<PAGE>1
=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1747603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
5025 Swetland Court, Richmond Hts., Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 261-5000
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 [ ]
Number of shares outstanding as of August 12, 1999:
21,540,375 shares
==========================================================================
<PAGE>2
ASSOCIATED ESTATES REALTY CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
ITEM 1 Condensed Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the three and
six month periods ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1999 and 1998 5
Notes to Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security-Holders 42
ITEM 6 Exhibits and Reports on Form 8-K 43
SIGNATURES 46
</TABLE>
<PAGE>3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
ASSETS (Unaudited)
------------- ------------
<S> <C> <C>
Real estate assets:
Land $ 91,380,383 $ 92,675,356
Buildings and improvements 782,516,008 778,450,807
Furniture and fixtures 32,553,819 30,804,870
----------- -----------
906,450,210 901,931,033
Less: accumulated depreciation (166,627,445) (153,941,702)
----------- -----------
739,822,765 747,989,331
Construction in progress 51,290,146 53,740,292
----------- -----------
Real estate, net 791,112,911 801,729,623
Property held for sale, net 15,837,111 -
Cash and cash equivalents 25,575,954 1,034,655
Restricted cash 22,629,401 6,718,863
Accounts and notes receivable
Rents 3,345,010 2,801,835
Affiliates and joint ventures 9,006,902 13,113,400
Other 2,630,631 2,293,007
Intangible and other assets, net 16,275,332 13,093,972
------------ ------------
$886,413,252 $840,785,355
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $369,227,076 $ 80,042,667
Unsecured debt 197,447,703 423,862,468
----------- -----------
Total indebtedness 566,674,779 503,905,135
Accounts payable and accrued expenses 23,367,410 21,525,517
Dividends payable 8,073,422 10,507,586
Resident security deposits 5,802,961 5,960,971
Funds held on behalf of managed properties
Affiliates and joint ventures 2,938,578 5,353,394
Other 2,277,030 4,128,298
Accrued interest 5,554,491 5,501,634
Accumulated losses and distributions of joint ventures
in excess of investment and advances 12,409,549 12,679,793
----------- -----------
Total liabilities 627,098,220 569,562,328
Operating partnership minority interest 11,988,535 12,034,880
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; 22,641,726 and 22,621,958 issued
and outstanding at June 30, 1999 and December 31, 1998,
respectively 2,264,172 2,262,195
Paid-in capital 277,134,892 277,134,988
Accumulated dividends in excess of net income (77,740,200) (75,991,638)
Accumulated other comprehensive income (875) (875)
Less: Treasury shares, at cost, 922,600 and 25,000 shares
at June 30, 1999 and December 31, 1998, respectively (10,581,492) (466,523)
----------- -----------
Total shareholders' equity 247,326,497 259,188,147
------------ -----------
$886,413,252 $840,785,355
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE>4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Rental $36,100,421 $ 30,886,103 $71,491,076 $59,990,715
Property management fees 1,329,357 881,208 2,625,095 1,830,046
Asset management fees 588,292 - 1,174,127 -
Asset acquisition fees 121,680 - 121,680 -
Asset disposition fees 5,042 - 5,042 -
Painting services 449,062 372,429 736,105 720,984
Other 720,136 706,497 1,226,916 1,013,295
---------- ---------- ---------- ----------
39,313,990 32,846,237 77,380,041 63,555,040
Expenses and charges
Property operating and maintenance 16,457,654 12,918,625 31,965,731 25,218,738
Depreciation and amortization 8,328,860 5,707,884 16,604,908 11,022,479
Painting services 407,874 394,002 715,275 731,941
General and administrative 4,767,213 1,799,001 8,562,232 3,634,966
Charge for funds advanced to non-owned property 150,000 - 150,000 -
Interest expense 9,105,415 7,112,892 17,356,147 13,544,559
---------- ---------- ---------- ----------
Total expenses and charges 39,217,016 27,932,404 75,354,293 54,152,683
Income before gain on sale of properties, equity
in net income of joint ventures, minority
interest, extraordinary item and cumulative
effect of a change in accounting principle 96,974 4,913,833 2,025,748 9,402,357
Gain on sale of properties 12,830,328 - 12,830,328 -
Equity in net income of joint ventures 264,106 170,665 237,370 206,887
Minority interest in operating partnership 32,362 - 64,521 -
---------- --------- --------- --------
Income before extraordinary item and cumulative
effect of a change in accounting principle 13,159,046 5,084,498 15,028,925 9,609,244
Extraordinary item-extinguishment of debt (1,808,742) (124,895) (1,808,742) (124,895)
Cumulative effect of a change in accounting
principle - - 4,319,162 -
----------- ------------ ----------- -----------
Net income $11,350,304 $ 4,959,603 $17,539,345 $ 9,484,349
=========== ============ =========== ===========
Net income applicable to common shares $ 9,979,199 $ 3,588,498 $14,797,135 $ 6,742,139
=========== ============ =========== ===========
Earnings per common share - basic:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ .53 $ .22 $ .54 $ .40
=========== ============ =========== ===========
Extraordinary item $ (.08) $ (.01) $ (.08) $ (.01)
=========== ============ =========== ===========
Cumulative effect of a change in accounting
principle $ - $ - $ .19 $ -
=========== ============ =========== ===========
Net income $ .45 $ .21 $ .65 $ .39
=========== ============ =========== ===========
Earnings per common share - diluted:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ .53 $ .22 $ .54 $ .40
=========== ============ =========== ===========
Extraordinary item $ (.08) $ (.01) $ (.08) $ (.01)
=========== ============ =========== ===========
Cumulative effect of a change in accounting
principle $ - $ - $ .19 $ -
=========== ============ =========== ===========
Net income $ .45 $ .21 $ .65 $ .39
=========== ============ =========== ===========
Pro forma amounts assuming the new
capitalization policy is applied retroactively:
Net income $11,350,304 $ 5,148,603 $13,220,183 $ 9,807,651
=========== ============ =========== ===========
Net income applicable to common shares $ 9,979,199 $ 3,777,498 $10,477,973 $ 7,065,441
=========== ============ =========== ===========
Earnings per common share - basic:
Net income applicable to common shares $ .45 $ .22 $ .47 $ .41
=========== ============ =========== ===========
Earnings per common share - diluted:
Net income applicable to common shares $ .45 $ .22 $ .47 $ .41
=========== ============ =========== ===========
Dividends paid per common share $ .375 $ .465 $ .75 $ .93
=========== ============ =========== ===========
Weighted average number of common
shares outstanding - Basic 22,359,480 17,133,185 22,516,237 17,102,729
=========== ============ =========== ===========
- Diluted 22,359,480 17,133,185 22,519,253 17,102,729
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE>5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 17,539,345 $ 9,484,349
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 16,604,908 11,022,479
Cumulative effect of a change in accounting principle (4,319,162) -
Minority interest in operating partnership 64,521 -
Loss on extinguishment of debt 1,808,742 124,895
Gain on sale of operating properties (12,830,328) -
Equity in net income of joint ventures (237,370) (206,886)
Earnings distributed from joint ventures 417,696 298,607
Net change in assets and liabilities
(net of effect of the MIGRA merger for
1998 amounts) - Accounts and notes receivable (880,799) (276,420)
- Accounts and notes receivable of affiliates and
joint ventures 4,106,498 2,452,693
- Accounts payable and accrued expenses 5,116,575 (4,372,186)
- Other operating assets and liabilities (319,281) (365,808)
- Restricted cash (2,553,261) 1,783,404
- Funds held for non-owned managed properties (1,851,268) 3,129,887
- Funds held for non-owned managed properties
of affiliates and joint ventures (2,414,816) 257,454
---------- ----------
Total adjustments 2,712,655 13,848,119
---------- ----------
Net cash flow provided by operations 20,252,000 23,332,468
Cash flow from investing activities:
Real estate acquired or developed (net of liabilities assumed) (20,575,616) (104,110,880)
Fixed asset additions (376,692) (739,418)
Net proceeds received from sale of operating properties 13,357,277 -
Net proceeds received from sale of operating properties held in escrow (13,357,277) -
Distributions from joint ventures 75,197 145,131
----------- ------------
Net cash flow used for investing activities (20,877,111) (104,705,167)
Cash flow from financing activities:
Principal payments on secured debt (725,591) (8,658,305)
Proceeds from secured debt 289,910,000 -
Proceeds from senior and medium-term notes - 20,000,000
Term loan borrowings - 45,000,000
Line of Credit borrowings 310,200,000 313,000,000
Line of Credit repayments (536,646,565) (268,000,000)
Deferred financing costs (5,734,394) (1,796,625)
Common share dividends paid (18,979,858) (15,878,833)
Preferred share dividends paid (2,742,213) (2,742,210)
Purchase of treasury shares (10,114,969) -
---------- ----------
Net cash flow provided by financing activities 25,166,410 80,924,027
---------- ----------
Increase (decrease) in cash and cash equivalents 24,541,299 (448,672)
Cash and cash equivalents, beginning of period 1,034,655 2,251,819
------------- ------------
Cash and cash equivalents, end of period $ 25,575,954 $ 1,803,147
============= ============
Supplemental disclosure of cash flow information:
Issuance of common shares in connection with the acquisition of MIG
REIT properties and the MIGRA merger $ - $105,782,635
Issuance of operating partnership units in connection with the
acquisition of the development property - 10,863,204
Assumption of liabilities in connection with the acquisition of - 15,013,771
properties
Assumption of mortgage debt in connection with the acquisition of
properties - 5,342,371
Dividends declared but not paid 8,073,422 10,513,686
Cash paid for interest (including capitalized interest) 18,258,876 13,659,390
</TABLE>
The accompanying notes are an integral part
of these financial statements
<PAGE>6
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
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. In
connection with the merger of MIG Realty Advisors, Inc. ( MIGRA )
on June 30, 1998, the Company also acquired the property and
advisory management businesses of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition and incentive fees, that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. MIG II Realty Advisors,
Inc. ("MIG"), MIGRA's successor, is a registered investment
advisor and also functions as a mortgage banker and as a real
estate advisor to pension funds. MIG recognizes revenue
primarily from its clients' real estate acquisitions and
dispositions, loan origination and consultation, debt servicing,
asset and property management and construction lending
activities. MIG earns the majority of its debt servicing fee
revenue from two of its pension fund clients. MIG's asset
management, property management, investment advisory and mortgage
servicing operations, including those of the prior MIG
affiliates, are collectively referred to herein as the "MIGRA
Operations".
At June 30, 1999, the Company owned directly or indirectly,
or was a joint venture partner in 97 multifamily properties
containing 21,068 units. Of these properties, 71 were located in
Ohio, 11 in Michigan, two in Florida, two in Georgia, three in
Maryland, one in North Carolina, one in Texas, one in Arizona,
three in Indiana, one in California and one in Pennsylvania.
Additionally, the Company managed 54 non-owned properties, 48 of
which were multifamily properties consisting of 11,555 units (17
of which are owned by various institutional investors consisting
of 5,991 units) and six of which were commercial properties
containing an aggregate of approximately 621,000 square feet of
gross leasable area. Through affiliates, collectively referred
to as the "Service Companies", the Company provides property and
asset management, investment advisory, painting and computer
services as well as mortgage origination and servicing to both
owned and non-owned properties.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, the Service
Companies and the operating partnership. In connection with the
project specific, nonrecourse mortgage refinancing as described
in Note 5, separate legal entities, which are qualified REIT
subsidiaries of the Company, were formed which are included in
the Company's consolidated financial statements. These qualified
REIT subsidiaries are separate legal entities and maintain
separate records, books of account and bank accounts separate and
apart from any other person or entity. The Company holds
preferred share interests 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.
The preferred share interests are not an impermissible investment
for purposes of the Company's REIT qualification test.
The Company entered into an operating partnership structured
as a DownREIT of which an aggregate 20% is owned by limited
partners. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as
"Operating partnership minority interest" in the Consolidated
Balance Sheets. Capital contributions, distributions and profits
and losses are allocated to minority interests in accordance with
the terms of the operating partnership agreement. In conjunction
with the acquisition of the operating partnership, the Company
issued a total of 522,032 operating partnership units ("OP
units") which consist of 84,630 Class A OP units, 36,530 Class B
<PAGE>7
OP units, 115,124 Class C OP units, 62,313 Class D OP units, and
223,435 Class E OP units. These OP units may, under certain
circumstances, become exchangeable into common shares of the
Company on a one-for-one basis. The Class A unitholders are
entitled to receive distributions per OP unit equal to the per
share distributions on the Company's common shares. At June 30,
1999, the Company charged $64,521 to minority interest in
operating partnership in the Consolidated Statements of Income
relating to the Class A unitholders allocated share of net
income. At June 30, 1999, the Class B, Class C, Class D and
Class E unitholders were not entitled to receive an allocation of
net income and did not receive any cash distributions from the
operating partnership.
One property included in the financial statements is 33-1/3%
owned by third party investors. As this property has an
accumulated deficit, no recognition of the third party interest
is reflected in the financial statements since it is the
Company's policy to recognize minority interest only to the
extent that the third party's investment and accumulated share of
income exceeds distributions and its share of accumulated losses.
Investments in joint ventures, that are 50% or less owned by the
Company, are presented using the equity method of accounting.
Since the Company intends to fulfill its obligations as a partner
in the joint ventures, the Company has recognized its share of
losses and distributions in excess of its investment.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited financial statements have been
prepared by the Company's management in accordance with generally
accepted accounting principles for interim financial information
and applicable rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of
normally recurring adjustments) considered necessary for a fair
presentation have been included. The reported results of
operations are not necessarily indicative of the results that may
be expected for the full year. The results of operations for the
six month period ended June 30, 1999 include the cumulative
effect of a change in accounting principle related to the Company
changing its capitalization policy on certain replacements and
improvements (See Note 12). These financial statements should be
read in conjunction with the Company's audited financial
statements and notes thereto included in the Associated Estates
Realty Corporation Annual Report on Form 10-K for the year ended
December 31, 1998.
Change in Estimates
During the first quarter, the Company refined certain cutoff
procedures and its estimation process for the accumulation of
property operating expense accrual adjustments. This refinement
was facilitated, in part, by the migration to the
decentralization of certain functions to the properties and also
by the upgrading of the Company's information systems. This
refinement had the one time effect of reducing net income by
approximately $632,000 for the six month period ended June 30,
1999. In addition, in connection with the Company's adoption of
the change in its policy for capitalizing certain replacements
(Note 12), the Company reassessed its remaining useful lives of
certain appliances and floor covering it had capitalized upon the
acquisition of a property. This change in useful lives together
with the reduction in the estimated useful lives of certain
software from 10 to 7 years had the effect of reducing income by
approximately $545,600 for the six month period ended June 30,
1999. Also, the Company had determined in December 1998 that it
would replace certain of its software during 1999. Commencing
January 1, 1999, the Company began amortizing the remaining net
book value over its revised estimated useful life of one year.
This change had the effect of reducing net income by
approximately $474,000 for the six month period ended June 30,
1999.
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, disclosure of contingent assets and
<PAGE>8
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.
Reclassifications
Certain reclassifications have been made to the 1998
financial statements to conform to the 1999 presentation.
Recent Accounting Pronouncements
Effective December 31, 1998, the Company implemented
Statement of Financial Accounting Standards ( SFAS ) No. 130 -
Reporting Comprehensive Income. At June 30, 1999, the Company
had no items of other comprehensive income requiring additional
disclosure. Effective December 31, 1998, the Company implemented
SFAS No. 131 - Disclosures about Segments of an Enterprise and
Related Information. All periods have been presented on the same
basis.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The provisions of
this statement require that derivative instruments be carried at
fair value on the balance sheet. The statement continues to
allow derivative instruments to be used to hedge various risks
and sets forth specific criteria to be used to determine when
hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value
or cash flow that represent the ineffective portion of a hedge
are required to be recognized in earnings and cannot be deferred.
For derivative instruments not accounted for as hedges, changes
in fair value are required to be recognized in earnings. The
provisions of this statement become effective for quarterly and
annual reporting beginning June 15, 2000. Although the statement
allows for early adoption in any quarterly period after June
1998, the Company has no plans to adopt the provisions of SFAS
No. 133 prior to the effective date. The impact of adopting the
provisions of this statement on the Company's financial position,
results of operations and cash flow subsequent to the effective
date is not currently estimable and will depend on the financial
position of the Company and the nature and purpose of the
derivative instruments in use by management at that time.
Effective January 1, 1999, the Company adopted Statement of
Position No. 98-5 - Reporting on the Cost of Start-Up Activities.
At June 30, 1999, there was no material impact of adoption on the
provisions of this statement on the Company's financial position,
results of operations or cash flow.
2. DEVELOPMENT AND DISPOSITION ACTIVITY
Development Activity
Construction in progress, including the cost of land, for
the development of multifamily properties was $51,290,146 and
$53,740,292 at June 30, 1999 and December 31, 1998, 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 available for leasing. Capitalized interest, real
estate taxes and insurance aggregated approximately $2,106,885
and $747,930 during the six month periods ended June 30, 1999 and
1998, respectively. For the six month period ended June 30,
1999, the construction and leasing of 204 units at two properties
were completed at a total cost of $16.0 million. The following
schedule details construction in progress at June 30, 1999:
<PAGE>9
<TABLE>
<CAPTION>
Placed in
(dollars in thousands) Number Costs Service June 30, 1999 Estimated
of Incurred through Land Building Scheduled
Property Units to Date 6/30/99 Cost Cost Completion
------------------------------ ----- -------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ANN ARBOR, MICHIGAN
Arbor Landings Apartments II 160 $10,855 $10,198 $ 32 $ 625 1999
ATLANTA, GEORGIA
Boggs Road 535 4,185 - 3,955 230 TBD
BATTLE CREEK, MICHIGAN
The Landings at the Preserve 90 326 - 266 60 TBD
ORLANDO, FLORIDA
Windsor at Kirkman Apts. 460 44,416 11,117 2,438 30,861 1999
AVON, OHIO
Village at Avon 312 9,646 - 2,158 7,488 2000
Other - 3,178 - 1,251 1,927
----- ------- ------- ------- ---------
1,557 $72,606 $21,315(1) $10,100 $ 41,191
===== ======= ======= ======= =========
(1) Including land of $1,396.
</TABLE>
Disposition Activity
In June 1999, the Company sold five operating properties for
net cash proceeds of $13.4 million, resulting in a gain of $12.8
million. The net cash proceeds were placed in a trust which
restricts the Company's use of these funds for the exclusive
purchase of other property of like-kind and qualifying use.
These funds are presented in the Consolidated Balance Sheet as
restricted cash. The like-kind exchange must occur prior to
December 3, 1999.
3. PROPERTY HELD FOR SALE
The Company has entered into a contract to sell one of its
Market-rate properties. This property is located in California.
The Company anticipates that this asset will be sold during 1999.
The net real estate assets of this property is presented in the
Consolidated Balance Sheet as property held for sale.
4. SHAREHOLDERS' EQUITY
The following table summarizes the changes in shareholders'
equity since December 31, 1998:
<TABLE>
<CAPTION>
Class A Common
Cumulative Shares
Preferred (at $.10 Paid-In
Shares stated value) Capital
------------ ------------- -------------
<S> <C> <C> <C>
Balance, Dec. 31, 1998 $ 56,250,000 $ 2,262,195 $ 277,134,988
Net income - - -
Issuance of 21,000
restricted common shares - 2,100 (2,100)
Retired 1,232 restricted
common shares - (123) 123
Purchase of treasury shares
(897,600 shares) - - -
Deferred compensation - - 1,881
Common share
dividends declared - - -
Preferred share
dividends declared - - -
------------ ------------ -------------
Balance, June 30, 1999 $ 56,250,000 $ 2,264,172 $ 277,134,892
============ ============ =============
Accumulated Accumulated
Dividends Other Treasury
In Excess Of Comprehensive Shares
Net Income Income (at cost) Total
------------- -------------- ----------- -------------
Balance, Dec. 31, 1998 $ (75,991,638) $ (875) $ (466,523) $ 259,188,147
Net income 17,539,345 - - 17,539,345
Issuance of 21,000
restricted common shares - - - -
Retired 1,232 restricted
common shares - - - -
Purchase of treasury shares
(897,600 shares) - - (10,114,969) (10,114,969)
Deferred compensation - - - 1,881
Common share
dividends declared (16,545,694) - - (16,545,694)
Preferred share
dividends declared (2,742,213) - - (2,742,213)
-------------- ------------ ------------- -------------
Balance, June 30, 1999 $ (77,740,200) $ (875) $(10,581,492) $ 247,326,497
============== ============= ============= =============
</TABLE>
<PAGE>10
5. SECURED DEBT
Conventional Mortgage Debt
Conventional mortgages payable are comprised of 30 and six
loans at June 30, 1999 and December 31, 1998, respectively, each
of which is collateralized by the respective real estate and
resident leases. These nonrecourse project specific loans accrue
interest at a fixed rate with the exception of one mortgage note
which accrues interest at a variable rate. Mortgages payable are
generally due in monthly installments of principal and/or
interest and mature at various dates through March 2024. The
balance of the conventional mortgages was $341.6 million and
$52.2 million at June 30, 1999 and December 31, 1998,
respectively.
As of June 30, 1999, the Company received gross proceeds of
$289.9 million from project specific, nonrecourse mortgage loans
collateralized by 24 properties owned by qualified REIT
subsidiaries, having a net book value of $350.9 million. These
qualified REIT subsidiaries are separate legal entities and
maintain records, books of accounts and bank accounts separate
and apart from any other person or entity. The proceeds from
these loans were used to pay down the Company s floating rate
unsecured line of credit facility and to increase the Company's
cash balances which will be used to fund construction in
progress, fund joint venture opportunities with pension fund
clients, and buy back limited quantities of the Company's stock
as authorized by the Board of Directors. Proceeds may also be
used to repurchase a portion of the Company's senior unsecured
debt. These mortgage loan documents require escrow deposits
for taxes and replacement of project assets. The weighted
average maturity of the loans is 9.86 years, and the weighted
average interest rate is 7.54%.
Federally Insured Mortgage Debt
Federally insured mortgage debt which encumbered seven of
the properties at June 30, 1999 and December 31, 1998 (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. The balance of
the federally insured mortgages was $27.6 million and $27.9
million at June 30, 1999 and December 31, 1998, respectively.
Six of the seven federally insured mortgages have a fixed rate
and the remaining mortgage ($1.8 million) has a variable rate.
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.
6. UNSECURED DEBT
Senior Notes
The Senior Notes 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 at June 30, 1999 and
December 31, 1998.
Medium-Term Notes Program
The Company had 11 Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million at June
30, 1999 and December 31, 1998. 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
<PAGE>11
a stated weighted average maturity of 8.77 years at June 30,
1999. The holders of two MTN's with stated terms of 30 years
each have a right to repayment in five and seven years from the
issue date of the respective MTN. If these holders exercised
their right to prepayment, the weighted average maturity of the
MTN's would be 4.41 years.
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 June 30,
1999, there was $62.5 million of additional MTN borrowings
available under the program. However, the Company may no longer
be in a position to access public unsecured debt markets due to
revised credit ratings.
From time to time, the Company may enter into hedge
agreements to minimize its exposure to interest rate risks.
There are no interest rate protection agreements outstanding as
of June 30, 1999.
Line of Credit
Prior to its termination in May 1999, the Company had
available a $250 million revolving credit facility (the "Line of
Credit") which contained various restrictive covenants. At
December 31, 1998, $226.0 million was outstanding under this
facility. The weighted average interest rate on borrowings
outstanding under the Line of Credit was 6.88% at December 31,
1998, representing a variable rate based on the prime rate or
LIBOR plus a specified spread, depending on the Company's long
term senior unsecured debt rating from Standard and Poor's and
Moody's Investors Service. An annual commitment fee of 15 basis
points on the maximum commitment, as defined in the agreement,
was payable annually in advance on each anniversary date. In May
1999, the Company repaid all outstanding obligations under this
Line of Credit through proceeds received from financing project
specific, nonrecourse mortgage loans (Note 5) and terminated the
facility. The Company recognized an extraordinary charge of
$1,808,742 which represents a $750,000 facility fee charge,
$126,559 breakage fee, and a $932,183 write off of deferred
finance costs related to the termination of the unsecured line of
credit facility.
MIGRA maintained a $500,000 Line of Credit facility ( MIGRA
Line of Credit Facility ) which the Company assumed at the time
of the merger. On February 10, 1999, the Company paid off the
$446,565 outstanding MIGRA Line of Credit Facility and terminated
this facility.
7. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
Management and Other Services
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>12
Summarized affiliate and joint venture transaction activity
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------------
1999 1998 1999 1998
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Property management fee and
other miscellaneous service
revenues - affiliates $605,868 $459,005 $ 1,101,000 $ 1,042,936
- joint ventures 228,191 236,609 451,557 463,554
Painting service revenues - affiliates 223,243 82,439 299,105 182,351
- joint ventures 36,883 119,065 64,625 212,966
Expenses incurred on behalf
of and reimbursed by(1) - affiliates 1,297,349 1,011,478 2,013,417 2,156,436
- joint ventures 364,348 640,937 1,383,329 1,282,578
Interest income - affiliates 2,502 210,701 77,370 378,685
Interest expense - affiliates (33,181) (83,751) (82,579) (213,130)
- joint ventures (6,883) (12,227) (12,627) (24,037)
<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 aggregated
$6,246,737 and $6,677,611 at June 30, 1999 and December 31, 1998,
respectively. There were no payables due to affiliates and joint
venture properties at June 30, 1999 and December 31, 1998.
Advances to Affiliates and Joint Ventures
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 $1,231,825 and $1,714,132 at June 30, 1999,
respectively, and $5,555,732 and $880,057 at December 31, 1998,
respectively. Except for insignificant amounts, advances to
affiliates bear interest; the weighted average rate charged was
8.3% during the periods ending June 30, 1999 and 1998. The
Company held funds for the benefit of affiliates and joint
ventures in the aggregate amount of $1,682,190 and $1,256,388 at
June 30, 1999, respectively, and $3,174,898 and $2,178,496 at
December 31, 1998, respectively.
During 1999, the Company provided an additional reserve of
$150,000 with respect to a receivable from a managed but non-
owned property. This reserve is reflected as a charge for funds
advanced to non-owned properties in the Consolidated Statements
of Income, but has been established primarily to cover the
potential legal costs related to collection.
In February 1998, 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 $4.0
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, had
informed the Company that the Corporation has caused the
commencement of a review of approximately $2.9 million in
expenditures relating to certain HUD subsidized properties. The
Company believed that all expenditures were appropriate and that
the ultimate outcome of any disagreement would not have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
<PAGE>13
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded in the first quarter of 1999
pursuant to the settlement agreement were $4.7 million.
Notes Receivable
At June 30, 1999, 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"). One of the notes is partially secured by 150,000 of
the Company's common shares; the other note is unsecured. For
the six months ended June 30, 1999, the interest rate charged on
this note was approximately 6.5%, with principal due May 1, 2002.
The Company recognized interest income of $109,106 for the period
ending June 30, 1999 relating to these notes.
8. RAINBOW TERRACE APARTMENTS
On February 9, 1998, HUD notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were 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.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had 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.
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of the HAP abatements
and the acceleration of the mortgage, the lender advised the
Company that the acceleration notification had been rescinded
pursuant to HUD's instruction. HUD then notified the Company
that the HAP payments would be reinstated and that HUD was
reviewing further information concerning RTA provided by the
Company. The Company has received the monthly HAP payments for
RTA.
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
From June 1998 through March 1999, the Company was involved
in ongoing negotiations with HUD for the purpose of resolving
these and other disputes concerning other properties managed or
formerly managed by the Company or one of the Service Companies,
which were similarly the subject of Comprehensive Management
Reviews initiated by HUD in the Spring of 1997.
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement
Agreement") for the purpose of resolving certain disputes
<PAGE>14
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
managed by the Company. Vanguard was managed by AEMC until
December 1997. All four properties are encumbered by HUD insured
mortgages, governed by HUD imposed regulatory agreements and
subsidized by Section 8 Housing Assistance Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467, which
represents the outstanding receivable recorded at June 30, 1999
and December 31, 1998. HUD has further agreed to release the
Company, AEMC, RTA and the owners and principals of PVA, Longwood
and Vanguard from all claims (other than tax or criminal fraud
claims) regarding the ownership or operation of Rainbow Terrace
Apartments, Park Village, Longwood and Vanguard. Moreover, HUD
has agreed not to issue a limited denial of participation,
debarment or suspension, program fraud civil remedy action or
civil money penalty, resulting from the ownership or management
of any of these projects, or to deny eligibility to any of their
owners, management agents or affiliates for participation in any
HUD program on such basis.
HUD's obligations under the Settlement Agreement are
conditioned upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1,784,467 retroactive rent increase payable to
RTA mentioned above. At June 30, 1999 and December 31, 1998, the
Company had receivables of $1,784,467 related to the 1995 and
1998 retroactive rental increase requests. At June 30, 1999, RTA
had net assets of approximately $1,827,319, including the
retroactive rental receivable of $1,784,467 due from HUD, and a
remaining amount due under the mortgage of approximately
$1,935,123. The transfer of RTA to a purchaser which is
acceptable to HUD or the direct transfer of RTA to HUD is not
expected to have a material impact on the results of operations
or cash flows of the Company. The Company has excluded RTA's
results of operations from its Consolidated Statement of Income
for 1999. RTA and PVA requested HUD to extend the April 11, 1999
deadline for identification of potential purchasers. HUD granted
that request and the deadline was extended to May 31, 1999. The
Company believes that RTA and PVA have satisfied their obligation
to identify prospective purchasers for those properties.
9. PREFERRED AND COMMON SHARES
Common Shares
In June and July 1998, the Company issued 408,314 and
5,139,387 common shares relating to the Company's merger of MIGRA
and the related acquisition of eight multifamily properties,
respectively.
Treasury Shares
On June 21, 1999, the Company's Board of Directors amended
the Company's stock repurchase plan by authorizing an additional
2,000,000 common shares to be repurchased by the Company at
market prices. The timing of stock purchases are made at the
discretion of management. During 1999 and 1998, 897,600 and
25,000 shares were repurchased at an aggregate cost of
$10,114,969 and $466,523, respectively, which was funded
primarily from operating cash flows and financing proceeds.
Preferred Shares
At June 30, 1999, 2,250,000 Depositary Shares were
outstanding, each representing 1/10 of a share of the Company's
9.75% Class A Cumulative Redeemable Preferred Shares (the
"Perpetual Preferred Shares"). 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
<PAGE>15
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 June 30,
1999 or December 31, 1998.
Shareholder Rights Plan
During January 1999, the Company adopted a Shareholder
Rights Plan. To implement the Plan, the Board of Directors
declared a distribution of one Right for each of the Company's
outstanding common shares. Each Right entitles the holder to
purchase from the Company 1/1,000th of a Class B Series I
Cumulative Preferred Share (a "Preferred Share") at a purchase
price of $40 per Right, subject to adjustment. One one-
thousandth of a Preferred Share is intended to be approximately
the economic equivalent of one common share. The Rights will
expire on January 6, 2009, unless redeemed by the Company as
described below.
The Rights are not currently exercisable and trade with the
Company's common shares. The Rights will become exercisable if a
person or group becomes the beneficial owner of 15% or more of
the then outstanding common shares of the Company or announces an
offer to acquire 15% or more of the Company's then outstanding
common shares.
If a person or group acquires 15% or more of the Company's
outstanding common shares, then each Right not owned by the
acquiring person or its affiliates will entitle its holder to
purchase, at the Right's then-current exercise price, fractional
preferred shares that are approximately the economic equivalent
of common shares (or, in certain circumstances, common shares,
cash, property or other securities of the Company) having a
market value equal to twice the then-current exercise price. In
addition, if, after the Rights become exercisable, the Company is
acquired in a merger or other business combination transaction
with an acquiring person or its affiliates or sells 50% or more
of its assets or earnings power to an acquiring person or its
affiliates, each Right will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the
acquiring Company's common shares having a market value of twice
the Right's exercise price. The Board of Directors may redeem
the Rights, in whole, but not in part, at a price of $.01 per
Right.
The distribution was made on January 29, 1999 to
shareholders of record on that date. The initial distribution of
Rights is not taxable to shareholders.
10. EARNINGS PER SHARE
Earnings per share ("EPS") has been computed pursuant to the
provisions of SFAS No. 128. The following table provides a
reconciliation of both income before cumulative effect of a
change in accounting principle and the number of common shares
used in the computation 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>16
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary item and
cumulative effect of a change in accounting
principle $ 13,159,046 $ 5,084,498 $ 15,028,925 $ 9,609,244
Less: Preferred share dividends 1,371,105 1,371,105 2,742,210 2,742,210
------------ ----------- ------------ ----------
Income before extraordinary item and
cumulative effect of a change in accounting
principle applicable to common shares 11,787,941 3,713,393 12,286,715 6,867,034
Less: Extraordinary loss 1,808,742 124,895 1,808,742 124,895
Plus: Cumulative effect of a change in
accounting principle - - 4,319,162 -
------------ ----------- ------------ -----------
Income applicable to common shares $ 9,979,199 $ 3,588,498 $ 14,797,135 $ 6,742,139
============ =========== ============ ===========
Diluted Earnings Per Share:
Income before extraordinary item and
cumulative effect of a change in accounting
principle $ 13,159,046 $ 5,084,498 $ 15,028,925 $ 9,609,244
Less: Preferred share dividends 1,371,105 1,371,105 2,742,210 2,742,210
Amortization expense relating to
contingent merger consideration 36,911 - 73,822 -
----------- ----------- ----------- ----------
Income before extraordinary item and
cumulative effect of a change in accounting
principle applicable to common shares 11,751,030 3,713,393 12,212,893 6,867,034
Less: Extraordinary loss 1,808,742 124,895 1,808,742 124,895
Plus: Cumulative effect of a change
in accounting principle - - 4,319,162 -
------------ ------------ ------------ -----------
Income applicable to common shares $ 9,942,288 $ 3,588,498 $ 14,723,313 $ 6,742,139
============ ============ ============ ===========
Number of Shares:
Basic-average shares outstanding 22,359,480 17,133,185 22,516,237 17,102,729
Dilutive shares - - 3,016 -
----------- ----------- ----------- ----------
Diluted-average shares outstanding 22,359,480 17,133,185 22,519,253 17,102,729
=========== =========== =========== ==========
Earnings per common share - basic:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ .53 $ .22 $ .54 $ .40
=========== =========== =========== ==========
Extraordinary item $ (.08) $ (.01) $ (.08) $ (.01)
=========== =========== =========== ==========
Cumulative effect of a change in accounting
principle $ - $ - $ .19 $ -
=========== =========== =========== ==========
Net income $ .45 $ .21 $ .65 $ .39
=========== =========== =========== ==========
Earnings per common share - diluted:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ .53 $ .22 $ .54 $ .40
=========== =========== =========== ==========
Extraordinary item $ (.08) $ (.01) $ (.08) $ (.01)
=========== =========== =========== ==========
Cumulative effect of a change in accounting
principle $ - $ - $ .19 $ -
=========== =========== =========== ==========
Net income $ .45 $ .21 $ .65 $ .39
=========== =========== =========== ==========
Pro forma amounts assuming the new
capitalization policy is applied retroactively:
Net income $ 11,350,304 $ 5,148,603 $ 13,220,183 $ 9,807,651
============ ============ ============ ===========
Income applicable to common shares $ 9,979,199 $ 3,777,498 $ 10,477,973 $ 7,065,441
============ ============ ============ ===========
Per Share Amount - Income applicable
to common shares:
Basic $ .45 $ .22 $ .47 $ .41
============ ============ ============ ===========
Diluted $ .45 $ .22 $ .47 $ .41
============ ============ ============ ===========
</TABLE>
<PAGE>17
Options to purchase 1,487,543 and 1,011,774 shares of common
stock were outstanding at June 30, 1999 and 1998, respectively, a
portion of which has been reflected above using the treasury
stock method.
11. INTERIM SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company
has four reportable segments: (1) Market-rate multifamily
properties, (2) Government-Assisted multifamily properties, (3)
Management and Service Operations and (4) Unallocated Corporate
Overhead. The Company has identified these segments because the
discrete information is the basis upon which management makes
decisions regarding resource allocation and performance
assessment. The Market-rate multifamily properties are
conventional multifamily residential apartments (the operations
are not subject to regulation by HUD). The Government-Assisted
properties are multifamily properties for which the rents are
subsidized and certain aspects of the operations are regulated by
HUD pursuant to Section 8 of the National Housing Act of 1937.
The Management and Service Operations provide management and
advisory services to the Market-rate and Government-Assisted
properties which are owned by the Company, as well as to clients
and properties that are not owned, but are managed by the
Company. All of the Company's segments are located in the United
States. During the second quarter of 1999, management added a new
segment representing Unallocated Corporate Overhead to capture costs
not specifically allocated to an individual segment and to isolate
these costs from the third party Management and Service Operations.
For comparability purposes, the second quarter of 1998 results have
been restated to reflect this revision to the Company's reportable
segments.
The accounting policies of the segments are the same as
those described in the "Basis of Presentation and Significant
Accounting Policies". The Company evaluates the performance of
its segments and allocates resources to them based on EBITDA.
EBITDA should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting
principles - "GAAP"), as an indicator of the Company's financial
performance, cash flow from operating activities (determined in
accordance with GAAP) or 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.
Information on the Company's segments for the three and six
months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the three months ended June 30, 1999
------------------------------------------------------------------
Management Unallocated
Government- and Service Corporate Total
Market-rate Assisted Operations Overhead Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total segment revenues $ 33,871,604 $ 2,486,838 $ 6,802,903 $ - $ 43,161,345
Elimination of intersegment
revenues (47,680) - (3,799,675) - (3,847,355)
------------ ------------ ----------- -----------
Consolidated revenues $ 33,823,924 $ 2,486,838 $ 3,003,228 $ - $ 39,313,990
============ ============ =========== ===========
Equity in net income of joint
ventures $ 167,152 $ 7,612 $ - $ 89,342 $ 264,106
*EBITDA-including the
proportionate share of joint
ventures $ 19,188,434 $ 1,517,549 $ 953,474 $(3,508,262) $ 18,151,195
Total assets $814,930,941 $ 13,975,788 $49,474,005 $ 8,043,299 $886,424,033
Capital expenditures, gross $ 10,476,510 $ 168,051 $ 162,176 $ - $ 10,806,737
</TABLE>
<PAGE>18
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
-----------------------------------------------------------------
Management Unallocated
Government- and Service Corporate Total
Market-rate Assisted Operations Overhead Consolidated
------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Total segment revenues $ 66,967,772 $ 4,934,048 $13,002,907 $ - $84,904,727
Elimination of intersegment
revenues (95,460) - (7,429,226) - (7,524,686)
------------- ----------- ----------- ----------
Consolidated revenues $ 66,872,312 $ 4,934,048 $ 5,573,681 $ - $77,380,041
============ =========== =========== ==========
Equity in net income of joint
ventures $ 139,223 $ 11,277 $ - $ 86,870 $ 237,370
*EBITDA-including the
proportionate share of joint
ventures $ 38,611,720 $ 3,021,972 $ 1,648,304 $(5,986,656) $ 37,295,340
Total assets $814,930,941 $13,975,788 $ 49,474,005 $ 8,043,299 $886,424,033
Capital expenditures, gross $ 20,043,462 $ 532,164 $ 376,682 $ - $ 20,952,308
</TABLE>
<TABLE>
<CAPTION>
For the three months ended June 30, 1998
-----------------------------------------------------------------
Management Unallocated
Government- and Service Corporate Total
Market-rate Assisted Operations Overhead Consolidated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total segment revenues $ 28,577,413 $ 2,487,695 $ 5,967,517 $ - $ 37,032,625
Elimination of intersegment
revenues (47,500) - (4,138,888) - (4,186,388)
-------------- ----------- ----------- -----------
Consolidated revenues $ 28,529,913 $ 2,487,695 $ 1,828,629 $ - $ 32,846,237
============= =========== =========== ===========
Equity in net income of joint
ventures $ 151,205 $ 19,460 $ - $ - $ 170,665
*EBITDA-including the
proportionate share of joint
ventures $ 17,180,477 $ 1,597,642 $ 213,418 $ (850,046) $ 18,141,491
Total assets $ 718,656,566 $13,204,186 $49,444,343 $ 4,353,221 $ 785,658,316
Capital expenditures, gross $ 157,237,022 $ 482,969 $ 673,002 $ - $ 158,392,993
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
-----------------------------------------------------------------
Management Unallocated
Government- and Service Corporate Total
Market-rate Assisted Operations Overhead Consolidated
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total segment revenues $ 55,330,208 $ 4,952,908 $10,407,180 $ - $ 70,690,296
Elimination of intersegment
revenues (95,000) - (7,040,256) - (7,135,256)
------------ ----------- -----------
Consolidated revenues $ 55,235,208 $ 4,952,908 $ 3,366,924 $ - $ 63,555,040
============ =========== ===========
Equity in net income of joint
ventures $ 180,989 $ 25,898 $ - $ - $ 206,887
*EBITDA-including the
proportionate share of joint
ventures $ 32,988,954 $ 3,200,689 $ 523,348 $(1,942,574) $ 34,770,417
Total assets $718,656,566 $13,204,186 $49,444,343 $ 4,353,221 $785,658,316
Capital expenditures, gross $240,132,931 $ 686,400 $ 1,032,948 $ - $241,852,279
*Intersegment revenues and expenses have been eliminated in the
computation of EBITDA for each of the segments.
