at any
particular time, all Indebtedness (i) in respect of any
money borrowed (including pursuant to this Agreement);
(ii) under or in respect of any Contingent Obligation
(whether direct or indirect) of any money borrowed; (iii)
evidenced by any loan or credit agreement, promissory
note, debenture, bond, guaranty or other similar written
obligation to pay money; or (iv) arising under leases
which, in accordance with GAAP, should be reflected as
indebtedness on a balance sheet.
"Interest Expense" means, for any period, the aggregate
interest payable by Borrower and all of Borrower's Consolidated
Subsidiaries during such period determined in accordance with
GAAP.
"Interest Period" means: (a) For each Libor Rate Loan
(including both Ratable Libor Rate Loans and all Competitive Bid
Loans), the period commencing on the Draw Date for such Loan and
ending one, two, three, four or six months thereafter; (b) for
each Prime Rate Loan, the period commencing on the Draw Date for
such Loan and ending on the earliest of (i) the date on which
such Loan is repaid; (ii) the date on which such Loan is
converted to a Ratable Libor Rate Loan pursuant to this
Agreement, or (iii) the Termination Date; and (c) for each
Competitive Bid Loan, the period not to exceed one hundred eighty
(180) days requested by Borrower in a Competitive Bid Loan
Request and confirmed by a Bank in a Competitive Bid Quote which
is accepted by Borrower. No Interest Period in any case may
extend beyond the Termination Date. Any Interest Period which
would otherwise end on a day which is not a Business Day shall
end on the next succeeding Business Day (unless such Business Day
falls in another calendar month, in which case such Interest
Period shall end on the Business Day immediately preceding such
day); each Interest Period in respect of a Libor Rate Loan or a
Competitive Bid Loan which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Periods) shall end on the last Business Day of a
calendar month.
"Investment" means any investment in any other Person
by stock purchase, capital contribution, loan, advance, guaranty
of any Indebtedness or creation or assumption of any other
liability in respect of any Indebtedness of such Person
(including, without limitation, any liability of any kind
described in clause (i) or (ii) of the definition of the term
"Indebtedness" set forth in this Section), or the transfer or
sale of Property (otherwise than in the ordinary course of the
business) to any other Person for less than payment in full in
cash of the transfer or sale price or the fair value thereof
(whichever of such price or value is higher).
"Invitation for Bids" means a written notice, given by
the Agent to each Bank following the Agent's receipt of a proper
Competitive Bid Quote Request from Borrower.
"Issuance Date" means, in relation to any Letter of
Credit, the day on which such Letter of Credit is issued or is to
be issued pursuant to this Agreement.<PAGE>
"Issuing Bank", means NCB or its successor as the Bank
responsible for the issuance of Letters of Credit in accordance
with Section 2.14.
"Late Charge" means with respect to any delinquent
payment of principal or interest hereunder a fee that is equal to
the greater of One Hundred and 00/100 Dollars ($100.00) or five
percent (5.0%) of the delinquent payment, charged to Borrower or
added to the unpaid balance of the Notes whenever any payment of
principal or interest is not paid when due.
"Legal Requirements" means all applicable laws, rules,
regulations, ordinances, judgments, orders, decrees, injunctions,
arbitral awards, permits, licenses, authorizations, directions
and requirements of all governments, departments, commissions,
boards, courts, authorities, agencies, and officials and officers
thereof, that are in effect now or at any time in the future.
"Letter of Credit" means any stand-by letter of credit
issued by the Issuing Bank pursuant to this Agreement.
"Letter of Credit Fee" means a fee, payable to the
Issuing Bank, equal to one-eighth of one percent (0.125%) of the
Face Amount of each Letter of Credit, payable in advance for the
issuance of each respective Letter of Credit.
"Letter of Credit Commission" means a commission,
payable annually in advance to the Agent for the ratable benefit
of the Banks, in an amount determined by multiplying the Face
Amount of each Letter of Credit issued hereunder by the Libor
Margin in effect as at the Issuance Date for such Letter of
Credit. The Letter of Credit Commission shall be paid annually
in respect of each Letter of Credit, with the first year's
payment being due and payable, in advance, on the Issuance Date
therefor and subsequent years' payments (each of which shall be
determined by multiplying the Face Amount of such Letter of
Credit by the Libor Margin then in effect) being due and payable
in advance on each anniversary thereof so long as such Letter of
Credit remains outstanding.
"Letter of Credit Usage" means, as at the date on which
the same is determined, the sum of (x) the aggregate of the Face
Amounts of all Letters of Credit then outstanding, plus (y) the
aggregate amount of all drawings under Letters of Credit honored
by the Issuing Bank and not theretofore either reimbursed by
Borrower or converted into Loans as provided in Section 2.14(e).
"Liabilities" means all indebtedness, obligations and
other liabilities of Borrower and Borrower's Consolidated
Subsidiaries, whether matured or unmatured, liquidated or
unliquidated, direct or indirect, absolute or contingent, joint
or several, secured or unsecured arising by contract, operation
of law or otherwise, classified as liabilities in accordance with
GAAP on a balance sheet of Borrower.
"Libor" means the rate (rounded upward to the next
highest 1/100 of 1%) obtained by dividing (x) the rate of
interest per annum determined by the Agent equal to the offered
rates for deposits in U.S. Dollars of one, two, three, four or<PAGE>
six-month periods (as the case may be) commencing of the first
date of the applicable Interest Period for which such rate is
determined as such rate appears on the Telerate system as of
11:00 a.m. (London, England time) on the date which is two (2)
Business Days preceding the first day of such Interest Period,
for a period comparable to the duration of such Interest Period
and in an amount comparable to the amount of the Libor Rate Loan
to be outstanding during such Interest Period, by (y) a
percentage equal to 100% minus the stated maximum rate of all
reserves required to be maintained against "Libor Rate
liabilities" as specified in Regulation D (or against any other
category of liabilities which includes deposits by reference to
which the interest rate on Libor Rate Loans or loans is
determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of a
bank to United States residents) on such date to any member bank
of the Federal Reserve System.
"Libor Break Funding Costs" means an amount sufficient
to reimburse each Bank for any and all loss, cost or expense
actually incurred by such Bank as the result of the occurrence of
any Libor Break Funding Event, including, without limitation,
(i) any loss incurred in obtaining, liquidating or reemploying
deposits from third parties, but excluding loss of margin for the
period after any such prepayment, and (ii) the excess, if any, of
the amount of interest that otherwise would have accrued on the
principal amount so paid, prepaid or repaid or not borrowed for
the period, beginning with the date of such payment, prepayment
or repayment until the last day of the Interest Period that would
otherwise have been in effect for such Libor Rate Loan, at the
applicable rate of interest for such Libor Rate Loan over the
amount of interest that otherwise would have accrued on such
principal amount at a rate per annum equal to the interest
component of the amount each Bank would have bid in the London
interbank market for dollar deposits of leading banks in amounts
comparable to such principal amount and with maturities
comparable to such period all as determined as of the date of the
occurrence of the Libor Break Funding Event.
"Libor Break Funding Event" means any of the events or
occurrences set forth in Sections 2.9(a) or 2.9(b).
"Libor Rate" means for each Interest Period applicable
to each Libor Rate Loan, the sum of Libor plus the Libor Margin
in effect as of the Draw Date for such Loan.
"Libor Rate Loan" means a Loan (without regard to
whether the same is a Ratable Loan or a Competitive Bid Loan)
which bears interest at the Libor Rate.
"Licenses and Permits" means all licenses, permits,
registrations and recordings thereof and all applications for
such licenses, permits and registrations now owned or hereafter
acquired by Borrower and required or necessary for the business
operations of Borrower.
"Lien" means any lien, mortgage, pledge, security
interest, charge or other encumbrance of any kind, including any
conditional sale or other title retention agreement, any lease in<PAGE>
the nature thereof, and any agreement to give any security
interest.
"Loan Documents" mean this Agreement, the Notes and any
other agreement, instrument, certificate or document now or
hereafter executed in connection with or pursuant to this
Agreement, including without limitation the Letter of Credit
applications submitted to the Agent by the Borrower pursuant to
Section 2.14(a) of this Agreement, as the same may be modified,
amended or supplemented from time to time.
"Loans" mean, collectively, the revolving credit loans,
(each, singly, a "Loan"), including both all Ratable Loans and
all Competitive Bid Loans, made or to be made to Borrower
pursuant to this Agreement.
"Loan Year" means a period of twelve (12) consecutive
calendar months beginning on the Closing Date (if the Closing
Date occurs on the first day of a calendar month; in the event
that the Closing Date occurs on any day other than the first day
of a calendar month, the initial Loan Year shall be deemed to
commence on and as of the first day of the initial calendar month
occurring after the Closing Date), and on any anniversary of such
date during the pendency of this Agreement.
"Market Value" means, as of any date, an amount equal
to the sum of (i) Borrower's Capitalized Income Value, plus (ii)
fifty percent (50%) of the book value of Borrower's Assets Under
Development and Raw Land, plus (iii) one hundred percent (100%)
of the value of cash equivalents owned and held by Borrower (all
as of the date of determination of Market Value).
"Maximum Commitment" means the lesser of (i) One
Hundred Million Dollars ($100,000,000.00), or (ii) the sum of the
Credit Commitments.
"MIGRA" means MIG Realty Advisors, Inc., a Florida
corporation.
"MIGRA Transactions" means a transaction, or series of
related transactions, pursuant to which MIGRA will be merged with
and into Borrower and Borrower shall acquire some, or all, of the
conventional apartment projects and other properties as to which
MIGRA or an Affiliate of MIGRA serves as manager or advisor as of
the date hereof, all as contemplated by that certain Agreement
and Plan of Merger, dated as of November 4, 1998, by and between
Borrower and MIGRA.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a "multiemployer plan" as
defined in Section 4001(a) (3) of ERISA which is maintained for
employees of Borrower or any ERISA Affiliate of Borrower.
"Net Income" means the net income of Borrower and
Borrower's Consolidated Subsidiaries as computed in accordance
with GAAP, as reported in Borrower's most recent report on Forms
10-Q or 10-K, as filed with the SEC.<PAGE>
"Net Worth" means, as of any date, Market Value as of
such date less the aggregate of all then-outstanding Liabilities
of Borrower and its Consolidated Subsidiaries.
"Notes" means, collectively, the promissory notes of
Borrower in the form of Exhibit D (the "Ratable Notes") and
Exhibit D-1 (the "Competitive Bid Notes"), which are to be dated,
executed and delivered to Banks by Borrower on the date hereof.
"Note" shall mean any one of the Notes, together with any
amendment, modification, supplement or renewal thereof and with
any instruments given in substitution or replacement thereof.
"Obligations" means, collectively, all of the
indebtedness, obligations and liabilities existing on the date
hereof or arising from time to time hereafter, whether direct,
indirect, absolute, contingent, joint or several, matured or
unmatured, liquidated or unliquidated, secured or unsecured,
arising by contract, operation of law or otherwise, of Borrower
to the Agent or any one or more of the Banks (i) in respect of
the Loans made, or the Letters of Credit issued, pursuant to this
Agreement; or (ii) under or in respect of any one or more of the
Loan Documents. Obligations shall also include, without
limitation, all interest, charges and other fees payable
hereunder (or under any of the Loan Documents) by Borrower, or
due hereunder (or under any of the Loan Documents) from Borrower
to the Agent or any one or more of the Banks from time to time,
together with all costs and expenses referred to in Section 9.5
herein.
"Outstanding Amount" means, at any time, the aggregate
of (x) the principal balance of all Ratable Loans and Competitive
Bid Loans then outstanding hereunder, plus (y) the Face Amount of
all Letters of Credit then outstanding hereunder, plus (z) the
amount of any draw or disbursement made under any Letter of
Credit which Borrower does not convert into a Loan or otherwise
reimburse to the Issuing Bank as and when required by Section
2.14, below. Notwithstanding the foregoing to the contrary, the
principal balance of any Competitive Bid Loans which may be
outstanding from time to time shall be excluded from the
Outstanding Amount solely for the purpose of calculating the
amount of the Commitment Fee.
"Participation Percentage" means, in relation to a
particular Bank, the percentage set forth with respect to such
Bank on Schedule 1.
"Payment Authorization" means the form substantially in
the form of attached Exhibit E, executed by Borrower and
delivered to Agent notifying Agent of any payment by Borrower
hereunder or under the Notes, and if appropriate, authorizing
Agent to debit one or more designated accounts of Borrower for
such payment amount.
"Person" shall include an individual, company,
corporation, association, partnership, joint venture,
unincorporated trade or business enterprise, trust, estate, or
any other legal entity, or a government (Federal, state or
local), court, arbitrator or any agency, instrumentality or
official of the foregoing.<PAGE>
"Prime Rate" means the rate of interest as in effect
from time to time of the Agent as its prime rate at its Head
Office, whether or not the Agent shall at times lend to other
borrowers at lower rates of interest; if there is no such prime
rate, then such other rate as may be substituted by the Agent for
its Prime Rate.
"Prime Rate Loan" means a Ratable Loan which bears
interest at the Adjusted Prime Rate.
"Property" means all types of real, personal, tangible,
intangible or mixed property.
"Pro Rata Share" means, in relation to any Ratable
Loan, any Letter of Credit or any other item (other than
Competitive Bid Loans) arising under this Agreement, the share of
any Bank in such item, which shall be in the same proportion
which the aggregate amount of all of the Obligations owing to
such Bank with respect to such item at such time shall bear to
the aggregate amount of all of the Obligations then owing to all
of the Banks with respect to such item, net of any and all
charges or fees due and payable to the Agent under the Loan
Documents.
"Rate Option" means the Prime Rate or the Libor Rate.
"Ratable Loans" means those Loans, other than
Competitive Bid Loans, made or to be made to Borrower under this
Agreement.
"Raw Land" means all parcels of unimproved and
undeveloped real property owned by Borrower or any of its
Consolidated Subsidiaries. For the purposes of this Agreement,
Raw Land shall be valued at the then-current book value thereof
(as determined in accordance with GAAP).
"Real Estate Project" means any income producing,
multi-family apartment project to be acquired or renovated, or to
be the subject of temporary "bridge" financing, with the proceeds
of any Loan, as contemplated by Section 2.8(a), below.
"REIT" means a qualified real estate investment trust,
as defined in the Code.
"Request For Advance" means the form, substantially in
the form of attached Exhibit F, to be executed by Borrower and
delivered to the Agent, requesting an advance of Loan proceeds
hereunder, and, among other items, notifying the Agent of
Borrower's intended use of such Loan proceeds.
"Request for Issuance of Letter of Credit" means the
form, substantially similar to that which is attached hereto as
Exhibit G, to be executed by Borrower and delivered to the Agent,
requesting the issuance of a Letter of Credit and providing the
information required in connection therewith by Section 2.14(a),
below.<PAGE>
"Required Banks" means those Banks having sixty-six and
two-thirds percent (66-2/3%) of the aggregate of all Banks'
Credit Commitments.
"S&P" means Standard & Poor's, a division of
McGraw-Hill, Inc.
"SEC" means the Securities and Exchange Commission or
any successor agency.
"Securities" means any stock, shares, voting trust
certificates, bonds, debentures, notes, or other evidences of
indebtedness, secured or unsecured, convertible, subordinated or
otherwise, or in general any instruments commonly known as
"securities" or any certificates of interest, shares or
participation in temporary or interim certificates for the
purchase or acquisition of, or any right to subscribe to,
purchase or acquire, any of the foregoing.
"Secured Debt" means any Indebtedness for Borrowed
Money which is secured by any Lien upon any property or asset and
any judgment lien in excess of $250,000 upon any property or
asset.
"Service EBITDA" means, for any fiscal period of
Borrower, that portion of Borrower's EBITDA which is attributable
(in accordance with GAAP) to payments received by Borrower for
its performance of services.
"Subsidiary" means any corporation in which Borrower
(or a Subsidiary of Borrower) owns at least a majority of the
securities having voting power for the election of directors.
"Termination Date" means the earliest of (i)
September 26, 1998, subject to extension in accordance with
Section 2.1(c), below; or (ii) the date upon which the entire
outstanding principal balance of the Notes shall become due
pursuant to the provisions hereof (whether as a result of
acceleration by the Agent or the Required Banks or otherwise);
(iii) the date on which the Credit Commitments shall terminate by
virtue of Borrower's exercise of its option under Section 2.15,
below; or (iv) the date upon which the Credit Commitments
terminate pursuant to Section 7.2 hereof.
"Unencumbered Debt" means all Indebtedness for Borrowed
Money which is not Secured Debt.
"Unencumbered EBITDA" means, for any fiscal quarter of
Borrower, the aggregate of Service EBITDA for such period (not to
exceed $375,000) and that portion of EBITDA which is
attributable, under GAAP, to earnings derived from Unencumbered
Real Estate Assets.
"Unencumbered Real Estate Assets" means all real estate
projects (including Raw Land, Assets Under Development and
income-producing apartment projects) owned by Borrower or any of
Borrower's Consolidated Subsidiaries which are not subject to any
Lien securing an obligation for the payment of money (other than
real property taxes and assessments which are not then due and<PAGE>
payable and Liens in favor of mechanics or material vendors which
are being contested in accordance with the terms of this
Agreement).
ARTICLE 2.
THE LOANS
Section 2.1 Commitments. (a) Each Bank, severally and
not jointly, agrees, upon the terms and subject to the conditions
contained in this Agreement, to make Ratable Loans to Borrower
and to issue, or participate as hereinafter provided in the
issuance of, the Letters of Credit for Borrower, from time to
time prior to the Termination Date. The principal amount of each
Bank's Pro Rata Share of each Ratable Loan shall be equal to such
Bank's Participation Percentage of the aggregate principal amount
of such Loan, and the amount of each Bank's Pro Rata Share in
each Letter of Credit shall be equal to such Bank's Participation
Percentage of the Face Amount of such Letter of Credit.
(b) From and after the Closing Date the Agent shall
have the right to sell interests in this Agreement to additional
lenders who shall become Banks under this Agreement; provided,
however, that (x) the Agent shall not accept additional lenders
if as a result of such addition the Maximum Commitment shall
exceed One Hundred Million Dollars ($100,000,000.00), without the
consent of Borrower and of all Banks; (y) such additional lenders
shall be financial institutions having the authority to perform
the obligations and exercise the rights of Banks hereunder; and
(z) the amount of any such additional lender's Credit Commitment
shall equal or exceed Five Million Dollars ($5,000,000). Such
additional lenders becoming Banks hereunder shall execute and
deliver to the Agent an Assumption Agreement in the form of
Exhibit H hereto, and the Agent shall have the right, without
further consent of the Banks or Borrower, to amend, substitute
and replace Schedule 1 hereto in order to reflect the Credit
Commitment of such additional lenders. Upon Borrower's receipt
of notification that a Bank has executed an Assumption Agreement,
Borrower shall execute and deliver to the Agent: (i) an
acknowledgment confirming the resulting amendment to Schedule 1;
(ii) a Note and a Competitive Bid Note in the amount of such
Bank's Credit Commitment; and (iii) a reaffirmation of the
representations and warranties set forth in Article 4 hereof.
Borrower's failure to execute such acknowledgment to the
Assumption Agreement shall not in any way diminish or alter its
obligations to such Bank, and such Bank shall have no duties or
obligations hereunder until it has received from Borrower a Note
in the amount of its Credit Commitment. If the additional lender
becoming a Bank pursuant to this 2.1(b) is replacing a lender
which was theretofore a Bank, the Bank being so replaced shall
surrender the Note previously issued to it by Borrower,
concurrently with the payment in full of the indebtedness
evidenced by such Note (together with all accrued but unpaid
interest thereon) and with Borrower's execution and delivery to
the new Bank of the Note required of it pursuant to clause (ii),
above.
(c) Provided that there is not then (or on the
commencement of the extension term resulting from Borrower's<PAGE>
exercise of the extension option set forth in this
Section 2.1(c)) any Event of Default hereunder or under any other
Loan Document, and no circumstance which would, with the passing
of time or delivery of notice (or both) constitute such an Event
of Default, Borrower may extend the Termination Date for
successive and consecutive periods of one (1) year each,
provided, as to each instance (x) that Borrower shall exercise
such option by providing the Agent and each Bank with written
notice of its election to do so not earlier than one hundred
twenty (120) days, nor later than thirty (30) days prior to the
first (or, if the Termination Date has theretofore been extended
to permit the same, each successive) anniversary of the Closing
Date; and (y) that the Agent and all of the Banks shall elect, in
their discretion, to consent to each such extension of the
Termination Date.
Section 2.2 Making the Ratable Loans. (a) Each Bank
will, subject to the terms and conditions of this Agreement, make
an amount equal to its Participation Percentage in each Ratable
Loan available to Borrower at such times and in such amounts as
shall be requested by Borrower in compliance with Section 2.13,
below. Borrower may, subject to the terms and conditions of this
Agreement, borrow on a revolving basis from the Banks from time
to time until the Termination Date sums, the outstanding amount
of which shall not, when added to the Letter of Credit Usage and
the outstanding principal balance of all Competitive Bid Loans,
exceed the Maximum Commitment at any time. Each Ratable Loan
shall be in an amount equal to or greater than One Million
Dollars ($1,000,000.00); provided, however, (i) with regard to
each Bank individually, the aggregate sum of each such Bank's Pro
Rata Share of all outstanding Ratable Loans and its Pro Rata
Share of the Letter of Credit Usage shall not exceed such Bank's
Credit Commitment; and (ii) with regard to the Banks
collectively, the aggregate sum of all Loans and the Letter of
Credit Usage shall not exceed the Maximum Commitment. The
Borrower may borrow, repay and reborrow hereunder on and after
the date hereof until the Termination Date, subject to the terms,
provisions and limitations set forth herein.
(b) The absolute and unconditional obligation of
Borrower to repay to each Bank such Bank's respective Pro Rata
Share of the principal of each Ratable Loan and the interest
thereon, as well as Borrower's absolute and unconditional
obligation to repay such Bank's respective Pro Rata Share of the
Face Amount of each Letter of Credit together with any
disbursements made under any Letter of Credit, as and when
required as hereinafter provided, shall be evidenced by a
separate Note for each Bank in the amount of its respective
Credit Commitment dated as of the Closing Date, and substantially
in the form of Exhibit D annexed to this Agreement. All payments
under the Notes shall be made to the Agent at its Head Office,
for the account of Banks; the Agent shall allocate all payments
received from Borrower among all Banks in accordance with each
Bank's Pro Rata Share.
Section 2.3 Competitive Bid Loans.
(a) General Provisions. <PAGE>
(i) In addition to Ratable Loans made
pursuant to this Agreement, but subject to the other terms and
conditions hereof (including, without limitation, the requirement
that the aggregate Outstanding Amount -- which for the purposes
of this Section 2.3 shall include the outstanding principal
amount of all Competitive Bid Loans -- not exceed the Maximum
Commitment at any time), Borrower may, provided that there is
then no Default or Event of Default hereunder, from time to time
prior to the Termination Date request the Banks to make offers to
make Competitive Bid Loans to Borrower. Each Bank may (but shall
not be obligated to) make such offers in response to Borrower's
written request therefor given in accordance with the procedures
set forth herein. Borrower may (but shall not be obligated to)
accept such offers in the manner provided in this Section 2.3.
All of the Competitive Bid Loans shall be evidenced by the
Competitive Bid Notes.
(ii) No Competitive Bid Loan shall affect or
limit the obligation of the Bank making such Competitive Bid Loan
to continue to fund its entire Participation Percentage of all
Ratable Loans and to participate in the issuance of all Letters
of Credit thereafter made or issued hereunder, notwithstanding
that the aggregate of (x) the outstanding principal balance of
all Competitive Bid Loans made by such Bank, and (y) such Bank's
Pro Rata share of all Ratable Loans and all Letters of Credit
made or issued hereunder may exceed such Bank's Credit
Commitment. No Bank may, at any time, have outstanding
Competitive Bid Loans hereunder in an aggregate amount greater
than such Bank's Credit Commitment. The aggregate principal
balance of all Competitive Bid Loans which may be outstanding at
any time shall not exceed fifty percent (50%) of the Maximum
Commitment. Borrower may not make more than three (3) requests
for Competitive Bid Loans in any period of thirty (30)
consecutive days, or more than one (1) request for Competitive
Bid Loans in any ten (10) day period (without regard to whether
such requests are made by means of Competitive Bid Quote Requests
to the Agent or Direct Invitations to Bid issued by Borrower to
all of the Banks). Each request made by Borrower for Competitive
Bid Loans (whether by means of its Competitive Bid Quote Requests
to the Agent or Direct Invitations to Bid issued directly to all
of the Banks) may invite offers to bid for as many as two (2)
Competitive Bid Loans. Notwithstanding any other provisions of
this Agreement to the contrary, no Competitive Bid Loan may be
continued at the expiration of its stated Interest Period; all
Competitive Bid Loans shall, if not repaid at the end of the
applicable Interest Period, either be replaced by a Ratable Loan
or by another Competitive Bid Loan made in accordance with and
subject to the terms and conditions of this Agreement.