</TABLE>
A reconciliation of total segment EBITDA to total
consolidated net income for the three and six months ended June
30, 1999 and 1998 is as follows:
<PAGE>19
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30 June 30,
--------------------------- -------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total EBITDA for reportable segments $ 18,151,195 $18,141,491 $ 37,295,340 $34,770,417
EBITDA-proportionate share of joint ventures (835,208) (712,459) (1,471,137) (1,300,850)
Equity in net income of joint ventures 264,106 170,665 237,370 206,887
Depreciation and amortization (8,328,860) (5,707,884) (16,604,908) (11,022,479)
Interest expense (9,105,415) (7,112,892) (17,356,147) (13,544,559)
Interest income 325,041 315,904 511,029 528,519
Income taxes (142,141) (10,327) (412,950) (28,691)
Extraordinary item - loss (1,808,742) (124,895) (1,808,742) (124,895)
Gain on sale of operating properties 12,830,328 - 12,830,328 -
Cumulative effect of a change in accounting
principle - - 4,319,162 -
------------- ------------ ------------
Consolidated net income $ 11,350,304 $ 4,959,603 $ 17,539,345 $ 9,484,349
============= ============ ============
</TABLE>
12. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company changed its method of
accounting to capitalize expenditures for certain replacements
and improvements, such as new HVAC equipment, structural
replacements, appliances, flooring, carpeting and kitchen/bath
renovations. Previously, these costs were charged to operations
as incurred. Ordinary repairs and maintenance, such as suite
cleaning and painting, and appliance repairs are expensed. The
Company believes the change in the capitalization method provides
an improved measure of the Company s capital investment, provides
a better matching of expenses with the related benefit of such
expenditures, including associated revenues, and is in the
opinion of management, consistent with industry practice. The
cumulative effect of this change in accounting principle
increased net income for the six months ended June 30, 1999 by
$4,319,162 or $.19 per share (basic and diluted). The effect of
this change was to increase income before cumulative effect of a
change in accounting principle by $2,157,594 or $.10 per share
(basic and diluted) and $3,389,087 or $.15 per share (basic and
diluted) for the three and six months ended June 30, 1999,
respectively. The pro forma amounts shown on the income
statement have been adjusted to reflect the retroactive
application of the capitalization of such expenditures and
related depreciation for the three and six months ended June 30,
1998 which increased net income by $189,000 and $323,302 or
$.01 and $.02 per share (basic and diluted), respectively.
13. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma operating
data for 1998 is presented to reflect, as of January 1, 1998, the
effects of: (i) the 12 property acquisitions completed in 1998,
(ii) the merger of MIGRA in 1998, (iii) the sale of a property
in 1998, (iv) the exclusion of Rainbow Terrace Apartments
operating results, and (v) the sale of the five properties in
1999. The following unaudited supplemental pro forma operating
data for 1999 is presented to reflect, as of January 1, 1999, the
effects of the sale of the five properties in 1999.
<TABLE>
<CAPTION>
For the six months
ended June 30,
1999 1998
(In thousands, except per share amounts) --------- --------
<S> <C> <C>
Revenues $ 75,304 $ 70,039
*Net income 1,571 7,120
*(Loss)/income applicable to common shares (Basic and
Diluted) (1,171) 4,378
Earnings per common shares (Basic and Diluted) $ (.05) $ .19
Weighted average number of common shares outstanding:
- Basic 22,516 22,516
- Diluted 22,519 22,519
*Before cumulative effect and extraordinary item
</TABLE>
<PAGE>20
The 1999 and 1998 pro forma financial information does not
include the revenue and expenses for the period January 1 through
the date the properties were acquired by the Company for Windsor
at Kirkman Apartments, Windsor Pines and Steeplechase at Shiloh
Crossing Apartments which are properties that were acquired in
1998. The revenue and expenses of the aforementioned properties
were excluded from the pro forma financial information for 1999
and 1998 as the properties were under 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.
14. SUBSEQUENT EVENTS
Treasury Shares
Subsequent to June 30, 1999, the Company repurchased 190,000
common shares at an aggregate cost of $2,185,000 which was funded
primarily from operating cash flows and financing proceeds.
Dividends Declared and Paid
On June 21, 1999, the Company declared a dividend of $0.375
per common share for the quarter ending June 30, 1999, which was
paid on August 2, 1999 to shareholders of record on July 15,
1999.
Advisory Contract
On July 14, 1999, MIG signed a contract with one of the
Company's major pension fund clients which authorizes MIG to
continue to manage existing properties and allocate up to $200
million in new, discretionary funds to purchase additional
properties for the client.
Common Shares
On July 14, 1999, the Company issued 11,249 common shares to
one of the MIGRA shareholders relating to a partial settlement of
the contingent consideration payable with respect to the amounts
due on the first anniversary of the merger. The shares were
issued at $11.64, representing the average closing price of the
common shares for the 20 trading days immediately preceding June
30, 1999. The remaining common shares payable with respect to
the first anniversary payment is under review by the Company's
management and the MIGRA shareholders since the language in the
governing document requires further review as applicable to certain
price adjustments the Company proposes to make.
Secured Financing
On August 3, 1999, the Company collateralized a mortgage on
one property for $6.6 million in a project specific, non-recourse
loan from The Chase Manhattan Bank. The loan will mature in 12
years with an interest rate of 7.8%. The proceeds from this loan
are being used to fund construction in progress, fund joint
venture opportunities with pension fund clients, and buy back a
limited number of the Company's stock as authorized by the Board
of Directors.
<PAGE>21
ASSOCIATED ESTATES REALTY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
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. In
connection with the merger of MIG Realty Advisors, Inc. ( MIGRA )
on June 30, 1998, the Company also acquired the property and
advisory management businesses of several of MIGRA's affiliates
and the right to receive certain asset management fees, including
disposition and incentive fees, that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. MIG II Realty Advisors,
Inc. ("MIG") MIGRA's successor, is a registered investment
advisor and also functions as a mortgage banker and as a real
estate advisor to pension funds. MIG recognizes revenue
primarily from its clients' real estate acquisitions and
dispositions, loan origination and consultation, debt servicing,
asset and property management and construction lending
activities. MIG earns the majority of its debt servicing fee
revenue from two of its pension fund clients. MIG's asset
management, property management, investment advisory and mortgage
servicing operations, including those of the prior MIG
affiliates, are collectively referred to herein as the "MIGRA
Operations".
At June 30, 1999, the Company owned directly or indirectly,
or was a joint venture partner in 97 multifamily properties
containing 21,068 units. Of these properties, 71 were located in
Ohio, 11 in Michigan, two in Florida, two in Georgia, three in
Maryland, one in North Carolina, one in Texas, one in Arizona,
three in Indiana, one in California and one in Pennsylvania.
Additionally, the Company managed 54 non-owned properties, 48 of
which were multifamily properties consisting of 11,555 units (17
of which are owned by various institutional investors consisting
of 5,991 units) and six of which were commercial properties
containing an aggregate of approximately 621,000 square feet of
gross leasable area. Through affiliates, collectively referred
to as the "Service Companies", the Company provides property and
asset management, investment advisory, painting and computer
services as well as mortgage origination and servicing to both
owned and non-owned properties.
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 Income contained in the
financial statements, including trends which might appear, should
not be taken as indicative of future operations. This discussion
may also contain forward-looking statements based on current
judgments and current knowledge of management, which are subject
to certain risks, trends and uncertainties that could cause
actual results to vary from those projected. Accordingly,
readers are cautioned not to place undue reliance on forward-
looking statements. 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, changes in
economic conditions in the markets in which the Company owns
properties, risks of a lessening of demand for the apartments
owned by the Company, changes in government regulations affecting
the Government-Assisted Properties, changes in or termination of
contracts relating to third party management and advisory
business, 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.
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, 1993. REITs
are subject to a number of organizational and operational
requirements including a requirement that 95% of the income that
would otherwise be considered as taxable income be distributed to
shareholders. Providing the Company continues to qualify as a
<PAGE>22
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, secured borrowings and property sales proceeds. 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. During 1999 and
2000, approximately $21.7 million and $109.4 million,
respectively, of the Company's debt will mature. Although the
Company may no longer be in a position to access public unsecured
debt markets due to revised credit ratings, the Company believes
it has adequate alternatives available to provide for its
liquidity needs including new secured borrowings and property
sales proceeds.
Financing:
As of August 12, 1999, the Company has received proceeds of
$296.5 million in project specific, nonrecourse mortgage loans
which are collateralized by 25 properties owned by qualified REIT
subsidiaries, having a net book value of $357.8 million. These
qualified REIT subsidiaries are separate legal entities and
maintain records, books of accounts and bank accounts separate
and apart from any other person or entity. Most of the proceeds
from these loans were used to pay down the Company's floating
rate unsecured line of credit facility. The proceeds were also
used to increase the Company's cash balances which will be used
to fund construction in progress, fund joint venture
opportunities with pension fund clients, and buy back limited
quantities of the Company's stock as authorized by the Board of
Directors. Proceeds may also be used to repurchase a portion of
the Company's senior unsecured debt. There are no cross-default
or cross-collateralization provisions in the mortgages. After
repayment of the unsecured line of credit facility, the Company's
total floating rate debt outstanding was reduced to $18.2
million, and all outstanding unsecured floating rate debt was
repaid. These nonrecourse financings have the effect of
increasing the Company's weighted average debt maturity from
approximately 3 years to approximately 9 years.
Prior to its termination in May 1999, the Company had
available a $250 million revolving credit facility (the "Line of
Credit") which contained various restrictive covenants. At
December 31, 1998, $226.0 million was outstanding under this
facility. The weighted average interest rate on borrowings
outstanding under the Line of Credit was 6.88% at December 31,
1998, representing a variable rate based on the prime rate or
LIBOR plus a specified spread, depending on the Company's long
term senior unsecured debt rating from Standard and Poor's and
Moody's Investors Service. An annual commitment fee of 15 basis
points on the maximum commitment, as defined in the agreement,
was payable annually in advance on each anniversary date. In May
1999, the Company repaid all outstanding obligations under this
Line of Credit through proceeds received from financing project
specific, nonrecourse mortgage loans (Note 5) and terminated the
facility. The Company recognized an extraordinary charge of
$1,808,742 which represents a $750,000 facility fee charge,
$126,559 breakage fee, and a $932,183 write off of deferred
finance costs related to the termination of the unsecured line of
credit facility.
The Company was in violation of certain financial ratio
covenants under the Line of Credit for the first quarter 1998
reporting period. The Company received waivers of those
violations through June 30, 1998. Additionally, the Company
advised its bank group that it was not in compliance with one of
the financial covenants concerning the Company's net worth for
the third quarter 1998 reporting period. The net worth covenant
required that the Company maintain a minimum net worth of $400
million, based on a formula that incorporates the annualized
multiple of the most recent quarter's earnings before interest,
taxes, depreciation and amortization ("EBITDA"), as defined in
the agreement. The Company negotiated with its bank group for a
waiver by the banks of the breach of the net worth covenant,
along with an increase in borrowing costs under its Line of
Credit from LIBOR plus 100 basis points to LIBOR plus 140 basis
points (based on the then-current credit rating). In addition,
certain of the covenants, including the minimum net worth
covenant, were modified to provide the Company a limited increase
in flexibility. The minimum net worth covenant was reduced from
<PAGE>23
$400 million to $325 million. The bank group continued to make
advances under the Line of Credit following the Company's
notification that it was not in compliance with the net worth
covenant. A $395,000 default waiver fee was paid in December
1998 and was reflected in the Consolidated Statements of Income
at December 31, 1998.
MIGRA maintained a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. During February 1999, the Company paid off the
$446,565 outstanding MIGRA Line of Credit Facility and terminated
this facility.
Fifty-five (43 Market-rate Properties which refers to the
Core and Acquired/Disposed Property portfolios and 12
Government-Assisted Properties) of the Company's 90 (77
Market-rate Properties and 13 Government-Assisted Properties)
wholly owned properties were unencumbered at June 30, 1999 with
annualized EBITDA of approximately $37.8 million (approximately
$32.1 million represents the Market-rate Properties and
approximately $5.7 million represents the Government-Assisted
Properties) and a historical gross cost basis of approximately
$389.4 million (approximately $354.3 million represents the
Market-rate Properties and approximately $35.1 million
represents the Government-Assisted Properties). The remaining
35 of the Company's wholly owned properties, (all of which are
Market-rate Properties except one which is a Government-Assisted
Property), have an historical gross cost basis of $518.9 million
($515.1 million represents the Market-rate Properties and $3.8
million represents the Government-Assisted Property) and
secured property specific debt of $369.2 million ($2.9 million
relates to the Government-Assisted Property) at June 30, 1999.
Unsecured debt, which totaled $197.4 million at June 30, 1999,
consisted of $112.5 million in Medium-Term Notes and Senior
Notes of $84.9 million. The Company's proportionate share of
the mortgage debt relating to the seven joint venture
properties was $17.4 million at June 30, 1999. The weighted
average interest rate on the secured, unsecured and the
Company's proportionate share of the joint venture debt was
7.28% at June 30, 1999.
After considering the effect of the August 3, 1999 $6.6
million mortgage refinancing of one property, 54 (42 Market-rate
Properties and 12 Government-Assisted Properties) of the
Company's 90 (77 Market-rate Properties and 13 Government-Assisted
Properties) wholly owned properties remain unencumbered with
annualized EBITDA of approximately $37.1 million (approximately
$31.4 million represents the Market-rate Properties and
approximately $5.7 million represents the Government-Assisted
Properties) and a historical gross cost basis of approximately
$381.0 million (approximately $345.9 million represents the
Market-rate Properties and approximately $35.1 million
represents the Government-Assisted Properties). The remaining
36 of the Company's wholly owned properties (all of which are
Market-rate Properties except one which is a Government-Assisted
Property, have a historical gross cost basis of $527.2 million
($523.4 million represents the Market-rate Properties and $3.8
million represents the Government-Assisted Property).
The Company had 11 Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million at June
30, 1999 and December 31, 1998, 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 8.77 years
at June 30, 1999. The holders of two MTN's with stated terms of
30 years each have a right to repayment in five and seven years
from the issue date of the respective MTN. If these holders
exercised their right to prepayment, the weighted average
maturity of the MTN's would be 4.41 years.
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 June 30,
1999, there are $62.5 million of additional MTN borrowings
available under the program. However, due to the downgrades of
the Company's credit rating to a non-investment grade rating in
March, June and July 1999, the Company does not anticipate near
to intermediate issuance of additional MTN's or similar unsecured
debt instruments.
Registration statements:
The Company has a shelf registration statement on file 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 of which MTN's totaling $40.0 million have
been issued leaving $62.5 million available. The securities may
be offered from time to time at prices and upon terms to be
determined at the time of sale. However, due to the currently
depressed price of the Company's common shares and downgrades of
the Company's public debt and preferred stock in March, June and
July 1999, it is unlikely that the Company will be in a position
to offer any securities under its shelf registration statement in
the near future.
<PAGE>24
Operating Partnership:
The Company entered into an operating partnership structured
as a DownREIT of which an aggregate 20% is owned by limited
partners. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as
"Operating partnership minority interest" in the Consolidated
Balance Sheets. Capital contributions, distributions and profits
and losses are allocated to minority interests in accordance with
the terms of the operating partnership agreement. In conjunction
with the acquisition of the operating partnership, the Company
issued a total of 522,032 operating partnership units ("OP
units") which consist of 84,630 Class A OP units, 36,530 Class B
OP units, 115,124 Class C OP units, 62,313 Class D OP units, and
223,435 Class E OP units. These OP units may, under certain
circumstances, become exchangeable into common shares of the
Company on a one-for-one basis. The Class A unitholders are
entitled to receive distributions per OP unit equal to the per
share distributions on the Company's common shares. At June 30,
1999, the Company charged $64,521 to minority interest in
operating partnership in the Consolidated Statements of Income
relating to the Class A unitholders allocated share of net
income. At June 30, 1999, the Class B, Class C, Class D and
Class E unitholders were not entitled to receive an allocation of
net income and did not receive nor were entitled to receive any
cash distributions from the operating partnership.
Merger Contingent Consideration Payable:
Subject to certain conditions and adjustments, the MIGRA
Stockholders' Conversion Rights entitle the MIGRA Stockholders to
receive (a) on the second issuance date (June 30, 1999), $872,935
worth of common shares of the Company at $11.64 per share, the
average closing price of the common shares for the 20 trading
days immediately preceding June 30, 1999, (approximately 74,994
common shares) subject to certain price adjustments as provided
for in the Merger Agreement and (b) on the third issuance date
(June 30, 2000) $2,982,917 worth of common shares of the Company
of which $872,935 is based on the average closing price of the
common shares for the 20 trading days immediately preceding the
date the consideration was met and $2,109,982 is based on a
closing price of $23.63 per the merger agreement. The obligation
of the Company to issue common shares on the second issuance date
was contingent upon the issuance of a certificate of occupancy
for the Windsor Pines property and the MIGRA stockholders'
submission to the Company of multifamily property acquisition
opportunities with an aggregate gross asset value of at least $50
million and an average yield of at least 85% of the pro forma
yield of the properties being acquired by the Company in
connection with the acquisitions (the "Minimum Yield"). The
obligation of the Company to issue common shares on the third
issuance date is contingent upon the issuance of a certificate of
occupancy for the Windsor at Kirkman property and the MIGRA
stockholders' submission to the Company of an additional $50
million of multifamily property acquisition opportunities with
the Minimum Yield. On July 14, 1999, the Company issued 11,249
common shares to one of the MIGRA shareholders relating to a
partial settlement of the contingent consideration payable in
respect of the amounts due on the first anniversary of the
merger. The shares were issued at $11.64, representing the
average closing price of the common shares for the 20 trading
days immediately preceding June 30, 1999. The remaining common
shares payable with respect to the first anniversary payment is
under review by the Company's management and the MIGRA
shareholders since the language in the governing document requires
further review as applicable to certain price adjustments the Company
proposes to make. The conditions precedent to the first anniversary
payment were met in December 1998. The contingencies precedent
to the third payment have not been met as of June 30, 1999.
Acquisitions, development and dispositions:
Should the Company acquire any multifamily properties in
1999, it would finance such acquisitions and development with the
most appropriate sources of capital, which may include the
assumption of mortgage indebtedness, bank and other institutional
borrowings, through the exchange of properties, undistributed
Funds From Operations, or secured debt financings.
The Company currently has a letter of intent to purchase one
multifamily property, located in Lawrenceville, Georgia,
containing an aggregate of 308 units for a total purchase price
of approximately $23.4 million. The Company may finance the
acquisition of the multifamily property or may purchase the
<PAGE>25
property in a joint venture transaction using the funds received
from the sale of five operating properties, which have been set
aside to execute a like-kind exchange and proceeds received from
the project specific, nonrecourse mortgage refinancing.
For the six month period ended June 30, 1999, the Company
completed the construction and leasing of 204 units at two of the
Company's development properties.
The Company is in the process of constructing or planning
the construction of an additional 1,557 units to be owned by the
Company as follows:
<TABLE>
<CAPTION>
Additional Anticipated
Property Location Units Completion
----------------------- --------------------- ---------- -------------
<S> <C> <C> <C>
Arbor Landings Apts. II Ann Arbor, Michigan 160 3rd Qtr. 1999
Boggs Road Atlanta, Georgia 535 TBD
The Landings at the
Preserve(a) Battle Creek, Michigan 90 TBD
Village at Avon Avon, Ohio 312 4th Qtr. 2000
Windsor at Kirkman
Apartments Orlando, Florida 460 3rd Qtr. 1999
-----
1,557
(a) A clubhouse will also be added to The Landings at the
Preserve.
TBD - To be determined.
</TABLE>
The Company is exploring opportunities to dispose of some of
its joint venture, Government-Assisted and congregate care
multifamily properties. The Company has retained a financial
advisor to evaluate the alternatives relating to the disposition
of its ownership of some of its Government-Assisted properties.
The Company has entered into a contract to sell one of its
Market-rate properties. This property is located in California.
The Company anticipates that this asset will be sold during 1999.
The net real estate assets of this property is presented in the
Consolidated Balance Sheet as property held for sale.
The sale of any or all of these assets may have either an
accretive or dilutive effect on earnings depending upon the
application of proceeds derived from the sale, which will not be
known until the time of sale.
In June 1999, the Company sold five operating properties for
net cash proceeds of $13.4 million, resulting in a gain of $12.8
million. The net cash proceeds were placed in a trust which
restricts the Company's use of these funds for the exclusive
purchase of other property of like-kind and qualifying use.
These funds are presented in the Consolidated Balance Sheet as
restricted cash. The like-kind exchange must occur prior to
December 3, 1999.
On May 4, 1999, a pension fund client of MIG acquired a
multifamily property containing 248 units located in Fairfax
County, Virginia. MIG was retained to provide asset and property
management services.
On July 14, 1999, MIG signed a contract with one of the
Company's major pension fund clients pursuant to which MIG will
continue to manage existing properties and the client has
committed to allocate up to $200 million in new, discretionary
funds to purchase additional properties.
<PAGE>26
Management Contract Cancellation:
On January 13, 1999, the Company terminated its management
contract for Longwood Apartments, which resulted in a loss of
management fee income for the six months ended June 30, 1999 of
approximately $148,000. Moreover, pursuant to the terms of the
HUD Settlement Agreement discussed in Note 7 of the notes to the
financial statements, the Company may terminate its management
contract for Park Village Apartments, which will result in a
partial loss of management fee income in 1999. The management
fees collected for Park Village Apartments for the six months
ended June 30, 1999 were $11,083.
In addition, pursuant to the terms of a separate settlement
agreement with affiliates entered into in conjunction with the
settlement agreement with the Corporation as discussed in Note 8,
the Company has agreed to end its management of certain
commercial properties owned by certain affiliated persons upon 60
days prior written notice from the respective owners of those
properties. The management fees generated from those commercial
properties for the six months ended June 30, 1999 was $56,242.
Subsequent to June 30, 1999, the 60 days written notice to cancel
the management of two commercial properties was received. The
management fees generated from these two commercial properties
was $15,500 for the six months ended June 30, 1999.
The Company has also lost management fees from Euclid
Medical & Commercial Arts Building, a non-owned commercial
property, because of foreclosure proceedings. During March 1999,
the Company lost management of this property. The management
fees generated from this property for the three months ended
March 31, 1999 was $20,728; no fees were recognized for the
period after March 31, 1999.
In addition, if the Company proceeds with the proposed sale
of its interests in certain joint venture properties, the Company
would no longer receive the management fees attributable to those
properties and one other property. The management fees net of
consulting fees generated for these properties for the six months
ended June 30, 1999 was $431,549. Certain third party owners of
properties currently managed by the Company have entered into
contracts to sell those properties, subject to certain
contingencies. To the extent those third party owned properties
are sold, the Company would similarly no longer receive the
management fees generated from the respective properties. The
aggregate management fees generated for these properties for the
six months ended June 30, 1999 was $196,055. The impact of the
loss of these management fee revenues would be partially offset
by a reduction in operating expenses.
Dividends:
On June 21, 1999, the Company declared a dividend of $0.375
per common share for the quarter ending June 30, 1999, which was
paid on August 2, 1999 to shareholders of record on July 15,
1999. The common share dividend was reduced to $0.375 from
$0.465 in order to reduce the Company's dividend payout ratio.
On May 20, 1999, 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 June 15, 1999 to
shareholders of record on June 1, 1999. At the current dividend
level, the Company is a net borrower and will continue to monitor
earnings expectations to determine if any changes should be made
with respect to the dividend policy.
Cash flow sources and applications:
Net cash provided by operating activities decreased
$3,080,500 from $23,332,500 to $20,252,000 for the six months
ended June 30, 1999 when compared with the six months ended June
30, 1998. This decrease was the result of increases in depreciation
and amortization, restricted cash and other operating assets and
liabilities offset by funds received from accounts and notes
receivable of affiliates and joint ventures and decreases in funds
held for non-owned managed properties of affiliates and joint
ventures as well as an increase in accounts payable and accrued
expenses.
<PAGE>27
Net cash flows used for investing activities of $20,877,100
for the six months ended June 30, 1999 were primarily used for
the development of multifamily real estate and acquisition of
capital expenditures.
Net cash flows provided by financing activities of
$25,166,400 for the six months ended June 30, 1999 were primarily
comprised of proceeds received from the mortgage financing of 24
properties. 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.
During the remainder of 1999 and 2000, approximately $131.1
million of the Company's debt will mature. The Company intends
to repay any such debt as it matures through a combination of new
secured borrowings and property sales proceeds.
RESULTS OF OPERATIONS
Comparison of the quarter ended June 30, 1999 to the quarter
ended June 30, 1998
In the following discussion of the comparison of the quarter
ended June 30, 1999 to the quarter ended June 30, 1998, Market-
rate Properties refers to the Core and Acquired/Disposed Property
portfolios. Core Properties represents 29 of the 34 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 46 properties acquired in separate transactions or
developed by the Company during 1994 through March 31, 1998 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/Disposed Properties refers to 13 properties
which were acquired between April 1, 1998 and June 30, 1999 as
well as the newly constructed and repositioned properties, the
sale of five operating properties and Rainbow Terrace Apartments.
Overall, total revenue increased $6,467,800 or 19.7% and
total expenses increased $11,284,600 or 40.4% for the quarter.
Net income applicable to common shares after deduction for the
dividends on the Company's Perpetual Preferred Shares increased
$6,390,700 or 178.1%.
During the quarter ended June 30, 1999, the Market-rate
Properties generated total revenues of $33,823,900 while
incurring property operating and maintenance expenses of
$15,438,500. Of these amounts, the Acquired/Disposed and Core
Properties contributed total revenues of $8,618,000 and
$25,206,000, respectively, while incurring property operating and
maintenance expenses of $3,945,300 and $11,493,200,
respectively. The Government-Assisted Properties generated total
revenues of $2,486,800 while incurring property operating and
maintenance expenses of $1,019,200 for the quarter ended June 30,
1999.
Rental Revenues:
Rental revenues increased $5,214,300 or 16.9% for the
quarter. Rental revenues from the Acquired/Disposed Properties
increased $5,021,900 for the quarter. Occupancy and unit rents
at the Core Properties and Government-Assisted Properties
resulted in an increase of $174,800 or .70% and $12,900 or .53%,
respectively, in rental revenue from these properties.
Other Revenues:
Other income decreased $110,300 or 29.1% for the quarter.
The decrease is due primarily to the receipt of a workers
compensation refund during the second quarter of 1998.
The Company recognized property and asset management fee
revenues of $1,329,400 and $588,200, respectively, for the
quarter ended June 30, 1999 as compared to $881,200 of property
management fees and no asset management fees for the quarter
ended June 30, 1998. The increase in property and asset
management fee revenues is primarily due to the collection of
these fees by MIGRA relating to their institutional investor
clients.
<PAGE>28
The Company recognized asset acquisition fee revenue of
$121,700 and $0 for the quarters ended June 30, 1999 and 1998,
respectively. The fee relates to MIG acquiring a multifamily
property on behalf of a pension fund client in May 1999.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$3,539,000 or 27.4% for the quarter. Property operating and
maintenance expenses at the Acquired/Disposed Properties
increased $2,093,900 for the quarter due primarily to the
operating and maintenance expenses incurred at the 13 properties
acquired in 1998, the newly constructed properties of The Village
of Western Reserve and The Residence at Barrington. Property
operating and maintenance expenses at the Core Properties
increased $1,386,900, or 13.7% when compared to the three months
ended June 30, 1998 primarily due to increases in personnel,
utilities, building and grounds repair and maintenance, and real
estate and local taxes. Property operating and maintenance
expenses at the Government-Assisted Properties increased $58,200
or 6.1% for the quarter
Other expenses:
Depreciation and amortization increased $2,621,100 or 45.9%
for the quarter primarily due to the increased depreciation
expense recognized on the Acquired/Disposed Properties and the
additional depreciation as a result of the adoption of the new
capitalization policy as well as the amortization expense of the
intangible assets recorded with respect to the merger with MIGRA.
The amortization expense related to the intangible assets is
reflected as a charge to the Management and Service Operations.
General and administrative expenses increased $3,019,600 or
172.8% for the quarter. This increase is primarily attributable
to payroll and related expenses due to the expense of the MIGRA
advisory operations and other consulting and professional fees
incurred by the Company principally related to system processes
and operating consulting services. During the second quarter of
1999, a severance benefit of $550,000 was paid to an executive
officer of the Company. The increase related to general and
administrative expenses of approximately $2,522,000 is
classified as Unallocated Corporate Overhead.
Interest expense increased $1,992,400 or 28.0% for the
quarter primarily due to the interest incurred with respect to
the project specific, nonrecourse mortgage financing
collateralized by 24 properties owned by the REIT.
The Company recognized a charge for funds advanced to a non-
owned property totaling $150,000 for the quarter ended June 30,
1999. The Company is continuing its collection efforts in
connection with this receivable.
The gain on sale of properties of $12,830,300 for 1999
resulted from the sale of five operating properties.
Extraordinary items:
The extraordinary item of $1,808,700 recognized during 1999
represents a $750,000 facility fee charge, $126,500 interest
breakage fee and a $932,200 write off of deferred finance costs
related to the termination of the unsecured line of credit
facility. The $124,900 charge recognized in 1998 relates to the
write off of the deferred financing fees related to the
termination of a $100 million unsecured revolving credit
facility.
<PAGE>29
Net income applicable to common shares:
Net income applicable to common shares is equal to net
income less dividends on the Perpetual Preferred Shares of
$1,371,100.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 1999 to the six
months ended June 30, 1998
In the following discussion of the comparison of the six
months ended June 30, 1999 to the six months ended June 30, 1998,
Market-rate Properties refers to the Core and Acquired/Disposed
Property portfolios. Core Properties represents 29 of the 34
wholly owned multifamily properties acquired by the Company at
the time of the IPO, the 41 properties acquired in separate
transactions or developed by the Company during 1994 and 1997 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/Disposed Properties refers to 18 properties
which were acquired between January 1, 1998 and June 30, 1999 as
well as the newly constructed and repositioned properties, the
sale of five operating properties and Rainbow Terrace Apartments.
Overall, total revenue increased $13,825,000 or 21.8% and
total expenses increased $21,201,600 or 39.2% for the six month
period. Net income applicable to common shares after deduction
for the dividends on the Company's Perpetual Preferred Shares
increased $8,055,000 or 119.5%.
During the six months ended June 30, 1999, the Market-rate
Properties generated total revenues of $66,872,300 while
incurring property operating and maintenance expenses of
$29,873,700. Of these amounts, the Acquired/Disposed and Core
Properties contributed total revenues of $23,710,700 and
$43,161,600, respectively, while incurring property operating and
maintenance expenses of $10,790,400 and $19,083,300,
respectively. The Government-Assisted Properties generated total
revenues of $4,934,000 while incurring property operating and
maintenance expenses of $2,012,300 for the six months ended June
30, 1999.
Rental Revenues:
Rental revenues increased $11,500,400 or 19.2% for the six
month period. Rental revenues from the Acquired/Disposed
Properties increased $11,518,700 for the six month period.
Occupancy and suite rents at the Core and Government-Assisted
Properties resulted in a decrease of $19,400 or .05% and $15,400
or .31%, respectively, in rental revenue from these properties.
Other Revenues:
The Company recognized property and asset management fee
revenues of $2,625,100 and $1,174,100, respectively, for the six
months ended June 30, 1999 as compared to $1,830,000 of property
management fees and no asset management fees for the six months
ended June 30, 1998. The increase in property and asset
management fee revenues is primarily due to the collection of
these fees by MIGRA relating to their institutional investor
clients.
The Company recognized asset acquisition fee revenue of
$121,700 and $0 for the quarters ended June 30, 1999 and 1998,
respectively. The fee relates to MIG acquiring a multifamily
property on behalf of a pension fund client in May 1999.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$6,747,000 or 26.8% for the six month period. Property operating
and maintenance expenses at the Acquired/Disposed Properties
increased $4,896,300 or 83% for the six month period due
primarily to the operating and maintenance expenses incurred at
the 18 properties acquired between January 1, 1998 and June 30,
1999 as well as the newly constructed and repositioned
properties. Property operating and maintenance expenses at the
Core Properties increased $1,629,600 or 9.3% when compared to the
prior six month period primarily due to increases in personnel,
utilities, real estate taxes and local taxes, and the one time
effect of additional operating expenses related to refining
<PAGE>30
certain cutoff procedures and its estimation process for the
accumulation of property operating expense accrual adjustments.
Property operating and maintenance expenses at the Government-
Assisted Properties increased $141,400 or 7.6% for the quarter
due to an increase in other operating expenses.
Other expenses:
Depreciation and amortization increased $5,582,400 or 50.6%
for the six months ended June 30, 1999 primarily due to the
increased depreciation expense recognized on the
Acquired/Disposed Properties and the additional depreciation as a
result of the adoption of the new capitalization policy as well
as the amortization expense of the intangible assets recorded
with respect to the merger with MIGRA. The amortization expense
related to the intangible assets is reflected as a charge to the
Management and Service Operations.
General and administrative expenses increased $4,978,700 or
138.9% for the six months ended June 30, 1999. This increase is
primarily attributable to payroll and related expenses due to the
expense of the MIGRA advisory operations and other consulting and
professional fees incurred by the Company principally related to
system processes and operating consulting services. During the
second quarter of 1999, a severance benefit of $550,000 was paid
to an executive officer of the Company. The increase related to
general and administrative expenses of approximately $3,881,000
is classified as Unallocated Corporate Overhead.
Interest expense increased $3,811,600 or 28.1% for the six
months ended June 30, 1999 primarily due to the interest
incurred with respect to the project specific, nonrecourse
mortgage financing collateralized by 24 properties owned by the
REIT.
The Company recognized a charge for funds advanced to a non-
owned property totaling $150,000 for the six months ended June
30, 1999. The Company is continuing its collection efforts in
connection with this receivable.
The gain on sale of properties of $12,830,300 for 1999
resulted from the sale of five operating properties.
Extraordinary items:
The extraordinary item of $1,808,700 recognized during 1999
represents a $750,000 facility fee charge, $126,500 interest
breakage fee and a $932,200 write off of deferred finance costs
related to the termination of the unsecured line of credit
facility. The $124,900 charge recognized in 1998 relates to the
write off of the deferred financing fees related to the
termination of a $100 million unsecured revolving credit
facility.
Cumulative effect:
Effective January 1, 1999, the Company changed its method of
accounting to capitalize expenditures for certain replacements
and improvements, such as new HVAC equipment, structural
replacements, appliances, flooring, carpeting and kitchen/bath
renovations to the capitalization method. Previously, these
costs were charged to operations as incurred. Ordinary repairs
and maintenance, such as suite cleaning and painting, and
appliance repairs are expensed. The Company believes the change
in the capitalization method provides an improved measure of the
Company s capital investment, provides a better matching of
expenses with the related benefit of such expenditures, including
associated revenues, and is in the opinion of management,
consistent with industry practice. The cumulative effect of this
change in accounting principle increased net income for the six
months ended June 30, 1999 by $4,319,162 or $.19 per share
(basic and diluted). The effect of this change was to increase
income before cumulative effect of a change in accounting
principle by $3,389,087 or $.15 per share (basic and diluted) for
the six months ended June 30, 1999. The pro forma amounts shown
on the income statement have been adjusted to reflect the
<PAGE>31
retroactive application of the capitalization of such
expenditures and related depreciation for the six months ended
June 30, 1998 of which increased net income by $323,302 or $.02
per share (basic and diluted).
Net income applicable to common shares:
Net income applicable to common shares is reduced by
dividends on the Perpetual Preferred Shares of $2,742,200.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures
increased $93,400 or 54.8% and $30,500 or 14.7% for the three and
six months ended June 30, 1999 and 1998, respectively. The
increase is due primarily to a decrease in the costs of
operations.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the three and six months ended June 30,
1999 and 1998.
<TABLE>
<CAPTION>
For the three months
ended For the six months
June 30, ended June 30,
---------- ----------- ----------- -----------
1999 1998 1999 1998
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 1,803,928 $ 1,746,864 $ 3,528,236 $ 3,472,360
Cost of operations 968,719 1,034,405 2,057,100 2,171,510
---------- ----------- ----------- ----------
835,209 712,459 1,471,136 1,300,850
Interest income 8,056 14,114 11,310 14,771
Interest expense (430,041) (436,132) (944,976) (872,948)
Depreciation (136,713) (107,067) (275,545) (212,577)
Amortization (12,405) (12,709) (24,555) (23,209)
------------ ----------- ----------- -----------
Net income $ 264,106 $ 170,665 $ 237,370 $ 206,887
=========== =========== =========== ===========
</TABLE>
Outlook
The long term goal for the Company is to acquire and develop
a portfolio of economically and geographically diversified
institutional quality multifamily assets. The goal extends to
the effective and efficient operation and management of those
assets. Implementation of this goal will be through balanced
investment in direct acquisition and co-investment with
institutional investors.
It is expected that individual acquisitions will be located
in the select metropolitan areas of Atlanta, Washington, D.C.,
Orlando, South Florida and Tampa until operational efficiencies
are maximized. Management believes that these markets offer
excellent diversification characteristics as well as growth
potential. Over the next several years, the Company's focus is
expected to expand to multiple major markets. In addition to
these direct investment markets, the Company plans to co-invest
with institutional clients in many markets that are in the long
term investment horizon. As with all growth markets at this
time, new development is active in these markets. The Company's
market research and operational experience in these areas will
guide site selection and pricing.
Investing for and with institutional investors is a major
component of the Company's growth strategy. The recent
allocation from two advised clients for discretionary multifamily
acquisition will enhance the Company's acquisition efforts.
Purchases on behalf of these clients are expected to improve
operational efficiency and generate advisory income.