(b) Funding the Competitive Bid Loans. Each Bank
making a Competitive Bid Loan shall place at the disposal of the
Agent, at the Agent's Head Office not later than 12:00 noon
Cleveland time on the Draw Date for such Competitive Bid Loan,
the principal amount of such Competitive Bid Loan in immediately
available and freely transferrable funds. Provided that the
conditions precedent applicable to such Loan under Article 3 of
this Agreement shall be satisfied as at such Draw Date, the Agent
shall disburse the proceeds of such Competitive Bid Loan to<PAGE>
Borrower at the time and in the manner provided at Section 2.13
of this Agreement.
(c) Competitive Bid Loans Administered by
the Agent.
(i) If Borrower elects to have the Agent
administer the solicitation and acceptance of offers to make
Competitive Bid Loans, Borrower shall provide the Agent with
written notice of such election, accompanied by Borrower's
completed Competitive Bid Quote Request, by telecopy for the
Agent's receipt not later than 9:00 A.M., Cleveland time, at
least five (5) Business Days before the proposed Draw Date for
each Competitive Bid Loan so requested. Each Competitive Bid
Quote Request submitted by Borrower shall specify:
(1) the proposed Draw Date and the
proposed Interest Period for each Competitive Bid Loan so
requested; and
(2) the requested principal amount of
each such Competitive Bid Loan, which shall be in whole
multiples of One Million Dollars ($1,000,000) and shall in
no case be less than Five Million Dollars ($5,000,000).
The Agent shall reject any Competitive Bid Quote Request which
does not comply in all material respects with the form of
Competitive Bid Quote Request appended as Exhibit B or which is
not given as and when provided above; such rejection shall be
confirmed by written notice from the Agent to Borrower by
telecopy promptly after it occurs.
(ii) Not later than 1:00 p.m., Cleveland
time, on the same Business Day on which it receives a proper
Competitive Bid Quote Request from Borrower, the Agent shall
provide each Bank, by telecopy, with an Invitation for Bids
consistent with the Competitive Bid Quote Request to which it
pertains, reflecting Borrower's request to each Bank for its
submission of a Competitive Bid Quote responsive to such
Competitive Bid Quote Request. Each Bank may, in its discretion
(but shall have no obligation to), submit its Competitive Bid
Quote in response to such Invitation in accordance with the
procedure set forth herein. Each Competitive Bid Quote shall be
furnished to the Agent, by telecopy, not later than 1:00 p.m.
Cleveland time at least four (4) Business Days before the
proposed Draw Date for each requested Competitive Bid Loan.
Notwithstanding the foregoing to the contrary, as to each
Competitive Bid Loan procedure which is administrated by the
Agent and for so long as NCB shall serve as the Agent hereunder,
NCB may, in its capacity as a Bank, submit Competitive Bid Quotes
only by providing Borrower with written notice of its election to
do so, along with its Competitive Bid Quote, by telecopy, at
least one-half hour before the relevant deadline for submission
of Competitive Bid Quotes by the other Banks. All Competitive
Bid Quotes shall be irrevocable once given, provided, however,<PAGE>
that any Bank which submits a Competitive Bid Quote which
contains a manifest error may supplement such Competitive Bid
Quote at any time prior to the Agent's transmission of its
written notice to Borrower describing the Competitive Bid Quotes
received by the Agent and including such original Competitive Bid
Quote by providing the Agent, by telecopy, with a corrective
Competitive Bid Quote (a "Corrective Quote") otherwise in
accordance with the foregoing criteria, together with express
written notice that such Corrective Quote is submitted for the
purpose of correcting a manifest error in such Bank's original
Competitive Bid Quote.
(iii) Each Competitive Bid Quote shall be in
the form attached hereto as Exhibit A, shall identify the Bank
making such quote, shall constitute an offer by the Bank
submitting such Competitive Bid Quote to make a Competitive Bid
Loan to Borrower in the entire principal amount set forth in the
application to Bid (or in such lesser principal amount as may
result from apportionment by the Agent as hereinafter provided)
and shall specify the following additional information:
(1) the proposed Draw Date and the
proposed Interest Period for the Competitive Bid Loan
contemplated thereby (which shall in each case
correspond to those requested in the relevant
Invitation for Bids); and
(2) the Competitive Libor Bid Rate for
such Competitive Bid Loan.
The Agent shall reject Competitive Bid Quotes which are submitted
after the applicable deadline as set forth above, which fail to
include all of the information required above, which include
additional or different terms than those requested in the
applicable Invitation for Bids or which deviate in any fashion
from the form of Competitive Bid Quote (by addition of qualifying
language or otherwise) attached hereto as Exhibit A. The Agent
shall not disclose the contents of any Bank's Competitive Bid
Quote to any other Bank prior to the Agent's receipt of
Borrower's Competitive Bid Borrowing Notice.
(iv) At or before 5:00 p.m., Cleveland time,
at least four (4) Business Days before the proposed Draw Date for
each Competitive Bid Loan for which the Agent shall have received
timely and proper Competitive Bid Quotes (or Corrective Quotes)
submitted in accordance with the foregoing procedures, the Agent
shall provide Borrower with written notice thereof, by telecopy.
Such notice shall describe the aggregate principal amount of
Competitive Bid Loans for which offers have been received for
each Interest Period for which Competitive Bid Loans were
requested in the relevant Bid Request and the respective
principal amounts and Competitive Libor Bid Rates so offered.<PAGE>
(v) Borrower may accept offers to make
Competitive Bid Loans only by providing the Agent with written
notice, by telecopy, of its election to accept such offers not
later than 11:00 a.m., Cleveland time, at least three (3)
Business Days before the proposed Draw Date for any Competitive
Bid Loan. Such notice (a "Competitive Bid Borrowing Notice")
shall specify the aggregate principal amount of the offers so
accepted and the applicable interest rate therefor. Borrower's
failure to provide its Competitive Bid Borrowing Notice as and
when specified in the preceding sentence shall constitute
Borrower's unqualified rejection of all such offers. Borrower
may accept any proper Competitive Bid Quote provided that:
(1) the aggregate principal amount of
all Competitive Bid Loans to be disbursed on a specified
Draw Date may not exceed the applicable amount set forth in
the related Competitive Bid Quote Request;
(2) acceptance of offers may only be
made on the basis of the Competitive Libor Bid Rates set forth in
such offers; and
(3) Borrower may not accept any offer
that fails to comply with the requirements of this Agreement.
(vi) If two or more Banks shall make
Competitive Bid Quotes having identical Competitive Libor Bid
Rates, the Agent shall apportion the principal amount of all such
Competitive Bid Loans among such Banks in proportion to the
respective Credit Commitments of the Banks submitting identical
Competitive Bid Quotes (which shall be rounded upwards to the
nearest multiple of $1,000.00). Allocations by the Agent of the
amounts of Competitive Bid Loans shall be binding and conclusive,
absent manifest error. The Agent shall, not later than
5:00 p.m., Cleveland time, on the third Business Day before the
applicable Draw Date, notify each Bank of its receipt of a
Competitive Bid Borrowing Notice and the principal amounts of the
Competitive Bid Loans allocated to each participating Bank.
(vii) Borrower shall pay the Agent an
administrative fee (the "Competitive Bid Fee") in the amount of
One Thousand Two Hundred Fifty Dollars ($1,250) for each
Competitive Bid Quote Request transmitted by Borrower to the
Agent pursuant to this Section 2.4(c). Each Competitive Bid Fee
shall be deemed to have been earned by the Agent with respect to
each Agent-administered Competitive Bid Loan solicitation process
(without regard to whether any Bank shall issue or Borrower shall
accept any Competitive Bid Quote in response thereto, or to
whether any Competitive Bid Loan resulting from such Competitive
Bid Request shall be funded). The Competitive Bid Fee in respect
of each such process may be deducted from the proceeds of each
Agent-administered Competitive Bid Loan; Borrower and each Bank
hereby expressly authorize the Agent to deduct its Competitive
Bid Fee from the proceeds of each such Competitive Bid Loan.<PAGE>
(d) Competitive Bid Loans Administered
by Borrower. (i) Borrower may request offers to make Competitive
Bid Loans from all (but not less than all) of the Banks directly
by providing each Bank and the Agent with its Direct Invitation
to Bid not later than 1:00 p.m., Cleveland time, at least five
(5) Business Days before the proposed Draw Date for the
Competitive Bid Loans described therein. Each Direct Invitation
to Bid shall specify:
(1) the proposed Draw Date and the
proposed Interest Period for the Competitive Bid Loan so
requested;
(2) the requested principal amount of
such Competitive Bid Loan, which shall be in whole multiples
of One Million Dollars ($1,000,000) and shall in no case be
less than Five Million Dollars ($5,000,000).
(ii) Each Bank may, in its discretion (but
shall have no obligation to), submit its Competitive Bid Quote in
response to such Direct Invitation in accordance with the
procedure set forth herein. Each Competitive Bid Quote shall be
furnished to Borrower, by telecopy, not later than 1:00 p.m.
Cleveland time at least four (4) Business Days before the
proposed Draw Date for each requested Competitive Bid Loan. All
Competitive Bid Quotes shall be irrevocable once given, provided,
however, that any Bank which submits a Competitive Bid Quote
which contains a manifest error may supplement such Competitive
Bid Quote at any time prior to the Borrower's acceptance of such
original Competitive Bid Quote by providing Borrower, by telecopy
with a Corrective Bid otherwise in accordance with the foregoing
criteria, together with express written notice that such
Corrective Bid is submitted for the purpose of correcting a
manifest error in such Bank's original Competitive Bid Quote.
Each Competitive Bid Quote shall identify the Bank making such
quote, shall constitute an offer by the Bank submitting such
Competitive Bid Quote to make a Competitive Bid Loan to Borrower
in the entire principal amount set forth in the applicable Direct
Invitation to Bid (or in such lesser principal amounts as may
result from apportionment by the Borrower as hereinafter provided
and shall specify the following additional information:
(1) the proposed Draw Date and the
proposed Interest Period for the Competitive Bid Loan
contemplated thereby (which shall in each case
correspond to those requested in the relevant Direct
Invitation for Bids);
(2) the Competitive Libor Bid Rate for
such Competitive Bid Loan; and
Borrower shall reject Competitive Bid Quotes which are submitted
after the applicable deadline as set forth above, which fail to
include all of the information required above, which include<PAGE>
additional or different terms than those requested in the
applicable Invitation for Bids or which deviate in any fashion
from the form of Competitive Bid Quote (by addition of qualifying
language or otherwise) attached hereto as Exhibit B. Borrower
shall notify any Bank whose Competitive Bid Quote is so rejected
by telecopy promptly after such rejection. Borrower shall not
disclose the contents of any Bank's Competitive Bid Quote to any
other Bank prior to Borrower's acceptance of offers to make
Competitive Bid Loans as provided in the following paragraph.
(iii) Borrower may accept offers to make
Competitive Bid Loans only by providing the Agent and each Bank
with written notice, by telecopy, of its acceptance or rejection
of the offers submitted to it in response to its Direct
Invitation to Bid not later than 11:00 a.m., Cleveland time, at
least three (3) Business Days before the proposed Draw Date for
any Competitive Bid Loan. Borrower's failure to provide such
notice as and when specified in the preceding sentence shall
constitute Borrower's unqualified rejection of all such offers.
Each acceptance notice shall specify the aggregate principal
amount of the offers so accepted and the applicable interest rate
therefor. Borrower may accept any proper Competitive Bid Quote,
provided that:
(1) the aggregate principal amount of
all Competitive Bid Loans to be disbursed on a specified
Draw Date may not exceed the applicable amount set forth in
the related Competitive Bid Quote Request;
(2) acceptance of offers may only be
made on the basis of the Competitive Libor Bid Rates set
forth in such offers; and
(3) Borrower may not accept any offer
that fails to comply with the requirements of this
Agreement.
(iv) If two or more Banks shall make
Competitive Bid Quotes having identical Competitive Libor
Margins, Borrower shall apportion the principal amount of all
such Competitive Bid Loans among such Banks in proportion to the
respective principal amounts offered by such Banks in their
respective Credit Commitments of the Banks submitting identical
Competitive Bid Quotes (which shall be rounded upwards to the
nearest multiple of $1,000). Allocations by Borrower of the
amounts of Competitive Bid Loans shall be binding and conclusive,
absent manifest error.
Section 2.4 Interest Payable on the Loans.
(a) Method of Selecting Rate Options and Interest
Periods. Borrower shall select the Rate Option for each Ratable
Loan and shall select the Interest Period applicable to each
Ratable Libor Rate Loan from time to time. Borrower shall give<PAGE>
the Agent its irrevocable Request For Advance not later than 1:00
p.m. Cleveland time at least one (1) Business Day before the Draw
Date of each Ratable Prime Rate Loan and three (3) Business Days
before the Draw Date for each Ratable Libor Rate Loan,
specifying:
(i) the Draw Date (which shall be a Business Day) for
such Loan;
(ii) the aggregate amount of such Loan;
(iii) the Rate Option selected for such Loan; and
(iv) in the case of each Libor Rate Loan, the Interest
Period applicable thereto.
Each Libor Rate Loan shall bear interest from and including the
first day of the Interest Period applicable thereto until (but
not including) the last day of such Interest Period at the
interest rate determined as applicable to such Libor Rate Loan.
Borrower shall select Interest Periods with respect to Libor Rate
Loans so that it is not necessary to pay a Libor Rate Loan prior
to the last day of the applicable Interest Period in order to
repay the Loans on the Termination Date. Provided that no
Default or Event of Default shall have occurred and be
continuing, Borrower may elect to continue a Ratable Loan (but
not a Competitive Bid Loan) as a Ratable Libor Rate Loan by
giving irrevocable written, telephonic or telegraphic notice
thereof to the Agent not less than three (3) Business Days prior
to the last day of the then-current Interest Period applicable to
such Ratable Libor Rate Loan, specifying the duration of the
succeeding Interest Period therefor. The continuation of any
Ratable Libor Rate Loan as provided in the preceding sentence
shall constitute the making of a new Libor Rate Loan in the
principal amount of the Ratable Libor Rate Loan so continued and
for the Interest Period selected as described above; the Draw
Date for such new Libor Rate Loan shall be the first Business Day
following the expiration of the Interest Period of the Loan so
continued. If the Agent does not receive timely notice of such
election, Borrower shall be deemed to have elected to convert
such Libor Rate Loan to a Prime Rate Loan at the end of the
then-current Interest Period. Provided that no Default or Event
of Default shall have occurred and be continuing, Borrower may,
on any Business Day, convert any outstanding Prime Rate Loan, or
portion thereof, into a Libor Rate Loan in the same aggregate
principal amount. If Borrower desires to convert a Prime Rate
Loan, it shall give the Agent prior written, telephonic or
telegraphic notice at least three (3) Business Days prior to the
requested conversion date, which notice shall specify the
duration of the Interest Period applicable thereto.
(b) Determination of Adjusted Prime Rate. The Agent
shall determine the Adjusted Prime Rate in effect from time to
time. Any change in the Adjusted Prime Rate shall, for all<PAGE>
purposes of this Agreement and the other Loan Documents, become
effective on the effective date of such change in the Prime Rate
as announced by the Agent in accordance with the Agent's
customary practices.
(c) Payments.
(i) Borrower shall pay to the Agent, for the account
of the Banks in accordance with their respective Pro
Rata Shares, monthly in arrears on the last Business
Day of each month beginning with the month following
the month in which the Closing Date occurs, interest on
the outstanding principal amount of the Adjusted Prime
Rate Loans at the annual rate equal to the Adjusted
Prime Rate; provided, however, that if Borrower elects,
pursuant to the final paragraph of Section 2.4(a), to
convert a Prime Rate Loan, or any portion thereof, to a
Libor Rate Loan, Borrower shall pay to the Agent, for
the account of the Banks in accordance with their
respective Pro Rata Shares, all accrued but unpaid
interest on the Prime Rate Loan, or such portion
thereof, being converted, for the period commencing on
the date of the last payment date under this
paragraph 2.4(c)(i) and concluding on the day
immediately preceding the first day of the Interest
Period for the Libor Rate Loan into which the Prime
Rate Loan is converted.
(ii) Borrower shall pay to the Agent, for the account
of the Banks in accordance with their respective Pro
Rata Shares, interest, in arrears, on the outstanding
principal amount of the Ratable Libor Rate Loans at the
annual rate equal to the Libor Rate. Such interest
shall be due and payable on the last Business Day of
the applicable Interest Period for each Libor Rate Loan
having an Interest Period of ninety (90) days or less;
for all other Libor Rate Loans, interest shall be
payable, in arrears as aforesaid, on (x) that Business
Day which is ninety (90) days after the respective Draw
Dates for such Libor Rate Loans; and (y) on the final
day of the Interest Period therefor.
(iii) Borrower shall pay to the Agent, for the account
of each Bank having a Competitive Bid Loan outstanding
to Borrower, interest, in arrears, on the outstanding
principal balance of the Competitive Bid Loans at the
annual rate equal to the Competitive Libor Bid Rate
applicable to such Competitive Bid Loans. Such
interest shall be due and payable on the last business
day of the applicable Interest Period for each
Competitive Bid Loan having an Interest Period of
ninety (90) days or less; for all other Competitive Bid
Loans, interest shall be payable, in arrears as
aforesaid, on (x) that Business Day which is ninety<PAGE>
(90) days after the respective Draw Dates for such
Competitive Bid Loans; and (y) on the final day of the
Interest Period therefor.
(d) Interest on Overdue Payments; Default Interest
Rate. If any payment of principal or interest, or any drawing or
disbursement made under any Letter of Credit, is not paid when
due, or prior to the expiration of the applicable period of grace
(if any) therefor, the Agent, upon the request of the Required
Banks, may charge and collect from Borrower, or may add to the
unpaid balance of the Notes, a Late Charge. The Agent may charge
interest on the Late Charge at the Default Interest Rate until
such time as the required payment of principal and interest
(together with the Late Charge) is paid hereunder. Any Late
Charge charged and collected by the Agent shall be distributed to
the Banks in accordance with their respective Pro Rata Shares.
Any Late Charge charged and collected by the Agent in respect of
any Competitive Bid Loan shall be distributed to the Banks making
such Loan in proportion to their respective shares in such
Competitive Bid Loans. No failure by the Agent to charge or
collect any Late Charge in respect of any delinquent payment
shall be considered to be a waiver by the Agent or the Banks of
any rights they may have hereunder, including without limitation
the right subsequently to impose a Late Charge for such
delinquent payment or to take such other actions as may then be
available to them hereunder or at law or in equity, including but
not limited to the right to terminate the Credit Commitments or
to accelerate the Obligations pursuant to the terms of
Section 7.2 hereof. If the Notes have been accelerated pursuant
to Section 7.2(b), or if an Event of Default hereunder or under
any other Loan Document shall have occurred and be continuing,
the outstanding principal balance of the indebtedness advanced
under this Agreement, together with all accrued interest thereon
and any and all other Obligations, shall bear interest from the
date on which such amount shall have first become due and payable
to the date on which such amount shall be paid (whether before or
after judgment) at the Default Interest Rate. Interest at the
Default Interest Rate will continue to accrue and will (to the
extent permitted by applicable law) be compounded daily until the
Obligations in respect of such payment are discharged (whether
before or after judgment).
Section 2.5 Repayments and Prepayments of Principal.
(a) Repayments of Certain Loans. Borrower shall pay to
the Agent, for the account of Banks in accordance with their
respective Pro Rata Shares, within one (1) year from the Draw
Date for such Loans, the amount of any and all Ratable Loans made
to provide "bridge" or temporary financing in accordance with
Section 2.8(a)(iv) below.
(b) Optional Prepayments. Without derogating from the
mandatory prepayment requirements contained in Section 2.5(c)
hereof, Borrower shall have the right to prepay the principal of<PAGE>
the Loans in full or in part at any time and from time to time
upon payment to Agent of all accrued interest to the date of
payment; provided, however, that (i) all partial payments of
principal shall be in an amount equal to or greater than Five
Hundred Thousand and 00/100 Dollars ($500,000.00); and (ii) all
Loans may be prepaid without penalty or premium; if Borrower
shall prepay any Libor Rate Loan on a day other than the final
day of the applicable Interest Period therefor, such prepayment
must include an amount equal to the aggregate Libor Break Funding
Costs applicable to or resulting from such prepayment in
accordance with Section 2.9, below.
(c) Mandatory Prepayments.
(i) If at any time the Outstanding Amount exceeds the
Maximum Commitment, Borrower shall immediately prepay
all sums in excess of the Maximum Commitment.
(ii) If (and on each occasion that) Borrower receives
any proceeds from the refinancing of any Real Estate
Project which is acquired or financed (in whole or in
part) with proceeds of any Loan, or which is financed,
in whole or part, by any financing supported by any
Letter of Credit issued hereunder, Borrower shall,
concurrently with the consummation of such refinancing,
prepay an amount equal to the lesser of (x) the
proceeds of such refinancing which would otherwise have
been payable to Borrower, net of the reasonable and
customary costs and out-of-pocket expenses incurred by
Borrower in connection with such refinancing
transaction (the "Net Refinancing Proceeds"); or
(y) the aggregate of all Loans made pursuant to this
Agreement in respect of such Real Estate Project; or
(z) the Face Amount of any Letters of Credit supporting
any financing for such Real Estate Project. In any
instance in which any such Real Estate Project is
financed both by the proceeds of Loans and by other
financing which is supported by Letters of Credit
issued pursuant to this Agreement, the amount of the
mandatory prepayment which shall be required under this
Section 2.5(c)(ii) shall be the lesser of (aa) the Net
Refinancing Proceeds of such Real Estate Project, or
(bb) the aggregate of all Loans and the Face Amount of
all Letters of Credit issued in respect of, or
supporting any financing for, such Real Estate Project.
(iii) If (and on each occasion that) a drawing or
disbursement is made under a Letter of Credit and
Borrower shall not reimburse the Issuing Bank therefor
(either by causing the amount of such drawing or
disbursement to be converted into a Loan or by paying
the Issuing Bank the amount of such drawing or
disbursement in immediately available funds), as and
when required by Section 2.14, below, Borrower shall<PAGE>
immediately repay an amount equal to the amount of such
drawing or disbursement, together with interest thereon
at the rate contemplated by Section 2.14, below.
(d) Application of Prepayments. Any prepayment under
the Notes shall be applied by the Agent as set forth in Section
2.6 hereof. To the extent that any prepayment shall be applied
to a Libor Rate Loan, the Agent shall (unless such prepayment
shall result from the acceleration of the Notes following the
occurrence of an Event of Default by Borrower) retain such amount
until the expiration of the Interest Period applicable to such
Libor Rate Loan, and shall apply such payment at such time so as
to minimize the Libor Break Funding Costs otherwise applicable to
such prepayment, unless specifically instructed by Borrower to
pay, repay or prepay such Libor Rate Loan and nonetheless incur
the applicable Libor Break Funding Cost.
(e) Maturity. Subject to the terms and conditions of
this Agreement, Borrower will be entitled to reborrow all or any
part of the principal of the Notes repaid or prepaid prior to the
termination of the Credit Commitments. The Credit Commitments
shall terminate, and all of the indebtedness evidenced by each
Note shall, if not sooner paid, be in any event absolutely and
unconditionally due and payable in full by Borrower on the
Termination Date.
(f) Notice of Prepayments of Principal. Borrower will
provide the Agent at least (1) one Business Day's advance,
written notice of Borrower's intention to make any voluntary
prepayment of principal. Such notice shall be irrevocable and
shall specify the date of prepayment and the aggregate amount to
be paid. The Agent will promptly notify each Bank of its receipt
of such notice.
Section 2.6 Payments and Computations.
(a) Time and Place of Payments. Except as
specifically provided to the contrary in Section 2.14, below,
each payment to be made by Borrower under this Agreement or any
other Loan Document shall be made directly to the Agent at its
Head Office, not later than 12:00 noon Cleveland Time, on the due
date of each such payment, in immediately available and freely
transferrable funds. Any payment received after such time will
be deemed to have been received on the next Business Day. All
payments of interest, principal and all other amounts owing
hereunder or under the Notes or any other Loan Document shall be
documented by Borrower's transmitting to the Agent, via telecopy,
a Payment Authorization; the funds representing such payment
shall be transferred to the Agent in accordance with such Payment
Authorization. On the same Business Day that it receives (or is
deemed to receive) payments hereunder the Agent will distribute
(or cause to be distributed) to each Bank, in immediately
available and freely transferrable funds: (x) such Bank's Pro
Rata Share of such payments in respect of all items other than<PAGE>
payments under Competitive Bid Loans, and (y) such Bank's share
of all payments on account of any Competitive Bid Loans made by
such Bank or in which such Bank has participated.
(b) Application of Funds. Notwithstanding anything
herein to the contrary, and notwithstanding anything set forth in
the Payment Authorization, the funds received by the Agent with
respect to the Obligations shall be applied as follows:
(i) No Default. Provided that the Notes have not been
accelerated pursuant to Section 7.2(b), below, and
provided further that no Event of Default hereunder or
under any Loan Document shall have occurred and be
continuing at the time that the Agent receives such
funds, in the following manner: (a) first, to the
payment of all fees, charges, and other sums (other
than principal and interest) then due and payable to
the Agent or the Banks under the Notes, this Agreement
or the other Loan Documents; (b) second, to the payment
of all accrued but unpaid interest at the time of such
payment; and (c) third, to the payment of principal as
allocated by Borrower between Competitive Bid Loans and
Ratable Loans, with principal payments in respect of
the latter to be apportioned among the Banks in
accordance with their respective Pro Rata Shares.
(ii) Default. If the Notes have been accelerated
pursuant to Section 7.2(b), or if an Event of Default
hereunder shall have occurred and be continuing
hereunder or under the Notes or any of the other Loan
Documents at the time the Agent receives such funds, in
the following manner: (a) first to the payment or
reimbursement of the Banks and the Agent for all costs,
expenses, disbursements and losses which shall have
been incurred or sustained by the Banks or the Agent in
or incidental to the collection of the Obligations owed
by Borrower hereunder or the exercise, protection, or
enforcement by the Banks or the Agent of all or any of
the rights, remedies, powers and privileges of the
Banks and the Agent under this Agreement, the Notes, or
any of the other Loan Documents and in and towards the
provision of adequate indemnity to the Agent and any of
the Banks against all taxes or Liens which by law shall
have, or may have priority over the rights of the Agent
or the Banks in and to such funds; and (b) second to
the payment of all of the Obligations in accordance
with Section 2.6(b)(i) above, provided, however, that
in such case the principal of, and interest in respect
of, the Obligations shall be allocated among the Banks
in accordance with their respective Funded Percentages.
(c) Payments on Business Days. If any sum would (but
for the provisions of this Section 2.6(c)) become due and payable
on any day which is not a Business Day, then such sum shall<PAGE>
become due and payable on the next succeeding Business Day, and
interest payable on such sum shall continue to accrue and shall
be adjusted by the Agent accordingly.
(d) Computation of Interest. All computations of
interest payable under this Agreement, the Notes, or any of the
other Loan Documents shall be computed by the Agent on the basis
of the actual principal amount outstanding on each day during the
payment period, and shall be calculated on the basis of the
actual number of days elapsed during such period on the basis of
a year consisting of three hundred and sixty (360) days. The
daily interest charge shall be one three-hundred-sixtieth
(1/360th) of the annual interest amount. Each determination of
any interest rate by the Agent shall be conclusive and binding in
the absence of manifest error. Absent manifest error, a
certificate or statement signed by an authorized officer of the
Agent shall be conclusive evidence of the amount of the
Obligations due and unpaid as of the date of such certificate or
statement.
Section 2.7 Payments to be Free of Deductions. Each
sum to be paid by Borrower under this Agreement, any Note, or any
of the other Loan Documents shall be made in accordance with
Section 2.6 hereof, without set-off, deduction or counterclaim
whatsoever, and free and clear of taxes, levies, imposts, duties,
charges, fees, deductions, withholdings, compulsory loans,
restrictions or conditions of any nature now or hereafter imposed
or levied by any governmental or taxing authority, unless
Borrower is compelled by law to make any such deduction or
withholding. In the event that any such obligation to deduct or
withhold is imposed upon Borrower with respect to any such
payment: (a) Borrower shall be permitted to make the deduction or
withholding required by law in respect of such payment, and (b)
there shall become and be absolutely due and payable by Borrower
to the Agent or such Bank on the date on which the said payment
shall become due and payable, and Borrower hereby promises to pay
to the Agent or such Bank on such date, such additional amount as
shall be necessary to enable the Agent or such Bank to receive
the same net amount which the Agent or such Bank would have
received on such due date had no such obligation been imposed by
law. Notwithstanding the foregoing to the contrary, this
Section 2.7 shall not apply in the case of any deductions or
withholdings made in respect of taxes charged upon or by
reference to the overall net income, profits or gains of the
Agent or any Bank.
Section 2.8 Use of Proceeds.
(a) Permitted Uses of Loan Proceeds. Borrower
represents, warrants and covenants to the Agent and to each Bank
that all proceeds of the Loans shall be used by Borrower solely
for the purpose of:<PAGE>
(i) Acquiring Conventional Apartment Projects located
within the United States, which are similar to those
currently owned or operated by Borrower;
(ii) Extending advances for the renovation of
multi-family apartment projects 100% owned by Borrower
or by a direct, wholly-owned subsidiary of Borrower;
(iii) Providing funds for general working capital
needs; provided, however, that the aggregate amount of
all Loans outstanding at any time for such purpose
shall not exceed Fifteen Million Dollars
($15,000,000.00);
(iv) Providing "bridge" or temporary financing to
Borrower with respect to existing indebtedness secured
by mortgages, deeds of trust, or deeds to secure debt
encumbering income-producing multi-family apartment
projects 100% owned by Borrower or by a direct,
wholly-owned subsidiary of Borrower, provided:
(x) that the amount of Loans outstanding at any time
for such purpose shall not exceed Thirty Million
Dollars ($30,000,000.00); and (y) that each Loan for
such purpose shall be repaid within one (1) year after
the Draw Date for such Loan; and
(v) Providing funds for the construction of
Conventional Apartment Projects which are Assets Under
Development; provided, however, that the aggregate
amount of all Loans outstanding at any time for such
purpose shall not exceed Thirty-Five Million Dollars
($35,000,000).
(b) Permitted Uses of Letters of Credit. Borrower
represents, warrants and covenants to the Agent and to each Bank
that Letters of Credit shall be used solely for the purpose of
providing credit enhancement for Borrower in connection with
financings of Conventional Apartment Projects acquired or
refinanced by Borrower (including but not limited to the
replacement of existing letters of credit), and for no other
purpose or purposes.
(c) Recharacterization of Certain Loans. If Borrower
shall, in connection with its acquisition of a Conventional
Apartment Project with the proceeds of a Loan made pursuant to
Section 2.08(a)(i) of this Agreement, either invest Borrower's
own funds or incur Indebtedness (other than to the Banks pursuant
to this Agreement), in either case for the purpose of funding a
portion of such acquisition, Borrower shall, subject to all of
the terms and conditions set forth in this Agreement, be entitled
to borrow an amount equal to the amount so invested or financed.
If Borrower should request a Loan for the foregoing purpose,
Borrower shall submit a Request for Advance therefor to the Agent
in accordance with Section 2.13 of this Agreement within ninety<PAGE>
(90) days after the date of Borrower's acquisition of such
Conventional Apartment Project. Such Request for Advance shall
include, in addition to all of the information required of
Borrower under this Agreement, a statement from Borrower to the
effect that the Loan requested thereby is for the purpose set
forth in this Section 2.08(c), and a description acceptable to
the Agent of the sources and uses of the investment or
Indebtedness for which such Loan is sought. Any such Request for
Advance shall be subject, among other things, to all of the
conditions to funding contained or referred to in Section 3.2,
below. Any Loans disbursed for the purposes described in this
paragraph shall be deemed to be Loans for the purposes of the
acquisition of Conventional Apartment Projects pursuant to
Section 2.08(a)(i). Borrower shall be entitled to request Loans
for the purposes described in this Section 2.08(c) not more often
than once per calendar month, and the minimum amount of any Loan
so requested shall be One Million Dollars ($1,000,000).
(d) Prohibited Uses. Borrower represents, warrants
and covenants to the Agent and to each Bank that the proceeds of
all Loans shall be used only for the permitted uses described in
the foregoing paragraph, and that no part of the proceeds of any
Loans will be used (directly or indirectly) so as to result in a
violation of Regulations G, T, U or X of the Board of Governors
of the Federal Reserve System or for any other purpose violative
of any rule or regulation of such Board.
Section 2.9 Libor Break Funding Costs. Borrower shall
pay to the Agent, for the benefit of the Banks entitled thereto,
the Libor Break Funding Costs that the Agent determines are
attributable to:
(a) any payment (including, without limitation, the
acceleration of the Loans pursuant to this Agreement or any Loan
Document), repayment, mandatory or optional prepayment, or
conversion of a Libor Rate Loan for any reason on a date other
than the last day of the Interest Period for such Libor Rate
Loan; or
(b) any failure by Borrower for any reason to borrow a
Libor Rate Loan on the date for such borrowing specified in the
relevant notice of borrowing or Request for Advance given
pursuant to this Agreement.
All Libor Break Funding Costs attributable to Ratable Libor Rate
Loans shall be for the ratable benefit of the Banks. All such
costs in respect of Competitive Bid Loans shall be on account of
those Banks which have funded such Competitive Bid Loans.
Section 2.10 Additional Costs.
(a) Notwithstanding any conflicting provision of this
Agreement to the contrary, if any applicable law or regulation
not in effect as of the date hereof shall (i) subject the Agent<PAGE>
or any Bank to any tax, levy, impost, duty, charge, fee,
deduction or withholding of any nature with respect to any Loan
or Letter of Credit, this Agreement, any Note, or any of the
other Loan Documents or the payment by Borrower of any amounts
payable to the Agent or any Bank hereunder or thereunder; or
(ii) materially change, in the reasonable opinion of the party so
affected, the basis of taxation of payments to the Agent or any
Bank of the principal of or the interest on any Note or any other
amounts payable to the Agent or any Bank under this Agreement, or
any of the other Loan Documents; or (iii) impose or increase or
render applicable any special or supplementary special deposit or
reserve or similar requirements (whether or not having the force
of law) against assets held by, or deposits in or for the account
of, or any eligible liabilities of, or loans by any office or
branch of, the Agent or any Bank; or (iv) impose on the Agent or
any Bank any other condition or requirement with respect to this
Agreement, any Note, or any of the other Loan Documents, and if
the result of any of the foregoing is (A) to increase the cost to
the Agent or any Bank of making, funding or maintaining all or
any part of the principal of the Loans or of issuing, maintaining
or making draws or disbursements under the Letters of Credit, or
(B) to reduce the amount of principal, interest or any other sum
payable by Borrower to the Agent or any Bank under this
Agreement, any Note, or any of the other Loan Documents, or
(C) to require the Agent or any Bank to make any payment or to
forego any interest or other sum payable by Borrower to the Agent
or any Bank under this Agreement, any Note, or any of the other
Loan Documents, the amount of which payment or foregone interest
or other sum is measured by or calculated by reference to the
gross amount of any sum receivable or deemed received by the
Agent or any Bank from Borrower under this Agreement, any Note,
or any of the other Loan Documents, then, and in each such case,
Borrower will pay to the Agent for the Agent or the account of a
Bank, as the case may be, within sixty (60) days of written
notice by the Agent or such Bank, such additional amounts as will
(in the reasonable opinion of the Agent or such Bank, as the case
may be) be sufficient to compensate the Agent or such Bank for
such additional cost, reduction, payment or foregone interest or
other sum. Anything in this paragraph to the contrary
notwithstanding, the foregoing provisions of this paragraph shall
not apply in the case of any additional cost, reduction, payment
or foregone interest or other sum resulting solely from or
arising solely as a consequence of any taxes charged upon or by
reference to the overall net income, profits or gains of the
Agent or any Bank.
(b) If any present or future applicable law shall make
it unlawful for Borrower to perform any one or more of its
agreements or obligations under this Agreement, any Note or any
of the other Loan Documents, then the obligations of the Banks
under their respective Credit Commitments shall terminate
immediately. If any present or future applicable law shall make
it unlawful for Borrower to perform any one or more of its
agreements or obligations under this Agreement, any Note, or any<PAGE>
of the other Loan Documents, and the Agent or any Bank shall at
any time determine (which reasonable determination shall be
conclusive and binding on Borrower) (i) that, as a consequence of
the effect or operation (whether direct or indirect) of any such
applicable law, any one or more of the rights, remedies, powers
or privileges of the Agent or any Bank under or in respect of
this Agreement, any Note, or any of the other Loan Documents
shall be or become invalid, unenforceable or materially
restricted; and (ii) that all or any one or more of the rights,
remedies, powers and privileges so affected are of material
importance to the Agent or any Bank (as determined by the party
so affected), then the Agent shall, at the direction of the
Required Banks, by giving notice to Borrower, declare all of the
Obligations, including, without limitation, the entire unpaid
principal of the Notes, all of the unpaid interest accrued
thereon and any and all other sums due and payable by Borrower to
the Agent or the Banks under this Agreement, any Note, and any of
the other Loan Documents, to be immediately due and payable, and,
thereupon, such Obligations shall (if not already due and
payable) forthwith become and be due and payable without further
notice or other formalities of any kind, all of which are hereby
expressly waived.
(c) If the Agent or any Bank shall reasonably
determine that any law, rule or regulation not in effect as of
the date hereof regarding capital adequacy, or in the event of
any change in any existing such law, rule or regulation or in the
interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any
Bank with any request or directive regarding capital adequacy
(whether or not having the force of law) from any such authority,
central bank or comparable agency, has or would have the effect
of reducing the rate of return on such Bank's capital, as a
consequence of its obligations hereunder, to a level below that
which such Bank could have achieved but for such adoption, change
or compliance (taking into consideration such Bank's policies
with respect to capital adequacy) by any amount deemed by such
Bank to be material, then Borrower shall pay to such Bank upon
demand such amount or amounts, in addition to the amounts payable
under the other provisions of this Agreement or any other Loan
Document, as will compensate such Bank for such reduction.
Determinations by any Bank of the additional amount or amounts
required to compensate such Bank in respect of the foregoing
shall be conclusive in the absence of manifest error. In
determining such amount or amounts, each Bank may use any
reasonable averaging and attribution methods of general
application.
Section 2.11 Indemnification for Losses. Without
derogating from any of the other provisions of this Agreement or
any of the other Loan Documents, Borrower hereby absolutely and
unconditionally agrees to indemnify the Agent and each Bank, upon
demand at any time and as often as the occasion therefor may<PAGE>
require, against any and all claims, demands, suits, actions,
damages, losses, costs, expenses and all other liabilities
whatsoever which the Agent or any Bank or any of their respective
directors, officers, employees or agents may sustain or incur as
a consequence of, on account of, in relation to or in any way in
connection with (a) any failure by Borrower to pay, punctually on
the due date thereof, any amount payable under this Agreement,
any Note, or any of the other Loan Documents beyond the
expiration of the period of grace (if any) applicable thereto, or
(b) the acceleration, in accordance with Section 7.2 hereof, of
the maturity of any of the Obligations, or (c) any failure by
Borrower to perform or comply with any of the terms and
provisions of this Agreement, any Note or any of the other Loan
Documents. Such claims, demands, suits, actions, damages,
losses, costs or expenses shall include, without limitation
(i) any costs incurred by the Agent or any Bank in carrying funds
to cover any overdue principal, overdue interest or any other
overdue sums payable by Borrower under this Agreement, any Note,
or any of the other Loan Documents; (ii) any interest payable by
the Agent or any Bank to the lenders of the funds borrowed by the
Agent or any Bank in order to carry the funds referred to in
clause (i) of this Section 2.11; and (iii) any losses (but
excluding losses of anticipated profit) incurred or sustained by
the Agent or any Bank in liquidating or re-employing funds
acquired from third parties to make, fund or maintain all or any
part of the Loans or to issue, maintain or make draws or
disbursements under the Letters of Credit.
Section 2.12 Statements by the Agent or any Bank. A
statement signed by an officer of the Agent or any Bank (as the
case may be) setting forth any additional amount required to be
paid by Borrower to the Agent or such Bank under Sections 2.10
and 2.11 hereof shall be submitted by the Agent or such Bank to
Borrower in connection with each demand made at any time by the
Agent (with copies thereof delivered to each other Bank) or such
Bank under either of such Sections. A claim by the Agent or any
Bank for all or any part of any additional amounts required to be
paid by Borrower under Sections 2.10 and 2.11 hereof may be made
before or after any payment to which such claim relates. Each
such statement shall, in the absence of manifest error,
constitute conclusive evidence of the additional amount required
to be paid to the Agent or such Bank.
Section 2.13 Requests for Advances. (a) All requests
for draws, advances, or disbursements of the proceeds of Ratable
Loans shall be made by Borrower, in writing, on a Request for
Advance in the form of Exhibit F hereto. Such Requests for
Advance may be transmitted to the Agent at its Head Office via
fax or telecopy, provided that Borrower immediately notify the
Agent by telephone of such transmission. All such Requests for
Advance for Ratable Loans for working capital purposes as
contemplated by Section 2.8(a)(iii) shall be transmitted to and
received by the Agent not later than 1:00 p.m. Cleveland Time, on
the Business Day prior to the Draw Date specified on such Request<PAGE>
for Advance subject, however, to such longer period as may be
required pursuant to Section 2.4, above. All such Requests for
Advance for Ratable Loans for any other purposes permitted by
Section 2.8(a) shall be transmitted to and received by the Agent
not later than 1:00 p.m., Cleveland Time, on a Business Day which
is not less than five (5) Business Days prior to the Draw Date
specified on such Request for Advance; all such Requests for
Advance for such Ratable Loans shall be accompanied by (x) a
written certification, signed by a duly authorized officer of
Borrower (or a properly designated delegate of such an officer),
indicating Borrower's Debt Rating as of the date of such Request
for Advance, and (y) such documents, reports and other materials
as may be necessary to enable the Agent (and each Bank) to
confirm that the conditions precedent to the disbursement of such
requested Loan have been satisfied.
(b) The Agent shall notify the Banks promptly by
telephone of Agent's receipt of Borrower's Request for Advance,
but in no event shall Agent notify the Banks later than 5:00 p.m.
Cleveland Time, on the day on which the Agent actually receives
the applicable Request for Advance. In addition, the Agent shall
provide each Bank with a copy of each such Request for Advance,
together with all accompanying materials, promptly upon the
Agent's receipt thereof, and shall provide each Bank with a
statement showing the Agent's calculation of its respective
Participation Percentage of each Ratable Loan so requested. Each
Bank will, upon receiving notice from the Agent of Borrower's
Request for Advance, become and be obligated to place at the
disposal of the Agent, not later than 12:00 noon Cleveland Time
on the Draw Date set forth on such Request for Advance, an
aggregate amount in dollars equal to such Bank's Participation
Percentage of each Ratable Loan requested. The payment by each
such Bank of such aggregate amount shall be made to the Agent at
the Agent's Head Office in immediately available and freely
transferrable funds.
(c) The Agent shall disburse the proceeds of each Loan
to Borrower, in immediately available funds, not later than
1:30 p.m., Cleveland time, on the Draw Date described therefor,
provided that: (x) Borrower shall have provided the Agent with a
Request for Advance for each Ratable Loan as and when provided
above; (y) all of the conditions precedent applicable to such
Loan under Article 3, below, shall be satisfied as at the Closing
Date or such later Draw Date as may be applicable to such Loan;
and (z) each Bank shall fund the amount equal to its
Participation Percentage in each Ratable Loan as provided in
Section 2.13(b), above. If after Borrower shall have provided
the Agent with its Request for Advance for any Ratable Loan, and
provided that all of the conditions precedent for the making of
such Ratable Loan shall have been satisfied, one or more of the
Banks shall for any reason not fund its Participation Percentage
in such Ratable Loan, the Agent shall so notify Borrower. If in
such event Borrower shall so request, the Agent shall advance
that portion of such Ratable Loan equal to the aggregate of the<PAGE>
funding Banks' Participation Percentages thereof, without thereby
waiving or releasing any right or claim that the Agent or
Borrower may have as against any Bank which failed to fund its
Participation Percentage in such Loan as and when required under
Section 2.13(b).
Section 2.14. The Letters of Credit.
(a) Issuance of Letters of Credit; Conditions and
Limitations. Upon the terms and conditions set forth in this
Agreement, Borrower may request, in accordance with the
provisions of this Section 2.14, that the Issuing Bank issue one
or more Letters of Credit for the account of Borrower from time
to time prior to the Termination Date. If Borrower desires the
issuance of a Letter of Credit, it shall deliver to the Agent a
Request for Issuance of Letter of Credit in form substantially
similar to that which is attached hereto as Exhibit G and made a
part hereof by this reference, no later than 1:00 p.m. (Cleveland
time) at least five (5) Business Days before the proposed
Issuance Date therefor. The Request for Issuance of Letter of
Credit shall be accompanied by a Letter of Credit Application, on
the Issuing Bank's then-customary form, and shall contain the
following information with respect to each requested Letter of
Credit: (i) its proposed Issuance Date (which shall be a Business
Day), (ii) its proposed Face Amount, (iii) its proposed
expiration date, (iv) the name and address of its proposed
beneficiary, and (v) a summary of its purpose and contemplated
terms. Borrower shall, in addition, furnish (x) a certificate,
signed by a duly authorized officer of Borrower (or a properly
designated delegate of such an officer), indicating Borrower's
Debt Rating as of the date of such Request for Issuance of a
Letter of Credit; and (y) a precise description of any documents
to be presented under, and any other terms of, the requested
Letter of Credit, together with the text of any certificate to be
presented by the beneficiary which, if presented by the
beneficiary prior to the expiration date of the Letter of Credit,
would require the Issuing Bank to make payment under the Letter
of Credit. No Letter of Credit shall require payment against a
conforming draft to be made thereunder on the same Business Day
that such draft is presented if such presentation is made after
10:00 A.M. (Cleveland time) on such Business Day. The minimum
Face Amount of any Letter of Credit shall be One Million Dollars
($1,000,000). The issuance of each Letter of Credit shall be
subject to the satisfaction, on the Issuance Date for each Letter
of Credit, of all of the conditions precedent set forth in
Section 3.2, below, and to the following additional limitations:
(i) Borrower shall not request the issuance
of a Letter of Credit if, after giving effect to
the issuance of such Letter of Credit, the Letter
of Credit Usage would equal or exceed Ten Million
Dollars ($10,000,000);<PAGE>
(ii) Borrower shall not request the issuance
of a Letter of Credit if, after giving effect to
the issuance of such Letter of Credit, the
Outstanding Amount would exceed the Maximum
Commitment; and
(iii) In no event shall the Issuing Bank
issue any Letter of Credit having an expiration
date later than the first to occur of
(x) Termination Date or (y) one (1) year after its
Issuance Date; provided that, subject to the
foregoing clause (x), this clause (y) shall not
prevent the Issuing Bank from agreeing that a
Letter of Credit will automatically be renewed for
a period not to exceed one (1) year if the Issuing
Bank does not cancel such renewal, provided that
at any such renewal date all of the conditions to
the issuance of a Letter of Credit and set forth
or referred to in this Section 2.14(a) shall be
satisfied.
(b) Issuance of Letters of Credit; Purchase of
Participations Therein. Upon receipt by the Agent of a Request
for Issuance of Letter of Credit from Borrower, the Agent shall
promptly so notify each Bank, and shall provide each Bank with a
copy of such Request for Issuance of Letter of Credit. Provided
that all of the conditions precedent to the issuance of the
requested Letter of Credit have been satisfied, the Issuing Bank
shall cause each Letter of Credit properly requested hereunder to
be issued as requested by Borrower in accordance with the terms
of the respective Request for Issuance for Letter of Credit
therefor. Immediately upon the issuance of each Letter of
Credit, each Bank (other than the Issuing Bank) shall be deemed
to have irrevocably purchased from the Issuing Bank a
participation in such Letter of Credit and any and all drawings
and disbursements thereunder in an amount equal to such Bank's
Pro Rata Share of the Face Amount of such Letter of Credit, and
each Bank hereby covenants and agrees to purchase and pay for
such participation on the terms and subject to the conditions set
forth in this Section 2.14.
(c) Payment in Certain Circumstances. Each Letter of
Credit may provide that the Issuing Bank may (but shall not be
required to) pay the beneficiary thereof upon the occurrence of
an Event of Default and the acceleration of the maturity of the
Loans or, if payment is not then due to the beneficiary, provide
for the deposit of funds in an account to secure payment to the
beneficiary, and that any funds so deposited shall be paid to
such beneficiary provided that all conditions to such payment are
satisfied, or returned to the Issuing Bank for distribution to
the Banks (or, if all Obligations then shall have been
indefeasibly paid in full, to Borrower) if no payment to such
beneficiary has been made and if the final date available for
drawings under the Letter of Credit has passed. Each payment or<PAGE>
deposit of funds by the Issuing Bank as provided in this
paragraph shall be treated for all purposes of this Agreement as
a drawing duly honored by the Issuing Bank under the related
Letter of Credit.