<PAGE>32
In addition to acquisitions on behalf of advised clients,
the Company is initiating co-investment with institutional
investors. These co-investments will include both purchase and
development opportunities. Co-investment in the purchase of
stabilized assets is expected to offer low volatility and
immediate cash flow. The development program allows the Company
and its institutional partners to seek the high yields
anticipated with development. The expected equity division for
both co-investment forms is 25% from the Company and 75% from
institutional investors.
Management believes this co-investment program should allow
the Company to increase operational efficiency in growth markets
at a more rapid pace than direct individual investment because it
requires less capital resources from the Company but allows the
Company to apply its expertise in multifamily management. The
programs described above are currently being actively marketed
and there can be no assurance that the Company will be able to
attract institutional capital to fund these programs.
Given the Midwestern concentration of the Market-rate
portfolio, management's performance expectations are consistent
with the recent past. Management projects that the market-rate
rental growth for existing assets will be a modest 2.5% over the
next twelve months. General market expectations for locations
where the Company has significant concentrations are as follows:
Columbus is experiencing construction levels consistent with
recent employment growth, Cleveland continues to exhibit
stability, Michigan markets are slowing from rapid growth in
1998, Indianapolis continues to improve, Washington, D.C.,
Atlanta, and South Florida are in equilibrium with significant
additions to employment and multifamily supply, and Orlando is
currently performing well in spite of significant construction.
Inflation
Management's belief is that any effects of minor inflation
fluctuations would be minimal on the operational performance of
its portfolio primarily due to the high correlation between
inflation and housing costs combined with the short term nature,
typically one year, of the leases. In addition, the fixed rate
nature of the Company's debt obligations virtually eliminates any
negative effect of inflation on income.
<PAGE>33
Quantitative and Qualitative Disclosures About Market Risk
At June 30, 1999, the Company had $18.2 million of variable
rate debt. Additionally, the Company has interest rate risk
associated with fixed rate debt at maturity.
Management has and will continue to manage interest rate
risk as follows: (i) maintain a conservative ratio of fixed
rate, long term debt to total debt such that variable rate
exposure is kept at an acceptable level; (ii) consider a hedge
for certain long term variable rate debt through the use of
interest rate swaps or interest rate caps; and (iii) use treasury
locks where appropriate to hedge rates on anticipated debt
transactions. Management uses various financial models and
advisors to achieve those objectives.
The table below provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------
Long term debt 1999 2000 2001 2002
<S> <C> <C> <C> <C>
Fixed:
Fixed rate mortgage debt $ 1,541,399$ 18,139,118 $ 14,822,243$ 4,003,176
Weighted average interest rate 7.63% 7.62% 7.56% 7.53%
MTN's 20,000,000 - 10,000,000 15,000,000
Weighted average interest rate 6.95% - 7.12% 7.09%
Senior notes - 74,947,703 - 10,000,000
Weighted average interest rate - 8.23% - 7.10%
-------------------------------------------------
Total fixed rate debt $ 21,541,399$ 93,086,821 $ 24,822,243$ 29,003,176
Variable:
Variable rate mortgage debt $ 184,615$ 61,687 $ 16,314,997$ 75,283
-------------------------------------------------
Total long term debt $ 21,726,014$ 93,148,508 $ 41,137,240$ 29,078,459
=================================================
Expected Maturity Date
--------------------- Fair Market
Long term debt 2003 Thereafter Total Value
Fixed: ---------------------------------------------------
Fixed rate mortgage debt $ 4,325,742$308,177,917 $ 351,009,595 $ 355,128,700
Weighted average interest rate 7.53% 7.57% 7.21% -
MTN's 12,500,000 55,000,000 112,500,000 116,146,455
Weighted average interest rate 7.12% 7.23% 6.95% -
Senior notes - - 84,947,703 88,121,306
Weighted average interest rate - - 8.23% -
---------------------------------------------------
Total fixed rate debt $16,825,742$363,177,917 $ 548,457,298 $ 559,396,461
Variable:
Variable rate mortgage debt $ 83,165$ 1,497,734 $ 18,217,481 $ 18,503,897
---------------------------------------------------
Total long term debt $16,908,907$364,675,651 $ 566,674,779 $ 577,900,358
===================================================
</TABLE>
On August 3, 1999, the Company collateralized an individual
mortgage on one property for $6.6 million in project specific,
nonrecourse loans from The Chase Manhattan Bank. The loan has a
maturity of 12 years and a fixed interest rate of 7.8%.
Sensitivity Analysis
The Company estimates that a 100 basis point decrease in
market interest rates would have changed the fair value of fixed
rate debt to a liability of $607.1 million. The sensitivity to
changes in interest rates of the Company's fixed rate debt was
determined with a valuation model based upon changes that measure
the net present value of such obligation which arise from the
hypothetical estimate as discussed above.
<PAGE>34
Year 2000 Compliance
The year 2000 issue ("Year 2000") is the result of computer
programs being written using two digits rather than four to
define the applicable year. Any of the Company's computer
programs or hardware that have date sensitive software or
embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, pay vendors or engage in similar normal business
activities.
The Company believes that it has identified all of its
information technology ("IT") and non-IT systems to assess their
Year 2000 readiness. Critical IT systems include, but are not
limited to, operating and data networking and communication
systems, accounts receivable and rent collections, accounts
payable and general ledger, human resources and payroll, cash
management and all IT hardware (such as servers, desktop/laptop
computers and data networking equipment). Critical non-IT
systems include telephone systems, fax machines, copy machines
and property environmental, access and security systems (such as
elevators and alarm systems).
The Company's plan to resolve the Year 2000 issue involves
the following four phases: assessment, remediation, testing and
implementation. The Company has conducted an assessment and/or
survey of its core IT and non-IT systems at both its corporate
offices and properties and believes it is 95% complete on such
assessment which is currently under review by the Company's
technical staff.
Much of the mission critical operating systems, networking
and accounting software that has been purchased over the past few
years has been represented by vendors to already be Year 2000
compliant. The property management software currently being
tested and used at the Company's corporate offices and which is
to be rolled out to the properties during the second and third
quarters of 1999 has been affirmed by the vendor to be tested and
Year 2000 compliant. Hardware upgrades at all of the properties
are expected to be complete by September 1999 to ensure all
hardware is compliant. Testing by the Company of all such
critical systems represented by the vendors to be compliant is
expected to be complete by September 1999.
The estimated costs of these upgrades and conversions should
not exceed $500,000 and have been considered in the Company's
cash flow requirements for 1999.
The Company believes it has identified all non-IT systems at
all properties and expects to have 90% of its remediation and/or
testing complete on these systems by September of 1999. While a
complete technical assessment of all such systems is not final,
the Company does not anticipate expenditures in excess of
$500,000 to remediate non-IT systems at the properties since
findings to date suggest a low incidence of non-compliance on
critical systems. The Company has engaged an outside technical
consultant to work with its internal technical staff to assist in
finalizing such assessment, remediation and testing.
In most cases, various third party vendors have been queried
on their Year 2000 readiness. While many responses have been
received to such queries (especially by banks and other large
financial institutions), many vendors have not yet responded.
The Company will continue to query its significant suppliers and
vendors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. To date, the Company is
not aware of any significant suppliers or vendors with a Year
2000 issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, there can
be no assurances that the systems of other companies, on which
the Company's systems rely, will be timely converted and would
not have an adverse effect on the Company's systems.
<PAGE>35
The Company believes it has an effective program in place
that will resolve the Year 2000 issue in a timely manner. In
addition, the Company has commenced its contingency planning for
critical operational areas that might be affected by the Year
2000 issue if compliance by the Company is delayed. The
Company's contingency plans will involve training and increased
awareness at the property management level, manual workarounds
and adjustment of staffing strategies. The Company intends to
have its contingency planning complete in the third quarter of
1999.
Aside from the catastrophic failure of banks or government
agencies, the Company believes it could continue its normal
business operations if compliance by the Company is delayed. In
the event of such catastrophic failures, the Company would be
unable to deposit rent checks, transfer cash, wire money, pay
vendors by check, or invest excess funds. The Company could be
subject to litigation for its inability to access cash to pay
vendors or failure to properly record business transactions or if
security or access systems fail at properties. However, given
that the Company intends to have contingency planning in place
and that the nature of its day-to-day real estate operations is
not heavily reliant on technology, the Company does not believe
that the Year 2000 issue will materially impact its results of
operations, liquidity or capital resources.
CONTINGENCIES
Environmental
There are no recorded amounts resulting from environmental
liabilities and 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
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.
Rainbow Terrace Apartments
On February 9, 1998, the U.S. Department of Housing and
Urban Development ("HUD") notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were 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.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had 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.
<PAGE>36
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of HAP abatements and
the acceleration of the mortgage, the lender advised the Company
that the acceleration notification had been rescinded pursuant to
HUD's instruction. HUD then notified the Company that the HAP
payments would be reinstated and that HUD was reviewing further
information concerning RTA provided by the Company. The Company
has received all monthly HAP payments for RTA during 1998.
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
From June 1998 to March 1999, the Company was involved in
ongoing negotiations with HUD for the purpose of resolving these
and other disputes concerning other properties managed or
formerly managed by the Company or one of the Service Companies,
which were similarly the subject of Comprehensive Management
Reviews initiated by HUD in the Spring of 1997.
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement
Agreement") for the purpose of resolving certain disputes
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
currently managed by the Company. Vanguard was formerly managed
by AEMC until December 1997. All four properties are encumbered
by HUD insured mortgages, governed by HUD imposed regulatory
agreements and subsidized by Section 8 Housing Assistance
Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467. HUD
has further agreed to release the Company, AEMC, RTA and the
owners and principals of PVA, Longwood and Vanguard from all
claims (other than tax or criminal fraud claims) regarding the
ownership or operation of Rainbow Terrace Apartments, Park
Village, Longwood and Vanguard. Moreover, HUD has agreed not to
issue a limited denial of participation, debarment or suspension,
program fraud civil remedy action or civil money penalty,
resulting from the ownership or management of any of these
projects, or to deny eligibility to any of their owners,
management agents or affiliates for participation in any HUD
program on such basis.
HUD's obligations under the Settlement Agreement are
conditioned upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1,784,467 retroactive rent increase payable to
RTA mentioned above. At June 30, 1999, the Company had
receivables of $1,784,467 related to the 1995 and 1998
retroactive rental increase requests. At June 30, 1999, RTA had
net assets of approximately $1,827,319, including the retroactive
rent receivable of $1,784,467 due from HUD, and a remaining
amount due under the mortgage of $1,935,123. The transfer of RTA
to a purchaser which is acceptable to HUD or the direct transfer
of RTA to HUD is not expected to have a material impact on the
results of operations or cash flows of the Company. The Company
has excluded RTA's results of operations from its Consolidated
Statement of Income for 1999. RTA and PVA requested HUD to
extend the April 11, 1999 deadline for identification of
potential purchasers. HUD granted that request and the deadline
was extended to May 31, 1999. The Company believes that RTA and
PVA have satisfied their obligations to identify prospective
purchasers for those properties.
<PAGE>37
Affiliate Transactions
In the normal course of business, the Company had followed a
practice of advancing funds on behalf of, or holding funds for
the benefit of, affiliates which own real estate properties
managed by the Company or one of the Service Companies. One of
these affiliates, 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, had informed the Company that the Corporation had
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. The Company
previously stated its belief that all expenditures were
appropriate and that the ultimate outcome of any disagreement
would not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded in the first quarter of 1999
pursuant to the settlement agreement were $4.7 million.
The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab. Sq. Ft.
------------------------------- -------- ------------ ------------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
MARKET RATE
Acquired Properties
Arizona
20th & Campbell Apartments 06/30/98 Phoenix Garden 204 1989 982
California
Desert Oasis Apartments 06/30/98 Palm Desert Garden 320 1990 875
Florida
Windsor Pines 10/23/98 Pembroke Pines Garden 368 1998 1,132
Georgia
Morgan Place Apartments 06/30/98 Atlanta Garden 186 1989 679
Indiana
Steeplechase at Shiloh Crossing Apts08/11/98 Indianapolis Garden 264 1998 929
Maryland
The Gardens at Annen Woods 06/30/98 Metro D.C. Garden 132 1987 1,269
Hampton Point Apartments 06/30/98 Metro D.C. Garden 352 1986 817
--- ----
484 940
Michigan
Georgetown-Phase II 02/01/99 Fenton Garden 120 1998 1,269
North Carolina
Windsor Falls Apartments 06/30/98 Raleigh Garden 276 1994 979
Central Ohio
Bradford at Easton 05/01/98 Columbus Garden 324 1996 1,010
Northeastern Ohio
Village at Western Reserve 08/01/98 Streetsboro Ranch 108 1998 999
Residence at Barrington 06/30/99 Aurora Gdn/Tnhms 285 1999 1,131
--- -----
393 1,095
Texas
Fleetwood Apartments 06/30/98 Houston Garden 104 1993 1,019
-----
3,043
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) IPO North Royalton Gdn/Tnhms 197 1982 1,038
Williamsburg at Greenwood Village 02/18/94 Sagamore Hills Townhomes 260 1990 938
--- ----
457 981
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 02/28/95 Columbus Townhomes 102 1987 1,344
Bedford Commons 12/30/94 Columbus Townhomes 112 1987 1,157
Bolton Estates 07/27/94 Columbus Garden 196 1992 687
Colony Bay East 02/21/95 Columbus Garden 156 1994 903
Heathermoor 08/18/94 Worthington Gdn/Tnhms 280 1989 829
Kensington Grove 07/17/95 Westerville Gdn/Tnhms 76 1995 1,109
Lake Forest 07/28/94 Columbus Garden 192 1994 788
Muirwood Village at Bennell 03/07/94 Columbus Ranch 164 1988 769
Muirwood Village at London 03/03/94 London Ranch 112 1989 769
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
June 30, 1999 June 30, 1998
---------------------------------- ---------------------------------
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
---------------------------- --------- --------- ----- ------- --------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET RATE
Acquired Properties
Arizona
20th & Campbell Apartments 87.9% 87.7% $ 843 $ 0.86 N/A 93.1% N/A N/A
California
Desert Oasis Apartments 93.8% 93.4% $ 691 $ 0.79 N/A 92.2% N/A N/A
Florida
Windsor Pines 91.2% 92.4% $1,039 $ 0.92 N/A N/A N/A N/A
Georgia
Morgan Place Apartments 92.6% 99.5% $ 809 $ 1.19 N/A 94.6% N/A N/A
Indiana
Steeplechase at Shiloh 77.5% 85.6% $ 769 $ 0.83 N/A N/A N/A N/A
Crossing Apts
Maryland
The Gardens at Annen Woods 90.1% 95.5% $ 936 $ 0.74 N/A 97.7% N/A N/A
Hampton Point Apartments 96.3 96.9 809 0.99 N/A 96.0 N/A N/A
---- ---- ----- ------ --- ----- --- ---
94.4% 96.5% $ 844 $ 0.90 N/A 96.5% N/A N/A
Michigan
Georgetown-Phase II 96.9% 96.7% $762 $ 0.60 N/A N/A N/A N/A
North Carolina
Windsor Falls Apartments 84.0% 90.2% $ 776 $ 0.79 N/A 94.9% N/A N/A
Central Ohio
Bradford at Easton 92.6% 97.5% $ 708 $ 0.70 85.8% 95.4% $ 715 $ 0.71
Northeastern Ohio
Village at Western Reserve 95.6% 96.3% $ 783 $ 0.78 N/A N/A N/A N/A
Residence at Barrington N/A 96.8 N/A N/A N/A N/A N/A N/A
----- ----- ----- ------
95.6% 96.7% $ 783 $ 0.78
Texas
Fleetwood Apartments 90.8% 92.3% $ 931 $ 0.91 N/A 93.3% N/A N/A
Repositioned Properties
Woodlands of North Royalton
fka Somerset West (a) 90.0% 98.0% $ 708 $ 0.68 81.1% 83.2% $ 698 $ 0.67
Williamsburg at Greenwood
Village 92.5 98.1 879 0.94 89.5 94.2 871 0.93
---- ---- ----- ------ ----- ----- ----- ------
91.6% 98.0% $ 805 $ 0.82 86.3% 89.5% $ 797 $ 0.81
CORE PORTFOLIO PROPERTIES
Market rate
Central Ohio
Arrowhead Station 94.4% 96.1% $ 727 $ 0.54 91.6% 93.1% $ 709 $ 0.53
Bedford Commons 91.3 92.0 788 0.68 94.8 97.3 786 0.68
Bolton Estates 88.2 96.4 472 0.69 96.8 97.4 463 0.67
Colony Bay East 87.3 92.3 530 0.59 92.6 94.2 524 0.58
Heathermoor 97.3 97.5 559 0.67 97.2 97.9 555 0.67
Kensington Grove 91.9 98.7 781 0.70 92.6 90.8 775 0.70
Lake Forest 93.1 97.9 555 0.70 92.0 95.3 544 0.69
Muirwood Village at Bennell 92.5 97.6 515 0.67 92.7 94.5 514 0.67
Muirwood Village at London 95.2 95.5 512 0.67 93.9 97.3 509 0.66
</TABLE>
<PAGE>39
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab. Sq. Ft.
----------------------------- --------- -------------- ------------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Muirwood Vllg at Mt. Sterling 03/03/94 Mt. Sterling Ranch 48 1990 769
Muirwood Vllg at Zanesville 03/07/94 Zanesville Ranch 196 1991-95 769
Oak Bend Commons 05/30/97 Canal Winchester Garden/Tnhm 102 1997 1,110
Pendleton Lakes East 08/25/94 Columbus Garden 256 1990-93 899
Perimeter Lakes 09/20/96 Dublin Gdn/Tnhms 189 1992 999
Residence at Christopher Wren 03/14/94 Gahanna Gdn/Tnhms 264 1993 1,062
Residence at Turnberry 03/16/94 Pickerington Gdn/Tnhms 216 1991 1,182
Saw Mill Village 04/22/97 Columbus Garden 340 1987 1,161
Sheffield at Sylvan 03/03/94 Circleville Ranch 136 1989 791
Sterling Park 08/25/94 Grove City Garden 128 1994 763
The Residence at Newark 03/03/94 Newark Ranch 112 1993-94 868
The Residence at Washington 02/01/96 Wash. Ct. House Ranch 72 1995 862
Wyndemere 09/21/94 Franklin Ranch 128 1991-95 768
----- ---
3,577 934
Cincinnati, Ohio
Remington Place Apartments 03/31/97 Cincinnati Garden 234 1988-90 830
Florida
Cypress Shores 02/03/98 Coconut Creek Garden 300 1991 991
Georgia
The Falls 02/03/98 Atlanta Garden 520 1986 963
Indianapolis, Indiana
The Gables at White River 02/06/97 Indianapolis Garden 228 1991 974
Waterstone Apartments 08/29/97 Indianapolis Garden 344 1997 984
--- ---
572 980
Maryland
Reflections 02/03/98 Metro D.C. Garden 184 1985 1,020
Northeastern Ohio
Bay Club IPO Willowick Garden 96 1990 925
Edgewater Landing 04/20/94 Cleveland High Rise 241 1988r 585
Gates Mills III IPO Mayfield Hts. High Rise 320 1978 874
Holly Park IPO Kent Garden 192 1990 875
Huntington Hills IPO Stow Townhomes 85 1982 976
Mallard's Crossing 02/16/95 Medina Garden 192 1990 998
Park Place IPO Parma Hts. Mid Rise 164 1966 760
Pinecrest IPO Broadview Hts. Garden 96 1987 r 598
Portage Towers IPO Cuyahoga Falls High Rise 376 1973 869
The Triangle (b) IPO Cleveland High Rise 273 1989 616
Timbers IPO Broadview Hts. Garden 96 1987-89 930
Washington Manor 07/01/94 Elyria Garden 120 1963-64 541
Westchester Townhouses IPO Westlake Townhomes 136 1989 1,000
Westlake Townhomes IPO Westlake Townhomes 7 1985 1,000
Winchester Hills I (c) IPO Willoughby Hills High Rise 362 1972 822
Winchester Hills II IPO Willoughby Hills High Rise 362 1979 822
----- ---
3,118 809
Michigan
Arbor Landings Apartments 01/20/95 Ann Arbor Garden 168 1990 1,116
Aspen Lakes 09/04/96 Grand Rapids Garden 144 1981 789
Central Park Place 12/29/94 Grand Rapids Garden 216 1988 850
Clinton Place 08/25/97 Clinton Twp. Garden 202 1988 954
Country Place Apartments 06/19/95 Mt. Pleasant Garden 144 1987-89 859
Georgetown Park Apartments 12/28/94 Fenton Garden 360 1987-96 1,005
The Landings at the Preserve 09/21/95 Battle Creek Garden 190 1990-91 952
The Oaks and Woods at Hampton 08/08/95 Rochester Hills Gdn/Tnhms 544 1986-88 1,050
Spring Brook Apartments 06/20/96 Holland Gdn/Tnhms 168 1986-88 818
Spring Valley Apartments 10/31/97 Farmington Hills Garden 224 1987 893
Summer Ridge Apartments 04/01/96 Kalamazoo Garden 248 1989-91 960
----- ---
2,608 955
Toledo, Ohio
Country Club Apartments 02/19/98 Toledo Garden 316 1989 811
Hawthorne Hills Apartments 05/14/97 Toledo Garden 88 1973 1,145
Kensington Village 09/14/95 Toledo Gdn/Tnhms 506 1985-90 1,072
Vantage Villa 10/30/95 Toledo Garden 150 1974 935
----- ---
1,060 981
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
------------------------------- ---------------------------------
June 30, 1999 June 30, 1998
------------------------------- ---------------------------------
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
----------------------------- --------- --------- ----- ------- --------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Muirwood Vllg at Mt. Sterling 92.2% 89.6% $ 488 $ 0.64 96.3% 100.0% $ 496 $ 0.65
Muirwood Village at Zanesville 92.7 96.9 520 0.68 92.8 95.9 522 0.68
Oak Bend Commons 93.1 100.0 744 0.67 93.8 99.0 700 0.63
Pendleton Lakes East 91.3 94.9 541 0.60 92.6 96.9 527 0.59
Perimeter Lakes 96.3 96.8 711 0.71 94.1 98.9 721 0.72
Residence at Christopher Wren 90.4 91.7 743 0.70 92.2 94.7 742 0.70
Residence at Turnberry 92.5 96.3 749 0.63 93.9 96.8 743 0.63
Saw Mill Village 92.7 95.9 752 0.65 90.7 94.1 752 0.65
Sheffield at Sylvan 98.2 99.3 516 0.65 98.3 98.5 510 0.65
Sterling Park 94.3 99.2 550 0.72 97.1 100.0 555 0.73
The Residence at Newark 96.1 94.6 573 0.66 98.2 98.2 568 0.65
The Residence at Washington 97.0 94.4 522 0.61 92.7 100.0 532 0.62
Wyndemere 97.1 95.3 546 0.71 95.8 98.4 549 0.71
----- ----- ----- ------ ----- ----- ----- ------
93.2% 95.9% $ 615 $ 0.66 93.8% 96.5% $ 611 $ 0.65
Cincinnati, Ohio
Remington Place Apartments 95.8% 97.0% $ 659 $ 0.79 91.5% 94.9% $ 650 $ 0.78
Florida
Cypress Shores 90.4% 94.3% $ 868 $ 0.88 88.3% 87.0% $ 841 $ 0.85
Georgia
The Falls 79.9% 89.8% $ 728 $ 0.76 75.4% 88.3% $ 713 $ 0.74
Indianapolis, Indiana
The Gables at White River 95.4% 91.2% $ 738 $ 0.76 91.9% 95.6% $ 731 $ 0.75
Waterstone Apartments 93.7 98.3 796 0.81 94.4 96.8 799 0.81
----- ---- ----- ------ ----- ----- ----- ------
94.3% 95.5% $ 773 $ 0.79 93.5% 96.3% $ 772 $ 0.79
Maryland
Reflections 95.2% 96.7% $ 903 $ 0.89 94.7% 95.1% $ 879 $ 0.86
Northeastern Ohio
Bay Club 93.4% 97.9% $ 643 $ 0.70 99.7% 97.9% $639 $0.69
Edgewater Landing 97.1 98.8 421 0.72 96.6 95.0 416 0.71
Gates Mills III 89.4 96.5 680 0.78 90.4 96.9 701 0.80
Holly Park 97.7 99.0 712 0.81 99.5 99.5 702 0.80
Huntington Hills 94.5 97.6 680 0.70 96.5 95.3 662 0.68
Mallard's Crossing 95.0 98.4 709 0.71 96.0 96.9 721 0.72
Park Place 97.4 95.7 511 0.67 93.6 95.1 525 0.69
Pinecrest 96.7 97.9 466 0.78 93.9 97.9 469 0.78
Portage Towers 96.0 97.6 583 0.67 95.7 96.5 588 0.68
The Triangle (b) 97.8 96.3 955 1.55 97.7 97.1 938 1.52
Timbers 93.6 95.8 691 0.74 92.5 97.9 707 0.76
Washington Manor 97.2 96.7 408 0.75 96.0 97.5 393 0.73
Westchester Townhouses 96.2 100.0 775 0.78 91.8 97.8 787 0.79
Westlake Townhomes 99.4 100.0 833 0.83 99.3 100.0 822 0.82
Winchester Hills I (c) 94.4 98.3 563 0.69 92.3 97.2 573 0.70
Winchester Hills II 90.3 98.3 588 0.72 88.5 97.5 600 0.73
---- ---- ----- ------ ---- ---- ----- ------
94.9% 97.7% $ 630 $ 0.78 94.2% 97.0% $ 634 $ 0.78
Michigan
Arbor Landings Apartments 92.5% 96.4% $ 917 $ 0.82 98.8% 98.8% $ 861 $ 0.77
Aspen Lakes 97.0 98.6 559 0.71 95.4 97.9 559 0.71
Central Park Place 96.9 99.1 627 0.74 95.8 96.8 613 0.72
Clinton Place 97.0 97.5 703 0.74 95.1 95.0 700 0.73
Country Place Apartments 98.8 99.3 565 0.66 94.1 95.8 550 0.64
Georgetown Park Apartments 87.3 95.3 677 0.67 93.2 96.4 747 0.74
The Landings at the Preserve 86.7 86.3 773 0.81 98.4 95.8 757 0.80
The Oaks and Woods at Hampton 96.8 98.0 818 0.78 94.4 98.5 813 0.77
Spring Brook Apartments 97.8 98.2 501 0.61 98.5 97.6 507 0.62
Spring Valley Apartments 94.6 98.2 825 0.92 95.8 100.0 818 0.92
Summer Ridge Apartments 95.2 98.8 674 0.70 91.5 95.2 701 0.73
---- ---- ----- ------ ---- ---- ----- ------
94.2% 96.9% $ 715 $ 0.75 95.1% 97.2% $ 719 $ 0.75
Toledo, Ohio
Country Club Apartments 91.8% 95.6% $ 635 $ 0.78 97.0% 97.5% $ 627 $ 0.77
Hawthorne Hills Apartments 93.4 97.7 584 0.51 95.8 100.0 554 0.48
Kensington Village 93.4 93.5 616 0.57 98.3 99.2 577 0.54
Vantage Villa 91.4 98.0 589 0.63 95.1 97.3 577 0.62
---- ---- ----- ------ ---- ---- ----- ------
92.6% 95.1% $ 615 $ 0.63 97.3% 98.5% $ 590 $ 0.60
</TABLE>
<PAGE>40
<TABLE>
<CAPTION>
Year Average
Date Type of Total Built or Unit Size
The Multifamily Properties Acquired Location Construction Units Rehab. Sq. Ft.
-------------------------- -------- -------------- ------------ ----- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pittsburgh, Pennsylvania
Chestnut Ridge 03/01/96 Pittsburgh Garden 468 1986 769
Core Market Rate 12,641 909
GOVERNMENT ASST.-ELDERLY
Ellet Development IPO Akron High Rise 100 1978 589
Hillwood I IPO Akron High Rise 100 1976 570
Puritas Place (d) IPO Cleveland High Rise 100 1981 518
Riverview IPO Massillon High Rise 98 1979 553
State Road Apartments IPO Cuyahoga Falls Garden 72 1977 r 750
Statesman II IPO Shaker Heights Garden 47 1987 r 796
Sutliff Apartments II IPO Cuyahoga Falls High Rise 185 1979 577
Tallmadge Acres IPO Tallmadge Mid Rise 125 1981 641
Twinsburg Apartments IPO Twinsburg Garden 100 1979 554
Village Towers IPO Jackson Twp. High Rise 100 1979 557
West High Apartments IPO Akron Mid Rise 68 1981 r 702
----- ---
1,095 602
GOVERNMENT ASST.-FAMILY
Jennings Commons IPO Cleveland Garden 50 1981 823
Shaker Park Gardens II IPO Warrensville Garden 151 1964 753
--- ---
201 770
----- ---
1,296 628
CONGREGATE CARE
Gates Mills Club IPO Mayfield High Rise 120 1980 721
Heights
The Oaks IPO Westlake Garden 50 1985 672
------ ---
170 707
------ ---
14,107 881
Joint Venture Properties
Northeastern Ohio
Market rate
Americana IPO Euclid High Rise 738 1968 803
College Towers IPO Kent Mid Rise 380 1969 662
Euclid House IPO Euclid Mid Rise 126 1969 654
Gates Mills Towers IPO Mayfield Hts. High Rise 760 1969 856
Highland House IPO Painesville Garden 36 1964 539
Watergate IPO Euclid High Rise 949 1971 831
----- ---
2,989 789
Government Asst.-Family
Lakeshore Village IPO Cleveland Garden 108 1982 786
------ ---
3,097 789
------ ---
Core 17,204 874
------ ---
Portfolio average 20,704 878
====== ===
</TABLE>
<TABLE>
<CAPTION>
For the three months ending For the three months ending
-------------------------------- -----------------------------------
June 30, 1999 June 30, 1998
-------------------------------- -----------------------------------
Average Average Rent Average Average Rent
Economic Physical Per Economic Physical Per
The Multifamily Properties Occupancy Occupancy Suite Sq. Ft. Occupancy Occupancy Suite Sq. Ft.
--------------------------- --------- --------- ----- ------- --------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pittsburgh, Pennsylvania
Chestnut Ridge 82.4% 84.4% $ 729 $ 0.95 95.0% 98.3% $ 760 $ 0.99
---- ---- ----- ------ ---- ----- ----- ------
Core Market Rate 92.8% 95.8% $ 666 $ 0.73 93.5% 96.4% $ 664 $ 0.73
GOVERNMENT ASST.-ELDERLY
Ellet Development 100.0% 100.0% $ 585 $0.99 100.0% 100.0% $ 587 $1.00
Hillwood I 99.3 100.0 605 1.06 99.7 99.0 594 1.04
Puritas Place (d) 100.0 100.0 793 1.53 100.0 100.0 782 1.51
Riverview 97.0 100.0 602 1.09 100.0 100.0 591 1.07
State Road Apartments 100.0 100.0 619 0.83 100.0 100.0 596 0.79
Statesman II 100.0 97.9 647 0.81 100.0 100.0 646 0.81
Sutliff Apartments II 98.7 100.0 596 1.03 100.0 100.0 586 1.02
Tallmadge Acres 100.0 100.0 658 1.03 100.0 100.0 658 1.03
Twinsburg Apartments 100.0 100.0 602 1.09 100.0 100.0 603 1.09
Village Towers 100.0 99.0 576 1.03 100.0 99.0 579 1.04
West High Apartments 94.9 100.0 822 1.17 100.0 100.0 792 1.13
----- ----- ----- ------ ----- -----
99.6% 99.8% $ 638 $ 1.06 100.0% 99.8% $ 630 $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons 100.0% 100.0% $ 674 $ 0.82 99.9% 100.0% $ 674 $ 0.82
Shaker Park Gardens II 97.8 98.0 568 0.75 99.9 100.0 539 0.72
---- ---- ----- ------ ----- -----
98.5 98.5 594 0.77 99.9 100.0 573 0.74
---- ---- ----- ------ ----- -----
99.4% 99.6% $ 631 $ 1.00 100.0% 99.8% $ 621 $ 0.99
CONGREGATE CARE
Gates Mills Club 90.6% 91.7% $ 916 $ 1.27 92.7% 95.0% $ 872 $ 1.21
The Oaks 93.4 98.0 1,075 1.60 88.7 86.0 1,024 1.52
---- ---- ----- ------ ---- ----
91.5 93.5 962 1.36 91.4 92.4 917 1.30
---- ---- ----- ------ ---- ----
93.3% 96.1% $ 667 $ 0.76 94.0% 96.7% $ 663 $ 0.75
Joint Venture Properties
Northeastern Ohio
Market rate
Americana 92.1% 96.5% $ 481 $ 0.60 91.3% 93.1% $ 490 $ 0.61
College Towers 94.1 90.3 418 0.63 96.2 99.2 409 0.62
Euclid House 92.6 96.0 443 0.68 91.4 94.4 446 0.68
Gates Mills Towers 92.2 96.5 694 0.81 94.8 96.8 707 0.83
Highland House 97.2 97.2 428 0.79 97.6 97.2 416 0.77
Watergate 89.4 95.0 546 0.66 92.6 94.6 548 0.66
---- ---- ----- ------ ---- ---- ----- ------
91.7% 95.2% $ 538 $ 0.68 93.5% 95.4% $ 542 $ 0.69
Government Asst.-Family
Lakeshore Village 99.7% 99.1% $ 670 $ 0.85 100.0% 100.0% $ 666 $ 0.85
---- ---- ----- ------ ----- ----- ----- ------
92.2 95.4 544 0.69 93.9 95.6 548 0.69
---- ---- ----- ------ ----- ----- ----- ------
Core 93.3% 96.0% $ 658 $ 0.75 94.0% 96.5% $ 655 $ 0.75
---- ---- ----- ------ ---- ---- ----- ------
Portfolio average 92.7% 95.8% $ 684 $ 0.78 93.6% 95.6% $ 618 $ 0.70
==== ==== ===== ====== ===== ===== ===== ======
<FN>
______________
(a) Woodlands of North Royalton (fka Somerset West) has 39 Contract Units and 158
Market-rate units.
(b) The Triangle also contains 63,321 square feet of office/retail space.
(c) The Company acquired a noteholder interest entitling the Company to substantially
all cash flows from operations. The Company has certain rights under a security
agreement to foreclose on the property to the extent that the unpaid principal
and interest on the underlying notes exceed seven years equivalent principal and
interest payments.
(d) The property was developed in 1981 subject to a warranty deed provision which states
that the assignment of fee simple title of the property to the Company shall expire
in 2037.
r = Rehabilitated
</FN>
</TABLE>
<PAGE>41
HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW
Industry analysts generally consider Funds From Operations
("FFO") to be an appropriate measure of the performance of an
equity REIT. FFO is defined as net income (computed in
accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property, non-recurring
and extraordinary items, plus depreciation on real estate assets
and after adjustments for unconsolidated joint ventures.
Adjustments for joint ventures are calculated to reflect FFO on
the same basis. FFO does not represent cash generated from
operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash
available to fund cash needs 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. Distributable Cash Flow ("DCF") is
calculated as FFO less capital expenditures funded by operations
and amortization of deferred financing fees. In 1999, the
Company has re-evaluated how it was calculating capital
expenditures funded by operations. Reclassifications were made
to the prior year to incorporate this refinement. The Company
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO and
DCF should be presented in conjunction with net income as
presented in the consolidated financial statements and data
included elsewhere in this report.
FFO and Funds Available for Distribution ("Distributable
Cash Flow") for the six month period ended June 30, 1998 and 1997
are summarized in the following table:
<TABLE>
<CAPTION>
For the three For the six
months months
ended June 30, ended June 30,
(In thousands) 1999(1) 1998 1999(1) 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income applicable to common shares $ 9,979 $ 3,588 $ 14,797 $ 6,742
Depreciation on real estate assets
Wholly owned properties 7,077 5,205 14,179 10,047
Joint venture properties 136 107 276 212
Amortization of intangible assets 155 - 345 -
Extraordinary item - loss 1,809 125 1,809 125
Nonrecurring expenses 937 51 1,319 51
Cumulative effect of a change in
accounting principle - - (4,320) -
Additional operating expenses - - 874 -
Gain on sale of properties (12,830) - (12,830) -
------ ----- ------ ------
Funds From Operations 7,263 9,076 16,449 17,177
Depreciation - other assets 810 320 1,468 593
Amortization of deferred financing fees 313 195 661 406
Fixed asset additions (2,632) (3,452) (4,112) (4,056)
Fixed asset additions - joint venture properties (75) (1) (244) (21)
------- ------- -------- -------
Distributable Cash Flow $ 5,679 $ 6,138 $ 14,222 $14,099
======= ======= ======== =======
Weighted average shares 22,359 17,133 22,516 15,321
<FN>
(1)DCF could be increased by up to the full amount of the gain on
sale of operating properties, $12,830,000, should the 1031 like-
kind exchange not take place. At a minimum, DCF would likely be
increased by $3,400,000 which is the Company's taxable gain.
This would be a one time adjustment.
</FN>
</TABLE>
<PAGE>42
PART II
OTHER INFORMATION
Except to the extent noted below, the items required in
Part II are inapplicable or, if applicable, would be answered in
the negative and have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 12, 1999, the Company held its Annual Meeting of
Shareholders. Following are the matters the Company's
shareholders voted upon and the results of the vote:
<TABLE>
<CAPTION>
For Withhold Authority
------------- ------------------
<S> <C> <C>
(a) To fix the number of directors at 17,070,567.794 1,204,672.720
nine;
(b) The election of the following
directors:
Albert T. Adams 17,415,085.191 683,585.323
James M. Delaney 17,447,121.191 651,549.323
Jeffrey I. Friedman 16,599,899.559 1,498,770.955
Gerald C. McDonough 17,460,625.420 638,045.094
Mark L. Milstein 16,559,222.897 1,539,447.617
Frank E. Mosier 17,453,725.420 644,945.094
Richard T. Schwarz 17,463,095.191 635,575.323
Louis E. Vogt 17,460,771.191 637,899.323
Larry E. Wright 17,465,184.191 633,486.323
</TABLE>
<PAGE>43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
------ ----------------------------------------------------------- --------------------
<S> <C> <C>
2.01 Second Amended and Restated Agreement and Plan of Merger by Exhibit 2.01 to Form
and among the Company, MIG Realty Advisors, Inc. ("MIGRA") 8-K filed March 31,
and the MIGRA stockholders dated as of March 30, 1998 1998.
3.1 Second Amended and Restated Articles of Incorporation of the Exhibit 3.1 to Form
Company 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, 1991 from Triangle Exhibit 4.3 to Form
Properties Limited Partnership, et. al., in favor of PFL S-11 filed September
Life Insurance Company; Open End Mortgage from Triangle 2, 1993 (File No.
Properties Limited Partnership I, et. al., in favor of PFL 33-68276 as
Life Insurance Company (The Registrant undertakes to provide amended).
additional long-term loan documents upon request).
4.4 Promissory Note dated February 28, 1994 in the amount of $25 Exhibit 4.4 to Form
million. Open-End Mortgage Deed and Security Agreement from 10-K filed March 31,
AERC to National City Bank (Westchester Townhouse); Open-End 1993.
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).
4.5 Form of Promissory Note and Form of Mortgage and Security Exhibit 4.5 filed
Agreement dated May 10, 1999 from AERC to The Chase herewith.
Manhattan Bank.
4.6 Indenture dated as of March 31, 1995 between Associated Exhibit 4.6 to Form
Estates Realty Corporation and National City Bank. 10-Q filed May 11,
1995.
4.7 $75 Million 8-3/8% Senior Note due April 15, 2000 Exhibit 4.7 to Form
10-Q filed May 11,
1995.
4.8e Credit Agreement dated June 30, 1998, by and among Exhibit 4.8e to Form
Associated Estates Realty Corporation, as Borrower; the 10-Q filed August
banks and lending institutions identified therein as Banks; 14, 1998.
National City Bank, as Agent and Bank of America National
Trust and Savings Association, as Documentation Agent
<PAGE>44
4.8f First Amendment to Credit Agreement by and among Associated Exhibit 4.8f to Form
Estates Realty Corporation, as Borrower; National City Bank, 10-Q filed November
as Managing Agent for itself and on behalf of the Existing 16, 1998.
Banks and First Merit Bank, N.A. and Southtrust Bank, N.A.
as the New Banks
4.8g Second Amendment to Credit Agreement by and among Associated Exhibit 4.8g to Form
Estates Realty Corporation, as Borrower, National City Bank, 10Q filed November
as Managing Agent for itself and on behalf of the Existing 16, 1998.
Banks and National City Bank, Bank of America National
Commerzbank Aktiengesellschaft.
4.8h Third Amendment to Credit Agreement by and among Associated Exhibit 4.8h to Form
Estates Realty Corporation, as Borrower, National City Bank, 10-K filed March 30,
as Managing Agent, Bank of America National Trust & Savings 1999.
Association, as Documentation Agent and the banks identified
therein.
4.9 Form of Medium-Term Note-Fixed Rate-Senior Security. Exhibit 4(I) to 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.
4.11 Form of Deposit Agreement and Depositary Receipt. Exhibit 4.2 to Form
8-K filed July 12,
1995.
4.12 Ten Million Dollar 7.10% Senior Notes Due 2002. Exhibit 4.12 to Form
10-K filed March 28,
1996.
10 Associated Estates Realty Corporation Directors Deferred Exhibit 10 to Form
Compensation Plan. 10-Q filed November
14, 1996
10.1 Registration Rights Agreement among the Company and certain Exhibit 10.1 to Form
holders of the Company's Common Shares. S-11 filed 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 Agreement between the Exhibit 10.1 to Form
Company and Jeffrey I. Friedman. 10-Q filed May 13,
1996.
10.4 Equity-Based Incentive Compensation Plan Exhibit 10.4 to 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.
<PAGE>45
10.6 Lease Agreement dated November 29, 1990 between Royal Exhibit 10.6 to Form
American Management Corporation and Airport Partners Limited 10-K filed March 29,
Partnership. 1995.
10.7 Sublease dated February 28, 1994 between the Company as Exhibit 10.7 to Form
Sublessee, and Progressive Casualty Insurance Company, as 10-K filed March 29,
Sublessor. 1995.
10.8 Assignment and Assumption Agreement dated May 17, 1994 Exhibit 10.8 to Form
between the Company, as Assignee, and Airport Partners 10-K filed March 29,
Limited Partnership, as Assignor. 1995.
10.9 Form of Restricted Agreement dated by and among the Company Exhibit 10.9 to Form
and Its Independent Directors. 10-K filed March 28,
1996.
10.10 Pledge Agreement dated May 23, 1997 between Jeffrey I. Exhibit 10.01 to
Friedman and the Company. Form 10-Q filed
August 8, 1997
10.11 Secured Promissory Note dated May 23, 1997 in the amount of Exhibit 10.02 to
$1,671,000 executed by Jeffrey I. Friedman in favor of the Form 10-Q filed
Company. August 8, 1997
10.12 Unsecured Promissory Note dated May 23, 1997 in the amount Exhibit 10.03 to
of $1,671,000 executed by Jeffrey I. Friedman in favor of Form 10-Q filed
the Company. August 8, 1997
10.14 Form of Share Option Agreement by and among the Company and Exhibit 10.14 to
Its Independent Directors. Form 10-K filed
March 30, 1993.
10.15 Agreement dated March 11, 1999 by and among the Company and Exhibit 10.15 to
The Milstein Affiliates Form 10-Q filed May
17, 1999.
10.16 Agreement dated March 11, 1999 by and among the Company and Exhibit 10.16 to
The Milstein Affiliates Form 10-Q filed May
17, 1999.
10.17 Separation Agreement and Release dated January 8, 1999 by Exhibit 10.17 to
and between the Company and Dennis W. Bikun Form 10-Q filed May
17, 1999.
10.18 Separation Agreement and Release dated June 30, 1999 by and Exhibit 10.18 filed
between the Company and Larry E. Wright herewith.
18.1 Letter regarding change in accounting principles Exhibit 18.1 to Form
10-Q filed May 17,
1999.
27 Financial Data Schedule Exhibit 27 filed
herewith.
(b) Reports on Form 8-K
None
</TABLE>
<PAGE>46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ASSOCIATED ESTATES REALTY CORPORATION
August 13, 1999 /s/ Kathleen L. Gutin
(Date) Kathleen L. Gutin, Vice President, Chief
Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> $25,575,954
<SECURITIES> 22,629,401
<RECEIVABLES> 15,168,335
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,275,332
<PP&E> 957,740,356
<DEPRECIATION> (166,627,445)
<TOTAL-ASSETS> 886,413,252
<CURRENT-LIABILITIES> 48,013,892
<BONDS> 0
0
56,250,000
<COMMON> 2,264,172
<OTHER-SE> 188,812,325
<TOTAL-LIABILITY-AND-EQUITY> 886,413,252
<SALES> 71,241,076
<TOTAL-REVENUES> 77,380,041
<CGS> 31,965,731
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,032,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,356,147
<INCOME-PRETAX> 15,028,925
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,808,742)
<CHANGES> 4,319,162
<NET-INCOME> 17,539,345
<EPS-BASIC> .65
<EPS-DILUTED> .65
</TABLE>
EXHIBIT 4.5
PROMISSORY NOTE
$13,500,000.00 New York, New York
March __, 1999
FOR VALUE RECEIVED AERC OF NC, LLC, a Delaware limited
liability company, as maker, having its principal place of
business at 5025 Swetland Court, Cleveland, Ohio 44143
("Borrower"), hereby unconditionally promises to pay to the order
of THE CHASE MANHATTAN BANK, a New York banking corporation, as
payee, having an address at 380 Madison Avenue, 10th Floor, New
York, New York 10017 ("Lender"), or at such other place as the
holder hereof may from time to time designate in writing, the
principal sum of THIRTEEN MILLION FIVE HUNDRED THOUSAND AND
00/100 DOLLARS ($13,500,000.00) in lawful money of the United
States of America with interest thereon to be computed from the
date of this Note at the Applicable Interest Rate (defined
below), and to be paid in installments as follows:
ARTICLE 1 PAYMENT TERMS
(a) A payment of interest only on the tenth day of April,
1999;
(b) A payment of interest on the unpaid principal balance
on the tenth day of May, 1999 and on the tenth day of each
calendar month thereafter up to and including the tenth day of
April, 2000; and
(c) A payment of $95,106.45 on the tenth day of May, 2000
and on the tenth day of each calendar month thereafter up to and
including the tenth day of March, 2009;
each of the payments to be applied as follows:
(i) first, to the payment of interest computed at the
Applicable Interest Rate; and
(ii) the balance toward the reduction of the principal
sum;
and the balance of the principal sum and all interest thereon
shall be due and payable on the tenth day of April, 2009 (the
"Maturity Date"). Interest on the principal sum of this Note
shall be calculated by multiplying the actual number of days
elapsed in the applicable period by a daily rate based upon a
three hundred sixty (360) day year. The first interest accrual
period hereunder shall commence on and include the date that
principal is advanced hereunder and shall end on and include the
1
next ninth (9th) day of a calendar month, unless principal is
advanced on the ninth (9th) day of a month, in which case the
first interest accrual period shall consist of only such ninth
(9th) day. Each interest accrual period thereafter shall
commence on the tenth (10th) day of each calendar month during
the term of this Note and shall end on and include the ninth
(9th) day of the next occurring calendar month.
ARTICLE 2 INTEREST
The term "Applicable Interest Rate" as used in the Security
Instrument (defined below) and this Note shall mean an interest
rate equal to seven and three eighths percent (7.375%) per annum.
ARTICLE 3 DEFAULT AND ACCELERATION
(a) The whole of the principal sum of this Note, (b)
interest, default interest, late charges and other sums, as
provided in this Note, the Security Instrument or the Other
Security Documents (defined below), (c) all other monies agreed
or provided to be paid by Borrower in this Note, the Security
Instrument or the Other Security Documents, (d) all sums advanced
pursuant to the Security Instrument to protect and preserve the
Property (defined below) and the lien and the security interest
created thereby, and (e) all sums advanced and costs and expenses
incurred by Lender in connection with the Debt (defined below) or
any part thereof, any renewal, extension, or change of or
substitution for the Debt or any part thereof, or the acquisition
or perfection of the security therefor, whether made or incurred
at the request of Borrower or Lender (all the sums referred to in
(a) through (e) above shall collectively be referred to as the
"Debt") shall without notice become immediately due and payable
at the option of Lender if any payment required in this Note is
not paid on or prior to the date when due or on the happening of
any other default, after the expiration of any applicable notice
and grace periods, herein or under the terms of the Security
Instrument or any of the Other Security Documents (collectively,
an "Event of Default").
ARTICLE 4 DEFAULT INTEREST
Borrower does hereby agree that upon the occurrence of an
Event of Default, Lender shall be entitled to receive and
Borrower shall pay interest on the entire unpaid principal sum at
a rate equal to the lesser of (a) five percent (5%) plus the
Applicable Interest Rate and (b) the maximum interest rate which
Borrower may by law pay (the "Default Rate"). The Default Rate
shall be computed from the occurrence of the Event of Default
until the earlier of the date upon which the Event of Default is
cured or the date upon which the Debt is paid in full. Interest
2
calculated at the Default Rate shall be added to the Debt, and
shall be deemed secured by the Security Instrument. This clause,
however, shall not be construed as an agreement or privilege to
extend the date of the payment of the Debt, nor as a waiver of
any other right or remedy accruing to Lender by reason of the
occurrence of any Event of Default.
ARTICLE 5 PREPAYMENT; DEFEASANCE
(a) The principal balance of this Note may not be prepaid
in whole or in part prior to the Maturity Date except as
expressly permitted pursuant to Section 5(l) hereof.
(b) Subject to compliance with and satisfaction of the
terms and conditions of this Article 5 and provided that no Event
of Default exists under this Note, Borrower may elect on any
Monthly Payment Date (defined below) after the Lockout Period
Expiration Date (defined below), to release (the "Release") the
Property from the lien of the Security Instrument by delivering
to Lender (a "Defeasance"), as security for the payment of all
interest and principal due and to become due pursuant to this
Note throughout the term hereof, Defeasance Collateral (defined
below) sufficient to generate Scheduled Defeasance Payments
(defined below). "Monthly Payment Date" shall mean the tenth day
of each calendar month prior to the Maturity Date. "Lockout
Period Expiration Date" shall mean the earlier to occur of (A)
April 10, 2002, or (B) the second anniversary of the "startup
day" within the meaning of Section 860G(a)(9) of the IRS Code
(defined below) of a REMIC Trust (defined below).
(c) As a condition precedent to a Defeasance, and prior to
any Release, Borrower shall have complied with all of the
following:
(i) Borrower shall provide not less than sixty (60) days
prior written notice to Lender of the Monthly Payment
Date upon which it intends to effect a Defeasance
hereunder (the "Defeasance Date").
(ii) All accrued and unpaid interest and all other sums
due under this Note, the Security Instrument and the
Other Security Documents up to the Defeasance Date
shall be paid in full on or prior to the Defeasance
Date.
(iii) Borrower shall have delivered to Lender all necessary
documents to reflect that the principal balance of
this Note has been defeased. This Note shall
thereafter be secured by the Defeasance Collateral
delivered in connection with the Defeasance. After
Defeasance, this Note cannot be prepaid in whole or
in part or be the subject of any further Defeasance.
3
(iv) Borrower shall execute and deliver to Lender any and
all certificates, opinions, documents or instruments
required by Lender in connection with the Defeasance
and Release, including, without limitation, a pledge
and security agreement satisfactory to Lender
creating a first priority lien on the Defeasance
Collateral (a "Defeasance Security Agreement").
(v) Borrower shall have delivered to Lender an opinion of
Borrower's counsel in form and substance satisfactory
to Lender stating (A) that the Defeasance Collateral
and the proceeds thereof have been duly and validly
assigned and delivered to Lender and that Lender has
a valid, perfected, first priority lien and security
interest in the Defeasance Collateral delivered by
Borrower and the proceeds thereof, and (B) that if
the holder of this Note shall at the time of the
Release be a REMIC (defined below), (1) the
Defeasance Collateral has been validly assigned to
the REMIC Trust which holds this Note (the "REMIC
Trust"), (2) the Defeasance has been effected in
accordance with the requirements of Treasury
Regulation 1.860(g)-2(a)(8) (as such regulation may
be amended or substituted from time to time) and will
not be treated as an exchange pursuant to Section
1001 of the IRS Code and (3) the tax qualification
and status of the REMIC Trust as a REMIC will not be
adversely affected or impaired as a result of the
Defeasance. The term "REMIC" shall mean a "real
estate mortgage investment conduit" within the
meaning of Section 860D of the IRS Code. "IRS Code"
shall mean the United States Internal Revenue Code of
1986, as amended, and the related Treasury Department
regulations, including temporary regulations.
(vi) Borrower shall have delivered to Lender written
confirmation from the Rating Agencies (defined in the
Security Instrument) that such Defeasance will not
result in a withdrawal, downgrade or qualification of
the then current ratings by the applicable Rating
Agencies of the Securities (defined in the Security
Instrument). If required by the Rating Agencies,
Borrower shall, at Borrower's expense, also deliver
or cause to be delivered a non-consolidation opinion
with respect to the Defeasance Obligor (as defined
below) in form and substance satisfactory to Lender
and the Rating Agencies.
(vii) Borrower shall have delivered to Lender a certificate
satisfactory to Lender given by Borrower's
independent certified public accountant (which
accountant shall be reasonably satisfactory to
4
Lender) certifying that the Defeasance Collateral
shall generate monthly amounts equal to or greater
than the Scheduled Defeasance Payments required to be
paid under this Note through and including the
Maturity Date.
(d) In connection with any Defeasance hereunder, Borrower
shall (unless otherwise agreed to in writing by Lender), at
Borrower's expense, establish or designate a successor entity,
which shall be a single purpose, bankruptcy remote entity
approved by Lender, as such term is described in Section 4.2 of
the Security Instrument (the "Defeasance Obligor") and Borrower
shall transfer and assign all obligations, rights and duties
under and to this Note together with the pledged Defeasance
Collateral to such Defeasance Obligor. Such Defeasance Obligor
shall assume the obligations under this Note and any Defeasance
Security Agreement, and Borrower shall be relieved of its
obligations under such documents and, except with respect to any
provisions of the Note, the Security Instrument or the Other
Security Documents which by their terms expressly survive payment
of the Debt in full, the Note, the Security Instrument or the
Other Security Documents.
(e) Each of the obligations of the United States of
America that is part of the Defeasance Collateral shall be duly
endorsed by the holder thereof as directed by Lender or
accompanied by a written instrument of transfer in form and
substance wholly satisfactory to Lender (including, without
limitation, such instruments as may be required by the depository
institution holding such securities or by the issuer thereof, as
the case may be, to effectuate book-entry transfers and pledges
through the book-entry facilities of such institution) in order
to perfect upon the delivery of the Defeasance Collateral a first
priority security interest therein in favor of the Lender in
conformity with all applicable state and federal laws governing
the granting of such security interests. Borrower shall
authorize and direct that the payments received from such
obligations shall be made directly to Lender or Lender's designee
and applied to satisfy the obligations of Borrower or, if
applicable, the Defeasance Obligor, under this Note.
(f) The Defeasance Collateral shall generate payments on
or prior to, but as close as possible to, the Business Day
(defined below) prior to each successive Monthly Payment Date
after the date of the Defeasance upon which payments are
required under this Note and in amounts equal to or greater than
the payments due on such dates (including, without limitation
scheduled payments of principal, interest, servicing fees (if
any) and any other regularly scheduled amounts due under this
Note, the Security Instrument or the Other Security Documents on
such dates) together with the outstanding principal amount of
this Note which would be due on the Maturity Date (the "Scheduled
5
Defeasance Payments"). The term "Business Day" shall mean a day
upon which commercial banks are not authorized or required by law
to close in New York, New York.
(g) Notwithstanding any release of the Security
Instrument granted pursuant to this Article 5 or any Defeasance
hereunder, the Defeasance Obligor shall, and hereby agrees to be,
bound by and obligated under Sections 3.1, 7.2, 7.4(a), 11.2,
11.7 and 14.2 and Articles 13 and 15 of the Security Instrument;
provided, however, that all references therein to "Property" or
"Personal Property" shall be deemed to refer only to the
Defeasance Collateral delivered to Lender.
(h) Any costs or expenses incurred or to be incurred in
connection with the Defeasance and any revenue, documentary stamp
or intangible taxes or any other tax or charge due in connection
with the transfer of this Note, or otherwise required to
accomplish the Defeasance shall be paid by Borrower
simultaneously with the occurrence of any Defeasance.
(i) The term "Defeasance Collateral" as used herein shall
mean non-callable and non-redeemable securities evidencing an
obligation to timely pay principal and interest in a full and
timely manner that are direct obligations of the United States of
America for the payment of which its full faith and credit is
pledged.
(j) Upon Borrower's compliance with all of the conditions
to Defeasance and a Release set forth in Article 5(b) through
(i), Lender shall release the Property from the lien of the
Security Instrument and the Other Security Documents. All costs
and expenses of Lender incurred in connection with the Defeasance
and Release, including, without limitation, Lender's counsel's
reasonable fees and expenses, shall be paid by Borrower
simultaneously with the delivery of the Release documentation.
(k) If a Default Prepayment (defined below) occurs,
Borrower shall pay to Lender the entire Debt, including, without
limitation, an amount (the "Default Consideration") equal to the
greater of (i) the amount (if any) which, when added to the
outstanding principal amount of the Note will be sufficient to
purchase Defeasance Collateral providing the required Scheduled
Defeasance Payments assuming Defeasance would be permitted
hereunder, or (ii) one percent (1%) of the Default Prepayment.
For purposes of this Note, the term "Default Prepayment" shall
mean a prepayment of the principal amount of this Note made after
the acceleration of the Maturity Date under any circumstances,
including, without limitation, a prepayment occurring after an
Event of Default or in connection with reinstatement of the
Security Instrument provided by statute under foreclosure
proceedings or exercise of a power of sale, any statutory right
of redemption exercised by Borrower or any other party having a
6
statutory right to redeem or prevent foreclosure, any sale in
foreclosure or under exercise of a power of sale or otherwise.
(l) Notwithstanding anything to the contrary herein,
provided no Event of Default exists under this Note, the Security
Instrument or the Other Security Documents, (i) Borrower may
prepay the principal balance of this Note in whole during the
three (3) months prior to the Maturity Date and no prepayment
consideration shall be due in connection therewith, but Borrower
shall be required to pay all other sums due hereunder together
with all interest which would have accrued on the principal
balance of this Note after the date of prepayment to the next
Monthly Payment Date (the "Interest Shortfall Payment"), if such
prepayment occurs on a date which is not a Monthly Payment Date;
and (ii) if a complete or partial prepayment results from the
application of insurance proceeds or condemnation awards pursuant
to Sections 3.3, 3.6 or 4.3 of the Security Instrument, no
prepayment consideration or Default Consideration shall be due in
connection therewith, but Borrower shall be required to pay all
other sums due hereunder, including, without limitation, the
Interest Shortfall Payment, if applicable.
ARTICLE 6 SECURITY
This Note is secured by the Security Instrument and the
Other Security Documents. The term "Security Instrument" as used
in this Note shall mean the Deed of Trust and Security Agreement
dated the date hereof in the principal sum of $13,500,000.00
given by Borrower to (or for the benefit of) Lender covering the
fee estate of Borrower in certain premises located in Wake
County, State of North Carolina and other property, as more
particularly described therein (collectively, the "Property") and
intended to be duly recorded in said County. The term "Other
Security Documents" as used in this Note shall mean all and any
of the documents other than this Note or the Security Instrument
now or hereafter executed by Borrower and/or others and by or in
favor of Lender, which wholly or partially secure or guarantee
payment of this Note. Whenever used, the singular number shall
include the plural, the plural number shall include the singular,
and the words "Lender" and "Borrower" shall include their
respective successors, assigns, heirs, executors and
administrators.
All of the terms, covenants and conditions contained in the
Security Instrument and the Other Security Documents are hereby
made part of this Note to the same extent and with the same force
as if they were fully set forth herein.
7
ARTICLE 7 SAVINGS CLAUSE
This Note is subject to the express condition that at no
time shall Borrower be obligated or required to pay interest on
the principal balance due hereunder at a rate which could subject
Lender to either civil or criminal liability as a result of being
in excess of the maximum interest rate which Borrower is
permitted by applicable law to contract or agree to pay. If by
the terms of this Note, Borrower is at any time required or
obligated to pay interest on the principal balance due hereunder
at a rate in excess of such maximum rate, the Applicable Interest
Rate or the Default Rate, as the case may be, shall be deemed to
be immediately reduced to such maximum rate and all previous
payments in excess of the maximum rate shall be deemed to have
been payments in reduction of principal and not on account of the
interest due hereunder. All sums paid or agreed to be paid to
Lender for the use, forbearance, or detention of the Debt, shall,
to the extent permitted by applicable law, be amortized,
prorated, allocated, and spread throughout the full stated term
of the Note until payment in full so that the rate or amount of
interest on account of the Debt does not exceed the maximum
lawful rate of interest from time to time in effect and
applicable to the Debt for so long as the Debt is outstanding.
ARTICLE 8 LATE CHARGE
If any sum payable under this Note is not paid on or prior
to the date on which it is due, Borrower shall pay to Lender upon
demand an amount equal to the lesser of five percent (5%) of the
unpaid sum or the maximum amount permitted by applicable law to
defray the expenses incurred by Lender in handling and processing
the delinquent payment and to compensate Lender for the loss of
the use of the delinquent payment and the amount shall be secured
by the Security Instrument and the Other Security Documents.
ARTICLE 9 NO ORAL CHANGE
This Note may not be modified, amended, waived, extended,
changed, discharged or terminated orally or by any act or failure
to act on the part of Borrower or Lender, but only by an
agreement in writing signed by the party against whom enforcement
of any modification, amendment, waiver, extension, change,
discharge or termination is sought.
ARTICLE 10 JOINT AND SEVERAL LIABILITY
If Borrower consists of more than one person or party, the
obligations and liabilities of each person or party shall be
joint and several.
8
ARTICLE 11 WAIVERS
Borrower and all others who may become liable for the
payment of all or any part of the Debt do hereby severally waive
presentment and demand for payment, notice of dishonor, protest
and notice of protest and non-payment and all other notices of
any kind. No release of any security for the Debt or extension
of time for payment of this Note or any installment hereof, and
no alteration, amendment or waiver of any provision of this Note,
the Security Instrument or the Other Security Documents made by
agreement between Lender or any other person or party shall
release, modify, amend, waive, extend, change, discharge,
terminate or affect the liability of Borrower, and any other
person or entity who may become liable for the payment of all or
any part of the Debt, under this Note, the Security Instrument or
the Other Security Documents. No notice to or demand on Borrower
shall be deemed to be a waiver of the obligation of Borrower or
of the right of Lender to take further action without further
notice or demand as provided for in this Note, the Security
Instrument or the Other Security Documents. If Borrower is a
partnership, the agreements contained herein shall remain in full
force and effect, notwithstanding any changes in the individuals
or entities comprising the partnership, and the term "Borrower,"
as used herein, shall include any alternate or successor
partnership, but any predecessor partnership and its partners
shall not thereby be released from any liability. If Borrower is
a corporation, the agreements contained herein shall remain in
full force and effect notwithstanding any changes in the
shareholders comprising, or the officers and directors relating
to, the corporation, and the term "Borrower" as used herein,
shall include any alternate or successor corporation, but any
predecessor corporation shall not be relieved of liability
hereunder. If Borrower is a limited liability company, the
agreements herein contained shall remain in full force and
effect, notwithstanding any changes in the individuals or
entities comprising the limited liability company and the term
"Borrower," as used herein, shall include any alternate or
successor limited liability company, but any predecessor limited
liability company and ts members shall not be released from any
liability. (Nothing in the foregoing sentence shall be construed
as a consent to, or a waiver of, any prohibition or restriction
on transfers of interests in such partnership, corporation or
limited liability company which may be set forth in the Security
Instrument or any Other Security Document.)
ARTICLE 12 TRANSFER
Upon the transfer of this Note, Borrower hereby waiving
notice of any such transfer, Lender may deliver all the
collateral mortgaged, granted, pledged or assigned pursuant to
the Security Instrument and the Other Security Documents, or any
part thereof, to the transferee who shall thereupon become vested
9
with all the rights herein or under applicable law given to
Lender with respect thereto, and Lender shall thereafter forever
be relieved and fully discharged from any liability or
responsibility in the matter, but Lender shall retain all rights
hereby given to it with respect to any liabilities and the
collateral not so transferred.
ARTICLE 13 WAIVER OF TRIAL BY JURY
BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING
DIRECTLY OR INDIRECTLY TO THE LOAN EVIDENCED BY THIS NOTE, THE
APPLICATION FOR THE LOAN EVIDENCED BY THIS NOTE, THIS NOTE, THE
SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY ACTS
OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR
AGENTS IN CONNECTION THEREWITH.
ARTICLE 14 EXCULPATION
(a) Except as otherwise provided herein, in the Security
Instrument or in the Other Security Documents, Lender shall not
enforce the liability and obligation of Borrower to perform and
observe the obligations contained in this Note or the Security
Instrument or any of the Other Security Documents by any action
or proceeding wherein a money judgment shall be sought against
Borrower, except that Lender may bring a foreclosure action,
action for specific performance or other appropriate action or
proceeding to enable Lender to enforce and realize upon this
Note, the Security Instrument, the Other Security Documents, and
the interest in the Property, the Rents (as defined in the
Security Instrument) and any other collateral given to Lender
created by this Note, the Security Instrument and the Other
Security Documents; provided, however, that any judgment in any
such action or proceeding shall be enforceable against Borrower
only to the extent of Borrower's interest in the Property, in the
Rents and in any other collateral given to Lender. Lender, by
accepting this Note and the Security Instrument, agrees that it
shall not, except as otherwise provided in this Article 14, sue
for, seek or demand any deficiency judgment against Borrower in
any such action or proceeding, under or by reason of or under or
in connection with this Note, the Other Security Documents or the
Security Instrument. The provisions of this Section shall not,
however, (i) constitute a waiver, release or impairment of any
obligation evidenced or secured by this Note, the Other Security
Documents or the Security Instrument; (ii) impair the right of
Lender to name Borrower as a party defendant in any action or
suit for judicial foreclosure and sale under the Security
Instrument; (iii) affect the validity or enforceability of any
indemnity (including, without limitation, the Environmental
Indemnity (as defined in the Security Instrument)), guaranty,
10
master lease or similar instrument made in connection with this
Note, the Security Instrument, or the Other Security Documents;
(iv) impair the right of Lender to obtain the appointment of a
receiver; (v) impair the enforcement of the Assignment of Leases
and Rents executed in connection herewith; (vi) impair the right
of Lender to enforce the provisions of Section 13.2, of the
Security Instrument; or (vii) impair the right of Lender to
obtain a deficiency judgment or other judgment on the Note
against Borrower if necessary to obtain any insurance proceeds or
condemnation awards to which Lender would otherwise be entitled
under this Security Instrument; provided however, Lender shall
only enforce such judgment to the extent of the insurance
proceeds and/or condemnation awards.
(b) Notwithstanding the provisions of this Article 14 to
the contrary, Borrower shall be personally liable to Lender for
the Losses (as defined in the Security Instrument) it incurs due
to: (i) fraud or intentional misrepresentation by Borrower or any
other person or entity in connection with the execution and the
delivery of this Note, the Security Instrument or the Other
Documents; (ii) Borrower's misapplication or misappropriation of
Rents received by Borrower after the occurrence of an Event of
Default; (iii) Borrower's misapplication or misappropriation of
tenant security deposits or Rents collected in advance; (iv) the
misapplication or the misappropriation of insurance proceeds or
condemnation awards; (v) Borrower's failure to pay Taxes (as
defined in the Security Instrument), Other Charges (as defined in
the Security Instrument) (except to the extent that sums
sufficient to pay such amounts have been deposited in escrow with
Lender pursuant to the terms of the Security Instrument), charges
for labor or materials or other charges that can create liens on
the Property; (vi) Borrower's failure to return or to reimburse
Lender for all Personal Property (as defined in the Security
Instrument) taken from the Property by or on behalf of Borrower
and not replaced with Personal Property of the same utility and
of the same or greater value; (vii) any act of actual waste or
arson by Borrower, any principal, affiliate, member or general
partner thereof or by any Indemnitor (as defined in the Security
Instrument) or Guarantor (as defined in the Security Instrument);
(viii) any fees or commissions paid by Borrower to any principal,
affiliate, member or general partner of Borrower, Indemnitor or
Guarantor in violation of the terms of this Note, the Security
Instrument or the Other Security Documents; or (ix) Borrower's
failure to comply with the provisions of Sections 12.1 and 12.2
of the Security Instrument.
(c) Notwithstanding the foregoing, the agreement of
Lender not to pursue recourse liability as set forth in
Subsection (a) above SHALL BECOME NULL AND VOID and shall be of
no further force and effect in the event of Borrower's default
under Sections 3.11 (after ten (10) days written notice) or 4.2
or Article 8 of the Security Instrument, or in the event of
11
Principal's (as defined in the Security Instrument) default under
Section 4.2 of the Security Instrument; provided, however, that
with respect to Borrower's default under Section 3.11 of the
Security Instrument only, upon Borrower's cure of said default,
Lender's agreement not to pursue recourse liability shall be
reinstated, provided further, however, that Borrower shall be
liable to Lender for the losses it realizes due to Borrower's
failure to deliver the statements required pursuant to the terms
of Section 3.11 of the Security Instrument from the date of said
failure up to and including the date of said cure.
(d) Nothing herein shall be deemed to be a waiver of any
right which Lender may have under Section 506(a), 506(b), 1111(b)
or any other provision of the U.S. Bankruptcy Code to file a
claim for the full amount of the indebtedness secured by the
Security Instrument or to require that all collateral shall
continue to secure all of the indebtedness owing to Lender in
accordance with this Note, the Security Instrument and the Other
Security Documents.
ARTICLE 15 AUTHORITY
Borrower (and the undersigned representative of Borrower, if
any) represents that Borrower has full power, authority and legal
right to execute and deliver this Note, the Security Instrument
and the Other Security Documents and that this Note, the Security
Instrument and the Other Security Documents constitute valid and
binding obligations of Borrower.
ARTICLE 16 APPLICABLE LAW
This Note shall be deemed to be a contract entered into
pursuant to the laws of the State of New York and shall in all
respects be governed, construed, applied and enforced in
accordance with the laws of the State of New York.
ARTICLE 17 JURISDICTION
With respect to any claim or action arising hereunder or
under the Security Instrument or the Other Security Documents,
Borrower (a) irrevocably submits to the nonexclusive jurisdiction
of the courts of the State of New York and the United States
District Court located in the Borough of Manhattan in New York,
New York, and appellate courts from any thereof, and (b)
irrevocably waives any objection which it may have at any time to
the laying on venue of any suit, action or proceeding arising out
of or relating to this Note brought in any such court,
irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an
inconvenient forum. Nothing in this Note will be deemed to
preclude Lender from bringing an action or proceeding with
12
respect hereto in any other jurisdiction.
ARTICLE 18 COUNSEL FEES
In the event that it should become necessary to employ
counsel to collect the Debt or to protect or foreclose the
security therefor, Borrower also agrees to pay all reasonable
fees and expenses of Lender, including, without limitation,
reasonable attorney's fees for the services of such counsel
whether or not suit be brought.
ARTICLE 19 NOTICES
All notices required or permitted hereunder shall be given
and become effective as provided in the Security Instrument.
ARTICLE 20 MISCELLANEOUS
(a) Wherever pursuant to this Note (i) Lender exercises
any right given to it to approve or disapprove, (ii) any
arrangement or term is to be satisfactory to Lender, or (iii) any
other decision or determination is to be made by Lender, the
decision of Lender to approve or disapprove, all decisions that
arrangements or terms are satisfactory or not satisfactory and
all other decisions and determinations made by Lender, shall be
in the sole and absolute discretion of Lender, except as may be
otherwise expressly and specifically provided herein.
(b) Wherever pursuant to this Note it is provided that
Borrower pay any costs and expenses, such costs and expenses
shall include, but not be limited to, reasonable legal fees and
disbursements of Lender, whether with respect to retained firms,
the reimbursement for the expenses of in-house staff, or
otherwise.
ARTICLE 21 DEFINITIONS
The terms set forth below are defined in the following
Sections of this Note:
(a) Applicable Interest Rate: Article 2;
(b) Borrower: Preamble, Articles 6 and 11;
(c) Business Day: Article 5, Section 5(f);
(d) Debt: Article 3;
(e) Default Consideration: Article 5, Section 5(l);
13
(f) Default Prepayment: Article 5, Section 5(l);
(g) Default Rate: Article 4;
(h) Defeasance: Article 5, Section 5(b);
(i) Defeasance Collateral: Article 5, Section 5(i);
(j) Defeasance Date: Article 5, Subsection 5(c)(i);
(k) Defeasance Obligor: Article 5, Section 5(d);
(l) Defeasance Security Agreement: Article 5, Subsection
5(c)(iv);
(m) Event of Default: Article 3;
(n) Interest Shortfall Payment: Article 5, Section 5(l);
(o) Lender: Preamble and Article 6;
(p) Lockout Period Expiration Date: Article 5, Section
5(b);
(q) Maturity Date: Article 1, Section 1(b);
(r) Monthly Payment Date Article 5, Section 5(b);
(s) Other Security Documents: Article 6;
(t) Property: Article 6;
(u) Release: Article 5, Section 5(b);
(v) REMIC Trust: Article 5, Subsection 5(c)(v);
(w) Scheduled Defeasance Payments: Article 5, Section
5(f); and
(x) Security Instrument: Article 6.
14
IN WITNESS WHEREOF, Borrower has duly executed this Note the
day and year first above written.
AERC OF NC, LLC,
a Delaware limited
liability company (SEAL)
By: (SEAL)
Gregory L. Golz
Vice President
15
IN WITNESS WHEREOF, Borrower has duly executed this Note the
day and year first above written.
Signed, sealed and delivered in the presence of:
AERC MORGAN PLACE, INC.,
a Delaware corporation
By: Gregory L. Golz
Vice President
Unofficial Witness
(SEAL)
Notary Public
My Commission Expires:
[NOTARIAL SEAL]
16
STATE OF _____________
COUNTY OF ___________
I, _____________________, Notary Public for said County and
State, certify that Gregory L. Golz personally came before me
this day and acknowledged that he is the Vice President of AERC
OF NC, LLC, a Delaware limited liability company, and that by
authority duly given and as an act of the aforesaid limited
liability company, the foregoing instrument was signed in its
name by its Vice President.
Witness my hand and official seal this _____ day of March,
1999.
Notary Public
(Official Seal)
My commission expires: ______________, _____.
17
STATE OF )
) ss.:
COUNTY OF )
On March ___, 1999, before me, a notary public, duly
commissioned, qualified and acting, personally appeared Gregory
L. Golz, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed
to the within instrument and acknowledged to me that he executed
the same in his authorized capacity, and that by his signature on
the instrument the person, or the entity upon behalf of which the
person acted, executed the instrument.
IN WITNESS WHEREOF, I hereunto set my hand and official
seal.
Notary Public
My Commission Expires:
___________________________
18
_____________________________________, as mortgagor
(Borrower)
to
THE CHASE MANHATTAN BANK, as mortgagee
(Lender)
___________________________________
MORTGAGE AND
SECURITY AGREEMENT
___________________________________
Dated:
Location:
Section:
Block:
Lot:
County:
PREPARED BY AND UPON
RECORDATION RETURN TO:
Messrs. Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention:
File No.:
Title No.:
19
THIS MORTGAGE AND SECURITY AGREEMENT (the "Security
Instrument") is made as of the ____ day of ________, 1999, by
, a , having its
principal place of business at as
mortgagor ("Borrower") to THE CHASE MANHATTAN BANK, a New York
banking corporation, having an address at 380 Madison Avenue,
10th Floor, New York, New York 10017 as mortgagee ("Lender").
RECITALS:
Borrower by its promissory note of even date herewith given
to Lender is indebted to Lender in the principal sum of
AND 00/100 DOLLARS ($______________) in lawful money
of the United States of America (the note together with all
extensions, renewals, modifications, substitutions and amendments
thereof shall collectively be referred to as the "Note"), with
interest from the date thereof at the rates set forth in the
Note, principal and interest to be payable in accordance with the
terms and conditions provided in the Note.
Borrower desires to secure the payment of the Debt (as
defined in Article 2) and the performance of all of its
obligations under the Note and the Other Obligations (as defined
in Article 2).