(d) Termination of Credit Commitments. If for any
reason the Credit Commitments shall terminate when any Letter of
Credit is outstanding, Borrower shall, on or prior to the date of
such termination: (i) cause each outstanding Letter of Credit to
be cancelled, and an amount equal to all amounts previously drawn
under Letters of Credit and not theretofore reimbursed by
Borrower or converted into Loans pursuant to Section 2.14(e) to
be paid immediately to or as directed by the Issuing Bank; or
(ii) deposit, with the Agent, an amount equal to the Letter of
Credit Usage to secure all outstanding Letters of Credit which
are not cancelled as described in the preceding clause.
(e) Payment of Amounts Drawn Under Letters of Credit.
Upon receipt by the Issuing Bank of any request for drawing under
its Letter of Credit by the beneficiary thereof, the Issuing Bank
shall notify Borrower and the Agent promptly after its receipt of
notice of any such request, and in any event at least two (2)
Business Days prior to the date on which the Issuing Bank intends
to honor such drawing (unless under the terms of the Letter of
Credit the Issuing Bank is required to honor a drawing prior to
the second Business Day after presentation of a request for
drawing, in which case the Issuing Bank shall provide Borrower
and the Agent with such notice of such request as may be
practicable under the circumstances). The Agent shall provide
each Bank with a true and complete copy of such notice within one
(1) Business Day of the Agent's receipt of the same. Borrower
shall, and hereby covenants and agrees to, reimburse the Issuing
Bank on the day on which such drawing is honored in an amount, in
immediately available funds, equal to the amount of such drawing;
provided that (i) unless Borrower shall have notified the Agent
prior to 11:00 A.M. (Cleveland time) on the Business Day
immediately prior to the date of such drawing that Borrower
intends to reimburse the Issuing Bank for the amount of such
drawing with funds other than the proceeds of Loans, Borrower
shall be deemed to have given a Request for Advance to the Agent
requesting a Prime Rate Loan on the date on which such drawing is
honored, in the amount of such drawing; and (ii) the Banks shall,
on the date of such drawing, make Loans in the amount of such
drawing, the proceeds of which shall be applied directly by the
Agent to reimburse the Issuing Bank for the amount of such
drawing; and provided further, that if for any reason proceeds of
such Loans are not received by the Issuing Bank on such date in
an amount equal to the amount of such drawing, Borrower shall
reimburse the Issuing Bank, on the next Business Day, in an
amount equal to the excess of the amount of such drawing over the
amount of such Loans which are actually received, plus accrued
interest on such amount at the Default Interest Rate.<PAGE>
(f) Payment by Banks. If Borrower shall fail to
reimburse the Issuing Bank as and when required above for the
amount of any drawing honored by the Issuing Bank under a Letter
of Credit issued by it, the Issuing Bank shall promptly notify
each Bank of the unreimbursed amount of such drawing and of such
Bank's respective Pro Rata Share thereof. Each Bank shall make
available to the Issuing Bank an amount equal to its respective
Pro Rata Share of such unreimbursed drawing, in immediately
available funds, at the office of the Issuing Bank specified in
such notice, not later than 12:00 p.m. (Cleveland time) on the
first Business Day after such Bank's receipt of such notice from
the Issuing Bank. If any Bank fails so to make available to the
Issuing Bank the amount of such Bank's Pro Rata Share of such
Letter of Credit, the Issuing Bank shall be entitled to recover
such amount on demand from such Bank, together with interest at
the customary rate set by the Issuing Bank for the correction of
errors among banks. Nothing in this provision shall prejudice
the right of any Bank to recover from the Issuing Bank any
amounts made available by such Bank to the Issuing Bank pursuant
to this provision in the event that it is determined by a court
of competent jurisdiction that the payment with respect to a
Letter of Credit by the Issuing Bank in respect of which payment
was made by the Issuing Bank constituted gross negligence or
willful misconduct on the part of the Issuing Bank. The Issuing
Bank shall, or shall cause the Agent to, distribute to each other
Bank which has paid all amounts payable by it under this Section
2.14(f) with respect to any Letter of Credit issued by the
Issuing Bank such other Bank's Pro Rata Share of all payments
received by the Issuing Bank from Borrower in reimbursement of
drawings honored by the Issuing Bank under such Letter of Credit
when such payments are received.
(g) Compensation. Borrower agrees to pay the
following amounts with respect to each Letter of Credit issued
pursuant to this Agreement:
(i) a Letter of Credit Fee equal to 1/8 of
1% of the Face Amount of such Letter of Credit,
payable in advance to the Issuing Bank on the
Issuance Date of such Letter of Credit; and
(ii) a Letter of Credit Commission in an
amount equal to the Libor Margin in effect as of
the Issuance Date of such Letter of Credit,
multiplied by the Face Amount of such Letter of
Credit, payable, in advance, to the Agent for the
ratable benefit of the Banks, on the Issuance Date
of such Letter of Credit (and, solely in the case
of Letters of Credit which are renewed after the
expiration of the initial period thereof, on each
renewal date for so long as such Letters of Credit
remain outstanding); and<PAGE>
(iii) with respect to the issuance, amendment or
transfer of each Letter of Credit and each drawing made
thereunder, documentary and processing charges in
accordance with the Issuing Bank's standard schedule
for such charges in effect at the time of such
issuance, amendment, transfer or drawing, as the case
may be.
Promptly upon receipt by the Agent of the Letter of Credit
Commission, the Agent shall distribute to each Bank its Pro Rata
Share of such amount.
(h) Obligations Absolute. The obligation of Borrower
to reimburse the Issuing Bank for drawings made under the Letters
of Credit and the obligations of the Banks under Section 2.14(f)
shall be unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement under all
circumstances including, without limitation, the following:
(i) any lack of validity or enforceability
of any Letter of Credit;
(ii) the existence of any claim, set-off,
defense or other right which Borrower may have at
any time against a beneficiary or any transferee
of any Letter of Credit (or any persons or
entities for whom any such transferee may be
acting), the Issuing Bank, the Agent, any Bank or
any other Person, whether in connection with this
Agreement, the transactions contemplated herein or
any unrelated transaction (including any
underlying transaction between Borrower and the
beneficiary for which the Letter of Credit was
procured);
(iii) any draft, demand, certificate or any
other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect;
(iv) payment by the Issuing Bank under any
Letter of Credit against presentation of a demand,
draft or certificate or other document which does
not comply with the terms of such Letter of
Credit, provided that such payment does not
constitute gross negligence or willful misconduct
of the Issuing Bank;
(v) any other circumstance or occurrence
whatsoever, which is similar to any of the
foregoing; or<PAGE>
(vi) the fact that a default or an Event of
Default shall have occurred and be continuing.
(i) Indemnification; Nature of the Issuing Bank's
Duties. In addition to amounts payable as elsewhere provided in
this Section 2.14, and without limiting any other indemnification
provided for in this Agreement, Borrower agrees to protect,
indemnify, pay and save the Issuing Bank harmless from and
against any and all claims, demands, liabilities, damages,
losses, costs, charges and expenses (including reasonable
attorneys' fees) which the Issuing Bank may incur or be subject
to as a consequence, direct or indirect, of (i) the issuance of
the Letters of Credit, other than as a result of the gross
negligence or willful misconduct of the Issuing Bank as
determined by a court of competent jurisdiction, or (ii) the
failure of the Issuing Bank to honor a drawing under any Letter
of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government
or governmental authority. Borrower assumes all risks of the
acts and omissions of, or misuse of the Letters of Credit issued
by the Issuing Bank by, the respective beneficiaries of such
Letters of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank shall not be responsible for:
(i) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection
with the application for and issuance of Letters of Credit, even
if any of the foregoing should in fact prove to be invalid,
insufficient, inaccurate, fraudulent or forged in any respect;
(ii) the validity or insufficiency of any instrument transferring
or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof,
in whole or in part, which may prove to be invalid or ineffective
for any reason; (iii) the failure of the beneficiary of any
Letter of Credit to comply fully with conditions required in
order to draw upon such Letter of Credit; (iv) the errors,
omissions, interruptions or delays in transmission or delivery of
any messages, by mail, cable, telegraph, telecopy, telex or
otherwise, whether or not they be in cipher; (v) the errors in
interpretation of technical terms; (vi) any loss or delay in the
transmission or otherwise of any document required in order to
make a drawing under any Letter of Credit or any proceeds
thereof; (vii) the misapplication by the beneficiary of any
Letter of Credit of the proceeds of any drawing under such Letter
of Credit; and (viii) for any consequences arising from causes
beyond the control of the Issuing Bank. None of the above shall
affect, impair, or prevent the vesting of any of the Issuing
Bank's rights or powers hereunder. In determining whether to pay
under any Letter of Credit, the Issuing Bank shall be responsible
only to determine that the documents and certificates required to
be delivered under that Letter of Credit have been delivered and
that the same comply on their face with the requirements of that
Letter of Credit. Borrower shall have no obligation to indemnify
the Issuing Bank in respect of any liability incurred by the
Issuing Bank arising solely out of the gross negligence or<PAGE>
willful misconduct of the Issuing Bank, as determined by a court
of competent jurisdiction, or out of the wrongful dishonor by the
Issuing Bank of a proper demand for payment made under the
Letters of Credit issued by it.
(j) Amendments. Borrower may request that the Issuing
Bank enter into one or more amendments of its Letter of Credit by
delivering to the Agent and the Issuing Bank a Notice of Issuance
of Letter of Credit specifying (i) the Issuing Bank, (ii) the
proposed date of the proposed amendment and (iii) the nature of
the requested amendment. The Issuing Bank shall be entitled to
enter into amendments with respect to its Letters of Credit,
provided, that any amendment extending the expiry date or
increasing the stated amount of any Letter of Credit shall be
permitted only if the Issuing Bank would, at the time of the
proposed be permitted to issue a new Letter of Credit having such
an expiry date or stated amount under this Section 2.14 on the
date of the amendment.
Section 2.15 Voluntary Termination of the Credit
Commitments. Borrower may cause the Banks to terminate this
Agreement and to terminate the Credit Commitments upon the
following conditions and requirements: (a) Borrower shall
provide the Agent and each Bank with not less than thirty (30)
days prior, written notice of its election to do so, which notice
shall specify the date on which Borrower would propose to effect
such termination (which date may be extended for a period not to
exceed thirty (30) days, by written notice from Borrower to the
Agent and the Banks prior to the date first specified for such
termination); (b) Borrower shall, on or before such effective
date, prepay all Loans in full in accordance with Section 2.5(b)
of this Agreement; (c) there shall be no Letters of Credit
outstanding as of the effective date of such termination;
(d) Borrower shall pay to the Agent, for the ratable benefit of
all of the Banks, a sum equal to the amount of the Commitment Fee
which would have been payable for the period commencing upon the
effective date of such termination and concluding on the final
day of Borrower's then-current fiscal quarter, determined
(notwithstanding such voluntary termination) on the basis of the
actual Outstanding Amount during such period and the amount of
the Maximum Commitment; and (e) Borrower shall pay, or shall
reimburse the Agent and each Bank, for all out-of-pocket costs
and expenses (including reasonable attorneys' fees) incurred by
them in connection with or as the result of Borrower's election
to cause the Credit Commitments to be terminated as provided in
this Section 2.15. From and after the effective date of any
termination affected in accordance with this Section 2.15, and
provided that Borrower shall have complied with the requirements
set forth above, none of the parties to this Agreement shall have
any further duties or obligations hereunder.
ARTICLE 3.
CONDITIONS PRECEDENT TO DISBURSEMENTS
Section 3.1 Conditions Precedent to Initial Closing.
On or prior to the Closing Date, each of the following conditions
precedent shall have been satisfied:
(a) Certified Copies of Charter Documents and Bylaws.
The Agent shall have received from Borrower (i) a copy, certified
by a duly authorized officer of Borrower to be true and complete
on and as of the Closing Date, of Borrower's Articles of
Incorporation, and by-laws or code of regulations as in effect on
the Closing Date (together with any an all amendments thereto);
(ii) the charter or other organizational documents of Borrower,
certified by the Ohio Secretary of State; and (iii) a Certificate
of Good Standing and Certificate of Continued Existence for
Borrower, each issued by the Ohio Secretary of State as of a date
not more than five (5) days before the Closing Date.
(b) Proof of Corporate Authority. The Agent shall
have received from Borrower copies, certified by a duly
authorized officer of Borrower to be true and complete on and as
of the Closing Date, of records of all corporate action taken by
Borrower to authorize (i) the execution and delivery of this
Agreement and the other Loan Documents and to which it is or is
to become a party as contemplated or required by this Agreement;
(ii) its performance of all of its obligations under each of such
documents; and (iii) the making by Borrower of the borrowings
contemplated hereby.
(c) Incumbency Certificate. The Agent shall have
received from Borrower an incumbency certificate, dated as of the
Closing Date, signed by a duly authorized officer and giving the
name and bearing a specimen signature of each individual who
shall be authorized (i) to sign, in the name and on behalf of
Borrower, each of the Loan Documents to which Borrower is or is
to become a party on the Closing Date; and (ii) to give notices
and to take other action on behalf of Borrower under the Loan
Documents.
(d) Officers' Certificates. The Agent shall have
received from Borrower a certificate dated as of the Closing Date
signed by a duly authorized officer of Borrower and certifying,
on terms acceptable to the Agent, that each of the
representations and warranties of Borrower in this Agreement and
in the other Loan Documents was true and correct when made, and
is true and correct on and as of the Closing Date.
(e) Loan Documents. (i) Each of the Loan Documents
shall have been duly and properly authorized, executed and
delivered by Borrower, and all such documents shall be in full
force and effect on and as of the Closing Date; and (ii) executed
originals of each of the Notes shall have been delivered to each
Bank in accordance with their respective Credit Commitments.
Executed originals or (as the case may be) executed counterparts
of each of the other Loan Documents shall have been delivered to
the Agent and each Bank.<PAGE>
(f) Legality of Transactions. No change in applicable
law shall have occurred as a consequence of which it shall have
become and continue to be unlawful (i) for the Agent or any Bank
to perform any of its agreements or obligations under any of the
Loan Documents to which it is a party on the Closing Date; or
(ii) for Borrower to perform any of its agreements or obligations
under any of the Loan Documents to which it is a party on the
Closing Date.
(g) Performance, Etc. Borrower shall have duly and
properly performed, complied with and observed, in all material
respects, each of its covenants, agreements and obligations
contained in each of the Loan Documents to which Borrower is a
party or by which Borrower is bound on the Closing Date. No
event shall have occurred on or prior to the Closing Date, and no
condition shall exist on the Closing Date, which constitutes or
would constitute a Default or an Event of Default.
(h) Compliance with Laws. The borrowing made, and
other financial accommodations provided, under this Agreement are
and shall be in compliance with the requirements of all
applicable laws, regulations, rules and orders, including without
limitation the Environmental Laws and the requirements imposed by
the SEC or by the Board of Governors of the Federal Reserve
System under Regulations U, G and X.
(i) Legal Opinion. The Agent and each Bank shall have
received a written legal opinion, addressed to the Agent and each
Bank and dated as of the Closing Date, from legal counsel for
Borrower, which shall be substantially in the form of attached
Exhibit I and which legal opinion shall otherwise be acceptable
to the Agent and each Bank.
(j) Expenses. Borrower shall have reimbursed the
Agent for all reasonable out-of-pocket costs and expenses,
including without limitation, all fees and disbursements of legal
counsel to the Agent which shall have been incurred by Agent.
Each Bank agrees that it shall be responsible for any legal fees
incurred by it in connection with the negotiation, review,
execution and delivery of the Loan Documents.
(k) Payment of Certain Fees. Borrower shall have
paid: (i) to the Agent, the Agency Fee for the initial Loan
Year; and (ii) to the Agent, for the benefit of the respective
Banks, any Closing Fee payable to each Bank.
(l) Purpose Certificate. The Agent shall have
received from Borrower on the Closing Date a certificate, in form
and substance satisfactory to the Agent and each Bank and signed
by an officer of Borrower, stating the purpose to which the
proceeds of the Loan or Loans to be made on the Closing Date are
to be applied, and certifying that such purpose is a permitted
purpose pursuant to Section 2.8 of this Agreement.<PAGE>
(m) Borrowing Purpose. Borrower shall have provided
the Agent with a single report identifying each Real Estate
Project for which the Proceeds of such Loan or Loans shall be
used for acquisition, renovation or for "bridge" financing as
described in Section 2.8(a), above, and describing, in detail
reasonably acceptable to the Agent: (i) the proposed use of such
Loan; (ii) historical operating results and occupancy levels of
each such Real Estate Project; and (iii) providing such other
information as the Agent may reasonably request.
(n) Changes: None Adverse. From the date of the most
recent balance sheets referred to in Section 4.5 of this
Agreement to the Closing Date, no changes shall have occurred in
the assets, liabilities, financial condition, business,
operations or prospects of Borrower or Borrower's Consolidated
Subsidiaries which, individually or in the aggregate, are
materially adverse to Borrower and its Consolidated Subsidiaries.
(o) Compliance Certificate. The Agent shall have
received a Compliance Certificate, the required calculations
under which shall be modified so as to demonstrate the compliance
by Borrower with the covenants of this Agreement required to be
measured in such Certificate, giving effect for the purpose of
such calculations the disbursement to Borrower of the Loan (or
Loans) on the Closing Date.
(p) Financial Statements. The Agent and each Bank
shall have received the financial statements referred to in
Section 4.5, certified by an officer of Borrower, and the Agent
and each Bank shall have been satisfied that such financial
statements accurately reflect the financial status and condition
of Borrower and its Consolidated Subsidiaries.
(q) American with Disabilities Act ("ADA")
Requirements. Borrower shall adopt and take commercially
reasonable efforts to implement a compliance program in order to
cause each real estate project owned by Borrower or any of its
Consolidated Subsidiaries which is not in compliance with Title
III of the Americans with Disabilities Act, as such act may be
amended, modified or replaced from time to time hereafter (the
"ADA") to be brought into such compliance, to the extent that
such action is required by law, at Borrower's sole cost and
expense, and shall not cause or permit any future improvements to
all or any part of any such property to be made which are not in
compliance with the ADA.
(r) Other Approvals. The Agent shall have received
such other approvals, opinions, certificates, instruments and
documents with respect to the transactions described herein as it
may reasonably request.
(s) Representations and Warranties. Each of the
representations and warranties made by or on behalf of Borrower<PAGE>
in this Agreement or in any other Loan Document shall be true,
correct and complete in all material respects.
(t) Evidence of Insurance. Borrower shall have
provided the Agent with original counterparts of Borrower's
insurance policies required by the terms of this Agreement; such
policies shall comply with the requirements therefor set forth
herein.
Section 3.2 Conditions Precedent to Subsequent Loans
and Letters of Credit. The obligation of the Banks to make or
disburse any one or more Loans and to issue any Letters of Credit
from time to time after the Closing Date shall be subject to the
satisfaction, prior thereto or concurrently therewith, of each of
the following conditions precedent:
(a) Legality of Transactions. It shall not be
unlawful (a) for any Bank or the Agent to perform any of its
agreements or obligations under any of the Loan Documents to
which such Person is a party on the Draw Date of such Loan or the
Issuance Date of such Letter of Credit; or (b) for Borrower to
perform any of its agreements or obligations under any of the
Loan Documents.
(b) Representations and Warranties. Each of the
representations and warranties made by or on behalf of Borrower
to the Banks or the Agent in this Agreement or any other Loan
Document (a) shall be true and correct when made and (b) shall,
for all purposes of this Agreement, be deemed to be repeated on
and as of the date of the Borrower's Request for Advance for such
Loan, or Request for Issuance of Letter of Credit as the case may
be, and shall be true and correct in all material respects as of
such date.
(c) Performance, etc. Borrower shall have duly and
properly performed, complied with and observed, in all material
respects, each of its covenants, agreements and obligations
contained in this Agreement and/or in all of the other Loan
Documents.
(d) No Default. No event shall have occurred on or
prior to such date and be continuing on such date, and no
condition shall exist on such date which constitutes a Default or
Event of Default, and the making of such Loan or the issuance of
such Letter of Credit shall not result in a Default or an Event
of Default.
(e) Proceedings and Documents. All corporate,
governmental and other proceedings in connection with the
transactions contemplated hereby and by the other Loan Documents,
and all instruments and documents incidental thereto shall be
completed and in place (and, to the extent required by the Agent,
duly recorded) in form and substance satisfactory to the Agent,
and the Agent shall have received all such counterpart originals<PAGE>
or certified or other copies of all such instruments and
documents as the Agent shall have reasonably requested.
(f) Borrowing Purpose. Borrower shall have provided
the Agent with a report describing in detail reasonably
acceptable to the Agent the proposed use of such Loan, and
providing such other information as the Agent may reasonably
request.
(g) Maximum Credit. The making of such Loan or the
issuance of such Letter of Credit shall not result in the
Outstanding Amount exceeding the Maximum Commitment.
(h) Other Approvals. The Agent shall have received
such other approvals, opinions, certificates, instruments and
documents as it may reasonably request.
ARTICLE 4.
GENERAL REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Agent and to
each Bank as follows:
Section 4.1 Corporate Existence, Etc.
(a) Borrower: (i) is duly organized, validly existing
and in good standing as a corporation under the laws of the State
of Ohio; (ii) has full corporate power and authority and full
legal right to own or to hold under lease its Property and to
carry on its businesses; and (iii) has timely filed all tax
returns and duly made all elections necessary or appropriate for
Borrower to be taxed as a REIT under Sections 856 through 860 of
the Code for each fiscal year of Borrower since 1994, and is a
self-administered REIT. Borrower is qualified and licensed,
admitted or approved to do business in each jurisdiction wherein
the character of its Property or the nature of its business make
such qualification necessary or advisable and where the failure
to so qualify would have a materially adverse effect on Borrower.
(b) Borrower has appropriate corporate power and
authority, and full legal right, to enter into this Agreement and
each of the other Loan Documents, and to perform, observe and
comply with all of its agreements and obligations under each and
all of such documents.
(c) Except as set forth on Schedule 4.1(c), Borrower
does not own or hold of record (whether directly or indirectly)
any shares of any class in the capital of any corporation, nor
does Borrower own or hold (whether directly or indirectly) any
legal and/or beneficial equity interest in any partnership,
business trust or joint venture or in any other unincorporated
trade or business enterprise.<PAGE>
(d) Upon the filing of its tax return for the 1995
fiscal year and its election to be taxed as a REIT under Sections
856 through 860 of the Code, Borrower will qualify for the 1995
fiscal year as a REIT under the Code. Borrower has not incurred
any liability for excise taxes pursuant to Section 4981 of the
Code.
Section 4.2 Due Authorization, Etc.
(a) The execution and delivery by Borrower of this
Agreement and each of the other Loan Documents, the performance
by Borrower of all of its agreements and obligations under such
documents, and the making by Borrower of the borrowings
contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Borrower and do not and
will not (i) contravene any provision of its charter documents or
by-laws or code of regulations (each as in effect from time to
time); (ii) conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or
(except as expressly contemplated by the terms of this Agreement)
result in the creation of any Lien upon any of the Property of
Borrower under any agreement, trust deed, indenture, mortgage or
other instrument to which Borrower is a party or by which
Borrower or any other Property of Borrower is bound or affected;
(iii) violate or contravene any provision of any law, rule or
regulation (including, without limitation, Regulations G, T, U or
X of the Board of Governors of the Federal Reserve System) or any
order, ruling or interpretation thereunder or any decree, order
or judgment of any court or governmental or regulatory authority,
bureau, agency or official (all as from time to time in effect
and applicable to Borrower); or (iv) require any waivers,
consents or approvals by any of the creditors or trustees for
creditors of Borrower or any other Person.
(b) Except as to matters which Borrower has procured,
obtained or performed prior to or concurrently with its execution
and delivery of this Agreement, no approval, consent, order,
authorization or license by, or giving notice to, or taking any
other action with respect to, any governmental or regulatory
authority or agency is required under any provision of any
applicable law:
(i) for the execution and delivery by Borrower of this
Agreement, each Note, and the other Loan Documents, for
the performance by Borrower of any of the agreements
and obligations hereunder or thereunder or for the
making by Borrower of the borrowing contemplated by
this Agreement, or for the conduct by Borrower of its
business; or
(ii) to ensure the continuing legality, validity,
binding effect, enforceability or admissibility in
evidence of this Agreement, the Notes and the other
Loan Documents.<PAGE>
Section 4.3 Enforceability of Documents, Etc.