Article 1 - GRANTS OF SECURITY
Section 1.1 Property Mortgaged. Borrower does hereby
irrevocably mortgage, grant, bargain, sell, pledge, assign,
warrant, transfer and convey to Lender, and grant a security
interest to Lender in, the following property, rights, interests
and estates now owned, or hereafter acquired by Borrower
(collectively, the "Property"):
(a) Land. The real property described in Exhibit A
attached hereto and made a part hereof (the "Land");
(b) Additional Land. All additional lands, estates and
development rights hereafter acquired by Borrower for use in
connection with the Land and the development of the Land and all
additional lands and estates therein which may, from time to
time, by supplemental mortgage or otherwise be expressly made
subject to the lien of this Security Instrument;
(c) Improvements. The buildings, structures, fixtures,
additions, enlargements, extensions, modifications, repairs,
replacements and improvements now or hereafter erected or located
on the Land (the "Improvements");
(d) Easements. All easements, rights-of-way or use,
rights, strips and gores of land, streets, ways, alleys,
passages, sewer rights, water, water courses, water rights and
20
powers, air rights and development rights, and all estates,
rights, titles, interests, privileges, liberties, servitudes,
tenements, hereditaments and appurtenances of any nature
whatsoever, in any way now or hereafter belonging, relating or
pertaining to the Land and the Improvements and the reversion and
reversions, remainder and remainders, and all land lying in the
bed of any street, road or avenue, opened or proposed, in front
of or adjoining the Land, to the center line thereof and all the
estates, rights, titles, interests, dower and rights of dower,
curtesy and rights of curtesy, property, possession, claim and
demand whatsoever, both at law and in equity, of Borrower of, in
and to the Land and the Improvements and every part and parcel
thereof, with the appurtenances thereto;
(e) Fixtures and Personal Property. All machinery,
equipment, fixtures (including, but not limited to, all heating,
air conditioning, plumbing, lighting, communications and elevator
fixtures) and other property of every kind and nature whatsoever
owned by Borrower, or in which Borrower has or shall have an
interest, now or hereafter located upon the Land and the
Improvements, or appurtenant thereto, and usable in connection
with the present or future operation and occupancy of the Land
and the Improvements and all building equipment, materials and
supplies of any nature whatsoever owned by Borrower, or in which
Borrower has or shall have an interest, now or hereafter located
upon the Land and the Improvements, or appurtenant thereto, or
usable in connection with the present or future operation and
occupancy of the Land and the Improvements (collectively, the
"Personal Property"), and the right, title and interest of
Borrower in and to any of the Personal Property which may be
subject to any security interests, as defined in the Uniform
Commercial Code, as adopted and enacted by the state or states
where any of the Property is located (the "Uniform Commercial
Code"), superior in lien to the lien of this Security Instrument
and all proceeds and products of the above;
(f) Leases and Rents. All leases, subleases and other
agreements affecting the use, enjoyment or occupancy of the Land
and/or the Improvements heretofore or hereafter entered into and
all extensions, amendments and modifications thereto, whether
before or after the filing by or against Borrower of any petition
for relief under 11 U.S.C. '101 et seq., as the same may be
amended from time to time (the "Bankruptcy Code") (the "Leases")
and all right, title and interest of Borrower, its successors and
assigns therein and thereunder, including, without limitation,
any guaranties of the lessees' obligations thereunder, cash or
securities deposited thereunder to secure the performance by the
lessees of their obligations thereunder and all rents, additional
rents, revenues, issues and profits (including all oil and gas or
other mineral royalties and bonuses) from the Land and the
Improvements whether paid or accruing before or after the filing
by or against Borrower of any petition for relief under the
21
Bankruptcy Code (the "Rents") and all proceeds from the sale or
other disposition of the Leases and the right to receive and
apply the Rents to the payment of the Debt;
(g) Condemnation Awards. All awards or payments,
including interest thereon, which may heretofore and hereafter be
made with respect to the Property, whether from the exercise of
the right of eminent domain (including but not limited to any
transfer made in lieu of or in anticipation of the exercise of
the right), or for a change of grade, or for any other injury to
or decrease in the value of the Property;
(h) Insurance Proceeds. All proceeds of and any unearned
premiums on any insurance policies covering the Property,
including, without limitation, the right to receive and apply the
proceeds of any insurance, judgments, or settlements made in lieu
thereof, for damage to the Property;
(i) Tax Certiorari. All refunds, rebates or credits in
connection with a reduction in real estate taxes and assessments
charged against the Property as a result of tax certiorari or any
applications or proceedings for reduction;
(j) Conversion. All proceeds of the conversion,
voluntary or involuntary, of any of the foregoing including,
without limitation, proceeds of insurance and condemnation
awards, into cash or liquidation claims;
(k) Rights. The right, in the name and on behalf of
Borrower, to appear in and defend any action or proceeding
brought with respect to the Property and to commence any action
or proceeding to protect the interest of Lender in the Property;
(l) Agreements. All agreements, contracts, certificates,
instruments, franchises, permits, licenses, plans, specifications
and other documents, now or hereafter entered into, and all
rights therein and thereto, respecting or pertaining to the use,
occupation, construction, management or operation of the Land and
any part thereof and any Improvements or respecting any business
or activity conducted on the Land and any part thereof and all
right, title and interest of Borrower therein and thereunder,
including, without limitation, the right, upon the happening of
any default hereunder, to receive and collect any sums payable to
Borrower thereunder;
(m) Intangibles. All trade names, trademarks,
servicemarks, logos, copyrights, goodwill, books and records and
all other general intangibles relating to or used in connection
with the operation of the Property;
(n) Accounts. All reserves, escrows and deposit accounts
maintained by Borrower with respect to the Property including,
22
without limitation, any lockbox account and cash management
account, and all complete securities, investments, property and
financial assets held therein from time to time and all proceeds,
products, distributions or dividends or substitutions thereon and
thereof; and
(o) Other Rights. Any and all other rights of Borrower
in and to the items set forth in Subsections (a) through (n)
above.
Section 1.2 Assignment of Leases and Rents. Borrower
hereby absolutely and unconditionally assigns to Lender
Borrower's right, title and interest in and to all current and
future Leases and Rents; it being intended by Borrower that this
assignment constitutes a present, absolute assignment and not an
assignment for additional security only. Nevertheless, subject
to the terms of this Section 1.2 and Section 11.1(h), Lender
grants to Borrower a revocable license to collect and receive the
Rents. Borrower shall hold the Rents, or a portion thereof
sufficient to discharge all current sums due on the Debt, for use
in the payment of such sums.
Section 1.3 Security Agreement. This Security Instrument
is both a real property mortgage and a "security agreement"
within the meaning of the Uniform Commercial Code. The Property
includes both real and personal property and all other rights and
interests, whether tangible or intangible in nature, of Borrower
in the Property. By executing and delivering this Security
Instrument, Borrower hereby grants to Lender, as security for the
Obligations (defined in Section 2.3), a security interest in the
Personal Property to the full extent that the Personal Property
may be subject to the Uniform Commercial Code.
Section 1.4 Pledge of Monies Held. Borrower hereby
pledges to Lender any and all monies now or hereafter held by
Lender, including, without limitation, any sums deposited in the
Escrow Fund (as defined in Section 3.5), Net Proceeds (as defined
in Section 4.3) and condemnation awards or payments described in
Section 3.6, as additional security for the Obligations until
expended or applied as provided in this Security Instrument.
CONDITIONS TO GRANT
TO HAVE AND TO HOLD the above granted and described Property
unto and to the use and benefit of Lender, and the successors and
assigns of Lender, forever;
PROVIDED, HOWEVER, these presents are upon the express
condition that, if Borrower shall well and truly pay to Lender
the Debt at the time and in the manner provided in the Note and
this Security Instrument, shall well and truly perform the Other
Obligations as set forth in this Security Instrument and shall
23
well and truly abide by and comply with each and every covenant
and condition set forth herein and in the Note, these presents
and the estate hereby granted shall cease, terminate and be void.
Article 2 - DEBT AND OBLIGATIONS SECURED
Section 2.1 Debt. This Security Instrument and the
grants, assignments and transfers made in Article 1 are given for
the purpose of securing the following, in such order of priority
as Lender may determine in its sole discretion (the "Debt"):
(a) the payment of the indebtedness evidenced by the Note
in lawful money of the United States of America;
(b) the payment of interest, default interest, late
charges and other sums, as provided in the Note, this Security
Instrument or the Other Security Documents (defined below);
(c) the payment of the Default Consideration (as defined
in the Note), if any;
(d) the payment of all other moneys agreed or provided to
be paid by Borrower in the Note, this Security Instrument or the
Other Security Documents;
(e) the payment of all sums advanced pursuant to this
Security Instrument to protect and preserve the Property and the
lien and the security interest created hereby; and
(f) the payment of all sums advanced and costs and
expenses incurred by Lender in connection with the Debt or any
part thereof, any renewal, extension, or change of or
substitution for the Debt or any part thereof, or the acquisition
or perfection of the security therefor, whether made or incurred
at the request of Borrower or Lender.
Section 2.2 Other Obligations. This Security Instrument
and the grants, assignments and transfers made in Article 1 are
also given for the purpose of securing the following (the "Other
Obligations"):
(a) the performance of all other obligations of Borrower
contained herein;
(b) the performance of each obligation of Borrower
contained in any other agreement given by Borrower to Lender
which is for the purpose of further securing the obligations
secured hereby, and any amendments, modifications and changes
thereto; and
(c) the performance of each obligation of Borrower
24
contained in any renewal, extension, amendment, modification,
consolidation, change of, or substitution or replacement for, all
or any part of the Note, this Security Instrument or the Other
Security Documents.
Section 2.3 Debt and Other Obligations. Borrower's
obligations for the payment of the Debt and the performance of
the Other Obligations shall be referred to collectively below as
the "Obligations."
Section 2.4 Payments. Unless payments are made in the
required amount in immediately available funds at the place where
the Note is payable, remittances in payment of all or any part of
the Debt shall not, regardless of any receipt or credit issued
therefor, constitute payment until the required amount is
actually received by Lender in funds immediately available at the
place where the Note is payable (or any other place as Lender, in
Lender's sole discretion, may have established by delivery of
written notice thereof to Borrower) and shall be made and
accepted subject to the condition that any check or draft may be
handled for collection in accordance with the practice of the
collecting bank or banks. Acceptance by Lender of any payment in
an amount less than the amount then due shall be deemed an
acceptance on account only, and the failure to pay the entire
amount then due shall be and continue to be an Event of Default
(defined below).
Article 3 - BORROWER COVENANTS
Borrower covenants and agrees that:
Section 3.1 Payment of Debt. Borrower will pay the Debt
at the time and in the manner provided in the Note and in this
Security Instrument.
Section 3.2 Incorporation by Reference. All the
covenants, conditions and agreements contained in (a) the Note
and (b) all and any of the documents other than the Note or this
Security Instrument now or hereafter executed by Borrower and/or
others and by or in favor of Lender, which wholly or partially
secure or guaranty payment of the Note (the "Other Security
Documents"), are hereby made a part of this Security Instrument
to the same extent and with the same force as if fully set forth
herein.
Section 3.3 Insurance.
(a) Borrower shall obtain and maintain, or cause to be
maintained, insurance for Borrower and the Property providing at
least the following coverages:
25
(i) comprehensive all risk insurance on the Improvements
and the Personal Property, in each case (A) in an
amount equal to 100% of the "Full Replacement Cost,"
which for purposes of this Security Instrument shall
mean actual replacement value (exclusive of costs of
excavations, foundations, underground utilities and
footings) with a waiver of depreciation, but the
amount shall in no event be less than the outstanding
principal balance of the Note; (B) containing an
agreed amount endorsement with respect to the
Improvements and Personal Property waiving all
co-insurance provisions; (C) providing for no
deductible in excess of $10,000; and (D) providing
coverage for contingent liability from Operation of
Building Laws, Demolition Costs and Increased Cost of
Construction Endorsements together with an "Ordinance
or Law Coverage" or "Enforcement" endorsement if any
of the Improvements or the use of the Property shall
at any time constitute legal non-conforming
structures or uses. The Full Replacement Cost shall
be redetermined from time to time (but not more
frequently than once in any twelve (12) calendar
months) at the reasonable request of Lender by an
appraiser or contractor designated and paid by
Borrower and approved by Lender, or by an engineer or
appraiser in the regular employ of the insurer.
After the first appraisal, additional appraisals may
be based on construction cost indices customarily
employed in the trade. No omission on the part of
Lender to request any such ascertainment shall
relieve Borrower of any of its obligations under this
Subsection;
(ii) commercial general liability insurance against claims
for personal injury, bodily injury, death or property
damage occurring upon, in or about the Property, such
insurance (A) to be on the so-called "occurrence"
form with a general aggregate limit of not less than
$2,000,000, or $6,000,000 if the Improvements contain
elevators, and a per occurrence limit of not less
than $2,000,000; (B) to continue at not less than the
aforesaid limit until required to be changed by
Lender in writing by reason of changed economic
conditions making such protection inadequate; and (C)
to cover at least the following hazards: (1) premises
and operations; (2) products and completed operations
on an "if any" basis; (3) independent contractors;
(4) blanket contractual liability for all written and
oral contracts; and (5) contractual liability
covering the indemnities contained in Article 13
hereof to the extent the same is available;
26
(iii) loss of rents insurance (A) with loss payable to
Lender; (B) covering all risks required to be covered
by the insurance provided for in Subsection
3.3(a)(i); (C) in an amount equal to 100% of the
projected gross income from the Property for a period
of eighteen (18) months; and (D) containing an
extended period of indemnity endorsement which
provides that after the physical loss to the
Improvements and the Personal Property has been
repaired, the continued loss of income will be
insured until such income returns to the same level
it was prior to the loss, or the expiration of
eighteen (18) months from the date of the loss,
whichever first occurs, and notwithstanding that the
policy may expire prior to the end of such period.
The amount of such loss of rents insurance shall be
determined prior to the date hereof and at least once
each year thereafter based on Borrower's reasonable
estimate of the gross income from the Property for
the succeeding eighteen-month period. All insurance
proceeds payable to Lender pursuant to this
Subsection shall be held by Lender and shall be
applied to the obligations secured hereunder from
time to time due and payable hereunder and under the
Note and the Other Security Documents, and any excess
insurance proceeds remaining after such application
which are not required for application against future
obligations hereunder or under the Note and the Other
Security Documents shall, provided no Event of
Default shall exist, be disbursed to Borrower on a
monthly basis; provided further, however, that
nothing herein contained shall be deemed to relieve
Borrower of its obligations to pay the obligations
secured hereunder on the respective dates of payment
provided for in the Note except to the extent such
amounts are actually paid out of the proceeds of such
loss of rents insurance;
(iv) at all times during which structural construction,
repairs or alterations are being made with respect to
the Improvements (A) owner's contingent or protective
liability insurance covering claims not covered by or
under the terms or provisions of the above mentioned
commercial general liability insurance policy; and
(B) the insurance provided for in Subsection
3.3(a)(i) written in a so-called builder's risk
completed value form (1) on a non-reporting basis,
(2) against all risks insured against pursuant to
Subsection 3.3(a)(i), (3) including permission to
occupy the Property, and (4) with an agreed amount
endorsement waiving co-insurance provisions;
27
(v) workers' compensation, subject to the statutory
limits of the state in which the Property is located,
and employer's liability insurance with a limit of at
least $1,000,000 per accident and per disease per
employee, and $1,000,000 for disease aggregate in
respect of any work or operations on or about the
Property, or in connection with the Property or its
operation (if applicable);
(vi) comprehensive boiler and machinery insurance, if
applicable, in amounts as shall be reasonably
required by Lender;
(vii) if any portion of the Improvements is at any time
located in an area identified by the Secretary of
Housing and Urban Development or any successor
thereto as an area having special flood hazards
pursuant to the National Flood Insurance Act of 1968,
the Flood Disaster Protection Act of 1973 or the
National Flood Insurance Reform Act of 1994, as each
may be amended, or any successor law (the "Flood
Insurance Acts"), flood hazard insurance in an amount
equal to the lesser of (A) the principal balance of
the Note, and (B) the maximum limit of coverage
available for the Property under the Flood Insurance
Acts;
(viii)earthquake, sinkhole and mine subsidence insurance, if
required in amounts, form and substance reasonably
satisfactory to Lender, provided that the insurance
pursuant to this Subsection (viii) shall be on terms
consistent with the all risk insurance policy
required under Section 3.3(a)(i); and
(ix) such other insurance and in such amounts as Lender
from time to time may reasonably request against such
other insurable hazards which at the time are
commonly insured against for property similar to the
Property located in or around the region in which the
Property is located.
(b) All insurance provided for in Subsection 3.3(a)
hereof shall be obtained under valid and enforceable policies
(the "Policies" or in the singular, the "Policy"), in such forms
and, from time to time after the date hereof, in such amounts as
may be reasonably satisfactory to Lender, issued by financially
sound and responsible insurance companies authorized to do
business in the state in which the Property is located and
reasonably approved by Lender. The insurance companies must have
a general policy rating of A or better and a financial class of
VIII or better by A.M. Best Company, Inc., and if there are any
Securities (defined in Section 19.1 below) issued which have been
28
assigned a rating by a credit rating agency approved by Lender (a
"Rating Agency"), the insurance company shall have a claims
paying ability rating of AAA@ (or its equivalent) or better by at
least two (2) of the Rating Agencies rating the Securities (one
of which will be Standard & Poor's Rating Group if they are
rating the Securities and one of which shall be Moody's Investors
Service, Inc. if they are rating the Securities), or if only one
Rating Agency is rating the Securities, then by such Rating
Agency approved by Lender, or in the event such insurance company
is not so rated, said insurance company shall be acceptable to
Lender in all respects (each such insurer shall be referred to
below as a "Qualified Insurer"). Not less than thirty (30) days
prior to the expiration dates of the Policies theretofore
furnished to Lender pursuant to Subsection 3.3(a), Borrower shall
deliver certified copies of the Policies marked "premium paid" or
accompanied by evidence satisfactory to Lender of payment of the
premiums due thereunder (the "Insurance Premiums"), provided,
however, that in the case of renewal Policies, Borrower may
furnish Lender with binders therefor to be followed by the
original Policies when issued.
(c) Borrower shall not obtain (i) any umbrella or blanket
liability or casualty Policy unless, in each case, such Policy is
approved in advance in writing by Lender and Lender's interest is
included therein as provided in this Security Instrument and such
Policy is issued by a Qualified Insurer, or (ii) separate
insurance concurrent in form or contributing in the event of loss
with that required in Subsection 3.3(a) to be furnished by, or
which may be reasonably required to be furnished by, Borrower.
In the event Borrower obtains separate insurance or an umbrella
or a blanket Policy, Borrower shall notify Lender of the same and
shall cause certified copies of each Policy to be delivered as
required in Subsection 3.3(a). Any blanket insurance Policy
shall specifically allocate to the Property the amount of
coverage from time to time reasonably required hereunder and
shall otherwise provide the same protection as would a separate
Policy insuring only the Property in compliance with the
provisions of Subsection 3.3(a). Lender acknowledges that it has
approved Borrower's blanket insurance Policy in effect as of the
date hereof. Notwithstanding Lender's approval of any umbrella
or blanket liability or casualty Policy hereunder, Lender
reserves the right, in its reasonable discretion, to require
Borrower to obtain a separate Policy in compliance with this
Section 3.3.
(d) All Policies of insurance provided for or
contemplated by Subsection 3.3(a), except for the Policy
referenced in Subsection 3.3(a)(v), shall name Lender and
Borrower as the insured or additional insured, as their
respective interests may appear, and in the case of property
damage, boiler and machinery, and flood insurance, shall contain
a so-called New York standard non-contributing mortgagee clause
29
in favor of Lender providing that the loss thereunder shall be
payable to Lender.
(e) All Policies of insurance provided for in Subsection
3.3(a) shall contain clauses or endorsements to the effect that:
(i) no act or negligence of Borrower, or anyone acting
for Borrower, or of any tenant under any Lease or
other occupant, or failure to comply with the
provisions of any Policy which might otherwise result
in a forfeiture of the insurance or any part thereof,
shall in any way affect the validity or
enforceability of the insurance insofar as Lender is
concerned;
(ii) the Policy shall not be materially changed (other
than to increase the coverage provided thereby) or
cancelled without at least 30 days' written notice to
Lender and any other party named therein as an
insured; and
(iii) each Policy shall provide that the issuers thereof
shall give written notice to Lender if the Policy has
not been renewed thirty (30) days prior to its
expiration; and
(iv) Lender shall not be liable for any Insurance Premiums
thereon or subject to any assessments thereunder.
(f) Borrower shall furnish to Lender, on or before thirty
(30) days after the close of each of Borrower's fiscal years, a
statement certified by Borrower or a duly authorized officer of
Borrower of the amounts of insurance maintained in compliance
herewith, of the risks covered by such insurance and of the
insurance company or companies which carry such insurance and, if
reasonably requested by Lender, verification of the adequacy of
such insurance by an independent insurance broker or appraiser
acceptable to Lender.
(g) If at any time Lender is not in receipt of written
evidence that all insurance required hereunder is in full force
and effect, Lender shall have the right, without prior notice to
Borrower to take such action as Lender deems necessary to protect
its interest in the Property, including, without limitation, the
obtaining of such insurance coverage as Lender in its sole
discretion deems appropriate, provided, however, that Lender
agrees to give Borrower notice after undertaking such action, and
all expenses incurred by Lender in connection with such action or
in obtaining such insurance and keeping it in effect shall be
paid by Borrower to Lender upon demand and until paid shall be
secured by this Security Instrument and shall bear interest in
accordance with Article 4 of the Note.
30
(h) If the Property shall be damaged or destroyed, in
whole or in part, by fire or other casualty, Borrower shall give
prompt notice of such damage to Lender and shall promptly
commence and diligently prosecute the completion of the repair
and restoration of the Property as nearly as possible to the
condition the Property was in immediately prior to such fire or
other casualty, with such alterations as may be reasonably
approved by Lender (the "Casualty Restoration") and otherwise in
accordance with Section 4.3 of this Security Instrument.
Borrower shall pay all costs of such Restoration whether or not
such costs are covered by insurance.
Section 3.4 Payment of Taxes, etc.
(a) Borrower shall promptly pay all taxes, assessments,
water rates, sewer rents, governmental impositions, and other
charges, including without limitation vault charges and license
fees for the use of vaults, chutes and similar areas adjoining
the Land, now or hereafter levied or assessed or imposed against
the Property or any part thereof (the "Taxes"), all ground rents,
maintenance charges and similar charges, now or hereafter levied
or assessed or imposed against the Property or any part thereof
(the "Other Charges"), and all charges for utility services
provided to the Property as same become due and payable.
Borrower will deliver to Lender, promptly upon Lender's
reasonable request, evidence reasonably satisfactory to Lender
that the Taxes, Other Charges and utility service charges have
been so paid or are not then delinquent. Borrower shall not
suffer and shall promptly cause to be paid and discharged any
lien or charge whatsoever which may be or become a lien or charge
against the Property. Except to the extent sums sufficient to
pay all Taxes and Other Charges have been deposited with Lender
in accordance with the terms of this Security Instrument,
Borrower shall furnish to Lender paid receipts for the payment of
the Taxes and Other Charges prior to the date the same shall
become delinquent.
(b) After prior written notice to Lender, Borrower, at
its own expense, may contest by appropriate legal proceeding,
promptly initiated and conducted in good faith and with due
diligence, the amount or validity or application in whole or in
part of any of the Taxes, provided that (i) no Event of Default
has occurred and is continuing under the Note, this Security
Instrument or any of the Other Security Documents, (ii) Borrower
is permitted to do so under the provisions of any other mortgage,
deed of trust or deed to secure debt affecting the Property,
(iii) such proceeding shall suspend the collection of the Taxes
from Borrower and from the Property or Borrower shall have paid
all of the Taxes under protest, (iv) such proceeding shall be
permitted under and be conducted in accordance with the
provisions of any other instrument to which Borrower is subject
and shall not constitute a default thereunder, (v) neither the
31
Property nor any part thereof or interest therein will be in
danger of being sold, forfeited, terminated, cancelled or lost,
(vi) Borrower shall have deposited with Lender adequate reserves
for the payment of the Taxes, together with all interest and
penalties thereon, unless Borrower has paid all of the Taxes
under protest, and (vii) Borrower shall have furnished the
security as may be required in the proceeding, or as may be
reasonably requested by Lender to insure the payment of any
contested Taxes, together with all interest and penalties
thereon.
Section 3.5 Escrow Fund. In addition to the initial
deposits with respect to Taxes and, if applicable, Insurance
Premiums made by Borrower to Lender on the date hereof to be held
by Lender in escrow, Borrower shall pay to Lender on the [MERRILL
LOANS ONLY -- first] [CHASE LOANS ONLY -- tenth] day of each
calendar month (a) one-twelfth of an amount which would be
sufficient to pay the Taxes payable, or estimated by Lender to be
payable, during the next ensuing twelve (12) months and (b) at
the option of Lender, if the liability or casualty Policy
maintained by Borrower covering the Property shall not constitute
a reasonably approved blanket or umbrella Policy pursuant to
Subsection 3.3(c) hereof, or Lender shall require Borrower to
obtain a separate Policy pursuant to Subsection 3.3(c) hereof,
one-twelfth of an amount which would be sufficient to pay the
Insurance Premiums due for the renewal of the coverage afforded
by the Policies upon the expiration thereof (the amounts in (a)
and (b) above shall be called the "Escrow Fund"). In the event
Lender shall elect to collect payments in escrow for Insurance
Premiums, Borrower shall pay to Lender an initial deposit to be
determined by Lender, in its reasonable discretion, to increase
the amounts in the Escrow Fund to an amount which, together with
anticipated monthly escrow payments, shall be sufficient to pay
all Insurance Premiums and Taxes as they become due. Borrower
agrees to notify Lender immediately of any changes to the
amounts, schedules and instructions for payment of any Taxes and
Insurance Premiums of which it has or obtains knowledge and
authorizes Lender or its agent to obtain the bills for Taxes
directly from the appropriate taxing authority. The Escrow Fund
and the payments of interest or principal or both, payable
pursuant to the Note shall be added together and shall be paid as
an aggregate sum by Borrower to Lender. Lender will apply the
Escrow Fund to payments of Taxes and Insurance Premiums required
to be made by Borrower pursuant to Sections 3.3 and 3.4 hereof.
If the amount of the Escrow Fund shall exceed the amounts due for
Taxes and Insurance Premiums pursuant to Sections 3.3 and 3.4
hereof, Lender shall, in its discretion, return any excess to
Borrower or credit such excess against future payments to be made
to the Escrow Fund. In allocating such excess, Lender may deal
with the person shown on the records of Lender to be the owner of
the Property. If the Escrow Fund is not sufficient to pay the
items set forth in (a) and (b) above, Borrower shall promptly pay
32
to Lender, upon demand, an amount which Lender shall estimate as
sufficient to make up the deficiency. The Escrow Fund shall not
constitute a trust fund and may be commingled with other monies
held by Lender. No earnings or interest on the Escrow Fund shall
be payable to orrower.
Section 3.6 Condemnation. Borrower shall promptly give
Lender notice of the actual or threatened commencement of any
condemnation or eminent domain proceeding and shall deliver to
Lender copies of any and all papers served in connection with
such proceedings. Notwithstanding any taking by any public or
quasi-public authority through eminent domain or otherwise
(including but not limited to any transfer made in lieu of or in
anticipation of the exercise of such taking), and whether or not
any Award (defined below) is made available to Borrower for
Restoration in accordance with Section 4.3, Borrower shall
continue to pay the Debt at the time and in the manner provided
for its payment in the Note and in this Security Instrument and
the Debt shall not be reduced until any award or payment therefor
(an "Award") shall have been actually received and applied by
Lender, after the deduction of expenses of collection, to the
reduction or discharge of the Debt. Lender shall not be limited
to the interest paid on the award by the condemning authority but
shall be entitled to receive out of the award interest at the
rate or rates provided herein or in the Note. Borrower shall
cause the award or payment made in any condemnation or eminent
domain proceeding, which is payable to Borrower, to be paid
directly to Lender. Lender may apply any award or payment to the
reduction or discharge of the Debt whether or not then due and
payable. If there is a complete taking of the Property by any
condemning authority, then Lender shall, after the application of
an Award to the payment of all sums then due under the Note, this
Security Instrument and the Other Security Documents, promptly
deliver all remaining proceeds of the Award to Borrower. If
there is a partial taking of the Property by any condemning
authority, then (i) Borrower shall, subject to Force Majeure,
promptly proceed to restore, repair, replace or rebuild the
portion of the Property that was not taken by such condemning
authority in a workmanlike manner (to the extent practicable) to
a condition that is substantially equal in value and character to
the condition and value of the Property prior to such
condemnation or eminent domain proceeding (the "Condemnation
Restoration; the Condemnation Restoration and the Casualty
Restoration collectively hereinafter referred to as the
"Restoration") and (ii) Lender will apply the Award to such
Condemnation Restoration in accordance with the disbursement
procedures set forth in Section 4.3 of this Security Instrument.
If the Property is sold, through foreclosure or otherwise, prior
to the receipt by Lender of the award or payment, Lender shall
have the right, whether or not a deficiency judgment on the Note
shall have been sought, recovered or denied, to receive the award
or payment, or a portion thereof sufficient to pay the Debt.
33
Section 3.7 Leases and Rents.
(a) Borrower may enter into a proposed Lease (including
the renewal or extension of an existing Lease ("a Renewal
Lease")) without the prior written consent of Lender, provided
such proposed Lease or Renewal Lease (i) provides for rental
rates and terms comparable to existing local market rates and
terms (taking into account the type and quality of the tenant) as
of the date such Lease is executed by Borrower (unless, in the
case of a Renewal Lease, the rent payable during such renewal, or
a formula or other method to compute such rent, is provided for
in the original Lease), (ii) is an arms-length transaction with a
bona fide, independent third party tenant, (iii) does not have a
materially adverse effect on the value of the Property taken as a
whole, (iv) the terms of such Lease provide that such Lease is
subject and subordinate to the Security Instrument and the lessee
thereunder agrees to attorn to Lender, and (v) is written on the
standard form of residential lease currently used by Borrower at
the Property, which lease has been previously approved by Lender.
All proposed Leases which do not satisfy the requirements set
forth in this Subsection 3.7(a) shall be subject to the prior
approval of Lender and its counsel, at Borrower's expense.
Notwithstanding the foregoing, Lender agrees that Borrower shall
have the right from time to time, without the consent of Lender,
to make non-material modifications to its standard form of
residential lease so long as such modified lease does not (i)
materially and adversely affect the value of Property and (ii)
affect the subordination of said lease to any mortgage, deed of
trust, deed to secure debt or other similar security instrument
affecting the Property.
(b) Borrower (i) shall observe and perform all the
obligations imposed upon the lessor under the Leases and shall
not do or permit to be done anything to impair the value of any
of the Leases as security for the Debt; (ii) upon request of
Lender, shall promptly send copies to Lender of all notices of
default which Borrower shall send or receive thereunder; (iii)
shall enforce all of the material terms, covenants and conditions
contained in the Leases upon the part of the tenant thereunder to
be observed or performed; (iv) shall not collect any of the Rents
more than one (1) month in advance (except security deposits
shall not be deemed Rents collected in advance); (v) shall not
execute any other assignment of the lessor's interest in any of
the Leases or the Rents; and (vi) upon request of Lender, shall
not consent to any assignment of or subletting under any Leases
not in accordance with their terms, without the prior written
consent of Lender.
(c) Borrower may, without the consent of Lender, amend,
modify or waive the provisions of any Lease or terminate, reduce
rents under, accept a surrender of space under, or shorten the
term of, any Lease (including any guaranty, letter of credit or
34
other credit support with respect thereto) provided that such
action (taking into account, in the case of a termination,
reduction in rent, surrender of space or shortening of term, the
planned alternative use of the affected space) does not have a
materially adverse effect on the value of the Property taken as a
whole, and provided that such Lease, as amended, modified or
waived, is otherwise in compliance with the requirements of this
Security Instrument and any lease subordination agreement binding
upon Lender with respect to such Lease. A termination of a Lease
with a tenant who is in default beyond applicable notice and
grace periods shall not be considered an action which has a
materially adverse effect on the value of the Property taken as a
whole. Any amendment, modification, waiver, termination, rent
reduction, space surrender or term shortening which does not
satisfy the requirements set forth in this Subsection shall be
subject to the prior approval of Lender and its counsel, at
Borrower's expense. Upon Lender's reasonable request, Borrower
shall promptly deliver to Lender copies of all Leases,
amendments, modifications and waivers which are entered into
pursuant to this Subsection together with Borrower's
certification that it has satisfied all of the conditions of this
Subsection.
(d) Reserved.
(e) Upon the occurrence of an Event of Default, to the
extent permitted by law, Borrower shall promptly deposit with
Lender any and all monies representing security deposits under
the Leases, whether or not Borrower actually received such monies
(the "Security Deposits"). Lender shall hold the Security
Deposits in accordance with the terms of the respective Lease,
and shall only release the Security Deposits in order to return a
tenant's Security Deposit to such tenant if such tenant is
entitled to the return of the Security Deposit under the terms of
the Lease and is not otherwise in default under the Lease. To
the extent required by Applicable Laws (defined below), Lender
shall hold the Security Deposits in an interest bearing account
selected by Lender in its sole discretion. In the event Lender
is not permitted by law to hold the Security Deposits, Borrower
shall deposit the Security Deposits into an account with a
federally insured institution as approved by Lender.
Section 3.8 Maintenance and Use of Property. Borrower
shall cause the Property to be maintained in a good and safe
condition and repair. The Improvements and the Personal Property
shall not be removed, demolished or materially altered (except
for normal replacement of the Personal Property) without the
consent of Lender. Borrower shall promptly repair, replace or
rebuild any part of the Property which may be destroyed by any
casualty, or become damaged, worn or dilapidated or which may be
affected by any proceeding of the character referred to in
35
Section 3.6 hereof and shall complete and pay for any structure
at any time in the process of construction or repair on the Land.
Borrower shall not initiate, join in, acquiesce in, or consent to
any change in any private restrictive covenant, zoning law or
other public or private restriction, limiting or defining the
uses which may be made of the Property or any part thereof
without the consent of Lender, which consent will not be
unreasonably withheld, conditioned or delayed. If under
applicable zoning provisions the use of all or any portion of the
Property is or shall become a nonconforming use, Borrower will
not cause or permit the nonconforming use to be discontinued or
the nonconforming Improvement to be abandoned without the express
written consent of Lender.
Section 3.9 Waste. Borrower shall not commit or suffer
any waste of the Property or make any change in the use of the
Property which will in any way materially increase the risk of
fire or other hazard arising out of the operation of the
Property, or take any action that might invalidate or give cause
for cancellation of any Policy, or do or permit to be done
thereon anything that may in any way impair the value of the
Property or the security of this Security Instrument. Borrower
will not, without the prior written consent of Lender, permit any
drilling or exploration for or extraction, removal, or production
of any minerals from the surface or the subsurface of the Land,
regardless of the depth thereof or the method of mining or
extraction thereof.
Section 3.10 Compliance With Laws.
(a) Borrower shall promptly comply with all existing and
future federal, state and local laws, orders, ordinances,
governmental rules and regulations or court orders affecting the
Property, or the use thereof ("Applicable Laws").
(b) Borrower shall from time to time, upon Lender's
reasonable request, provide Lender with evidence reasonably
satisfactory to Lender that the Property complies with all
Applicable Laws or is exempt from compliance with Applicable
Laws.
(c) Notwithstanding any provisions set forth herein or in
any document regarding Lender's approval of alterations of the
Property, Borrower shall not alter the Property in any manner
which would materially increase Borrower's responsibilities for
compliance with Applicable Laws without the prior written
approval of Lender. Lender's approval of the plans,
specifications, or working drawings for alterations of the
Property shall create no responsibility or liability on behalf of
Lender for their completeness, design, sufficiency or their
compliance with Applicable Laws. The foregoing shall apply to
tenant improvements constructed by Borrower or by any of its
36
tenants. Lender may condition any such approval upon receipt of
a certificate of compliance with Applicable Laws from an
independent architect, engineer, or other person acceptable to
Lender.
(d) Borrower shall give prompt notice to Lender of the
receipt by Borrower of any notice related to a violation of any
Applicable Laws and of the commencement of any proceedings or
investigations which relate to compliance with Applicable Laws.
(e) After prior written notice to Lender, Borrower, at
its own expense, may contest by appropriate legal proceeding,
promptly initiated and conducted in good faith and with due
diligence, the Applicable Laws affecting the Property, provided
that (i) no Event of Default has occurred and is continuing under
the Note, this Security Instrument or any of the Other Security
Documents; (ii) Borrower is permitted to do so under the
provisions of any other mortgage, deed of trust or deed to secure
debt affecting the Property; (iii) such proceeding shall be
permitted under and be conducted in accordance with the
provisions of any other instrument to which Borrower or the
Property is subject and shall not constitute a default
thereunder; (iv) neither the Property, any part thereof or
interest therein, any of the tenants or occupants thereof, nor
Borrower shall be affected in any material adverse way as a
result of such proceeding; (v) non-compliance with the Applicable
Laws shall not impose civil or criminal liability on Lender or
with respect to Borrower or the Property, to the extent that such
non-compliance or liability shall not have a material adverse
effect on (A) Borrower's ability to fully perform all of its
obligations under the Note, this Security Instrument or the Other
Security Documents or (B) the value, operation or net operating
income of the Property; (vi) Borrower shall have furnished the
security as may be required in the proceeding or by Lender in its
reasonable discretion to ensure compliance by Borrower with the
Applicable Laws; and (vii) Borrower shall have furnished to
Lender all other items reasonably requested by Lender.
Section 3.11 Books and Records.
(a) Borrower and any Guarantors (defined in Subsection
10.1(e)) and Indemnitor(s) (defined in Section 13.4), if any,
shall keep adequate books and records of account in accordance
with generally accepted accounting principles ("GAAP"), or in
accordance with other methods acceptable to Lender in its
reasonable discretion, consistently applied and furnish to
Lender:
(i) monthly certified rent rolls signed and dated by
Borrower in the form previously furnished to Lender,
detailing the names of all tenants of the
Improvements, the portion of Improvements occupied by
37
each tenant, the base rent and any other charges
payable under each Lease and the term of each Lease,
including the expiration date, the extent to which
any tenant is in default under any Lease, and any
other information as is reasonably required by
Lender, within twenty (20) days after the end of each
calendar month;
(ii) quarterly operating statements of the Property,
prepared and certified by Borrower in the form
reasonably required by Lender, detailing the revenues
received, the expenses incurred and the net operating
income before and after debt service (principal and
interest) and major capital improvements for that
quarter and containing appropriate year to date
information, within forty-five (45) days after the
end of each fiscal quarter;
(iii) an annual operating statement of the Property
detailing the total revenues received, total expenses
incurred, total cost of all capital improvements,
total debt service and total cash flow, to be
prepared and certified by Borrower in the form
reasonably required by Lender, or if reasonably
required by Lender, an audited annual operating
statement prepared and certified by an independent
certified public accountant reasonably acceptable to
Lender, within ninety (90) days after the close of
each fiscal year of Borrower;
(iv) an annual balance sheet and profit and loss statement
of Borrower, any Guarantors and any Indemnitor(s) in
the form reasonably required by Lender, prepared and
certified by the respective Borrower, Guarantors
and/or Indemnitor(s), or if reasonably required by
Lender, audited financial statements prepared by an
independent certified public accountant reasonably
acceptable to Lender, within ninety (90) days after
the close of each fiscal year of Borrower, Guarantors
and Indemnitor(s), as the case may be; and
(v) an annual operating budget presented on a monthly
basis consistent with the annual operating statement
described above for the Property, including cash flow
projections for the upcoming year, and all proposed
capital replacements and improvements at least
fifteen (15) days prior to the start of each fiscal
year.
(b) Upon reasonable request from Lender, Borrower, any
Guarantor and any Indemnitor shall furnish in a timely manner to
Lender:
38
(i) a property management report for the Property,
showing the number of inquiries made and/or rental
applications received from tenants or prospective
tenants and deposits received from tenants and any
other information requested by Lender, in reasonable
detail and certified by Borrower (or an officer,
general partner, member or principal of Borrower if
Borrower is not an individual) under penalty of
perjury to be true and complete, to the best of its
knowledge, but no more frequently than quarterly; and
(ii) an accounting of all security deposits held in
connection with any Lease of any part of the
Property, including the name and identification
number of the accounts in which such security
deposits are held, the name and address of the
financial institutions in which such security
deposits are held and the name of the person to
contact at such financial institution, along with any
authority or release necessary for Lender to obtain
information regarding such accounts directly from
such financial institutions.
(c) Borrower, any Guarantor and any Indemnitor shall
furnish Lender with such other additional financial or management
information (including State and Federal tax returns) as may,
from time to time, be reasonably required by Lender in form and
substance reasonably satisfactory to Lender.
(d) Borrower, any Guarantor and any Indemnitor shall
furnish to Lender and its agents convenient facilities (located
at the Property or Borrower's corporate offices) for the
examination and audit of any such books and records.
(e) Any reports, statements or other information required
to be delivered under this Security Instrument shall be delivered
in paper form and in the event that Lender requires financial
statements in connection with subsection (f) below because the
Loan together with any Affiliated Loans (defined below) equal or
exceed 20% of the aggregate principal amount of all mortgage
loans included in a securitization, Borrower shall deliver such
reports, statements and other information (i) on a diskette, and
(ii) if reasonably requested by Lender and within the
capabilities of Borrower's data systems without change or
modification thereto, in electronic form and prepared using
Microsoft Word for Windows or WordPerfect for Windows files
(which files may be prepared using a spreadsheet program, such as
Microsoft Excel for Windows, and saved as word processing files).
(f) If requested by Lender, Borrower shall provide
Lender, promptly upon request, with the following financial
statements if, at the time a preliminary or final prospectus is
39
being prepared for a securitization, it is expected that the
principal amount of the Loan together with any Affiliated Loans
at the time of securitization may, or if the principal amount of
the Loan together with any Affiliated Loans at any time during
which the Loan and any Affiliated Loans are included in a
securitization does, equal or exceed 20% of the aggregate
principal amount of all mortgage loans included or expected to be
included, as applicable, in the securitization:
(i) A balance sheet with respect to the Property for the
two most recent fiscal years, meeting the
requirements of Section 210.3-01 of Regulation S-X of
the Securities Act of 1933, as amended and statements
of income and statements of cash flows with respect
to the Property for the three most recent fiscal
years, meeting the requirements of Section 210.3-02
of Regulation S-X, and, to the extent that such
balance sheet is more than 135 days old as of the
date of the document in which such financial
statements are included, interim financial statements
of the Property meeting the requirements of Section
210.3-01 and 210.3-02 of Regulation S-X (all of such
financial statements, collectively, the "Standard
Statements"); provided, however, that with respect to
a Property (other than properties that are hotels,
nursing homes, or other properties that would be
deemed to constitute a business and not real estate
under Regulation S-X or other legal requirements, if
any) that has been acquired by Borrower from an
unaffiliated third party (such Property, "Acquired
Property"), as to which the other conditions set
forth in Section 210.3-14 of Regulation S-X for
provision of financial statements in accordance with
such Section have been met, in lieu of the Standard
Statements otherwise required by this section,
Borrower shall instead provide the financial
statements required by such Section 210.3-14 of
Regulation S-X ("Acquired Property Statements").
(ii) Not later than 30 days after the end of each fiscal
quarter following the date hereof, a balance sheet of
the Property as of the end of such fiscal quarter,
meeting the requirements of Section 210.3-01 of
Regulation S-X, and statements of income and
statements of cash flows of the Property for the
period commencing following the last day of the most
recent fiscal year and ending on the date of such
balance sheet and for the corresponding period of the
most recent fiscal year, meeting the requirements of
Section 210.3-02 of Regulation S-X (provided, that if
for such corresponding period of the most recent
fiscal year Acquired Property Statements were
40
permitted to be provided hereunder pursuant to
subsection (i) above, Borrower shall instead provide
Acquired Property Statements for such corresponding
period).
(iii) Not later than 75 days after the end of each fiscal
year following the date hereof, a balance sheet of
the Property as of the end of such fiscal year,
meeting the requirements of Section 210.3-01 of
Regulation S-X, and statements of income and
statements of cash flows of the Property for such
fiscal year, meeting the requirements of Section
210.3-02 of Regulation S-X.
(iv) Within ten business days after notice from the Lender
in connection with the securitization of this Loan,
such additional financial statements, such that, as
of the date (each an "Offering Document Date") of
each Disclosure Document, Borrower shall have
provided Lender with all financial statements as
described in subsection (f)(i) above; provided that
the fiscal year and interim periods for which such
financial statements shall be provided shall be
determined as of such Offering Document Date.
(g) If requested by Lender, Borrower shall provide
Lender, promptly upon request, with summaries of the financial
statements referred to in Section 3.11(f) hereof if, at the time
a Disclosure Document is being prepared for a securitization, it
is expected that the principal amount of the Loan and any
Affiliated Loans at the time of securitization may, or if the
principal amount of the Loan and any Affiliated Loans at any time
during which the Loan and any Affiliated Loans are included in a
securitization does, equal or exceed 10% (but less than 20%) of
the aggregate principal amount of all mortgage loans included or
expected to be included, as applicable, in a securitization.
Such summaries shall meet the requirements for "summarized
financial information," as defined in Section 210.1-02(bb) of
Regulation S-X, or such other requirements as may be determined
to be necessary or appropriate by Lender.
(h) All financial statements provided by Borrower
hereunder pursuant to Section 3.11(f) and (g) hereof shall be
prepared in accordance with GAAP, and shall meet the requirements
of Regulation S-X and other applicable legal requirements, if
any. All financial statements referred to in Subsections
3.11(f)(i) and 3.11(f)(iii) above shall be audited by independent
accountants of Borrower reasonably acceptable to Lender in
accordance with Regulation S-X and all other applicable legal
requirements, shall be accompanied by the manually executed
report of the independent accountants thereon, which report shall
meet the requirements of Regulation S-X and all other applicable
41
legal requirements, if any, and shall be further accompanied by a
manually executed written consent of the independent accountants,
in form and substance acceptable to Lender, to the inclusion of
such financial statements in any Disclosure Document and any
Exchange Act Filing and to the use of the name of such
independent accountants and the reference to such independent
accountants as "experts" in any Disclosure Document which is
intended to be registered with the Securities and Exchange
Commission and Exchange Act Filing (as defined below), all of
which shall be provided at the same time as the related financial
statements are required to be provided. Lender agrees that
unless Lender notifies Borrower otherwise, Price Waterhouse
Coopers and any other big "A5" accounting firm is an acceptable
independent accountant. All financial statements (audited or
unaudited) provided by Borrower under this Section 3.11 shall be
certified by the chief financial officer or administrative member
of Borrower, which certification shall state that such financial
statements meet the requirements set forth in the first sentence
of this Section 3.11(h).
(i) If requested by Lender, Borrower shall provide
Lender, promptly upon request, with any other or additional
financial statements, or financial, statistical or operating
information, as Lender shall determine to be required pursuant to
Regulation S-X or any amendment, modification or replacement
thereto or other legal requirements in connection with any
Disclosure Document or any filing under or pursuant to the
Securities and Exchange Act of 1934, as amended, in connection
with or relating to a securitization (hereinafter an "Exchange
Act Filing") or as shall otherwise be reasonably requested by the
Lender.
(j) In the event Lender determines, in connection with a
securitization, that the financial statements required in order
to comply with Regulation S-X or other legal requirements are
other than as provided herein, then notwithstanding the
provisions of Section 3.11(f), (g) and (h) hereof, Lender may
request, and Borrower shall promptly provide, such combination of
Acquired Property Statement and/or Standard Statements or such
other financial statements as Lender reasonably determines to be
necessary or appropriate for such compliance.
(k) The term "Affiliated Loan" shall be a Loan by Lender
to a parent or subsidiary of, or such other entity affiliated to,
Borrower, Indemnitor or Guarantor.
Section 3.12 Payment For Labor and Materials. Subject to
Borrower's right to discharge liens as permitted under Subsection
10.1(h) hereof, Borrower will promptly pay when due all bills and
costs for labor, materials, and specifically fabricated materials
incurred in connection with the Property and never permit to
exist in respect of the Property or any part thereof any lien or
42
security interest, even though inferior to the liens and the
security interests hereof, and in any event never permit to be
created or exist in respect of the Property or any part thereof
any other or additional lien or security interest other than the
liens or security interests hereof, except for the Permitted
Exceptions (defined below).
Section 3.13 Performance of Other Agreements. Borrower
shall observe and perform each and every material term to be
observed or performed by Borrower pursuant to the terms of any
agreement or recorded instrument affecting or pertaining to the
Property, or given by Borrower to Lender for the purpose of
further securing an Obligation and any amendments, modifications
or changes thereto.
Section 3.14 Change of Name, Identity or Structure.
Except as may be permitted under Article 8 hereof, Borrower will
not change Borrower's name, identity (including its trade name or
names) or corporate, partnership or other structure without
notifying Lender of such change in writing at least thirty (30)
days prior to the effective date of such change and, in the case
of a change in Borrower's structure, without first obtaining the
prior written consent of Lender.
Section 3.15 Existence. Borrower will continuously
maintain (a) its existence and shall not dissolve or permit its
dissolution, (b) its rights to do business in the state where the
Property is located and (c) its franchises and trade names, if
any.
Section 3.16 Non-Consolidation Opinion. Borrower has
complied and will comply with each of the assumptions made with
respect to it in that certain substantive non-consolidation
opinion letter, dated the date hereof, delivered by Borrower's
counsel in connection with the Loan and any subsequent
non-consolidation opinion delivered in accordance with the terms
and conditions of this Security Instrument or the Cooperation
Letter (the "Non-Consolidation Opinion"), including, but not
limited to, any exhibits attached thereto. Borrower has caused
and shall cause each entity other than the Borrower with respect
to which an assumption is made in the Non-Consolidation Opinion,
including, but not limited to, any exhibits attached thereto, to
comply with each of the assumptions made with respect to it in
the Non-Consolidation Opinion, including, but not limited to, any
exhibits attached thereto.
Article 4 - SPECIAL COVENANTS
Borrower covenants and agrees that:
Section 4.1 Property Use. The Property shall be used
43
only for a multifamily apartment complex and incidental uses
thereto, and for no other use without the prior written consent
of Lender, which consent may be withheld in Lender's sole and
absolute discretion.
Section 4.2 Single Purpose Entity. It has not and shall
not:
(a) engage in any business or activity other than the
ownership, operation and maintenance of the Property, and
activities incidental thereto,[PA ONLY: except with respect to
prior activities under that certain [management agreement];
(b) acquire or own any material assets other than (i) the
Property, and (ii) such incidental Personal Property as may be
necessary for the operation of the Property;
(c) merge into or consolidate with any person or entity
or dissolve, terminate or liquidate in whole or in part, transfer
or otherwise dispose of all or substantially all of its assets or
change its legal structure, without in each case Lender's
consent;
(d) fail to observe its organizational formalities or
preserve its existence as an entity duly organized, validly
existing and in good standing (if applicable) under the laws of
the jurisdiction of its organization or formation, and
qualification to do business in the state where the Property is
located, if applicable, or without the prior written consent of
Lender, amend, modify, terminate or fail to comply with the
provisions of Borrower's Partnership Agreement, Articles or
Certificate of Incorporation, Articles of Organization or similar
organizational documents, as the case may be;
(e) own any subsidiary or make any investment in, any
person or entity without the consent of Lender;
(f) commingle its assets with the assets of any of its
members, general partners, affiliates, principals or of any other
person or entity, participate in a cash management system with
any other entity or person or fail to use its own separate
stationery, invoices and checks;
(g) incur any debt, secured or unsecured, direct or
contingent (including guaranteeing any obligation), other than
the Debt, except for trade payables in the ordinary course of its
business of owning and operating the Property, provided that such
debt (i) is paid within sixty (60) days of the date it is
incurred, (ii) does not exceed four percent (4%) of the then
outstanding principal balance due under the Note and (iii) is not
evidenced by a note;
44
(h) become insolvent and fail to pay its debts and
liabilities (including, as applicable, shared personnel and
overhead expenses) from its assets as the same shall become due;
(i) fail to maintain its records, books of account and
bank accounts separate and apart from those of the members,
general partners, principals and affiliates of Borrower, the
affiliates of a member, general partner or principal of Borrower,
and any other person or entity. Notwithstanding anything to the
contrary contained herein, Borrower's financial position, results
of operations and cash flows may be included in the consolidated
financial statements of Associated Estates Realty Corporation
("AERC") in accordance with GAAP, provided, however, that any
such consolidated financial statements shall contain a note
indicating that Borrower and its affiliates are separate legal
entities and maintain records, books of account and bank accounts
separate and apart from any other person or entity;
(j) enter into any contract or agreement with any member,
general partner, principal or affiliate of Borrower, Guarantor or
Indemnitor, or any member, general partner, principal or
affiliate thereof, except upon terms and conditions that are
intrinsically fair and substantially similar to those that would
be available on an arms-length basis with third parties other
than any member, general partner, principal or affiliate of
Borrower, Guarantor or Indemnitor, or any member, general
partner, principal or affiliate thereof;
(k) seek the dissolution or winding up in whole, or in
part, of Borrower;
(l) fail to correct any known misunderstandings regarding
the separate identity of Borrower;
(m) guarantee or become obligated for the debts of any
other entity or person or hold itself out to be responsible for
the debts of another person;
(n) make any loans or advances to any third party,
including any member, general partner, principal or affiliate of
Borrower or any member, general partner, principal or affiliate
thereof, and shall not acquire obligations or securities of any
member, general partner, principal or affiliate of Borrower or
any member, general partner, or affiliate thereof;
(o) fail to file its own tax returns (except that Lender
acknowledges that Borrower and its affiliates shall have the
right to file consolidated or combined federal, state and city
tax returns which shall provide that Borrower and its affiliates
are separate legal entities and pay their respective
proportionate shares of the taxes shown on such returns);
45
(p) fail either to hold itself out to the public as a
legal entity separate and distinct from any other entity or
person or to conduct its business solely in its own name in order
not (i) to mislead others as to the identity with which such
other party is transacting business, or (ii) to suggest that
Borrower is responsible for the debts of any third party
(including any member, general partner, principal or affiliate of
Borrower or any member, general partner, principal or affiliate
thereof);
(q) fail to maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and
character and in light of its contemplated business operations;
(r) file or consent to the filing of any petition, either
voluntary or involuntary, to take advantage of any applicable
insolvency, bankruptcy, liquidation or reorganization statute, or
make an assignment for the benefit of creditors;
(s) share any common logo with or hold itself out as or
be considered as a department or division of (i) any general
partner, principal, member or affiliate of Borrower, (ii) any
affiliate of a general partner, principal or member of Borrower,
or (iii) any other person or entity;
(t) fail to allocate fairly and reasonably any overhead
expenses that are shared with an affiliate, including paying for
office space and services performed by any employee of an
affiliate;
(u) pledge its assets for the benefit of any other person
or entity, other than with respect to the Loan;
(v) fail to maintain a sufficient number of employees in
light of its contemplated business operations;
(w) violate or cause to be violated the assumptions made
with respect to Borrower and its principals in that certain
opinion letter pertaining to substantive consolidation (the
"Non-Consolidation Opinion") delivered by Baker & Hostetler LLP
to Lender and the Rating Agencies;
(x) fail at any time to have at least one independent
director that is not and has not been for at least five (5)
years: (a) a stockholder, director, officer, employee, partner,
attorney or counsel of Borrower or any affiliate thereof; (b) a
customer, supplier or other person who derives any revenues from
its activities with Borrower or any affiliate thereof; (c) a
person or other entity controlling or under common control with
any such stockholder, partner, customer, supplier or other
person; or (d) a member of the immediate family of any such
stockholder, director, officer, employee, partner, customer,
46
supplier or other person. (As used herein, the term "control"
means the possession, directly or indirectly, of the power to
direct or cause the direction of management, policies or
activities of a person or entity, whether through ownership of
voting securities, by contract or otherwise; or
(y) permit its board of directors to take any action
which, under the terms of any certificate of incorporation, by-
laws or any voting trust agreement with respect to any common
stock, requires the vote of Borrower's board of directors unless
at the time of such action there shall be at least one member who
is an independent director.
Section 4.3 Restoration. The following provisions shall
apply in connection with the Restoration of the Property:
(a) If the Net Proceeds (defined below) shall be less
than $150,000 and the costs of completing the Restoration shall
be less than $150,000, the Net Proceeds will be disbursed by
Lender to Borrower upon receipt, provided that all of the
conditions set forth in Subsection 4.3(b)(i) are met and Borrower
delivers to Lender a written undertaking to expeditiously
commence and to satisfactorily complete with due diligence,
subject to Force Majeure (defined below), the Restoration in
accordance with the terms of this Security Instrument. The term
"Force Majeure", as used herein, shall mean the failure of
Borrower to perform any obligation hereunder by reason of any act
of God, enemy or hostile government action, civil commotion,
insurrection, sabotage, strikes or lockouts, fire or other
casualty.
(b) If the Net Proceeds are equal to or greater than
$150,000 or the costs of completing the Restoration is equal to
or greater than $150,000, Lender shall make the Net Proceeds
available for the Restoration in accordance with the provisions
of this Section 4.3(b). The term "Net Proceeds" for the purposes
of this Section shall mean: (i) the net amount of all insurance
proceeds received by Lender pursuant to Sections 3.3(a)(i), (iv),
(vi), (vii), (viii) and, as applicable, (ix) of this Security
Instrument as a result of such damage or destruction, after
deduction of its reasonable costs and expenses (including, but
not limited to, reasonable counsel fees), if any, in collecting
same (Insurance Proceeds") or (ii) the net amount of the Award,
after deduction of its reasonable costs and expenses (including,
but not limited to, reasonable counsel fees), if any, in
collecting same ("Condemnation Proceeds"), whichever the case may
be.
(i) The Net Proceeds shall be made available to Borrower
for the Restoration provided that each of the following
conditions are met:
47
(A) no Event of Default shall have occurred and be
continuing under the Note, this Security Instrument or any of the
Other Security Documents;
(B) (1) in the event the Net Proceeds are Insurance
Proceeds, not more than fifty percent (50%) of the total floor
area of the Improvements has been damaged, destroyed or rendered
unusable as a result of such fire or other casualty or (2) in the
event the Net Proceeds are Condemnation Proceeds, not more than
ten percent (10%) of the land constituting the Property has been
taken, such land is located along the perimeter or periphery of
the Property, no portion of the Improvements is located on such
land and such taking does not materially impair access to the
Property;
(C) Leases demising in the aggregate at least 50% of the
total rentable space in the Property which has been demised under
executed and delivered Leases in effect as of the date of the
occurrence of such fire or other casualty shall remain in full
force and effect during and after the completion of the
Restoration;
(D) Borrower shall commence the Restoration as soon as
reasonably practicable (but in no event later than thirty (30)
days after such damage or destruction occurs) and shall
diligently, subject to Force Majeure, pursue the same to
satisfactory completion;
(E) Lender shall be reasonably satisfied that any
operating deficits which will be incurred with respect to the
Property as a result of the occurrence of any such fire or other
casualty will be covered out of (1) the Net Proceeds, (2) the
insurance coverage referred to in Subsection 3.3(a)(iii), or (3)
by other funds of Borrower;
(F) Lender shall be reasonably satisfied that, upon the
completion of the Restoration, the gross cash flow and the net
cash flow of the Property will be restored to a level sufficient
to cover all carrying costs and operating expenses of the
Property, including, without limitation, debt service on the Note
at a coverage ratio (after deducting all required reserves as
required by Lender from net operating income) of at least 1.25 to
1.0, which coverage ratio shall be determined by Lender in its
reasonable discretion on the basis of the Applicable Interest
Rate (as defined in the Note);
(G) Lender shall be reasonably satisfied that, subject to
Force Majeure, the Restoration will be substantially completed on
or before the earliest to occur of (1) six (6) months prior to
the Maturity Date (as defined in the Note), (2) six (6) months
after the occurrence of such fire or other casualty, or (3) such
time as may be required under applicable zoning law, ordinance,
48
rule or regulation in order to repair and restore the Property to
the condition it was in immediately prior to such fire or other
casualty;
(H) Borrower shall execute and deliver to Lender a
completion guaranty in form and substance reasonably satisfactory
to Lender and its counsel pursuant to the provisions of which
Borrower shall guaranty to Lender the lien-free completion by
Borrower of the Restoration in accordance with the provisions of
this Subsection 4.3(b);
(I) the Property and the use thereof after the
Restoration will be in compliance with and permitted under all
applicable zoning laws, ordinances, rules and regulations; and
(J) the Restoration shall be done and completed by
Borrower in an expeditious and diligent fashion, subject to Force
Majeure, and in compliance with all applicable governmental laws,
rules and regulations (including, without limitation, all
applicable Environmental Laws (defined below).
(ii) The Net Proceeds shall be held by Lender and, until
disbursed in accordance with the provisions of this
Subsection 4.3(b), shall constitute additional
security for the Obligations. The Net Proceeds shall
be disbursed by Lender to, or as directed by,
Borrower from time to time during the course of the
Restoration, upon receipt of evidence reasonably
satisfactory to Lender that (A) all materials
installed and work and labor performed (except to the
extent that they are to be paid for out of the
requested disbursement) in connection with the
Restoration have been paid for in full, and (B) there
exist no notices of pendency, stop orders, mechanic's
or materialman's liens or notices of intention to
file same, or any other liens or encumbrances of any
nature whatsoever on the Property arising out of the
Restoration which have not either been fully bonded
to the reasonable satisfaction of Lender and
discharged of record or in the alternative fully
insured to the reasonable satisfaction of Lender by
the title company insuring the lien of this Security
Instrument.
(iii) All plans and specifications required in connection
with the Restoration shall be subject to prior review
and acceptance in all reasonable respects by Lender
and by an independent consulting engineer reasonably
selected by Lender (the "Casualty Consultant").
Lender shall have the use of the plans and
specifications and all permits, licenses and
approvals required or obtained in connection with the
49
Restoration. The identity of the contractors,
subcontractors and materialmen engaged in the
Restoration, as well as the contracts under which
they have been engaged, shall be subject to prior
review and acceptance by Lender and the Casualty
Consultant. All costs and expenses incurred by
Lender in connection with making the Net Proceeds
available for the Restoration including, without
limitation, reasonable counsel fees and disbursements
and the Casualty Consultant's fees, shall be paid by
Borrower.
(iv) In no event shall Lender be obligated to make
disbursements of the Net Proceeds in excess of an
amount equal to the costs actually incurred from time
to time for work in place as part of the Restoration,
as certified by the Casualty Consultant, minus the
Casualty Retainage. The term "Casualty Retainage" as
used in this Subsection 4.3(b) shall mean an amount
equal to 10% of the costs actually incurred for work
in place as part of the Restoration, as certified by
the Casualty Consultant, until such time as the
Casualty Consultant certifies to Lender that Net
Proceeds representing 50% of the required Restoration
have been disbursed. There shall be no Casualty
Retainage with respect to costs actually incurred by
Borrower for work in place in completing the last 50%
of the required Restoration. The Casualty Retainage
shall in no event, and notwithstanding anything to
the contrary set forth above in this Subsection
4.3(b), be less than the amount actually held back by
Borrower from contractors, subcontractors and
materialmen engaged in the Restoration. The Casualty
Retainage shall not be released until the Casualty
Consultant certifies to Lender that the Restoration
has been completed in accordance with the provisions
of this Subsection 4.3(b) and that all approvals
necessary for the re-occupancy and use of the
Property have been obtained from all appropriate
governmental and quasi-governmental authorities, and
Lender receives evidence reasonably satisfactory to
Lender that the costs of the Restoration have been
paid in full or will be paid in full out of the
Casualty Retainage, provided, however, that Lender
will release the portion of the Casualty Retainage
being held with respect to any contractor,
subcontractor or materialman engaged in the
Restoration as of the date upon which the Casualty
Consultant certifies to Lender that the contractor,
subcontractor or materialman has satisfactorily
completed all work and has supplied all materials in
accordance with the provisions of the contractor's,
50
subcontractor's or materialman's contract, and the
contractor, subcontractor or materialman delivers the
lien waivers and evidence of payment in full of all
sums due to the contractor, subcontractor or
materialman as may be reasonably requested by Lender
or by the titl company insuring the lien of this
Security Instrument. If required by Lender, the
release of any such portion of the Casualty Retainage
shall be approved by the surety company, if any,
which has issued a payment or performance bond with
respect to the contractor, subcontractor or
materialman.
(v) Lender shall not be obligated to make disbursements
of the Net Proceeds more frequently than once every
calendar month.
(vi) If at any time the Net Proceeds or the undisbursed
balance thereof shall not, in the reasonable opinion
of Lender, be sufficient to pay in full the balance
of the costs which are reasonably estimated by the
Casualty Consultant to be incurred in connection with
the completion of the Restoration, Borrower shall
deposit the deficiency (the "Net Proceeds
Deficiency") with Lender before any further
disbursement of the Net Proceeds shall be made. The
Net Proceeds Deficiency deposited with Lender shall
be held by Lender and shall be disbursed for costs
actually incurred in connection with the Restoration
on the same conditions applicable to the disbursement
of the Net Proceeds, and until so disbursed pursuant
to this Subsection 4.3(b) shall constitute additional
security for the Obligations.
(vii) The excess, if any, of the Net Proceeds and the
remaining balance, if any, of the Net Proceeds
Deficiency deposited with Lender after the Casualty
Consultant certifies to Lender that the Restoration
has been completed in accordance with the provisions
of this Subsection 4.3(b), and the receipt by Lender
of evidence reasonably satisfactory to Lender that
all costs incurred in connection with the Restoration
have been paid in full, shall be remitted by Lender
to Borrower, provided no Event of Default shall have
occurred and shall be continuing under the Note, this
Security Instrument or any of the Other Security
Documents.
(c) All Net Proceeds not required (i) to be made
available for the Restoration or (ii) to be returned to Borrower
as excess Net Proceeds pursuant to Subsection 4.3(b)(vii) may be
retained and applied by Lender toward the payment of the Debt
51
whether or not then due and payable in such order, priority and
proportions as Lender in its reasonable discretion shall deem
proper or, at the reasonable discretion of Lender, the same may
be paid, either in whole or in part, to Borrower for such
purposes as Lender shall designate, in its reasonable discretion.
If Lender shall receive and retain Net Proceeds, the lien of this
Security Instrument shall be reduced only by the amount thereof
received and retained by Lender and actually applied by Lender in
reduction of the Debt.
Section 4.4 ERISA. (a) Borrower shall not engage in any
transaction which would cause any obligation, or action taken or
to be taken, hereunder (or the exercise by Lender of any of its
rights under the Note, this Security Instrument and the Other
Security Documents) to be a non-exempt (under a statutory or
administrative class exemption) prohibited transaction under the
Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(b) Borrower further covenants and agrees to deliver to
Lender such certifications (subject to Article 15 hereof) or
other evidence from time to time throughout the term of the
Security Instrument, as requested by Lender in its sole
discretion, that (i) Borrower is not an "employee benefit plan"
as defined in Section 3(3) of ERISA, which is subject to Title I
of ERISA, or a "governmental plan" within the meaning of Section
3(3) of ERISA; (ii) Borrower is not subject to state statutes
regulating investments and fiduciary obligations with respect to
governmental plans; and (iii) one or more of the following
circumstances is true:
(A) Equity interests in Borrower are publicly offered
securities, within the meaning of 29 C.F.R. SS 2510.3-101(b)(2);
(B) Less than 25 percent of each outstanding class of
equity interests in Borrower are held by "benefit plan investors"
within the meaning of 29 C.F.R. SS 2510.3-101(f)(2); or
(C) Borrower qualifies as an "operating company" or a
"real estate operating company" within the meaning of 29 C.F.R.
SS 2510.3-101(c) or (e) or an investment company registered under
The Investment Company Act of 1940.
Article 5 - REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender that:
Section 5.1 Warranty of Title. Borrower has good title
to the Property and has the right to mortgage, grant, bargain,
sell, pledge, assign, warrant, transfer and convey the same and
that Borrower possesses an unencumbered fee simple absolute
52
estate in the Land and the Improvements and that it owns the
Property free and clear of all liens, encumbrances and charges
whatsoever except for those exceptions shown in the title
insurance policy insuring the lien of this Security Instrument
(the "Permitted Exceptions"). Borrower shall forever warrant,
defend and preserve the title and the validity and priority of
the lien of this Security Instrument and shall forever warrant
and defend the same to Lender against the claims of all persons
whomsoever.
Section 5.2 Legal Status And Authority. Borrower (a) is
duly organized, validly existing and in good standing under the
laws of its state of organization or incorporation; (b is duly
qualified to transact business and is in good standing in the
state where the Property is located; and (c) has all necessary
approvals, governmental and otherwise, and full power and
authority to own, operate and lease the Property. Borrower (and
the undersigned representative of Borrower, if any) has full
power, authority and legal right to execute this Security
Instrument, and to mortgage, grant, bargain, sell, pledge,
assign, warrant, transfer and convey the Property pursuant to the
terms hereof and to keep and observe all of the terms of this
Security Instrument on Borrower's part to be performed.
Section 5.3 Validity of Documents. (a) The execution,
delivery and performance of the Note, this Security Instrument
and the Other Security Documents and the borrowing evidenced by
the Note (i) are within the power and authority of Borrower; (ii)
have been authorized by all requisite organizational action;
(iii) have received all necessary approvals and consents,
corporate, governmental or otherwise; (iv) will not violate,
conflict with, result in a breach of or constitute (with notice
or lapse of time, or both) a material default under any provision
of law, any order or judgment of any court or governmental
authority, the articles of incorporation, by-laws, partnership or
trust agreement, articles of organization, operating agreement,
or other governing instrument of Borrower, or any indenture,
agreement or other instrument to which Borrower is a party or by
which it or any of its assets or the Property is or may be bound
or affected; (v) will not result in the creation or imposition of
any lien, charge or encumbrance whatsoever upon any of its
assets, except the lien and security interest created hereby; and
(vi) will not require any authorization or license from, or any
filing with, any governmental or other body (except for (1) the
recordation of this Security Instrument in appropriate land
records in the State where the Property is located, (2) Uniform
Commercial Code filings relating to the security interest created
hereby, and (3) any required filings with the Securities and
Exchange Commission, provided, however, that Borrower covenants
to Lender that any such filings will be made in a timely manner);
and (b) the Note, this Security Instrument and the Other Security
53
Documents constitute the legal, valid and binding obligations of
Borrower.
Section 5.4 Litigation. Except as previously disclosed
in writing to Lender, there is no action, suit or proceeding,
judicial, administrative or otherwise (including any condemnation
or similar proceeding), pending or, to the best of Borrower's
knowledge, threatened or contemplated against, or affecting,
Borrower, a Guarantor, if any, an Indemnitor, if any, or the
Property.
Section 5.5 Status of Property.
(a) No portion of the Improvements is located in an area
identified by the Secretary of Housing and Urban Development or
any successor thereto as an area having special flood hazards
pursuant to the Flood Insurance Acts or, if any portion of the
Improvements is located within such area, Borrower has obtained
and will maintain the insurance prescribed in Section 3.3 hereof.
(b) Except as previously disclosed in writing to Lender,
Borrower has obtained all necessary certificates, licenses and
other approvals, governmental and otherwise, necessary for the
operation of the Property and the conduct of its business and all
required zoning, building code, land use, environmental and other
similar permits or approvals, all of which are in full force and
effect as of the date hereof and not subject to revocation,
suspension, forfeiture or modification.
(c) Except as previously disclosed in writing to Lender,
the Property and the present and contemplated use and occupancy
thereof are in full compliance with all applicable zoning
ordinances, building codes, land use and Environmental Laws
(hereinafter defined) and other similar laws.
(d) The Property is served by all utilities required for
the current or contemplated use thereof. All utility service is
provided by public utilities and the Property has accepted or is
equipped to accept such utility service.
(e) All public roads and streets necessary for service of
and access to the Property for the current or contemplated use
thereof have been completed, are serviceable and all-weather and
are physically and legally open for use by the public.
(f) The Property is served by public water and sewer
systems.
(g) The Property is free from damage caused by fire or
other casualty.
(h) All costs and expenses of any and all labor,
54
materials, supplies and equipment used in the construction of the
Improvements have been paid in full.
(i) Except for trade payables permitted pursuant to the
terms hereof, Borrower has paid in full for, and is the owner of,
all furnishings, fixtures and equipment (other than tenants'
property) used in connection with the operation of the Property,
free and clear of any and all security interests, liens or
encumbrances, except the lien and security interest created
hereby.
(j) All liquid and solid waste disposal, septic and sewer
systems located on the Property are in a good and safe condition
and repair and in compliance with all Applicable Laws.
(k) All the Improvements materially lie within the
boundaries of the Land.
Section 5.6 No Foreign Person. Borrower is not a
"foreign person" within the meaning of Section 1445(f)(3) of the
Internal Revenue Code of 1986, as amended and the related
Treasury Department regulations, including temporary regulations.
Section 5.7 Separate Tax Lot. The Property is assessed
for real estate tax purposes as one or more wholly independent
tax lot or lots, separate from any adjoining land or improvements
not constituting a part of such lot or lots, and no other land or
improvements is assessed and taxed together with the Property or
any portion thereof.
Section 5.8 Leases. Except as previously disclosed in
writing to Lender, whether in the rent roll for the Property
delivered to and approved by Lender or otherwise, (a) Borrower is
the sole owner of the entire lessor's interest in the Leases; (b)
the Leases are valid and enforceable and in full force and
effect; (c) all of the Leases are arms-length agreements with
bona fide, independent third parties; (d) no party under any
Lease is in default; (e) all Rents due have been paid in full;
(f) the terms of all alterations, modifications and amendments to
the Leases are reflected in the certified occupancy statement
delivered to and approved by Lender; (g) none of the Rents
reserved in the Leases have been assigned or otherwise pledged or
hypothecated; (h) none of the Rents have been collected for more
than one (1) month in advance (except a security deposit shall
not be deemed rent collected in advance); (i) the premises
demised under the Leases have been completed and the tenants
under the Leases have accepted the same and have taken possession
of the same on a rent-paying basis; (j) there exist no offsets or
defenses to the payment of any portion of the Rents; (k) Borrower
has received no notice from any tenant challenging the validity
or enforceability of any Lease; (l) there are no agreements with
the tenants under the Leases other than expressly set forth in
55
each Lease; (m) the Leases are valid and enforceable against
Borrower and the tenants set forth therein; (n) no Lease contains
an option to purchase, right of first refusal to purchase, or any
other similar provision; (o) no person or entity has any
possessory interest in, or right to occupy, the Property except
under and pursuant to a Lease; (p) each Lease is subordinate to
this Security Instrument, either pursuant to its terms or a
recordable subordination agreement; (q) no Lease has the benefit
of a non-disturbance agreement that would be considered
unacceptable to prudent institutional lenders, (r) all security
deposits relating to the Leases reflected on the certified rent
roll or other certification delivered to Lender have been
collected by Borrower; and (s) no brokerage commissions or
finders fees are due and payable regarding any Lease.
Section 5.9 Solvency. Borrower (a) has not entered into
the transaction or executed the Note, this Security Instrument or
any Other Security Document with the actual intent to hinder,
delay or defraud any creditor and (b) has received reasonably
equivalent value in exchange for its obligations under such
documents. Giving effect to the Loan, the fair saleable value of
Borrower's assets exceeds and will, immediately following the
making of the Loan, exceed Borrower's total liabilities,
including, without limitation, subordinated, unliquidated,
disputed and contingent liabilities. The fair saleable value of
Borrower's assets is and will, immediately following the making
of the Loan, be greater than Borrower's probable liabilities,
including the maximum amount of its contingent liabilities on its
debts as such debts become absolute and matured. Borrower's
assets do not and, immediately following the making of the Loan
will not, constitute unreasonably small capital to carry out its
business as conducted or as proposed to be conducted. Borrower
does not intend to, and does not believe that it will, incur debt
and liabilities (including contingent liabilities and other
commitments) beyond its ability to pay such debt and liabilities
as they mature (taking into account the timing and amounts of
cash to be received by Borrower and the amounts to be payable on
or in respect of obligations of Borrower). Except as expressly
disclosed to Lender in writing, no petition in bankruptcy has
been filed against Borrower, any Indemnitor, any Guarantor, any
principal or any related entity thereof, or any principal,
general partner or member thereof, in the last seven (7) years,
and neither Borrower, any Indemnitor, any Guarantor, any
principal nor any related entity thereof, nor any principal,
general partner or member thereof, in the last seven (7) years
has ever made an assignment for the benefit of creditors or taken
advantage of any insolvency act for the benefit of debtors.
Section 5.10 Business Purposes. The loan evidenced by the
Note secured by the Security Instrument and the Other Security
Documents (the "Loan") is solely for the business purpose of
Borrower, and is not for personal, family, household, or
56
agricultural purposes.
Section 5.11 Taxes. Borrower, any Guarantor and any
Indemnitor have filed all federal, state, county, municipal, and
city income and other tax returns required to have been filed by
them and have paid all taxes and related liabilities which have
become due pursuant to such returns or pursuant to any
assessments received by them. Neither Borrower, any Guarantor
nor any Indemnitor knows of any basis for any additional
assessment in respect of any such taxes and related liabilities
for prior years.
Section 5.12 Mailing Address. Borrower's mailing address,
as set forth in the opening paragraph hereof or as changed in
accordance with the provisions hereof, is true and correct.
Section 5.13 No Change in Facts or Circumstances. All
information in the application for the Loan submitted to Lender
(the "Loan Application") and in all financial statements, rent
rolls, reports, certificates and other documents submitted in
connection with the Loan Application or in satisfaction of the
terms thereof, are accurate, complete and correct in all material
respects. There has been no adverse change in any condition,
fact, circumstance or event that would make any such information
inaccurate, incomplete or otherwise misleading.
Section 5.14 Disclosure. Borrower has disclosed to Lender
all material facts and has not failed to disclose any material
fact that could cause any representation or warranty made herein
to be materially misleading.
Section 5.15 Third Party Representations. Each of the
representations and the warranties made by each Guarantor and
Indemnitor herein or in any Other Security Document(s) is true
and correct in all material respects.
Section 5.16 Illegal Activity. No portion of the Property
has been or will be purchased, improved, equipped or furnished
with proceeds of any illegal activity and to the best of
Borrower's knowledge, there are no illegal activities or
activities relating to any controlled substance at the Property.
Section 5.17 Contracts. All contracts, agreements,
consents, waivers, documents and writings of every kind or
character at any time to which Borrower is a party to be
delivered to Lender pursuant to any of the provisions of this
Security Instrument are valid and enforceable against Borrower
and, to the best knowledge of Borrower, are enforceable against
all other parties thereto, and, to Borrower's actual knowledge,
in all respects are what they purport to be and, to the best
knowledge of Borrower, to the extent that any such writing shall
impose any obligation or duty on the party thereto or constitute
57
a waiver of any rights which any such party might otherwise have,
said writing shall be valid and enforceable against said party in
accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally.
Section 5.18 Non-Consolidation Opinion Assumptions. All
of the assumptions made in the Non-Consolidation Opinion,
including, but not limited to, any exhibits attached thereto, are
true and correct.
Section 5.19 ERISA. (a) As of the date hereof and
throughout the term of the Loan, (i) Borrower is not and will not
be an "employee benefit plan" as defined in Section 3(3) of
ERISA, which is subject to Title I of ERISA, and (ii) the assets
of Borrower do not and will not constitute "plan assets" of one
or more such plans for purposes of Title I of ERISA; and
(b) As of the date hereof and throughout the term of the
Loan (i) Borrower is not and will not be a "governmental plan"
within the meaning of Section 3(32) of ERISA and (ii)
transactions by or with Borrower are not and will not be subject
to state statutes applicable to Borrower regulating investments
of and fiduciary obligations with respect to governmental plans.
Section 5.20 Federal Reserve Regulations. No part of the
proceeds of the Loan will be used for the purpose of purchasing
or acquiring any "margin stock" within the meaning of Regulation
U of the Board of Governors of the Federal Reserve System or for
any other purpose which would be inconsistent with such
Regulation U or any other Regulations of such Board of Governors,
or for any purposes prohibited by Legal Requirements or by the
terms and conditions of this Security Instrument, the Note or the
Other Security Documents.
Section 5.21 Forfeiture. There has not been and shall
never be committed by Borrower or any other person in occupancy
of or involved with the operation or use of the Property any act
or omission affording the federal government or any state or
local government the right of forfeiture as against the Property
or any part thereof or any monies paid in performance of
Borrower's obligations under the Note, this Security Instrument
or the Other Security Documents. Borrower hereby covenants and
agrees not to commit, permit or suffer to exist any act or
omission affording such right of forfeiture.
Section 5.22 Investment Company Act. Borrower is not (a) an
"investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of
1940, as amended; (b) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of either a
"holding company" or a "subsidiary company" within the meaning of
58
the Public Utility Holding Company Act of 1935, as amended; or
(c) subject to any other federal or state law or regulation which
purports to restrict or regulate its ability to borrow money.