(a) On or before the Closing Date, Borrower will have
duly executed and delivered each of the Loan Documents required
of it by this Agreement, and each such Loan Document will be in
full force and effect. Each Loan Document shall constitute the
legal, valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its respective terms.
(b) The representations and warranties made by
Borrower in this Section 4.3 are subject to the following
qualifications:
(i) the enforceability of any rights and remedies
provided in any of the Loan Documents or against any
particular party thereto is subject to applicable
bankruptcy, reorganization, moratorium or other similar
laws affecting generally the enforcement of creditors'
rights; and
(ii) the availability of equitable remedies for the
enforcement of any provision of any of the Loan
Documents may be subject to the discretion of the court
before which any proceeding for the enforcement of any
provision may be brought.
Section 4.4 No Default.
(a) No event has occurred and is continuing, and no
condition exists, which constitutes a Default or an Event of
Default.
(b) No default by Borrower and no accrued right of
rescission, cancellation or termination on the part of Borrower,
exists under this Agreement or any of the other Loan Documents.
Section 4.5 Financial Statements. Borrower has
furnished the Agent with copies of its annual financial
statements dated December 31, 1996, as audited by Borrower's
Accountants and certified by Borrowers' chief financial officer,
together with Borrower's unaudited quarterly financial statements
for the quarter ended as of June 30, 1997, certified by
Borrower's chief financial officer, all of which have been
prepared in accordance with GAAP. Such balance sheets and other
financial statements present fairly the financial condition of
Borrower and its Consolidated Subsidiaries as of the respective
dates thereof. Such statements of income present fairly the
results of operations of Borrower and its Consolidated
Subsidiaries for the fiscal period then ended. There are no
material liabilities or obligations, secured or unsecured
(whether accrued, absolute or actual, contingent or otherwise),
which were not reflected in the balance sheets of Borrower as at
such date or in the footnotes thereto, and which should, in
accordance with GAAP, have been reflected in such balance sheets.<PAGE>
Section 4.6 No Adverse Changes. No changes have
occurred in the assets, liabilities or financial condition of
Borrower or its Consolidated Subsidiaries from those reflected in
the most recent balance sheets referred to in Section 4.5 hereof
which, individually or in the aggregate, have been materially
adverse. Since the date of the most recent balance sheet, there
has been no materially adverse development in the business or in
the operations or prospects of Borrower.
Section 4.7 Title to Assets. Except as set forth in
Schedule 4.7, Borrower or a Consolidated Subsidiary has good,
sufficient and legal title to, or leasehold interest in, all the
Property and assets reflected in the most recent balance sheet
referred to in Section 4.5, other than assets disposed of since
the date of such balance sheet in the ordinary course of
business.
Section 4.8 Indebtedness for Borrowed Money. Except
as permitted under Section 6.7, no Indebtedness of Borrower is
secured by or otherwise benefits from any Lien on or with respect
to the whole or any part of Borrower's properties or assets,
present or future. There exists no default or event or condition
which, with the giving of notice or passage of time, or both,
would constitute a default under the provisions of any instrument
evidencing or securing any Indebtedness of Borrower or of any
agreement relating thereto.
Section 4.9 Litigation. Except as disclosed in
Schedule 4.9, there is no pending action, suit, proceeding or
investigation pending, or, to Borrower's knowledge, threatened,
before any court, governmental or regulatory authority, agency,
commission or official, board of arbitration or arbitrator
against Borrower or in which Borrower is a participant
("Litigation"). None of the Litigation could, if determined
adversely to Borrower, reasonably be expected to affect, in any
material and adverse way, the financial position, assets,
business, operations or prospects of Borrower. There are no
proceedings pending or threatened against Borrower which call
into question the validity or enforceability of any of the Loan
Documents.
Section 4.10 No Materially Adverse Contracts.
Borrower is not a party to or bound by any contracts, agreements
or instruments (whether written or oral) which, either
individually or in the aggregate, materially adversely affect the
financial position, business, operations or prospects of
Borrower.
Section 4.11 Tax Returns. Borrower has filed all
federal, state and other tax returns required to be filed by it
and has made reasonable provisions, in accordance with GAAP, for
the payment of all taxes (if any) which have or may become due
and payable pursuant to any of the said returns or pursuant to
any matters raised by audits or for other reasons. In addition,<PAGE>
Borrower has paid or caused to be paid all real and personal
property taxes and assessments and other governmental charges
lawfully levied or imposed on or against it or its Property,
other than those presently payable without payment of interest or
penalty and those which are subject to contests initiated by
Borrower in good faith and diligently prosecuted, in each case as
permitted by and subject to the requirements of Section 5.8,
below.
Section 4.12 Contracts with Affiliates or
Subsidiaries. (a) Except as permitted by Section 6.9 hereof and
as otherwise set forth on Schedule 4.1(c) hereto, Borrower is not
a party to or otherwise bound by any material agreements,
instruments or contracts (whether written or oral) with any
Affiliate or Subsidiary.
(b) Except as set forth on Schedule 4.1(c) hereto,
there is no Indebtedness for Borrowed Money owing by Borrower to
any Affiliate nor is there Indebtedness for Borrowed Money owing
by any Affiliate to Borrower.
Section 4.13 Employee Benefit Plans. Borrower does
not maintain any Employee Benefit Plans or Guaranteed Pension
Plans, except for those which are described on Schedule 4.13,
attached hereto and made a part hereof by this reference.
Section 4.14 Governmental Regulation. Borrower is not
a "public utility company", a "holding company" or a "subsidiary"
or an "affiliate" of a "holding company," as such terms are
defined in the federal Public Utility Holding Company Act of
1935, as amended. Borrower is not an "investment company" or a
company "controlled" by an "investment company," as such terms
are defined in the federal Investment Company Act of 1940, as
amended. Borrower is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act or the Investment Company Act of 1940 or
under any federal or state statute or regulation limiting its
ability to incur Indebtedness for Borrowed Money.
Section 4.15 Securities Activities. Borrower is not
engaged in the business of extending credit for the purpose of
purchasing or carrying any "margin security" or "margin stock" as
such terms are used in Regulation U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and
224.
Section 4.16 Disclosure. Neither this Agreement nor
any other Loan Document, or any other document, certificate or
written statement furnished to the Agent or any Bank by or on
behalf of Borrower for use in connection with the transactions
contemplated by this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in
order to make the statements contained therein not misleading as
of the date of such document, certificate or other statement.<PAGE>
Section 4.17 No Material Default. Borrower is not in
default under any order, writ, judgment, injunction, decree,
statute or governmental rule, indenture, agreement, contract,
lease or other instrument or contract applicable to it, which
default would have a material adverse effect on the business,
assets, Properties or conditions, financial or otherwise, of
Borrower or in the performance of any covenants or conditions
respecting any of its Indebtedness, and no holder of any
Indebtedness of Borrower has given notice of any asserted default
thereunder, and no liquidation or dissolution of Borrower and no
receivership, insolvency, bankruptcy, reorganization or other
similar proceedings relative to Borrower or its Property is
pending threatened.
Section 4.18 Environmental Conditions. (a) Borrower
has obtained all necessary permits, licenses, variances,
satisfactory clearances and all other necessary approvals
(collectively the "EPA Permits") for the operation and conduct of
its business from all applicable federal, state, and local
governmental authorities, utility companies or
development-related entities including, but not limited to, any
and all appropriate Federal or State environmental protection
agencies and other County or City departments, public water works
and public utilities. All EPA Permits are in full force and
effect; no such EPA Permit has expired or been suspended, denied
or revoked, or is under challenge by any Person. Borrower is in
compliance with each EPA Permit, and Borrower has no knowledge or
information concerning any condition or fact which might or could
cause a suspension, denial or revocation of any of Borrower's EPA
Permits.
(b) Neither Borrower nor any Property owned by
Borrower is (i) subject to any material private or governmental
litigation, threatened litigation, Lien or judicial or
administrative notice, order or action relating to Hazardous
Substances or environmental problems, impairments or liabilities;
or (ii) with any applicable notice or lapse of time (or both),
and/or failure to take certain curative or remedial actions, in
direct or indirect violation of any Environmental Laws.
(c) To the best of Borrower's knowledge, there has
been no Release (as defined in CERCLA) into, on or from any
Property and no Hazardous Substances (except for (x) "Household
Waste" as that term is defined at 40 C.F.R. 261.4(b)(l) (1990),
and (y) de minimis amounts of Hazardous Substances which neither
violate any Environmental Laws nor require any affirmative
remediation or corrective action) are located on or have been
treated, stored, processed, disposed of, handled, transported to
or from, disposed of upon the or into, upon or from any of
Borrower's Property. Borrower shall not allow any Hazardous
Substance to exist or be treated, stored, disposed, Released,
located, discharged, possessed, managed, processed, or otherwise
handled on any Property or in the operation or conduct of its<PAGE>
business in violation of Environmental Laws, and shall comply
with all Environmental Laws affecting Borrower's Property.
(d) Borrower and its Affiliates do not and shall not
transport or engage in the business of transporting, in any
manner, any Hazardous Substances.
(e) Borrower is not aware of any circumstances which
would result in any material obligation under any Environmental
Law to remediate any Hazardous Substances in, on or under any of
Borrower's Property.
Section 4.19 Licenses and Permits. Borrower owns or
possesses all material Licenses and Permits and rights with
respect thereto necessary for the lawful and proper conduct of
its business as presently conducted and proposed to be conducted,
without any known conflict with the rights of others, free of any
Lien not permitted by Section 6.7 of this Agreement. All such
Licenses and Permits are in full force and effect, and Borrower
is in compliance with the requirements imposed by, or in respect
of, all such Licenses and Permits without any known conflict with
the valid rights of others which could affect or impair in any
material manner the business, assets or condition, financial or
otherwise, of Borrower. No event has occurred and is continuing
which permits, or after notice or lapse of time or both would
permit, the revocation or termination of any such License or
Permit, or affect the rights of Borrower thereunder. There is no
litigation or other proceeding or dispute with respect to any
such Licenses and Permits which has, or is reasonably likely to
have, any material adverse effect on the validity or continued
availability of any such Licenses and Permits.
ARTICLE 5.
AFFIRMATIVE COVENANTS OF BORROWER
Borrower covenants with and warrants to the Agent and
to each Bank that, from and after the Closing Date and until all
of the Obligations are paid and satisfied in full, Borrower shall
comply with, observe, perform or fulfill all of the covenants set
forth in this Article 5.
Section 5.1 Reports and Other Information.
(a) Borrower shall provide to the Agent as soon as available, and
in any event within fifty (50) days after the close of each of
the first three quarters of each fiscal year of Borrower, balance
sheets of Borrower as of the end of such quarter and statements
of income and statements of cash flow of Borrower and its
Consolidated Subsidiaries for the period commencing at the end of
the previous fiscal year and ending with the end of such quarter,
certified by the chief financial officer, principal accounting
officer or chief executive officer of Borrower, together with a
certificate of such officer stating that of the date of such
certificate and to the best of his knowledge, after reasonable<PAGE>
inquiry, no event has occurred which constitutes an Event of
Default or would constitute an Event of Default with the giving
of notice or the lapse of time or both, or, if an Event of
Default or such an event has occurred and is continuing, a
statement as to the nature thereof and the action which Borrower
has taken or proposes to take with respect thereto, and further
setting out in such detail as is reasonably required by the Banks
(i) Borrower's compliance with the requirements of Sections 5.19,
6.7 and 6.8 hereof, (ii) a borrowing report, certified by a duly
authorized officer of Borrower, on behalf of Borrower, and
(iii) such other information as may reasonably be requested by
Banks through the Agent with respect to Borrower or Borrower's
business or Property.
(b) Borrower shall provide to the Agent as soon as
available and in any event within ninety (90) days after the end
of each fiscal year of Borrower a copy of the annual financial
statements of Borrower and its Consolidated Subsidiaries for such
year, including therein a copy of the balance sheets of Borrower
and its Consolidated Subsidiaries as of the end of such fiscal
year and statements of income and statements of cash flow and
statements of Shareholders' Equity of Borrower and its
Consolidated Subsidiaries, certified without qualification by
Borrower's Accountants, together with a certificate of the chief
financial officer, principal accounting officer or chief
executive officer of Borrower stating that, as of the date of
such certificate, to the best of his knowledge and after
reasonable inquiry, no event has occurred which constitutes an
Event of Default or would constitute an Event of Default with the
giving of notice or the lapse of time or both, or, if an Event of
Default or such an event has occurred and is continuing, a
statement as to the nature thereof and the action which Borrower
has taken or proposes to take with respect thereto and further
setting out in such detail as is reasonably required by the Banks
(i) Borrower's compliance with the requirements of Sections 5.23,
6.7 and 6.8 hereof, (ii) setting forth the Borrowing Report,
certified by a duly authorized officer of Borrower, and (iii)
such other information as may be reasonably requested by the
Banks through the Agent with respect to Borrower or Borrower's
Business or Property.
(c) Borrower shall provide to the Agent, promptly
after sending or filing thereof, copies of all reports which
Borrower sends to its shareholders, and copies of all reports and
registration statements which Borrower files with the Securities
and Exchange Commission.
(d) Borrower shall provide to the Agent as soon as
possible, and in any event within five (5) days after the
occurrence thereof, any information as to the occurrence of an
Event of Default, or an event which with notice or lapse of time
or both would constitute an Event of Default, continuing on the
date of such statement, together with a statement of the chief
financial officer or treasurer of Borrower setting forth the<PAGE>
details of such Event of Default or event, and the action which
Borrower proposes to take with respect thereto.
(e) Borrower shall provide to the Agent, immediately
upon Borrower's receipt thereof, copies of all notices and other
written communications received by Borrower from Moody's or S&P
relating to any change, or proposed change, in Borrower's Debt
Rating (including, without limitation, any notice that either
Moody's or S&P has changed, or is changing, the basis on which
its ratings are established or reported).
(f) Borrower shall also provide the Agent with such
other information relating to Borrower (including, without
limitation, any business plan of Borrower) as the Agent may from
time to time reasonably request.
Section 5.2 Maintenance of Property; Insurance.
(a) Borrower covenants and agrees to keep and maintain all of its
Property in good repair, working order and condition, reasonable
wear and tear excepted, and from time to time to make, or use all
reasonable legal remedies to cause to be made, all proper
repairs, renewals or replacements, betterments and improvements
thereto so that the business carried on in connection therewith
may be properly and advantageously conducted at all times.
(b) Borrower covenants and agrees to keep all of its
Properties insured against loss or damage by theft, fire, smoke,
sprinklers, riot and explosion, such insurance (the "Insurance")
to be in such form, in such amounts and against such other risks
and hazards as are customarily maintained by other Persons
operating similar businesses and having similar properties in the
same general areas, including but not limited to liability
coverage, with an insurer which is financially sound and
reputable and which has been accorded a rating by A.M. Best
Company, Inc. (or any successor rating agency) of A-/X (or any
replacement rating of equivalent stature) or better (a "Qualified
Insurer"). In the event that an insurer ceases to be a Qualified
Insurer during the term of any Insurance policy, Borrower shall
replace such coverage, at the end of the then-current policy
term, by a policy issued by a Qualified Insurer. Borrower
further shall, in addition, require that the insurer with respect
to each such Insurance policy provide for at least thirty (30)
days' advance written notice to Borrower of any cancellation or
termination of, or other change of any nature whatsoever in, the
coverage provided under any such policy.
Section 5.3 REIT Status; Corporate Existence; Listing.
(a) Borrower shall make all filings under the Code necessary to
preserve and maintain (i) its qualifications as a REIT under the
Code and (ii) the applicability to Borrower and its shareholders
of the method of taxation provided for in Section 857(b) of the
Code (and any successor provision thereto).<PAGE>
(b) Borrower shall preserve and maintain its existence
and all of its rights, franchises and privileges as an Ohio
corporation.
(c) Borrower shall preserve and maintain the listing
of its common stock on the New York Stock Exchange.
Section 5.4 Compliance with Laws. (a) Borrower shall,
and hereby covenants and agrees to, comply with all acts, rules,
regulations, orders, directions and ordinances of any
legislative, administrative or judicial body or official,
applicable to the operation of Borrower's business.
(b) Borrower will promptly notify the Agent in the
event that Borrower receives any notice, claim or demand from any
governmental agency which alleges that Borrower is in violation
of any of the terms of, or has failed to comply with any
applicable order issued pursuant to any Federal, state or local
statute regulating its operation and business, including, but not
limited to, the Occupational Safety and Health Act, the ADA and
all Environmental Laws.
Section 5.5 Notice of Litigation; Judgments. Borrower
shall furnish or cause to be furnished to the Agent, promptly
(and, in any event, within five (5) Business Days) after Borrower
shall have first become aware of the same, a written notice
setting forth full particulars of and what action Borrower is
taking or proposes to take with respect to (a) any final judgment
in an amount exceeding Five Hundred Thousand Dollars
($500,000.00) rendered against Borrower or any Affiliate of
Borrower; (b) the commencement or institution of any legal or
administrative action, suit, proceeding or investigation by or
against Borrower in or before any court, governmental or
regulatory body, agency, commission or official, board of
arbitration or arbitrator, the outcome of which could materially
and adversely affect Borrower's current or future financial
position, assets, business, operations or prospects, or could
prevent or impede the implementation or completion, observance or
performance of any of the arrangements or transactions
contemplated by any of the Loan Documents; or (c) the occurrence
of any adverse development, not previously disclosed by Borrower
to the Agent in writing, in any such action, suit, proceeding or
investigation.
Section 5.6 Notice of Other Events. (a) If (and on
each occasion that) any event shall occur or any condition shall
develop which constitutes a Default or an Event of Default, then,
promptly (and, in any event, within five (5) Business Days) after
Borrower shall have first become aware of the same, Borrower will
furnish or cause to be furnished to the Agent a written notice
specifying the nature and the date of the occurrence of such
event or (as the case may be), the nature and the period of
existence of such condition and what action Borrower is taking or
proposes to take with respect thereto.<PAGE>
(b) Immediately upon Borrower's first becoming aware
of any of the following occurrences, Borrower will furnish or
cause to be furnished to the Agent (for further distribution to
Banks) written notice with full particulars of (i) the business
failure, insolvency or bankruptcy of Borrower; (ii) the
rescission, cancellation or termination, or the creation or
adoption, of any material agreement or contract to which Borrower
is a party; (iii) any material labor dispute, any attempt by any
labor union or organization representatives to organize or
represent employees of Borrower, or any unfair labor practices or
proceedings of the National Labor Relations Board with respect to
Borrower; or any defaults or events of default under any material
agreement of Borrower or any material violations of any laws,
regulations, rules or ordinances of any governmental or
regulatory body by Borrower or with respect to any of Borrower's
Property.
Section 5.7 Inspections. Borrower shall permit any
officer, employee, consultant or other representative or agent of
the Agent or of any Bank to visit and inspect, from time to time
and at any reasonable time, after prior notice to Borrower, any
of the assets or Property owned or held under lease by Borrower,
to examine the books of account, records, reports and the papers
(and to make copies thereof and to take extracts therefrom) of
Borrower and to discuss the affairs, finances and accounts of
Borrower with the directors and executive officers, as the case
may be, of Borrower. All of such activities shall be coordinated
by and through the Agent.
Section 5.8 Payment of Taxes and Other Claims.
Borrower shall pay and discharge promptly all taxes, assessments
and other governmental charges or levies at any time imposed upon
it or upon its income, revenues or Property, as well as all
claims of any kind (including claims for labor, material or
supplies) which, if unpaid, might by law become a Lien or charge
upon all or any part of its income, revenues or Property.
Notwithstanding the foregoing to the contrary, Borrower may,
provided that there is not then an Event of Default hereunder,
contest the propriety or amount of any such taxes, assessments or
governmental charges, or of any such claims, if (a) such contest
is instituted in good faith and prosecuted with reasonable
diligence; (b) such contest shall preclude the sale or forfeiture
of the affected Property (or Borrower shall provide the Agent
with such reasonable security or other assurances as may be
requested by the Agent in connection with such contest); and
(c) Borrower shall indemnify the Agent and all of the Banks of
and from any and all liability, loss, cost or expense incurred by
or asserted against any such party in connection with, or in
consequence of, any such contest.
Section 5.9 Payment of Indebtedness. Borrower will
duly and punctually pay or cause to be paid the principal and
interest on the Loans, all draws and disbursements under the
Letters of Credit and all fees and other amounts payable<PAGE>
hereunder or under the Loan Documents, as and when required by
this Agreement and/or the other Loan Documents. Borrower shall
pay all other Indebtedness (whether existing on the date hereof
or arising at any time thereafter) as and when the same is due
and payable.
Section 5.10 Payment of Fees. Borrower shall, and
hereby covenants and agrees to, pay the following fees as and
when described below:
(a) A Commitment Fee, to be determined and paid
quarterly, in arrears, on the final day of each calendar quarter
during the pendency of this Agreement and on the Termination
Date. The amount of each installment of the Commitment Fee shall
be determined by multiplying the Unused Component by (x) 0.15%,
if the average daily Outstanding Amount (exclusive of Competitive
Bid Loans) during such period shall exceed Fifty Million Dollars
($50,000,000), or (y) 0.20%, if the average daily Outstanding
Amount (exclusive of Competitive Bid Loans) during such period
shall be Fifty Million Dollars ($50,000,000) or less, and by
dividing the product of such multiplication by four (4) (in the
case of quarterly installments) or, in the case of the
installment payable on the Termination Date, by the appropriate
annualizing factor;
(b) The Agency Fee, payable semi-annually in advance
to the Agent in the amount calculated as described in
Section 1.2, above; the Agency Fee for the period through
September 30, 1997 has been paid in full; the Agency Fee for
periods after September 30, 1997 shall be payable in advance
beginning on October 1, 1997 and thereafter on each April 1 and
October 1 throughout the pendency of this Agreement;
(c) The Letter of Credit Fee in accordance with
Section 2.14;
(d) The Letter of Credit Commission in accordance with
Section 2.14; and
(e) The Competitive Bid Fee in accordance with
Section 2.3, above.
Section 5.11 Performance of Obligations Under the Loan
Documents. Borrower will duly and properly perform, observe and
comply with all of its agreements, covenants and obligations
under this Agreement and each of the other Loan Documents.
Section 5.12 Governmental Consents and Approvals.
(a) Borrower will obtain or cause to be obtained all such
approvals, consents, orders, authorizations and licenses from,
give all such notices promptly to, register, enroll or file all
such agreements, instruments or documents promptly with, and
promptly take all such other action with respect to, any
governmental or regulatory authority, agency or official, or any<PAGE>
central bank or other fiscal or monetary authority, agency or
official, as may be required from time to time under any
provision of any applicable law:
(i) for the performance by Borrower of any of its
agreements or obligations under the Notes, this
Agreement or any of the other Loan Documents or for the
payment by Borrower to the Agent at its Head Office of
any sums which shall become due and payable by Borrower
to the Agent or any Bank thereunder;
(ii) to ensure the continuing legality, validity,
binding effect or enforceability of the Notes or any of
the other Loan Documents or of any of the agreements or
obligations thereunder of Borrower; or
(iii) to continue the proper operation of the business
and operations of Borrower.
(b) Borrower shall duly perform and comply with the
terms and conditions of all such approvals, consents, orders,
authorizations and Licenses and Permits from time to time granted
to or made upon Borrower.
Section 5.13 Notice as to Certain Documents. If (and
on each occasion that) any of the following events shall occur:
(i) the charter or other organizational documents of
Borrower shall at any time be modified or amended in
any respect whatever; or
(ii) the by-laws or code of regulations of Borrower
shall at any time be modified or amended in any respect
whatever;
then promptly (and, in any event, within one (1) Business Day)
after the occurrence of any such event, Borrower shall furnish
the Agent with a true and complete copy of each such
modification, amendment or supplement.
Section 5.14 Notice of Termination of Certain
Documents. (a) If (and on each occasion that) any of the
following events shall occur:
(i) any Loan Document shall at any time be terminated,
cancelled or rescinded for any reason whatever; or
(ii) any action at law, suit in equity or other legal
proceeding shall at any time be commenced or threatened
in writing by any person (A) to terminate, cancel or
rescind any Loan Document, or (B) to enforce any other
Person's performance or observance of or compliance
with any covenants, agreements or obligations under any
Loan Document; or<PAGE>
(iii) any Person which is a party to or otherwise
bound by any Loan Document shall fail or refuse to
perform, comply with or observe or shall otherwise
breach any one or more of its covenants, agreements or
obligations under such Loan Document;
then Borrower will promptly (and, in any event, within one (1)
Business Day) after Borrower shall have first become aware of the
occurrence of any such event, furnish to the Agent written notice
setting forth the particulars thereof.