Article 6 - OBLIGATIONS AND RELIANCES
Section 6.1 Relationship of Borrower and Lender. The
relationship between Borrower and Lender is solely that of debtor
and creditor, and Lender has no fiduciary or other special
relationship with Borrower, and no term or condition of any of
the Note, this Security Instrument and the Other Security
Documents shall be construed so as to deem the relationship
between Borrower and Lender to be other than that of debtor and
creditor.
Section 6.2 No Reliance on Lender. The members, general
partners, principals, shareholders, and (if Borrower is a trust)
beneficial owners of Borrower are experienced in the ownership
and operation of properties similar to the Property, and Borrower
and Lender are relying solely upon such expertise and business
plan in connection with the ownership and operation of the
Property. Borrower is not relying on Lender's expertise,
business acumen or advice in connection with the Property.
Section 6.3 No Lender Obligations.
(a) Notwithstanding the provisions of Subsections 1.1(f) and
(l) or Section 1.2, Lender is not undertaking the performance of
(i) any obligations under the Leases; or (ii) any obligations
with respect to such agreements, contracts, certificates,
instruments, franchises, permits, trademarks, licenses and other
documents.
(b) By accepting or approving anything required to be
observed, performed or fulfilled or to be given to Lender
pursuant to this Security Instrument, the Note or the Other
Security Documents, including without limitation, any officer's
certificate, balance sheet, statement of profit and loss or other
financial statement, survey, appraisal, or insurance policy,
Lender shall not be deemed to have warranted, consented to, or
affirmed the sufficiency, the legality or effectiveness of same,
and such acceptance or approval thereof shall not constitute any
warranty or affirmation with respect thereto by Lender.
Section 6.4 Reliance. Borrower recognizes and
acknowledges that in accepting the Note, this Security Instrument
and the Other Security Documents, Lender is expressly and
primarily relying on the truth and accuracy of the warranties and
representations set forth in Article 5 and Article 12 without any
obligation to investigate the Property and notwithstanding any
investigation of the Property by Lender; that such reliance
59
existed on the part of Lender prior to the date hereof; that the
warranties and representations are a material inducement to
Lender in accepting the Note, this Security Instrument and the
Other Security Documents; and that Lender would not be willing to
make the Loan and accept this Security Instrument in the absence
of the warranties and representations as set forth in Article 5
and Article 12.
Article 7 - FURTHER ASSURANCES
Section 7.1 Recording of Security Instrument, etc.
Borrower forthwith upon the execution and delivery of this
Security Instrument and thereafter, from time to time, will cause
this Security Instrument and any of the Other Security Documents
creating a lien or security interest or evidencing the lien
hereof upon the Property and each instrument of further assurance
to be filed, registered or recorded in such manner and in such
places as may be required by any present or future law in order
to publish notice of and fully to protect and perfect the lien or
security interest hereof upon, and the interest of Lender in, the
Property. Borrower will pay all taxes, filing, registration or
recording fees, and all expenses incident to the preparation,
execution, acknowledgment and/or recording of the Note, this
Security Instrument, the Other Security Documents, any note or
mortgage supplemental hereto, any security instrument with
respect to the Property and any instrument of further assurance,
and any modification or amendment of the foregoing documents, and
all federal, state, county and municipal taxes, duties, imposts,
assessments and charges arising out of or in connection with the
execution and delivery of this Security Instrument, any mortgage
supplemental hereto, any security instrument with respect to the
Property or any instrument of further assurance, and any
modification or amendment of the foregoing documents, except
where prohibited by law so to do.
Section 7.2 Further Acts, etc. Borrower will, at the
cost of Borrower, and without expense to Lender, do, execute,
acknowledge and deliver all and every such further acts, deeds,
conveyances, mortgages, assignments, notices of assignments,
transfers and assurances as Lender shall, from time to time,
require, for the better assuring, conveying, assigning,
transferring, and confirming unto Lender the Property and rights
hereby mortgaged, granted, bargained, sold, conveyed, confirmed,
pledged, assigned, warranted and transferred or intended now or
hereafter so to be, or which Borrower may be or may hereafter
become bound to convey or assign to Lender, or for carrying out
the intention or facilitating the performance of the terms of
this Security Instrument or for filing, registering or recording
this Security Instrument, or for complying with all Applicable
Laws. Borrower, on demand, will execute and deliver and hereby
authorizes Lender, following twenty (20) days' notice to
60
Borrower, to execute in the name of Borrower or without the
signature of Borrower to the extent Lender may lawfully do so,
one or more financing statements, chattel mortgages or other
instruments, to evidence more effectively the security interest
of Lender in the Property. Borrower grants to Lender an
irrevocable power of attorney coupled with an interest for the
purpose of exercising and perfecting any and all rights and
remedies available to Lender at law and in equity, including
without limitation such rights and remedies available to Lender
pursuant to this Section 7.2.
Section 7.3 Changes in Tax, Debt Credit and Documentary
Stamp Laws.
(a) If any law is enacted or adopted or amended after the
date of this Security Instrument which deducts the Debt from the
value of the Property for the purpose of taxation or which
imposes a tax, either directly or indirectly, on the Debt or
Lender's interest in the Property, Borrower will pay the tax,
with interest and penalties thereon, if any. If Lender is
advised by counsel chosen by it that the payment of tax by
Borrower would be unlawful or taxable to Lender or unenforceable
or provide the basis for a defense of usury, then Lender shall
have the option, exercisable by written notice of not less than
ninety (90) days to declare the Debt immediately due and payable.
(b) Borrower will not claim or demand or be entitled to
any credit or credits on account of the Debt for any part of the
Taxes or Other Charges assessed against the Property, or any part
thereof, and no deduction shall otherwise be made or claimed from
the assessed value of the Property, or any part thereof, for real
estate tax purposes by reason of this Security Instrument or the
Debt. If such claim, credit or deduction shall be required by
law, Lender shall have the option, exercisable by written notice
of not less than ninety (90) days, to declare the Debt
immediately due and payable.
(c) If at any time the United States of America, any
State thereof or any subdivision of any such State shall require
revenue or other stamps to be affixed to the Note, this Security
Instrument, or any of the Other Security Documents or impose any
other tax or charge on the same, Borrower will pay for the same,
with interest and penalties thereon, if any.
Section 7.4 Estoppel Certificates.
(a) After request by Lender, Borrower, within ten (10)
days, shall furnish Lender or any proposed assignee with a
statement, duly acknowledged and certified, setting forth (i) the
amount of the original principal amount of the Note, (ii) the
unpaid principal amount of the Note, (iii) the rate of interest
of the Note, (iv) the terms of payment and maturity date of the
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Note, (v) the date installments of interest and/or principal were
last paid, (vi) that, except as provided in such statement and to
the best of Borrower's knowledge, there are no defaults or events
which with the passage of time or the giving of notice or both,
would constitute an event of default under the Note or the
Security Instrument, (vii) that the Note and this Security
Instrument are valid, legal and binding obligations and have not
been modified or if modified, giving particulars of such
modification, (viii) whether any offsets or defenses exist
against the obligations secured hereby and, if any are alleged to
exist, a detailed description thereof, (ix) that all Leases are
in full force and effect, (x) the date to which the Rents
thereunder have been paid pursuant to the Leases, (xi) whether or
not, to the best knowledge of Borrower, any of the lessees under
the Leases are in default under the Leases, and, if any of the
lessees are in default, setting forth the specific nature of all
such defaults, (xii) the amount of security deposits held by
Borrower under each Lease and that such amounts are consistent
with the amounts required under each Lease, and (xiii) as to any
other matters reasonably requested by Lender and reasonably
related to the Leases, the obligations secured hereby, the
Property or this Security Instrument.
(b) With respect to commercial Leases, Borrower shall use
its best efforts to deliver to Lender, promptly upon request,
duly executed estoppel certificates from any one or more lessees
as required by Lender attesting to such facts regarding the Lease
as Lender may require, including but not limited to attestations
that each Lease covered thereby is in full force and effect with
no defaults thereunder on the part of any party, that none of the
Rents have been paid more than one month in advance, and that the
lessee claims no defense or offset against the full and timely
performance of its obligations under the Lease, provided,
however, that if any of the foregoing is not true, then the
estoppel certificates shall so state.
(c) Upon any transfer or proposed transfer contemplated
by Section 19.1 hereof, at Lender's request, Borrower, any
Guarantors and any Indemnitor(s) shall provide an estoppel
certificate to the Investor (defined in Section 19.1) or any
prospective Investor in such form, substance and detail as
Lender, such Investor or prospective Investor may require.
Section 7.5 Flood Insurance. After Lender's request,
Borrower shall deliver evidence satisfactory to Lender that no
portion of the Improvements is situated in a federally designated
"special flood hazard area" or if it is, that Borrower has
obtained insurance meeting the requirements of Section
3.3(a)(vii).
Section 7.6 Replacement Documents. Upon receipt of an
affidavit of an officer of Lender as to the loss, theft,
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destruction or mutilation of the Note or any Other Security
Document which is not of public record, and, in the case of any
such mutilation, upon surrender and cancellation of such Note or
Other Security Document, Borrower will issue, in lieu thereof, a
replacement Note or Other Security Document, dated the date of
such lost, stolen, destroyed or mutilated Note or Other Security
Document in the same principal amount thereof and otherwise of
like tenor.
Article 8 - DUE ON SALE/ENCUMBRANCE
Section 8.1 No Sale/Encumbrance. Borrower agrees that
Borrower shall not, without the prior written consent of Lender,
sell, convey, mortgage, grant, bargain, encumber, pledge, assign,
or otherwise transfer the Property or any part thereof or permit
the Property or any part thereof to be sold, conveyed, mortgaged,
granted, bargained, encumbered, pledged, assigned, or otherwise
transferred, except that Borrower may lease space in the
Improvements to tenants in accordance with the provisions of
Section 3.7. Lender agrees that it shall not unreasonably
withhold or delay any consent as may be required from Lender
under this Section 8.1 with respect to utility easements with
utility providers, governmental entities or such other parties,
provided that any such utility easement does not have a material
adverse affect on the use or value of the Property and does not
impair the lien of this Security Instrument.
Section 8.2 Sale/Encumbrance Defined. A sale,
conveyance, mortgage, grant, bargain, encumbrance, pledge,
assignment, or transfer of the Property within the meaning of
this Article 8 shall be deemed to include, but not limited to,
(a) an installment sales agreement wherein Borrower agrees to
sell the Property or any part thereof for a price to be paid in
installments; (b) an agreement by Borrower leasing all or a
substantial part of the Property for other than actual occupancy
by a space tenant thereunder or a sale, assignment or other
transfer of, or the grant of a security interest in, Borrower's
right, title and interest in and to any Leases or any Rents; (c)
if Borrower, any Guarantor, any Indemnitor, or any managing agent
affiliated with any of the foregoing (the "Affiliated Manager")
or any general or limited partner or member of Borrower, any
Guarantor, any Indemnitor or any Affiliated Manager is a
corporation, the voluntary or involuntary sale, conveyance,
transfer or pledge of such corporation's stock (or the stock of
any corporation directly or indirectly controlling such
corporation by operation of law or otherwise) or the creation or
issuance of new stock by which an aggregate of more than 10% of
such corporation's stock shall be vested in a party or parties
who are not now stockholders; (d) if Borrower, any Guarantor, any
Indemnitor or any Affiliated Manager or any general or limited
partner or member of Borrower, any Guarantor or any Indemnitor or
63
any Affiliated Manager is a limited or general partnership or
joint venture, the change, removal or resignation of a general
partner or managing partner or the transfer or pledge of the
partnership interest of any general partner or managing partner
or any profits or proceeds relating to such partnership interest
or the voluntary or involuntary sale, conveyance, transfer or
pledge of limited partnership interests (or the limited
partnership interests of any limited partnership directly or
indirectly controlling such limited partnership by operation of
law or otherwise) or the creation or issance of new limited
partnership interests, by which an aggregate of more than 10% of
such limited partnership interests are held by parties who are
not currently limited partners; and (e) if Borrower, any
Guarantor, any Indemnitor or any Affiliated Manager or any
general or limited partner or member of Borrower, any Guarantor
or any Indemnitor or any Affiliated Manager is a limited
liability company, the change, removal or resignation of a
managing member or the transfer of the membership interest of any
managing member or any profits or proceeds relating to such
membership interest or the voluntary or involuntary sale,
conveyance, transfer or pledge of membership interests (or the
membership interests of any limited liability company directly or
indirectly controlling such limited liability company by
operation of law or otherwise) or the creation or issuance of new
membership interests, by which an aggregate of more than 10% of
such membership interests are held by parties who are not
currently members; and (f) the removal or the resignation of the
managing agent (including, without limitation, the Affiliated
Manager) other than in accordance with that certain Conditional
Assignment of Management Agreement dated the date hereof between
Borrower and Lender. Notwithstanding the foregoing, the
following transfer shall not be deemed to be a sale, conveyance,
mortgage, grant, bargain, encumbrance, pledge, assignment, or
transfer within the meaning of this Article 8:
(a) transfer by devise or descent or by operation of law
upon the death of a member, partner or stockholder of Borrower,
any Guarantor or any Indemnitor or any general partner or member
thereof;
(b) provided that no Event of Default has occurred and is
continuing under the Note, this Security Instrument or the Other
Security Documents, transfers of non-managing membership, limited
partnership or shareholder interests, as applicable, in Borrower
or Affiliated Manager (other than AERC to the extent that AERC is
a Publicly Traded Entity (defined below)) (the "Permitted
Transfers") up to 49%, respectively, in the aggregate; provided,
however, that (i) Lender must receive sixty (60) days prior
written notice of any transfer pursuant to this Section, (ii)
AERC must continue to hold after the Permitted Transfer at least
a 51% direct or indirect beneficial interest in Borrower or
Affiliated Manager (as the case may be), (iii) such transfers
64
shall not result in a change in control of Borrower or Affiliated
Manager (other than AERC to the extent that AERC is a Publicly
Traded Entity) (as the case may be) or in the day-to-day
operations of the Property, (iv) Lender shall have received
evidence satisfactory to it (which shall include a
non-consolidation opinion acceptable to Lender) that after such
transfer Borrower shall be in compliance with the terms hereof,
including without limitation, Section 4.2, and (v) Lender shall
have received payment of all fees and expenses set forth in
Section 8.3 (notwithstanding anything to the contrary contained
in Section 8.1 or this Subsection 8.2 (b), in the event that (A)
Borrower requests Lender's consent to a transfer of shareholder
interests in the Affiliated Manager in excess of 49%, (B) the
Affiliated Manager is a corporation which is not publically
traded on a nationally recognized exchange or shall no longer
continue to be a corporation which is publically traded on a
nationally recognized exchange as a result of such transfer, and
(C) if Securities are then rated by the Rating Agencies, Borrower
shall deliver to Lender written confirmation from the Rating
Agencies that the transfer shall not result in a downgrade,
withdrawal or qualification of the then current ratings by the
applicable Rating Agencies of the Securities and otherwise in
form and substance reasonably satisfactory to Lender, Lender's
consent with respect to such requested transfer shall not be
unreasonably withheld [;] [and];
(c) in the event the Affiliated Manager is a corporation
publicly traded on a nationally-recognized exchange (a Publicly
Traded Entity) and provided that the Affiliated Manager shall
continue to be publicly traded on a nationally-recognized
exchange after any such trade, transfers of shareholder interests
in the Affiliated Manager [; and] [.]
(d) [WITH RESPECT TO COUNTRY CLUB ONLY: (d) a transfer of
all of the shares of the Borrower by Associated Estates
Management Company, its sole shareholder, to Associated Estates
Realty Corporation provided Lender receives at least sixty (60)
days prior written notice of the transfer.]
Section 8.3 Lender's Rights. Lender reserves the right
to condition the consent required hereunder upon a modification
of the terms hereof and on assumption of the Note, this Security
Instrument and the Other Security Documents as so modified by the
proposed transferee, payment of a transfer fee of not less than
one percent (1%) of the principal balance of the Note (the
"Transfer Fee"), a $4,000 processing fee, and all of Lender's
expenses incurred in connection with such transfer, the approval
by a Rating Agency of the proposed transferee, the proposed
transferee's continued compliance with the covenants set forth in
this Security Instrument, including, without limitation, the
covenants in Section 4.2 hereof, or such other conditions as
Lender shall determine in its sole discretion to be in the
65
interest of Lender. Notwithstanding the preceding sentence, (i)
no Transfer Fee shall be payable in connection with any
Permitted Transfer and (ii) in the event of any transfer of
shareholder interests in Borrower other than a Permitted
Transfer, the Transfer Fee equal to seventy-five hundredths of a
percent (0.75%) of the principal balance of the Note. All of
Lender's expenses incurred and the $4,000 processing fee shall be
payable by Borrower whether or not Lender consents to the
transfer. Lender shall not be required to demonstrate any actual
impairment of its security or any increased risk of default
hereunder in order to declare the Debt immediately due and
payable upon Borrower's sale, conveyance, mortgage, grant,
bargain, encumbrance, pledge, assignment, or transfer of the
Property without Lender's consent. This provision shall apply to
every sale, conveyance, mortgage, grant, bargain, encumbrance,
pledge, assignment, or transfer of the Property regardless of
whether voluntary or not, or whether or not Lender has consented
to any previous sale, conveyance, mortgage, grant, bargain,
encumbrance, pledge, assignment, or transfer of the Property.
Article 9 - PREPAYMENT
Section 9.1 Prepayment. The Debt may not be prepaid in
whole or in part except in strict accordance with the express
terms and conditions of the Note.
Article 10 - DEFAULT
Section 10.1 Events of Default. The occurrence of any one
or more of the following events shall constitute an "Event of
Default":
(a) if any portion of the Debt is not paid on or prior to
[MERRILL LOANS ONLY -- the fifth (5th) day after the same is due]
[CHASE LOANS ONLY -- the date the same is due];
(b) if any of the Taxes or Other Charges is not paid when
the same is due and payable except to the extent sums sufficient
to pay such Taxes and Other Charges have been deposited with
Lender in accordance with the terms of this Security Instrument;
(c) if the Policies are not kept in full force and
effect, or if the Policies are not delivered to Lender upon
request;
(d) if Borrower or principal, as applicable, violates or
does not comply with any of the provisions of Section 4.2 or
Article 8, including, but not limited to, if Borrower or any
principal shall fail to comply with the provisions of its
operating agreement, articles or certificate of incorporation,
66
partnership agreement or any other governing documents;
(e) if any representation or warranty of Borrower, any
Indemnitor or any person guaranteeing payment of the Debt or any
portion thereof or performance by Borrower of any of the terms of
this Security Instrument (a "Guarantor"), or any member, general
partner, principal or beneficial owner of any of the foregoing,
made herein or in the Environmental Indemnity (defined below) or
in any guaranty, or in any certificate, report, financial
statement or other instrument or document furnished to Lender
shall have been false or misleading in any material respect when
made;
(f) if (i) Borrower or any managing member or general
partner of Borrower, or any Guarantor or Indemnitor shall
commence any case, proceeding or other action (A) under any
existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization,
conservatorship or relief of debtors, seeking to have an order
for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or
(B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any
substantial part of its assets, or the Borrower or any managing
member or general partner of Borrower, or any Guarantor or
Indemnitor shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against Borrower or
any managing member or general partner of Borrower, or any
Guarantor or Indemnitor any case, proceeding or other action of a
nature referred to in clause (i) above which (A) results in the
entry of an order for relief or any such adjudication or
appointment or (B) remains undismissed, undischarged or unbonded
for a period of sixty (60) days; or (iii) there shall be
commenced against the Borrower or any managing member or general
partner of Borrower, or any Guarantor or Indemnitor any case,
proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all
or any substantial part of its assets which results in the entry
of any order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within
sixty (60) days from the entry thereof; or (iv) the Borrower or
any managing member or general partner of Borrower, or any
Guarantor or Indemnitor shall take any action in furtherance of,
or indicating its consent to, approval of, or acquiescence in,
any of the acts set forth in clause (i), (ii), or (iii) above; or
(v) the Borrower or any managing member or general partner of
Borrower, or any Guarantor or Indemnitor shall generally not, or
shall be unable to, or shall admit in writing its inability to,
pay its debts as they become due;
67
(g) if Borrower shall be in default beyond applicable
notice and grace periods under any other mortgage, deed of trust,
deed to secure debt or other security agreement covering any part
of the Property whether it be superior or junior in lien to this
Security Instrument;
(h) if the Property becomes subject to any mechanic's,
materialman's or other lien other than a lien for local real
estate taxes and assessments not then due and payable and the
lien shall remain undischarged of record (by payment, bonding or
otherwise) for a period of thirty (30) days;
(i) if any federal tax lien is filed against Borrower,
any member or general partner of Borrower, any Guarantor, any
Indemnitor or the Property and same is not discharged of record
within thirty (30) days after same is filed;
(j) if Borrower shall fail to deliver to Lender, within
fifteen (15) days after request by Lender, the estoppel
certificates required pursuant to the terms of Subsection 7.4(a)
and (c);
(k) if any default occurs under any guaranty or indemnity
executed in connection herewith (including, without limitation,
the Cooperation Letter (defined in Section 19.2) the Indemnity
Agreement (defined in Section 13.4), and the Environmental
Indemnity (defined in Section 13.4) and such default continues
after the expiration of applicable grace periods, if any;
(l) if any of the assumptions contained in the
Non-Consolidation Opinion, including, but not limited to, any
exhibits attached thereto, were not true and correct as of the
date of such Non-Consolidation Opinion or thereafter became
untrue or incorrect in any material respect; or
(m) if for more than ten (10) days after written notice
from Lender, Borrower shall continue to be in default under any
term, covenant or condition of the Note, this Security Instrument
or the Other Security Documents (including, without limitation,
the Cooperation Letter) not set forth in Subsections 10.1(a)
through (l) above, then, in the case of any default which can be
cured by the payment of a sum of money or for thirty (30) days
after written notice from Lender in the case of any other
default, provided that if such default cannot reasonably be cured
within such thirty (30) day period and Borrower shall have
commenced to cure such default within such thirty (30) day period
and thereafter diligently and expeditiously proceeds to cure the
same, such thirty (30) day period shall be extended for so long
as it shall require Borrower in the exercise of due diligence to
cure such default, it being agreed that no such extension shall
be for a period in excess of sixty (60) days.
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Article 11 - RIGHTS AND REMEDIES
Section 11.1 Remedies. Upon the occurrence of any Event
of Default, Borrower agrees that Lender may take such action,
without notice or demand, as it deems advisable to protect and
enforce its rights against Borrower and in and to the Property,
including, but not limited to, the following actions, each of
which may be pursued concurrently or otherwise, at such time and
in such order as Lender may determine, in its sole discretion,
without impairing or otherwise affecting the other rights and
remedies of Lender:
(a) declare the entire unpaid Debt to be immediately due
and payable;
(b) institute proceedings, judicial or otherwise, for the
complete foreclosure of this Security Instrument under any
applicable provision of law in which case the Property or any
interest therein may be sold for cash or upon credit in one or
more parcels or in several interests or portions and in any order
or manner;
(c) with or without entry, to the extent permitted and
pursuant to the procedures provided by applicable law, institute
proceedings for the partial foreclosure of this Security
Instrument for the portion of the Debt then due and payable,
subject to the continuing lien and security interest of this
Security Instrument for the balance of the Debt not then due,
unimpaired and without loss of priority;
(d) sell for cash or upon credit the Property or any part
thereof and all estate, claim, demand, right, title and interest
of Borrower therein and rights of redemption thereof, pursuant to
power of sale or otherwise, at one or more sales, in one or more
parcels, at such time and place, upon such terms and after such
notice thereof as may be required or permitted by law;
(e) subject to the provisions of Article 15, institute an
action, suit or proceeding in equity for the specific performance
of any covenant, condition or agreement contained herein, in the
Note or in the Other Security Documents;
(f) subject to the provisions of Article 15, recover
judgment on the Note either before, during or after any
proceedings for the enforcement of this Security Instrument or
the Other Security Documents;
(g) apply for the appointment of a receiver, trustee,
liquidator or conservator of the Property, without notice and
without regard for the adequacy of the security for the Debt and
without regard for the solvency of Borrower, any Guarantor,
Indemnitor or of any person, firm or other entity liable for the
69
payment of the Debt;
(h) subject to any applicable law, the license granted to
Borrower under Section 1.2 shall automatically be revoked and
Lender may enter into or upon the Property, either personally or
by its agents, nominees or attorneys and dispossess Borrower and
its agents and servants therefrom, without liability for
trespass, damages or otherwise and exclude Borrower and its
agents or servants wholly therefrom, and take possession of all
books, records and accounts relating thereto and Borrower agrees
to surrender possession of the Property and of such books,
records and accounts to Lender upon demand, and thereupon Lender
may (i) use, operate, manage, control, insure, maintain, repair,
restore and otherwise deal with all and every part of the
Property and conduct the business thereat; (ii) complete any
construction on the Property in such manner and form as Lender
deems advisable; (iii) make alterations, additions, renewals,
replacements and improvements to or on the Property; (iv)
exercise all rights and powers of Borrower with respect to the
Property, whether in the name of Borrower or otherwise,
including, without limitation, the right to make, cancel, enforce
or modify Leases, obtain and evict tenants, and demand, sue for,
collect and receive all Rents of the Property and every part
thereof; (v) require Borrower to pay monthly in advance to
Lender, or any receiver appointed to collect the Rents, the fair
and reasonable rental value for the use and occupation of such
part of the Property as may be occupied by Borrower; (vi) require
Borrower to vacate and surrender possession of the Property to
Lender or to such receiver and, in default thereof, Borrower may
be evicted by summary proceedings or otherwise; and (vii) apply
the receipts from the Property to the payment of the Debt, in
such order, priority and proportions as Lender shall deem
appropriate in its sole discretion after deducting therefrom all
expenses (including reasonable attorneys' fees) incurred in
connection with the aforesaid operations and all amounts necessry
to pay the Taxes, Other Charges, Insurance Premiums and other
expenses in connection with the Property, as well as just and
reasonable compensation for the services of Lender, its counsel,
agents and employees;
(i) exercise any and all rights and remedies granted to a
secured party upon default under the Uniform Commercial Code,
including, without limiting the generality of the foregoing: (i)
the right to take possession of the Personal Property or any part
thereof, and to take such other measures as Lender may deem
necessary for the care, protection and preservation of the
Personal Property, and (ii) request Borrower at its expense to
assemble the Personal Property and make it available to Lender at
a convenient place acceptable to Lender. Any notice of sale,
disposition or other intended action by Lender with respect to
the Personal Property sent to Borrower in accordance with the
provisions hereof at least five (5) days prior to such action,
70
shall constitute commercially reasonable notice to Borrower;
(j) apply any sums then deposited in the Escrow Fund and
any other sums held in escrow or otherwise by Lender in
accordance with the terms of this Security Instrument or any
Other Security Document to the payment of the following items in
any order in its sole discretion:
(i) Taxes and Other Charges;
(ii) Insurance Premiums;
(iii) interest on the unpaid principal balance of the Note;
(iv) amortization of the unpaid principal balance of the
Note; or
(v) all other sums payable pursuant to the Note, this
Security Instrument and the Other Security Documents,
including without limitation advances made by Lender
pursuant to the terms of this Security Instrument;
(k) surrender the Policies maintained pursuant to Article
3 hereof, collect the unearned Insurance Premiums and apply such
sums as a credit on the Debt in such priority and proportion as
Lender in its discretion shall deem proper, and in connection
therewith, Borrower hereby appoints Lender as agent and attorney-
in-fact (which is coupled with an interest and is therefore
irrevocable) for Borrower to collect such Insurance Premiums;
(l) apply the undisbursed balance of any Net Proceeds
Deficiency deposit, together with interest thereon, to the
payment of the Debt in such order, priority and proportions as
Lender shall deem to be appropriate in its discretion;
(m) in conjunction with or pursuant to the exercise by
Lender of its rights under this Section 11.1 to institute
proceedings, judicial or otherwise, for the full or partial
foreclosure of this Security Instrument, terminate any agreement
with respect to the management of the Property; or
(n) pursue such other remedies as Lender may have under
applicable law.
In the event of a sale, by foreclosure, power of sale, or
otherwise, of less than all of the Property, this Security
Instrument shall continue as a lien and security interest on the
remaining portion of the Property unimpaired and without loss of
priority. Notwithstanding the provisions of this Section 11.1 to
the contrary, if any Event of Default as described in clause (i)
or (ii) of Subsection 10.1(f) shall occur, the entire unpaid Debt
shall be automatically due and payable, without any further
71
notice, demand or other action by Lender.
Section 11.2 Application of Proceeds. The purchase money,
proceeds and avails of any disposition of the Property, or any
part thereof, or any other sums collected by Lender pursuant to
the Note, this Security Instrument or the Other Security
Documents, may be applied by Lender to the payment of the Debt in
such priority and proportions as Lender in its discretion shall
deem proper.
Section 11.3 Right to Cure Defaults. Upon the occurrence
of any Event of Default or if Borrower fails to make any payment
or to do any act as herein provided, Lender may, but without any
obligation to do so and without notice to or demand on Borrower
and without releasing Borrower from any obligation hereunder,
make or do the same in such manner and to such extent as Lender
may deem necessary to protect the security hereof. Lender is
authorized to enter upon the Property for such purposes, or
appear in, defend, or bring any action or proceeding to protect
its interest in the Property or to foreclose this Security
Instrument or collect the Debt. The cost and expense of any cure
hereunder (including reasonable attorneys' fees to the extent
permitted by law), with interest as provided in this Section
11.3, shall constitute a portion of the Debt and shall be due and
payable to Lender upon demand. All such costs and expenses
incurred by Lender in remedying such Event of Default or such
failed payment or act or in appearing in, defending, or bringing
any such action or proceeding shall bear interest at the Default
Rate (as defined in the Note), for the period after notice from
Lender that such cost or expense was incurred to the date of
payment to Lender. All such costs and expenses incurred by
Lender together with interest thereon calculated at the Default
Rate shall be deemed to constitute a portion of the Debt and be
secured by this Security Instrument and the Other Security
Documents and shall be immediately due and payable upon demand by
Lender therefor.
Section 11.4 Actions and Proceedings. Lender has the
right to appear in and defend any action or proceeding brought
with respect to the Property, and after the occurrence and during
the continuance of an Event of Default, to bring any action or
proceeding, in the name and on behalf of Borrower, which Lender,
in its discretion, decides should be brought to protect its
interest in the Property.
Section 11.5 Recovery of Sums Required To Be Paid. Lender
shall have the right from time to time to take action to recover
any sum or sums which constitute a part of the Debt as the same
become due, without regard to whether or not the balance of the
Debt shall be due, and without prejudice to the right of Lender
thereafter to bring an action of foreclosure, or any other
action, for a default or defaults by Borrower existing at the
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time such earlier action was commenced.
Section 11.6 Examination of Books and Records. Lender, its
agents, accountants and attorneys shall have the right, upon
prior written notice to Borrower (unless an Event of Default
exists, in which case no notice shall be required), to examine
and audit, during reasonable business hours, the records, books,
management and other papers of Borrower and its affiliates or of
any Guarantor or Indemnitor which pertain to their financial
condition or the income, expenses and operation of the Property,
at the Property or at any office regularly maintained by
Borrower, its affiliates or any Guarantor or Indemnitor where the
books and records are located. Lender and its agents shall have
the right to make copies and extracts from the foregoing records
and other papers.
Section 11.7 Other Rights, etc. (a) The failure of Lender
to insist upon strict performance of any term hereof shall not be
deemed to be a waiver of any term of this Security Instrument.
Borrower shall not be relieved of Borrower's obligations
hereunder by reason of (i) the failure of Lender to comply with
any request of Borrower, any Guarantor or any Indemnitor to take
any action to foreclose this Security Instrument or otherwise
enforce any of the provisions hereof or of the Note or the Other
Security Documents, (ii) the release, regardless of
consideration, of the whole or any part of the Property, or of
any person liable for the Debt or any portion thereof, or (iii)
any agreement or stipulation by Lender extending the time of
payment or otherwise modifying or supplementing the terms of the
Note, this Security Instrument or the Other Security Documents.
(b) It is agreed that the risk of loss or damage to the
Property is on Borrower, and Lender shall have no liability
whatsoever for decline in value of the Property, for failure to
maintain the Policies, or for failure to determine whether
insurance in force is adequate as to the amount of risks insured.
Possession by Lender shall not be deemed an election of judicial
relief, if any such possession is requested or obtained, with
respect to any Property or collateral not in Lender's possession.
(c) Lender may resort for the payment of the Debt to any
other security held by Lender in such order and manner as Lender,
in its discretion, may elect. Lender may take action to recover
the Debt, or any portion thereof, or to enforce any covenant
hereof without prejudice to the right of Lender thereafter to
foreclose this Security Instrument. The rights of Lender under
this Security Instrument shall be separate, distinct and
cumulative and none shall be given effect to the exclusion of the
others. No act of Lender shall be construed as an election to
proceed under any one provision herein to the exclusion of any
other provision. Lender shall not be limited exclusively to the
rights and remedies herein stated but shall be entitled to every
73
right and remedy now or hereafter afforded at law or in equity.
Section 11.8 Right to Release Any Portion of the Property.
Lender may release any portion of the Property for such
consideration as Lender may require without, as to the remainder
of the Property, in any way impairing or affecting the lien or
priority of this Security Instrument, or improving the position
of any subordinate lienholder with respect thereto, except to the
extent that the obligations hereunder shall have been reduced by
the actual monetary consideration, if any, received by Lender for
such release, and may accept by assignment, pledge or otherwise
any other property in place thereof as Lender may require without
being accountable for so doing to any other lienholder. This
Security Instrument shall continue as a lien and security
interest in the remaining portion of the Property.
Section 11.9 Violation of Laws. If the Property is not in
compliance with Applicable Laws, Lender may impose additional
requirements upon Borrower in connection herewith including,
without limitation, monetary reserves or financial equivalents.
Section 11.10 Right of Entry. Lender and its agents shall
have the right to enter and inspect the Property at all
reasonable times.
Section 11.11 Subrogation. If any or all of the proceeds
of the Note have been used to extinguish, extend or renew any
indebtedness heretofore existing against the Property, then, to
the extent of the funds so used, Lender shall be subrogated to
all of the rights, claims, liens, titles, and interests existing
against the Property heretofore held by, or in favor of, the
holder of such indebtedness and such former rights, claims,
liens, titles, and interests, if any, are not waived but rather
are continued in full force and effect in favor of Lender and are
merged with the lien and security interest created herein as
cumulative security for the repayment of the Debt, the
performance and discharge of Borrower's obligations hereunder,
under the Note and the Other Security Documents and the
performance and discharge of the Other Obligations.
Article 12 - ENVIRONMENTAL MATTERS
Section 12.1 Environmental Representations and Warranties.
Borrower represents and warrants, based upon an environmental
site assessment of the Property and information that Borrower
knows or should reasonably have known, that: (a) there are no
Hazardous Materials (defined below) or underground storage tanks
in, on, or under the Property, except those that are both (i) in
compliance with Environmental Laws (defined below) and with
permits issued pursuant thereto (if such permits are required),
and (ii) either (A) in amounts not in excess of that necessary to
74
operate the Property or (B) fully disclosed to and approved by
Lender in writing pursuant to the written reports resulting from
the environmental site assessments of the Property delivered to
Lender (the "Environmental Report"); (b) there are no past,
present or threatened Releases (defined below) of Hazardous
Materials in violation of any Environmental Law and which would
require remediation by a governmental authority in, on, under or
from the Property except as described in the Environmental
Report; (c) there is no threat of any Release of Hazardous
Materials migrating to the Property except as described in the
Environmental Report; (d) there is no past or present non-
compliance with Environmental Laws, or with permits issued
pursuant thereto, in connection with the Property except as
described in the Environmental Report; (e) Borrower does not know
of, and has not received, any written or oral notice or other
communication from any person or entity (including but not
limited to a governmental entity) relating to Hazardous Materials
in, on, under or from the Property; and (f) Borrower has
truthfully and fully provided to Lender, in writing, any and all
information relating to environmental conditions in, on, under or
from the Property known to Borrower or contained in Borrower's
files and records, including but not limited to any reports
relating to Hazardous Materials in, on, under or migrating to or
from the Property and/or to the environmental condition of the
Property. "Environmental Law" means any present and future
federal, state and local laws, statutes, ordinances, rules,
regulations, standards, policies and other government directives
or requirements, as well as common law, that apply to Borrower or
the Property and relate to Hazardous Materials, including,
without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act and the Resource Conservation and
Recovery Act. "Hazardous Materials" shall mean petroleum and
petroleum products and compounds containing them, including
gasoline, diesel fuel and oil; explosives; flammable materials;
radioactive materials; polychlorinated biphenyls ("PCBs") and
compounds containing them; lead and lead-based paint; asbestos or
asbestos-containing materials in any form that is or could become
friable; underground or above-ground storage tanks, whether empty
or containing any substance; any substance the presence of which
on the Property is prohibited by any federal, state or local
authority; any substance that requires special handling; and any
other material or substance now or in the future defined as a
"hazardous substance," "hazardous material," "hazardous
waste,""toxic substance," "toxic pollutant," "contaminant,"
"pollutant" or other words of similar import within the meaning
of any Environmental Law. "Release" of any Hazardous Materials
includes but is not limited to any release, deposit, discharge,
emission, leaking, spilling, seeping, migrating, injecting,
pumping, pouring, emptying, escaping, dumping, disposing or other
movement of Hazardous Materials.
Section 12.2 Environmental Covenants. Borrower covenants
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and agrees that so long as Borrower owns, manages, is in
possession of, or otherwise controls the operation of the
Property: (a) all uses and operations on or of the Property,
whether by Borrower or any other person or entity, shall be in
compliance with all Environmental Laws and permits issued
pursuant thereto; (b) there shall be no Releases of Hazardous
Materials in, on, under or from the Property; (c) there shall be
no Hazardous Materials in, on, or under the Property, except
those that are both (i) in compliance with all Environmental Laws
and with permits issued pursuant thereto, if and to the extent
required, and (ii) (A) in amounts not in excess of that necessary
to operate the Property or (B) fully disclosed to and approved by
Lender in writing; (d) Borrower shall keep the Property free and
clear of all liens and other encumbrances imposed pursuant to any
Environmental Law, whether due to any act or omission of Borrower
or any other person or entity (the "Environmental Liens"); (e)
Borrower shall, at its sole cost and expense, fully and
expeditiously cooperate in all activities pursuant to Section
12.3 below, including but not limited to providing all relevant
information and making knowledgeable persons available for
interviews; (f) Borrower shall, at its sole cost and expense,
perform any environmental site assessment or other investigation
of environmental conditions in connection with the Property,
pursuant to any reasonable written request of Lender, upon
Lender's reasonable belief that the Property is not in full
compliance with all Environmental Laws, and share with Lender the
reports and other results thereof, and Lender and other
Indemnified Parties (as defined in the Environmental Indemnity)
shall be entitled to rely on such reports and other results
thereof; (g) Borrower shall, at its sole cost and expense, comply
with all reasonable written requests of Lender to (i) reasonably
effectuate remediation of any Hazardous Materials in, on, under
or from the Property; and (ii) cmply with any Environmental Law;
(h) Borrower shall not allow any tenant or other user of the
Property to violate any Environmental Law; and (i) Borrower shall
immediately notify Lender in writing after it has become aware of
(A) any presence or Release or threatened Releases of Hazardous
Materials in, on, under, from or migrating towards the Property;
(B) any non-compliance with any Environmental Laws related in any
way to the Property; (C) any actual or potential Environmental
Lien; (D) any required or proposed remediation of environmental
conditions relating to the Property; and (E) any written or oral
notice or other communication of which Borrower becomes aware
from any source whatsoever (including but not limited to a
governmental entity) relating in any way to Hazardous Materials.