(b) Borrower will take or cause to be taken, promptly
and without any expense to the Agent or any Bank, all such action
as may be required to prevent, and will refrain from taking any
action that might cause, the termination, cancellation, amendment
or rescission of this Agreement or any of the other Loan
Documents.
Section 5.15 Employee Benefit Plans and Guaranteed
Pension Plans. (a) Borrower will not establish any Guaranteed
Pension Plans or Employee Benefit Plans without the Agent's prior
written consent (which will not be unreasonably withheld or
delayed), (b) Borrower will make full payment when due of all
amounts which, under the provisions of Employee Benefit Plans or
under applicable law, are required to be paid as contributions
thereto, (c) Borrower will not permit to exist any accumulated
funding deficiency, whether or not waived, (d) Borrower will file
on a timely basis all reports, notices and other filings required
by any governmental agency with respect to any of its Employee
Benefit Plans, (e) Borrower will make any payments to
Multiemployer Plans required to be made under any agreement
relating to such Multiemployer Plans, or under any law pertaining
thereto, (f) Borrower will cause the actuarial present value of
all benefit commitments under each Guaranteed Pension Plan to be
less than the current value of the assets of such Guaranteed
Pension Plan allocable to such benefit commitments, (g) Borrower
will furnish to all participants, beneficiaries and employees
under any of the Employee Benefit Plans, within the periods
prescribed by law, all reports, notices and other information to
which they are entitled under applicable law, and (h) Borrower
will take no action which would cause any of the Employee Benefit
Plans to fail to meet any qualification requirement imposed by
the Code, as amended. As used herein, the term "accumulated
funding deficiency" has the meaning specified in Section 302 of
ERISA and Section 412 of the Code, and the terms "actuarial
present value", "benefit commitments" and "current value" have
the meaning specified in Section 4001 of ERISA.
Section 5.16 Further Assurances. Borrower will
execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, any and all such further assurances
and other agreements or instruments, and take or cause to be
taken all such other action, as shall be reasonably requested by<PAGE>
the Agent from time to time in order to give full effect to any
of the Loan Documents.
Section 5.17 Borrower's Depository Accounts. Borrower
shall maintain a primary depository relationship with NCB,
including without limitation demand deposit, time deposit,
concentration, cash management and zero balance accounts.
Section 5.18 Use of Proceeds. Borrower shall use all
Loan proceeds for the purposes permitted by Section 2.8 of this
Agreement.
Section 5.19 Financial Covenants.
(a) Indebtedness to Market Value Ratio. The aggregate
outstanding principal balance of all Indebtedness of Borrower and
its Consolidated Subsidiaries shall not, at any time, exceed
fifty percent (50%) of Market Value.
(b) Secured Debt to Market Value. The aggregate
outstanding principal balance of all Secured Debt of Borrower and
its Consolidated Subsidiaries shall not, at any time, exceed
twenty-five percent (25%) of Market Value.
(c) Floating Rate Debt. The aggregate outstanding
principal balance of all Floating Rate Debt of Borrower and its
Consolidated Subsidiaries shall not exceed fifty percent (50%) of
the aggregate outstanding principal balance of all Indebtedness
for Borrowed Money of Borrower and its Consolidated Subsidiaries.
(d) Leverage Ratio. Borrower shall at all times
maintain a ratio of Liabilities to EBITDA, on an annualized basis
(determined by multiplying the quarterly EBITDA by a factor of
four, and subject to the adjustment described in the following
sentence), of not more than five and three-quarters (5.75) to one
(1). For the purposes of this provision, Borrower's EBITDA shall
be adjusted to reflect any acquisitions made by Borrower during
the quarter on a pro forma basis acceptable to the Agent,
assuming the lesser of 90% or actual occupancy.
(e) Debt Service Coverage Ratio. Borrower shall at
all times maintain a ratio of EBITDA to all required payments of
debt service as described in this Section 5.19(e), on an
annualized basis (determined by multiplying the quarterly EBITDA
by a factor of four, and subject to the adjustments described in
the following sentence), of not less than two (2.00) to one (1).
For the purposes of this provision: (i) Borrower's EBITDA shall
be subject to adjustment to reflect any acquisitions made by
Borrower during the applicable fiscal period on a pro forma basis
acceptable to the Agent, assuming the lesser of 90% or actual
occupancy, to exclude Service EBITDA in excess of $1,500,000 with
respect to any annual period and to reflect, in a manner
acceptable to the Agent, the proper treatment of such items of
expense as payment of real property ad valorem taxes (which,<PAGE>
while paid in a specific quarter, pertain to a semi-annual or
annual period), as well as extraordinary items of income or
expense, to the extent that the foregoing are not accrued or
annualized in accordance with GAAP on Borrower's financial
statements; and (ii) "debt service" shall include actual payments
of principal and/or interest on Indebtedness for Borrowed Money,
together with projected principal payments on all of Borrower's
non-amortizing Indebtedness for Borrowed Money (excluding any
construction loans); such projected principal payments shall be
calculated on the basis of the rate of interest then applicable
to such Indebtedness and a twenty-five (25) year mortgage
amortization schedule for such Indebtedness.
(f) Unencumbered Debt Service Coverage Ratio.
Borrower shall at all times maintain a ratio of Unencumbered
EBITDA to all required payments of debt service as described in
this Section 5.19(f) on Indebtedness for Borrowed Money which is
Unencumbered Debt, on an annualized basis (determined by
multiplying the quarterly Unencumbered EBITDA by a factor of
four, and subject to the adjustments described in the following
sentence) of not less than two (2.0) to one (1). For the
purposes of this provision: (i) Unencumbered EBITDA shall be
subject to adjustment to reflect any acquisition of an
Unencumbered Real Estate Asset (other than Raw Land or Assets
Under Development) made by Borrower during the applicable period,
on a pro forma basis acceptable to Agent, assuming the lesser of
90% or actual occupancy, and to reflect, in a manner acceptable
to the Agent, the proper treatment of such items of expense as
payment of real property ad valorem taxes (which, while paid in a
specific quarter, pertain to an annual or semi-annual period);
and (ii) "debt service" shall include actual payments of
principal and/or interest on Indebtedness for Borrowed Money,
together with projected principal payments on all of Borrower's
non-amortizing Indebtedness for Borrowed Money (excluding any
construction loans) which is Unencumbered Debt; such projected
principal payments shall be calculated on the basis of the rate
of interest then applicable to such indebtedness and a twenty-
five (25) year mortgage amortization schedule for such
indebtedness.
(g) Unencumbered Real Estate Assets to Unencumbered
Debt Ratio. The ratio of the aggregate value of Borrower's
Unencumbered Real Estate Assets to the aggregate outstanding
principal balance of Borrower's Unencumbered Debt shall at all
times equal or exceed two (2.0) to one (1). The aggregate value
of Borrower's Unencumbered Real Estate Assets for the purposes of
this Section 5.19(g) shall be determined (x) by including therein
fifty percent (50%) of the book value of the Assets Under
Development and of the Raw Land comprised within Borrower's
Unencumbered Real Estate Assets, and (y) with respect to
Unencumbered Real Estate Assets other than Assets Under
Development or Raw Land, determined by reference to the
Capitalization Factor.<PAGE>
(h) Dividend Ratio. The amount of all Dividends paid
or declared by Borrower in any fiscal period shall not exceed
ninety percent (90%) of Borrower's Distributable Cash Flow for
such period (except as may be necessary to preserve Borrower's
status as a REIT).
(i) Assets Under Development and Raw Land. The
aggregate value of Borrower's Assets Under Development and Raw
Land shall not, at any time, exceed twenty percent (20%) of
Borrower's Market Value at such time.
(j) Minimum Net Worth. Borrower's Net Worth shall, at
all times during the pendency of this Agreement, equal or exceed
One Hundred Seventy Million Dollars ($170,000,000). In the event
that Borrower shall make any equity offerings (including, without
limitation, any public offering, however characterized, which
would be treated as an equity offering for the purposes of GAAP)
during the pendency of this Agreement, the minimum Net Worth
required to be maintained by Borrower hereunder shall be not less
than the sum of $170,000,000 plus ninety percent (90%) of the net
proceeds to Borrower of such offering.
(k) Concentration of Stock. Jeffrey I. Friedman and
Susan Friedman shall at all times own, beneficially and of
record, an aggregate of not less than five hundred thousand
shares of Borrower's capital stock on an undiluted basis.
(l) Conventional Apartments Ratio. The aggregate
number of Conventional Apartment units owned by Borrower and its
Consolidated Subsidiaries shall, at all times, exceed seventy-
five percent (75%) of the number of all Apartment Suites owned by
Borrower and its Consolidated Subsidiaries.
(m) Geographic Distribution of Apartment Suites. All
Apartment Suites owned by Borrower and its Consolidated
Subsidiaries shall be located within the United States of
America.
(n) Refurbishment Expenditures. Borrower shall not
materially diminish its annual expenditures for the refurbishment
of Apartment Suites and common areas from historical levels
customarily maintained by Borrower.
ARTICLE 6.
NEGATIVE COVENANTS OF BORROWER
Borrower covenants with and represents and warrants to
the Agent and to each Bank that from and after the Closing Date
and until all of the Obligations are paid and satisfied in full:
Section 6.1 Limitation on Nature of Business.
Borrower will not at any time make any material alterations in
the nature or character of its business as carried on at the date<PAGE>
hereof, or undertake, conduct or transact any business in a
manner prohibited by applicable law.
Section 6.2 Limitation on Consolidation and Merger.
Borrower shall not at any time consolidate with or merge into or
with any Person or Persons or enter into or undertake any plan or
agreement of consolidation or merger with any Person. This
Section 6.2 shall not prohibit Borrower from (a) merging any one
or more of Borrower's subsidiaries identified on Schedule 4.1(c)
with or into Borrower; or (b) effecting the MIGRA Transactions.
Section 6.3 Limitation on Distributions, Dividends and
Return of Capital. (a) Borrower shall not (i) declare or pay
any Distribution or cash dividends of any kind on any shares of
any class in its capital; (ii) make any payments on account of
the purchase or other acquisition or redemption or other
retirement of any shares of any class in its capital, or any
warrants or options to purchase any such shares; or (iii) make
any other Distributions of any kind in respect of any shares of
any class in its capital, if, at the time of such payment or
Distribution, there shall have occurred and be continuing any
Event of Default hereunder or under any Loan Document.
(b) Borrower shall make such Distributions as may be
necessary to permit Borrower to preserve its status as a REIT,
provided, however, that the making of any Distribution for such
purpose which would be prohibited or would, if made, constitute a
Default or Event of Default under any provision of this Agreement
shall nevertheless be prohibited, or shall constitute a Default
or an Event of Default, as the case may be.
(c) Borrower shall not at any time make (whether
directly or indirectly) any payment of any kind on any
Indebtedness (other than the Obligations) to any other Person
while any Default or Event of Default exists hereunder.
(d) Borrower shall not at any time make (whether
directly or indirectly) any payments or other distributions of
any kind to any Affiliate or transfer or assign (whether directly
or indirectly) any Property or assets of any kind to any
Affiliate; excluding, however, from the operation of the
foregoing provisions of this paragraph:
(i) payments on transactions or contracts which are
permissible under Section 6.9;
(ii) remuneration payable by Borrower to its
employees, directors, or officers in amounts approved
by its board of directors or officers;
(iii) reimbursements by Borrower of the business
expenses of employees, directors and officers incurred
in the ordinary course of business;<PAGE>
(iv) payments, distributions or transfers which are
consolidated on Borrower's financial statements; and
(v) payments, distributions, or transfers to or
contributions to the capital of subsidiaries or
Affiliates of Borrower, other than Borrower's
Consolidated Subsidiaries, provided that (1) Borrower
shall have given prior written notice of the terms and
conditions of such transaction to the Agent,
(2) Borrower shall provide to the Agent such
documentation, and execute such agreements, as the
Agent deems reasonably necessary to assure that the
Agent and the Banks shall have the rights of an
unsecured creditor of Borrower with respect to the net
equity and excess cash flow of such subsidiary or
Affiliate as an unsecured creditor of Borrower after
payment of the senior indebtedness of such subsidiary
or Affiliate, to the extent such net equity and excess
cash flow are assets of Borrower, (3) all net equity
and excess cash flow of such subsidiary or Affiliate
shall be made available to Borrower, (4) such
subsidiary or Affiliate shall be a special purpose
corporation or affiliate structured in such a manner as
to assure that the only debt of such subsidiary or
Affiliate is acquisition or refinancing debt secured by
property of such subsidiary or Affiliate, and (5) no
proceeds of the Loans shall be used to fund such
subsidiary or Affiliate or shall, directly or
indirectly, be transferred to such subsidiary or
Affiliate.
Notwithstanding any provision of this Section 6.3 to the
contrary, Borrower shall not be permitted to make any
Distribution which would vitiate or jeopardize in any material
way Borrower's status or qualification as a REIT or would violate
any other provision of this Agreement.
Section 6.4 Limitation on Disposition of Assets.
During the term of this Agreement, Borrower shall not at any time
engage in any sale, lease (as lessor), liquidation or other
transfer, distribution or disposition of all or any material part
of its Property or assets (either by or through a single
transaction or by or through a series of separate but related
transactions).
Section 6.5 Limitation on Investments. Borrower shall
not at any time make any Investments of any kind whatever in any
Person or Persons; excluding, however, the following Investments:
(a) Property to be used in the ordinary course of
business of Borrower as multi-family apartment projects;
(b) Acquisition of undeveloped land for development
purposes;<PAGE>
(c) Assets arising from the sale of goods and services
in the ordinary course of business of Borrower;
(d) Investments in a subsidiary or Affiliate permitted
pursuant to Section 6.3(d)(iv) or (v);
(e) Investments in direct obligations of the United
States of America, or any agency thereof or obligations
guaranteed by the United States of America, provided that such
obligations mature within two (2) years from the date of
acquisition thereof;
(f) Investments in certificates of deposit maturing
within two (2) years from the date of acquisition issued by any
bank or trust company organized under the laws of the United
States or any state thereof having capital surplus and undivided
profits aggregating at least One Hundred Million and 00/100
Dollars ($100,000,000.00); or
(g) Investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more
than two (2) years from the date of creation thereof.
Notwithstanding any restriction set forth in this Section 6.5 to
the contrary, Borrower shall be permitted (x) to make such
Investments in the ordinary course of Borrower's business as
shall not vitiate or jeopardize in any material way Borrower's
status or qualification as a REIT and shall not, singly or
cumulatively violate any other provisions of this Agreement
(including without limitation those which are set forth in
Sections 6.1, 6.6, or 6.10 hereof), and (y) to complete the MIGRA
Transactions.
Section 6.6 Acquisition of Margin Securities.
Borrower shall not own, purchase or acquire (or enter into any
contract to purchase or acquire) any "margin security" as defined
by any regulation of the Federal Reserve Board as now in effect
or as the same may hereafter be in effect unless, prior to any
such purchase or acquisition or entering into any such contract,
the Agent, for its benefit and that of each Bank, shall have
received an opinion of counsel satisfactory to the Agent and each
Bank to the effect that such purchase or acquisition will not
cause this Agreement or the Notes to be in violation of
Regulation G, T, U, X or any other regulation of the Federal
Reserve Board then in effect.
Section 6.7 Limitation on Mortgages, Liens and
Encumbrances. Borrower shall not at any time create, assume or
incur any mortgage, Lien or other encumbrance in respect of any
of its Property, assets, income or revenues of any character if,
as a result of the creation, assumption or existence of the same,
Borrower shall (x) breach any of Borrower's warranties or
representations under this Agreement, or (y) violate any covenant
contained in this Agreement. Notwithstanding the foregoing,<PAGE>
Borrower will not create, assume, incur or permit to exist any
involuntary Lien on any of its Property, assets, income or
revenues other than: (i) Liens for taxes, assessments or
governmental charges or claims the payment of which is not at the
time required by Section 5.8 of this Agreement; (ii) statutory
Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law incurred in
the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP,
shall have been made in respect thereof; and (iii) Liens (other
than any Lien imposed by ERISA) incurred or deposits made in the
ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social
security, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other
similar obligations (exclusive of Indebtedness for Borrowed
Money).
Section 6.8 Limitation on Sales and Leasebacks.
Borrower shall not at any time, directly or indirectly, sell and
thereafter lease back any of its assets or Property.
Section 6.9 Transactions with Affiliates. Except as
set forth on Schedule 4.1(c), Borrower shall not at any time
enter into or participate in any agreements or transactions of
any kind with any Affiliates of Borrower, except (i) agreements
or transactions that individually produce annual payments of less
than Fifty Thousand and 00/100 Dollars ($50,000.00);
(ii) agreements or transactions entered into in the ordinary
course of business on an arms-length basis; or (iii) agreements
permitted pursuant to Section 6.3(d)(iv); provided that any such
agreements or transactions permitted by clause (i) above are not
otherwise prohibited by this Agreement or any of the other Loan
Documents and no Event of Default shall have occurred and be
continuing or would result as a consequence thereof.
Section 6.10 Limitation on Certain Transactions.
Borrower shall not acquire or purchase any equity interest in any
other entity, or acquire or purchase any assets or obligation of
any other entity or incur any Indebtedness for Borrowed Money if
any such acquisition, purchase or financing (whether in any
specific transaction or in a series of transactions or
undertakings) would result in a violation of any one or more (or
all) of the covenants set forth in Section 5.19 above.
ARTICLE 7.
EVENTS OF DEFAULT; REMEDIES
Section 7.1 Events of Default. The occurrence of any
one or more of the following events shall constitute an "Event of
Default":<PAGE>
(a) Principal and Interest. Any principal, interest or
any other sum payable under this Agreement or the Notes (or any
Note) shall not be paid within five (5) days of the date on which
the same first became due and payable hereunder, or Borrower
shall fail to reimburse the Issuing Bank for any draws or
disbursements made under any Letters of Credit as and when
required by the terms of Section 2.14, above;
(b) Representations and Warranties. Any representation
or warranty at any time made by or on behalf of Borrower in this
Agreement, any Loan Document or in any certificate, written
report or statement furnished to the Agent or to any Bank in
connection therewith shall prove to have been untrue, incorrect
or breached in any material respect on or as of the date on which
the same was made or was deemed to have been made or repeated;
(c) Certain Covenants. Borrower shall fail to comply
with the covenants set forth in Sections 5.2(b), 5.5(a), 5.19 or
Article 6, or shall fail to maintain the insurance required to be
maintained pursuant to Section 5.2(b);
(d) Other Covenants. Borrower shall fail to perform,
comply with or observe any other covenant or agreement contained
in this Agreement and such failure or breach shall continue for
more than twenty (20) days after the earlier of the date on which
Borrower shall have first become aware of such failure or breach
or the date on which the Agent or any Bank shall have first
notified Borrower of such failure or breach (provided, however,
that solely with respect to defaults of the nature described in
this Section 7.1(d) which cannot be cured by the payment of money
and cannot using appropriate diligence be cured within such 20-
day period, Borrower shall not be deemed to have defaulted
hereunder provided that Borrower shall commence reasonable
curative action with respect to such matter within such 20-day
period and shall thereafter diligently and continuously prosecute
the same to a timely completion);
(e) Loan Documents. Borrower shall fail to observe or
perform in any material fashion any of its obligations or
undertakings under any Loan Document other than this Agreement,
and such failure shall continue beyond the applicable period of
grace (if any) provided therein, or any Loan Document shall cease
to be legal, valid, binding or enforceable in accordance with its
terms;
(f) Litigation. Any action at law, suit in equity or
other legal or administrative proceeding to amend, cancel, revoke
or rescind any Loan Document shall be commenced by or on behalf
of Borrower or by any court or any other governmental authority
or any court or any other governmental authority shall make a
determination, or issue a judgment, order, decree or ruling to
the effect that, any one or more of the covenants, agreements or
obligations of Borrower hereunder or under any one or more of the<PAGE>
other Loan Documents are illegal, invalid or unenforceable in
accordance with the terms thereof;
(g) Acceleration of Other Agreements. Borrower shall
default under any agreement, instrument or contract to which
Borrower is a party or by which any of its assets or Property is
bound, and such default shall result in all or any material part
of the Indebtedness of Borrower becoming or being declared due
and payable prior to the date on which such Indebtedness or any
part thereof would otherwise have become due and payable;
(h) Insolvency-Voluntary. (i) If Borrower shall:
(1) take any action for the termination, winding up, liquidation
or dissolution of Borrower; (2) make a general assignment for the
benefit of creditors, become insolvent or be unable to pay its
debts as they mature; (3) file a petition in voluntary
liquidation or bankruptcy; (4) file a petition or answer or
consent seeking the reorganization of Borrower, or the
readjustment of any of the Indebtedness of Borrower; (5) commence
any case or proceeding under applicable insolvency or bankruptcy
laws now or hereafter existing; (6) consent to the appointment of
any receiver, administrator, custodian, liquidator or trustee of
all or any part of its assets or property; (7) take any corporate
action for the purpose of effecting any of the foregoing; or
(8) be adjudicated as bankrupt or insolvent;
(i) Insolvency-Involuntary. If any petition for any
proceedings in bankruptcy or liquidation or for the
reorganization or readjustment of Indebtedness of Borrower shall
be filed, or any case or proceeding shall be commenced, under any
applicable bankruptcy or insolvency laws now or hereafter
existing, against Borrower, or any receiver, administrator,
custodian, liquidator or trustee shall be appointed for Borrower
or for all or any part of Borrower's assets or Property, or any
order for relief shall be entered in a proceeding with respect to
the Borrower under the provisions of the United States Bankruptcy
Code, as amended and such proceeding or such appointment shall
not be dismissed or discharged, as the case may be, within
forty-five (45) days after the filing or appointment thereof;
(j) Judgment. Any final and non-appealable judgment,
order or decree for the payment of money in excess of Five
Hundred Thousand and 00/100 Dollars ($500,000.00) shall be
rendered against Borrower, and shall not be discharged within
thirty (30) days after the date of the entry thereof;
(k) ERISA. (i) Any Termination Event shall occur and,
as of the date thereof or any subsequent date, the sum of the
various liabilities of Borrower and its ERISA Affiliates
including, without limitation, any liability to the Pension
Benefit Guaranty Corporation or its successor or to any other
party under Sections 4062, 4063, or 4064 of ERISA or any other
provision of law resulting from or otherwise associated with such
event exceeds Fifty Thousand Dollars ($50,000.00); or Borrower or<PAGE>
any of its ERISA Affiliates as an employer under any
Multiemployer Plan shall have made a complete or partial
withdrawal from such Multiemployer Plans and the plan sponsors of
such Multiemployer Plans shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability
requiring a payment in an amount exceeding Fifty Thousand and
00/100 Dollars ($50,000.00);
(l) Material Adverse Change. Any material adverse
change shall occur in the financial condition or operation of
Borrower; or
(m) Loss of Licenses or Permits. Any of the Licenses
and Permits now held or hereafter acquired by Borrower, shall be
revoked or terminated and not renewed and the absence of any such
Licenses and Permits would have a material adverse impact on the
business, Property, prospects, profits or condition (financial or
otherwise) of Borrower.
Section 7.2 Termination of Commitments and
Acceleration of Obligations. If any one or more of the Events of
Default shall at any time occur and be continuing:
(a) The Agent, upon the request of the Required Banks,
shall, by giving notice to Borrower, immediately terminate the
Credit Commitments of all of the Banks in full, and each Bank
shall thereupon be relieved of all of its obligations to make any
Loans and to issue (or participate as hereinabove provided in the
issuance of) any Letters of Credit hereunder; except that if
there shall be a Default under Section 7.1(i) or (h) hereof, the
Credit Commitments of all of the Banks shall automatically
terminate in full concurrently with the occurrence of such
Default, and each Bank shall thereupon be relieved of all of its
obligations to make any Loans hereunder.
(b) The Agent, upon the request of all the Banks,
shall, by giving notice to Borrower (a "Notice of Acceleration"),
declare all of the Obligations, including the entire unpaid
principal of the Notes, all of the unpaid interest accrued
thereon, and any and all other sums payable by Borrower under
this Agreement, the Notes, or any of the other Loan Documents, to
be immediately due and payable; except that if there shall be an
Event of Default under Section 7.1(i) or (h), all of the
Obligations, including the entire unpaid balance of all of the
Notes, all of the unpaid interest accrued thereon and all (if
any) other sums payable by Borrower under this Agreement, the
Notes or any of the other Loan Documents shall automatically and
immediately be due and payable without notice to Borrower; and
except further that if there shall be an Event of Default under
Section 7.1(h) or (i), and if the Agent, in accordance with the
terms of this Agreement, shall give a Notice of Acceleration to
Borrower, Borrower shall not be required to pay any prepayment
penalties in connection with the acceleration of any of the
Obligations of Borrower. Thereupon, all of such Obligations which<PAGE>
are not already due and payable shall forthwith become and be
absolutely and unconditionally due and payable, without
presentment, demand, protest or any further notice or any other
formalities of any kind, all of which are hereby expressly and
irrevocably waived.
(c) Subject always to the provisions of Section 8.8
hereof, the Agent may proceed to protect and enforce all or any
of its or the Banks' rights, remedies, powers and privileges
under this Agreement, the Notes or any of the other Loan
Documents by action at law, suit in equity or other appropriate
proceedings, whether for specific performance of any covenant
contained in this Agreement, any Note or any of the other Loan
Documents, or in aid of the exercise of any power granted to the
Agent herein or therein. If the Agent shall fail or refuse to so
proceed, the Banks shall be entitled to take such action as they
shall deem appropriate to enforce their rights hereunder and
under the other Loan Documents.
Section 7.3 No Implied Waiver; Rights Cumulative. No
delay on the part of the Agent or any Bank in exercising any
right, remedy, power or privilege hereunder or under any of the
other Loan Documents or provided by statute or at law or in
equity or otherwise shall impair, prejudice or constitute a
waiver of any such right, remedy, power or privilege or be
construed as a waiver of any Default or Event of Default or as an
acquiescence therein. No right, remedy, power or privilege
conferred on or reserved to the Agent or any Bank under any of
the Loan Documents or otherwise is intended to be exclusive of
any other right, remedy, power or privilege. Each and every
right, remedy, power and privilege conferred on or reserved to
the Agent or any Bank under any of the Loan Documents or
otherwise shall be cumulative and in addition to each and every
other right, remedy, power or privilege so conferred on or
reserved to Agent or any such Bank, and may be exercised at such
time or times and in such order and manner as the Agent or any
such Bank shall (in its sole and complete discretion) deem
expedient.
ARTICLE 8.
CONCERNING THE AGENT AND THE BANKS
Section 8.1 Appointment of the Agent. Each of the
Banks hereby appoints NCB to serve as its Agent under this
Agreement and the other Loan Documents, and in such capacity, to
administer this Agreement and the other Loan Documents.
Section 8.2 Authority. Each of the Banks hereby
irrevocably authorizes the Agent (i) to take such action on its
behalf under this Agreement and the other Loan Documents and to
exercise such powers and to perform such duties hereunder and
thereunder as are delegated to or required of the Agent by the
terms hereof or thereof, together with such powers as are<PAGE>
reasonably incidental thereto; and (ii) to take such action on
such Bank's behalf as the Agent shall consider reasonably
necessary or advisable for the protection, collection or
enforcement of any of the Obligations.
Section 8.3 Acceptance of Appointment. The Agent
hereby accepts its appointment as Agent for each of the Banks
under this Agreement and the other Loan Documents, on the terms
set forth in this Agreement, including the following:
(a) The Agent makes no representation as to the value,
validity or enforceability of this Agreement or of any of the
other Loan Documents or as to the correctness of any statement
contained in this Agreement or in any of the other Loan
Documents;
(b) The Agent may exercise its powers and perform its
duties under this Agreement and the other Loan Documents either
directly or through its agents or attorneys;
(c) The Agent shall be entitled to obtain from counsel
selected by it advice with respect to legal matters pertaining to
this Agreement or any of the other Loan Documents, and shall not
be liable for any action taken, omitted to be taken or suffered
in good faith in accordance with the advice of such counsel,
except for losses due to the Agent's gross negligence or willful
misconduct;
(d) The Agent shall not be required to use its own
funds in the performance of any of its duties or in the exercise
of any of its rights or powers, and shall not be obligated to
take any action which, in its reasonable judgment, would involve
it in any expense or liability unless it shall have been
furnished security or indemnity in an amount and in form and
substance satisfactory to it;
(e) The Agent, in performing its duties and functions
under this Agreement and the other Loan Documents on behalf of
the Banks, will exercise the same care which it normally
exercises in making and handling loans in which it alone is
interested, but the Agent does not assume further responsibility;
and
(f) The Agent shall not be removed, replaced or
succeeded without its consent except for its gross negligence or
willful misconduct.
Section 8.4 Agency Fee. Agent shall collect for its
sole benefit the Agency Fee which shall be payable as hereinabove
provided.
Section 8.5 Application of Moneys. All moneys
realized by the Agent under the Loan Documents shall be held by<PAGE>
the Agent for application in accordance with Section 2.6(b)
hereof.
Section 8.6 Reliance by the Agent and Banks. The
Agent and each Bank shall be entitled to rely on any notice,
consent, certificate, affidavit, letter, telegram, telecopy,
facsimile or teletype message, statement, order, instrument or
other document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons. The
Agent shall deem and treat the payee of any Note as the absolute
owner thereof for all purposes hereof until such time as it
receives written notice of an assignment permitted hereunder of
such payee's interest, together with the written agreement of the
assignee in form and substance reasonably satisfactory to Agent
that such assignee is bound by this Agreement as a "Bank"
hereunder.
Section 8.7 Exculpatory Provisions. (a) Neither the
Agent nor any of its shareholders, directors, officers, employees
or agents shall be liable in any manner to any Bank for any
action taken, omitted to be taken or suffered in good faith by it
or them under any of the Loan Documents or in connection
therewith, or be responsible for the consequences of any
oversight or error of judgment, except for losses due to gross
negligence or willful misconduct of the Agent or any such
shareholder, director, officer, employee or agent. Without
limiting the generality of the foregoing, under no circumstances
shall the Agent be subject to any liability to any Bank on
account of any action taken or omitted to be taken by the Agent
in compliance with the direction of the Required Banks or all
Banks, as the case may be as provided for hereunder.
(b) The Agent shall not be responsible in any manner
to any Bank for the due execution, effectiveness, genuineness,
validity, enforceability, perfection or recording of this
Agreement, any of the Notes, any of the other Loan Documents or
for any certificate, report or other document used under or in
connection with this Agreement or any of the other Loan
Documents, or for the truth or accuracy of any recitals,
statements, warranties or representations contained herein or in
any certificate, report or other document at any time hereafter
furnished or purporting to have been furnished to it by or on
behalf of Borrower, or any other Person, or be under any
obligation to any Bank to ascertain or inquire as to the
performance or observance of any of the covenants, agreements or
conditions set forth in this Agreement, the Notes or any of the
other Loan Documents or as to the use of any moneys lent
hereunder or thereunder, except for losses due to the Agent's
gross negligence or willful misconduct.
(c) The Agent shall not be obligated to take any
action or refrain from taking any action hereunder or under any
Loan Document that might, in its judgment, involve it in any
expense or liability until it shall have been indemnified to its<PAGE>
satisfaction by, or received an agreement to indemnify from, each
Bank. If a court of competent jurisdiction shall determine that
any amount received and distributed by the Agent is to be repaid,
each Person to whom any such distribution shall have been made
shall either repay to the Agent such Person's proportionate share
of the amount so determined to be repaid or shall pay over the
same in such manner and to such Persons as shall be determined by
such court.
Section 8.8 Action by the Agent. Except as otherwise
expressly provided in this Agreement or in any other Loan
Document, the Agent will take such action, assert such rights and
pursue such remedies under this Agreement and the other Loan
Documents as the Required Banks or all of the Banks, as the case
may be as provided for hereunder, shall direct. Except as
otherwise expressly provided in any of the Loan Documents, the
Agent will not (and will not be obligated to) take any action,
assert any rights or pursue any remedies under this Agreement or
any of the other Loan Documents in violation or contravention of
any express direction or instruction of the Required Banks or all
of the Banks, as the case may be as provided for hereunder. The
Agent may refuse (and will not be obligated) to take any action,
assert any rights or pursue any remedies under this Agreement or
any of the other Loan Documents without the express written
direction and instruction of the Required Banks or all of the
Banks, as the case may be as provided for hereunder. If the
Agent fails, within a commercially reasonable time, to take such
action as may properly be directed by the Required Banks or all
of the Banks, as the case may be as provided for hereunder, such
parties may take such action in the Agent's place and stead, on
behalf of all Banks. All notices, Loan Documents, supporting
documentation, appraisals, surveys, environmental site
assessments, and other material information required to be
delivered by Borrower to the Agent hereunder, including without
limitation those notices and reports furnished to the Agent by
Borrower as more particularly described in Sections 2.4 and/or
5.1, above, shall be delivered to each Bank within a reasonable
time after the Agent's receipt of same by the Agent. No Bank
(other than the Agent, acting in its capacity as the Agent) shall
be entitled to take any enforcement action of any kind under any
of the Loan Documents, except as expressly provided in this
Agreement. Action that may be taken by Required Banks or all of
the Banks, as the case may be as provided for hereunder, may be
taken pursuant to a vote at a meeting (which may be held by
telephone conference call) of all Banks, or pursuant to the
written consent or direction of such Banks. Each Bank shall be
entitled to request such reasonable information about Borrower
from the Agent as such Bank may determine to be appropriate.
Section 8.9 Defaults. The Agent will promptly notify
each Bank of any Default or Event of Default or any failure by
Borrower to make any payment in respect of any of the Notes,
provided, however, that the Agent shall not be deemed to have
knowledge of any item until such time as the Agent's officers<PAGE>
responsible for administration of the Loans shall receive written
notice thereof or have actual knowledge of such event. If any
Bank becomes aware of any Default or Event of Default by
Borrower, it shall promptly notify the Agent and each Bank
thereof, provided, however, that no Bank shall be deemed to have
knowledge of any item until such time as its officers responsible
for administration of the Loans shall receive written notice
thereof, or have actual knowledge of such event.
Section 8.10 Amendments, Waivers and Consents. Any
provision of this Agreement, the Notes or the other Loan
Documents may be amended or waived upon the consent of the
Required Banks; and after such consent the Agent, on behalf of
all Banks, may execute and deliver to Borrower a written
instrument waiving or amending such provision; provided, however,
that neither this Agreement, the Notes, nor any of the other Loan
Documents may be amended, waived or a variation therefrom
consented to without the written consent of the Agent and all of
Banks which effect (i) a change in the Maximum Commitment; (ii) a
change in any Bank's Credit Commitment; (iii) a reduction in the
interest rates or reduction of the principal set forth in the
Notes; (iv) the extension of the maturity date on the Notes
beyond the Termination Date; (v) a change in the payment
schedule; (vi) any acceleration of Borrower's Obligations under
any of the Loan Documents or any amendment to Section 7.2; (vii)
any waiver of any Event of Default under Section 7.1(a); (viii) a
change in this paragraph, the definition of Required Bank or any
provision of this Agreement which requires consent or action of
all Banks for action thereunder; (ix) a change in the obligations
and liabilities of the Agent; (x) a change which increases the
obligations of any Bank; or (xi) a reduction in any fees or
charges hereunder or in Sections 2.10, 2.11, 5.10(a) or 9.5
hereof.
Section 8.11 Indemnification. Each Bank agrees to
indemnify the Agent (to the extent that the Agent is not promptly
reimbursed by Borrower), in accordance with (and limited to) such
Bank's respective Participation Percentage, from and against any
and all liabilities, obligations, losses, damages, penalties,
interests, actions, judgments and suits of any kind or nature
whatsoever which may be imposed on, incurred by or asserted
against the Agent (solely in its capacity as Agent hereunder)
relating to or arising out of this Agreement or any of the other
Loan Documents or relating to any action taken or omitted by the
Agent under this Agreement or any of the other Loan Documents,
provided that no Bank shall be liable under this Section 8.11 for
any portion of such liabilities, obligations, losses, damages,
penalties, interest, actions, judgments or suits resulting from
the Agent's gross negligence or willful misconduct.
Section 8.12 Reimbursement of the Agent. Upon the
occurrence of an Event of Default which Borrower has not cured
within a reasonable period of time and subject to the consent of
the Required Banks (or all Banks, as appropriate) to the taking<PAGE>
by the Agent of any action under the Loan Documents, each Bank
further agrees to reimburse the Agent, in accordance with (and
limited to) such Bank's respective Participation Percentage, for
any reasonable out-of-pocket costs or expenses incurred by the
Agent in connection with its duties under this Agreement
(including, but not limited to, reasonable fees and disbursements
of counsel, travel and living expenses away from home of
employees or agents of the Agent and compensation of agents or of
experts employed by the Agent to render services for the Banks
hereunder), but only to the extent such fees, disbursements,
expenses and compensation have not been promptly reimbursed to
the Agent by Borrower. If any such sums are reimbursed to the
Agent by Borrower after one or more Banks have reimbursed the
Agent for such sums, the Agent will refund such sums ratably to
the Banks which contributed such sums.
Section 8.13 Dealing with the Banks. The Agent may at
all times deal solely with the several Banks for all purposes of
this Agreement and the protection, enforcement and collection of
the Notes, including without limitation the acceptance and
reliance upon any certificate, consent or other document executed
on behalf of one or more of the Banks and the division of
payments pursuant to Sections 2.4, 2.5, 2.6 or 8.5 hereof. The
Agent shall not have a fiduciary relationship in respect of any
Bank by reason of this Agreement. The Agent shall have no
implied duties to the Banks, or any obligation to the Banks to
take any action hereunder except for those actions which are
specifically provided by this Agreement to be taken by the Agent.
No Bank shall have a fiduciary relationship in respect of the
Agent by reason of this Agreement. No Bank shall have any
implied duties to the Agent, or any obligation to the Agent to
take any action hereunder except any action specifically provided
by this Agreement to be taken by the Banks.
Section 8.14 The Agent as Bank. NCB shall, in its
capacity as a Bank under the Loan Documents, have the same
obligations, rights, remedies, powers and privileges under the
Loan Documents as it would have were it not also the Agent.
Section 8.15 Duties Not to be Increased. The duties
and liabilities of the Agent under this Agreement and the other
Loan Documents shall not be increased or otherwise changed
without its express prior written consent. The Agent shall have
no duty to provide information to the Banks except as expressly
set forth herein.
Section 8.16 Bank Credit Decisions. Each Bank
acknowledges that it has, independently of and without reliance
upon the Agent or any of the other Banks, made its own credit
analysis and decision to enter into this Agreement and the other
Loan Documents to which it is a party. Each Bank also
acknowledges that it will, independently of and without reliance
upon the Agent or any of the other Banks, continue to make its
own credit decisions in taking or not taking action under this<PAGE>
Agreement or any of the other Loan Documents and in determining
the compliance or lack thereof by Borrower and any other Person
with any provision of any Loan Document or other document or
agreement.
Section 8.17 Resignation of the Agent. NCB and any
successor Agent may resign as such at any time by giving at least
ninety (90) days' prior written notice of resignation to each
Bank and to Borrower. Such resignation will be effective on the
date which is specified in such notice. Upon any such
resignation by NCB as Agent, or in the event the office of Agent
shall thereafter become vacant for any other reason, the Required
Banks shall appoint a successor Agent, by an instrument in
writing signed by the Required Banks and delivered to such
successor Agent and Borrower, whereupon such successor Agent
shall succeed to all of the rights and obligations of the
resigning Agent as if originally named. The resigning Agent
shall duly assign, transfer and deliver to such successor Agent
all moneys at the time held by it hereunder, after deducting
therefrom its expenses for which it is entitled to be reimbursed.
Upon such succession of any such successor Agent, the prior Agent
shall thereafter be discharged from its duties and obligations
hereunder. After the resignation of an Agent, the provisions of
this Section 8.17 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while
it was acting as Agent.
Section 8.18 Assignment of Notes: Participation.
(a) Each Bank may, with concurrent notice to the Agent and
Borrower, but without the consent of Borrower or any other Bank,
assign to one or more banks or other financial institutions all
or a portion of its rights and obligations under this Agreement,
the Notes and the other Loan Documents; provided that (i) for
each such assignment, the parties thereto shall execute and
deliver an assignment and assumption agreement, in form and
substance acceptable to the Agent, together with any Notes
subject to such assignment, and (ii) no such assignment shall be
for less than Five Million and 00/100 Dollars ($5,000,000.00) of
the aggregate of the assigning Bank's Credit Commitment, unless
such assignment is to a then-current holder of a Note. Upon the
delivery of an executed assignment and assumption agreement as
described in the preceding sentence to the Agent, from and after
the date specified as the effective date therein (the "Acceptance
Date"), (x) the assignee thereunder shall be a party hereto, and,
to the extent that rights and obligations hereunder have been
assigned to it pursuant to such agreement, such assignee shall
have the rights and obligations of a Bank hereunder; and (y) the
assignor thereunder shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such
agreement, relinquish its rights (other than any rights it may
have pursuant to Section 9.5 which will survive) and be released
from its obligations under this Agreement (and, in the case of an
assignment covering all or the remaining portion of an assigning<PAGE>
Bank's rights and obligations under this Agreement, such Bank
shall cease to be a party hereto).
(b) Each Bank may sell participations of up to fifty
percent (50%) of its rights and obligations under the Loan
Documents to one or more banks or other financial institutions;
provided, however, that (i) any selling Banks' obligations under
the Loan Documents shall remain unchanged by any such
participation, (ii) such Bank shall remain solely responsible to
the other parties hereto for the performance of such obligations,
(iii) such Bank shall remain the holder of its Note for all
purposes of the Loan Documents, (iv) the participating banks or
other entities shall be entitled to the cost protection
provisions of Sections 2.10 and 9.5 hereof, but a participant
shall not be entitled to receive pursuant to such provisions an
amount larger than its share of the amount to which the Bank
granting such participation would have been entitled,
(v) Borrower, the Agent and the other Banks shall continue to
deal solely and directly with the selling Bank in connection with
such Bank's rights and obligations under the Loan Documents, and
(vi) no such transfer shall include the transfer of any of such
Bank's rights to grant consents or approve amendments or
modifications to the Loan Documents except with respect to those
items requiring the action of or consent by all Banks or
affecting the rights and obligations of Agent. Each Bank may
share any and all information received by it from or on behalf of
the Borrower pursuant to this Agreement or any of the other Loan
Documents with any participant or prospective participant of such
Bank.
(c) Notwithstanding any other provision of this
Section 8.18 to the contrary, NCB hereby agrees that so long as
NCB shall be the Agent hereunder, NCB's Credit Commitment shall
be equal to or greater than the largest Credit Commitment of any
other Bank. To that end, NCB covenants and agrees that so long
as NCB shall be the Agent hereunder, it shall not sell, assign,
dispose of or participate any portion of or interest (whether
legal or beneficial) in its Credit Commitment if the result
thereof would be to reduce NCB's Credit Commitment or interest in
or to the Loan Documents (or any of them) below the level
required by the preceding sentence.
ARTICLE 9.
PROVISIONS OF GENERAL APPLICATION
Section 9.1 Duration. This Agreement shall continue
in full force and effect and the duties, covenants, and
liabilities of Borrower hereunder and all the terms, conditions,
and provisions hereof relating thereto shall continue to be fully
operative until all Obligations to the Agent and each Bank have
been satisfied in full, provided, however that notwithstanding
the provisions of this Section 9.1 the Commitments shall expire<PAGE>
and all Obligations shall be due and payable on the Termination
Date.
Section 9.2 Notices. (a) All notices and other
communications pursuant to this Agreement shall be in writing,
either delivered in hand or sent by first-class mail, postage
prepaid, or sent by telex, telecopier, facsimile transmission or
telegraph, addressed as follows:
(i) If to Borrower, to:
Associated Estates Realty Corporation
5025 Swetland Court
Cleveland, Ohio 44143
Telecopier: (216) 289-9600
Attn: Jeffrey I. Friedman, President
with a copy to:
Associates Estates Realty Corporation
5025 Swetland Court
Cleveland, Ohio 44143
Telecopier: (216) 289-9600
Attn: Martin A. Fishman, Esq.,
General Counsel
(ii) If to Agent, to:
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44101
Telecopier: (216) 575-3160
Attn: Gary L. Wimer, Vice President
with a copy to:
Taft, Stettinius & Hollister
Bond Court Building, Suite 600
1300 East Ninth Street
Cleveland, Ohio 44114
Telecopier: (216) 241-2837
Attn: William K. Smith, Esq.
(iii) If to a Bank, to such Bank's address set forth
on Schedule 1;
or to such other addresses or by way of such telex and other
numbers as any party hereto shall have designated in a written
notice to the other parties hereto.
(b) Except as otherwise expressly provided herein, any
notice or other communication given under this Agreement or any
other Loan Document shall be deemed to have been duly given or<PAGE>
made and to have become effective when delivered in hand to the
party to which it is directed, or, if sent by first-class mail,
postage prepaid, or by telex, telecopier, facsimile transmission
or telegraph, and properly addressed in accordance with
Section 9.2(a): (i) when received by the addressee; or (ii) if
sent by first class mail, postage prepaid, on the third (3rd)
Business Day following the day of the dispatch thereof, whichever
of (i) or (ii) shall be the earlier; provided, however, that any
notice sent by telex, telecopier or facsimile transmission or
telegraph shall be confirmed by a counterpart thereof sent by
overnight courier or hand-delivery.
Section 9.3 Survival of Representations. All
representations and warranties made by or on behalf of Borrower
in this Agreement or any of the other Loan Documents shall be
deemed to have been relied upon by the Agent and each Bank
notwithstanding any investigation made by Agent or any Bank. All
such representations and warranties shall survive the making of
each of the Loans and the issuance of the Letters of Credit until
all of the Obligations shall have been paid in full.
Section 9.4 Amendments. Each of the Loan Documents
may be modified, amended or supplemented in any respect whatever,
only by a written instrument signed by Borrower and the Agent
with the prior written consent or approval of the Required Banks
or all of the Banks (as the case may be), all in accordance with
the terms of Section 8.10 hereof.
Section 9.5 Costs, Expenses, Taxes and
Indemnification. (a) Borrower absolutely and unconditionally
agrees to pay to the Agent, and to reimburse the Agent for, all
reasonable out-of-pocket costs and expenses (including legal fees
and expenses) which shall at any time be incurred or sustained by
the Agent or any of its directors, officers, employees or agents
as a consequence of or any way in connection with: (a) the
preparation, negotiation, execution and delivery of the Loan
Documents; (b) the perfection and continuation of the rights of
the Banks and the Agent in connection with the Loans;
(c) preparation, negotiation, execution, or delivery of any
amendment or modification of any of the Loan Documents; or (d) in
the granting by the Agent or any Bank of any consents, approvals
or waivers under any of the Loan Documents.
(b) Borrower absolutely and unconditionally agrees to
pay to the Agent, for the account of Agent and each Bank and upon
demand by the Agent or any Bank at any time and as often as the
occasion therefor may require, all reasonable out-of-pocket costs
and expenses which shall be incurred or sustained by the Agent,
any Bank or their respective directors, officers, employees or
agents as a consequence of, on account of, in relation to or any
way in connection with the exercise, protection or enforcement
any of its rights, remedies, powers or privileges hereunder or
under any of the Loan Documents or in connection with any
litigation, proceeding or dispute arising from or related to any<PAGE>
of the Loan Documents (including, but not limited to, all of the
reasonable fees and disbursements of consultants, legal advisers,
accountants, experts and agents for the Agent or any Bank, the
reasonable travel and living expenses away from home of
employees, consultants, experts or agents of the Agent or any
Bank, and the reasonable fees of agents, consultants and experts
of the Agent or any Bank for services rendered on its behalf).
(c) Borrower shall absolutely and unconditionally
indemnify and hold harmless the Agent and each Bank against any
and all claims, demands, suits, actions, causes of action,
damages, losses, settlement payments, obligations, costs,
expenses and all other liabilities whatsoever which shall at any
time or times be incurred or sustained by the Agent or any Bank
or by any of their respective shareholders, directors, officers,
employees, subsidiaries, Affiliates or agents on account of, or
in relation to, or in any way in connection with, any of the
arrangements or transactions contemplated by, associated with or
ancillary to this Agreement or any of the other Loan Documents,
without regard to whether all or any of the transactions
contemplated by, associated with or ancillary to this Agreement,
or any of such Loan Documents shall ultimately be consummated.
(d) Borrower hereby covenants and agrees that any sums
expended by the Agent or any Bank for which Agent or any Bank is
entitled to reimbursement under this Section 9.5 shall be
immediately due and payable upon demand by the Agent or any Bank,
and shall bear interest at the Default Interest Rate from the
date on which the Agent or such Bank incurred such expense until
the date such payment is made in full.