Section 12.3 Lender's Rights. Lender and any other person
or entity designated by Lender, including but not limited to any
representative of a governmental entity, and any environmental
consultant, and any receiver appointed by any court of competent
jurisdiction, shall have the right, but not the obligation, to
enter upon the Property at all reasonable times to assess any and
76
all aspects of the environmental condition of the Property and
its use, including but not limited to conducting any
environmental assessment or audit (the scope of which shall be
determined in Lender's sole and absolute discretion) and taking
samples of soil, groundwater or other water, air, or building
materials, and conducting other invasive testing. Borrower shall
cooperate with and provide access to Lender and any such person
or entity designated by Lender.
Article 13 - INDEMNIFICATIONS
Section 13.1 General Indemnification. Borrower shall, at
its sole cost and expense, protect, defend, indemnify, release
and hold harmless the Indemnified Parties from and against any
and all Losses (defined below) imposed upon or incurred by or
asserted against any Indemnified Parties and directly or
indirectly arising out of or in any way relating to any one or
more of the following: (a) any accident, injury to or death of
persons or loss of or damage to property occurring in, on or
about the Property or any part thereof or on the adjoining
sidewalks, curbs, adjacent property or adjacent parking areas,
streets or ways; (b) any use, nonuse or condition in, on or about
the Property or any part thereof or on the adjoining sidewalks,
curbs, adjacent property or adjacent parking areas, streets or
ways; (c) performance of any labor or services or the furnishing
of any materials or other property in respect of the Property or
any part thereof; (d) any failure of the Property to be in
compliance with any Applicable Laws; (e) any and all claims and
demands whatsoever which may be asserted against Lender by reason
of any alleged obligations or undertakings on its part to perform
or discharge any of the terms, covenants, or agreements contained
in any Lease; or (f) the payment of any commission, charge or
brokerage fee to anyone which may be payable in connection with
the funding of the Loan evidenced by the Note and secured by this
Security Instrument, provided, however, that Borrower shall not
be obligated to protect, defend, indemnify, release and hold
harmless Lender from any commission, charge or brokerage fee
claimed solely through Lender. Any amounts payable to Lender by
reason of the application of this Section 13.1 shall become
immediately due and payable and shall bear interest at the
Default Rate from the date loss or damage is sustained by Lender
until paid.
The term "Losses" shall mean any and all claims, suits,
liabilities (including, without limitation, strict liabilities),
actions, proceedings, obligations, debts, damages, losses, costs,
expenses, fines, penalties, charges, fees, expenses, judgments,
awards, amounts paid in settlement of whatever kind or nature
(including but not limited to attorneys' fees and other costs of
defense).
77
Section 13.2 Mortgage and/or Intangible Tax. Borrower
shall, at its sole cost and expense, protect, defend, indemnify,
release and hold harmless the Indemnified Parties from and
against any and all Losses imposed upon or incurred by or
asserted against any Indemnified Parties and directly or
indirectly arising out of or in any way relating to any tax on
the making and/or recording of this Security Instrument, the Note
or any of the Other Security Documents.
Section 13.3 Duty to Defend; Attorneys' Fees and Other
Fees and Expenses. Upon written request by any Indemnified
Party, Borrower shall defend such Indemnified Party (if requested
by any Indemnified Party, in the name of the Indemnified Party)
by attorneys and other professionals approved by the Indemnified
Parties. Notwithstanding the foregoing, any Indemnified Parties
may, in their sole and absolute discretion, engage their own
attorneys and other professionals to defend or assist them, and,
at the option of Indemnified Parties, their attorneys shall act
as co-counsel in connection with the resolution of any claim or
proceeding, provided, however, that upon an Event of Default, the
attorneys of Indemnified Parties shall control the resolution of
any claim or proceeding. Upon demand, Borrower shall pay or, in
the sole and absolute discretion of the Indemnified Parties,
reimburse, the Indemnified Parties for the payment of reasonable
fees and disbursements of attorneys, engineers, environmental
consultants, laboratories and other professionals in connection
therewith.
Section 13.4 Environmental Indemnity. Simultaneously with
this Security Instrument, Borrower and other persons or entities
defined therein have executed and delivered that certain
environmental indemnity agreement dated the date hereof
(collectively, the "Indemnitors") to Lender (the "Environmental
Indemnity"). AERC shall not be deemed an Indemnitor (as defined
hereunder) by virtue of the Cooperation Letter or that certain
Indemnity Agreement dated as of the date hereof made by Borrower
and AERC in favor of Lender (the "Indemnity Agreement").
Article 14 - WAIVERS
Section 14.1 Waiver of Counterclaim. Borrower hereby
waives the right to assert a counterclaim, other than a mandatory
or compulsory counterclaim, in any action or proceeding brought
against it by Lender arising out of or in any way connected with
this Security Instrument, the Note, any of the Other Security
Documents, or the Obligations.
Section 14.2 Marshalling and Other Matters. Borrower
hereby waives, to the extent permitted by law, the benefit of all
appraisement, valuation, stay, extension, reinstatement and
redemption laws now or hereafter in force and all rights of
78
marshalling in the event of any sale hereunder of the Property or
any part thereof or any interest therein. Further, Borrower
hereby expressly waives any and all rights of redemption from
sale under any order or decree of foreclosure of this Security
Instrument on behalf of Borrower, and on behalf of each and every
person acquiring any interest in or title to the Property
subsequent to the date of this Security Instrument and on behalf
of all persons to the extent permitted by Applicable Laws.
Section 14.3 Waiver of Notice. Borrower shall not be
entitled to any notices of any nature whatsoever from Lender
except (a) with respect to matters for which this Security
Instrument specifically and expressly provides for the giving of
notice by Lender to Borrower, and (b) with respect to matters for
which Lender is required by Applicable Laws to give notice, and
Borrower hereby expressly waives the right to receive any notice
from Lender with respect to any matter for which this Security
Instrument does not specifically and expressly provide for the
giving of notice by Lender to Borrower.
Section 14.4 Waiver of Statute of Limitations. Borrower
hereby expressly waives and releases to the fullest extent
permitted by law, the pleading of any statute of limitations as a
defense to payment of the Debt or performance of its Other
Obligations.
Section 14.5 Sole Discretion of Lender. Wherever pursuant
to this Security Instrument (a) Lender exercises any right given
to it to approve or disapprove, (b) any arrangement or term is to
be satisfactory to Lender, or (c) any other decision or
determination is to be made by Lender, the decision of Lender to
approve or disapprove, all decisions that arrangements or terms
are satisfactory or not satisfactory and all other decisions and
determinations made by Lender, shall be in the sole and absolute
discretion of Lender, except as may be otherwise expressly and
specifically provided herein.
SECTION 14.6 WAIVER OF TRIAL BY JURY. BORROWER HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER
IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY
TO THE LOAN EVIDENCED BY THE NOTE, THE APPLICATION FOR THE LOAN
EVIDENCED BY THE NOTE, THE NOTE, THIS SECURITY INSTRUMENT OR THE
OTHER SECURITY DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER, ITS
OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH.
79
Article 15 - EXCULPATION
Section 15.1 Exculpation. The provisions of Article 14 of
the Note are hereby incorporated by reference to the fullest
extent as if the text of such Article were set forth in its
entirety herein.
Article 16 - NOTICES
Section 16.1 Notices. All notices or other written
communications hereunder shall be deemed to have been properly
given (i) upon delivery, if delivered in person or by facsimile
transmission with receipt acknowledged by the recipient thereof
and confirmed by telephone by sender, (ii) one (1) Business Day
(defined below) after having been deposited for overnight
delivery with any reputable overnight courier service, or (iii)
three (3) Business Days after having been deposited in any post
office or mail depository regularly maintained by the U.S. Postal
Service and sent by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
If to Borrower:
Attention:
Facsimile No.:
With a copy to:
Attention:
Facsimile No.:
If to Lender: The Chase Manhattan Bank
c/o Chase Commercial Mortgage Banking Corp.
Servicing Department
380 Madison Avenue
10th Floor
New York, New York 10017
Attention: Ms. Janice Smith
Facsimile No.: (212) 622-3553
and
The Chase Manhattan Bank
Legal Department
270 Park Avenue
39th Floor
New York, New York 10017
Attention: Ronald A. Wilcox, Esq.
Facsimile No.: (212) 270-2934
80
With a copy to: Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: Joseph Philip Forte, Esq.
Facsimile No.: (212) 912-7751
or addressed as such party may from time to time designate by
written notice to the other parties.
Either party by notice to the other may designate additional
or different addresses for subsequent notices or communications.
For purposes of this Subsection, "Business Day" shall mean a
day on which commercial banks are not authorized or required by
law to close in New York, New York.
Article 17 - SUBMISSION TO JURISDICTION
Section 17.1 Submission to Jurisdiction. With respect to
any claim or action arising hereunder or under the Note or the
Other Security Documents, Borrower (a) irrevocably submits to the
nonexclusive jurisdiction of the courts of the State of New York
and the United States District Court located in the Borough of
Manhattan in New York, New York, and appellate courts from any
thereof, (b) irrevocably waives any objection which it may have
at any time to the laying on venue of any suit, action or
proceeding arising out of or relating to this Security Instrument
brought in any such court, and (c) irrevocably waives any claim
that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum. Nothing in this
Security Instrument will be deemed to preclude Lender from
bringing an action or proceeding with respect hereto in any other
jurisdiction.
Article 18 - APPLICABLE LAW
Section 18.1 CHOICE OF LAW. THIS SECURITY INSTRUMENT
SHALL BE DEEMED TO BE A CONTRACT ENTERED INTO PURSUANT TO THE
LAWS OF THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE
GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, PROVIDED HOWEVER, THAT WITH
RESPECT TO THE CREATION, PERFECTION, PRIORITY AND ENFORCEMENT OF
THE LIEN OF THIS SECURITY INSTRUMENT, AND THE DETERMINATION OF
DEFICIENCY JUDGMENTS, THE LAWS OF THE STATE WHERE THE PROPERTY IS
LOCATED SHALL APPLY.
Section 18.2 Provisions Subject to Applicable Law. All
rights, powers and remedies provided in this Security Instrument
may be exercised only to the extent that the exercise thereof
does not violate any applicable provisions of law and are
intended to be limited to the extent necessary so that they will
not render this Security Instrument invalid, unenforceable or not
81
entitled to be recorded, registered or filed under the provisions
of any Applicable Law. If any term of this Security Instrument
or any application thereof shall be invalid or unenforceable, the
remainder of this Security Instrument and any other application
of the term shall not be affected thereby.
Article 19 - SECONDARY MARKET
Section 19.1 Transfer of Loan. Lender may, at any time,
sell, transfer or assign the Note, this Security Instrument and
the Other Security Documents, and any or all servicing rights
with respect thereto, or grant participations therein (the
"Participations") or issue mortgage pass-through certificates or
other securities evidencing a beneficial interest in a rated or
unrated public offering or private placement (the "Securities").
Lender may forward to each purchaser, transferee, assignee,
servicer, participant, or investor in such Participations and/or
Securities (collectively, the "Investor") or any Rating Agency
rating such Participations and/or Securities and each prospective
Investor, and any organization maintaining databases on the
underwriting and performance of commercial mortgage loans, all
documents and information which Lender now has or may hereafter
acquire relating to the Debt and to Borrower, any Guarantor, any
Indemnitor(s) and the Property, whether furnished by Borrower,
any Guarantor, any Indemnitor(s) or otherwise, as Lender
determines necessary or desirable. Borrower irrevocably waives
any and all rights it may have under Applicable Laws to prohibit
such disclosure, including but not limited to any right of
privacy.
Section 19.2 Cooperation. Borrower, any Guarantor and any
Indemnitor agree to cooperate with Lender in connection with any
transfer made or any Securities created pursuant to this Section
19, including, without limitation, complying with all of the
terms and conditions of that certain Letter, dated the date
hereof, from Lender to Borrower and _________________ (the
"Cooperation Letter").
Article 20 - COSTS
Section 20.1 Performance at Borrower's Expense. Borrower
acknowledges and confirms that Lender shall impose certain
administrative processing and/or commitment fees in connection
with (a) the extension, renewal, modification, amendment and
termination of the Loan, (b) the release or substitution of
collateral therefor, (c) obtaining certain consents, waivers and
approvals with respect to the Property, or (d) the review of any
Lease or proposed Lease or the preparation or review of any
subordination, non-disturbance agreement (the occurrence of any
of the above shall be called an "Event"). Borrower further
acknowledges and confirms that it shall be responsible for the
82
payment of all costs of reappraisal of the Property or any part
thereof, whether required by law, regulation, Lender or any
governmental or quasi-governmental authority. Borrower hereby
acknowledges and agrees to pay, immediately, with or without
demand, all such fees (as the same may be increased or decreased
from time to time), and any additional fees of a similar type or
nature which may be imposed by Lender from time to time, upon the
occurrence of any Event or otherwise. Wherever it is provided
for herein that Borrower pay any costs and expenses, such costs
and expenses shall include, but not be limited to, all legal fees
and disbursements of Lender, whether with respect to retained
firms, the reimbursement for the expenses of in-house staff or
otherwise.
Section 20.2 Legal Fees for Enforcement. (a) Borrower
shall pay all reasonable legal fees incurred by Lender in
connection with (i) the preparation of the Note, this Security
Instrument and the Other Security Documents and (ii) the items
set forth in Section 20.1 above, and (b) Borrower shall pay to
Lender on demand any and all expenses, including legal expenses
and attorneys' fees, incurred or paid by Lender in protecting its
interest in the Property or in collecting any amount payable
hereunder or in enforcing its rights hereunder with respect to
the Property (including commencing any foreclosure action),
whether or not any legal proceeding is commenced hereunder or
thereunder, together with interest thereon at the Default Rate
from the date paid or incurred by Lender until such expenses are
paid by Borrower.
Article 21 - DEFINITIONS
Section 21.1 General Definitions. Unless the context
clearly indicates a contrary intent or unless otherwise
specifically provided herein, words used in this Security
Instrument may be used interchangeably in singular or plural form
and the word "Borrower" shall mean "each Borrower and any
subsequent owner or owners of the Property or any part thereof or
any interest therein," the word "Lender" shall mean "Lender and
any subsequent holder of the Note," the word "Note" shall mean
"the Note and any other evidence of indebtedness secured by this
Security Instrument," the word "person" shall include an
individual, corporation, partnership, limited liability company,
trust, unincorporated association, government, governmental
authority, and any other entity, the word "Property" shall
include any portion of the Property and any interest therein, and
the phrases "attorneys' fees" and "counsel fees" shall include
any and all attorneys', paralegal and law clerk fees and
disbursements, including, but not limited to, fees and
disbursements at the pre-trial, trial and appellate levels
incurred or paid by Lender in protecting its interest in the
Property, the Leases and the Rents and enforcing its rights
83
hereunder.
Section 21.2 Headings, etc. The headings and captions of
various Articles and Sections of this Security Instrument are for
convenience of reference only and are not to be construed as
defining or limiting, in any way, the scope or intent of the
provisions hereof.
Article 22 - MISCELLANEOUS PROVISIONS
Section 22.1 No Oral Change. This Security Instrument,
and any provisions hereof, may not be modified, amended, waived,
extended, changed, discharged or terminated orally or by any act
or failure to act on the part of Borrower or Lender, but only by
an agreement in writing signed by the party against whom
enforcement of any modification, amendment, waiver, extension,
change, discharge or termination is sought.
Section 22.2 Liability. If Borrower consists of more than
one person, the obligations and liabilities of each such person
hereunder shall be joint and several. This Security Instrument
shall be binding upon and inure to the benefit of Borrower and
Lender and their respective successors and assigns forever.
Section 22.3 Inapplicable Provisions. If any term,
covenant or condition of the Note or this Security Instrument is
held to be invalid, illegal or unenforceable in any respect, the
Note and this Security Instrument shall be construed without such
provision.
Section 22.4 Duplicate Originals; Counterparts. This
Security Instrument may be executed in any number of duplicate
originals and each duplicate original shall be deemed to be an
original. This Security Instrument may be executed in several
counterparts, each of which counterparts shall be deemed an
original instrument and all of which together shall constitute a
single Security Instrument. The failure of any party hereto to
execute this Security Instrument, or any counterpart hereof,
shall not relieve the other signatories from their obligations
hereunder.
Section 22.5 Number and Gender. Whenever the context may
require, any pronouns used herein shall include the corresponding
masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural and vice versa.
Article 23 - SPECIAL [NAME OF STATE] PROVISIONS
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[NO FURTHER TEXT ON THIS PAGE]
85
IN WITNESS WHEREOF, THIS SECURITY INSTRUMENT has been
executed by Borrower the day and year first above written.
[BORROWER]
Name:
Title:
86
ACKNOWLEDGEMENTS
(to be attached)
87
EXHIBIT A
(Description of Land)
ALL of that certain lot, piece or parcel of land, with the
buildings and improvements thereon, situate, lying and being
88
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Page
Article I Grants of Security 2
Section 1.1 Property Mortgaged 2
Section 1.2 Assignment of Leases and Rents 5
Section 1.3 Security Agreement 5
Section 1.4 Pledge of Monies Held
Article 2 Debt and Obligations Secured 5
Section 2.1 Debt 5
Section 2.2 Other Obligations 6
Section 2.3 Debt and Other Obligations 6
Section 2.4 Payments 6
Article 3 Borrower Covenants 7
Section 3.1 Payment of Debt 7
Section 3.2 Incorporation by Reference 7
Section 3.3 Insurance 7
Section 3.4 Payment of Taxes, etc 11
Section 3.5 Escrow Fund 12
Section 3.6 Condemnation 13
Section 3.7 Leases and Rents 13
Section 3.8 Maintenance and Use of Property 15
Section 3.9 Waste 15
Section 3.10 Compliance with Laws 16
Section 3.11 Books and Records 17
Section 3.12 Payment for Labor and Materials 21
Section 3.13 Performance of Other Agreements 21
Section 3.14 Change of Name, Identity or 21
Structure
Section 3.15 Existence 21
Article 4 Special Covenants 22
Section 4.1 Property Use 22
Section 4.2 Single Purpose Entity 22
Section 4.3 Restoration 25
Article 5 Representations and Warranties 30
Section 5.1 Warranty of Title 30
Section 5.2 Legal Status and Authority 30
Section 5.3 Validity of Documents 30
Section 5.4 Litigation 31
Section 5.5 Status of Property 31
Section 5.6 No Foreign Person 32
Section 5.7 Separate Tax Lot 32
Section 5.8 Leases 32
Section 5.9 Solvency 32
Section 5.10 Business Purposes 33
Section 5.11 Taxes 33
Section 5.12 Mailing Address 33
Section 5.13 No Change in Facts or Circumstances 33
Section 5.14 Disclosure 33
Section 5.15 Third Party Representations 34
Section 5.16 Illegal Activity 34
Section 5.17 Contracts 34
Article 6 Obligations and Reliances 35
Section 6.1 Relationship of Borrower and Lender 35
Section 6.2 No Reliance on Lender 35
Section 6.3 No Lender Obligations 35
Section 6.4 Reliance 35
Article 7 Further Assurances 36
Section 7.1 Recording of Security Instrument, 36
etc.
Section 7.2 Further Acts, etc. 36
Section 7.3 Changes in Tax, Debt Credit and 37
Documentary Stamp Laws
Section 7.4 Estoppel Certificates 37
Section 7.5 Flood Insurance 38
Section 7.6 Replacement Documents 38
Article 8 Due on Sale/Encumbrance 38
Section 8.1 No Sale/Encumbrance 38
Section 8.2 Sale/Encumbrance Defined 38
Section 8.3 Lender's Rights 40
Article 9 Prepayment 40
Section 9.1 Prepayment 40
Article 10 Default 41
Section 10.1 Events of Default 41
Article 11 Rights and Remedies 43
Section 11.1 Remedies 43
Section 11.2 Application of Proceeds 45
Section 11.3 Right to Cure Defaults 45
Section 11.4 Actions and Proceedings 46
Section 11.5 Recovery of Sums Required to Be 46
Paid
Section 11.6 Examination of Books and Records 46
Section 11.7 Other Rights, etc. 46
Section 11.8 Right to Release any Portion of the 47
Property
Section 11.9 Violation of Laws 47
Section 11.10 Right of Entry 47
Section 11.11 Subrogation 47
Article 12 Environmental Matters 48
Section 12.1 Environmental Representations and 48
Warranties
Section 12.2 Environmental Covenants 48
Section 12.3 Lender's Rights 49
Article 13 Indemnifications 49
Section 13.1 General Indemnification 49
Section 13.2 Mortgage and/or Intangible Tax 50
Section 13.3 Duty to Defend; Attorneys' Fees and 50
Other Fees and Expenses
Section 13.4 Environmental Indemnity 50
Article 14 Waivers 51
Section 14.1 Waiver of Counterclaim 51
Section 14.2 Marshaling and Other Matters 51
Section 14.3 Waiver of Notice 51
Section 14.4 Waiver of Statute of Limitations 51
Section 14.5 Sole Discretion of Lender 51
Section 14.6 Waiver of Trial by Jury 51
Article 15 Exculpation 52
Section 15.1 Exculpation 52
Article 16 Notices 52
Section 16.1 Notices 52
Article 17 Submission to Jurisdiction 53
Section 17.1 Submission to Jurisdiction 53
Article 18 Applicable Law 53
Section 18.1 Choice of Law 53
Section 18.2 Provisions Subject to Applicable 54
Law
Article 19 Secondary Market 54
Section 19.1 Transfer of Loan 54
Section 19.2 Cooperation 54
Article 20 Costs 54
Section 20.1 Performance at Borrower's Expense 54
Section 20.2 Legal Fees for Enforcement 55
Article 21 Definitions 55
Section 21.1 General Definitions 55
Section 21.2 Headings, Etc. 55
Article 22 Miscellaneous Provisions 56
Section 22.1 No Oral Change 56
Section 22.2 Liability 56
Section 22.3 Inapplicable Provisions 56
Section 22.4 Duplicate Originals; Counter 56
Section 22.5 Number and Gender 56
Article 23 Special (Name of State) Provisions 56
Definitions v
</TABLE>
91
Definitions
The terms set forth below are defined in the following Sections of this
Security Instrument:
(a) Applicable Laws: Article 3, Subsection 3.10(a);
(b) Attorneys' Fees/Counsel Fees: Article 21, Section 21.1;
(c) Bankruptcy Code: Article 1, Subsection 1.1(f);
(d) Borrower: Preamble and Article 21, Section 21.1;
(e) Business Day: Article 16, Section 16.1;
(f) Casualty Consultant: Article 4, Subsection 4.3(b)(iii);
(g) Casualty Retainage: Article 4, Subsection 4.3(b)(iv);
(h) Debt: Article 2, Section ?;
(i) Environmental Indemnity: Article 13, Section 13.4;
(j) Environmental Law: Article 12, Section 12.1;
(k) Environmental Liens: Article 12, Subsection 12.2(d);
(l) Environmental Report: Article 12, Subsection 12.1(a)
(m) Escrow Fund: Article 3, Section 3.5;
(n) Event: Article 20, Section 20.1;
(o) Event of Default: Article 10, Section 10.1;
(p) Flood Insurance Acts: Article 3, Subsection 3.3(a)(vii);
(q) Full Replacement Cost: Article 3, Subsection 3.3(a)(i)(A);
(r) GAAP: Article 3, Subsection 3.11(a);
(s) Guarantor: Article 10, Subsection 10.1(e);
(t) Hazardous Materials: Article 12, Section 12.1;
(u) Improvements: Article 1, Subsection 1.1(c);
(v) Indemnitor(s): Article 13, Subsection 13.4(o);
(w) Insurance Premiums: Article 3, Subsection 3.3(b);
(x) Investor: Article 19, Section 19.1;
(y) Land: Article 1, Subsection 1.1(a);
(z) Leases: Article 1, Subsection 1.1(f);
(aa) Lender: Preamble and Article 21, Section 21.1;
(bb) Loan: Article 5, Subsection 5.12;
(cc) Loan Application: Article 5, Section 5.10;
(dd) Losses: Article 13, Section 13.1;
(ee) Major Lease: Article 3, Subsection 3.7(d);
(ff) Net Proceeds: Article 4, Subsection 4.3(b);
(gg) Net Proceeds Deficiency: Article 4, Subsection 4.3(b)(vi);
(hh) Note: Recitals and Article 21, Section 21.1;
(ii) Obligations: Article 2, Section 2.3;
(jj) Other Charges: Article 3, Subsection 3.4(a);
(kk) Other Obligations: Article 2, Section 2.2;
(ll) Other Security Documents: Article 3, Section 3.2;
(mm) Participations: Article 19, Section 19.1;
(nn) Permitted Exceptions: Article 5, Section 5.1;
(oo) Person: Article 21, Section 21.1;
(pp) Personal Property: Article 1, Subsection 1.1(e);
(qq) Policies/Policy: Article 3, Subsection 3.3(b);
(rr) Property: Article 1, Section 1.1 and Article 21, Section 21.1;
(ss) Qualified Insurer: Article 3, Subsection 3.3(b);
(tt) Rating Agency: Article 3, Subsection 3.3(b);
(uu) Release: Article 12, Section 12.1;
(vv) Renewal Lease: Article 3, Subsection 3.7(c);
(ww) Rents: Article 1, Subsection 1.1(f);
(xx) Restoration: Article 3, Subsection 3.3(h);
(yy) Securities: Article 19, Section 19.1;
92
(zz) Security Instrument: Preamble;
(aaa) Taxes: Article 3, Subsection 3.4(a);
(bbb) Uniform Commercial Code: Article 1, Subsection 1.1(e)
93
<TABLE>
<CAPTION>
Property/Loan Amount Borrower Name Type of Entity
------------------------------------------ ----------------------------- ------------------------
<S> <C> <C> <C>
1. 20th & Campbell/$10,700,000 AERC Campbell, Inc. Delaware corporation
2. Central Park Place/$7,200,000 AERC Central Park Place, LLC Delaware LLC
3. Chestnut Ridge/$15,920,000 Associated Estates Realty Ohio corporation
Corporation of Pennsylvania
Inc.
4. Clinton Place/$9,500,000 AERC Clinton Place, LLC Delaware LLC
5. Country Club/$12,150,000 AERC Country Club, Inc. Delaware corporation
6. Fleetwood/$4,917,000 AERC Fleetwood, L.P. Delaware ltd. ptship.
7. Gables at White River/$9,030,000 AERC White River, LLC Delaware LLC
8. Hampton Point/$18,500,000 AERC Hampton Point, Inc. Delaware corporation
9. Heathermoor/$9,608,000 AERC Heathermoor, Inc. Delaware corporation
10. KTC Properties/$19,710,000 AERC KTC Properties, Inc. Delaware corporation
11. The Oaks at Hampton/$29,200,000 AERC Oaks Hampton, LLC Delaware LLC
12. Pendleton Lake East/$7,575,000 AERC Pendleton, Inc. Delaware corporation
13. Perimeter Lakes/$6,400,000 AERC Perimeter Lakes, Inc. Delaware corporation
14. Remington Place/$6,950,000 AERC Remington Place, Inc. Delaware corporation
15. Residence at Christopher Wren/$10,565,000 AERC Christopher Wren, Inc. Delaware corporation
16. Residence at Turnberry/$9,050,000 AERC Turnberry, Inc. Delaware corporation
17. Saw Mill Village/$12,500,000 AERC Saw Mill Village, Inc. Delaware corporation
18. Spring Valley/$12,000,000 AERC Spring Valley, LLC Delaware LLC
19. Summer Ridge/$9,900,000 AERC Summer Ridge, LLC Delaware LLC
20. Waterstone/$17,125,000 AERC Waterstone, LLC Delaware LLC
</TABLE>
94
EXHIBIT 10.18
June 30, 1999
Mr. Larry E. Wright
11 DeWitt Place
Tequesta, FL 33469
Re: Agreement and Release between Larry E. Wright and
Associated Estates Realty Corporation
Dear Mr. Wright:
This Agreement and Release (this "Agreement") sets forth our
mutual understanding and our commitments related to your
termination of employment with Associated Estates Realty
Corporation, an Ohio corporation (the "Company") as of July 1,
1999. This Agreement is final and binding on you and the
Company. You and the Company are parties to an employment
agreement dated as of June 30, 1998 (your "Employment
Agreement"). No commitment, obligation or claim solely arising
out of or related to your employment relationship with the
Company, your separation from employment or your Employment
Agreement (collectively, "Your Employment") not contained herein
will be asserted, supported or permitted by you or recognized by
the Company.
1. Effective Date. The effective date of your termination
of employment with the Company is July 1, 1999.
2. Termination Payments. As consideration for your
promises contained in this Agreement and the continuation of all
of the provisions of Paragraph 6, entitled "Covenants and
Confidential Information," of your Employment Agreement, as
modified by Paragraph 10 hereof:
a. On July 7, 1999, if you do not cancel this Agreement on
or before that date, you will receive a one-time, lump sum
termination payment of $575,000, representing all bonuses due and
payable under your Employment Agreement, the advance payment of
the base pay under your Employment Agreement through June 30,
2001 and bonuses that could be payable under your Employment
Agreement, as well as consideration for your execution of this
Agreement; and
b. The termination of employment will be effective July 1,
1999 and the Company will maintain your current salary and
benefits until that date.
3. COBRA. All insurance, including medical, dental and
life, that has covered you while employed by the Company will be
discontinued as of July 1, 1999. The Company will provide you
with the necessary information and forms related to your option
to purchase continued medical coverage for up to 18 months,
beginning July 1, 1999, under the applicable provisions of the
Consolidated Omnibus Budget Reconciliation Act ("COBRA").
Applicable COBRA premiums to continue coverage for you will be
paid by you.
4. Vacation. You agree that the payments made pursuant to
Paragraph 2 cover the value of any accrued vacation owed to you.
5. Taxes. All payments made under this Agreement shall be
subject to applicable taxes and minimum withholding as prescribed
by law. You agree that you will be solely responsible for the
payment of any taxes that may be required to be paid by you or on
your behalf based on, or as a result of, payments made in
accordance with this Agreement (other than any obligation to
withhold taxes with respect to such payments, which is the
obligation of the Company).
6. Broker s License. You agree that your broker s license
will remain with the Company so long as you serve as a director
of the Company. The Company will pay all costs incurred by you
to maintain your broker's license. The Company will pay,
reimburse, indemnify, defend and hold you harmless from and
against any and all penalties, claims, losses, liabilities,
damages, charges, costs and/or expenses (including without
limitation, attorneys' fees and court costs) arising out of or
resulting from or in any manner connected with the Company's use
of your broker's license.
7. Release. (a) Other than as set forth in this
Agreement, you have no further monies, bonuses, benefits or
entitlements coming or accruing from the Company or the Company
Released Parties (as defined herein) solely arising out of Your
Employment.
In consideration of the payments and agreements described in
this Agreement, you, for yourself and for your executors,
administrators, assigns and heirs (including your spouse and
family members), fully and forever release the Company and the
Company Released Parties, from and of any and all actions, suits,
claims, issues, charges, allegations, demands, disputes,
liabilities, debts or sums of money of any kind or nature
whatever, which you have or may have, on or prior to the date
hereof solely arising out of Your Employment.
This release specifically includes any actions sounding in
or related to tort, contract or discrimination of any kind,
including but not limited to any and all claims arising under any
federal, state or local laws prohibiting age, race, sex,
disability and other forms of discrimination, including but not
limited to age discrimination claims under the Age Discrimination
in Employment Act, claims under Title VII of the 1964 Civil
Rights Act, the Americans with Disabilities Act, the Employee
Retirement Income Security Act, or arising under any other
federal, state or local statute relating to employment.
You understand that you may be replaced by a younger
individual and expressly agree that among the claims being
released herein are any and all claims that might arise out of
any such action by the Company or the Company Released Parties.
You voluntarily waive any right to seek reemployment by the
Company.
You also agree that neither you nor anyone acting on your
behalf will file, claim, sue or cause or permit to be filed or
claimed, any action for damages or other relief against the
Company or the Company Released Parties involving any matter
occurring prior to the date of this Agreement, or involving the
effects of actions or practices which arose prior to the date of
this Agreement solely arising out of Your Employment. You
further agree that you will neither seek nor accept any further
benefit or consideration from any source whatsoever in respect to
any claims solely arising out of Your Employment which you have
asserted or could have asserted against the Company or the
Company Released Parties.
Further, you agree that this Agreement meets the
requirements of the Age Discrimination in Employment Act of 1967
("ADEA"), as amended by the Older Workers Benefit Protection Act
of 1990 ("OWBPA"), including the provisions of 29 U.S.C.
SS 626(f)(1) regarding specific requirements for the waiver of
rights and claims thereunder in any way arising prior to the
execution of this Agreement. Those requirements include that you
understand and acknowledge that by executing this Agreement:
a. You are knowingly and voluntarily waiving any and
all rights and claims you may have under the ADEA and OWBPA;
b. You are receiving hereunder consideration in
addition to anything of value to which you are already entitled;
c. You have been advised to consult with an attorney
of your choice prior to executing this Agreement;
d. You have carefully read this Agreement, know and
understand its contents and its significance, and intend to be
bound by its terms;
e. You have been given a period of 21 days from the
receipt of this Agreement to consider its contents and
ramifications and your decision to sign it, although you may
execute it and return it prior to that if desired.
f. You will be given seven days following execution
of this Agreement to revoke it by notifying Nan Zieleniec in
writing, since it will not become effective or enforceable and
no payments will be made under this Agreement until that seven
day revocation period has expired.
You agree that the contents of these paragraphs not only
release the Company and the Company Released Parties from any and
all claims as stated herein which you could or may make on your
own behalf, but also those claims solely with respect to Your
Employment, which could or may be made by any other person or
entity (including your spouse and family members).
It is further understood and agreed that this entire
Agreement is not to be construed as an admission of liability by
the Company or the Company Released Parties. Further, the
payment of monies under this Agreement does not constitute an
admission by or on behalf of the Company or the Company Released
Parties that you are entitled to such payment pursuant to any
policy or practice.
Nothing in this Agreement shall be construed as a release,
waiver or other relinquishment by you and any of Your Released
Parties of your rights under (including, without limitation, your
right to receive the moneys held under) the AERC 401(k) Plan and
the MIG Money Purchase Plan, all of which shall continue to be
held by you whether or not this Agreement becomes effective.
(b) In consideration of the agreements described in this
Agreement, Company, for itself and its successors and permitted
assigns fully and forever release you and Your Released Parties,
from and of any and all actions, suits, claims, issues, charges,
allegations, demands, disputes, liabilities, debts or sums of
money of any kind or nature whatever, which Company has or may
have, on or prior to the date hereof, solely arising out of Your
Employment, except fraud.
Company agrees that the contents of the preceding paragraph
release you from any and all claims with respect to Your
Employment as stated herein which Company could or may make on
its own behalf.
It is further understood and agreed that this entire
Agreement is not be to construed as an admission of liability by
you or Your Released Parties.
8. Options. You were granted options to purchase the
Company s common shares, without par value, pursuant to plans
maintained by the Company for that purpose. You acknowledge and
agree that, under the terms of the options granted to you, all of
your non-qualified options will be forfeited on the date of your
termination. You will have three months from the date of your
termination to execute any incentive options granted to you by
the Company.
9. Directorship. You and the Company agree that you will
continue to serve as a member of the Company's board of directors
you are removed or voluntarily resign or until your successor is
duly elected following you not being nominated to the board. You
will be compensated for such service as a non-employee, non-
independent director.
10. Non-Compete. You agree to continue to be bound by the
terms of Paragraph 6, entitled "Covenants and Confidential
Information," of your Employment Agreement for so long as you
serve as a director of the Company and for a period of two years
thereafter. You hereby agree and acknowledge that Paragraph 6(a)
of your Employment Agreement precludes you from advising
institutional investors, pension funds and other persons with
respect to multifamily real estate development and acquisitions.
11. Company Property. You agree to repay to the Company
any outstanding debts solely arising out of Your Employment or
non-reimbursable expenses, and to return all credit cards,
telephone cards, cellular telephones and other equipment or
property of the Company in your possession prior to July 15,
1999.
12. No Further Obligations. You expressly acknowledge that
the Company has no further obligations to you, and Company
expressly acknowledges that you have no further obligations to
Company, pursuant to your Employment Agreement, which Employment
Agreement is agreed void and of no further effect as of July 1,
1999, except for all of the provisions of Paragraph 6, entitled
"Covenants and Confidential Information," of your Employment
Agreement which shall continue as set forth in Paragraph 10.
13. Acknowledgment. You acknowledge that the payment
referred to in Paragraph 2 and the benefits provided under
Paragraph 9 are solely in exchange for the promises in your
Employment Agreement and this Agreement and are not normally
available under the Company s policies to employees. You further
acknowledge that such payments and benefits do not constitute an
admission by the Company or the Company Released Parties of
liability or of violation of any applicable law or regulation.
The Company expressly denies any liability or alleged violation
and states that payments and promises are being made solely for
the purpose of effectuating a mutually amicable separation of you
from your employment with the Company.
14. Non-disparagement. You agree not to disparage, directly
or indirectly, the Company or the Company Released Parties or any
of their personnel, management, products, services or practices,
and the Company agrees that neither it nor any of its affiliates
or any of their respective personnel shall, directly or
indirectly, disparage you.
15. Confidentiality of Agreement. The parties agree to
keep all provisions, terms and conditions of the Agreement
confidential, and not disclose them to any person not a party
hereto other than your counsel, spouse and tax advisor, under any
circumstances, except as required by law.
16. No Further Promises. You agree that no promise has
been made to you except those contained in this Agreement which
sets forth the entire understandings of the parties.
17. Revocation of Agreement. You may revoke and cancel
this Agreement in writing at any time within seven days after
your execution of this Agreement by providing written notice of
revocation to the Company. If you do so revoke, this Agreement
will be null and void and the Company will have no obligation to
make the payments or fulfill the obligations contained herein.
This Agreement shall not become effective and enforceable until
after the expiration of that seven-day revocation period. After
such time, if there has been no revocation, this Agreement shall
be fully effective and enforceable.
18. Successors and Assigns. This Agreement will also be
binding on the parties and their respective, successors and
permitted assigns and, with respect to you, heirs. This Agreement
releases, to the extent set forth herein, (a) the Company and its
successors, assigns, divisions, parents or affiliates, officers,
directors, shareholders, members, employees, heirs, agents and
counsel, including, without limitation, any and all management
and supervisory employees (collectively, the "Company Released
Parties"), and (b) you and your successors, assigns, executors,
administrators, heirs (including spouse and family members),
counsel and agents (collectively, "Your Released Parties").
Neither this Agreement nor any the rights or obligations herein
may assigned or otherwise transferred by a party without the
prior written consent of the other party. Any such assignment or
other transfer in violation of the preceding sentence shall be
null and void.
19. Entire Agreement. This Agreement contains the entire
agreement between the parties and this Agreement cannot be
modified, varied or altered, except in a writing signed by both
parties hereto.
20. Enforceability. If any provision of this Agreement is
declared invalid or unenforceable, the remaining portions of the
Agreement shall not be affected thereby and shall be enforced.
21. Ohio Law. This Agreement shall be governed by the laws
of the State of Ohio.
Please confirm that the foregoing correctly states the
understanding between us by signing and returning to the Company
a counterpart hereof.
ASSOCIATED ESTATES REALTY CORPORATION
By: /s/ Jeffrey I. Friedman
Name: Jeffrey I. Friedman
Title: Chairman, President and
Chief Executive Officer
Accepted and agreed to as of the date hereof:
/s/ Larry E. Wright
Larry E. Wright