(e) Borrower's indemnity obligations under this
Section 9.5 shall not extend to any losses, costs, expenses or
damages proximately caused by the gross negligence or willful
misconduct of any party which, absent this Section 9.5(e), would
be entitled to indemnification hereunder.
Section 9.6 Set-Off; Sharing of Set-Off Proceeds. (a)
Borrower hereby confirms to the Agent and to each Bank the
continuing and immediate rights of set-off of the Agent and each
Bank with respect to all deposits, balances and other sums
credited by or due from Agent or such Bank or any of their
respective offices or branches to Borrower, which rights are in
addition to any other rights which the Agent or such Bank may
have under applicable law. If any principal, interest or other
sum payable by Borrower to the Agent or any Bank under the Notes
or any of the Loan Documents is not paid punctually as and when
the same shall first become due and payable, or if any Event of
Default shall at any time occur and be continuing, any deposits,
balances or other sums credited by or due from Agent or such Bank
or any of their respective offices or branches to Borrower, may,
without any prior notice of any kind to Borrower, and without any
other conditions precedent now or hereafter imposed by statute,
rule or law or otherwise (all of which are hereby expressly and<PAGE>
irrevocably waived by Borrower), be immediately set off,
appropriated and applied by the Agent or such Bank toward the
payment and satisfaction of the Obligations in accordance with
the provisions of paragraph (b) below.
(b) Each Bank and the Agent agrees that if it shall
receive (whether by payment received otherwise than in accordance
with the terms of the Loan Documents, exercise of the right of
set-off, counterclaim, cross-claim, enforcement of any claim, or
proceedings against Borrower or any other Person or Persons,
proof of claim in bankruptcy, reorganization, liquidation,
receivership or other similar proceedings, or otherwise), and
shall retain and apply to the payment of any of the Obligations
owing to it any amount in excess of its Funded Percentage of the
aggregate of all payments received by all of the Banks and the
Agent in respect of all of the Obligations, such Bank will
promptly make such dispositions and arrangements with the other
Banks and the Agent with respect to such excess, either by way of
distribution, pro tanto assignment of claim, subrogation or
otherwise, as shall result in each of the Banks receiving its
Funded Percentage of such payments.
Section 9.7 Binding Effect; Assignment. This
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted
assigns; provided, however, that (i) Borrower may not assign or
delegate any of its rights or obligations hereunder without the
express prior written consent of the Agent and all Banks; and
(ii) no Bank may assign or delegate its rights or obligations
hereunder except in accordance with Section 8.18 hereof.
Section 9.8 Governing Law; Jurisdiction and Venue.
(a) This instrument and the rights and obligations of all parties
hereunder shall be governed by and construed under the
substantive laws of the State of Ohio, without reference to the
conflict of laws principles of such state.
(b) The Agent, each Bank and Borrower hereby designate
all state and federal courts of record sitting in Cleveland, Ohio
as forums where any action, suit or proceeding in respect of or
arising out of this Agreement, the Notes, Loan Documents, or the
transactions contemplated by this Agreement may be prosecuted as
to all parties, their successors and assigns, and each hereby
consents to the jurisdiction and venue of such courts. Borrower
waives any and all personal rights under the laws of any other
state to object to jurisdiction within the State of Ohio for the
purposes of litigation to enforce the Obligations of Borrower.
In the event any such litigation shall be commenced, Borrower
agrees that service of process may be made, and personal
jurisdiction over Borrower obtained, by service of a copy of the
summons, complaint and other pleadings required to commence such
litigation upon Borrower's appointed Agent for Service of Process
in the State of Ohio, which the undersigned hereof designates to
be: Martin A. Fishman, Esq., 5025 Swetland Court, Cleveland,<PAGE>
Ohio 44143. Borrower recognizes and agrees that such designation
agency has been created for the benefit of the Borrower, and the
parties agree that this designation shall not be revoked,
withdrawn, or modified without the prior written consent of the
Agent.
Section 9.9 WAIVER OF JURY TRIAL. AS A MATERIAL
INDUCEMENT FOR THE BANKS TO EXTEND CREDIT TO BORROWER, AND AFTER
HAVING THE OPPORTUNITY TO CONSULT COUNSEL, BORROWER HEREBY
EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS OR ARISING IN ANY WAY FROM THE OBLIGATIONS.
Section 9.10 Waivers. Borrower waives notice of
nonpayment, demand, notice of demand, presentment, protest and
notice of protest with respect to the Obligations, or notice of
acceptance hereof, notice of the Loans made, credit extended, or
any other action taken in reliance hereon, and all other demands
and notices of any description, except for those notices which
are expressly provided for herein.
Section 9.11 Integration of Schedules and Exhibits.
The Exhibits and Schedules annexed to this Agreement are part of
this Agreement and are incorporated herein by reference.
Section 9.12 Headings. The table of contents,
headings of the Articles, Sections and paragraphs of this
Agreement have been inserted for convenience of reference only
and shall not be deemed to alter, limit or affect the scope,
meaning or interpretation of any provision of this Agreement.
Section 9.13 Counterparts. This Agreement may be
executed in any number of counterparts, and signature pages but
all of such counterparts shall together constitute a single
agreement. In making proof of this Agreement, it shall not be
necessary to produce or account for more than one counterpart
hereof signed by each of the parties hereto.
Section 9.14 Severability. If any provision of this
Agreement, or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
balance of this Agreement and the application of all provisions
of this Agreement to all other persons and circumstances shall
not be affected thereby; each provision of this Agreement shall
remain valid and enforceable to the fullest extent permitted by
law.
Section 9.15 Miscellaneous. All of the rights of the
Agent and each Bank contained in this Agreement shall likewise
apply insofar as applicable to any modification of or supplement
to this Agreement. No officers, directors, shareholders or
employees of Borrower shall have any personal liability for any
obligations under this Agreement or as a result of any documents
or certificates delivered pursuant to this Agreement, except in<PAGE>
cases of actual fraud or willful misconduct; provided, however,
that nothing in this sentence shall be deemed in any way to limit
the absolute and unconditional liability of Borrower for the full
and timely payment, observance and performance of all of its
obligations hereunder.
Section 9.16 Confidentiality. (a) Borrower
acknowledges that from time to time financial advisory,
investment banking and other services may be offered or provided
to Borrower or one or more of its Affiliates by the Agent or any
Bank, or by their respective Affiliates, and Borrower hereby
authorizes the Agent and each Bank to share any information
delivered to it by Borrower or its Affiliates pursuant to this
Agreement, or in connection with their respective decisions to
enter into this Agreement, with any such Affiliate, it being
understood that any such Affiliate receiving such information
shall be bound by the provisions of clause (b) below as if it
were a Bank hereunder.
(b) Each Bank and the Agent agrees to keep
confidential, in accordance with their customary procedures for
handling confidential information, any non-public information
supplied to it by Borrower pursuant to this Agreement which is
identified by Borrower as being confidential at the time the same
is delivered to Agent or any Bank. Notwithstanding the foregoing
to the contrary, the Agent and any Bank may disclose any such
information: (i) to the extent required by statute, rule,
regulation or judicial process, (ii) to its counsel, (iii) to
regulatory personnel, auditors or accountants, (iv) to the Agent
or any other Bank, (v) in connection with any litigation to which
any one or more of the Banks or the Agent is a party, (vi) to an
Affiliate of Agent or any Bank as provided in clause (a) above,
or (vii) to any assignee or participant (or prospective assignee
or participant) so long as such assignee or participant (or
prospective assignee or participant) agrees to be bound by the
provisions hereof."
IN WITNESS WHEREOF, the parties have caused this
Amended and Restated Credit Agreement to be signed by their
respective officers as of the day first above written.
BORROWER:
ASSOCIATED ESTATES REALTY
CORPORATION
By: /S/ Martin A. Fishman
Name: Martin A. Fishman
Title:Vice President
AGENT:<PAGE>
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
Gary L. Wimer
Vice President
THE BANKS:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
Gary L. Wimer
Vice President
BANK ONE, CLEVELAND, N.A.
By: /s/Douglas D. Lyons
Name: Douglas D. Lyons
Title:Vice President
MANUFACTURERS AND TRADERS
TRUST COMPANY
By: /s/Kevin B. Quinn
Name: Kevin B. Quinn
Title:Banking Officer
THE FIRST NATIONAL BANK
OF CHICAGO
By: /s/Gregory A. Gilbert
Name: Gregory A. Gilbert
Title:Vice President
COMERICA BANK
By: /s/ David J. Campbell
Name: David J. Campbell
Title:Vice President
HARRIS TRUST & SAVINGS BANK<PAGE>
By: /s/ Gregory M. Bins
Name: Gregory M. Bins
Title:Vice President
HUNTINGTON BANK-CLEVELAND,
N.A.
By: /s/ Gerald A. Buck
Name: Gerald A. Buck
Title:<PAGE>
SCHEDULE 1
to
Third Amended Restated Credit Agreement
<TABLE>
<CAPTION>
Participation Credit
Bank Percentage Commitment
<S> <C> <C>
National City Bank 20% $ 20,000,000
Bank One, Cleveland, N.A. 14% 14,000,000
Manufacturers and
Traders Trust Company 14% 14,000,000
First National Bank 16% 16,000,000
of Chicago
Comerica Bank 11% 11,000,000
Harris Trust & Savings Bank 16% 16,000,000
Huntington Bank-Cleveland,N.A. 9% 9,000,000
100% $100,000,000
</TABLE>
_________________________________________________________________
SEVENTH AMENDMENT TO CREDIT AGREEMENT
BY AND AMONG
ASSOCIATED ESTATES REALTY CORPORATION,
Borrower,
NATIONAL CITY BANK,
as Agent
AND
THE BANKS IDENTIFIED ON SCHEDULE 1
Dated: as of November 12, 1997
_________________________________________________________________<PAGE>
EXHIBIT 4.8 d
SEVENTH AMENDMENT TO
CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this
"Amendment") is made as of November 12, 1997, by and among
ASSOCIATED ESTATES REALTY CORPORATION, an Ohio corporation
("Borrower"), the banks and lending institutions identified on
Schedule 1, attached hereto and made a part hereof by this
reference (the "Banks"), and NATIONAL CITY BANK, a national
banking association, in its capacity as agent for the Banks under
the Credit Agreement defined in the recitals below (in such
capacity, the "Agent").
R E C I T A L S
A. Pursuant to that certain credit agreement, dated as of
March 30, 1994, by and among Borrower, the Banks identified on
Schedule 1.1 thereto and the Agent, such Banks agreed to advance
certain Loans to Borrower, on the terms and subject to the
conditions set forth therein, and Borrower agreed to repay such
Loans, with interest thereon, as provided therein.
B. The aforementioned credit agreement has been amended
(1) by a First Amendment to Credit Agreement, dated as of May 17,
1994; (2) by a Second Amendment to Credit Agreement, dated as of
February 24, 1995, pursuant to which the aforementioned credit
agreement was amended and restated in its entirety; (3) by a
Third Amendment to Credit Agreement, dated as of September 26,
1995, pursuant to which such credit agreement was again amended
and restated pursuant to a Second Amended and Restated Credit
Agreement dated as of September 26, 1995; (4) by a Fourth<PAGE>
Amendment to Credit Agreement, dated as of March 26, 1996; (5) by
a Fifth Amendment to Credit Agreement, dated as of November 27,
1996 and (6) by a Sixth Amendment to Credit Agreement, dated as
of April 22, 1997. As amended, and amended and restated as
aforesaid, such credit agreement is referred to as the "Credit
Agreement".
C. Borrower, the Banks and the Agent have agreed further
to amend the Credit Agreement in order to reflect the parties'
understandings regarding the increase in the Maximum Commitment
from Seventy-Five Million Dollars ($75,000,000) to One Hundred
Million Dollars ($100,000,000), the adjustment of the Banks'
respective Participation Percentages and other mutually
acceptable changes to the Credit Agreement, upon and subject to
the terms and conditions hereinafter set forth.
NOW, THEREFORE, for Ten Dollars ($10.00) and other valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Defined Terms. Capitalized terms which are used
in this Amendment without being defined herein shall have the
meanings ascribed to them in the Amended Credit Agreement
(defined below).
2. Amendment of the Credit Agreement. The parties
agree that the Credit Agreement shall be further amended,
effective as of the Effective Date (as hereinafter defined), so
that from and after the Effective Date the Credit Agreement shall
be completely amended and restated as set forth in Annex 1 to
this Amendment. As so amended and restated, the Credit Agreement
is referred to herein as the "Amended Credit Agreement". The<PAGE>
parties acknowledge that certain of the exhibits and schedules to
the Amended Credit Agreement have been omitted therefrom. Each
exhibit and schedule so omitted remains identical to the
corresponding version thereof which was appended to the Credit
Agreement; all such exhibits and schedules shall be deemed to be
incorporated in the Amended Credit Agreement by this reference.
3. Conditions Precedent to this Amendment. On or
prior to the Effective Date, each of the following conditions
precedent shall have been satisfied:
(a) Proof of Corporate Authority. The Agent
shall have received from Borrower copies,
certified by a duly authorized officer of Borrower
to be true and complete on and as of the Effective
Date, of records of all corporate action taken by
Borrower to authorize (i) the execution and
delivery of this Amendment, the Competitive Bid
Notes and the Substitute Notes (as such terms are
hereinafter defined); (ii) the making by Borrower
of the borrowings contemplated by the Amended
Credit Agreement, as amended hereby; and (iii) the
performance of its other obligations and
agreements hereunder, under the Amended Credit
Agreement and under the Substitute Notes and the
Competitive Bid Note;
(b) Incumbency Certificate. The Agent shall have
received from Borrower an incumbency certificate,
dated as of the Effective Date, signed by a duly
authorized officer and giving the name and bearing
a specimen signature of each individual who shall
be authorized to sign, in the name and on behalf
of Borrower, this Amendment and each of the
Substitute Notes and Competitive Bid Note to be
executed and delivered by Borrower as provided in
the Third Amended and Restated Credit Agreement.
(c) Officers' Certificate. The Agent shall have
received from Borrower a certificate dated as of
the Effective Date, signed by a duly authorized
officer of Borrower and certifying on terms
acceptable to the Agent that each of the
representations and warranties of Borrower in the
Credit Agreement was true and correct when made
and is deemed to be repeated and remains true and<PAGE>
correct in all material respects on and as of the
Effective Date.
(d) Loan Documents. (i) Borrower shall have
executed and delivered to the Agent (x) substitute
promissory notes (the "Substitute Notes") for each
Bank, in the amount of such Bank's respective
Credit Commitment, in the form attached hereto as
Exhibit A and made a part hereof by this
reference; and (y) Competitive Bid Notes for each
Bank, in the amount of such Bank's Credit
Commitment, in the form attached hereto as
Exhibit B and made a part hereof by this reference
(the "Competitive Bid Notes"; the Substitute Notes
and the Competitive Bid Notes are sometimes
collectively referred to as the "Notes"); (ii)
this Amendment and each Note shall have been duly
and properly authorized, executed and delivered by
Borrower, and shall be in full force and effect on
and as of the Effective Date; and (iii) executed
originals of each of the Notes shall have been
delivered to the respective Banks.
(e) Legality of Transactions. No change in
applicable law shall have occurred as a
consequence of which it shall have become and
continue to be unlawful (i) for the Agent or any
Bank to perform any of its agreements or
obligations under the Amended Credit Agreement or
any other Loan Document on or as of the Effective
Date; or (ii) for Borrower to perform any of its
agreements or obligations under the Amended Credit
Agreement or any Loan Document.
(f) Performance, Etc. Borrower shall have duly
and properly performed, complied with and
observed, in all material respects, each of its
covenants, agreements and obligations contained in
each of the Loan Documents to which Borrower is a
party or by which Borrower is bound. No event
shall have occurred on or prior to the Effective
Date, and no condition shall then exist, which
constitutes or would (with the delivery of notice
or the passing of time, or both) constitute a
Default or an Event of Default under the Amended
Credit Agreement or under any other Loan
Agreement.
(g) Compliance with Laws. Each of the borrowings
made and each Letter of Credit issued under the
Credit Agreement is, and each borrowing to be made
and each Letter of Credit to be issued under the
Amended Credit Agreement shall be, in compliance
with the requirements of all applicable laws,
regulations, rules and orders, including without<PAGE>
limitation the Environmental Laws and the
requirements imposed by the SEC or by the Board of
Governors of the Federal Reserve System under
Regulations U, G and X.
(h) Payment of Loan Fee and Certain Expenses.
Borrower shall have (i) paid to the Agent, for the
benefit of the Banks as hereinafter provided, a
Loan Fee (the "Loan Fee") in the amount of Fifty
Thousand Dollars ($50,000); and (ii) reimbursed
the Agent for all reasonable out-of-pocket costs
and expenses, including, without limitation, all
fees and disbursements of legal counsel to the
Agent which shall have been incurred by Agent in
connection with the negotiation and preparation of
this Amendment and the documents and instruments
described or referred to herein.
(i) Changes: None Adverse. From the date of the
most recent balance sheets referred to in
Section 4.5 of the Amended Credit Agreement or
delivered in accordance with the requirements of
the Amended Credit Agreement, in either case
through and including the Effective Date, no
changes shall have occurred in the assets,
liabilities, financial condition, business,
operations or prospects of Borrower or Borrower's
Consolidated Subsidiaries which, individually or
in the aggregate, are material and adverse to
Borrower and its Consolidated Subsidiaries.
(j) Compliance Certificate. The Agent shall have
received a Compliance Certificate, the required
calculations under which shall demonstrate
Borrower's compliance with the covenants set forth
in the Credit Agreement.
(k) Borrower's Counsel's Opinion. The Agent and
each Bank shall have received a written legal
opinion from Borrower's legal counsel, addressed
to the Agent and each Bank and dated as of the
Effective Date, substantially in the form attached
hereto as Exhibit C and made a part hereof by this
reference.
(l) Other Approvals. The Agent shall have
received such other approvals, opinions,
certificates, instruments and documents with
respect to the transactions described herein as it
may request.
(m) Representations and Warranties. Each of the
representations and warranties made by or on
behalf of Borrower in the Credit Agreement or in
any other Loan Document (giving effect to the<PAGE>
Amendatory Loan Documents) shall be true, correct
and complete in all material respects as of the
Effective Date.
5. Ratification. Except as specifically modified and
amended by this Amendment, the Credit Agreement is unchanged and
remains in full force and effect. Borrower, the Banks and the
Agent each hereby ratifies and affirms the Credit Agreement and
every term and condition thereof, as the same are amended and
restated as provided herein.
6. Binding Effect. This Amendment shall be binding
upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
7. Effective Date. The amendments contemplated by
this Amendment shall be effective, as of the date first set forth
above (the "Effective Date"), upon (i) the execution of this
instrument by each of Borrower, the Banks and the Agent; and (ii)
the satisfaction of each of the conditions precedent set forth in
Section 4 of this Amendment, including without limitation the
execution and delivery of the Substitute Notes and the
Competitive Bid Notes as therein provided. Promptly after the
Effective Date, each Bank shall return the original Note
previously delivered to it, legended to reflect the replacement
of such Note by the appropriate Substitute Note as hereinabove
described, or shall otherwise indicate, on the face of its
original Note and in a manner reasonably acceptable to Borrower,
that its Substitute Note was issued in replacement of and in
substitution for such original Note.
8. Payment and Disbursement of the Loan Fee. On the
Effective Date, Borrower shall, and hereby covenants and agrees<PAGE>
to, pay the Loan Fee to the Agent. Upon or promptly after the
Effective Date, the Agent shall disburse to the Banks their
respective shares of the Loan Fee, which shall be determined in
each respect of each Bank by multiplying the Loan Fee by a
fraction having a denominator of $25,000,000 and a numerator
equal to the difference between such Bank's Credit Commitment as
shown on the attached Schedule 1 and its Credit Commitment
immediately prior to the Effective Date.
9. Regarding Borrower's Debt Ratings. Borrower
represents that as of the Effective Date, Borrower's Debt Ratings
are as follows:
Moody's: BBB-; and
S&P: Baa3
10. Certain Outstanding Obligations. Each of the
parties acknowledges that certain Loans [and Letters of Credit]
are presently outstanding under the Credit Agreement, and that
the Banks' respective Participation Percentages in all such
outstanding items have been established in accordance with their
Credit Commitments in effect prior to the Effective Date. The
Banks and the Agent agree, and Borrower acknowledges, that the
amendments effected pursuant to this Amendment shall not affect
the Banks' respective Participation Percentages in, or with
respect to, any such outstanding item, but shall govern all
Ratable Loans and all Letters of Credit to be made or issued on
or after the Effective Date.
11. Counterparts. This Amendment may be executed in
multiple counterparts, and signature pages from any counterpart<PAGE>
may be appended to any other counterpart. All such counterparts
shall constitute a single, unified instrument.
IN WITNESS WHEREOF, this Amendment has been duly
executed and delivered by or on behalf of each of the parties as
of the date first set forth above.
BORROWER:
ASSOCIATED ESTATES REALTY
CORPORATION
By: /s/ Martin A. Fishman
Martin A. Fishman
Vice President
AGENT:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
Gary L. Wimer
Vice President
THE BANKS:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
Gary L. Wimer
Vice President<PAGE>
BANK ONE, CLEVELAND, N.A.
By: /s/ Douglas D. Lyons
Douglas D. Lyons
Vice President
MANUFACTURERS AND TRADERS TRUST
COMPANY
By: /s/Kevin B. Quinn
Kevin B. Quinn
Banking Officer
COMERICA BANK
By: /s/ David J. Campbell
Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Gregory M. Bins
Gregory M. Bins
Vice President
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Gregory A. Gilbert
Gregory A. Gilbert
Vice President
HUNTINGTON BANK-CLEVELAND, N.A.
By: /s/ Gerald A. Buck
Gerald A. Buck
Vice President
SCHEDULE 1
<TABLE>
<CAPTION>
Participation
Bank Credit Commitment Percentage
<S> <C> <C>
National City Bank 20,000,000 20%
Bank One, Cleveland, NA 14,000,000 14%
Manufacturers and
Traders Trust Company 14,000,000 14%
Comerica Bank 11,000,000 11%
Harris Trust & Savings
Bank 16,000,000 16%
The First National Bank
of Chicago 16,000,000 16%
Huntington Bank-
Cleveland, N.A. 9,000,000 9%<PAGE>
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF
ASSOCIATED ESTATES REALTY CORPORATION
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
<S> <C>
AERC of Indiana, LLC Indiana
AERC of Michigan, LLC Ohio
Aspen Lakes - AERC, Inc. Michigan
Associated Estates Realty Corporation
of Pennsylvania, Inc. Ohio
Cloisters Apartments, Inc. Ohio
Country Place, Inc. Michigan
Ellet Apartments, Inc. Ohio
FHM Corporation Michigan
Gables Indiana, Inc. Ohio
Gates Mills III Apartments, Inc. Ohio
Gates Mills Club Housing, Inc. Ohio
Hillwood I Apartments, Inc. Ohio
Jennings Commons Apartments, Inc. Ohio
Kensington Apartments, Inc. Ohio
PatCon, Inc. Ohio
Puritas Place Apartments, Inc. Ohio
Rainbow Terrace Apartments, Inc. Ohio
Riverview Towers Apartments, Inc. Ohio
Shaker Park Gardens II, Inc. Ohio
Somerset West Apartments, Inc. Ohio
State Road Apartments, Inc. Ohio
Statesman II Apartments, Inc. Ohio
Sutliff Apartments, Inc. Ohio
Tallmadge Acres Apartments, Inc. Ohio
The Oaks at the Woods Company, Inc. Ohio
Treetop Village, Inc. Ohio
Twinsburg Apartments, Inc. Ohio
Village Tower Apartments, Inc. Ohio
West High Apartments, Inc. Ohio<PAGE>
</TABLE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference
in the Registration Statements on Form S-8 (No. 333-27429
and No. 33-88430), and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-22419) of Associated
Estates Realty Corporation of our report dated March 18, 1998,
appearing on page F-2 of Associated Estates Realty Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Cleveland, Ohio
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,251,819
<SECURITIES> 10,125,513
<RECEIVABLES> 19,081,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,621,404
<PP&E> 646,498,965
<DEPRECIATION> (130,668,538)
<TOTAL-ASSETS> 553,910,305
<CURRENT-LIABILITIES> 44,244,275
<BONDS> 0
0
56,250,000
<COMMON> 1,707,377
<OTHER-SE> 123,200,701
<TOTAL-LIABILITY-AND-EQUITY> 553,910,305
<SALES> 101,639,584
<TOTAL-REVENUES> 108,809,948
<CGS> 43,229,949
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,354,912
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,144,260
<INCOME-PRETAX> 19,688,656
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 1,023,713
<CHANGES> 0
<NET-INCOME> 20,712,369
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
</TABLE>
